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What is a Transferable Letter of Credit

Under what circumstances transferable letters of credit are issued

A transferable credit is one under which the exporter has the right to make the credit available to third parties. The exporter may be only an intermediary  who procures goods from the suppliers and arranges them to be sent to the importer. For example, Exporters India Ltd. may enter into an agreement for supply of handicraft and get a transferable letter of credit opened in its favor. It may procure the articles from different manufacturers. To enable the manufacturers to get banking facilities for the export, Exporters India Ltd  may get the credit transferred  to the manufacturers.

A credit is transferred in the following ways: The exporter, now called the first beneficiary, will apply to the negotiating bank (intermediary bank) to transfer and establish in favor of the manufacturer (the second beneficiary) a letter of credit with the same terms and conditions as that of the original with the exception to the following:

(a) The amount of the credit may be reduced. The difference would be the profit or commission on the transaction for the first beneficiary.

(b) The validity period and date of shipment may be curtailed. For example, if the original letter of credit has 12th May as the latest date of shipment and 18th May, respectively. The difference in time would be required by the first beneficiary  to substitute his invoices for those submitted by the second beneficiary.

(c) Because the value of goods is reduced, the percentage for which insurance cover must be effected may be increased in such a way as to provide the amount of cover stipulated in the original credit.

The negotiating bank will obtain the original credit and endorse the fact of transfer on it. It will then issue a credit in favor of the second beneficiary complying with the terms of the first beneficiary. The credit would show the first beneficiary as the applicant. This is done so as not to reveal the name of the importer to the second beneficiary. But if the name of the applicant for the credit is specifically required by the original credit to appear in any document other than the invoice, such requirement must be fulfilled.

When the second beneficiary ships and presents documents to the bank, the amount as per the credit in his favor is paid to him. The invoice of the first beneficiary is then substituted and the difference  in the amount paid to him.

If the first beneficiary fails to supply his own invoice on first demand by the negotiating bank, it has the right to deliver to the issuing bank the documents, including the invoice, submitted by the second beneficiary.

As an alternative to the above arrangement, the first beneficiary may collect his commission directly from the second beneficiary and the transfer may be made for the full amount of the credit. In such cases normally no substitution on invoices by the first beneficiary is needed.

The first beneficiary may request that payment or negotiation be effected to the second beneficiary at the place to which the credit has been transferred up to and including the expiry date of the credit unless the original credit expressly states that it may not be made available for payment or negotiation at a place other than that stipulated in the credit. This is without prejudice to the first beneficiary’s right to substitute subsequently his own invoice and drafts for those of the second beneficiaries and to claim any difference due to him.

Transfer of a credit is allowed only once. It may be transferred in full. For example, a letter of credit in favour of A for $20,000 may be transferred to B for $20,000. Or, it may be transferred in fractions up to the full limit of the credit provided partial shipments are not prohibited. In our example, the credit may be transferred to B for $ 5,000 and to C for $ 7,000 and the balance of $ 8,000 may be retained by A . But no second transfer is allowed. Therefore, C cannot further transfer  it to D.

A credit can be transferred only if it is expressly designated as transferable by the issuing bank. Terms such as ‘divisible’, ‘fractionable’, ‘assignable’ and ‘transmissible’ do not render the credit transferable. If such terms are used, they shall be disregarded [Article 48 (b)].

Who can effect the transfer?

In the case of payment credit or acceptance credit, the paying bank or the accepting bank, as the case may be, is authorized to effect the transfer. In the case of a freely negotiable credit, transfer can be effected by the bank specifically authorized in the credit as a transferring bank.

The transferring bank shall be under no obligation to effect such transfer except  to the extent and in the manner expressly consented to by such bank. However , the credit can be transferred only on the terms and conditions specified in the original credit except in respect of amount, period of validity, insurance, etc., as detailed above.

At the time of making a request for transfer and prior to transfer of the credit, the first beneficiary must irrevocably instruct the transferring bank whether or not he retains the right to refuse to allow the transferring bank to advise amendments to the second beneficiary(ies). If the transferring bank consents to the transfer under these conditions, it must, at the time of transfer, advise the second beneficiary(ies) of the first beneficiary’s instructions regarding amendments. If a credit is transferred to more than one second beneficiary, refusal of an amendment by one or more of them does not invalidate the acceptance by the other second beneficiary with respect to whom the credit will be amended accordingly, With respect to the second beneficiary who rejected the amendment, the credit will remain unamended.

Bank charges in respect of transfers are payable by the first beneficiary unless otherwise specified. The transferring bank shall be under no obligation to effect the transfer until such charges are paid.

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