Other kinds of Documentary Credit
A documentary credit is a flexible payment instrument. I has became increasingly popular as an universally accepted method of payment.In fact, over the years, it has developed and earned the respect, trusts and confidence of the international trade community and bankers as well. There are other variations of a documentary credit, depending on the wordings, terms and conditions incorporated into the said credit.
Standby Credit
Standby credit was not specifically mentioned until the 1983 revision of the UCP No. 400. In the united States, the bankers are not permitted to issue guarantees under the Federal Law.
Standby credit was introduced in the 1920s to overcome the problem of the prohibition. A standby credit may be utilized for various transactions, for example to guarantee the repayment of a loan, for payment of services rendered, for goods sold, etc.
Revolving Documentary Credit
A buyer or importer may need to import X tons of Y products every month. Instead of requesting his bank to issue a documentary credit, for example for about 6 months, the buyer or importer can in fact request his bank to issue a revolving credit to cover the monthly shipment.
A revolving credit is a form of credit which by its terms and conditions provides for an amount of the credit to be renewed or reinstated automatically, and which does not require the issuing bank to renew the credit each time.
A revolving credit may be revocable or irrevocable and it may revolved as to the amount or time.
Back to Back Documentary Credit
When a seller is a middleman (trader), he may buy from the actual seller (manufacturer) and at the same time sell the goods to the actual buyer. Thus, he may receive a documentary credit in his favour and on the strength of this credit, he may request his bank to issue a credit to the actual seller.
It is to be noted that in a back to back credit operations, two credits are involved, the first credit (also known as master credit or prime credit) in which the middleman is the original beneficiary and the second credit (or known as back to back credit or secondary credit) in which the middleman is the applicant.
Counter Credit
Where a middleman has a blanket documentary credit facility provided by his bank, he need not lodge the master credit as a form of security to his bank to issue a back to back credit.
Instead, he shall only use his blanket documentary credit facility and request his bank to issue a credit in favour of the actual supplier. This credit issued is known as a counter credit.
Under this situation, when the stipulated documents are presented, the middleman would settle accordingly as arranged with his bank.
After switching the relevant documents, the middleman should be able to secure payment under the first credit provided he has complied with the relative terms and conditions in the facility.
Red Clause Credit
When a seller require some temporary or ad-hoc financing from his buyer, he may arrange for a red clause credit to be issued in his favour. A red clause credit has a special clause incorporated therein, in which it advises the nominated bank to advance a certain amount of money to the seller beneficiary before presentation of the stipulated documents as a form of pre-shipment advance for working capital.
A red clause credit is so-called because originally the special clause was written in red ink. Red clause credits are commonly used in the wool trade.
Green Clause Credit
A green clause credit authorizes the nominated bank to make an advance to the seller beneficiary against security, for example, a standby credit, warehouse receipt, etc. This kind of credit is not popularly used these days.
