Dear all,
we received letter of credit with the following revolving clause:
this l/credit value is revolving and will be increased automatically by euro xxx.xxx for thirteen times only and by euro yyy.yyy for the fourteenth time up to a maximum amount not to exceed euro zz.zzz.zzz.
The letter of credit is issued for euro xxx.xxx (same as shown above for thirteen times revolving).
I have the following questions on that issue:
1. May i assume that this is a cumulative or non-cumulative L/C out of the text?
2. Does this text implicite that each drawing under the L/C could only be for euro xxx.xxx ?
3. What would happen in case a presentation of documents would be more than the original L/C value and may i then assume that the L/C amount is reinstated for the overdrawn amount ?
Your suggestions would be very helpful, many thanks in advance.
Best regards
GerhardH
Revolving letter of credit clause
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Revolving letter of credit clause
Dear GerhardH,
To answer your questions,
1. Ideally the credit should specifically state whether it is cumulative/non cumulative, however this may also be determined from the text of the credit.
2. The cited example is not clear whether the credit is cumulative or non cumulative as such it is not possible to determine the maximum amount of each presentation.
3. I don’t think it would be prudent to accept a presentation for a greater value without seeking a clarification from the I/B.
Regards, Khalid
To answer your questions,
1. Ideally the credit should specifically state whether it is cumulative/non cumulative, however this may also be determined from the text of the credit.
2. The cited example is not clear whether the credit is cumulative or non cumulative as such it is not possible to determine the maximum amount of each presentation.
3. I don’t think it would be prudent to accept a presentation for a greater value without seeking a clarification from the I/B.
Regards, Khalid
Revolving letter of credit clause
Should not the amount of credit be the amount of the first drawing plus thirteen times this amount plus the fourteenth time ?
Daniel
Daniel
Revolving letter of credit clause
Hi Daniel,
yes you're right, for example the credit was opened for euro 100.000,00 only and the said revolving clause says that the credit should be automatically increased thirteen times by euro 100.000,00 and at fourteenth time by euro 50.000,00.
Thank you all in advance for your suggestions.
Best regards
GerhardH
yes you're right, for example the credit was opened for euro 100.000,00 only and the said revolving clause says that the credit should be automatically increased thirteen times by euro 100.000,00 and at fourteenth time by euro 50.000,00.
Thank you all in advance for your suggestions.
Best regards
GerhardH
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Revolving letter of credit clause
Hi Daniel/Gerhard
Should that be the case then there would not be a clause for a reinstatment of amount to take place. The drawings and shipments would take place and the LC o/s would automatically reduce. The LC would then have/need a clause limiting the drawing/shipment not to exceed a particular value.
Usually, Revolving Credits do not have the total of all drawings as the outstanding LC value at any point of time. The amount of drawing representing a shipment for a particular period, be it cummulative or non cummulative would be the o/s amount shown.This has benefits for beneficaries as well as banks in terms of obligation/exposure at any point of time as well as applicants in terms of receiving quantities of shipments for disposal.
Regards
Jason
Should that be the case then there would not be a clause for a reinstatment of amount to take place. The drawings and shipments would take place and the LC o/s would automatically reduce. The LC would then have/need a clause limiting the drawing/shipment not to exceed a particular value.
Usually, Revolving Credits do not have the total of all drawings as the outstanding LC value at any point of time. The amount of drawing representing a shipment for a particular period, be it cummulative or non cummulative would be the o/s amount shown.This has benefits for beneficaries as well as banks in terms of obligation/exposure at any point of time as well as applicants in terms of receiving quantities of shipments for disposal.
Regards
Jason
Revolving letter of credit clause
Gerhard, Jason,
I was not clear, I should have written "amount of drawings" and not "credit".
In my opinion, the real revolving credit is when, for example, a certain quantity of goods must be shipped within a period and for several periods.
If a quantity of goods is not fully shipped during a given period, the balance may be shipped during the next period as long as 1. partials shipments are allowed and 2. the credit is cumulative (and called so).
It is also my opinion that the exposure of the issuing bank if for the total value of shipments for the total of periods as early as the issuance of the credit.
A drawing may be made in excess of the amount of the credit in the case a balance of goods is shipped together with the goods of an ulterior period.
Daniel
I was not clear, I should have written "amount of drawings" and not "credit".
In my opinion, the real revolving credit is when, for example, a certain quantity of goods must be shipped within a period and for several periods.
If a quantity of goods is not fully shipped during a given period, the balance may be shipped during the next period as long as 1. partials shipments are allowed and 2. the credit is cumulative (and called so).
It is also my opinion that the exposure of the issuing bank if for the total value of shipments for the total of periods as early as the issuance of the credit.
A drawing may be made in excess of the amount of the credit in the case a balance of goods is shipped together with the goods of an ulterior period.
Daniel
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Revolving letter of credit clause
Hi Daniel,
You are correct for revolving LCs which are cumulative as the total amount of drawing/shipment over time can reach the total amount of the LC drawing and IB should record the full cumulative value at the time of issuance.
Regards
Jason
You are correct for revolving LCs which are cumulative as the total amount of drawing/shipment over time can reach the total amount of the LC drawing and IB should record the full cumulative value at the time of issuance.
Regards
Jason
Revolving letter of credit clause
Jason,
Actually, it is the same with the non cumulatives ones. The shipments may be fully effected. So, the bank must book its obligations for the full value of total shipments.
Daniel
Actually, it is the same with the non cumulatives ones. The shipments may be fully effected. So, the bank must book its obligations for the full value of total shipments.
Daniel
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Revolving letter of credit clause
Hi Daniel
I am not disagreeing with that view.
For Non Cumulative revolving LCs even though all shipments may be effected over a period of time thus covering the entire value, my obligation/exposure at any point of time would only be for the single value of the instalment/drawing.
Rather than booking eg 1.2 Million for a 12 month period when I know the monthly instalment is only 100K, I could use the balance 1.1 Mil to handle other transactions within that 12 month period.
Regards
Jason
I am not disagreeing with that view.
For Non Cumulative revolving LCs even though all shipments may be effected over a period of time thus covering the entire value, my obligation/exposure at any point of time would only be for the single value of the instalment/drawing.
Rather than booking eg 1.2 Million for a 12 month period when I know the monthly instalment is only 100K, I could use the balance 1.1 Mil to handle other transactions within that 12 month period.
Regards
Jason
Revolving letter of credit clause
Jason,
In that case, your booking for one period will not reflect the reality, that is your undertaking to honour
all shipment up to 1.2 mios.
What if the applicant goes bankrupt during the first period?
You would have to pay the next shipments anyway if effected by the beneficiary. Audit could be surprised to see you obliged to pay 1.2 mios while only 0.1 has been booked.
Daniel
In that case, your booking for one period will not reflect the reality, that is your undertaking to honour
all shipment up to 1.2 mios.
What if the applicant goes bankrupt during the first period?
You would have to pay the next shipments anyway if effected by the beneficiary. Audit could be surprised to see you obliged to pay 1.2 mios while only 0.1 has been booked.
Daniel