Types of lc/dc
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
14 January 2014
How many types of Letter of Credit/documentary Credit available?
14 January 2014
good morning anonymous,
Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document.
The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as:
"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf :
Is to make a payment to or to the order third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary.
Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).
Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.
A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.
A letter of credit is basically a guarantee from a bank that a particular seller will receive a payment due from a particular buyer. The bank guarantees that the seller will receive a specified amount of money within a specified time. In return for guaranteeing the payment, the bank will require that strict terms are met. It will want to receive certain documents - for example shipping confirmation - as proof.
Types of letter of credit
There are five commonly used types of letter of credit. Each has different features and some are more secure than others. The most common types are:
irrevocable
revocable
unconfirmed
confirmed
transferable
Other types include:
standby
revolving
back-to-back
Sometimes a letter of credit may combine two types, such as ‘confirmed’ and ‘irrevocable’.
Irrevocable and revocable letters of credit
A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason.
An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.
Confirmed and unconfirmed letters of credit
When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid.
For extra security, the seller may require the letter of credit to be ‘confirmed’ by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.
Transferable letters of credit
A transferable letter of credit can be passed from one ‘beneficiary’ (person receiving payment) to others. They’re commonly used when intermediaries are involved in a transaction.
Standby letters of credit
A standby letter of credit is an assurance from a bank that a buyer is able to pay a seller. The seller doesn’t expect to have to draw on the letter of credit to get paid.
Revolving letters of credit
A single revolving letter of credit can cover several transactions between the same buyer and seller.
Back-to-back letters of credit
Back-to-back letters of credit may be used when an intermediary is involved but a transferable letter of credit is unsuitable.
Uniform customs and practice for documentary credit
To standardise terms and procedures and avoid misunderstandings, a set of international rules for letters of credit have been developed by the International Chamber of Commerce (ICC).
Most commercial letters of credit are governed by these rules, which are referred to as Uniform Customs and Practice for Documentary Credits (UCP). The current version of the rules is UCP 600, which came into effect on 1 July 2007.
The UCP standards give definitions of important terms that are used in letters of credit. When referring to letters of credit, banks and others involved in international trade will generally use the UCP definitions of key terms and phrases.
UCP also sets out general documentary requirements and standard practices for handling letters of credit.
Further information
http://agriexchange.apeda.gov.in/Ready%20Reckoner/LETTER_OF_CREDIT.aspx
Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document.
The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as:
"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf :
Is to make a payment to or to the order third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary.
Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).
Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.
A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.
A letter of credit is basically a guarantee from a bank that a particular seller will receive a payment due from a particular buyer. The bank guarantees that the seller will receive a specified amount of money within a specified time. In return for guaranteeing the payment, the bank will require that strict terms are met. It will want to receive certain documents - for example shipping confirmation - as proof.
Types of letter of credit
There are five commonly used types of letter of credit. Each has different features and some are more secure than others. The most common types are:
irrevocable
revocable
unconfirmed
confirmed
transferable
Other types include:
standby
revolving
back-to-back
Sometimes a letter of credit may combine two types, such as ‘confirmed’ and ‘irrevocable’.
Irrevocable and revocable letters of credit
A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason.
An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.
Confirmed and unconfirmed letters of credit
When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid.
For extra security, the seller may require the letter of credit to be ‘confirmed’ by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.
Transferable letters of credit
A transferable letter of credit can be passed from one ‘beneficiary’ (person receiving payment) to others. They’re commonly used when intermediaries are involved in a transaction.
Standby letters of credit
A standby letter of credit is an assurance from a bank that a buyer is able to pay a seller. The seller doesn’t expect to have to draw on the letter of credit to get paid.
Revolving letters of credit
A single revolving letter of credit can cover several transactions between the same buyer and seller.
Back-to-back letters of credit
Back-to-back letters of credit may be used when an intermediary is involved but a transferable letter of credit is unsuitable.
Uniform customs and practice for documentary credit
To standardise terms and procedures and avoid misunderstandings, a set of international rules for letters of credit have been developed by the International Chamber of Commerce (ICC).
Most commercial letters of credit are governed by these rules, which are referred to as Uniform Customs and Practice for Documentary Credits (UCP). The current version of the rules is UCP 600, which came into effect on 1 July 2007.
The UCP standards give definitions of important terms that are used in letters of credit. When referring to letters of credit, banks and others involved in international trade will generally use the UCP definitions of key terms and phrases.
UCP also sets out general documentary requirements and standard practices for handling letters of credit.
Further information
http://agriexchange.apeda.gov.in/Ready%20Reckoner/LETTER_OF_CREDIT.aspx
Querist : Anonymous
Querist :
Anonymous
(Querist)
17 January 2014
Dear Expert,
You mean to say that the LC/DC confirming Bank will pay money in any circumstances if the LC/DC issuing bank will not pay !!
You mean to say that the LC/DC confirming Bank will pay money in any circumstances if the LC/DC issuing bank will not pay !!
02 August 2025
Yes, that’s correct! In a **confirmed letter of credit (LC)**, the confirming bank adds its own commitment to pay the seller (beneficiary) in addition to the issuing bank’s commitment. So:
* If the **issuing bank fails to pay** (maybe because of financial trouble or political risk in buyer’s country),
* The **confirming bank** must pay the beneficiary **as long as the terms and conditions of the LC are met** and documents are presented correctly.
This gives the seller **extra security** that they will receive payment.
---
### Quick recap of main types of LCs:
| Type of LC | Description |
| ------------------- | ---------------------------------------------------------------------------------- |
| **Irrevocable LC** | Cannot be changed or cancelled without agreement of all parties. |
| **Revocable LC** | Can be changed or cancelled by issuing bank without notice (less secure). |
| **Confirmed LC** | Another bank (confirming bank) guarantees payment in addition to issuing bank. |
| **Unconfirmed LC** | No additional guarantee other than the issuing bank’s. |
| **Transferable LC** | LC can be transferred to another beneficiary (useful with intermediaries). |
| **Standby LC** | Acts as a guarantee to pay if buyer defaults, not meant for routine payment. |
| **Revolving LC** | Used for multiple transactions under one LC up to a certain limit. |
| **Back-to-back LC** | Two LCs used when an intermediary is involved and transferable LC is not suitable. |
---
If you want, I can explain any type of LC with an example or guide you on how banks handle these in practice!
* If the **issuing bank fails to pay** (maybe because of financial trouble or political risk in buyer’s country),
* The **confirming bank** must pay the beneficiary **as long as the terms and conditions of the LC are met** and documents are presented correctly.
This gives the seller **extra security** that they will receive payment.
---
### Quick recap of main types of LCs:
| Type of LC | Description |
| ------------------- | ---------------------------------------------------------------------------------- |
| **Irrevocable LC** | Cannot be changed or cancelled without agreement of all parties. |
| **Revocable LC** | Can be changed or cancelled by issuing bank without notice (less secure). |
| **Confirmed LC** | Another bank (confirming bank) guarantees payment in addition to issuing bank. |
| **Unconfirmed LC** | No additional guarantee other than the issuing bank’s. |
| **Transferable LC** | LC can be transferred to another beneficiary (useful with intermediaries). |
| **Standby LC** | Acts as a guarantee to pay if buyer defaults, not meant for routine payment. |
| **Revolving LC** | Used for multiple transactions under one LC up to a certain limit. |
| **Back-to-back LC** | Two LCs used when an intermediary is involved and transferable LC is not suitable. |
---
If you want, I can explain any type of LC with an example or guide you on how banks handle these in practice!
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