In this article, we will cover the topic of Letter of Credit from the JAIIB Study Material & Syllabus for the 2023 Exams.



An LC is a form of guarantee which is given by banks to third parties on behalf of their customers. 


A number of parties are involved when the services of a letter of credit are provided to a customer. These parties are mentioned below:

Applicant i.e Buyer-Importer-Opener: He or she is a person who comes to a bank for letter of credit

Issuing Bank: The bank which opens a letter of credit when a customer applies for the letter of credit is known as the issuing Bank.

Beneficiary i.e Exporter-Seller: Beneficiary is someone who is entitled to receive the benefits under the letter of credit.

Advising Bank / Notifying Bank: It refers to the bank situated as the beneficiary for the exporting country. This is the bank through which LC is advised to beneficiary.

Negotiating Bank: Negotiating bank is that bank in the country of the beneficiary which negotiates the bill. Negotiating the bill means making payment on the bill and accepting the documents. 

If a specific bank has been specified as a negotiating Bank, it will be called as one. It is also sometimes called the nominated Bank or the paying Bank. 

In case No bank has been specified as a negotiating Bank, any bank can be a negotiating Bank.

Confirming Bank: The advising Bank only needs to advise the credit to the beneficiary but in case if this bank also confirms it, it also becomes the confirming bank.

Reimbursing Bank: The bank who reimburses the payment to the negotiating, paying or confirming bank as appointed by the issuing Bank, is referred to as the reimbursing Bank.

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The below mentioned are some of the different types of letters of credit which are used regularly:

  • Acceptance Credit: Generally, ordinary letters of credit are sight credits. Sight credits are bills drawn by the beneficiary whose payment is done immediately. 
  • Revocable Credit: The bill which can be amended or canceled by the issuing Bank without serving any prior notice to the beneficiary is referred to as a revocable letter of credit. But in case any negotiating Bank had acted on the credit before the receipt of amendment or cancellation of the LC, then the issuing bank is under liability to reimburse the amount to the negotiating Bank.
  • Irrevocable Credit: Letter of credit which cannot be amended or canceled without taking the beneficiary’s consent is known as irrevocable credit.
  • Confirmed Credit: If a bank who has advised the credit to the beneficiary, provides the confirmation to the same, then that LC it will be called as a confirmed credit. It should be noted that only irrevocable credit can be confirmed.
  • With Recourse and without Recourse Credits: When a bill is drawn by a beneficiary under a letter of credit and if the drawee fails to make the payment, the beneficiary is liable to make the payment to the bank. These types of bills are known as recourse letters of credit. 

But the beneficiary can also exclude the liability by adding the words ‘ without recourse’ on the letter of credit.

  • Transferable Credits: In case of letters of credit, the rights of the beneficiary cannot be transferred. And therefore, by default a letter of credit is non-transferable unless specifically stated otherwise.
  • Back-To-Back Credits: In this case of letter of credit, the beneficiary in whose favour the letter of credit has been issued, uses the same LC to get another credit from reserve Bank in favour of the supplier. In this case, a total of three banks are involved i.e issuing Bank, third Bank and advising Bank.


Anticipatory Letter of Credit

Red Clause Letter of credit: In a normal transaction of letter of credit, the beneficiary is to receive payment when he or she hands over the documents along with the bill drawn under the letter of credit to the negotiating Bank. 

However, there are certain types of letter of credit in which the beneficiary can get an advance of the price. This type of credit generally contains a ‘Red Clause’ through which an intermediary bank is authorised to make an advance payment to the beneficiary before shipment.

Green Clause Letter of Credits: –Green clause is a refinement of the Red clause. In the green clause, not only the payment is allowed to be made in advance (before the shipment) but advances are also allowed to the exporter to cover the storage cost at the shipment port. Together, the red clause and green clause are called anticipatory credits. 

Revolving Letter of Credit: In case of regular exporters, it is a hassle to apply for a letter of credit every time the need to export. So, a revolving letter of credit is a solution to them. Under this LC, a definite amount is fixed which can be renewed as soon as the earlier bills have been paid.



  1. Bill of Exchange: In transactions related to letters of credits, the bill can be drawn only by the beneficiary and the amount has to be within the limit that has been fixed in the letter of credit.
  2. Invoice: It is required that all the details which are mentioned in the invoice must be consistent with the details of the letter of credit.
  3. Revocable Credit: When as per the credit terms, the latter can be altered or canceled by the issuing Bank it is known as revocable credit.
  4. Revolving Credit: In case a definite amount has been fixed which can be used again and again (after all the previous bills have been paid), it is known as revolving credit.
  5. Transferable Credit: Where the rights acquired under a letter of credit can be transferred to third parties, it is known as transferable credit.
  6. Red Clause Credit: In case the beneficiary can make the payment before producing the documents, it is known as Red clause credit.
  7. Green Clause Credit: In case the beneficiary along with the advance payment can also see payment for the storage and warehousing charges, it is known as green clause credit.


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