spot_img

Red clause LC and Green Clause Letter of Credit

Red Clause Letters of Credit (Red Clause LCs)

A Red Clause Letter of Credit incorporates a special clause that allows the beneficiary (the person who will derive benefit from the Letter of Credit being issued) to draw a pre-shipment advance against a simple receipt and a draft.

The Red Clause Letter of Credit can provide the beneficiary with credit that may not otherwise be available locally or with cheaper financing, by having the funds advanced by the issuing bank.

Full Course Videos in Hindi English
Check Here
————————————————————-
jaiib ppb short notes part 1
Check Here
————————————————————-
jaiib exam free study material
Check here
————————————————————-
jaiib study material pdf notes 2023
Get Tests Here
————————————————————-
how to prepare for ppb
Check Here
CAIIB ABM - Advanced Bank Management Syllabus Priority
Check Here
————————————————————-
Bank Financial Management - BFM Syllabus Priority
Check Here
————————————————————-
110+ CAIIB Case Study Videos
Check here
————————————————————-
ABM BFM Retail Previous Year Questions
Get Tests Here
————————————————————-
Full Course Videos in Hindi English
Check Here
————————————————————-
ABFM and BRBL Courses now available
Click Here
CAIIB Crash course

What was the background of the Red Clause Letter of Credit?

It is reputed that the Red Clause Letter of Credit was started on the back of the Australian Wool Trade. Exporters in Australia were able to draw money in order to purchase wool and the clause that stated this was red. The clause was written in a red colouring so as to draw attention to the nominated bank. However, in todays market the advantages that were associated with Red Clause Letters of Credit are usually cancelled out by the request of an Advance Payment Guarantee.

LC – Letter of Credit and its Types and how it Works. In Detail

As stated above, the reason for the red clause was to assist the exporter as a pre-export finance product. It was mainly used in the farming, agriculture and in general the commodity markets as it provided finance for the buyer to source commodity from the grower. It is not obsolete as cotton and wool buyers still use it to finance their pre-shipment costs.

How does a Red Clause LC work in practice?

There will be an instruction from the importer to the advising bank, which will be for a percentage of credit available to be advanced prior to shipment. This will usually be around 20-25% of the amount of the Letter of Credit value. It will also usually be for the amount to provided in the local currency and will be against security from the exporter. The funds will be repaid when the documents are presented and goods are shipped. In terms of costs, the amount of the advance plus interest and fees are deducted from the available credit.

Green Clause Letters of Credit (Green Clause LCs)

Green Clause Letters of Credit are usually used in the commodity sector and were originally written in green ink. There would be a specific instruction from the applicant to the issuing bank which will enable the exporter to purchase commodity from the grower. Similar to a Red Letter of Credit, it finances pre-shipment costs.

There are differences from Green Letters of Credit to Red Letters of Credit. The differences to Red Letters of Credit are that advances of cash are made against the actual documents of title and not simply just an undertaking to produce them. Therefore it is a secured lending product and not unsecured. It is secured against commodities that will be registered in the banks name and usually up to 75-80% of the face value of credit can be advanced. Therefore, security is provided to the buyer and the buyer can be confident that there are goods which are at the bed of any advance.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

šŸ¤© šŸ„³ JAIIB NEW BATCH START šŸ„³ šŸ¤©spot_img
šŸ¤© šŸ„³ JAIIB CAIIB CLASSES šŸ„³ šŸ¤©spot_img

POPULAR POSTS

RELATED ARTICLES

Continue to the category

JAIIB FREE NOTES OF PPB 2024 | BANKING OMBUDSMAN SCHEME

JAIIB FREE NOTES OF PPB 2024 | BANKING OMBUDSMAN SCHEME In this article, we will discuss the Banking Ombudsman Scheme (which falls under the syllabus...

FREE BANK PROMOTION NOTES FOR 2024 | RISK MANAGEMENTĀ 

FREE BANK PROMOTION NOTES FOR 2024 | RISK MANAGEMENT So, the next session has already begun & there should not be anything that does not...

CAIIB RISK MANAGEMENT MOCK TEST 2024

FREE RISK MANAGEMENT MOCK TEST 2024 | CAIIB 2024 This post contains IIBF CAIIBā€™s paper - Risk Management Mock Tests as per the CAIIB Syllabus...

JAIIB Principles and Practices of Banking Study Material Live Class Previous Year Questions Part 12

JAIIB PPB STUDY MATERIAL LIVE CLASS | PREVIOUS YEAR QUESTIONS PART 12   JAIIB exam is one of the premium flagship courses offered by IIBF twice...