29 May 2008

Revolving Letter of Credit

A revolving credit (RC) is one that is available for an amount that remains constant for a given period of time so that whenever it is drawn upon, it becomes available again for the full amount, either immediately or as soon as advice is received from the issuing bank that earlier presentations are acceptable to them. Alternatively, it may be made available for a reducing sum during a given period of time, to become automatically available again for the original sum at the end of the period. If the renewal of amount is not automatic but subject to reinstatement instructions after each drawing, it is not strictly a true RC but rather one of fixed amount which has to be increased by means of amendment.

RC may be renewable as to amount and time as follows:

· RC may be available for up to, say USD10,000 at any one time, and as soon as a drawing is made the amount drawn immediately becomes available gain. Often there is no limit to the number of drawings that may be made of up to USD10,000 each, except perhaps a qualification as to how much may be drawn per day; such RC continues to be drawn upon and reinstated until it expires.

· RC may be available for up to USD10,000 per week or per month. The amount is automatically available each week or month irrespective of whether any sum has been drawn during the previous week or month. This can be on a cumulative or non-cumulative basis, cumulative being more common, i.e. un-utilized amounts are carried forward and added to the total amount available for the following week or month.

RCs that revolve around amount, as in the first example, are rarely confirmed since it is virtually impossible to establish the total liability that may be incurred during the life of the RC. RCs that revolve around time (example 2) are more likely to bear confirmation since the overall amount of liability is ascertainable.

RCs should not be confused with LCs available by instalments. If an LC has an overall limit as to amount and validity and permits specified drawings or quantities of goods to be shipped at appointed periods of time during that validity, it is an LC that is available by instalments and as such is subject to UCP 600 article 32, “if a drawing or shipment by instalments within given periods is stipulated in the credit and any instalment is not drawn or shipped within the period allowed for that instalment, the credit ceases to be available for that and any subsequent instalment.”

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