Types of Letters of Credit

By How the Credit Is Honoured

UCP 600 Article 6(b) requires every credit to state which one of these four it is available by.

By Who Stands Behind It

Irrevocable credit

The default. UCP 600 Article 3 says a credit is irrevocable even if it does not say so, and Article 10 bars amendment or cancellation without the issuing bank, the confirming bank (if any) and the beneficiary all agreeing.

Revocable credit

Not recognised under UCP 600. The older UCP 500 still allowed a credit to be issued as revocable, so revocable credits appear in older texts and as a distractor.

Confirmed credit

A second bank, usually in the exporter's country, adds its own definite undertaking to honour or negotiate a complying presentation (Article 8). The exporter now has two banks liable, which covers issuing-bank and country risk.

Silent confirmation

A private arrangement between the beneficiary and a bank to cover the issuing bank's risk without the issuing bank's request. It is outside the confirmation UCP 600 describes, so that bank does not hold the status of a confirming bank under the rules.

By Special Feature

Transferable credit

Lets the first beneficiary, usually a trader, transfer the credit in whole or part to one or more second beneficiaries (Article 38). It must say "transferable", it can be transferred only once, and the transferring bank need not transfer except to the extent it expressly consents.

Back-to-back credit

Two separate credits. The trader's bank issues a fresh credit in favour of the supplier on the strength of the master credit received. Unlike a transfer, the second credit is a new undertaking by the trader's bank.

Assignment of proceeds

The beneficiary assigns the money it is entitled to, not the right to perform under the credit (Article 39). Possible even when the credit is not transferable.

Revolving credit

The amount reinstates after use, for repeat shipments to the same buyer. It can be cumulative (unused amounts carry forward) or non-cumulative.

Red clause and green clause

Allow the beneficiary to draw an advance before shipment. A green clause adds that the goods are stored in the bank's name as security.

Standby letter of credit

A credit used as a guarantee: it is drawn only if the applicant defaults. It can be issued under UCP 600, which applies to standbys to the extent applicable, or under ISP98, written for standbys.

How CCFE Tests This

Expect short classification MCQs, often with an Indian trade scenario wrapped around them.

• check_circle"Which type suits a trader who does not want the buyer and supplier to see each other's prices?" Transferable credit, because the first beneficiary may substitute its own invoice and draft.
• check_circle"A credit silent on revocability is..." Irrevocable. The trap option treats revocability as the default, which no current rule does.
• check_circle"Which credit allows pre-shipment advances to the beneficiary?" Red clause. The distractor is often a revolving credit.
• check_circleConfusing negotiation (bank buys the documents and gives value) with acceptance (bank signs a time draft) is the most common slip in the availability questions.

FAQs