What is Revocable Letter of Credit?
Revocable Letter of Credit is a letter of credit that can be revoked, amended, or canceled at by the issuing bank without prior notice or consent of the beneficiary.
Revocable Letter of credit is rarely used because it doesn’t give sufficient security or protection to the beneficiary. Most of the time, the importer’s bank refuse to issue such kind of Letter of credit due to the terms and conditions of the LC.
UCP 500 which was the ” Letter of Credit Rules published by ICC”, mentioned two types of Letter of credit – Revocable and Irrevocable Letter of credit. UCP 500 indicated that a letter of credit is irrevocable in default of the indication whether it is revocable or irrevocable. Existing Letter of Credit Rules UCP 600, where Revocable Letter is omitted from the list. Hence, this is clear only Irrevocable Letter of credit can be used. A credit is irrevocable even if there is no indication to that effect.
What is Irrevocable Letter of Credit?
Irrevocable Letter of Credit is a letter of which cannot be amended and canceled without prior consent of both the issuing bank and the beneficiary. Issuing bank cannot solely modify or cancel the letter of credit. The payment security of irrevocable letter of credit is much better than revocable letter of credit.
Banks allows only irrevocable letter of credit. The Confirming bank is not obligated to add its confirmation to any amendment, and the transferable letters of credit should not be issued in a revocable form.
Irrevocable Letter of Credit are used to facilitate international transactions and to secure payment when a seller is unwilling to offer trade credit to a customer. The bank gives a guarantee to the beneficiary that the customer’s bank will pay the amount if customer fails to do so.
Is Irrevocable Letter of Credit can be amended?
The answer is “Yes”. The term irrevocable is not used to describe that the obligation of the seller and buyers can be revoked, but it implicates that the issuing or the beneficiary bank should honor the immutable terms and will meet its obligation as a financial intermediary. It means, the issuer is irrevocably bound to honor the seller/beneficiary’s presentation of complying documents once the LC has been issued. However, in case of changes both parties have to agree upon the proposed amendments.
Can Irrevocable Letter of Credit be revoked or cancelled?
Yes. Under the UCP 600 guidelines, all letters of credit must contain an expiry, and the last date by which the shipping documents must be presented (usually within 21 days of the date of shipment).
The importers and exporters have to be wary of the transit time of the cargo transported, and factor that into consideration when drafting a Letter of Credit’s expiry date.
If the LC has expired, or the document is presented after the last day in the LC. The banks have the right to revoke the irrevocable LC.