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Following is the detailed response on the query
Quote
Revolving Credits are used between buyers and
sellers who have a long-standing trading relationship and experience in the
shipment of the goods described in the credit. The buyer and seller arrange
for a Credit to be issued which allows the amount available on the Credit to
be reinstated usually without any specific amendment. From the point of view
of the buyers and sellers this arrangement may save not only bank charges
but also overhead costs incurred in keeping records in respect of each
amendment and monitoring that shipments fit in with such amendments. This
arrangement, in which the continuing availability of the Credit revolves
upon shipment or presentation of documents or at a specific time, i.e. 1st
of each month and not upon specific amendment, is known as a Revolving
Credit.
Banks issuing revolving credit should specifically
exclude Art 32 (Instalment Drawings or Shipments). Issuing bank undertakes
to reinstate the credit after each drawing or time period (e.g. monthly).
The number of utilisations and the period of time within which these must
take place are specified in the documentary credit. The revolving
documentary credit is used when a purchaser wishes to have certain partial
quantities of the ordered goods delivered at specified intervals multiple
delivery contract) and when multiple documents are presented for this
purpose. Such credits may be cumulative or non-cumulative. A revolving
documentary credit is one by which, under the terms and conditions thereof,
the amount is renewed or reinstated without specific amendments to the
documentary credit being required. The revolving documentary credit may be
revocable (specifically this needs to be mentioned as per UCP 600) or
irrevocable, and may revolve in relation to time or value.
Where reinstatement is dependent upon time
In these circumstances a specific amount is allowed
to be drawn within each specific period as stipulated in the credit during
its validity. For example: the credit may indicate that USD 25K may be drawn
each month during the six-month validity of the credit. The reinstatement of
the amount may be cumulative or non-cumulative.
Cumulative Reinstatement
Where the credit indicates that the reinstatement is
on a cumulative basis, in the above example the sixth instalment may be the
cumulative totals for six months, i.e. USD 150K.
Non-Cumulative Reinstatement
In the above example if the credit indicates that
the reinstatement of the amount is non-cumulative, it means that if one
month's shipment of USD 25K is not made (either completely or partially), it
cannot be carried forward to the succeeding month. If for example, no
shipments have been effected for five months, the drawing for the sixth
month is restricted to USD 25K.
Where reinstatement is dependent upon value
Sometimes revolving credits may indicate that the
amount is to be reinstated upon utilisation within the overall validity of
the credit. In the absence of any other indication, such an authorisation
allows reinstatement upon each and every utilisation and in the above
example the beneficiary could theoretically make shipments every day for 6
months i.e. 180 reinstatements of the amount shipped. In these circumstances
it is almost impossible to calculate the liability. This kind of documentary
credit involves the buyer and the banks in an incalculable liability. To
maintain a degree of control, it would be necessary to specify the overall
amount that may be drawn under the documentary credit. Such amount would
have to be decided by the buyer and the seller to meet their requirements
and would have to be agreed to by the Issuing bank. For this reason banks
issuing revolving credits where reinstatements are dependent upon value may
indicate:
- The maximum amount of each drawing.
- The overall amount for which the credit can be
drawn for all shipments during its validity.
- That reinstatement is dependent upon receipt by
the negotiating bank of the issuing bank's authorisation for reinstatement.
This type of reinstatement is not automatic.
Examples of the wording of restrictions in respect
of a. and c.
This credit shall revolve for USD 25,000 during
its validity up to a maximum overall drawing of USD 250,000/-.
Reinstatements of the amounts of presentations under this credit will be
advised to the beneficiary by yourselves (negotiating bank) only after
receipt of authority from the Issuing Bank.
Advantages:
a) Saves bank charges and overhead cost that may be
incurred in monitoring amendments to a non-revolving credit.
b) For the exporter documents preparation is simple
- he can use one template for all the shipments since there is no change of
the issuing bank and the LC number.
c) In case of automatic re-instatement, exporter is
assured of the payment for the entire order, provided he presents conforming
documents.
Disadvantages for the applicant:
a) In case of the fall in the price of the
merchandise say after one revolution (drawings) under the credit and the
applicant wants to exit, it would be difficult since the bank has committed
for the number of revolutions under the credit.
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