How does a letter of credit work in imports and exports?
How does a letter of credit work in imports and exports?
September 11, 2022
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A revocable letter of credit is one that the issuing bank may cancel or modify at any time without the beneficiary’s knowledge or approval. According to the exporter, such LCs are not secure.

Additionally, since no bank will add confirmation to revocable LCs, exporters cannot get such LCs confirmed. However, the opening bank is required to uphold its commitments if any bank had negotiated bills before receiving the notice of revocation. The LC needs to make it abundantly apparent that the same is revocable.

Reasons for a Bank to Withdraw a Letter of Credit

The issuing bank may choose to revoke the letter of credit for a variety of reasons.

First, there are unfavorable situations that prevent the bank from upholding the letter of credit’s requirements, such as political unrest, weakening market conditions, etc. There is a good likelihood that an Afghan bank that was damaged by a bomb may cancel the letter of credit.

The second option is that the issuing bank may decide to terminate the letter of credit if it does not have enough money to honor it. In the wake of the 2008 financial crisis, some banks, for instance, declared bankruptcy. In such a circumstance, it may cancel every revocable letter of credit it has.

There is no security associated with a revocable letter of credit. The applicant’s history and credit score were the only factors considered by the bank when issuing this letter of credit.

It is important to understand that the banker always has the option to withdraw any revocable letter of credit, whether it is secured or unsecured.

At stages 3, 4, and 5 click the link to read all the stages… The issuing bank may alter or revoke the letter of credit at any time. The bank has the right to request changes to the letter of credit’s terms, such as requesting an extra document or delaying the letter of credit’s expiration date. Additionally, the issuing bank has the option to avoid acting as a middleman and reject the payment. The buyer must give the vendor cash directly in this situation. It now falls under the seller’s control.

An irrevocable letter of credit is quite uncommon. There are a number of reasons for this. In the first instance, it is subject to the danger of non-payment.

Writer: Shakir Ali Rajput: Global Trade Professional, For additional information, please contact me at WhatsApp (00971) 543785186 or email address.

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