QUESTION
WHAT ARE THE POINTS ONE HAS TO KEEP IN MIND, WHILE OPENING REVOLVING LC?
Bhatia J
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ANSWER
Dear Bhatia,
There are some definitions of revolving letter of credit, one of which is defined as follows:
A revolving letter of credit (RLC) is a special letter of credit type which is structured in a way so that it revolves either in value or in time covering multiple-shipments over a long period of time under single letter of credit.
When issuing RLC, please note the following points:
1/ Does RLC resolve in relation to time or value?
If the LC revolves by time, it may be available for an agreed value against a predefined number of times, for example, USD100,000 every month for 12 months.
If the LC revolves by value, the amount would be reinstated after utilization for a potentially unlimited number of times during the validity of the LC.
2/ Is RLC cumulative or non-cumulative?
Cumulative RLC means that the unused sum of the LC can be added to the subsequent shipments. For example, if the beneficiary ships USD95,000 in a given month, the unused amount of USD5,000 can be added to the next shipments.
Non-cumulative RLC means that the unused sum of the LC cannot be added to the subsequent shipments. For example, if the beneficiary ships USD95,000 in a given month, the unused amount of USD5,000 cannot be added to the next shipments.
3/ Does RLC revolve either automatically or subject to a certain provisions?
4/ Is the applicant’s credit line sufficient for total value of all installments?
Please also note that in reality RLC is rarely used as:
(i) it occupies a large amount of the credit line of the applicant;
(ii) banks are not familiar with this type of LC; and
(iii) there is an alternative that is not as complicated as RLC and can help save the credit line as well as costs for opening a new LC, i.e., just issuing a common LC and then issuing amendment to increase the LC value, latest shipment date, expiry date and other details if necessary once it has been fully drawn.
Best regards,
Mr. Old Man
