The Letter of credit( LC ) can be transferable or non-transferable. In case of transferable credit, the word ‘transferable’ is mentioned on the LC. However, in the absence of such an indication, the LC is deemed to be non-transferable.
What is a Transferable Letter of Credit?
A transferable Letter of Credit is a credit facility in which the first beneficiary has the right to pass on the available credit to another party, (the secondary beneficiary).
This is possible only when the Letter of Credit is marked as transferable by the issuing bank upon the instructions of the buyer or the importer of goods.
Transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank,
a bank that is specifically authorized by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank.
Transferred credit means a credit that has been made available by the transferring bank to a second beneficiary.
How does a Transferable Letter of Credit Work?
A transferable LC can only be transferred to one or more second beneficiaries, but it cannot be transferred further.
The first beneficiary (the exporter) can request the paying bank to make the credit available wholly or in part to one or more party or second beneficiaries in a transferable LC. Here, the second beneficiary can be an export manufacturer or an export trader.
Fractions of a transferable LC can be transferred separately. However, the sum of the fractions of transfer must not exceed the total amount of the credit. Also, there must be a mention of permission for partial shipment in the LC.
The terms and the conditions mentioned in the original LC cannot be changed while transferring the LC.
The following changes are permitted in the Transferable L/C,
- The amount of the LC
- The unit price of the goods
- The time of shipment
- The last date for the presentation of documents
- The expiry date of the LC
The percentage for which insurance cover must be effected may be increased to provide the amount of cover stipulated in the credit.