Red Clause LC and Green Clause LC
What is Red Clause LC?
A Red Clause LC is a documentary credit with a special clause incorporated in it, authorizing the advising bank or the conforming bank to make advances to the beneficiary before presentation of documents stipulated therein. It will have the following information.
- It will bear a clause typed in red authorizing making advance payment to the beneficiary.
- It will usually state the amount that can be advanced with a view to provide funds to the seller prior to shipment. When the shipment is actually made and the documents are presented, the amount advanced will be deducted from the proceeds of export bill.
- In case of non-shipment and non-presentation of documents in compliance with Letter of Credit terms, the bank that has lent the amount will, have the right to demand payment with interest from the issuing bank
- Such an LC authorizes the designated negotiating bank to make clean advances, generally a percentage of the LC amount, to the beneficiary to finance the purchase and preparation for shipment of the relative merchandise. The negotiating bank is under no obligation to supervise the use made of such advances by the beneficiary. The negotiating bank makes such advances relying on the issuing bank for reimbursement, if the beneficiary fails to make the required shipment.
- Unless specified otherwise in the Letter of Credit, proceeds of drawings will be applied to the funds previously advanced, plus interest and other charges, any surplus being paid over to the beneficiary.
Green Clause LC
What is Green Clause LC?
This clause is a refinement of the “red clause”. It will have the following:
- It will be typed in green and hence known as green clause
- It will state the amount to be advanced
- It will require that the goods should be stored in the name/order of the LC opening bank.
The green clause credit authorizes advances to the beneficiary on secured basis i.e. against pledge of the goods.