Transferable LC

A transferable LC is designated as transferable by the LC issuing bank, under which the beneficiary (first beneficiary) may request the advising bank (the transferring bank) to make the credit available in whole or in part to one or more other Beneficiary(ies) (second beneficiary(ies).

                                    Such Credits are governed by Article 48 of UCP according to which:

  1.  A Credit can be transferred only if it is expressly designated as “transferable” by the Issuing Bank
  2. The Transferring Bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank.
  3. If the first beneficiary retains the right to refuse to allow the transferring bank to advise amendments to the second beneficiary, it must irrevocably instruct the transferring bank at the time of making request for the transfer and the transferring bank must also inform the second beneficiary of such conditions
  4. If the Credit is transferred to more than one second beneficiary, and if one or more beneficiaries refuse to accept an amendment, it will not invalidate the acceptance by the other second beneficiaries. For those beneficiaries who rejected the amendment, the letter of credit will remain un-amended.
  5. The changes of the transferring bank, such as commission, fees, costs or expenses are payable by the first beneficiary, unless otherwise agreed.
  6. Unless specifically authorized, the credit can be transferred only once i.e. the second beneficiary cannot request for further transfer of the credit
  7. If partial shipments/drawings are allowed, fractions of a transferable separately provided total amount so transferred does not exceed the amount of the LC.
  8. The credit can be transferred only on the terms and conditions specified in the original credit with exception of:
    • The amount of the credit
    • Any unit price stated therein
    • The expiry date
    • The last date of presentation of documents-Article 43
    • The period for shipment
    • Any or all of which may be reduced or curtailed.

The main purpose of such a credit is to allow the first beneficiary who is a middle man or agent of the actual supplier, to transfer the LC in favor of the suppliers, while still allowing the first beneficiary to substitute his invoices and draft for those presented by the second beneficiary to conceal the identity of the supplier as well as to draw difference being his profit on the transaction.

Back-to-Back LC.

This refers to a credit opened by the beneficiary of the first LC in favor of another party (supplier of goods) on the security and strength of the first LC. This represents entirely two different contracts and two different documentary credits; one credit serves as security for the other e.g. a middleman receives LC (first credit); he opens LC in favor of supplier (second credit). The second credit must not have terms more professional than the terms of the original LC and the expiry date must permit enough cushioning time for documents to be presented under the original credit. A back-to-back credit is risky in the sense that if due to strike, mail delays or insolvency of the middleman, the performance under the prime LC cannot be completed, the bank issuing the back-to-back credit would still be liable to effect payment against proper documents submitted by the beneficiary of the back-to-back credit.

The followings are the major differences between a Transferable LC and a Back-To-Back LC

  1. In a transferable credit the ultimate buyer is aware that he is dealing with a middleman whereas in back to back he would not know.
  2. In a transferable credit the middleman and his bankers are not liable for the performance of the second beneficiary whereas in a back-to-back credit the middleman is applicant and beneficiary of the first credit and the bank, as the issuing bank (for second LC) remain liable.

In a transferable LC middleman only gets “profit” and no debit is made to his account and hence no impact on his cash flow whereas in Back-to-Back LC the middleman is applicant and beneficiary of first credit and the hence the transaction will move through his account.

Difference between Transferable LC and Back to Back LCInternational Tradeback to back LC,LC,Transferable Credit,transferable LC,Types of LCTransferable LC A transferable LC is designated as transferable by the LC issuing bank, under which the beneficiary (first beneficiary) may request the advising bank (the transferring bank) to make the credit available in whole or in part to one or more other Beneficiary(ies) (second beneficiary(ies).                                     Such Credits are governed by...Investment analysis basics