Revolving credits
There is hardly any type of documentary credit that is more
inexact than the revolving credit.
The expression itself hardly tells you anything. It is
necessary that the documentary credit itself evidence a precise description of
the “revolving function.”
The purpose of a revolving credit is to avoid the issuance
of a number of identical documentary credits; e.g. with the same:
• Parties
• Type
of goods
• Documentation
Whereby the documentary credit will “revolve” automatically.
A revolving credit may be:
1. Automatic
2. Non-automatic
3. Cumulative
4. Non-cumulative
Automatic versus non-automatic
In case of an automatically revolving credit, no further
amendments are required when the amount once again falls due or becomes
available.
In case of a non-automatic revolving credit, the issuing
bank must amend the credit each time a revolvement is due.
Cumulative versus non-cumulative
“Cumulative” means, that any undrawn balance in one
revolvement is carried forward to the next.
In a non-cumulative revolving credit, the outstanding
balance is not carried over, i.e. any balance not been drawn is lost.
This means that the revolving credit must indicate whether
or not it is automatic or non-automatic and cumulative or non-cumulative.
In addition the revolving credit should include the number
of times the credit can revolve as well at the time limits for the drawings.
The beneficiary is likely to prefer a cumulative, automatic
revolving credit as they have a bank undertaking for the full amount of the
value of their goods.
The issuing bank (and a confirming bank for that matter),
must book the full liability for the maximum amount that could be drawn under
the revolving credit.
This means that the limit of the applicant will be booked for
the full amount, already when the revolving credit is issued.
For that reason the parties often choose to use a standby
letter of credit – covering the buyer’s payment obligation instead of a
revolving credit.
That way the actual payments are made “outside” the standby
letter of credit, and the standby letter of credit is only used (by the seller)
in case of non-payment. That way the amount of the standby letter of credit
should only cover the maximum outstanding amount at any time.