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Unit 2: Methods of Payment and Incoterms

and secure mode for payment realization for the exporter and is rarely used in international Notes
trade.
2. Irrevocable L/C: An irrevocable letter of credit cannot be amended, altered and cancelled
by either party of the trade deal without seeking the consent of the other party. In the
UCP600, as applicable from July 1, 2007, all letters of credit are irrevocable unless otherwise
specified and stated in the L/C. An irrevocable Letter of Credit is quite safe and secure as
the issuing bank gives a contractual undertaking to the exporter for making payments,
subject to the fulfilment of terms and conditions of the letter of credit.
3. Unconfirmed L/C: An unconfirmed letter of credit is one that is forwarded by the advising
bank directly to the exporter. Under such letter of credit, the exporter bank does not
undertake or commit itself for making payment to the exporter at a future date, but
ensures that L/C is authentic and exporter can enter into this trade deal.

4. Confirmed L/C: A confirmed letter of credit is one in which the advising bank undertakes
and confirms that payment will be made to the exporter provided trade documents are not
discrepant and presented accordingly to confirming bank. Such L/C covers the risk of
default and insolvency of issuing bank or the unforeseen political conditions in the
importer’s country, such as restrictions on outflow of foreign exchange, inconvertibility,
etc. The confirming bank will impose additional charges for confirming a letter of credit
and such charges have to be paid by the exporter, which can be between 2% to 10%
depending on the ranking of bank and the importer country’s economic and political
stability. The confirmed L/C is one of most secure and safest modes of payment in
international trade.
5. Special or Stand by Letters of Credit: Special or Stand by letters of credit are governed by
ISP98 International Stand by Practices of the International Chamber of Commerce and are
used as support in cases when a less secure mode of payment has been agreed between the
exporter and importer. If the exporter does not receive the payments from the importer
under the agreed mode, he can claim payment under the special or standby letter of credit.

Some documents are required for requesting the payment under the Stand by Letter of
Credit:
(a) The original standby letter of credit;

(b) The sight draft for the amount due from importer;
(c) The copy of the unpaid invoice;
(d) The proof of dispatch of goods such as bill of lading and

(e) A signed declaration from the beneficiary stating that payment has not been received
by the due date and therefore reimbursement is claimed by letter of credit.
Post-liberalisation of trade, Special or Stand by Letter of Credit are not very attractive as
the transaction cost is high for processing the payment through Special or Stand by Letter
of Credit.
6. Revolving Letter of Credit: Revolving Letter of Credit is popular among regular traders;
dealing in the same nature of goods and services round the year. This type of letter of
credit is advisable for those traders who deal in the same product round the year. They
need not request, process and understand the terms and conditions of L/C each time as
under the revolving L/C; the credit limit will be reinstated automatically for further
regular shipments until the credit is fully drawn. Revolving L/C can be framed either on
the time basis or on value basis. The most important feature of this type of L/C is that it
reduces the time and transaction cost involved in opening amending the L/C and processing

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