Transferable versus
Non-transferable Letters of Credit

   A letter of credit (L/C) can be transferable or non-transferable. The L/C usually indicates "transferable" in the case of a transferable credit. In the absence of such indication, the L/C is deemed to be non-transferable

   Transferable Letter of Credit

 
In a transferable letter of credit, the first beneficiary (the exporter) may request the paying, accepting or negotiating bank to make the credit available in whole or in part to one or more second beneficiary(ies). The second beneficiary can be an export-manufacturer or an export-trader. The L/C is expressly designated "transferable" by the issuing bank on instructions of the applicant. If the words "transmissible", "assignable", "divisible", and "fractionable" are used, the L/C is not transferable.

 

   Transferable Letter of Credit

 
In a transferable letter of credit, the first beneficiary (the exporter) may request the paying, accepting or negotiating bank to make the credit available in whole or in part to one or more second beneficiary(ies). The second beneficiary can be an export-manufacturer or an export-trader. The L/C is expressly designated "transferable" by the issuing bank on instructions of the applicant. If the words "transmissible", "assignable", "divisible", and "fractionable" are used, the L/C is not transferable.

The letter of credit that was transferred or made available to the second beneficiary is known as the transferred credit. The bank that makes the transfer is known as the transferring bank.

The term "transferable credit" should not be confused with the "transferred credit", the two terms are different.

Unless otherwise agreed between the first and second beneficiary, the first beneficiary (the exporter) must pay the transferring bank charges (including commissions, fees, costs, or expenses) in respect to a letter of credit transfer.

   

   Unless otherwise stipulated in the credit, the second beneficiary cannot transfer the L/C to any subsequent third beneficiary. The second beneficiary can retransfer the L/C to the first beneficiary.

   Fractions of a transferable L/C can be transferred separately, provided that the sum of the fractions does not exceed the amount of the credit and the partial shipment (or partial drawing in the case of exporting the services) is permitted in the L/C.

   The letter of credit (L/C) can be transferred only on the terms and conditions stipulated in the original L/C, except with the following which may be changed:

  • the L/C amount,
  • the unit price of goods (if stated in the original L/C),
  • the time of shipment,
  • the last date for presentation of negotiation documents,
  • the expiry date of L/C,

any or all of the above may be reduced in the transferred credit to the second beneficiary.

Moreover, the name of the applicant can be substituted with the name of the first beneficiary, unless the original L/C stipulates that the name of the applicant be used in any documents other than the invoice.

In a transferable letter of credit, the first beneficiary can substitute the invoice(s) and draft(s) of the second beneficiary(ies) with his/her own invoice and draft, but the amount thereon must not exceed the amount of the original L/C, and the unit price(s) on invoice must be the same as stated in the original L/C, if any. The difference, if any, between the invoice(s) of the second beneficiary(ies) and first beneficiary's invoice is the amount that the first beneficiary draws.

Since a transferred credit is backed or supported by another credit, it is referred to as the back-to-back credit in some countries. The functionality of the transferable L/C makes it ideal for use in the triangle trade.

The export-trader (the first beneficiary) can use a transferable L/C to transfer the full amount of the credit to his/her supplier, who is an exporter-manufacturer (the second beneficiary) and acts as the consignor (the shipper) of goods. The first beneficiary does not issue his/her own invoice and draft. Consequently, the transferring bank delivers the invoice and draft of the second beneficiary to the issuing bank. The first beneficiary collects a payback from the second beneficiary, representing the difference between the purchase amount from the supplier and the export amount.

The export-trader (the first beneficiary) can also use a transferable L/C to transfer the full amount of the credit to another export-trader (the second beneficiary), who acts as the consignor (the shipper) of goods. This arrangement is popular in countries where the export-trader, and sometimes the export-manufacturer, may want to attain the annual minimum (export) quota requirement so as to qualify for the export incentives. The second beneficiary pays the first beneficiary a commission plus other charges as agreed upon in the arrangement.

Banks in most countries have no problem issuing a transferable letter of credit. However, when it comes to transferring a transferable L/C to the second beneficiary(ies), it is a fact that the banks either restrict or refuse to accept it. Generally, it is more restrictive with bigger banks and in some areas, for example Canada and the U.S.A.. Some of the reasons the bank may refuse to transfer a transferable L/C are as follows:


 

  • The beneficiary of the L/C does not maintain an account or existing credit line with the bank.

     
  • The beneficiary of the L/C does not have sufficient past export records or transactions with the bank from which it may gauge the ability of the beneficiary to perform under the L/C.

     
  • The business relationships between the transferring bank and issuing bank or reimbursing bank is not well established.

     
  • The beneficiary of the L/C lacks personal ties to the bank. Personal ties is very important in certain countries.
Non-transferable Letter of Credit

 
In a non-transferable letter of credit, the beneficiary cannot transfer the credit to other beneficiary. The L/C usually indicates "non-transferable" or "not transferable." In the absence of such indication, the L/C is deemed to be non-transferable.





Assignment of Proceeds


 

In a non-transferable letter of credit, the beneficiary may assign any proceeds that he/she may be entitled under the L/C, but not the right to perform under the L/C.

The assignment of proceeds is not limited to a non-transferable L/C, all letters of credit are assignable.

In layman's parlance, the assignment of proceeds means that you (the assignee), as a supplier to the exporter (the beneficiary of L/C), are assured by bank of being paid first when the beneficiary (exporter) negotiates the L/C, and the balance amount goes to the beneficiary (exporter).

Payment of assignment fees to the bank is made by the exporter, unless agreed otherwise.

In practice, few suppliers and banks are willing to accept payment by assignment, especially when the exporter is new or when more than one assignee is involved in a settlement. Assignment of proceeds is, in fact, not a guarantee of payment. It relies on the ability of the exporter to perform under the L/C. If the exporter fails to meet the L/C requirements, he/she cannot negotiate the L/C. Consequently, the assignment is rendered useless.