Article-38-UCP-600-Transferable Credits

A transferable letter of credit is a type of credit, which additionally allows the beneficiary to transfer some or all of the credit to another party, called second beneficiary. The party whose favor a transferable letter of credit is issued called first beneficiary or primary beneficiary.

Requirement of a transferable letter of credit occurs when the actual manufacturer of the goods is someone else other than the beneficiary of the credit and beneficiary acts as an agent or mediator between manufacturer/supplier and applicant by earning some commission. This article provide basic rules regarding a transferable credit. 

Article-38-UCP-600-Transferable Credits

 A. A bank is under no obligation to transfer a credit except to the extent and in the manner expressly consented to by that bank.

No bank (not even issuing bank or a confirming bank) is under any obligation to transfer the credit until a bank provides a written consent to transfer the credit.

B. For the purpose of this article: Transferable credit means a credit that specifically states it is "transferable". A transferable credit may be made available in whole or in part to another beneficiary ("second beneficiary") at the request of the beneficiary ("first beneficiary").

A credit which specifically states via field 40a-“Irrovacable Transferable” or similar word (apart from ‘divisible’, ‘fractionable’, ‘assignable’ or ‘transmissible) is only transferable credit and can be transfer further to second beneficiary (s). A transferable credit can be transferred fully or in part to another second beneficiary at the request of first beneficiary, point to note here that a second beneficiary cannot transfer a transferred credit further to 3rd or subsequent beneficiary.

Transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorized by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank. Transferred credit means a credit that has been made available by the transferring bank to a second beneficiary.

A particular nominated bank (41a) can transfer the credit further if field 40a of a credit states transferable or similar wording; however, in case a credit available with “any bank” then a bank only can transfer the credit to second beneficiary (s) which is specifically authorized by the issuing bank. Transferred credit means a credit which is transferred by the transferring bank to second beneficiary (s).

C. Unless otherwise agreed at the time of transfer, all charges (such as commissions, fees, costs or expenses) incurred in respect of a transfer must be paid by the first beneficiary.

This sub-article indicates that such as commissions, fees, transfer charges etc., should be borne by the trader (first beneficiary), unless otherwise agreed at the time of transfer. It is usual that the fees involved while transferring a transferable documentary credit are paid to the transferring bank prior to the issuance of the transferred documentary credit.

D. A credit may be transferred in part to more than one second beneficiary provided partial drawings or shipments are allowed. A transferred credit cannot be transferred at the request of a second beneficiary to any subsequent beneficiary. The first beneficiary is not considered to be a subsequent beneficiary.

A credit can be transferred either fully to one second beneficiary or partially to different second beneficiaries, provided that partial shipment must be allowed as two second beneficiaries may ship goods at two time which will be deemed partial shipment under the master credit.

E. Any request for transfer must indicate if and under what conditions amendments may be advised to the second beneficiary. The transferred credit must clearly indicate those conditions.

This sub-article requires that if the transferring bank consents to the transfer, it must advise the mediator/first beneficiary instruction at the time of issuing its transferred documentary credit.

F. If a credit is transferred to more than one second beneficiary, rejection of an amendment by one or more second beneficiary does not invalidate the acceptance by any other second beneficiary, with respect to which the transferred credit will be amended accordingly. For any second beneficiary that rejected the amendment, the transferred credit will remain unamended.

Let’s take an example to understand this; transferable credit issued for USD 10,000 for shipment of 10 cars @ USD 1000 each, partial shipments allowed.

Transfer-1: To Second beneficiary “A” for value USD 4000 for shipment of 5 cars @ USD 800 each.
Transfer-2: To Second beneficiary “B” for value USD 4000 for shipment of 5 cars @ USD 800 each.
Amendment-1: Advised to Second Beneficiary “A” to reduce the value to USD 3200 for shipment of 4 cars.
Amendment-1: Advised to Second Beneficiary “B” to reduce the value to USD 3200 for shipment of 4 cars.

Consent receives from “A” accepts the amendment wherein “B” rejects the same, so amendment accepted by “A” and rejected by “B” will be applicable and will not be considered the partial acceptance of the amendments.

G. The transferred credit must accurately reflect the terms and conditions of the credit, including confirmation, if any, with the exception of:

1-the amount of the credit,2-any unit price stated therein,3-the expiry date,4- the period for presentation, or 5- the latest shipment date or given period for shipment, Any or all of which may be reduced or curtailed.

Transferred credit must accurately reflects the terms and conditions, including confirmation (if any) and only above stated points can be reduced.

Amount of the credit and unit price: Amount of the credit and unit price may be reduce and that reduction will be first beneficiary profit.

Expiry date, period for presentation and latest shipment date: Logic to reduce expiry, period for presentation and latest shipment date is; that first beneficiary has to perform under the master credit as per master credit terms and condition to present the document on or before expiry.

The percentage for which insurance cover must be effected may be increased to provide the amount of cover stipulated in the credit or these articles.

The percentage for insurance cover (if any) must be match of with master credit requirement, for example if original credit is issued for USD 1000, insurance requirement is 110 percent, credit transferred for USD 800 then as per master credit insurance requirement is 110% of USD 1000 ei USD 1100 so for transferred credit insurance requirement will remain same equal to USD 1100 as 137%.

We can look the method for calculation:

Master Credit: USD 1000x110/100=USD 1100
Transferred Credit: USD 1000/800x110= 137%. 

The name of the first beneficiary may be substituted for that of the applicant in the credit. If the name of the applicant is specifically required by the credit to appear in any document other than the invoice, such requirement must be reflected in the transferred credit.

The name of the first beneficiary may be replaced as applicant under transferred credit to hide the details of the original applicant, however, in case if the name of the applicant require to be appear in any other document apart from invoice then that requirement must clearly states in transferred credit, usually first  beneficiary will always try to substitute its name as applicant and allow under transferred credit to be mentioned in either invoice or draft or both, because those documents are manipulated by first beneficiary and not presented to original applicant to hide the details of second beneficiary to applicant or vice versa.

H. The first beneficiary has the right to substitute its own invoice and draft, if any, for those of a second beneficiary for an amount not in excess of that stipulated in the credit, and upon such substitution the first beneficiary can draw under the credit for the difference, if any, between its invoice and the invoice of a second beneficiary.

Once the presentation been made by second beneficiary to transferring bank, first beneficiary can substitute the invoice or draft (replace with the original invoice and draft presented by second beneficiary) by its own invoice and draft, by doing this a first beneficiary can earn and draw for the difference amount between its invoice and second beneficiary invoice.

I. If the first beneficiary is to present its own invoice and draft, if any, but fails to do so on first demand, or if the invoices presented by the first beneficiary create discrepancies that did not exist in the presentation made by the second beneficiary and the first beneficiary fails to correct them on first demand, the transferring bank has the right to present the documents as received from the second beneficiary to the issuing bank, without further responsibility to the first beneficiary.

Upon receipt of the presentation from the second beneficiary, transferring bank will send a demand letter to first beneficiary to substitute the invoice and draft (draft if any), in case first beneficiary is not able to substitute the same on first demand or substituted documents have discrepancies which actually do not exist in invoice and draft presented by the second beneficiary, a transferring bank will ask first beneficiary to correct the discrepancy (s); if they fails to do so a transferring bank has rights to present the documents as received from the second beneficiary to the issuing bank without any responsibility.

Practically a transferring bank will not do and follow up with the first beneficiary to substitute the documents as it may cause to loss of business for first beneficiary.

J. The first beneficiary may, in its request for transfer, indicate that honour or negotiation is to be effected to a second beneficiary at the place to which the credit has been transferred, up to and including the expiry date of the credit. This is without prejudice to the right of the first beneficiary in accordance with sub-article 38 (h).

When first beneficiary submitting its request for transfer, they may indicate that honour or negotiation is to occur at the place to which the transferred documentary credit is to be transferred. Such request is subject to the consent of the transferring bank

K. Presentation of documents by or on behalf of a second beneficiary must be made to the transferring bank.

One of the biggest risks that can occur with a transferred documentary credit is that the documents of the second beneficiary by-pass the transferring bank by being sent directly to the issuing bank. This sub-article provides a rule regarding the disposal of documents which must be presented at transferring bank counter.

Important points to remember: 

Transferable Credit: A credit which can be transfer.
Transferred Credit: A credit which is transferred to second beneficiary (s).
Transferor: A Bank who makes a transfer.
Transferee: A second beneficiary (s); a party whose favour credit is being transferred.
Master Credit: Original credit ei issued in favour of first beneficiary.
Mediator or trader: 1st beneficiary who works for margin amount and arranges the shipment from 2nd beneficiary to applicant.

-    When the above stated points are not enough for a trader to arrange the shipment of the goods by a manufacturer to applicant, a back to back credit may be used.
-    A transferring bank must not disclose the applicant information to second beneficiary or vice versa else they may deal directly and a trader or mediator will  lose its business.