A revolving documentary credit is issued to avoid the issuance of repeat documentary credits in respect of the same type of goods, same parties and same documentation. However, whilst a revolving documentary credit has some appeal to a beneficiary in that only one set of terms and conditions need to be agreed with the applicant, they will also want the revolving nature of the documentary credit to occur automatically.
A beneficiary will usually prefer a cumulative, automatic revolving documentary credit as it will have a bank undertaking for the full amount of the value of its contract.
An automatically revolving documentary credit will require the issuing bank, and any confirming bank, to record liability entries for the maximum amount that could be drawn under the terms and conditions of the revolving documentary credit and, depending on the value, may cause a strain on the credit facility that is in place, especially in respect of an applicant.
However, banks will often prefer to issue or confirm a non-cumulative, or a cumulative, but non-automatic, revolving documentary credit as it limits the banks exposure to the value of one shipment or amount.
Although a beneficiary will prefer an automatically revolving documentary credit, it should not be forgotten that a non-automatic revolving documentary credit could also aid a beneficiary.
If one documentary credit is issued, it will contain all the documentary conditions that the beneficiary must adhere to. For any subsequent shipments, all that will be required is an amendment giving new expiry and shipment dates together with any different quantities of goods that may be required (in which event the amount will also change). The beneficiary avoids having different documentary credits issued with the possibility of varying terms and conditions that could affect its ability to present a complying presentation.
A revolving documentary credit has three features that need to be addressed in its structure:
1. Whether the revolving nature of the documentary credit is automatic or not;
2. Whether the documentary credit revolves on a cumulative or non-cumulative basis; and
3. The basis under which the documentary credit will revolve.
More information on revolving credits can be found in our Documentary Credits modules at www.tradefinance.training