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Anticipatory Credit 1

Anticipatory Credit (Red Clause/ Green Clause LCs)

1. Introduction

Documentary credit, in its simple form, provides payment to beneficiary/exporter against


presentation of documents evidencing shipment of goods described in the credit. In
other words, the exporter gets payment subsequent to shipment or a post shipment
payment against compliant documents. In order to obtain payment, the exporter has to
procure/produce goods, ship them and present documents to the nominated bank for
negotiation and payment. To procure/produce goods, he has to fund himself and/or
approach his banker to provide pre-shipment finance by way of packing credit on the
strength of the documentary credit received by him.

To avoid the hassles of availing pre-shipment finance and incurring interest and other
cost, the exporter would like to have an irrevocable credit that would provide pre-
shipment payment or payment even before procurement/shipment. The type of credit
that enables an exporter/beneficiary to secure pre-shipment payment or payment in
anticipation of shipment is known as anticipatory credit.

2. Types of Anticipatory Credit

Anticipatory Credit

Red Clause Credit Green Clause Credit

LC that provides 40%/ 50% preshipment


payment to beneficiary against a simple LC that provides 70%/ 80% preshipment
undertaking to present compliant payment to beneficiary against evidence of
documents on or before stipulated expiry goods ready for/ awaiting shipment (i.e.
date and warehouse receipts or forwarder’s cargo
receipts (FCR) and
balance 60%/50% against presentation of
shipping documents (e.g. BLs etc) as per balance 30%/20% against presentation of
terms of LC. shipping documents (e.g. BLs etc) as per
terms of LC.

3. Red Clause Credit

A red clause credit is a special type of credit with a clause inserted which authorizes the
advising or confirming bank to make advances to the beneficiary before presentation of
the documents.
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The credit is so called because the clause was originally typed in red ink in the manual
typewriter to draw the beneficiary’s attention. The clause is added at the requests of the
LC applicant who instructs the issuing bank to incorporate such a clause in the credit. It
specifies a certain percentage of the LC amount (or a fixed sum) to be given to the
beneficiary before he delivers goods. This type of finance is known as pre-shipment
finance, which is usually in the form of a loan from the advising/confirming bank to the
beneficiary at the request of issuing bank.

Finance is given to the beneficiary against his undertaking to the financing bank
(advising/confirming bank) that he promises to ship the goods and submit documents in
strict compliance with LC terms and conditions. If he fails to ship the goods and default
in payment of the pre-shipment finance, the financing bank has a right of recourse to the
instructing bank (i.e. the issuing bank) for the amount advanced plus interest. The
issuing bank, in turn, has a right of recourse against the applicant.

Sometimes, instead of asking the advising bank/confirming bank to finance the


beneficiary on its behalf, the issuing bank may give a pre-shipment undertaking. Here,
the beneficiary is instructed to draw a set of draft on issuing bank, together with an
undertaking to ship goods and present compliant documents. This set of draft and the
undertaking are sent for payment (pre-shipment finance) to issuing bank, which then
remits the proceeds to the beneficiary. Again, if the beneficiary fails to ship the goods
and default in repayment, issuing bank has a right of recourse to the LC applicant. In
most cases, issuing bank may have taken additional security to back up the amount of
the pre-shipment finance. The following example is a red clause credit.

Documentation of a Red Clause Credit

Credit Amount: USD$500,000


List of Documents to be Presented

Terms of Payment
Advance payment up to 40% (i.e. USD$200,000) will be paid against presentation of the
following documents:

1. Beneficiary’s drafts at sight in duplicate drawn on our bank.


2. Beneficiary’s undertaking certifying to deliver all of the goods within the delivery date
and to present full set of documents in full compliance with the terms and conditions
of this credit.
3. Refund the advance payment plus interest at 4% p.a. if no shipment is effected within
the shipment date stated in the credit.

Second payment up to 60% (i.e.USD$300,000) against presentation of the following


documents:

1. Beneficiary’s draft at sight in duplicate drawn on our bank..


2. Signed commercial invoice in quadruplicate.
3. Full set of clean on board bills of lading made out to order, blank endorsed and
marked “freight prepaid” notifying LC applicant.
4. Certificate of origin in triplicate.
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4. Green Clause Credit

(a) Sometimes, it may be very risky for a bank to issue a red clause credit for its
customers as the issuing bank has no control over the goods.

(b) In green clause credit, the advances are made by the advising bank upon the
beneficiary producing a warehouse receipt/ forwarder’s cargo receipt, thereby
overcoming the weakness of a red clause credit.

(c) Warehouse receipts are made out in the name of the bank actually making the
advance.

(d) Advising bank retains the control over the goods.

(e) Goods are released for shipment by the warehouse keeper on the instruction of the
advising bank.

Documentation of a Green Clause Credit

Credit Amount: USD$1 million


List of Documents to be Presented

Terms of Payment
Advance payment up to 70% (i.e. USD$700,000) will be paid against presentation of the
following documents:

1. Beneficiary’s drafts at sight in duplicate drawn on our bank.


2. Warehouse receipt issued by SGS.
3. Inspection certificate of quantity and quality issued by SGS.
4. Export license issued by government authority.

Final payment up to 30% (i.e. USD$300,000) against presentation of the following


documents:

1. Beneficiary’s drafts at sight in duplicate drawn on our bank.


2. Signed commercial invoice in triplicate.
3. Full set of clean on board bills of lading made out to order blank endorsed and
marked “freight prepaid” notifying LC applicant.
4. Inspection certificate of quantity and quality by SGS
5. Export license issued by government authority
6. Certificate of origin in triplicate

5. Common Risks to and Precautions Taken By Issuing Bank

5.1 Red Clause Credit


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1. Beneficiary may misuse funds advanced to him and may not make the shipment
and present documents under the credit.

2. Enforcement of beneficiary’s undertaking letter may be difficult and time


consuming.

3. Credit should be issued nominating/restricting a bank for negotiation. It is


advisable to nominate the bank giving the advance being the negotiating bank.

4. Should specifically mention the amount of the advance to be made by either


specifying the percentage of the credit amount or a fixed sum.

5. Should specify whether the interest for the advance is for account of the
beneficiary or for account of the issuing bank (normally such charges are to be
borne by the beneficiary).

6. Should specify if the advance is to be made in the currency of the credit or in the
currency of the beneficiary’s country (normally in the currency of the credit).

7. Should incorporate an undertaking clause undertaking to pay the advising bank


(or the issuing bank) the amount advanced plus the interest and bank charges
should the beneficiary not export the goods.

8. The portion of pre-shipment finance should be further supported by tangible


security.

5.2 Green Clause Credit

1. Beneficiary/supplier must be a reputable, strong party and has good experience


sourcing for such goods (e.g. seasonal commodities).

2. Prior arrangements between applicant and beneficiary in identifying inspector


and warehousekeeper/ freight forwarder.

3. Goods financed can be stored over a period of time, has alternate markets and
must not display violent price movements.

4. Close co-ordination with nominated bank for presentation of warehouse receipts/


inspector certificates, shipment dates and expiry dates etc.

6. Role of Nominated Bank in Anticipatory Credit

6.1 Red Clause Credit

1. Release pre-shipment advance strictly as per LC terms and claim from issuing
bank promptly. Red Clause advances recoverable only at time of negotiation of
documents should not be accepted, except under special circumstances and with
approval of underlying bank risk.
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2. Follow up with beneficiary for presentation of shipping and other documents as


per LC terms.

3. Carefully scrutinize the credit and take safeguards against penalty provisions, if
any.

4. Claim balance amount (against presentation of documents) as per LC terms.

6.2 Green Clause Credit

1. Verify and ensure the warehouse receipts presented comply with LC terms,
before release of pre-shipment payment.

2. Diarise expiry dates for shipment/presentation of documents and follow up with


beneficiary for presentation of documents as per LC terms.

3. Claim balance amount against documents, as per LC terms.