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What is an Irrevocable Letter of Credit?

Irrevocable Letter of Credit provides security of payment to its beneficiary who is usually an exporter. In this blog, learn more about meaning and benefits of ILOC.

A Letter of Credit (LC) is a payment method used by businesses – it is a document issued by a bank or a financial institution that guarantees that the exporter will receive payment from the importer on time for the full or remaining amount. Among the many types of LCs, an Irrevocable Letter of Credit (ILOC) is a guarantee for payment issued by the importer’s bank for the transaction of goods between importer and exporter, which cannot be cancelled during any specified time period. ILOCs are mostly used to facilitate international trade and offer additional risk protection for the exporter by providing a guarantee of payment from both the importer and exporter’s banks.

What is an Irrevocable Letter of Credit?

As the name suggests, an Irrevocable Letter of Credit cannot be cancelled or amended without the explicit agreement of all parties (importer, exporter and issuing bank). This LC is an official correspondence from the bank that it guarantees payment for goods being purchased by the importer who requests the Letter of Credit. The issuing bank is bound by the commitments mentioned and cannot change any terms of an ILOC once issued.

The ILOC is irrevocable and is frequently used for large transactions. It facilitates international trade because of the additional credit risk involved when two parties are unfamiliar with each other. ILOC helps exporters with receiving payment because this is a guarantee by the issuing bank (importer’s bank) that payment will be made by the bank if the importer fails to do so¹.

Conditions associated with an Irrevocable Letter of Credit

The conditions of ILOC are fixed and cannot be amended without the consent of the involved parties. The stakeholders (importer and exporter) have to agree on all the clauses mentioned in this letter under different conditions. This letter specifies more provisions about security, blacklisting and boycott, if there is any misconduct. Besides terms and conditions, authority is also defined for disbursements in different situations, possession of goods and acknowledgment of documents in conformity with terms and conditions of the credit².

How to get an Irrevocable Letter of Credit?

To obtain an ILOC, you need to approach a bank, who assigns a representative with prior experience in international trade and related compliance. It is suggested that you do not draft your own ILOC and this may lead to legal and financial complications.

Template of an Irrevocable LC

An Irrevocable Letter of Credit usually includes the following³:
• Name of the issuing bank or financial institution
• Letter of Credit number
• Date of issue
• Applicant details and amount
• Date and place of expiry
• Conditions of the transaction
• Authorized signature of the banking professional

Cost of obtaining an Irrevocable Letter of Credit

The cost of an Irrevocable Letter of Credit depends on the type of ILOC used, customer credit history, tenure, safeguarding clauses and various other factors⁴.

Irrevocable LC is used to ensure safe and secure payments that also benefits both – importer and exporter. With e-commerce exports, reaching international customers and receiving payments has become easier and simpler than before. Amazon Global Selling not just enables you to export to 200+ countries and territories but also helps you receive payments directly to your bank account in INR or other currency of your choice.

Easy e-commerce exports with Amazon Global Selling

Amazon Global Selling is an e-commerce exports program that helps exporters take their businesses from India to 18 international markets across 200+ countries and territories. Whether you are a manufacturer, seller or you have an emerging brand, Amazon Global Selling supports you to expand your brand using state-of-the-art tools for listing and logistics, among others.

Frequently Asked Questions

What is a Clean Irrevocable Letter of Credit?

A clean LC allows the beneficiary of the credit to draw the bill of exchange without any extra documentation. A clean LC is irrevocable till the period of renew.

What is the difference between a revocable Letter of Credit and an Irrevocable Letter of Credit?

Revocable Letter of Credit

• After its issue, a Revocable Letter of Credit can be modified, amended, or cancelled by the issuing bank without the permission of the beneficiary.
• It can be considered as a limited security payment method for the beneficiary as it is subjected to amendment or cancellation without the consent of the beneficiary.
• The bank of the exporter’s country is not informed about any changes or amendments done in the Letter of Credit and hence there is a risk of payment being refused by the issuing bank.

Irrevocable Letter of Credit

• An Irrevocable Letter of Credit is a type of letter credit which does not allow the issuing bank to modify, amend, or cancel it without giving an acknowledgement to the beneficiary.
• This Letter of Credit provides much security to the beneficiary.
• The bills drawn under an Irrevocable Letter of Credit will be honoured by the issuing bank, once all the conditions of the LC agreement have been met.

Is an LC always irrevocable?

No, LC are not always irrevocable. There are revocable LCs as well.

Who can issue an Irrevocable Letter of Credit?

An Irrevocable Letter of Credit is issued by a commercial bank (the importer’s bank) that makes sure that the amount is received by the exporter on time.

Can an irrevocable LC be cancelled?

An irrevocable LC is the Letter of Credit cannot be cancelled pr amended without the consent of all parties concerned. This is where the terms and conditions and the amount are renewed or restricted without specific amendments to the credit being needed.

Published on November 28, 2022.

Sources:
1. https://www.unionbankofindia.co.in/pdf/hkb_20_auditpolicylettersofcredit.pdf
2. https://agriexchange.apeda.gov.in/Ready%20Reckoner/LETTER_OF_CREDIT.aspx
3. https://www.investopedia.com/terms/i/iloc.asp
4. https://www.tradefinanceglobal.com/letters-of-credit/standby-letter-of-credit-sblc/
5. https://www.emeriobanque.com/blogs/revocable-and-irrevocable-letter-of-credit

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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.

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