Professional Documents
Culture Documents
1. Introduction
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.
Anticipatory 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.
Anticipatory Credit 2
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.
Terms of Payment
Advance payment up to 40% (i.e. USD$200,000) will be paid against presentation of the
following documents:
(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.
(e) Goods are released for shipment by the warehouse keeper on the instruction of the
advising bank.
Terms of Payment
Advance payment up to 70% (i.e. USD$700,000) will be paid against presentation of the
following documents:
1. Beneficiary may misuse funds advanced to him and may not make the shipment
and present documents under the credit.
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).
3. Goods financed can be stored over a period of time, has alternate markets and
must not display violent price movements.
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.
Anticipatory Credit 5
3. Carefully scrutinize the credit and take safeguards against penalty provisions, if
any.
1. Verify and ensure the warehouse receipts presented comply with LC terms,
before release of pre-shipment payment.