Green Clause Letter of Credit

Green clause letter of credit is a type of letter of credit that is available for international trade. It is called green clause letter of credit because originally these were written in green ink.

Understanding Green Clause Letter of Credit

To understand the green clause letter of credit, it is first important to understand the red clause letter of credit.

Red Clause Letter of Credit

In the simplest words, we can say that red clause letter of credit is an advance payment letter of credit. Under the red clause letter of credit, the issuing bank will make an advance payment to the exporter i.e. the seller before the seller ships the goods to the importer i.e. buyer. This is usually done to provide aid to the seller in the form of working capital to purchase raw material, processing and packaging of goods, etc. The advance payment will be done against documentary requirement under the red clause letter of credit. Generally, documents required are written undertaking and receipts.

Now let’s move on to green clause letter of credit.

Green Clause Letter of Credit

Green clause letter of credit is an extension of red clause letter of credit. Which means it provides the advance not only for the purchase of raw materials, processing, and packaging of goods, etc. but also for pre-shipment warehousing at the port of origin and insurance expense. In usual cases, the advance under this letter of credit is granted only after the purchased goods are stored in bonded warehouses. This type of letter of credit is usually used in transactions related to commodity market such as wheat, rice, gold, etc.

The documentary requirement for green clause letter of credit is more than the red clause letter of credit. In addition to written undertaking and receipts, the issuing bank requires documents of title to transfer advance under green clause letter of credit. The document of title just proves that the goods to be shipped are already warehoused.

Let us now understand the difference between the green clause letter of credit and red clause letter of credit.

Difference between Green Clause Letter of Credit and Red Clause Letter of Credit

Documentation Requirement

As mentioned in previous paragraphs, the defining difference between a green clause and a red clause letter of credit is its documentary requirement. While advance can be transferred in red clause letter of credit by presenting written undertaking and receipts, an additional document of title is required in green clause letter of credit for transfer of advance.

Proportion of Advance

In red clause letter of credit, usually, the percentage of advance available is 20% to 25% of the face value of the letter of credit. In contrast, the availability of advance can be expanded to 75% to 80% of the face value of the letter of credit under the green clause letter of credit.

Security

In such international transactions, the buyer is always concerned about his safety as he is paying advance money to the seller. The buyer i.e. the importer is more secured in green clause letter of credit than the red clause letter of credit. This is because the buyer is extending the advance against the document of title. Which means the buyer knows that the goods in question are already warehoused and only the shipment procedure is remaining. On the other hand, in the red clause letter of credit, the advance can be extended even before the production begins this makes it more risky for the buyer.

Green Clause Letter of Credit

 

Green Clause Letter of Credit Process with an Example

Let’s now understand the green clause letter of credit process with an example.

Example –

Mr. Mac from Canada is buying wheat worth USD 10,000.00 from Mr. Shiv from India. Mr. Shiv requests Mr. Mac to issue a green clause letter of credit with an advance payment of USD 5000.00 (i.e. 50%). Mr. Mac agrees and applies for green clause letter of credit with his bank – Bank of Canada

Importer/Buyer – Mr. Mac from Canada
Exporter/Seller – Mr. Shiv from India
Green clause letter of credit issuing bank – Bank of Canada
Advising bank – Bank of India

Following is the detailed process for the above example –

  1. The sale transaction in agreed upon.
  2. On request of Mr. Mac, Bank of Canada issues Green Clause Letter of Credit of USD 10,000.00 in the name of Mr. Shiv (beneficiary)
  3. Bank of India advises the Green Clause Letter of Credit received from Bank of Canada to Mr. Shiv
  4. Mr. Shiv collects warehouses the wheat that is to be shipped on Mundra Port (Port of origin) of India
  5. Mr. Shiv submits the advance payment document, i.e. written undertaking, receipt and document of title to the Bank of India
  6. Bank of India checks these documents and sends it to Bank of Canada
  7. Bank of Canada checks the advance payment documents and informs Mr. Mac that the documents have arrived
  8. Mr. Mac provides an undertaking to Bank of Canada that he will pay the 50% advance i.e. USD 5000.00 to the Bank of Canada in future.
  9. Bank of Canada pays USD 5000.00 to the Mr. Shiv through Bank of India. Which means Bank of India receives the payment from the Bank of Canada and notifies Mr. Shiv.
  10. Upon receiving the advance payment, Mr. Shiv starts shipment procedure and ships the goods to Mr. Mac.
  11. Mr. Shiv submits the shipping documents such as invoice, packing list, bill of lading, etc. to Bank of India
  12. Bank of India checks the shipping documents and forwards it to Bank of Canada
  13. Bank of Canada checks the documents and informs Mr. Mac that they have received the shipping documents.
  14. Mr. Mac makes the payment of USD 10,000.00 to the Bank of Canada (100%) + plus pays interest for the 50% advance payment that has been paid by Bank of Canada earlier.
  15. Bank of Canada remits the remaining unpaid portion of USD 5000.00 (50%) to the Mr. Shiv through Bank of India.
  16. Bank of India receives the payment of USD 5000.00 and further remits this payment to Mr. Shiv’s account
  17. Using the shipping documents, Mr. Mac clears the goods from the shipping line.

This is the entire process of green clause letter of credit.

Reference –

Website –

Books –

  • Export/Import procedure and documentation by Thomas E Johnson
Last updated on : August 23rd, 2018

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