A former assistant manager at the People's Bank of Sri Lanka (PBSL) has provided a comprehensive analysis of the challenges faced by the bank as it withholds payment under a letter of credit (L/C) issued for a cargo of Chinese fertiliser.

The bank is required under a court order to withhold payment because of contamination the Sri Lankan authorities say they found in the fertiliser. In response the economic and commercial office of the Chinese Embassy in Sri Lanka blacklisted PBSL over its failure to make a US$4.9 million payment under the L/C to the Chinese exporter (DC World News, 1 November 2021).

Wimalarathna Banda, who is now a visiting lecturer at the Institute of Credit Management, Sri Lanka, looks at the ongoing case under the terms of terms and conditions of the L/C, applicable provisions of UCP 600 and International Standard Banking Practices. He also discusses the immediate consequences of PBSL's blacklisting

Primacy of documents

In an article published by The Daily FT, Banda points to Article 5 of the UCP 600 that says banks deal only with documents and not with goods, services or performance to which the documents may relate.

If the L/C documents are compliant then the bank should make the payment to the exporter irrespective of the nature and conditions of the goods and cannot hold the payment until the goods are cleared by the importer and confirms the quality of the goods.

Documents compliantThe documents presented are reportedly fully compliant. PBSL has said it cannot make the payment due to the court order but that once the order is revoked, the payment would be made.Banda concludes that the court order and the subsequent blacklisting of PBSL appears to be a power struggle and a political issue that the Sri Lankan and Chinese governments should resolve without the PBSL incurring financial losses.

Immediate consequences

In his discussion of the immediate consequences of PBSL's blacklisting, Banda says when a bank is blacklisted, "it spreads like a virus among the international banking community and has a negative impact, forcing them [international banks] to take immediate steps to refuse international transactions with such a bank." International banks are not bothered about the reasons for blacklisting, and their immediate reaction is to avoid dealings with a blacklisted bank to safeguard the interests of their own customers he concludes.

The full article by Wimalarathna Banda can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.