Bank A issues a usance L/C (say 90 days after B/L date) available by negotiation/acceptance with any bank with draft drawn on the issuing bank (reimbursement to be effected by the issuing bank at maturity against a complying presentation). The L/C does not ask for confirmation thereof, and hence is not confirmed by the beneficiary's bank (Bank X).
Exporter makes a complying presentation to Bank X and requests them to negotiate/discount the export bill before the draft and documents are sent to the issuing bank.
Questions:
i.If the term draft is drawn on the issuing bank (negotiation L/C), can Bank X negotiate/discount the draft presented by its customer before it is accepted by the issuing bank ?
ii. If the term draft is drawn on the issuing bank (acceptance L/C), can Bank X negotiate/discount the draft presented by its customer before it is accepted by the issuing bank ?
Regards,
Shahed
Discount of export documents prior to issuing bank's accepta
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HOANGTHIANHTHU_invalid
- Posts: 189
- Joined: Fri Apr 05, 2019 5:15 pm
Discount of export documents prior to issuing bank's accepta
Dear Shahed,
.
In addition to the 4 common types of LC, which includes: (1) LC available by negotiation of draft at sight; (2) LC available by payment (no sight draft is required); (3) LC available by acceptance of draft at xxx days sight/after BL date; and (4) LC available by deferred payment (no time draft is required), we sometimes come across their varieties one of which is LC available by negotiation of a time draft drawn on the issuing bank.
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Can the nominated negotiating bank negotiate a draft at xxx days sight/after BL date before it is accepted by the issuing bank?
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My answer is yes, based on the following reasoning:
According to Article 2 UCP 600, negotiation is defined as the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
.
It is understood from the above definition that the nominated negotiating bank can negotiate any draft irrespective of draft at sight or draft at xxx days sight/after BL date, and irrespective of whether or not the draft is accepted by the issuing bank. The nominated bank can also negotiate documents presented under the negotiation LC which does not require presentation of drafts. If the documents are complying the nominated negotiating bank is entitled to the issuing bank’s reimbursement when due.
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Where the LC is available with the issuing bank by acceptance of draft, it is obvious that the issuing bank does not authorize any bank to negotiate/discount the not yet - accepted draft. Therefore, the bank that has negotiated the not yet-accepted draft may be exposed to the risk of non-reimbursement from the issuing bank as it cannot take any legal action against the issuing bank on its name.
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So, my short answers to your questions as follows:
.
1. Yes
2. Should not.
.
Kind regards,
N.H.Duc
.
In addition to the 4 common types of LC, which includes: (1) LC available by negotiation of draft at sight; (2) LC available by payment (no sight draft is required); (3) LC available by acceptance of draft at xxx days sight/after BL date; and (4) LC available by deferred payment (no time draft is required), we sometimes come across their varieties one of which is LC available by negotiation of a time draft drawn on the issuing bank.
.
Can the nominated negotiating bank negotiate a draft at xxx days sight/after BL date before it is accepted by the issuing bank?
.
My answer is yes, based on the following reasoning:
According to Article 2 UCP 600, negotiation is defined as the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
.
It is understood from the above definition that the nominated negotiating bank can negotiate any draft irrespective of draft at sight or draft at xxx days sight/after BL date, and irrespective of whether or not the draft is accepted by the issuing bank. The nominated bank can also negotiate documents presented under the negotiation LC which does not require presentation of drafts. If the documents are complying the nominated negotiating bank is entitled to the issuing bank’s reimbursement when due.
.
Where the LC is available with the issuing bank by acceptance of draft, it is obvious that the issuing bank does not authorize any bank to negotiate/discount the not yet - accepted draft. Therefore, the bank that has negotiated the not yet-accepted draft may be exposed to the risk of non-reimbursement from the issuing bank as it cannot take any legal action against the issuing bank on its name.
.
So, my short answers to your questions as follows:
.
1. Yes
2. Should not.
.
Kind regards,
N.H.Duc
Discount of export documents prior to issuing bank's accepta
Thanks.
But I also like to know what would be the scenario of "Deferred Payment" L/C?
Can a nominated bank negotiate/discount the export bill prior to issuing bank's acceptance of documents?
It may be mentioned that there is no draft required under a defererred payment L/C.
Regards,
Shahed
But I also like to know what would be the scenario of "Deferred Payment" L/C?
Can a nominated bank negotiate/discount the export bill prior to issuing bank's acceptance of documents?
It may be mentioned that there is no draft required under a defererred payment L/C.
Regards,
Shahed
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HOANGTHIANHTHU_invalid
- Posts: 189
- Joined: Fri Apr 05, 2019 5:15 pm
Discount of export documents prior to issuing bank's accepta
Hi Shahed,
.
Where the LC is available with a nominated bank by deferred payment, then in accordance with sub-article 12 (b) that nominated bank may discount its own deferred payment undertaking.
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Where the LC is available with the issuing bank by deferred payment and the issuing bank has not yet incurred a defered payment undertaking, the presenting bank, which is not a nominated bank, is not authorized to discount the documents. Even when the issuing bank has incurred its deferred payment undertaking and so communicated to the presenting bank, the presenting bank should ask for the issuing bank’s authorization to discount if it intends to discount the deferred payment undertaking. Please note that deferred payment undertaking is not world wide recognized as an financial instrument that is negotiable.
.
Kind regards,
N.H.Duc
.
P/s: Please note that where an LC is available with the issuing bank by deferred payment, there is no nominated bank. The bank that presents the documents to the issuing bank on behalf of the beneficiary is the presenting bank (and not nominated bank).
[edited 1/28/2015 2:58:24 AM]
.
Where the LC is available with a nominated bank by deferred payment, then in accordance with sub-article 12 (b) that nominated bank may discount its own deferred payment undertaking.
.
Where the LC is available with the issuing bank by deferred payment and the issuing bank has not yet incurred a defered payment undertaking, the presenting bank, which is not a nominated bank, is not authorized to discount the documents. Even when the issuing bank has incurred its deferred payment undertaking and so communicated to the presenting bank, the presenting bank should ask for the issuing bank’s authorization to discount if it intends to discount the deferred payment undertaking. Please note that deferred payment undertaking is not world wide recognized as an financial instrument that is negotiable.
.
Kind regards,
N.H.Duc
.
P/s: Please note that where an LC is available with the issuing bank by deferred payment, there is no nominated bank. The bank that presents the documents to the issuing bank on behalf of the beneficiary is the presenting bank (and not nominated bank).
[edited 1/28/2015 2:58:24 AM]
Discount of export documents prior to issuing bank's accepta
Bank X has received an export L/C from the issuing bank in China, which is available “with any bank” by deferred payment. Payment terms “120 days after the B/L date”. There is a clause in the L/C under field 47A, which states that “payment under this L/C will be payable at sight basis”. (which I understand that the issuing bank will purchase/discount the bill at their end and pay to the nominated bank at sight).
Exporter has presented its bill to Bank X and requested to purchase/discount without recourse basis prior to sending it the issuing bank.
As per Article 12 B of the UCP, the rule covers two aspects: (i) that the nominated bank must have incurred a deferred payment undertaking and (ii) the nominated bank has the authorization of the issuing bank to prepay or purchase.
In normal circumstances, the nominated bank incur a deferred payment undertaking and then purchase/discount its own undertaking.
But in this case, since the payment terms is at sight by the issuing bank to the nominated bank, the Bank X does not need to incur a deferred payment undertaking (which may involve commission of such undertaking for 120 days), simply pay the bill amount to the beneficiary, and send documents to the issuing bank.
My question is by doing the above (i.e. purchase the bill without incur a deferred payment undertaking) will the nominated bank get UCP protection ?
Thanks and best regards,
Shahed
Exporter has presented its bill to Bank X and requested to purchase/discount without recourse basis prior to sending it the issuing bank.
As per Article 12 B of the UCP, the rule covers two aspects: (i) that the nominated bank must have incurred a deferred payment undertaking and (ii) the nominated bank has the authorization of the issuing bank to prepay or purchase.
In normal circumstances, the nominated bank incur a deferred payment undertaking and then purchase/discount its own undertaking.
But in this case, since the payment terms is at sight by the issuing bank to the nominated bank, the Bank X does not need to incur a deferred payment undertaking (which may involve commission of such undertaking for 120 days), simply pay the bill amount to the beneficiary, and send documents to the issuing bank.
My question is by doing the above (i.e. purchase the bill without incur a deferred payment undertaking) will the nominated bank get UCP protection ?
Thanks and best regards,
Shahed
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JudithAutié
- Posts: 195
- Joined: Fri Apr 05, 2019 5:20 pm
Discount of export documents prior to issuing bank's accepta
My understanding of this credit is that it is what they are now calling a UPAS credit : Usance Payable at Sight. This new twist to credits has been developed to enable Asian buyers to take advantage of the much lower interest rates available in the West. In such cases the documents are paid at sight but reimbursement will only be made at 120 days. However a close look should be taken to see what the credit says about who pays the interest and when exactly the issuing bank is going to reimburse.
If the credit does not clearly stipulate this, then it should be clarified prior to any payment. In most cases that I have seen, there has been a preliminary agreement between the two banks stipulating reimbursement agreement and interest rates.
Of course, none of this can be found in the UCP, except the responsibilities of both banks.
If the credit does not clearly stipulate this, then it should be clarified prior to any payment. In most cases that I have seen, there has been a preliminary agreement between the two banks stipulating reimbursement agreement and interest rates.
Of course, none of this can be found in the UCP, except the responsibilities of both banks.
Discount of export documents prior to issuing bank's accepta
Thanks Judith.
My question is by purchasing the bill without incur a deferred payment undertaking will the beneficiary bank/nominated bank get UCP protection ?
Shahed
My question is by purchasing the bill without incur a deferred payment undertaking will the beneficiary bank/nominated bank get UCP protection ?
Shahed
Discount of export documents prior to issuing bank's accepta
Hi Shahed,
I agree fully with Judith. I have seen many UPAS LCs since decades ago. The issuing bank undertakes to pay a usance LC at sight and such LCs are restricted to the issuing bank only - NOT available with any bank. It does not make sense for an issuing bank to allow "any bank" to incur a deferred payment undertaking but then impose on any such banks to make payment at sight. I believe a similar issue (in principle) was the subject of an ICC Opinion in which the LC terms imposed on "any bank" to negotiate. Result was that an issuing bank cannot impose that any bank must negotiate and pay at sight. The idea is the same in your def. payment example. If the issuing bank wants that the payment "must" be made at sight, it shoud take this obligation on itself and make the LC available only with itself. Or alternatively if the issuing bank's intent is just to allow any bank to incur a def. payment undertaking + discount and pay at sight, no need to put any language in the LC about paying at sight as this is already provided for in UCP 600 sub-article 12 b. In your case the LC does not appear issued properly. On the one hand it is available with any bank, which would seem to give the nominated bank the right to discount under UCP 600, but on the other hand the issuing bank also inserted the statement that payment will be made at sight, which could imply that it reserves the right to discount for itself. I would clarify with the issuing bank before agreeing to discount. Best,
Rita
I agree fully with Judith. I have seen many UPAS LCs since decades ago. The issuing bank undertakes to pay a usance LC at sight and such LCs are restricted to the issuing bank only - NOT available with any bank. It does not make sense for an issuing bank to allow "any bank" to incur a deferred payment undertaking but then impose on any such banks to make payment at sight. I believe a similar issue (in principle) was the subject of an ICC Opinion in which the LC terms imposed on "any bank" to negotiate. Result was that an issuing bank cannot impose that any bank must negotiate and pay at sight. The idea is the same in your def. payment example. If the issuing bank wants that the payment "must" be made at sight, it shoud take this obligation on itself and make the LC available only with itself. Or alternatively if the issuing bank's intent is just to allow any bank to incur a def. payment undertaking + discount and pay at sight, no need to put any language in the LC about paying at sight as this is already provided for in UCP 600 sub-article 12 b. In your case the LC does not appear issued properly. On the one hand it is available with any bank, which would seem to give the nominated bank the right to discount under UCP 600, but on the other hand the issuing bank also inserted the statement that payment will be made at sight, which could imply that it reserves the right to discount for itself. I would clarify with the issuing bank before agreeing to discount. Best,
Rita