Credit issued for USD50,000 favouring our customer
First presentation of documents was for an amount of USD38, 000 leaving a balance of USD12, 000.
There was a second presentation for USD18, 000 on 28 May 01.
As it exceeds the available balance of the credit we sent documents for payment.
Bill was duly paid on 1 June 01.
Subsequently on the 7 June we received an amendment increasing the credit by USD50, 000.
Are we right in computing the current available credit balance to be USD44, 000 after deducting the previous overdrawn portion of USD6, 000?
Computation of available credit balance
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gracehwang
- Posts: 6
- Joined: Fri Apr 05, 2019 5:19 pm
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PGauntlett
- Posts: 153
- Joined: Fri Apr 05, 2019 5:25 pm
Computation of available credit balance
I agree with you that, logically, the balance of the l/c is now usd 44,000-
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Computation of available credit balance
Since the second drawing was sent on a collection basis, it is possible that this was paid exclusive of the funds allocated to the DC. The issuing bank or collecting bank should advise whether payment was made under UCP 500 or URC 522. This will determine the remaining balance on the DC, having allowed for the amended increase.
Computation of available credit balance
DIFFERENT OPINIONS FROM DIFFERENT PERSPECTIVES
We understand the argument from Mr. Alistairo (treating each presentation as separate and considering overdrawing as a waivable discrepancy) and that from Mr. PGaunlett (computing the balance LC amount in the bookkeeping approach). However, from a customer service point of view, we do encourage the issuing bank to state more clearly that the drawable amount after the amendment is not affected by the previous overdrawing. A little bit more explanation in the amendment should make all the differences in customer services.
Considering the previous overdrawn situation, the issuing bank should have been aware that such instruction may lead to doubts and should have stated clearly what exactly is the balance drawable amount after acceptance of the amendment, rather than simply stating an increase of LC amount of USD 50K.
Bear in mind that the beneficiary and the applciant are not experts in LC.
We are from http://www.tolee.com
[edited 7/17/02 9:18:36 PM]
We understand the argument from Mr. Alistairo (treating each presentation as separate and considering overdrawing as a waivable discrepancy) and that from Mr. PGaunlett (computing the balance LC amount in the bookkeeping approach). However, from a customer service point of view, we do encourage the issuing bank to state more clearly that the drawable amount after the amendment is not affected by the previous overdrawing. A little bit more explanation in the amendment should make all the differences in customer services.
Considering the previous overdrawn situation, the issuing bank should have been aware that such instruction may lead to doubts and should have stated clearly what exactly is the balance drawable amount after acceptance of the amendment, rather than simply stating an increase of LC amount of USD 50K.
Bear in mind that the beneficiary and the applciant are not experts in LC.
We are from http://www.tolee.com
[edited 7/17/02 9:18:36 PM]
Computation of available credit balance
SURELY THE ANSWER MUST BE USD50,000 - THE AMOUNT OF THE AMENDMENT.
THE OVERDRAWN BALANCE IS A DISCREPANCY WHICH WAS ACCEPTED. IN EFFECT THE L/C BALANCE IS 0. ANY AMENDMENT CANNOT INCLUDE THE OVERDRAWN PORTION OF THE PREVIOUS DRAWING.
THE OVERDRAWN BALANCE IS A DISCREPANCY WHICH WAS ACCEPTED. IN EFFECT THE L/C BALANCE IS 0. ANY AMENDMENT CANNOT INCLUDE THE OVERDRAWN PORTION OF THE PREVIOUS DRAWING.
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PGauntlett
- Posts: 153
- Joined: Fri Apr 05, 2019 5:25 pm
Computation of available credit balance
The previous response is illogical. By accepting the overdrawing, the applicant is effectively allowing the l/c to have a minus balance in the same way that an overdrawn bank current account has a minus balance. When you pay in some money the balance doesn't start from zero.
Since, however, the amendment referred to above is ambiguous it should be the is advising bank's duty to seek clarification from the I/B.
Since, however, the amendment referred to above is ambiguous it should be the is advising bank's duty to seek clarification from the I/B.
Computation of available credit balance
Sorry- I do not agree.
When a L/C is opened the issuing bank is taking on a contingent liability for a specific amount. If the L/C becomes overdrawn the issuing bank need not accept the presentation and need not even refer the discrepancy to the applicant. If the issuing bank agrees to accept the discrepancy and refers it to the applicant who also accepts it, then the original contingent liability has been extinguished. If there is an amendment increasing the amount then that is a new contingent liablity and the L/C balance starts from 0.
When a L/C is opened the issuing bank is taking on a contingent liability for a specific amount. If the L/C becomes overdrawn the issuing bank need not accept the presentation and need not even refer the discrepancy to the applicant. If the issuing bank agrees to accept the discrepancy and refers it to the applicant who also accepts it, then the original contingent liability has been extinguished. If there is an amendment increasing the amount then that is a new contingent liablity and the L/C balance starts from 0.
Computation of available credit balance
CONTINGENT LIABILITY AND DC BALANCE ARE TWO SEPARATE ISSUES
Mr Alistairo treats the "LC balance amount" issue solely from the perspective of the issuing bank's contingent liability with the applicant. This involves only the issuing bank's credit arrangements with its customer. It has no direct contractual relationship with the LC, which is solely between the issuing bank and the beneficiary according to Article 3 of the UCP 500. Hence it is not right to form his opinions based on "contingent liability", an unrelated perspective.
The issue concerns the accounting treatment of the LC drawable amount and this has to be endorsed on the back of the LC.
HOW TO DEAL WITH NEGATIVE BALANCE AFTER OVERDRAWING
We are wondering how Mr. Alistairo would mark on the back of the LC to record each drawing amount and the balance available after each drawing, particularly after the overdrawing. Would he treat the OVERDRAWN PORTION as a payment by D/P collection, clean collection or as a payment under LC?
If the OVERDRAWN PORTION is paid under the LC, then an amendment should be necessary to increase the LC balance amount to match the overdrawing. It is not logical to draw $200 on a $100 LC. Otherwise the LC balance amount would become negative after the overdrawing. A negative balance should not exist when the LC is also available for further drawings. Again how to mark on the back of the LC to record the balance amount? Showing a negative balance?
OVERDRAWING IS A COMPLEX PROBLEM
We realise that overdrawing is not a simple issue for us just to say "yes" or "no', "agree" or "disagree". We have to think through all the related issues that may be affected by the overdrawing. This overdrawing issue involves many other issues and should be treated as a complex problem (such as applicant's and issuing bank's waiver of overdrawing as a discrepancy, amendments (i) to cover the overdrawn amount in order to avoid negative balance and (ii) to increase the balance LC amount to enable further drawings, automatic notification of acceptance of amendment by presentation of documents meeting the amendment according to sub Article 9 (d) (iii) and the like).
We are from http://www.tolee.com
[edited 8/6/02 3:08:28 AM]
Mr Alistairo treats the "LC balance amount" issue solely from the perspective of the issuing bank's contingent liability with the applicant. This involves only the issuing bank's credit arrangements with its customer. It has no direct contractual relationship with the LC, which is solely between the issuing bank and the beneficiary according to Article 3 of the UCP 500. Hence it is not right to form his opinions based on "contingent liability", an unrelated perspective.
The issue concerns the accounting treatment of the LC drawable amount and this has to be endorsed on the back of the LC.
HOW TO DEAL WITH NEGATIVE BALANCE AFTER OVERDRAWING
We are wondering how Mr. Alistairo would mark on the back of the LC to record each drawing amount and the balance available after each drawing, particularly after the overdrawing. Would he treat the OVERDRAWN PORTION as a payment by D/P collection, clean collection or as a payment under LC?
If the OVERDRAWN PORTION is paid under the LC, then an amendment should be necessary to increase the LC balance amount to match the overdrawing. It is not logical to draw $200 on a $100 LC. Otherwise the LC balance amount would become negative after the overdrawing. A negative balance should not exist when the LC is also available for further drawings. Again how to mark on the back of the LC to record the balance amount? Showing a negative balance?
OVERDRAWING IS A COMPLEX PROBLEM
We realise that overdrawing is not a simple issue for us just to say "yes" or "no', "agree" or "disagree". We have to think through all the related issues that may be affected by the overdrawing. This overdrawing issue involves many other issues and should be treated as a complex problem (such as applicant's and issuing bank's waiver of overdrawing as a discrepancy, amendments (i) to cover the overdrawn amount in order to avoid negative balance and (ii) to increase the balance LC amount to enable further drawings, automatic notification of acceptance of amendment by presentation of documents meeting the amendment according to sub Article 9 (d) (iii) and the like).
We are from http://www.tolee.com
[edited 8/6/02 3:08:28 AM]
Computation of available credit balance
Thank you T.O. for your as always well argued and lucid reply.
I am looking at the problem purely from an issuing bank's point of view and how we record and process overdrawn L/Cs.
Saying the contingent liablity and balance of the L/C is a different thing is semantics. In reality , to the issuing bank, they are the same thing.
We would process an overdawn drawing under UCP 500. I do not think it is correct to process drawings under Collections articles.
The fact is , once an overdrawn balance has been accepted as a discrepancy it no longer exists as a discrepancy. The L/C balance is 0 and any amendment goes from there. However , and this is where it gets awkward and sounds if the above arguement is defeated, if there is no amendment increasing the L/C and drawings continue to be received they are added on to the previous overdrawn balance.
This is our procedure.
I am looking at the problem purely from an issuing bank's point of view and how we record and process overdrawn L/Cs.
Saying the contingent liablity and balance of the L/C is a different thing is semantics. In reality , to the issuing bank, they are the same thing.
We would process an overdawn drawing under UCP 500. I do not think it is correct to process drawings under Collections articles.
The fact is , once an overdrawn balance has been accepted as a discrepancy it no longer exists as a discrepancy. The L/C balance is 0 and any amendment goes from there. However , and this is where it gets awkward and sounds if the above arguement is defeated, if there is no amendment increasing the L/C and drawings continue to be received they are added on to the previous overdrawn balance.
This is our procedure.
Computation of available credit balance
DC PAYEMNT SHOULD NOT BE UNDER COLLECTIONS AND URC 522
Thanks for the respond and kind words from Mr. Alistairo. In fact when we mention "collections" in our previous comments, we only intend to ask a question or to clarify from the enquirer whether his bank would treat (or pay out) the overdrawn amount as collections and/or under URC 522.
We do not think paying out the overdrawn amount as collections under URC 522 is the right approach because all payments under the presentation, although overdrawn, but nevertheless accepted, should be under the DC and UCP 500. It is also not recommended to pay the available balance amount under DC and the overdrawn amount under collecitons.
AUTO ACCEPTANCE OF AMENDMENT IS A SAFER APPROACH
Theoretically, a safer approach seems to be issue of a separate in-house amendment to cover the overdrawn amount and to deem this amendment to be accepted automatically by the beneficiary in his presention of documents reflecting the changes made by that amendment according to UCP 500 sub Article 9 (d) (iii).
Although such amendment may not be advised to the beneficiary at all, or may be advised only after the presentation, the beneficiary, in practice, would not challenge this because he gets paid in spite of the discrepancies. That is what he is most concerned about. The rest is not important to him.
We are from http://www.tolee.com
[edited 7/30/01 6:06:35 PM]
Thanks for the respond and kind words from Mr. Alistairo. In fact when we mention "collections" in our previous comments, we only intend to ask a question or to clarify from the enquirer whether his bank would treat (or pay out) the overdrawn amount as collections and/or under URC 522.
We do not think paying out the overdrawn amount as collections under URC 522 is the right approach because all payments under the presentation, although overdrawn, but nevertheless accepted, should be under the DC and UCP 500. It is also not recommended to pay the available balance amount under DC and the overdrawn amount under collecitons.
AUTO ACCEPTANCE OF AMENDMENT IS A SAFER APPROACH
Theoretically, a safer approach seems to be issue of a separate in-house amendment to cover the overdrawn amount and to deem this amendment to be accepted automatically by the beneficiary in his presention of documents reflecting the changes made by that amendment according to UCP 500 sub Article 9 (d) (iii).
Although such amendment may not be advised to the beneficiary at all, or may be advised only after the presentation, the beneficiary, in practice, would not challenge this because he gets paid in spite of the discrepancies. That is what he is most concerned about. The rest is not important to him.
We are from http://www.tolee.com
[edited 7/30/01 6:06:35 PM]