Letter of Credit Basics

Understanding main concepts of letters of credit and most frequently used terms related to L/C payments.

How to Determine Maturity Date if Letter of Credit States That Tenor of the L/C is 60 Days After Bill of Lading Issue Date?

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How to Determine Maturity Date if Letter of Credit States That Tenor of the L/C is 60 Days After Bill of Lading Issue Date?

Maturity date is a term related to a time draft.

A time draft is a form of payment that is guaranteed by an issuing bank, but is not payable in full until a specified amount of time after it is received and accepted. (1)

The maturity date is a date on which a bill of exchange or deferred payment undertaking under a documentary credit is to be paid by the party assuming the undertaking. (2)

Determining the maturity date is an important concept especially when the letter of credit is available with a time draft.

Example: A letter of credit has been issued by an international bank’s branch in France states that the documentary credit is available by drafts payable at 60 days after bill of lading issue date.

The beneficiary has presented the bill of lading showing:

  • date of issue : 04.August.2014 and
  • shipped on board date :  01.August.2014.

How to determine maturity date if letter of credit states that tenor of the L/C is 60 days after bill of lading issue date?

How to determine the maturity date of the draft based on above information?

First of all we need to understand that whether there are any differences exist between the “bill of lading date” and the “bill of lading issue date”.

When we look at the ISBP 745 we understand that ICC Banking commission used these terms with the same meaning. As a result both “bill of lading date” and “bill of lading issue date” have the same meaning in terms of letter of credit rules.

Secondly we need to answer which date we should be using when determining the maturity date of the draft.

Should we use bill of lading issuance date or shipped on board date?

Once again we need to look at the ISBP 745 for the correct answer. ISBP 745 states that shipped on board date is deemed to be bill of lading date or bill of lading issue date with the following statement:

“When the tenor refers to, for example, 60 days after the bill of lading date, the on board date is deemed to be the bill of lading date even when the on board date is prior to or later than the date of issuance of the bill of lading.”

As a result we need to use shipped on board date when determining the maturity date of the draft even if the letter of credit states that tenor of the L/C is 60 days after bill of lading issue date.

On the above example shipped on board date is 01.August.2014 and tenor is 60 days after bill of lading issuance date.

We should accept shipped on board date as bill of lading issue date and should use it on calculation of the maturity date.

The maturity date is 30.September.2014.

Important Note: You should add 60 days to 01.August.2014. Remember you should exclude 01.August.2014 when counting 60 days.

Sources:

  1. https://www.investopedia.com/terms/t/time-draft.asp
  2. Documentary credits in practice, Reinhard Längerich, Second edition – 2009, Page: 304, Published by: Nordea

How to Determine Date of Shipment on an Air Transport Document?

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Date of Shipment on an Air Transport Document

An air waybill is a document covering the carriage of goods by plane from one airport to another.

Date of shipment is one of the key definitions in a letter of credit transaction. It is used to determine

  • whether shipment made on time or not (in other words a late shipment has been effected or not),
  • whether documents presented within the presentation period or not (in other words a late presentation has been effected or not),
  • maturity date of the time draft,
  • maturity date of a deferred payment letter of credit.

Date of shipment can be determined in two ways on an air waybill.

Option 1 => There is no actual date of shipment notation on the air waybill:

  • The date of issuance of the air waybill will be deemed to be the date of shipment.

Option 2=> Air waybill indicates, by notation, the actual date of shipment: Notation date will be deemed to be the date of shipment as specified below:

  • Date of the actual date of shipment notation/stamp => this date will be deemed to be the date of shipment.
How to determine date of shipment on an Air Transport Document?
An air waybill with a separate actual date of shipment notation. The date of shipment on this air waybill is 15.05.2014 as indicated on the notation.

How to Add a Confirmation to a Letter of Credit?

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How to Add a Confirmation to a Letter of Credit?

Confirmation gives additional payment assurance to the exporters.

When an irrevocable letter of credit is issued, the risk of payment rests with the issuing bank. This type of letter of credit is defined as an unconfirmed letter of credit.

However, in certain circumstances, the exporter may find the issuing bank not fully trustworthy and/or the country where it is located has high political or economic uncertainty.

In this situation, the exporter should consider requesting a confirmed letter of credit.

Confirmation is a security tool for the exporters. Confirmation eliminates country risks and insolvency risk of the issuing bank.

Step by Step Explanation of Letter of Credit Confirmation Process

Figure 1 : Step by step explanation of letter of credit confirmation process

  • Step 1 – Sale Contract: The exporter and importer sign a sale contract. They choose letter of credit as a payment method.
  • Step 2 – Confirmation Request on Sale Contract: On the sales contract, the exporter demands a confirmed letter of credit. The exporter may wish the credit to be confirmed by a bank which is acceptable for the exporter. In order to make sure that the credit is not be confirmed by another bank, which is not suitable for the exporter, the exporter should indicate this on the sales contract with a wording similar stated bellows:

“The documentary letter of credit should be issued in a way so that it can be confirmed by a bank acceptable to the exporter”.

  • Step 3 – Letter of Credit Application: The importer applies to his bank to open the letter of credit.
  • Step 4 – Letter of Credit Issuance: The issuing bank issues the letter of credit. The letter of credit must include “May Add” or “Confirm” codes in field “Field 49: Confirmation Instructions”.
  • Step 5 – Confirmation: Advising bank or another bank that the beneficiary wants to have the letter of credit confirmed discuss the terms and conditions of the confirmation. If both parties agreed on the confirmation conditions, then the letter of credit will be confirmed. Confirming bank should inform to the beneficiary that it has included its confirmation to the letter of credit.

Dates

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dates

Whatever your position in an international letter of credit transaction, whether you are an export specialist in a small manufacturing company, an import responsible in a medium size international trade firm or a trade finance expert in one of the first class banks, you should always be very careful with the dates of the documents.

The dates of the documents are one of the major sources of discrepancies. This is not only my claim, but also supported by evidences.

Significant amount of ICC Opinions are issued related to this subject for the last 25 years.

How to Deal with Dates of the Documents When Working with a Letter of Credit?

Make Sure That Each Document is Properly Dated: As a general rule each letter of credit document should be dated. The documents are expected to be dated after the issuance date of the credit, but not later than the presentation date.

Important Note: The letter of credit rules allow presentation of undated documents.

Additionally, documents dated prior to the issuance date of the credit is also acceptable under the letters of credit rules.

However, the issuing banks prevent presentation of such documents via additional conditions such as:

  • All documents including transport documents must be dated but not dated prior to the issuance date of this credit.
  • All required documents date should be later than issue date of this later of credit
  • All documents must be dated and made out in English language

Follow the Instructions Indicated in the Letter of Credit: Some of the letters of credit may contain special conditions regarding the dates of the documents such as:

  • Shipment dated before 16/11/2018 not acceptable (blocking regulatory condition).
  • First shipment is to be effected on or before 50 days from L/C issuance date.

If the letter of credit contains a clause as indicated above, the beneficiaries must act accordingly.

Make Sure That You are Using L/C Terminology Correctly: Some word have special meanings under the letter of credit rules such as:

  • The term “within” when used in connection with a date excludes that date in the calculation of the period.
  • “within 2 days after” indicates a period from the date of the event until 2 days after the event.
  • “not later than 2 days after” does not indicate a period, only a latest date. If an advice must not be dated prior to a specific date, the credit must so state.
  • “at least 2 days before” indicates that something must take place not later than 2 days before an event. There is no limit as to how early it may take place.
    “within 2 days of” indicates a period 2 days prior to the event until 2 days after the event.

Special Suggestions From the International Standard Banking Practice – ISBP 2007

  • Drafts, transport documents and insurance documents must be dated even if a credit does not expressly so require.
  • Documents must not indicate that they were issued after the date they are presented.
  • Any document, including a certificate of analysis, inspection certificate and pre-shipment inspection certificate, may be dated after the date of shipment. However, if a credit requires a document evidencing a pre-shipment event (e.g., pre-shipment inspection certificate), the document must, either by its title or content, indicate that the event (e.g., inspection) took place prior to or on the date of shipment.
  • A document indicating a date of preparation and a later date of signing is deemed to be issued on the date of signing.
  • Dates may be expressed in different formats, e.g., the 12th of November 2007 could be expressed as 12 Nov 07, 12Nov07, 12.11.2007, 12.11.07, 2007.11.12, 11.12.07, 121107, etc. Provided that the date intended can be determined from the document or from other documents included in the presentation, any of these formats are acceptable.
  • To avoid confusion it is recommended that the name of the month should be used instead of the number.

Freight Forwarder’s Bill of Lading Not Acceptable

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Freight Forwarder’s Bill of Lading Not Acceptable

Some issuing banks add an additional condition to the letters of credit they have issued, indicating that freight forwarder’s bill of lading is not acceptable.

  • Why issuing banks disallow freight forwarder’s bill of lading?
  • What happens if issuing bank forbids presentation of a freight forwarder’s bill of lading under a letter of credit?

If an issuing bank wants to prohibit presentation of a freight forwarder’s bill of lading, can achieve this aim simply by adding a condition under field 47-A Additional Conditions.

Below you can find some example texts, disallowing presentation of freight forwarder’s bill of lading.

Sample Texts from Selected Letters of Credit

  • Forwarder’s bill of lading not acceptable.
  • Transport documents issued by freight forwarder are not acceptable.
  • Goods must be shipped through the nominated liner which will be advised by the applicant in a certified format with applicant’s seal, a copy of the same must be presented for negotiation and the bill of lading, (freight forwarder’s bill of lading is not acceptable) must evidence that the goods have been shipped on the liner specified therein.

Why issuing banks disallow freight forwarder’s bill of lading?

Issuing banks want to secure themselves as much as possible by requesting not a freight forwarder’s bill of lading, but a carrier’s bill of lading.

A carrier’s bill of lading, which is known as master bill of lading, give more security to the issuing banks comparing to freight forwarder’s bill of lading, which is known as house bill of lading.

differences between a freight forwarder's bill of lading and a carrier's bill of lading

What Does the Letter of Credit Rules Tell About Disallowing Freight Forwarder’s Bill of Lading?

UCP 600:

UCP 600 sub-article 14(l) states that

“A transport document may be issued by any party other than a carrier, owner, master or charterer provided that the transport document meets the requirements of articles 19, 20, 21, 22, 23 or 24 of these rules.”

UCP 600 sub-article 20(a) states that

a.A bill of lading, however named, must appear to:
i. indicate the name of the carrier and be signed by:
– the carrier or a named agent for or on behalf of the carrier, or
– the master or a named agent for or on behalf of the master.

ISBP 745:

ISBP 745 states that

“A stipulation in a credit that “Freight Forwarder’s Bills of Lading are not acceptable” or “House Bills of Lading are not acceptable” or words of similar effect has no meaning in the context of the title, format, content or signing of a bill of lading unless the credit provides specific requirements detailing how the bill of lading is to be issued and signed. In the absence of these requirements, such a stipulation is to be disregarded, and the bill of lading presented is to be examined according to the requirements of UCP 600 article 20″.

  • According to latest version of international standard banking practices, “Freight Forwarder’s Bills of Lading are not acceptable” or “House Bills of Lading are not acceptable” stipulations in a letter of credit has no meaning unless banks defines how the bill of lading is to be issued and signed.
  • If no specific requirements have been mentioned in the letter of credit in regards to issuance and signature of the bill of lading, then banks, nominated bank, confirming bank and issuing bank, have to disregard such a stipulation.
Official Opinion R643 / TA669rev – 2005-2008:

If a transport document states “freight forwarder bills of lading are not acceptable” or “house bills of lading not acceptable”, can the freight forwarder or agent sign the bill of lading according to the requirements expressed in sub-article 20 (a) (i)?

Query

ICC Opinion TA 572 – Issue No. 1 (October 2004) describes the situation in which the documentary credit states that “Transport document issued by Freight Forwarder not acceptable”. The conclusion of the Opinion was that ” … the bank would be obliged to accept a bill of lading that was signed ‘as carrier’ irrespective of any knowledge it may have as to the capacity of the issuer” – i.e., even when the transport document was entitled “FBL BIFA Negotiable FIATA Multimodal Transport Bill of Lading”.

a-The above Opinion was given subject to UCP 500, and we ask you kindly to inform us if the same position would apply under UCP 600.

b-Also kindly advise if the conclusion above would be the same had the documentary credit stated that “House bill of lading not acceptable” or similar.

Analysis

One of the reasons behind conditions such as “freight forwarder bills of lading are not acceptable” or “house bills of lading not acceptable” is to require the issuance of a bill of lading by the carrier, albeit that the freight forwarder or agent could sign the bill of lading according to the requirements expressed in sub-article 20 (a) (i). If a freight forwarder or agent signs as carrier, the bill of lading becomes a carrier document.

Conclusion

The same position applies under UCP 600.
If the credit states “house bill of lading not acceptable” or similar, the same position will apply.

How Does a Negotiable Letter of Credit Work?

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How Does a Negotiable Letter of Credit Work?

What Does Negotiation Mean?

Negotiation means 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.

What Are the Benefits of a Negotiable Letter of Credit to the Exporters?

Exporters can reach the payment sooner with negotiable letters of credit, while offering usance terms to the importers.

With the help of the negotiable letters of credit, exporters can balance their cash flows, and able to propose competitive payments terms to the importers.

Who Should Pay Negotiation Fees?

Negotiation fees generally covered by the exporters, although this is contrary to the letter of credit rules.

How to Understand if a Letter of Credit Negotiable or Not?

In order to understand if a letter of credit is negotiable or not, you need to look at field “41A-Available with/by” field in a MT700 swift message.

If letter of credit is negotiable, it must be mentioned under field 41A that the letter of credit is available by negotiation.

How Does a Negotiable Letter of Credit Work?

How does a negotiable letter of credit work?

  • Step 1: Exporter and importer enter into a sales contract by agreeing on the terms and conditions of the business transaction.
  • Step 2: Importer contacts to the issuing bank for the issuance of the negotiable letter of credit.
  • Step 3: Issuing bank issues negotiable letter of credit in swift format and sends it to the nominated bank, who is also negotiating bank and advising bank.
  • Step 4: Negotiating bank advices the letter of credit to the exporter. Exporter checks the letter of credit conditions, if they are acceptable to the exporter, he starts production of the goods.
  • Step 5: Exporter ships the goods within the validity of the letter of credit and not later than latest date of shipment indicated in the L/C.
  • Step 6: Exporter presents the documents to the negotiating bank within the presentation period allowed under the letter of credit. Remember if presented documents contain a transport document, presentation must be completed within 21 days after date of shipment.
  • Step 7: Negotiating bank checks the documents presented by the exporter and, if determines that they are compliant, advances cash to the exporter. The “negotiation” is effectively the purchase of documents from the exporter at a discount.
  • Step 8: Negotiating bank presents the documents to the issuing bank.
  • Step 9: Issuing bank checks the documents and, if compliant, accepts them to be paid to the negotiating bank at maturity. At the same time, issuing bank gets in touch with the importer and delivers documents to him according to the financial agreement between the issuing bank and the importer.

Sample Negotiable Letter of Credit Swift Message 

————————————- Message Header ——————————————-
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : COBADEFFXXX
COMMERZBANK AG
(HEAD OFFICE)
FRANKFURT AM MAIN DE
Receiver : BOBIHKHH
BANK OF BARODA, HONG KONG
Hong Kong HK
————————————- Message Text———————————————–
27: Sequence of Total
1/1
40A: Form of Documentary Credit
IRREVOCABLE
31C: Date of Issue
140922
40E: Applicable Rules
UCP LATEST VERSION
31D: Date and Place of Expiry
05FEB15 HONG KONG
41A: Available With…By… – BIC
ANY BANK
BY NEGOTIATION
42C: Drafts At
AT 90 DAYS AFTER BL
42A: Drawee
BOBIHKHH

What Does Duplicate, Triplicate Mean in a Letter of Credit?

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What does duplicate, triplicate, quadruplicate, quintuplicate etc. mean?

Letters of credit have a special jargon.

If you are not familiar with the L/C language, you may not be able to understand what letter of credit is telling to you.

Issuing banks frequently state quantities of required document not explicitly, but with a special letter of credit jargon.

On this port you can find the meaning of one of the most frequently used L/C terms in regards to multiple documents.

Sample Texts:

  • Packing list in triplicate
  • Beneficiary’s signed commercial invoice{s) in triplicate, original of which must be certified by the chamber of commerce.
  • Certificate of origin in duplicate evidencing country of goods origin.
  • Beneficiary’s manually signed commercial invoice in quintuplicate certified by the chamber of commerce and/or industry or equivalent authority of the exporting / beneficiary country.
  • Signed and stamped with company’s seal commercial invoice in quadruplicate mentioning: a. name and address of the manufacturers/producers, b. relevant harmonized commodity code number(s) applicable to the products shipped under this credit, and certifying that: c. country of origin, d. all cartons and each items are marked with the words made in e. country of origin is printed/stitched on each item.

Letter of Credit Rules:

  • If a credit requires presentation of multiple documents by using terms such as “in duplicate“, “in two fold” or “in two copies“, this will be satisfied by the presentation of at least one original and the remaining number in copies, except when the document itself indicates otherwise.

definitions of multiple documents

Explanations:

  • “Packing list in triplicate” means that beneficiary could present 3 originals of packing lists or at least one original packing list and remaining with copies.
  • “Certificate of origin in duplicate evidencing country of goods origin” means that beneficiary could present 2 originals of certificates of origin or one original and one copy of certificates of origin.

Which is the Best Cargo Insurance Type That Should be Selected Against Non-Delivery Risks?

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Which is the best insurance type that should be selected against non-delivery risks?

Institute Cargo Clause A (All risks), Institute Cargo Clause B and Institute Cargo Clause C are the main types of cargo insurance types used in international trade

But which cargo clause is the most suitable one for letter of credit transactions?

How to eliminate non-delivery risks, war and strike risks in international trade?

Question Comes from Lus Miguel, Porto, Portugal:

Dear sirs,

First of all, congratulations for your website, it has been a great help. I’d like to ask you some questions regarding insurance versus letters of credit.

Knowing that if the credit is under the UCP 600 the insurance terms is agreed between exporter and importer (INCOTERMS) the banks sometimes ask for a Clause A plus extra coverage.

I think (and this is my doubt) that the banks at the bottom line can ask a minimum clause insurance (110%) if they trust their client financial capability to support a cargo loss/accident.

It is always a commercial decision.

Am I right at my conclusion?

The reason for my question is that nowadays we usually approve with clause A but if the commercials ask we lower the type of coverage to B or C.

I was looking for case studies, but I believe the risk when the cargo does not arrive to destiny is always on the side of importers/exporters (INCOTERMS chosen) and the bank is always defended since if the documents are good we have to pay them to the exporter.

Do you have knowledge of other situations that banks got “burned” regarding insurance problems when docs were okay?

Sincerely,

Here is the Answer:

Thanks for your question.

Analyses:

Insurance Coverage Under the Incoterms: According to the Incoterms 2010, seller has to make the insurance agreement with an insurance company and has to supply an insurance policy or certificate by paying the insurance premium under two trade terms:

Both CIF and CIP incoterms outlines a minimum insurance coverage, which is Institute Marine Cargo Clauses, C.

Exporters and importers are free to determine a more detailed insurance coverage such as Institute Marine Cargo Clauses, A (all risks).

Furthermore they can choose to include additional clauses to an all risk policy such as

  • WSRCC (War, strikes, riots and civil commotion) Clause,
  • Theft, Pilferage and Non-Delivery clause etc.

All of these extra insurance coverage must be paid by the buyer, unless otherwise determined on the sales contract.

Delivery Place Under CIF incoterms: Most of the international trader think that under CIF incoterms, the seller delivers the goods to the buyer at the port of discharge but this is not correct.

The seller delivers the goods to the buyer at the port of loading once the goods are shipped on board a named vessel under the CIF incoterms.

As a result, non delivery risks of the goods is not different between FOB and CIF incoterms from the point of the issuing bank under a letter of credit transaction.

The exporter delivers the good under both incoterms at the port of loading, and if the issuing bank receives a complying presentation, then it has to honor whether or not the goods arrive to the port of discharge. (Fraudulent shipments are the exemptions)

Insurance Coverage Under the Letter of Credit rules: The letter of credit rules, UCP 600, does not give directions either banks or their customers that what type of insurance cover must be selected.

Just on the contrary, the letter of credit rules tell that a credit should state the type of insurance required and, if any, the additional risks to be covered.

Conclusion:

Non-delivery Risk of Goods: As an issuing bank, the non-delivery risks remains unchanged under certain incoterms such as FOB and CIF.

The issuing bank has to honor complying presentations whether or not goods arrive port of discharge.

In practice, in most of the cases, the issuing banks have to decide accepting or rejecting the presentations while goods are still in transit, long before they have completed their journey.

Establishing Internal Standards: Each bank should establish an internal standards against non-delivery of goods risks.

This can be done by requesting all risks insurance policy covering additional clauses such as war, strikes, riots and civil commotion and theft, pilferage and non-delivery under CIF and CIP incoterms.

For the remaining incoterms you may indicate on the letter of credit application form that your bank will be arranging an insurance policy on behalf of your customer in order to secure delivery of goods.

Alternatively you can indemnify yourself against such risks by holding your customer fully responsible against non-delivery of goods under complying presentations.

Implementation: In order to establish a well-structured internal guidelines, an issuing bank could get in touch with local ICC Banking committee.

In our case it is ICC Portugal.

ICC Portugal
Rua das Portas de Santo Antão, 89
1169-022 Lisboa
T: +351 21 346 3304
E-mail: [email protected] Web: www.icc-portugal.com

L/C Demands a B/L Stating That All Original B/Ls Must be Surrendered

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Bill of Lading Stating That All Originals Must be Surrendered

A negotiable bill of lading is a bill of lading where the consignee’s name is preceded by the words “to order,” thus allowing the consignee to endorse the bill of lading to another party, thereby transferring title of the relative goods to another party. (1)

The importer has to present at least one original copy of the negotiable bill of lading to the carrier’s agent at the port of discharge in order to receive goods from the carrier.

What happens if letter of credit requests presentation of all original bills of lading to the carrier as follows?

  • Bill of lading to clearly indicate that the goods can only be delivered at destination port only on submission of all 3 sets of original bills of lading.

Question Comes from Heidi, Hayward, California, USA:

Can you please take a look at the following L/C language for the required documents of the B/Ls and confirm this will be manageable with the steamship lines?

  • Full Set of clean on board bills of lading made out to the order of opening bank and marked “freight prepaid” and notify applicant.
  • Bills of Lading to show the name and address and telephone/fax numbers of shipping company/agent representing them at port of destination.
  • B/L to clearly indicate that the goods can only be delivered at destination port only on submission of all 3 sets of original bills of lading.

Please advise.

Thank you,

Answer:

Thanks for your question.

Above letter of credit condition, which can be evaluated as a standard format, used by many banks under field 46-A: Documents Required.

The only part that you should be careful is the following one:

  • Bill of lading to clearly indicate that the goods can only be delivered at destination port only on submission of all 3 sets of original bills of lading.

Apparently the issuing bank would like to say:

  • Bill of lading to clearly indicate that the goods can only be delivered at destination port only on submission of all original bills of lading.

The problem with above condition is that it contradicts surrender clauses of the most, if not all, bills of lading in circulation as can be seen on below image.

surrender clause of a bill of lading
Surrender clause of a typical negotiable bill of lading used in port to port container carriages.

Each original negotiable bills of lading is equally represents the title of goods, as a result when one them surrendered to the carrier, the remaining ones becomes void.

For this reason it is highly recommended either correction or deletion of this clause from the letter of credit.

Sources:

  1. International Trade Procedures: A guide to doing business abroad, Wells Fargo Bank, Page: 70

Confirmed L/C at Sight

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Understanding the benefits of confirmed lc at sight.

Confirmed L/C at sight covers two definitions: Confirmed letter of credit which is payable at sight.

Letters of credit can permit the beneficiary to be paid immediately upon presentation of specified documents (at sight letter of credit), or at a future date as established in the sales contract (term/usance letter of credit). (1)

Confirmation means “a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation” according to latest UCP rules.

By reading this post, you should understand the responsibilities of confirming banks, benefits of confirmed at sight letters of credit and why in some situations at sight confirmed letters of credit mechanism does not work.

Definition of at Sight Letter of Credit:

Latest letter of credit rules, UCP 600, defines four availability options;

A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation (UCP 600 – Article 6- b).

At sight payment is one of the payment terms in a letter of credit transaction.

At sight letter of credit can be defined as a letter of credit that is payable as soon as the complying documents have been presented to the issuing bank or the confirming bank.

Definition of the Confirmation:

According to latest UCP rules confirmation means,

“a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation”

Confirming Banks’ Responsibilities:

UCP 600 define confirming banks’ responsibilities as follows,

Article 8 – Confirming Bank Undertaking

a. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

i. honour, if the credit is available by

a. sight payment, deferred payment or acceptance with the confirming bank;
b. sight payment with another nominated bank and that nominated bank does not pay;
c. deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
d. acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
e. negotiation with another nominated bank and that nominated bank does not negotiate.

ii. negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

b. A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

c. A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank’s undertaking to reimburse
another nominated bank is independent of the confirming bank’s undertaking to the beneficiary.

d. If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.

Benefits of At Sight Confirmed Letter of Credit?

Why exporters pay additional fees to have their L/Cs confirmed?

  • First reason is that the exporters would like to eliminate default risk of the issuing bank.
  • Second reason is that they would like to receive their payment sooner by removing the issuing bank out of the equation.

Why in some Situations At Sight Confirmed Letter of Credit Mechanism Does not Work?

The nominated banks, whom added their confirmations and became the confirming banks, keep sending documents to the issuing banks and wait for reimbursement even under confirmed at sight letters of credit.

Unfortunately even the confirmation couldn’t eliminate typical nominated bank action: wait for reimbursement, then pay to the beneficiary!

Confirming banks should pay the credit amount against confirming documents to the beneficiaries under at sight letters of credit as letter of credit rules dictate.

But in practice they are ready to act in this way only if they have determined that the issuing bank is defaulted.

Sources:

  1. Documentary Letters of Credit: A Practical Guide, Scotiabank International Trade Services, Page:2