Confirming Bank

Presentation – Parties to the Letter of Credit

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Presentation – Parties to the Letter of Credit

Issuing Bank

issuing bank

  • Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf.
  • Letter of credit is issuing bank’s payment promise against a complying presentation.
  • Most of the time issuing issuing banks receive receive the conditions conditions of the letters of credit from applicants through LC Application Forms.
  • Once an issuing bank opens an LC it undertakes to honor a complying presentation of the beneficiary without recourse.

Applicant

Applicant

  • Applicant is the buyer of the underlying transaction.
  • Applicant is the party on whose behalf the letter of credit is issued.
  • Applicants complete Letter of Credit Application Forms to pass the details details of the letter of credit to issuing issuing banks via online forms or hard copy.
  • Once letter of credit is issued applicant removes from the lc equation in terms of payment obligation. Issuing banks must honor complying presentations independently and irrevocably.

Beneficiary

beneficiary

  • Beneficiary is the seller of the underlying transaction.
  • Beneficiary is the party in whose favor the letter of credit is issued.
  • Beneficiary ships the goods as required by the letter of credit and presents presents documents documents as indicated indicated.
  • Beneficiary will gets its money from the issuing bank as long as it complies with the letter of credit conditions.
  • Beneficiaries prove their compliance to the letter of credit conditions by making complying presentations to the banks.

Advising Bank

advising bank

  • Advising bank is the bank that passes letter of credit to the beneficiary. UCP 600 describes advising bank as « the bank that advises the credit at the request of the issuing bank»
  • Advising banks mostly located on the same country with the beneficiaries.
  • Advising banks have very limited responsibilities against beneficiaries. Their main responsibility is to advise the credit to the beneficiaries.
  • They have no payment obligation unless they are also the confirming bank.

Nominated Bank

nominated bank

  • Nominated bank is the bank with which the credit is available.
  • Most of the time nominated banks are also the advising banks.
  • Nominated banks may honor a complying presentation. But their payment responsibility is not obvious. If they choose not to honor a complying presentation, there is no penalty mechanism defined in the letter of credit rules, UCP 600, for such an activity

Confirming Bank

confirming bank

  • Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
  • Most of the time a confirming bank is also the advising bank and the nominated bank.
  • Confirming Confirming bank provides provides beneficiary beneficiary an additional payment guarantee separate from the issuing bank’s payment obligation.
  • Confirming banks are located on the same country as beneficiaries so they will eliminate country risk of the issuing banks.

Reimbursing Bank

Reimbursing Bank

Reimbursing Bank : Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

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

Banks in Letter of Credit

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banks in letters of credit

Banks play a key role in letters of credit transactions. They start and end the L/C operations.

They also decide either refusal of the documents or acceptance of the presentation. Without banks we cannot talk about any L/C transactions.

Different types of banks exist in a letter of credit transaction and each of them are functioning various roles according to the authorizations granted to them.

Issuing bank, advising bank, nominated bank, confirming bank and reimbursement bank are the main banks that exist in a standard international documentary credit payment.

On this post, you can find detailed information in regards to the banks in letters of credit, especially their roles and responsibilities.

Which Banks Involved in a Letter of Credit Transaction?

Issuing bank is the core financial institution in a documentary credit process.

At least an issuing bank must be present for the existence of an L/C payment. All other banks shall be added to the transaction as circumstances required.

For example, the issuing bank will be using an advising bank’s services to advise the letter of credit to the beneficiary.

L/C may be issued so that it is available with a nominated bank which is located in the same country as the beneficiary.

Additionally, the issuing bank may demand from the nominated bank to add its confirmation to the letter of credit.

Confirming bank can claim reimbursement from the reimbursement bank against a complying set of documents.

As I have shown above, all other banks, but the issuing bank, can be added to the letter of credit transaction, if the issuing bank needs to use that particular bank’s services.

Let me explain the banks in a letter of credit transaction one by one more in detail below.

Issuing Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

issuing bank

Issuing bank is the main bank in a letter of credit transaction.

Letter of credit is opened by the issuing bank mostly on behalf of the applicant.

Rarely issuing banks open letters of credit on their own name without having been instructed by the applicants.

All other banks are acting according to the instructions and authorization that they have received from the issuing bank.

For more details please click here.

 

Advising Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Advising bank

Advising bank is the bank that advises the letter of credit to the beneficiary.

Advising bank acts at the request of the issuing bank.

In most cases advising bank and beneficiary locate at the same country which is contrary to the issuing bank.

This is why issuing banks use another bank’s services to advice the letter of credit to the beneficiaries.

Advising bank has no obligation for payment.

For more details please click here.

 

Nominated Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Nominated Bank

Nominated Bank is the bank with which the letter of credit is available.

In some situations issuing banks open letters of credit that is available with any bank in beneficiaries countries. These kind of letters of credit are known as “freely negotiable l/cs”.

Nominated bank’s payment obligation is not defined in strict terms.

Beneficiaries could get their payment from nominated banks with recourse basis.

For more details please click here.

Confirming Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Confirming Bank

Confirming bank is the bank that adds its confirmation to a letter of credit.

Confirming banks could only add their confirmation if the issuing banks authorize them to do so.

Confirming bank and nominated bank are expected to be the same bank, although it is not a necessity according to UCP 600.

Confirming bank’s payment obligation is defined in strict terms. Beneficiaries could get their payment from confirming banks without recourse basis.

For more details please click here.

Reimbursing Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Reimbursing bank

Reimbursing bank is the bank instructed or authorized to provide reimbursement to the nominated bank or confirming bank.

Reimbursing banks provide reimbursement to above mentioned banks according to the reimbursement authorization issued by the issuing bank.

Reimbursing banks are big and globally reliable financial institutions.

For more details please click here.

 

What Does “With Recourse” and “Without Recourse” Mean in International Finance?

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What does "with recourse" and "without recourse" mean in international letter of credit transaction?

Recourse means the right to claim a refund of an amount paid in connection with the negotiation of a documentary credit or the discounting of a bill of exchange. (1)

With recourse and without recourse are two terms defining whether or not the paying bank shall claim refund from the beneficiary in case it could not get reimbursement from the issuing bank.

On this post I will be answering below questions with the help of the graphic illustrations.

  • What is the meaning of with recourse term in international trade finance terminology?
  • What is the meaning of without recourse in international trade finance terminology?
  • Which banks pay with recourse and which bank pay without recourse basis?

What is the Meaning of With Recourse and Without Recourse Terms in International Trade Finance Terminology?

With recourse term defines the situation in which the paying bank will be able to claim refunds from the beneficiary in case the letter of credit documents are not paid by the issuing bank.

In general, the nominated bank or the negotiated bank pay the letter of credit amount to the beneficiaries with recourse terms.

with recourse and without recourse

Without recourse term defines the situation in which the paying bank will not be able to claim refunds from the beneficiary in case the letter of credit documents are not paid by the issuing bank.

In general, the confirming bank pay the letter of credit amount to the beneficiaries without recourse terms.

Important Note: The nominated bank may also pay to the beneficiary against discrepant documents with recourse basis.

These types of payments should be covered with a formal indemnity.

References:

Documentary Credits, Nordea Trade Finance, Page: 305

Confirming Bank

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confirming bank

If you would like to export your goods to one of the high risk countries and you would like to eliminate default risk of the importer’s bank, then you may seek to have your letter of credit confirmed by one of the prime banks.

Confirmation is a security tool, which is develop to reduce exporters risks in letters of credit transactions.

In theory, an exporter should be able to get his money from the confirming bank against a complying presentation.

However, in real life, in some cases even the confirming banks do not pay the credit amount to the exporters, until they have been reimbursed by the issuing banks. (For further information regarding confirming banks behavior, even if the presentation is complying, please read my article titled : Confirmed L/C at Sight.)

On this post I will try to explain you one of the most frequently used term in international letter of credit transactions: Confirming Bank.

Here are the headlines of the article:

  • What is a confirming bank?
  • What are the responsibilities of the confirming bank?
  • Which UCP 600 article regulates the confirming banks responsibilities?
  • What are the differences between the confirming bank and advising bank?
  • What are the differences between the nominated bank and confirming bank?
  • Case Study: Confirming bank’s payment responsibility when documents are presented with discrepancies.

What is a Confirming Bank?

Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

confirming bank definition

What are the Responsibilities of the Confirming Bank?

According to the latest version letter of credit rules, if 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:

  • honour, if the credit is available by sight payment, deferred payment or acceptance with the confirming bank;
  • honour, if the credit is available by sight payment with another nominated bank and that nominated bank does not pay;
  • honour, if the credit is available by 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;
  • honour, if the credit is available by 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;
  • honour, if the credit is available by negotiation with another nominated bank and that nominated bank does not negotiate.
    negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

confirming bank responsibilities

Which UCP 600 Articles Regulate the Confirming Bank’s Responsibilities?

UCP 600 article 8 defines the roles and responsibilities of the confirming bank. Additionally confirming bank’s liabilities have been described in numerous articles under UCP 600.

What are the Differences Between the Confirming Bank and the Advising Bank?

The advising bank has no payment obligations under the letter of credit rules. The advising bank has two main responsibilities: authenticating incoming letters of credit and transmitting them to the beneficiaries as a whole, intact.

Additionally, an advising bank has no connection with the letter of credit availability or the place of letter of credit expiry.

On the other hand the confirming bank has to pay the letter of credit amount to the beneficiary against a complying presentation, even if nominated bank or issuing bank refrain to pay.

In case the credit is issued that is available by negotiation with the confirming bank, then the confirming bank must negotiate, without recourse.

What are the Differences Between the Nominated Bank and the Confirming Bank?

First of all, please kindly be noted that according to the letter of credit rules it is possible that the nominated bank and the confirming bank could be different banks.

But in practice a bank would not add its confirmation to the letter of credit, if it is not available with itself.

As per the letter of credit rules, the confirming bank has clear payment obligations. If the presentation is complying, then the confirming bank must honor.

It is a very straight forward definition.

But nominated banks may or may not pay against complying presentations. If they do not, then either the confirming bank or the issuing bank must pay.

discrepant documents and the confirming bank

Query:

A German exporter ships 2 containers of process pumps to an importer located in Libya. Due to the internal turmoil in Libya, the issuing bank face difficulties to honor the presentation.

The letter of credit was confirmed by another bank in UK, but due to the discrepancies found on the documents the confirming bank refrain to pay the L/C amount.

The exporter explains the situation and asks the following question: “We think that a confirmed letter of credit means that the confirming bank gives his definitive undertaking in addition to that of the issuing bank, provided that the stipulated documents are presented to the confirming bank and that the terms and conditions of the documentary credit are complied with, either to pay at sight, or to accept drafts and to pay them at their maturity, or to pay on a determinable date if there is a deferred payment.”

But what happens;

1-) if documents are presented with discrepancies to the confirming bank, and the confirming bank notifies advice of refusal to the beneficiary/presenter in regards of the discrepancies, does the definitive undertaking of confirming bank cease to exist?

2-) if these documents are sent to issuing bank on an approval basis and the discrepancies are waived, does the confirming bank have to pay with its resources (or accept drafts or incur a deferred payment undertaking), or does it have to wait until it receives the funds from the issuing bank and then pay the beneficiary?

Analysis of the Case Study:

A confirmation of a letter of credit is, as you indicated, an undertaking from a bank in addition to the undertaking provided by the issuing bank. The UCP 600 states that the undertaking (confirmation) is subject to presentation of complying documents under the letter of credit.

Where documents are presented to the confirming bank, within the validity of their undertaking, and found to be discrepant, and the confirming bank provides a notice of refusal in accordance with the UCP, its undertaking would no longer exist in respect of that presentation (subject to the beneficiary being unable to correct the discrepancy(ies) within the credit timelines).

If the documents, on instructions of the beneficiary, are subsequently sent to the issuing bank on an approval basis and the discrepancies are waived, the confirming bank has no obligation to make payment unless it has indicated its willingness to do so at the time of providing its notice of refusal.

The presentation of discrepant documents to the confirming bank would end its obligation under the credit unless it has stated otherwise, and the fact that the issuing bank accepts a waiver of discrepancies would not further obligate the confirming bank. (Source:Official Opinion R520 / TA543 rev2)

Can the Confirming Bank Cancel Its Confirmation by Himself?

The confirming bank could not cancel its confirmation by himself, because the confirmation is an irrevocable undertaking of the confirming bank against the beneficiary of the letter of credit and another nominated bank, if it exists.

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

  • the beneficiary will not be making presentation withing the allowed time frame as stated in the credit, or
  • the beneficiary presented discrepant documents and could not remove discrepancy within the presentation period, or
  • the beneficiary is confirmed by a written statement with the confirming bank that the beneficiary will not be utilizing the letter of credit.

Must the Confirming Bank and the Beneficiary Locate in the Same Country?

Usually the confirming bank and the beneficiary are located within the same country, but there is no governing rule in the letter of credit rules that is forcing these two parties must be located in the same country.

As a result the beneficiary and the confirming bank may be located in different countries.

In practice, German banks confirm the credits issued in African countries such as Ethiopia, Nigeria, etc. for Non-German beneficiaries. The same structure applies for the French banks for the letters of credit issued in Senegal, Morocco, Algeria etc.

Does a Confirming Bank Must Add Its Confirmation to a Letter of Credit?

Adding a confirmation to a letter of credit is a commercial decision for the confirming bank.

As a result a confirming bank may or may not be adding its confirmation to a given letter of credit, based on solely its own decision.

But if the confirming bank decides to confirm, it will be irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

What Happens When a Confirmed Letter of Credit is Amended?

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment.

A confirming bank may, however, choose to advise an amendment without extending its confirmation and, if so, it must inform the issuing bank without delay and inform the beneficiary in its advice.

What Does Silent Confirmation Mean?

Under normal conditions, the confirming bank could add its confirmation to a letter of credit upon the issuing bank’s authorization or request.

If the confirming bank adds its confirmation to the credit without any request from the issuing bank, then this procedure will be called as a silent confirmation or unauthorized confirmation.

It is worth mentioning that silent confirmation is not covered under letter of credit rules.

Confirming banks pay letter of credit amount to the beneficiaries without recourse basis. Do you want to know more about without recourse term? Please click here for more information.

Confirmation Fee

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confirmation fee

Confirmation fee can be defined as charges collected by the confirming banks, against the risks they will be having to posses by confirming the letters of credit.

As I will be explaining below a confirming bank undertakes two main risk factors by adding its confirmation to the letter of credit: default risk of the issuing bank and political risk of the issuing bank’s country.

Basically, the confirmation fee is the ‘risk fee’ taken by the confirming bank.

Understanding the Confirmation Process and Confirmation Fee Reasoning:

Confirmation, is defined as an undertaking from a bank, in addition to the undertaking provided to the beneficiary by the issuing bank.

Beneficiary, by having the letter of credit confirmed to a bank which is located within the same country of himself, would like to eliminate the default risk of the issuing bank as well as political risks of the issuing bank’s country of domicile.

A confirming bank takes the default risk of the issuing bank; as well as non-payment risk of the letter of credit originated from the political risks of the issuing bank’s country.

The confirming bank, irrevocably bound himself to make a payment to the beneficiary against a complying presentation from the moment it has added its confirmation to the letter of credit.

Even if the confirming bank could not receive any reimbursement from the issuing bank, he has to make payment to the beneficiary against a complying presentation under the letter of credit which he has confirmed.

By the way, it is beneficial to remind my readers that a confirming bank could only honour or negotiate a complying presentation.

As a result, the beneficiary has to present complying documents in order to obtain funds under the letter of credit, either from the issuing bank or the confirming bank.

For this reason, the complying presentation is the key for reaching out the payment under both confirmed and unconfirmed letters of credit.

You might be wondering, why a confirming bank would take such risks to confirm a letter of credit.

The correct answer is very simple and straight forward; to make more profit.

Determinants of a Confirmation Fee:

The confirmation fee is subject to arrangement and based on the following:

  1. Issuing bank isk
  2. Country risk
  3. Value of the letter of credit
  4. Validity period of the letter of credit

The confirmation fee is usually difficult to quantify in advance, unless you have managed to establish which bank is to confirm and they have provided the information to you in advance. (1)

Examples of Confirmation Fees:

Confirmation Fee Format 1:

Exporters First Help Bank of New York confirms this credit and hereby undertakes to honor all drafts and documents presented in strict compliance with the credit terms.

Our confirmation charges USD3.120,48.

Confirmation Fee Format 2:

We shall charge our confirmation commission of 4,000000 PCT p.a., min. EUR 200.00 p.q.

p.a. : per annum (12 months or 360 days)
p.q. : per quarter (3 months)

Who should pay confirmation fees?

According to letter of credit rules all fees and charges related to credits should be paid by the applicants.

But we have learned long ago that this perfect world indication is not valid under real life situations.

In most cases applicants pay only letter of credit issuance charges and let the banks collect all the remaining fees from the beneficiaries.

As a result confirmation fees will be paid by the beneficiaries in most cases.

Sources: 1: A Guide to Letter of Credit Charges,  the Institute of Export & International Trade, Reached : 24.Jan.2018

Confirmation and Confirmed Letter of Credit

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Confirmation and Confirmed Letter of Credit

Updated on:

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 risks of the issuing bank.

With a confirmed letter of credit, another bank, the confirming bank, usually located in the same country that the exporter is located, will add its confirmation to the letter of credit.

By adding its confirmation, the confirming bank undertakes to honour the exporter’s claim under the letter of credit, provided all terms and conditions of the letter of credit are met. (1)

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Parties to Letters of Credit

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parties to letter of credit

This page discusses the parties involved in a letter of credit. Each L/C party will be presented briefly, and its roles and responsibilities will be explained with the help of the graphic illustrations. A video on this topic is also available.

A Letter of Credit (LC) is a financial instrument in international trade that guarantees payment to the seller (beneficiary) as long as the agreed-upon terms and conditions are met.

It involves multiple parties, each playing a distinct role.

The key parties in an LC transaction include the beneficiary (seller), applicant (buyer), issuing bank, advising bank, confirming bank, nominated bank, and reimbursing bank. Understanding the roles and responsibilities of these entities ensures smooth and hassle-free letter of credit operations for businesses.

youtube video link image for Parties to Letters of Credit
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