Reimbursing Bank

Presentation – Parties to the Letter of Credit

Ozgur Eker (CDCS) Presentation 28 January 20198 February 2019Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Presentation, Reimbursing 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 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 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 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 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 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 shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Banks in Letter of Credit

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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 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 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 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 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 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.

Reimbursement and Reimbursing Bank

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What Does Reimbursement Mean?

Reimbursement is defined as a compensation paid to someone for an expense.

In order to be reimbursed by another person or organisation, first of all you have to make some expenses, then you will be qualified for a reimbursement.

The same logic apply to the reimbursement as a trade finance term.

A confirming bank or a nominated bank first honors or negotiates against a complying presentation under a letter of credit and then they will be reimbursed by the reimbursing banks in accordance with the issuing banks authorization.

Reimbursing Bank:

Reimbursing bank is the bank that, at the request of the issuing bank, is authorized to pay, or accept and pay time draft under a documentary credit in accordance with UCP 600 article 13 or if incorporated, the ICC uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725). (1)

What is the Function of a Reimbursing Bank Under a Letter of Credit?

There are two possible reasons that makes a reimbursing bank necessary under a documentary credit transaction.

First reason may be that the confirming bank does not trust the issuing bank in terms of risk issues and demands more security. In this situation presence of the reimbursing bank is a requirement for the confirmation.

Without receiving a reimbursement undertaking from the reimbursing bank, the confirming bank may elect not to add its confirmation to the credit.

Note: Please keep in mind that confirmation process is a commercial decision and no bank is forced to add its confirmation to any letter of credit. Please read my article Confirmation and Confirmed Letter of Credit for more detail.

Second reason could be that the issuing bank and nominated bank (in case confirmed letter of credit confirming bank) do not have an account relationship, as a result they may be requiring a third bank’s service for the settlement.

What are the Rules Covering Bank-to-Bank Reimbursements Under Letters of Credit?

There are two options for the reimbursement rules.

Reimbursements must be governed either by URR 725 or UCP 600 article 13 for the letters of credit which are opened according to latest documentary credit rules.

URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits – ICC Publication No. 725: This is a small size booklet published by ICC that specifically governs the bank-to-bank reimbursements. If issuing bank would like to be the reimbursement is subject to URR 725, then it must make a reference at the swift message when issuing a letter of credit.

Issuing bank put a reference to MT700 swift message under field “40E- Applicable Rules” as “UCPURR LATEST VERSION” which means that letter of credit is subject to latest version of letter of credit rules (UCP 600) and latest version of bank-to-bank reimbursements rules (URR 725).

Note: Additionally the reimbursement authorization should expressly indicate that it is subject to URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits.

UCP 600 Article 13: If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the UCP 600 article 13 applies.

Some important definitions from URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits:

“Claiming bank” means a bank that honours or negotiates a credit and presents a reimbursement claim to the reimbursing bank. “Claiming bank” includes a bank authorized to present a reimbursement claim to the reimbursing bank on behalf of the bank that honours or negotiates.
“Issuing bank” means the bank that has issued a credit and the reimbursement authorization under that credit.
“Reimbursing bank” means the bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank
“Reimbursement Authorization” means an instruction or authorization, independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursing bank.
“Reimbursement Undertaking” means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank’s reimbursement claim, provided the terms and conditions of the reimbursement undertaking have been complied with.
“Reimbursement Claim” means a request for reimbursement from the claiming bank to the reimbursing bank.

Reimbursement Transaction Under a Letter of Credit:

Issuing bank issues the letter of credit and transmits it to the nominated bank via swift message.
Issuing bank gives reimbursement authorization to reimbursing bank.
Reimbursing bank issues its reimbursement undertaking and transmits it to the nominated bank via swift message.
Nominated bank advices the letter of credit to the beneficiary. (please keep in mind that step 3 and step 4 may be change their sequence)
Beneficiary presents documents to the nominated bank.
Nominated bank checks the documents and negotiate upon a complying presentation.
Nominated bank sends it reimbursement claim to the reimbursing bank. Reimbursing bank reimburse nominated bank according to terms and conditions of the reimbursement undertaking.
Nominated bank send documents to the issuing bank.
On the final stage issuing bank and reimbursing bank arrange settlement between themselves. Issuing bank gets the letter of credit amount from the applicant and releases original shipment documents.

References:

The Guide to Documentary Credits” written by Garry Collyer, 3rd Edition, Page : 36)

Parties to Letters of Credit

Ozgur Eker (CDCS) Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Letter of Credit Basics, Letter of Credit Parties, Nominated Bank, Reimbursing Bank 16 January 201810 February 2025Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank

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.