ADVISING BANK & NOMINATED BANK Role of advising bank : Advising bank means the bank that advises

the credit at the request of the issuing bank. A credit and any amendment may be advised to a beneficiary through an advising bank. an advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honour or negotiate. By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received. Advising bank may utilize the services of another bank ("second advising bank") to advise the credit and any amendment to the bene. by adivising the credit or amendment, the second adivsing bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amd If a bank is requested to advise a credit or AMD but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from whihc the instructions appear to have been received. Nominated bank : means the bank with which the credit is available or any bank in the case of a credit available with any bank Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honor or negotiate, except when expressly agreed to by that nominated bank and so communicated to the bene. By nominating a bank to accept a draft or incur a deferred payment undertaking an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred b that nominated bank. Receipt or examination and forwarding of dox by a nominated bank that is not a confirming bank does not make that nominated bank liable to honor or negotiate, nor does it constitute honor or negotiation.

DOCUMENT some organization use a seal "Documents received without verifying the contents."

Negotiation A Nominated bank is the specific bank with which the LC is available, as indicated in field 41A, and to whom documents must be presented. The "nomination" originates from the issuing bank. If this field states "Any Bank", then the Nominated bank is de facto, any bank where the beneficiary elects to present documents.

A Negotiating bank is a Nominated bank under an LC which is "available by Negotiation", and which acts on its nomination by "buying" the documents (subject to the presentation being in order) from the beneficiary, and paying the beneficiary the proceeds of the presentation from its own funds, before the bank has received reimbursement from the issuing bank. Because of the time factor, the negotiating bank would usually deduct an element of "interest" from the payment. So, the terms "Negotiating" bank and "Nominated" bank are not mutually exclusive. A Nominated Bank only becomes a Negotiating bank if it elects to act on its nomination under an LC available by negotiation", otherwise its status remains as a Nominated bank. A Negotiating bank on the other hand, must necessarily be a Nominated bank, because it will have elected to effect the act of negotiation. Unless the Nominated bank is a confirming bank, and unless otherwise agreed with the beneficiary, any negotiation which it may effect will always be with recourse to the beneficiary.

A Gentle Introduction: The definitions: Article 2 UCP 600

a) new organization of the material One of the most important structural changes of the Uniform Customs and Practices consists of the concentration of the definitions in article 2. In the UCP 500 these definitions had been mentioned for each transport document and thus the same text was repeated. The objective of the UCP 600 was to reduce this redundancy. To place the definitions at the beginning of the UCP certainly is correct from a systematic point of view. The practitioner however will struggle with this change, since he/she now has to decide which definition to apply to which document. Furthermore, the definitions are not devoid of redundancy, since some of the definitions and rules for interpretation (article 3), as e.g. the terms "negotiation" or "complying presentation" have to be mentioned for issuing and secondary bank. b) definitions Article 2 UCP 600 now contains the twelve most important definitions for the use of the UCP. The reason for this summary was according to the ICC, that these definitions are "complete when standing alone and are not part of an article". Article 2 does not contain definitions regarding a second advising bank (Article 9 c), pre-advised credits (Article 11), Bank-to-Bank Reimbursements (Article 13 a), or the liability for commissions, fees and other charges of a bank instructing another bank to perform services (Article 37 c). Some of the definitions of Article 2 (e.g. Advising Bank, Applicant, Beneficiary, Confirmation etc.) do not need further explanation. The following lists the definitions that offer a new terminology without substantive changes: Complying presentation: This new term is just a summary of well known principles of examination. A presentation has to fulfill three criteria to qualify as a complying presentation: It has to

comply with a) the terms and conditions of the Credit b) the applicable provisions of the UCP, and c) international standard banking practices. Regarding the international standard banking practices, the ICC refers to its publication 681-E (ISBP) with the caveat that the ISBP are not all-encompassing and that hence the term international standard banking practice is broader than its publication 681-E.

Credit: The definition of Credit (arrangement, however named .. that constitutes a undertaking of the issuing bank to honour..) has not changed. What is new however is that all Credits are irrevocable, as hitherto was the case in practice. Honour: the definition of the term honour contains the obligation of a bank to pay, deferred pay, of accept bills of exchange. It is however little systematic not to mention a bank's obligation to fulfill its obligations under a negotiation credit. Nevertheless, the substantive law has not changed: An issuing bank is obligated to negotiate documents presented under a complying presentation (Article 7 a) and the Credit has to state whether it is available by sight payment, deferred payment, acceptance or negotiation (Article 6 b). Non banks issuing Credits: The UCP 600 designate the issuer of a Credit as "Issuing Bank". Nevertheless, Credits can be issued by non-banks, a fact confirmed by the ICC Banking Commission (Comm. ICC-Pub. No. 680, page 18,19). However, when a bank advises a Credit issued by a non-bank, it has to inform the beneficiary of this fact. Banking Day: The definition of a Banking Day is relevant for the calculation of the five day deadline (Article 14 b) to examine the documents. That a bank is open for business is not sufficient, rather, a banking day is a day on which the issuing or nominated bank is regularly open to conduct letter of credit business. Hence, local customs come into play as e.g. Saturday is a Banking Day in China but not in Singapore. Furthermore, differences may occur within one country.

Available by negotiation
In the definition of Honour you are clarifying negotiation, Is the issuing bank obligated to negotiate (give present value to a draft) if the LC was open available by negotiation?
Tue, 11/18/2008 - 11:15 admin

Negotiation
UCP Article 7 stipulates:

Issuing Bank Undertaking a. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by: ... v. negotiation with a nominated bank and that nominated bank does not negotiate.

Is the Nominated Bank Obligated to Negotiate Documents?

The word 'available' as used in LC operations, ranks high on the list of terms that confuse exporters. A letter of credit should clearly specify how it is available; by sight payment, deferred payment, acceptance or negotiation [article 6(b), UCP 600]. It is preferable for exporters that letter of credits be advised available with a local bank, or at least with a bank in the exporter's own country. For instance, if the letter of credit is available at the counters of a local advising bank by sight payment, deferred payment, acceptance, where confirmation is added, then the exporter will, in the normal course of events, receive payment or have a bank acceptance or a deferred payment commitment a few days after presenting documents complying with the terms of the letter of credit. Such commitments are definitive and without recourse to the exporter. However, if a letter of credit is not confirmed, such advising bank may decide not to pay, accept or issue a deferred payment commitment at the time documents are presented, even if they are presented in order [article 12, UCP 600]. There can be many reasons for this, but the most common is that the advising bank where the letter of credit is available is not satisfied with the bank risk or country risk. If on the other hand, the letter of credit was confirmed, such advising/confirming bank would have no option but to take up documents which comply with the terms and conditions of the LC and honor its commitment to the exporter. Negotiation deserves a special mention. Negotiation is a term which regularly confuses exporters and perhaps even some bankers. If a letter of credit is available by negotiation with an advising bank and not confirmed, that bank has the option to pay to the exporter, remit the documents and claim payment from the issuing bank. The exporter must realize that the final decision as to whether or not documents meet the terms and conditions of the letter of credit, and consequently as regards payment, rests with the issuing bank. The negotiating bank will request repayment from the beneficiary (with interest) if payment is not received from the issuing bank. Negotiation without confirmation is with recourse. A letter of credit available by negotiation and confirmed by the negotiating bank means that the negotiating bank has no option but to negotiate documents presented complying with the terms and conditions of the letter of credit. Such negotiation under a confirmed letter of credit is without recourse. Where a letter of credit is only available by negotiation and not confirmed, many banks which have been nominated as negotiating banks are not prepared to take the risk of paying the exporter for fear they may not get reimbursed. Exporter should appreciate the service provided by a bank when it negotiates documents, and also understand why a bank is not always prepared to negotiate.

Article Source: http://EzineArticles.com/2086801

Definiation of negotiating bank Article 6(b): "A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation." Therefore, the four terms are distinctly separate. They are different in meaning. Hence, acceptance and negotiation cannot be equated. What you have defined as 'negotiation' is actually the definition of a 'nominated bank'. See article 2 of UCP 600. Reverting to my earlier response, if the presenting bank is not the nominated bank, then it is on the same footing as the beneficiary, isn't it? If an LC is available by negotiation, then it is not available by payment (nowadays termed as 'honour'). Payment is without recourse, negotiation may or may not be so. For example, a confirming bank negotiates without recourse. Others negotiate with recourse. An issuing bank pays, it never negotiates. Negotiation, acceptance, payment, deferred payment are terms strictly defined by the UCP and are distinct in meaning and implications.

LETTERS OF CREDIT- ADVISED vs. CONFIRMED The letter of credit transaction usually involves two banks: the buyer's bank issuing the letter of credit and a bank in the seller's country, which advised the letter of credit to the beneficiary. The advising bank may also assume the role of confirming bank. Whether advising and/or confirming, the seller's bank assumes certain responsibilities. Advising An advising bank acts as the agent of the issuing bank. The function of the advising bank is to take reasonable care to verify the authenticity of credits received and then accurately transmit them to their beneficiaries. When advising a letter of credit, the bank assumes no other liability. On receipt of the documents for examination and payment, the advising bank will pay the seller only if it has received good funds from the issuing bank, even if it was specifically named as paying bank in the letter of credit. Confirmation

By confirming a letter of credit, the advising or another bank assumes the same responsibilities as the issuing bank, including the obligation to pay against presented documents if they are in order and all of the letter of credit terms are met. In effect, the beneficiary has the individual promise of two banks to pay against conforming documents; the issuing bank and the confirming bank. How is a Letter of Credit Confirmed? When negotiating the terms of sale, the seller would require a letter of credit requesting the advising bank to add its confirmation. The buyer includes this request when submitting the application for L/C issuance to his bank. In most instances the issued credit states: "Please advise beneficiary adding your confirmation" or words to similar effect. Note: This is a request, not a requirement. The advising bank for various reasons may decline to add its confirmation and simply advise the L/C without engagement on its part. When adding confirmation, typical language included in the cover letter would be, "We hereby confirm this credit and thereby undertake that all drafts drawn under, and in strict compliance with the terms stated therein (and any further terms stated herein) will be duly honored on presentation and delivery of documents as specified, if presented, at this office on or before the expiry date." Why Request Confirmation? The beneficiary may have concerns about the political or economic stability of the buyer's country, or the strength and reputation of the issuing bank. Confirmation by a bank known and convenient to the seller promotes the commercial utility of letters of credit. Also in the event of a dispute, jurisdiction will be determined by the confirming bank's location.

Confirmation of LC as well as the confirmation charges Confirmation of LC as well as the confirmation charges are the understanding between the buyer and seller. If field No-49 of the LC : Confirm and field No. 71 B is saying the confirmation charges are on account of applicant. The advising bank will automatically add the confirmation upon receipt of LC from the issuing bank. (confirmation charges on A/C of applicant) If field No-49 of the LC : May Add and field No. 71 B is saying the confirmation charges are on account of beneficiary. In this case either the advising bank will contact to the beneficiary or the beneficiary has to request in writing to the advising bank or any suitable bank for adding the confirmation. (Confirmation charges on A/C of Beneficiary if required). After adding confirmation of the LC the filed will change as Confirm. If field No-49 of the LC : Without and field No. 71 B is saying the confirmation charges are on account of beneficiary or silent on the confirmation. In this case either the advising bank will contact to the beneficiary or the beneficiary has to request in writing to the advising bank or any suitable bank for adding the confirmation. (Confirmation charges on A/C of Beneficiary only)

After adding confirmation of the LC the filed will change as Confirm. All document need to present to the counter of confirming bank only and the drafts drawn on confirming bank.
Confirmation ??

The meaning of confirmation : the issuing bank asks another bank to add its own engagement to the undertaking due to issue a L/C. Normally this engagement covers so called Country Risk and / or Issuing Bank default. A l/c could be advised by a bank, usually located in beneficiary's Country: -WITHOUT confirmation by the advising bank, -CONFIRM, the advising bank added its own confirmation, -MAY ADD, the advising bank is requested to add its confirmation on beneficiary' request. To remember that confirmation means fees to pay . In many Countries, there is a Governamental Export Guarantee Agency that helps banks in confirming L/c by sharing the risks, for about 80 %, and banks have to pay an insurance premium too.
The confirming bank must pay ...

If the LC is confirmed by and available with Citibank Branch Office by payment, the documents should be presented to Citibank Branch Office for payment. The confirming bank, i.e. Citibank Branch Office, must pay if the documents presented are complying. The documents can be presented to the counter of the confirming bank either directly by the beneficiary or through the beneficiarys banker. In case the documents are presented through the beneficiarys banker which is not a branch of Citibank or is a branch of Citibank but not located in the same country, the beneficiarys banker is acting as a remitting bank only. The remitting bank may or may not check the documents at its own discretion but must ensure that the documents must reach the counter of the confirming bank by the last day for presentation and within the validity of the LC. Please note that under LC available with a nominated bank by payment, the LC would normally expire at the counter of the nominated bank.

'Credit is available with any bank and unrestricted for negotiation'.

As a beneficiary, this provides you with maximum flexibility, without any additional risk. Instead of being required to present documents to a specific bank, you can present documents to any bank, and provided such bank is willing to handle the transaction, you can request them to examine and negotiate the documents. I assume the LC is unconfirmed? Although, as a beneficiary this will not concern you, the issuing bank's obligations to "any" bank is the same as if the LC had been restricted for negotiation with a specific bank.

The advantage for you is that in theory, you would be able to shop around to see which negotiating bank was willing to negotiate, and at what price. If you require a "silent confirmation", with the ability to shop around, this would be easier to achieve under a freely negotiable LC, than a restricted LC.

Obviously the incoming MT700 will not mention that the LC may be silently confirmed (field 49 will state "WITHOUT"), but provided the nominated bank, or "any" bank is willing to "silently" confirm, the confirming bank will wish to draw up a set of agreements with the beneficiary, such as for example, that the beneficiary is restricted from accepting an amendment without the confirming bank's approval, and that the bank is a nominated assignee under the LC proceeds. The first issue is important, because the confirming bank does not enjoy the protection of a confirming bank, as under Art. 10 a. The second issue is important to enable the confirming bank to step into the shoes of the beneficiary, in order to pursue a claim against the issuing bank,if necessary. The confirmation advice from the bank is likely to set all these out in detail, but will vary from bank to bank.
But if the LC is changed to be available by negotiation, the draft should be drawn on the issuing bank instead of SCB. And SCB is to negotiate the draft without recourse. The LC may not be issued by draft available with any bank by acceptance. The draft on hsbc bank cannot be accepted by another bank. Hence the available with must be any bank by negotiation.

41D: field of swift700 says "LC available with any bank in China for negotiation" . Issuing bank is in USA and beneficiary is from China, Bene directly presents the documents to issuing bank. Can issuing bank rejects the documents saying that documents are directly presented by bene? Here the act of issuing bank is correct or not.
its very easy to understand. Sub Article 6.a UCP600 "A credit available with a nominated bank is also available with the issuing bank." also Sub Article 6.e "a presentation by or on behalf of the beneficiary must be made on or before the expiry date."

Can a L/C , (field 49 says :confirm ) be available with, field 41 : any bank, by negotiation or it has to be available only with the confirming bank ?.

Further is it necessary that in a confirmed lc the drawee should be the confirming bank .Can the drawee be the issuing bank in a confirmed L/C The main obstacle to the above scenario, is the confirming bank's requirement under Sub-Art. 8 d of UCP600. Without nominating a specific confirming bank, the issuing bank will never be in a position to ensure compliance with the sub-article. This issue aside, if "any" bank wished to exercise its right to act as a confirming bank, in theory, this could be done. However, the confirming bank would be wise to advise the issuing bank that it has acted on its nomination as negotiating bank, and furthermore, had added confirmation, so as to ensure that it was protected under all rights afforded to a confirming bank under UCP600. To protect the confirming bank's position with the beneficiary, it would also be wise for the confirming bank to clause its confirmation to the effect that its confirmation would only conditional upon the LC being thereafter restricted for negotiation with the confirming bank only. This would ensure that the confirming bank is not unnecessarily exposed under sub-art. 8 C. As the confirmation agreement would be a private contract between the beneficiary and the confirming bank, such restriction as part of its confirmation agreement would not require an amendment from the issuing bank. As regards "drawee", I assume you are referring to an LC available by acceptance. It is of course not necessary for the drawee to be the confirming bank, but on the basis that the beneficiary is seeking to engage the confirming bank's, rather than the issuing bank's engagement to pay at maturity, it seems highly unlikely that it would ever be desirable to draw the draft on the issuing bank. Of course, it is well recognised that the requirement for a sight draft under a sight LC, whether on the confiming bank, or the issuing bank, serves no useful purpose.
Suppose negotiating bank add their confirmation, is it right that drafts to be drawn on confirming bank? Coz as per article 2 of UCP says Negotaion means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) The only scenario where drafts are drawn on the nominated bank is when the LC is available with them by acceptance in order to facilitate the prepay/purchase of their own acceptance undertaking.

honour vs negotiate
Negotiation is a subset of Honour. However to honour according to UCP ARTICLE 2 simply means to pay at sight, to incur a deferred payment underking, and pay at maturity, to accept draft and pay at maturity or to negotiate, while negotiation simply mean tp purchase or buy accepted draft drawn on a bank other than the nominated bank and or other documents by agreeing or to make fund available to the beneficiary on or before the day in which reimbursement is due

Negotiation is the purchase of drafts (not drawn on the nominated bank) and/or documents under a complying presentation by nominated bank, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which the payment is due. Honour is a function that can be performed by A) issuing bank (sub-article 7a of the UCP 600), B) confirming bank (if any) [sub-article 8 a (i) and 8 (b) of the UCP 600]. Negotiation is only possible if a credit states that it is available "by negotiation". Negotiation is a function which cannot be performed by the issuing bank. It can be performed by A) confirming bank (if any)[sub-article 8 a (ii) and 8 b of the UCP 600], B) nominated bank (article 2 'definition of purchase' and article 12]. Negotiation is purchasing of documents under Letter of Credit. Here I would like to explain about Honour and Negotiation. Under Honour, you have to perform your duties, Under Negotiation , It is an option to you to perform other's duties. Lets assume When Drawee is Citi Bank The Citi Bank responsibility is to make the payment to Payee of the Draft. It can not escape from making payment to Payee. When It comes to Negotiation. If Bank of American makes the payment to Payee(Still Drawee is Citi Bank) then it is called Negotiation. The Honour or Negotiation when documents clean(sometimes discrepant docs also negotiated). Collection means passing the documents from Exporter to Importer. Banks play role of Intermediary. They donot assume any responsibility under collections. Also, when docs are presented to you for Negotiation and if you opt to do so, you have check the docs and give value to it (pay or accept to pay). And, when docs are presented to you for collections, you don't need to check documents and you do just a courier job, give the docs to the customer.

Usance LC and deferred LC. Same thing?

I have put them in that order for good reason. Heres my understanding: 1. tenor is the time when payment is due under an LC. Payment may be due at sight, with or without a draft, or at some time in the future with or without a draft. That future time can be expressed as xx days sight, xx days B/L date or as a specified date, e.g., December 31, 2009. 2. usance refers to the time in the future when payment is due, i.e., xx days sight, xx days B/L date, or a specified future date but is not used when payment is due at sight. 3. acceptance is the term used to indicate that honor under an LC is available at a time in the future by presentation of a draft indicating that future time, e.g., xx days sight, xx days B/L date, or as a specified date.

4. deferred payment is the term used to indicate that honor under an LC is available at a time in the future without the presentation of a draft. While it appears that acceptance and deferred payment are functionally equivalent, there are significant differences in practice and in some legal regimes. 1. Honor of an LC available by acceptance with the issuing bank, confirming bank or a nominated bank will create a bankers acceptance which is a negotiable instrument separate from the LC and which in many regions is a readily marketable instrument. Bankers Acceptances are direct liabilities of the accepting bank, replacing that banks contingent liability under the LC. 2. Honor of an LC available by deferred payment with the issuing bank, confirming bank or a nominated bank will create a deferred payment obligation which is not a negotiable instrument and for which there is not a ready market for trading such obligations. Deferred payment obligations are direct liabilities of the bank incurring the obliugation and in the case of issuing and confirming banks, replaces their contingent liability under the LC. A beneficiary holding a bankers acceptance will generally be in a better position to discount the banks obligation at a more favorable rate than if holding a banks deferred payment obligation. In addition, a beneficiary holding a bankers acceptance will generally be in a safer position to avoid legal action should an applicant seek injunction prohibiting an obligor paying at maturity/due date rather than if the beneficiary were holding a deferred payment obligation. I am sure this does not answer all your questions and may raise a few more, such is the nature of LC. ---Recalling my past experience as a letter of credit document examiner, the word "Usance" was most often used with regard to LCs issued by Korean banks. As I did not observe a reference to this phenomenon in the thread, Id like to share my understanding. As I remember Usance was a practice referred to under Korean Bank issued LCs whereby they were available with any bank by negotiation and the drafts were drawn (at a determinable date; e.g. 180 Days Sight) on the reimbursing bank. The LC would explicitly state that the reimbursing banks acceptance and discount charges were for the account of the LC applicant (consequently the beneficiary would effectively receive payment At Sight). The reimbursing bank was typically but not always either a branch or correspondent of the issuing bank domiciled in the country where the LCs currency is issued (e.g. a USD denominated LC would often have its reimbursing bank domiciled in, say, New York City). From an operational perspective, it meant two transmittals were effected by the document examining bank. The transmittal of the shipping documents was dispatched to the issuing bank while the financial document (i.e. the draft) was dispatched to the

reimbursing bank. I suspect (but I am by no means certain) this particular type of structure was due to the tax treatment of Usance interest in Korea. Notwithstanding this, in my department (that handles doc. & standby credits, collections & guarantees) usance tends to be used to mean either tenor (as in What is the usance of the bill / credit?) or not payable at sight (as in a usance bill / credit) and thus can encompass a credit available by deferred payment, acceptance or (where payment is not due at sight by the issuing bank) negotiation.

Sight Drafts versus Term Drafts

Sight Draft The sight draft is most commonly used in international trade. In a sight draft, the payment is on demand or on presentation of the negotiation documents to the paying bank or the importer. In practice, the bank may pay within three (3) working days (not instantly) after the receipt and review of the negotiation documents and if they are in order, that is, the documents comply exactly to the letter of credit (L/C) stipulations.

In certain countries where the business relationships between the exporter and the bank is well established, the bank may pay the exporter a few hours after the receipt of the negotiation documents that are in order. In the sample L/C it was stipulated "available by your draft(s) drawn at sight", as such the payment is by sight draft(s).

Term Draft
The term draft--(time draft or usance draft)---is used in a deferred payment arrangement. The payment is on the maturity date determinable in accordance with the stipulations of the letter of credit (L/C). The maturity date can be at a stated period after sight or after date:
after sight ---

after the draft is presented to the drawee for acceptance, for example, "at 90 days sight" and "at 120 days after sight".
after date ---

after a specific date, for example, "at 150 days B/L date" (i.e., the

maturity date is 150 days after the date of the bill of lading) and "at 180 days after date" (i.e., the maturity date is 180 days after the date of the draft). Unless the maturity date is tied to a specific date, the importer may refuse to accept the draft until the goods have arrived, such deferred acceptance can extend the maturity date.

In other words, in a term draft the exporter extends the credit to the importer. If a term draft is accepted by the accepting bank (in the case of draft drawn on the confirming bank or the issuing bank or other bank stipulated in the letter of credit), such draft becomes what is known as banker's acceptance. The exporter may hold the banker's acceptance pending payment by the bank on the maturity date or discounts it with the bank, thus provides the exporter with immediate funds. If a term draft is accepted by the importer (in the case of draft drawn on the importer) when it is presented to him/her by the collecting (presenting) bank, such draft becomes what is known as trade acceptance. In practice, the collecting bank usually holds the trade acceptance pending payment by the importer on the maturity date and advises the remitting bank of the date of acceptance. The drawee may default on the payment of a trade acceptance. Nevertheless, the trade acceptance has a better chance of being paid by the importer compared to a sales invoice. The usual way the drawee accepts a draft is by writing or stamping the word "ACCEPTED" on the face of the draft, plus the drawee's authorized signature and the date accepted. Unless the importer's integrity is irrefutable, using a term draft is risky, especially when the draft is drawn on the importer where the remitting bank and the collecting bank are merely acting as agents without guarantee of payment. In certain countries, the importer may have access to the customs warehouse or docks and examine the goods before accepting them. The risk is that the importer may intentionally reject the goods even when they are in good order and condition, without paying or accepting the draft. The importer may reject the goods, for example, if the local market prices of the goods have dropped. Unless the goods are shipped back or rerouted to other buyers, the goods may incur warehousing charges and be subject to foreclosure after a period of time and auctioned off by the customs. The importer, not surprisingly, could be one of the bidders at the auction and obtain the abandoned goods at a fraction of the import cost. A remedy to counter such rejection is to send the draft and documents immediately to the remitting bank, so that the remitting bank may relay them to the collecting bank and the collecting bank presents them to the importer for payment or acceptance before the goods arrive at the destination.

The importer, however, has the right to reject goods that deviate from the contracted specifications and quality. The importer can instruct the collecting bank not to pay the draft.

_ _ _ _

By sight payment (Draft is optional) By deferred payment (Draft not required) By acceptance (Draft required) By negotiation (Draft is optional)

NRB 381

$=!( =============== . kl5 e'Qmfg x'g] u/L vf]lnPsf] k|tLtkq (Usance Bill) sf] xsdf eg] of] aGb]h nfu" x'g] 5}g . %=! Deferred Payment ;DaGwL Joj:yf M k|tLtkq vf]Nbf k|tLtkqsf] e'QmfgL At Sight Basis x'g'kg]{5 . t/ Deferred Payment jf Suppliers Credit cGtu{t vf]lng] Usance k|tLtkqx hlt;'s} cjlwsf] klg x'g ;Sg]5 . o;/L vf]lnPsf k|tLtkqxsf] Documents ;DjlGwt a} +sn] rfx]df Discount ;d]t ug{ ;Sg]5 .

Acceptance LCs and deferred payment LCs are usance LCs. The difference is that the acceptance LC requires a time draft, whereas the deferred payment LC does not. usance letter of credit (L/C): Alternative term for deferred payment letter of credit.

Negotiation/Acceptance/Deferred Payment

From an earlier post .... Negotiation : An LC payable by negotiation may require a draft (drawn on any party except the applicant, or the negotiating bank) but requirement is not mandatory. If the negotiating bank is also the confirming bank, the draft is likely to be required to be drawn on either a reimbursing bank or the issuing bank. The act of negotiation involves the purchasing of the drawee's (in the case of a draft being required, this could be any one of the reimbursing bank, issuing bank or a confirming bank) obligation represented by the draft and/or documents presented by the beneficiary. The negotiating bank would also have to "give value", that is to say, make immediate payment to the beneficiary, less an interest element, representing the delay period in receiving payment from the issuing/confirming/reimbursing bank. If payment is made for the full amount by the negotiating bank, this does not represent true negotiation, and nor is it represented by payment being made after the negotiating bank is put in receipt of covering funds. Needless to say, although a negotiating bank has full recourse on the issuing bank, not many non-confirming banks are willing to "negotiate" in its truest sense. Acceptance : Acceptance, must always involve a usance (time) draft, and may be drawn on either a "nominated", that is to say, a bank nominated by the issuing bank, which is likely to be a confirming bank. The basis of calculation of the due date must be with reference to a fixed point in time (e.g. 60 days from B/L date, 20 days sight,etc). Whomsoever the draft is drawn on, once it has been "accepted" for payment, the drawee becomes liable for payment under the draft. Drafts under acceptance credits are sometimes useful, as the instruments are abstract from the underlying LC and are subject to its own set of rules, codified in the Bills of Exchange Act 1882. As such, they may have a life and value outside of the LC transaction, through the endorsement and purchase of the draft by subsequent holders, in the secondary market, such as in Forfaiting. The drawee's legally bound obligation to honour the draft at maturity need not nenecessarly be tied up in the LC transaction, and as such, a rightful holder of the draft in "due course", who may not be a party to the LC, can theoreticaly enforce payment from the drawee in his own name. An LC cannot be available by acceptance with a bank, unless that bank is also the designated drawee of the draft. For example, an LC available by acceptance of beneficiary's draft drawn at x days sight on the issuing bank. and payable at the counters of the nominated bank, is properly, deemed to be available by "negotiation" and not by "acceptance". Deferred Payment : As in "Acceptance", payment is "deferred", i.e paid at a later date, but the fundamental difference is that drafts are not called for.

These fundamental concepts of the method of payment run throughout UCP600, but specifically, Articles 2, 6, 7, 8, 12, 15, and 35 all refer.

deferred payment letter of credit (L/C)

Definition
A letter of credit that is paid a fixed number of days after shipment or presentation of prescribed documents. It is used where a buyer and a seller have a close working relationship because, in effect, the seller is financing the purchase by allowing the buyer a grace period for payment. A deferred payment letter of credit differs from a sight draft or time draft in that no drafts are involved but the payment is guaranteed on the stated date. However, there being no draft, the beneficiary party's ability to discount or sell his or her right to payment is restricted. Also called usance letter of credit. See also red clause letter of credit.
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usance letter of credit (L/C)

Definition
Alternative term for deferred payment letter of credit. Read more: http://www.businessdictionary.com/definition/usance-letter-of-credit-LC.html#ixzz1ujPiwXML

Is using reimbursing bank mandatory in a confirmed l/c

It is not mandatory in either case, whether confirmed or uinconfirmed. It is the method of availability, and existing account mandates between the issuing bank and its correspondent, which would determine whether the provsion of a reimbursing bank is relevant, or applicable. Under a confirmed LC, the nominated confirming bank, is required to honour compliant documents on presentation. As reimbursement, the confirming bank will require the facility (supported by a certificate of compliance) : 1. To claim on either the issuing bank, or: 2. To claim on a nominated reimbursing bank, or ; 2. To debit the issuing bank's account in its books. The main point is that the issuing bank must put the confirming bank in funds against the confirming bank's assertion that compliant documents have been taken up by the confirming bank, and not subject to the issuing bank requiring the opportunity to examine the documents themselves. How the issuing bank chooses to provide reimbursement (i.e whether directly, by debit to an account, or by claiming on a reimbursing bank) is a matter for the issuing bank to decide. Many issuing banks choose not to provide a reimbursing party in the LC, but this should not stop a confirming bank from confirming the LC, provided the confirming bank is permitted to make a claim against its own examination, and the issuing bank undertakes to honour such claims, without first requiring receipt of the documents.