Uncategorized STANDBY LETTER OF CREDIT By Mr Old Man Posted on August 19, 2014 8 min read 9 0 6,067 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr QUESTION Dear Mr. Old Man, One of my bank’s customers asks for our consultation on how to open standby LC. To tell the truth I am not familiar with this type of LC. I have contacted my colleagues at other banks but it cannot help because they have not yet had any experience in this type of LC. I will highly appreciate if you explain to me about this type of LC. The customer wants to open standby LC to pay the exporter under the commercial contract. Best regards, N. ———– ANSWER Hi, Standby letter of credit is a kind of letter of guarantee (guarantee). In USA and some countries where banks are not allowed to issue guarantees, they would issue standby letters of credit instead. Standby letter of credit (SBLC) is different from commercial LC (CLC) in the following aspects: Purpose of payment type: The issuing bank’s obligation under SBLC is a secondary one, i.e., the obligation will be triggered when another primary payment mechanism does not work, whereas the issuing bank’s obligation under CLC is a primary obligation, i.e., the issuing bank issues CLC at the request and for the account of the importer to pay for the goods and the issuing bank will honour upon receipt from the presenter of complying documents required under the LC. Governing rules: SBLC may be subject to UCP 600 or ISP98, whereas a commercial LC is subject to UCP 600. Required documents for payment: Documents required under SBLC may be simply a draft accompanied a statement of default, whereas documents requires under CLC are much complex including drafts, invoice, transport documents, certificate of origin, inspection certificate, packing list…. I guess your customer is requesting your bank to issue SBLC to guarantee his//her payment obligation under the sales contract. It is quite possible. However, it is advisable that your customer would rather use CLC than insist on SBLC. In Vietnam banks are more familiar with guarantees than SBLC. Vietnam has Circular 28.TT-2012/TT/NHNN governing bank guarantees and there is no specific law on SBLC. However, this does not mean that banks in Vietnam cannot issue SBLCs. If you have to issue SBLC, you still use MT 700 and should pay attention to the following: Field 40A (Form of Documentary Credit): IRREVOCABLE STANDBY Field 40E: (Applicable Rules): UCP LATEST VERSION or ISP98 SBLC would not contain fields regarding description of goods, latest shipment date, port of loading, port of discharge… Here is a sample for your reference: *****MESSAGE***** 27: Sequence of Total 1/1 40A: Form of Documentary Credit IRREVOCABLE STANDBY 20: Documentary Credit Number DC12345 31C: Date of Issue 140819 40E: Applicable Rules UCP LATEST VERSION 31D: Date and Place of Expiry 141210 AT OUR COUNTER 50: Applicant VN BEVERAGE CO. LTD. LOT 12A DANANG INDUSTRIAL PARK DANANG CITY, VIETNAM 59: Beneficiary CALIFORNIA BEVERAGE CO., LTD. 100 VERMON ST. ROSERVILL, CA 12345 32B: Currency Code / Amount USD500000, 39A: Percentage Credit Amount Tolerance 10/10 41D: Available With … By … VIETCOMBANK DANANG BY PAYMENT 42C: Drafts at.. SIGHT 42D: Drawee VIETCOMBANK DANANG 47A: Additional Conditions PLEASE ADVISE THÍ STANDBY LC TO THE BENEFICIARY AT ADDRESS:…. WE HEREBY ESTABLISH OUR IRREVOCABLE STANBY LETTER OF CREDIT NO 12345 IN FAVOR OF BENEFICIARY FOR THE ACCOUNT OF VN BEVERAGE CO. LTD IN AN AMOUNT NOT TO EXCEED USD500.000,00 (FIVE HUNDRED THOUSAND AND 00/100 US DOLLARS) PLUS OR MINUS TEN PERCENT, AVAILABLE FOR PAYMENT AT OUR COUNTER AT 140-142 LE LOI ST., DANANG CITY, VIETNAM AVAILABLE BY BENEFICIARY’S SIGHT DRAFT DRAWN ON VIETCOMBANK DANANG ACCOMPANIED BY BENEFICIARY’S STATEMENT AS FOLLOWS : “WE, CALIFORNIA BEVERAGE CO., LTD, HEREBY DEMAND PAYMENT OF USD (INSERT AMOUNT) UNDER VIETCOMBANK BINH DUONG LETTER OF CREDIT NO 12345. WE FURTHER CERTIFY THAT THE AMOUNT OF OUR DEMAND REPRESENTS THE AMOUNT DUE US AS A RESULT OF THE FAILURE OF VN BEVERAGE CO. LTD TO PERFORM IN ACCORDANCE WITH CONTRACT 45678. DRAFTS DRAWN UNDER THIS LETTER OF CREDIT MUST BE MARKED : “DRAWN UNDER VIETCOMBANK DANANDG STANDBY LETTER OF CREDIT NO : 12345 DATED 19 AUGUST 2014 PARTIAL DRAWINGS ARE PERMITTED. THIS LETTER OF CREDIT WILL EXPIRE AT OUR COUNTERS 140-142 LE LOI ST, DA NANG CITY, VIETNAM THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (2007 VERSION) INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO 600. WE HEREBY ENGAGE WITH YOU THAT DRAWINGS PRESENTED UNDER AND IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS CREDIT WILL BE DULY HONORED. 71 B : Charges and Fees OTHER THAN THE ISSUING BANKS ARE FOR THE ACCOUNT OF THE BENEFICIARY. ISSUING BANK’S CHARGES ARE FOR THE ACCOUNT OF THE APPLICANT. 49 : Confirmation Instructions WITHOUT ***End of Message*** Kind regards, Mr. Old Man P/s: To tell the truth I haven’t had any practical experience in SBLC
IS THE NOMINATED BANK REQUIRED TO VERIFY WHETHER THE BENEFICIARY HAS AUTHORIZED THE PRESENTING BANK TO PRESENT THE DOCUMENTS?
CAN THE ISUING BANK CITE “LATE PRESENTATION” AS A DISCREPANCY SOLELY BASED ON THE DATE OF THE COVER LETTER?
IS THE NOMINATED BANK REQUIRED TO VERIFY WHETHER THE BENEFICIARY HAS AUTHORIZED THE PRESENTING BANK TO PRESENT THE DOCUMENTS?
CAN THE ISUING BANK CITE “LATE PRESENTATION” AS A DISCREPANCY SOLELY BASED ON THE DATE OF THE COVER LETTER?