Confirmed Usance LCs: Who Actually Gets Paid—and by Whom?

Questions on confirmed usance LCs are often less about whether they can be issued, and more about how they operate in practice. In particular, the roles of the nominated bank and the confirming bank—and their respective obligations—can give rise to uncertainty.

The following Q&A looks at two practical points: the possibility of issuing a confirmed usance LC, and, more importantly, who is entitled to claim proceeds at maturity under different scenarios.

Question

Dear Sir,

I hope you are doing well.

I would like to ask a question regarding a usance LC.

Can we issue/establish a confirmed usance LC?
If yes, will the nominated bank claim the proceeds from the confirming bank at maturity?

I look forward to your guidance.

Thanks and best regards,

Jawad Ahmed
Pakistan

_______

Answer

Dear Jawad,

Thank you for your question.

1. Can a confirmed usance LC be issued?

Yes—there is no restriction on issuing a confirmed usance LC.

A usance LC (available by deferred payment or acceptance) can certainly be confirmed. The more practical question, however, is whether a bank is willing to add its confirmation—and on what terms.

The confirming bank will assess the issuing bank’s creditworthiness, country risk, and the tenor of the usance period before deciding. In many cases, confirmation may be subject to conditions, additional fees, or may be declined altogether.

2. Will the nominated bank claim proceeds from the confirming bank at maturity?

This depends on how the credit is available and whether the nominated bank acts on its nomination.

• If the LC is available with a nominated bank (other than the confirming bank) and that bank honours a complying presentation (i.e., incurs a deferred payment undertaking or accepts a draft), it is entitled to reimbursement from the confirming bank at maturity.
• If the nominated bank does not honour, but simply forwards the complying presentation, the confirming bank must honour in accordance with UCP 600 Article 8(a)(i)(c) or 8(a)(i)(d)—that is, by incurring its own deferred payment undertaking or accepting the draft and paying at maturity.
• If the LC is available with the confirming bank, the beneficiary’s bank acts only as a presenting bank. Upon receipt of a complying presentation, the confirming bank must honour in accordance with UCP 600 Article 8(a)(i)(a)—that is, by incurring its own deferred payment undertaking or accepting the usance draft and paying at maturity.

At its core, the structure is simple:

• If the nominated bank acts, it earns the right to reimbursement.
• If it does not act, the confirming bank steps in under its own undertaking.
• If the credit is available with the confirming bank, the obligation is direct from the outset.

I hope this clarifies your query.

Best regards,
Mr. Old Man