Accepted Drafts under LC: Keep Them, Return Them, or Forget Them?

– Roshani asks, Mr. Old Man answers –

When it comes to letters of credit available by acceptance, one of the classic debates is: what happens to the draft once it’s accepted?

Some bankers insist it should go back to the beneficiary as proof, others shrug and say the bank’s SWIFT message is more than enough. Throw in a few concerns about negotiable instruments law versus UCP 600, and suddenly a simple piece of paper becomes the star of a courtroom imagination.

Let’s break it down with some straight answers.

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Q1. Does the practice of returning accepted drafts to the beneficiary by the issuing bank or negotiating bank prevail in case of an LC available by acceptance, or is it only on paper? Is there any timeline prescribed for banks to return the draft to the beneficiary?

A1.

In standard practice, drafts under LCs with a tenor of up to 180 days sight (or after B/L date) are not returned to the beneficiary. The issuing bank retains them and pays at maturity.

In rare cases of long-term tenors (e.g., 360 days or more, usually linked to project finance), the drafts may be returned to the beneficiary so that they can be used for forfeiting in the market.

If the LC specifically requires the accepted drafts to be returned, or if the presenting bank’s covering schedule requests it, then the issuing bank must accept the drafts and return them to the beneficiary through the presenting bank.

Meanwhile, the beneficiary’s bank can always discount the drafts based on the issuing bank’s authenticated acceptance, which serves as a firm payment undertaking.

Q2. Should the practice of calling for drafts under LCs with tenors up to 180 days sight be discontinued?

A2.

No. Calling for drafts up to 180 days sight remains within accepted practice. The choice of whether drafts are required, and their tenor, usually depends on the credit arrangement between the applicant and the beneficiary. While in many cases the draft requirement is more of a formality, it is still commonly used.

Q3. The beneficiary never regains possession of the accepted draft once it is handed to the issuing or nominated bank. Without the draft, the beneficiary cannot produce it in court under the relevant Negotiable Instruments Act. If the beneficiary cannot even verify whether the draft has been properly accepted, what purpose does such a draft serve?

A3.

In practice, once the issuing bank accepts a draft, it sends an authenticated SWIFT message confirming acceptance and its undertaking to pay at maturity. The presenting bank forwards this confirmation to the beneficiary.

This authenticated SWIFT message serves as binding evidence of acceptance. In case of a dispute, the beneficiary can rely on this message as proof in court. In modern international banking practice, such authenticated messages carry the same legal force as possession of the physical draft itself.

Q4. Isn’t the issuing bank’s undertaking weaker than a formally accepted draft? Under a dispute, wouldn’t the provisions of the local Negotiable Instruments Act prevail over UCP 600? Why then is the practice of not returning the draft followed?

A4.

It is true that national law, including the Negotiable Instruments Act of the relevant jurisdiction, would prevail over UCP 600. However, in practice, courts generally accept an issuing bank’s authenticated SWIFT acceptance as strong and binding evidence.

The reason drafts are not usually returned is that the bank’s authenticated acceptance message is considered sufficient proof of liability and enforceability, rendering the physical draft largely unnecessary.

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Mr. Old Man