Can an Issuing Bank Issue a Credit Available with Itself by Negotiation?

The question occasionally arises where both the applicant and beneficiary maintain accounts with the same bank. The applicant wants a usance LC, while the beneficiary wishes to obtain immediate funds by discounting complying documents. Can the issuing bank simply make the credit available with itself by negotiation?

Question

Hi Mr. Old Man,

Can a bank issue an LC available with itself by negotiation?

Both the buyer and the seller are located in the same country and maintain accounts with the same bank. The applicant wants to issue a usance LC with a tenor of 60 days, while the beneficiary wishes to negotiate complying documents.

Sameer

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Answer

Dear Sameer,

Thank you for your question.

Based on the definition of “negotiation” in Article 2 of UCP 600, a bank cannot negotiate a draft drawn on itself.

Furthermore, there is generally no need for an issuing bank to issue a usance credit available with itself by negotiation.

Sub-article 12(b) of UCP 600 allows a nominated bank to prepay or purchase (discount) a draft accepted or a deferred payment undertaking incurred by that nominated bank. In my opinion, the same principle may be applied to an issuing bank. In other words, the issuing bank may also prepay or purchase (discount) a draft that it has accepted or a deferred payment undertaking that it has incurred.

Accordingly, the credit may be issued available with the issuing bank by acceptance or deferred payment, payable at 60 days sight or 60 days after the bill of lading date. Once the issuing bank has accepted the draft or incurred its deferred payment undertaking, it may, at the beneficiary’s request, prepay or purchase the proceeds before maturity.

Therefore, the practical solution is not to issue the credit available by negotiation, but rather available by acceptance or deferred payment, with the issuing bank subsequently discounting its own accepted draft or deferred payment undertaking.

For readers interested in this topic, I discussed a similar question in 2010:

https://mroldman.net/can-the-issuing-bank-discount-its-own-accepted-draft-or-deferred-payment-undert/

Best regards,

Mr. Old Man