CAN A BANK ISSUE AN LC FOR AN AMOUNT LESS THAN THE PROFORMA INVOICE?

QUESTION

Dear Sir,

This is Jawad from Askari Bank, Pakistan.

I would like to confirm whether a bank can issue a Letter of Credit (LC) for an amount lower than the proforma invoice amount.

For example, if the proforma invoice amount is USD 100, can the applicant request an LC for only USD 45?

Additionally, if the applicant later requests multiple amendments to increase the LC amount, how can the issuing bank keep track of the total utilized amount from the proforma invoice?

I am asking because one of our customers frequently provides a new proforma invoice and requests to issue an LC for an amount lower than the original invoice value. This situation is unclear to me.

Thank you and best regards,

Jawad

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ANSWER

Hi Jawad,

It is possible for an issuing bank to issue an LC for an amount lower than the proforma invoice, provided the applicant and the beneficiary have agreed on this arrangement. The issuing bank may request the applicant to provide evidence of such an agreement if necessary.

Here are a few key considerations:

1. Issuing an LC for a Lower Amount

• Based on practical experience, legally and procedurally, a bank may issue an LC for an amount lower than the proforma invoice or contract value if the applicant requests it.

2. Tracking LC Amendments for Amount Increases

• If the applicant later requests an amendment to increase the LC amount, they must submit a copy of the original proforma invoice provided at the time of LC issuance.
• The issuing bank can then verify whether the requested increase is within the total proforma invoice value.

3. New LC Issued Against a New Proforma Invoice

• If the applicant provides a new proforma invoice and requests a new LC, the bank should treat it as a separate transaction.

4. Handling Unutilized Proforma Invoice Amounts

• If necessary, the bank may ask the applicant to explain any unutilized amounts from previous proforma invoices.
• Any remaining balance from an old proforma invoice may no longer be valid, and a new proforma invoice should be used for a new transaction or LC.

Best regards,

Mr. Old Man