Uncategorized CAN THE ISSUING BANK DISCOUNT ITS OWN ACCEPTED DRAFT OR DEFERRED PAYMENT UNDERTAKING? By Mr Old Man Posted on March 7, 2010 11 min read 15 0 6,211 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr QUERY FROM GhubshawiCan the issuing bank negotiate? Dear All, According to article 7.a.i & b of UCP600 the responsibility of the issuing bank is limited to honour and not to negotiate. Assume that a deffered L/C is available by negotiation with a nominated bank and that bank doesn't negotiate, could the issuing bank, in light of article 7.v., negotiate in this exceptional case? If yes, can the negotiation be with recourse or with out recourse? If no, please offer other solutions. Best Ghubshawi ————————————COMMENTS FR MR. OLD MAN Negotiate or Discount Before giving my answer to Ghubshawi’s question, I think some points of his question need to be clarified: 1/ What does he mean by deferred LC ? I guess he means usance LC that may include (i) an acceptance LC and/or (ii) a deferred payment LC. 2/ Discount or Negotiate ? In accordance with the above reasoning, the term “discount” instead of “negotiate” should be used to indicate the action of purchasing at a discount of an accepted time draft or of a deferred payment undertaking (though in reality the term. “negotiate” is sometimes used by some banks). 3/ Can the issuing bank discount a bill of exchange or a deferred payment undertaking accepted or incurred by itself ? My answer is yes. However, the issuing bank is not obligated to discount unless it is willing to do so as its obligation under an acceptance LC or under a deferred payment LC is to honour a bill of exchange or a deferred payment undertaking accepted or incurred by itself. Except for sight payment LC, the term “honour” is understood as its action of (i) accepting a bill of exchange (draft) drawn by the beneficiary and pay at maturity or (ii) incurring a deferred payment undertaking and pay at maturity . 4/ Discounting with recourse or without recourse ? And risk of loss ? Discounting if any should be on a without recourse basis. The issuing bank has no risks when discounting its own accepted bill of exchange or its own deferred payment undertaking as it is the issuing bank that shall reimburse itself when due. The issuing bank may suffer risk of loss in case the applicant fails to fulfil its obligation under its contract with the issuing bank for opening usance LC. That the issuing bank refuses to discount but pay at maturity does not help it avoid the same risk if any. However, to avoid risks regarding possible disputes between the applicant and the beneficiary in connection with the cargoes shipped under the LC, a cautious bank should choose the right time to discount, i.e. discount after the applicant has been in full receipt of the cargoes and satisfied with the quality (though I know banks deal with documents not with goods). 5/ What benefit does the issuing bank earn from discounting a bill of exchange or a deferred payment undertaking accepted or incurred by itself ? By discounting, the issuing bank may get the benefit both from the beneficiary (due to paying at a discount) and from applicant (due to aval commission). I think in reality that the beneficiary requests the issuing bank to discount its own accepted bill of exchange or its own deferred payment undertaking rarely happens. However, if someday my bank receives such request from the beneficiary of the acceptance or deferred payment LC issued by my bank, I will not hesitate to advise my staff to take it into consideration. Frammi and Shahriar, I will appreciate your comments on my point of view. Best regards, Nguyen Huu Duc ————————————————————- FROM Shahriar well pointed out Dear duc, Very well pointed out. ofcourse issuing bank can discount its accepted bill. in fact sometimes we do so. but there is a little confusion in me. Is this discounting a part of LC? To me its a different arrangement between the exporter and the issuing bank. So far I understand, as soon as the acceptance / refusal advice is given, the lc is over. as per lc paymnt wil b made at maturity. any early discount is against the acceptance nt draft. in negitiation there is no such acceptance, rather draft and complying presentation. whats ur opinion? Anyway let me share what we do in real life. such discounting is nt very common as central bank strongly discourage it as there are higher chances for accomodation bills / similar irregularity especially when the importer and exporter are sister concerns; common in BTB LCs!! second when discounting such a bill, its done by two different department as if they are two different banks!!! thus more people get involved and banks' risk minimized. :)) Shahriar ————————————————————————FROM MR. OLD MAN Hi Shahriar I highly appreciate your comments. I wish to exchange with you the following: Draft when accepted shall become a negotiable financial instrument that is independent of the LC and can be forfaited or sold on the market. Therefore, any banks including the issuing bank can discount (purchase at a discount) such a draft if they wish to do so. I am afraid that a deferred payment undertaking is not largely accepted as a financial instrument that can be forfaited or sold on the market like an accepted draft. Therefore, the bank that discounts such a deferred payment undertaking may not be protected by UCP. Yet, one thing I wish to draw your attention to is that UCP 600 Art. 12 (b) has given the green light to the nominated bank to prepay or purchase its own deferred payment undertaking (or its own accepted draft). It was the famous court case “Banco Santander” that brought about this change in UCP. UCP has a definition for the term “negotiation” which you can refer to in Art. 2 but no definition for the term “discounting”. In practice when referring to an action of purchase at a discount of a time draft, the term “discounting” is used. However, in the marketplace the two terms are sometimes used interchangeably without causing any misunderstanding. Thanks for your experience sharing. Best regards, Nguyen Huu Duc——————————————————————————— …
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