Commitment Fee After LC Expiry — Still Chargeable?

Intro:

A reader recently asked an interesting question about fees under a letter of credit. When an LC expires, does that mean the applicant no longer has to pay commitment fees to the issuing bank? Let’s take a closer look.

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Question:

Good morning, Sir!

Thank you so much for all your efforts in making trade finance information more accessible. I have a question please. Regarding the letter of credit, can the issuing bank continue to charge a commitment fee to its client, the applicant, after the letter of credit’s expiry date?

H.B

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Answer:

Dear H. B.,

The contract between the issuing bank and the applicant for issuing a letter of credit is separate from the letter of credit itself. Therefore, the issuing bank may continue to charge any commitment fees owed by the applicant under that contract, regardless of whether the letter of credit has expired or not.

Please note that the expiry date stated in a letter of credit merely indicates the last day on which the beneficiary may present documents. It does not mark the end of the applicant’s obligations to the issuing bank under their LC issuance agreement or credit facility.

For example:

If a letter of credit available by deferred payment for 90 days with the issuing bank shows an expiry date of 10 August 20XX, and the beneficiary presents complying documents before that date, the issuing bank incurs its deferred payment undertaking. In such a case, the bank may still collect the applicable commitment fee from the applicant even after 10 August 20XX.

In short:

The LC expiry date limits the beneficiary’s right to present documents, not the applicant’s liability to the bank.

Best regards,

Mr. Old Man