Deferred Payment LC: Is a Draft Required? And If So, Drawn on Whom?

Intro
A small but recurring point of confusion in practice: when a credit is available by deferred payment, do we still need a bill of exchange—and if yes, who should it be drawn on? The answer is straightforward in principle, but often misunderstood in execution.

Question

Dear Sir,

Good day!

The LC shows:

• Available with: XYZ Bank
• Drawee: XYZ Bank
• Payment terms: Deferred Payment
• Tenor: 360 days after Bill of Lading date

Is a bill of exchange required when presenting documents under this LC?

Regards,
Nish

_______

Answer

Dear Nish,

Thank you for your question.

Under a deferred payment credit, drafts (bills of exchange) are generally not required, as the undertaking to pay at maturity replaces the need for a draft.

In your case, the LC is available with XYZ Bank by deferred payment, with payment due 360 days after the Bill of Lading date. Therefore, a bill of exchange is not required unless the LC explicitly calls for one.

If XYZ Bank agrees to act on its nomination, it may incur a deferred payment undertaking upon a compliant presentation. In such circumstances, there is no need to present any draft to the issuing bank. The reason is simple: any draft, if issued, would be drawn on the nominated bank—not on the issuing bank—and therefore does not form part of the presentation to the issuing bank.

If the nominated bank refuses to act on its nomination, presentation would then be made to the issuing bank. In that case, it may seem logical to draw the draft on the issuing bank. However, to avoid discrepancies, any draft (if required by the LC) should still be drawn strictly in accordance with the LC terms—i.e. on the nominated bank as stipulated.

Best regards,
Mr. Old Man