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FIVE BANKING DAY RULE

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QUESTION

Dear Mr Old Man,

I’d like to ask you a question relating to the 05 banking days after presentation day a bank has to determine if the presentation is complying.

The issuing bank decides its a complying presentation and agrees to release the docs to applicant on 1st day while holding their full deposit or promissory note, is it reasonable if they wait until the 5th day to make payment? Or they have to do it right away?

The similar question is when the documents are discrepant and applicant accepts the discrepancy. Does the issuing bank have to make payment right after releasing documents to applicant? Or can they wait until the 5th day following the day the applicant accepts and takes the documents? And of course the source of payment ensured.

The basic is sometimes made complicated. My colleague and I are really looking forward to your answer.

Thank you.

TTL

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ANSWER

Hi,

In 2007 on www.letterofcreditforum.com I ever made a comment on the same question. Click here to read it or see below:

QUOTE

Five- banking day rule

Five – banking day rule refers to the deadline for a  nominated bank, a confirming bank, if any, and the issuing bank to reject the documents if the presentation is not complying.  If the said bank(s) does not give a notice of refusal by this deadline, it shall be precluded from claiming that the documents are not complying.

This rule is not applied to the payment deadline.  In practice no banks try to delay the payment just because they want to earn some interest from such a delay.

Let’s take the position of the issuing bank as an example. In theory, the issuing bank may effect the payment on any day within five-banking day period. However, once the applicant has taken up the documents and deposited sufficient fund (if the transaction is self-financed) or submitted its signed promissory note to the issuing bank (if the transaction is financed by the bank), the issuing bank has no reason to delay the payment except for the scenario where there is a foreign currency exchange involved (rarely).

Please note the issuing bank’s unreasonable payment delay if any could be objected even by the applicant. 

Best regards,

Nguyen Huu Duc

UNQUOTE

I hope the above comment would help answer your question.

Kind regards,

Mr. Old Man

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FURTHER QUESTION

Dear Mr. Old Man,

Thank you for your answer. In our bank, all of the L/C’s are financed so it is mostly the Applicant’s request for postponing the payment until the 5th banking days as they do not want to take out a loan early and still have the docs to take delivery of goods. I think it’s the unreasonable delay but could not find any article in UCP600 or ISBP745 to support my point of view. Hence, to maintain the relationship between customers and bank, we still agree with the request from applicant.

I do not want to keep doing this but can’t turn down the applicant’s request just by saying it’s unreasonable.

Could you please help me dig deeper and find a strong evidence to back up the idea.

Thank you.

TTL

—————

ANSWER

Hi,

It is true that some banks would make full use of five- banking – day gap to save their customers from paying interest for some days.  This practice is not fair.

Sub-article 15 (a) UCP 600 stipulates “WHEN an issuing bank determines that a presentation is complying, it must honour”.

So, WHEN is WHEN?

The following is quoted from Commentary on UCP 600 written by Gary Collyer. “

QUOTE

The essential word in each of the sub-articles is “when”. The introduction of this concept was necessary as a result of the removal from the UCP of the term “reasonable time” in relation to examination of documents and the provision in article 14 of a maximum of five banking days following the day of presentation to determine compliance.

The word “when” does not mean immediately, but indicates that the process of honour or negotiation must begin. During the normal workflow for documentary credits, it can often take some time after the actual determination that the documents comply to conclude the processing of the transaction. THIS COULD RANGE FROM AN HOUR TO A DAY, DEPENDING ON THE WORK FLOW AND THE TIME OF DAY THAT DETERMINATION IS MADE. BANKS REGULARLY HAVE CUT-OFF TIMES FOR THE PROCESSING OF WORK LATE IN THE DAY, WHICH CAN MEAN THAT AN ACTUAL PAYMENT MIGHT NOT BE EFFECTED UNTIL THE FOLLOWING DAY (Capitals by Mr. Old Man for emphasis).

UNQUOTE

I hope my answer can help support your view.

Kind regards,

Mr. Old Man

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