WHY SHOULD AN ISSUING BANK NOT REQUIRE A SIGHT DRAFT TO BE DRAWN ON THE REIMBURSING BANK?

QUESTION

 Dear Mr. Old Man,

I hope this email finds you well.

I came across URR 725 while studying for CDCS and found some points unclear for me. Would you please kindly share your thoughts about the following questions?

Question 1: Articles 6e-iii and 9c-iii: “An issuing bank should not require a sight draft to be drawn on the reimbursing bank”. According to these sub-articles, reimbursing bank can accept and pay a time draft. I was wondering why not sight draft? It is because reimbursing process would slow down the nature of sight payment?

Question 2: in which cases will the (time) draft be drawn on reimbursing bank? And reimbursing bank can accept and pay a time draft without physically receiving it? It is because I understood reimbursing bank does not have the documents in hands.

Question 3: do I understand correctly that reimbursing bank can only honour (but not negotiate) – according to sub-article 2g? If reimbursing bank can accept and pay a time draft without physically receiving it, why can’t it negotiate?

Question 4: would the reimbursement instruction for LC available by acceptance and LC available by deferred payment similar to reimbursement instruction for LC available by negotiation as follows:”Upon receipt of the documents complying with the credit terms and conditions, we – Issuing bank – will authorize the nominated bank to claim reimbursement from the reimbursing bank”? If not, would you please provide alternatives?

Question 5: in this post , you mentioned “It is encouraged (through ICC Opinion R666/TA569) that a negotiation L/C should not include any reference to claiming reimbursement from a reimbursing bank or any reference to the debiting of the issuing bank’s account held with the nominated bank. This structure is a payment L/C.” I don’t understand why negotiation LC should not include any reference to claim reimbursement from reimbursing bank? or that they mean from Issuing bank?

Thank you so much for your time. I hope you know your work means a lot to us.

Best regards,

Green Rose

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ANSWER

Hi,

Sorry but I do not have much time to answer a lot of questions at a time. So, one or two questions at a time is always welcomed.

Anyway, I would like to answer question by question as follows:

 Answer to QUESTION 1

In my opinion, there are some reasons why an issuing bank should not require a sight draft to be drawn on the reimbursing bank:

(i) In fact, LCs need not a sight draft. A sight draft plays no role in LC transactions.

(ii) Reimbursement is  an arrangement between the issuing bank and the reimbursing bank. The issuing bank authorizes the reimbursing bank to reimburse the claiming bank upon receipt of the reimbursement claim without a sight draft.

ICC recommends that the habit of requiring a draft for a LC available at sight be curtailed, particularly sight drafts drawn on an issuing bank, confirming bank, or a bank nominated to pay, unless required for a specific commercial, regulatory or legal reason.

I do not think the presentation of a sight draft (if any) slow down the payment process.

Answer to QUESTION 2

In some cases, a draft may be required to draw on the reimbursing bank. For example, a usance LC is available with a nominated bank by negotiation of a 90 days sight draft drawn on the reimbursing bank. In this case, the reimbursing bank is requested to accept and pay time drafts at maturity.

ICC also recommends that banks issue a usance LC available by deferred payment as an alternative to availability by acceptance of a draft, unless there is a specific commercial, regulatory or legal reason to create a banker’s acceptance.  So, time drafts may not be needed, either.

Answer to QUESTION 3

According to sub-article 10(b), when a time draft is to be drawn on the reimbursing bank, the claiming bank must forward the draft with the reimbursement claim to the reimbursing bank.

Sub-article 12 (b) UCP 600 allows the nominated bank to prepay its own deferred payment undertaking. So, the reimbursing bank can discount its own deferred payment undertaking when it is a nominated bank.

 Answer to QUESTION 4

If the LC is available with a nominated bank by deferred payment, the issuing bank would authorize the nominated bank to claim reimbursement from the reimbursing bank at maturity with wording as follows:

“We authorize you to claim reimbursement from the reimbursing bank at maturity. In case of discrepant documents, please remit on approval basis. Only after our authenticated advice acceptance, may you claim” or words of similar effect.

Answer to QUESTION 5

It is encouraged (through ICC Opinion R666/TA569) that a negotiation L/C should not include any reference to claiming reimbursement from a reimbursing bank or any reference to the debiting of the issuing bank’s account held with the nominated bank. This structure is a payment L/C.

The conclusion of ICC Opinion TA569 is extracted as below:

“A letter of Credit that is stated to be available with the nominated bank, by negotiation should not include any reference to claiming reimbursement from a reimbursing bank… This form of structure is a payment letter of credit. A negotiation letter of credit should specify the nominated bank is to send the documents to the issuing bank and upon the issuing bank ascertaining it complies with the terms and conditions of the credit the issuing bank will reimburse in accordance with the instruction of the negotiating bank”.

It can be understood that under an LC available by negotiation, there should be no reimbursement instructions. In practice, you still come across negotiation LCs with reimbursement instructions.

Your questions are interesting, but next time I will refuse to answer a lot of questions at a time. It took me a lot of time.

Best regards,

Mr. Old Man