MT 202 or MT 103 – A Case Study You Won’t Find in Textbooks

In trade finance, life is rarely as straightforward as the manuals suggest. Real transactions often bring up situations that don’t quite fit the “standard” rules. One such puzzle is deciding whether an LC payment should go out via MT202 (bank-to-bank transfer) or MT103 (customer credit). The following Q&A, based on a real-life case in Vietnam, illustrates how to untangle this issue.

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QUESTION

Dear Mr. Old Man,

I work for a branch of a foreign bank in Vietnam and need to resolve an LC issue for a corporate client.

To invest in a project in Vietnam, our FDI client imported equipment from Europe under a sight LC. For certain reasons, the LC was issued by our bank’s branch in China.

The beneficiary shipped the goods and presented documents to the issuing bank’s China branch. However, the payment funds are only available from the client’s account with our Vietnam branch.

The problem is that the issuing bank’s China branch wants our Vietnam branch to send an MT202 to the European beneficiary’s bank, while in Vietnam our branch can only send MT103 for cross-border customer payments.

My question:

If the issuing bank amends the LC to make our branch the negotiating bank, can we settle this LC in favor of the beneficiary’s bank? Ultimately, our goal is to find a solution that allows us to pay via MT202.

Thank you.

NVT

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ANSWER

Hi,

MT 202 is a payment message used strictly between financial institutions.

For your branch to pay by MT202, the LC could be amended to make it available with your Vietnam branch by payment. For example, Field 47A could add: “Documents must be presented to Bank … Hanoi Branch, Address … for payment.”

However, since the beneficiary has already presented documents to the issuing bank’s China branch, they may not agree to such an amendment or to re-present the documents in Vietnam.

In my view, the practical solution is for the issuing bank’s China branch to amend the LC as follows:

1. Add F53a (Reimbursing Bank) – appointing your Vietnam branch as the reimbursing bank.
2. Amend F78 (Instructions to the paying/accepting/negotiating bank) – instructing the presenting bank to send documents to the China branch and claim reimbursement from your Vietnam branch.

At the same time, the issuing bank’s China branch should notify both the presenting bank and your Vietnam branch that your Vietnam branch is authorized to reimburse. Of course, debiting your client’s account in Vietnam requires their consent and authorization.

This approach not only makes the records compliant, but also meets the issuing bank’s requirements in a straightforward manner (sometimes even without the presenting bank’s acceptance).

Important note:

Since this is an “unusual” transaction, your Vietnam branch should prepare an internal memorandum, approved by higher management, explaining the reason and attaching full supporting documents, such as:

• Copy of the presented documents (with customs declaration, if available).
• Written authorization from the China branch empowering the Vietnam branch to reimburse.
• Written consent from the client allowing automatic debit of its account for LC settlement.

In short:

MT202 can only be used if your Vietnam branch is formally brought into the LC as a reimbursing bank. Without that amendment, the only option is MT103.

Best regards,

Mr. Old Man