QUERY FROM SAFEE RIZVEE
Safee Rizvee writes: Dear Old Man Our bank negotiated the discrepant documents against the mortgaged collecteral security.. rather we have allowed a finance limit of Rs 24.00 Million to our valued cleint for negotiation of discrepant documents aginst letter of credit.. i am working in the branch as compliance officer please tell me it is ok or not
COMMENT FROM MR. OLD MAN
Mr. Old Man # 3. September 2010, 22:05
Your bank can accept to negotiate the discrepant documents on a with recourse basis. That is to say, if the issuing bank refuses to honour the documents, your bank can have recourse to the beneficiary for the value advanced.
The key problem here is whether the beneficiary is capable to repay the money in case the issuing bank refuses the documents. Bear in mind that collateral is the last thing among 5 C's (Creditworthiness, Capacity, Capital, Condition and Collateral) that banks consider to make their decision.
One thing your bank should also take into consideration is the market price. If the price of goods at the time of shipment falls down dramatically the applicant may not want to receive the goods, and hence, the discrepant documents will not be honoured.
That is theoretical only. If the beneficiary is one of your bank's value clients, i.e, creditworthy, good financial standing…, your bank can accept to advance funds against the discrepant documents, of course, on a with recourse basis (and better against mortgage collateral).
What's more. From my own experience, 99% of non-complying presentations are paid at last as LC is an instrument of payment, not refusal. The buyer opens LC to pay for the goods, not to reject.
