NEXT TIME DON’T BOMBARD MR. OLD MAN WITH TOO MANY QUESTIONS AT ONCE

QUESTION

Hi Mr. Old Man,

It’s me again. Sorry for reaching out over the weekend. I have some more complex questions this time, so please feel free to respond whenever it’s convenient for you.

1. When issuing a usance LC, does the issuer need to maintain 100% of the purchase value in their bank account for the entire duration of the LC?
2. Given that I can’t issue a back-to-back LC due to a lack of credit line/assets/collateral, what would you suggest as the best way to offer credit terms to my customers?
3. If a transferable usance LC is discounted by the first beneficiary, does the second beneficiary receive payment immediately, or does he still have to wait until the LC matures?
4. I know this varies across banks, but based on your experience, what is the typical discount applied by banks when discounting an LC?
5. If you were an importer, what concerns would you have if an exporter insisted on using a transferable LC instead of a non-transferable one?
6. This question is unrelated to LCs but I hope you might know something about this. Please take a look at the attached image — what do you think “BIENMAU – Border Trade” means? I read it from this link.
7. In which field of an LC is the T.T.R clause typically mentioned? I tried googling it to no avail.

Thanks so much!

Genevieve

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ANSWER

Hi,

Next time don’t bombard me with so many questions at once, please.

1. The issuing bank is obliged to pay LC when the documents presented are complying, whether it is an LC at sight or a usance LC. Depending on the creditworthiness of the applicant and other criteria, the Issuing Bank decides to waive the deposit or require the applicant to deposit from 10 – 100% of the LC value to ensure the source of payment.

2. A trader can suggest the applicant to open a transferable in favour of the trader (the first beneficiary) who can request the transferring bank to transfer the LC in favour of the supplier (the second beneficiary).  The transferring bank does not require the first beneficiary to have credit line or collateral.

3. UCP 600 does not use the term “discount”, but the terms “negotiate” and “negotiation” (though in trade market, the two terms are used inchangeably.  Under the LC transferred to the second beneficiary, the transferring bank will only credit the first beneficiary’s account with the amount received from the issuing bank after deducting the amount payable to the second beneficiary. Therefore, if the documents are discounted at the request of the first beneficiary, the transferring bank will only discount the amount payable to the first beneficiary.

4. As said, UCP 600 does not use the term “discount”, but the terms “negotiate” and “negotiation”. If the nominated bank is also the confirming bank under an LC available by negotiation, it must negotiate WITHOUT RECOURSE. If the nominated bank is NOT the confirming bank, it would negotiate on a WITH RECOURSE BASIS or on side agreement, e.g., it can have recourse to the beneficiary if the issuing bank refuses to pay the documents due to discrepancies.

5. When an exporter insists on a transferable LC instead of a non-transferable LC, the importer should understand that the exporter may be just a trader or a middle man in the transaction. If the importer can deal directly with the supplier, he may get a lower price than he would with the trader.

6. BIENMAU is a Vietnamese word, fully written as Biên Mậu, meaning “Border Trade”. Vietnam has borders with China, Laos and Cambodia, so border trade between Vietnam and related countries is developed. The government has regulations on border trade that allow people and traders to buy and sell goods and pay through banks in local currency. For example, Vietnamese traders buying Chinese goods at the border can pay through bank in VND, and vice versa.

7. T.T.R clause is stated in Field 78: Instructions to the paying/accepting/negotiating bank.

Best regards,

Mr. Old Man