Uncategorized PAYMENT LC Vs NEGOTIATION LC By Mr Old Man Posted on March 6, 2010 6 min read 11 0 29,685 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr QUERY FROM BAHAR Dear Mr. Oldman, I live and work in middle east and have some problems on opening LC. Kindly provide me with differences of PAYMENT and NEGOTIATION LCs. Thanks a million. Bahar ———————————–COMMENT FROM MR. OLD MAN Dear Bahar, Thanks for using Mr. Old Man’s blog. I have answered the same question as yours in www.letterofcredit.com and also posted it in my blog under tag “LC Availability”. For your convenience, I cite hereunder such an answer with some minor modifications. An LC may be stipulated available by payment, available by negotiation, available by acceptance or available by deferred payment. LC available by (sight) payment does not require sight drafts to be presented and normally the payment is to be effected at the counter of the issuing bank or at its nominated paying bank upon receipt of the complying documents. The beneficiary under LC available by payment normally may not obtain the payment in advance by negotiating (selling at a discount) the documents at his bank. Different from LC available by payment, LC available by negotiation allows the beneficiary to receive the payment by negotiating the sight drafts and documents at a nominated negotiating bank which is normally located in his country. The negotiation may be effected on a with or without recourse basis. However, under a confirmed LC, the confirming bank must negotiate the documents on without recourse basis. Acceptance LCs and deferred payment LCs are usance LCs. The difference is that the acceptance LC requires a time draft, whereas the deferred payment LC does not. Under acceptance LC, the beneficiary may receive the payment before the draft is due by discounting the accepted draft at its bank or discounting it on forfaiting markets (as the accepted draft is a financial instrument which can be transferable). Under deferred payment LC, after his presentation of complied documents, the beneficiary receives a deferred payment undertaking incurred by the issuing bank or its nominated bank. Deferred payment undertaking is not largely accepted as a financial instrument, therefore, normally the beneficiary may not discount the deferred payment undertaking. However, in some cases, the beneficiary can use the deferred payment undertaking incurred by the issuing bank or nominated bank as a security for the advance given by his banks. UCP 500 was silent on negotiating/discounting deferred payment undertakings. The dispute between Banco Santander and Banque Paribas in connection with the discounting of a deferred payment undertaking led to the change in UCP. Under UCP 600 Art. 12 (b), the nominated bank is allowed to purchase (buying at a discount) its own deferred payment undertaking. Some advices: If you are the seller/beneficiary, you should choose LC available by negotiation or by acceptance as you may obtain the payment in advance by negotiating the drafts and/or documents with the nominated bank that are normally located in your country. You can also discount the draft that was accepted by the issuing bank. If you are the buyer/the applicant, you should request for LC available by payment or deferred payment. These types of LC, in some scenario, may help you avoid paying for the fraudulent documents as said, the documents are normally required to be presented to your bank’s counter (the issuing bank). Hoping the matter has been clear. Best regards,Mr. Old Man (Nguyen Huu Duc) …
IS THE NOMINATED BANK REQUIRED TO VERIFY WHETHER THE BENEFICIARY HAS AUTHORIZED THE PRESENTING BANK TO PRESENT THE DOCUMENTS?
CAN THE ISUING BANK CITE “LATE PRESENTATION” AS A DISCREPANCY SOLELY BASED ON THE DATE OF THE COVER LETTER?
IS THE NOMINATED BANK REQUIRED TO VERIFY WHETHER THE BENEFICIARY HAS AUTHORIZED THE PRESENTING BANK TO PRESENT THE DOCUMENTS?
CAN THE ISUING BANK CITE “LATE PRESENTATION” AS A DISCREPANCY SOLELY BASED ON THE DATE OF THE COVER LETTER?