WHICH TYPES OF LC REQUIRE PRESENTATION OF DRAFTS

QUESTION

Can any one clear me the specific rules for draft for different type of LC?
.

1. If LC available by payment then Draft is must/must not / maybe?
2. If LC available by Deffered payment then Draft is must/must not / maybe?
3. If LC available by Negotiation then Draft is must/must not / maybe?
4. If LC available by Acceptance then Draft is must/must not / maybe?

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ANSWER

Hi,

No specific rules, just practice that has been followed by banks.

1)      No sight draft is required

2)      No tenor draft is required

3)      Sight draft is required

4)      Tenor draft is required

LC available by negotiation would refer to an action of negotiation by a nominated bank of sight draft drawn on the issuing bank or another nominated bank.

LC available by acceptance would refer to an action of acceptance by the issuing bank or by a nominated bank of tenor draft drawn on the issuing bank or another nominated bank.

LC available by payment would refer to an action of  sight payment by the issuing bank or by a  nominated bank  against complying documents not including drafts.

LC available by deferred payment would refer to an action of   hounour (incur a deferred payment undertaking and pay at maturity) by the issuing bank or by a  nominated bank  against complying documents not including drafts.

Regarding the types of LC, I answered a similar question raised by Neville Dcosta on www.letterofcreditforum.com in 2007.  I quote here for your further reference:

QUOTE

Dear Neville Dcosta,

As you may know, 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 bank upon receipt of the complied 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 paymet 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 uindertakings. 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.

UNQUOTE

Best regards,

Nguyen Huu Duc