QUERY FROM SHAHRIAR
Post subject: Re: draft for negotiation
dear Nguyen Huu Duc,
im very happy to see you here. i always enjoy your writings
about draft, u said for negotiation for sight lc draft is required which made me bit confused. from the ucp wording, its seems to me that negotiation is possible without draft.
about the requirement of draft in lc, its always confusing to me. i got different comments on it.some are –
drafts are not req by beneficiary. its req by the bank for refinancing purpose – tolee
make senses if the lc is at sight and issuing bank will get the payment after xxx days from applicant
2. draft is req coz local law says so.
3. draft is req by the customs authority!!!
4. European dont like draft and therefore prohibits in some cases since there are some stamp charges involved
could u please help me out of this maze?
shahriar
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Md.zakir Hossen
Post subject: Re: draft for negotiation
DEAR NHDUC
WELCOME TO THIS SITE.IT IS A GREAT PLEASURE FOR US YOUR SIGNING THIS FORUM.
I ALWAYS ENJOY YOUR OPINION
THANKS AGAIN.
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COMMENT FROM MR. OLD MAN
Post subject: Re: draft for negotiation
Dear Shahriar and Md. zakir Hossen,
Many thanks for your inviting me to this forum. I do find it interesting as there are members like you in the forum.
Regarding your query I wish to share my view as follows:
Are the draft required by the beneficiary or by the bank ? In reply to the same query on http://www.lcviews.com Mr. Abdulkader Bazara, Product Manager, Trade Finance, Samba Financial Group says it is the beneficiary that requires the draft for post export finance.
I agree with Mr. Abdulkader Bazara’s view. Let’s compare the following types of L/C couple by couple to see the reason why the beneficiary requires the draft:
(i) Negotiation L/C Vs. Sight Payment L/C
(ii) Acceptance L/C Vs. Deferred Payment L/C
A negotiation L/C is the L/C available by negotiation of draft(s) at sight with the nominated bank which is normally located in the beneficiary’s country. The beneficiary can receive the payment in advance by negotiating the draft and documents with the nominated bank. The nominated bank, which has negotiated the draft and documents, is entitled to the issuing bank’s reimbursement as it is authorized to do so.
A sight payment L/C, which does not require drafts, is the L/C available by sight payment normally with the issuing bank. The beneficiary can receive the payment only when the complying documents are presented to the issuing bank’s counter. Normally it takes the beneficiary at least 10 days, which represents the time for the documents to be forwarded to and examined by the issuing bank, to receive the payment.
It is obvious that as for sight L/C transactions a wise beneficiary would prefer a negotiation L/C to a payment L/C.
Similarly, an acceptance L/C is the L/C available by acceptance of term draft(s). A term draft once accepted will become an independent (financial) instrument which can be transferred on forfeiting markets. The beneficiary gives credit (e.g., 90 or 180 days after sight) to his customer (applicant) but can receive the proceeds any time before the maturity date of the draft by discounting the accepted draft.
A deferred payment L/C, which does not require term draft(s), is the L/C available by deferred payment normally with the issuing bank. When the documents presented to the issuing bank or a nominated bank (if any) are complying, the issuing bank or the nominated bank will incur a deferred payment undertaking.
Please note that a deferred payment undertaking is not a financial instrument, therefore, unlike drafts it may not be discounted on forfeiting markets except when the discounting bank is the nominated bank which has incurred such a deferred payment undertaking.
It was the dispute between Banco Santander and Banco Paribas in connection with the discounting of a deferred payment undertaking that led to the change in UCP allowing the nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank (Article 12 (b) UCP 600).
It is obvious that as for usance L/C transactions a wise beneficiary would choose an acceptance L/C rather than a deferred payment L/C.
I hope the above analysis and comparison can help explain the reason why the beneficiary would require drafts in L/C transactions.
Best regards,
Nguyen Huu Duc …
