Commentary on Confirmed Letter of Credit
In an international trade transaction, additional money has to be paid to have a Letter of Credit (LC) confirmed since a seller would like to liquidate the risk of an issuing bank default on payment.
- Confirming a LC has the following benefits:
- It lowers:
- the ‘Country Risk’ (political; economic) of country in which the issuing bank operates
- ‘Insolvency Risk’ of the issuing bank.
- If dispute arises, the jurisdiction gets determined by the location of the confirming bank which is mostly in the country of the Seller.
- Another reason to have the LC confirmed would be to receive payment sooner since it cuts-out the issuing bank from the payment loop.
Under an unconfirmed; sight LC, nominated banks (bank at which the complying presentation is made by the seller) in most cases send documents to issuing banks and wait for reimbursement from the issuing bank. The nominated bank then pays to the seller only after they have been reimbursed by the issuing banks. This could end-up taking days and sometimes even weeks before a seller gets paid.
A confirmed; sight LC may appear to be a solution to this issue. According to UCP 600 Article 8, a confirming bank that has confirmed the LC should pay the seller against complying presentation of documents even without having received reimbursement from the issuing bank.
However, in the real world a confirmed LC does not quite reduce the wait for getting reimbursed. The confirming bank generally ends up paying only once they have determined that the issuing bank has indeed defaulted. This determination again takes up time!
Thus, confirmation too does not quite eliminate the delay in reimbursement thereby defeating this very purpose!
It is therefore in the best interest of the seller to speak to the confirming bank at the time that the sight LC is opened that the confirming bank will adhere to UCP 600 and make immediate payment upon complying presentation of documents.
• Confirming a letter of credit does not mean that confirming bank is obligated to confirm any subsequent amendment or amendments.
Author: Credit Guru Inc© | CreditGuru.com ©