Home › Forums › Letters of Credit
8 replies [Last post]
Sat, 05/15/2010 - 01:56
mia vervacke
Offline
Joined: 04/14/2010
Posts:
Printer-friendly versionPDF version

What is the benefit of a draft under a letter of credit?

As issuing bank we always ask a draft when the credit is available by negotiation/acceptance. Upon receipt of the draft we always put it into our file, but never do something with it.

I know what negotiation/acceptance is, but why do we ask a draft?

‹ URGENT, HELP, TRANSFER LC Excess of Goods shipped ›
Top
Sun, 05/16/2010 - 07:54
#1
Abrar
Offline
Joined: 03/12/2009
Posts:
sight drafts

To my mind, a sight draft does not serve any useful purpose under an LC, and it seems a force of habit that banks call for drafts under an LC available by sight negotiation (assuming wrongly that a negotiation LC requires a draft).

Contrast this with an accepted usance draft which has a potential value outside the immediate LC sphere, and may be discounted in the secondary market.

Top
Sun, 05/16/2010 - 02:50
#2
arunambar
Offline
Joined: 04/23/2010
Posts:
drafts

A draft under an LC is called to have recourse under Negotiable Instruments Act in addition to the protection available under UCP.

The draft is always drawn on issuing bank in such cases (or confirming bank, as the case may be). Even if the accepted draft is not returned to beneficiary, the recourse is not really impacted for the beneficiary. In case of any litigation, the drawee bank (issuing bank) can always be asked to produce the original draft.

Top
Tue, 05/18/2010 - 04:56
#3
willy
Offline
Joined: 09/24/2008
Posts:
At sight LC

Dear Sirs

I've always thought that a by negotiation "at sight" LC  does not require the bene to present a draft, nor dose a confirmed LC payable at sight? so what you are discussing hear is the process that take place between the banks in the above instances?

Willy Cooper

Top
Tue, 05/18/2010 - 05:34
#4
Abrar
Offline
Joined: 03/12/2009
Posts:
Sight LC

Just to clear up any ambiguity: a credit available "by acceptance" will always require a draft. A credit available "by negotiation, may or may not require a draft. A credit available "by payment", or "by deferred payment" must not call for a draft.

Top
Mon, 05/17/2010 - 01:04
#5
prem_kumaran
Offline
Joined: 10/24/2007
Posts:
Sight drafts

Hi Mia,

As discussed, a sight draft serves no useful purpose as the payment is at sight , but if the terms of payment are 'by acceptance' ,the purpose of the draft becomes more evident. There must be some mechanism whereby bank can accpet its undertaking to pay at maturity and this is done by accepting a draft.

Also, an accepted draft by the bank can be used for further discount by the bank underataking acceptance of it and susequent selling of it by the bank in secondary markets or this can be used for forfaiting if draft drawn by on and accepted by issuing bank  (Purchase of draft by the forfaiter) to avail funds by the beneficiary without recourse before maturity for capital inflows (Of course, care should be taken by the bene to assign the proceeds to the forfaitor).Thus an accepted draft can serve many pupose.

Top
Tue, 05/18/2010 - 05:03
#6
willy
Offline
Joined: 09/24/2008
Posts:
At sight LC

Dear Sirs

I've always thought that a by negotiation "at sight" LC  does not require the bene to present a draft, nor dose a confirmed LC payable at sight? so what you are discussing hear is the process that take place between the banks in the above instances?

Willy Cooper

Top
Tue, 05/18/2010 - 05:37
#7
prem_kumaran
Offline
Joined: 10/24/2007
Posts:
Drafts at sight

Hi,

Whether the credit is available by payment or sight negotiation, whether or not draft is required is determined by the LC calling for it or not.

The above conversations by members refer to the importance of an usance draft. Hope this clears

Top
Tue, 05/18/2010 - 13:18
#8
mia vervacke
Offline
Joined: 04/14/2010
Posts:
drafts

I have learned from the discussion that a sight draft is no longer required, but why was it asked for in the past?

As issuing bank we accept usance drafts by sending a swift message mt 752 to the negotiating bank and not by returning the accepted draft. We (issuing bank) put the draft in the file, so why do we ask a draft?

Mia Vervacke

Top