Reimbursing Bank

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JessR
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Joined: 07/23/2007
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Dear Friends,

Can anyone enlighten me on the following situation.  First, we open an L/C for a supplier in Japan.   The L/C was initially issued as CONFIRMED and the issuing bank give reimbursing instruction to the negotiating/accepting bank to reimburse the fund to their corresponding bank in UK.

The beneficiary then requested to amend the L/C to make it "Available with any bank" and make the L/C "UNCONFIRM".  When the beneficiary bank submitted a complying documents to the issuing bank, the issuing bank sent a reimbursing instruction to the negotiating bank to reimburse the fund to the issuing bank correspondent in Japan which is not mentioned before in the L/C issuance and in the amendment.

The beneficiary now wants to integrate in the L/C the reimbursing bank name of which the issuing bank refuse for reason that the L/C is no longer CONFIRMED.  They pointed out that they will only issue reimbursing instruction whenever they receive from the negotiating bank a complying documents.

Now, the question, is the issuing bank correct.  We have the same situation before with other bank and they have included in the L/C the reimbursing bank even it is not confirmed L/C.

Your comments will be highly appreciated.

Thanks 

 

 

LC Sam
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Joined: 08/09/2007
A bit confusing, but I will try to reply

Hi JessR,

The scenario that you put forward is somewhat confusing, but I will try to answer your question. If I am off base, please let me know.

Let me first break down the scenario as I see it.

1. The issuing bank issued a letter of credit through their correspondent bank asking that the letter of credit be confirmed.

2. The letter of credit was available with the correspondent bank. The letter of credit also contained a clause allowing the correspondent bank to debit the issuing banks account for payment under the letter of credit upon the correspondent's negotiation of the documents.

3. The correspondent bank advised and confirmed the letter of credit.

4. The beneficiary asked that the letter of credit be amended to remove the confirmation and make the letter of credit freely negotiable.

5. The letter of credit was amended removing the confirmation and making the credit freely negotiable.

6. The beneficiary agreed to the amendment.

7. The beneficiary presented documents to their bank who negotiated documents and claimed reimbursement from the correspondent bank.

8. The correspondent bank would not honor the reimbursement claim as they did not have a reimbursement authority.

9. The issuing bank will only authorize reimbursement once they receive the documents. 

***

Your question: "Is the issuing bank correct?"

I would not say that the issuing bank is correct or incorrect, as they are acting on their policy.  What they have done is completely acceptable.  Here is why:

A. The relationship between the issuing bank and the corresponding bank allows them to authorize the debit of the issuing bank's account upon negotiation by the corresponding bank.  This is probably an agreement that was at the insistence of the corresponding bank so that they would be more comfortable in adding their confirmation.

B. The issuing bank need not include a reimbursing bank in a letter of credit. If there is none, the issuing bank is obligated to honor upon receipt of the stipulated documents that comply with the terms and conditions of the letter of credit.

C.Since the letter of credit was amended and the documents did not go to the correspondent bank, they did not have any authorization to debit the issuing bank's account.  The issuing bank is not required to have a reimbursing bank in a freely negotiable credit, so their decision was a matter of policy not to have a reimbursing bank.  This is acceptable procedure.

 

I hope this helps out and I hope I did not confuse you.

Best regards,

LC Sam

 

lahorite78
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Joined: 01/21/2009
on the other hand ...

Hi LC Sam,

but if correspondent bank could have released the payment as they are still holding the debit authority, whats your say on this?

Rgrds,

lahorite78

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