Letter of Credit Forum

Hi Imran,

This is a good question, and it is one that a lot of beneficiaries have.  To better understand this, it is best to look at the relationships between banks.

Since there are thousands of banks worldwide, it is impossible to have a correspondent relationship with every bank.  It is also impposible to have swift authentication (a swift RMA) with every bank as well.

Given the above, issuing banks will normally use a preferred correspondent if no relationship exists.  This is a standard practice worldwide.

Also, there are handful of banks, normally the very large banks, that will ignore the instructions even if they have a correspondent or swift relationship. These bank's have an internal policy to send the letter of credit to a specific bank in that country.  That bank is usually either a branch of the issuing bank or owned in part or fully by the issuing bank. This is to generate business for that bank.

As a beneficiary, what are your options? You can do the following:

1. Check with your bank to see if they have a relationship with the issuing bank.  If not, see if they can set up at a minimum a swift relationship (known as an RMA).  This way the issuing bank may be able to use your bank.

2. Continue to accept the letters of credit as is and process according to the instructions contained in the letter of credit.  You may have to incur additional costs because of this.

3. Have the letters of credit changed so that the charges for any bank other than your bank are for the account of the applicant. This may save you some fees, but your transaction may still be delayed given the number of banks involved.

4. If your bank does have a relationship with the issuing bank, and the issuing bank is routing the transaction for the benefit of collecting additional fees for its branch or a bank that it owns, you can refuse to accept the letter of credit.  Let the applicant know of this routing and ask them to use a different bank.

5. You can establish a relationship with the advising bank.

I hope this helps you out.

Best regards,

LC Sam