avoiding interest in confirmed letter of credit

jim · Post by **jim** » Tue Mar 03, 2009 10:03 am

dear sir,

i have encountered an unusual case. we are the confirming bank. the confirmation charge is on applicant account and the LC is available by negotiation on our counter. now as per out bank's policy we have negotiation charges. but the beneficiary dont want to pay it. its saying that since the negotiation is without recourse and we are bound to pay against a complying presentation, we must pay the full value. otherwise the beneficiary wants us to forward the document without negotiation. what is out responsibility in this case

iLC · Post by **iLC** » Tue Mar 03, 2009 8:30 pm

when the credit is available by negotiation, you can charge interest interest for the negotiated period even though that is without recourse basis.the failure of the confirming bank does not affect the undertaking of the issuing bank. if the beneficiary does not want to negotiate the document, it can still forward the document as a presenting bank. your responsibility; in my opinion, your responsibility remains the same. if the issuing bank does not pay, you are bound to negotiate the document even after the expiry of the credit

cristiand969 · Post by **cristiand969** » Wed Mar 04, 2009 5:01 pm

Jim,
Form your query I suspect two different scenarios:
1. You confirmed the credit and advised beneficiary accordingly and then you advise them about your negotiation commission. (Guess this is the real one from your wording).
2. You are prepared to confirm the credit, wish to do so, but confirmation is subject to solving negotiation issue with beneficiary who actually does not wish to pay this charges.
On the other hand you did not mention on whose account the negotiation commission is.

On the first scenario you have to make your customer aware of the fact that once you confirmed the credit you are obliged to negotiate the documents and by presenting the documents to your counter (as a confirming bank) the beneficiary automatically agree to be bound by all terms and conditions of the credit (including to pay all commissions and charges unless the LC states otherwise as far as the commissions are concerned). I would personally write an official letter to beneficiary in this respect
If beneficiary still insist on that you can make use of art. 37 c and request them from issuing bank. In such a case I would never confirm other credits to this beneficiary.
One more question to ask you: have you already recovered the confirmation charges from issuing bank?

Second scenario is quite simple: You will not add confirmation to the credit if beneficiary do not agree to pay this charges.

jim · Post by **jim** » Wed Mar 04, 2009 7:07 pm

Dear sir,

the credit is already confirmed by our bank and the charges are paid by the applicant. we have received the charges. i think this is the reason the beneficiary dont care about the confirmation. now our main question is will we be liable to negotiate if the issuing bank refuses the document?

cristiand969 · Post by **cristiand969** » Wed Mar 04, 2009 8:48 pm

If the beneficiary presents documents directly to the issuing bank, then by virtue of art. 10 of UCP 600 you are not obliged to negotiate documents unless a representation is made to your counters.
If the representation is however being made to your counters and is compliant you have the possibility to insert in your claiming letter value of documents + yr negotiating charges (as per art. 37c). The issuing bank is obligated to reimburse you full claim.
Hope this help you!

dholat · Post by **dholat** » Wed Mar 04, 2009 10:40 pm

i have a question. we know negotiation involves risk of not being reimbursed. and negotiation inevitably occurs before the issuing bank decision. if the document is presented to the confirming bank where is confirming bank is not requested to negotiation and the issuing bank makes a wrongful dishonor, then this risk concept will disappear. what do you think?

shahriar · Post by **shahriar** » Wed Mar 04, 2009 11:04 pm

when a credit is available with the confirming bank by negotiation, the confirming bank must negotiate. article 2

Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation.

further article 8

ii. negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

since there is not binding on when a negotiation is to occur, the confirming bank has to negotiate the document if a complying presentation is made on or before the expiry date of the credit

dholat · Post by **dholat** » Wed Mar 04, 2009 11:15 pm

before i make further discussion, i have a question. if the confirming bank does not negotiate a complying presentation at the request of the beneficiary and forward the document to the issuing bank, was the confirming bank acting on its nomination? and

say the credit was available with the nominated by negotiation where the issuing bank made a wrongful dishonor and after knowing that the issuing bank has dishonor the presentation, a nominated bank pay the beneficiary. is it negotiation?

Ozoda · Post by **Ozoda** » Fri Mar 13, 2009 5:28 pm

Dear Jim,

Could you please advise me on how do you calculate your negotiation commission?
When we confirmed the doc. credit available with us by negotiation we charged the bene for confirmation commission only.

Thank you,
regards,
Ozoda

shahriar · Post by **shahriar** » Fri Mar 13, 2009 8:41 pm

while then term has been used negotiation commission, it should be called negotiation interest. negotiation interest or commission is charged at the time of negotiation. say if the LC for 10000 USD, then generally the beneficiary will get 9500 initially. 500 is kept as interest margin. on receipt of reimbursement from the issuing bank, the nominated bank calculate the interest for the days between the date of negotiation and date of reimbursement. if the interest is 100 USD, then rest 400 is paid to the beneficiary.

there are other ways of negotiation related to usance rate of LC currency which is more closely related to the concept of discounting.

apart from this, the bank may charge a small service charges.

Ozoda · Post by **Ozoda** » Mon Mar 16, 2009 5:51 pm

Dear Shahriar!
Thank' s a lot!

Negotiation is very popular in Asian countries (China, Korea...)

Is there any colleagues from this countries?

Could you please share with your methods of calculation of negotiation fees under doc. credit available at sight.

Thank you in advance.