Dear Shahriar and Md. zakir Hossen,
Many thanks for your inviting me to this forum. I do find it interesting as there are members like you in the forum.
Mr. T.O Lee is a great man. I have ever paid membership fees to access his website and read his view on drafts in L/C transactions.
Regarding your query I wish to share my view as follows:
Are the draft required by the beneficiary or by the bank ? In reply to my same query on
http://www.lcviews.com Mr. Abdulkader Bazara, Product Manager, Trade Finance, Samba Financial Group says it is the beneficiary that requires the draft for post export finance.
I agree with Mr. Abdulkader Bazara’s view. Let’s compare the following types of L/C couple by couple to see the reason why the beneficiary requires the draft:
(i) Negotiation L/C Vs. Sight Payment L/C
(ii) Acceptance L/C Vs. Deferred Payment L/C
A negotiation L/C is the L/C available by negotiation of draft(s) at sight with the nominated bank which is normally located in the beneficiary’s country. The beneficiary can receive the payment in advance by negotiating the draft and documents with the nominated bank. The nominated bank, which has negotiated the draft and documents, is entitled to the issuing bank’s reimbursement as it is authorized to do so.
A sight payment L/C, which does not require drafts, is the L/C available by sight payment normally with the issuing bank. The beneficiary can receive the payment only when the complying documents are presented to the issuing bank’s counter. Normally it takes the beneficiary at least 10 days, which represents the time for the documents to be forwarded to and examined by the issuing bank, to receive the payment.
It is obvious that as for sight L/C transactions a wise beneficiary would prefer a negotiation L/C to a payment L/C.
Similarly, an acceptance L/C is the L/C available by acceptance of term draft(s). A term draft once accepted will become an independent (financial) instrument which can be transferred on forfeiting markets. The beneficiary gives credit (e.g., 90 or 180 days after sight) to his customer (applicant) but can receive the proceeds any time before the maturity date of the draft by discounting the accepted draft.
A deferred payment L/C, which does not require term draft(s), is the L/C available by deferred payment normally with the issuing bank. When the documents presented to the issuing bank or a nominated bank (if any) are complying, the issuing bank or the nominated bank will incur a deferred payment undertaking.
Please note that a deferred payment undertaking is not a financial instrument, therefore, unlike drafts it may not be discounted on forfeiting markets except when the discounting bank is the nominated bank which has incurred such a deferred payment undertaking.
It was the dispute between Banco Santander and Banco Paribas in connection with the discounting of a deferred payment undertaking that lead to the change in UCP allowing the nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank (Article 12 (b) UCP 600).
It is obvious that as for usance L/C transactions a wise beneficiary would choose an acceptance L/C rather than a deferred payment L/C.
I hope the above analysis and comparison can help explain the reason why the beneficiary would require drafts in L/C transactions.
Best regards,
Nguyen Huu Duc
