Best Trade Solution

hi,

i just encountered this question from a forum member today - is draft mandatory for negotiation since UCP says draft drawn on other banks? my standing is -

Negotiation means the purchase by the nominated bank of draft (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

as you can see from the quoted text, UCP says draft and / or document. therefore negotiation is possible without draft.

shahriar

Hi Shahriar,

Drafts are required under the L/C available by negotiation (of sight draft) or under the L/C available by acceptance (of time draft).

It is agreed that there is ever a common view amongst L/C experts that drafts are not part of documents required in Field 46A, therefore, discrepancies, if any, in drafts does not constitute good reason for the issuing bank to reject the payment.

However, there is a difference between a presentation with discrepant drafts and that with no drafts. The issuing bank may refuse to reimburse the negotiating bank if the documents forwarded to it for reimbursement do not include drafts as required under the L/C.

Please note that drafts are drawn by the beneficiary and it takes him just some minutes to prepare them. An experienced negotiating bank should insist the beneficiary to present drafts as required under the L/C.

Best regards,
Nguyen Huu Duc

P/S: Sorry for not reading your query carefully. Regarding drafts drawn on the bank other than the issuing bank, e.g., the confirming bank, I would like to add the following:

If the L/C is available with the confirming bank by negotiation of drafts drawn on the confirming bank, it is the confirming bank itself that decides to negotiate the documents with or without drafts as the documents forwarded to the issuing bank for reimbursement may not include drafts.

Dear Shahriar,

I agree with shahriar for right quotation of article and word.
.
I want to add something more which may not pertain with the posted query.
once upon a time, I thought deeply why some banker's of our country alleged that a credit transaction is impossible without draft. finally i came into the following conclusion:
History of letter of credit:
if one look into the history of letter of credit, one can find that the earliast form of letter of credit is traveller's letter of credit, where the correspondent bank sent a draft to the issuing bank for settlement of its bill which correspondent bank has paid to the issuing bank's customer as per instruction of letter of credit. latter on the first UCP incorporated this practice into this rule.
.
Terms and condition of our old fashioned credit:
Terms and conditions of letter of credit's in our country represents the inheritate version[copy pest formula] [ i am sorry to say that] which disseminated from generation to generation.[ I appriciate that todays dc is more up to date from my comments].
.
If one make link with the history of letter of credit with this old fashioned DC,then one can find that the incorporation of Draft is remained within our each and every letter credit transaction.
.
More surprisingly, still we have opened L/C available by deferred payment and also called draft.
Another surprising issue is that of late, we have opened L/C available with nominated bank, by acceptance with a draft drawn on issuing bank.
.
However what I think regarding draft with the availability of the credit mentioned in sub article 6(b) as follows:
Credit available by negotiation:
Draft is not mendatory,If credit ask for draft, it must be drawn on other than nominated bank.
Credit available by payment:Draft is not mendatory.
Credit available by deferred payment: draft must not called by the credit.
Credit available by acceptance: Draft must called by the credit.
I think this will add....
thanks
nesar

dear nesar,

wow!! thanks for sharing this LC history.

shahriar

dear Nguyen Huu Duc,

im very happy to see you here. i always enjoy your writings

about draft, u said for negotiation for sight lc draft is required which made me bit confused. from the ucp wording, its seems to me that negotiation is possible without draft.

about the requirement of draft in lc, its always confusing to me. i got different comments on it.some are -

drafts are not req by beneficiary. its req by the bank for refinancing purpose - tolee
make senses if the lc is at sight and issuing bank will get the payment after xxx days from applicant

2. draft is req coz local law says so.
3. draft is req by the customs authority!!!
4. European dont like draft and therefore prohibits in some cases since there are some stamp charges involved

could u please help me out of this maze?

shahriar

DEAR NHDUC

WELCOME TO THIS SITE.IT IS A GREAT PLEASURE FOR US YOUR SIGNING THIS FORUM.

I ALWAYS ENJOY YOUR OPINION
THANKS AGAIN.

Drafts:

Like Shariar I find no need of draft in case of Sight Credit. Thanks Shariar.I also faced this problem from our Central Bank. In a sight Credit Issuing Bank did not sought draft. Central Bank opined that (personal correspondence) draft is a valuable instrument for Credit and sought draft. Then I prepared (!) the draft and submitted it for fund release. (This is case for govt.Credit) and release the fund.

One thinks here that whether draft is essential for sight credit: I think it depends on the local law of importer, exporter and Issuing Bank.

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

dear duc,

thanks for your excellent analysis. as you have said that a draft is required for a post export finance and nominated bank require a draft for negotiation. but the draft in concern is never on the nominated bank and therefore not even endorsed by them. how can then a draft help a nominated bank then?

shahriar

Dear Shahriar,

Under L/C transactions, drafts drawn by the beneficiary are normally made payable to order of the nominated bank, which is a named bank or any bank.

For example, the draft drawn under the L/C available with Bank AAA by negotiation shall contain the following wordings:

PAY TO THE ORDER OF BANK AAA

Before forwarding the draft and documents to the issuing bank for payment or reimbursement, Bank AAA endorses on the back side of the draft as follows:

PAY TO THE ORDER OF ANY BANK, BANKER AND TRUST COMPANY


For BANK AAA
(Authorized signature)


Best regards,
Nguyen Huu Duc.