1. Advising Bank
- Clause: The bank that advises the credit at the request of the issuing bank.
- Explanation: The advising bank serves as the intermediary between the issuing bank and the beneficiary. It is responsible for transmitting the credit and any amendments to the beneficiary without any obligation on its part.
- Example: If Bank A (issuing bank) in the USA issues a letter of credit (LC) for a beneficiary in India, Bank A may request Bank B (advising bank) in India to advise the credit to the beneficiary. Bank B will inform the beneficiary of the LC details.
2. Applicant
- Clause: The party on whose request the credit is issued.
- Explanation: The applicant is the buyer in a trade transaction who requests the issuance of a letter of credit in favor of the seller (beneficiary).
- Example: In an export-import transaction, an importer in India requests their bank to issue a letter of credit in favor of an exporter in China. The importer is the applicant.
3. Banking Day
- Clause: A day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.
- Explanation: A banking day refers to any day when banks are open to conduct regular business. This is crucial in determining deadlines for presentations and payments under a letter of credit.
- Example: If a presentation is due on January 1st, but this is a public holiday in the bank’s location, the presentation would be due on the next banking day.
4. Beneficiary
- Clause: The party in whose favour a credit is issued.
- Explanation: The beneficiary is the seller or exporter who will receive payment under the letter of credit once they comply with its terms.
- Example: In a trade between a US buyer and an Indian seller, if the buyer issues an LC, the Indian seller is the beneficiary.
5. Complying Presentation
- Clause: A presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules, and international standard banking practice.
- Explanation: A complying presentation occurs when the beneficiary submits documents that fully meet the requirements set out in the letter of credit, ensuring that payment will be made.
- Example: If an LC requires a commercial invoice and a bill of lading, a complying presentation will include these documents, exactly as specified.
6. Confirmation
- Clause: A definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
- Explanation: When a confirming bank adds its confirmation to a letter of credit, it takes on the responsibility to pay the beneficiary even if the issuing bank fails to do so. This adds extra security in the LC. Confirming bank generally located in the country of beneficiary however it can be in the different country also. When a beneficiary does not have confident on issuing bank or country of issuing bank due to sanction or political risk or any other reason, then beneficiary opt for confirmation.
- Example: If a bank in Germany issues an LC, but the seller in India wants more security, a confirming bank in India might confirm the LC, guaranteeing payment.
7. Confirming Bank
- Clause: The bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
- Explanation: The confirming bank provides an additional level of assurance to the beneficiary by guaranteeing payment if the issuing bank fails to do so.
- Example: An exporter in Brazil might require a confirming bank in their country to confirm an LC issued by a bank in Nigeria, ensuring that they will get paid.
8. Credit
- Clause: Any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.
- Explanation: The term “credit” refers to the letter of credit itself, which is an irrevocable commitment from the issuing bank to pay the beneficiary if they comply with the terms.
- Example: A bank issues an LC for $100,000 to a beneficiary; this document is the “credit” which guarantees payment upon compliance.
9. Honour
- Clause:
- a. To pay at sight if the credit is available by sight payment.
- b. To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
- c. To accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
- Explanation: Honour refers to the actions a bank must take under different types of letters of credit—paying immediately, deferring payment, or accepting a draft for future payment. Please refer “Available By” field in the LC.
- Example:
- a. Sight Payment: A beneficiary presents documents and is paid immediately.
- b. Deferred Payment: Documents are presented, and payment is made after 90 days basis deferred payment undertaking. In deferred payment draft is not presented.
- c. Acceptance: The bank accepts a draft and pays the beneficiary at maturity.
10. Issuing Bank
- Clause: The bank that issues a credit at the request of an applicant or on its own behalf.
- Explanation: The issuing bank is the financial institution that creates the letter of credit, committing to pay the beneficiary once they comply with the LC terms.
- Example: A bank in Japan issues an LC to a US exporter; this bank is the issuing bank.
11. Negotiation
- Clause: The purchase by the nominated bank of drafts (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.
- Explanation: Negotiation involves the nominated bank purchasing documents or drafts from the beneficiary before payment is due, essentially providing an advance.
- Example: A bank in the UK buys a draft from a beneficiary in South Africa under a complying presentation and advances payment before the due date.
12. Nominated Bank
- Clause: The bank with which the credit is available or any bank in the case of a credit available with any bank.
- Explanation: The nominated bank is authorized by the issuing bank to handle the presentation of documents and make payments under the letter of credit. We need to refer “Available With” field in the LC.
- Example: An LC issued in Canada might nominate a bank in Mexico to handle document presentations and payments.
13. Presentation
- Clause: Either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.
- Explanation: Presentation refers to the submission of documents required by the letter of credit to the relevant bank for review and payment processing.
- Example: A beneficiary submits the required commercial invoice and shipping documents to the nominated bank as a presentation under the LC.
14. Presenter
- Clause: A beneficiary, bank, or other party that makes a presentation.
- Explanation: The presenter is the entity that submits the documents under the letter of credit, which could be the beneficiary, a bank, or another involved party.
- Example: A freight forwarder submits the required documents on behalf of the beneficiary to the issuing bank. Then freight forwarder is presenter.