advising bank

UCP600 Article 2 Explanation – CDCS Guide: Definitions

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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.

UCP600 Article 9 Explanation – CDCS Guide: Advising of Credits and Amendments

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Clause a

Clause: A credit and any amendment may be advised to a beneficiary through an advising bank. An advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honour or negotiate.

Explanation: An advising bank acts as an intermediary that passes the credit and any amendments to the beneficiary. If the advising bank is not a confirming bank, it does not provide any guarantee or obligation to honor or negotiate the credit; it simply forwards the information received from the issuing bank to the beneficiary.

Example: Bank A (the issuing bank) issues a letter of credit for $100,000 to Beneficiary X. This credit is sent through Bank B (the advising bank). Bank B, which is not confirming the credit, forwards this letter of credit to Beneficiary X without any promise to pay the $100,000 itself.

Clause b

Clause: By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received.

Explanation: When the advising bank forwards the credit or amendment to the beneficiary, it indicates that it has verified the apparent authenticity of the document and confirms that the details provided to the beneficiary match those received from the issuing bank. However, advising bank does not verify genuineness of the LC. “Apparent authenticity” means that the letter of credit should appear to look authentic from the face. If LC is transmitted through swift then authenticity automatically verified by checking if it is received in MT700 format and in swift application as this application is secured.

Example: Bank B receives an amendment to the letter of credit from Bank A. Before advising Beneficiary X, Bank B checks the authenticity of the amendment and ensures that the details match those sent by Bank A. Once verified, Bank B advises Beneficiary X of the amendment.

Clause c

Clause: An advising bank may utilize the services of another bank (“second advising bank”) to advise the credit and any amendment to the beneficiary. By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received.

Explanation: An advising bank can use a second advising bank to forward the credit or amendment to the beneficiary. The second advising bank must also verify the authenticity of the document it received and ensure the details are accurate before advising the beneficiary.

Example: Bank A issues a credit and sends it to Bank B, which then uses Bank C (second advising bank) to advise Beneficiary X. Bank C verifies the authenticity of the document received from Bank B and advises Beneficiary X.

Clause d

Clause: A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment thereto.

Explanation: If an issuing bank uses an advising bank or a second advising bank to advise a credit, it must use the same advising bank for any subsequent amendments to that credit to ensure consistency and reliability in communication.

Example: Bank A issues a credit through Bank B to Beneficiary X. Later, if there is an amendment, Bank A must again use Bank B to advise Beneficiary X of this amendment.

Clause e

Clause: If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received.

Explanation: If a bank chooses not to advise a credit or amendment, it must promptly notify the bank that sent the credit or amendment of its decision not to advise it. This ensures transparency and allows the issuing bank to take necessary actions. Please note here the word “immediately” is not defined anywhere about how long it means. So we need to consider this as soon as possible.

Example: Bank B receives a credit from Bank A but decides not to advise it to Beneficiary X. Bank B promptly informs Bank A of its decision not to advise the credit.

Clause f

Clause: If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice.

Explanation: If an advising bank cannot verify the authenticity of the credit or amendment, it must inform the bank that sent it. If the advising bank still decides to advise the credit or amendment, it must notify the beneficiary or second advising bank that it could not confirm the authenticity.

Example: Bank B receives a credit from Bank A but is unsure of its authenticity. Bank B informs Bank A of this uncertainty. If Bank B decides to advise the credit despite this, it must inform Beneficiary X that it could not verify the credit’s authenticity.

UCP600 Article 37 Explanation: Disclaimer for Acts of an Instructed Party

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Clause a:

Clause: A bank utilizing the services of another bank for the purpose of giving effect to the instructions of the applicant does so for the account and at the risk of the applicant.

Explanation: When an issuing bank uses another bank’s services to fulfill the applicant’s instructions, it does so on behalf of and at the risk of the applicant. This means any issues arising from the other bank’s actions are the applicant’s responsibility.

Example: A company in India (the applicant) applies for a letter of credit with an Indian issuing bank to pay a supplier in Germany. The Indian bank uses a German bank to advise the credit to the supplier. If the German bank fails to deliver the documents on time, causing a delay, the risk and consequences of this failure fall on the Indian company, not the Indian issuing bank.

Clause b:

Clause: An issuing bank or advising bank assumes no liability or responsibility should the instructions it transmits to another bank not be carried out, even if it has taken the initiative in the choice of that other bank.

Explanation: Neither the issuing bank nor the advising bank is liable if the instructions they send to another bank are not executed, even if they chose that bank themselves.

Example: The Indian issuing bank selects a German advising bank to notify the supplier in Germany. If the German bank fails to notify the supplier, the Indian bank is not responsible for this failure, even though it chose the German bank.

Clause c:

Clause: A bank instructing another bank to perform services is liable for any commissions, fees, costs or expenses (“charges”) incurred by that bank in connection with its instructions. If a credit states that charges are for the account of the beneficiary and charges cannot be collected or deducted from proceeds, the issuing bank remains liable for payment of charges. A credit or amendment should not stipulate that the advising to a beneficiary is conditional upon the receipt by the advising bank or second advising bank of its charges.

Explanation: The bank that instructs another bank to perform services must pay any charges incurred by that bank. If the credit specifies that charges are the beneficiary’s responsibility but cannot be collected, the issuing bank must pay. Credits should not make the beneficiary’s receipt of advice conditional on the advising bank receiving its charges.

Example: An Indian issuing bank instructs a German advising bank to notify the supplier and charges the supplier for the advising fees. If the supplier refuses to pay, the Indian bank must cover the advising fees. Additionally, the letter of credit should not state that the supplier will only be advised upon payment of the advising bank’s charges.

Clause d:

Clause: The applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages.

Explanation: The applicant must cover any obligations and responsibilities the bank faces due to foreign laws and customs.

Example: An Indian company applies for a letter of credit with an Indian bank to pay a supplier in Germany. If German laws impose additional requirements or responsibilities on the advising bank, the Indian company must indemnify the Indian bank for any resulting costs or obligations.