Letters of Credit

How does trade finance work for digital goods and services? | Financing Digital Exports, Letters of Credit, and Payment Processing Risks

by

Table of Contents

  1. Introduction
  2. What Are the Unique Challenges of Financing Digital Goods Exports?
  3. How Do Letters of Credit Apply to Digital Goods Transactions?
  4. What Types of Collateral Are Used in Financing Digital Goods?
  5. How Does Payment Processing Work for Digital Services in International Trade?
  6. What Are the Risks Associated with Digital Goods in Trade Finance?
  7. Conclusion
  8. Frequently Asked Questions (FAQs)

1. Introduction

In today’s interconnected world, digital goods and services are at the forefront of global trade. From software and e-books to cloud computing services and digital entertainment, the landscape of trade is undergoing a massive transformation. The ease of cross-border digital transactions has expanded opportunities for businesses, but it has also introduced new challenges, especially in terms of trade finance. Whether you are a fintech startup offering digital services or a seasoned exporter of digital products, understanding how trade finance works for digital goods is essential.

Let’s take a look at a scenario: Imagine a software company based in India that has just signed a contract with a client in the United States. The client wants to pay via international transfer, but they also want to ensure that the product meets the agreed terms before the payment is released. This is where trade finance becomes crucial. But how does it work for digital goods and services? What are the key considerations and risks? We will explore these questions in this blog post.

2. What Are the Unique Challenges of Financing Digital Goods Exports?

Exporting digital products involves unique complexities that traditional goods do not encounter. While physical goods are shipped through customs and require storage and transportation, digital goods such as software, e-books, and digital media are intangible. So, what challenges arise when financing these exports?

One of the primary challenges is the lack of physical collateral. In traditional trade finance, banks often rely on tangible goods as collateral in case the buyer defaults on payment. However, with digital goods, the situation changes. There is no tangible asset to secure the financing, which raises the need for alternative methods of collateralization. But can digital goods truly be “secured” in the traditional sense?

Another challenge is the fluctuating nature of digital product values. Digital goods can be easily copied and distributed, which might make them harder to value accurately in trade finance arrangements. Pricing fluctuations, piracy risks, and varying customer expectations make financing these goods more volatile compared to tangible products.

Moreover, the regulations governing digital exports are often complex and vary between countries. Different nations have specific laws concerning digital trade, privacy, and intellectual property rights, making cross-border financing difficult. For instance, data protection laws in Europe (GDPR) and content distribution rules in the United States can affect the legal landscape of digital goods trade.

Digital goods exporters must also deal with the issue of payments. While digital transactions are fast and efficient, the payment systems used often face challenges such as fraud, currency conversions, and delays. How do exporters ensure timely and secure payments?

These unique challenges highlight the importance of specialized trade finance solutions that consider the characteristics of digital products. The role of fintech and innovation in this space has been growing, offering new ways to manage these issues.

3. How Do Letters of Credit Apply to Digital Goods Transactions?

A Letter of Credit (LC) is a well-known instrument in traditional trade finance, offering security to both buyers and sellers. But how do these work in the world of digital goods and services?

Letters of Credit are typically used to guarantee payments between parties in a trade agreement. They are most often used for physical goods transactions, where the seller needs assurance that they will receive payment after fulfilling the order. But in digital transactions, where no physical goods are being shipped, the concept needs to be adapted.

For example, a software company in India that exports software to a US-based client may request an LC to ensure payment. But what happens when the product is intangible? A well-structured LC for digital goods would include clear terms on the delivery of digital products, such as a downloadable file or access to an online service. Additionally, the LC would outline conditions for delivery, like confirmation of successful installation or access granted to the client.

An essential component of an LC is the ability to provide documentation to prove that the terms of the agreement have been met. In the case of digital goods, this documentation can be challenging to define. How do you prove that a digital service was successfully provided to a buyer?

The use of LCs in digital trade is still developing, but many financial institutions are beginning to recognize the need for innovative solutions. For example, fintech companies are introducing digital platforms that allow for the management of LCs specifically designed for digital goods transactions.

4. What Types of Collateral Are Used in Financing Digital Goods?

Collaterals are a fundamental element in trade finance, providing lenders with security in case of non-payment. But when it comes to digital goods, the absence of physical assets complicates this process.

In the context of digital exports, the collateral used may not be a tangible product but instead could be intellectual property (IP) rights. For example, software companies might offer a license to their product or code as collateral. However, how does one assign a monetary value to IP, especially if it is easily reproducible? The challenge here lies in determining the true worth of digital collateral.

Some digital goods exporters may also use accounts receivable as collateral. This could involve securing financing by pledging expected payments for a future sale. In such cases, the exporter’s ability to demonstrate the reliability of their payment stream becomes a key factor in obtaining financing.

Furthermore, fintech solutions have started to offer digital escrow accounts, where payments are held until the digital product is delivered, giving lenders confidence in the transaction. Escrow services are increasingly being used as collateral in online trade, particularly for digital goods and services.

While the use of IP as collateral is still relatively new, it offers an innovative approach to overcoming the challenges faced in securing financing for digital exports. However, the question remains: How can companies ensure that their digital collateral is not devalued or misused?

5. How Does Payment Processing Work for Digital Services in International Trade?

The payment processing landscape for digital services is rapidly evolving as more businesses move online. But how does payment processing work for digital services in international trade?

Payment systems for digital services involve several steps. First, the buyer and seller agree on the price and method of payment. Digital services, unlike physical goods, often require instant payment or payments based on milestones. This may include subscriptions, licensing fees, or one-time purchases.

Cross-border payments can be tricky because they involve currency exchange and international banking regulations. Traditional payment methods, such as wire transfers, often come with high fees and slow processing times. However, alternative payment platforms, including digital wallets and cryptocurrency, are starting to play a major role in international trade.

For instance, PayPal and Stripe have become popular platforms for facilitating payments for digital services. These platforms allow instant payments between global buyers and sellers, making transactions smoother and more efficient.

Cryptocurrency, specifically Bitcoin and Ethereum, has also emerged as an alternative payment solution. The decentralized nature of these currencies allows for faster, borderless transactions, although they come with their own set of risks, including volatility and regulatory uncertainty.

Understanding the available payment methods and selecting the right platform can make or break a digital service’s success in the global marketplace.

6. What Are the Risks Associated with Digital Goods in Trade Finance?

As with any aspect of international trade, financing digital goods comes with its risks. These risks must be understood and managed carefully to ensure the success of transactions.

One of the primary risks is fraud. Digital goods, particularly software and intellectual property, are susceptible to piracy, illegal copying, and distribution. In such cases, exporters may find themselves facing significant losses due to unpaid licenses or counterfeit products.

Another risk is related to payment defaults. Without the traditional collateral that accompanies physical goods, the risk of non-payment for digital goods becomes heightened. Without proper safeguards in place, the seller may face significant financial exposure.

Additionally, fluctuations in currency values pose a risk in cross-border digital trade. If the currency of the seller’s country weakens significantly, the payment received in foreign currency may not cover the expected costs. Currency exchange rate volatility is a challenge that exporters need to consider when financing digital exports.

Lastly, data security and intellectual property theft present real risks to digital goods exporters. How do companies safeguard sensitive data and ensure that their digital products are protected from cyber threats?

Understanding these risks and implementing proper strategies, such as insurance, fraud prevention measures, and cybersecurity protocols, can mitigate many of the potential challenges in financing digital goods.

7. Conclusion

In conclusion, trade finance for digital goods and services presents both significant opportunities and unique challenges. As digital goods exports continue to grow, businesses must navigate the complexities of securing financing, ensuring payments, and mitigating risks. Innovative financial solutions, including fintech platforms, digital collateral, and adaptable letters of credit, are emerging to support the evolving digital trade landscape.

For businesses looking to expand into global digital trade, understanding how trade finance works is crucial. With the right strategies in place, companies can overcome challenges and unlock the potential of the digital economy.

Frequently Asked Questions (FAQs)

  1. What is trade finance for digital goods?
    Trade finance for digital goods involves financial services and solutions that help businesses finance the export and import of digital products, including software, e-books, and online services.
  2. How does a Letter of Credit work for digital products?
    A Letter of Credit guarantees payment between the buyer and seller in digital transactions, ensuring that the exporter is paid once the agreed digital service or product is delivered.
  3. What are the risks in digital goods trade finance?
    Risks include fraud, piracy, payment defaults, currency fluctuations, and cybersecurity threats.
  4. Can I use intellectual property as collateral for digital goods?
    Yes, intellectual property, such as software licenses and digital content, can be used as collateral in digital goods financing.
  5. What payment systems are used for digital services?
    Payment systems such as PayPal, Stripe, and cryptocurrency are commonly used for digital services in international trade.
  6. How do I secure payment for digital goods?
    Payment can be secured through tools like Letters of Credit, escrow accounts, and digital wallets.
  7. Are there specific trade finance solutions for digital services?
    Yes, fintech companies offer tailored solutions for financing digital services, including online payment platforms and digital collateral management.
  8. What is the role of fintech in trade finance?
    Fintech provides innovative solutions such as blockchain, digital LCs, and instant payment platforms to streamline the financing of digital goods and services.
  9. How do currency fluctuations impact digital goods financing?
    Currency fluctuations can affect the value of cross-border payments, potentially leading to losses for exporters.
  10. What types of collateral are accepted for digital goods?
    Collateral can include intellectual property rights, accounts receivable, and digital escrow services.
  11. What are the challenges of exporting digital goods?
    Challenges include lack of physical collateral, legal complexities, and ensuring secure and timely payments.
  12. Can digital services be financed like physical goods?
    Yes, digital services can be financed through mechanisms like Letters of Credit and digital escrow services, though it requires adaptation of traditional trade finance models.
  13. How do I protect my digital goods from piracy?
    Measures include digital rights management (DRM), encryption, and robust cybersecurity protocols.
  14. What are the benefits of using cryptocurrency in digital trade?
    Cryptocurrency offers faster, borderless transactions with lower fees, although it comes with volatility risks.
  15. Is digital collateral effective in securing financing?
    Digital collateral, especially IP rights and escrow accounts, are becoming increasingly accepted in trade finance for digital goods.

eUCP Version 2.1 Article e7: Examination of Electronic Records – CDCS Guide

by

Article e7: Examination

a. i. The period for the examination of documents commences on the banking day following the day on which the notice of completeness is received by the nominated bank, confirming bank, if any, or by the issuing bank, where a presentation is made directly.

Explanation: This clause specifies when the examination of documents should start. The process begins the day after the bank receives the notice of completeness. This notice indicates that the documents presented under a letter of credit (LC) are complete and in order.

Example: If the notice of completeness is received on Monday, the examination period begins on Tuesday. If documents are presented directly to the issuing bank, this rule still applies.

ii. If the time for presentation of documents or the notice of completeness is extended, as provided in sub-article e6 (e) (i), the time for the examination of documents commences on the next banking day following the day on which the bank to which presentation is to be made is able to receive the notice of completeness, at the place for presentation.

Explanation: If an extension is granted for the presentation of documents or the notice of completeness, the examination period starts the next banking day after the bank can receive the notice at the presentation place.

Example: If an extension is granted until Wednesday and the notice is received on that day, the examination period starts on Thursday, the next banking day.

b. i. If an electronic record contains a hyperlink to an external system or a presentation indicates that the electronic record may be examined by reference to an external system, the electronic record at the hyperlink or the external system shall be deemed to constitute an integral part of the electronic record to be examined.

Explanation: When an electronic record includes a hyperlink or reference to an external system, that external information is considered a part of the electronic record being examined.

Example: A digital invoice includes a link to an external database for detailed transaction information. This linked information must be reviewed as part of the invoice examination.

ii. The failure of the external system to provide access to the required electronic record at the time of examination shall constitute a discrepancy, except as provided in sub-article e7 (d) (ii).

Explanation: If the external system is inaccessible when the record is being examined, it is considered a discrepancy, meaning the documentation is not compliant.

Example: If the external system linked to a shipment’s electronic record is down during the examination, this would be considered a discrepancy unless covered by exceptions outlined in sub-article e7 (d) (ii).

c. The inability of a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank, to examine an electronic record in a format required by an eUCP credit or, if no format is required, to examine it in the format presented is not a basis for refusal.

Explanation: A bank cannot refuse to process a document simply because it is unable to examine it in the required format, as long as the document meets the credit’s terms.

Example: If a bank is unable to open a file in a specific format but the document’s content is accurate and complete, the bank cannot reject it solely due to format issues.

d. i. The forwarding of electronic records by a nominated bank, whether or not it is acting on its nomination to honour or negotiate, signifies that it has satisfied itself as to the apparent authenticity of the electronic records.

Explanation: When a nominated bank forwards electronic records, it indicates that it has verified the authenticity of these records, regardless of whether it is honoring or negotiating.

Example: A nominated bank that sends electronic records to a confirming or issuing bank confirms that it has checked these records for authenticity.

ii. In the event that a nominated bank determines that a presentation is complying and forwards or makes available those electronic records to the confirming bank or issuing bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when a specified hyperlink or external system does not allow the issuing bank or confirming bank to examine one or more electronic records that have been made available between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.

Explanation: If a nominated bank finds a presentation compliant and forwards the records to the confirming or issuing bank, the latter must honor, negotiate, or reimburse the nominated bank even if some records are inaccessible through links or external systems.

Example: If the nominated bank provides all required electronic records but some records are inaccessible due to a broken link, the issuing or confirming bank must still process the payment or reimbursement based on the compliant records.

URR 725 Article 4 & 5 : Honour of a Reimbursement Claim & Responsibility of the Issuing bank – CDCS Guide

by

Article 4. Honour of a Reimbursement Claim

“Except as provided by the terms of its reimbursement undertaking, a reimbursing bank is not obligated to honour a reimbursement claim.”

Explanation:
This clause outlines the fundamental principle that a reimbursing bank’s obligation to honour a reimbursement claim is strictly defined by the terms of its reimbursement undertaking. This means that if the conditions specified in the reimbursement undertaking are not met, the reimbursing bank is under no obligation to honour the claim. The reimbursing bank’s role is to disburse funds according to the specific terms outlined in the reimbursement undertaking, which is a formal agreement between the bank and the beneficiary. If those terms are not fulfilled, the bank is not required to make any payment.

Example:
Consider a scenario where an exporter is expecting payment from an importer’s bank through a reimbursing bank. The reimbursement undertaking specifies that the reimbursing bank will only honour claims made within 30 days from the date of shipment. If the claim is presented on the 35th day, the reimbursing bank is not obligated to honour the claim because it does not comply with the terms of the reimbursement undertaking. In this case, the reimbursing bank can rightfully refuse the payment request.

Article 5. Responsibility of the Issuing bank

“The issuing bank is responsible for providing the information required in these rules in both the reimbursement authorization and the credit, and is responsible for any consequences resulting from non-compliance with this provision.”

Explanation:
This clause emphasizes the responsibility of the issuing bank to ensure that all necessary information is accurately provided in both the reimbursement authorization and the credit. The issuing bank must comply with the rules specified under URR 725 when drafting the reimbursement authorization. If the issuing bank fails to provide accurate information or omits essential details, it is held accountable for any adverse consequences arising from such non-compliance. This may include delays in payment, disputes, or financial losses.

Example:
Imagine a situation where an issuing bank authorizes a reimbursement but fails to include critical details like the amount to be reimbursed or the timeframe within which the claim should be presented. If the reimbursing bank or the beneficiary faces any issues due to this lack of information, the issuing bank would be held responsible for the resulting complications. For instance, if the reimbursing bank refuses to honour a claim due to the absence of clear instructions, the issuing bank would be liable for any losses incurred by the beneficiary.

Conclusion:

URR 725 Article 4 sets forth essential guidelines for the honouring of reimbursement claims by reimbursing banks. It clarifies that a reimbursing bank’s obligation to honour such claims is contingent upon strict adherence to the terms of the reimbursement undertaking. Moreover, Article 5 underscores the issuing bank’s duty to furnish accurate and comprehensive information in both the reimbursement authorization and the credit. Any failure to comply with these responsibilities could lead to significant financial and operational repercussions. Understanding these articles is crucial for banks, exporters, and importers involved in international trade transactions.

URR 725 Article 2: Definitions – Detailed Explanation with Examples – CDCS Guide

by

Explanation of URR 725 Article 2 : Definitions

For the purpose of these rules, the following terms shall have the meaning specified in this article and may be used in the singular or plural as appropriate:

a. “Issuing bank” means the bank that has issued a credit and the reimbursement authorization under that credit.

Explanation: The issuing bank is the financial institution that initiates a letter of credit (LC) and provides a reimbursement authorization under that credit. This bank is responsible for ensuring that the terms of the LC are met and that the funds are available for the reimbursement to the bank that honors the credit.

Example: If Bank A issues a letter of credit for a buyer in Country X, Bank A is the issuing bank. Bank A also provides a reimbursement authorization to Bank B (the reimbursing bank) to pay the bank (the claiming bank) that presents a valid claim under the letter of credit.

b. “Reimbursing bank” means the bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Explanation: The reimbursing bank is the bank that receives instructions from the issuing bank to pay the claiming bank upon receipt of a valid reimbursement claim. The reimbursing bank acts as an intermediary between the issuing bank and the claiming bank.

Example: If Bank A (the issuing bank) instructs Bank B to pay Bank C upon the presentation of a valid reimbursement claim, Bank B is the reimbursing bank.

c. “Reimbursement authorization” means an instruction or authorization, independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursing bank.

Explanation: A reimbursement authorization is a separate instruction from the issuing bank to the reimbursing bank, directing the latter to reimburse the claiming bank. This authorization is independent of the letter of credit and can also involve accepting and paying a time draft drawn on the reimbursing bank.

Example: Bank A issues a letter of credit and separately authorizes Bank B (the reimbursing bank) to pay Bank C (the claiming bank) upon the presentation of the required documents. This instruction from Bank A to Bank B is the reimbursement authorization.

d. “Reimbursement Amendment” means an advice from the issuing bank to a reimbursing bank stating changes to a reimbursement authorization.

Explanation: A reimbursement amendment is a notice from the issuing bank to the reimbursing bank that modifies the original reimbursement authorization. This amendment may involve changes in terms, conditions, or instructions provided earlier.

Example: If Bank A initially authorized Bank B to reimburse Bank C upon presentation of specific documents, but later needs to change the amount or conditions, Bank A will issue a reimbursement amendment to Bank B.

e. “Claiming Bank” means a bank that honours or negotiates a credit and presents a reimbursement claim to the reimbursing bank. “Claiming Bank” includes a bank authorized to present a reimbursement claim to the reimbursing bank on behalf of the bank that honours or negotiates.

Explanation: The claiming bank is the financial institution that pays or negotiates under the letter of credit and then seeks reimbursement from the reimbursing bank. This term also applies to any bank authorized to claim reimbursement on behalf of the bank that made the payment.

Example: Bank C negotiates a letter of credit and subsequently presents a reimbursement claim to Bank B (the reimbursing bank) for payment. Bank C is the claiming bank.

f. “Reimbursement Claim” means a request for reimbursement from the claiming bank to the reimbursing bank.

Explanation: A reimbursement claim is a formal request made by the claiming bank to the reimbursing bank, asking for the payment of funds as per the reimbursement authorization.

Example: After Bank C honors a letter of credit, it sends a reimbursement claim to Bank B (the reimbursing bank) to receive payment for the amount disbursed under the credit.

g. “Reimbursement undertaking” means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank’s reimbursement claim, provided the terms and conditions of the reimbursement undertaking have been complied with.

Explanation: A reimbursement undertaking is an irrevocable commitment made by the reimbursing bank, at the request of the issuing bank, to honor the claiming bank’s reimbursement claim. This undertaking is independent and ensures that the claiming bank will be paid if the conditions are met.

Example: Bank B, acting as the reimbursing bank, issues a reimbursement undertaking to Bank C, promising to pay the claim made by Bank C under the letter of credit, provided all terms and conditions are fulfilled.

h. “Reimbursement undertaking amendment” means an advice from the reimbursing bank to the claiming bank named in the reimbursement authorization stating changes to a reimbursement undertaking.

Explanation: A reimbursement undertaking amendment is a notification from the reimbursing bank to the claiming bank, informing it of any changes to the original reimbursement undertaking.

Example: If Bank B (the reimbursing bank) needs to alter the terms of the reimbursement undertaking issued to Bank C (the claiming bank), Bank B will send a reimbursement undertaking amendment to Bank C.

i. For the purpose of these rules, branches of a bank in different countries are considered to be separate banks.

Explanation: Under these rules, different branches of the same bank located in various countries are treated as separate legal entities or banks.

Example: If a bank with branches in both Country X and Country Y is involved in a transaction under URR725, the branch in Country X is considered a separate bank from the branch in Country Y.

UCP600 Article 1 Explanation – CDCS Guide: Application of Rules and Their Binding Nature

by

Article 1: Application of UCP

Clause 1: “The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (‘UCP’) are rules that apply to any documentary credit (‘credit’) (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules.”

Explanation: This clause establishes that UCP600 rules are applicable to any documentary credit, including standby letters of credit, provided that the text of the credit explicitly states that it is subject to these rules. UCP600 is not automatically applied; it must be expressly mentioned in the credit’s text. This clause ensures that all parties involved in the credit are aware that the rules of UCP600 govern the transaction.

Example: Consider a buyer in India who requests a documentary credit from their bank to pay a seller in Germany for goods. If the credit document explicitly states, “This credit is subject to UCP600,” then all the rules and regulations under UCP600 will apply to the transaction. Both the buyer’s and seller’s banks, along with the parties themselves, are bound by these rules. It can also be stated like “This credit is subject to UCP LATEST VERSION” or “This credit is subject to UCPDC,” etc.

Clause 2: “They are binding on all parties thereto unless expressly modified or excluded by the credit.”

Explanation: This clause emphasizes that UCP600 rules are mandatory for all parties involved in the documentary credit, including the issuing bank, the advising bank, the beneficiary, and the applicant, unless the credit specifically modifies or excludes certain rules. This means that the parties cannot opt out of the UCP600 rules unless they have expressly stated any modifications or exclusions in the credit itself.

Example: In the same transaction between the Indian buyer and the German seller, if the credit document states, “This credit is subject to UCP600, except for Article 16,” then all the rules of UCP600 will apply except Article 16. The parties have the flexibility to modify or exclude certain parts of UCP600, but such modifications must be explicitly stated in the credit.

UCP600 Article 8 Explanation – CDCS Guide: Confirming Bank Undertaking

by

Article 8: Confirming Bank Undertaking

Clause a

Clause:
Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

i. honour, if the credit is available by –

a. sight payment, deferred payment or acceptance with the confirming bank;

b. sight payment with another nominated bank and that nominated bank does not pay;

c. deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity; d. acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;

e. negotiation with another nominated bank and that nominated bank does not negotiate.

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

Explanation:
This clause outlines the conditions under which the confirming bank must honor or negotiate the credit. If the stipulated documents are presented and they comply with the terms of the credit, the confirming bank has specific obligations to fulfill. Honour means fulfilling the obligations i.e. issuing acceptance or doing payment as per applicable scenario.

Examples:

  1. Sight payment with the confirming bank: The confirming bank in India must pay the exporter immediately upon presentation of compliant documents if the credit specifies sight payment.
  2. Sight payment with another nominated bank: If the UK bank (another nominated bank) fails to pay under a sight payment arrangement, the confirming bank in India must still pay the exporter.
  3. Deferred payment with another nominated bank: If the UK bank fails to honor a deferred payment at maturity, the confirming bank in India must pay the exporter.
  4. Acceptance with another nominated bank: If the UK bank fails to accept a draft or pay it at maturity, the confirming bank in India must step in and honour.
  5. Negotiation with another nominated bank: If the UK bank fails to negotiate the documents and pay to exporter, the confirming bank in India must honour the documents.
  6. Negotiate, without recourse, if the credit is available by negotiation with the confirming bank: The confirming bank in India must negotiate the documents without recourse if the credit is available by negotiation with confirming bank. (“Without recourse” here means incase issuing bank defaults to reimburse confirming bank then confirming bank would not be able to claim the funds back from beneficiary)

Clause b

Clause:
A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

Explanation:
Once a confirming bank adds its confirmation to a letter of credit, it is irrevocably obligated to honor or negotiate the credit. This clause provides certainty and assurance to the beneficiary of the letter of credit.

Example:
When the confirming bank in India adds its confirmation to a letter of credit, it is legally bound to pay or negotiate according to the terms of the credit, giving the exporter confidence in receiving payment.

Clause c

Clause:

Confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a
complying presentation and forwarded the documents to the confirming bank. Reimbursement for the
amount of a complying presentation under a credit available by acceptance or deferred payment is due at
maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming
bank’s undertaking to reimburse another nominated bank is independent of the confirming bank’s
undertaking to the beneficiary.

Explanation:
The confirming bank must reimburse another nominated bank that honors or negotiates a complying presentation. The reimbursement is due at maturity for credits available by acceptance or deferred payment, regardless of whether the nominated bank prepaid or purchased before maturity. This reimbursement obligation is independent of the confirming bank’s undertaking to the beneficiary.

Example:
If another bank in the UK honors a deferred payment and forwards the documents to the confirming bank in India, the confirming bank must reimburse the UK bank at maturity. It is additional obligation of confirming bank apart from the obligations we read in previous clauses which were obligations towards beneficiary.

Clause d

Clause:

If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so,
it must inform the issuing bank without delay and may advise the credit without confirmation.


Explanation:
If a bank is asked to confirm a credit but is unwilling, it must promptly inform the issuing bank and may still advise the credit without confirmation. This ensures clarity and timely communication between banks.

Example:
If the confirming bank in India is requested to confirm a credit but chooses not to, it must inform the issuing bank in the UK immediately and can advise the credit without adding its confirmation.