Major Banks and Their Roles in Letter of Credit Payment
Which banks involved in a letter of credit transaction?
Issuing bank is the core financial institution in a documentary credit process. At least an issuing bank must be present for the existence of an L/C payment. All other banks shall be added to the transaction upon requirements of the consequences.
For example issuing bank will be using an advising bank's services to advice the letter of credit to the beneficiary. L/C may be issued so that it is available with a nominated bank which is located in the same country as the beneficiary. Additionally, the issuing bank may demand from the nominated bank to add its confirmation to the letter of credit. Confirming bank can claim reimbursement from the reimbursement bank against a complying set of documents.
As I have shown above, all other banks except the issuing bank can be added to the letter of credit transaction, if the issuing bank needs to use that particular bank's services.
Let us explain the banks in a letter of credit transaction one by one more detailly below.
Banks play a key role in letters of credit transactions. They start and end the L/C operations. They also decide either refusal or payment of the presentation. Without banks we cannot talk about any L/C transactions.
Different types of banks exist in a letter of credit transaction and each of them are functioning various roles according to authorizations granted to them.
Issuing bank, advising bank, nominated bank, confirming bank and reimbursement bank are the main banks that exist in a standard international documentary credit payment.
Today I want to explain all these banks' roles in a letter of credit transaction.
Issuing bank is the main bank in a letter of credit transaction.
Letter of credit is opened by the issuing bank mostly on behalf of the applicant. Rarely issuing banks open letters of credit on their own name without having been instructed by the applicants.
All other banks are acting according to the instructions and authorization that they have received from the issuing bank.
Advising bank is the bank that advises the letter of credit to the beneficiary. Advising bank acts at the request of the issuing bank.
In most cases advising bank and beneficiary locate at the same country which is contrary to the issuing bank. This is why issuing banks use another bank's services to advice the letter of credit to the beneficiaries.