Definition: Approval basis is a letter of credit term used in situations where the beneficiary could not prepare the documents according to the letter of credit terms and asks the presenting bank to send the documents to the issuing bank as it is by indicating each discrepancy.
Explanation: Letter of credit is a conditional payment method. The issuing bank is obligated to pay for the credit amount to the beneficiary only against a complying presentation.
If the issuing bank determines that the presentation is not complying, which means that the documents contain discrepancies, then the issuing bank should approach the applicant for a waiver of the discrepancies.
If the applicant accepts the documents with discrepancies, then the issuing bank can pay the credit amount to the beneficiary by deducting the discrepancy fee.
Approval basis is an option available to the beneficiary.
If the beneficiary ascertains himself that the documents are discrepant and there is no chance that the issuing bank fails to notice them, then the beneficiary may want to fasten the process by having sent the documents under approval basis.
What are the Advantages and Disadvantages of Documents Sent under Approval Basis?
Advantages Approval Basis
- Beneficiary may be able to send the documents faster to the applicant.
- Applicant may be able to receive documents faster so that demurrage and detention charges may be eliminated or restricted.
Disadvantages Approval Basis
- Payment guarantee of the issuing bank diminishes as the issuing bank can not pay the credit amount until getting the applicant’s approval.
- Beneficiary can not receive the payment without getting any approval from the applicant.
- Payment method should be regarded as a documentary collection rather than a letter of credit, but letter of credit rules will apply and letter of credit fees will be deducted.
What is the Difference Between on Approval Basis and Collection Basis?
Although collection basis and approval basis are used with the same meaning in letters of credit terminology, it is possible to make some distinction.
Collection basis may refer to the situation in which the beneficiary would prefer to send discrepant documents to the issuing bank under documentary collection rules. (URC 522)
In such a scenario the issuing bank must act according to instructions sent by the presenting bank’s cover letter. Under documentary collections banks do not check the documents.
Approval basis may refer to the situation in which the beneficiary would prefer to send discrepant documents to the issuing bank under the letters of credit rules. (UCP 600)
Letter of Credit Examples:
- SENDING DOCUMENTS UNDER COLLECTION BASIS OR ON APPROVAL OR TRUST BASIS WITHOUT INDICATING DISCREPANCIES ARE PROHIBITED.