Amendment Fee

Effectiveness Date of an Amendment

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics , , ,
Effectiveness Date of an Amendment

Letter of credit is an irrevocable and conditional payment obligation of the issuing bank.

As the letter of credit is irrevocable, its terms and conditions can not be changed without the consent of the beneficiary.

The beneficiary may find some of the terms and conditions of the credit unacceptable. Under such circumstances, the beneficiary has three options,

  • leaving the deal by not utilizing the letter of credit
  • making shipments with the original letter of credit by taking discrepancy risk
  • seeking an amendment by applying to the applicant.

Amendment in a letter of credit, a change in terms and conditions of the letter (e.g., extension of the letter of credit´s validity period, shipment deadline, etc.) usually to meet the needs of the seller. (1)

But what is the effectiveness date of an amendment?

The question comes from Vincent, who is asking a question regarding the effectiveness date of an amendment.

Here is his question as arrived by e-mail.

If the bank issues an amendment directly to the beneficiary decreasing the letter of credit amount without indicating an effective date for the amendment, is the decrease effective the date the amendment is issued or is the decrease effective the date the beneficiary agrees to the amendment.

What is your opinion, with of course no responsibility for providing such an opinion.

Regards
Vincent

Dear Vincent ,

In order to find the right answer to your question we need to look at the related part of the letter of credit rules.

Amendments are explained at article 10 in UCP 600.

UCP 600 states that “a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.”

UCP 600 article 10 continues to clarify effectiveness date of an amendment for the issuing bank and the confirming bank as follows “an issuing bank is irrevocably bound by an amendment as of the time it issues the amendment.

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment.”

On the next couple of phrases explains the position of a beneficiary against amendments.

“The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment.”

As UCP 600 clearly indicates letter of credit will remain in force as is for the beneficiary until the beneficiary communicates its acceptance of the amendment.

But how beneficiaries can communicate their acceptance to amendments. This would be a good discussion topic for a future page.

Is it allowed partial acceptance of amendments under the letter of credit rules?

References:

  1. Dictionary of International Trade, Amendment, https://www.globalnegotiator.com/

How to Deal with High Banking Commissions under Letters of Credit?

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , ,
high letter of credit fees and commissions

No matter how many advantages letters of credit have, they have one big disadvantage. They are expensive.

As a result, you should understand your costs before finalizing a letter of credit deal.

Letter of credit is a secure payment method in foreign trade. But this comfort of security comes with a price.

Letters of credit are one of the most expensive international payment methods available on the market.

As a result, exporters find themselves in a dilemma, when negotiating the terms of the business conditions.

Question is simple but not easy to answer; either choosing an expensive but relatively secure payment method or choosing a risky but less expensive payment method.

What are the Main Letter of Credit Fees That Exporters Have to Pay?

It is really hard to answer this question. Because what rules say is different than what the daily practice dictates.

  • According to the Rules: The issuing bank must pay all banking commissions as per UCP 600, which is the latest ICC rules of documentary credits.
  • Real Life Situations: The applicant pays the letter of credit issuance charges, but all other l/c costs will be collected from the beneficiary.

Bank Commissions That Exporters Normally Have to Pay:

  • Courier Fee / Postage Fee
  • Advising Fee
  • Discrepancy Fee
  • Handling Fee / Negotiation Fee
  • Amendment Commission
  • Confirmation Fee
  • Reimbursing Bank Charges

Real Life Example :

I would like to share a real life bank commissions example below.

These bank fees were collected from a British exporter under a letter of credit transaction. As you can see, the exporter had to pay 487 GBP to the banks as letter of credit fees.

Total transaction amount was only 1890 GBP. Letter of credit fees comprised 25% of all transaction amount, and this is unacceptable.

letter of credit bank commissions
Figure 1 : Real life example of bank commissions under a letter of credit transaction.

Suggestions to Eliminate High Banking Commissions Under Letters of Credit Transactions for Exporters:

  • Suggestion 1: Do not use letters of credit in low value transactions. As a general rule of thumb, transaction amounts below 10.000 USD to 15.000 USD can be considered as a low value businesses. Try to use alternative payment methods, instead of letters of credit on these occasions.
  • Suggestion 2: Try to convince your customer, so that the letter of credit fees will be paid by the applicant. Remember, letter of credit rules are on your side.
  • Suggestion 3: The worst case scenario may be is that, you can not find an alternative payment option and your customer does not want to pay letter of credit charges, except for the l/c issuance costs. If this is the situation, then try to learn approximate bank commissions and make sure that you have included at least some of them on your price offer.

Letter of Credit Fees

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , , ,
Letter of credit fees

Letters of credit have certain advantages as an international payment method.

If you have enough knowledge and expertise on letters of credit field, then you can use them wisely to get paid where no other payment method works.

No matter how many advantages letters of credit have, they have one big disadvantage.

They are expensive.

As a result, you should understand your costs, before finalizing a letter of credit deal.

Why Letters of Credit are Expensive Comparing to Other Payment Methods?

Banks play a key role in letters of credit transactions.

This is the main reason, why letters of credit are so expensive comparing to other payment methods.

Issuing banks open letters of credit for the account of applicants and in favor of the beneficiaries.

Issuing banks have to bear certain amount of risks, when they open letters of credit. They also let the applicants are benefited from their credit worthiness.

As a commercial institution, issuing banks provide these services only for one reason. To earn more money, to make more profit.

Similarly, confirming banks collect fees from the letter of credit parties for the same reason.

When confirming a letter of credit, confirming banks may have to bear substantial amount of non-payment risk.

As a result, confirmation fees can sometimes be climbing to high values.

As I have indicated on my previous posts, in a typical letter of credit transaction an advising bank, a nominated bank, a reimbursing bank may exist in addition to that an issuing bank and a confirming bank.

Every additional bank means additional fees and additional costs for either applicants or beneficiaries.

Who Should Pay Bank Charges in a Letter of Credit Transaction?

This question can be answered either by looking at the rules or by looking at the real life situations, because what rules say is not what is really happening on practice.

  1. UCP 600’s article related to charges of letters of credit is article 37 c: “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.”
  2. In real life situations, the applicant pay only the issuing bank’s charges and remaining bank charges will be paid by the beneficiary unless the beneficiary is in a very strong position against the applicant. One must look at field “71B: Charges” in a letter of credit text, which is issued in swift format, to understand how bank charges are allocated to the letter of credit parties.

Examples :

Issuing bank charges will be paid by the applicant and all other charges will be paid by the beneficiary:

  1. Field “71B: Charges: “ALL BANKING CHARGES OUTSIDE BRAZIL ARE FOR BENEFICIARY’S ACCOUNT.” This letter of credit issued by a Brazilian bank.
  2. Field “71B : Charges and Fees: “OTHER THAN THE ISSUING BANKS ARE FOR THE ACCOUNT OF THE BENEFICIARY. ISSUING BANK’S CHARGES ARE FOR THE ACCOUNT OF THE APPLICANT.”

What are the Major Types of Letter of Credit Fees?

  1. L/C Issuance Fee: This is the amount demanded by the issuing bank to open a letter of credit.
  2. Advising Fee: A type of letter of credit fee, which is demanded by the advising bank to advise the credit to the beneficiary.
  3. Discrepancy Fee: The issuing bank discount a certain sum of money from the proceeds of the letter of credit, if the beneficiary has presented discrepant documents.
  4. Confirmation Fee: This is the fee, that is taken by the confirming bank to adding its confirmation to the credit.
  5. Amendment Fee: If the letter of credit is amended, the issuing bank and/or the confirming bank may demand amendment fees.
  6. Handling Fee: Handling fees are collected by banks for a variety of reasons, such as sending swift messages, holding documents, set of photocopy documents not presented etc.
  7. Reimbursement Fee: Reimbursement bank’s fee to settle the credit amount between issuing bank and the confirming bank or the nominated bank.