Understanding the benefits of confirmed lc at sight.
UCP 600 defines four availability options ; A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation (UCP 600 - Article 6- b). At sight payment is one of the payment terms in a letter of credit transaction. Also confirmation means "a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation" according to latest UCP rules. On this page I would like to write about pros and cons of confirmation when letter of credit is available with sight payment (l/c at sight)
Let us start by asking ourself a very simple question. Why sellers pay additional money to have their L/Cs confirmed? The first reason is that sellers would like to eliminate default risk of the issuing bank. Second reason is that they would like to receive their payment sooner by removing the issuing bank out of the equation.
Most of the small companies work with limited capital volume and they rely on their suppliers credit terms such as 30 days after bill of lading date. Which means that a seller have to pay to its supplier 30 days after he ships the goods. This relatively short time could create problems in terms of cash flow, when we take into account document examination period of 5 working day that each bank has to examine the documents under a letter of credit presentation.
Confirmation would be a great solution for this problem. Under unconfirmed letters of credit nominated banks in most cases send documents to issuing banks and wait reimbursement. Nominated banks pay to the sellers only after they have been reimbursed by the issuing banks. This is a relatively long period of time and could exceed 30 days time allowance that sellers have to pay to their suppliers.
Nomimated banks keep sending documents to issuing banks and wait for reimbursement even under confirmed letters of credit. Unfortunately confirmation couldn't eliminate the wait for reimbursement! Confirming banks should pay against credits they confirmed without receiving reimbursement. But in practice they pay without waiting reimbursement only when they have determined that the issuing bank defaulted. Further, confirming banks unable to tell us how long it might take to determine that the issuing bank had defaulted! This is another example where theory does not match the practice. UCP 600 sub-Article 8(a) clear enough. I will qoute related articles from UCP 600 belows,
Article 8 - Confirming Bank Undertaking
a. 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; ..."
I am asking now a simple question to banks, if you do not honour your confirmation as per UCP rules why are you adding your confirmation to lcs and charging confirmation cost to sellers?
What are the benefits of at sight confirmed letter of credit?
At sight payment is one of the payment terms in a letter of credit transaction. Also confirmation means "a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation" according to latest UCP rules.