Previous:   Documentary Credit/ Letter of Credit in International Trade

Applicant's Undertaking and Risks

The applicant of the letter of credit undertakes to pay the LC issuing bank, provided, compliant documents are submitted. But there is a risk that the documents may not be genuine. Even genuine documents do not ensure that beneficiary has met all his obligations.

LC Issuing Bank's Undertaking and Risks

The LC issuing bank undertakes, to pay back the nominated bank, that has honored or negotiated a complying presentation.
But there is a risk that it may fail to correctly examine documents presented. Also, there may be a situation that the applicant may not be capable or unwilling to reimburse the LC issuing bank.

LC Advising Bank's Undertaking and Risks

Now, the LC reaches the advising bank. Let's consider that the advising bank, the confirming bank and the nominated bank are different banks. In such a case the advising bank undertakes to satisfy itself as to the authenticity of the credit or any amendment.
Also, it must forward to the beneficiary the credit or amendment received from the issuing bank. But there is a risk, that it advises a credit that may subsequently be found, to not be authentic.

LC Confirming Bank's Undertaking and Risks

The confirming bank must satisfy itself as to the authenticity of the credit, when it itself is not the advising bank. It must honor or negotiate a complying presentation. But there is a risk that the issuing bank may fail to honor its obligations to reimburse the confirming bank.

Nominated Bank's Undertaking and Risks

The nominated bank undertakes to, honor or negotiate, according to the terms and conditions of the credit. But there is a risk that it may fail, to correctly examine the documents presented. Also, the issuing bank or confirming bank, may fail to reimburse the nominated bank.

Beneficiary's Undertaking and Risks

Lastly, the beneficiary undertakes to present compliant documents. But there is a chance that he may be unable to provide compliant documents. Also, a request for a necessary amendment may be refused. There is a risk that the nominated bank may fail to honor or negotiate the presentation.

These risks discussed are indicative and not an exhaustive list. Some of these risks are less likely to happen than others. Issuing bank or confirming bank failing to honor their undertakings can rarely happen if the banks go bankrupt, or sanctions or blacklisting on certain countries gets imposed, or maybe due to some legal battle resulting in court intervention. Failures to honor undertakings by applicant or beneficiary may happen when proper due diligence, and financial evaluation of such customers are not done by the banks before commencing an LC transaction. Thus, always remember letter of credit is a financial liability and thus should always be handled with care.

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Next:    Types of Documents in International Trade