06 December 2007

LC: Negotiation against indemnity

In LC operations, the seller is entitled for payment only against documents in strict compliance of the terms and conditions of the LC. This is the basic principle on which the LC operates. But, it often happens that the documents tendered are not always in conformity with the terms and conditions of the LC. According to a study conducted by the International Chamber of Commerce (ICC), Banking Commission, it shows that two-thirds of presentation of the documents against LC deviate from the terms and conditions of the LC on first presentation. Under this situation, negotiating banks may decide whether:
  • to refuse the request for payment by the seller
  • to pay under reserve to the seller
  • to pay against indemnity from the seller.

It is easy for a bank to refuse to pay against non-confirming documents but this will have negative consequences especially if the seller is a valued customer of the bank. Therefore, banks do negotiate documents against an indemnity from the seller. The bank's decision to negotiate the documents against an indemnity is dependent mainly upon evaluation of the credit risk of its customer. When negotiating documents against indemnity, the discrepancies in the documents are listed in bank's standard indemnity form and executed by the seller. By doing so, the seller has full knowledge and aware of the discrepancies, possibility of rejection by the issuing bank and his obligation to refund the negotiating bank in the event the issuing bank refuses to take up the documents and pay the negotiating bank.

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