Part three: Responsibility of the issuing bank

The issuing bank, as mentioned in the previous post, is a bank which issues the LC at the request and on the instruction of the buyer. The issuing bank, in most cases is the bank of the buyer where he maintains banking relationships. Prior to giving the instruction to issue the LC, buyer and seller had concluded a sales agreement or contract and agreed to settle the trade payment using LC.

In the LC operations, other than the buyer, seller and issuing bank, there are other banks involved such as advising bank, nominated bank and in some instances, confirming bank. The issuing bank is the ‘anchor’ bank, the last bank in the line of banks, which holds the definite undertaking to pay and the final destination where the documents must reach, before they fall in the hand of the buyer.

The main responsibility of the issuing bank is to make payment, either directly to the seller or to reimburse the bank which had made the payment to the seller.

The seller, upon shipment of the goods, presents the documents to his bank. His bank may or may not pay him for the value of the documents depending on whether or not his bank is expressly nominated by the issuing bank to make payment. Even if his bank is expressly nominated by the issuing bank to make payment, this does not mean that his bank holds the ‘definite undertaking’ to pay. Meaning, his bank may refuse to pay and send the said documents to issuing bank for payment. Upon receipt of the same, the issuing bank will examine the documents to ensure compliance. When the issuing bank is satisfied, payment will be remitted for the credit of the seller’s account via his bank.

If, however, the seller’s bank agrees to make payment against the documents to the seller, the seller’s bank will credit the amount into his account. The documents than, will be sent to the issuing bank for final examination. Upon receipt of the said documents and in compliance with the terms and conditions of the credit, the issuing bank will remit the payment for the credit of the seller’s bank, being reimbursement of the amount paid to the seller.

In any event, either the nominated bank pays to the seller or not, the issuing bank must honour its undertaking to pay provided that the documents are in compliance with the terms and conditions of the credit. The issuing bank is also responsible to examine the document within the stipulated time to decide whether or not the documents are in compliance.

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