Issuing Bank

On this article you can find the definition of an issuing bank, its roles and responsibilities in a typical letter of credit transaction.

Letters of credit transactions are started and ended by issuing banks.

An issuing bank negotiates with the applicant to draft the letter of credit, determines the conditions for payment, issues it in swift format and transmits it to the advising bank.

Advising bank, confirming bank, nominated bank are all selected by the issuing bank, as well. Additionally, payment or refusal decision is given by the issuing bank, at the end of the transaction.

Issuing bank sits on the core of letters of credit and today, we are going to understand, why.

Let me start my article with the definition of the letter of credit:
the definition of an issuing bank, its roles and responsibilities in a typical letter of credit transaction.
Issuing Bank
According to letter of credit rules, letter of credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

The same rules define issuing bank is the bank that issues a letter of credit at the request of an applicant or on its own behalf.


Roles of the Issuing Bank:

Roles of the Issuing Bank
Issuing banks are key players in letters of credit. Some of their roles can be summarized as below:
  1. Drafting the letter of credit: Issuing banks gather required information from applicants via "Letter of Credit Application Forms" and "Proforma Invoices" to draft letters of credit. At this stage issuing banks not only determine the structure of the letters of credit, but also name the banks and their roles such as advising banks, nominated banks, confirming banks, reimbursing banks etc.
  2. Issuance of the Letter of Credit: After gathering necessary data, issuing banks issue letters of credit. By doing so, they declare that they will comply with the letter of credit rules, laws and regulations, both domestic and international.
  3. Checking the Presentation: Issuing banks check the documents presented by beneficiaries, in order to determine whether presentation is compliant or not. 
  4. Payment or Returning Documents: Issuing banks have the last word in a letter of credit transaction. If documents found to be complying, then issuing banks must pay. If documents are not complying, then issuing banks get in touch with applicants to clear the discrepancies. If applicants accept documents with discrepancies, issuing banks have two options: pay or return of the documents to beneficiaries. 
Responsibilities of the Issuing Bank:

Letter of credit rules define main responsibilities of the issuing bank as below:
  1. An issuing bank is irrevocably bound to honour a complying presentation as of the time it issues the letter of credit.
  2. An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. 
  3. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. 
  4. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary.
  5. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by sight payment, deferred payment or acceptance with the issuing bank
  6. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by sight payment with a nominated bank and that nominated bank does not pay.
  7. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity.
  8. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity.
  9. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by negotiation with a nominated bank and that nominated bank does not negotiate.
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