TRADE FINANCE FOCUS ON : Export Bills For Negotiation

Export Bills Negotiation

Export bills negotiation is payment (with or without recourse) or acceptance made under documents presented under Documentary Credit subject to Uniform Customs and Practices for Documentary Credits ICC publication No 500 of 1993.

The definition of terms and current commercial practices shall apply to all Documentary Credits (including to the extent to which they may be applicable, Standby Letter(s) of Credit) where they are incorporated into the text of the Credit. This practice is to be adopted by all parties involved, unless otherwise stipulated in the Credit. Clerks/ bank officers who are responsible for the checking and processing of documents under Documentary Credits must be familiar with these rules.

Types of Credit

When documents drawn under a Documentary Credit are submitted to the Bank, the utilisation of this Credit may have various aspects, depending on the conditions of availability of the Credit.

Provided the documents are in strict compliance with the Credit terms and conditions, the position of the negotiating bank  will be as follows :

a) Credit available by payment

If advised and confirmed by the negotiating bank, negotiating bank must honour the documents/drawings upon presentation of complying documents and pay the beneficiary without any recourse.

If advised by the negotiating bank but not confirmed, negotiating bank may refuse to pay if the opening bank appears to be a “high risk”. If negotiating bank eventually accept to honour the documents/drawings, negotiating bank payment will be made without recourse.

If the Credit is valid at the counter of another bank (whether advised by negotiating bank or not), documents are not to be paid by negotiating bank but by the bank nominated in this Credit. They can only be treated by negotiating bank on a collection basis and presented to that bank. If that bank agrees to pay, this payment must be clean and will not be subject to any recourse.

b) Credit available by acceptance

If advised and confirmed by negotiating bank, negotiating bank must accept the draft upon presentation and advise maturity date. The draft is retained by negotiating bank and negotiating bank shall be responsible for the payment on maturity. The payment on due date or any advance granted to the beneficiary by way of discounting is made without recourse.

If the Credit is valid at the counter of another bank, that bank only is supposed to give the acceptance on behalf of the opening bank. If documents are presented to negotiating bank, negotiating bank must forward them to the bank nominated in the Credit, for acceptance and upon their acceptance, negotiating bank may discount the draft, without recourse to the drawer, if the sole liability of the accepting bank is an acceptable risk.

c) Credit available by negotiation

Unless it is confirmed by negotiating bank, a Credit which has been issued valid by negotiation only carries the issuing bank’s commitment to pay. Any advance made by a negotiating bank is subject to the receipt of the final payment.

Negotiating a bill drawn under a Credit confirmed by negotiating bank and made valid by negotiation at negotiating bank counter is granting an advance to the beneficiary, pending receipt of payment from the opening bank or its reimbursing agent if any. Such a negotiation is made without recourse to drawer.

Classification of Export LC Documents

Documents received for negotiation will be classified into the following bill categories and processed accordingly depending on whether financing is required by the customer:

a. Export Bills for Collection

Clean documents (without discrepancies) and/or discrepant documents presented for which the exporter does not require us to finance the bill. The documents will be sent on approval basis. The exporter will only be paid upon receipt of reimbursement claim (if applicable) and/or bill proceeds from the remitting bank. The bill will be processed as a collection bill under Export Bills for Collection.

b. Export Bill Purchased

The bill will be discounted under customer’s limit with recourse where the exporter requires financing for documents presented under the following circumstances:

i) Negotiation of clean documents where there is no approved bank’s limit for the LC issuing bank.

ii) Discrepant documents presented.

Upon purchase, the bill amount will be advanced to the customer/beneficiary and interest will be collected in arrears/advance as applicable for the period till the bank received reimbursement. The bill will be processed as Export Bill Purchased.

c. Export Bills Negotiation

Where the bank negotiate documents and are prepared to finance the exporter under the LC issuing bank’s limit. The bill will be processed as an Export Bill Negotiation.

Situations for Checking of Documents

In all the above cases checking of documents is required except for the following situations:

- Where negotiation is restricted to a local bank.

- Where finance is not required and the customer specifically requests that the documents be sent to the issuing bank for approval and payment.

Checking Documents against the Credit

Bank officers shall examine all documents with reasonable care to ascertain that the terms and conditions are in compliance with the Credit( UCP 500 (now will be 600) and International Standard Banking Practice).

Any discrepancies found must be recorded on the Scrutiny Sheet.   

Bank officers will then inform the Scrutiny sheet listing the discrepancies to beneficiary for their notification and further correction.

Handling Discrepant Documents

Where shipping documents do not comply with the LC terms, customers should be contacted immediately either for correction of documents or further handling instructions. The following alternative ways for handling discrepant documents:

a) Return the documents to the beneficiary for correction and re-submission.

b) Accept the beneficiary’s indemnity and negotiate under reserve

c) Swift Issuing Bank for authority to negotiate despite the discrepancies listed

d) Send documents on collection basis under LC.

e) Return document to the customer, if requested by them.

In case where the documents have to be returned to the customer for correction or cancellation, all “bank” stamps and endorsements, if any, on the documents should be cancelled/endorsed before they are released to the customer who should acknowledge receipt of the returned documents.