Drafts …. my worst LC nightmare!


A real challenge for me is to keep my writing short. For this blog post there is a real risk that it will be very loooong. Too Loooong. I have promised myself that this must not happen … so please stop me after 200 words….

 

The topic that may give birth to far too many words - is drafts … or perhaps rather the “bill of exchange.” I cannot count the endless discussions I have witnessed (but only seldom have taken active part in) regarding drafts in LCs.

 

My favourite story about drafts is when I presented documents to a confirming bank in Germany, and they refused because the LC number was not mentioned on the draft. I told them 1) that you cannot refuse based on the absence of an LC number, and 2) you cannot refuse a presentation under an LC based on the draft.

The reply from the confirming bank was: “We know that, but the issuing bank (in India) does not.” I had many laughs about that one that summer.

Manily because I felt sure that I was right. For the issue of the LC number I think that I am right … but for the issue of whether or not a refusal can be made based on a draft I think that over time I am less and less right. With the new ISBP 745 …. My level of being right is so small that I am technically wrong ….

 

Let me explain:

 

ISBP 745 paragraph B1 (b) reads:

 

“Banks only examine a draft to the extent described in paragraphs B2-B17.”

 

This does sound mostly harmless …. But if you read paragraph B2 through B17 you will find that this covers mostly every single aspect of a draft i.e.:

  

The tenor

The maturity data

Banking days

Grace days

Delays in remittance

Drawing

Signing

Amounts

Endorsements

Correction and alteration

 

Since the banks will examine these issues, then logically these issues may be the basis for a refusal of the full presentation under the LC. So: a refusal can in fact be based on drafts!

 

My second favourite story about drafts is from I just started working in an LC department in a bank. I received the documents under the issued LCs. Together with the documents was two small “slips” of paper. I asked a more experienced colleague what that was. The answer: “drafts.” I said: “Okay – what is it – and what to do with it.” The answer: “never mind just attach it to the forwarding schedule and keep it in the file. We do not look at it.”

Of course the LCs that we issued called for drafts (!!) – but the drafts were never ever examined!

 

Is there morale to the story? Yes there is – here goes:

 

I accept fully that drafts/bills of exchange may play an important role in a transaction – even a transaction covered by an LC. However, in most cases it is my impression that the draft is required by the bank (i.e. not the applicant), and has no real function to the transaction – and effectively is NOT being used.

 

An LC should ONLY include documents and requirements that are important to the transaction – because otherwise the presentation may be refused based on a document of no real value to the commercial parties or the transaction.

 

Since it is now made clear in ISBP 745 that a refusal may be made based on a draft, then drafts should ONLY be required in an LC when it has a real function to the transaction.

 

I repeat: Drafts should ONLY be required in an LC when it has a real function to the transaction!

 

I repeat: Drafts should ONLY be required in an LC when it has a real function to the transaction!

 

In other words: when a bank is about to issue an LC that requires drafts, I beg that the LC officer stop – take a deep breath – and think: “Why do we call for drafts. What is the purpose?” If there is no good answer, then do not call for the draft.

 

I repeat: If there is no good answer as to why you call for drafts, then do NOT call for drafts.

 

Take care of each other and the LC!

 

Kim

 

Ps. Hmmm that was 728 words … why did you not stop me?

 



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  • Ulrich Zeuss on 2013-05-22 01:16pm
    Well, German banks usually mark advising letters that sight drafts drawn on advising German banks are not required. For China, the drafts have for the issuing bank the function of payment receipt, seldom as financing instrument due to the main tenor at sight. I am often confused being asked to issue LC's with tenor negotiation at sight without using drafts which causes trouble in the SWIFT mandatory field functions.I learned, there is nothing which does not exist in LC's world based on participants visions.

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LCViews - Drafts …. my worst LC nightmare!