Role of an issuing bank in a Letter of Credit

  1. What is an issuing bank in a Letter of Credit (LC)?
    • An issuing bank is the bank that opens a Letter of Credit on behalf of the buyer (importer). It undertakes to make payment to the beneficiary (seller/exporter) upon presentation of compliant documents.
  2. What are the responsibilities of the issuing bank in a Letter of Credit transaction?
    • The issuing bank is responsible for issuing the LC in accordance with the buyer’s instructions, verifying the documents presented by the beneficiary, and making payment if the terms of the LC are met.
  3. How does an issuing bank evaluate the creditworthiness of the buyer?
    • The issuing bank may assess the creditworthiness of the buyer before opening a Letter of Credit. This evaluation involves reviewing the buyer’s financial history, business reputation, and ability to fulfill payment obligations.
  4. Can an issuing bank amend a Letter of Credit after it has been issued?
    • Yes, an issuing bank has the authority to amend the terms of a Letter of Credit. However, any amendments must be agreed upon by all parties involved, including the buyer, seller, and confirming bank if applicable.
  5. What is the role of the advising bank in relation to the issuing bank?
    • The advising bank is an intermediary that informs the beneficiary about the issuance of the LC by the issuing bank. It does not assume payment obligations but plays a crucial role in facilitating communication between parties.
  6. Can the beneficiary choose the issuing bank in a Letter of Credit transaction?
    • The issuing bank is typically chosen by the buyer, as it is the buyer’s bank. The beneficiary may suggest a specific bank, but the final decision rests with the buyer.
  7. How does the issuing bank protect the interests of the buyer in a Letter of Credit transaction?
    • The issuing bank ensures that the terms and conditions of the Letter of Credit align with the buyer’s instructions. It also verifies the documents presented by the beneficiary to confirm compliance before making payment.
  8. What is the difference between a confirmed and unconfirmed Letter of Credit from the perspective of the issuing bank?
    • In a confirmed Letter of Credit, a confirming bank adds its commitment to pay, providing additional assurance to the beneficiary. In an unconfirmed LC, the issuing bank’s obligation is standalone, without the involvement of a confirming bank.
  9. How does the issuing bank handle discrepancies in documents presented by the beneficiary?
    • The issuing bank examines the documents presented by the beneficiary and may reject them if discrepancies are found. The issuing bank then works with the buyer and beneficiary to resolve the issues.
  10. Can an issuing bank refuse payment under a Letter of Credit?
    • An issuing bank is obligated to make payment if the beneficiary presents documents that comply with the terms of the LC. However, if there are discrepancies or issues, the issuing bank may work with the parties involved to find a resolution.

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