Advising bank and its role in LC
What is an advising bank in a Letter of Credit (LC)?
- An advising bank in a Letter of Credit is a bank that informs the beneficiary (seller/exporter) about the issuance of the LC by the issuing bank. It acts as an intermediary, ensuring that the beneficiary is aware of the terms and conditions of the LC.
- Why is an advising bank required in a Letter of Credit transaction?
- The advising bank plays a crucial role in reducing the risk for both the buyer and the seller. It verifies the authenticity of the LC, provides guidance on its terms, and facilitates communication between the involved parties.
- What are the responsibilities of the advising bank in a Letter of Credit process?
- The advising bank authenticates the LC, checks for discrepancies, and advises the beneficiary on the terms. It may also forward documents to the issuing bank and, in some cases, confirm the LC.
- Can the beneficiary choose the advising bank in a Letter of Credit?
- In many cases, the beneficiary can suggest an advising bank. However, the final decision often rests with the issuing bank, which may choose an advising bank with which it has correspondent relationships.
- What is the difference between an advising bank and a confirming bank in a Letter of Credit?
- While an advising bank simply informs the beneficiary of the LC, a confirming bank adds its confirmation to the credit, thereby assuming the obligation to pay if the conditions of the LC are met.
- How does the advising bank get compensated for its services?
- The advising bank typically charges a fee for its services, which can be negotiated between the bank and the beneficiary. The fee may vary based on the complexity of the transaction and the services provided.
- Can an advising bank refuse to advise a Letter of Credit?
- Yes, an advising bank has the right to refuse advising a Letter of Credit. This decision may be influenced by factors such as the bank’s policies, the credibility of the issuing bank, or the specific terms of the LC.
- What should the beneficiary do upon receiving advice of the Letter of Credit?
- The beneficiary should carefully review the terms and conditions of the LC to ensure they can be met. If there are discrepancies or issues, the beneficiary should communicate promptly with the advising bank.
- Is the advising bank obligated to pay under the Letter of Credit?
- No, the advising bank is not obligated to pay under the LC. Its primary role is to advise and authenticate the LC, but it does not assume the payment obligation unless it also confirms the credit.
- Can the advising bank also be the confirming bank in a Letter of Credit transaction?
- Yes, a bank can act as both an advising and confirming bank. In such cases, it provides comprehensive services, including authenticating the LC and adding its confirmation to enhance the beneficiary’s payment security.