Restricted Letters of Credit

Restricted LCs

A Restricted Letter of Credit is where the issuing bank of the LC only lets the customer redeem the LC from a specific bank.

What is the procedure of the beneficiary banks (not a negotiating bank) if there is a restricted Letter of Credit (LC)?

The bank could tell the beneficiary to present documents to the negotiating bank along with instructions. Documents should then be presented to the negotiating bank requesting acceptance (or payment) as outlined by the LC. This would save costs and time.

The reason that costs are saved is that both banks will be familiar with each others process of handling the documents.

Prior to the beneficiary’s bank forwarding the documents through banking channels, they would usually charge fees to perform a document examination service for the beneficiary. This document checking is not strictly necessary.

It is important to mention that the non-nominated bank does not have any extra security or protection. A document examination service could be offered by the bank but if the bank has not included such examination, then it will be a “silent” confirmation and the beneficiary will have limited recourse against such bank. This will include potential problems, such as the dishonour by the nominated bank or even potential loss of documents when they are sent from the beneficiary’s bank. It can also be viewed an advantage if documents are presented through a banker, so that KYC and AML are covered.

The non-nominated bank will not get protection under UCP, but if the documents are credit compliant then they should get paid on the maturity date.

Where can problems occur with Restricted Letters of Credit?

There may be difficulties where the beneficiary’s bank does not have SWIFT authentication arrangements with the opening bank. This is why the opening bank will send the LC to their correspondent in the beneficiary’s country and restrict the LC to that correspondent.

What are examples of Restricted L/Cs?

An LC may be provided which restricts presentation to a client’s bank and allows them to confirm. It may outline that presentation may not be made at any specific banks.

An LC may be restricted to a bank whose London office is the drawee and also the financing and the issuing bank. The beneficiary would deal with the bank and would not maintain their account there, this may be due to the reason that they had wanted to use another bank as the confirming bank due to the better rate they offered.

Another example is a client waiting for an LC from a developing country where there are inherent risks in the transactions. The counter party is from a developed country but the client does not know who the LC will be advised through. It may be that a restricted LC is favoured due to the issuing bank and country risk, along with the infancy of banking networks.

It is often beyond the beneficiary’s control as to which correspondent bank is selected by the issuing bank and why they might restrict it.

Can the bank directly send the documents to the LC issuing Bank without going through the negotiating bank?

Yes. UCP600 sub-article 6a and 6d (ii) – If the primary contract is between the issuing bank and the beneficiary and the nominated bank/advising banks/confirming banks are utilised only for the beneficiary’s benefit. If the beneficiary chooses to forego the services of these additional agents and deal with the issuing bank directly that remains the beneficiary’s prerogative.

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About the Author

Deepesh Patel is Editorial Director at Trade Finance Global (TFG). In this role, Deepesh leads efforts in developing TFG’s brand, relationships and strategic direction in key markets, including the UK, US, Singapore, Dubai and Hong Kong.

Deepesh regularly chairs and speaks at international industry events with the WTO, BCR, Excred, TXF, The Economist and Reuters, as well as industry associations including ICC, FCI, ITFA, ICISA and BAFT.

Deepesh is the host of the ‘Trade Finance Talks’ podcast and ‘Trade Finance Talks TV’. He is co-author of ‘Blockchain for Trade: A Reality Check’ with the ICC and the WTO, alongside other industry research.

In addition to his work at TFG, Deepesh is a Strategic Advisor for WOA, and works closely with ITFA. He also sits on the Fintech Working Group of the Standardised Trust.

Prior to TFG, Deepesh worked at Travelex where he was responsible for the cards business and the Travelex Money app in Europe, NAM, UK and Brazil. Deepesh is Chair of Governors and co-opted LA Governor of the Wyvern Federation, which has responsibility for 5 primary schools in South London.

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