Reimbursing bank
Reimbursing bank - the bank named in a documentary credit (letter of credit) from which the paying, accepting or negotiating bank may request cover after receipt of the documents in compliance, with the documentary credit. The reimbursing bank is often, but not always, the issuing bank. If the reimbursing bank is not the issuing bank, it does not have a commitment to pay unless it has confirmed the reimbursement instruction. The issuing bank is not released from its commitment to pay trough the nomination of a reimbursing bank. If cover from the reimbursing bank should not arrive in time, the issuing bank is obliged to pay (also any accrued interest on arrears)[1].
Bank-to-bank reimbursement arrangements
There are several Bank-to-bank reimbursement arrangements[2][3]:
- If a credit states that reimbursement is to be obtained by a nominated bank ('claiming bank') claiming on another party ('reimbursing bank'), the credit must state if the reimbursement is subject to the ICC rules for bank-to-bank reimbursement is effect on the date of issuance of the credit.
- An issuing bank is not relieved of any of its obligations to provide reimbursement if reimbursement is not made by a reimbursing bank on first demand.
- If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the following apply:
- an issuing bank must provide a reimbursing bank with a reimbursement authorization that conforms with the availability stated in the credit. The reimbursement authorization should not be subject to an expiry date
- a claiming bank shall not be required to supply a reimbursing bank with a certificate of compliance with the terms and conditions of the credit
- an issuing bank will be responsible for any loss of interest, together with any expenses incurred, if reimbursement is not provided on first demand by a reimbursing bank in accordance with the terms and conditions of the credit
- a reimbursing bank's charges are for the account of the issuing bank
Parties to the Letter of Credit
There are several parties to the letter of credit, which are summarized below[4]: There are several parties to the letter of credit, which are summarized below:
- Applicant - the buyer/importer of goods. This person has to make payment of the letter of credit to the issuing bank if the documents are in accordance with the terms and conditions of he LC.
- Issuing bank - the importer's or buyer's bank, which lends its name or credit, is the issuing bank. This bank gets five days to check the documents.
- Advising bank - the issuing bank branch or correspondent in the exporter's country, to whom the letter of credit is sent for onward transmission to the seller or beneficiary, after authentication of genuineness of the credit, is the advising bank.
- Beneficiary - the party to whom the credit is addressed, i.e. the seller, the exporter or the supplier of the goods is the beneficiary.
- Negotiating bank - the bank to which the beneficiary presents the documents for negotiation is the negotiating bank. It claims payment from the reimbursing bank or opening bank and gets five banking days to check the documents.
- Reimbursing bank - is the third bank; t repays, settles or funds the negotiating bank at the request of its principal, the issuing bank.
- Confirming bank - this bank adds confirmation to the credit; it undertakes the responsibility of payment by the issuing bank ad on its failure to pay the confirmation, is added on request of the opening bank.
Examples of Reimbursing bank
- The most common example of a reimbursing bank is a commercial bank that has been nominated by an issuing bank. In this case, the commercial bank is the one that will provide payment to the seller once the seller meets the terms and conditions of the documentary credit.
- Another example of a reimbursing bank is an international organization such as the International Monetary Fund (IMF). The IMF may be nominated as the reimbursing bank for a documentary credit. In this case, the IMF will be responsible for providing the payment once the seller meets the terms and conditions of the documentary credit.
- A third example of a reimbursing bank is a government agency. For example, a government agency may be nominated as the reimbursing bank for a documentary credit. In this case, the government agency will be responsible for providing the payment once the seller meets the terms and conditions of the documentary credit.
Advantages of Reimbursing bank
A Reimbursing Bank provides many advantages, such as:
- Increased flexibility and security for international payments, as the issuing bank does not have to make the payment directly.
- The ability to reduce risk for the issuing bank, as the issuing bank can transfer the risk to the reimbursing bank.
- The issuing bank can also benefit from reduced transaction costs and improved cash flow, as the reimbursing bank will be responsible for making the payment.
- The reimbursing bank can also provide additional services such as advising on foreign exchange rates, making payments in local currencies, and providing credit checks.
- It allows for easier compliance with international trade regulations, as the reimbursing bank can ensure that all documents are in order before releasing payment.
Limitations of Reimbursing bank
The limitations of a reimbursing bank include:
- The issuing bank is not released from its commitment to pay even with the nomination of a reimbursing bank.
- The reimbursing bank may not have a commitment to pay unless it has confirmed the reimbursement instruction.
- If cover from the reimbursing bank should not arrive in time, the issuing bank is still obligated to pay, including any accrued interest on arrears.
- If the documents presented to the reimbursing bank do not comply with the documentary credit, the reimbursing bank may reject the documents and the issuing bank is still obliged to pay.
Apart from being the bank from which the paying, accepting or negotiating bank may request cover after receipt of the documents in compliance with the documentary credit, there are other approaches related to the reimbursing bank.
- It can also provide guarantee for payment to the beneficiary if the issuing bank cannot fulfill its obligation due to insolvency.
- It can also act as a paying bank if the issuing bank has not been able to fulfill its obligation due to its own inefficiency.
- The reimbursing bank can also provide a back-to-back documentary credit facility to the beneficiary. This means that the issuing bank will issue a credit to the beneficiary and the reimbursing bank will issue another credit in favor of the beneficiary.
- The reimbursing bank is also responsible for ensuring the authenticity of the documents presented by the beneficiary and checking their compliance with the terms and conditions of the documentary credit.
- The reimbursing bank can also provide advice to the issuing and negotiating banks on any matters related to the documentary credit.
The responsibility of the reimbursing bank is not limited to providing cover to the paying, accepting or negotiating bank; it can also provide guarantee for payment to the beneficiary, act as a paying bank, provide back-to-back documentary credit facility, ensure the authenticity of the documents presented, and provide advice to the issuing and negotiating banks.
Footnotes
| Reimbursing bank — recommended articles |
| Transferable letter of credit — Shipping guarantee — Documents against acceptance — Advising bank — Collecting bank — Revolving letter of credit — Sea waybill — Contract guarantee — Counter guarantee |
References
- Gupta R.K., Gupta H., (2019), Working Capital Management & Finance, Notion Press, New York.
- Hinkelman E.G., (2010), Dictionary of International Trade, World Trade Press, Brno.
- Luk K.W., (2011), International Trade Finance: A Practical Guide, City University of HK Press, Hong Kong.
- Rose F., (2015), Blackstone's Statutes on Commercial & Consumer Law , Oxford University Press, New York.
Author: Karolina Morga
