Confirmation commission

shahriar · Post by **shahriar** » Mon Jul 06, 2009 7:49 pm

Dear Friends,

What is the usual practice for charging confirmation commission on a deferred payment LC? say a LC is available at 180 days sight and expiry date is 90 days from the date of issuance. whats the duration for confirmations charge here? 90 or 270?

regd
shahriar

picant · Post by **picant** » Mon Jul 06, 2009 9:01 pm

Hi Shahriar

We are used to debit confirmation charges from issuing to the expiry date(90 days in your case)
then acceptance/deferred payment commissions from availment to payment date(180 days in your case)
Confirmation charges will cover an eventual risk and a bank could reject documents or retain it as guarantee, but acceptance/deferred payment commissions should be higher as, by delivering documents, and goods, indeed, you renonce to this guarantee and your is blank credit.

Hoping to have been clear.

Ciao

MMM · Post by **MMM** » Thu Jul 09, 2009 6:30 pm

Hi

Confirmation commission based on bank's policy ie some banks calculate it upon add its confirmation on the LC till maturity date and some banks based all validity of LC

MM
CDCS

Md.zakir Hossen · Post by **Md.zakir Hossen** » Thu Jul 09, 2009 9:47 pm

I always found confirmation commission/Charges up to expiry date of the Credit.
Some times I also think about confirmation charge up to due date/acceptance date.
But I think it is not acceptable to count confirmation charge up to due date.Because confirmation is on L/C not on Banks Acceptance.
In real case I never found confirmation on Banks Acceptance.

nesarul · Post by **nesarul** » Thu Jul 09, 2009 11:23 pm

Dear Zakir vai,
Did u remember the exact date on which you posted any answer or topic in this forum. i think you cannot ...... because its too long to recall. we expect at least one posting from your side.
Let analysis an issue from another angle:[pls disregard it if going into wrong track]
while confirming a credit confirmer usually take the following risk: documentary risk, country risk, bank risk.
country risk and bank risk are weighted before taking expouser through setting a limit. the remaining risk i.e. documentary risk has actually been completed while beneficiary complying presentation occurred [implied indication in sub article 7(a) and 8(a).
consequently, confirming charge should be for expiry period not form thereafter.....
pls be confirmed that this is solely my own thought which has arisen from the query. i have no beck up[authentic source] for it.
regards
nesar

shahriar · Post by **shahriar** » Fri Jul 10, 2009 9:53 am

Thank you all for you nice answers

nesarul wrote:Did u remember the exact date on which you posted any answer or topic in this forum. i think you cannot ...... because its too long to recall. we expect at least one posting from your side.

agree with brother nesar.

about the original question, in recent days for a deferred payment letter of credit, we are frequently asked for three types of charges -
1. confirmation commission
2. acceptance commission
3. discounting charges / interest

as far as my bank is concern, we charge commission for this LC in two stages,
1. Issuing commission at the time of issuance of the credit
2. acceptance commission at the time of issuing deferred payment undertaking.

i believe no. 2 is justified as there is still liability for the bank over the usance period.

more comments appreciated

Md.zakir Hossen · Post by **Md.zakir Hossen** » Fri Jul 10, 2009 4:52 pm

Honestly Speaking
When I get time I saw the posting.Actually I was a free rider of the forum
So busy with my child that it is difficult to ....
However again I will see your good posting here
Thanks Shahria and Nesar and every body for good comment.

jmitra · Post by **jmitra** » Wed Jul 22, 2009 8:44 am

This ICC opinion may help
399

The confirmation period is from the time of adding the confirmation until the expiry date. The Usance period is a reimbursement condition.

ajoy · Post by **ajoy** » Wed Jul 22, 2009 3:07 pm

Dear All,

Confirmation commission is to cover the service provided by CB.. covering country riskand /or Bank risk for the bene.

Therefore does the Cb run the same risk in the below two cases:

Case 1 : LC Amount X dollars
Expiry date 10 July 2010
Country of Issuing bank /Applicant : country Y
Tenor Sight
Issuing bank Bank Z

Case 2: LC Amount X dollars
Expiry date 10 July 2010
Country of Issuing bank /Applicant : country Y
Tenor 180 days from B/L date
Issuing Bank Bank Z

In the above cases everything is identical - country of issuance , Issuing Bank, amount etc except for tenor.

When you confirm the above LC is the risk to confirming bank same? Does the risk run for the same period?

I think it is not... i.e

For negotiation LCs the liability of a negotiating bank and a confirming bank is not the same for a usance LC.

For an acceptance LC If you are not a Confirming bank you should not accept drafts under an LC or charge to cover your additional risk. Once you accept a draft you become as liable as a confirming bank in the same situation.

Hence the resaon why banks take confirmation commission after including the usance period?

Comments welcome

Ajoy

jmitra · Post by **jmitra** » Thu Jul 23, 2009 9:17 am

dear ajoy,

good answer and its not that i dont agree with you. but its not the country risk that all its matter. there are other risks for the confirming bank including wrongful dishonor of the issuing bank. in fact country risk is the least one i think. thus one a bill has been accepted by the issuing bank, there is no reason to charge the same

Judith · Post by **Judith** » Thu Jul 23, 2009 9:40 am

jmitra wrote:This ICC opinion may help 399

The case referred to was a specific reply to a particular credit which included the following:
"Usance drafts shall be negotiated at sight basis regardless of the tenor of the draft...Please reimburse yourselves from BBB bank at the time of negotiation."

Even though the LC was a usance LC, the confirming bank was to negotiate and claim reimbursement at sight basis. For all practical purposes, it was a sight LC.

From my understanding, confirmation fee is charged on account of the following risks:
- risk that the issuing bank will not pay
- country risk of the issuing bank
Neither of these risks are mitigated on receipt of the issuing bank's acceptance.

So, in my opinion, it is reasonable to charge confirmation fee for the usance period also.

Other comments appreciated.

ajoy · Post by **ajoy** » Thu Jul 23, 2009 10:24 am

Hi Mitra

good answer and its not that i dont agree with you. but its not the country risk that all its matter. there are other risks for the confirming bank including wrongful dishonor of the issuing bank. in fact country risk is the least one i think. thus one a bill has been accepted by the issuing bank, there is no reason to charge the same

Judith has summed up the issue nicely including the ICC opinion.

It was not my contention that country risk is the only issue. That's why my example mentions identical IB besides identical country etc.....

To take up your statement in italics above : Even when an Issuing Bank has accepted the draft it may still be unable/unwilling to pay on due date. Therefore the risk on Issuing bank is still there till actual payment is made.

(BTW, I do agree that non payment due to country risk is rare but when it happens it can hurt CBs really bad. Example Recall the SE Asia crisis . Many banks in Australia had confirmed a number of LCs from SE Asia. When the crisis happened the CBs took a massive hit from a large number of these LCs simultaneously.)

As for Confirmation charges :

It is upto a bank to charge confirmation commision only till acceptance if they want.

But they are well within their rights to charge for the usance period also from date of expiy date/date of acceptance of docs to date of final maturity to compensate for the additional risk /responsibility arising from confirmation.

I would prefer charging confirmation commison upfront for the usance period also as it may be hard to recover if no docs are submitted under LC or discreapnt docs are submitted. Because even when LC expires unutilized there is still an opportunity cost involved here for CB.
Cheers.