What is discrepant LC?
Many suppliers ask their importers for arranging a letter of credit. This can be considered as a payment guarantee from the importer’s bank. It is intended for ensuring that the seller can ship the consignment and is confident that the importer will pay for the consignment being shipped later.
But the LC payment guarantee is somehow conditional and rely on specific documents that has to be provided by a given date. An LC becomes a discrepant LC if the supplier fails to meet the mentioned deadline or provides documents which as not relevant enough as per the specified ones. Each failure is termed as a discrepancy.
I am an exporter. The LC is discrepant. What happens?
This is a usual condition that and also quite normal.
Some banks, even experiences high percentage of discrepancy rates on the LCs that they have to process. The typical reason behind this is that LCs might have involvement of complex conditions involving for the provision of many documents being produced by certain parties within short timeframes.
A discrepant LC is not a big thing, generally occurs. These are some important principles:
- The LC issuing bank is not supposed to waive discrepancies without any consent from the buyer.
- It is considered best to pre-clear the discrepancies before actually presenting documents under the LC.
- Overall the bank has to control the process, but it is practically best if the seller and the buyer sort out the related issues amongst themselves and then further clear the banks instructions.
Below mentioned three things can happen:
- The importer provides instructions to the bank for accepting the discrepancies. The supplier gets paid and the importer gets the required documents for the customs procedures.
- The importer provides instructions to the bank for offering a lower price. The seller’s bank has to accept this price and then further the exporter gets paid and the buyer is provided with required documents.
- If the importer does not agree or the seller rejects the offered terms, then the importer’s bank tends to send the documents back to the seller’s bank. In case the LC is properly organised, such a situation will surely prevent the buyer from the collection of commodities so the supplier can recover them.
So the exporter has to trust the buyer?
Yes, for sure. A letter of credit which is discrepant will no longer includes any kind of active obligation that has to be paid. However, it has turned within a documentary collection.
Is a discrepant LC worth anything?
Yes. Trade examples shows that LCs might fail when the communication between the importer and the seller has broken down, or even if the importer has changed the mind on the related transaction.
The LC provides certain protections, even if they are discrepant:
- Buyer is not provided with the original shipping documents unless the exporter is being paid. This prevents the exporter from credit risk.
- For organising the letter of credit the importer has committed his time, money and other resources which demonstrate a commitment towards the purchase order along with a validation for the involved parties that the purchase order is genuine and real.