In order to help the reader understand the steps taken in a letter of credit transaction, the following is a brief description of the parties most commonly involved in letters of credit.
Accepting Bank
The bank named in a letter of credit on whom term drafts are drawn and who indicates acceptance of the draft by dating and signing across its face, thereby incurring a legal obligation to pay the amount of the draft at maturity.
Advising Bank
A branch or correspondent bank at or near the domicile of the beneficiary, to which the issuing bank either sends the letter of credit, or a notification that a letter of credit has been issued, with instructions to notify the beneficiary. The advising bank advises the beneficiary of the letter of credit without engagement.
Applicant
The buyer or the party who requests the letter of credit to be issued.
Beneficiary
The seller or the party to whom the letter of credit is addressed.
Confirming Bank
A bank usually in the country of the beneficiary which, at the request of the issuing bank, joins that bank in undertaking to honour drawings made by the beneficiary, provided the terms and conditions of the letter of credit have been complied with.
Discounting Bank
A bank which discounts a draft for the beneficiary after it has been accepted by an accepting bank.
Drawee Bank
The bank named in the letter of credit on whom drafts are to be drawn.
Drawer
The beneficiary of the letter of credit who will draw the draft in accordance with the terms of the letter of credit.
Issuing Bank
The bank which opens a letter of credit on behalf of the applicant and forwards it to the advising bank for delivery to the beneficiary.
Negotiating Bank
Usually the beneficiary’s bank which, after satisfying itself that the documents conform with the letter of credit, agrees to purchase the draft (pay the beneficiary).
Paying Bank
The bank named in the letter of credit where drafts are to be paid. It is not necessarily the issuing bank, but often a branch of the issuing bank or its correspondent. Once drafts have been paid or accepted by the paying/drawee bank, there is no recourse to the drawers.
Reimbursing Bank
The bank authorized by the issuing bank to reimburse the drawee bank or other banks submitting claims under the letter of credit.
