Claiming Standby LC Issue

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Posted by: Crazy7 Apr 15 2004, 09:32 AM

I am a junior banker. I grant a loan to a corporate which is secured by “A” Bank’s standby LC in Hong Kong. Due to our operation dept’s oversight, the due date of the loan (15Jun04) is longer than the expiry date of “A” Bank’s standby LC (10Apr04) during the loan rollover.

In late Mar04, I advised “A” Bank to extend the standby LC to cover our loan tenor, but I didn’t receive the extension. Then, I claimed the standby LC via cable (SWIFT) on 09Apr04, the last date before the standby LC expired. At the same time, I also sent a demand letter to the corporate, as the firm couldn’t repay the loan either. Today, “A” Bank told me that the claim was invalid, because they didn’t receive requested documents from me via Courier (there is such wording in the standby LC but didn’t mention what kind of documents should be represented and before which date).

To me knowledge, I can claim the standby LC via SWIFT with no need to represent anything. Is this claim really invalid as “A” bank said? Should I really have to represent “some” documents such as the loan agreement to “A” Bank before LC’s maturity date? How should I deal with the situation?

I really need a help on this asap. Appreciate your any input.

Posted by: loanuniverse Apr 15 2004, 11:29 AM

I wish I could help you, but the question is operational in nature and not credit related. I just don’t see how the loan administration department extended the credit up until that date without an approval. While I do not know all the details, it looks to me as if this was a problem in the way the facility was structured. Now let me give you some feedback that will probably not be of much use to you, but might help other bankers trying to get their feet into international finance. { take into consideration that my expertise in international financing is limited, and that I have been doing domestic loans without a letter of credit component for a couple of years so I am a little rusty }.

1 You are probably out of alternatives in your situation. If the LC required the claim/draw to be made by courier, you have to do it by courier.

2 It is best to require that letters of credit are drafted in a way that they allow SWIFT claim/draw.

3 According to my friend that knows more about international financing that I do, the issuing bank has 7 days to review the documentation, which means that they can come back to you on the seventh day and ask you to resubmit.

4 It is best to give yourself thirty days of cushion between the maturity of the loan and the maturity of the LC.

5 It is also good practice to have the LC confirmed by a strong US based bank.

6 Obviously the credit decision was done because of the additional comfort provided by the LC. I think is time to reconsider the situation and at the very least downgrade the loan to watch or special mention. If this is your loan, being proactive is better than having “loan review”, “credit” or even worst “the regulators” do it for you.

7 It is time to consider going to your borrower and getting additional collateral to mitigate this.

8 The claim/draw is usually a very detailed document that has to reference the verbiage in the LC and sometimes it requires a draft and a signature attached.

9 Most importantly, you need to go talk to your international department about this situation and get their help. While I think that you are in trouble, there might be a way that this can be salvaged. This just isn’t my area of expertise.

Sorry I could not be of more help. I just write the credit, I don’t monitor it.
Author: Commercial Loan Underwriter