Hi LC expert. After advice of payment at maturity issuing bank received from presenting bank the following communication: ' We have received your advice of acceptance with maturity date january 15, 2009. The beneficiary has approached us (presenting bank) to inquire if you (issuing bank) would be willing to discount the amount due prior to maturity. Kindly advice if you would be willing to pay the item prior to maturity and any related fees.'
What kind of choice do you suggest to issuing bank?
What are issuing bank risk?
Your opinion is highly appreciated.
Discount of acceptance period
As an issuing bank of an L/C available by acceptance with themselves they would be relying on the applicant to reimburse the bank at maturity and would probably be holding collateral to secure this obligation. The usual method would be to block an operating line for the L/C amount at time of issuance to ensure that sufficient facility is available to effect payment at maturity.
This is very common and discounts of this nature happen daily. Payment to the beneficiary would be on a discounted value using the following formula:
Acceptance amount ($) X number of days from date of discount to maturity date X interest rate divided by 360 X 100
For example if the accetpance was for $100,000 and there were 95 days left of the acceptance period and the interest cost was 6%p.a. then the calculation would be:
100,000 X 95 X 6 Divided by 360 X 100 = $1,583.33
Take this figure from the face value and you get net proceeds of $98,416.67 which is the amount that you would pay to the beneficiary.
There are no additional risks to the issuing bank. As long as they can obtain reimbursement from the applicant at maturity all is OK and this would be the case whether the acceptance was discounted or not.
It is also an opportunity for the issuing bank to make additional income on the transaction by charging a discount "fee" or an extra margin over the cost of funds in the discount calculation.