What are Confirmed and Unconfirmed Letter of Credits

Confirmed and Unconfirmed Credits. When a letter of credit is advised to the beneficiary through a bank in the beneficiary’s country, it may request the other bank to add its confirmation or merely advise the credit to the beneficiary without adding its confirmation. If the advising bank adds confirmation to the credit, it becomes a confirming bank and the credit a confirmed credit.

Confirmation is a definite undertaking of the confirming bank, in addition to the undertaking of the issuing bank, to accept and/or pay bills or make payment (without bills) provided the terms and conditions of the credit are satisfied (Article 9). When the advising bank confirms a credit, it undertakes to negotiate bills drawn under the credit without recourse to the drawer.

Normally, all confirmed credits are also irrevocable letters of credit. It is so because no bank in the exporter’s country would be willing to undertake a liability on a revocable credit on which there is no definite undertaking by the issuing bank.

A confirmed irrevocable credit is the best form of credit available to the exporter  as it has following added advantages:

(a) It insures the exporter not only against the failure of the importer but that of the issuing bank also. Though a letter of credit bears the superior credit of a bank in the importer’s country, the exporter may not know the financial standing of the issuing bank. When the credit is confirmed by bank which he knows well he is more secure.

(b) It also haves the beneficiary from changes in government policies, or disturbances in the political situation of the importer’s country. Irrespective of these changes the beneficiary is assured of payment by the confirming bank.

When the advising bank does not add its confirmation, but merely forwards the credit to the beneficiary, the credit remains unconfirmed. The advising of the credit through a bank serves in such a case to get the signature of the issuing bank on the credit authenticated by the advising bank. There is no additional undertaking  by the advising bank.

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