Negotiation Credit. A negotiation credit is one which contains an open invitation to banks to negotiate documents under the credit. The issuing bank undertakes to honor on presentation the drafts drawn and negotiated in conformity with the terms of the credit.
In a negotiation credit the documents are accompanied by a sight draft (bill of exchange). The bill of exchange may be drawn on the issuing bank or any other bank stipulated in the credit. The bank which negotiates documents under the credit pays the amount to the beneficiary who tenders the documents. The negotiating bank is reimbursed by the issuing bank.
In certain cases the issuing bank may restrict the negotiation of documents under the credit to a specified bank in the exporter’s country. Such credits are known as restricted letters of credit.
Payment Credit. A payment credit provides that payment will be made to the beneficiary against the documents to be submitted by him. The documents are not accompanied by a bill of exchange; if there is one, it is drawn on the paying bank. In certain countries even sight drafts attract stamp duty. To avoid stamp duty the parties may agree for a payment credit.
In a payment credit the issuing bank nominates a bank in the exporter’s country as the paying bank. If the paying bank accepts its nomination, its position is that of an agent of the issuing bank. When the documents under the credit are presented to it, it pays to the beneficiary. It gets reimbursement from the issuing bank for the amount paid.