Will the issuing bank be responsible to the negotiating bank for any loss of interest

Under Article 19 (D) the issuing bank will be responsible to the negotiating bank for any loss of interest if reimbursement is not provided on first demand. Our presumption is that the negotiating bank should look to the issuing bank and not the beneficiary of the credit for reimbursement of loss of interest if their claim is not honored on first demand.

Article 19 (D) of UCP provides that the opening bank shall pay interest for the delay if the negotiating bank is not reimbursed on the first demand. The right of the negotiating bank to claim interest from the opening bank arises if the documents tendered under the letter of credit are in order and the reimbursement is claimed before the L/C is expired.

In case of usance bills, apart from a bill of exchange that may be drawn separately for interest portion, if so provided in the L/C, claim for interest may arise if the reimbursement is not made on the due date.

The right to claim interest for delayed payment from the opening bank does not affect the right of the negotiating bank as against the beneficiary. Further the provisions of UCP are subject to specific agreement between the parties. Generally , when a bank negotiates a bill under a letter of credit, the understanding is that the beneficiary will pay interest at the stipulated rate from the date of negotiation to the date of reimbursement.

In fact for delay in reimbursement beyond due date overdue interest at penal rate is recovered from the beneficiary, as per the directives  of RBI on interest rates.

Generally, for delay in reimbursement the opening bank would pay at the rate prevailing in its country. The negotiating bank makes a rupee advance to the beneficiary on negotiating the credit. As the situation prevails now, the rupee cost of funds to the bank is higher than the prime rate. The bank would prefer to enforce his right to recover the overdue interest from beneficiary.

Any interest received  from the opening bank may, however, be passed on to the beneficiary.

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