Usance LC and deferred LC. Same thing?

[Niklas Andersson]

By taking the risk of asking a silly question, is usance LC and deferred LC the same thing?

My opinion:
If a LC is to be paid X days after a fixed date (for example a BL's on-board notation) I consider this as a deferred payment LC. But if an LC is to be paid X days after sight, i.e. the issuing bank establishes the maturity after receiving the shipping documents, I consider this as a usance LC. Do you agree? When reading UCP600 nothing is explicitely mentioned regarding usance LC as far as I can see.

Your comments are most welcome,

Niklas

[Andreas Hoth]

May be my answer is is not the correct answer according the rules. But at the end it is just a difference in the calculation of the final payment date.

Of course there can be a big difference for the exporter regarding the receipt of the payment.

[Marianne Wabnik]

The issue is a linguistic one, more or less, these expressions are used interchangeably. In practice it implies the same undertaking, an undertaking connected to a tenor. When describing interest under L/Cs the expression "usance interest" is often seen.
URR 725 - the reimbursement rules states.
"URR 725 - Article 9
v. latest date for presentation of a claim, including any usance period".
Any undertaking or risk connected with an applicant's bank or applicant's country is the same irrespective of expression, "tenor", "deferred", "usance".
Best regards
Marianne Wabnik

[Kim Christensen]

Dear Niklas,

My take on this one would be the following.

At the end of the day what matters is how the LC is made available. UCP 600 sub-article 6 (b) states: “A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation”.

This means that an LC can not be made availably “by usance” – but must be made available in one of the four ways indicated, e.g. “available with Bank X by deferred payment yy days after shipment”.

To me “usance” is an “umbrella name” for any LC where payment is only due after a specified period.

Best regards
Kim

[Niklas Andersson]

Marianne, Kim and Andreas, thank you all for your input. Trade Finance is full of interpretations and definitions and you certainly helped clarify usance LC.

All the best,

Niklas

[maulellav]

I am not in the habit of visiting LC discussion forums/blogs much less in the replying but this question and the posted responses intrigued me, so let me share my view and hope that I don’t confuse the issue. As an aside, I suspect that a complete answer to this question might take a chapter in book but I will try to summarize my view in 1 page or less.
Based on the replies, we have introduced at least the following terms: “tenor”, “usance”, “acceptance” and “deferred payment”. I have put them in that order for good reason. Here’s my understanding:
1. “tenor” is the time when payment is due under an LC. Payment may be due at sight, with or without a draft, or at some time in the future with or without a draft. That future time can be expressed as “xx days sight”, “xx days B/L date” or as a specified date, e.g., “December 31, 2009”.
2. “usance” refers to the time in the future when payment is due, i.e., “xx days sight”, “xx days B/L date,” or a specified future date but is not used when payment is due at sight.
3. “acceptance” is the term used to indicate that honor under an LC is available at a time in the future by presentation of a draft indicating that future time, e.g., “xx days sight”, “xx days B/L date”, or as a specified date.
4. “deferred payment” is the term used to indicate that honor under an LC is available at a time in the future without the presentation of a draft.
While it appears that “acceptance” and “deferred payment” are functionally equivalent, there are significant differences in practice and in some legal regimes.
1. Honor of an LC available by “acceptance” with the issuing bank, confirming bank or a nominated bank will create a bankers acceptance which is a negotiable instrument separate from the LC and which in many regions is a readily marketable instrument. Bankers Acceptances are direct liabilities of the accepting bank, replacing that bank’s contingent liability under the LC.
2. Honor of an LC available by “deferred payment” with the issuing bank, confirming bank or a nominated bank will create a deferred payment obligation which is not a negotiable instrument and for which there is not a ready market for trading such obligations. Deferred payment obligations are direct liabilities of the bank incurring the obliugation and in the case of issuing and confirming banks, replaces their contingent liability under the LC.
A beneficiary holding a bankers acceptance will generally be in a better position to discount the bank’s obligation at a more favorable rate than if holding a bank’s deferred payment obligation.
In addition, a beneficiary holding a bankers acceptance will generally be in a safer position to avoid legal action should an applicant seek injunction prohibiting an obligor paying at maturity/due date rather than if the beneficiary were holding a deferred payment obligation.
I am sure this does not answer all your questions and may raise a few more, such is the nature of LC.

[Lars Hagne]

Thanks Vincent- intriguing views :-)

[Samsuddain Mazumder]

I've seen the term 360 days Usance L/C - this must not be good for the supplier?

[maulellav]

In the words of a lawyer that I have worked with for over 25 years, "It depends."
Whether this is good or bad for the supplier (beneficiary) depends on the beneficiary's ability to comply with the LC as well as the credit and integrity of the issuing bank (and confirming bank, if any) and the legal system under which any litigation may take place.
First, you use the term "usance" and as I tried to explain above, the term "usance" does not appear in UCP so in my opinion we need to use "deferred payment" or "acceptance"; clarifying that will at least get us to common ground on the type of obligation.
In what is a buyer's market, the beneficiary may be expected to offer financing in order to close the deal. If so, acceptance and deferred payment lcs allow that to happen and that is good for the supplier.
In my experience, based in large part on the US Bankers Acceptance market, short term (six month), self liquidating financing is preferred over longer term financing. After all, you as supplier and much like the issuing bank would look for the buyer to use the goods (sell or remanufacture, etc.) and use the proceeds of that to fund the acceptance/deferred payment (usance) obligation on or before maturity. Does the buyer really need one year to turn over the goods or will he realize that sale and use the procceds for some other purpose and if so, will those funds be available at maturity of your obligation?
When offering financing this way, suppliers should build in the cost of goods a percentage for the time they will be out of funds as well as consider the interest rate differential between their country and the buyer's country. In addition, an issuing bank and confirming bank, if any, will charge a fee well above that of a sight payment, for that time period. Depending on the leverage you may have, an lc providing for "acceptance (deferred payment) commission and discount charges for buyer's account" will allow you to receive full payment at sight. (This puts the onus and risk on the issuing bank.)
Finally, consider the buyer (credit and integrity) and their market. What if the buyer cannot realize the proceeds they expected, will the buyer/applicant seek judicial intervention to stop payment prior to maturity and if so what are their chances for success. For these concerns it is best to consult a lawyer familiar with international treatment of acceptance and deferred payment and injunctions.
The good news is that you have a letter of credit; the bad news is that you have a letter of credit.
Good Luck!

[ThosHrubecky]

Buddy Baker started a discussion in the Export Letters of Credit group at LinkedIn that prompted me to Google “Usance”, “Banker’s Usance” and “Shipper’s Usance”; results from one of those queries lead me to this thread. Apologies for bringing back an old discussion but I was fascinated by the responses to the original question. I agree with Marianne that it does appear to be a question of semantics.

Recalling my past experience as a letter of credit document examiner, the word "Usance" was most often used with regard to LCs issued by Korean banks. As I did not observe a reference to this phenomenon in the thread, I’d like to share my understanding.

As I remember “Usance” was a practice referred to under Korean Bank issued LCs whereby they were available with any bank by negotiation and the drafts were drawn (at a determinable date; e.g. 180 Days Sight) on the reimbursing bank. The LC would explicitly state that the reimbursing bank’s acceptance and discount charges were for the account of the LC applicant (consequently the beneficiary would effectively receive payment At Sight). The reimbursing bank was typically – but not always – either a branch or correspondent of the issuing bank domiciled in the country where the LC’s currency is issued (e.g. a USD denominated LC would often have it’s reimbursing bank domiciled in, say, New York City). From an operational perspective, it meant two transmittals were effected by the document examining bank. The transmittal of the shipping documents was dispatched to the issuing bank while the financial document (i.e. the draft) was dispatched to the reimbursing bank.

I suspect (but I am by no means certain) this particular type of structure was due to the tax treatment of Usance interest in Korea.

Oh… I really enjoyed Vincent’s posts!

[ThosHrubecky]

Buddy Baker followed-up his LinkedIn-group query with the following:

It turns out that "banker's usance" means discount charges are for the buyer and will be charged by the nominated bank, "shipper's usance" means they are for the seller and will be charged by the nominated bank, "mixed" means what it says, and "domestic" means discount charges are for the seller but there is no nominated bank so they will be charged by the issuing bank.

Based on another reply, it seems the reason for the practice in Korea is not for tax purposes but rather to allow the Korean buyer (under "banker's usance") to access lower interest rates than are available domestically if the buyer were to refinance a sight draft. Consequently the drafts are drawn on a nominated reimbursing bank outside Korea. Under the "banker's usance" scenario the buyer takes possession of the goods and sells them before the draft comes due. An additional benefit to "banker's usance" is that the seller is is not incented to mark-up his unit costs to account for the discount and acceptance fees because he is paid at sight.

[Mr. Smith]

In the Concise Oxford Dictionary, 7th ed, (1982) usance is defined as “time allowed by commercial usage for payment of foreign bills of exchange”.

Notwithstanding this, in my department (that handles doc. & standby credits, collections & guarantees) ‘usance’ tends to be used to mean either ‘tenor’ (as in ‘What is the usance of the bill / credit?’) or not payable at sight (as in a ‘usance bill / credit’) and thus can encompass a credit available by deferred payment, acceptance or (where payment is not due at sight by the issuing bank) negotation.