Focus on definitions (Reimbursing Bank vs. Claiming Bank)

 

Reimbursing Bank

Definition:

A Reimbursing Bank is a bank that is authorized and instructed by the Issuing Bank to honor a reimbursement claim presented to it by the Claiming Bank. The Reimbursing Bank holds funds on behalf of the Issuing Bank and is responsible for paying the Claiming Bank, provided the reimbursement claim complies with the reimbursement instructions issued by the Issuing Bank.

Key Characteristics:

Acts on Instructions: The Reimbursing Bank acts solely on the instructions of the Issuing Bank. It has no direct relationship with the beneficiary or the applicant.

Payment Obligation: Its primary obligation is to pay the Claiming Bank according to the reimbursement instructions.

No Examination of Documents: Unlike the Nominated Bank or Confirming Bank, the Reimbursing Bank typically does not examine the underlying documents presented under the Letter of Credit. Its focus is solely on the reimbursement claim itself.

Separate Role: The Reimbursing Bank's role is distinct from that of the Issuing Bank, Nominated Bank, or Confirming Bank.

Efficiency: Utilizing a Reimbursing Bank can streamline the payment process, especially when the Claiming Bank and the Issuing Bank are located in different countries with different clearing systems.

Example:

Imagine a scenario where:

Applicant (Buyer): A company in India (let's call it "Indian Importers Ltd.")

Beneficiary (Seller): A company in the USA (let's call it "US Exporters Inc.")

Issuing Bank: A bank in India that opens the Letter of Credit on behalf of Indian Importers Ltd. (e.g., "Indian National Bank").

Nominated Bank (and Claiming Bank): A bank in the USA where US Exporters Inc. presents the complying documents (e.g., "First American Bank").

Reimbursing Bank: A bank in the USA authorized by Indian National Bank to reimburse First American Bank (e.g., "Global Payments Bank").

Process:

US Exporters Inc. presents the complying documents to First American Bank.

First American Bank, having honored the presentation (either by paying or accepting a draft), acts as the Claiming Bank.

First American Bank then submits a reimbursement claim to Global Payments Bank, along with a copy of its authenticated SWIFT message claiming reimbursement from Indian National Bank.

Indian National Bank has previously instructed Global Payments Bank to honor such reimbursement claims if they comply with the specified conditions in the reimbursement authorization.

Global Payments Bank, acting as the Reimbursing Bank, examines the reimbursement claim for compliance with Indian National Bank's instructions.

If the claim is compliant, Global Payments Bank debits the account it holds for Indian National Bank (or its correspondent bank) and credits the account of First American Bank.

Claiming Bank

Definition:

A Claiming Bank is the Nominated Bank that has honored or negotiated a complying presentation under a Letter of Credit and subsequently presents a claim for reimbursement to the Reimbursing Bank (if one is nominated) or directly to the Issuing Bank (if no Reimbursing Bank is involved).

Key Characteristics:

Honors/Negotiates First: The Claiming Bank is typically the Nominated Bank that has fulfilled its role by paying, accepting, or negotiating against the beneficiary's complying presentation.

Seeks Reimbursement: Its primary action is to seek reimbursement for the funds it has disbursed to the beneficiary or for the value it has given through negotiation.

Presents a Claim: It initiates the reimbursement process by submitting a formal claim, usually via SWIFT, to the designated Reimbursing Bank or the Issuing Bank.

May Examine Documents: As a Nominated Bank, the Claiming Bank will have examined the underlying documents presented by the beneficiary to ensure they comply with the terms and conditions of the Letter of Credit.

Example (Continuing from the previous scenario):

In the same scenario:

First American Bank acted as the Nominated Bank when US Exporters Inc. presented the documents.

After verifying that the documents were compliant and paying US Exporters Inc., First American Bank becomes the Claiming Bank.

First American Bank then sends a reimbursement claim to Global Payments Bank (the Reimbursing Bank), requesting payment for the amount it disbursed to US Exporters Inc.

Distinguishing the Two:

The key difference lies in their primary function and relationship to the underlying transaction:

Reimbursing Bank: Primarily focuses on paying the reimbursement claim based on the Issuing Bank's instructions. It has a direct relationship with the Issuing Bank for this specific purpose.

Claiming Bank: Primarily focuses on honoring or negotiating the beneficiary's presentation of documents under the Letter of Credit and then seeking reimbursement for that action. It has a direct relationship with the beneficiary and then with the Reimbursing Bank (or Issuing Bank) for reimbursement.

In essence, the Claiming Bank is the one that initially disburses funds based on the compliant documents, while the Reimbursing Bank is the one that ultimately provides the funds to the Claiming Bank based on the Issuing Bank's mandate. The Reimbursing Bank acts as a payment conduit in the reimbursement process.