What changed
Previously, banks could only discount/negotiate bills under LC for their own borrower constituents with regular credit facilities, and 'without recourse' bills were prohibited. Now, banks may negotiate restricted LCs for non-constituent beneficiaries if proceeds are remitted to the beneficiary's regular banker. Also, banks can negotiate LC bills on 'with recourse' or 'without recourse' basis based on their assessment of the LC issuing bank's creditworthiness.
What it means for you
Banks gain flexibility to handle LC transactions for non-constituents in restricted LCs, expanding business opportunities without violating earlier norms. The discretion on 'without recourse' LC bills allows banks to manage risk based on the issuing bank's credit quality, potentially increasing LC volumes. However, the ban on 'without recourse' for non-LC bills remains, so banks must differentiate between LC and other bill types.
What you must do
- Update internal policies to allow negotiation of restricted LCs for non-constituent beneficiaries with proceeds remitted to their regular banker.
- Develop credit assessment frameworks for evaluating LC issuing banks' creditworthiness to decide on 'with recourse' or 'without recourse' basis.
- Ensure continued prohibition on purchase/discount of non-LC bills on 'without recourse' basis.
- Train staff on the distinction between restricted and unrestricted LCs for non-constituent negotiation.
Who it affects
Scheduled commercial banks (excluding RRBs/LABs), Trade finance departments, Credit risk teams handling LC transactions, Borrower constituents with LC-based trade transactions
Can we now negotiate any LC for a non-constituent?
No, only restricted LCs (where negotiation is limited to your bank) can be negotiated for non-constituent beneficiaries, provided the proceeds are sent to their regular banker. Unrestricted LCs for non-constituents remain prohibited.
Does this circular allow 'without recourse' for all bills?
No, the relaxation applies only to bills drawn under LCs. For other bills (non-LC), the earlier restriction on 'without recourse' continues.