What Is the Nominating Bank Role in a Letter of Credit Transaction?

Banks play an important role in business.

Letters of credit facilitate business transactions and involve the buyer, the seller, the issuing bank and the nominated bank. Each plays a unique role in the transaction. The issuing bank is also called the nominating bank.

Receives Buyer's Funds

Assume the buyer needs a letter of credit for $6,000. The buyer deposits at least $6,000 into his own account at the nominating bank.

Issues Letter of Credit

The nominating bank issues a letter of credit to the buyer. The bank also notifies the buyer that his $6,000 deposit will be held as security while the letter of credit is in effect.

Nominates Another Bank

Optionally, the issuing bank may nominate another bank to act on its behalf for all LC-related transactions. The nominated bank could be in a different state or country, closer to the seller.

Pays Nominated Bank

After the seller satisfactorily delivers goods or services, the nominating bank transfers money to the nominated bank. The nominated bank pays the seller.

Primary Responsibility

The issuing bank holds primary responsibility for the payment of funds. If the business transaction is canceled, the issuing bank deducts LC fees and expenses, and releases the remaining security deposit.

References

• Google Books: "The law of letters of credit and bank guarantees"; Agasha Mugasha; 2003