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What is an Advising Bank- Explained with Examples

Meaning of Advising Bank

So, imagine that you are exporting  certain machinery for your plan in India to China. Also you have had all the necessary meetings and discussions. But the problem is that what is the surety that money will come through. And that’s exactly what the role of advising bank is.

advising bank

What is an Advising Bank?

So, an advising bank which is chosen by you as an exporter for international trade ensures timely payments for the work you put in. For example you are exporting a machine to china, then issuing bank at china offers the letter of credit to your client. Then this letter gets notified to you as exporter throught the notifying bank. Finally the notifying bank becomes the confirming bank, accepting bank or paying bank for the exporter.

Secondly, the role of advising bank is very critical for smooth flow of international business. Which basically reduces any possibility of fraud for validating the trade. This bank can be.

  • Either a branch of the main bank
  • Or could be the bank the exporter appoints specifically.

Generally speaking you as an exporter would often pick an this bank depending on the reputation and experience of the bank in this field. Using this process the complications of international business is reduced. This is even more important now days because there is no gurantee that the buyer is genuine and often now a days physical meetings might be restricted.

Comparison between Advising bank Vs Issuing bank Vs Confirming Bank

So the major difference between an advising bank is that its unrelated to the location of the LC(Letter of credit). While conversely even if the issuing bank choses not to pay, the confirming bank still needs to pay the beneficiary.

Issuing BankAdvising BankConfirming Bank
Prepares and Issues LCPasses the LC to exporterNegotiate credit with notifying banl
The main bank that assigns different rolesActs as an intermediaryAny bank is eligible to be confirming bank
The importer assigns thisCan get chosen by either exporter or importerThe issuing bank can be itself or select the confirming bank
Mandated to honour all LCObligation to pay exporterFully obliged to pay or negoiate the acceptance on sight
Have to ensure the authencity of LCmay or may not check documentsExamines the validity of LC
It disburses the payment to confirming bankNo responsibility of paymentsCo responsibility with issuing bank to check authenticity
There can be only one issuing bankThere can be two advising banksCan be more than two confirming banks

Functions

In today’s world where the everything is digitally verified, the question that arises is that whether traditional authenticators like advising bank survives. However let’s try to understand what are the functions;

  • Firstly the authentication of a letter of credit. Which is prior to the credit into the hands of the beneficiary, the bank has the responsibility is to determine that the credit is genuine and originated from a bank that purportedly issued the credit and its not from any other source.
  • Scrutinization of a letter of credit: To review the word of the inconsistences and point them out to the beneficiary  the errors.
  • Finally the delivery the credit physically using fax, courier or airmail.

Frequently Asked Questions(FAQ’s)

Can an advising bank refuse the LC?

So, the advising bank can talk to the beneficiary and help make any changes but the main terms of the LC cannot be negotiated by the advising bank

Can you change your advising bank?

Usually the issue that arises is that if the issuing bank has issued a revocable letter of credit then the issuing bank can cancel the advise without the beneficiary knowing this. However, this would also not be confired by the confirming bank at the first place.

Can an advising bank role be played by the issuing bank?

That’s almost impossible because the issuing bank is the bank that is giving the letter of credit to the seller. Hence there has to be a different bank which confirms and advises on bhelf of the seller. Hence they never can be the same bank.