Module: | MODULE A: INTERNATIONAL BANKING
Q77: Consider the following statements regarding the availability and settlement methods of a Letter of Credit:
Statement 1: In a Sight Credit, payment is to be made to the beneficiary immediately upon presentation of complying documents at the counters of the nominated bank or issuing bank.
Statement 2: An Acceptance Credit requires the drawing of a time draft which the nominated bank or issuing bank accepts and is obligated to pay at maturity.
Statement 3: In a Deferred Payment Credit, a time draft is mandatorily drawn on the applicant, requiring the acceptance of the applicant before the bank releases the documents.
Statement 2: An Acceptance Credit requires the drawing of a time draft which the nominated bank or issuing bank accepts and is obligated to pay at maturity.
Statement 3: In a Deferred Payment Credit, a time draft is mandatorily drawn on the applicant, requiring the acceptance of the applicant before the bank releases the documents.
✅ Correct Answer: A
The correct option is A. Only 1 and 2 are correct.
Concept Definition: The availability of a Letter of Credit defines how and when the beneficiary will be paid.
The main types are Sight Payment, Deferred Payment, Acceptance, and Negotiation.
Structural Breakdown: Sight payment requires immediate settlement.
Acceptance requires accepting a draft, which is a formal order to pay.
Deferred payment requires a promise to pay at a future date without a physical draft.
Historical/Related Context: The regulatory framework clearly delineates these methods.
The distinction between Acceptance and Deferred Payment emerged to avoid stamp duties on physical drafts in certain countries, achieving the same credit period without the physical paperwork.
Causal Reasoning: Statement 1 correctly describes a Sight Credit.
Statement 2 correctly describes an Acceptance Credit, where a time draft is drawn on the bank and accepted by the bank.
Statement 3 is incorrect for two reasons.
First, under a Deferred Payment Credit, no draft is drawn because it relies on a deferred payment undertaking.
Second, under standard banking regulations, drafts must always be drawn on a bank, never on the applicant.
Concept Definition: The availability of a Letter of Credit defines how and when the beneficiary will be paid.
The main types are Sight Payment, Deferred Payment, Acceptance, and Negotiation.
Structural Breakdown: Sight payment requires immediate settlement.
Acceptance requires accepting a draft, which is a formal order to pay.
Deferred payment requires a promise to pay at a future date without a physical draft.
Historical/Related Context: The regulatory framework clearly delineates these methods.
The distinction between Acceptance and Deferred Payment emerged to avoid stamp duties on physical drafts in certain countries, achieving the same credit period without the physical paperwork.
Causal Reasoning: Statement 1 correctly describes a Sight Credit.
Statement 2 correctly describes an Acceptance Credit, where a time draft is drawn on the bank and accepted by the bank.
Statement 3 is incorrect for two reasons.
First, under a Deferred Payment Credit, no draft is drawn because it relies on a deferred payment undertaking.
Second, under standard banking regulations, drafts must always be drawn on a bank, never on the applicant.