A nominated bank is the bank named in a letter of credit as the one with which the credit is available. The beneficiary, usually the exporter, may present its documents to that bank, and the bank is authorised to honour the credit (by paying at sight, incurring a deferred payment undertaking or accepting a draft) or to negotiate it. When a credit says it is "available with any bank", every bank is a nominated bank.
The term is defined in the ICC's Uniform Customs and Practice for Documentary Credits (UCP 600). Nomination is an authority, not a duty: unless the nominated bank has added its confirmation or has expressly agreed, it does not have to act. What it gains by acting is the issuing bank's promise to reimburse it for a complying presentation. The nominated bank is often, but not always, the bank that advised the credit in the exporter's country.
Nominated bank in plain terms
Imagine a company head office that tells a supplier: "Bring your paperwork to our regional office in your city, and they can pay you on our behalf." The regional office is allowed to pay, and head office promises to pay it back, but nobody can force the regional office to open its cash drawer. If it pays, it does so because it trusts head office.
A nominated bank is that regional office. The letter of credit names it as a convenient place for the seller to hand in documents and, if the bank chooses, get paid locally and quickly. The seller benefits from dealing with a nearby bank in its own language and time zone. The nominated bank benefits from fees and from the issuing bank's promise to reimburse it, as long as the documents match the credit.
How nomination works
Under Article 6 of UCP 600, a credit must state the bank with which it is available, or say that it is available with any bank, and it must state how it is available: by sight payment, deferred payment, acceptance or negotiation. The bank named there is the nominated bank, and the place where it sits is normally the place for presentation. The sight letter of credit and the usance letter of credit both use nomination in the same way; only the timing of payment differs.
A typical sequence runs as follows:
- The beneficiary ships the goods and presents the bill of lading, commercial invoice and other required documents to the nominated bank.
- The nominated bank examines them. Under Article 14, it has a maximum of five banking days after presentation to decide whether the presentation complies.
- If it decides to act, it pays, accepts, incurs a deferred payment undertaking or negotiates, and forwards the documents to the issuing bank (or the confirming bank).
- It then claims reimbursement, either from the issuing bank or from a reimbursing bank named under a reimbursement authorization.
Article 12 also lets a nominated bank prepay or purchase a draft it has accepted or a deferred payment undertaking it has incurred. This allows an exporter under a usance credit to receive discounted cash before maturity, which is a common form of post-shipment finance.
Nominated, advising and confirming banks
The three roles are often held by one institution, which is why they are confused. They carry very different obligations:
| Role | What it does | Is it bound to pay? |
|---|---|---|
| Advising bank | Checks that the credit looks authentic and passes it to the beneficiary | No |
| Nominated bank | Is authorised to honour or negotiate against complying documents | No, unless it agrees or confirms |
| Confirming bank | Adds its own undertaking to that of the issuing bank | Yes, for a complying presentation |
Under Article 12(c), receiving, examining and forwarding documents does not by itself make a nominated bank liable to honour or negotiate. An exporter worried about the issuing bank or its country should therefore ask for confirmation rather than rely on nomination alone. Nomination protects the exporter mainly against delay and distance, not against credit risk or sovereign risk.
Rights and risks of the nominated bank
A nominated bank that honours or negotiates a complying presentation is protected by Article 7(c): the issuing bank must reimburse it, and that obligation is independent of the issuing bank's undertaking to the beneficiary. Article 35 adds that if complying documents are lost in transit between the nominated bank and the issuing bank, the issuing bank must still honour or reimburse.
The main risks the nominated bank carries are:
- Examination risk. If it pays against documents it wrongly judged compliant, the issuing bank may refuse reimbursement.
- Issuing-bank risk. When it negotiates or prepays, it is extending credit to the issuing bank and is exposed to its failure or to capital controls in its country.
- Fraud risk. A forged presentation can leave the bank arguing about whether it acted in good faith before notice of the fraud.
Banks therefore set limits on each issuing bank, much as a correspondent bank sets limits on its counterparties.
Restricted and freely available credits
A credit can be restricted to one named bank or made freely available with any bank. Exporters generally prefer availability with a bank in their own country, because presentation there is quicker and the expiry date is measured at that place. Issuing banks and applicants sometimes prefer to restrict availability to the issuing bank itself, which keeps control but forces the exporter to send documents abroad before the expiry date. Any later change to the nomination is made through a documentary credit amendment. The nominated bank also screens the parties and goods for sanctions screening purposes and looks for signs of trade-based money laundering before it pays.