LC Discrepancies and How Banks Refuse
One discrepancy turns a bank promise back into the buyer's goodwill. Here is what causes them and how refusal works.
A discrepancy is any way in which a presentation fails to comply with the credit, UCP 600 or international standard banking practice. Once there is a discrepancy, the issuing bank's undertaking to pay falls away. Payment then depends on the applicant agreeing to waive it, which turns a bank promise back into the buyer's goodwill.
For an exporter that is the whole risk of an LC in one sentence. For the bank, a discrepancy sets off a strict procedure: miss a step and the bank loses the right to refuse.
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Common Discrepancies by Document
| Document | Typical discrepancy |
|---|---|
| Commercial invoice | Wrong currency, unit price or total; goods description that does not correspond with the credit; not issued by the beneficiary or not made out to the applicant |
| Transport document | Shipment after the latest date; wrong port of loading or discharge; missing signature or on board notation; clauses declaring goods or packaging defective |
| Insurance document | Cover below the minimum (110% of CIF or CIP value when the credit is silent); wrong currency; dated after shipment without showing cover from that date |
| All documents | Data that conflicts across documents; unauthenticated corrections; presentation later than 21 days after shipment or after expiry |
| Quantities and amounts | Drawing beyond the tolerance the credit or Article 30 allows |
The Refusal Procedure Under Article 16
- 1
Bank decides the presentation does not comply
Within the maximum five banking days following the day of presentation.
- 2
Issuing bank may approach the applicant for a waiver
At its sole judgement. This does not extend the five banking days.
- 3
Bank sends a single notice of refusal
It must state that the bank is refusing, list every discrepancy, and say whether it is holding the documents pending further instructions, holding them until the applicant waives, returning them, or acting on earlier instructions from the presenter.
- 4
Notice goes by the close of the fifth banking day
By telecommunication, or other expeditious means if that is not possible.
- 5
Bank may then return the documents at any time
And, having refused properly, may claim a refund with interest of any reimbursement it has made.
Preclusion: The Rule That Costs Banks Money
If an issuing bank or confirming bank fails to follow Article 16, it is precluded from claiming that the documents do not comply. A late notice, a second notice adding a discrepancy, or a notice that does not say what the bank is doing with the documents can each turn a discrepant presentation into one the bank must pay.
Refusal notices, waiver and preclusion. No signup.
What the Exporter's Bank Can Do
- check_circleCorrect and re-present: replace or fix documents, if time remains before the 21-day and expiry limits.
- check_circleSeek the applicant's acceptance through the issuing bank, by cable before sending documents, or by sending them on approval basis.
- check_circleSend the documents on collection basis, at which point the LC protection is effectively gone.
- check_circleTreat any finance given against discrepant documents as with recourse to the exporter, since the bank's own reimbursement is no longer assured.
How CCFE Tests This
- check_circle"How many notices of refusal may a bank send?" One. The trap is a second notice listing more discrepancies.
- check_circle"Does approaching the applicant for a waiver extend the examination period?" No.
- check_circle"Consequence of a late refusal notice?" Preclusion: the bank cannot claim non-compliance.
- check_circleScenario questions on whether a small error is a discrepancy. The test is whether meaning changes or data conflicts, not whether wording is identical.
FAQs
What is a discrepancy in a letter of credit?expand_more
Any way in which the presented documents fail to comply with the credit terms, UCP 600 or international standard banking practice. A discrepant presentation releases the bank from its obligation to pay.
What are the most common LC discrepancies?expand_more
Late shipment or late presentation, invoice errors in amount or description, insufficient or wrongly dated insurance, inconsistent data across documents, and unauthenticated corrections.
Within how many days must a bank refuse discrepant documents?expand_more
The single notice of refusal must be given no later than the close of the fifth banking day following the day of presentation, under UCP 600 Article 16(d).
What happens if the bank misses the refusal deadline?expand_more
Under Article 16(f) an issuing or confirming bank that fails to follow the procedure is precluded from claiming the documents do not comply, and must honour.
Next steps
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