In a Letter of Credit (LC) transaction, the drawee is the party who is expected to make the payment upon presentation of conforming documents. This is typically the issuing bank or, in some cases, the confirming bank.
Drawee Explained
The drawee's role is crucial in an LC. They are obligated to honor the draft (a written order to pay) if the beneficiary (exporter) presents documents that strictly comply with the terms and conditions of the LC.
Drawee in Different Scenarios
| Scenario | Drawee |
|---|---|
| Typical LC | Issuing Bank |
| Confirmed LC | Confirming Bank (along with issuing bank) |
| Buyer's Credit | Buyer (less common in standard LCs) |
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Issuing Bank: The bank that opens the letter of credit on behalf of the applicant (importer). This is the most common drawee.
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Confirming Bank: A bank that adds its guarantee to the issuing bank's promise to pay. If a confirming bank is involved, they also become a drawee.
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Buyer: While less common in standard LCs, in certain financing arrangements like buyer's credit, the buyer can be the drawee. However, this deviates from the typical LC structure.
Why is the Drawee Important?
The drawee's commitment is the cornerstone of an LC's security. The beneficiary (exporter) relies on the drawee's solvency and willingness to pay, assuming all documentation is in order. This assurance mitigates the risk of non-payment.
