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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

A supplier ships goods to Kaveri Industries under a letter of credit, but the invoice presented to the bank shows a description of goods that differs from the one stated in the credit. The bank examines the documents and finds the discrepancy. What is the correct position under the documentary credit principle?

The bank may refuse the discrepant documents. Under the documentary credit principle, banks deal only with documents, not with goods or the underlying sale contract, and the credit is independent of that contract. Payment is due only against documents that comply on their face with the credit terms.

  1. AThe bank must pay, since the underlying sale contract is valid
  2. BThe bank may refuse the documents, as it deals with documents and not with the goods or underlying contractCorrect
  3. CThe bank must first inspect the goods physically before deciding
  4. DThe bank must pay and later recover the amount from the supplier

Explanation

Banks deal in documents, not goods, and the credit is independent of the sale contract. Documents that do not comply on their face can be refused as discrepant, so the bank is not bound to pay merely because the sale contract is valid. Physical inspection of goods is not the bank's role.

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