Reimbursing bank means the bank instructed or authorized to provide reimbursement to pay, or accept and pay time draft pursuant to a reimbursement authorization issued by the issuing bank.
Reimbursement Authorization means an instruction or authorization, independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursing bank.
Reimbursement Undertaking means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank’s reimbursement claim, provided the terms and conditions of the reimbursement undertaking have been complied with.
Function of a Reimbursing Bank
There are two possible reasons that makes a reimbursing bank necessary under a documentary credit transaction.
First reason may be that the confirming bank does not trust the issuing bank in terms of risk issues and demands more security. In this situation presence of the reimbursing bank is a requirement for the confirmation.
Without receiving a reimbursement undertaking from the reimbursing bank, the confirming bank may elect not to add its confirmation to the credit.
Second reason could be that the issuing bank and nominated bank (in case confirmed letter of credit confirming bank) do not have an account relationship, as a result they may be requiring a third bank’s service for the settlement.