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Basic Requirements

8.5 A signed application (Appendix 8A) for issuance of a commitment letter in the form ADB-CL is submitted to ADB together with a summary sheet (Appendix 8B) for the commitment letter and the required supporting documents. A separate application is required for each currency in which a commitment letter is requested.

Supporting Documents

8.6 Supporting documents to be submitted to ADB with the application for a commitment letter include (i) a contract or confirmed purchase order, if not yet submitted earlier to ADB; and (ii) a copy of the LC against which ADB's commitment letter is requested (see Section 4.29 for retention period of supporting documents). ADB will return applications which do not meet the requirements.

Issuing the Commitment Letter

8.7 Upon approval of the borrower's application for a commitment letter, ADB issues a commitment letter (Appendix 8C[1]) to a commercial bank specified in the LC.

8.8 Where the LC indicates a separate advising bank and nominated commercial bank, ADB will issue the commitment letter to the nominated commercial bank, with a copy provided to the advising bank. Indicating "negotiation with any bank" is not acceptable.[2]

8.9 A "transferrable" LC that allows the rights and obligations of the LC beneficiary (i.e., manufacturer or exporter) to be transferred to another party, thereby creating a secondary beneficiary, is not acceptable under ADB's commitment letter procedure. Therefore, the borrower or executing agency should not have the LC issuing bank approve a transferrable LC.

8.10 No commitment letter is issued if shipment or LC expiry date fall beyond the loan closing date.

Accepting the Commitment Letter

8.11 The nominated commercial bank's first request for payment under the commitment letter constitutes its acceptance of the terms and conditions of ADB's commitment.

Payment to Commercial Banks

8.12 ADB pays from the loan account after receipt of the confirmation from the supplier's nominated commercial bank (normally a negotiating bank) which has paid for or agreed to pay in accordance with the LC terms.

8.13 Requests for reimbursement from the nominated commercial bank are made in authenticated SWIFT or tested telex. The word "Condiment" or the words "(i) payment has been made or is due and will be promptly made to the beneficiary under and in full compliance with the terms and conditions of the LC; (ii) documents were presented within the original or extended expiry date; and (iii) discrepancies, if any, have been referred to and accepted by LC issuing bank" must be written on the request for reimbursement (Appendix 8C).

Amendments Requiring ADB's Prior Approval

8.14 ADB's prior approval is required for amendments to the LC involving changes such as

• extension of the LC expiry date beyond the loan closing date of the loan account, as specified in the loan agreement, or otherwise extended by ADB;

• change in the LC's value or currency;

• description or quantity of goods;

• country of origin;

• beneficiary; and

• terms of payment.

8.15 The nominated commercial bank(s) is (are) to copy all proposed amendments to ADB for its information or approval.

Amendments to the Letter of Credit

8.16 The borrower requests ADB's approval of amendments to the LC as soon as the LC amendment is obtained from the LC issuing bank (Appendix 8E). A copy of the signed amendment must be attached to the request.

8.17 ADB communicates its approval to the nominated commercial bank and the borrower by the form shown in Appendix 8F or by authenticated SWIFT, tested telex, or a formal letter of approval.

8.18 ADB can allow the borrower, in urgent cases, to send its application for approval to amend the LC by fax. The message is to include loan number, commitment letter number, LC number, and nature and reason for the amendment. A copy of the LC amendment should be attached to the application.

8.19 The message must state that the amendment has been made by the LC issuing bank and that the application for approval of amendment of the LC and a copy of the LC amendment are being airmailed to ADB.

8.20 Amendments to the LC for the following need not be submitted to ADB for approval: (i) extending the expiry date and shipping dates up to the loan closing date, and (ii) other amendments except those mentioned in Section 8.14. The borrower merely needs to inform ADB using the standard form (Appendix 8G) and submit a signed copy of the amendment. This will ensure ADB's prompt payment of claims received from the nominated commercial bank.

Limitation of ADB's Commitment

8.21 A borrower, when requesting a commitment letter, agrees in the application form that if the US dollar or special drawing right (SDR)[3] equivalent as specified in ADB's commitment is exceeded at the time of ADB's payments due to currency fluctuations, ADB may use the uncommitted portion of the loan to cover the deficiency. If the uncommitted portion of the loan is insufficient, the borrower agrees to pay the remaining obligation promptly under the LC after receiving ADB's notice.

Discrepancies

8.22 ADB is unable to honor the payment claim of the nominated commercial bank if there is any discrepancy between the shipping documents and the LC terms. In such event, the nominated commercial bank must seek, through the LC issuing bank, the borrower's authorization to pay despite such discrepancy.

Linking the Letter of Credit to the Commitment Letter

8.23 The LC is linked to ADB's commitment letter with the following clause:

This letter of credit is established under Asian Development Bank Loan_ (number) and becomes effective only if and when the Asian Development Bank issues its commitment letter to the nominated commercial bank. For payment, please follow the instructions contained in the commitment letter.

8.24 Alternatively, the LC need not have the clause. Instead, it is immediately operative on the strength of the LC issuing bank's commitment to finance the transaction. ADB's commitment, if and when issued, will shift the financing commitment from the LC issuing bank to ADB. In this case, the LC contains the following clause:

The financing of this letter of credit is undertaken by_(LC issuing bank). However, it is established under Asian Development Bank Loan (number) and, if and when the Asian Development Bank issues its commitment letter to the advising or negotiating bank, the latter shall follow the provisions contained in the said commitment letter, and claim payment or reimbursement from the Asian Development Bank.

8.25 The narrative procedures and the check list for the commitment procedure are in Appendix 8H.

  • [1] Appendix 8C is a sample of a SWIFT-based commitment letter. Appendix 8D is a sample of a paper-based commitment letter which should be used only when the circumstances require.
  • [2] This is to keep the legal connection between the LC and ADB's commitment letter, which is addressed to the specific bank or payee.
  • [3] The special drawing right (SDR) is an international reserve asset created by the International Monetary Fund in 1969 to supplement the official reserves of its member countries. Its value is based on a basket of four key international currencies — US dollar, yen, pound sterling, and euro. Source: imf.org/ external/np/exr/facts/sdr.htm
 
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