Nominated Bank

Publication Date :

10 May, 2025

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Table of Contents

Nominated Bank Meaning

Nominated bank in banking terms refers to the financial institution nominated by the issuing bank to handle transactions on behalf of the beneficiary. The sole purpose of this bank is to receive or make payments, usually in international trades.

The nominated bank account is mostly used in the letter of credit. They ensure all the payments happen within the stipulated time. It is authorized by the exporter (seller) bank upon presentation of documents. However, they only receive payments when all terms and conditions of LC are met.

Key Takeaways

The nominated bank is a financial institution appointed by an issuing bank to make due payments to the exporter, seller, or payee.
It is mostly used in international and overseas markets in the form of letters of credit (LC).
When the documents are verified, the nominee performs payment procedures.
In some cases, this bank also acts as a collecting bank for the seller. They also accept drafts or bills of exchange in cases of deferred payments.
In the United Kingdom, such banks act as transactional accounts for making or receiving electronic payments.

Nominated Bank Explained

Nominated bank in LC is a common term used to designate a bank on behalf of the beneficiary. It functions as a payor or payee as per the issuing bank orders. Generally, the bank is supposed to make payments from the importer. But, in some cases, this bank is bound to receive under the terms. Thus, they play a crucial role in international trade or when issuing a letter of credit.

The occurrence of nominated banks and issuing banks is mostly connected to the exports/imports business. When the exporter (seller) and importer enter into a trade (contract of sale) agreement, the latter acts as a beneficiary in the LC. Here, the beneficiary can also be the applicant, seller or buyer receiving payment or goods in return. The issuing bank then appoints a nominee on their behalf to fulfill the duties. Thus, when the documents and related compliances are satisfied, the nominee can receive payment from another party. Here, the issuing bank (or buyer's bank) assures the seller that the payment will happen upon receiving the goods. On receiving them, the nominated bank and issuing bank facilitate the payment to the seller. They in return, help in preventing any frauds in such trades.

On the contrary, the nominated bank account also refers to a transactional account in the United Kingdom used to make electronic payments. An individual can assign one bank to act as a nominee for making payments.

Role

The role of the nominee is mostly visible in the trades occurring overseas. However, they have dual duties to perform in the process. Let us understand them in detail:

Examining the documents - The main role of the nominated bank in LC is to examine and verify the trade documents before releasing the payment. When they receive shipping documents from sellers, they ensure compliance with the same. For instance, the bill of lading, invoice, and certificate of origin are some of them.
Acting as a collecting bank - At times, it also acts as a collecting bank to receive payments from the payee. On behalf of the beneficiary, the bank may ensure the examination of documents and forward them to the issuing bank.
Payment to the concerned party - Another major responsibility of this bank is to process the payment to the seller on verification. If the documents are in order, they can communicate with the issuing bank to make payment to the payee.
Accepting draft (or bill of exchange) - Sometimes, the bank may accept a bill of exchange or draft for a future payment of the bill on a certain date. It ensures the other party on the receipt of goods sold with this draft. Furthermore, this deferred payment allows them to inspect the goods and later make the payment.
Reimbursement - Also, the issuing bank reimburses for the service offered by the nominated bank. However, it is only released on the rightful payment to the exporter or on compliance with duties.

Examples

Let us look at some examples of the nominated bank in banking terms to understand it in a better way:

Example #1

Suppose Samuel owns a business exporting toys and accessories to different countries. They export to around 32 countries in total. And looking at the need, even Kevin decided to get some for his newly opened mall. So, Samuel and Kevin enter into a trade agreement, where the former will supply goods for a decided consideration. And to secure the deal, Samuel appointed a collecting bank to collect payments from the buyer. Likewise, Kevin also kept a nominated bank to release payments on receiving documents.

After a week, when Kevin received the goods, the bank first verified the documents and then made a payment of $500,000 as decided. Later, the collecting bank received the payment and informed Kevin of the same. As a result, both parties had their risk secured and the amount involved, too!

Example #2

Another example involves a nominated bank acting as a collecting bank for the seller as well. Suppose James has made an export order of $10 million. However, he was insecure about the payment to be received from Carol. Therefore, he assigned a YESH bank as a nominee to send documents to Carol's bank. Here, this bank also acts as a collecting banker by receiving payment from Carol on proper verification of documents. In short, when the importer receives documents, the bank acts as a nominee to send them on James's behalf. And when receiving sales, the same bank serves as a collecting bank.

Nominated Bank vs Advising Bank vs Confirming Bank

Following are the points explaining the difference between nominated, advising, and confirming banks. Let us understand them in detail:

Basis	Nominated Bank	Advising Bank	Confirming Bank
Meaning	It refers to a bank releasing payments on behalf of the importer or beneficiary.	An advising bank is a bank advising the exporter (seller) on drafting a letter of credit in the trade.	Confirming bank is a bank adding confirmation on the LC (letter of credit) as per the issuing bank's request.
Payment obligation	They have an obligation to make payment to the seller.	They have no such duty to perform as they only advise on LC.	They can negotiate or present payment when adding confirmation to the LC. But, it is without a recourse basis.
Place of presentation	When a bank acts as a collector and nominee, the presentation happens at the nominee's place.	They have no such place of presentation.	Here, confirming the bank has no presentation purpose. Instead, the beneficiary makes it and sends it to the nominated bank.