A reimbursement undertaking is issued by a reimbursing bank at the request of an issuing bank, in favor of a claiming bank—typically the confirming bank—to honor that bank's reimbursement claim. It's important to note that this undertaking is not issued in favor of the beneficiary of the letter of credit (L/C). From the beneficiary's perspective, such an undertaking is generally not essential for his own bank to process or handle the credit.
However, in trade finance practices, banks that are reluctant to confirm an L/C due to country risk or the creditworthiness of the issuing bank may request a reimbursement undertaking. This instrument helps mitigate risk and provides assurance that reimbursement will be honored, thereby securing the confirming bank’s exposure.
Often, exporters or beneficiaries require the credit to be confirmed—particularly when the issuing bank is located in a high-risk country or has a low credit rating. But if the nominated bank (usually the exporter’s bank) lacks a credit limit or country exposure limit to take on the risk of such an issuing bank or jurisdiction, it may request the risk to be shifted to the reimbursing bank—often based in a more stable financial environment.
In such cases, the nominated or confirming bank may request an Irrevocable Reimbursement Undertaking (IRU) from the reimbursing bank, located in a safer jurisdiction where it has available limits. It’s crucial to understand that the reimbursing bank, when issuing such an IRU, is not concerned with the documentary compliance of the beneficiary’s presentation, but only with the validity of the claiming bank’s demand.
According to Article 1 of URR 725 (Uniform Rules for Bank-to-Bank Reimbursements), in a bank-to-bank reimbursement, the reimbursing bank acts solely on the instructions and under the authority of the issuing bank.
Further, Article 2 defines a Reimbursement Undertaking as a separate, irrevocable undertaking issued by the reimbursing bank upon the authorization or request of the issuing bank, addressed to the claiming bank. This obligates the reimbursing bank to honor the claim as long as the terms and conditions of the reimbursement undertaking are complied with.
Therefore, a reimbursing bank cannot issue an IRU without the explicit instruction from the issuing bank. This reinforces that an IRU is not an independent instrument like a standby letter of credit, but rather part of the structured reimbursement arrangement tied directly to the issuing bank's authority.