METHODS OF PAYMENT

DR NAVNEET GERA
DR NAVNEET GERA 1
SESSION OBJECTIVES
To understand the importance of payments in export transactions.

To discuss the various methods of payments in international trade, its

mechanism and risk associated.

DR NAVNEET GERA 2
SESSION OBJECTIVES
To discuss the methods of payment on the basis of risk and cost factors
prevalent in trade.

To discuss the mechanism of LC and its types.

To discuss the operational issues and case study related to LC.

DR NAVNEET GERA 3
PAYMENT
Exporter is looking forward to get the payment from foreign buyer with
whom the personal interaction is least possible and the means to interact is
through technology.

SWIFT (Society for worldwide Interbank telecommunication) is the standard,

cheapest, quick and the most secured instrument for international payments.

DR NAVNEET GERA 4
RISK INVOLVED
Political risk of importer country
Commercial risk of non-payments
Cancellation of order by buyer
Currency fluctuation risk
Delays in Payment
Insolvency Issues

DR NAVNEET GERA 5
RISK ASSOCIATED
1. Non-Payment by Buyer (Commercial Risk) – No exporter should ship the
goods without ECGC.
2. Transit Risk - Marine Insurance
3. Currency Risk - Dollar - Re --- Rate

DR NAVNEET GERA 6
TERMS OF PAYMENT
Exporter needs money either hundred percent advance, partially in advance or
it may be post-shipment depending upon the agreement between exporter and
importer.

However, both exporter and importer are looking towards secured way of
dealings.

DR NAVNEET GERA 7
PAYMENT MODES
Advance Payment -The most secure method of trading for exporters and,
consequently the least attractive for buyers.

Payment is expected by the exporter, in full, prior to goods being shipped.

Exporter is asking for advance payment even without shipment of goods

whereas the importer is at high risk in making the advance payment without
receiving the goods or documents.

DR NAVNEET GERA 8
ADVANCE PAYMENT Goods

Exporter Importer (High Risk)

Doc
um
ents

Documents
Bank

DR NAVNEET GERA 9
EXPORTER TO INSIST FOR ADVANCE PAYMENT
Political and commercial risks of buyers country are of very high degree
(Africa)
Exported product is solely owned by exporter or very less players are there in
the market.
Importer is new in the business
Track record of buyer is not known (history, experience etc)
Credit worthiness is doubtful

DR NAVNEET GERA 10
OPEN ACCOUNT

Least secure method of trading for the exporter, but the most attractive to
buyers.

Goods are shipped and documents are remitted directly to the buyer, with a
request for payment at the appropriate time (immediately, or at an agreed
future date).
Use –When exporter is sure.

DR NAVNEET GERA 11
ADVANCE PAYMENT Goods

Exporter Importer (High Risk)

Doc
um
ents

Documents
Bank

Due Date-
Pymt DR NAVNEET GERA 12
OPEN ACCOUNT
Precautions - ECGC Policy before shipment of goods.

High Risk for Exporter …..

Should not be used while dealing with new buyer and risky markets …

DR NAVNEET GERA 13
DOCUMENTARY COLLECTIONS
A documentary collection (D/C) is a transaction whereby the
exporter entrusts the collection of a payment to the remitting bank
(exporter’s bank), which sends documents to a collecting bank
(importer’s bank), along with instructions for payment.

DR NAVNEET GERA 14
DOCUMENTS AGAINST PAYMENT (D/P)

Documents against payment are the term wherein the importer is making the
payment against documents at sight.
This process is often referred to as "Cash against Documents".
The buyer's bank is instructed to release the exporter's documents only when
payment has been made.

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DOCUMENTS AGAINST ACCEPTANCE (D/A)
Documents against acceptance means where exporter has agreed
for a credit period of 30/60/90 days from the importer.
The buyer is able to collect the documents against their
undertaking to pay on an agreed date in the future, rather than
immediate payment.
The exporter's documents are usually accompanied by a "Draft"
or "Bill of Exchange" which looks something like a cheque, but
is payable by (drawn on) the buyer.
When a buyer (drawee) agrees to pay on a certain date, they sign
(accept) the draft.

DR NAVNEET GERA 16
CONTD..
Funds are received from the importer and remitted to the exporter through the
banks involved in the collection in exchange for those documents.
D/Cs involve using a draft that requires the importer to pay the face amount
either at sight (document against payment) or on a specified date (document
against acceptance).
The draft gives instructions that specify the documents required for the
transfer of title to the goods.

DR NAVNEET GERA 17
LETTER OF CREDIT

The most secure instrument that is Letter of Credit L/c also known as
Documentary Credit is a widely used term to make payment secure in
domestic and international trade.
A Letter of Credit is a bank-to-bank commitment of payment in favour of an
exporter (the Beneficiary), guaranteeing that payment will be made against
certain documents that, on presentation, are found to be in compliance with
terms set by the buyer (the Applicant).

DR NAVNEET GERA 18
MECHANISM FOR LETTER OF CREDIT
EXPORTER
FORMATION OF IMPORTER
CONTRACT (1)

bank.
instruction of issuing
No contract but act as per

CONTRACT ( 2)
APPLY FOR LC
EXPORTER AND ISSUING
BANK (CONTRACT 3)

ADVISING
ISSUING
BANK
BANK

DR NAVNEET GERA 19
MECHANISM (LC)
CONTRACTS IN LC
The sale contract between exporter & importer.
The contract between importer & the issuing bank.
The contract between issuing bank & the beneficiary.

Buyer and seller agree on a commercial transaction.

Buyer applies for opening letter of credit.
Issuing bank issues the letter of credit (LC) in favour of beneficiary.
Advising bank advises seller than an LC has been opened in his favor.
DR NAVNEET GERA 20
Seller sends merchandise and documents to the freight forwarder.
Freight forwarder sends merchandise to the buyer's agent
(customs broker).
Seller or Freight forwarder submits documents to the advising
bank.
Advising bank examines the documents and submits to issuing
bank.
Issuing bank arranges for advising bank to make payment.
Advising bank makes payment available to the seller.
Buyer pays or takes loan from the issuing bank.
Issuing bank sends bill of lading and other documents to the
customs broker.
Customs broker forwards merchandise to the buyer.

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CONTRACTUAL RELATIONSHIP
The sale contract between exporter & importer.

The contract between importer & the issuing bank.

The contract between issuing bank & the beneficiary.

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CONTENTS OF LC
Complete & correct name & address of exporter(beneficiary).
Complete & correct name & address of importer(applicant).
Type of LC
Amount of LC
Description of goods, quantity of items & unit price.
List of documents to be submitted by exporter.
Port of discharge & final destination.
Terms of delivery FOB, CIF etc
Status of transshipment whether allowed or not.
Status of partial shipment whether allowed or not.

DR NAVNEET GERA 23
CONTENTS OF LC

The last date of sending shipment.

Time period for presentation of documents for
negotiation after the dispatch of shipment.
The date & place of expiry of LC.
Transfer of LC allowed or not.
Mode of advise of LC i.e. by mail or teletransmission.

DR NAVNEET GERA 24
PRECAUTIONS TO BE TAKEN BY BENEFICIARY ON
THE RECEIPT OF LC
1. The LC appears to be a valid LC. He can consult his banker
for this purpose.
2. The type of LC and the terms are as per the agreed terms.
3. All the terms & conditions are acceptable & can be complied
with.
4. The documents required under LC can be obtained &
presented.
5. Description, qty & prices of goods are as per contract.
6. Last date of shipment & time allowed for presenting
documents are acceptable.
7. Port of loading & discharge as per contract.
8. Responsibility of insurance clearly stated.
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DOCTRINE OF STRICT COMPLIANCE
1. The doctrine implies that the issuing bank would make the
payment if the documents as specified under LC appear on
their face to be in compliance with the terms & conditions of
LC.
2. The bank follows UCPDC (Uniform customs practices for
documentary credit) published by International Chamber of
commerce.
3. The only risk under this mode of payment is when the
documents submitted have discrepancy.
4. If any document is missing, spelling mistake or delay in
shipment than mentioned in LC are discrepancies.
5. Issuing bank has 5 days to examine document to m,ake the
payment.

DR NAVNEET GERA 26
FORMS OF LETTER OF CREDIT

1. Revocable Letter of Credit L/c

A revocable letter of credit may be revoked or modified for any reason, at any
time by the issuing bank without notification.

2. Irrevocable Letter of Credit L/c

In this case it is not possible to amend a credit without the consent of the
issuing bank, the confirming bank, and the beneficiary.

DR NAVNEET GERA 27
KINDS OF LC

1. Sight or usance LC
2. Confirmed or Unconfirmed LC
3. Negotiable LC
4. Revolving LC
5. Red Clause LC
6. Green Clause LC
7. Transferable LC
8. Back to back LC
9. Standby LC
DR NAVNEET GERA 28
SIGHT OR USANCE LC

1. Sight or usance LC – If it involves payment to the

exporter against sight draft.

2. In usance draft is accepted jointly by issuing bank &

the importer which can be discounted through
commercial bank before due date.

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CONFIRMED/UNCONFIRMED LC
1. An irrevocable LC is confirmed when another bank
adds its confirmation to LC.(Confirming bank)
2. Confirming bank assumes the primary liability for
making payment to beneficiary as issuing bank.
3. Beneficial to exporter in protecting against political
risk & operates as an insurance.
4. In LC this clause of Confirmed LC must be negotiated
with importer & mentioned thereof.
5. Confirmed bank in turn gets payment from issuing bank
but in case of non-payment can not get from importer.
6. If irrevocable LC does not provide confirmation –
Unconfirmed LC. DR NAVNEET GERA 30
NEGOTIABLE LC
1. A LC is known as negotiable if the issuing bank
authorises the negotiating bank to honour the draft
under the terms of credit.
2. The negotiating bank i.e. the bank through which
documents are presented for negotiation for
realisation of export proceeds would examine the
document & if the same are found to be non-
discrepant then it would release the payment under the
terms of the credit to the exporter subject to an
undertaking from the exporter that in case the issuing
bank does not release the payment then he would
refund the amount to the negotiating bank.
DR NAVNEET GERA 31
REVOLVING LC
1. A revolving LC is one which provides for the renewal of
the amount of the credit without any amendments to
the LC in relation to a given time period or a given
amount.
2. The revolving credit may be revocable or irrevocable.
3. The revolving credits are opened in those cases where
the importer regularly imports goods from a certain
exporter.
4. Importer saves on the transaction costs by opening the
revolving credit.

DR NAVNEET GERA 32
RED CLAUSE & GREEN CLAUSE LC
1. Red clause LC enables the confirming bank or
nominated bank to make advances to the beneficiary
even before the presentation of the document.
2. Written in red ink so red clause LC.
3. Clause states amount that can be advanced to
beneficiary in case discrepancy is there in documents
than confirming bank cab get from issuing bank which
in turn can demand from the importer.
4. LC is known as Green clause LC if it provides for the
credit given to the exporter to cover the period of
storage of goods at the sea port.

DR NAVNEET GERA 33
TRANSFERABLE LC
1. Transferable LC is a credit which authorises the
advising bank to transfer part or full amount of the
credit to any other party at the request of the
beneficiary.
2. Importer runs the risk of accepting the shipment from a
party other than with whom the order was placed.
3. Useful in those cases where the importer is making
imports through an agent in the exporting country.

DR NAVNEET GERA 34
BACK TO BACK LC
4. Back to back LC involves two LC –
5. One opened in favour of primary beneficiary or the
original exporter.
6. The credit opened in favour of second beneficiary who
would supply goods to the first beneficiary. First
beneficiary becomes applicant for opening of second
LC.
7. To ensure that second LC specifies all the documents
required by first credit & time limits set for
presentation of documents in such a manner that it will
enable the primary beneficiary i.e. original exporter
to present the documents within the time limits set by
the primary LC.
DR NAVNEET GERA 35
ADVANTAGES OF LC
1. Exporter is assured of payment as there is written
undertaking by the importers bank to make the
payment if the shipment is sent in strict compliance with
t & c.
2. The exporter is able to obtain advance from the bank
to finance the credit needs to send shipment.
3. Eliminates the commercial risk to payment since is
assured from bank if irrevocable.
4. LC mode enables the importer to expand the sources
of supply because the exporters are always willing to
supply goods against LC.

DR NAVNEET GERA 36
CASE STUDY Dr Navneet Gera

DR NAVNEET GERA 37
CASE STUDY -1 –CREDITS VS CONTRACTS
Bank of Madurai issued LC to Rameshwar & Co. The company on receiving
goods from the Chinese manufacturer asked the bank not to honour the LC as
the goods are not as per Proforma Invoice which was agreed by both buyer
and seller in their contract. The bank should
A) Refuse to honour the request of Rameshwar & Co
B) Honour the request of Rameshwar & Co
C) Bank should ask to settle the issue in International court of Justice
D) Honour the request of Rameshwar & Co in case Chinese manufacturer
refuses to comply with proforma invoice as per contract between buyer and
seller
DR NAVNEET GERA 38
DISCUSSION –CASE -1 (ANS A )
Article -4
LC by its nature is separate from the sale or other contract on which it is based and
banks are in no way concerned with or bound by such contracts.
Issuing bank must discourage any attempt by the applicant to include the details of
the contact, proforma invoice etc as an integral part of the LC.
Article 5 of UCPDC 600 states that bank deals in documents and not in goods and
services.
Some reasons for refusal of document acceptance
A) Goods not as per profroma invoice
B) Obtain stay against the opening bank to honour payment of the document due to
the reason that the beneficiary has not sent the goods as per agreement.
DR NAVNEET GERA 39
CASE STUDY -2
Mr Malhotra, a resident of puri in Orissa, issued an LC from his bank. On
receipt of LC, the exporter dispatched the consignment to Mr Malhotra and
thereby sending all necessary documents to the issuing bank via negotiating
bank. The documents reached delhi where they were held due to severe
cyclone Fani in the state of Orissa. The documents reached Orissa but the
operations of issuing bank were seriously affected due to the cyclone and was
out of operation for 10 days. Since documents were not handed over to Mr
Malhotra on time, he suffered major loss in business. Mr Malhotra sued the
bank for this delay.

DR NAVNEET GERA 40
CASE STUDY -2
A) Mr Malhotra is correct and bank should reimburse for the losses.
B) Bank is not liable for the losses.
C) Bank will only reimburse 10% of the LC value.
D) Bank will ask Mr Malhotra to settle his issues in the court.

DR NAVNEET GERA 41
CASE STUDY-2 FORCE MAJEURE
Article 36 – Force Majeure
A bank assumes no liability for the consequences arising out of its
business by Acts of God, riots, civil commotions, wars or any other
causes beyond its control.
A bank will not, upon resumption of its business honour or negotiate
under a credit that expired during such interruption of its business .
Ans –B (Bank is not liable for the losses)

DR NAVNEET GERA 42
CASE STUDY -3
Bank A issues LC dated 1.10.2018, in favour of a beneficiary in UK. The last
date of shipment as per LC is 15.10.2018 and last date of negotiation is
31.10.2018.
The beneficiary presents documents to Bank B for negotiation on 5.10.2018
with documents evidencing shipmen of goods on 30.09.2018, which sends the
documents to the opening bank asking to reimburse as per LC terms.
The opening bank, on receipt of documents notices that the shipment was
made on 30.-9.2018 and the invoice was dated 02-09-2018 while the
inspection certificate, analysis certificate and packing list were dated 25-09-
2018. The issuing bank on receipt of documents rejected the documents,
notifying discrepancy that documents were dated prior to date of credit.

DR NAVNEET GERA 43
CASE STUDY-3
A) The issuing bank has rightly pointed out the discrepancy.
B) There is no discrepancy whatsoever and issuing bank should accept the
documents.
C) The issuing bank has rightly pointed out the discrepancy but reasoning for
rejection is incorrect.
D) Both issuing bank and negotiating banks are at fault of working carelessly
and they should compensate both applicant and beneficiary jointly.

DR NAVNEET GERA 44
CASE STUDY -3 DATE OF DOCUMENTS
Article -14 I
Documents could be dated prior to the date of LC, but should not be dated
after the date of presentation

Ans – B
There is no discrepancy whatsoever and issuing bank should accept the documents.

DR NAVNEET GERA 45
 CASE STUDY -4 PARTIAL SHIPMENTS
An LC covering shipment of 1000 cartons consisting of 15000 pieces of shirts (readymade
garments) from Chennai port to Dubai port provides that partial shipment is not allowed.
The beneficiary hands over 500 cartons of shirts to the shipping company on 15-7-2018
and another 500 cartons on 18-7-2018. The shipping company issues bill of lading for the
first 500 cartoons on 17-7-2018 and another B/L covering 500 cartoons on 19-7-2018.
Both the consignments are to be shipped by a vessel that is due to leave Chennai port on
21-7-2018. Thus, the total goods under the LC that is 1000 cartons are shipped on a single
vessel but with two bill of ladings.
The LC issuing bank, on receipt of documents drawn under the LC rejects the documents
stating the shipment is not made under one Bill of Lading and as such constitutes partial
shipment, which is not permitted under the LC. The issuing bank informs the negotiating
bank that the goods are held at their disposal and further instructions are awaited.

DR NAVNEET GERA 46
CASE STUDY -4 PARTIAL SHIPMENTS
The issuing bank is correct in rejecting the documents since these don’t comply
with the instructions under LC.
The issuing bank is not correct since all 1000 cartons are sent on the same
means of transport and has same journey.
The Chennai exporter is at fault of not sending all 1000 cartons under same one
B/L and thus he should reimburse the importer for losses.
The negotiating bank should reimburse the applicant since they didn’t check the
documents before sending and missed this important error in documents that is
two bill of lading.

DR NAVNEET GERA 47
ARTICLE 31 (PARTIAL SHIPMENTS)
A presentation of documents consisting of more than one set of
transport documents covering shipment of goods on the same
means of transport and has same journey will not be considered as
partial shipment, even if they indicate different dates of shipment.

Ans. B
The issuing bank is not correct since all 1000 cartons are sent on
the same means of transport and has same journey.

DR NAVNEET GERA 48
CASE STUDY -5 DISCREPANT DOCUMENTS WAIVER
AND NOTICE
The LC issuing bank on receipt of documents on 15-9-2018 (Tuesday) took two
working days to examine the same and referred documents to the applicants for
acceptance on 17-9-2018 (Thursday). The applicants came up with a discrepancy in
documents on 22-9-2018 (Tuesday) evening stating that the documents need to be
rejected as the bill of lading was not stamped with “on board” stamp and initated by
the shipping company. With 21-9-2018 holiday on account of Dussehra.
The issuing bank sent a swift message of rejection to the negotiating bank on 23-9-
2018. On receipt of swift message from the issuing bank, informing rejection of
documents and discrepancy as informed by the applicant the negotiating bank
referred the matter back to the opening bank stating that the message of refusal and
notification of discrepancy was not received within the time period of 5 days and as
such claimed to be reimbursed as per LC terms.

DR NAVNEET GERA 49
CASE STUDY 5
The negotiating bank is correct, and issuing bank should reimburse the claims as per
LC terms.
The issuing bank has notified the discrepancy well within stipulated 5 working days.
19th and 20th being Saturday and Sunday and 21st being holiday on ac of dussehra.
The negotiating bank will accept the rejected documents but with a penalty on
issuing bank for delay. Since 21st was not a holiday in negotiating bank country.
The issuing bank will impose a penalty on the applicant for not informing it well on
time.

DR NAVNEET GERA 50
CASE STUDY 5
Article 16 D of UCP 600
The notice of refusal and discrepancy must be given latest by the closing hours of 5th
working day from the date of presentation
Ans-B
The issuing bank has notified the discrepancy well within stipulated 5 working days.
19th and 20th being Saturday and Sunday and 21st being holiday on ac of dussehra.

DR NAVNEET GERA 51
METHODS OF PAYMENT PRACTICALITIES

DR NAVNEET GERA 52
AUTONOMY OF LETTER OF CREDIT
Bank is concerned only with whether the documents tendered by the seller
correspond to those specified in the instructions.
Letter of credit is a paper transaction. (Article 5 of UCP 600)

It is irrelevant to bank whether the business is for oil, machinery, Gems and
Jewellery etc

Exceptionally the bank should refuse to pay the credit if it is proved to its
satisfaction that the documents, though apparently in order on their face are
fraudulent and that the seller was involved in the fraud. (Fraud Exception)
DR NAVNEET GERA 53
BANK SHOULD HONOUR OBLIGATIONS
Bank is not concerned with dispute between buyer and seller.
Buyer may say goods are not upto contract but bank must honour its
obligations.
Buyer may say that he has a cross-claim in large amount but still the bank
must honour its obligations.
LC is like a Bill of exchange given for price of goods.
Bill of exchange is given by buyer to seller
Letter of credit is given by Bank to the seller with the very intention of
avoiding anything in the nature of a set off or counterclaim.
DR NAVNEET GERA 54
CASE
Distributor of kuwait bought machinery from power curber an american company.
The national bank of kuwait issued an irrevocable letter of credit instructing the
Bank of America in Miami to advise the credit to the seller through a bank in
charlotte.
The machinery was duly delivered but the kuwaiti buyer raised a large counterclaim
against the seller in the court of kuwait and obtained provisional attachment order
which prevented the bank which was willing to honour the irrevocable credit from
paying under it.

DR NAVNEET GERA 55
CONTD..
The seller sued the bank which had a registered address in London in the English
Courts and parker J gave summary judgement against the bank.
The court of Appeal upheld this decision.
It was held that the order of the court in kuwait did not affect the obligation of the
bank to honour the credit and moreover it could not have extraterritorial effect.

DR NAVNEET GERA 56
DOCTRINE OF STRICT COMPLIANCE
The legal principle that the bank is entitled to reject documents which do not strictly
conform with the terms of the credit is conveniently referred to as the doctrine of
strict compliance.

If the documents tendered are not strictly in conformity with the terms of the credit
and the bank refuses to accept them, the exporter should at once contact his overseas
buyer and request him to instruct the bank to accept the documents as tendered.

DR NAVNEET GERA 57
CONTD..

The refusal of the bank to depart in even a small and apparently insignificant matter
not sanctioned by the instructions or the UCP, where applicable from its instructions
will, in the overwhelming majority of cases, be upheld by the courts if litigation
ensures.

DR NAVNEET GERA 58
EQUITABLE TRUST CO VS DAWSONS PARTNERS LTD
The defendant bought vanilla beans from a seller in Jakarta. They instructed
the plaintiff bank to open a confirmed letter of credit in favour of the seller
and to make finance available thereunder on delivery of certain documents
including a certificate of quality to be issued “by experts”.
The advising bank in Jakarta informed the seller that the credit was
available on the tender of a certificate “by expert”.
The seller who was fraudulent shipped mainly rubbish and the expert failed
to discover the fraud.

DR NAVNEET GERA 59
DECISION

The house of Lords held that the plaintiff bank was not entitled to be reimbursed by
the buyer because, contrary to their instructions it made available finance on the
certificate of one expert only instead of at least two experts.

DR NAVNEET GERA 60
Thanks

DR NAVNEET GERA 61