School of Economics

International Business (MBA)

Semester :3

TOPIC : Modes of payment in International transactions

Submitted By : Himani Bhargava

ROLL NO. 20215

DL1500867

INTRODUCTION
In order to become successful in today’s global marketplace, exporters should provide their
customers with appealing sales terms supported by suitable payment methods. The ultimate goal
is getting paid in full and on-time for each export sale. An applicable payment method must be
chosen carefully to reduce the payment risk while also fulfilling the needs of the buyer.

To succeed in today’s global marketplace and win sales against foreign competitors, exporters
must offer their customers attractive sales terms supported by the appropriate payment methods.
Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate
payment method must be chosen carefully to minimize the payment risk while also
accommodating the needs of the buyer.

There are a variety of ways that payments can be made, including a different level risk for
collection.

Letter Of Credit

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount. In the normal sense, LC is an authorization
letter( recommending bank) to pay a specified person upon the completion of conditions started
in letter of credit. Due to the nature of international dealings, including factors such as distance,
differing laws in each country, and difficulty in knowing each party personally, the use of letters
of credit has become a very important aspect of international trade.

A Letter of Credit (LC) is a document that guarantees the buyer’s payment to the sellers. It is
issued by a bank and ensures timely and full payment to the seller. If the buyer is unable to make
such a payment, the bank covers the full or the remaining amount on behalf of the buyer.

Basic Feature Of Letter Of Credit

Negotiability

Letter of credit are usually negotiable. The issuing bank is obligated to pay not only the
beneficiary, but bank nominated by the beneficiary. To be negotiable, the letter of credit must
contain either an unconditional promise to pay at any time the holder wishes or at a definite time.
Negotiable notes become transferable in a way comparable to money when they have this
feature.

Revocability

A letter of credit may be revocable or irrevocable. In the case of a revocable letter of credit, it is
possible that the obligation to pay may be revoked or modified at any time or for any reason. An
irrevocable letter cannot be changed without agreement by all of the affected parties.

Transfer And Assignment

Domestic letters of credit, which are governed by the UCC (Uniform commercial code), may be
transferred as many times as desired and will remain effective. This holds true even where the
letter of credit says that it is non-transferable to the extent that no one has yet performed actions
pursuant to the letter of credit when the transfer occurs.

Sight And Time Drafts

There are two possible features of a letter of credit that can trigger an obligation to pay: sight or
time. A sight draft must be paid when the letter is presented for payment. A time draft must be
paid after a certain period of time has elapsed. In both instances, the bank is allowed the
opportunity to review the letter of credit to assure its validity.

Importance of Letters of Credit

Since the nature of international trade includes factors such as distance, different laws in each
country and the lack of personal contact during international trade, letters of credit make a
reliable payment mechanism. The ‘International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits’ oversees letters of credit used in international transactions.

Types of a Letter of Credit

The letters of credit can be divided into the following categories:
Sight Credit

Under this LC, documents are payable at the sight/ upon presentation of the correct
documentation. For example, a businessman can present a bill of exchange to a lender along with
a sight letter of credit and take the necessary funds right away. A sight letter of credit is more
immediate than other forms of letters of credit.

Acceptance Credit/ Time Credit

The Bills of Exchange which are drawn and payable after a period, are called usance bills. Under
acceptance credit, these usance bills are accepted upon presentation and eventually honoured on
their respective due dates.

Revocable and Irrevocable Credit

A revocable LC is a credit, the terms and conditions of which can be amended/ cancelled by the
Issuing Bank. This cancellation can be done without prior notice to the beneficiaries. An
irrevocable credit is a credit, the terms and conditions of which can neither be amended nor
cancelled. Hence, the opening bank is bound by the commitments given in the LC.

Confirmed Credit

Only irrevocable LC can be confirmed. A confirmed LC is one when a banker other than the
Issuing bank, adds its own confirmation to the credit. In case of confirmed LCs, the beneficiary’s
bank would submit the documents to the confirming banker.

Back-to-Back credit: In a back to back credit, the exporter (the beneficiary) requests his banker
to issue an LC in favour of his supplier to procure raw materials, goods on the basis of the export
LC received by him. This type of LC is known as Back-to-Back credit.
Example: An Indian exporter receives an export LC from his overseas client in the Netherlands.
The Indian exporter approaches his banker with a request to issue an LC in favour of his local
supplier of raw materials. The bank issues an LC backed by the export LC.

Transferable Credit: While an LC is not a negotiable instrument, the Bills of Exchange drawn
under it are negotiable. A Transferable Credit is one in which a beneficiary can transfer his rights
to third parties. Such LC should clearly indicate that it is a ‘Transferable’ LC.

Bank Guarantee
A bank guarantee is a type of financial backstop offered by a lending institution. The bank
guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other
words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the
customer, or debtor, to acquire goods, buy equipment or draw down a loan.

· A bank guarantee is when a lending institution promises to cover a loss if a borrower

defaults on a loan.

· Parties to a loan choose direct guarantees for international and cross-border transactions.

· The guarantee provides additional risk to the lender, so loans with such a guarantee will
come with greater costs or interest rates.

A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults
on a loan. The guarantee lets a company buy what it otherwise could not, helping business
growth and promoting entrepreneurial activity.

· KINDS OF BANK GUARANTEE

Performance Guarantee

Performance guarantee is used as collateral in transactions involving a buyer and a seller. A

performance guarantee is typically invoked if the buyer incurs cost and the seller does not deliver
goods or services as promised in the contract. To invoke a performance guarantee, the
beneficiary requires to declare in writing that the seller did not fulfil his or her contractual
obligations properly or on time.

Bid Bond Guarantee

Bid bond guarantees are typically used in tenders to ensure that the winning bidder undertakes
the contract as per the terms of their winning bid. In case a winning bidder does not perform the
tender requirements as stipulated, then the tender issuer can invoke the bank guarantee and fully
or partially forfeiture the amount. Therefore, bid bonds are mainly to ensure that the winning
bidder performs as per the tender terms after winning the tender.

Financial Guarantee

A financial guarantee is an undertaking from a bank to take responsibility for another company’s
financial obligation if that company does not meet its responsibility. The bank provides financial
guarantees mostly between two related parties, i.e., a partner company providing a financial
guarantee to a subsidiary company.

Advance Payment Guarantee

An advance payment guarantee is used to protect the advance payment made by a buyer to a
seller. In case the seller fails to deliver goods or services as per the terms and conditions of a
trade transaction, then the buyer can invoke the advance payment guarantee to recover a full or
partial advance payment made to the seller. Advance payment guarantees are used in
international trade transactions and domestic transactions wherein large advance payments are
made to a vendor.

Foreign Bank Guarantee

International trade uses a foreign bank guarantee. The bank issues a foreign bank guarantees for
the benefit of a foreign beneficiary.

Deferred Payment Guarantee

Deferred payment guarantees are used when one party in a transaction undertakes to make
payment of fixed amount at corresponding times in the future. In case, the debtor is unable to
pay, then the deferred payment guarantee can be invoked to claim the money.

Open Account

An open account transaction is a sale where the goods are shipped and delivered before payment
is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this is one of the
most advantageous options to the importer in terms of cash flow and cost, but it is consequently
one of the highest risk options for an exporter. Because of intense competition in export markets,
foreign buyers often press exporters for open account terms since the extension of credit by the
seller to the buyer is more common abroad.

Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors.
Exporters can offer competitive open account terms while substantially mitigating the risk of
non-payment by using one or more of the appropriate trade finance techniques covered later in
this Guide. When offering open account terms, the exporter can seek extra protection using
export credit insurance.

CONSIGNMENT PAYMENT METHOD

Under this method, the exporter receives the payment only after the goods have been sold by the
importer to the end customer.This international payment method is based on an agreement under
which the foreign seller retains ownership of the merchandise until it has been sold. In exchange,
the buyer is responsible for the management and sale of the merchandise to the end customer.

Consignment is usually only recommended for buyers and sellers with a trusting relationship or
reputable distributors and providers. Given the high risk involved, sellers should make sure they
have adequate insurance coverage that can cover both the goods from transit to final sale and
mitigate any damages caused in the event of non-payment by the buyer.

DOMESTIC METHOD OF PAYMENT ARE AS FOLLOWS:

IMPS (Immediate Payment Service)

IMPS full form is Immediate Payment Service. It is an instant electronic fund transfer service
that allows inter and intra-bank transfers. In simple word, IMPS helps customers transfer money
instantly from one account to another.

Objectives of IMPS

· To enable bank customers to use mobile instruments as a channel for accessing their
banks accounts and remit funds

· Making payment simpler just with the mobile number of the beneficiary

· To sub-serve the goal of Reserve Bank of India (RBI) in electronification of retail

payments

· To facilitate mobile payment systems already introduced in India with the Reserve Bank
of India Mobile Payment Guidelines 2008 to be inter-operable across banks and mobile
 operators in a safe and secured manner

· To build the foundation for a full range of mobile based Banking services.

Below are some features of the Immediate Payment Service system:

· IMPS is one of the fastest and one of the most reliable ways to conduct inter-account
money transfers. The Unified Payment Interface (UPI) is also built on this platform.

· Immediate Payment Service (IMPS) is a fast, safe and secure way to send and receive
funds.

· IMPS works on both net-banking and mobile platforms and its services are available at
all times even on public and bank holidays and bank off-days.

· Money can be sent to any beneficiary through IMPS mobile platform by only providing
his/her mobile no. and Mobile Money Identifier (MMID).

· Bank account nos. are not necessarily required for IMPS fund transfer if you are
transacting through mobile. Transfer notification is sent by the bank to both the payer and
the payee when the transfer is complete.

· The IMPS fund transfer limit currently is Rupees 2 lakh per day. The minimum allowed
transaction value in IMPS is Rupees 1.

· To conduct transactions through the IMPS, you shall have to follow the below steps:

· Register for mobile banking or net banking of your bank account.

· If accessing the IMPS fund transfer through mobile banking, you should have the
beneficiary’s Mobile Money Identifier (MMID) and your MPIN (Mobile PIN).

· If you are transferring money through IMPS net-banking, you need the payee’s account
details such as account name, no., IFSC, etc. to pay the beneficiary.
 RTGS-Real Time Gross Settlement

Real-Time Gross Settlement (RTGS) is a fund transfer method via which money is sent
immediately without any delays. RTGS is typically meant for larger value transactions and the
minimum amount that can be sent via this mode is Rs.2 lakh.

You can use the net banking or mobile banking facility to transfer money via RTGS. You need
the bank details of the individual to transfer money via this mode. Transfers can be scheduled in
advance as well.

The following information is required for an RTGS transaction:

· The amount that needs to be transferred.

· Name of the payee/beneficiary as in the bank account,

· IFSC code of the payee/beneficiary.

· Account number of the payee/beneficiary.

· Name of beneficiary bank and bank branch

· Features and Benefits of RTGS Transactions

The main features and benefits of RTGS transactions are mentioned below:

· Realtime online fund transfer

· Used for high value transactions

· Safe and secure

 · Reliable and backed by the RBI

· Immediate clearing

· Funds credited on a one-on-one basis

· Transactions executed on an individual and gross basis

RTGS is used by the Central Bank of India to help in minimising the risk that is involved in all
transactions that are of high-value. In spite of financial institutions and banks having very high
security processes in place for protecting its customer’s information, threats will always be
there.This is why the RTGS process has offered a lot of security to the customers for making
secure transactions by clearing all their settlements immediately.

NEFT - National Electronics Fund Transfer

The National Electronic Fund Transfer (NEFT) is payment platform which is used nation-wide
by many banks. This allows the easy and hassle-free transfer of money from one bank account to
another bank account. With the world slowly shifting to online banking, the concept NEFT has
become very popular in the country and is an easy way of transferring funds. It eliminates the
need to visit the bank to transfer funds, as you can transfer funds from while being at home.

1. National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating

one-to-one funds transfer.

2. Under this Scheme, individuals, firms and corporate can electronically transfer funds
from any bank branch to any individual, firm or corporate having an account with any
other bank branch in the country participating in the Scheme.

3. Even such individuals who do not have a bank account (walk-in customers) can also
deposit cash at the NEFT-enabled branches.

4. There is no limit – either minimum or maximum – on the amount of funds that could be
transferred using NEFT. However, maximum amount per transaction is limited to
 Rs.50,000/- for cash-based remittances within India and also for remittances to Nepal
under the Indo-Nepal Remittance Facility Scheme.

5. Presently, NEFT operates in hourly batches – there are twelve settlements from 8 am to 7
pm on week days (Monday through Friday) and six settlements from 8 am to 1 pm on
Saturdays.

Advantages of National Electronic Funds Transfer (NEFT) over the other modes of funds
transfer:

· The remitter or sender does not need to send the physical cheque or Demand Draft to the
beneficiary. Hence, it reduces time and effort while making process efficient.

· The beneficiary is not required to visit the bank for depositing these paper
instruments( cheque or DD).

· The beneficiary need not be cautious and apprehensive of any loss or theft of the physical
instruments or any likelihood of fraudulent en-cashment of the paper instrument.

· This electronic transfer is Cost effective.

· Under this system, Credit confirmation of the remittances is swiftly received by SMS or
email.

· The remitter or sender can initiate the remittances directly from his/her location (home/
place of work , etc.) by using internet banking also.

· The National Electronic Funds Transfer (NEFT) system is a near real time funds transfer
to the beneficiary account in a secure manner.

· Difference Between NEFT And RTGS

NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS)
basis which settles transactions in batches. In DNS, the settlement takes place with all
transactions received till the particular cut-off time. These transactions are netted (payable and
receivables) in NEFT whereas in RTGS the transactions are settled individually.

For example, currently, NEFT operates in hourly batches. Any transaction initiated after a
designated settlement time would have to wait till the next designated settlement time Contrary
to this, in the RTGS transactions are processed continuously throughout the RTGS business
hours.