MODE OF PAYMENT

GROUP MATES
Saurabh Awasthi
Arpit Shukla
Pushpam Raj
Nisha Chandran
METHOD OF PAYMENT
 The method of payment signifies the terms and condition
between importer and exporter.

 In method of payment at least two parties are essential.

 Both parties must agreed upon terms and condition of

payment.
PARTIES INVOLVED IN TRANSACTION

 Importer
 Benificiary/Exporter

 Importer’s Bank

 Exporter’s Bank

 Advisory Bank

 Negotiating Bank
METHODS OF PAYMENT
 Advance payment

 Open account

 Documentary collections;
 Documents against payment(D/P)

 Documents against acceptance(D/A)

 Documentary credit(Letter of credit)

 
 Advance payment

 In this mode the exporter receives payment from the

overseas importer in advance.

 The payment is in the form of demand draft or cheque .

 It is Denominated in foreign currency or by way of direct

telegraphic transfer against the supply of goods to be
made later on.
CONTINUED…
 In the case of huge payments in advance, the importer
demands that an advance payment guarantee be provided
through a bank.

 The export may ask for the advance payment only when
he is in a strong trading position.

 When the exporter receive advance payment then he

must have an evidence of advance payment in the form
of certificate of foreign inward remittance(CFIR).
 Open payments

 It is an arrangement between the exporter and the

importer whereby the goods are manufactured and
delivered even before the payment is required.

 This mode of provides payment at some stated specific

future date.

 In this importer makes the payments only when he has

received the goods and inspected them to be of quality to
his satisfaction.
 Documentary collection

 The documentary collection involves collection of a

given sum of money by a bank due from the importer
against delivery of certain documents at the instruction
of the exporter.

 The parties involved in the documentary collection are as

follows:
CONTINUED……..
 The Exporter

 The collection bank

 The remitting bank

 The importer
TYPES OF DOCUMENTARY COLLECTION

 Documents against payment: In this

documents of the export order are given against
the payment of goods.
 The exporter sends the shipment and obtains
shipping documents from the clearing and
forwarding agent.
 He prepares a sight draft on the importer for
the value of the goods
CONTINUED…………

 The exporter submits the sight draft along with other shipping
documents to his bank. The exporter’s bank acknowledges
that all the documents as noted by the exporter are presented.

 The exporter’s bank sends the shipping documents and the

draft along with a collection letter to a correspondent bank
known as remitting bank which is usually located in the
importer’s country.
CONTINUED………

 The remitting bank notifies to the importer upon receipts o

the draft and the documents and requires him to make the
payment against the draft so that the documents are released
to him.

 All the documents including those establishing the importer’s

title to the goods are released to him upon his payment of the
amount of the sight draft.
CONT…………

 The remitting bank sends the remittance tot the exporter’s

bank which, in turn, credits the account of the exporter.

 In case, the importer doesn’t make the payment, the set of

documents are returned to the exporter.

 
DOCUMENTS AGAINST ACCEPTANCE

 In this remitting bank hand over the shipping documents

to the importer only acceptance of accompanying draft.

 Importers are ready to pay amount within the usance

period.

 The payment must be paid on the expiry of usance

period.
BILL OF EXCHANGE
 It is an unconditional written order prepared by an
exporter for the payment.
 Importer has to pay a specified sum of money to a
specified person at a specified time.
 Specified amount - The amount of invoice

 Specified person - Bank

 Specified Time - Matter of Negotiation

PARTIES INVOLVED
 Drawer

 Drawee

 Payee

 Collecting Bank

 Remitting Bank
TYPES OF BILL OF EXCHANGE

 Sight Bill Of Exchange

 Usance Bill Of Exchange

 LETTER OF CREDIT

 The International Chamber of Commerce (ICC) in the

Uniform Custom and Practice for Documentary Credit
(UCPDC) defines L/C as:

 "An arrangement, however named or described, whereby

a bank (the Issuing bank) acting at the request and on the
instructions of a customer (the Applicant) or on its own
behalf.”
CONTI…….
 It is the mode of payment in which buyer and seller
agree on some terms and conditions.

 Buyer arranges for payment on the presentation of

document by the importers bank.

 Exporter get the payment from the bank on fulfillment of

all terms and condition.
FUNDAMENTAL OF LETTER OF
CREDIT

 Autonomy of L/C : According to this principle credit is

separate and independent of underlying contract .

 A bank which operates the credit is concerned only with

the documents tendered by the seller correspond to the
specified terms.
DOCTRINE OF STRICT COMPLIANCES
 According to this principle the bank is entitled to reject
documents which donot strictly conformed with the
terms of credit.

 The document should not be discripent by the L/c.

 PARTIES INVOLVED IN LETTER OF CREDIT

 Opener: Buyer or Importer

 Issuing Bank : It is a bank which create a letter of credit

and takes the responsibility to make the payments on
receipt of the documents from the beneficiary .

 Beneficiary :Exporter or Seller

CONT…….
 Advising Bank : An Advising Bank provides advice to
the beneficiary and takes the responsibility for sending
the documents to the issuing bank and is normally
located in the country of the beneficiary.

 Confirming Bank : Confirming bank play an important

role where the exporter is not satisfied with the
undertaking of only the issuing bank
CONT………
 Negotiating Bank:  The Negotiating Bank is the bank
who negotiates the documents submitted to them by the
beneficiary under the credit either advised through them
or restricted to them for negotiation.
STEPS OF ISSUING LETTER OF CREDIT

E I I A E
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po is
p p p
rte or
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te te Ba ba te
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TYPES OF LETTER OF CREDIT

 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. 

 It is rarely used in international trade and not considered

satisfactory for the exporters but has an advantage.
IRREVOCABLE LETTER OF CREDITL/C

 In this case it is not possible to revoked or amended a

credit without the agreement of the issuing bank, the
confirming bank, and the beneficiary.

 The exporters point of view it is believed to be more

beneficial
CONFIRMED LETTER OF CREDIT L/C

 Confirmed Letter of Credit is a special type of L/c in

which another bank apart from the issuing bank has
added its guarantee.

 Although,  the cost of confirming by two banks makes it

costlier, this type of  L/c is more beneficial for the
beneficiary as it doubles the guarantee.
SIGHT CREDIT AND USANCE CREDIT  L/C

 Sight credit states that the payments would be made by

the issuing bank at sight, on demand or on presentation.

 In case of usance credit, draft are drawn on the issuing

bank or the correspondent bank at specified usance
period

 The credit will indicate whether the usance draft are to

be drawn on the issuing bank or in the case of confirmed
credit on the confirming bank
BACK TO BACK LETTER OF CREDIT  L/C

 Back to Back Letter of Credit is also termed as

Countervailing Credit. A credit is known as back to back
credit when a L/c is opened with security of another L/c.

 In this 3 parties are involved Importer , Exporter &

Agent.
TRANSFERABLE LETTER OF CREDIT  L/C

 A transferable documentary credit is a type of credit

under which the first beneficiary which is usually a
middleman may request the nominated bank to transfer
credit in whole or in part to the second beneficiary.

 The L/c does state clearly mentions the margins of the

first beneficiary and unless it is specified the L/c cannot
be treated as transferable
CONT……
 It can only be used when the company is selling the product
of a third party and the proper care has to be taken about
the exit policy for the money transactions that take place.

 This type of L/c is used in the companies that act as a

middle man during the transaction but don’t have large
limit.

 In the transferable L/c there is a right to substitute the

invoice and the whole value can be transferred to second
Benificiary.
RED GREEN CLAUSE L/C
 In red clause partial payment is done and it is written in
red colour.
 Red clause is for the purpose of pre shipment finance .

 In Green clause partial payment is done and it is written

in red colour.
 Green clause is for the ware housing finance.
STAND BY L/C
 Initially used by the banks in the United States, the
standby letter of credit is very much similar in nature to
a bank guarantee.  
 The main objective of issuing such a credit is to secure
bank loans.
 Standby credits are usually issued by the applicant’s
bank in the applicant’s country and advised to the
beneficiary by a bank in the beneficiary’s country.
CONT…….
 A standby letter of credit is subject to "Uniform Customs
and Practice for Documentary Credit" (UCP),
International Chamber of Commerce Publication No
500, 1993 Revision, or "International Standby Practices"
(ISP), International Chamber of Commerce Publication
No 590, 1998.
THANK
YOU. . .