5

TERMS OF PAYMENT

INTRODUCTION
WHAT FACTORS DETERMINE TERMS OF PAYMENT
METHODS OF RECEVING PAYMEN
PAYMENT IN ADVANCE
DOCUMENTARY BILL
DOCUMENTARY CREDIT UNDER LETTERS OF CREDIT
OPEN ACCOUNT WITH PERIODIC SETTLEMENT :

SHIPMENT ON CONSIGNMENT BASIS

CHECK YOUR UNDERSTANDING
REVEW QUIESTIONS

INTRODUCTION
In international trade, the growing competition is not confined to quality, price and
delivery schedule but extends to terms of payment. International trade has been not ony
highly competitive, equally sensitive. Credit facilities extended to the importers, many atine
tilt the choice of exporter. Importer may prefer that exporter who can afford credit eveen

though the price is relatively higher.

When all the factors stand on the same footing betwe
competing exporters, it is all the more choice ofthe importer to finalise with that exporter wn
extends credit on favourable terms. Here, the role of institutional credit comes into full
play
Amount and Time of Credit
The extent of credit needed lised
depends upon the terms of sale. Exporter who has fina
the terms of sale on CIF basis requires more funds to finance the ion, i
export transacuo
48
 Terms of Payment 49

to FOB contract when no advance payment is received from the importer. So, sale
olation
rel
not only the amount of credit, but also when the credit must
be extended
terms influence
to facilitate successful completion of export transaction.
In some cases, credit
ta the exporter
even to purchase raw
extended to the exporter by importer, through letter of credit,
nav be
ma transactions are deemed to be
manufacture goods, meant for export. Export
materials to received from the importer.
when the export proceeds are fully
complete only
an important role in export
business. How and when the
The terms of payment play
between the exporter
receive payment are decided during early negotiations
to
exporter has deal based on attractive payment
terms
exporters are able to clinch the
Many
and importer. of price or quality. Payment
not be totally competitive from the viewpoint
though they may of the
host of factors, including the exchange control regulations
determined by a
the product and above
terms are
of the exporter, monopolistic conditions of
financial competence in our country,
country,
According to exchange control regulations
strength of the parties. date
all bargaining of six months from the
must be received within period
a
of export proceeds Bank of India.
the full value requires the prior approval of Reserve
extension of the period
of shipment. Any from o v e r s e a s buyers.
Choice of method,
of receiving payment
methods Different methods of
There are five the trading partners.
muscle of
on the bargaining
largely, depends to the exporter.
varying degrees of risk
payment carry

Determine Terms
of Payment? terms of
What Factors while deciding the
usually taken into consideration,
factors are
The following
payment:
knowledge of the Buyer.
A. Exporter's
financial ability.
B. Buyer's is not considered.

of payment, if advance payment

C. Degree of security
Remittance.
D. Speed of on speed of
remittance.

which normally
depends
remittance,
E. Cost of
faced by the exporter.
F. Competition
country.
restrictions in the importer's
G. Exchange
Payment
Methods of Receiving
This mode
I. Payment in Advance
viewpoint of the exporter.
from the whatsoever.

favoured method of payment the contract,

This is most in executing of
the exporter is n o guarantee
transfer risk to and there
credit or unstable is
a0es not have any are
advance payment
importer's country
conditions in the of the contract,
When the successful
execution
Indian exporter
even
after is received,
eceipt of payment, from Afghanistan unless
advance

exporter.
If a n order terms may be,
by the attractive the price
ways insisted however
the order
uay prefer to forego
payment is received.
 50 Export-Import Procedures, Documentation and Logistics

ExDorter receives payment irom the importer, in advance, before

efore execution ocs
execution
Receipt of payment can be at the time of receiving the order, initially, or later s of the order
hut hefore final execution of the order. Payment
means of dem Iment
may be received by
mail transfer or telegraphic transter in the currency specified in
the contract nf.
exchange risk from #hsale. Even
in this mode of payment, slight risk exists in the form of
contract till the date of receipt payment. Kisk appears to be an
of e d:
the slightest! However, importer seldom accepts this integral of life. at 1
Importer doa.least
method of
nant the mode unless there is heavy demand for those payment.
goods in his not
are tailor- made to the
specific requirements of the importer. In thosecountry or the o
exporter can dictate the advance payment. When the circumstancasi
ereditworthiness is doubtful and not acceptable to the importer is unknown or his
exporter and the importer
those goods, there is no alternative to the
importer, other than reauiraa
Normally, importing country's exchange control restrictions do not making advance pavmon
payment. Even when advance payment is allowed, a permit this tvpe of addvaance
part payment is made at the time
acceptance of order, another part, in stages, while the of
verification and balance before shipment, manufacturing is in progress, after
finally.
This methods works out to be the
cheapest mode of contract to the
would be no commission charges as banks do
not charge while
exporter as there
mail transfer/telegraphic
transfer amount to the account of crediting the demand draf
the exporter.
Il. Documentary Bills
When the exporter is unable to get the advance
best alternative mode of payment from the importer, the next
payment
with the documents of title
is
'Documentary Bills. The exporter is unwilling to part
till he receives the
to part with payment and the importer is not prepared
payment and assume the risk until he is sure
those of receiving the
cireumstances, 'Documentary Bills' is a bridge, as goods. Under
bank. It provides the documents are routed through the
required solution as it satisfies the claims of both the
system of payment, banks act as a media to reconcile the
parties. In this
exporter as well as
importer. conflicting requirements of the

Forms of
Documentary Bills
Documentary Bills can be in the form of Sight Bill and
payment depends on the form of bill used. Acceptance Bill. Method
Documents against
ne Payment: Under this method, exporter draws a on
importer and hands over the
relative documents sign nker
with the
instructions to deliver the documents specified in the contract to his
baua
to the only on payment. The documents aare sent
correspondent's bank, where the importer is located, with the a by
Xporter. When the instruc
importer makes the payment, he can get title to the eand and
possession. Eoo
uments
DIL on
the
against Acceptance (D/P): Under this method, exporter draw
usance

importer. Usance period mav d 180

180
be 30 to 180 days. Usance period Xceed

canno
 Terms of Payment 51

days a8
the export proceeds are maximum period of 180 days as per
to be collected within a

hange Control restrictions. The essence of the transaction is the exporter is not only
Ex

willing to
ship the goods but also prepared to part with the title and po8session of goods,
before payment is received and even extending the agroed period of credit.

of Bill: In this case, either D/P bill o r D/A bill is nent uo the
Collection
A)
resDondent's bank for collection of proceeds from the importer.
of
In case of D/P bill, importer has to make payment to get the documents8. In case
the
n/A Bill, on receipt of advice from the bank, importer accepts the u s a n c e bill by writing
with his signature on the usance only, importer gets documents
draft. Then
words 'Accepted'
firom the bank. He c a n get possession of goods and e v e n sells the goods to
af title to goods is
funds to make payment on the due date. In this case, the exporter
Tet the necessary
the commercial risk of default in
extending credit to the exporter, apart from assuming
Soon
not pay o n the due date, after taking delivery of goods.
navment as the importer nmay account will be credited
is received from the correspondent bank, exporter's
after the payment
sent collection basis.
when the bill is
on

the time
Purchase/Discounting of Bill: When the exporter is in need of funds, at
(B) the bill and
over the documents,
he c a n request the banker to purchase/discount
of handing
his account.
allow the proceeds to be credited to
the bill.
and if it is u s a n c e bill, bank discounts
If it is a sight bill, bank purchases
of documents.
is made to the exporter, o n presentation
In both the cases, payment to s e r v e the
Discount a r e used, in separate contexts,
Different terms Purchase' and
in c a s e the importer fails to pay
the bill, the exporter's account
same purpose. However,

will be debited.
fails to make
in Case of D/P Bill: When importer
Consequences of Non-Payment
the payment, on presentation by the correspondent's
bank, exporter may have to pay
and insurance charges, at the port of
additional charges by way of warehouse charges
If the importer finally refuses to
destination a s the goods will be lying in the foreign port.
take delivery of goods, alternative buyer may
have to be procured o r distress sale may

become necessary. If nothing have to be brought back to the country.

materialises, goods may
This course of action results in heavy loss to the exporter.
Bill: There a r e greater risks
Consequences of Non-Payment in Case of D/A
associated in case of D/A Bill, compared to D/P Bil. In c a s e
of D/A Bill, importer makes
payment only on the due date. From the date of delivery
of goods till date of payment,
of goods. If the
exporter has to bear credit risk as importer has, already, taken delivery
alternative but to file only a civil suit
mporter fails to make the payment, exporter has no

a t is beset with costs and realisation difficulty.

there
Common Risk: In both the cases, documents against payment and acceptance,
a common risk-transfer risk-if there is shortage of foreign currency or exchange control
 Dorumentation and Logistics
P'rurdures,
Export-Import
52
facilities
in the importer's country.
However, inatitutional aro
available in al
aals

rictions
risk related to inabilit
to receive the remittance from the import
s to cover politieal
India, Export. Credit Guaranteo t
orter
country.
even after payment by
the importer.

this facility.
In
Corporationm
1.1) (ECGC) oflers
of India of Credit
Credit under Letters
1. Documentary
of payment has become highly popular in recent tim
Attraction: This method
Main
risks, Ern
times
is elimination of credit and payment
The greatest
attraction to the exporter porter
the creditworthiness of the borrower while entering into the Contract
with
is not concerned
substituted for that of the importer. There
credit of the banker is
In other words, the
bank makes the payment to him, once the stipulated condit.. tions
payment risk as negotiating from the viewpoint of the exDorte
Above all, an
with. important advantage
are complied
obtain the payment from a bank, at his own centre. The documentary bills finane
he can
trade.
large part of
overseas
a

3 of Uniform (Customs and Practices relating to

Definition: According to Article
Letter of Credit has been defined as "any arrangement
Documentary credits, Documentary
and in accordance with the instructions of a customer
whereby a bank acting at the request
to or to the order of a third party (the exporter)
the importer) undertakes to make payment
documents and compliance with stipulated terms
and conditions"
against stipulated
makes commitment to the exporter to
Method: At the request of the importer, bank
a

make payment, under certain circumstances and up

to limit, provided the stipulated
a

are presented and found to be

documents in the letter of credit, requested by the importer,
or importer's bank. The documents
in order. Exporter may draw the draft on the importer
invoice and marine insurance policy.
usually required are full set of bill of lading,
Parties in Documentary Credits
There are several parties involved in documentary credit arrangement.
initiates the process of opening
1. The importer (applicant) approaches the bank and
the bank to open the
documentary credit in favour of the exporter. He requests
to be presented by
documentary credit, incorporating the documents required and
into between the importer
exporter, which are specified in the contract entered
exporter.
is reterreu
2. The banker who issues the letter of credit at the request of the applicant "
make the payment
to as the opening o r issuing banker who undertakes to
condition.
the exporter
on of the required documents, in proper
presentation
3. The bank to whom the letter of credit is sent for authentication and delivery is know
as Advising Bank. According to Article 8 of UCP, the advising bank is expecu
edit.
to take reasonable care while verifying the authenticity of the documentary creu
The
4. The bank, which adds the confirmation, is known as "Confirming Bank "ed
Contirming bank gives its commitment to make the payment if conditions supua
 Terma of Payment 53

unable to pay or refuses

in the credit are complied with even if the advising bank in
bank are one and
to make the payment. Normally, advising bank and confirming
the same.

the exporter on the importer or named importer's

5. Bill of exchange is drawn by
bank of documentary
bank. When the exporter draws the bill on importer, issuing
when draft is drawn on the
eredit becomes the Paying Bank. Alternatively,
importer's bank, that bank becomes the Paying Bank.
credit permits any
bank is not located in the exporter's place,
6. When the paying the exporter,
of documents and disburse payment to
bank to make the negotiation bank claims
Bank'. After payment, the negotiating
known as Negotiating
bank. Until the paying bank makes
the payment,
reimbursement from the paying
r e c o u r s e to the exporter
finalised. The negotiating bank can have
the drawing is not
reimbursement from the paying bank.
till it can get
credit is opened is called
the
The exporter for whose benefit the documentary
7.
Beneficiary.
applicant, beneficiary,
credit, there should be at least four parties,
In a documentary bank and paying
the advising bank. The advising bank, confirming
the issuing bank and
into one.
bank may be rolled

Different Types of Letter of Credit

credit. They are:
There are different types of letter of
various
credit specifies the
Letter of Credit: This letter of
1. Documentary the importer. That
to be submitted by the exporter to
documents that are required documents are
credit. Following
called documentary letter of
why it is
is the reason

letter of credit.
usually specified in the
Sight or Usance Bill of Exchange
Commercial Invoice/Customs Invoice

Consular invoice

Packing List
Bill/Combined Transport
Full set clean-on-board Bill of lading/Airway

Document
Inspection Certificate

Marine insurance policy/certificate

Certificate of origin
mentioned in letter of credit
Any other document as required by the buyer,
Under revocable letter of credit,
the opening
2. Revocable and Irrevocable Credit:
at any time, without the
bank reserves the right to cancel or modify the credit,
 Procedurrs,
Dxumentation and L»gistie
54 Export-Import

leaves the exporter in lurches. The ev.

consent of the
beneficiary. This
to revoke the creit
yrter may
realise that the inmporter
has instructed his banker redit when
the
execution o r e v e n after shipment,
ent. Thia
This metho
advancod stage of
contract i s at a n
this unsafe system of of paymer,
a s no exporter accepts
of payment is not popular
ln case of irrevocable letter of eredit, the opening ank has no right to ange the
the consent of the beneficiary. The
Th opening ban
bank
terms of credit. without
make the payment, if the documents are in confo
ireocably committed itselfto rmity
the exporter is secured aass
to credit terms specified in the letter ol credit. So, above
remain in this type of credit.
said problems do not
of credit should state whether it is revocahio
According to UCP, the letter
irrevocable credit. In the absence
of any specific mention, it is deemed that
he
credit is irrevocable credit effective
from 1st January '94.
Without Recourse Letter of Credit: The revocable and
3. With Recourse or
irrevocable credits are further classified into "With Recourse" and "Without Recours
letter of credit.
Under With Recourse" letter of credit, the negotiating bank can make the exporter
liable, in case of default in payment by the opening bank or importer. For this
from the exporter for refund
Negotiating bank has to obtain suitable undertaking
reimbursement from the issuing bank.
of amount paid, in the event of not getting
bank has no recourse to
Under Without Recourse" letter of credit, the negotiating
to be the negotiating bank, it
the exporter. But, if the confirming bank happens
cannot have recourse to the exporter.
r e c o u r s e to the beneficiary.
Unconfirmed or
A confirmed letter of credit is without
the beneficiary.
negotiable credit is always with r e c o u r s e to
remain
Credit: Exporter and importer
4. Confirmed and Unconfirmed Letter of
a w a r e of the standing
of the issuing
in different countries. Exporter may not be
bank should add confirmation
bank. In such cases, exporter may insist that the local
to add confirmation
to the credit Normally, importer would not be willing
opened. Ater
it involves additional commission of the
confirming bank.
to the credit as
becomes confirmed and
irrevocable. Once
confirmation, the letter of credit
confirmation is added, the confirming bank,
which is normally the corresponden
the effect that:
bank of the opening bank, adds a clause to
we hereby irrevocably undertake
The above credit is confirmed by us and all
drawn under this credit on presentation, provided tha
honour the drafts
a r e duly satisfied".
the terms and conditions of the credit
bank asks
When the credit is irrevocable
but not confirmed, the issuing bank

and in such case,

a the correspondent
correspondent bank to advise the credit
will advise the credit with a clause stating that:
eredit is irrevocable on the part of the issuing
bank but is not con
This
by us and therefore it does not involve any undertaking on our pato
."
 Terms of Payment 55

In the absence of confirmation of eredit, there is a

contingent riak to the exporter.
The exporter has to endorse the documents to the negotiating bank. Though the
negotiating bank nmakes the payment. to the exporter, it will have recourse on the
exporter in the event it does not get reimbursement from the isauing bank.

5. Transferable and Non-Transferable Letter of Credit: Under transferable letter

of eredit, exporter can transfer the credit fully or partly to one or more partien. This
is possible when the credit clearly states it is "tranaferable" (no other term i
acceptable). In cases, when the product is to be fabricated by a third party, fully
or partly, a portion of the credit is made transferable to the third party. Such
transfer of credit must be informed to the issuing bank. It is used when the seller
is a middleman who can transfer a part of the credit to the exporter for shipping
the goods. When the credit is not transferable, it is non-transferable credit.
is for fixed
6. Fixed and Revolving Letter of Credit: A fixed letter of credit a

period and amount. Letter of credit expires if the credit is exhausted or period is
over, whichever is
earlier. In case of revolving letter of credit, the letter of credit
once it is exhausted.
would be revived automatically for the same amount and period,
and importer have frequent
Such letter of credit is beneficial when the exporter
dealings of the same nature.
7. Freely Negotiable and Restricted Letter of Credit: When the letter of credit
it is a freely negotiable
does not put any condition for the negotiation of documents,
be negotiated through any willing bank. In
letter of credit. This letter of credit can
a specific bank for negotiation,
then the letter of credit is
case, the credit names
restricted credit. In case, the bank that has
been named for negotiation refuses
a
to pay as per the
to negotiate, then it is the responsibility of the opening bank
terms of credit.
Credit: A red clause letter of credit is
8. Red Clause and Green Clause Letter of
of
one that authorises the exporter to
avail pre-shipment finance on the strength
or typed in red ink. Hence,
the credit. In this letter of credit, the clause is printed
credit. This is a pre-shipment
such letter of credit is known as red clause letter of
This credit is liquidated once
finance provided to the beneficiary by the importer.
the documents are negotiated.
in addition to pre-shipment finance, storage
In agreen clause letter of credit,
bank. Such
facilities are allowed at the port of shipment to the exporter by opening
ink. So, this letter of credit is known as
type of clause is typed or printed in green
green clause letter of credit'.
finance
9. Back-to-Back Letter of Credit: This letter of credit provides pre-shipment
raw materials from a
to the When the beneficiary wants to purchase
beneficiary.
is only middleman and
third party for the purpose of executing export order, or a

new letter of credit,

not the actual supplier of goods, he can ask the bank to open a
a new letter
on the strength of this credit, in favour of a third party. In this case,
56 E^port-lmport Procedures, Documentation and Logisties

of eredit has to be opened while in the case of transferable eredit: th

10.
credit is only transferred.

Assignable and Non Assignable Letter of Credit: An assignable letto

existing
le letter of
can be assigned to a third party by the beneficiary of the credit. Whon. credit
is not able to find the real exporter, in the meantime, he opens the credit in
ouyer
of his agent or representative. When uhe agent is able to find an exporte vour
willing to supply the goods on the erms ol uhe buyer, he assigns the lott wheo i
n
to the supplier of goods. A non-assignable letter of credit is one that a
further assigned and so opened only in lavour of the real exporter
ter of
of e
order.
goods after
the exporter confirms the
11, Deferred period of Credit: In this period of eredit, the supplier provides er
of goods. edit
to the buyer after supply
12. Stand by Credit: This is similar to a performance bond or guarantee, but in t
nature of letter of credit. The eredit assures the beneficiary that in the euo the
non-perfornmance or non-payment of any obligation, the beneficiary may recino
the issuing bank to make the payment. The beneficiary has to draw the claim by
drawing a bill on the issuing bank, accompanied with documentary evidence in
support of non-performance of contract. When the exporter receives the advance
payment from importer, importer may insist on exporter to open 'Stand by credit
in favour of the importer to protect the latter's interests.
Main distinction between Documentary Bill and Documentary Credit under
Letters of Credit
Documentary Bills: Under this method of payment, bank opens no letter of credit
Bank functions as an agent for collection of the bill. The role of bank is that of medium only.
There is no commitment on the part of bank for any payment, whatsoever. In case of D/A
bill, importer gets documents of title to goods, on acceptance of the bil1. Exporter gets
payment only if importer makes payment. If importer fails to make payment on due date,
exporter has no alternative other than filing a civil suit against importer as it is not legaly
possible to get back possession of goods. In case of D/P bill, if importer fails to make
payment, exporter gets back the document of title to goods. There is no risk in case of
non-

payment, an important advantage from the viewpoint of the exporter.

ban,
Documentary Credit under Letters of Credit: Letter of credit is opened by
letter o
at the instance of the applicant (importer). Here, the bank that has opened the
credit assumes the responsibility to make the payment, on presentation of the documents
specified in the letter of credit. So, exporter is sure of receiving the payment, once te
with ue
documents specified in the letter of credit are presented. Exporter is not concerned
creditworthiness of the importer. Neither credit risk nor political risk- in fact, no risk e
it.
for receipt of payment if the exporter, scrupulously, follows conditions in the letter of ereu
 Terms of Payment 57
V. Open Account with Periodic Setlement
Under this form of payment, exporter sends the goods, divectly, to the overseas buyer
lang with invoice. The exporter does not draw any bill of exchange on the importer. This
alon
for of payment is made when the exporter and importer are inter-connected companies
like holding company and subsidiary company or where the relationship hetween them is
long standing and absolute trust exists between the two. There is real risk to the exporter
as there is no proof in the torm of documentary evidence to establish the obligation on the
nart of the importer to make the payment. If no credit arrangement is agreed, the buyer has
to make payment, immediate to the receipt of goods. However, in most of the cases, importer
makes the payment only on the expiry of the stipulated credit period agreed. It is desirable
Gar the exporter to enter into this manner of payment only when the bonafides of the
doubt.
importer is beyond
This method of payment is simple and involves no additional costs. This form of payment

is possible only when the exporter is financially strong as he is meeting the credit requirements
that there are no exchange control restrictions in the importer's
of the buyer. It presupposes
not be able to remit the amount when the amount falls
county. Otherwise, the importer may
due for payment.
Indian exporters are allowed to send the goods on this basis only with the special
to foreign companies operating in India.
approval of RBI. RBI normally permits

V. Shipment on Consignment Basis

Under the consignment basis, the seller ships the goods to his agent or representative.
the physical possession is with the agent.
Exporter retains legal title to the goods though
remittance to the principal who is the
As and when agent sells the goods, he makes the
if the agent is dishonest, not sincere
exporter. There is no financial security to the exporter
or fraudulent in working document of evidence in the form of Bill of Exchange is
as no
will send back
available to protect him from default. In case goods are not sold, the agent
the goods to the exporter, at the risk and cost of later. However, this form of payment

goods, which cannot be standardised in respect

arrangement is common in respect of those
of quality such as tea, coffee, wool etc.
There is a certain advantage to the exporter to secure better realisation as the buyers
would be having an opportunity to inspect the goods and may be willing to pay a higher
price if they are satisfied with the quality of the product.
At the time of sending the goods on consignment, the exporter has to declare the selling
of the goods in the GR form. If the value of the goods is not ascertainable, the exporter
price
ds to declare that value, at which they can be sold, having regard to the prevailing market
COnditions at that time. FERA provisions indicate that the exporter shall not sell the goods
a price lower than the declared value unless exporter takes prior permission of RBI for

such sale.