International

Settlement & financing Trade

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Exchange of Goods &
01 Services

Activities of Exporter &

Internation 02 Importer

al Trade
International payments &
Activities 03 Exchange Rates

International Banking &

04 Finance

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Beyond Normal
01 C r rde
Ce
normal ti dfacilities
credit faciiltities are
may be
fully extended.
availed even when

Profitability
E Cuvso
t aby
customer lrucaanfinancial
mecounting tieovalncosts.
uae
t the
02
profitability of the

Lower Margin
03 The creditworthy customer can get lower margin
than conventional overdraft.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 01 Advance Payment

Open Account
Trading
02
03 Documentary
Collections

Documentary Credit
04
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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Factors Determining Method of Payment

Negotiations The
between exporter c.ommercial
.
and importer practices in the
countries
involved
 Open Account
Trading
No bank involvement in
settlement of trade financing and
in enforcing the payment.

This method is based on complete

trust between the importer and
exporter.

The documents of title is directly sent to the

importer, and importer endorses the
payments.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Documentary Collections
Definition
01 The collection service by a bank is a means whereby a creditor
in one country obtains payment from a debtor in another
country.

URC
02 The roles and responsibilities of banks in collections
established by ICC and are known as Uniform Rules for
were

Collection (URC).

Documentary Collection
03 When the commercial and financial documents are present, it
is known as documentary collection.

Clean Collection
04 A clean collection consists only of financial documents.

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Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences
 Parties in Documentary Collections

Principal Collecting Bank

Exporter, who entrusts an A correspondent bank of the
outward to a remitting bank who present the
collection bank.
commercial documents and collect the
payment.

Remitting Bank Debtor

This is where the document Debtor is usually the importer.
is sent from the bank. Importer endorses the
documents of pay the money.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Collection Process (Outward Collections):
01
Exporters
03 05
Exporter negotiates a The remitting bank Collecting bank
contract with forwards documents releases the
importer and ships to the collecting documents against
his/ her goods. bank. payment or
acceptance of the
bill or the issuing of
a promissory note.

02 04 06
Exporter submits his Collecting bank When the bill is
financial and arranges for the received, collecting
commercial importer to inspect bank sends the
documents to his the documents. proceeds to the
banks in the home remitting bank.
country.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 D/P versus D/A
01
Documents against Acceptance
means the exporter allows credit
terms to the importer, and bill is
known as ‘usance’.

01 02
Documents against Payment The importer sign the bill as a
means the bill is payable at sight promise to pay it at a set date in
by the importer. the future and documents are
handled to him.

02
The collecting bank hands over
the documents only when
importer has paid the bill.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Advantages of Collections for the Exporter

Reduces Risk
01 It reduces the ri sk for both exporter and
importer receiving payment and
for
goods.

Cheaper
Collections are cheaper t han documentary
credit through the later is more safe.
02
Obtaining Finances
03 Exporter can raise finance by obtaining an
advance against the security of the bill.

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Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences
 Possible Disadvantages of Collections for the
Exporter

01 02 03 04
Financing Protesting
Rejection Slow
Cost Cost
Overseas buyer Remittance docs In case of usance Any expenses
might refuse to pay of and bill, exporter may incurred by a
or accept bill on can be relativelytimes
collection slow raise funds against collecting bank for
a of the & exporter may have the collection but protesting a bill are
presentation to wait. it will increase cost . charged to the
documents. exporter.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Collection Process (Inward Collections): Importers

The collecting Collecting Collecting bank The

bank acts as bank advises advises collecting bank
agent to the the the bill fate
of of remit the to the
proceeds
remitting the bank importer exchange by remitting bank
and explicitly that
been received, informing promptly less
follows the collection
seeks his remitting bank. the charges.
instructions of has
acceptance or
remitting01bank.
paymen0t 2of 03 04
bill.
the

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Advantages of Collections for the Importer

Term bill provides Importer can In clean The collection is

the buyer with a inspect collection, cheaper and
period of credit documents beforethe can buyer simpler for
from the exporter. accepting a bill. possession of take
the
goods before importer
documentary the
paying for them. credits. than

01 02 03 04

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Disadvantages of Collections for the Importer

Legal action
Refusal to
might be taken
a.ccept goods
aga. inst if
could lead to a
importer
protest of
dishonors an
non-
accepted bill of
acceptance.
exchange.
 Recourse Finance versus Non-recourse
Finance
•01
•Non-recourse finance
01 happen where the bills
avalized by an overseas
Bank grant loan against the or the importer has
collection in order to make credit rating.
available the exporter a part
of all of the sale proceeds.
•02
02 •Avalization is the pro
whereby a bank guarant
Generally, loan against bill of exchange.
collections are subject to full
recourse to the exporter.
 Documentary Credit

01 L/C
It is a written undertaking by a
0 0 Irrevocable L/C 03
1
bank on behalf on a importer to

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Once issued cannot be
pay the seller an amount of amended or cancelled without
money within a specified time prior agreement of the exporter
provided the seller
presents documents strictlyin
accordance with the terms of
L/C.
Irrevocable L/C 04
04
02 Revocable L/C
02
Irrevocable L/C provides greater
Importer can amend or cancel it security to the exporter, hence
without prior notice to the almost all the L/C issued today
exporter, rate in today’s. are irrevocable L/C.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Process of Documentary Credits
01 03
(L/C) 05
Importer negotiates a Issuing bank sends The documents are
contract with the L/C to the forwarded to the
exporter providing for exporter’s bank, issuing banks for
payment by L/C. known as advising receiving payment at
banks, it may add sight or in future
its own specified date.
confirmation.

02 04 06
The Importer’s bank Exporter ships the Issuing bank makes
is instructed to issue goods and presents the documents
an L/C in favor of the documents to available to the
the exporter. the advising, importer and receive
confirming or imbursement from
nominating firm. the importer.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Advantages of L/C for the Exporter
Domestic payment
arrangement is
1 Security and
Confidence
2 possible

Confirmation is
3 Bank
guarantee
4 available

UCPDC reduces
5 No buyer risk 6 unpleasant surprise

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Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences
 Advantages of L/C for the Importer

Importer Payments will Importer

can obtain only be made obtain trade
if documents
and
help advice credit and
are presented
from properly.
better
the
issuing bank. price
under L/C.

Importer’s
Importer can Some
insist credibility
costs
on increases
may be
shipment
goods within of in the
passed
the exporter.to
a eyesof
reasonable exporter.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Disadvantages of L/C for the Importer

Importer is
Bank deals with
required a
documents,
credit limit
goods, it doesn’t
not .
. approved by
concern about
bank, which
goods’
restricts
condition.
credit other
Confirmed L/C & Deferred Payment L/C

Advising bank in L/C payment

the exporter’s is made in
country confirms .future date,
an. L/C. So, the exporter need
L/C ‘t draw a bill of
is exchange.
guaranteed by
 General Types of L/Cs

1 Transferable L/C
2 Back-to-Back

Receipt &
3 Standby L/C
4
Undertaking L/C

Red Clause L/C

5 Revolving L/C 6

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Similarities Between Back to Back L/C and
Transferable L/C

Both Intermediary Terms and

substitutes his conditions vary
involve an
invoices between the
intermediary first and second
in place of
as seller. the original stages
invoices. of transactions.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Differences between Back to Back L/C and
Transferable L/C
Back to Back involves Transferable credit
01 05

TRANSFERABLE
two L/Cs. involves one L/C.
BACK TO BACK

Back to Back Transferable L/C is

02 arrangement may work designated
06

L/C
L/C

with any L/C. as ‘Transferable’.

L/C is issued under the L/C is transferred
03 full responsibility of bank. 07
without
responsibility of bank.
the
Intermediary needs Intermediary
04 credit to be approved by credit to be approved by 08
needn’t
bank. bank.

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Post Shipment Finance for Exporters

Bank Discounting Exporter

discounts L/C can offer
the bill is credit
of obtained terms though
importer
exchange less on a to
obtain
(L/C) non immediate
recourse

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Pre Shipment Finance for Exporters

Red Clause Receipt

Back to Back
Letter of and
Undertakin
Letter
Credit. g Letter of
of Credit.
Credit

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Post-shipment Finance for Importers

There are Import loans used Finance is made Clean import

Two types: as stand-alone available against loans are
documentary funding the security as appropriate when
import loans and vehicle and letter of pledge or loans need to be
clean essentially
not much different trust receipts in structured and
import from other loans. documentary transactional
loans. import control is not
loans. required0.4
01 02 03

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Security Documents used with Documentary Import
Loans
A General Letter of
1 Pledge
2 Shipping Documents

3 Bills of Lading
4 Airway Bill

A Warehouse
Trust Receipts
5 Warrant 6

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Advantages of Documentary Import Loans for the
Banks

01 02 03 04
Transactional Early
More Loans Structured Control Warning
Banks can lend more Banks know the Transactional control Non-repayment
though the source and timing of is obtained by on due date provides
customer’s repayment and handling an
early warning of
sheet balance exactly shipping possible problems
don’tlevels requested.
the know they what
lending documents. ahead.
support against.are

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Disadvantages of Documentary Import for
Banks

Additional cost of The value of

administration- goods may fall
security taking, .significantly in
struc. turing is case of forced
time consuming, sale.
additional

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Advantages of Documentary Import loans for
Importer

The The importer

increased may obtain
assurance the reduction
.
in
permits to pricing
imp. orter compared
obtain increased to overdraft.
credit facilities.
Disadvantages of Documentary Import loans for
Importer

Complex Banks’
administration involvement in
and less movements of
.
flex.ibility goods are
compared to disliked
conventional importer. by
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Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences