Module III-- Methods & Instruments of
Payment & Pricing and
Methods of Financing Exports
Dr.Prof :Darshana Palwankar
B.com,LLB, LLM, PHD.
Methods of payment in international trade
There are five primary methods of payment in international trade that
range from most to least secure:
cash in advance,
letter of credit,
documentary collection or draft,
open account and
consignment.
Cash in Advance
The safest method of payment in international trade is getting cash in
advance of shipping the goods ordered, whether through bank wire
transfers, credit card payments or funds held in escrow until a
shipment is received.
A wire transfer is a method of transmitting money electronically between people or
businesses in which no physical money is exchanged.
An escrow account is a third party account where funds are kept before they are
transferred to the ultimate party.
Exporters prefer cash in advance before shipping orders
because there is no risk of default.
They will also have the cash in hand if there is any problem
with the order or the customer is unhappy or a shipment is
damaged.
If the exporter needs to provide a refund or credit in these
cases, it can do so without worrying whether the buyer will
withhold payment until the issue is settled.
The main drawback of cash in advance is that many customers may
not want or be able to afford to pay in advance.
Paying cash in advance for goods can harm cash flow and buyers
may be concerned that they may not receive the shipment.
As a result, an exporter that requires cash in advance may receive
fewer orders from its customers and may even lose customers to
sellers with less stringent payment terms
Open Account Terms
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.
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.
Consignment
Consignment in international trade is a variation of open account in
which payment is sent to the exporter only after the goods have
been sold by the foreign distributor to the end customer.
An international consignment transaction is based on a contractual
arrangement in which the foreign distributor receives, manages,
and sells the goods for the exporter who retains title to the goods
until they are sold.
Exporting on consignment is very risky as the exporter is not
guaranteed any payment and its goods are in a foreign country in
the hands of an independent distributor or agent.
The key to success in exporting on consignment is to partner with
a reputable and trustworthy foreign distributor or a third-party
logistics provider.
Appropriate insurance should be in place to cover consigned goods
in transit or in possession of a foreign distributor as well as to
mitigate the risk of non-payment.
Letters of Credit
Letters of credit (LCs) are one of the most secure instruments
available to international traders.
An LC is a commitment by a bank on behalf of the buyer that
payment will be made to the exporter, provided that the terms
and conditions stated in the LC have been met, as verified through
the presentation of all required documents.
Documentary Collections
A documentary collection (D/C) is a transaction whereby the
exporter entrusts the collection of the payment for a sale to its
bank (remitting bank), which sends the documents that its buyer
needs to the importer’s bank (collecting bank), with instructions
to release the documents to the buyer for payment.
Funds are received from the importer and remitted to the
exporter through the banks involved in the collection in exchange
for those documents
Introduction to UCP600
The UCP 600 is “The Uniform Customs & Practice for
Documentary Credits” (rules governing the Documentary
credits)
The official publication is issued by the International Chamber
of Commerce (ICC).
UCP is a set of rules on the issuance and use of letters of
credit.
It is a set of 39 articles on issuing and using Letters of Credit.
The UCP is utilized by bankers and commercial parties in more
than 175 countries in trade finance
Bankers, traders, lawyers, transporters, academics and all who deal with
letter of credit transactions worldwide refer to UCP 600 on a daily basis.
Historically, the commercial parties, particularly banks, have developed
the techniques and methods for handling letters of credit in international
trade finance.
This practice has been standardized by the International Chamber of
Commerce (ICC) by publishing the UCP in 1933 and subsequently updating
it throughout the years.
The ICC always makes every effort to keep trade finance flowing
smoothly around the world by creating standards and guidelines
to avoid the confusion and conflicts between parties and
continually adjust and overhaul the rules to reflect the changing
nature of banking in trade.
UCP was established by the international chamber of commerce
(ICC) to mitigate the doubts caused by individual countries
promoting their own national rules on documentary credit practice.
The objective,
was to create a set of contractual rules that would establish
uniformity in that practice,
obtain global understanding, a common interpretation and
application of documentary credit, so that practitioners would not
have to cope with plenty of conflicting national regulations.
eUCP
The eUCP is a supplement and digital companion to the UCP 600 in purely
digital form, allowing a quicker and safer way for financing trade.
ICC issued new electronic rules (eRules); they came into effect on the 1st of
July.
The eRules will be continually monitored and updated to reflect future
technological developments and trends that emerge in trade finance.
ICC will ensure that the eRules remain applicable to banks and other trade
finance institutions.
eUCP using Bolero
At the end of 2010 Bolero announced the first electronic presentation
using the Bolero platform to perform fully electronic presentation of
documents under a documentary Credit issued subject to eUCP.
First ePresentation under eUCP using Bolero ( Bolero International is a leading
cloud-based platform driving the digitisation of global trade)
The parties involved in the transaction:
The beneficiary BHP Australian mining company, formerly known as (BHP
Billiton)
The applicant Tae Kyung Ind. Co. Ltd. in South Korea
The issuing bank Korea Exchange Bank (KEB)
The advising and negotiating bank, The Royal Bank of Scotland (RBS)
The shipping company “K” Line Pte Ltd.
The electronic documents sent via Bolero platform by the beneficiary to
RBS for pre-checking then as a formal ePresentation, after approval the
documents forwarded to KEB and is promptly honoured.
Mr. Yutaka Kuge, General Manager, from “K” Line Pte Ltd. said: “Electronic
BOL’s provide significant benefits to all parties in the supply chain.
For ship-owners specifically, the most notable advantages are a fully
traceable audit trail of BOL ownership and faster turnaround of
administrative processes around BOL’s by elimination of physical BOL’s
getting delayed or even lost during the transfer between the various parties.”
The ePresentation replaces the need for paper documentation, thereby
saving the time for all parties involved, while accelerating the working
capital cycle through faster and secure payment.
Pre-Shipment Finance and Post-shipment finance
Meaning:
Pre-Shipment finance refers to the credit extended to the exporters
prior to the shipment of goods for the execution of the export order.
Post-shipment finance refers to the credit extended to the exporters
after the shipment of goods for meeting working capital
requirement.
Purpose:
Pre-Shipment finance is granted for as purchase, processing,
manufacturing or packing of goods as defined by the Reserve Bank
of India.
Short-term finance is extended for meeting working capital
requirement and medium and long-term for exports on deferred
payment
Amount of Finance:
In Pre-Shipment finance generally, the amount of packing credit does not exceed
the FOB value of the goods to be exported or their domestic value whichever is
less.
Post-shipment finance can be given to the extent of 100% of the invoice value of
the goods exported
Beneficiary:
Pre-Shipment finance is extended to the Indian exporters or deemed exporters
from India.
Post-shipment finance is extended to the Indian exporters as well as the overseas
importers.
Form of Finance:
Pre-Shipment finance is extended in the following forms:
Extended Packing Credit Loan;
Packing Credit Loan (Hypothecation and Pledge);
Secured Shipping Loan.
Post-shipment finance is extended in the following forms
Discounting of export bills,
Against undrawn balances
Against retention money; Against goods on consignment.
Period of Credit:
Pre-Shipment finance is granted for a maximum period of 180 days and
can be further extended for a period of 90 days with a prior permission
of the RBI.
Post-shipment finance can be granted for short, medium and long term
for periods ranging from 90 days to 12 years depending upon the nature
of exports.
Documentary Evidence:
Pre-Shipment finance is extended against the documentary evidence of
confirmed export order or letter of credit.
Post-shipment finance is extended against the evidence of shipping
documents certified by the customs authorities.
Lending Institutions:
Pre-Shipment finance is generally extended by commercial banks in India.
Short-term post-shipment credit is extended by the commercial banks while
medium and long-term credits are extended by the EXIM bank.
Foreign Exchange regulations for international trade
Foreign Exchange Management Act or in short (FEMA) is an act that
provides guidelines for the free flow of foreign exchange in India.
It has brought a new management regime of foreign exchange
consistent with the emerging frame work of the World Trade
Organisation (WTO).
Foreign Exchange Management Act was earlier known as FERA (Foreign
Exchange Regulation Act), which has been found to be unsuccessful with the
proliberalisation policies of the Government of India.
FEMA is applicable in all over India and even branches, offices and agencies
located outside India, if it belongs to a person who is a resident of India.
Some Highlights of FEMA
It prohibits foreign exchange dealing undertaken other than an authorised
person;
It also makes it clear that if any person residing in India, received any Forex
payment (without there being a corresponding inward remittance from abroad)
the concerned person shall be deemed to have received they payment from a
nonauthorised person.
There are 7 types of current account transactions, which are totally prohibited,
and therefore no transaction can be undertaken relating to them. These include
transaction relating to lotteries, football pools, banned magazines and a few
others.
FEMA and the related rules give full freedom to Resident of India (ROI) to
hold or own or transfer any foreign security or immovable property
situated outside India.
Similar freedom is also given to a resident who inherits such security or
immovable property from an ROI.
An ROI is permitted to hold shares, securities and properties acquired by
him while he was a Resident or inherited such properties from a Resident.
The exchange drawn can also be used for purpose other than for which
it is drawn provided drawl of exchange is otherwise permitted for such
purpose.
Certain prescribed limits have been substantially enhanced.
For instance, residence now going abroad for business purpose or for
participating in conferences seminars will not need the RBI's permission
to avail foreign exchange up to US$. 25,000 per trip irrespective of the
period of stay, basic travel quota has been increased from the existing
US$ 3,000 to US$ 5,000 per calendar year.
THANK YOU
