4. Methods of Payment for DFT

7/24/2019 4. Methods of Payment for DFT

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Methods of Payment

Dr. Anupam Varma

BIMTECH

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The Importance

In international trade today,the ompetition is no lon!er

onfined to prie, "uality ordeli#ery shedule $ut e%tendsto terms of payment

The terms of payment oftendeide o$tainin! of the order

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The Risks

'is(s in#ol#ed may $e more serious thanthose in domesti trade

Complete elimination of the ris(s

assoiated )ith international trade isdiffiult

Consider your preferred option )ith

are Hed!e the ris(s alon! )ith appropriate

redit he(s on your ustomers.

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Determination of Method ofPayment

Host of fators determine the payment terms,suh as e%port ontrol re!ulations,

trade praties, $uyers+ redi$ility, eonomi and politial sta$ility of the

$uyer+s ountry

ompetition faed $y the seller $ar!ainin! stren!th

si-e and type of sale, et.


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To /elet Payment Terms

Questions to Ask:

Can your $usiness afford the loss if it is

not paid0ill e%tendin! redit and the possi$ilityof )aitin! se#eral months for paymentstill ma(e the sale profita$le0Can the sale $e made only $ye%tendin! redit0 2ontd3

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To /elet Payment Terms 2ontd3

Ho) lon! ha#e the $uyers $een operatin!,and )hat is their redit history0

Has your $usiness sold suessfully to the

$uyer $efore0 Are there reasona$le alternati#es for

olletin! if the $uyer does not pay0 2Doesthe $uyer+s ountry ha#e the le!al and$usiness infrastruture for settlin! disputesfairly and s)iftly03

If shipment is made $ut not aepted, analternati#e $uyers $e found0

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Cash in Ad#ane

Typically used where transactionsare small or you have a unique

product Advantage to exporter:

No risk

Immediate use of funds

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6etters of Credit

Most ommonly used mehanism ininternational trade.

Affords !reatest de!ree of protetion to

the seller after ad#ane payment. Atsli(e an insurane ontrat for$uyer:seller, eliminatin! redit ris(

Issued $y importer+s $an( in fa#our ofthe e%porter !i#in! him authority todra) $ills up to a partiular amounto#erin! a speified shipments of !oods

2ontd.3

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Doumentary 6etters of Credit2ontd.3

Bills are aompanied $y the shippin!douments o#erin! the !oods ontrated to $epurhased $y the importer

Assures payment a!ainst deli#ery ofdouments. At the same time reduespayment delays

Pratie

for Doumentary Credits ? latest edition=CP 5@@.

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Parties to a 6etter of Credit ?'i!hts and 'esponsi$ilities

Appliant:Importer

Appliant+s:Importer+s Ban( 2Issuin!

Ban(3 Confirmin! Ban(

Intermediary Ban( 2Ad#isin! Ban(3

E%porter

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The Proess

The importer 2opener3 as(s his $an( to open a 6C infa#our of the e%porter

The 6C is opened $y the openin! $an( The ad#isin! $an( 2an intermediary $an( in e%porter+s

ountry3 reei#es redit from the openin! $an(. If allo(ay, it is for)arded to $enefiiary 2e%porter3

E%porter satisfies itself a$out the pro#isions in the 6Cas in onformity )ith the ontrat and see(s anyamendment, if needed

The shipment is effeted $y the e%porter. He preparesthe douments and dra)s his $ill under the 6C andsends these to ad#isin!:ne!otiatin! $an( ontd

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The Proess 2ontd3

The ne!otiatin! $an( he(s the doumentsand if in onformity )ith the redit terms,ne!otiates the $ill and releases payment to thee%porter.

The douments are sent to the openin! $an()hih reim$urses the ne!otiatin! $an(. Theopenin! $an( for)ards the $ills to the importer

The importer reei#es the $ill. Che(s thedouments. If found in order the payment is

made to the openin! $an( 7n aeptane:payment, the shippin!

douments are !i#en to the importer forreei#in! the !oods

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Types of 6etters of Credit

/i!ht 6C =sane:Deferred payment

6C 'e#oa$le > Irre#oa$le 6C

Confirmed 6C ith reourse > )ithout reourse 6C Transfera$le 6C ontd.

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Types of 6etters of Credit ontd.

Di#isi$le Ba( to $a( 6C'ed Clause+ and unrestrited 6C /tand$y 6C?Both I/P;9 2International

/tand$y Praties3 > =CP 5@@ apply

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=CP 5@@

The stated aim of the ne) re#ision is

To address de#elopments in the $an(in!,transport and insurane industries.

To impro#e the draftin! of the =CP in orderto failitate onsistent appliation andinterpretation of the 'ules.

In pratie there are many han!es, theo#erall effet is one of larifiation andonsolidation not radial rethou!ht.

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e) Features in =CP5@@ #isG#is=CP4@@

Artile 1 of the =CP 5@@ states that the 'ules )ill onlyapply )hen the te%t of the redit e%pressly indiatesthat it is su$et to these rules.

The default type 6:C is no) irre#oa$le 6:C. The =CP5@@ ha#e mo#ed firmly a)ay from re#oa$le redits.There is no e"ui#alent of the old Artile 5 )hihe%pressly !a#e $uyers the hoie of applyin! for are#oa$le redit.

Artile & no) defines a redit as any arran!ement,ho)e#er named or desri$ed, that is irre#oa$le andthere$y onstitutes a definite underta(in! of the issuin!$an( to honor a omplyin! presentation. 2ontd3

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e) Features in =CP5@@ #isG#is=CP4@@ 2ontd3

As no presumption relatin! to the status of onfirmatione%ists, this important hoie needs to $e e%presslymade in the payment lause of the sale > purhasea!reement and the 6:C

It is made lear that the $an(s )ill disre!ard all nondoumentary re"uirements. The onse"uene is thatparties )ill need to e%erise !reater are in formulatin!their doumentary re"uirements.

For e%amination of douments the $an(s no) ha#e ama%imum of fi#e $an(in! days follo)in! the day ofpresentation, and no lon!er the reasona$le time note%eedin! 8 $an(in! days 2ontd3

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Commerial In#oie must $e made out in thesame urreny as the 6:C

The data in a doument )hen read in onte%t)ith the redit, the doument itself and

international $an(in! pratie, need not $eidential to, $ut must not onflit )ith data inthat doument, any other stipulated doumentor the 6:C.

At least one ori!inal of eah stipulated

doument must $e tendered unless e%epted inthe 6:C. 7ri!inal doument has $een defined in=CP 5@@.

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B:6 may no) allo) transshipment pro#idedthat the entire arria!e is o#ered $y one andsame B:6. hen transshipment is not to $eallo)ed, it must $e e%pressly mentioned in the

sale:purhase ontrat and 6:C In ase harter party B6 is to $e produed, it

should $e mentioned in the 6C A $an( )ill only aept lean transport

douments. 2A lean doument does not needthe )ord lean $ut must not ha#e any lauseor notation e%pressly delarin! a defeti#eondition of the !oods or pa(a!in!3.

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A ne) addition is e%press aeptane of insuranedouments )ith a deduti$le, e%ess or franhise. Itremains a re"uirement that the insurane o#er $y11@ of the CIF or CIP #alue.

The date of the insurane must $e prior to shipment or

e%pressly o#er from a date not later than the date ofshipment.

The early payment of deferred payment underta(in!s2disountin!3 $y a nominated $an( is no) e%presslyreo!nised and permitted. The Issuin! $an( mustreim$urse the nominated $an( on maturity )hether or

not the nominated $an( has paid. The o#erall effet is tomo#e ris(s of somethin! !oin! )ron! 2e.!. fraud3 fromthe disountin! $an( $a( to the appliant for the reditdurin! the deferred payment period early.

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Common Defets in Doumentation

A$out half of all dra)in!s ontain disrepanies, li(e The 6:C e%pires prior to presentation of douments B:6 e#idenes deli#ery prior to or after the date ran!e

stated in 6:C

Chan!es inluded in in#oie not authori-ed in 6:C Inonsistent desription of !oods Insurane doument errors. A doument re"uired may

$e missin! In#oie amount not e"ual to draft amount ame of douments not e%at as desri$ed in the

redit. Benefiiary information not e%at In#oie:statement not si!ned as stipulated in 6:C

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'is( /ituations in a 6:C Transation

General- If !oods $ein! offered for sale at a priethat is too !ood to $e true, then it is a ris(y situation

Fraud-Payment may $e o$tained for none%istent or)orthless !oods a!ainst presentation of $y the$enefiiary of for!ed or falsified douments orredititself may $e for!ed

Risks to applicant? non deli#ery of !oods, shortshipment, inferior "uality, early:late shipment,dama!es in transit, Failure of $an( #i-. issuin!$an(:olletin! $an(

Risks to eneficiary- failure to omply )ith reditonditions, failure of, or delays in payment from theissuin! $an( ontd

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'is( /ituations in a 6:C Transation2ontd3

!o"erei#n $ Re#ulatory Risks- possi$ility that 6:Cmay $e pre#ented $y the !o#ernment ation out sidethe ontrol of parties

Risks to issuin# ank- Insol#eny of the appliant,

fraud ris(, so#erei!n, re!ulatory > le!al ris(s Risks to ad"isin# ank- if it is a payin! $an( ?

failure to he( apparent authentiity of 6:C ? andad#isin! it to $enefiiary

Risks to confirmin# ank- 7ne ha#in! paid the

$enefiiary, it may not $e a$le to o$tainreim$ursement from the issuin! $an( $eause ofinsol#eny of issuin! $an(

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Bills for Colletion 2Drafts3

Dra)n $y e%porters on importers o letter of redit is esta$lished The e%porter dra)s the $ill of e%han!e

2draft3 for olletion )hih is sent to$uyer+s $an( #ia the e%porters $an( alon!)ith the shippin! douments

The $uyer+s $an( ats on the instrutions

pro#ided $y the e%porter 2throu!h their$an(3 for !i#in! these to $uyers dependin!the type of payment a!reement

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Types of Bills for Colletion+

Douments a!ainst payment 2DP3, alsoalled Cash a!ainst douments 2CAD3 The shippin! douments are deli#ered to the

importer only after the payment is released$y him

In ase of air frei!ht the !oods an $eonsi!ned to the $an( )ith their prior

appro#al. They )ill then hand o#er to theimporter only after reeipt of payment

2ontd.3

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Types of Bills for Colletion+2ontd.3

Douments A!ainst Aeptane:DA =sed )here a redit period 2e.!.

*@:5@:;@ days si!ht of douments from

the date of shipment3 is a!reed $et)eenthe e%porter and the importer

=ntil the point of aeptane, e%porterretains ontrol of !oods. After

aeptane, the e%porter is finaniallye%posed until the $uyer atually initiatespayment throu!h their $an(.

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7pen Aount

6east seure for e%porter, mostattrati#e to $uyer.


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International Methods of Payment: %ollection "s& '(%

Differences %ollection %ommercial '(%

Importer must ha#e

Ban( 6ine of Credit

'eommended 'e"uired

'is( to /eller 'elies on Buyer+s finanialstren!th and )illin!ness topay

'elies on Issuin!:Confirmin!Ban(+s finanial stren!th andle!al o$li!ation

Doumentation ot he(ed $y the $an(,only ounted. Buyer must

re#ie) himself or herself

Compared to letter of reditre"uirements pro#ided $y

the importer andinternational !uidelines

'ole of Ban(s Ats as olletion a!ent only Ban( su$stitutes its redit forthat of $uyer. Pays a!ainstonformin! doumentsre!ardless of )hether Buyer

an pay'eeipt ofMerhandise

After time draft is aeptedor after payment of si!htdraft $y the Buyer

After time draft is aeptedor after payment of si!htdraft $y the Ban(

Cost 6ess e%pensi#e, $ut doesnot offer same protetion as

a letter of redit

More e%pensi#e $ut offers!reater de!ree of protetion

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)*porter: 'east

!ecure

'ess

!ecure

More

!ecure

Most

!ecure

Importer: Most

!ecure More

!ecure

'ess

!ecure

'east

!ecure

7pen

Aount

Bills for

Colletion

DoumentaryCredits

Ad#ane

Payment

Payment Risk Ladder

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4. Methods of Payment for DFT

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Transcript of 4. Methods of Payment for DFT