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1.1
Introduction
1.2
trade and settlement of the transactions arising there from. Important among
such problems are:
Different countries have different monetary units;
. Restrictions imposed by countries on import and export of goods;
Restrictions imposed by nations on payments from and into their
countries;
Differences in legal practices in different countries.
The existence of national monetary units poses a problem in the settlement of
international transactions. The exporter would like to get the payment in the
currency of his own country.
For instance, if amerexport of New York export machinery to in imports,
Mumbai, the former would like to get the payment in US dollars. Payment in
Indian rupees will not serve their purpose because Indian rupee cannot be used
as currency in the USA. On the other hand, the importers in India have their
savings and borrowings in Indian in rupees. Thus the exporter requires payment
in the currency of the exporters country whereas the importer can pay only in
the currency of the importers country. A need, therefore, arises for conversion
of the currency of the importers country into that of the exporters country.
Foreign exchange is the mechanism by which the currency of one country gets
converted into the currency of another country.
FERA :
Regulated in India by the Foreign Exchange Regulation Act (FERA),
OBJECTIVES :
To regulate certain payments.
To regulate dealings in foreign exchange and securities.
To regulate transactions, indirectly affecting foreign exchange.
To regulate the import and export of currency.
To conserve precious foreign exchange.
The proper utilization of foreign exchange so as to promote the
economic development of the country.
Chapter No: 2
INTERNATIONAL PAYMENT
Payment made between countries, whether in settlement of a trade debt, as a
unilateral transfer of funds, for capital investment, or for some other
purpose. The reasons for such payments and the methods of making them
and accounting for them are matters of concern to economists and national
governments. International debts are settled either from accumulated
balances of foreign currency or claims on foreign currency, or by loans from
creditor to debtor, or by drawing on the International Monetary Fund, or by
movements of gold. How a country balances its international accounts is
one of the most important decisions for its balance of payments.
Methods of Payment in International Trade
This guide explains the different methods of getting paid and the different levels
of risks involved. You should note that none of the methods outlined below will
completely eliminate the payment risks associated with international trade, so
you should consider your preferred payment option with care and hedge the
risks along with appropriate credit insurance and credit checks on your
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customers. You should read it if you trade internationally and want to know
what your options are in making and receiving international payments. You may
wish to pass on the information in this Briefing to your colleagues in the Sales
& Marketing team and your Finance Director so that they are aware of these
issues.
Introduction
Getting paid for providing goods or services is critical for any business.
However, getting paid for an international transaction (also commonly known
as "export receivables") can be a very different experience from securing
payment on business with other UK entities, due to the number of extra factors
that can influence the process. The main factor in considering how an exporter
expects to be paid for a transaction is the potential risk that they and their
customer are willing to face between them - don't forget, there are always two
sides to any situation. There are different types of risk that you will face as an
exporter, this briefing will consider the payment risk.
Exporter
Impoter
Least Secure
Most Secure
Open Account
Bills Of Collection
Letter Of Credit
Advance Payment
Most Secure
Least Secured
exchange rate has changed significantly by the time it arrives, clears and
is credited. On the other hand, the check can make it easier to shop for a
better exchange rate between different financial institutions.
For wire transfers the seller must provide clear routing instructions in
writing to the buyer or the buyer's agent. These include:
The full name, address, telephone, and telex of the seller's bank
The bank's SWIFT and/or ABA numbers2
The seller's full name, address, telephone, type of bank account , and
account number.
No further information or security codes should be offered.
Letter of Credit
Basic Understanding
The letter of credit (LC) allows the buyer and Seller to contract a
trusted intermediary (a bank) that will guarantee full payment to the seller
provided that he has shipped the goods and complied with the terms of the
agreed-upon Letter. This instrument, although inherently simple, can have
many variations. The LC serves to evenly distribute risk between buyer and
seller since the seller is assured of payment when the conditions of the LC
are met and the buyer is reasonably assured of receiving the goods ordered3.
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A rejected shipment means that the seller must quickly find a new
buyer, usually at a lower price, or pay for the shipment to be
returned or disposed.
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Drafts
A draft (sometimes called a bill of exchange) is a written order by one
party directing a second party to pay a third party. Drafts are negotiable
instruments that facilitate international payments through respected
intermediaries such as banks but do not involve the intermediaries in
guaranteeing performance. Such drafts offer more flexibility than LCs
and are transferable from one party to another.
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There are two basic types of drafts: sight drafts and time drafts.
Sight Drafts: Sight drafts are the most familiar kind of draft, as a sight
draft would be a check. The characteristics of a sight draft include those
of all drafts, with the distinguishing trait that sight drafts are always
payable when presented, in a manner somewhat akin to bearer
instruments. This means that upon the presentation of such sight draft, the
drawee would be required to immediately pay the presenter without any
substantial delay. Sight drafts are most often used for those interpersonal
payments or in shipping transactions, for example, when the seller does
not want the buyer to gain control of the shipment until payment has been
made. In such an instance, a sight draft would ensure that the seller would
have an immediately payable draft before transferring title of the goods to
the buyer.
Time Draft: A time draft is differentiated from a sight draft by the fact
that it has a set payment date some time in the future, as opposed to
immediately upon presentation of the draft. A time draft does not have to
be set for a specific date. It can instead be set so that it is only payable
upon the fulfillment of certain conditions. The point of a time draft is to
delay any form of payment until certain actions will likely have occurred.
Time drafts are the only type of draft used with acceptances. Acceptances
are used, as in the above example, when the drawee of a draft negotiable
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instrument "accepts" the draft, essentially promising the payee that it will
provide payment to the payee upon satisfaction of the terms in the draft.
A sight draft would never require such an acceptance, however, as a sight
draft would always require the drawee to pay the payee presenting the
sight draft.
Hybrid Methods
In practice, international payment methods tend to be quite flexible and
varied. Frequently, trading partners will use a combination of payment
methods. For example: the seller may require that 50% payment be made
in advance using a wire transfer and that the remaining 50% be made by
documentary collection and a sight draft.
Open Account
Open account means that payment is left open to an agreed-upon future
date. It is one of the most common methods of payment in international
trade and many large companies will only buy on open account. Payment
is usually made by wire transfer or check. This can be a very risky
method for the seller unless he has a long and favorable relationship with
the buyer or the buyer has excellent credit. Still, there are no guarantees
and collecting delinquent payments is difficult and costly in foreign
countries especially considering that this method utilizes few official and
legally binding documents. Contracts, invoices, and shipping documents
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Payment
Features
Advantages
Disadvantages
Method
Cost is usually more
than other means of
Wire
Transfer
of payment Uses
hard to recover if
correspondent bank
Beneficiary to
Intermediary banks
receive good
foreign currencies
funds
Easy to trace
to apply funds
security as domestic
movement of
management
each authorized
to bank
individual Repetitive
lacking/insufficient
Impossible to stop
transfers to same
payment
Beneficiaries
after execution
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Convenient when
must be sent to
Beneficiary's
can be
Beneficiary and is
slow
payable in
not known
Foreign
Beneficiary's
Useful when
be
Checks
country
information/
Uses account
documentation
drawee bank
relationships with
must
If payable in foreign
foreign
accompany
currency,
correspondent banks
payment
Available in U.S.
(subscriptions,
during the
registrations,
collection period
foreign currencies
reservations, etc.)
Relatively easy to
in
stop payment
various countries
if necessary
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balanced
Buyer's credit
Seller is assured
payment
of payment
alternatives
Commercial
compliant
when conditions
Issuance and
Letters of
documents
are met
amendments
Credit
Buyer is
be eliminated via
reasonably
Strict documentary
confirmation of a bank
assured of
compliance
in Beneficiary's
receiving the
by Seller is required
country
goods ordered
Reduces applicant's
Acceptance credits
Confirmation
credit
eliminates
facilities
opportunity
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May be cheaper
than
Powerful instrument
Commercial
Letter of Credit
Increasingly popular in
Beneficiary unintended
Standby
open account
advantages
Letters of
or Documentary
Credit
be eliminated via
Collection
Documentary
confirmation of a bank
Discrepancies less
Collections
in Beneficiary's
likely than
country
under Commercial
facilities
"Evergreen" clauses
L/C
Confirmation
Beneficiary to issuer
eliminates
country risk and
commercial
risk
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Documentary
Collections
Somewhat more
agents to present
secure than
commercial
shipping documents to
open account
risk exist
Buyer against
No guaranty of payment
Buyer's payment or
rigid than
by any
promise to pay
Commercial L/C
bank
No strict
No protection against
compliance rules
order
apply
cancellation
shipping documents
No credit facilities
No built-in financing
directly to Buyer's
required
opportunity as with
Commercial L/C
and
remits funds to Seller's
bank
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