You are on page 1of 34

Unit-III

• Export and Import order, contract, pricing,


• Payment terms and methods of payment.
• Parties involved in EXIM and their functions.
• Quality Control and Pre-shipment Inspection.

• Payment Terms and Methods of Payment in


Export
Methods of Payment in Export
• Advance Payment
• Open Account
• Consignment Sales
• Documents against Acceptance (D/A)
• Documents against Payment (D/P)
• Letter of Credit
Advance Payment
• It is the safest payment option where the importer
sends the payment in advance to the exporter (but
after the acceptance of the order by the exporter)
either through TT (Telegraphic Transfer) or cheque or
demand draft or through electronic transfers.
• The exporter needs to submit the cheque/dd with its
bank and obtain an FIRC (Foreign Inward Remittance
Certificate).
• Least expensive and less complicated method, mostly
used in case of small orders and on continuous basis by
foreign affiliates.
• Risky for importer and more suitable to exporter.
Open Account
• Both the parties agree on sales, goods are
shipped but no documentary evidence is created
everytime. The accounts bw parties settled
periodically.
• Beneficial for importer as no instant payment is
made, savings of time, money and effort, trouble
free.
• Risky for exporter and needs huge funds for
operations.
• Generally done in long relations, affiliate firms.
Consignment Sales
• Goods shipped by exporter but transfers the
ownership to the importer only when the goods
are actually sold.
• If the importer is unable to find an actual buyer,
the exporter is stuck with the unsold goods and
he can not claim payment for the same from the
importer.
• The exporter’s funds are blocked throughout this
period and he is responsible for additional
expenses such as interest, warehousing costs,
commissions, insurance charges etc.
Conti….
• Uncertainty for exporter- not sure of actual
sale, timeframe and the price realization. But
he needs to declare the expected value of the
shipment on the GR form.
• Done for higher price, by affiliates, control
over sales. E.g. Agro exports- onion, rice,
mango pulp.
Documents against Acceptance (D/A)
• Risk at both side: Export-Receivable, Import-
goods/shipment.
• The exporter does not want to part with the
ownership of goods unless he is sure about
receipt of payment. /And/ the importer does not
pay unless he is sure about the receipt of goods.
• Solution: ……Documentary credit
• Banks work as intermediaries, providing
assurance to both the parties on the other’s
behalf and use documents as a tool for this
assurance
• Under D/A method, the exporter sends the shipment
documents along with the draft (bill of exchange)
through his bank to the importer’s bank that gets the
draft accepted by the importer before handing him
over the title documents.
• The importer thus gets the title to the shipment against
his acceptance of the bill of exchange for the value of
the shipment.
• The exporter presents the draft on the due date
(30/45/60/90 days) to the buyer’s bank through his
bank and gets the payment.
• The system provides for the delivery of ownership
documents against acceptance of an instrument of
debt.
• Risky for exporter- due to not honouring of bill by
importer at presentation.
Documents against Payment (D/P)
• Like in D/A arrangement, here too the
documents are sent to the buyer’s bank with a
sight draft (bill of exchange).
• The sight draft has to be paid immediately on
sight and only after the receipt of payment
the shipment title documents are released.
• It means importer gets possession of the
ownership documents of shipment only after
making the payment. No credit is involved.
Letter of Credit (LC)
• Documentary credit.
• The LC is a letter established by the importer through his
bank to the benefit of the exporter promising payment of
drafts drawn against this letter if the exporter complies
with specific conditions prescribed in the LC.
• The LC acts as a substitution of the importer’s promise to
that of his bank’s to the exporter to honour its commitment
to pay for the export bills provided all conditions are
satisfied.
• The bank checks the conditions mentioned in export
order/contract.
• Thus it works as an independent contract bw the exporter
and the issuing bank (importer’s bank).
• Letter of Credit refers to a written undertaking
made by the importer's bank to the exporter that
the payment shall be made to him provided the
shipment is sent by him in strict compliance with
the terms and conditions of the export contract.
• The terms and conditions of the export contract
form part of the letter of credit and are known as
the terms and conditions of the letter of credit.
• The essential characteristic of the Letter of Credit is
that it relies on the doctrine of strict compliance
for release of payment to the exporter against the
draft( s ) drawn by him. The banks do not deal in
goods; they deal in documents.
• As such, the importer has to specify to the bank
the documents which it should examine as an
evidence to the effect that the exporter has sent
the shipment in strict compliance with the terms
and conditions of the export contract.
• The operations of Letters of Credit have been
regulated and are governed by the articles of
'Uniform Customs and Practice for Documentary
Credits' of International Chamber of Commerce
adopted by more than 165 countries which were
last revised in 1993 for implementation w.e.f. 1st
January 1994.
PROCEDURE FOR OPENING LETTER OF CREDIT
• (a) Importer's Request: - If the method of payment
agreed between the importer and exporter is
through letter of credit then the importer requests
his bank to open a letter of credit in favour of
exporter, either by paying the amount of letter of
credit or by requesting credit to that extent.
• (b) Issue of Letter of Credit: - The issuing bank issues
letter of credit in favour of the exporter and sends it
to its -branch located in exporter's country (advising
bank). The issuing bank may also request advising
bank to add its confirmation, if desired by the
beneficiary.
• (c) Receipt of Letter of Credit: - The
exporter takes the possession of the letter
of credit from the advising bank. He should
check the relevant details in the letter of
credit and in case there is any discrepancy,
the same should be brought to the notice of
the advising bank.
• (d) Shipment of Goods: - The exporter
fulfils the shipping and customs procedure
and collects the required documents from
various authorities for negotiation.
• (e) Negotiation of Documents: - The exporter
submits the required documents to the
negotiating Bank, which scrutinises the
documents and makes payment to the exporter.
• (f) Re-imbursement of Payment:- The
negotiating bank gets the payment reimbursed
from the issuing bank.
• (g) Documents to Importer :- The documents
forwarded to the issuing bank by the
negotiating bank are handed over to the
importer and the amount is debited to his
account.
• Letter of Credit..\rai export\ltr crdt.pdf
• Import aspects related to LCF:\lectures
notes\export\rai export\ltr crdt.pdf
Factoring
• It is an attractive way of providing export finance to
exporters. In this system, factor bears the complete
credit risk.
• Who is a factor?
• A factor is a special type of agent who, depending upon
the type of agreement, offers a variety of services.
• These services include coverage of credit risk,
collection of export proceeds, maintenance of accounts
receivables and advance of funds. Purchase of
receivables of its clients without recourse is the most
important service of the factor.
• A big advantage to the exporter is that it is without
recourse financing. This means that the risk of non-
payment by the importer is to be borne entirely by
the factor.
• In India, International Export Factoring services on with
recourse basis have been approved by the RBI. It provides
a new dimension to management of export receivables.
SBI Factors and Commercial Services Pvt. Ltd., Bombay
has been permitted to provide International Export
Factoring.
• In this system, the exporter enters into an export factoring
agreement with exporter's factor. The exporters ship
goods to approved foreign buyers. Each invoice is made
payable to a specific factor in the importer's country.
Copies of invoices and shipping documents are sent to the
Importer's factor.
• Exporter's factor will make prepayment to the export
against approved export receivables. On receipt of
payments from the importer on due date of invoice,
importer's factor remits the fund to the exporter's factor.
The exporter's factor pays to the exporter after deducting
the amount of prepayments.
Forfaiting
• Forfaiting refers to the non-recourse discounting
of export receivables.
• It is a mechanism of financing exports that
involves less risk and enhances international
competitiveness.
• It converts a credit sale into cash sale for an
exporter.
• In this system Forfaiting agency discounts
international trade receivables of the exporter.
• The forfaiter pays the exporter in cash and
undertakes the risk associated with the export
deal. The exporter surrenders, without recourse
to him, his rights to claim for payment on goods
delivered to an importer.
• All exports of capital goods and other goods made on medium to
long term credit are eligible to be financed through Forfaiting.
• In India, EXIM bank plays an intermediary role between the
Indian exporter and the overseas forfaiting agency. The exporter
approaches EXIM bank for forfaiting transaction.
• The bank receives bills of exchange or promissory notes from the
exporter and sends them to the forfaiter for discounting.
Subsequently, the bank arranges for the discounted proceeds to
be remitted to the Indian exporter.
• The bank issues appropriate certificates to enable Indian
exporters to remit commitment fees and other charges.
• RBI has allowed Authorised dealers to undertake forfaiting of
medium term export receivables.
Export Order and its Processing:
NATURE AND FORMAT OF EXPORT ORDER:
• Processing of an export order starts with the receipt of an
export order. An export order may be either in the form of
export sales contract, which is concluded and incorporated
in the form of a document or in the form of evidence or an
instrument evidencing the conclusion of a contract.
• Simply stated, it means that there should be an agreement,
which is mostly reduced in a documentary form, between
the exporter and the importer before the exporter can
start making arrangements for production or procurement
of goods and their shipment.
Generally an export order may take the following forms:
i) Proforma Invoice accepted and signed by the importer
ii) Purchase Order accepted and signed by the exporter
iii) Letter of Credit opened by the importer in favour of the
exporter.
• A proforma Invoice is prepared and sent by the exporter to
the importer. After accepting the terms and conditions
given in it as given in a documented contract, if any, the
importer returns a copy of this invoice to the exporter.
Such a process helps in accepting the offer of the exporter
by the importer and, thus the conclusion of an export
contract. In the case of long- term contract, the exporter
may be required to send proforma invoice for any intended
'shipment.
• Alternatively, the export contract may require a purchase
order to be sent by the importer to the exporter. If the
purchase order is in accordance with the terms and
conditions of the contract, the exporter will duly accept it.
Opening of a letter of credit is also a common method of
receiving the export order. Although an instrument of
payment, the letter of credit states major terms and
conditions of shipment and enables the exporter to start
processing of the export order.
PROCESSING OF AN EXPORT ORDER