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Unit 14
Unit 14
Structure:
14.1 Introduction
Objectives
14.2 Understanding Payment Mechanism in foreign trade
Payment terms in foreign trade
Letter of credit
14.3 Documentation in International Trade
Commercial invocie
Packing list
Bill of lading
Insurance certificate
14.4 Financing Techniques
Bankers acceptance
Factoring
Forfaiting
14.5 Export Promotion Schemes
14.6 Export and Import Finance
Short term credit
Long term credit
EXIM bank
14.7 Summary
14.8 Glossary
14.9 Terminal Questions
14.10 Answers
14.11 Caselet
14.1 Introduction
In the previous unit, we have studied about the importance of ethics in
international business. We also learned the various methods adopted for
formulating ethics and how the difference in culture affects the ethical
practices around the world.
Walk into any mall, you will come across Washington apples, cheap
Chinese toys and plastics, South Korean and Japanese television sets,
Brazilian coffee or South African wine. Today, Indian spices are popular all
Sikkim Manipal University
Unit 14
over the world. All these are the results of increasing international trade.
International trade is a system, which deals with the exchange of goods and
services between nations. As global citizens, International Trade shapes our
lives and boosts the economy of the participating countries. There are
various financing techniques that play a major role in international trade and
finance.
This unit covers the benefits, payment systems and arrangements related to
international trade. We will discuss documentation required to make any
foreign trade transaction. We will also learn about various export promotion
schemes supported by the government and methods to avail finance as
exporters and importers within India.
Objectives:
After studying this unit, you should be able to:
describe the payment system facilitating the foreign trade.
analyse the documentation required to facilitate international trade.
explain various Government schemes to promote exports from India.
explain different kinds of finance options available for international trade.
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Consider Documentary
Collection Against
Payment
Consider
Open
Account
Type of the
customer
Undetermined
Acceptable
Excellent
Relationship
New
Established
Established
Economic
stability
Unstable
Stable
Very stable
Type of order
Custom
Regular production
In stock
Transaction
Size
Large
Moderate
Small
Cash flow
Always
Never
Never
Factor
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1.
2.
3.
4.
5.
6.
7.
8.
9.
Buyer-Seller relationship.
Competition.
Buyers credit standing.
Uniqueness of the product (Is it custom made?)
Cash flow considerations.
Country conditions (political, economic).
Transaction costs.
Risk tolerance/aversion.
Other.
General Insurance Companies, in LPG&M era covers even the Force Majeure
risks in international trade.
2
J. H. Rayners & Co., Ltd., and the Oilseeds Trading Company, Ltd. v.Hambros
Bank Limited 1942
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As shown in figure 14.1, there is uncertainty during the time when payment
transactions happen between importer and exporter. The figure compares
and contrasts the most suitable methodology from the perspective of
importer and exporter. Apparently the most secure methodologies that work
for the exporter is not safe for the importer. For exporters, documentary
collection and open account are less secure and letter of credit and cash in
advance are more secure methods. In the same way, with respect to the
importer, the letter of credit and cash in advance are less secure and the
documentary collection and open account are more secure. These terms
are explained as follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By
this method, exporter receives the payment before the transfer of goods.
The options that are available with the cash-in-advance method include wire
transfers and credit cards. This is the least attractive method for many of the
buyers as it creates cash flow problems. The buyers are concerned about
the quality/quantity and delivery of the goods that are not sent if the
payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international
traders. This is the commitment made by the bank that the payment will be
made to the exporter if the terms and conditions are met. The terms and
conditions of the payment are explained in the required documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank
(remitter bank) sends the documents to the importer's bank (collecting
bank). The document contains information about the payment. The funds
are collected from the importer and paid to the exporter through the banks
involved in the collection, in exchange for the documents.
Open account
The open account transaction involves the shipping and delivery of goods in
advance. The payment is due usually from 30 to 90 days. This is
advantageous for the importer in cash flow and cost terms, but at the same
time it is very risky for the exporters. Buyers from abroad stress on open
accounts since the extension of credit from the seller to the buyer are more
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common in many countries. Exporters who avoid extending credit may face
loss in the sale because of competitors in the market.
14.2.2 Letter of credit
International Trade is affected by distance, laws, political instability and lack
of familiarity by the transacting parties. Letter of credit assumes significance
since it can be used to mitigate risk. It is a document that is issued by the
bank that guarantees payment to a beneficiary. It is written by the financial
institution in favour of the importer of goods to the seller. In the letter, the
bank promises that it will honour the drafts drawn on it if the seller confirms
to the specific conditions that are set forth in the letter of credit. The process
of letter of credit works as shown under:
Exhibit 14.2: Process of Execution for Payment under L/C Mode
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1. Shipping Instruction
1. Commercial Invoice
2. Pro-forma Invoice
2. Packing List
3. Shipping Order
4. intimation of Inspection
3. Certificate of Inspection/Quality
Control
5. Mates Receipt
4. Certificate of Insurance
6. Insurance Declaration
5. Bill of Lading/Combined
Transport Document
6. Certificate of Origin
7. Bill of Exchange
8. Shipment Advice
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REGULATORY DOCUMENTS
Main and important regulatory
documents
Allied regulatory
documents
1. Export Application/Dock
Challan/Port Trust Copy
of Shipping Bill
3. Vehicle Chit
5. Proof of Landing
4. Freight Payment
Certificate
5. Insurance Premium
Payment Certificate
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The date of issue of the insurance certificate should not be later than the
date of isuuance of transport documents unless the cover that is shown
be effective before the date of transport documents.
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goods. Forfaiter does not have a recourse on the promissory notes and the
structure of the payment is extended for a period of three to seven years.
Self Assessment Questions 3
6. The _________________is the credit instrument that is developed by
the non financial firm.
7. The term factoring is the financial transaction in which the business sells
its accounts receivable at a discount. (True/False)
8. In which of the following technique the buyer is known as the forfaiter?
a) Bankers acceptance.
b) Factoring.
c) Forfaiting.
d) Commercial invoice.
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Duty neutralization
and remission
a. Advance
authorisation
scheme
b. Duty free import
authorisation
scheme
c. Duty drawback
scheme
a. Export promotion
capital goods scheme
b. EOU/STPI/BTP EHTP
scheme
c. Textiles and apparel
park scheme
d. Agri export zones
scheme
Page No. 307
f.
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promote and develop the trade. This was established on Jan 1, 1982. This
has the power to borrow from the RBI as well as from abroad. This plays an
important role in the export financing. This bank provides the financial
assistance for promoting the Indian exports. This provides the financial
assistance through the direct financial assistance, abroad investment
finance, pre-shipment credit, buyers lines, export bills discounting and so
on. This also extends the help through the non funded facility for the
exporters in the form of guarantees. This aims at export of the manufactured
goods, export of technology, export of software. EXIM bank provides pre
shipment and post shipment credit in Indian rupees and foreign currency.
Finance is extended for short term i.e. upto 6 months and also for
medium/long term i.e. beyond 6 months for eligible products and projects.
Medium/long term export credit is extended by way of supplier's credits (i.e.
through the Indian exporter) with recourse to the exporter or buyer's credits
i.e. directly to the overseas buyer with no recourse to the Indian exporter.
Certain RBI guidelines apply for such medium/long term export credit.
The financing programmes of the EXIM bank are the most comprehensive
among the export credit agencies across the globe.
Self Assessment Questions 5
12. The ________________ credit is mainly used for production, processing
and packaging.
13. Name the credit that is provided by the EXIM bank and the commercial
banks that are again financed by the IDBI?
14. EXIM bank is a private owned body. (True/False)
Activity 2
Consider that you are a business head in the company and you have to
deal with the finance related to the imports and exports of the company.
Due to the transit period in the company, there is shortage of funds and
your management has planned to go for credit terms. Name the credits
that you would suggest for the same.
Hint: Short term credit.
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14.7 Summary
Let us summarise the points covered in this unit about finance and
international trade:
There are some risks with both the exporter and importer of the goods.
The letter of credit is a letter that is given to the seller. The letter of credit
helps in solving the risks that the importer and exporter may face in
terms of payment or delivery of goods.
Commercial invoice is the document that is given to the seller from the
buyer. The insurance certificate is the insurance policy which allows the
transport of goods under the open policy.
The three broad categories of credits include the short term, medium
term and long term credit.
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14.8 Glossary
Beneficiary: In insurance, the beneficiary is the person or organisation that
receives money from insurance company when the insured event occurs.
Commodity: The physical substances such as food, grains and metals are
interchangeable with other products of the same type.
Export promotion: Program that promotes the domestic producer for
exporting and importing goods.
Foreign Direct Investment (FDI): This is the amount of money that is
invested by foreign companies and other assets that helps the economies to
grow more efficiently and become competitive participants.
Gross Domestic Product (GDP): The final market value of all the goods
and services are produced in the country in one financial year.
Monopoly: Situation in which a single firm owns almost all the market of a
given type of product or service.
14.10 Answers
Self Assessment Questions 1
1. True
2. a. Open account
Self Assessment Questions 2
3. Bill of lading
4. Consular invoice
5. b. Insurance certificate
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14.11 Caselet
In order to promote paperless, transperent and cost effective export
import operations; government of India with the help of UNCTAD has
implemented the ICEGATE platform which is a one-stop-window for
filing of export import documents so that the goods can be cleared for
export and import. ICEGATE is an e-commerce initiative for filing of all
export import documents so that the cargo can be cleared on real time
basis and informed decisions vis-a-vis composition and direction of
foreign trade can be taken. Thus, ICEGATE is an infrastructure project
that fulfils the customs department's electronic communication/electronic
data interchange and data communication requirements.
ICEGATE system facilitates the smooth functioning of Central Board of
Exicse and Customs through various facilities such as electronic filing of
Bill of Entry (import goods declaration) and Shipping Bills (export goods
declaration) and related electronic messages between customs and the
trading partners using communication facilities, i.e. e-mail. The ICEGATE
also ensures 24X7 helpdesk facilities on status of trade documents to
trading partners, i.e. exporters and importers. For safe and secure
transactions, it is mandatory that one should use only digital signatures
on Bill of Entry and other documents/messages to be handled on the
gateway.
At present, ICEGATE system at Indian customs is working through a
MPLS based Wide Area Network. It links all the buildings of the 582
departments of Indian customs all over the country. In addition to e-filing
of export import documents, ICEGATE also provides a host of other
services like e-payment, online registration for intellectual property
rights/SPS barriers/TBT barriers etc. One can check the status of trade
by using Document Tracking status platform at ICEGATE. Now, it is
possible to make online verification of export promotion schemes like
DCS/DEPB/DEEC/EPCG licences, Importer-Exporter code status.
ICEGATE is also linked up with other system like ACES (excise and
service tax), PAN (income tax) for availing input credit if any. Custom
House Agents can also use it on behalf of exporter/importer and can
access important information relating to export or import from other
websites and databases. Due to all these reasons, Indian exporters and
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E-Reference:
http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1077787643&
type=RESOURCES, retrieved on 3rd November, 2010.