Chapter 6 Instruments of payments and methods of financing exports

1. Chapter 6Instruments of payments and methods of financing exports Course: MKT 417 Faculty: Samy Ahmed

2. INSTRUMENTS OF PAYMENT The following are the methods of transferring money from one country to another. • Telegraphic Transfer (TT) • Mail Transfer (MT) • Bank Drafts and Cheques • Bill of Exchange

3. INSTRUMENTS OF PAYMENT(CONT.) • Telegraphic Transfer (TT) This is a method or remitting foreign payments through telegraphic transfer of funds to persons in foreign countries. The money is deposited with the banks and the banker sends a cable, telegram or fax to the foreign branch/correspondent to make certain payments to the specific party, on that very date. Then, the foreign branch/ correspondent makes necessary payments in foreign exchange to the specific party. In export import trade, this practice is commonly adopted where realizations are received through bank, when documents are sent for collection.

4. INSTRUMENTS OF PAYMENT(CONT.) 2. Mail Transfer (MT) In this method of remittance, an order to pay cash to a third party or credit to account of a person who has account with bank is made, in writing, which is sent by mail. This is similar to a telegraphic transfer with the difference that instead of the order being sent by cable/fax, it is sent through post.

5. INSTRUMENTS OF PAYMENT(CONT.) 3. Bank Drafts and Cheques A bank draft is a pay order issued by a bank on its own branch or correspondent bank abroad. The bank draft or demand draft is handed over to the buyer who sends it to the beneficiary. In case of cheque, there is no guarantee of receipt of amount if the cheque is from a party whose credit worthiness is not known.

6. INSTRUMENTS OF PAYMENT(CONT.) 4. Bill of Exchange A bill of exchange is an order drawn by a person upon bank or another person asking the latter to make payment to a third party. Foreign Bill of Exchange may be of two types : (i) Ordinary or Clean Foreign Bill : The is an ordinary bill of exchange and drawn in case the exporter has sufficient confidence in the credit-worthiness of the importer. This is also called Clean Foreign Bill of Exchange. (ii) Documentary Bill : When necessary documents to the title of the goods are also sent along with the foreign bill of exchange, it is called Documentary Bill. A Documentary bill may be of two types :

7. INSTRUMENTS OF PAYMENT(CONT.) (a) Documents Against Payment : In this case, the documents are delivered to the importer provided he makes the full payment. The exporter gives clear instruction to the bank that the documents should only be given provided the importer makes the full payment. (b) Documents Against Acceptance : The exporter instructs the bank to deliver the documents to the importer provided the importer accepts the enclosed bill of exchange. Foreign Bill of Exchange bear the stamps of both the countries. The exporter should affix sufficient stamps while sending the bill and the acceptor of the bill also should affix the stamps according to the rules his country.

8. INSTRUMENTS OF PAYMENT(CONT.) Features of Instruments

9. PRE-SHIPMENT FINANCE Pre-shipment finance is financial assistance extended to the exporter before the shipment of goods and post-shipment finance is concerned with the financial assistance extended after shipment of goods. Classification of Pre-Shipment of Finance: (A) Packing Credit (B) Advances against incentives receivable from Government (C) Pre-shipment credit in Foreign Currency.

10. PRE-SHIPMENT FINANCE(cont.) • Packing Credit The basic purpose is to enable the exporter to procure, process, manufacture or store the goods for export. Packing credit refers to the credit granted by bank to an exporter to enable him to pack the goods. This is a short-term working capital advance.

11. PRE-SHIPMENT FINANCE(cont.) The salient features of the scheme are: 1. Eligibility Criteria 2. Purpose of Finance 3. Form of Finance 4. Security 5. Quantum of Finance 6. Margin Requirement 7. Period of Finance and Interest Rate 8. Sanction of Packing Credit Limit 9. Closure of Packing Credit Loan 10. Running Account Facility 11. Packing Credit under Red Clause L/C

12. POST-SHIPMENT FINANCE Post-shipment finance may be defined as loan or advance granted by the bank to the exporter after the date of shipment of goods till the date of realization of export proceeds. It includes any advance granted on the security or in consideration of the amount of duty drawback or any kind of receivable in the form of incentives to be received from Government.

13. POST-SHIPMENT FINANCE (CONT.) Compliance of Exchange Control Provisions Post-shipment finance is granted under various methods. Exporter seeks the sanction of appropriate type advance from the bank, depending upon the actual requirement. Bank scrutinizes the following documents to verify the compliance of exchange control provisions by the exporter: (a) Whether the documents are drawn in permitted currencies and the payment receivable is under permitted method of payment. (b) Whether the relevant GR/PP is duly certified by the customs authorities and the particulars contained are consistent with the particulars in other documents and export contract/firm order/letter of credit. (c) The documents are submitted for negotiation within the prescribed period and in case of delay, delay is supported by sufficient documentary proof. (d) Usance bill is in consonance with the time limit fixed.

14. POST-SHIPMENT FINANCE (CONT.) Types of Post-Shipment of Finance • Negotiation of Export Documents under Letters of Credit • Purchase/Discount of Foreign Bills • Advance Against Export Bills Sent on Collection • Advance Against Exports Sent on Consignment Basis • Advance Against Export Incentives • Advance Against Undrawn Balances • Advance Against Retention Money • Post-shipment Credit in Foreign Currency • Buyers’ Credit 10. Line of Credit