Post on 11-Jan-2016
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Module IV – Int’l Financial SystemSession 29-30 dtd 18.3.14
International Trade Transactions
EXPORTER(SELLER)
GOODS
IMPORTER(BUYER)
$ MONEY $
SALES/PURCHASE AGREEMENT
Sales/Purchase Agreement specifies :Buyer/seller details, Goods description, Unit price, Quantity, Amount, Quality, Shipment date, Mode of transport, Port of loading/destination, INCOTERMS etc.
Complexities
Int’l Trade ComplexitiesParties unknownGeographic distanceDifferences:
• Social• Economic• Political• Legal• Language • Customs & Culture • Marketing & Attitudes• Financial condition & Currency• Business Practices
Int’l Trade Complexities• Currency Risk• Logistics & Transit Risk• Govt. Regulations• Trade & non-trade barriers• Time duration• Buyer’s apprehension of timely & quality
delivery• Sellers apprehension of timely payment
Types of Trade Distortions & Barriers
Tariff barriers - tax on imports or exports:Customs duty, protective tariffs, revenue tariffs, surcharge, countervailing duties, specific & Ad valorem duties, sales tax, value-added tax (VAT), excise tax, turnover tax, consumption tax, anti-dumping duties.
Non-tariff barriers - restrict imports by non-tariff means: Quotas, Licenses & permits, subsidies, incentives, Govt. procurement & State Trading, Govt. procedures regarding classification, valuation & documentation procedures, health & safety regulations, packaging/labeling/marking & product testing regulations.
Distortions & Barriers to Free Trade
Why ??• Protection to local industries
• Earn revenue for Govt.
• Conserve forex
• Reduce unemployment
• Equalize domestic costs & price of imported goods
• Enhancing national security
• To favour certain or prohibit trade with certain countries
Modes of PAYMENT
in International Trade
Payment TermsMode depends on :• Nature of business/trade• Transaction amount• Buyer’s credit rating• Economic condition in importing country• Credit terms of competitors• Financial strength of exporter• Level of trust • Foreign exchange regulations
Payments Modes
1. Advance Payment2. Open Account3. Documents on Collection 4. Documentary Credit (D/C) or
Letters of Credit (L/C’s)5. Consignment Purchase/Sale
Payments Modes1. Advance Payment Payment received before delivery. Minimum risk for the exporter. Maximum risk for the importer. Exporters may loose business to competitors
offering better payment terms.
2. Open Account Delivery made by exporter Payment received after goods delivered to
importer. Maximum risk for exporter.
Payments Modes3. Documents on Collection (Documentary Collections) Exporter gives documents for collection to
the Remitting bank (exporter’s bank) which sends documents to a Collecting bank
(importer’s bank) along with instructions for payment.
Delivery & payment made simultaneously by Collecting bank either upon payment or acceptance of B/E (Bill of exchange) by importer:
D/P - Documents against Payment for “SIGHT” D/A – Documents against Acceptance for “USANCE” Bills with a credit period
Payments Modes4. Documentary/Letters of Credit (L/C’s) Importer’s bank provides payment
guarantee prior to delivery.
5. Consignment Purchase/Sale Payment is received after goods are sold. Till then, goods remain overseas with
importer or in exporters warehouse. Unsold goods returned to exporter. Minimum risk for importer. Risky & time-consuming for exporter. e.g. Used for auctions sale like tea/coffee/Art
Payments Modes – Pro’s & Con’sMode Pro’s Con’sAdvance Simple
Secure for exporterMinimal transaction cost
Highly unsecure for importer
Open Account SimpleMinimal transaction costTrustworthy association
Unsecure for exporterBuyer may defaultNo recourse to 3rd party
Documents on collection
Bank acts as intermediary Delivery of title either on:• Payment for SIGHT• Acceptance for CreditModerate transaction cost
Unsecure for exporter Buyer may defaultNo recourse to bankPrior association desired
Payments Modes – Pro’s & Con’sMode Pro’s Con’sDocumentary Credit (L/C)
Bank guarantees payment.Bank pays even if buyer defaults. Both buyer/seller protected.Recommended for first time association.
High transaction cost
Document must comply with L/C terms
Consignment- purchase
Local presence Overseas warehouse Costly & CumbersomeTime-consuming
DOCUMENTARY CREDIT (D/C) or LETTERS OF CREDIT (L/C’s)
Bank’s unconditional undertaking of payment• given on behalf of the buyer• upon presentation of documents by seller • which comply with certain conditions.
Origin in London in 1840’s. Earlier, Traveler’s Letter of credit.
Payment is exchanged for documents provided stipulated doxs. are presented and the terms & conditions of the L/C are complied with.
SALE CONTRACT (Bipartite Commercial Agreement)
SELLER BUYERSALES CONTRACT
SELLER(Beneficiary)
DOCUMENTS
$ MONEY $
Buyer’sBANK
(Issuing bank)
BUYER(Applicant)
DOCUMENTARYCREDIT
Letter of Credit (Tripartite Agreement)
ALL PARTIES DEAL WITH DOCUMENTS AND NOT WITH GOODS, SERVICES AND/OR PERFORMANCES TO WHICH THE DOCUMENTS MAY RELATE ( ICC’S UCPDC 600)
Seller’sBANK
(Advising/Nominated bank)
12
3
GOODS & DOCUMENTS
$ MONEY $
Parties to L/C’s1. APPLICANT - Buyer or importer ; opener 2. ISSUING BANK - Buyer’s bank, importing country 3. BENEFICIARY - Seller or exporter 4. ADVISING/Notifying BANK – Branch or
Correspondent Bank of the issuing bank which receives, notifies & authenticates the L/C in the exporting country
5. NOMINATED BANK - bank authorised to receive doxs and/or pay exporter in exporter’s country.
Optional :6. CONFIRMING BANK - provides guarantee in
addition to the Issuing Bank
Parties to L/C’s cont…….. Optional :
7. RE-IMBURSING BANK - a bank authorized to make the payment to the Nominated Bank (exporter’s bank). Can be a bank other than the issuing bank.
6. NEGOTIATING BANK –bank authorised to negotiate doxs./draft, generally but not always in exporter’s country.
NegotiableThe ability to be sold or transferred to another party
as a form of payment. Negotiable instruments are transferable by
endorsement and delivery. e.g. Promissory notes, Bills of exchange, Bills of
Lading and cheques are Negotiable instruments.
Types of Documentary Credit (L/C’s)1. Revocable / Irrevocable L/C2. Confirmed / unconfirmed L/C3. SIGHT / Acceptance Credit4. Transferable / non-transferable L/C
(i) amount, (ii) unit price, (iii) expiry date, (iv) shpt date, (v) last date of presentation & (vi) insurance %
4. Back-to-back L/C5. Revolving L/C – cumulative & non-cumulative6. Advance payment (Red clause L/C)7. Evergreen or Annually renewable L/CICC Publication 600 – UCPDC (Uniform Custom and Practice
for Documentary Credit) 8. Standby Letters of Credit (Bank Guarantee)International Standby Practices (ISP 98)
Payment Modes - Risk Ladder
BUYER’S PERSPECTIVE SELLER’S PERSPECTIVE
Source: Adapted from Chase Manhattan Bank, Dynamics of Trade Finance (New York: Chase Manhattan Bank, 1984),5