International Financial Management

Chinese are very successful in IB because they favour Letter of Credit.

Letter Of Credit : A document issued by a bank that guarantees the payment of a

customer's draft; substitutes the bank's credit for the customer's credit.

Factoring : these scheme financings are available only after shipment. If they need

money before shipment then pre-shipment advance needs to be obtained from

bank and when goods are produced, it has to be

Factors discount the export bills and give immediate cash or amount to the

exporter. Factor will take the responsibility to discount.

recourse facility - when exporters are entering new market , then they goto the

factor. In this case no ECGC (export credit guarantee corporation) coverage is

required because factors take the responsibility of non payment.

IMPORT TRANSACTIONS :

importer new SBI - will issue an LOC to chinese supplier.

Supplier China

Gurantee beneficiary

Import Fator

exporter - preshipment(machinery) , shipment(exim bank) , postshipment(forfaiting)

preshipment - 6 months

4 types of different counter trade transactions :

1. barter transaction - exporter commodity A, importer gives commodity B.

settlement will take place with commodities A and B.

2. Counter purchase transaction : sell machinery to a country and in lieu

buy turbines from that country.

3. switch transactions :

Letter of credit :

exporter will get payment in his home country. LOC is a method of paymnet

which gives conditional undertaking

LOC is always arranged by importer's bank. Exporter should ensure that issueing

bank has a good reputation.

exporter must read each and every term and condition in the LOC.

LC converts goods sales into document sales. exporter will get payment based

on documents not based on goods.

The document acts as a guarantee to the seller that it will be paid by the issuer of the

letter of credit regardless of whether the buyer ultimately fails to pay. So the risk that the

buyer will fail to pay is transferred from the seller to the letter of credit's issuer.

When LC is received by the exporter, he should read and see if he will be able to adhere

to terms and conditions.

responsibility to make re-imbursement is of the importer. Exporter is getting payment based

upon the documents not based upon the goods.

payment recieved under two categories : 1. with recourse - bank has the right to recover the

payment from the exporter.

2. without recourse - if bank does not get reimbursment from foriegn bank, then money can't be

recovered from exporter.

negotiation documents-

Rules for Letter of credit - 39 rules by international chambers of commerce. Refer handout from

campus360.

Article 1 - Rules applicable only if rule says LC is subject to these rules. If rule does not specify -

then rule law is reffered by court in case of conflict.

These rules can be changed/ amend these articles by exporters and importers depending on the

business conditions.

Discount - it is a process where bank is charging interest from the exporter.

Negotiate - without recourse if credit is available

Issuing bank always honours the document.