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Documentary Creditin

International Trade

Presented By:Anupam Gupta

ICFAI Business School

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International Trade

Trade a definition

Export Contract Complexities under International trade

General Risk of buyer and seller

Letter of Credit

Trade terms in foreign trade

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Export Contract

Most basic agreement in International Trade.

Other essential contracts under exportcontract:

Issuing banks undertaking to pay seller.

Contract with a carrier. Contract with a freight forwarder.

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Complexities under International Trade

Location of parties to

contract.

Currencies are different.

Different trade and exchange regulations.

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Risk of buyer and seller

Major concerns under international trade:

Buyers concern for goods. Sellers concern for payment.

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Letter of Credit (LC)

A Definition

Parties involved in LC Types of letter of Credits

How a letter of credit operates?

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Parties in letter of credit

The Applicant (Importer / Buyer) The Issuing Bank (Bank which opens the LC)

The Beneficiary (Exporter / Seller of goodsand/or Services) Nominated bank The Advising Bank Confirming Bank Negotiating Bank (Paying, Accepting Bank) Reimbursing Bank.

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Types of Letter of credits

Revocable Letter of credit

Irrevocable Letter of Credit

Confirmed Letter of credit Sight Credit

Usance Credit

Revolving Credit Stand by Letter Of Credit

Transferable Credit

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Operation of Letter of Credit

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Documents under

Documentary Credit

Golden Rule:All parties under Documentary Credit dealsonly with documents not with goods. These documents shouldbe strictly in accordance with the terms and conditions of LC.

Types of Documents:

Payment Documents Shipping Documents Other Documents

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Payment Documents

Commercial Invoice

Drafts or Bills of Excahnge

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Shipping Documents

Transport Documents :

Marine/Ocean Bill of Lading. Multimodal Transport document. Air Transport document. Railway Conignment Note. Road Transport document. Courier Receipt.

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Other Documents

Insurance Documents

Certificate of Origin Certificate of Inspection

Packing List

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Documentary Collection Process

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International Commercial Terms

(Incoterms)

Incoterms are a series of 13 trade terms,and were firstintroduced to prevent misunderstandings and disputes thatmay arise because of different trading practices among

different countries.

EXW - Ex Works (named Place)

FCA - Free Carriers (named Place)

FAS - Free Alongside Ship (named port of shipment) FOB - Free on Board (named port of shipment)

CFR - Cost and Freight (named port of destination)

CIF - Cost, Insurance and Freight (named port of destination)

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Incoterms contd

CPT - Carriage paid to (named place of destination)

CIP - Carriage and Insurance paid to (named place of destination) DAF - Delivered at frontier (named place)

DES - Delivered Ex Ship (named port of destination)

DEQ - Delivered Ex quay (named port of destination)

DDU - Delivered duty unpaid (named place of destination) DDP - Delivered duty paid(named place of destination)

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Modes of Payment

By agreeing to buy the goods from the seller , thebuyer undertakes to pay the seller on deliver, themethods of payment also form part of the salesagreement.

Methods of payment are as follows:

Advance Payment

Open Account Documentary Collections Documentary Credits

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Advance Payment

The buyer makes payment to seller inadvance before the goods are shipped.

The reasons may be as follows:

Due to certain country risks.

To encourage the seller into long term relationship.

Inadequate finance with supplier.

Good relationship with supplier.

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Open Account

Under open account terms, sellerdispatches goods to the buyer, and at the

same time sends the invoice for paymentat an agreed date.

Advantages of Open account trading:

Opportunity to examine. Less banking fee and other costs involved.

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Documentary Collections

Handing over the Documents:

1. By the seller to his bank.

2. By sellers bank to Issuing bank.

Under this procedure banks give no

payment undertaking. But the sellersinterest is still served.

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Documentary Credits

Documentary Credit is the mostpreferred method of payment under

International trade.

It provides both seller and buyer withindependent assurance in the exchangeof goods for payment.

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Types of Payment

Sight Payment

By Acceptance Deferred Payment

Negotiation

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Negotiation

Negotiation means giving value for draftsor documents. Mere examination of

documents without giving value does notconstitute a negotiation.

The phrasegiving of value, here means either

making immediate payment or undertakingan obligation to make payment.

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Reimbursement

Issuing bank should provide proper

authorization to reimbursing bank to

honor claims.

Issuing bank is not relieved from its

obligation in case, reimbursement

is not claimed from reimbursing bank.

Reimbursing banks charges are forthe account of Issuing bank.

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Questions???

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