Ib documentary credit and collection preshipment and post shipment credit


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documentary credit and collection pre shipment and post shipment credit in international business

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Ib documentary credit and collection preshipment and post shipment credit

  3. 3. CONTENTS Documentary credit Documentary collection Pre shipment credit Post shipment credit
  5. 5. Definition A documentary credit can be simply defined as a conditional guarantee of payment made by a bank to a named beneficiary guaranteeing that payment will be made provided that the terms of the credit are met. These terms will state that the beneficiary must submit specified documents, usually to a stated bank and by a certain date.
  6. 6. Parties to a documentary credit Applicant Issuing bank Advising bank Beneficiary Confirming bank
  7. 7. Importance of documents in documentary credits As can be seen from Article 4 of UCP, bank concerned only with the documents in documentary credits. If the documents do not conform the issuing bank is freed from liability under its guarantee. If the documents do conform, the bank must pay.
  8. 8. A common occurrence, which causes a problem for the beneficiary, arises when the change in transport arrangements. If the transport document which is subsequently presented does not conform to the credit, presentation will be rejected by the banks. The fact that the buyer and sells have agreed to the change is immaterial, unless the buyer agrees to authorise the issuing bank to amend the credit.
  9. 9. Advantages of documentary credit With a documentary credit, exporters retain a measure of control over the goods, either until they are paid or until the importer accepts the bill of exchange. The buyer risk is virtually eliminated, because an unknown buyer’s agreement to pay is replaced by a conditional bank guarantee.
  10. 10. With a documentary credit, exporters know that they have a bank guarantee of payment provided the comply with the terms and conditions of the credit.
  11. 11. Problems of documentary credit There have two problems that exporters often overlook are : If the credit advice is received direct from an unknown bank, there is a danger that it may be forged. The exporter may not be able to fulfill the terms of the credit, because it calls for documents he cannot provide.
  12. 12. Documentary collection
  13. 13. Operation of a documentary collection The exporter ships goods and obtains documents of title from the shipping line. The exporter, who is known as the principle, hands in the following documents to his bank(the remitting bank) 1) bill of exchange drawn on the importer
  14. 14. 2) documents of title(ie, a complete set of clean, shipped on board bills of lading, made out to order and blank endorsed), and other relevant documents(insurance policy or certificate if CIF): 3)A collection instruction which contains the exporter’s instructions to the remitting bank The remitting bank completes its own collection instruction addressed to the importer’s bank.
  15. 15. This collection instruction contains the same instructions as the exporter’s original collection order. This collection order is then sent to the importer’s bank, along with the other documents. If the instructions are D/P(documents against payment), the importer’s bank will release the documents to the importer only against payment.
  16. 16. If the instructions are D/A (documents against acceptance), the importer’s bank will release the documents against acceptance of the bill of exchange by the importer. If and when the bill of exchange is paid, the importer’s bank sends the funds to the remitting bank for credit to the principal’s account. The importer will require a bill of lading in order to obtain the goods from the overseas port. The bill of
  17. 17. Lading can only be obtained by payment of the bill of exchange(D/P) or by acceptance (D/A). Therefore, the importer cannot obtain the goods without paying or accepting the bill of exchange, and conversely an exporter retains control of the goods until payment or acceptance of the bill of exchange. When goods are sent by air freight, the airway bill could show the importer’s bank as consignee.
  18. 18. once the importer has paid or accepted the bill of exchange, the importer’s bank will issue a delivery order. The deliver order is an authority, signed on behalf of the bank, authorizing the airport to release the goods to the named importer. An exporter should obtain the prior agreement of the importer and the importer’s band before he consigns goods to that bank. In practice, the importer’s bank will not often agree to be named as consignee, unless its own customer is of major importance.
  19. 19. Pre shipment/packing credit Packing credit is the term used for the pre-shipment short-term finance obtained by an exporter through his bankers. A loan is granted to him by the bankers with the view to financing his manufacturing activity exclusively in relation to specific export order/contracts.
  20. 20. In order to avail himself of packing credit, an exporter has to make a formal application to his bank either in a specified format or make an ad hoc application, depending on the requirement imposed by the bank. To support his application, he should enclose: i) firm contract with the buyer or exporter order. ii) letter of credit received against the contract.
  21. 21. Amount of loan: The amount of packing credit loan depends on the f.o.b value of goods and the incentives there of, and generally conforms to the norms set up by the ECGC under its Export Production Finance Guarantee schemes. The limits laid down for this purpose by the ECGC are 50% over and above the f.o.b value of the goods, subject to a maximum of 100% of the domestic cost of the export
  22. 22. product. The ECGC covers the financial risk of the bank while such packing credit loans are extended. Period for which packing credit loans are available: packing credit loans are usually made available for 180 days. The period of credit may further be extended beyond 180 days, up to 270 days, with the prior approval of the
  23. 23. Interest charges: on pre-shipment credit for most export products, a concessionary rate of interest of 8% per annum is changed, for 180 days. For delays caused by factors beyond the control of the exporter, this period may be extended beyond 180 days, and in all up to 270 days, with the prior approval of the bank. For such an extended period, the interest applicable is high, and is at present 12%. If export does not materialize, a high penal import rate will be charged.
  24. 24. Post shipment credit Post – shipment credit is an advance extended by a bank to an exporter from the time goods are shipped/exported til the time bills/export proceeds are realized. In other words, post-shipment credit is an advance extended by a bank to an exporter. Firm to meet financial requirement that may arises between the time of the shipment of goods and the time of realization of the export proceeds.
  25. 25. Post-shipment credit generally takes the form of bills discounting/purchasing or an advance against bills under collection. Post shipment credit may be a short term, medium term or long term.
  26. 26. medium term credit (up to 5 years) is provided in the case of durable consumer goods and light capital goods. long term credit is extended in the case of capital goods and completion of turnkey projects.
  27. 27. conclusion
  28. 28. Reference International trade finance paul cowdell, Derek Hyde International financial management Thummuluri Siddaiah Export finance Subba Rao