Different means of remittance

Introduction
Apart from accepting deposits and lending money, banks also
carry out the act of transfer of money - both domestic and
foreign. This activity is known as "remittance business" . The
money transfer between two branches of the same country is
known as internal transfer. In case of international transfer the
banks remit the funds through letter of credit. Banks remit
funds from one place to another through the network of their
branches. The main instruments for transfer of funds are
Demand Drafts, Mail Transfer, Travellers’ cheques, Banker's
Cheques, Money Orders, plastic cards etc.

Different Means of Remittance of
Funds
 Bank Drafts or Demand Drafts
 Mail Transfer
 Telegraphic Transfer
 Letter of Credit
 Credit/Debit cards or plastic Money

Bank Drafts or Demand Drafts:
 A bank draft is an order from one branch of a bank to another
branch of the same bank to pay a specified sum of money to the
person named therein or to his order.
 A person who wants to send money can buy a draft by paying
the required amount to a bank and send to another who can
encash it in his place. Banks issue drafts for a nominal
commission. The purchaser of the draft need not to be a
customer or account holder of the bank.
 According to the section 13 of the Negotiable Instrument Act, a
bank draft is not a negotiable instrument. But a draft has all the
attributes of a bill of exchange, such as an instrument in
writing, containing an unconditional order, signed by banker.

Bank Drafts or Demand
Drafts(cont.):
 Section 85-A provides protection to bank against forged or
unauthorized endorsement on drafts.
 A bank draft is a commitment on the part of the issuing bank to
pay a certain amount of money to a third party.
 Sometimes the purchaser of the bank draft may return it to the
issuing bank with a request to cancel it and refund the amount
to him. The banker may consider his request subjected that the
draft has not been delivered to payee.
 Validity of the bank or demand draft is three months from the
date of issue.

Loss of draft
In case the draft is lost and it is reported to the issuing bank, it
should immediately advice the loss to the drawee branch which
will make note of the loss in the record to guard itself against
the fraudulent use of the lost draft.

Loss of draft
The draft lost by the purchaser is entitled to get a duplicate one
from the issuing bank. The banker, before issuing a duplicate
draft should take the following steps:
1. The banker should be satisfied with the genuineness of the
request by the purchaser for the issue of a duplicate.
2. A confirmation regards non-payment of the draft should be
obtained from the drawee bank.
3. An indemnity bond must be obtained from the purchaser. If
the draft has reached the hands of the payee, he should also
sign the indemnity bond.
4. When a duplicate draft is issued, the drawee bank must be
informed about it.

Mail Transfer:
The facility of transferring money by mail is available to
customers having some sort of an account with the bank. The
remitter deposits the amount to be transferred with a small
commission with the remitting branch. After receiving the
money, the bank sends instruction by mail to its drawee branch
to credit the account of the payee about it. This is, however, a
dying product and many banks like State Bank of India have
since withdrawn this.

Telegraphic Transfer:
Telegraphic Transfer is a historic term used to refer to an
electronic means of transferring funds abroad. A transfer charge
is often charged by the sending bank and in some cases by the
receiving bank. This is similar to the Mail Transfer except that
the message is sent by way of a telegram and the money is
deposited the next day.

Telephonic Transfer:
When any bank sends to its branch the advice or instruction of
such transfer or remittance of money on telephone, it is called
telephonic transfer.

Letter of Credit:
 A letter of credit is a document from a bank guaranteeing that
a seller will receive payment in full as long as certain delivery
conditions have been met. In the event that the buyer is unable
to make payment on the purchase, the bank will cover the
outstanding amount.
 They are often used in international transactions to ensure that
payment will be received where the buyer and seller may not
know each other and are operating in different countries.
 The bank that writes the letter of credit will act on behalf of the
buyer and make sure that all delivery conditions have been met
before making the payment to the seller.

Letter of Credit (cont.):
 Letters of credit are typically used by importing and exporting
companies particularly for large purchases.
 A letter of credit is defined as a letter issued by the importer’s
bank in favor of the export authorizing him to draw bill up to
an amount specified in it and assuring him of payment against
the delivery of the prescribed documents in his own country.
 The importer is called the opener and his bank is known as
opening bank.
 The letter of credit is sent to the foreign branch of the banker to
its correspondent bank, which is called the negotiating bank.

Letter of Credit (cont.):
 After satisfying itself about the authenticity of the credit, the
bank forwards it to the exporter who is called the beneficiary.
 The exporter ships the goods, prepares the document and draws
a bill on his importer.
 The negotiating bank receives the bill and pays the amount if it
is in accordance with the letter of credit.
 Documents are delivered on payment or acceptance, as the case
may be to the importer who takes delivery of the goods.

Parties of a letter of credit:
1. Applicant of Letter of Credit: Applicant is one of the
main parties involved in Letter of Credit. Applicant is the
buyer of goods who opens letter of credit. The applicant
arranges to open letter of credit with his bank as per the terms
and conditions of purchase order and business contract
between buyer and seller.
2. Issuing Bank: Issuing bank is the bank which issues the
Letter of Credit and takes responsibility to pay amount on
receipt of documents from supplier of goods.

Parties of a letter of credit (cont.):
3. Beneficiary: Beneficiary is another main parties under letter
of credit. Beneficiary is the seller or supplier of the goods.
Beneficiary submits all required documents with bank in
accordance with the terms and conditions under Letter of
Credit. Beneficiary receives amount under letter of credit.
4. Advising Bank: Advising bank, as a part of letter of credit
takes responsibility to communicate with necessary parties
under letter of credit and other required authorities. The
advising bank is the party who sends documents under Letter
of Credit to opening bank.

5. Confirming Bank: Confirming bank as a party of letter
of credit confirms and guarantee to undertake the
responsibility of payment or negotiation acceptance under
the credit.
6. Negotiating Bank: Negotiating Bank, who negotiates
documents delivered to bank by beneficiary of LC.
Negotiating bank is the bank who verifies documents and
confirms the terms and conditions under LC on behalf of
beneficiary to avoid differences.

7. Paying or Nominated Bank: Paying bank makes the
payment to the beneficiary on the behalf of the issuing
bank.
8. Reimbursing Bank: It is normally the bank with
which the issuing bank maintains an account from
where payment will be made.

Travelers' Letter of Credit:
Travelers' letter of credit are issued for the convenience of
travelling public. A traveler who intends to go abroad incurs
great risk if he keeps cash with him. Travelers’ letter of credit
issued by banks avoids the risk of loss or inconvenience in
carrying large amount of cash. On travels’ letter of credit to the
foreign bank the traveler can get money.
A travelers letter of credit consists of two parts:
i. Letter of credit or circular letter of credit
ii. Letter of identification or circular note

Travelers’ Letter of Credit
Letter of credit or circular letter of credit: If the
travelers' letter of credit is addressed to more than one
bank it is called a circular letter of credit.
Letter of identification or circular note: It is a
document showing specified value of the sum it
contains travelers’ name and specimen signature.
When the traveler needs money he has to present
letter of identification, sign the circular note and will
get the money.

Letter for Commercial Credit
This type of letter of credit is used to finance trading
activities. The customer wishing to open such a credit
approaches a banker with a request for a letter addressed
to another person in a different city or country from whom
he expects shipments of goods on credit. The total amount
of such credit is settled with the banker after the letter
receives the requisite security to his satisfaction.

Types of Letter of Credit
 Documentary and clean letter of credit.
 Revocable and irrevocable letter of credit.
 Fixed and revolving letter of credit.
 Confirmed and unconfirmed letter of credit.
 With or without recourse letter of credit.
 Back to back letter of credit.
 Red clause letter of credit.
 Green clause letter of credit.
 Importer/Exporter letter of credit.

Documentary and clean letter
of credit
 A documentary letter of credit is one which the issuing
bank undertakes to honor the bills drawn under it only
when it receives with certain documents. The documents
are kept by the issuing bank as security for advance made
by it.
 A clean letter of credit is one where no documents are
involved. Such a letter of credit is issued for customers of
high financial standing.

Revocable and irrevocable
letter of credit
 The revocable letter of credit can be changed at any time
by either the buyer or the issuing bank with no notification
to the beneficiary. Since revocable letters of credit do not
provide any protection to the beneficiary, they are not used
frequently.
 Conversely, the irrevocable letter of credit only allows
change or cancellation of the letter of credit by the issuing
bank after application by the buyer and approval by the
beneficiary. All letters of credit governed by the current
UCP (Uniform Customs and Practice for Documentary
Credits) are irrevocable letters of credit.

Fixed and revolving letter of
credit
 A fixed letter of credit is opened for a specific amount for
a specific period. The credit would exhaust as soon as the
total amount has been drawn. If the period is fixed, it
expires after the lapse of the prescribed time.
 In case of revolving letter of credit, the amount of credit
remains constant during the period of validity. When a bill
is duly honored, the credit amount is automatically
renewed.

Confirmed and unconfirmed
letter of credit
 A confirmed letter of credit is one where a second
bank agrees to pay the letter of credit at the request of
the issuing bank. An LC is said to be confirmed when
a second bank adds its confirmation (or guarantee) to
honor a complying presentation at the request or
authorization of the issuing bank.
 An unconfirmed letter of credit is guaranteed only
by the issuing bank.

With or without recourse letter
of credit
 In case of a letter of credit with recourse the
beneficiary of the letter of credit holders himself
liable to the holder of the bill, in the event dishonor.
 Where the beneficiary does not hold himself liable,
such a letter of credit is known as without recourse
letter of credit.

Transferable and non-
transferable letter of credit
Transferrable letter of credit are commonly used
when the beneficiary is simply an intermediary for the
real supplier of the goods and services or is one of a
group of suppliers. It allows the named beneficiary to
present its own documentation but transfer all or part
of the payment to the actual suppliers.
An un-transferrable letter of credit does not allow
transfer of payments to third parties.

Back-to-back letter of credit
A back-to-back letter of credit is used in a trade
involving an intermediary, such as a trading house. It
is actually made up of two letters of credit, one issued
by the buyer's bank to the intermediary and the other
issued by the intermediary's bank to the seller.

Red clause letter of credit
A red clause letter of credit allows the beneficiary to
receive partial payment before shipping the products
or performing the services. Originally, these terms
were written in red ink, hence it was named as red
clause letter of credit. In practical use, issuing banks
will rarely offer these terms unless the beneficiary is
very creditworthy or an advising bank agrees to
refund the money if the shipment is not made.

Green clause letter of credit
A condition in a guarantee document that allows a
purchase to receive advances ahead of shipment
against collateral property represented by warehouse
receipts. Use of a green clause letter of credit is often
used in the agricultural business where a company can
fund the harvest of a new crop by pledging available
stock as collateral.

Import/Export letters of Credit
Most letters of credit are import/export letters of credit,
which, as the name implies, are letters of credit that are
used in international trade. The same letter of credit would
be termed an import letter of credit by the importer and an
export letter of credit by the exporter. In most cases, the
importer is the buyer and the exporter is the beneficiary.

Documentation Requirements
The documents that the issuing bank will accept are specified in
the letter of credit, but may often include:
 Bills of exchange
 Invoices
 Government documents such as licenses, certificates of origin,
inspection certificates, embassy legalizations.
 Shipping and transport documents such as bills of lading and
airway bills
 Insurance policies or certificates, except cover notes.

Advantages of letter of credit to
beneficiary or exporter
 Certainty of payment.
 Financial standing of the buyer is replaced by the issuing bank.
 In case of confirmed LC, additional assurance from the
Confirming bank.
 Reducing the production risk, if the buyer cancels or changes
his order.
 The opportunity to get finance in the period between the
shipment of the goods and receipt of payment.
 The buyer will not be able to refuse to pay due to a complaint
about the goods.


Advantages of letter of credit to
buyer or importer
 The issuing banker lends the benefits of his own credit to the
buyer or importer.
 Easier to do business with unknown sellers.
 No payment is made until documentary evidence is received
showing shipment details.
 The letter of credit gives an assurance to the importer that the
bills of exchange drawn under the credit will be honored only
when they are strictly in accordance with the conditions laid
down in the letter of credit and the documents required there in
are duly enclosed.

Risks in Letter of Credit
Transactions
 The payment may be obtained through the use of
fraud documents.
 Legal risk prevents completion of the transaction.
 The completion of the transaction may be prevented
by an external force, such as war or natural disaster.
 Failure of the issuing or collecting bank or insolvency
of the buyer.
 In addition, non-delivery, shipping less than was
ordered, inferior quality merchandise, early or late
shipment, or goods being damaged in transit.

Credit Cards
A small plastic card issued by a bank and other credit
agencies, allowing the holder to purchase goods or
services on credit. The card allows the customer to spend
money within a credit limit. The customer then has to pay
back the amount at a fixed rate of interest by a specified
date. Most merchants and stores accept credit card
payments these days and some cards have attractive cash
back offers and loyalty rewards associated with them.

Procedure for applying credit
card
 Choose the card that you wish to apply.
 A duly completed application form along with a photograph has to be submitted.
 You have to provide the following identification documentations for verification:
1. Proof of income.
2. Statement copy of bank (previous 6 months).
 You can send the documents through an agent or can even courier to the given
address.
 The company would verify the details given by you.
 If all the details after verification are found in order, the company would send the
credit card in 3 to 4 weeks starting from the day the application has been sent.
 The company also provides details about the credit limit.
 It is important to sign at the back of the credit card. It serves the purpose of
authentication on the spot when the card is stolen or lost.

Advantages of Credit card-
holder
 Credit cards offer you the freedom to buy any product
within your spending limit and make payments later.
 Reduces the need to carry cash.
 Large purchase.
 Card-holder has a benefit of free interest up to a period
as per the policy of the issuing bank.
 Cash up to certain limit is obtained from the banks.
 Flexible reward schemes.
 Abroad purchases.

Advantages to
businessmen/merchants
 The shopkeepers have no risk of sale to consumers on
credit because the issuing bank makes the payment to
them by verifying the signature of the card-holders.
 Merchants can easily increase their sale.
 Since the payment is made by the bank of the credit
card holder the shopkeeper behavior with the card-
holder is co-operative and polite.

Advantages to card issuer
(Bank)
 By issuing the credit card to the holder, bank gets
commission.
 This is an more advantage instrument of income to the
banker as compared to the annual interest.
 The banks become a contributor in increasing the
business transaction.
 Since use of the credit cards do not require cash or
cheque the use of currencies is minimized.
 Government gets more taxes because this plastic
currency is made legal.

Disadvantages of Credit cards
 Inviting cardholders to spend more money.
 Credit cards can be stolen.
 High interest charges.
To conclude, we should know our limits and spend
according to it.

Charge Cards
 A charge card is a card that provides a payment method
enabling the cardholder to make purchases. The cardholder is
obligated to repay the debt to the card issuer in full by the due
date, usually on a monthly basis, or be subject to late fees and
restrictions on further card use.
 Credit cards are revolving credit instruments that do not need
to be paid in full every month. There is no late fee payable so
long as the minimum payment is made at specified intervals.
Charge cards are typically issued without spending limits,
whereas credit cards usually have a specified credit limit that
the cardholder may not exceed.

Smart Cards
 A plastic card with a built-in microprocessor, used
typically to perform financial transactions. It stores and
transacts data. This data is usually associated with either
value, information, or both and is stored and processed
within the card's chip. The card data is transacted via a
reader that is part of a computing system.
 Credit cards and smart cards may have a similar
appearance at first glance, but a traditional credit card only
features a magnetic strip and nothing inside. Where as
smart cards are safer than credit card.

ATM Cards
An ATM card is any payment card issued by a financial
institution that enables a customer to access an
Automated Teller Machine (ATM) in order to
perform transactions such as deposits, cash
withdrawals, obtaining account information, etc. The
ATM card consists of a Personal Identification
Number (PIN), which is known only to the customer.
A customer who wishes to transact through the ATM
will have to place the ATM card in the slot before
starting his operation and he will be able to transact
his business through interactive visual display unit.

Advantages of ATM to the
customers
 ATMs provide 24 hours, 7 days a week and 365 days a
year service.
 Service is quick and efficient.
 Privacy in transaction.
 Free from errors.
 On networking, card holder can access cash and
service at any location regardless of where he
maintains account.
 Wider flexibility in withdrawals.
 Fund transfer across the banks.
 Anywhere banking facility.

Advantages of ATM to Bank
 Alternative to extend banking hours.
 Crowding at bank counter considerably reduced.
 Service is cheaper.
 Alternative to new branches.
 Cash transportation and cash handling is avoided.
 ATMs can be located in any convenient location in the
city.

Disadvantages of ATM
 Not available in remote places.
 Cannot avoid illegal use in case of stolen card.
 The use of this ATM requires literate users.
 Only limited withdrawal can be transacted on ATM.
 ATM is unable to count spoiled notes.

Safety measures while using
ATMs
 ATM should be located in a locality where there is safety.
 The site of ATM should have enough lighting facility.
 The customers should not use their ATM cards and their
PIN when others are watching.
 PIN should be kept secret.
 ATM cards should be kept at safe place.
 Loss or theft of a card should be reported immediately.
 Obtain transaction slip and maintain it.
 Insert ATM card after receiving the instruction from ATM.
 If the ATM card happens to be fixed up or detained then
complain to the help line of the bank.

Debit Cards
A card allowing the holder to transfer money
electronically from their bank account when making a
purchase. A debit card is a more convenient way of
spending money than carrying cash around all the
time. You put your cash (or a check) into a checking
account, and you can swipe your debit card to deduct
money from that account to pay for your purchases.

Features of debit Cards
 Withdrawals more than that of available balance in
the account of the customer, are not allowed.
 No credit loss to banks, since the system works on
available funds in the customer’s account.
 Since the payments are directly debited from the
account of payee, there is no late payment fees payable
by payee nor there be any interest earnings for banks,
as there is no credit involved.

Different means of remittance

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