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Banking Process in EXIM. Role of Banks (Commercial / Central).

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Role of banks commercial central
Role of Banks (Commercial / Central)

  • It is impossible to be in international trade without involving your bank for all the services they provide such as advice on financial issues and the potential risks involved. It is true that one critical hurdle is the lack of information on international trade processes, documentation and banking procedures necessary to carry on with business abroad. For result oriented and cost effective international trade, you will very definitely need access to accurate and timely information and a sound knowledge of banking.

    Continue ...


Role of banks commercial central1
Role of Banks (Commercial / Central)

  • Attractions for banks in international trade;

    A. Profitability

    B. Low Risk Nature-The Six “S”s

    i. Short-Term

    ii. Small

    iii. Secured

    iv. Self-Liquidating

    v. Specific

    vi. Selective

    C. A large growing Market

    D. Well spread over market

    E. Easy to Monitor

    F. Cross Selling information

    G. Capital efficient

    Continue …

Overview of International Trade

A. Flow of goods from seller to buyer

B. Flow of Payment from buyer to seller

C. In accordance with a contract of sale

Documentary requirements

Buyer - What documents does he needs?

Seller - With what documents will he be able to supply?

Country of export - what documents are required under the regulations of the exporting country?

Country of import - what documents are required under the regulations of the importing country?


Role of banks commercial central2
Role of Banks (Commercial / Central)

  • Wants / needs and problem of trading partners


Role of banks commercial central3
Role of Banks (Commercial / Central)

  • Basic agreement (International Trade – Sale Contract)

  • Preliminary Quotation & Commitment (Invoicing / order etc)

  • The Merchandise (goods to be imported / exported)

  • Packing (instructions regarding packing of imported / exported merchandise)

  • Method of Settlement (Immediate or Credit / Advance / LC Collection???)

  • Shipping Instructions (trans shipment – partial shipment etc)

  • Price and its components (INCOTERMS 2000)

  • Delivery Mode ,Period, Place (Sea, Air, Road – place of shipment and last date of shipment)

  • Documents (Invoice, packing list, inspection report, certificate of origin, BL/AWB etc)

    Continue …


Methods of settlement
Methods of Settlement

  • Considerations of trading partners;

  • Methods of settlement (Payments)


Clean payments
Clean Payments

  • Clean Payments are characterized by trust. Either the Exporter sends the goods and TRUSTS the Importer to pay once the goods have been received (Open Account / Extended Terms), or the Importer TRUSTS the Exporter to send the goods after payment is affected (Advance Payments).


Documentary collection
Documentary Collection

  • A method of payment used in international trade whereby the Exporter entrusts the handling of commercial and financial documents to banks and gives the banks instructions concerning the release of these documents to the Importer.

  • Banks involved do not provide any guarantee of payment.

  • Collections are subject to the Uniform Rules for Collections published by the International Chamber of Commerce. The last revision of these rules came into effect on January 1, 1996 and is referred to as the URC522.

  • Documentary collection may be carried out in two following ways;

    A. Documents against Payment (DAP) / Sight Collection (SC) / Cash Against Documents (CAD)

    Documents are released to the Importer only against payment.

    B. Documents against Acceptance (DAA) / Term Collection (TC)

    Documents are released to the Importer only against acceptance of a draft/promissory note. Also known as a Term Collection. Due date can be from any document date (BL/AWB etc) or from acceptance of promissory note date.


Documentary collection1
Documentary Collection

Mechanism of Documentary Flow

The mechanics of a Documentary Collection are easily understood when separated into the following three steps:

A. Flow of Goods

After the Importer and the Exporter have established a sales contract and agree on a Documentary Collection as the method of payment, the Exporter ships the goods.

B. Flow of Documents

After the goods are shipped, documents originating with the Exporter (e.g. commercial invoice) and the transport company (e.g. bill of lading) are delivered to a bank (Remitting Bank). The role of the Remitting Bank is to send these documents accompanied by a Collection Instruction giving complete and precise instructions to a bank in the Importer’s country (Collecting/ Presenting Bank).

The Collecting/ Presenting Bank acts in accordance with the instructions given in the Collection Order and releases the documents to the Importer against payment (DAP/SC/CAD) or acceptance (DAA/TC), according to the Remitting Bank’s Collection instructions.

C. Flow of Payment

Payment is forwarded by Collecting / Presenting Bank to the Remitting Bank for the Exporter’s account and the Importer can now present the transport/title document to the carrier in exchange for the goods.



Documentary collection governing rules
Documentary Collection – Governing Rules

  • International

  • URC-522 (Uniform Rules for Collections-ICC Publication no. 522)

  • INCOTERMS-2000(International Commercial Terms)

  • Local

  • Foreign Exchange Manual-2002

  • SBP Prudential Regulations M-Series

  • Others i.e. (CBR Directives, Trade Policy, Contract Act, Sale of Goods Act, Negotiable Instruments/Bill of Exchange Act, Carriage of Goods by Sea Act, Marine Insurance Act, Bills of Lading Act etc)


Documentary credits l cs
Documentary Credits / L.Cs

  • The LC in its modern shape appeared for the 1st time in 1840s in London for the settlement of trade transactions.

  • A Documentary Credit (DC) is a written undertaking by a bank (Issuing Bank) given to the exporter (Beneficiary) at the request of the importer (Applicant) to effect payment (Reimbursement) up to a stated amount (Credit Amount) within a stated time period (Expiry date) against presentation of compliant documents (LC terms). In other words DC is a conditional payment undertaking from a bank.


Documentary credits mechanism
Documentary Credits - Mechanism

The mechanics of a Documentary Credit / Letter of Credit are easily understood when separated into the following three steps;

A. Issuance of Documentary Credit / Letter of Credit

After the trading parties agree on a sale of goods where payment is made by Letter of Credit, the Importer requests that its bank (the Issuing Bank) issue a Letter of Credit in favour of the Exporter (Beneficiary).

The Issuing Bank then sends the Letter of Credit to the Advising Bank. A request may be included for the Advising Bank to add its confirmation. The Advising Bank is usually located in the country where the Exporter does business and may be the Exporter’s bank, but does not have to be.

Next, the Advising/ Confirming Bank verify the Letter of Credit for authenticity and sends it to the Exporter.

B. Flow of Goods

Upon receipt of the Letter of Credit, the Exporter reviews the Letter of Credit to ensure that it corresponds to the terms and conditions in the purchase and sales agreement; that the documents stipulated in the Letter of Credit can be produced; and that the terms and conditions of the Letter of Credit can be fulfilled. Assuming the Exporter is in agreement with the above, it arranges for shipment of the goods.


Documentary credits mechanism1
Documentary Credits - Mechanism

C. Flow of Documents & Payments

After the goods are shipped, the Exporter presents the documents specified in the Letter of Credit to the Advising/ Confirming /Negotiating Bank.

Once the documents are checked and found to comply with the Letter of Credit (i.e. without discrepancies), the Advising/ Confirming Bank forward these documents to the Issuing Bank. The drawing is negotiated, paid or accepted as the case may be.

In turn, the Issuing Bank examines the documents to ensure they comply with the Letter of Credit. If the documents are in order, the Issuing Bank will obtain payment from the Importer for payment already made to the Confirming Bank.

Documents are delivered to the Importer to allow him to take possession of the goods



Documentary credits governing rules
Documentary Credits – Governing Rules

  • International

  • UCP-600 (Uniform Customs and Practice for Documentary Credits -ICC Publication no. 600)

  • URR-525(Uniform Rules for Reimbursements, ICC-525)

  • International Standby Practices ICC-ISP 98

  • International Standard Banking Practices

  • INCOTERMS-2000(International Commercial Terms)

  • Local

  • Foreign Exchange Manual-2002

  • SBP Prudential Regulations M-Series

  • Others i.e. (CBR Directives, Trade Policy, Contract Act, Sale of Goods Act, Negotiable Instruments/Bill of Exchange Act, Carriage of Goods by Sea Act, Marine Insurance Act, Bills of Lading Act etc)


Swift operations
SWIFT Operations

  • It (Society for Worldwide Interbank Financial Telecommunications) is Cooperative Society under Belgium Law and owned and controlled by its members-share holders. It has a board of 25 Independent directors appointed by the shareholders who are responsible for overseeing and governing the company.

  • The National Bank of Belgium, the central bank of the country in which SWIFT head quarters are located and which is under arrangement with central Banks of G-10 countries i.e. Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, Unites States, Switzerland, Sweden, and the European Central Bank’’.

  • A new SWIFT member will pay a onetime entry fee and recurring service fees to SWIFT.


Swift operations benefits
SWIFT Operations - Benefits

  • Benefits of joining SWIFT;

  • Cost is much lower than telex message

  • Use of standard formats for messages results in consistency.

  • Improved accuracy.

  • Timely delivery.

  • Confidentiality and security.

  • Reduced risk.


Documents for negotiation
Documents for Negotiation

  • Depend on the stipulation in the letter of credit.

  • Exporter must present all documents specified in the letter of credit for negotiation.

  • Any missing document or incorrect document becomes a discrepancy.

  • Issuing bank of the L/C has under no circumstances an obligation to honor the draft and shipping documents with discrepancies.


Documents for negotiation1
Documents for Negotiation

  • Common documents used in the international trade accompanying exporter’s Draft (Bill of Exchange)

    (1) Commercial Invoice

    (2) Packing List

    (3) Ocean Bill of Lading

    (4) Marine Insurance Certificate

    (5) Any other documents if required by the L/C

    • Certificate of Country Origin

    • Consular Invoice

    • Inspection Certificate

    • Beneficiary's statement


Presentation of documents
Presentation of Documents

  • Draft and all shipping documents must be presented to a negotiating bank together with the original letter of credit.

  • Presentation must be made within a specified period of time after shipment in the L/C, but not later than 21 days after shipment

  • A bank must determine whether or not presentation is a complying presentation in 5 banking days


Presentation of documents1
Presentation of Documents

  • If a nominated (negotiating) bank, a confirming bank, if any, or the issuing bank determines that a presentation does not comply,

    • it may refuse to honor or negotiate, then

    • it must give a single notice to presenter no later than the close of the 5th banking days.


Presentation of documents2
Presentation of Documents

  • The notice must state

    • The bank is refusing to honor or negotiate

    • Each discrepancy

    • The bank’s disposal of shipping documents:

      • The bank is holding documents pending instructions from the presenter or

      • The issuing bank is holding documents until it receives a waiver from the applicant & agrees to accept it or

      • The bank is returning documents or

      • The bank is acting according to the previous instructions from the presenter.


Presentation of documents3
Presentation of Documents

  • If a bank does not follow these negotiation and notice provisions,

    • The bank cannot claim that the documents do not constitute a complying presentation.

    • The bank must honor or negotiate.

  • A document presented but not required by the Credit will be disregarded.

  • If a Credit contains a condition without stipulating the document to indicate compliance with the condition,

    • Banks will deem such condition not stated and will disregard it.


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