Banking Process in EXIM. Role of Banks (Commercial / Central).
B. Low Risk Nature-The Six “S”s
C. A large growing Market
D. Well spread over market
E. Easy to Monitor
F. Cross Selling information
G. Capital efficient
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
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?
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.
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.
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.
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
(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