Chapter4_International Settlement.pdf

Chapter International payments transactions LOGO Payment methods in international trade LOGO  Similar to those in domestic trade  Added risks involved in cross-border transactions  Means of payment = terms of payment in international trade  Four commonly used terms of payment – each of them defers in level of risk and stability for buyer and seller  Absolute v relative security of parties (compromise of the parties interests) Key factors determining the payment method LOGO  Relationship between the seller and the buyer  The length of business relationship between the parties (most important factor)  Nature of merchandise  Industry norms  Distance between seller and buyer  Currency fluctuations  Political and economic stability LOGO There is a mismatch between Buyer and Seller Goals When YOU want to get paid? When Buyers want to pay? Now! Later! Choice of Methods LOGO (What Determines?)  Buyer-Seller Relationship  Buyer’s credit standing  Competition  Uniqueness of the product (custom made?)  Country conditions (political, economic)  Cash flow considerations  Transaction costs  Other Payment risk diagram LOGO How to transfer money between banks  Vostro Account When a foreign bank maintains a current account with a local bank ,from the point of a domestic bank, the account is a vostro account  Nostro Account When a domestic bank maintains a current account with a foreign bank ,from the point of a domestic bank, the account is a nostro account Vostro a/c (1)in cover,we have credited you’re a/c with us Remitting bank (2)in cover,please debit our a/c with you Paying bank Nostro a/c LOGO Remittance LOGO  Remittance refers to a bank (remitting bank), at the request of its customer (remitter), transfers a certain sum of money to its overseas branch or correspondent bank (paying bank) instructing it to pay a named person domiciled in that country  Parties of a remittance Remitter The Remitting Bank The Paying bank Beneficiary or Payee Methods and procedures of remittance LOGO  Remittance can be classified as M/T、T/T、 D/D  Remittance by mail (M/T) the remitting bank transfers the funds by mailing a P.O cheap but slow  Telegraphic Transfer the remitting bank sends the P.O to the paying bank by cable, telex, or SWIFT, authorizing the paying bank to make payment to the payee fast ; safe ; limited time for banks to keep the funds Methods and procedures of remittance LOGO  Procedures of M/T、T/T (8) Beneficiary Remitter (1) (2) Remitting bank (4) (3) (5) (6) Paying bank (7) (1)Remittance application with funds and commission; (2)receipt (3)sends P.O /telex/SWIFT instructing paying bank to make payment (4)after authenticating, notifies the payee (5)upon receipt, the payee provides the paying bank a receipt (6)the paying bank debited the remitting bank’s a/c and make payment (7)sends the debit advice and payment receipt from payee to the remitting bank (8)the debt is discharged Documentary Credit 3.4 Letter of Credit 39 LOGO Documentary Credit 3.4 Letter of Credit 40 LOGO Documentary Credit 3.4 Letter of Credit 46a Documents Required 47a Additional Conditions 71B Charges 78 Reimbursement Instructions 41 LOGO 3.4 Letters of credit LOGO Functions of Letters of Credit  Payment Instrument • In absence of letter of credit, sight or time drafts used No Guarantee of Payment – Letters of Credit Involves Bank in Transaction  Performance Guarantee • In Documentary Transaction no guarantee of performance – Payment by bank would not be released until goods and document conforms to specifications on letter of credit  Finance Instrument • Seller can use letter of credit as collateral to finance production and exportation of good 3.4 Letters of credit LOGO Types of Letters of Credit  Irrevocable Letter of Credit: bank cannot revoke letter of credit To change letter of credit, must get written agreement • Most Popular in International Commercial Transaction • Article of of UCP-600 says that a credit is irrevocable even if there is not indication to that effect  Revocable Letter of Credit-bank can revoke the letter of credit • Very Seldom Used 3.4 Letters of credit LOGO Types of Letters of Credit  Confirmed Documentary Credit: A confirmation of a documentary credit by a bank (confirming bank) upon the authorization or request of the issuing bank constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank, provided that the stipulated documents are presented to the confirming bank or to any other nominated bank on or before the expiry date and the terms and conditions of the documentary credit are compiled with either to honor or to negotiate 3.4 Letters of credit LOGO Types of Letters of Credit  Revolving Credit: A Revolving Documentary Credit is one by which, under the terms and conditions thereof, the amount is renewed or reinstated without specific amendments to the documentary credit being required The Revolving Documentary Credit may revolve in relation to time or value A documentary credit of this nature may be cumulative or noncumulative 3.4 Letters of credit LOGO Types of Letters of Credit  Transferable Credit and Transferred Credit: Transferable credit means a credit that specifically states it is “transferable” A transferable credit may be made available in whole or in part to another beneficiary (“second beneficiary”) at the request of the beneficiary (“first beneficiary”) Transferred credit means a credit that has been made available by the transferring bank to a second beneficiary 3.4 Letters of credit LOGO Types of Letters of Credit  Back to Back Credit: The back to back credit is a new credit opened on the basis of an original credit in favor of another beneficiary Under the back to back concept, the seller as the beneficiary of the first credit offers it as ‘security’ to his bank for the issuance of the second credit The beneficiary of the back to back credit may be located inside or outside the original beneficiary’s country 3.4 Letters of credit LOGO Types of Letters of Credit  Red Clause Credit: A Red Clause Credit is a credit with a special condition incorporated into it that authorizes the confirming Bank or any other Nominated Bank to make advances to the beneficiary before presentation of the documents Under the above credit, the issuing bank is liable for the preshipment advances made by the nominated bank, in case the beneficiary fails to repay or present the documents for settlement 3.4 Letters of credit LOGO Types of Letters of Credit  Standby Credits : The Standby Credit is a documentary credit or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the Issuing Bank to : a) repay money borrowed by the applicant, or advanced to or for the account of the applicant; (b)Make payment on account of any indebtedness undertaken by the applicant; or (c)Make payment on account of any default by the applicant in the performance of an obligation 3.4 Letters of credit Other types of Letters of Credit IRR L/C without recourse (miễn truy đòi) Reciprocal L/C (đối ứng) Deferred payment L/C (Thanh toán dần) LOGO 3.5 Uniform customs and practices for documentary credits Uniform Customs and Practices for Documentary Credits are rules and procedure published by International Chamber of Commerce  Provisions • Care should be taken in specifying expiration dates • The applicant must specify if the letter of credit is transferable • The applicant must specify that the letter be confirmed • The currency of the letter of credit should be designated using ISO currency code • The applicant should designate the nominating bank LOGO Uniform customs and practices for documentary credits Uniform Customs and Practices for Documentary Credits-provisions continued LOGO  Applicant must specify clearly whether the letter of credit will be available for partial shipment  The letter of credit should provide transport details  Under “rule of strict compliance”, banks are authorized to reject documents if there are any discrepancies • Facial Compliance Rule-bank only required to review documents • Banks are not required to investigate trade customs or usage Uniform customs and practices for documentary credits Uniform Customs and Practices for Documentary Credits-provisions continued LOGO  Description of the Goods should be clear and brief as possible  In the listing of documents, should list the contents of each document  Transportation Documents must be clear  Insurance Documents must be clear  Time periods for presentation of documents must be specified  Title of Letter of Credit should specify irrevocable ... and international levels 38 Documentary Credit 3 .4 Letter of Credit 39 LOGO Documentary Credit 3 .4 Letter of Credit 40 LOGO Documentary Credit 3 .4 Letter of Credit 46 a Documents Required 47 a...Payment methods in international trade LOGO  Similar to those in domestic trade  Added risks involved in cross-border transactions  Means of payment = terms of payment in international trade... bank) along with instructions for payments Funds are received from the importer and remitted to the exporter through the banks in exchange for those documents 24 Collection LOGO 2.3 Classification