Banking Services for Importers and Exporters Chapter 18 Banking Services for Importers and Exporters

Trade enquiries Through the contact with overseas branches and correspondent banks, the bank can assist the exporters to find potential buyers for their goods and the importers to find potential suppliers.

Credit information Through bank-to-bank status enquiry, the bank can help the exporters to obtain the up-to-date credit information of the buyers and the importers to know the creditworthiness of the suppliers.

Research reports Many commercial banks have a research department to report on the political and economic development of different countries. The information also includes trade regulations and foreign exchange control. The reports provide important reference for exporters and importers to design their international trade strategies.

Travel services Besides traveller’s cheques, a banker can also issue a letter of introduction to an exporter or importer to request its overseas branch or correspondent bank to give assistance to the customer.

Foreign exchange Whenever the imported or exported goods are to be settled in foreign currencies, there is a danger that exchange rate fluctuation occurring between the date of shipment and the date of payment may adversely affect the importer or the exporter. Many commercial banks offer forward foreign exchange contracts to solve this problem, so that the bank agrees to buy the foreign currency from the exporter or to sell the foreign currency to the importer at the date of payment at a predetermined exchange rate.

Trade finance Trade finance ranges from short-term to long-term depending on the needs of the importers and exporters. Short-term finance may be required for the goods in transit or imported inventory whereas long-term finance is used for the purchases of capital goods.

International Trade transactions between a domestic dealer and an overseas trader involves imported and exported goods/services resulting in the direct transfer of money from one country to another calls for payment or settlement in a foreign currency plays an important role in the exchange of goods and services leads to specialization which allows one country to produce an output from its relatively abundant resources with least expensive input costs

International Trade trader who exports goods from his country to overseas is the exporter trader who purchases goods from other country is the importer both the importing and exporting countries can enjoy “comparative advantage” in which the exporting countries can produce the goods at lower opportunity costs than other countries

Importance of banks in International Trade Provision of advance for importers: trust receipt facility, documentary credit facility for exporters: negotiation of export bills, purchase of bills for collection encourages enterprises to engage in trade enhances their liquidity position

Importance of banks in International Trade Provision of alternative payment method overcomes the disadvantages of settlement methods, i.e. cash in advance or open account enlarge trading volumes Medium of fund transfer allows payments to be made safely and quickly e.g. TT, SWIFT, CHIPS

Importance of banks in International Trade Expert advice from bankers provide advice to the trading terms especially those related to documentary credit Credit risk management credit risk may be transferred to banks when they provide various services e.g. when a bank issues a documentary credit for its customer, it replaces the role of the buyer and undertakes an obligation to pay the seller, thus the bank has taken the credit risk

Importance of banks in International Trade Management of foreign exchange risk to eliminate the foreign exchange risk by forward foreign exchange or currency option

Documentary credits and Documentary collections The most popular means of international trade financing arrangements are “documentary credits” and “documentary collections”. An importer who needs financial assistance when buying from a foreign country may require a documentary credit arrangement.

Documentary credits and Documentary collections On the other hand, an exporter may require help in financing his production for export purposes. He may consider a documentary collection arrangement. Irrespective of whether it is a documentary collection or a documentary credit, a bank would normally be involved in such “credit” and “collection” processes – an obvious example of the bank’s function as an “agent”.

Documentary Credits A documentary credit is a written undertaking by a banker who is the agent for the importer or the buyer. The written undertaking is passed to the exporter or the beneficiary at the importer’s request. In accordance with the instructions of the importer, the bank undertakes to pay the exporter, up to a limit, within a designated time period and against any stipulated terms and documents. They are usually subject to Uniform Customs and Practice for Documentary Credit 500.

The parties involved in a documentary credit Issuing Banker also called importer’s banker or buyer’s banker; the bank is usually in the importer’s country, it issues the credit and undertakes to pay Advising Banker (also called confirming bank) correspondent bank or exporter’s bank; this bank is usually in the exporter’s country which advises the credit to the exporter

The parties involved in a documentary credit (c) The Applicant the importer or the buyer (d) The Beneficiary the exporter or the seller

Documentary Credit Arrangements After a sales contract is initiated, the buyer and the seller may agree to have payments settled by means of a documentary credit arrangement. The applicant (importer) will first request his banker (issuing bank) to issue a documentary credit (letter of credit) in favour of the exporter (seller) or the beneficiary. The bank will examine the credit-worthiness of the buyer before it considers issuing the documentary credit. The issuing bank then informs the reimbursing bank and instructs them to honor the claims from the negotiating bank. If an applicant is a new customer to the bank, he may need to pay up to 20% deposit on the credit amount.

Documentary Credit Arrangements The documentary credit is then passed to the advising bank (exporter’s bank) who represents the beneficiary in his country. The advising bank is expected to pass the documentary credit to the beneficiary after verification of the genuineness of the credit. On receiving the documentary credit, the exporter should check the terms and conditions against the sales contract to ensure that everything agrees with the credit requirement. If there is no obvious problem, the exporter will then present the necessary documents, including transport document and insurance policy etc, to the advising bank for the release of goods and settlement of payments. In this sense, the advising bank also acts as the negotiating bank.

Documentary Credit Arrangements The negotiating (advising) bank, after receiving the documents from the exporter, will check the documents against the terms and conditions of the contract signed. If all is proper, the negotiating (advising) bank will pay the exporter and immediately forward the documents to the issuing bank and claim reimbursement from the reimbursing bank. The issuing bank, having received the documents from the negotiating (advising) bank, will debit the account of its client (importer) and forward the document to them.

Functions of Documentary Credits The credit created for international settlement among banks not only provides a sense of security for the traders involved, but also a reliable source of finance for foreign trade where required. The credit created, in general, favours the exporter. In order to reduce the possible risk, the exporter usually insists on the buyer establishing a credit in his favour before shipment is unloaded.

Functions of Documentary Credits There are several types of credits. A “revocable credit” may be cancelled at any time up to the moment the advising bank pays. This type of credit is the least favourable to the exporter. There is a problem that the goods may be shipped and the credit revoked before documents are presented to the advising bank. An “irrevocable credit” may not be amended or even cancelled without the consent of all the parties involved. This type of credit guarantees payment to the beneficiary, provided that the credit terms and conditions are met.

Functions of Documentary Credits A “confirmed credit” guarantees payment to the beneficiary by a confirming bank, provided that the terms and conditions of the credit are complied with. Hence a “confirmed credit” bears two undertakings to pay, one from the issuing bank and the other from the confirming bank. With the credit arrangement, the issuing bank agrees to pay the negotiating (advising) bank, and the negotiating (advising) bank pays the exporter according to the terms of the documents which fulfil the conditions of the credit.

Functions of Documentary Credits Banks, however, are not bound by the underlying sales contract on which the credit requirements are based. As long as the documents are in good order and there are no apparent problems with the process, the buyer is still responsible for payment to the issuing bank although the goods received may be of inferior quality to those ordered.

Documentary Collections The function of a documentary collection is to provide both importer (buyer) and exporter (seller) with a compromise to settle their trade transactions between payment in advance and on open account terms. The collection service provided by the bank involves little risk and appears to be the least expensive. Under the general rules, once the documents are passed to the bank by the drawer (exporter), the bank has an absolute right over the goods through the title documents. The right includes the arrangements concerning the release, protection, warehousing and shipment of the goods on behalf of the exporter.

Documentary Collection Arrangements Once a sales contract is confirmed between the exporter and the importer, the documentary collection will flow in the following manner: The “drawer” (exporter or seller) ships his goods and, at the same time, presents the shipping documents, including other transshipment documents, to his bank (remitting bank) or sends them directly to the “drawee” (importer or buyer).

Documentary Collection Arrangements If the drawer is to present the documents to the remitting bank, he will provide the remitting bank with the bill of exchange, the transport documents and the instructions required. The remitting bank will deliver all these documents to the collecting bank in the drawee’s country. The collecting bank will then follow the instructions on payment collection from the drawee (importer) at the time specified in the contract.

Documentary Collection Arrangements After the drawee makes the payment to the collecting bank, the collecting bank will then remit the proceeds of the collection to the remitting bank who will then credit the drawer’s account. Before sending all the documents abroad to the collecting bank for payment, the remitting bank must ensure that the documents are properly drawn and endorsed. Then it has no further obligation to examine the documents.

Documentary Collection Arrangements The documents will specify whether the bill of exchange is drawn at sight (i.e., payable by the drawee on presentation) or at a tenor (i.e., payable at a fixed date in the future), whether the sale of contracts includes freight or insurance premium, e.g. FOB, C&F or CIF. The bills that can be drawn are:

Documentary Collection Arrangements Sight Bill A sight bill is a bill of exchange drawn by the drawer at sight for immediate payment. The bill is payable by the drawee on presentation by the collecting bank. Term Bill This is a bill of exchange drawn by the drawer and allows the drawee time to pay at a fixed or determinable future date. Such bill will have to be accepted by the importer before payment is made.

Types of Collection Documentary collection consists of : collection of financial documents and commercial documents, or collection of financial documents only Clean Collection A clean collection consists of financial document only i.e.one or more bills of exchange or promissory notes, cheques, receipts, or other similar types of documents for obtaining cash. The collection requires no other documents to be attached.

Types of Collection Since the drawer or the exporter is to draw the bill and to receive payment, the drawer must give clear instructions to the remitting bank for a smooth collection process. The drawer must indicate the bank to which the collection is to be sent and advise the collecting bank on the method of payment. The drawer should also inform the collecting bank of the ways the documents should be released to the drawee, against his acceptance or only against payment of the bill. Lastly, instructions should also be given to the collecting bank on how to proceed if there is default in payment and on the action to be taken for the protection of the goods.

Shipping Terms and Documents A documentary credit or a documentary collection involves four parties: the exporter, the importer and the two banks. Because of the multi-party involvement, the procedures and the paper documents must be properly handled and drawn. In addition, due to different circumstances and jurisdictions, each country has its own laws and practices in foreign trade and banking regulations. To maintain consistency in foreign trade practices, regulations and procedures have been developed so that each party involved would follow the set of agreed procedures, thus avoiding serious legal problems.

Shipping Terms and Documents In turn, this requires a thorough understanding of the terms and the implications of each document attached to the documentary credit and collection procedures. The following are the most familiar documents attached to credit and collection papers: - Commercial invoice - Certificate of receipt - Bill of lading - Certificate of origin - Air waybill - Certificate of inspection - Combined transport document - Insurance Policy Certificate - Consignment note

Shipping Terms and Documents The International Chamber of Commerce (ICC) publishes a set of trade terms – the incoterms. These are accepted by banks, exporters, importers and trade parties around the world to overcome problems of conflicting laws and interpretations. Over the years, most of the frequently used terms are referred to by 3-letter abbreviations. The most familiar shipping terms are: F A S (free alongside ship) F O B (free on board) C & F (cost and freight) C I F (cost, insurance and freight)

Shipping Terms and Documents Commercial Invoice A commercial invoice is a sales document issued by the seller who charges the buyer for the goods purchased. The invoice contains the invoice number, sales contents, sales date and amount of items sold. It also includes a description of the goods sold, delivery, shipping methods, date and payment term, unit price.

Shipping Terms and Documents Bill of Lading The bill of lading is a receipt for, and document of title to the goods. It is legal evidence of a contract of carriage for the goods dispatched by sea and land. The document contains the name of the shipper, the vessel’s name, place of delivery, receipt, port of loading, discharge, and the necessary description of the goods and the package. The bill of lading is usually an essential document for insurance claims.

Shipping Terms and Documents Air Waybill The air waybill has the same effect as the bill of lading except that the air waybill is evidence of a contract for goods delivered by air carriage. The bill must bear the reception stamp of the air carrier or its agent.

Shipping Terms and Documents Combined Transport Document Usually drawn together with the bill of lading or the air waybill, the combined transport document describes the transfer of goods from one mode of transport to another. The document is needed for transshipment.

Shipping Terms and Documents Consignment Note A consignment note could be drawn in a simple form of letter on a short note. The note is usually required when the buyer (importer) demands it. The note is drafted by the seller (exporter) who has to state the name of the departure point and the destination. The note may contain the name of the shippers and their addresses.

Shipping Terms and Documents Certificate of Origin This certificate is not required unless the buyer or the buyer’s country requests it. It provides evidence of the origin of the goods, i.e., where the goods are produced. It is used by the importing authorities to determine the applicable tariff rates.

Shipping Terms and Documents Certificate of Inspection This is usually issued by independent bodies or associations or government agents. It provides evidence regarding the level of quality, weight, composition and content of the goods etc., after checking and examination of samples of the goods.

Shipping Terms and Documents Insurance Policy Certificate A document which shows the policy covering the goods being delivered; it states the type of insurance, the risks involved and the amount covered. The goods covered and the amount of value stated in the certificate must be consistent with the contents of other documents. The policy must bear the name of the insurance company, its agents or the underwriter. It must also describe the date of the policy covered with the amount at least equivalent to the C I F value of the goods.