Monday Export Class with Dr Godwin Oyefeso

Monday Export Class with Dr Godwin Oyefeso

Topic: TERMS OF PAYMENT (Part 3)

Main distinction between Documentary Bill and Documentary Credit under Letters of Credit

Documentary Bills: Under this method of payment, bank opens no letter of credit. Bank functions as an agent for collection of the bill. The role of bank is that of medium only. There is no commitment on the part of bank for any payment, whatsoever. In case of D/A bill, importer gets documents of title to goods, on acceptance of the bill. Exporter gets payment only if importer makes payment. If importer fails to make payment on due date, exporter has no alternative other than filing a civil suit against importer as it is not legally possible to get back possession of goods. In case of D/P bill, if importer fails to make payment, exporter gets back the document of title to goods. There is no risk in case of non- payment, an important advantage from the viewpoint of the exporter.

Documentary Credit under Letters of Credit: Letter of credit is opened by bank, at the instance of the applicant (importer). Here, the bank that has opened the letter of credit assumes the responsibility to make the payment, on presentation of the documents specified in the letter of credit. So, exporter is sure of receiving the payment, once the documents specified in the letter of credit are presented. Exporter is not concerned with the creditworthiness of the importer. Neither credit risk nor political risk- in fact, no risk exists for receipt of payment if the exporter, scrupulously, follows conditions in the letter of credit.

I. Open Account with Periodic Settlement

Under this form of payment, exporter sends the goods, directly, to the overseas buyer along with invoice. The exporter does not draw any bill of exchange on the importer. This form of payment is made when the exporter and importer are inter-connected companies like holding company and subsidiary company or where the relationship between them is long standing and absolute trust exists between the two. There is real risk to the exporter as there is no proof in the form of documentary evidence to establish the obligation on the part of the importer to make the payment. If no credit arrangement is agreed, the buyer has to make payment, immediate to the receipt of goods. However, in most of the cases, importer makes the payment only on the expiry of the stipulated credit period agreed. It is desirable for the exporter to enter into this manner of payment only when the bonafides of the importer is beyond doubt.

This method of payment is simple and involves no additional costs. This form of payment is possible only when the exporter is financially strong as he is meeting the credit requirements of the buyer. It presupposes that there are no exchange control restrictions in the importer’s county. Otherwise, the importer may not be able to remit the amount when the amount falls due for payment.

Indian exporters are allowed to send the goods on this basis only with the special approval of RBI. RBI normally permits to foreign companies operating in India.

II. Shipment on Consignment Basis

Under the consignment basis, the seller ships the goods to his agent or representative. Exporter retains legal title to the goods though the physical possession is with the agent. As and when agent sells the goods, he makes the remittance to the principal who is the exporter. There is no financial security to the exporter if the agent is dishonest, not sincere or fraudulent in working as no document of evidence in the form of Bill of Exchange is available to protect him from default. In case goods are not sold, the agent will send back the goods to the exporter, at the risk and cost of later. However, this form of payment arrangement is common in respect of those goods, which cannot be standardised in respect of quality such as tea, coffee, wool etc.

There is a certain advantage to the exporter to secure better realisation as the buyers would be having an opportunity to inspect the goods and may be willing to pay a higher price if they are satisfied with the quality of the product.