MONDAY EXPORT CLASS
With
DR GODWIN OYEFESO (SUCCESSEDGE EXPORTERS NETWORK)
Topic: NEGOTIATIONS DOCUMENTS WITH BANKS (Part 1)
After the goods have been physically loaded on board, exporter collects Bill of Lading, which is the primary document in the process of shipment of goods. After collecting all relevant documents that the importer requires, in terms of the contract, exporter presents documents to the bank to collect payment. This process is known as “Negotiation of Documents with Banks”.
There are two methods in negotiation of documents with banks, one under documentary bill; second under documentary letter of credit. In both the cases, exporter draws bill of exchange either on D/A or D/P basis, in terms of the contract. In the method of documentary bill, there would be no letter of credit while letter of credit is one of the documents, in case documents are negotiated under documentary letter of credit. In case of documentary bill, exporter may request the bank to purchase or discount them to get the funds immediately. If the exporter enjoys the sanctioned limit from the bank, exporter avails the facility as interest is concessional and so funds would be available at a cheaper rate. Here, bank provides the funds even before the receipt of payment from the importer. In the absence of limit or when funds are not needed immediately, exporter may request his banker to collect the billl, under collection. In such a case, the exporter gets funds soon after the payment by the importer, after deduction of commission. When it is D/P bill, it is called purchase of bill and if the bill is drawn on D/A basis, it is called discounting of bill. Though the terms ‘Purchase’ and ‘Discount’ are used in different types of bills, in both the cases, the negotiating bank immediately makes payment to the seller.
When letter of credit is opened in favour of exporter, exporter negotiates the documents with the negotiating bank. Exporter gets the payment if the documents are in conformity with the terms of letter of credit.
Whether there is letter of credit or not, the exporter has to draw the bill of exchange on D/A or D/P basis, in terms of contract, for presenting the documents to the bank which is known as “Negotiating of Documents with Banks”. The exporter has to submit the documents along with the Standardised Letter to the bank for Collection/Negotiation of Documents. This letter provides comprehensive coverage of different points to be covered.
DOCUMENTS REQUIRED UNDER LETTER OF CREDIT
According to Article 4 of UCP, in credit operations all parties concerned deal in documents, but not in goods or services and or other performances to which the documents relate. Hence, beneficiary has to tender the documents, meticulously, as per the requirements of Letter of Credit.
Usual documents prescribed in letter of credit are:
- Sight or Usance Bill of Exchange
- Commercial Invoice/Customs Invoice
- Packing List
- Full set clean-on-board Bill of lading(all negotiable copies)/Airway Bill/Combined transport document
- Inspection Certificate
- Marine insurance policy/certificate, in duplicate
- GR-1/SDF Form, in duplicate
- Original letter of credit along with amendments made up to date
- Certificate of Foreign Inward remittance in case of advance payment
- Any other document as required by the buyer, mentioned in letter of credit
WHEN DOCUMENTS CAN BE NEGOTIATED?
When the exporter presents the documents, the first thing negotiating bank does is to carefully scrutinise the documents whether they are as per the terms and conditions of letter of credit. The bank should exercise extreme care in verifying the documents. There are no minor or major discrepancies in the documents. The documents should also be in accordance with the interpretation of various clauses contained in Uniform Customs and Practices for Documentary Credits, applicable at the time of the negotiation of documents.
(a) Document should Permit Negotiation
The advising bank or any bank can negotiate the documents and make the payment to the exporter provided the negotiation is not restricted and the credit is freely negotiable. Banks negotiate when the letter of credit is irrevocable. As far as revocable letters of credit are concerned, banks do not negotiate documents drawn under such letters of credit.
(b) Not Obligatory to Negotiate
It is not obligatory on the part of advising bank to negotiate the documents merely it has advised the letter of credit. Only a bank that has confirmed the letter of credit is bound to negotiate provided the documents are in order. Even confirming bank can refuse to negotiate, if the documents are not in accordance with the terms of credit, strictly. If the documents are discrepant, documents will be returned to the exporter for suitable correction and presentation, again. If the documents are presented again before the expiry of credit and are totally in conformity of the letter of credit, then only the documents are negotiated. Before the correction or obtaining the necessary amendment to the letter of credit, if the letter of credit expires, exporter can not get the payment even from the issuing bank.
(c) Documents should be Non-Discrepant
Discrepancies of even minor nature may take away the right of the negotiating bank to claim reimbursement from the opening bank. So, meticulous care has to be exercised while examining the documents. If the documents are totally in order and comply with the terms of the letter of credit, they should be negotiated.
(d) Slight Discrepancy in Documents takes away the Right
Even if there is slight discrepancy in the document, negotiating bank should not assume the risk of making payment to the exporter as it can not get reimbursement from the opening bank.
(e) Recourse to Drawer
Negotiating bank can have recourse to the exporter if the issuing bank refuses to make the payment on account of any discrepancies in the documents. In such a case, the negotiating bank recovers the amount paid from the exporter. In case documents are discrepant, negotiating bank takes indemnity to protect itself from such situation. However, negotiating bank can not have recourse to the drawer if it is also a confirming bank. So, confirming Bank can not have recourse to exporter while negotiating do amounts under letter of credit.
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Till then, you will succeed