UNIT 6 TERMS OF PAYMENT

6.0 Objectives
6.1 Introduction
6.2 Terms of Payment
6.3 Advance Payments
6.4 Documentary Credit
6 4.1 Parties In Documentary Credits
6.4.2 Details included ln Let- of Credit
6 4.3 Roctical Mechanism
6.4 4 Different Kinds of L e n a of Credit
6.4.5 Documents requ~redunder Lenm of Cred~t
6 4.6 Guidcl~ncsfor the Exporters
6.5 Documents against Payment
6.6 Documents against Acceptance
6.7 Open Account with Provisions for Periodic Settlement
6.8 Sbipment on Consignment Basis
6.9 Let Us Sum Up
6.10 Key Words
6.11 Answers to Check Your Progress
6.12 Terminal Questions

6.0 OBJECTIVES
After studying this unit, you should be able to:
explain various methods of payment in export business;
discuss the implication in terms of risks and time under various methods ;
describe various types of letters of credit; and
explain the documentation and related procedures covering realisation of export proceeds
under various terms.

6.1 INTRODUCTION
You have learnt in Block 1 the introduction of export, various aspects of documentation, legal
procedures in export trade and processing of an export order. In international trade today, the
competition is no longer confined to price, quality or delivery schedule but extends to terms
of payments. The terms of payment are often decisive in obtaining an order. In this unit, you
will learn various methods of payment in export business. You will also be acquainted with
the documentation and related procedures regarding realisation of export proceeds.

6.2 TERMS OF PAYMENT

The terms of payment play a very important role in export business. The terms are
instrumental in attracting foreign buyers and thus expanding the export business. Many
exporters are able to clinch an order on the bass of attractive payment terms, even though
they may not be competitive from the viewpoint of price or quality. Payment terms are
determined by a host of factors, such as exchange control regulations, trade practices,
financial position of buyers and above all bargaining strength of the trading partners. In
India, exchange control regulations play an important role in this regard. According to these
regulations, the amount representing the full export value of the goods exported to all
countrids, other than Bhutan and Nepal, must be realised within six months from the
date of shipment. Any deviation from the rule will require the Reserve Bank's prior
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Terms o f Payment approval. There are six main methods of receiving payments from the overseas buyers. These
and Export Finance methods cany risks of vanying nature. Hence, the choice depends largely on the bargain~ng
strength of the trading partners. Let us discuss various methods of receiving payments In
detail.

6.3 ADVANCE PAYMENTS

In this method, the payment is made either at the time of acceptance of the order, or at the
same time before the shipment. This is the safest and ideal method from the exporter's side.
In most cases, however, this method is not likely to be favoured by the buyer. The buyer may
favour this methods when he is an overseas affiliate of the exporter, or urgently requires the
goods and the exporter is in a position to dictate his terms. The buyer may make remittance
by: (a) purchasing a draft from the bank payable at a bank in India and despatching it to the
exporter, or (b) arranging through his bank for a bank in India to be instructed by mail or
cable to pay the exporter (i.e., by mail transfer or telegraphic transfer). The draft, mail or
telegraphic transfer will be in the currency specified in the contract of sale.

From the exporter's point of view, it is not only the simplest method but also free from any
kind of credit or transfer risks. Payment is received before the shipment, and hence, there is
no need for prior post-shipment finance of any kind. And as no interest or commission is
charged by Indian banks for payment of clean remittances, it works out to be the cheapest
method as well. However, in case, the exporters has quoted in a foreign currency, an
exchange risk exists from the date of contract until payment is received from the buyer.

6.4 DOCUMENTARY CREDIT

Where an exporter is unable to procure order with advance payment, the next best alternative
is the documentary credit method. Ib this method at the instance of importer, bank usually in
the importing country sends a letter to the exporter giving an assurance or an undertaking that
the payment will be made soon after shipment. In order to ensure that the exporter complies
with the agreed terms and conditions of sales contract, the letter from the bank stipulates
submission of certain documents. As credit is given to the exporter on the basis of
documents, the methods is referred to as a system of payments through documentary credits.

According to the Uniform Customs and Practices relating to Documentary Credits (UCP),
documentary credit has been defined as 'any arrangement whereby a bank acting at the
request and in accordance with the instructions of a customer (the importer) undertakes to
make payment to or to the order of a third party (the exporter) against stipulated documents
and compliance with stipulated terms and conditions.' Payment through documentary credits
have become popular because the mechanism therein reconciles the conflicting interest of
buyers and sellers. In this method, a bank gives an undertaking to the importer that he will
make payment to the exporter only after he has ensured compliance with stipulated terms and
conditions. At the same time, he also gives an undertaking to the exporter that payment will
be made as soon as documents evidencing compliance with stipulated terms and conditions
are submitted.

6.4.1 Parties in Documentary Credits

There are several parties involved in the documentary credit arrangement. Let us discuss
them in detail.

Firstly, it is the importer, who is referred to as an applicant in tenns of UCP, who initiates the
process. Having agreed to buy under such arrangements, he approaches his bankers and
requests him to issue a documentary letter of credit in the name of the exporter. While
requesting tbe banker, he mentions the documents to be submitted by the exporter in
compliance of the terms and conditions stipulated in the sales contract.

Secondly, the banker who issues the letter of credit to the exporter, is referred to as the
opening or issuing banker. 1i is the issuing banker who, at the request of and on the
insbuctlons of a customer (the applicant for the credit) undertakes to pay the exporter.
 Terms of Payment
Thirdly, the banker to whom the letter of credit is sent for authentication and delivery is
referred to as advising banker. According to the Article 8 of the UCP, 'advising bank shall
take reasonable care to check authenticity of the credit which advises'.

~ourthljl,a banker, who adds his confirmation to the credit is called a confirming banker
Confirmation of credit implies an undertaking to pay to the beneficiary in the event of issuing
banker's inability or refusal to pay. Confirmation can be added only at the instance of issuing
bank. Usually, the advising and the confirming bankers are one and the same.

Fifthly, Where a credit provides for bills of exchange, the paying bank is the bank on which
such bills are drawn. This may be the issuing bank, or another bank (either in the country of
the beneficiary, or in a large financial centre such as London or New York). If the credit
provides for bills to be drawn on the buyer, the issuing bank is the paying bank.

Sixthly, where the paying bank is not located in the exporter's country, credits usually permit
a bank or bankers in the beneficiary's country to negotiate drawings under the credit and
disburse the amount of the exporter. This banker is called a negotiating bank. Negotiating
bank must present the relative bills of exchange to the paying bank, and until that bank pays
the bill, the drawing is not finalised.

Finally, the exporter who concludes the contract with the importer providing for payment
under the documentary credit arrangement is called beneficiary.

Hence, in any documentary credit, there can be at least four parties, viz., the applicant,
the issuing banker, the beneficiary and the advising, confirming and negotiating banker
rolled into one. Look at Figure 6.1 which summarises the relationship among the parties to
the letters of credit.

Relationship among the parties to the Letters of Credit

1. The buyer and seller enter into

payment by documentary credit

4. The advising or confirming bank

informs the seller that the credit
has been issued credit in favour of the seller

3. The issuing bank asks another

bank, usually in the country of

6.4.2 Details included in Letters of Credit

The advice of a documentary credit addressed to the beneficiary gives the following
particulars though @e format order vary among banks:

1)' Name of the issuing bank, and type of credit with number and date
, 2) On whose behalf the credit is issued (the applicantlbuyer)
3 ) The amount (including the currency)
4) The date upto which the credit is valid (expiry date). the last date for shipment may also
7
Terms o f Payment 5) Since the benefic~aryis usually required to draw a bill of exchange (normally referred to
and Export Finance as 'draft' in documentary credits) (i) the terms of the draft (i.e., sight or usance) (ii)
whether the draft is to be drawn on a named bank or the buyer
6) Brief details of the goods
7) Documents required - usually the documents are : Commercial Invoice, Packing List,
Insurance Policylcertificate, Inspection Certificate, Transport document - Bill of Lading,
Airway Bill or Combined Transport Document
8) Port(s) of shipment and destination of shipment (only country's name may be written)
9) Price and terms of shipment (whether FOB, C&F or CIF)
10) Whether the part shipment andlor transhipment permitted
11) Any other conditions applicable to the credit
12) Certificate as the issuing bank's responsibility in the credit. If the certificate is omitted, it
may be implied from type of credit indicated in (a) above, e.g.., irrevocable, etc.
13) Statement that the credit is subject to the provisions of the Uniforq Customs & Practices
for Documentary Credits.
"\
6.4.3 practical Mechanism

The general procedure in a letter of credit usually follows the sequence given below:
i) The buyer and seller agree terms of sale, including payment by letter of credit
ii) The buyer issues an instruction to the issuing bank to issue the credit
iii) The issuing bank instructs the advising or confirming bank, including specification of
documents
iv) The advising bank informs the beneficiary
v) The beneficiary, if he accepts the advice and fi happy with it, arranges shipment
vi) The seller obtains the bill of lading and the other required documents. He delivers them
to the issuing, paying, accepting or negotiating bank, whichever is the appropriate one for
the settlement.
vii) The bank checks the documents. If they are in accordance with the instructions from the
issuing bank, (or the applicant) if the issulng bank is the paying bank, effects payment as
appropriate.
viii) If the paying bank is not the issuing bank, it sends the documents to the issuing bank.
The issuing bank checks them and, if they are correct, release them to the buyer upon
payment of the amount of credit.
ix) The buyer uses the documents to get possession of the goods.

6.4.4 Different kinds of Letters of Credit

There are various kinds of Letters of Credit. Let us discuss them in detail.

1) Revocable and Irrevocable Letter of Credit : lJnder the revocable letter of credit, the
issuing bank retains the right to cancel or modify the credit. Whereas in an irrevocable
letter of credit, the issuing bank gives a binding undertaking to the beneficiary.
2) Confirmed Letter of Credit :This implies that a banker other than the issuing banker,
by adding its confirmation, assumes the responsibility of payment, in case of the issuing
banker's inability or refusal to pay.
3) Restricted Credit : This refers that negotiations under a credit may be restricted by the
issuing bank to a named bank.
4) Revolving Credit: This process is arranged where regular, continuing shipments are
made by seller. It may be available even after the credit has been utilised once.
5) Red Clause Letter of Credit : This is in the nature of pre-shipment finance given to the
seller by the buyer. This credit thus enables the beneficiary to draw on advance against
shipments. The advance is liquidated by the amount due on presentation of documents.
6) Transferable Credit : This enables the beneficiary to make the credit available, in
whole or in part, to one or more third parties (second beneficiaries). This can only be
done if the credit clearly states it is 'transferable' (no other term is acceptable). It is used
when the seller is a 'middleman' who transfer part of the credit to the supplier who ships
the goods. Credit can be transferred once only.
7) Back to Back Letter of Credit : The benefkiary of an irrevocable letter of credit may
not be the actual supplier of the goods (he would be a middleman as in the case of the
transferable credit). He will request his banker to open a further letter of credit ( the back
8) Standby Credit: This is similar to a Performance Bond on Guarantee, but in the form of Terms of Payment
an UC. It thus assures the beneficiary that in the event of non-performance or non-
payment of an obligation, the beneficiary may request payment from the issuing banker.
The claim would be a draft accompanied by the requisite documentary evidence of non-
performance as stipulated in the credit.
9) Deferred Payment Credits: These credits are used where supplier wishes to allow the
buyer time to pay for the documents. He provides the beneficiary a specified time for
payment after presentation of the documents which the bank will deliver to the applicant1
buyer in the meantime.
10) Payment Credit : This is a sight credit which will be paid at sight basis against
presentation of requisite documents to the designated paying bank. In a payment credit,
beneficiary may or may not be called upon to draw a drafts. In many countries, because
of stamp duties even on sight drafts, it has become increasingly customary not to call for
drafrs under credit available by sight payment.
11) Acceptance Credit: This is similar to Deferred Payment Credit except for the fact that in
this credit, drawing of a usance draft is a must. Under this credit, drafts must be drawn on
the specified bankfdrawee for specified period. the designated bank will accept the drafts
and honour the same by making payment on the due dates.
12)Negotiation Credit: This can be sight credit or a usance credit. But drawing a draft is
must in Negotiation Credit. Further the draft can be drawn either on the beneficiary or
any other drawee as per credit terms. In a Negotiation Credit, the nomination can be
restricted to a specific bank or it may allow free negotiation in which case it is called as
'Freely Negotiable Credit'. Under aNegotiation Credit, if the bank nominated as a
Negotiated Bank refuses to negotiate, then the responsibility of Issuing Bank would be to
pay as terms of that credit.
13) Sight and Usance Credit: When a LC states that the payment will be made by the bank
at sight, on demand or pn presentation, such credit is called Sight Credit. However,
drawing of a draft is not always needed; payment can be made on presentation of
specified documents. Under Usance Credit, LC calls for drawing drafts at a stated
usance period. This type of credit is also referred as 'Term Credit'.
14) Fixed and Revolving Credit: When a credit is available for fixed amount and period, it
is called Fixed Credit. In this type of credit, the credit gets exhausted once it is utilised
for the stipulated amount or after the stated validity date.
15) Under Revolving Credit : Under this credit, the amount is revived or reinstated without
requiring re-enhancement in credit.
16)Transit Credit: This is issued in one foreign currency with beneficiary in another but is
advised through an usually confirmed by a bank in London.

Check Your Progress A

1. Distinguish between revocable and irrevocable letkrs of credit.

2. Distinguish between sight and usance credit.

3. What do you mean by deferred payment credit?

4. State whether the following statements are True or False.

i) Documentary credits have become popular because it reconciles the kterest of buyers
and sellers.
ii) Advance payment is the safest method from the importer's side.
iii) The banker to whom the letter of credit is sent for authentication and delivery is
known as confirming banker.
iv) Commercial Invoice is a document of content.
v) Red clause U C is in the nature of pre-shipment finance given to the seller by the buyer.
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Terms of Payment 6.4.5 Documents required under Letters of Credit
and Export Finance
According to Article 4 of the Uniform Customs and Practice for Docume~tarycredit, in
credit operations all parties concerned deal in documents, and not in goods, services andlor
other performances to which the documents may relate. Hence, it is necessary that the
beneficiary tenders documents in conformity with the requirements of letter of credit. Usual
documents prescribed in letters of credit are discussed below:

1) Bill of Exchange: It is an instrument drawn by one person (the seller of the goods) on
another (the buyer) directing him to pay to or to the order of drawer (i.e., the seller). The
person whom payment is to be made is called 'payee', who can be either the drawer
himself or a third person. Most letters of credit require that the exporter will prepare the
bill, called the draft and submit it to the banker along with other documents. It is a
document through which payment is arranged.
2) Commercial Invoice: It is a document of content. It contains details about the goods
sold, the price and any other charges, which may be on account of the buyer. It also
contains information about any discounts, if given by the seller. A correctly completed
commercial invoice-should conform to the sale contract.
3) Packing List: This gives details of the individual parcels/packets shipped to the buyer.
4) Transport Documents :As shipment is-themost crucial condition of >ayrnent, all letters
of credit insist on lodgement of documentary evidence in support of exporter's contention
of having shipped the goods. Rill of Lading is issued in case of air consignment, Railway
Receipvtruck Challan in case the goods are sent by land route. Combined Transport
Document is issued where the exporter chooses a multimodel transport system. These
documents are accepted as proof of shipment.
5) Inspection Certificate: As the goods must conform to a p e d quality standards, all
letters of credit require an Inspection Certificate. The Inspection Certificate has to be
submitted as a proof of the goods having been inspected by a qualified government or
private agency.
6 ) Insurance Policy Certificate: Insurance Policy is a legal evidence of contract of
insurance, showing 911 details of risks covered. Insurance certificate, applicable in case
of 'Flqtiqg' or 'Open' cover, contains a declaration regarding value of each shipment
and issigaed by the ejtporter himself. Insurance certificate is not normally acceptable
unless specifically provided in the letter of credit.

Besides, some letters of credit require documents such as Certificate of Origin, Analysis and
Weight Certificate, Health ?nd Sanitary Certificate to be submitted to the pegotiating bank.

6.4.6 Guidelines for the Exporters

As stated earlier, payment under letter of credit is available only if the exporter has tendered
correct documents. These documents are carefully scrutinised first by the negotiating banker
in the exporting country, before he makes payment to exporters. The issuing banker in the
importer's country also scrutinises it before reimbursing the negotiating'banker. Any
discrepancy in document can lead delays in payment. Quite often documents are rejected on
first presentation because they are either incomplete or incorrect. Some of the typical errors
are as follows:
1) The letter of credit had expired.
2) The bill of lading was claused (unclean or dirty).
3) A charter party bill of lading was presented when LIC called on on-board shipment.
4) The goods were shipped on deck when it was not permitted.
5) Shipment was made between the ports other than those stated in the letter of credit.
6 ) Insurance cover was inadequate and expressed in a cutency other than that required by
the letter of credit.
7) n e description (or spelling) of goods on invoice(s) differed from that in the letter of
credit.
8) The weights, marks and numbers differed between export documents.
9) The amounts of value shown on the invoice(s) and bill of exchange (draft) differed.
10) The drawing was for less than the letter of credit amount (when part shipment) were not
permitted.
1 1) The bill of lading did not evidence whether freight was paid or not.
12) The shipment was short.
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 Terms of Payment
13) The bill of exchange(draft) was drawn on wrong party.
14) the bill of exchange was payable on indeterminable date.
15) The bill of lading, insurance documents or bill of exchange(draft) were not endorsed

16) The copy of the freight account was not attached (when called for by the letter of credit).
17) There was an absence of signatures of witnesses, when required, on document presented.
18) The facsimile signatures were used when not allowed.

In view of such common errors, it is necessary to read the letter of credit very carefully and
check the terms against the contract of sale. It is fundamental to check that the letter of credit:
i) is of the type agreed, e.g. irrevocable and confirmed or just irrevocable
ii) has an expiry date that is sufficiently far ahead for the goods to be shipped and the required
documents obtained and presented in time
iii) has terms and conditions that can be met and that the required documents can be obtained
exactly as called for
iv) has correct spelling any misspellings should be taken up immediately with the buyer.

If any amendment or extension is necessary, the buyer should be asked immediately to

instruct the issuing bank accordingly. A watch should be kept to see that advice of
amendment of the credit is received without delay. It should be remembered that bank is not
allowed to overlook or approve errars and inconsistencies, however, small in the documents
presented and will not pay in such circumstances.

6.5 DOCUMENTS AGAINST PAYMENT

It is a widely used method for receiving payments in respect of exports. The essence of this
type of transaction is that the exporter is willing to ship the goods before payment. I-Iowever,
he is not prepared to allow the buyer to take possession of them before the buyer has paid.

The mechanism of the system requires the'exporter to draw a bill of exchange on the buyer,
payable at sight. The exporter then hands over the bill to his banks together with the
documents of title to goods. The documents include commercial invoices. packing list, marine
insurance policy or certificate and a full set of ocean bills of lading, airway bill for combined
transport document. These documents are to be surrendered to the importer only upon
payment of the bill. These bills are presented to the buyer for payment through a branch or a
correspondent in the buyer's country. The amount is realised and remitted back to the
exporter's bank for his account.

In case of goods sold on documents against payment basis, the exporter retains control of
goods till payment is received but risks still exist. If the bill is not paid on presentation and
the goods are lying in the foreign port, custom duties, warehouse and insurance charges and
other incidental expenses may be incurred. It may-be impossible to find another buyer, and
difficult to reship the goods.

In cases where the bills are in foreign currencies, exchange risks also exist from the time sales
contract is concluded until the bill is realised. If the exporter's bank purchases such bill and
the bill is not paid by drawee, exporter's account will be debited with the amount of the bil!
and related charges,

There are transfer risks arising from possible delays in remittances from the buyer because of
shortage of foreign exchange in his country. Incidence of such risks, can however, be
minimised by taking recourse to an export credit insurance policy.

6.6 DOCUMENTS AGAINST ACCEPTANCE

Under the documents against acceptance method, the exporter draws a usance or time bill on
the importer. He forwards the bill along with the export documents to the bank for delivery to
importer against acceptance of the bili. The essence of this type of transaction is that the
exporter is willing not only to ship the goods before payment but is prepared to wait even
after the buyer has taken delivery of goods. He, therefore, draws a bill and insists upon its
acceptance befare the documents are handed over to the importer. These bills have a usance 11
Terms of Payment period, usually of 30, 60,90, 120 or 180 days. Accepting the bill (which means writing the
and Export Finance word ACCEPTED and putting the signature) implies an unconditional undertaking to pay on
the due date mentioned in the bill. On the due date, the bill is presented for payment and the
amount remitted to the exporter.

There are several risks associated with the system. Firstly, there is a credit risk. Failure or
unwillingness to pay on the due date may force the exporter to take recourse to legal action.
Secondly, there are transfer risks arising from possible delays in remittances from the buyer
because of shortage of foreign exchange in his country. Incidence of such risks, can however,
be minimised by taking recourse to an export credit insurance policy. Lastly, where the bills '

are drawn in foreign currencies, exchange risks as also the time contract is concluded and the
bill is paid.

6.7 OPEN ACCOUNT WITH PROVISIONS FOR

PERIODIC SETTLEMENT

This method is genera!ly used in cases of inter-company relationship between seller and
buyer. This is also used where the exporter and overseas buyers have had long and favourable
dealings together and there are no exchange restrictions that might complicate settlement.
Sales on open account are sealed through periodic remittances to exporters. In such cases,
financing is carried by the exporter. The exporters have sufficient financial strength or credit
worthiness to cany the inventory abroad out of his own resources. Exporting on open account
basis requires special permission of the Reserve Bank of India. Normally, it is available only
to foreign companies operating in India.

6.8 SHIPMENT ON CONSIGNMENT BASIS

Shipment on consignment basis implies that goods are sent to the importer on the
understanding that the later will sell the goods and remit the sale proceed. Importer, in most
cases, is either the exporter's own agent or certain marketing agencies who undertake to sell
the goods on commission basis. A typical example of such sale is export of tea to UK.Tea is
sent to London, where it is sold through periodic auctions, and the sale proceed is remitted
back to exporters.

Under the exchange control regulations in India, Indian exporters are required to declare the
minimum sellkg price of each consignment. In case the goods cannot be sold at the price
declared at the time of shipment, reduction in price can be effected only with the permission
from Reserve Bank of India.

Check Your Progress B

1. List four important documents required under leffer of credit.

2. What do you mean by open account method of payment ?

3. State whether the following statements are True or False.

i) The exporter draws a usance bill under the documents against acceptance method.
ii) Open account method is generally used in cases of inter-company relationship
between seller and buyer.
iii). In documents against payment method, the buyer can take the possession of goods
without making thepayment.
iv) J n shipment of consignment basis, the importer is either the exporter's agent or
works on the commission basis.
 Fill in the blanks.
i) A banker, who adds his confirmation to the market is known as ......:...
ii) Under .......... an arrangement of regular and continuing shipments is made by seller.
iii) Under ........... the supplier allows the buyer time to pay for the documents.
iv) In ......... method, the importers are allowed to take the delivery of goods before he
has made the payment of the goods.

6.9 LET US SUM UP

Terms of payment are often decisive in obtaining an export order. Hence, an understanding of
alternative payment terms is important for marketing goods abroad. There are six methods of
receiving payments. They are: Advance Payment, Documentary Credit, Documents Against
Payment, Documents Against Acceptance, Open Account and Shipment on Consignment.

Advance payment, which is the simplest and safest method, involves remittance (by cable or
mail) in payment for the goods by the buyer at the time of acceptance of the order at some
time before the shipment. In most cases, however, it may not be accepted by the buyer, except
perhaps when the buyer is an overseas affiliate of the exporter, or urgently requires the goods
and the exporter is in a position to dictate his terms.

Where an exporter is unable to procure order with advance payment, the next best alternative
for him is to export under 'Documentary Credit' arrangements. Under this method, at the
instance of the importer (called applicant to the credit) a banker in the importing country
(called the issuing banker) undertakes to make payment to the exporter (called the
beneficiary), subject to fulfilment of the terms and conditions mentioned therein. This
arrangement is communicated through a banker in the exporting country (called the advising
banker). On receipt of the communication called the letter of credit, the exporter ships the
goods. At the same time, he brings the shipping documents to a banker (who may be the
advising banker, or if not forbidden in the latter of credit can be any banker). If the bank is
satisfied with the documents, makes payment. After thst, the bank sends the documents to the
issuing banker and seeks reimbursement of the amount he had paid. The issuing banker, if
satisfied with the documents, reimburses the amount to the negotiating banker. At the same
time, the issuing banker hands over the documents to the importer, who takes delivery of the
goods and makes payment to the issuing banker. Essence of the documentary credit
arrangement is that a bank assures the exporter of payment if he fulfils the terms and
conditions of the sales contract. This assurance inspires confidence in the exporter, who
accepts the order without reservation. Compliance of the terms and conditions is ensured
through submission of certain documents. It also helps importer in the sense that it enables
h~m to secure compliance of the terms and conditions of the contract and takes away the risk
of placing order with suppliers in far-off countries.

Documents which the exporters are required to submit are (i) commercial invoice which
indicates the goods supplied together with price (ii) a bill of lading or an airway bill or a
combined transport document as proof of shipment (iii) inspection certificate as evidence of
quality (iv) Insurance Policy or Certificate indicating risk coverage and most often (v) a bill
of exchange through which payment is arranged.

Under the Documents Against Payment, the exporter draws a Sight Draft and sends it to a
bank in the importing country. I-Ie also sends the shipping documents and requests the bank to
hand over the documents only after the importer has paid. This method ensures safety in the
sense that the documents are handed over to him only after payment. Whereas, under the
Documents Against Acceptance, documents are handed over to the importer against
acceptance of the bill which has a certain usance period (30,60,90, 120 or 180 days).
Importer takes delivery of the goods and pays on due date. I11 other words, the exporter sells
the goods to the overseas buyer on credit, incurring the usual credit risk.

Under Open Account, the exporter s k s the goods on a regular basis and receives
periodically as per the terms of sales contract: Such arrangement is resorted to where either
the buyer and seller are the same entity or the seller has full confidence in the buyer's
integrity. Whereas, under shipment and consignment basis, the exporter sends the goods to
the foreign buyer (who, in most cases, is his own agent) on the condition that the latter will
 Terms of Payment sell the goods and remit the sale proceeds.
and Export Finance

6.10 KEY WORDS

Documentary Credit: An arrangement whereby a bank (the issuing bank) undertakes to pay
on behalf of its client (the importer or applicant) to make payment to the beneficiary or
I
exporter upon presentation of certain documents specified in the credit.

Uniform Customs and Practices for Documentary Credit: The operation of letters of
credit has been regulated and is governed by Uniform Customs and Practices for
Documentary Credits of I~ltemationalChambers of Commerce adavted by 165 countries,
including India.

Applicant: The buyer or importer of goods. He is called applicant because he makes an

application to the bank for opening a letter of credit in favour of exporter.

Issuing Bank: The bank who, at the request of the importer, issues the letter of credit.

Advising Bank: Issuing bank branch or correspondents in the exporter's country to whom the
letter of credit is sent-for onward transmission to the beneficiary.

Confirming Banker: The bank who undertakes to pay to the exporter in case the issuing
bank fails to do so. Most often, the advising and the confirming banker are one and the same.

Beneficiary: The party t'o whom the credit is addressed. The seller or supplier of goods.

Revolving Credit: In a revolving credit the amount of a drawing is reinstated and made
available to the beneficiary again after a period of time, on notification of payment by the
applicant or merely the fact that the shipment has been made.

I Restricted Credits: The credits where a specified bank is designated to pay, accept or
negotiate the credit.
I
Bill of Exchange: An unconditional order given by the drawer of bill to make payment,
either at sight or after a specified time period, a specified sum of money to him (the drawer)
or to the party named therein (the payee). I

Documents Against Payment: An arrangement under which the importer is called upon to
pay against documents relating to shipment.

Documents Against Acceptance: An arrangement whereby the bank is instructed by the

exporter to handover the documents to the importer against acceptance of the bill presented to
him.

Consignment Export: This implies that goods are despatched to the importer, who is either
exporter's own branchlsubsidiary or his agent asking him to sell the goods and remit the sale
proceeds thereafter.

Red C l a ~ ~Credit:
se This authorises the advising bank to advance a part of the credit amount
to the seller for the delivery of the merchandise.

Deferred Payment Credit: Under this Credit, the issuing bank issues a written promise to
make payment on the due date calculated on the basis of the credit terms.

6.11 ANSWERS TO CHECK YOUR PROGRESS

A) 4 i) True ii) False iii) False iv) True v) True
B) 3 i) True ii) True iii) False iv) True
4 i) Confirming Banker ii) Revolving Credit iii) Deferred Payment Credit
iv) Documents Against Acceptance
 Trrms of Paymen1
- -

6.12 TERMINAL QUESTIONS

1) Discuss the significance of payment terms in export transactions ?

2) What are the various alternatives available to an exporter from the viewpoint of reaiising
export proceeds ? Arrange them in order of safety. What are the risks associated with
each of these alternatives ?
3) Discuss the mechanism of realising payment under letter of credit arrangements.
Enumerate its advantages from the point of view of both exporter and importer.
4) What precautions should an exporter take while exporting under Letter of Credit
arrangements ?
5 ) What is the method of realising payments under Documents Against Payment ? How
does it differ from that of Documents Against Acceptance ?
6) Is it possible for an Indian exporter to export on Running Account Basis ? Discuss.

Note : These questions and exercises will help you to understand the unit better.
Try to write answers for them. But do not send your answers to the
University. These are for your practice only.