What are the different methods of international payment settlement?

Answer 1

INTRODUCTION The central bank of any country is usually the driving force in the development of the national payment system. The Reserve Bank of India (RBI) as the central bank of the country has been playing this developmental role and has taken several initiatives for a safe, secure, sound and efficient payment system. The buyer and the seller incorporate the details in the contract of sale itself that how payments for goods to be send. Depending upon the bargaining power of the buyer and seller, provisions of Exchange Contracts in the countries concerned, the duration of trade relationship between the buyer and seller and also the credit worthiness of the parties concerned, terms of payment are arrived at. It can also be said in general that, terms of payment reflects the extent to which the seller requires a guarantee of payment before he loses control over the goods. There are four main methods using by the exporters and importers to fulfil the contract value. These are Advance payment, open Account System, Consignment Sale and Documentary Collection. ADVANCE PAYMENT 1) Meaning:- An amount paid before it is earned or incurred, for example, a prepayment by an importer to an exporter before goods are shipped, or a cash advance for travel expenses. 2) This method is the most desirable for the Exporter, the Importer has to rely on the integrity of the Exporter and his capacity to execute the order in time. More than that, the entire transaction is financed by the Importer in this method thereby making the transaction more costly for him; besides exposing the Importer to credit risks. On account of the above factors some countries have imposed Exchange Control restriction regarding imports. 3) In India advance payment is allowed only in respect of import of books, periodicals, life saving payment apparatus, capital goods, machinery and a few other items. 4) Advance payment of USD 2500/- or equal to this amount can be made for commercial purposes. If the following condition are followed by the contract party. a) Documents produced by the parties must be evidence showing the demand of the overseas supplier. b) Payment must be given to the overseas supplier. c) Endorsement in the import licence if any. d) Import is permitted either by a licence covered under OGL. As regards exports, depending on the nature of goods exported and the competitiveness of the product, advance payments are insisted. For example in the case of export of vegetables and fruits, it is customary to demand 100% advance payment. e) Application in F.A.I. in duplicate. f) Importer will submit evidence of import in the Exchange Control Copy of Bill of Entry/Postal wrapper within a period of 3 months. OPEN ACCOUNT SYTEM 1) It is just opposite to the Advance payment. 2) Meaning: When an Exporter agrees to sell the commodity on open account system to the Importer, he despatches the goods to the buyer directly followed by the transport documents and an invoice requesting payment. 3) The Exporter loses control over the goods completely and leaves everything on the integrity of the buyer. 4) It is beneficiary to the Importer; the Exporter bears the entire financial and commercial risks. This system is normally resorted to when the goods command buyer's market. 5) The commercial risk is, to some extent minimised by taking a policy of ECGC. To take care of the interest of the Indian Exporters, there are Exchange Control restrictions imposed by RBI on open account export Sales. CONSIGNMENT SALE If you sell goods sold on consignment, you have agreed to sell the goods without first buying those goods from the owner. Typically, your agreement specifies one of the following: 1) you agree to sell the goods on behalf of the owner as an agent 2) you agree to purchase the goods for an agreed price when you find a buyer. There are no restrictions on what goods can be sold on consignment. Goods regularly sold on consignment include: motor vehicles, boats, wedding and formal dresses, cameras, farm machinery and artworks. For Example: Selling on consignment means giving your car to someone else, usually a motor dealer, to sell on your behalf. Generally you set the minimum price you will accept and the dealer will add a commission to it. While the ownership and possession passes to the buyer in the case of open account system, the ownership remains with the seller in the case of consignment sale. In the case of goods exported on consignment basis, freight and marine insurance must be arranged in India. DOCUMENTARY COLLECTION The Exporter prepares the proper financial and commercial document including the transport document and hands over to his Banker requesting in clear terms as to how the documents are to be delivered to the Importer at the other end. Four main parties to a documentary collection are The Principal i.e.. the Exporter, The Remitting Bank - The Exporter's Bank , The Collecting Bank - The Bank in the Importer's country and The Importer, the consignee. When the Exporter wants the Bank to hand over the export documents to the Importer only against payment immediately, the Bill of Exchange is called a Sight Draft. In case the Exporter wishes to give some time (30 days, 60 days, 90 days etc.) to the Importer to arrange for the funds but at the same time would not like to part with the documents before payment of money, the appropriate bill of exchange is called a D/P (Document against Payment). Banks act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods. The procedure is easier than a documentary credit, and the bank charges are lower. The bank, however, does not act as surety of payment but rather only as collector of funds for documents. For the seller and buyer, a documentary collection falls between a documentary credit and open account in its desirability. By Kishan Singh Rana