In this article we will discuss about:- 1. Importance of Bills of Exchange in the Financing of Foreign Trade 2. Process of Payment through Bill of Exchange 3. Discounting.
Importance of Bills of Exchange in the Financing of Foreign Trade:
Payment in the case of Foreign Trade is being done through the medium of bill of exchange.
It is advantageous to different parties in the following ways:
1. Advantages to Importers:
Importer who buys goods and services reaps benefits with bill of exchange. Importer gets the delivery of goods with its help. He gets sufficient time limit to make the payment for the received goods or services.
2. Advantages to Exporters:
Bill of exchange is also beneficial to exporters. They do not have any apprehension in selling their goods on credit. Exporters are able to receive cash payment through bill of exchange even though they had sold goods on credit. In case of acceptance by bank, exporter has no risk of any type as he has the proof that importer owes him a particular amount. Even if the importer refuses to make payment, the exporter can take legal action against the importer.
3. Advantages to Banks:
Banks too gain while dealing in bill of exchange. Banks act as intermediaries in transactions pertaining to bill of exchange. They get their commission on presenting, accepting and discounting bill of exchange. If banks are in need of cash amount they can again get these bills of exchange rediscounted.
4. Advantages to Government:
Government also benefits from transaction relating to bill of exchange. Foreign trade gets encouraged with its help. The nation gets foreign exchange for exporting goods. Bill of exchange simplifies the procedure of foreign trade. This also enhances per-capita income and employment in the country.
Process of Payment through Bill of Exchange:
There are four parties involved in the process of payment through bill of exchange:
2. Importer’s Bank.
4. Exporter’s Bank.
All the procedures involved in foreign trade regarding purchase and sale of goods are to be followed. First of all the bill is written. After that the activities pertaining to acceptance, discounting and payment of the bill are to be initiated through a bank which is authorized to deal in Foreign Exchange transactions.
Exporter hands over all the documents relating to goods sold along with bill of exchange, to his banker. After that this bank informs the importer about receipt of all such documents along with bill of exchange. Under this system, payment amount is not sent to the exporter separately. Exporter’s bank deposits such amount in the exporter’s account maintained by him in that bank. Bank informs the exporter of this entry on receipt of payment.
The process regarding payment is made clear with the help of following example:
Importer—Marvo Company, London
Importer’s Bank—Amro Bank, London
Exporter—Swadeshi Kins, Mumbai
Exporter’s Bank—SBI, Mumbai
For example, Swadeshi Kins exports goods worth Rs. Ten Thousand to Marvo Company, London and loads the goods on ship bound for London. After that this company hands over the documents such as Bill of lading, invoice, insurance policy etc. to SBI, Mumbai. It instructs its banker to hand over such documents to Marvo Company, London after getting payment from that company. SBI, Mumbai dispatches all such documents to its branch in London.
The SBI, London informs the importer about the receipt of all such documents pertaining to goods and hands over these documents to the importer after getting full payment for the goods. London branch of exporter’s bank informs SBI, Mumbai about the receipt of payment and deposits Rs 10,000 in exporter’s account in SBI, Mumbai. In this way, transactions regarding payment of bill are completed.
The steps involved in case of payment through demand bill are:
1. Exporter makes arrangement to send the goods by ship from Mumbai to London.
2. Hands over the documents such as invoice, insurance policy and bill of exchange to SBI Mumbai.
3. SBI, Mumbai sends all these documents to its branch in London.
4. London Branch of SBI, Mumbai informs the importer about the receipt of such documents and presents bill of exchange to it.
5. Importer makes payment of the bill and takes delivery of all documents.
6. SBI (London) informs SBI, Mumbai that the necessary amount has been deposited in exporter’s account.
7. SBI, Mumbai deposits the amount in exporter’s account.
If exporters and importers use time bill for making such international payments, such bills are dispatched to the buyer after getting them accepted. Exporter hands over Bill and other shipping documents to its banker. Exporter’s bank dispatches all such documents to its branch or representative bank in buyer’s country.
This representative bank presents the bill of exchange before the buyer for acceptance and after the acceptance, hands over these documents to the importer. When this bill is accepted by the buyers the same reaches exporter’s bank’s representative office in buyer’s country. The exporter keeps the bill under its custody till the due date of payment.
The other alternative at the disposal of the exporter is to order its banker to get the bill discounted. If the exporter keeps the bill till the due date of payment, then the exporter presents the same bill before the buyer (or its Banker) for payment on due date. Exporter’s bank usually presents the bill for payment. Exporter’s bank deposits the amount in seller’s account after getting the payment from the buyer.
Thus payment of bill gets finally settled. If the bill is being discounted then that amount after due discount is deposited in seller’s account. The bank which discounts the bill gets the whole amount of bill on due date from the buyer. Thus the process of payment of bill finishes completely.
Discounting of Bills of Exchange:
If the drawer does not want to wait till the date of payment then he gets the bills discounted from banks and discount houses. “Discounting Bills of Exchange” refers to that process in which bills of exchange are bought by banks or discount houses at a price which is a little less than the actual value of these bills. Later on the banks or the discount houses receive full payment from the drawee.
Discount House refers to those business establishments that discount these bills. These houses buy these bills of exchange before the payment date and then receive the payment from the drawee on the due date. Discount Houses are found only in the money markets of London. They are an important source of funds in the case of emergency.
These two forms of payment-advance payment, and payments on open account- are not very common in international trade. The documentary bills, however, are a very common method adopted for payment in international trade. These bills act as a bridge between- (i) the unwillingness of the exporter to part with the goods until he is paid for, and (ii) the unwillingness of the importer to pay for the import unless he is sure of receiving the goods.
Banks act as a via-media by giving the necessary assurance to both the parties. Under this form of payment, the exporter submits the documents to his bank along with the bill of exchange. The documents required usually are bill of lading, invoice and marine insurance policy.
The exporter’s bank then sends the bill along with the documents to its correspondent bank in the importer’s country and presents the bill before the importer either for payment or for acceptance as per terms of the bill. The documents along with bill comprise full set of bill of lading, invoice and a marine insurance policy.
There are two types of payments under this method:
(i) Documents against Payments (D/P):
In such cases goods are shipped and the documents of title of goods along with the bill of exchange are surrendered to his bank by the exporter. The bank will send the documents and bill to its corresponding bank in the importer’s country. The bank in the importing country will present the documents along with the bill to the buyer and on his making the payment of the bill of exchange, will handovers the documents to the importer. Until the payments are made, the title to the goods vests with the exporter.
(ii) Documents against Acceptance (D/A):
In case of documents sent to the importer through banker, the banker presents the bill to the importer for acceptance and if he accepts the bill, the bank will deliver the documents of title to the buyer so that he may take possession of goods. On due date, the bank will again present the bill to the buyer for payment and if payment is received, the collecting banker sends the amount to the exporter through normal banking channels to be credited to his account.
Normally under Documents against Acceptance (D/A), the exporter will have to wait for payment till the final payment is received on due date. This may take time and the commercial banks very often discount such acceptances and thus the exporter receives the payment of the bill immediately after shipment of goods. Both the types of bill – D/A and D/P – are common in international trade.
There are various commercial risks which the exporter must take into account before he agrees to accept payment on such basis. Even when the documents are against payment (D/P), the exporter runs the risk of non-payment by the importer, as the documents in this case will not be handed over to the importer unless he makes the necessary payments. The documents will remain in the banks of the banker and the exporter will not lose possession of and title to the goods.
Therefore, he would be able to find alternative buyers for his goods and in extreme case, ship the goods back to his own country. The latter alternative is very costly and even in the former, he may have to resort to distress sales. In the case of D/A bill, the risk is even greater as the importer has already taken the possession of goods which may or may not be in his custody.
If he fails to meet his obligation of payment on due date, the exporter will not have any other alternative except to start civil proceedings for the recovery of amount. Institutional facilities are available almost in every country which undertake responsibility and provide cover for such commercial risks. In India, the Export Credit Guarantee Corporation (ECGC) offers such facilities.