Methods of Payments

Payment can be made by means of any of the following 1. Advance payment 2. Open Account 3. Documentary collection 4. Letter of Credit

 Advanced Payment
Under this method, the exporter receives payment from the importer in advance through demand draft or cheque Huge payment require involvement of bank Exporter may ask for advance payment only when he is in strong position of trading.

Open Account
Open account is an arrangement between the exporter & importer whereby the goods are manufactured & delivered even before the payment is required No legal commitments Required high trust

Documentary Collection
The exporter- present document to his bank along with bill of exchange The collection bank- the bank which forward the documents for collection or obtaining the acceptance of the draft from the importer as per the instruction of the exporter The remitting bank- the bank which present the documents to the importer for collection of payment as per the instruction of the collection bank

 The importer- the party to whom documents are handed over against payment/acceptance. Types Documents against payments (D/P) Document against acceptance (D/A)

D/P
Under this method, the shipping documents concerning the shipment of goods are given to the importer against payment for the goods D/A In this case, the remitting bank hands over the shipping documents to the importer only upon acceptance of the accompanying draft. The acceptance implies that he agrees to pay the amount of the draft.

Collection of the payment under D/P

1
Exporter (forward documents to) Exporter's Bank (forward documents to)

2
Importers Bank

3
Importer

7 6 3. Inform 4 Makes Payments 5. Handover of documents 6. Send remittance 7. Credit the account of

4,5

Acceptance of the draft under D/A

1
Exporter (forward documents to) Exporter's Bank (forward documents to)

2
Importers Bank

3
Importer

7 6 3. Informs 4. Acceptance of draft 5. Handover of documents 6. Send acceptance to 7. Send acceptance to

4,5

Collection of the payment under D/A

1
Exporter (forward documents to) Exporter's Bank (forward acceptance to)

2
Importers Bank

3
Importer

6 5 3. Ask for payment 4 Makes Payments 5. Sent remittance to 6. Credit the account of

Risk Under D/P

Importer not receiving the goods It makes liquidity problems The possible options before him are as follows 1. Re-negotiate with the importer & offer him a discount 2. Bring goods back to home country 3. Look for alternate importer 4. Abandon the goods

Risk in D/A
Importer may not pay on due date Importer becomes bank corrupt Importer may refuse to make payment Options available 1. Rating of the importer 2. consign the goods to importers bank rather than importer 3. Obtain credit risk policy

Quality Control & Pre Shipment Inspection

Quality Control it is a set of attributes or specifications including packaging. It is the manufacturer who first decide the quality of product before launching in the market. Finally quality may vary according to buyers demand. Quality may be high, low or medium according to the quality of the specification

Need for pre shipment inspection

Exporters face the competition from inside & outside players Quality also affect the image of the exporter & country as well. Thus, Indian govt. introduced the Export (Quality Control & Inspection) Act, 1963.

Types of pre shipment inspection

Voluntary Inspection
By exporter himself
Primary responsibility of exporter Inspection of finished product Inspection under process of manufacturing Inspection after packaging

By buyers representative
Inspection before dispatch Shipment only after getting the satisfaction certificate Buyer can not raised question after satisfaction certificate

By buying agent in the exporters country

Inspection by agent & satisfaction certificate for raw material, process, product, packaging

By inspection agencies in the private sector

By private agency like SGS India Ltd.

 Compulsory Inspection
The central Govt. is empowered to
Notify the commodities which shall be subject to quality control or inspection or both Specify the type of quality control or inspection Prohibit the export without inspection certificate EIC is the body 5 Agencies works under EIC

EIA- Compulsory Product Coverage

Engineering Chemical Food & Agriculture products Jute products Coir products Footwear & footwear components Cashew Fish & fish products Miscellaneous products

System of Inspection
Consignment Wise Inspection
On request pre shipment

In process Quality control (IPQC) Self Certification System

Required proven record of quality maintenance

Exemption
Star Export House 100% EOU Units in SEZ Product bearing ISI or AGMARK for Export Item notify under Export Act, 1963

Export Finance
The commercial banks are required to observe the following
Finance are to be disposed off expeditiously Adequate finance Credit Appraisal Close eyes on the end use of the funds Additional funds for extra export order Finance as per MPBF

Maximum Permissible Bank Finance

Method I Under this method, the amount of margin money is computed on the basis of a specified % of the working capital gap. Method II - Under this method, the amount of margin money is computed on the basis of a specified % of the total current assets.

Classification of Finance
Pre Shipment finance
To provide finance for working capital To enable the exporters to purchase raw material, supplies, manufacture or ship the goods. Classifications Packing Credit Advance against incentives receivables from Govt. covered by ECGC Advance against cheques/drafts received as advance payment

Packing credit
Packaging credit granted by a bank to enable an exporter to pack the goods meant for export. It includes purchase raw material, supplies etc. It is granted on the basis of confirmed export order received or letter of credit opened.

Criteria
Export order should contains
Name of overseas buyer Particular of goods Quantity & Unit prices or values of order Date of shipment Term of sale & payment

Form of Finance
Fund Based
To purchase the raw material, processing, warehousing, manufacturing etc.

Non Fund based

To open letter of credit for export & import as well Issue of various types of guarantees

Security
Packaging credit hypothecation

Packaging credit pledge loan

 No fixed formula for determining the quantum of finance, it depends upon the specific order. RBI guidelines that no export order should suffer because of wants of funds. Bank do ask for the exporters to contribute a part of the fund from their own sources i.e margin money.

Period
Total 270 days max
Initially 180 day 90 days may be extended Interest rate according to the benchmark prime lending rate (BPLR) - actual cost of funds to the bank - Operating expenses - minimum margin to cover regularity requirement of capital charge & profit margin