Page 37 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

International Trade Procedures and Documentation

Notes the documents. Some special arrangements in terms and conditions have to be ingrained
for availing of revolving credit.
7. Transferable Letter of Credit: The transferable Letter of Credit is popular when there are
middlemen or agents involved in a trade deal, as under this types of L/C, the exporter has
the right to request the confirming or negotiating bank to make a part of payments in
favour of agent or middleman or any other third party involved in trade transactions. The
exporter can also extend such facility to raw material suppliers in case the major component
of goods input cost comes from a particular supplier.
8. Back-to-Back Letter of Credit: The trade deals in the present scenario may involve suppliers
from many countries and therefore transferring the part of payment is not a practical and
workable preposition under transferable letter of credit. Hence traders can request to
bank to open a back-to-back letter of credit in favour of supplier on the basis on letter of
credit, which the exporter has received. Under back-to-back Letter of Credit, the original
letter of credit is used as security to establish a second letter of credit (B2B L/C) drawn in
favour of supplier of inputs or raw materials. The risk exposure is very high under such
types of letter of credit hence banks are usually reluctant to open such types of L/C in
today’s trade environment.
9. Inland Letter of Credit: The Inland Letter of Credit is popular among merchant traders
who procure material from manufacturers and export it to overseas markets. The original
manufacturer may demand such type of letter of credit, as he has to ensure pre-shipment
finances under liberal interest rate as specified by the RBI. Such manufacturer, who in turn
becomes a deemed exporter, will also wish to avail of other export incentives and benefits
and hence may request for Inland Letter of Credit. Such Letter of Credit is becoming
popular in India as the units situated in SEZ/EHTP/BTP/STPI/EOU are opening such
credit in favour of their local suppliers. An importer willing to procure plants and
machinery under the EPCG scheme can also open an Inland Letter of Credit in favour of
local suppliers of plant and machinery, if such plants and machinery are locally purchased.
There can be two types of documentary collection payments, which are detailed as under:
1. Documents against Acceptance: In a competitive international environment, the exporter
sometimes has to extend the credit to the importer to win buyers and penetrate new
markets. Such a payment option is also known as Time Draft, as payment is due on the
importer and will be made on a mutually agreed future date, usually 30 to 90 days. Such
extension of credit helps the importer sell these goods in local markets and make
payments. The importer, under this method, is obligated to make payment to the exporter
but can default or deny making the payment to exporter. Therefore, this is a risky
payment option for the exporter and has to be used after thoroughly verifying and
cross-checking the creditworthiness of importer and his country’s economic and political
situation.
The exporter can smartly use this payment option by insuring the credit risk or by using
the factoring or forfaiting services. He can also sell his draft to a bank on discount and thus
the risk of non-payment is shifted to the bank. The exporter can also cover his risk to a
certain extent by using a Date Draft. A date draft is slightly different from a time draft, as
it prevents the importer to delay the acceptance of draft and release of payment.
2. Documents against Payment: This is best payment option as such payment term can be
acceptable to both the parties in international trade transactions because under this payment
mode, the exporter retains the title to the shipment until the cargo has reached the importer’s
country and payment for the same has been made. The importer is also assured, as he will
make payment when the goods arrive in his country. Therefore, the degree of various
risks is minimal to both the parties. The collecting bank, on receiving the trade documents

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