Foreign exchange market plays the part of a clearing house, while, similarly, banks (authorized dealers in foreign exchange) act as clearing agents for international debts. The authorized dealers buy rights to wealth from those who have them to dispose of and sell rights to wealth who wish to acquire them. In practice, it is very much usual that when the exporter parts with his goods, either he wants money immediately or wants to be sure that it will be paid at the pre-determined date without any contestation. The importer, on the other hand, does not want to pay the goods until arrival of the carrying vessel. This two-faced problem in all cases is solved where both parties are favorable known to their own bankers. Depending upon the terms of agreement, the exporter can draw on his counterpart, the importer, or on the importer’s banks (or even on any third party) Continue reading
International Trade Finance
Bills for Collection
Under Bills for Collection method of international trade payments, since a bank acts as an intermediary, the seller does not have to depend on the buyer only. But here the bank’s role is only in the process of routing the documents of transport/title along with other documents. The seller draws documents in terms of the contract that it has entered into with the buyer, hands over those documents to the bank with clear instructions as to the mode of collection- whether goods are to be delivered against payment or against acceptance of documents and a bill of exchange on the basis of which he can get payment after due date of exchange and if for instance that bill is not paid for some reason the seller can fall back on the Bill of Exchange law and can take action under that law to get payment. While the buyer does not Continue reading
Pre-Shipment Inspection
Pre-shipment inspections (PSI) is defined as the certification of the value, quality, and/or identity of traded goods done in the exporting country by specialized agencies or firms on behalf of the importing country. Traditionally used as a means to prevent over-or under-invoicing, it is now being used as a security measure. Pre-shipment inspections are required when mandated by the government of the importing country. Governments assert that pre-shipment inspections ensure that the price charged by the exporter reflects the true value of the goods, prevent substandard goods from entering their country, and mitigate attempts to avoid the payment of customs duties. Pre-shipment inspections are typically performed by contracted private organizations. In most cases, importers can select from a short list of these organizations when planning inspections. However, sometimes one firm is appointed to carry out inspections for a given country on an exclusive bases. Inspection costs are generally paid either Continue reading
Eurocurrency Market Characteristics
The Euro-currency market has no geographical limits or a common market place. Business is done by telex, telephone and other communication systems. Internationally-reputed brokers put through the transactions for the banks. Deposits are secured for the banks operating in the market by the general guarantee of its parent or holding company and in some cases, by its central bank and /or the government of the concerned country. Similarly, loans to commercial parties are guaranteed by their respective governments. Deposits and loans to banks are, however, not guaranteed except by the banks parent companies or their exchange control authorities. The amounts of loans and the periods of maturity vary over a wide range from a few thousands to millions of dollars and from call loans to maturities extending up to 10-15 years. Some of the loans may be syndicated and jointly sponsored by a number of banks. There are also varied Continue reading
Introduction to Export Finance
Credit and finance is the life and blood of any business whether domestic or international. It is more important in the case of export transactions due to the prevalence of novel non-price competitive techniques encountered by exporters in various nations to enlarge their share of world markets. The selling techniques are no longer confined to mere quality; price or delivery schedules of the products but are extended to payment terms offered by exporters. Liberal payment terms usually score over the competitors not only of capital equipment but also of consumer goods. The payment terms however depend upon the availability of finance to exporters in relation to its quantum, cost and the period at pre-shipment and post-shipment stage. Production and manufacturing for substantial supplies for exports take time, in case finance is not available to exporter for production. They will not be in a position to book large export order if Continue reading
Multinational Corporations and Accounts Receivable Management
Multinational Corporations (MNC’s) grant trade credit to customers, both domestically and internationally, because they expect the investment in receivables to be profitable, either by expanding sales volume or by retaining sales that otherwise would be lost to competitors. Some companies also earn a profit on the financing charges they levy on credit sales. The need to scrutinize credit terms is particularly important in countries experiencing rapid rates of inflation. The incentive for customers to defer payment, liquidating their debts with less valuable money in the future, is great. Furthermore, credit standards abroad are often more relaxed than in the home market, especially in countries lacking alternative sources of credit for small customers. To remain competitive, MNCs may feel compelled to loosen their own credit standards. Finally, the compensation system in many companies tends to reward higher sales more than it penalizes an increased investment in accounts receivable. Local managers frequently Continue reading