INTERNATIONAL TRADE

byJoe Rayen

Trade Advisor

Agenda

Risks in International Trade

International Payment Methods

Trade Products

Types of Risks in International Trade

Buyer Credit Risk Supplier Performance Risk Sovereign and Country Risk Foreign Exchange Risk Market Risk Operational Risk

Buyer Risk

Exporters have to assess both the honesty and financial standing of overseas buyers they do not know. The risks include:

Goods are retained by dishonest buyer and not paid Buyers are slow in payments for goods supplied Goods are shipped to a buyer who cannot pay

Methods of Mitigating Buyer Risk

Credit Reports Advance Payment Letter of Credit Documentary Collection Export Credit Insurance

Supplier Performance Risk

Buyer takes the risk that the goods they order:

May arrive late May arrive damaged / perished May not match the required specification

Methods of mitigating Supplier Performance Risk

Performance Bond issued by a recognised / acceptable Bank

Letter of Credit calling : Inspection Certificate by an

independent Inspection agency Penalty clause for delayed shipment

Sovereign and Country risk

Sovereign risk – default on payment obligations by a government or civil authority

Country risk – though the buyer is willing to meet his payment obligations, economic or political factors prevent fulfillment of buyers obligations. These factors may include shortage of foreign exchange, political instability, civil unrest etc.

Methods of mitigating Sovereign and Country risk

Export Credit Insurance

Confirmed Letter of Credit

Foreign Exchange Risk

Whenever an importer/exporter has to make/receive a payment in another currency there may be a risk of exchange rate movement against him which will:

For an importer, increases the counter value that must be paid

For an exporter, reduces the counter value that must be received

Methods of mitigatingForeign Exchange Risk

Forward Currency Contracts

Currency Options

Currency swaps

Market Risk

Price volatility in the market is a major aspect. There are many risks related to MARKET which ultimately result in price movement. Some of these are:

Lack of adequate market to sell Market volatility Product obsolescence / perishability Product substitution Market depending on single buyer Market depending on current trend in fashion Product facing the end of its life cycle

How can NBD help to mitigate some of these risks

Act as a channel of communications for payments

Maintain control over goods on behalf of the seller

Give our financial backing to these transactions

Act as a guarantor for these transactions Apply international codes of practices Structure transactions in the best interest of

the customer Provide or obtain buyer / seller reports

Methods of Trade Settlements

Open Account --Most secure for buyer

Collections

Letter of Credit

Advance Payment -- Most secure for seller

Open Account

A sum to be paid To the seller by the buyer Upon receipt of goods / services Directly to the seller

Documentary Collection

A set of commercial document made by a seller

Presented to a buyer

Through the buyer’s bank

To be released against payment or acceptance

For a given sum of money

Types of Documentary Collection

Documents against payment• Documents are released to the buyer

against the payment of bill value

Documents against acceptance• Documents are released to the buyer

against the acceptance of the bill

Clean collection• Presentation of a financial instrument only for

payment or acceptance

Avalisation of Bill

Avalisation of a Bill is an acceptance or a payment undertaking of a term bill by a bank in addition to that of the acceptance of the drawee

Avalised bills can be discounted under risk of the bank who accepted the bill

The counter party risk is moved from the buyer to the bank

The risk for the seller is non performance of the contract if goods are not acceptable by the buyer

Letter of Credit

A Bank’s irrevocable undertaking Made on behalf of the buyer To pay a seller A given sum of money Provided that goods are shipped And documents are presented As per the terms and condition of the credit And presented within time and place specified Governed by UCP 500

Advance Payment

A sum paid in advance To the seller by the buyer For supply of goods / services In full or in part Directly to the seller

Payment Methods Compared

Advance Payment

Letter of Credit Documentary Collections

Open Account

Seller totally secured

Seller’s security is prior payment undertaking given by a Bank

Seller’s security is constructive control over goods is possible

Seller must trust the buyer

Buyer must trust the seller

Buyer’s security is that the Bank will pay only if documents comply with all the terms of the credit

Buyer’s security is sight of shipping documents and will have to pay thereafter

Buyer is totally secure

Types of Letter of Credit

All credits should either be revocable or irrevocable. In the absence ofsuch notation it will be deemed as irrevocable. The tenor of the creditshould either be sight or usance. They also can be opened for third portshipment or local deliveries subject to appropriate credit approvals

The types of credits are: Confirmed Revolving Transferable Back to Back Standby

Confirmed Letter of Credit

Is an undertaking by a bank other than the issuing bank to effect payment as per the payment terms of the credit in the event the issuing bank fails to honour its payment commitment, subject to presentation of documents called under the credit is in full compliant with the terms and conditions of the credit.

It is: Undertaken by the confirming bank, mostly at the request of

beneficiary Subject to the agreement of issuing Bank All risks of the issuing bank is shifted to confirming bank Charges are generally borne by the beneficiary

Silent Confirmation of Letter of Credit

Is an undertaking by a bank other than the issuing bank to effect payment as per the payment terms of the credit in the event the issuing bank fails to honour its payment commitment, subject to presentation of documents called under the credit is in full compliant with the terms and conditions of the credit.

It is: Added without the consent of the issuing bank Not recognised by UCP 500 Added at the request of beneficiary by the confirming bank All risks of the issuing bank is shifted to confirming bank Charges are generally borne by the beneficiary and is higher

than the open confirmation

Revolving Letter of Credit

A credit which is available for an amount that reinstated by the amount of the drawing in a given period of time. Such amount becomes available again under the credit either automatically or by means of an amendment to the credit.

It is often used in a series of similar transactions between trading partners e.g.:

A pre-agreed fixed quantity of merchandise once a monthOR Ten consignments of merchandise over a year

Transferable Letter of Credit

A credit which is permitted by the issuing bank to be transferred to one or more 2nd beneficiaries by a bank nominated by the issuing bank at the request of 1st benef.

It is transferred: At the request of 1st beneficiary In whole or in part to one or more 2nd beneficiaries Not exceeding the credit amount Unit price, Shipment, expiry and presentation period can be

curtailed Percentage of insurance can be adjusted Subject to UCP 500

Back To Back Letter of Credit

A credit (Slave LC) which is issued by a bank for a customer against an export LC (Master LC) received by him. The source of payment for his obligation under the LC opened by the bank will be the export LC.

BTB LC is : An independent LC from the export LC Structured by the Slave LC issuing bank Enabling smooth substitution of documents under Master LC More complex and high risk Subject to availability of Bank & Country risk on Master LC Subject to internal credit approval Not recognised by UCP 500

Back To Back Letter of Credit

In order to give consideration to open a Slave LC by the issuing bank, the master LC:

Be available with the issuing bank

Expires at the counters of slave LC issuing bank

Allow third party documents to be acceptable. (exception for Iranian LC on transport document)

Terms and conditions are unambiguous

Is not a transferred LC

Standby Letter of Credit

A Standby Letter of Credit is very similar in nature to a payment guarantee.

It is issued between trading parties who have high degree of trust between them.

Usually opened when there is regular shipments and parties would want to avoid opening independent LC each time

Generally calls for a simple written claim

Amendments to Letter of Credit

Amendments are normally initiated by the beneficiaries. However, credits are amended by the issuing bank at the request of the applicant.

The amendments follows the same route as the original letter of credit.

Before issuance of the amendment the issuing bank will consider whether the amendment could be accommodated.

The beneficiary need not give acceptance or rejection of amendment. The presentation of documents will imply the acceptance or rejection.

The amendments cannot be accepted partially.

Availability of Letter of Credit

The tenor of the credit will either be sight or term (usance). It must also stipulate the availability of the credit. The methods of availability are:

Payment

Negotiation

Acceptance

Deferred Payment

Availability of Letter of Credit - Sight

Payment Bank claims money and pay the beneficiary

Payment is without recourse to beneficiary

No draft is required

Negotiation Bank pays the beneficiary and waits for repayment by issuing bank

Payment is with recourse

Draft must be drawn on the issuing bank

Availability of letter of credit - Term

Acceptance Bank accept the draft drawn on itself.

Bank is committed to pay at maturity May discount at its discretion

Draft must be drawn on the accepting bank

Negotiation Bank pays the beneficiary and obtain reimbursement from issuing bank

Payment is with recourse to beneficiary

Draft is drawn on the issuing bank

Deferred Payment

Bank pays at maturity date determinable in accordance with the terms of credit.

Payment is with recourse to beneficiary. May discount at its discretion

No draft is required

Parties to a Letter of Credit

Applicant Issuing Bank Advising Bank Beneficiary Confirming Bank Negotiating Bank Reimbursing Bank

Points to be checked on receipt of a Letter of Credit

Is authentic and operative Issued by an acceptable bank Name and address of beneficiary is correct Amount, unit price and description of goods are correct Is opened as per pre agreed terms and conditions Is available for negotiation at the country of beneficiary Port of loading and discharge is specified Charges on whose account ie applicant or beneficiary Reimbursement terms and clear Shipment and expiry dates are sufficient Shipment term is specified (CFR / FOB etc) No ambiguity in clauses Is subject to UCP 500

Financial Documents

Bills of Exchange

Promissory Notes

Bill of Exchange

A financial document establishes a legal undertaking to make a payment distinct from the underlying transaction

A bill of exchange is the commonest financial document used in international trade

Bill of exchange has been recognised for many years by trade and customs and by the laws of many countries. So, there is a widely recognised code of practice for their use

Bill of exchange is also called as draft

Bill of Exchange - sample

Bill of Exchange

Date 10th July 2005 Amount usd 75,000

At ________ pay against this sole Bill of Exchange to theorder of _______________________________________the sum of _____________________________________for value received against _________________________

National Bank of Dubai for Mitsui CorporationDubai

Manager

Bill of Exchange

An unconditional order in writing

Addressed by one party (drawer) to another (drawee)

Signed by the party drawing it

Requiring the party to whom it is addressed tp pay on demand or at a fixed determinable future date

A certain sum of money

To a specified party or to the order of a specified party or to bearer

Commercial Documents

Commercial documents looks into various other aspects of trade transactions relating to the goods

What goods are being shipped How are they being transported What insurance is in force …… and so on

Types of Commercial Documents

Commercial documents can be broadly classified as follows:

Documents describing the commercial transaction as a whole

Commercial InvoicePro forma Invoice

Documents describing a specific aspect of the transaction

Transport DocumentInsurance DocumentInspection CertificateWeight Note

Documents dealing with customs or duty considerations

Consular InvoiceCertificate of OriginCertified Invoice

The above is not a hard and fast classification. Sometimes a single document can perform multiple functions.

Types of Transport Documents

Marine Bill of lading

Air Way Bill

Truck Consignment Note

Railway receipt

Bill of Lading

A Bill of lading is issued in sets of signed originals, anyone one of which can be used to claim the goods

Extra copies are also issued for record purposes, which are not signed. These are called non negotiable copies. They do not have any control on goods unlike the originals.

Signatories to a transport document

Transport document issued must be signed as follows as per UCP 500:

As carrier…………………………..or

As agents……………….. For and behalf of the carrier………………………..or

The master………………………..or

As agents……………….. For on behalf of the master……………………………..

Insurance

The buyer will want to know whether the goods have been adequately insured and for what damages. The insurance document must state:

The amount covered The risks covered ie war, theft, pilferage

etc The period covered

Common documents called under LC

Bill of Exchange Commercial Invoice Transport Document Packing List Shipment Advice Insurance Policy Certificate of Origin Inspection Certificate Certificates issued by beneficiary Postal Receipts etc. etc.

Incoterms

The International Chamber of Commerce has defined a standard set of terms clearly defining the shipping arrangements. It prevents misunderstanding and simplifies the responsibilities between the buyer and seller. These are called as INCOTERMS.Some of them which are commonly used are:

EXW Ex-worksFOB Free on boardCFR Cost and freightCIF Cost, freight and insuranceCPT Carriage paid toCIP Carriage and insurance paid toDDP Delivery duty paid

Points to be noted when documents are prepared

Drafts to be drawn for the net invoice value Invoice to be addressed to the applicant, unless the credit

specifies otherwise Goods description on the invoice must be exactly as appearing

on the credit LC No and name of the issuing bank to be shown on all

documents, unless the credit specifies otherwise If credit calls for signed documents, ensure such documents

are signed Original documents must be marked “original” and copies as

“copy” Ensure to effect shipment prior to last date of shipment If expiry or last date of presentation falls on a holiday,

documents can be presented to the nominated bank on the following working day

Common discrepancies

Credit expired Late presentation Late shipment Goods description not as per credit Excess drawing Short shipment Incomplete set of transport document Name of beneficiary differs from credit Inconsistency of information/data between documents Documents not submitted (ie Inspection/Certificate of

origin)

Bank Guarantee

A Bank’s irrevocable undertaking Payable to beneficiary On demand Against a valid claim Without demur / protest Mostly governed by land of law

It is an obligation by the Bank:to pay the seller in case of buyer’s default to pay ORto pay the buyer in case of non performance by the seller

Types of Bank Guarantee

Guarantees are broadly divided into two categories. They are Financial and Non Financial. Financial Non Financial

1 Advance payment Bid/Tender Bond2 Retention Gtee Performance Bond3 Payment Gtee Labour Gtee4 Facilities Gtee Customs Gtee

Bank Guarantee Vs Letter of Credit

Bank Guarantee Letter of Credit

1. Payment upon non performance or default

2. Mostly payable on demand

3. Generally governed by law of the land

4. Standalone instrument. Transaction flows separately

5. A simple process for the beneficiary

1. Payment upon performance by seller

2. Payable on compliance with terms and conditions of credit

3. Always governed by UCP 500

4. Transaction flow through the instrument

5. A complex process for the beneficiary

Questions?

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