Methods of Trade Settlements

Overview

Objectives
After going through this presentation you will be able
to:
Explain clean payments as a method of trade
settlement
Explain bills for collection as a method of trade
settlement

Major Recognized Ways of Settling

Trade Transactions
Clean Payments

Bills for Collection

Documentary Credits
You will learn about clean payments and bills of
collection in the subsequent slides.

You will learn about documentary credits in a later

session.

Clean Payments: Overview

All shipping documents, including title documents, are
handled by the trading parties, that is, seller and buyer.
Features:
The basis is trust
between the
trading parties.
Role of the banks is
limited only to
transfer of funds.

Types:
Advance payment
transactions
Open account
transactions

Clean Payments: Title Document

A title document is one that provides title to the goods.
Such documents are used as follows:
Generally, the transport
operator issues these
documents upon receipt of
goods from the seller for
transporting to the
designated place of delivery.

These documents are

required to be produced for
taking delivery of the goods
at the destination.

Examples:
Motor Transport Receipt (MTR)
Railway Receipt (RR)
Bill of Lading (BL)

Clean Payment Transactions: Types (1 of 3)

Advance Payment Transactions

Open Account Transactions

You will learn about each type of transactions in the

subsequent slides.

Clean Payment Transactions: Types (2 of 3)

Advance Payment Transactions

Open Account Transactions

Steps:
i. Buyer (importer) sends payment to seller (exporter).
ii. Buyer waits for delivery of goods.
iii. Seller supplies goods after receipt of funds.
Highlights:
Advantageous to the sellers, since they do not bear risks
Disadvantageous to the buyers, since they bear all risks
Usually used when the seller is well known and strong, and the
buyer needs the goods even on the sellers terms

Clean Payment Transactions: Types (3 of 3)

Advance Payment Transactions

Open Account Transactions

Steps:
i. Seller (exporter) ships the goods and sends all documents,
including title documents, to buyer (importer).
ii. Seller waits for buyer to make payment.
Highlights:
Advantageous to the buyers, since they do not bear risks
Disadvantageous to the sellers, since they bear all risks
Usually used when the buyer is well known and strong, whereas
the seller is new or not that well known

Bills for Collection: Overview

It is also known as documentary collection or
collection against bills.
Roles of Parties:
Seller (exporter):
o ships the goods to the buyer (importer) and
o provides instructions to a bank about the disposal
of documents.
Banks do not provide any guarantee of payment of
the bills.

Bills for Collection: Terminology

Term
Remitting Bank

Meaning
Sellers bank

Drawer of Bill
Collecting Bank
or
Presenting Bank

Seller
The bank in the buyers country
to which the remitting bank
sends the documents along with
instructions for collection

Bills for Collection: Process (1 of 4)

i Seller (exporter) and buyer (importer) enter into

a sales contract.
Sales Contract is a document that contains
details of the transaction, including:
Nature of goods
Quality and quantity of goods
Rate
Method of transportation and delivery

Bills for Collection: Process (2 of 4)

ii

The method of
payment agreed
is documentary
collection.

iii Seller ships the goods and

receives document of title
to the goods from the
transport company or
agent.

iv Document of title to goods

are handed over to the bank
for collection along with other
documents, including
Commercial Invoice.

Bills for Collection: Process (3 of 4)

v

Collecting or
presenting bank
releases documents to
buyer (importer),
either against payment
(DP basis) or
acceptance (DA basis).
vii Payment received by
collecting or presenting
bank is remitted to the
remitting bank.

vi

Buyer (importer)
presents the title
document to the
shipping or
transport company
and takes delivery
of the documents.

Bills for Collection: Process (4 of 4)

viii Remitting bank credits the proceeds to the

sellers account.

Note:
Sellers (exporters) bank and remitting bank
need not be the same.
Collecting bank and presenting bank need not
be the same.
Different banks may perform one or more
roles.

Bills for Collection: Roles (1 of 5)

Seller
(Exporter)

Remitting
Bank
Collecting
Bank
Buyer
(Importer)

You will learn about the role of each in the

subsequent slides.

Bills for Collection: Roles (2 of 5)

Seller
(Exporter)

Remitting
Bank
Collecting
Bank
Buyer
(Importer)

i.
ii.

Ship the goods as per contract.

Hand over documents of title to the
goods and other related documents to
their bank.
iii. Instruct their bank to collect payment as
per terms of payment already agreed
with the buyer (importer).
iv. Wait for credit of proceeds to their
account on final payment of the bill.

Bills for Collection: Roles (3 of 5)

Seller
(Exporter)

Remitting
Bank
Collecting
Bank
Buyer
(Importer)

i.

Check the documents about consistency

with each other.
ii. Send the documents to the collecting
bank for collecting payment as per
instruction of the seller (exporter) by
usually acting as a correspondent bank
in the buyers (importers) country.
iii. Monitor and follow up bill for payment.
iv. Pay the exporter after receipt of
proceeds from the collecting bank.

Bills for Collection: Roles (4 of 5)

Seller
(Exporter)

i.
ii.

Act as an agent of the remitting bank.

Present the bill to the buyer for payment
(DP) or acceptance (DA).
Remitting iii. Release the documents to the buyer on
payment or acceptance.
Bank
iv. Follow up for payment on due date for
DA.
Collecting
v. Collect charges from the buyer or deduct
Bank
from proceeds, as per instructions.
vi. Remit the proceeds on receipt of
Buyer
payment to the collecting bank.
(Importer)

Bills for Collection: Roles (5 of 5)

Seller
(Exporter)

Remitting
Bank
Collecting
Bank

i.

Pay the DP bill when presented, and take

delivery of documents and the goods in
that order.
ii. Accept the DA bill, and take delivery of
documents and the goods in that order.
iii. Make payment on due date for DA.

Note:
A clean bill is one which is not accompanied
by title documents. For a clean bill, no
Buyer
(Importer) delivery of goods is involved.

Bills for Collection: Non-payment and Nonacceptance of Bills

When bill is not accepted or not paid, the collecting
bank acts as follows:

Arranges for storage and insurance of goods, if

so instructed by the remitting bank

ii Gets the bill noted and protested, if so

instructed

iii Seeks instructions of remitting bank, when so

required

iv Disposes off documents, as instructed by the

remitting bank

Bills for Collection: Noting and Protesting

of Bills
A bill may be dishonoured by non-payment (DP) or
non-acceptance (DA). Noting and protesting are formal
representations of dishonoured bill of exchange.
Noting and protesting are performed as follows:

Prompt compliance with instructions for noting

and protesting

ii Noting the bill preferably on the day of dishonour

and within the legal timeframe requirements

iii Subsequent protesting within the prescribed time

limit as per local laws

Bills for Collection: DP Terms

Documents
against payment
(DP) means
"payable at
sight". DP bills
are also called
"Cash against
Documents" or
"Cash on
Delivery".

Terms of DP
These bills are usually expected to
be paid within three days from
presentation.
Seller (exporter) retains control of
goods till payment and the bank
holds the documents.
Seller can find an alternate buyer if
the bill is not paid on presentation.
Seller can refer to Case in Need, if
there is one.

Bills for Collection: DA Terms

This method of settlement is:
Beneficial to the buyer (importer)
Risky for seller (exporter)
Terms of DA
Seller extends credit
Period of credit is reckoned
to buyer.
either from date of bill or
Buyer (importer) takes date of acceptance.
delivery of goods
before payment.
Period of credit is
known as usance.

Seller bears the risk if buyer

does not pay on due date or
goes bankrupt before
payment.

Bills for Collection: Usance DP Bills

Buyer (importer) accepts
the bill when it is
presented with payment
to be made on a specified
future date.

Buyer can pay early if

ship or goods arrives
before due date.

Documents are not

delivered to buyer.

It is not common but

remains one of the
options for trade
settlement.

Buyer is not required to

pay before due date.

Risk profile is the same

as in DP bills.

Bills for Collection: Snapshot

It is a better option than
clean payment methods.

Risk profiles of buyer

and seller are modified
to some extent, with the
presence of a buffer of
banks that act in
between.

This method of
settlement is effective
when buyer and seller
know each other well.
This method of
settlement is cheaper
than documentary
credit (LC) method.

Summary
In this presentation you learnt:
Clean payments as a method of trade settlement
Bills for collection as a method of trade settlement