Intro

Mohandy goal for the company :

 Expand in new markets & get new clients

 Expand business volumes & profitability
 Minimize risks of international trade

She proposed 100% payment due in advance which most new clients refused

Company
M/S Padhy Leather Sales depend at 90% from export, and only 10% of domestic sales. Inputs
(leather) are coming from outside country (= importing = exposed to int’l risks)

(Turnover 2017 = $3m & Turnover 2018 = $5m)

M/S Padhy Leather is specialized into the winter clothing which does not present many competitors
in the industry.

Risks associated with International Trade

Carriage (=transport) Risk: goods can be damaged/loss in transit

Commercial Risk (contract & credit): the buyer might not accept the good at receipt or not pay at
due date (contract risk) OR may face bankruptcy and cannot pay (non-payment risk)

Special Risk Factors in Int’l trade:

 Currency Risk (or exchange rate fluctuation risk) -> can have huge impact on earnings,
profitability, equity value
 Country Risk: Political / Economic / Legal / Forex restrictions

Methods of Payment in International Trade

Clean Payments: documents dispatched & good consigned directly)
 Advance Payment/Remittance: Importer pay full amount in advance, trust the exporter for
the shipping of goods  Importer bears all risks of non-performance of the contract)
 Cash on delivery: Exporter send goods & Importer pays the postal or courier authority at the
receipt of the good  Exporter bears the highest risk.
 Open Account Sales: Exporter send goods & documents directly while the importer pays at a
future specified date (usually happens when they are in LT relationship)  Exporter bear
entire risks. However ECGC offers credit risk insurances to protect exporters.
 Consignment Sale: Exporter send goods to overseas agents which are trying to sell them at
the risk of the exporter (exporter get paid only if agents are able to sell those, otherwise
agents keep the goods)  Exporter bears all risks

Bills for Collection or Documentary Collection: use banks for documents & funds
 Documents against Payment: Documents released by the collecting banker when importer
paid shipment (demand bill), exporter can have control over goods if specified)
 Documents against Acceptance: Documents released by the collecting banker on
acceptance of the usance (=date of future payment) (usance bill). This acceptance is seen as
 a commitment to pay on due date, which is a guarantee and can do recourse if not paid.
However here, the exporter cannot not have control over goods.

Documentary credit or letter of credit (LC): LC created by the importer’s bank to ensure that if the
exporter performed according to the contract then they would receive payment with no default risk.
The obligation is performed by the bank, not the importer  risk on the bank is better than risk on
the importer, the bank has less chance of default

 Sight and Term Letter of Credit: sigh LC use demand bill of exchange & term LC use usance
bill of exchange, depending if the payment was to be made at the time of the document was
presented or at a future date.
 Confirmed LC: The exporter choose a 2nd confirming bank in the exporter’s country that
assesses the risk of the issuing bank and availability of credit limit  Exporter get guarantee
from 2 banks. (Credit risk on the confirming bank which the beneficiary [the exporter] could
deal more conveniently than with the issuing bank in a foreign country)
 Transferable credit: A LC that has been market “transferable when issued, could be
transferred to a second or third beneficiary under the same terms & conditions (e.g.
exporter could be only an intermediary between the supplier & the importer, therefore if he
is the first beneficiary he can transfer this to supplier who’ll benefit from the LC)  pas sur
d’avoir tout compris la dedans
 Back to Back Credit: Rewrite over an original Credit to change some aspects. Has almost the
same features as a Transferable Credit but in Back to Back credit there is no authority from
the issuing bank. Also, Transferable credit is only an extension of the original credit (with
same conditions), here the B2B credit exists independently of the original form.
 Standby Letter of Credit or Guarantee Credit: The beneficiary of a Standby LC can only act
upon a “non-payment” under a payment obligation or a “non-performance/under-
performance” in a contract. All other LCs above ensure payment for performance and are
referred as “Commercial LCs” to distinguish them from the Standby LC which operates like a
bank guarantee (used as a substitute for a bank guarantee where those were not allowed
e.g. in Japan or in US)

Minimizing International Trade Risk

Minimizing Carriage risks: proper packaging, purchase insurance, selecting right shipping terms)

Minimizing Country risks: insurance ECGC, country risk rating from either ECGC or rating agencies
such as D&B, look for a confirmed LC by a bank outside of the issuer country)

Minimizing Currency risks: Hedging with forward, futures & option, credit risk insurance ECGC

Minimizing Commercial (default & non-payment) risks:

 Advance payment from the buyer (portion or full)

 Credit report on the buyer (obtained from buyer’s bank or D&B)
 Document sent on a collection basis (documents handed over ONLY on payment)
 LC (establish LC issued by bank in favor of supplier to pay him conditions of credits met &
documents are in order)
 Confirmed LC (Bank from exporter’s country confirms the credit issued by importer’s bank 
helps localize the risk to the exporter country instead of foreign)
 Credit risk insurance (cover commercial risks, ECGC)
Other Seminar Topics
Regulatory Requirements: Both exports & imports were subject to regulations (on movements of
goods, movements of documents & movements of funds)

Trade Control Requirements: by the DGFT in India, relating to the physical movement of goods (what
goods can be imported/exported from the country, the conditions and some schemes for export
promotion and import facilitation). While opening an import LC, it is obligatory to ensure compliance
with EXIM policy (export import policy).

Exchange Control Regulations: deals with the movement of funds/documents in and out of India (by
Reserve bank of India).

Uniform Customs & Practice for Documentary Credits: LC recognized as the best payment
mechanism for international trade. But different bank may have different interpretation of the LC
terms & conditions. Therefore, the International Chamber of Commerce published a standard of
rules (UCPDC) which deals with documentary credits (LC recognized as documentary LC). The
objective of UCPDC was to standardize the rules of the DLC. Two principal rules:

1) Independence of the LC of the rights & liabilities of the trading parties (issuing bank was
required to pay the exporter even though the importer said that he breached the contract)
2) Bank deals with documents, not with the goods associated to those (therefore if docs sent
by exporter complied with the requirements of the credit , issuing bank was required to pay
even though the good were not up to the specified quantity or quality. The exporter was
assured of a payment in virtue of the independence of the LC & bank obligation to pay.

After this Seminar, Mohandy was confident in solving her problems (developing business, improving
profitability & minimizing risk). She understood than no one would pay 100% in advance and she
wants to weight all the possible modes of payment in international trade and make the optimal
choice.