HSBC Trade & Supply Chain: Performance and its Contribution to Economy
BACKGROUND INFORMATION OF HSBC BANGLADESH
1.0: HSBC BANGLADESH
HSBC Bangladesh Overview
Name of the Organization : The Hongkong and Shanghai Banking Corporation Ltd
Year of Establishment : 1996
Head Office : Anchor Tower, 1/1-B Sonargaon Road, Dhaka 1205
Nature of the Organization : Multinational Company
Shareholders : HSBC group shareholders
Products : Savings & deposit services
Loan products
Corporate and Institutional services
Trade services
Hexagon
Number of Offices : 9
Number of Employees : 800 +
Technology : Offers full online banking from branch to branch.
Customers : Serves individual and corporate customers.
2.0: DIVERSIFIED BANKING SERVICES OF HSBC
As one of the largest international banks in Bangladesh, HSBC has a long-term commitment to its customers and provides a comprehensive range of financial services: personal, commercial and corporate banking; trade services; cash management; treasury; consumer & business finance; and securities and custody services.
Personal Banking Services
The Hongkong and Shanghai Banking Corporation Limited offers a full range of personal banking products and services designed to take care of its customers’ growing needs and requirements. HSBC in Bangladesh has launched a number of loan products. Among those – Car Loan, Home Loan, Travel Loan, Professional Loan, Lifestyle Loan, Student Loan, Motorbike Loan, Furniture Loan, Wedding Loan, CNG Conversion Loan, Medical Loan and Home Equity Loan are most popular. The Bank has already launched Phone banking, a state-of-the-art automated telephone banking service available 24 hours a day, 7 days a week, and 365 days a year, which allows customers to access their account from the comfort of the office or home.
Corporate Banking Services
The Hongkong and Shanghai Banking Corporation Limited offers a wide range of cash financing, working capital, short and medium-term loans and guarantee facilities from its Head Office and Chittagong branch. The Offshore Banking Unit (OBU) provides US Dollar denominated working capital as well as short-term finance for capital imports to eligible businesses. Using high-speed communication links, HSBC connects customers to international payment systems.
Trade Services
As the leading provider of trade finance and related services to importers and exporters in Asia, HSBC in Bangladesh operates a highly automated trade-processing network and offer an Electronic Data Interchange (EDI) capability through Hexagon. The Bank also uses SWIFT, an efficient and secure mechanism for bank-to-bank global communications used for all trade related activities including fund transfers and issuance of DC’s (Documentary Credit).
Financial Institutions
HSBC provides global trade services and cash management services to local banks. HSBC’s worldwide network strength, with over 7900 offices in 81 countries and territories, coupled with a world class reputation in Trade Finance (“Best Trade Documentation Bank” – Euro money) and an unparalleled presence in Asia (“Best Bank in Asia” — Euro money), places HSBC in an ideal position to render unmatched correspondent banking services.
HSBC’s commanding presence in the USA (5th largest USD clearing bank globally), UK (largest GBP clearing bank globally), and the Euro land (largest Euro clearing bank in the UK) both in terms of network strength and clearing ability allows the Bank to also provide first class cash management solutions in 3 major global currencies; the US dollar, Pound sterling and the Euro.
Payments and Cash Management
HSBC was the pioneer in introducing electronic cash management solutions in Bangladesh, by introducing its state-of-the-art proprietary software, Hexagon, back in 1997. This was initially made available to corporate clients only but has since been expanded to include banks and retail clients.
With Hexagon, the Bank’s proprietary cash management system, corporate customers can access banking services from anywhere in the world to view account balances and statements, make transfers and international payments, and to open documentary credits, by using only a PC, a modem and a telephone line.
2.1: BUSINESS PRINCIPLES AND VALUES
The HSBC Group is committed to Five Core Business Principles:
· Outstanding customer service;
· Effective and efficient operations;
· Strong capital and liquidity;
· Conservative lending policy;
· Strict expense discipline;
HSBC Operates According to Certain Key Business Values:
· The highest personal standards of integrity at all levels;
· Commitment to truth and fair dealing;
· Hand-on management at all levels;
· Openly esteemed commitment to quality and competence;
· A minimum level of bureaucracy;
· Fast decisions and implementation;
· Putting the Group’s interests ahead of the individual’s;
· The appropriate delegation of authority with accountability;
· Fair and objective employer;
· A merit approach to recruitment/selection/promotion;
· A commitment to complying with the spirit and letter of all laws and regulations business is conducted;
· The promotion of good environmental practice and sustainable development and commitment to the welfare and development of each local community.
HSBC’s reputation is founded on adherence to these principles and values. All actions taken by a member of HSBC or staff member on behalf of a Group company should conform to them.
HSBC TRADE & Supply Chain OPERATION
3.1: ABOUT HSBC TRADE & SUPPLY CHAIN (TSC)
Trade service is known by various names in other banks, e.g. Trade Finance, Foreign Exchange, Foreign Trade etc. However, the functions are the same. As the name suggests, this department is involved in facilitating trade, both international & within Bangladesh. HSBC is the leading provider of trade finance and related services to importers and exporters in Asia. Trade is considered a core business of the group. The group’s presence in 81 countries of the world gives a good opportunity to control both ends of a trade transaction and keep the business within the Group. The various awards it has won from the leading publications of the world acknowledge HSBC’s excellence in trade. The Trade & Supply Chain department has two separate subsidiaries: Credit Administration & Foreign Exchange Division.
Credit Administration
Credit Administration department basically deals with all the documentation, processing, administration and disbursement of the import-export services provided to corporate clients. This department is known to be the heart of HSBC Trade & Supply Chain that administers and manages all the trade tools and facilities provided by HSBC Corporate Banking. Some important aspects of this department are LC advising, documentation, OD facilities, guarantees, etc.
Foreign Exchange Division
The For-ex division of Trade & Supply Chains is solely concerned with the management of Foreign exchange inflow and outflow. The For-ex division of Trade & Supply Chain in relation with NSC and FCD manages the foreign currency traffic of HSBC that originates from Corporate Banking and Trade & Supply Chains.
3.2: TRADE & SUPPLY CHAIN OPERATION
3.2.1 Letter of Credit or Documentary Credit
Letter of Credit or Documentary Credit is a conditional bank undertaking of payment provided that all the terms and conditions of the credit are complied with. Elaborately, it is a conditional undertaking given by issuing bank at the request of a customer (Importer) or on its own behalf to pay seller (Exporter) against stipulated documents provided all the terms and conditions of the Credit is complied with.
These stipulated documents are likely to include those required for commercial, regulatory, insurance or transport purposes such as commercial invoice, certificate of origin, insurance policy or certificate and a transport document of a type appropriate to the mode(s) of transport used.
The basic of Trade & Supply Chain operation is to have clear understanding about the trade cycle. A typical scenario of trade cycle is presented below. At first, initial contract and agreement occurs between buyer/importer and seller/exporter. Then seller/exporter asks buyer/importer to open a letter of credit. Importer approaches to a bank and the bank then issues LC and sends the information to exporter’s bank. Exporter’s bank then advices LC to the exporter. Exporter then dispatches the goods according to the terms and conditions to the Importer. Then exporter presents all the documents to the bank. Exporter’s bank then forwards the documents to the importer’s bank. Importer’s bank collects payments from the importer and handovers the documents. Importer’s bank then remits funds to the exporter’s bank and thus exporter receives the payments made by the importer from the exporter’s bank. This is a generalized scenario of trade. Collection and payment mechanism among the involved parties can vary according to different terms and conditions.
Figure 1: Typical Scenario of Trade Cycle
3.2.2 Importance of Letter of Credit
Letter of Credit or Documentary Credit offers some benefit to both importer and exporter. The importance of letter of credit to importer and exporter is presented below-
Importance or Advantages of Letter of Credit to the Beneficiary/Exporter/Seller:
A letter of credit is an instrument which facilitates trade transactions between two parties who are not known to each other. The major advantages derived by the seller or the beneficiary of a letter of credit are as follows:
i) Certainty of Payment and Avoidance of Risk. Though the exporter may be quite unfamiliar with the importer, the letter of credit provides him an absolute assurance that the bills of exchange drawn under the letter of credit will be honored. The risk of dishonor of the bill is thus totally avoided because the financial standing and reputation of the opening banker (and also of the confirming banker in case of a confirmed letter of credit) stands as an absolute security against any such risk. The exporter may execute the order with greater degree of assurance and certainty.
ii) Immediate Negotiation of Bills is possible under Letter of Credit.
Bills drawn under the letters of credit are readily negotiated by the advising/confirming banker or any other banker, because of the firm undertaking given by the opening banker. The seller (or exporter) is able to realize the amount of the bill immediately by negotiating it with any banker. In the absence of a letter of credit, the bill may not be acceptable to a banker for negotiation or may be negotiated on the basis of the exporter’s standing. If a bill is sent for collection, the exporter has to wait till the amount of the bill is actually realized from the importer.
iii) Security against Exchange Restrictions.
The opening banker issues a letter of credit after having been satisfied that the exchange control regulation of his own country do not impose any restriction on the transfer of money fro the purpose in question. The availability of necessary foreign exchange in the importer’s country for honoring the bill is taken for granted. The transfer risks are thus avoided and the exporter need not investigate into the foreign exchange regulation in the importer’s country.
iv) Advance may be obtained.
The exporter may obtain an advance from the bank on the basis of a letter of credit for the purpose of procuring and processing or manufacturing the goods to be exported.
Importance or Advantages of Letter of Credit to the Opener/ Importer/ Seller:
i) The issuing banker lends the benefit of his own credit to the importer, who is enabled to import the good which is otherwise not possible.
ii) The letter of credit gives an assurance to the importer that the bills of exchange drawn under the credit will be honored only when they are strictly in accordance with the conditions laid down in the letter of credit and the documents required therein are duly enclosed.
3.2.3 Types of Letter of Credit
1. Documentary Letter of Credit and Clean Letter of Credit:
When the banker opening a letter of credit incorporates a clause in the letter of credit that the documents of title to goods, such as bill of lading, insurance policy, invoice, consular invoice, certificate of origin, etc. must be attached with the bill of exchange drawn under the letter of credit, such letter is called a documentary letter of credit. In fact the opening bankers undertaking to honor or pay the bill of exchange is made conditional on the submission of such documents by the beneficiary. The interest of the opening bank is thus safeguarded, because it acquires the property in the goods exported, as soon as the documents of title to goods duly endorsed in its name are handed over to it.
When the letter of credit does not contain any such clause, it is called a clean letter of credit. Documents of title in such a case are not attached with the bill of exchange, but are sent to the consignee directly. As the opening banker does not get possession over the documents, such letter of credit is opened in case of parties of sound financial standing. In case of other parties, the banker may insist on the maintenance of adequate cash margin with it or the guarantee of a third party, or any other security.
2. Fixed Credit and Revolving Credit:
The opening banker specifies in the letter of credit the amount up to which one or more bills may be drawn by the beneficiary within the specified period of time. The letter of credit remains effective until the specified amount is exhausted within the specified time. Such credit is called a fixed credit.
In case of revolving credit, the opening banker specifies not the total amount up to which bills may be drawn, but the total amount up to which bills drawn may remain outstanding at a time. As soon as any of such bills is paid by the importer, the beneficiary may draw another bill/bills under the letter of credit. Revolving credit is thus automatic and does not need renewal within the specified period of time.
3. Revocable and Irrevocable Letters of Credit:
Letters of Credit may be either revocable or irrevocable. All credits should, therefore, indicate whether they are revocable or irrevocable. If no such indication is given, the credit shall be deemed to be revocable (Article 1, Uniform Customs and Practice).
In case of revocable letter of credit, the opening banker reserves to himself the right to cancel or modify the credit at any moment without prior notice to the beneficiary. A revocable credit, therefore, does not constitute a legally binding undertaking between the banker concerned and the beneficiary. It is a mere intimation or advice to the beneficiary to draw bills under the credit. Such credit provides no real security to the exporter, who should accept it only from buyers of known integrity.
Article 2 of the Uniform Customs and Practice of Documentary Credits, however, provides that when a revocable credit has been transmitted to and made available at a branch or other bank, its modification or cancellation shall become effective only upon receipt of its notice by such branch or other bank. The right of such branch or other bank to be re-imbursed for any payment, Acceptance or negotiation made by it prior to receipt of such notice shall not be affected.
According to Article 3, irrevocable credit constitutes a definite undertaking of the issuing bank, provided and the terms and conditions of the credit are complied with:
(i) To pay or that payment will be made (if the credit provides for payment) whether against a draft or not;
(ii) To accept drafts (if the Credit provides for acceptance by the issuing bank) or to be responsible for their acceptance and payment at maturity (if the Credit provides for acceptance of drafts drawn on the applicant for the credit or any other drawee specified in the credit).
(iii) To purchase/negotiate without recourse to drawers and or bona fide holder, drafts drawn by the beneficiary, at sight or at a tenor, on the applicant or any other drawee specified in the credit or to provide for purchase/negotiation by another bank (if the credit provides for purchase/negotiation).
Such a letter of credit once established and advised cannot be cancelled or amended in any way by the issuing banker, except with the consent of the beneficiary and any other interested party, i.e. the negotiating banker.
4. Confirmed and Unconfirmed Letters of Credit:
When the opening bank requests the advising bank in the exporter’s country to add its confirmation to an irrevocable credit and the latter does so, it is called ‘irrevocable and confirmed letter of credit’. The advising banker, after he adds his name to the undertaking, is called the ‘confirming banker’. Such confirmation constitutes a definite undertaking on the part of the confirming bank either-
(i) that the provisions for the payment or acceptance will be duly fulfilled or
(ii) that in case of a credit available by negotiation of draft, the confirming will be negotiate drafts without recourse to the drawer.
Such undertaking cannot be cancelled or modified without the agreement of all concerned. A confirmed irrevocable letter of credit provides absolute security to the beneficiary. The opener asks the issuing banker, at the request of the beneficiary, to arrange a confirmed credit. The confirming banker takes upon himself the liability similar to that of the opening banker.
If the advising banker does not add his confirmation, the letter of credit remains an unconfirmed one. In such a case there will be no such obligation on the advising bank.
5. ‘With’ and ‘Without Recourse’ Credits:
Bills of exchange may be drawn under the letter of credit ‘with recourse to the drawer’ or without such recourse. In case of ‘with recourse’ bills, the banker, as the holder of the bill, can recover the amount of the bill from its drawer, in case the drawee of the bill fails to honor it. In order to avoid such liability, the exporter may ask the importer to arrange credit ‘without recourse’ to the drawer. Under this type of credit, the issuing banker will have recourse to the drawee only and if he fails to honor the bill, the banker can realize the amount by deposing of the goods (if it is a documentary credit and documents have not been handed over to the importer). The liability of the drawer of such a bill of exchange ends as soon as it is negotiated.
6. Transferable and Non-Transferable Letters of Credit:
Ordinarily, the beneficiary is authorized to draw bills of exchange under a letter of credit. But if the beneficiary is an intermediary in the transaction and the goods are actually to be supplied by someone else, the beneficiary may request the opener to arrange a transferable letter of credit. Under a transferable letter of credit the beneficiary can transfer his right to draw a bill to somebody else. The Uniform Customs and Practice for Documentary Credits define a transferable credit as “a credit under which the beneficiary has the right to give instructions to the bank called upon to effect payment of acceptance or to any bank entitled to effect negotiation to make the credit available in whole or in part to one or more third parties (second beneficiaries).” Thus the credit may be transferred to one or more persons. But it can be done only if the credit is expressly designated as “transferable” by the issuing bank. The rules regarding transferable credit are as follows (Article 46, Uniform Customs):
1. A transferable credit can be transferred only once.
2. Fraction of transferable credit can be transferred separately, provided partial shipments are not prohibited and the aggregate of such transfers does not exceed the amount of the credit.
3. The credit can be transferred only on the terms and conditions specified in the original credit, with the exception of the amount of the credit, of any unit price stated therein, and of period of validity or period of shipment. Any or all of these may be reduced or curtailed.
4. The name of the first beneficiary can be substituted for that of the applicant for the credit. But if the name of the applicant for the credit is specially required by the original credit to appear in any document other than the invoice, such requirement must be fulfilled.
5. The first beneficiary of a transferable credit can transfer the credit to a second beneficiary in the same country, but if he is to be permitted to transfer the credit to a second beneficiary in another country, this must be expressly stated in the credit.
The credit may be divisible also. The total amount may be split into more than one part and each part may be transferred to different persons.
7. Back to Back Letter of Credit:
When a beneficiary receives a non-transferable letter of credit, he may request a bank to open a new letter of credit in favor of some other person on the security of the letter of credit issued in his favor. Such letter of credit is called Back to Back Letter of Credit.
8. Red Clause Letter of Credit:
Often the seller of the exporter needs credit for the purchase of raw materials, processing them into final product, packing and dispatching them to the port town. Such credit is called ‘packing credit’. A letter of credit which includes a clause printed in red ink and known as “red clause” enables him to secure such packing credit from the banker advising such credit. A Red Clause Letter of Credit contains an authority from the issuing banker to the advising/negotiating banker to grant advances to the beneficiary up to a specified amount at the responsibility of the former. The advance made under this letter of credit is for short period and is recovered from the amount, payable by the negotiating banker to the beneficiary when the letter negotiates the required documents under the letter of credit.
3.2.4 Parties to a Letter of Credit
A letter of credit is a legal instrument, which binds all parties according to the terms and conditions incorporated in the credit. There are four principal parties in a Letter of Credit:
a) The Importer/Buyer/Opener
The purchaser of the goods is called importer. Once the buyer and the seller have agreed to the sales transactions, it is the buyers’ responsibility to initiate the opening of the letter of credit.
b) Issuing Bank/Opening Bank
The Bank which at the request of his customer (importer) opens a Letter of Credit is called Issuing Bank. The Issuing Bank is the buyer’s bank/opening bank of the credit.
c) The Seller/Exporter/Beneficiary
The supplier of the goods is called as seller or exporter or the beneficiary. The seller after shipping the goods as per terms of the credit presents the documents to the negotiating bank.
d) Advising Bank
It is the correspondent bank of the issuing bank of the credit through which the credit issued by the opening bank is advised at seller’s country. Advising bank may also be a negotiating bank.
e) Negotiating Bank
The bank who negotiates/purchases/discounts the documents tendered by the exporter as per terms of the credit is known as negotiating bank.
3.2.5 Import Procedures
1. Procurement of IRC from the concerned authority.
2. Signing purchase contract with the seller.
3. Requesting the concerned bank (importer’s bank to open an L/C (irrevocable) on behalf of the importer favoring the exporter/ seller/ beneficiary.
4. The issuing bank opens/ issues the L/C in accordance with the instruction/ request of the importer and request another bank (advising bank) located in seller’s /exporter’s country to advise the L’C to the beneficiary. The issuing may also request the advising bank to confirm the credit, if necessary.
5. The advising bank advises/informs the seller that the L/C has been issued.
6. As soon as the exporter/seller receives the L/C and is satisfied that he can meet L/C terms and conditions, he is in a position to make shipment of the goods.
7. After making shipment of goods in favor of the importer the exporter/s submits the documents to the negotiating bank for negotiation.
8. The negotiating bank scrutinizes the documents and if found o.k. Negotiate documents and sends the said documents to the L/C issuing bank.
9. After receiving the documents the L/C issuing bank also examines the document and if found complete, then makes payment to the negotiating bank.
10. The L/C opening bank then requests the importer to receive the document payments.
3.2.6 Opening of Import Letter of Credit
The import of goods into Bangladesh is regulated by the Ministry of Commerce in accordance with the imports and exports (control) Act 1950 and notifications issued there under while Bangladesh Bank control the financial aspects such as method of payments, rates of exchange, remittances against imports through its exchange control department under the provisions of foreign exchange regulation Act 1947. The Customs Authorities physically supervised the goods to ensure that the items imported are permissible under import trade control regulations before release of the same for consumption in the country.
Pre-Requisite for Opening a Letter of Credit
a) Must be a client/account holder.
b) Request letter from the client to open L/C.
c) Original IRC (Import Registration Certificate) duly renewed up to current date should also be produced to the bank for verification and return.
d) Valid Membership Certificate from a registered Chamber of Commerce and Industries/Trade Association. .
e) Trade License.
f) Income Tax declaration in triplicate/TIN Certificate.
g) INDENT issued by the local indenting agent or PROFORMA INVOICE issued by the foreign supplier/contract/purchase order/sale order (duly accepted by the importer).
h) Fixing up of margin of L/C on mutual basis.
Documents Required from the Importer
a) DOCUMENTARY CREDIT APPLICATION (supplied by the Bank -duly filled in by the importer or his authorized Agent. This application is an agreement between the importer and the Bank. This form is to be affixed with Tk. 150/- adhesive stamp.
b) INSURANCE COVER NOTE (Marine/Air/Post) in favor of the bank.
c) One set of IMP FORM (4 copies) duly signed by the importer. 3 (three) copies are to be left blank and are to be filled in afterthe documents arrive from the Negotiating Bank. The remaining one copy is kept for Bill of Entry purpose, which is signed by the Bank for submission to Bangladesh Bank along with the monthly return for sale of foreign exchange for the import covered under the L/C.
d) UNDERTAKING for Fluctuation of Foreign Currency duly signed.
e) LC AUTHORIZATION FORM In Lieu of Import License duly signed by the importer and permission from Bangladesh Bank (may be taken by the client and/or by the Bank on behalf of the importer).
3.3: TRADE DOCUMENTS
Documentation provides tangible evidence that the goods ordered have been produced and dispatched in accordance with the buyer’s requirement.
Consignment details need to be communicated accurately to various parties, so both importers and exporters need to be familiar with the principal documents used. Documentation is also used to satisfy government regulations and has become an increasingly important factor in obtaining finance for international trade.
It is normally the responsibility of the exporter to make sure that documents for the transportation of goods are complete, accurate and properly and promptly processed. Failure to do so may result in additional costs being incurred.
The importer has the responsibility for completing accurately the necessary forms for the goods to be licensed for import and cleared through Customs. Incorrect documentation can cause delay in the clearance of goods at their destination. Goods can be impounded, warehoused or left on the quayside, with the risk of damage or loss and consequent expenses. The use of a forwarding agent can help reduce administrative and documentation pressures on importers and exporters.
3.3.1 Financial Documents
The principal financial documents used in international trade are described below-
Bill of exchange
The bill of exchange is the most important and most widely used instrument in international trade by which sellers can obtain the payment from their buyers for the invoiced value of goods. It provides a convenient mechanism for the giving or receiving or receiving of a period of credit.
According to bill of exchange Act, 1882, bill of exchange is defined as “An unconditional order in addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinate future time a certain sum of money to or to the order of a specified person, or to bearer.”
- A ‘sight’ bill payable on demand, or at sight.
- A ‘term’ bill or ‘usance’ bill is payable at a fixed or determinable future time. The drawee agrees to pay on the due date by writing an acceptance across the face of the bill.
Promissory Note
A promissory note is a promise to pay issued by the buyer (the maker) in favor of the seller (the payee or beneficiary). Although it is similar to a bill of exchange it does not always carry the same legal rights. Promissory noted are popular in forfeiting arrangement and with countries where there is some fiscal reason not issuing a bill of exchange.
3.3.2 Other International Trade Documents
Commercial Invoice
A commercial invoice is a claim for payment for the goods under the terms of the commercial contract. It is addressed to the importer by the exporter. It serves as a checklist so that a particular consignment can be identified and is the main evidence in any assessment for customs duty. A commercial invoice normally includes the following information-
- Date.
- Invoice number.
- Name and address of seller and buyer.
- Order or contact number, quantity and description of the goods, unit price and the total price.
- Weight of the goods, number of packages, and shipping marks and numbers.
- Terms of delivery and payment.
- Shipment details.
Packing List
The exporter must prepare a packing list showing item by item, the contents of the containers, or cases to enable the importer of the goods to check the shipment. It should give description of the goods, net weight and gross weight, measurement etc. this helps in identifying the contents of specific packages and thus may facilitate assessment by the customs. Bank may require such list when they have financial interest in the merchandise.
Bills of Lading
Still the most important commercial document in international trade, the bill of lading (B/L) is used to control delivery of goods transported by sea. In negotiable form, title to the goods may be transferred by endorsement of the B/L. The details of the bill of lading should include-
- A description of the goods in general terms not inconsistent with in the credit.
- Identify marks and numbers, if any.
- The name of the carrying vessel.
- Evidence that the goods have been loaded on board.
- The ports of shipment and discharge.
- The names of shipper, consignee and name & address of notifying party.
- Whether freight has been paid or is payable at destination.
- The number of original bills of lading issued.
- The date of issuance.
Sea Waybill
Like a B/L, a waybill provides a receipt for goods and evidence of a contract for their carriage by sea. However, it is not a negotiable document and cannot be used to convey title to the goods. The shipper can vary the consignee and delivery instructions at any time prior to delivery. It is a simple alternative where the transferable nature of a B/L is not required.
Insurance Policy or Certificate
The terms of a contract between the importer and the exporter should define the responsibilities for arranging insurance cover whilst the goods are in transit and what risks are to be covered. The insured risks will be detailed under Institute Cargo Clauses, and those applicable to a particular transaction will be noted on the certificate/policy.
The insurance certificate document must-
- Be that specified in the credit.
- Cover the risks specified in the credit.
- Be consistent with the other documents in its identification of the voyage and description of the goods.
Air Waybill
An air waybill is a receipt for goods carried by air and is often referred to as an ‘air consignment note’. Like the sea waybill, it is non-transferable and not a document of title. It is usually produced as ‘house air waybill’ where cargo consolidation is involved.
Road Consignment Note
This is used for international transport by road. It is not a document of title and is not transferable. It is more commonly known as certificate of movement by road (CMR) or ‘truck waybill’.
Railway Consignment Note
This is used for international transport by rail. It is not a document of title and is not transferable.
Parcel Post Receipt
A post office receipt for goods dispatched by mail. The receipt is evidence of dispatch only.
Certificate of Origin
This is a declaration which states the country (or countries) of origin of the goods and is commonplace in countries wishing to identify the origin of all imported goods (or their components) or where there are quotas or other import restriction in force. It should be completed by the supplier and may have to be authenticated by a chamber of commerce or other authorized body in the exporter’s country. In some instances, the certificate must also be legalized by the embassy or other representative of the concerned. The certificate should include the name and address of the exporter, the manufacturer (if different), the importer, a description of the goods and, if required, the signatures and seals of the authorizing organization.
Certificate of Inspection
Importers can safeguard their interests, and ensure that the goods comply with the specifications stated in the contract of sale by arranging for the goods to be inspected by an independent body before they are dispatched. The certificate of inspection will give details such as weights, numbers and quality, packaging and identifying marks, shipping details and the signatures and seals of the inspecting organization. In some countries exporters may be required to obtain certificate of inspection from a specific inspection agency, such as SGS, for exports to certain countries.
Certificate of Health
Agricultural and animal products may require a certificate stating that they comply with the importing country’s health regulations. This certificate must be authorize and signed by the health authority in the exporter’s country.
3.4: EXPORT COLLECTION
The concept of ‘collection’ is a compromise between:
- Open Account Trading
– favors the buyer/importer who usually pays after he receives the goods, reducing the debit balance of his account with the seller/ exporter according to arrangements established between themselves. And,
- Payment in Advance
– Favors the seller/exporter who receives payments before he ships the goods.
Trade settlement by collection reduces
– risk to both importer and exporter
– delay in receipt of payment by exporter
by using banks as intermediaries to ‘collect’ payment from the importer for goods which the exporter has already sent.
3.4.1 Clean and Documentary Collections
It is a request for payment which can be put forward in different ways – Clean Collection or Documentary Collection:
a) Clean Collection: Bills of Exchange/Draft with no commercial documents attached.
The amount of the bill may be:
i) the cost of goods, in which case the documents of title would have been sent direct to the importer
ii) the cost of a service, such as the use of a tugboat to bring into harbor, when no documents are required
b) Documentary Collection: Bill of Exchange/Draft with Shipping Documents etc. The attachment documents include the document(s) of the title (Bill of Lading) which the importer needs to clear the goods.
Whichever documents the exporter presents to his bank, he always attaches his instructions on a COLLECTION ORDER. These instructions are passed on to the importer telling him how and when to pay.
The exporter will ask the importer to settle the bill in one of two ways:
D/P: DOCUMENTS AGAINST PAYMENT: payable at sight (on demand) – the collecting bank hands over the shipping documents only when the importer has paid the bill. The drawee is usually expected to pay within 3 working days of presentation.
D/A: DOCUMENTS AGAINST ACCEPTANCE: D/A means that the exporter is allowing credit terms to the importer: the period of credit is the ‘term’ of the bill, also known as ‘usance’. The importer/drawee is required to ACCEPT the bill i.e. to make a signed promise to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the documents and clear his goods. The payment date is calculated from the ‘term’ of the bill- the ‘term’ is usually a multiple of 30 i.e. 30 days, 60 days, 90 days, 120 days etc. and starts either from sight or from the date of shipment, whichever is stated on the bill of exchange.
3.4.2 Handling Export Collections
The role of the Exporter’s bank is to follow the instructions on the method of collecting payment from the Importer. There is no legal obligation for the bank to check documents but it should warn its customer of defects which may cause delay: this is, after all, part of good customer service.
Collection Order
After shipping the goods, the Exporter prepares the documents and hands them to his bank (the Remitting Bank) to be forwarded to the Collecting Bank. With the documents he submits a COLLECTION ORDER with his instructions.
The Collection Order is a form issued by the bank, to be completed by the Exporter when he submits any trade bill –DC or Non-DC; it is designed to make it simple:
– for the Exporter to give bank his instructions clearly and completely
– for bank to transfer the instructions to bank’s covering schedule which bank send to the collecting bank
Terms and conditions are printed on the back of the Collection Order- by signing the form, the Exporter agrees:
– to be bounded by the provisions of ICC 522, the Uniform Rules for Collections
– that the bank is not liable for error made by the Collecting Bank
– to be subject to bank TFGA form.
Banks Job on Receipt of Collection
There are several simple tasks to be done- they may be done in a different order in different branches:
– check the completeness of the Collection Order details
· names and addresses
· shipment details
· instructions
· payment terms
· disposal of proceeds
– verify the signature(s) on the Collection Order
– confirm TFGA held
– verify that all documents listed on the Collection Order are attached
– assign internal control number (single series for all bills)
– register receipt of the bill
– time stamps the Collection Order and return the duplicate to the customer
– check the consistency of the documents
If the Collection Order needs to be amended the amendments must be signed by the customer’s authorized signatory or confirmed in writing.
Checking Documents
There is no legal obligation for banks to check documents sent for collection, but bank should warn its exporting customers of delay that might be caught by incomplete documentation etc.
So Bank Checks:
– That the documents are consistent e.g.
· that invoice amount = the draft amount
· all documents mention the same goods
– That vital documents are not missing e.g.
· some countries require certificate of origin certified by an embassy or consulate
– That all documents requiring customer’s signature are signed by an authorized signatory of the customer.
– individual documents:
Bill of Exchange
Invoice
Bill of Lading
Insurance Policy (only required for CIF and CIP shipment)
Any documents presented should be examined to ensure they are consistent with each other. All documents received by the Remitting Bank should be as stated on the Exporter’s Collection Order and should mention the number of copies of each document presented.
Any amendments to documents must be made as soon as possible to avoid any delay to the Importer because the goods have already been shipped.
Covering Schedule
If the documents are in order and instructions complete, the Remitting Bank:
- Choose the Collecting Bank (if not specified by the Exporter): a branch or correspondent bank in the Importer’s country (in the same city/town if possible).
- Prepares the Covering Schedule on the basis of the Collection Order together with instruction on how to send payment to the Remitting Bank (usually by telex unless the amount is small).
- Mails the Schedule and Bill by REGISTERED AIR MAIL to the Collecting Bank.
- Diaries a date for chasing the bill if payment/advice of acceptance has not been received.
Recording Collections
At this stage the Remitting Bank will have to pass entries covering the transaction regarding the remitting fund to the exporter’s bank. Thus, exporter’s bank realizes the remitted fund by the importer’s bank. Then recognizes the fund and records appropriately.
3.5: IMPORT PAYMENT
Securing payment is a vital consideration in any international trade transaction. In this chapter the payment mechanisms of HSBC Trade & Supply Chains are discussed. Before the discussions of the payment mechanisms the risks of international trade are briefly discussed.
3.5.1 The Risks
It is important to identify the risks that faced when trading internationally and to be aware of some of the methods available to reduce these risks. In international trade there are generally more risks for the seller of goods than for the buyer.
Many of these risks can be insured against or mitigated through the payment mechanism. However, reducing risks may transfer both risk and cost to trading partner, and impact upon competitiveness.
Some of the main risks in international trade are-
Country risk
- Political and economic stability
- Transfer risk
- War
- Import/export regulations
Importer risk
- Non-payment of invoices
- Delayed payment of invoices
- Insolvency of buyer
Industry risk
- Demands for particular products
- Recession in particular industry
- Competitive products/pricing
- Fashionable or seasonal goods