The truth is that every payment method involves risk. Managing payment risks in merchandising transactions is very important. The major risks are fraud and operational risk.

3.  Not fully conversant with the financial status of the buyer
 To receive payment as early as possible without disturbing his
funds flow
 If required, to avail credit facilities with financial institutions at
the cheapest interest rates against the receivables
 If it is an export - Not fully aware about the legal formalities
prevailing in buyer’s country
 If it is a service provider – delayed settlement of receivables
 To receive correct amount - in the desired currency - in his
own place at the right time

4.  To receive the same consignment at the right place
 Not to pay until the consignment is received at his
end
 to defer the payment as far as possible
 to avail cheapest credit facility from any financial
institution at concessional rate of interest for the
payables…

5.  With all these risks and uncertainties, trade
is continuously growing with no boundaries
 Who takes the risk .. the buyer, the seller or
both or the intermediaries ?
 How do they manage the receivables and
the outstanding ?
 At what cost….

6. Clean collection
Direct collection

7. seller buyer
Commercial contractual terms

8.  Sale / purchase contract is a document
recording the terms of delivery and terms of
payment
 Who will bear the expenses / risk factors up to
which stage
 Whether transport charges will be for the buyer or
seller’s account
 Transit risk will be covered by marine insurance at
whose expense
 At which stage transfer of title of the goods will
take place

9. 2
Remitting Bank Collecting bank
1
Submission
of
documents
Documents forwarded
3
Documents
Presented
COMMERCIAL CONTRACT
Seller buyer

10. 2
Remitting Bank Collecting Bank
1
Submission
of
documents
Documents forwarded
3
Documents
Presented
4
Payment
made
5
6
Payment Transferred
Payment
made to
Exporter
SALE CONTRACT
seller Buyer

11.  If the buyer refuses to accept the documents and not paying –
Seller
 To offer discount
 To search for an alternate buyer offering the goods with or
without discount
 If alternate buyer not found, goods are to be re-booked
 Expenses – transport charges, freight charges, bank
charges….Cost of funds
 Or abandon the goods…..
 Documents are safe but payment not assured

12. Goods consigned directly
1
SALE CONTRACT
seller buyer

13. 3
Sellers Bank Buyers Bank
2
Submission
of
Draft /
Bill of
Exchange
Documents forwarded
4
Documents
Presented
Goods consigned directly
1
SALE CONTRACTSeller buyer

14. 3
Sellers Bank Buyers Bank
2
Submission
of
Draft /
Bill of
Exchange
Documents forwarded
4
Documents
Presented
5
Payment
made
6
7
Payment Transferred
Payment
made to
Exporter
Goods consigned directly
1
SALE CONTRACTseller buyer

15.  Seller should have absolute faith and
confidence on the buyer… since goods are
directly consigned.
 Payment on due date by buyer
 If defaulted…. No assurance
 Has to resort to legal procedures

16. Sellers Bank
buyers
Bank
2
Payment
made
on the
agreed date
3
4
Payment Transferred
Payment
made to
Exporter
Goods consigned directly with documents
1
SALE CONTRACT
seller buyer

17.  No control on the goods since it is directly
consigned to buyer
 Documents are also forwarded directly to the buyer
 … Only if the Seller has absolute confidence on the
buyer’s capacity to pay..this method will be suitable;
Otherwise… this will be more risky

18.  Transaction is covered under Indian Contract Act
1872.
 Bank is appointed as an agent for collection by the
seller
 Bank does not assume any responsibility for credit
protection
 Seller has to proceed against the buyer for non-
fulfillment of contractual obligations under civil suit.
 In case of exports – no legal support except ICC
Paris guidelines on collection documents

19. Commercial contract
Payment made in advance
through the bank
Goods
consigned
seller buyer
Advance payment

20.  Buyer remits the payment in advance
 Receiving the consignment or getting back
the payment if shipment never takes place
will be the risk for the buyer
 Seller enjoys buyer’s funds

21.  To manage the receivables with lesser
risks corporate may opt for any of these
payment methods:
› Letter of Credit / Documentary Credit
 Inland / Foreign
› Guarantees / Standby credits
 Inland / Foreign

22. Establishing Letter of Credit
SALE CONTRACT
1 2 3
1. LC application submitted by the applicant to the issuing bank
2. LC established by issuing bank through their correspondent
bank with a request to pay on their behalf against submission
of prescribed documents by the beneficiary
3. LC advised- with /without confirmation
ISSUING
BANK
CONFIRMING /
ADVISING
BANK
buyer seller

23. NEGOTIATION OF DOCUMENTS
UNDER CONFIRMED CREDIT
ISSUING
BANK
CONFIRMING
BANK
1
2
35
6 4buyer seller

24. NEGOTIATION OF DOCUMENTS IN
UNCONFIRMED CREDITS
ISSUING
BANK
NEGOTIATING
BANK
1
2
35
6 4
buyer
seller

25.  An arrangement whereby a bank acting at the
request and on instructions of a customer i.e.,
the applicant / buyer
 To make payment to a third party (the
beneficiary) by themselves or authorize other
bank to pay or negotiate
 Against stipulated documents
Provided
 Terms and conditions of the credit are complied
with

26. Inland letter of credit - discounting
Issuing bank Sellers Bank
1
2
35
6 4buyer
seller

27.  Bill of Exchange
 Commercial Invoice
 Transport document
 Inspection certificate
 Insurance
 Certificate of origin (in foreign trade)

28. 4
Exporter’s Bank Issuing Bank
2
Submission
of
Draft /
Bill of
Exchange
Documents forwarded
7
Documents
Presented
8
Payment
made
5
6
Payment made
Payment
made to
Exporter
Goods consigned directly
1
Payment demanded on due date and defaulted by
importer
3
Standby credit
seller buyer

29.  Promise to honour beneficiary’s presentation
of a document indicating the default of the
applicant
 Act as a standby arrangement in case the
obligation is not fulfilled by the applicant

30.  MORE USEFUL IN COLLECTION
INSTRUMENTS.
 TO PRESENT A COPY OF COMMERCIAL
INVOICE & UNPAID BILL OF EXCHANGE

31.  In respect of any debt,obligation or any
liability by the overseas party in connection
with bonafide trade transaction
 As a back up instrument for collection
 ICC 500 & ISP 98 are the governing
guidelines

32. guarantees
Issuing bank
buyer seller
contract

33. Guarantee invocation
Issuing bank
buyer seller
Non performance
Default stage i
Recovery
Stage 3

34.  FINANCIAL / PERFORMANCE /DPG
 DIFFERENCE BETWEEN FIN/PERF
GUARANTEES
 TYPES OF GUARANTEES –RECEIVABLES
AND PAYABLES
 CHECK POINTS

35.  PURPOSE – SPECIFIC
 VALIDITY PERIOD
 CLAIM PERIOD
 VALUE
 LIMITATION CLAUSE
 REASONS FOR INVOKING – SPECIFIC
 HOW TO EXTINGUISH THE LIABLITY

36.  TYPE
 STATUS OF THE IB
 DOCUMENTARY CONDITIONS
 DOCUMENTS TO BE SPECIFIED
 REINSTATEMENT CLAUSE
 CHARGES
 INTEREST FACTOR

37.  Advantages
 Wrongful dishonour
 Rightful dishonour
 Implications of dishonour
› Criminal
› N I law (Amendment) Act 1988

38.  IPC 415 CHEATING
 IPC 417 PUNISHMENT FOR CHEATING
 IPC 420 CHEATING AND DISHONESTLY
INDUCING FOR DELY OF PROPERTY –
7YEARS
 SEC 2 & 11 DEFINES ‘PERSONS’ – CO,
ASSNS, BODY OR PERSONS WHETHER
INCORPORATED OR NOT

39.  Sec 138 – dishonour of cheques
› For insufficient balance
› Exceeds arrangement
› Account closed
› Payment stopped by drawer
 Issuing notice by the drawer to the payee not to
present the cheque – but the payee presents the
cheque – dishonoured – can the drawer prosecuted?
 Modi cements vs Kuchil kumar -1998
 Drawer can easily get rid of the consequences.. Hence stop
payment will not preclude action under Sec 138
 Non cognizable offence

40.  Cheque to be presented within 6 months or expiry date
whichever is earlier
 Payee or holder in due course makes a demand to drawer
within 30 days from date of receipt of the returned instrument
 Drawer’s failure to pay within 15 days of receipt of notice
 Non-payment leads to ‘cause of action’
 Complaint to be registered within one month of the ‘cause of
action’
 Period of one month should be from the day immediately
following the day on which the period of 15 days from the date of
receipt of the notice by the drawer expired.. Supreme Court
judgement in Prem Chand Vs Yashpal Singh
 No court lower to that of Metropolitan Magistrate or Judicial
Magistrate of I class will try the offence

41.  Complaint in writing
 With dishonoured cheque / return memo / copy of notice / evidence
for receipt of notice by the drawer
› Sec 146 conveys ‘Bank’s slip prima facie evidence of certain facts –
court will presume the fact of dishonour of such cheques until such fact
is disproved’
› Sec 147 – every offence punishable under this act is compoundable
 To be filed either where cheque is issued / dishonoured
 With metropolitan magistrate/ judicial magistrate/ I class magistrate

42.  Drawer can be punished only if he could not
pay during the notice period
 Not for dishonour of cheque
 Punishment
› Twice the cheque value
› Two years imprisonment

43.  Sec 141 of NI Act – every person of a company in
charge of and responsible for business shall be
deemed guilty
 Recent Supreme Court judgment by Arun Kumai in
› Appeal by SMS Pharmaceuticals
› Only directors responsible for the particular deal would be
liable under NI Act
› No universal rule that a director of a company is in
charge of its every day affairs…
› Depends upon the respective roles assigned to the
officers in a company