Purchase/Discount of Foreign Bills
When the exporter has not received the letter of credit from the importer, as mode of payment, exporter requests the bank to purchase / discount documents for receiving immediate payment. Bill may be drawn on D/A (Documents against Acceptance) or DTP (Documents against Payment) basis, dependent on the terms of the export contract. Bank hands over the documents only on receipt of payment from buyer, in case of DIP basis. So, bank is reasonably secured in case of default in payment as title to goods is in possession of the bank. In case of D/A bills, document of title would be given to the buyer, on acceptance of the usance bill. So, risk is greater to the bank as no security lies with the bank, in case of default in payment by the importer. The credit worthiness of the buyer is important in such a case. When the exporter enjoys the sanctioned limit for purchase/discount of bills, exporter can get the funds immediately. When it is D/P bill, the bank purchases it. The term 'discount' is used in case of D/A bill.
To cover the risk, banks insist on the exporter to take ECGC policy in favor of the exporter and assign the policy in favour of bank. Under the policy, ECGC may fix payment terms and limits to the individual buyers and bank has to ensure that the limits are not exceeded while purchasing the bills. More so, banks can also take guarantee from ECGC in respect of post-shipment finance either on selective or whole turnover basis. If the buyers are new, banks may also obtain credit reports about the buyers before purchasing the bills, drawn on them.
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