CHAPTER – IV

COMPARATIVE ANALYSIS OF TRADE

SETTLEMENT METHODS

4.1 A CHARACTERISTIC FEATURES OF METHODS WITH

SPECIAL FOCUS ON DOCUMENTARY CREDIT

4.1 B COMPARATIVE ANALYSIS OF METHODS

 A Critical Study of International Trade Settlement Methods in Post Globalization Era

Chapter IV: Comparative Analysis of Trade Settlement Methods

With the advent of the globalization the world trade has witnessed
phenomenal growth, particularly in the first decade of 21st century. The process of
globalization has resulted into opening of economies which led to rise in Cross
Border Trade Transactions. This increase in the volume of world trade is certainly
not without Trade Settlement related issues. The trade settlement involves two flows
i.e. Flow of goods from seller to buyer and flow of money from Buyer to seller. In the
context of Cross border trade, the settlement process becomes more complex as
compared to domestic trade.

Against this background organization Chapter is as follows:

A. Characteristic Features of methods with special focus on Documentary

Credit
B. Comparative Analysis of Methods

When the exporter and importer enters in to the cross border trade contract.
The nature of contract is about the flow of goods from exporter to importer and
correspondingly flow of foreign currency (money) from the importer to the exporter.
It is only when these two flows are complete, we say that there is a settlement of the
cross border trade transaction .The above settlement process is relatively more
difficult in cross border trade rather than in domestic trade. The complexities are
attributed to various factors such as Distance, Currency, Legal Economic and Political
factors confronted by participants of international trade. Each of the above are really
important factors that differentiates international trade from domestic trade.

Distance: Unlike Domestic Trade the parties are situated at long distance from each
other in cross border trade and therefore in the event of nonpayment or non-receipt of
goods direct accessibility is not feasible.

Currency: The choice of currency for invoicing is always a matter of debate and
dispute as exporter would like to draw a bill in his domestic currency, in that case
importer is exposed to fluctuations of exchange rate and vice versa. In case if some

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third currency is used for billing or invoicing then both the parties are exposed to
market fluctuations. Such question about the choice of currency doesn’t arise at all in
domestic trade.

Economic Factors: Unlike domestic trade exporter may be from the economy where
free trade is promoted, whereas importer may be from the economy following
conservative and restrictive trade policy. Due to this settlement process may get
delayed.

Political Factors: In cross border trade there is always a possibility of two countries
are political rivals and such rivalry may result into imminent threat of war. In case of
eruption of war either of the flow may get stuck for no fault of parties involved in the
trade. Moreover it is needless to state that if two countries are having democratic
pattern the settlement is facilitated as against to countries having different political
system.

Legal Factors: Unlike Domestic Trade in the event of dispute and litigation there is
really no international court as such where matter can be taken up. The only option
available is referring cases to dispute settlement mechanism of ICC which takes long
time in resolution of dispute and obvious delay in settlement.

Thus Legal Political Economic Environment creates hindrance in the settlement

process. In spite of all these obstacles the parties are desirous of entering into
international trade and therefore are in lookout for the mutually convenient reliable
and safe trade method. The options available to facilitate flows are the methods of
trade settlement. The methods that are in vogue are as follows.

1. Open Account
2. Advanced payment
3. Documentary Credit
4. Documentary Collection
5. Consignment
6. International Trade Guarantees

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Incidentally before discussing characteristic features of the methods and

comparative analysis thereof it is certainly not out of place here to understand
expectation of exporter from importer and vice versa so as to enable us to arrive at
mutually convenience/reliability and safe trade method.

Exporter Importer

Immediate Payment before shipment Evidence of shipment before payment

Assurance of Payment Assurance of Performance

Finance at pre and post shipment Finance to effect the payment

Both parties are looking out for resource persons having special skill sets in
international marketing/ Finance and Risk management/ Human Resource
Management and logistics and from identification of the market, financing

It is seen from the above table that expectation of the parties to the trade are
conflicting to each other and therefore it is really difficult to opt for method which can
be termed as mutually convenient reliable and safe. However as stated earlier parties
are desirous of entering into cross border trade and therefore have to compromise on
their earlier expectations in selection of methods.
In order to throw more light on selection process a comparative study of methods
was necessary and for that it was thought fit by the researcher initially to discuss in
details characteristic features of the available methods followed by comparative study
thereof.

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4.1 A. Characteristic Features of Cross Border Trade Settlement

Methods:

1. Open Account:

In this method the exporter allows the buyer to effect the payment at any later
date but delivers goods immediately. It is a typical case of monopsony market.
Monopsony market is a market situation/condition where many sellers are available
for a single buyer. Here there is competition amongst the sellers to tap the single
buyer. Due to this competition the seller (exporter) allows the buyer to effect the
payment at any later date and dispatches the goods immediately.

In this method there is risk to the exporter and no risk to the importer.
Exporter has the apprehension what if I send the consignment and importer does not
pay. Therefore this method cannot be used safely unless the buyers’ creditworthiness
is known and the destination of the importer’s country is economically, politically and
legally sound.

From the sellers point of view Open Account is the most unsatisfactory
payment system. Under this system the arrangement is that the buyer pays at the end
of an agreed period. The seller consigns the goods directly to the buyer or to his order
and documents pertaining to the good are sent directly to the buyer enabling him to
take delivery of the goods. Under this system the seller after having supplied the
goods is purely at the mercy of the buyer.

Such payment is normally in those trading arrangements requiring a high

degree of trust between the buyer and the seller and a regular continuous business
relationship between the two parties.

Advantage of this system if at all is that since there is no involvement of a

bank, there is less paper work, and consequently lesser costs.

This system is more beneficial to a large number of exporters and importers

and is purely based upon full and undoubted trust between two parties.

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Certainly from exporter’s point of view, if exporter is going to release goods

and also giving buyer documents to go with it, exporter must have a very high
element of trust. Otherwise exporter would be out of business.

Characteristics of Open Account Method:

1. Exporter allows the buyer to effect the payment at later date, but
dispatches goods immediately
2. The account of the exporter (seller) is open and anytime payment can be
effected by the buyer.
3. This a Monopsony Market Condition i.e. One Buyer and Many Sellers.
4. Here buyer gets the high negotiating power and can dictate terms of trade.

Advantages:

1. This method is beneficial to the importer (Buyer), he/she can enjoy the
credit period.
2. No risk to buyer, he/she receives the consignment as per specifications
before effecting the payment.
3. Seller’s account is open, so buyer can make payment as per his/her
convenience

Risks:

1. No risk to the importer

2. Exporter bears the total risk as once goods are dispatched then no control
over the goods.
3. Exporter faces the uncertainty about the receipt of payment, there is an
apprehension that what if exporter does not pay?

Suitability Conditions for Selection of Open Account Method:

1. At the time of Monopsony Market (Buyers’ Market)

2. Importer has a good reputation (creditworthiness)
3. Importer is solvent

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4. Importer’s country’s Social legal and political and economic environment

is sound.
5. At the time of long term trade relationship between the parties to the trade.

Summary:

It is the extreme case of market condition. If such Monopsony prevails then

Open Account is suitable method. In this method the exporter has to have trust on
importer for getting the payment and for early settlement. However from the above
discussion of Merits demerits and characteristic features of Open Account it is
inferred that seller has to have full trust on buyer.

2. Advance Payment:

In this method exporter insists upon full payment in advance and only then
delivers goods. It is a typical case of monopoly market. Monopoly market is a market
situation/condition where there are many buyers and a single seller. Here there is
competition amongst the buyers to procure the goods. Due to this competition the
seller (exporter) insists upon full payment in advance and only then delivers goods.

In this method there is significant risk to the Importer and no risk to the
Exporter. Importer has the apprehension what if I make the payment and the exporter
does not perform (i.e. may not send the goods as per the required specifications).

In some cases where the manufacturing process is specialized, lengthy or

capital-intensive, it may be reasonable to ask for full payment in advance or with
progressive instalments. Secondly this method is most suitable when goods are
manufactured as per the specific requirements of the particular client, i.e. customized
goods. This method is useful when goods are shipped to political unstable countries or
when buyer’s creditworthiness is not known.

The system of Advance Payment is advantageous to the seller for he gets the
payment in advance even before good are released from his possession. Thus Exporter
has money in his account before parting with the goods and can use it for arranging

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production and delivery of goods. Therefore seller need not to worry about receipt of
money. The Buyer on the other hand faces many risks in such a system.

Characteristics of Advance Payment Method:

1. Exporter insists upon full payment in advance and only then delivers
goods.
2. Importer makes the full payment first and then receives the consignment.
3. This a Monopoly Market Condition i.e. One Seller and Many Buyers.
4. Here Seller gets the high negotiating power, and can dictate his/her terms
for trade.

Advantages:

1. This method is beneficial to the Exporter (Seller), he/she can use the
payment received, for processing of next order. Buyer’s funds are for
exporters no uncertainty about the receivables.
2. No risk to the exporter as he/she receives the full payment before
shipment.
3. Goods can be shipped as and when it is convenient to the exporter.

Risks:

1. No risk to the Exporter

2. Importers bears the total risk once payment is made.
3. Importer faces uncertainty till the receipt/arrival of consignment as per the
specifications, there is an apprehension that what if I make the payment
and exporter does not perform?
4. No Control over the goods
5. Use of funds is lost for the importer once payment is done.
6. Importer faces the risks of local regulations as to whether they allow
payment to a seller to be made in another country before he receives the
goods

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7. Importer also faces the risks of trustworthiness and capabilities of seller to

fulfil the contract.
8. Also there can be any regulations in the seller’s country which might
prohibit the sending of goods. (6,7,8 points are from sir’s book)

Suitability Conditions for selection of Advance Payment Method:

1. At the time of Monopoly Market Condition (Seller’s Market)

2. Importer lacks creditworthiness
3. Importer is not able to offer sufficient security for payment
4. When Importer is located in a country of political and economic
instability.
5. When a product is very much customized, which cannot be sold to other
customer in case the first customer commits default.

Summary:

It is the extreme case of market condition. If such Monopoly condition

prevails then Advance Payment is suitable method. In this method the importer must
have trust on the exporter to receive the goods as per consignment. However from the
above discussion of Merits demerits and characteristic features of Open Account it is
inferred that seller/exporter has no trust whatsoever on buyer and therefore demands
full payment in advance.

3. Documentary Credit

In between above two methods of Open Account and Advance Payment lies
most popular method known as Letter of Credit where it is the Banker who plays the
role of intermediary and assures Payment and Performance to Exporter and Importer
respectively.

The Exporter (seller) has the apprehension that, “what if I send the good of
required specification and importer does not pay?”

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The Importer (Buyer) has the apprehension that, what if the payment is made
and exporter does not perform?”

Exporters wants the “Assurance of Payment” and the Importer wants

“Assurance of Performance”, here it is the Bank which plays the role of third party
as an intermediary. Banks gives assurance of payment to the exporter, you send the
goods as per the specifications, I commit to Pay” On the other hand Bank assures to
the importer “I will not debit your account till the goods are not up to specifications”

Characteristics of Documentary Credit Method:

1. There are Three Contractual Relationships in the use of Documentary Credits:

a. The relationship between the Importer and the Exporter
b. The contractual relationship between the Importer and Importer’s bank
c. Issuing Bank and the beneficiary (Seller-Exporter)

2. The parties concerned with Letter of Credit are described below:

a. Applicant: is the Importer who requests his Bank to Open a LC
b. Beneficiary: The Party in whose favour the LC is issued, generally the
Exporter.
c. Issuing Bank: Is the Importer’s Bank, which generally issues the LC
d. Advising Bank: The bank from Exporter’s Country, determines the
authenticity of LC before forwarding it to the beneficiary.

3. The Importer may stipulate the Letter of Credit be accompanied by Laboratory

Test Certificates, or other documents that confirm the quality or quantity of
goods

4. A Letter of Credit assures the payment only if its terms and conditions are
satisfied by compiling the necessary documents.

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5. The Letter of Credit refers to the documents representing the goods not the
goods themselves. Banks are not in the business of examining the goods on
behalf of their customers.

6. The quality and quantity of goods shipped depends upon the honesty and
integrity of the seller, who has manufactured, packaged the goods and
organized the delivery.

7. If the documents are not compliant the Bank will not effect the payment and if
in such case of discrepant documents if bank effects the payment and debit the
importer’s account, then bank has to re credit importers account again.

8. While preparing a shipment covered under LC, it is very much important to

closely follow the instructions in the LC. LC will explain exactly, how to
prepare a draft, commercial invoice, which other documents must be prepared
and attached to the draft for payment, what the deadline to ship the goods is
and when to present the documents for payment. In all this entire process
accuracy is extremely important.

9. The Letter of Credit Process has been standardized by a set of rules published
by ICC. These rules are called the Uniform Customs and Practise for
Documentary Credits (UCPDC).

Advantages:

1. Both the Exporter and the Importer gets the assurance of Payment and
Performance respectively.

Risks:

1. Noncompliance of documents by the seller (Exporter) may lead to delay in the

settlement process.

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2. Bank deals only with documents representing the goods and not the goods
themselves.
3. Seller may face commercial risks, political and foreign exchange risks.

Suitability Conditions for selection of Documentary Credit Method:

1. When both the parties to the trade are not having established trade relationship
from many years.
2. When the Importer’s creditworthiness is not known

Summary:

In this method the bank tries to eliminate the risk, which the seller faces in
case of Open Account Method on the other hand also eliminates the risk which the
buyer faces at the time of Advance Payment Method. Bank plays an important role of
intermediary by assuring the Payment and Performance to the Exporter and the
Importer.

The honesty of parties to the trade is of paramount importance in any

exchange of goods across the borders regardless of Method of Payment.

However from the above discussion of Merits demerits and characteristic

features of Documentary Credit it is inferred that seller/exporter and buyer importer
has full trust on banker who acts as an intermediary to the trade transaction.

4. Documentary Collection Method:

Under this system bank acts as an intermediary, the seller doses not have to
depend on the buyer only. Here bank’s role is only in the process of routing the
documents of transfer /title along with other documents.

The banker acts as a collecting agent only and it is the role of collecting
payment from the importer and goods from the exporter without any commitment.

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In this method the exporter ships the goods and draws a bill of exchange on
the buyer through an intermediary bank. The draft is an unconditional order to make a
payment in accordance with certain terms. The documents needed are specified before
the title of goods is transferred (Latin Trade, 1999).

Operation/Process of Documentary collection:

a) There are four parties involved in the Documentary Collection Method:

 The Buyer (Importer)
 Collecting/Presenting Bank (Buyer’s Bank)
 The Seller (Exporter)
 Remitting Bank (Seller’s Bank)

b) There are Four main steps involved in the Process of Documentary Collection:
1. First of all, The Seller sends the draft to the Remitting Bank
2. The Remitting Bank, as an intermediary, sends the draft to the
Collecting/Presenting Bank.
3. The Collecting/Presenting Bank, as an intermediary, makes the
documents available to the buyer.
4. The buyer has three options after examination of the documents.
 To Pay immediately
 To pay at a future date
 To refuse to pay for the draft

c) When the draft is paid, the title documents are released to the buyer so he/she
can obtain possession of the goods.
d) The title of goods is not transferred until the draft is paid or accepted
e) Both the buyer and seller are protected
f) If the seller requires immediate payment of a collection and is not willing to
extend financing to a buyer, the seller will use a sight draft. A sight draft is an
order signed by the seller directing the buyer to pay a specified amount to the
seller upon presentation of the draft. After shipping the goods, the seller sends

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a sight draft with the commercial documents (transport documents,

commercial invoice and any other document applicable to the collection
transaction) to the collecting / presenting bank through the remitting bank the
collecting / presenting bank releases the commercial documents to the buyer
only upon payment of the sight draft. The buyer must effect payment of this
draft to receive the commercial documents. The release of the documents to
the buyer upon payment of a sight draft is known as documents against
payment (D/P collection). The collecting / presenting bank forwards the
payment to the seller through the remitting bank.

g) If the seller extends financing to the buyer, the seller uses a time draft. A time
draft is an order signed by the seller directing the buyer to pay a specified
amount to the seller on a specified future date. After shipping the goods, the
seller sends a time draft with the commercial documents (transport documents,
commercial invoice, and any other document applicable to the collection
transaction) to the collecting / presenting bank through the remitting bank. The
collecting / presenting bank releases the commercial documents to the buyer
only upon the buyer obligating itself to pay the accompanying draft. The buyer
obligates itself to pay by placing the word accepted across the face of a draft
followed by the maturity date and the buyer’s signature. The release of the
commercial documents to the buyer upon its acceptance of the time draft is
known as documents against acceptance (D/A collection). These steps occur
simultaneously. The seller receives the accepted draft from the remitting bank
and holds it to maturity; it may then be presented for payment under a D/P
collection.

Advantages:

1. In a documentary collection transaction, the banker do not make any

commitment and therefore not liable in case documents turned out to be
discrepant at later stage.

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2. For the seller, the advantage is that the seller is confident that goods in the
form of documents are in the safe custody of bank who would not release
documents unless importer effects the payment.
3. The use of Draft (Documentary Collection) is less expensive for the buyer as
compared to the Documentary Credit (LC)

Risks:

1. In terms of risks, the goods may not meet the buyer’s specifications after
payment and/or acceptance.
2. A bank’s control of the documents reduces the seller’s risk in relation to the
documents only; however, the seller may be exposed to:
 Cross-border risk
 Foreign exchange risk
 Interest rate risk
 Commercial or credit risk
 Costs resulting from the buyer’s refusal to pay.In this instance, the
seller incurs the expense of storing goods in a foreign country
while finding another buyer in that country (or in another country),
or arranging for their return to the country of origin.
 Loss of goods resulting from a time limit for holding goods in
public storage. Regulations in many countries may restrict the
number of days in which goods may be held in public storage.
After that time, the goods may be sold at auction.

When Documentary Collection Method is suitable or preferred?

1. This method is used when either Cash in Advance is not acceptable to the
Importer (Buyer), or the Open Account Method is not acceptable to the
Exporter (Seller).
2. Documentary credit method may be perceived relatively costly and time
consuming by the parties to the trade.

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3. Since the parties are trading with each other for many years therefore trust
relation already exists and opening of LC would not be necessary which in
turn prove to be costly as compared to documentary collection.

In above cases the importer and exporter may opt for Documentary Collection
Method.

Summary:

The exporter and importer are having well established trade relations, which
means trust is already is established in the sense that, hardly settlement is delayed due
to nonpayment and nonperformance. In such situations exporter and importer
mutually agree to settle the trade, without any commitments from third party that is
banker, as done in the Letter of Credit. Moreover the commitment charges are very
heavy. The exporter’s only concern is that documents/goods should not fall in the
hands of the importer unless payment is received. Here the banker’s role is confined
as collecting agent only. The trust relation therefore is seller/exporter has some trust
on banker that documents would not be released unless payment is received and
therefore goods are in safe hands of the banker.

Source: Latin America training and development center, basics of trade services and trade finance January
1999, self-instructions series, Citi Bank, Global Corporate Bank training and development, Basics of Trade
Services and Trade Finance,

5. Consignment:

In an “on consignment” sale, the seller ships the goods to the importer while
retaining ownership of the goods. The importer is referred to as the consignee who is
actually an agent responsible for paying for the goods if and when the goods are sold.

Characteristics of Consignment Method:

1. With consignment sales, the seller does not receive payment until the importer
sells or resells the goods.

2. The Product stays with importer until all the terms of the sale have been satisfied.

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3. In the consignment Method, the importer is called the consignee and he/she is
responsible for paying for the goods when they are sold.

Advantages:

1. The consignee pays only as (when) the imported goods are sold.
2. The consignee receives a fee for brokering the sale.
3. The major advantage for the seller is that he/she can retain the ownership of
the goods until sold
4. The exporter (Seller) uses the services of the consignee to intermediate the
sale of the goods to the buyer.

Risks:

1. There is no risk for the Consignee (Importer)

2. The seller has limited control over the goods
3. The seller has no control over the consignee’s willingness to pay for goods
4. The Exporter receives payment only upon sale of goods.
5. The Exporter may incur cross-border risk of the consignee’s country
6. The Exporter may incur foreign exchange risk
7. The Exporter may incur commercial or credit risk

Suitability Conditions for selection of On Consignment Method:

1. When the consignee is reliable (reputable with good credit ratings)
2. When the Consignee has a good credit history (with the exporter)
3. The consignee’s country has economic and political stability

Summary:

At times situation arises where goods though manufactured the potential buyer
is yet to be traced. The goods are of perishable in nature and therefore seller exporter
cannot afford to wait till final buyer is traced and identified. Under such typical
circumstances banker releases the goods to the agents against “Trust Receipts” only.

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6. International Trade Guarantees:

The guarantees are often used in international trade to secure performance and
payment just like Letter of Credit. However the basic difference lies into the fact that
Letter of Credit is a commitment of the banker to pay irrespective of importer’s
payment obligation. Whereas in case of guarantees the importer buyer’s obligation
comes first and in the event of nonpayment i.e. default guarantee is invoked. And
therefore it is an irrevocable obligation to pay in the event of nonperformance of a
contract by third party. The commonly used guarantees are as follows:

Bid Bond Guarantee: It is used when company fulfills the tender and must
submit bid bond guarantee together with offer so as to ensure that contract awarded is
not accepted by the tender or offer is withdrawn before maturity.

Performance Bond: It is issued in cases where supplier insufficiently fulfills

the contractual delivery and therefore non adherence to the delivery schedule i.e.
performance the banker has to pay.

Advance Payment: It is used by big export orders, where buyer’s pay to the
exporter in installments to purchase a raw material. Such down payment will not be
agreed to without advance payment guarantee ensuring Advance Payment in the event
of nonperformance.

In international trade it is difficult for the buyer of the goods or services to

accurately assess the professional ability and financial position of a supplier.
Therefore the buyer quite rightly, demands that the seller’s ability to perform be
secured and for this purpose a bank guarantee is arranged.

In general, the use of the bank guarantees as an instrument for securing

payment is restricted in international trade to nonpayment guarantees used for the
“Open Account” mode of payment.

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Suitability Conditions for selection of International Trade

Guarantees:

Some situations require that a third party (often a bank) guarantees to pay a
sum of money to one party if the counterparty defaults, for example if the
counterparty fails to deliver a project within the agreed time lines. As such, the
guarantee transfers the creditworthiness of the applicant/instructing party of the
guarantee to the bank (the guarantor). (Source: Bank Guarantees in International
Trade, Nordea Trade Finance, 2010)

Summary:
The guarantee is a separate obligation independent of principal debt obligation
between creditor and debtor however basically demanded out of lack of trust only
between creditor and debtor, if importer has lack of trust on the exporter’s
performance, the bank issues performance guarantee at the request of the
seller/exporter.

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Table No. 4.1 B Table showing Comparative Features of Cross Border Trade Settlement Methods at Glance:

Methods Goods Available Usual Time of Risk to Exporter Risk to Importer Trust Relation
to Buyer Payment
Advance Payment After payment Before shipment Very low Maximum-Relies on Seller has no trust on
exporter to ship goods buyer
as ordered
Open Account Before payment As agreed Relies on importer to Very low Seller has no choice but
pay account as to have full trust on
agreed- takes buyer
complete risk
Consignment Before payment, After use; Substantial risk Very low Documents are
exporter retains inventory and unless through delivered by the banker
title until goods are warehousing costs foreign branch of to the agent against
sold or used to exporter subsidiary Trust Receipt
Documentary After payment On presentation or If draft unpaid, goods Assured of quantity, Seller has some trust on
Collection/ Sight draft to importer must be returned or also quality, if goods are Bank in the sense that
Draft /Documents disposed of, usually inspected before goods are in the safe
against Payment at loss shipment hands of the banker.

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Methods Goods Available Usual Time of Risk to Exporter Risk to Importer Trust Relation
to Buyer Payment
Documentary Before Payment On maturity of Relies as importer to Minimal-Can check
Collection/ Time draft pay draft shipment for quantity
Draft/ Documents and quality before
against Acceptance payment

Letter of Credit After Payment When documents Very low Assured of quantity and Seller and buyer has a
Confirmed are available at also quality at shipment trust on banker
Unconfirmed shipment if inspection report is
required
International Trade Guarantee and LC are commonly used trade methods however in case of later, commitment aspect on the part of the
Guarantees v/s Letter banker to the seller arises irrespective of default on the part of buyer whereas guarantee is invoked only on default on the
of Credit part of buyer. The commitment charges under LC are therefore heavy as compared to that of guarantee. Guarantee is a
three way contract, whereas LC is a contract between opener Importer and LC opening Banker only thus it is a two way
contract.

(Source: http://lnweb90.worldbank.org/ECA/Transport.nsf/0/786e3f9f52ad321485256b7a0051b6be/$FILE/PAYMENTP.pdf)

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The comparative analysis of methods stem from the above chart displaying features of
various methods at glance.

4.1B Comparative Analysis of Cross Border Trade Settlement

Methods:

1. Though each method enumerates cross border trade settlement, however

applicability of any method much depends upon :
a) Bargaining power of the parties to the trade
b) Trust relation that exists between the parties to the trade.

2. In Respect of Advance Payment seller exporter has no trust on the buyer, as

against this in case of Open Account seller has no choice that to have trust on
buyer. While in case of LC seller and buyer do not trust each other, but
however trust on banker. And in case of Documentary Collection seller has
some trust on bank In case of Consignment in a way like a open account only
however goods are handed over to the agent against trust receipt. As far as the
bargaining power is concerned in Open Account, Bargaining Power is more in
favour of buyer unlike advance payment when seller has strong bargaining
power. In case of LC seller and Buyer may have equal bargaining power.

3. In respect of Documentary Credits the data obtained from ICC, reveals that it
commonly accepted and used method, towards trade settlement, however
interestingly ICC data also revealed Settlement Process in Letter of Credit
methods is delayed for various reasons. Even though such method is relatively
more secured from the viewpoint of Payment and Performance assurance.

4. The efficacy of LC Method depends more on efficient documentation,

however paradox is compliance of documents not necessary (rarely though)
relates to compliance of goods. The UCP clause stating that “Bankers deal in
documents and not in goods” is true in this context.

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5. The guarantees like performance and bid bond could be viable option to
documentary credit method, however unlike documentary credit method
guarantees are required to be invoked and come to effect only if default is
from importers towards non-payment.

6. Each of the method is unique in its own way, therefore it would be wrong to
infer one method is superior to other however it can certainly be inferred that
documentary credit is most suitable method, mutually convenient, reliable and
safe trade method.

7. In selection of method trust relation plays a significant role, however apart

from the trust exchange control regulations also have direct bearing on method
of selection e.g. the amount of the advance payment permissible is subject to
exchange control regulations prevailing in the country in India, is upto two
lakhs.

8. Considering the apprehensions of the parties involved in the trade the most
widely accepted and used method is documentary credit also called as foreign
letter of credit.

9. Each of the method stated above to certain extent fulfill expectations of the
parties

10. However none of the method can be considered as a full proof covering
expectations of both the parties and therefore it can be said that method so
chosen is compromised method.

As the title of the research indicates critical study of settlement methods, it was
thought fit by the researcher to discuss features and comparative analysis of trade
method as a background to probe into the problem of research. The study enabled
researcher to understand impediments faced by parties to the trade in their attempt
towards trade settlement. The study brought to light concern of the exporter in

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realization of the goods while that of importer in performance of the contract. The
study also emphasizes upon why Documentary Credit is considered as mutually
convenient reliable and safe trade method.

The contents of the chapter are in line with fulfillment of the part objective i.e.
critical analysis of methods. The other part of the objective i.e. with reference to
focus on Documentary Credit as a method is covered in succeeding chapter.

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