IGNOU : M.COM : IBO 4 : UNIT 6 : Q - 3. What is the method of realizing payments under Documents Against Acceptance. Discuss? How does it differ from that of Documents Against Payments?

 

Ans. Documents Against Acceptance

Under the documents against acceptance method, the exporter draws a issuance or time bill in the importer. He forwards the bill along with the export documents to the bank for delivery to importer against acceptance of the bill. The essence of this type of transaction is that the exporter is willing not only to ship the goods before payment but is prepared to wait even after the buyer has taken delivery of goods. He, therefore, draws a bill and insists upon its acceptance before the documents are handed over to the importer. These bills have a issuance period, usually of 30, 60, 90, 120 or 180 days. Accepting the bill (which means writing the word ACCEPTED and putting the signature) implies an unconditional undertaking to pay on the due date mentioned in the bill. On the due date, the bill is presented for payment and the amount remitted to the exporter.

There are several risks associated with the system. Firstly, there is a credit risk. Failure or unwillingness to pay on the due date may force the exporter to take recourse to legal action. Secondly, there are transfer risks arising from possible delays in remittances from the buyer because of shortage of foreign exchange in his country, Incidence of such risks, can however, be minimized by taking recourse to an export credit insurance policy. Lastly, where the bills are drawn in foreign currencies, exchange risks as also the time contract is concluded and the bill is paid.

Documents Against Payment

It is a widely used methods for receiving payments in respect of exports. The essence of this type of transaction is that the exporter is willing to ship the goods before payment. However, he is not prepared to allow the buyer to take possession of them before the buyer has paid.

The mechanics of the system requires the exporter to draw a bill of exchange on the buyer, payable at sight. The exporter then hands over the bill to his banks together with the documents of title to goods. The documents include commercial invoices, packing list, marine insurance policy or certificate and a full set of bill of lading /airway bill/combined transport document. The documents are to be surrendered to the importer only upon payment of the bill. These bills are presented to the buyer for payment through a branch or correspondent in the buyer's country. The amount is realized and remitted back to the exporter's bank for his account.

In case of goods sold on documents against payment basis, the exporter retains control of goods till payment is received but risks still exist. If the bill is not paid on presentation and the goods are lying in the foreign port, custom duties, warehouse and insurance charges and other incidental expenses [nay be incurred. It may be impossible to find another buyer, and difficult to reship the goods. In cases where the bills are in foreign currencies, exchange risks also exist from the time sales contract is concluded until the bill is realized. If the exporter's bank purchases such bill and the bill is not paid by drawee, exporter's account will be debited with the amount of the bill and related charges.

There are transfer risks arising from possible delays in remittances from the buyer because of shortage of foreign exchange in his country. Incidence of such risks, can however, be minimized by taking recourse to an export credit insurance policy.