Unit 4: Banking, Payment & Foreign Exchange Documents
Payment Modes in Indian Trade
When Indian exporters and importers trade internationally, the payment can be made in different ways depending on risk, trust, and convenience.
Advance Payment
The importer pays in advance before goods are shipped.
- Pros- Exporter receives payment before shipment → no risk
- Cons - High risk for importer → may not receive goods if exporter defaults
- Example: Importer pays 100% upfront for machinery from Germany.
- Best for: Small exporters or high-trust buyers.
Documents Against Payment (DP) / Cash Against Documents
Meaning: Bank releases shipping documents to importer only after payment.
Process
- Exporter ships goods and gives documents to bank
- Importer pays the amount to get the documents
- Importer clears goods at port using documents
Pros: Safer than advance
payment for importer.
Cons: Exporter ships first
→ some risk.
Example: Shipping textiles to UK → documents released only after payment.
Documents Against Acceptance (DA) / Bills of Exchange
Meaning: Importer accepts a bill of exchange (promise to pay) for goods at a later date.
Process
- Exporter ships goods and sends documents via bank
- Importer accepts bill (signs)
- Payment is made on agreed due date
Pros: Helps importer with
short-term credit
Cons: Exporter bears risk
until due date
Example: Exporter ships electronics → importer promises to pay in 60 days.
Letter of Credit (LC)
Meaning: A bank guarantees payment to exporter on behalf of importer if terms and documents are met.
Regulated By: UCPDC (Uniform Customs and Practice for Documentary Credits) by International Chamber of Commerce (ICC).
Process
- Importer requests bank (issuing bank) to issue LC
- Exporter receives LC from advising bank
- Exporter ships goods and submits documents to bank
- Bank checks documents → pays exporter
Pros
- Safe for both exporter and importer
- Reduces payment risk
Cons
- Involves bank charges
- Documentation must be precise
Example: Exporting machinery → payment secured via LC under UCPDC rules.
Comparison Table of Payment Modes
| Payment Mode | Risk | Payment Timing | Best For |
|---|---|---|---|
| Advance Payment | High risk for importer | Before shipment | Trusted buyers/exporters |
| Documents Against Payment (DP) | Moderate risk for exporter | On payment at bank | Standard export transactions |
| Documents Against Acceptance (DA) | Moderate risk for exporter | On future due date | Provides credit to importer |
| Letter of Credit (LC) | Low risk for both | On presentation of correct documents | High-value or international trade |
Foreign Exchange Management in India
Foreign exchange (forex) deals with buying and selling foreign currency for trade, investment, and remittances.
In India, RBI and FEMA regulate forex transactions to ensure smooth trade and economic stability.
Reserve Bank of India (RBI)
India’s central bank that regulates currency, credit, and foreign exchange.
Role in Forex Management
- Maintains stability of INR against foreign currencies
- Authorizes banks to deal in forex
- Regulates import/export payments, remittances, and trade settlements
- Issues guidelines and limits for forex transactions
Example: RBI sets rules for importing machinery from the USA and converting USD to INR.
Foreign Exchange Management Act (FEMA), 1999
Meaning: Law governing all foreign exchange dealings in India.
- Objective: Facilitate external trade and payments while preventing misuse of forex.
Key Provisions
- Regulates export and import of goods and services
- Controls foreign investments and remittances
- Allows Indian companies and individuals to transact in foreign currency under RBI rules
Example: FEMA allows an Indian company to invest in a foreign subsidiary within prescribed limits.
Authorized Dealer (AD) Bank
Meaning: Banks authorized by RBI to deal in foreign exchange.Role
- Convert INR ↔ Foreign Currency for imports and exports
- Issue LUT (Letter of Undertaking) or LC for exports
- File documents with RBI under FEMA rules
- Facilitate foreign remittances, travel, and investment
Example: State Bank of India (SBI) helps exporters receive USD from overseas buyers and converts it to INR.
Summary Table
| Authority / Entity | Role in Forex | Example |
|---|---|---|
| RBI | Central regulation of currency & forex; stability & guidelines | Sets rules for imports/exports payments |
| FEMA | Legal framework for forex transactions; promotes trade | Indian company investing abroad legally |
| Authorized Dealer (AD) Bank | Executes forex transactions under RBI rules | SBI converting USD payment to INR for exporter |
Banking Documents in Export-Import Transactions
These documents help track payments from foreign buyers, ensure regulatory compliance, and assist in claiming export incentives.
Electronic Bank Realization Certificate (e-BRC)
A digital certificate issued by the bank confirming foreign currency received against export shipments.
Purpose:
- Proof of export earnings
- Required for export incentives and GST refunds
- Issued By: Authorized Dealer (AD) bank after receiving payment from overseas buyer
Example: Exporter of garments receives USD from buyer → bank issues e-BRC as proof.
Foreign Inward Remittance Certificate (FIRC)
A certificate issued by the bank to confirm receipt of foreign currency in India.
Purpose
- Used for income verification
- Required for loan applications or investment purposes
Difference from e-BRC
- e-BRC → linked to exports
- FIRC → linked to any foreign remittance (exports, gifts, investments)
Example: NRI sends money to family in India → bank issues FIRC.
Goods Receipt (GR) Form
A form confirming that export goods have left India via customs.
Purpose:
- Proof for export documentation
- Required to claim export incentives and duty drawbacks
- Issued By: Customs at the port/airport
Example: Exporter ships spices → customs issues GR form.
Shipping Declaration Form (SDF)
A declaration by the exporter about shipment details submitted to Customs and RBI.
Purpose
- Provides data for foreign trade statistics
- Used to track export value and forex inflow
- Includes: Exporter details, buyer, shipment value, currency, and port
Example: Export of electronics → exporter files SDF electronically.
Steps for Foreign Currency Realization and Repatriation
- Foreign currency realization = receiving payment from abroad.
- Repatriation = bringing the money into India.
Step-by-Step Process
- Export goods to overseas buyer
- Ship documents (Invoice, B/L, Shipping Bill) via bank
- Importer pays through bank (wire transfer, LC, DP, DA)
- Bank receives foreign currency
- Bank issues e-BRC / FIRC to exporter
- Currency is converted to INR and credited to exporter’s account
- Exporter files documents with RBI (if required)
- Claim export incentives or GST refund using e-BRC / GR Form
Example: Exporter of software exports to USA → USD received → bank issues e-BRC → converted to INR → used to claim GST refund.
Summary Table
| Document | Issued By | Purpose | Example |
|---|---|---|---|
| e-BRC | AD Bank | Proof of export payment received | USD payment for garments export |
| FIRC | AD Bank | Proof of any foreign inward remittance | NRI remittance to India |
| Goods Receipt (GR) Form | Customs | Confirms goods left India | Shipment of spices |
| Shipping Declaration Form (SDF) | Exporter/Customs | Provides export details to RBI | Electronics export report |
| Steps for Realization & Repatriation | Exporter + Bank + RBI | Receive foreign currency & convert to INR | USD → INR via bank for export |