Different means of Remittance

Different means of RemittanceProf. ISHA JAISWAL

IntroductionApart from accepting deposits and lending money, banks also carry out the act of transfer of money - both domestic and foreign. This activity is known as "remittance business" . The money transfer between two branches of the same country is known as internal transfer. In case of international transfer the banks remit the funds through letter of credit. Banks remit funds from one place to another through the network of their branches. The main instruments for transfer of funds are Demand Drafts, Mail Transfer, Travellers cheques, Banker's Cheques, Money Orders, plastic cards etc.

Different Means of Remittance of FundsBank Drafts or Demand DraftsMail TransferTelegraphic TransferLetter of CreditCredit/Debit cards or plastic Money

Bank Drafts or Demand Drafts:A bank draft is an order from one branch of a bank to another branch of the same bank to pay a specified sum of money to the person named therein or to his order.A person who wants to send money can buy a draft by paying the required amount to a bank and send to another who can encash it in his place. Banks issue drafts for a nominal commission. The purchaser of the draft need not to be a customer or account holder of the bank.According to the section 13 of the Negotiable Instrument Act, a bank draft is not a negotiable instrument. But a draft has all the attributes of a bill of exchange, such as an instrument in writing, containing an unconditional order, signed by banker.

Bank Drafts or Demand Drafts(cont.):Section 85-A provides protection to bank against forged or unauthorized endorsement on drafts.A bank draft is a commitment on the part of the issuing bank to pay a certain amount of money to a third party.Sometimes the purchaser of the bank draft may return it to the issuing bank with a request to cancel it and refund the amount to him. The banker may consider his request subjected that the draft has not been delivered to payee.Validity of the bank or demand draft is three months from the date of issue.

Loss of draftIn case the draft is lost and it is reported to the issuing bank, it should immediately advice the loss to the drawee branch which will make note of the loss in the record to guard itself against the fraudulent use of the lost draft.

Loss of draftThe draft lost by the purchaser is entitled to get a duplicate one from the issuing bank. The banker, before issuing a duplicate draft should take the following steps:The banker should be satisfied with the genuineness of the request by the purchaser for the issue of a duplicate.A confirmation regards non-payment of the draft should be obtained from the drawee bank.An indemnity bond must be obtained from the purchaser. If the draft has reached the hands of the payee, he should also sign the indemnity bond.When a duplicate draft is issued, the drawee bank must be informed about it.

Mail Transfer:The facility of transferring money by mail is available to customers having some sort of an account with the bank. The remitter deposits the amount to be transferred with a small commission with the remitting branch. After receiving the money, the bank sends instruction by mail to its drawee branch to credit the account of the payee about it. This is, however, a dying product and many banks like State Bank of India have since withdrawn this.

Telegraphic Transfer:Telegraphic Transfer is a historic term used to refer to an electronic means of transferring funds abroad. A transfer charge is often charged by the sending bank and in some cases by the receiving bank. This is similar to the Mail Transfer except that the message is sent by way of a telegram and the money is deposited the next day.

Telephonic Transfer:When any bank sends to its branch the advice or instruction of such transfer or remittance of money on telephone, it is called telephonic transfer.

Letter of Credit:A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met. In the event that the buyer is unable to make payment on the purchase, the bank will cover the outstanding amount.They are often used in international transactions to ensure that payment will be received where the buyer and seller may not know each other and are operating in different countries.The bank that writes the letter of credit will act on behalf of the buyer and make sure that all delivery conditions have been met before making the payment to the seller.

Letter of Credit (cont.):Letters of credit are typically used by importing and exporting companies particularly for large purchases.A letter of credit is defined as a letter issued by the importers bank in favor of the export authorizing him to draw bill up to an amount specified in it and assuring him of payment against the delivery of the prescribed documents in his own country.The importer is called the opener and his bank is known as opening bank.The letter of credit is sent to the foreign branch of the banker to its correspondent bank, which is called the negotiating bank.

Letter of Credit (cont.):After satisfying itself about the authenticity of the credit, the bank forwards it to the exporter who is called the beneficiary.The exporter ships the goods, prepares the document and draws a bill on his importer.The negotiating bank receives the bill and pays the amount if it is in accordance with the letter of credit.Documents are delivered on payment or acceptance, as the case may be to the importer who takes delivery of the goods.

Parties of a letter of credit:Applicant of Letter of Credit: Applicant is one of the main parties involved in Letter of Credit. Applicant is the buyer of goods who opens letter of credit. The applicant arranges to open letter of credit with his bank as per the terms and conditions of purchase order and business contract between buyer and seller. Issuing Bank: Issuing bank is the bank which issues the Letter of Credit and takes responsibility to pay amount on receipt of documents from supplier of goods.

Parties of a letter of credit (cont.):3. Beneficiary: Beneficiary is another main parties under letter of credit. Beneficiary is the seller or supplier of the goods. Beneficiary submits all required documents with bank in accordance with the terms and conditions under Letter of Credit. Beneficiary receives amount under letter of credit.

4. Advising Bank: Advising bank, as a part of letter of credit takes responsibility to communicate with necessary parties under letter of credit and other required authorities. The advising bank is the party who sends documents under Letter of Credit to opening bank.

Parties of a letter of credit (cont.):5. Confirming Bank: Confirming bank as a party of letter of credit confirms and guarantee to undertake the responsibility of payment or negotiation acceptance under the credit.

6. Negotiating Bank: Negotiating Bank, who negotiates documents delivered to bank by beneficiary of LC. Negotiating bank is the bank who verifies documents and confirms the terms and conditions under LC on behalf of beneficiary to avoid differences.

Parties of a letter of credit (cont.):7. Paying or Nominated Bank: Paying bank makes the payment to the beneficiary on the behalf of the issuing bank.8. Reimbursing Bank: It is normally the bank with which the issuing bank maintains an account from where payment will be made.

Travelers' Letter of Credit:Travelers' letter of credit are issued for the convenience of travelling public. A traveler who intends to go abroad incurs great risk if he keeps cash with him. Travelers letter of credit issued by banks avoids the risk of loss or inconvenience in carrying large amount of cash. On travels letter of credit to the foreign bank the traveler can get money.A travelers letter of credit consists of two parts:Letter of credit or circular letter of creditLetter of identification or circular note

Travelers Letter of CreditLetter of credit or circular letter of credit: If the travelers' letter of credit is addressed to more than one bank it is called a circular letter of credit.Letter of identification or circular note: It is a document showing specified value of the sum it contains travelers name and specimen signature. When the traveler needs money he has to present letter of identification, sign the circular note and will get the money.

Letter for Commercial CreditThis type of letter of credit is used to finance trading activities. The customer wishing to open such a credit approaches a banker with a request for a letter addressed to another person in a different city or country from whom he expects shipments of goods on credit. The total amount of such credit is settled with the banker after the letter receives the requisite security to his satisfaction.

Types of Letter of CreditDocumentary and clean letter of credit.Revocable and irrevocable letter of credit.Fixed and revolving letter of credit.Confirmed and unconfirmed letter of credit.With or without recourse letter of credit.Back to back letter of credit.Red clause letter of credit.Green clause letter of credit.Importer/Exporter letter of credit.

Documentary and clean letter of creditA documentary letter of credit is one which the issuing bank undertakes to honor the bills drawn under it only when it receives with certain documents. The documents are kept by the issuing bank as security for advance made by it.A clean letter of credit is one where no documents are involved. Such a letter of credit is issued for customers of high financial standing.

Revocable and irrevocable letter of creditThe revocable letter of credit can be changed at any time by either the buyer or the issuing bank with no notification to the beneficiary. Since revocable letters of credit do not provide any protection to the beneficiary, they are not used frequently. Conversely, the irrevocable letter of credit only allows change or cancellation of the letter of credit by the issuing bank after application by the buyer and approval by the beneficiary. All letters of credit governed by the current UCP (Uniform Customs and Practice for Documentary Credits) are irrevocable letters of credit.

Fixed and revolving letter of creditA fixed letter of credit is opened for a specific amount for a specific period. The credit would exhaust as soon as the total amount has been drawn. If the period is fixed, it expires after the lapse of the prescribed time.In case of revolving letter of credit, the amount of credit remains constant during the period of validity. When a bill is duly honored, the credit amount is automatically renewed.

Confirmed and unconfirmed letter of creditA confirmed letter of credit is one where a second bank agrees to pay the letter of credit at the request of the issuing bank. An LC is said to be confirmed when a second bank adds its confirmation (or guarantee) to honor a complying presentation at the request or authorization of the issuing bank. An unconfirmed letter of credit is guaranteed only by the issuing bank.

With or without recourse letter of creditIn case of a letter of credit with recourse the beneficiary of the letter of credit holders himself liable to the holder of the bill, in the event dishonor.Where the beneficiary does not hold himself liable, such a letter of credit is known as without recourse letter of credit.

Transferable and non-transferable letter of creditTransferrable letter of credit are commonly used when the beneficiary is simply an intermediary for the real supplier of the goods and services or is one of a group of suppliers. It allows the named beneficiary to present its own documentation but transfer all or part of the payment to the actual suppliers. An un-transferrable letter of credit does not allow transfer of payments to third parties.

Back-to-back letter of creditA back-to-back letter of credit is used in a trade involving an intermediary, such as a trading house. It is actually made up of two letters of credit, one issued by the buyer's bank to the intermediary and the other issued by the intermediary's bank to the seller.

Red clause letter of creditA red clause letter of credit allows the beneficiary to receive partial payment before shipping the products or performing the services. Originally, these terms were written in red ink, hence it was named as red clause letter of credit. In practical use, issuing banks will rarely offer these terms unless the beneficiary is very creditworthy or an advising bank agrees to refund the money if the shipment is not made.

Green clause letter of credit A condition in a guarantee document that allows a purchase to receive advances ahead of shipment against collateral property represented by warehouse receipts. Use of a green clause letter of credit is often used in the agricultural business where a company can fund the harvest of a new crop by pledging available stock as collateral.

Import/Export letters of CreditMost letters of credit are import/export letters of credit, which, as the name implies, are letters of credit that are used in international trade. The same letter of credit would be termed an import letter of credit by the importer and an export letter of credit by the exporter. In most cases, the importer is the buyer and the exporter is the beneficiary.

Documentation RequirementsThe documents that the issuing bank will accept are specified in the letter of credit, but may often include: Bills of exchange Invoices Government documents such as licenses, certificates of origin, inspection certificates, embassy legalizations.Shipping and transport documents such as bills of lading and airway bills Insurance policies or certificates, except cover notes.

Advantages of letter of credit to beneficiary or exporterCertainty of payment.Financial standing of the buyer is replaced by the issuing bank.In case of confirmed LC, additional assurance from the Confirming bank.Reducing the production risk, if the buyer cancels or changes his order.The opportunity to get finance in the period between the shipment of the goods and receipt of payment.The buyer will not be able to refuse to pay due to a complaint about the goods.

Advantages of letter of credit to buyer or importerThe issuing banker lends the benefits of his own credit to the buyer or importer.Easier to do business with unknown sellers.No payment is made until documentary evidence is received showing shipment details.The letter of credit gives an assurance to the importer that the bills of exchange drawn under the credit will be honored only when they are strictly in accordance with the conditions laid down in the letter of credit and the documents required there in are duly enclosed.

Risks in Letter of Credit TransactionsThe payment may be obtained through the use of fraud documents. Legal risk prevents completion of the transaction. The completion of the transaction may be prevented by an external force, such as war or natural disaster. Failure of the issuing or collecting bank or insolvency of the buyer.In addition, non-delivery, shipping less than was ordered, inferior quality merchandise, early or late shipment, or goods being damaged in transit.

Credit CardsA small plastic card issued by a bank and other credit agencies, allowing the holder to purchase goods or services on credit. The card allows the customer to spend money within a credit limit. The customer then has to pay back the amount at a fixed rate of interest by a specified date. Most merchants and stores accept credit card payments these days and some cards have attractive cash back offers and loyalty rewards associated with them.

Procedure for applying credit cardChoose the card that you wish to apply. A duly completed application form along with a photograph has to be submitted.You have to provide the following identification documentations for verification:1. Proof of income. 2. Statement copy of bank (previous 6 months). You can send the documents through an agent or can even courier to the given address. The company would verify the details given by you. If all the details after verification are found in order, the company would send the credit card in 3 to 4 weeks starting from the day the application has been sent. The company also provides details about the credit limit. It is important to sign at the back of the credit card. It serves the purpose of authentication on the spot when the card is stolen or lost.

Advantages of Credit card-holderCredit cards offer you the freedom to buy any product within your spending limit and make payments later.Reduces the need to carry cash.Large purchase.Card-holder has a benefit of free interest up to a period as per the policy of the issuing bank.Cash up to certain limit is obtained from the banks.Flexible reward schemes.Abroad purchases.

Advantages to businessmen/merchantsThe shopkeepers have no risk of sale to consumers on credit because the issuing bank makes the payment to them by verifying the signature of the card-holders.

Merchants can easily increase their sale.

Since the payment is made by the bank of the credit card holder the shopkeeper behavior with the card-holder is co-operative and polite.

Advantages to card issuer (Bank)By issuing the credit card to the holder, bank gets commission.This is an more advantage instrument of income to the banker as compared to the annual interest.The banks become a contributor in increasing the business transaction.Since use of the credit cards do not require cash or cheque the use of currencies is minimized.Government gets more taxes because this plastic currency is made legal.

Disadvantages of Credit cardsInviting cardholders to spend more money.Credit cards can be stolen.High interest charges.To conclude, we should know our limits and spend according to it.

Charge CardsA charge card is a card that provides a payment method enabling the cardholder to make purchases. The cardholder is obligated to repay the debt to the card issuer in full by the due date, usually on a monthly basis, or be subject to late fees and restrictions on further card use. Credit cards are revolving credit instruments that do not need to be paid in full every month. There is no late fee payable so long as the minimum payment is made at specified intervals. Charge cards are typically issued without spending limits, whereas credit cards usually have a specified credit limit that the cardholder may not exceed.

Smart CardsA plastic card with a built-in microprocessor, used typically to perform financial transactions. It stores and transacts data. This data is usually associated with either value, information, or both and is stored and processed within the card's chip. The card data is transacted via a reader that is part of a computing system. Credit cards and smart cards may have a similar appearance at first glance, but a traditional credit card only features a magnetic strip and nothing inside. Where as smart cards are safer than credit card.

ATM CardsAn ATM card is any payment card issued by a financial institution that enables a customer to access an Automated Teller Machine (ATM) in order to perform transactions such as deposits, cash withdrawals, obtaining account information, etc. The ATM card consists of a Personal Identification Number (PIN), which is known only to the customer. A customer who wishes to transact through the ATM will have to place the ATM card in the slot before starting his operation and he will be able to transact his business through interactive visual display unit.

Advantages of ATM to the customersATMs provide 24 hours, 7 days a week and 365 days a year service.Service is quick and efficient.Privacy in transaction.Free from errors.On networking, card holder can access cash and service at any location regardless of where he maintains account.Wider flexibility in withdrawals.Fund transfer across the banks.Anywhere banking facility.

Advantages of ATM to BankAlternative to extend banking hours.Crowding at bank counter considerably reduced.Service is cheaper.Alternative to new branches.Cash transportation and cash handling is avoided.ATMs can be located in any convenient location in the city.

Disadvantages of ATMNot available in remote places.Cannot avoid illegal use in case of stolen card.The use of this ATM requires literate users.Only limited withdrawal can be transacted on ATM.ATM is unable to count spoiled notes.

Safety measures while using ATMsATM should be located in a locality where there is safety.The site of ATM should have enough lighting facility.The customers should not use their ATM cards and their PIN when others are watching.PIN should be kept secret.ATM cards should be kept at safe place.Loss or theft of a card should be reported immediately.Obtain transaction slip and maintain it.Insert ATM card after receiving the instruction from ATM.If the ATM card happens to be fixed up or detained then complain to the help line of the bank.

Debit CardsA card allowing the holder to transfer money electronically from their bank account when making a purchase. A debit card is a more convenient way of spending money than carrying cash around all the time. You put your cash (or a check) into a checking account, and you can swipe your debit card to deduct money from that account to pay for your purchases.

Features of debit CardsWithdrawals more than that of available balance in the account of the customer, are not allowed.No credit loss to banks, since the system works on available funds in the customers account.Since the payments are directly debited from the account of payee, there is no late payment fees payable by payee nor there be any interest earnings for banks, as there is no credit involved.