PARA 13.2|IC 67, Marine Insurance One Liner|Chapter-11 | Role Of Banker In Marine Insurance

PARA 13.2|IC 67, Marine Insurance One Liner|Chapter-11 | Role Of Banker In Marine Insurance

Insurance exams offered by the Insurance Institute of India (III), consist of various papers either in Life or Non Life or Combined. Here we are providing ONE LINER IC 67, Maine Insurance Chapter 11 “Role Of Banker In Marine Insurance″ for para 13.2 and III exam . These questions will be very helpful for upcoming promotional exam in 2020.

IC 67, Maine Insurance is a very important topic in insurance promotional exam. This IC 67, Maine Insurance paper comes in all GIPSA exams which makes it very important.

Para 13.2 Maha Combo Mock

♦CHAPTER 11: ROLE OF BANKER IN MARINE INSURANCE

  1. In international trade various methods are used for payment for goods and services viz:
  • Consignment purchase
  • Cash-in-advance (Pre-payment)
  • Down payment
  • Open account
  • Documentary collection
  • Letter of credit
  1. Consignment purchase terms can be the most beneficial method of payment for the goods.
  1. In this method of purchase, importer makes the payment only once the goods or imported items are sold to the end user.
  2. In case of no selling, the same item is returned to the foreign supplier.
  3.  Consignment purchase is considered the most risky and time consuming method of payment for the exporter.
  4. Cash-in-advance (Pre-payment): Cash in Advance is a pre-payment method in which, an importer makes the payment for the items to be imported in advance prior to the shipment of goods.
  5. The importer must trust that the supplier will ship the product on time and that the goods will be as advertised.
  6. Cash-in-Advance method of payment creates a lot of risk factors for the importers. However, this method of payment is inexpensive as it involves direct importer-exporter contact without commercial bank involvement.
  7. Down payment: In the method of down payment, an importer pays a fraction of the total amount for, the items to be imported in advance.
  1. The down payment advantage is that it induces the exporter or seller to begin performance without the importer or buyer paying the full agreed price in advance.
  2. the disadvantage is that there is a possibility, that the seller or exporter may never deliver the goods even though it has the buyer’s down payment.
  3. Open account: an importer takes delivery of the good assures and the supplier make payment at some specific date in the future.
  4. Importer is not required to issue any negotiable instrument as evidence towards his legal commitment to pay at the appointed time.
  5. This type of payment method is mostly seen in cases where the importer/buyer has a strong credit history and is well-known to the seller.
  6. Open Account method of payment offers no protection in case of nonpayment to the seller.
  7. There may be a time delay in payment; depending on how quickly documents are exchanged between Seller and Buyer.
  8. It also presents the Seller with the highest degree of payment risk and is employed only between a Buyer and a Seller who have a long term relationship involving a great level of mutual trust.
  9. Documentary collection is an important bank payment method under which the sale transaction is settled by the bank through an exchange of documents.
  10. In this process, the seller instructs his bank to forward documents related to the export of goods to the buyer’s bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer.
  11. The buyer may obtain possession of goods and clear them through customs, if the buyer has the shipping documents such as original bill of lading, certificate of origin, etc.
  12. The documents are only given to the buyer after payment has been made (documents against payment) or payment undertaking has been given – the buyer has accepted a bill of exchange issued by the seller and payable it at a certain date in the future (maturity date) (documents against acceptance).
  13. Documentary collection by the bankers can be compared with Cash On Delivery (COD) transaction.
  14. However, it differs from COD in two ways.
  • Instead of an individual shipping company or postal service collecting the payment; bank handles the transaction; and
  • Instead of cash on delivery of goods, it is cash on delivery of title document (Bill of Lading). Goods can then be claimed from the shipping company against the document of title.
  1. Banks, therefore, act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods.
  2. There are three types of documentary collections, and each relates to a buyer option for payment for the documents at presentation.
  3. The three types are as follows:
  4. i) Documents against payment (D/P): In D/P terms, the collecting bank releases the documents to the buyer only upon full and immediate cash payment.
  • D/P terms most closely resemble traditional Cash on Delivery transactions.
  • The buyer must pay the presenting/ collecting bank the full amount in freely available funds in order to take possession of the documents.
  • This type of collection offers the greater security to the seller.

ii) Documents against acceptance (D/A): In D/A terms, the collecting bank is permitted to release the documents to the buyer against acceptance (signing) of the Bill of Exchange or signing of a Time Draft at the bank promising to pay at a later date (usually 30, 60 or 90 days).

  • The completed draft is held by the collecting bank and presented to the buyer for payment at maturity, after which the collecting bank sends the funds to the remitting bank, which in turn sends them to the principal/ seller.

iii) Acceptance of documents against payment

An acceptance document against payment has features of both D/P and D/A. It works like this:

  • Step 1: The collecting bank presents a Bill of Exchange to the buyer for acceptance.
  • Step 2: The accepted Bill of Exchange remains at the collecting bank together with the documents up to maturity,
  • Step 3: The buyer pays the Bill of Exchange at maturity.
  • Step 4: The collecting bank releases the documents to the buyer who takes possession of the shipment
  • Step 5: The collecting bank sends funds to the remitting bank, which then sends them to the seller.
  1. Payment notes: If the buyer draws ( takes possession of ) the documents against acceptance of a Bill of Exchange , the collecting bank send the acceptance back to the remitting bank or retains it on fiduciary basis up to maturity.
  2. On maturity, the collecting bank collects the bill and transfers the proceeds to the remitting bank for crediting to the seller.
  3. Letter of credit (L/C): The LC is an undertaking given by the bank at the request of its customer in favor of a third party to the effect that it (the bank) will accept these bills up to the amount and subject to the terms outlined in the LC.
  4. When the bills are presented for payment strictly as per terms of the LC, the bank is subject to honor it.
  1. Sellers demand cash or the LC from the buyer’s make a guarantee for payment. The LC reinforces the buyer’s undertaking to pay.
  1. Documentary credit is a duly signed instrument, embodying an undertaking by a buyer’s bank to pay his seller a certain sum of money upon presentation of documents evidencing shipment of specified goods and subject to the stipulated terms and condition being comprised with.
  2. A documentary credit requires that drafts drawn there under must be :
  • accompanied by other documents as stipulated therein
  • giving title to the goods,
  • providing protection to loss or damage to the goods

and furnishing other information and particulars such as:

  • Bill of lading ,
  • Marine insurance policy,
  • Commercial invoice,
  • Customs invoice,
  • Certificate of origin,
  • Weight list,
  • Packing list,
  • Inspection certificate,
  • Certificate of analysis and/o
  • Other documents as stipulated
  1. Working of letter of credit
  • Step 1: Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment.
  • Step 2: Buyer applies to his bank for a letter of credit in favor of the seller.
  • Step 3: Buyer’s bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).
  • Step 4: Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).
  • Step 5: Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company.
  • Step 6: Seller presents the required documents to the advising or confirming bank to be processed for payment.
  • Step 7: The advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit.
  • Step 8: If the documents are correct, the advising or confirming bank will claim the funds by:

􀀹 Debiting the account of the issuing bank

􀀹 Waiting until the issuing bank remits, after receiving the documents

􀀹 Reimbursing on another bank as required in the credit

  • Step 9: The advising or confirming bank will forward the documents to the issuing bank.
  • Step 10: The issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer’s account.
  • Step 11: The issuing bank then forwards the documents to the buyer.
  1. Documentary collection Vs documentary credits: In a documentary collection, the seller prepares and presents documents to the bank in much the same way as for a documentary letter of credit.
  2. There are two major differences between a documentary collection and documentary credit:
  • The draft involved is not drawn by the seller (the drawer) upon a bank for payment, but rather on the buyer itself (the drawee) and
  • The seller’s bank has no obligation to pay upon presentation, but more simply, acts as a collecting or remitting bank on behalf of the seller, thus earning a commission for its service.
  1. Uniform Customs & Practice for Documentary Credits 600 (UCP 600): The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules on the issuance and use of letters of credit.
  2. The UCP is utilised by bankers and commercial parties in more than 175 countries in trade finance
  3. The ICC has developed and moulded the UCP by regular revisions, the current version being the UCP600
  1. The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCP600, formally commenced on 1 July 2007.
  2. ICC, which was established in 1919, had as its primary objective facilitated theflow of international trade at a time when nationalism and protectionism threatened the easing of world trade
  3. “Banks deal with documents, other parties deal with documents and/ or goods” This is the basic principle of UCP.
  4. Article 28 of UCP 600 deals with Insurance Documents and other factors pertaining thereto
  5. Insurance documents must appear on their face to be issued and signed by insurance companies or underwriters or their agents
  6. In India, underwriter is insurance company is the underwriter and generally agents are not allowed to sign marine insurance documents
  1. If the insurance document indicates that it has been issued in more than one original, all the originals must be presented unless otherwise authorised in the Credit
  2. Cover notes issued by brokers will not be accepted, unless specifically authorised in the Credit
  3. The currency of coverage should be the currency of L/C. As per insurance practice the insurance cover can be taken in any currency
  4. Banks will accept as such minimum amount of 110% of the amount for which payment, acceptance or negotiation is requested under the Credit, or 110% of the gross amount of the invoice, whichever is greater.
  5. LC stating “insurance for 110%” = minimum of insurance coverage. If LC is silent minimum insurance required to be taken is 110% of CIF value or if CIF can’t be properly ascertained from the documents, 110% of invoice value.
  6. the bankers also issue ‘Unpaid vendor certificate’, which is required for the settlement of the claim in case of exports on FOB,CFR,FCA or other similar terms and a claim is lodged under Sellers’ Interest Insurance Policy; certifying that the money has not been received in India by the buyer.
  7. In case of letter of export transaction (whether under LC or otherwise) when the bankers makes payment to the seller but are unable to recover the amount from buyer or their bankers and if goods are lost or damaged in transit, if the bakers are holding original insurance policy either assigned in blank or in their favor, bankers can recover claim directly from insurers as they would be having insurable interest.

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