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August 13, 2018

Use of a bill in international settlements

The bill, which performs the function of settlement and payment means, is widely used in international trade. In this case, in various types of international transactions, a bill may act as a security, settlement, payment and / or credit. Therefore, it is widely used both in commercial and banking practice.

Historically, the bill of exchange originated and became widespread in many countries. Bill as a settlement and payment instrument is actively used in commodity transactions. In this case, both simple and bills of exchange can act as a form of circulation.

With a simple bill, a foreign buyer issues a bill to the supplier.

The endorsement used to transfer bills offers its participants additional opportunities to simplify and accelerate payments and settlements. The use of promissory notes in international settlements, especially on commercial loans for goods delivered, creates a number of inconveniences. The seller must, before shipment of the goods, inform the foreign buyer of the exact amount of the bill, which is not always possible, and the buyer must write out the bill and send it to the seller for verification. The seller, having checked the bill, should send it back to the foreign buyer who only after that can sign it and dispose of it in the bank. Therefore, in commercial settlements, drafts are used.

Unlike solo bills, drafts are issued by the seller of the goods – the drawer and are his unconditional order to the drawee – the drawee, which is usually the accepting bank of a foreign buyer, to pay to the bearer of the drafts the amounts indicated in them at the specified time. Tratts, as well as solo bills, can serve as a means of calculation, i.e. transmitted to others through endorsements, the number of which is unlimited.

In accordance with this scheme, the exporter issues a bill. The importer pays it immediately with a discount (cash discount), while the exporter issues a bill for the full value of the goods. The importer accepts the bill and takes it into account in the bank, receiving a bill of exchange after deducting the discount in favor of the bank. When the bill expires, the importer pays the bill to the bank. Thus, the importer using a negotiable bill receives a loan from the bank and an interest discount from the price of the goods, and the exporter sells the goods with immediate payment. Other more complicated schemes of using bills in the course of implementing a foreign trade transaction are also possible.

The bill also carries a credit function.

For example, a chemical company buys a bill from a bank and calculates for electricity from a thermal power plant. The last on the approach of the bill of exchange presents a bill to the bank for redemption.

The bill specifies the amount that the borrower must return to the lender. Interest for the use of credit is often the borrower pays for the loan. Therefore, the amount received by the borrower and the amount indicated in the bill do not coincide. Such an operation is called discounting – the determination of the value of current value, provided that in the future, after charging interest on it, it will make a bill amount.

If the seller, having a bill in his hands, needs money immediately, he can invite any bank to buy back from him this bill, the payment date for which will come in the future in accordance with the dates indicated therein. The purchase by a bank or a specialized credit institution of bills of exchange before the expiry of the bill of exchange is called a discount of a bill. In this case, the bank makes a profit. Discount is the difference between the nominal value of a bill (that is, the bill amount) and the amount received by the billholder:

D = S – P,

where D – the size of the discount;

S – face value of the bill;

P is the amount received by the borrower.

In this case, there is a transfer of rights to receive funds by the bill holder-seller of goods to the bank. This operation is called forfeiting and allows the bill holder, thus, to turn the credit transaction into cash.

After invoicing the exporter, the importer pays an avalized bill. Having received from the importer a bill, the exporter transfers it to the forfeiter in exchange for a cash payment.

A bill is one of the main tools, using which you can actually reduce the volume of non-payments. Analyzing the functioning of the bill in the markets of different countries, it can be noted that the largest volumes of promissory notes issue occur during the so-called nonpayment crisis. This follows from the very essence of the bill.

The market of bills expands rather quickly, which there are many reasons that attract investors to these securities:

  • Profitability. The yield of bills is comparable to the yield of deposits. High profitability of financial bills, even in conditions of high inflation, allows us to regard this financial instrument as not only saving, saving capital from depreciation, but also accumulative, yielding income;
  • Reliability. Bills are highly reliable securities. Particular confidence is caused by promissory notes issued by equity syndicates secured by the assets of several banks that bear joint responsibility for their debts;
  • Liquidity. This investment advantage of the bill suggests several aspects. First, many banks in terms of promissory notes issue provide for the possibility of early repayment of the loan. In this case, either a full or partial loss of interest is possible, depending on the issuer’s policy. Secondly, in case of impossibility of early repayment, the bill, in the presence of the buyer, can be sold on the secondary market. Thirdly, the bill can be used as a means of payment for payments for goods and services.
  • Collateral value. The promissory notes are accepted as collateral for the loan not only in the issuing bank, but also in other banks. Many exchanges accept promissory notes as a contribution guaranteeing the execution of futures contracts. To use a bill as a pledge is very convenient, since it can be put in a safe for safekeeping for the whole bill of time. It cannot be laid in two places at the same time, and it is easy to trace all the way of the debt obligation from the owner to the owner by transferring the inscriptions.
  • Means of overcoming the crisis of non-payments. The versatility of a bill, the possibility of using it as a means and lending, and payment make it possible to unite the interests of both financiers and manufacturers.

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