INTRODUCTION: The foreign (international) trade has become inevitable for all countries in present era. But every country faces problems for international receipts and payments due to determination of exchange rate and procedure. It is the desire of every country’s trader that he should be paid in his own country’s currency. Thus, determination of exchange rate, conversion of the currency of one country into the currency of another country and adoption of proper procedure for payment is the main theme or subject matter of foreign exchange.
MEANING: The term foreign exchange has different meaning in banking. Normally, all the credit instruments used in foreign receipts and payments are considered as foreign exchange (e.g.) bank drafts and foreign bills of exchange etc. It is also meant for exchange rate, on the basis of which all these receipts and payments take place. In another sense, foreign exchange means foreign currency. So, ‘the term foreign exchange can be used in following three senses.
- Currency: It means currency of other countries.
- System: It is a system whereby international payments are made.
- Rate: It refers to that rate at which foreign currency is bought and sold.
- Foreign Exchange: A mechanism by which international indebtedness is settled between one country and another.
METHODS OF MAKING FOREIGN PAYMENTS
The money of one country is not legal tender in the other country. The monetary device, which has been developed for all international payments, is the foreign exchange. The authorised dealers in foreign exchange purchase foreign exchange from the exporters and others who have it for sale. The important dealers in the foreign exchange banks, brokers, acceptance houses, central bank and treasury authorities. The main devices, which have adopted for making international payments by these agencies are as follows:
- Letter of Credit
- Foreign Bills of Exchange
- Foreign Bank Draft
- Mail Transfer (M.T.)
- Telegraphic Transfer (T.T.)
- Traveler’s Cheque
- International Money Order (IMO)
- Dealer of Foreign Exchange
1. Letter of Credit: It is a document issued by the bank to an exporter authorizing him to draw drafts on the bank payable on demand on the specified terms and conditions. It is very useful instrument for the international trade.
2. Foreign Bills of Exchange: It is the most popular method of selling international indebtedness. The creditor draws the bill on the debtor in the home currency of its origin. The debtor makes payment either by honouring the bill drawn by the creditor or by purchasing and remitting a bill payable in the creditor’s country.
3. Foreign Bank Draft: Foreign remittance can also be made through bank draft. Bank draft is one of the usual processes of remitting fund from one place to another. A bank draws it on itself in order to transfer money. Usually, the bank draws the draft on its branch or agency in the country of payment. The draft is always payable on demand. The debtor deposits the amount with a bank that draws the draft on its foreign branch or agency where the money will be paid to the creditor. For this service the bank usually charges a commission.
4. Mail Transfer (M.T.): This refers to a transfer of fund to a foreign country by writing a letter through mail. Usually, a banker writes the letter to his branch office or agent or correspondent in the country where money will be payable. The debtor deposits the money in his home currency with a bank. The bank transfers the fund to the creditor through its branch or agency. To cover the risk of missing or misdelivery of the letter, the banker sometimes gives guarantee for the payment on Certain date. Such mail transfer is known as Guarantee Mail Transfer.
5. Telegraphic Transfer (T.T.): It means transfer of funds from one country go another by means of message through telegraph. Money is remitted through telegraphic transfer for quick payment.
6. Traveler’s Cheque: It is an order drawn by a bank upon itself to pay a specified sum of money on demand to the purchaser of cheque. The paying bank in foreign country, after comparing the signature of purchaser with specimen signature on the cheque makes the payment.
7. International Money Order (IMO): A means provided by the post offices, of transferring relatively small sum of money from one country to another.
8. Dealers of Foreign Exchange: In many countries there are foreign exchange dealers who purchase and sell the foreign exchange. They purchase foreign currency from the visitors of the other countries and pay them in the home currency for meeting their local money needs and sell the foreign currency notes to the persons visiting foreign countries.