INCOTERMS 2020 | CAIIB NEW & LATEST BFM NOTES 2023 | PART 1

FREE REVISION NOTES ON INCOTERMS 2020 PART -1 | BANK FINANCIAL MANAGEMENT

In this post, we will read about the Incoterms 2020 which are an important part of the CAIIB 2023 Syllabus & to crack the exam.

Hey Bankers, I know you might be feeling a bit pressured over the new & revised Certified Associate of the Indian Institute of Bankers Syllabus made applicable for the 2023 Exams.

• What if I ask you to think this CAIIB is just a new Course introduced by IIBF just in 2023 & has the prescribed pattern & syllabus that you can see in the notification?
• What if this could actually be practically better & useful than goes above the Certification?

Well… I want you to consider that. 

And then do that.

Get familiar with the newly revised CAIIB June 2023 topics & see your perspective change from fear to driven spirit. 

See 2023 for what it is. A challenge that holds the trophy of 2 increments all at once. We have read from our childhood ‘Well begun is half done’. So, let us start 2023 with higher energy & spirit than ever before. And with this, let us begin one of the most important topics from the Latest BFM Syllabus 2023 as prescribed by IIBF.

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INCOTERMS 2020 | INTERNATIONAL BANKING 2023

The International Chamber of Commerce (ICC) published a set of 11 rules known as the Incoterms that outline the obligations of purchasers & sellers for the sale of products in cross-border transactions. Each Incoterms rule provides clarification of:

• the responsibilities, 
• expenses, and 
• risks that buyers and sellers must assume 

in these transactions is of utmost importance. Understanding Incoterms can help you do smoother transactions by specifying precisely who is in charge of what at each stage of the transaction.

From a trade finance standpoint, it is crucial to comprehend where risk transfer occurs to determine how much of the invoice may be financed through a service platform like Velotrade.

Trade finance service providers favour some Incoterms over others. In actuality, the longer the items stay in the seller’s possession, the more of the invoice the financial institution may pay. The Incoterms FOB and FCA are commonly preferred for invoice discounting and receivables finance. DAP and DDP are the Incoterms that are most frequently used in e-commerce finance.

The modified Incoterms 2020 guidelines are divided into 2 categories: 

• Seven of the 11 rules apply to ALL modes of transportation, while 
• Four are exclusive to SEA, LAND, or INLAND WATERWAY transportation.

The 7 Incoterms 2020 rules for any mode(s) of transport are: 

• EXW i.e.  Ex Works (place of delivery)

• FCA i.e.  Free Carrier (place of delivery) 

• CPT i.e.  Carriage Paid to (place of destination) 

• CIP i.e. Paid For Transport and Insurance (place of destination) 

• DAP i.e.  Delivered at Place (place of destination) 

• DPU i.e.  Unloaded at the Place of Delivery (place of destination) 

• DDP i.e.  Delivered Duty Paid (place of destination). 

The four Incoterms 2020 regulations for shipping on the ocean and inland waterways are as follows:

• FAS i.e.  Free Next to Ship (insert name of the port of loading) 

• FOB i.e.  Free on Board (port of loading) 

• CFR i.e.  Cost and Freight (port of destination) 
• CIF i.e.  Cost of shipping, insurance (port of destination) 

CHANGES IN INTERCOM FROM 2010 TO 2020

• It’s FCA that has seen the most dramatic modification (Free Carrier). The carrier can now be told by the buyer to give the seller a Bill of Lading with an onboard remark. In the past, a lot of exporters opted to set up payment under a Letter of Credit using FOB (Free on Board). However, FCA was more suited for shipping containerized products. 
• The obligation for insurance coverage is altered by the phrase CIP (Carriage and Insurance Paid). This Clause requires the seller to get a higher level of insurance. For manufactured items, the insurance might be worth up to 110 percent of the invoice value.
• The addition of DPU in place of DAT (Delivered at Terminal) is the other prominent change (Delivered at Place Unloaded). 
• Commodity shipments use the CIF (Cost Insurance & Freight) method while the necessary insurance remains unchanged.

INCOTERMS FOR ANY MODE OF TRANSPORT

1. EXW (Ex Works)

• The seller is in charge of making the products accessible on its property under the EXW term. 
• Another designated location, such as a factory, office, or warehouse, may also be agreed upon by the parties. 
• Ownership of the products passes to the buyer at this moment. 
• After the items are collected, the buyer takes care of all expenses and risks.
• EXW benefits the seller the most. Once the products have left the premises, he is under no responsibility to load them or to pay for the freight. 
• If items are intended for export, this word may provide difficulties for the buyer.

2. FCA (Free Carrier)

• With FCA, delivery of the products to the designated premises of the customer is the seller’s responsibility. 
• The seller must carry the stocks onto the buyer’s vehicle. 
• The vendor then arranges for transportation, taking into account security considerations and export clearance.
• Once the products are put into the buyer’s vehicle, the risk is considered to be passed.
• Therefore, the purchaser is liable for any damage to the goods while they are on board the vessel.
• The buyer is only responsible for paying the freight, bill of lading, and insurance costs while also covering the cost of transportation to the final location and unloading.

Change: The most major modification to a term under the Incoterms 2020 guidelines is FCA. 

Previously, the seller was prevented from obtaining a bill of lading with an onboard remark when they used a transport agent. But in accordance with the updated Incoterms 2020, FCA has fixed this issue. The buyer can now direct the carrier to provide the seller with a bill of lading that includes the onboard notation. 

3. CPT – Carriage Paid To

• By mandating that the seller pays for transportation to the buyer’s final destination, CPT has gone beyond FCA. 
• Now according to the buyer’s instructions, the seller prepares the items for export and delivers them to the carrier or the final destination.
• The risk has been shifted to the buyer at the point of shipping. 
• The price of the delivery of the products’ transportation is the seller’s responsibility. But the seller will not be responsible to charge of obtaining insurance.
• The parties shall instead take into account the Incoterm CIP if the buyer demands that the seller get insurance.

4. CIP – Carriage and Insurance Paid To

• CPT and CIP are comparable in many ways. 
• However, the buyer must cover both the cost of shipping and the insurance for the items while they are in transit in case of CIP.
• Here, the seller prepares (According to the buyer’s instructions) the items for export and delivers them to the carrier or the final destination. 
• The expense of transporting the goods to their intended location is covered by the vendor too.
• At the site of transportation, the risk is shifted over to the purchaser.

Change: One of the most important modifications made by Incoterms 2020 is the need that the seller gets a higher level of insurance under CIP. 

For containerized products, 110% of the contract value under Institute Cargo Clauses (A) of the Institute is the minimum acceptable amount of coverage. 

Previously, Institute Cargo Clauses only required the seller to pay a minimum level of insurance.

5. DPU – Delivered at Place Unloaded

• Previously, it was referred to as Delivered at Terminal (DAT). 
• The reason for the name change is that the buyer (or seller) could choose to indicate the delivery location as opposed to the terminal. 
• This phrase is frequently used to describe condensed containers with several consignees. 
• It is the sole clause that requires the seller to unload the merchandise.
• The buyer pays all transportation expenses (export fees and carriage). 
• The vendor is also responsible for paying port fees and offloading from the carrier at the destination port. 
• Up to his arrival at the port or terminal of his choice, he has to take all risks.
• After unloading, the buyer is liable for all expenses (including Taxes, import fees, and customs clearance) and risks. 
• Additionally, local transportation to the specified end location is paid for by the customer.
• The seller should think about shipping under DAP terms if he can’t arrange for unloading.

This is it for now. We will continue to understand the terms in the 2nd part of INTERCOM NOTES 2023 under New BFM Syllabus 2023.

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