Bank Payment Obligation!

Bank Payment Obligation!

BPO is a payment tool offering a level of security similar to that of a letter of credit. The BPO is an irrevocable undertaking on the part of an obligor bank (typically that of a buyer) to recipient bank (typically that of a seller) to pay a specified amount on agreed date on condition of a successful matching of electronic data according to rules adopted by the ICC. It combines some of the features of a Documentary Credit but with the intention to meet the needs of open account trade transactions. As a conditional payment mechanism, it may be issued to make immediate (sight) payments or deferred payments, based on the irrevocable undertaking of the obligor bank towards the recipient bank. The matching of trade data on an electronic matching platform triggers this irrevocable undertaking. The parties to the BPO are the buyer, obligor bank (buyer’s bank), seller (supplier) and recipient bank (seller’s bank).

worldbanks apps in google play storePost- shipment Finance under a BPO, the risk for the obligor bank is that the buyer does not make payment of the BPO amount at maturity. This risk is mitigated by buyer’s credit worthiness and the establishment of an appropriate credit facility. The risk for the recipient bank engaged in any financing under the BPO is the failure of the obligor bank to meet its obligations for whatever reason. The recipient bank needs to establish the necessary credit line for the obligor bank. The primary risk of pre-shipment finance on the basis of the established BPO baseline is the performance and credit risk of the seller, as repayment is dependent on the seller’s performance ability and its provision of trade data for a successful matching against the baseline. Mitigation of risk is provided by proven performance of the seller in a repeatable and predictable fashion. Other risks and their mitigation are analogous to those under post-shipment finance.

1 thoughts on “Bank Payment Obligation!”

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