TRADE FINANCE SERVICES TO SMEs IN LUDHIANA BY HSBC<br />Presented by:<br />NITIN KOCHHAR<br />MBA 2C<br />
INTRODUCTION TO HSBC<br /><ul><li> Headquartered in London
One of the world’s largest banking & financial services organization
8,000 offices in 88 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa
Serves over 100 million personal and almost three million commercial customers
Listed in London, New York, Hong Kong and Paris stock exchanges. </li></li></ul><li>HISTORICAL BACKGROUND<br /><ul><li>Bank owed its origins to the business communities of the China coast in the 1860s.
Thomas Sutherland is known to be the founder of the bank.
Started with an initial capital of HK$5 million.
Bank was founded in 1865 and opened for business in Hong Kong on 3rd March 1865.
MaliniThadani : Head of Group Communications & Corporate</li></ul> Sustainability<br /><ul><li>Maitri Kumar : Head of Marketing
DeveshMathur : Chief Technology & Services Officer</li></li></ul><li>AWARDS & RECOGNITION<br /><ul><li>In Feb 2010, ranked No.1 Bank in the world by Brand Finance Global Banking 500.
In 2010, won the Innovation in Recruitment – Employer Branding Award
In 2009, HSBC was the proud recipient of two awards at the first ever Dun & Bradstreet Bank Awards – for Best Asset Quality – Foreign Banks and Best SME Financing –Foreign Banks.
HSBC was adjudged as the Best Securities Services Provider in India by AsianInvestor in the AsianInvestor Service Provider Awards, 2009.
HSBC equity fund was ranked 5 star fund by Value Research Online in March 2009.
HSBC has been ranked second amongst the Financial Institutions and 22nd amongst all companies in an Outlook Business Hewitt Association Study.</li></li></ul><li>SWOT ANALYSIS<br /><ul><li> STRENGTHS : </li></ul> - Brand Name<br /> - Various Products & Services<br /> - Customer Relations<br /> - Located in the financial hub of Ludhiana<br /><ul><li> WEAKNESSES :</li></ul> - Only having one branch in the city<br /> - Suitable for business class customers only<br /> - More focus on investments & insurance<br /> - Centralisation<br />
Contd.<br /><ul><li> OPPORTUNITIES : </li></ul> - Untapped Market<br /> - Growing number of businesses in <br /> Ludhiana<br /><ul><li> THREATS : </li></ul> - Tough competition from both public sector & <br /> private sector banks<br /> - Unawareness among people<br /> - Restrictive norms of RBI<br />
SMALL & MEDIUM ENTERPRISES IN INDIA<br /><ul><li> Contribution 40% of Total Exports
Remarkable progress in various Industries like Manufacturing, Food processing, Pharmaceuticals, Textile & Garments, Retail, Agro, IT & Service sector.</li></li></ul><li>Contd.<br /><ul><li>MSMED Act 2006, which came into force w.e.f. 02/10/2006, defines the Micro, Small, and Medium Enterprises. The following chart indicates the threshold investment levels for both Manufacturing sector (INVESTMENT IN PLANT & MACHINERY) and Services sector (INVESTMENT IN EQUIPMENT)</li></li></ul><li>WHY FOCUS ON SMEs<br /><ul><li>High contribution to domestic production
Ineffective marketing and identification of new markets
Non availability of highly skilled labour at affordable cost </li></li></ul><li>TRADE FINANCE<br /><ul><li>Trade Finance is the science that describes the management of money, banking , credit, investments and assets for international trade transactions.
Different from commercial lending, mortgage lending or insurance.
Trade Finance enables credit worthy businesses to fund purchases from suppliers.</li></li></ul><li>RISKS<br /><ul><li>Country Risk </li></ul>Political and economic stability<br /> War and civil disturbance<br /> Import/export regulations<br /><ul><li>Importer Risk </li></ul>Non-payment of invoices<br /> Delayed payment of invoices<br /> Insolvency of buyers<br /><ul><li>Industry Risk </li></ul>Demand for particular products<br /> Recession in particular industry<br /> Competitive products/pricing<br /> Fashionable or seasonal goods<br />
Contd.<br /><ul><li>Foreign Exchange Risk </li></ul>Fluctuating exchange rates affect pricing and profit<br /><ul><li>Exporter Risk </li></ul>Problems in producing correct documentation<br /> Failure in supply goods in accordance with the sales contract<br /><ul><li>Transportation Risk </li></ul>Risks associated with the mode of transport, e.g. marine risks<br /> Storage facilities in ports<br /> Delayed shipment<br />
Documentary Collection</li></li></ul><li><ul><li>Open Account</li></ul>In open account method, the importer is trusted to<br /> pay the exporter after receipt of goods. The main <br /> drawback of open account method is that exporter <br /> assumes all the risks.<br /><ul><li>Advance Payment</li></ul>Payment is received in advance for the goods being <br /> dispatched by the exporter. This method of <br /> payment is least secure for the importer.<br />
DOCUMENTARY CREDITS<br /><ul><li> “An undertaking by an issuing bank, on behalf of an importer (the applicant), that payment will be made for goods and services supplied by an exporter (the beneficiary), provided that the exporter complies with all terms and conditions established by the credit”.
Stand by Letter of Credit</li></li></ul><li>DOCUMENTARY CREDITS (DC) ADVISING<br /><ul><li>The basic responsibility of an advising bank is to advise the credit received from its overseas branch after checking the apparent genuineness of the credit recognized by the issuing bank.
Functions of the Advising Bank (Governed by Article 7 of UCPDC 500)</li></ul>Authenticate the DC<br />Verifies DC is “workable”<br />Collects advising commission and despatches DC to the beneficiary<br />Evaluates DC for confirmation, if requested<br />
<ul><li>DC CONFIRMATION– When a bank, other than the Issuing Bank, adds its undertaking to pay under the DC is known as DC Confirmation. The political and transfer risks are mitigated from exporter’s viewpoint.
DC NEGOTIATION/DISCOUNTING– When the exporter requires funds before due date then he can discount or negotiate the LCs with the negotiating bank.
The first condition to discount an LC is that it should be a Usance LC.
The bank earns interest and charges, thus earns from LC discounting.</li></li></ul><li>
DOCUMENTARY COLLECTIONS<br />Payment Collection against Bills also known Documentary Collection.<br />Bank only acts as a medium for the transfer of documents but does not make any payment guarantee<br />Collection of documents is subjected to the Uniform Rules for Collections published by the International Chamber of Commerce (ICC)<br />
TYPES OF DOCUMENTARY COLLECTIONS<br />Documents against Payment (D/P)<br />Documents against acceptance (D/A)<br />
The Exporter allows credit to Importer, the period of credit is referred to as Usance
Under D/A terms the importer can inspect the documents and, if he is satisfied, accept the bill for payment on the due date, take the documents and clear the goods; the exporter loses control of them.</li></li></ul><li>
Buyer’s Credit<br /><ul><li>Buyers’ credit refers to loans for payment of imports into India.
The offshore branch credits the nostro of the bank in India and the Indian bank uses the funds and makes the payment to the exporter’s bank as an import bill payment on due date.
The importer reflects the buyers credit as a loan in the balance sheet.
All documents have to be routed through banking channels i.e. no direct dispatch of documents</li></li></ul><li>BENEFITS OF BUYER’S CREDIT TO THE IMPORTER<br /><ul><li>The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per cash flows.
The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
The importer can use this financing for any form of trade viz. Open account, collections or LCs.</li></li></ul><li>COST INVOLVED<br /><ul><li> Interest Cost: This is charged by funding bank as a financing cost (LIBOR Based).
Arrangement fees: This is charged by HSBC India for arranging the funds for the transaction.
Withholding Tax (WHT): The customer has to pay WHT on the interest amount. (The WHT is not applicable where HSBC India arranges for buyers credit from offshore offices of Indian Banks or Banks incorporated locally in Mauritius).</li></li></ul><li>AVALISATION<br /><ul><li>Avalisation is the co acceptance of usance export non LC bills by the importer’s bank
Drawee bank is not just giving an acceptance on behalf of the customer, but is co accepting the bills which mean even in the event of the importer not paying, the drawee bank will pay HSBC.
HSBC will discount up to 85-90% of the bill value upon receiving the confirmation from the drawee’s bank.</li></li></ul><li>FORFEITING<br /><ul><li> Forfeiting means to surrender ones right on something to someone else.
It refers to purchasing of an exporter’s receivables at a discount price by paying cash</li></ul>Process<br /><ul><li> Commercial contract between exporter & importer
Exporter approaches the forfeiter to ascertain the terms of forfeiting
Forfeiter estimates risk involved in it and then quotes the discount rate.
It gives the right but not the obligation, to buy or sell one currency against delivery of another at a specific rate on a specific date .
Premium based product</li></li></ul><li>TITLE – TRADE FINANCE SERVICES TO<br /> SMEs IN LUDHIANA BY HSBC<br />
Need of the study <br /><ul><li> Every business is not always aware about all the services being provided by its bank.
Clients do not operate their current accounts for a long time.
Competition among banks to attract more customers to increase their income. </li></li></ul><li>OBJECTIVES OF RESEARCH<br /><ul><li> To know the awareness level of SMEs regarding Trade Finance services.
To know the factors influencing the selection of a bank to avail Trade services.
To know the satisfaction level of SMEs from the services of HSBC.</li></li></ul><li>RESEARCH METHODOLOGY<br /><ul><li>Research methodology is a way to systematically solve the research problem. It may be understood as the science of studying how research is done scientifically.
RESEARCH DESIGN</li></ul>Exploratory Research Design<br />Descriptive Research Design<br />Causal Research Design<br />
SAMPLING PLAN<br /><ul><li>Population – All the SMEs in Ludhiana having current account with HSBC, is the population of the research project.
Sampling Unit – Any SME using the services of HSBC.
Sample size – 30 SMEs in Ludhiana having current account with HSBC
Title:- Number of SMEs availing Trade Services</li></li></ul><li><ul><li> Table No. 4a.1
Title:- Type of Trade Services availed by SMEs</li></li></ul><li><ul><li>Figure No. 4b
Title:- No. of SMEs having awareness about different Trade Services</li></li></ul><li><ul><li>Table No. 4a.2
Title:- No. of SMEs having awareness about foreign exchange services of HSBC </li></li></ul><li><ul><li> Table No. 4a.3
Title:- No. of SMEs having awareness about different foreign exchange services</li></li></ul><li><ul><li> Figure No. 4b.1
Title: - SMEs availing services of banks other than HSBC</li></li></ul><li><ul><li> Figure No. 4b.2
Title:- Factors considered before selecting a bank for availing Trade services</li></li></ul><li><ul><li> Figure No. 4b.4
Title:- Level of satisfaction of those SMEs having current account with HSBC</li></li></ul><li><ul><li> Table No. 4a.4
Title:- No. of SMEs likely to shift to other Bank</li></li></ul><li>Figure No. 4b.5<br />Title:- SMEs likely to join other banks<br />
RESULTS & FINDINGS<br /><ul><li>LCBD (Letter of Credit Bill Discounting) is the most preferred trade service i.e. availed by SME clients from HSBC.
SME clients are aware about Documentary Credits, Buyer’s Credit & Import payments while its other trade products like Forfeiting, Avalisation are not known to its SME clients.
Public Sector Banks State Bank of India, Punjab National Bank; and Private Sector Banks ICICI, HDFC are popular among SMEs who are also availing services from these banks along with HSBC.</li></li></ul><li>Contd.<br /><ul><li>The most important factor:</li></ul> “Fee & charges of a bank” followed by “Documentation Process” & T.A.T. (Turn Around Time) <br /><ul><li>Least important factor </li></ul>“Number of branches in the country” <br /> but when it comes to select HSBC, “Brand name” plays an important role followed by “References” & “Customer Relations”.<br /><ul><li>SME clients of HSBC are satisfied with the services of HSBC but still some of them want to shift to some other bank and those who want to shift will mostly prefer a Public Sector Bank but no foreign bank</li></li></ul><li>THANK YOU<br />