The document discusses various instruments used in foreign trade, including letters of credit, bills of exchange, documentary collections, open accounts, export credit insurance, forfeiting, factoring, and methods of settlement between banks for foreign exchange transactions. It provides details on each instrument, describing their purpose and processes. It also discusses some challenges and limitations of foreign trade.

1. Instruments in foreign trade
IRFAN SHAIKH
HPGD/JA22/0245
SPECIALIZATION: FINANCE
PRIN. L. N. WELINGKAR INSTITUTE OF MANAGEMENT
DEVELOPMENT & RESEARCH
YEAR OF SUBMISSION: November, 2023

2. foreign trade finance:
 The project ‘FOREIGN TRADE FINANCE’ is a detailed study of the Import, Export, &
Foreign Exchange Market of India with the main objective of making a successful career in the
sector by getting placed with one of the Foreign Exchange companies.
 The project has explored the need for trade finance and introduced some of the most common
trade finance tools and practices. A proactive role of governments in trade finance may alleviate
the lack of trade finance in emerging economies and contribute to trade expansion and
facilitation.
Contd…

3. Foreign trade finance:
 While doing this project, different aspect of ECB, Buyers Credit, concept of LIBOR & Margins
in Interest Rate were studied. Trade financing in India is in nascent stage; in order to explore
foreign exchange market & smooth functioning of transactions, the government should undertake
some initiative to with-stand among the developed countries.
 Needless to say, no text paper or text book by itself can convey the full richness of either the
theoretical development or subtleness if practiced in its chosen fields. This Project is a sincere
attempt to provide a basic understanding of the complexities of foreign trade of world finance in
simple manner.

4. Letters of credit:
Letters of credit (LCs) are among the most secure instruments available to foreign
traders. An LC is a commitment by a bank on behalf of the buyer that payment will
be made to the exporter provided that the terms and conditions have been met, as
verified through the presentation of all required documents. The buyer pays its bank
to render this service. An LC is useful when reliable credit information about a
foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of
your buyer’s foreign bank. An LC also protects the buyer since no payment
obligation arises until the goods have been shipped or delivered as promised.

6. Bill of exchange
 It is an unconditional order in writing addressed by the drawer to the drawee requiring the
drawee to pay on demand a stated sum of money to the bearer / specified person or organization .
 IN INTERNATIONAL TRADE , the Normal practice is to send documents in Two Sets , as well
as Bill of Exchange
 TYPES OF BILL OF EXCHANGE
 CLEAN AND DOCUMENTARY BILLS: A Clean Bill is not accompanied by the relative
shipping documents , after the shipment the documents are send directly to the importer and the
bills are sent to the bank for collecting the Payment
 SIGHT & USANCE BILLS : A Sight Bill is payable “At Sight” OR Demand or on Presentation
& a bill which is required to be paid within the Period Specified .
 D/P & D/A BILLS: Bill Documents On Payment & Documents on Acceptance .

7. Documentary collections:
 A documentary collection is a transaction whereby the exporter entrusts the collection
of a payment to the remitting bank (exporter’s bank), which sends documents to a
collecting Bank (importer’s bank), along with instructions for payment. Funds are
received from the importer and remitted to the exporter through the banks involved in
the collection in exchange for those documents. Documentary collections involve the
use of a draft that requires the importer to pay the face amount either on sight
(document against payment—D/P) or on a specified date in the future (document
against acceptance—D/A). The draft lists instructions that specify the documents
required for the transfer of title to the goods. Although banks do act as facilitators for
their clients under collections, documentary collections offer no verification process
and limited recourse in the event of non-payment. Drafts are generally less expensive
than letters of credit.

9. Open account:
An open account transaction means that the goods are shipped and delivered before payment is due,
usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and
cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for
export markets, foreign buyers often press exporters for open account terms since the extension of credit
by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit
may face the possibility of the loss of the sale to their competitors. However, with the use of one or more
of the appropriate trade finance techniques, such as export credit insurance, the exporter can offer open
competitive account terms in the global market while substantially mitigating the risk of non-payment by
the foreign buyer.

10. Export credit insurance:
Export credit insurance provides protection against commercial losses—default,
insolvency, bankruptcy, and political losses—war, nationalization, currency
inconvertibility, etc. It allows exporters to increase sales by offering liberal open
account terms to new and existing customers. Insurance also provides security to
SVB in the event it considers providing working capital to finance exports. Forfeiting
(Medium-term Receivables Discounting) is a method of trade financing that allows
the exporter to sell its medium-term receivables (180 days to 7 years) to SVB at a
discount, in exchange for cash. With this method, the forfeiter assumes the risk of
non-payment, enabling the exporter to extend open account terms and incorporate the
discount into the selling price.

11. Forfeiting & factoring:
 Forfeiting and Factoring are services in foreign market given to an exporter or seller.
Its main objective is to provide smooth cash flow to the sellers. The basic difference
between the forfeiting and factoring is that forfeiting is a long term receivables (over
90 days up to 5 years) while factoring is short termed receivables (within 90 days)
and is more related to receivables against commodity sales.
 Definition of factoring is very simple and can be defined as the conversion of credit
sales into cash. Here, a financial institution which is usually a bank buys the accounts
receivable of a company usually a client and then pays up to 80% of the amount
immediately on agreement. The remaining amount is paid to the client when the
customer pays the debt. Examples includes factoring against goods purchased,
factoring against medical insurance, factoring for construction services etc.

12. Foreign trade exchange:
 The primary purpose of the foreign exchange is to assist foreign trade and investment,
by allowing businesses to convert one currency to another currency. For example, it
permits a US business to import British goods and pay Pound Sterling, even though the
business' income is in US dollars. It also supports direct speculation in the value of
currencies, and then carry trade, speculation on the change in interest rates in two
currencies.
 In a typical foreign exchange transaction, a party purchases a quantity of one currency
by paying a quantity of another currency. The modern foreign exchange market began
forming during the 1970s after three decades of government restrictions on foreign
exchange transactions (the Bretton Woods system of monetary management established
the rules for commercial and financial relations among the world's major industrial
states after World War II), when countries gradually switched to floating exchange
rates from the previous exchange rate regime, which remained fixed as per the Bretton
Woods system.

13. settlements of accounts:
Whenever, there is a foreign trade and inflow and outflow of foreign exchange, there must be
some mechanism for settlement of these transactions. The need for settlement leads to opening
of accounts by banks in other countries.
1. NOSTRO ACCOUNT: Nostro accounts are usually in the currency of the foreign country.
This allows for easy cash management because currency doesn't need to be converted. Nostro
is derived from the Latin term "ours."
2. VOSTRO ACCOUNT: It is the account in India in Indian rupees maintained by overseas
bank.
3. LORO ACCOUNT: This terminology is used when one bank refers to the NOSTRO account
of another bank. If IOB and SBI maintain Nostro account with ABN AMRO Frankfurt, IOB,
will refer to SBI account as LORO account “IT IS THEIR ACCOUNT WITH YOU”.
4. MIRROR ACCOUNT: As the very name suggests, it is the reflection of “NOSTRO
ACCOUNT”. The banks maintain the REPLICA of the NOSTRO account they have with the
foreign banks. There mirror accounts mainly helps in reconciliation of the account and is
maintained in both foreign currency and in Indian rupees.

14. problems of foreign trade:
 Primary Exporting
 Unfavourable terms of trade
 Mounting Developmental and Maintenance Imports
 Higher Import Intensity
 BOP Crisis
 Lack of Co-ordination
 Depleting Foreign Exchange Reserve and Import Cover
 Steep Depreciation
 Higher Prices of POL imports
 International Liquidity Problem

16. CASH-IN-ADVANCE:
With this payment method, the exporter can avoid credit risk, since payment is received
prior to the transfer of ownership of the goods. Wire transfers and credit cards are the
most commonly used cash-in-advance options available to exporters. However,
requiring Payment in advance is the least attractive option for the buyer, as this method
creates cash flow problems. Foreign buyers are also concerned that the goods may not
be sent if payment is made in advance. Thus, exporters that insist on this method of
payment as their sole method of doing business may find themselves losing out to
competitors who may be willing to offer more attractive payment terms.
CASH-IN-ADVANCE METHODS:
1. Wire transfer
2. Credit card
3. Payment by Cheque

17. PROCESS FLOW OF BUYERS CREDIT FOR
CAPITAL GOODS:
Buyers Credit can be used both for Raw Material and Capital Goods. Below gives
complete detailed information along with process and sample sanction letters.
Stages involved are as follows:
Stage 1: Bank's Term Loan Sanction
Stage 2: LC Issuance for import of Machinery
Stage 3: On due date of payment of LC convert it to Buyers Credit and rollover for 3 year
Stage 4: At end of 3 year convert to term loan

18. Limitations
Foreign trade does not always amount to blessings.
 1) Rapid Depletion of Exhaustible Natural Resources: It could lead to a more rapid depletion of
exhaustible natural resources.
 2) Import of Harmful Goods: Foreign trade may lead to import of harmful goods like cigarettes,
drugs, etc., which may harm the health of the residents of the country. For example, the people of
China suffered greatly through opium imports.
 3) It may Exhaust Resources: International trade leads to intensive cultivation of land. Thus, it has
the operations of law of diminishing returns in agricultural countries.
 4) Over Specialization: Over specialization may be disastrous for a country. A substitute may appear
and ruin the economic lives of millions.

19. metso operations:
 As time is progressing, an acute shortage of good quality iron ore seems to have surfaced. With
demand always growing higher & higher, it has become mandatory for iron ore production companies
to rely their plans around beneficiating the available grades of iron ore and convert them to a grade
suitable for further use. This calls for high precision and state of the art technology that can make low
grade iron ore suitable for use.
 JSW being a pioneer in converting low grade ore to high grade substantially trusts Metso technology
for the same.
 With world-class manufacturing facilities, Metso is geared to cater to the rapid growth in demand for
Metso’s products and services, not only in India but across Asia Pacific region. Metso Park in Alwar is
the single largest green field investment made by Metso anywhere in the world. The EUR 30 million
industrial centre will provide employment opportunities for about 700 people, creating industrial
excellence and is scheduled to be completed in three phases. The Park consists of multifunctional
premises, offices, engineering, logistics and training centres' including workshops.
 Metso has set up the first Metso DNA Engineering Centre in India for domestic and global projects.
The centre will be the third engineering centre after Helsinki and USA. It will serve as the engineering
hub for its global operations. Global customers will be managed out of this Indian engineering centre.

20. Thanking
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