International Trade Finance Summer Internship Project
Appendix: 1 INTERNATIONAL TRADE FINANCE Project submitted to H & G H Mansukhani Institute of Management in partial fulfillment of the requirements for Master in Management Studies By KAPIL P. ISRANI Roll No: 16 Specialization MMS (FINANCE) Batch: 2010 - 2012 Under the guidance of (Prof. ANJALI SAWLANI)
Appendix 2: INTERNATIONAL TRADE FINANCE Project submitted to H & G H Mansukhani Institute of Management in partial fulfillment of the requirements for Master in Management Studies By KAPIL P. ISRANI Roll No: 16 Specialization MMS (FINANCE) Batch: 2010 - 2012 Under the guidance of (Prof. ANJALI SAWLANI)
Appendix: 3 H & G H Mansukhani Institute of Management Ulhasnagar Student‘s DeclarationI hereby declare that this report submitted in partial fulfillment of the requirement of MMSDegreeof University of Mumbai to H & G H Mansukhani Institute of Management. This is my originalwork and is not submitted for award of any degree or diploma or for similar titles or prizes.Name : KAPIL P. ISRANIClass : MMS FINANCERoll No. : 16Place : UlhasnagarDate :Students Signature :
Appendix: 4 CertificateThis is to certify that the dissertation submitted in partial fulfillment for the award of MMS degreeof University of Mumbai to H & G H Mansukhani Institute of Management is a result of thebonafide research work carried out by Mr. KAPIL P. ISRANIunder my supervision andguidance, no part of this report has been submitted for award of any other degree, diploma or othersimilar titles or prizes. The work has also not been published in any journals/Magazines.DatePlace: UlhasnagarInternal Guide External Guide(Miss Anjali Sawlani) (Mr. K.V. Bandekar)DirectorDr. Swati Sabale
EXECUTIVE SUMMARYThe project ‗INTERNATIONAL 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 thesector 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 tradefinance tools and practices. A proactive role of governments in trade finance may alleviate the lackof trade finance in emerging economies and contribute to trade expansion and facilitation.Recent times have witnessed remarkable growth in international transactions. With the fast growinginternational oriented transactions in business enterprise. The different areas which play vital role ingrowth of Global Trade Finance market such as Methods of Payments of International Trade, Letterof credit, and concept of Forfeiting, Factoring, and Buyers Credit, Pre shipment & Post ShipmentFinancing and Role of ECGC in foreign exchange market.While doing this project, different aspect of ECB, Buyers Credit, concept of LIBOR & Margins inInterest Rate were studied. Trade financing in India is in nascent stage in order to explore foreignexchange market & smooth functioning of transactions the government should undertake someinitiative 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 thetheoretical development or subtleness if practice in its chosen fields. This Project is a sincereattempt to provide a basic understanding of the complexities of international trade of world financein simple manner.
INTRODUCTIONThe absence of an adequate trade finance infrastructure is, in effect, equivalent to a barrier to trade.Limited access to financing, high costs, and lack of insurance or guarantees are likely to hinder thetrade and export potential of an economy, and particularly that of small and medium sizedenterprises. As explained earlier, trade facilitation aims at reducing transaction cost and time bystreamlining trade procedures and processes. One of the most important challenges for tradersinvolved in a transaction is to secure financing so that the transaction may actually take place. Thefaster and easier the process of financing an international transaction, the more trade will befacilitated. Traders require working capital (i.e., short-term financing) to support their tradingactivities. Exporters will usually require financing to process or manufacture products for the exportmarket before receiving payment. Such financing is known as pre-shipping finance. Conversely,importers will need a line of credit to buy goods overseas and sell them in the domestic marketbefore paying for imports. In most cases, foreign buyers expect to pay only when goods arrive, orlater still if possible, but certainly not in advance. They prefer an open account, or at least a delayedpayment arrangement. Being able to offer attractive payments term to buyers is often crucial ingetting a contract and requires access to financing for exporters. Therefore, governments whoseeconomic growth strategy involves trade development should provide assistance and support interms of export financing and development of an efficient financial infrastructure. There are manytypes of financial tools and packages designed to facilitate the financing of trade transactions. Thisintroduces three types, namely:o Trade Financing Instruments;o Export Credit Insurances; ando Export Credit GuaranteesThe primary purpose of the foreign exchange is to assist international trade and investment, byallowing businesses to convert one currency to another currency. For example, it permits a USbusiness to import British goods and pay Pound Sterling, even though the business income is in USdollars. It also supports direct speculation in the value of currencies, and the carry trade, speculationon the change in interest rates in two currencies.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying aquantity of another currency. The modern foreign exchange market began forming during the 1970safter three decades of government restrictions on foreign exchange transactions (the Bretton Woodssystem of monetary management established the rules for commercial and financial relations amongthe worlds major industrial states after World War II), when countries gradually switchedto floating exchange rates from the previous exchange rate regime, which remained fixed as perthe Bretton Woods system.FEMA ACT 1999 Defines Foreign Exchange as ―Foreign Exchange means & includes: a) All deposits, credits and balances payable in foreign currency, and any drafts, traveler‘s Cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency and payable in any foreign currency. b) Any instrument payable at the option of the drawee or holder, thereof or any other party thereto, either in Indian currency or in foreign currency, or partly in one and partly in the other‖. DEALING IN FOREIGN EXCHANGEIn India dealing in foreign exchange is permitted only with the approval of RBI. RBI is theauthority to administer exchange control in India. It also has the responsibility to maintain theexternal value of rupee.AD is person authorised by RBI in the form of a license to deal in foreignexchange. In addition to above category to buy & sell foreign currency / coins and FTC calledmoney changers like hotels and business establishments.
Sr. No. SOURCES / INFLOW USES / OUTFLOW1 INWARD REMITTANCE OUTWARD DD/MT/TT/CREDIT REMITTANCE CARD DD/MT/TT/CREDIT CARD2 REMITTANCE TO OUTWARD NRE/FCNR(B)/NRO REMITTANCE ACCOUNTS3 EXPORT RECEIVABLES IMPORT PAYMENTS4 BORROWINGS BY LOAN REPAYMENT, COMPANIES, AID & LOAN SERVICING LOANS5 TOURIST INCOME TOUR, TRAVEL RELATED PAYMENTS, EXPORT RELATED PAYMENTS LIKE COMMISSION etc.
SETTLEMENTS OF ACCOUNTSWhenever, there is an international trade and inflow and outflow of foreign exchange, theremust be some mechanism for settlement of these transactions. The need for settlement leads toopening of accounts by banks in other countries.1. NOSTRO ACCOUNT Banks in India are permitted to open foreign currency accounts with bank abroad. IOB having an account with American Express Bank – New York is a Nostro Account. It is ―OUR ACCOUNT WITH YOU‖. When an Indian bank issue a foreign currency draft, payable abroad on a correspondent bank, the Nostro Account of the Indian bank is debited and the amount paid to the beneficiary. In the same way when the bill or Cheques is received for collection the proceeds will be credit to the Nostro Account Only. Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesnt need to be converted. Nostro is derived from the latin term "ours."2. VOSTRO ACCOUNTIt is the account in India in Indian rupees maintained by overseas bank. It Citi Bank, New Yorkopens an account with IOB in India it is a Vostro Account. It is ―YOUR ACCOUNT WITHUS‖. Any draft, TC, issued by overseas correspondent in Indian rupees is paid in India, to thedebt of vostro account.The account a correspondent bank, usually U.S. or UK, holds on behalf of a foreign bank. Also known as a loroaccount.
3. LORO ACCOUNT This terminology is used when one bank refeers 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. METHODS OF PAYMENT IN INTERNATIONAL TRADETo succeed in today‘s global marketplace, exporters must offer their customers attractive salesterms supported by the appropriate payment method to win sales against foreign competitors. Asgetting paid in full and on time is the primary goal for each export sale, an appropriate paymentmethod must be chosen carefully to minimize the payment risk while also accommodating the needsof the buyer. As shown below, there are four primary methods of payment for internationaltransactions. During or before contract negotiations, it is advisable to consider which method in thediagram below is mutually desirable for you and your customer.Ninety-five percent of the world‘s consumers live outside of the United States, so if you are onlyselling domestically, you are reaching just a small share of potential customers. Exporting enablessmall and medium-sized exporters (SMEs) to diversify their portfolios and insulates them againstperiods of slower growth. Free trade agreements have opened in markets such as Australia, Canada,Central America, Chile, Israel, Jordan, Mexico, and Singapore, creating more opportunities for U.S.businesses.
DETERMINANTS OF INTERNATIONAL PAYMENTo TRADE FINANCE Offers a means to convert export opportunities into sales by managing the risks associated with doing business internationally, particularly the challenges of getting paid on a timely basis.O OPPORTUNITIES a) Helps companies reach the 95 percent of non-U.S. customers worldwide b) Diversifies SME customer portfoliosO RISKS a) Nonpayment or delayed payment by foreign buyers b) Political and commercial risks; cultural influences
KEY POINTSo International trade presents a spectrum of risk, causing uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer)o To exporters, any sale is a gift until payment is receivedo Therefore, the exporter wants payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importero To importers, any payment is a donation until the goods are receivedo Therefore, the importer wants to receive the goods as soon as possible, but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to make payment to the exporter. CASH-IN-ADVANCEWith this payment method, the exporter can avoid credit risk, since payment is received prior to thetransfer of ownership of the goods. Wire transfers and credit cards are the most commonly usedcash-in-advance options available to exporters. However, requiringPayment in advance is the least attractive option for the buyer, as this method creates cash flowproblems. Foreign buyers are also concerned that the goods may not be sent if payment is made inadvance. Thus, exporters that insist on this method of payment as their sole method of doingbusiness may find themselves losing out to competitors who may be willing to offer more attractivepayment terms.
CHARACTERISTICS OF A CASH -IN -ADVANCE PAYMENT METHOD1. APPLICABILITY Recommended for use in high-risk trade relationships or export markets, and ideal for Internet- based businesses.2. RISK Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the importer.3. PROS a) Payment before shipment b) Eliminates risk of nonpayment4. CONS a) May lose customers to competitors over payment terms b) No additional earnings through financing operations KEY POINTS o Full or significant partial payment is required, usually via credit card or bank/wire transfer, prior to the transfer of ownership of the goods. o Cash-in-advance, especially a wire transfer, is the most secure and favorable method of international trading for exporters and consequently, the least secure and attractive option for importers. However, both the credit risk and the competitive landscape must be considered. o Insisting on these terms ultimately could cause exporters to lose customers to competitors who are willing offer more favorable payment terms to foreign buyers in the global market.
o Creditworthy foreign buyers, who prefer greater security and better cash utilization, may find cash-in-advance terms unacceptable and may simply walk away from the deal. WIRE TRANSFER - CASH-IN-ADVANCE METHODAn international wire transfer is commonly used and has the advantage of being almost immediate.Exporters should provide clear routing instructions to the importer when using this method,including the name and address of Silicon Valley Bank (SVB), the bank‘s SWIFT address, andABA numbers, and the seller‘s name and address, bank account title, and account number. Thisoption is more costly to the importer than other options of cash-in-advance method, as the fee for aninternational wire transfer is usually paid by the sender. CREDIT CARD—A VIABLE CASH-IN-ADVANCE METHODExporters who sell directly to the importer may select credit cards as a viable method of cash-in-advance payment, especially for consumer goods or small transactions. Exporters should check withtheir credit card company(s) for specific rules on international use of credit cards as the rulesgoverning international credit card transactions differs from those for domestic use. As internationalcredit card transactions are typically placed via online, telephone, or fax methods that facilitatefraudulent transactions, proper precautions should be taken to determine the validity of transactionsbefore the goods are shipped. Although exporters must endure the fees charged by credit cardcompanies, this option may help the business grow because of its convenience.
PAYMENT BY CHECK—A LESS-ATTRACTIVE CASH-IN-ADVANCE METHODAdvance payment using an international check may result in a lengthy collection delay of severalweeks to months. Therefore, this method may defeat the original intention of receiving paymentbefore shipment. If the check is in U.S. dollars or drawn on a U.S. bank, the collection process is thesame as any U.S. check. However, funds deposited by non-local check may not become availablefor withdrawal for up to 11 business days due to Regulation CC of the Federal Reserve. In addition,if the check is in a foreign currency or drawn on a foreign bank, the collection process is likely tobecome more complicated and can significantly delay the availability of funds. Moreover, there isalways a risk that a check may be returned due to insufficient funds in the buyer‘s account. WHEN TO USE CASH-IN-ADVANCE TERMS o The importer is a new customer and/or has a less-established operating history o The importer‘s creditworthiness is doubtful, unsatisfactory, or unverifiable o The political and commercial risks of the importer‘s home country are very high o The exporter‘s product is unique, not available elsewhere, or in heavy demand o The exporter operates an Internet-based business where the use of convenient payment methods is a must to remain competitive
LETTERS OF CREDITLetters of credit (LCs) are among the most secure instruments available to international traders. AnLC is a commitment by a bank on behalf of the buyer that payment will be made to the exporterprovided that the terms and conditions have been met, as verified through the presentation of allrequired documents. The buyer pays its bank to render this service. An LC is useful when reliablecredit information about a foreign buyer is difficult to obtain, but you are satisfied with thecreditworthiness of your buyer‘s foreign bank. An LC also protects the buyer since no paymentobligation arises until the goods have been shipped or delivered as promised. CHARACTERISTICS OF A LETTER OF CREDIT 1. APPLICABILITY Recommended for use in new or less-established trade relationships when you are satisfied with the creditworthiness of the buyer‘s bank. 2. RISK Risk is evenly spread between seller and buyer provided all terms and conditions are adhered to. 3. PROS a) Payment after shipment b) A variety of payment, financing and risk mitigation options 4. CONS a) Requires detailed, precise documentation b) Relatively expensive in terms of transaction costs
KEY POINTSo An LC, also referred to as a documentary credit, is a contractual agreement whereby a bank in the buyer‘s country, known as the issuing bank, acting on behalf of its customer (the buyer or importer), authorizes a bank in the seller‘s country, known as the advising bank, to make payment to the beneficiary (the seller or exporter) against the receipt of stipulated documents.o The LC is a separate contract from the sales contract on which it is based and, therefore, the bank is not concerned whether each party fulfills the terms of the sales contract.o The bank‘s obligation to pay is solely conditional upon the seller‘s compliance with the terms and conditions of the LC. In LC transactions, banks deal in documents only, not goods.ILLUSTRATIVE LETTER OF CREDIT TRANSACTION1. The importer arranges for the issuing bank to open an LC in favor of the exporter2. The issuing bank transmits the LC to the advising bank, which forwards it to the exporter.3. The exporter forwards the goods and documents to a freight forwarder.4. The freight forwarder dispatches the goods and submits documents to the advising bank.5. The advising bank checks documents for compliance with the LC and pays the exporter.6. The importer‘s account at the issuing bank is debited.7. The issuing bank releases documents to the importer to claim the goods from the carrier.
IRREVOCABLE LETTER OF CREDITLCs can be issued as revocable or irrevocable. Most LCs is irrevocable, which means they may notbe changed or cancelled unless both the buyer and seller agree. If the LC does not mention whetherit is revocable or irrevocable, it automatically defaults to irrevocable. Revocable LCs is occasionallyused between parent companies and their subsidiaries conducting business across borders. CONFIRMED LETTER OF CREDITA greater degree of protection is afforded to the exporter when a LC issued by a foreign bank (theimporter‘s issuing bank) and is confirmed by Silicon Valley Bank (the exporter‘s advising bank).This confirmation means that Silicon Valley Bank adds its guarantee to pay the exporter to that ofthe foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the foreignbank and the political risk of the importing country. Exporters should consider confirming LCs ifthey are concerned about the credit standing of the foreign bank or when they are operating in ahigh-risk market, where political upheaval, economic collapse, devaluation or exchange controlscould put the payment at risk. SPECIAL LETTERS OF CREDITLCs can take many forms. When an LC is issued as transferable, the payment obligation under theoriginal LC can be transferred to one or more ―second beneficiaries.‖ With a revolving LC, theissuing bank restores the credit to its original amount once it has been drawn down. Standby LCscan be used in lieu of security or cash deposits as a secondary payment mechanism.
DOCUMENTARY COLLECTIONSA documentary collection is a transaction whereby the exporter entrusts the collection ofa payment to the remitting bank (exporter‘s bank), which sends documents to a collectingBank (importer‘s bank), along with instructions for payment. Funds are received from the importerand remitted to the exporter through the banks involved in the collection in exchange for thosedocuments. Documentary collections involve the use of a draft that requires the importer to pay theface 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 documentsrequired for the transfer of title to the goods. Although banks do act as facilitators for their clientsunder collections, documentary collections offer no verification process and limited recourse in theevent of nonpayment. Drafts are generally less expensive than letters of credit. Open Account anopen 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 cashflow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intensecompetition for export markets, foreign buyers often press exporters for open account terms sincethe extension of credit by the seller to the buyer ismore common abroad. Therefore, exporters who are reluctant to extend credit may face thepossibility of the loss of the sale to their competitors. However, with the use of one or more of theappropriate trade finance techniques, such as export credit insurance, the exporter can offer opencompetitive account terms in the global market while substantially mitigating the risk ofnonpayment by the foreign buyer.
CHARACTERISTICS OF A DOCUMENTARY COLLECTION1. APPLICABILITY Recommended for use in established trade relationships and in stable export markets.2. RISK Exporter is exposed to more risk as D/C terms are more convenient and cheaper than an LC to the importer.3. PROS a) Bank assistance in obtaining payment b) The process is simple, fast, and less costly than LCs c) DSO improved if using a draft with payment at a future date4. CONS a) Banks‘ role is limited and they do not guarantee payment b) Banks do not verify the accuracy of the documentsKEY POINTSo D/Cs is less complicated and more economical than LCs.o Under a D/C transaction, the importer is not obligated to pay for goods prior to shipment.o The exporter retains title to the goods until the importer either pays the face amount on sight or accepts the draft to incur a legal obligation to pay at a specified later date.o SVB plays an essential role in transactions utilizing D/Cs as the remitting bank (exporter‘s bank) and in working with the collecting bank (importer‘s bank).
o While the banks control the flow of documents, they do not verify the documents nor take any risks, but can influence the mutually satisfactory settlement of a D/C transaction. DOCUMENTS AGAINST PAYMENT (D/P) COLLECTIONA greater degree of protection is afforded to the exporter when an LC is issued by a foreign bank(the importer‘s issuing bank) and is confirmed by Silicon Valley Bank (the exporter‘s advisingbank). This confirmation means that Silicon Valley Bank adds its guarantee to pay the exporter tothat of the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of theforeign bank and the political risk of the importing country. Exporters should consider confirmingLCs if they are concerned about the credit standing of the foreign bank or when they are operatingin a high-risk market, where political upheaval, economic collapse, devaluation or exchangecontrols could put the payment at risk. 1. Time of Payment : After shipment, but before documents are released 2. Transfer of Goods : After payment is made on sight 3. Exporter Risk : If draft is unpaid, goods may need to be disposed DOCUMENTS AGAINST ACCEPTANCE (D/A) COLLECTIONUnder a D/A collection, the exporter extends credit to the importer by using a time draft. In thiscase, the documents are released to the importer to receive the goods upon acceptance of the timedraft. By accepting the draft, the importer becomes legally obligated to pay at a future date. Atmaturity, the collecting bank contacts the importer for payment. Upon receipt of payment, thecollecting bank transmits the funds to SVB for payment to the exporter. 1. Time of Payment : On maturity of draft at a specified future date 2. Transfer of Goods : Before payment, but upon acceptance of draft 3. Exporter Risk : Has no control of goods and may not get paid at due date
OPEN ACCOUNTAn 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 cashflow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intensecompetition for export markets, foreign buyers often press exporters for open account terms sincethe extension of credit by the seller to the buyer is more common abroad. Therefore, exporters whoare 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 exportcredit insurance, the exporter can offer open competitive account terms in the global market whilesubstantially mitigating the risk of nonpayment by the foreign buyer. CHARACTERISTICS OF AN OPEN ACCOUNT1. APPLICABILITY Recommended for use (1) In secure trading relationships or markets or (2) In competitive markets to win customers with the use of one or more appropriate trade finance techniques.2. RISK Exporter faces significant risk as the buyer could default on payment obligation after shipment of the goods.3. PROS o Boost competitiveness in the global market o Establish and maintain a successful trade relationship4. CONS o Exposed significantly to the risk of nonpayment o Additional costs associated with risk mitigation measures
KEY POINTS o The goods, along with all the necessary documents, are shipped directly to the importer who agrees to pay the exporter‘s invoice at a future date, usually in 30 to 90 days. o Exporter should be absolutely confident that the importer will accept shipment and pay at agreed time and that the importing country is commercially and politically secure. o Open account terms may help win customers in competitive markets, if used with one or more of the appropriate trade finance techniques that mitigate the risk of nonpayment. EXPORT CREDIT INSURANCEExport credit insurance provides protection against commercial losses—default, insolvency,bankruptcy, and political losses—war, nationalization, currency inconvertibility, etc. It allowsexporters 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 tofinance exports. Forfeiting (Medium-term Receivables Discounting) Forfeiting is a method of tradefinancing that allows the exporter to sell its medium-term receivables (180 days to 7 years) to SVBat 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 sellingprice.
CHARACTERISTICS OF EXPORT CREDIT INSURANCE1. APPLICABILITY Recommended for use in conjunction with open account terms and export working capital financing.2. RISK Exporters share the risk of the uncovered portion of the loss and their claims may be denied in case of non-compliance with requirements specified in the policy.3. PROS o Reduce the risk of nonpayment by foreign buyers o Offer open account terms safely in the global market4. CONS o Cost of obtaining and maintaining an insurance policy o Deductible—coverage is usually below 100 percent incurring additional costs KEY POINTS o ECI allows you to offer competitive open account terms to foreign buyers while minimizing the risk of nonpayment. o Creditworthy buyers could default on payment due to circumstances beyond their control. o With reduced nonpayment risk, you can increase your export sales, establish market share in emerging and developing countries, and compete more vigorously in the global market. o With insured foreign account receivables, banks are more willing to increase your borrowing capacity and offer attractive financing terms.
COVERAGEShort-term ECI, which provides 90 to 95 percent coverage against buyer payment defaults, typicallycovers(1) Consumer goods, materials, and services up to 180 days, and(2) Small capital goods, consumer durables and bulk commodities up to 360 days. Medium-termECI, which provides 85 percent coverage of the net contract value, usually covers large capitalequipment up to five years. PRICINGPremiums are individually determined on the basis of risk factors such as country, buyer‘screditworthiness, sales volume, seller‘s previous export experience, etc. Most multi-buyer policiescost less than 1 percent of insured sales while the prices of single-buyer policies vary widely due topresumed higher risk. However, the cost in most cases is significantly less than the fees charged forletters of credit. ECI, which is often incorporated into the selling price, should be a proactivepurchase, in that you have coverage in place before a customer becomes a problem. FEATURES OF EX-IM BANK’S EXPORT CREDIT INSURANCE o Offers coverage in emerging foreign markets where private insurers may not operate. o Exporters electing an Ex-Im Bank Working Capital Guarantee may receive a 25 percent premium discount on Multi-buyer Insurance Policies. o Offers enhanced support for environmentally beneficial exports. o The products must be shipped from the United States and have at least 50 percent U.S. content. o Unable to support military products or purchases made by foreign military entities. o Support for exports may be closed or restricted in certain countries per U.S. foreign policy.
GOVERNMENT ASSISTED FOREIGN BUYER FINANCINGThe role of government in trade financing is crucial in emerging economies. In the presence ofunderdeveloped financial and money markets, traders have restricted access to financing.Governments can either play a direct role like direct provision of trade finance or credit guarantees;or indirectly by facilitating the formation of trade financing enterprises. Governments could alsoextend assistance in seeking cheaper credit by offering or supporting the following: o Central Bank refinancing schemes; o Specialized financing institutes like o Export-Import Banks or Factoring Houses; o Export credit insurance agencies; o Assistance from the Trade Promotion Organisation; and o Collaboration with Enterprise Development o Corporations (EDC) or State Trading o Enterprises (STE). CHARACTERISTICS OF GOVERNMENT ASSISTED FOREIGN BUYER FINANCING 1. APPLICABILITY Suitable for the export of high-value capital goods that require extended-term financing. 2. RISK Ex-Im Bank assumes all risks. 3. PROS o Buyer financing as part of an attractive sales package o Cash payment upon shipment of the goods or services
4. CONS o Subject to certain restrictions per U.S. foreign policy o Possible lengthy process of approving financing KEY POINTS o Helps turn business opportunities, especially in emerging markets, into real transactions for large U.S. exporters and their small business suppliers. o Enables creditworthy foreign buyers to obtain loans needed for purchases of U.S. goods and services, especially high-value capital goods or services. o Provides fixed-rate direct loans or guarantees for term financing o Available for medium-term (up to five years) and for certain environmental exports up to 15 years. KEY FEATURES OF EX-IM BANK LOAN GUARANTEES I. Loans are made by SVB and guaranteed by Ex-Im Bank.II. 100 percent principal and interest cover for 85 percent of U.S. contract price.
INTRODUCTION OF FORFEITINGForfeiting and Factoring are services in international market given to an exporter or seller. Its mainobjective is to provide smooth cash flow to the sellers. The basic difference between the forfeitingand factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) whilefactoring is short termed receivables (within 90 days) and is more related to receivables againstcommodity sales. DEFINITION OF FORFEITINGThe terms forfeiting is originated from a old french word ‗forfait‘, which means to surrender onesright on something to someone else. In international trade, forfeiting may be defined as thepurchasing of an exporter‘s receivables at a discount price by paying cash. By buying thesereceivables, the forfeiter frees the exporter from credit and the risk of not receiving the paymentfrom the Importer. HOW FORFEITING WORKS IN INTERNATIONAL TRADEThe exporter and importer negotiate according to the proposed export sales contract. Then theexporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the detailsabout the importer, and other necessary documents, forfeiter estimates risk involved in it and thenquotes the discount rate.The exporter then quotes a contract price to the overseas buyer by loading the discount rate andcommitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter.Export takes place against documents guaranteed by the importer‘s bank and discounts the bill withthe forfeiter and presents the same to the importer for payment on due date.
COST ELEMENTThe forfeiting typically involves the following cost elements:1. Commitment fee, payable by the exporter to the forfeiter ‗for latter‘s‘ commitment to execute aspecific forfeiting transaction at a firm discount rate within a specified time.2. Discount fee, interest payable by the exporter for the entire period of credit involved anddeducted by the forfeiter from the amount paid to the exporter against the availed promissory notesor bills of exchange. SIX PARTIES IN FORFEITING1. Exporter (India)2. Importer (Abroad)3. Export‘s Bank (India)4. Import‘s Bank / Avalising Banks (Abroad)5. EXIM Bank (India)6. Forfaiter (Abroad) BENEFITS TO EXPORTER i. 100 per cent financing Without recourse and not occupying exporters credit line that is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt.ii. Improved cash flow Receivables become current cash inflow and its is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability.
iii. Reduced administration cost By using forfeiting, the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly.iv. Advance tax refund Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing. v. Risk reduction Forfeiting business enables the exporter to transfer various risk resulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank.vi. Increased trade opportunity With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more competitive in the market. BENEFITS TO BANKS Banks can offer a novel product range to clients, which enable the client to gain 100% finance, as against 8085% in case of other discounting products. Bank gain fee based income. Lower credit administration and credit follow up. DRAWBACKS OF FORFEITING i. Non Availability of short periods ii. Non availability for financially weak countries iii. Dominance of western countries iv. Difficulty in procuring international bank‘s guarantee
DEFINITION OF FACTORINGThis involves the sale at a discount of accounts receivable or other debt assets on a daily, weekly ormonthly basis in exchange for immediate cash. The debt assets are sold by the exporter at a discountto a factoring house, which will assume all commercial and political risks of the account receivable.In the absence of private sector players, governments can facilitate the establishment of a state-owned factor; or a joint venture set-up with several banks and trading enterprises.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 companyusually a client and then pays up to 80% of the amount immediately on agreement. The remainingamount is paid to the client when the customer pays the debt. Examples includes factoring againstgoods purchased, factoring against medical insurance, factoring for construction services etc. CHARACTERISTICS OF FACTORING1. The normal period of factoring is 90 to 150 days and rarely exceeds more than 150 days.2. It is costly.3. Factoring is not possible in case of bad debts.4. Credit rating is not mandatory.5. It is a method of off balance sheet financing.6. Cost of factoring is always equal to finance cost plus operating cost.
DIFFERENT TYPES OF FACTORING1. Disclosed factoringIn disclosed factoring, client‘s customers are aware of the factoring agreement.Disclosed factoring is of two types:Recourse factoringThe client collects the money from the customer but in case customer don‘t pay the amount onmaturity then the client is responsible to pay the amount to the factor. It is offered at a low rate ofinterest and is in very common use.Nonrecourse factoringIn nonrecourse factoring, factor undertakes to collect the debts from the customer. Balance amountis paid to client at the end of the credit period or when the customer pays the factor whichevercomes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate theneed for credit and collection departments in the organization.2. UndisclosedIn undisclosed factoring, clients customers are not notified of the factoring arrangement. In thiscase, client has to pay the amount to the factor irrespective of whether customer has paid or not.
FACTORING V/S FORFEITINGHeading Factoring ForfeitingPoint A Suitable for ongoing open account sales, Oriented towards single transactions backed not backed by LC or accepted bills or by LC or bank guarantee. exchange.Point B Usually provides financing for short- Financing is usually for medium to long- term credit period of up to 180 days. term credit periods from 180 days up to 7 years though shorterm credit of 30–180 days is also available for large transactions.Point C Requires continuous arrangements Seller need not route or commit other between factor and client, whereby all business to the forfeiter. Deals are concluded sales are routed through the factor. transaction-wise.Point D Factor assumes responsibility for Forfeiter‘s responsibility extends to collection, helps client to reduce his own collection of forfeited debt only. Existing overheads. financing lines remains unaffected.Point E Separate charges are applied for Single discount charges is applied which — financing depend on — collection — guaranteeing bank and country risk, — administration — credit period involved and — credit protection and — Currency of debt. — provision of information. Only additional charges are commitment fee, if firm commitment is required prior to draw down during delivery period.Point F Service is available for domestic and Usually available for export receivables only export receivables. denominated in any freely convertible
currency.Point G Financing can be with or without It is always ‗without recourse‘ and recourse; the credit protection collection essentially a financing product. and administration services may also be provided without financing.
BUYERS CREDITA financial arrangement whereby a financial institution in the exporting country extends a loandirectly or indirectly to a foreign buyer to finance the purchase of goods and services from theexporting country. This arrangement enables the buyer to make payments due to the supplier underthe contract.A loan or credit line that a bank or other institution provides a company to buy goods needed toconduct its business operations. For example, a bank may extend buyer credit for a company tobuy inventory, which it then sells to customers. The term is sometimes used with regard tointernational commerce.Buyers credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks andFinancial Institutions for payment of his Imports on due date. The overseas Banks usually lend theImporter (Buyer) based on the Letter of comfort (a Bank Guarantee) issued by the Importers(Buyers) Bank. Importers Bank / Buyers Credit Consultant / Importer arrange buyer‘s credit frominternational branches of Indian Bank or other international bank. For this services Importers Bank /Buyers credit consultant charges a fee call arrangement fee. Buyer‘s credit helps local importersaccess to cheaper foreign funds close to LIBOR rates as against local sources of funding which arecostly compared to LIBOR rates. Buyer‘s credit can be availed for 1 year in case the Import is fortrade-able goods and for 3 years if the Import is for Capital Goods. Every six months the interest onBuyers credit may get reset.
BENEFITS OF BUYERS CREDIT TO IMPORTERa) The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flowsb) The importer can deal with exporter on sight basis, negotiate a better discount and use the buyer‘s credit route to avail financing.c) The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.d) The importer can use this financing for any form of trade viz. open account, collections, or LCs.e) The currency of imports can be different from the funding currency, which enables importers to take a favorable view of a particular currency. STEP INVOLVED IN BUYERS CREDIT1. The Indian customer will import the goods either under DC, Collections or open account2. The Indian customer request the Buyers Credit Arranger before the due date of the bill to avail buyers credit financing3. Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer4. Overseas Bank to fund your existing bank Nostro account for the required amount5. Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment)6. On due date existing bank to recover the principal and amount from the importer and remit the same to Overseas Bank on due date.
INDIAN REGULATORY FRAMEWORKo Banks can provide buyer‘s credit upto USD 20M per import transactions for a maximum maturity period of 1 year from date of shipment. In case of import of capital goods banks can approve buyer‘s credits upto USD 20M per transaction with a maturity period of upto 3 years. No roll over beyond this period is permitted.o RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for short term credit for financing — by way of either suppliers‘ credit or buyers‘ credit — of import of goods into India, based on uniform criteria. Credit is to be extended for a period of less than three years; amount of credit should not exceed $20 million, per import transaction; the `all-in-cost‘ per annum, payable for the credit is not to exceed LIBOR + 50 basis points for credit up to one year, and LIBOR + 125 basis points for credits for periods beyond one year but less than three years, for the currency of credit.o All applications for short-term credit exceeding $20 million for any import transaction are to be forwarded to the Chief General Manager, Exchange Control Department, Reserve Bank of India, Central Office, External commercial Borrowing (ECB) Division, Mumbai. Each credit has to be given `a unique identification number‘ by authorised dealers and the number so allotted should be quoted in all references. The International Banking Division of the authorised dealer is required to furnish the details of approvals granted by all its branches, during the month, in Form ECB-ST to the RBI, so as to reach not later than 5th of the following month. (Circular AP (DIR Series) No 24 dated September 27, 2002.o As per RBI Master Circular on ECB and trade finance 2010, interest cost of overseas lender has been capped at 6 month libor + 200bps for tenure upto<3 years.
BUYERS CREDIT ON CAPITAL GOODSo Buyers Credit can be used both for Raw Material and Capital Goods. Below gives complete detailed information along with process and sample sanction letters.PROCESS FLOW OF BUYERS CREDIT FOR CAPITAL GOODSo Term Loan Sanctiono LC Issuance for import of Machineryo On due date of payment of LC convert it to Buyers Credit and rollover for 3 yearo At end of 3 year convert to term loan
Stage 1Bank’s Term Loan Sanction Facility: Buyer‘s Credit (capex) in lieu of Foreign L/C Capex (to be converted to Term loan after 3 years) Purpose for Purchase of Machinery only
Tenure of 36 months with rollover every 6 / 12 months till Month / Year Repayment schedule as the buyers credit is under roll over every 6 / 12 months subject to availability of funds (to be converted to Term loan after 3 years) The buyers credit is proposed to be retired through term loan and the same will be repaid in say 24 equal monthly installments (example of 5 year term loan), starting from Month / Year. In- case buyer credit is not available for further rollover at any point of time, the buyer credit will be converted to term loan and the repayment will start immediately from the next month of conversion, repayable in monthly installments (starting from the next month of conversion) equal divided into the balance tenor. Charges: Issuance of LOU / LOC Charges to overseas bankStage 2Based on the agreement with the supplier either a sight LC or USANCE LC get opened frombank. Based on this supplier will ship machinery.Stage 3 The Indian customer will import the goods either under DC, Collections or open account The Indian customer request the Buyer‘s Credit Arranger before the due date of the bill to avail buyers credit financing Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer Overseas Bank to fund your existing bank nostro account for the required amount
Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment) On due date (6 / 12 Month) it will again get rollover (Principal + interest) with the same foreign bank or another bank based on the pricing and availability on that day. This will keep on happening till 3 yearsStage 4Based on the sanction convert the buyers credit to term loan at the end of 3rd year. COST INVOLVED 1. Interest cost: This is charged by overseas bank as a financing cost 2. Letter of Comfort / Undertaking: Your existing bank would charges this cost for issuing letter of comfort / Undertaking 3. Forward Booking Cost / Hedging Cost 4. Arrangement fee: Charged by person who is arranging buyers credit for you. 5. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges. 6. WHT (Withholding Tax): The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities. (The WHT is not applicable where Indian banks arrange for buyers credit through their offshore offices)
CONCEPT OF WHT (WITHHOLDING TAX)Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken fromthem. Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needsis borne by the borrower. IMPACT OF WHT o Tax is paid @ 20% (As per Income Tax Act, 1961) or as per DTA (Double Taxation Agreement) agreement between India and the lender‘s country o No Withholding tax on loans raised from overseas branch of Indian bank: Withholding tax is 10% of the gross amount of the interest on loans made or guaranteed by a bank or other financial institution carrying on bona fide banking or financing business or by an enterprise which holds directly or indirectly at least 10 per cent of the capital of the company paying the interest. WHT CALCULATION METHOD o Foreign Bank BC with Withholding tax = (L + 1.00) + ((L+ 1.00) *10%) = (0.25 + 1) + ((0.25+1) *10%) = 1.25 + 0.125 = 1.375 o Indian bank overseas branches = L + 1.50 = 0.25 + 1.50 = 1.75 o Assumption - 90 days Transaction USD Libor =0.25
BUYERS CREDIT INTEREST RATE (LIBOR+MARGINS)Earlier on Buyer‘s Credit have provided details on total cost involved like, Interest cost, libor, Loucharges, forwarding booking cost, arrangement fee, and others.This provides details on how interest cost (margin) is arrived at by Indian Bank Overseas Branchesor Foreign Bank.Interest Rate = L + Margin Rates FACTORS RELATED TO MARGIN1. Availability of Funds Whether sufficient funds are available (will be able to borrow) for the required amount of transaction.2. Cost of Funds The rate at which these banks gets to borrow funds from their local market (L + X).3. Banks Lines For Example: When lines of particular banks are running in scarcity, bank would ask for higher margin in comparison to other banks lines.4. Internal Minimum Margin Over and above cost of funds (L+X) bank adds their margin. There is minimum cut off margin decided by bank treasury or committee below which they are not able to offer pricing.5. External Factors Some recent examples are Market Volatility, US downgrade, Greece and Portugal debt crisis, etc.
MEANING OF LIBORLIBOR stands for London Interbank Offered Rate. LIBOR is an indicative average interest rate atwhich a selection of banks (the panel banks) are prepared to lend one another unsecured funds onthe London money market. Although reference is often made to the LIBOR interest rate, there areactually 150 different LIBOR interest rates. LIBOR is calculated for 15 different maturities andfor 10 different currencies. The official LIBOR interest rates (bbalibor) are announced once a dayat around 11:45 a.m. London time by Thomson Reuters on behalf of the British Bankers’Association (BBA). THE CREATION OF LIBORAt the start of the nineteen eighties there was a growing need amongst the financial institutions inLondon for a benchmark for lending rates. This benchmark was particularly needed in order tocalculate prices for financial products such as interest swaps and options. Under the leadership ofthe BBA a number of steps were taken from 1984 onwards which led in 1986 to the publication ofthe first LIBOR interest rates (bbalibor). LIBOR PANEL BANKSAs has already been indicated, LIBOR is an average interest rate at which a selection of banks willlend one another funds. These banks are called ‗panel banks‘. The selection is made every year bythe British Bankers‘ Association (BBA) with assistance from the Foreign Exchange and MoneyMarkets Committee (FX&MMC). A panel is made up for each currency consisting of at least 8 anda maximum of 16 banks which are deemed to be representative for the London money market.Banks are assessed on market volume, reputation and assumed knowledge of the currencyconcerned. Because the criteria applied are strict, the rates can generally be considered to be thelowest interbank lending rates on the London money market.
LIBOR CALCULATION METHODThe LIBOR interest rates are not based on actual transactions. On every working day at around 11a.m. (London time) the panel banks inform Thomson Reuters for each maturity at what interest ratethey would expect to be able to raise a substantial loan in the interbank money market at thatmoment. The reason that the measurement is not based on actual transactions is because not everybank borrows substantial amounts for each maturity every day. Once Thomson Reuters hascollected the rates from all panel banks, the highest and lowest 25% of value are eliminated. Anaverage is calculated of the 50% remaining ‗mid values‘ in order to produce the official LIBOR(bbalibor) rate. SIGNIFICANCE OF LIBOR INTERESTLIBOR is viewed as the most important benchmark in the world for short-term interest rates. On theprofessional financial markets LIBOR is used as the base rate for a large number of financialproducts such as futures, options and swaps. Banks also use the LIBOR interest rates as the baserate when setting the interest rates for loans, savings and mortgages. The fact that LIBOR is oftentreated as the base rate for other products is the reason why LIBOR interest rates are monitored withgreat interest by a large number of professionals and private individuals worldwide.
LIBOR CURRENCIESOriginally (in 1986) LIBOR was published for 3 currencies: the US dollar, the pound sterling andthe Japanese yen. Over the years that followed the number of LIBOR currencies grew to amaximum of 16. A number of these currencies merged into the euro in 2000. At the moment wehave LIBOR rates in the following 10 currencies (click on the currency for the current interest ratefor each maturity): o American dollar – USD LIBOR o Australian dollar- AUD LIBOR o British pound sterling – GBP LIBOR o Canadian dollar- CAD LIBOR o Danish krone – DKK LIBOR o European euro – EUR LIBOR o Japanese yen – JPY LIBOR o New Zealand dollar – NZD LIBOR o Swedish krona – SEK LIBOR o Swiss franc – CHF LIBOR LIBOR MATURITIESBecause there are 15 different maturities there are 15 different LIBOR rates in total. There have notalways been 15 maturities. Up until 1998 the shortest maturity was 1 month. In 1998 the 1 weekrate was added, and only in 2001 were the overnight and 2 week LIBOR rates introduced.
RESTRICTIONS IN BUYERS CREDITType of transaction where buyer‘s credit can be done for limited amountcase where import billare directly received by importer from his overseas supplier, buyers credit amount is restricted upto$ 3, 00,000. Except for the followings o Import bill received by wholly owned Indian subsidiary of foreign companies from their principal o Import bill received by Status Holder Exporters as defined in the Foreign Trade Policy, 100% Export Oriented Units, Units in Special Economic Zones, Public Sector Undertakings and Limited Companies o Import bills received by all limited companies viz. public limited companies, deemed public limited and private limited companies. TYPE OF TRANSACTION WITH LIMITED TENURE IN B.Cr.When below given goods / commodity are involved, buyer‘s credit and suppliers credit cannotexceed 90 days from the date of shipment as per Reserve Bank of India (RBI) guidelines o Rough, Cut and Polishes Diamonds o Gold o Silver, Platinum, Palladium, Rodhium
GUIDELINES FOR TRANSACTIONS WITH LIMITED TENUREReserve Bank of India (RBI) in its circular dated 06-05-2011 has revised guidelines for import ofRough, Cut and Polished Diamonds. Extracts are given below.Buyer’s Credit (Trade Credit) including the Usance period of Letter of Credit (LC) openedfor import of rough, cut and polished diamonds has been restricted to 90 days from the dateof shipment from immediate effect.Banks have been also advised to ensure that due diligence is undertaken and Know-Your-Customer(KYC) norms and Anti-Money Laundering (AML) standards, issued by RBI are adhered to whileundertaking the import transactions. Further, any large or abnormal increase in the volume ofbusiness should be closely examined to ensure that the transactions are bona fide and not intendedfor interest / currency arbitrage. All other instructions relating to import of rough, cut and polisheddiamonds shall continue.The earlier instruction issued for import of gold, import of platinum / palladium / rhodium /silver and advance remittance for import of rough diamonds shall remain unchanged. BUYERS CREDIT ROLLOVEROne of the important factors in Buyer‘s Credit is the tenure for which you get the Buyer‘s Credit.From RBI Regulation perspective, RBI allows buyer‘s credit on import of raw material (noncapitalgoods) upto 360 days from Shipped On Board on Bill of Lading (BL) and on Capital Goods upto 3years.From the point of view of Importer‘s Working Capital Bank, Non-Fund Based Limit issanctioned based on your working capital cycle and your requirement. At the same time they decidea cap upto to which tenure they would issue Letter of Credit (LC) / Bank Guarantee (BG) / Letter ofComfort (LOC). This is where the problem starts, when you decide on taking a buyers credit for 180days but you sanction is say for 90 days. Solution is
o Get your limits revised for 180 days which might take around 15 days to a month.o Or you initially take it for 90 days and then again roll it over to another 90 days to meet you requirement. And when you take it for second time, your buyer‘s credit get rolled overTo explain rollover with an example. Say, you have taken $1, 00,000 buyers credit for tenure of 90days and now you want to extend it for another 90 days. There are two things:-o Go to your existing buyer‘s credit provider Bank (Foreign Bank or Indian Bank Overseas Branch) and get the extended tenure offer and ask your bank to send the swift for the same.o Get fresh quote issued from a bank which is giving further competitive pricing than existing bank. Ask your bank to send new LOU to new bank. When funds are received from the new bank in the Nostro of your bank, your bank will pay your existing buyers credit bank and your buyer‘s credit will get rolled overOTHER FACTORSo If you have time, prefer to get your tenure change in your sanction instead of taking buyers credit and then rollovero Cost factor. Every time you roll over LIBOR will Change, Margin might change, LOU charges (like nationalized bank charges some fixed amount for issuance of LOU plus Usance charges. Because of this overall cost would go up)o In case of non-capital goods transaction, bank would provide LC/BG/LOU limits for not more than 180 days. Thus for using Buyers credit for more than 180 days, you will have to rollover in such cases.
EXPORT FINANCING―Export or perish‖ Our imports are more than exports. Hence there is a necessity to encourageexports. Govt. and RBI extend various concessions to boost exports.Conventional Banks play two very important roles in Exports.o They act as a negotiating bank and charge a fee for this purpose which is allowed in Shariah.o Secondly they provide export-financing facility to the exporters and charge Interest on this service.These services are of two types o Pre Shipment Financing o Post Shipment FinancingAs interest cannot be charged in any case, Shariah experts have proposed certain methods forfinancing exports.
PRE-SHIPPING FINANCINGThis is financing for the period prior to the shipment of goods, to support pre-export activities likewages and overhead costs. It is especially needed when inputs for production must be imported. Italso provides additional working capital for the exporter. Pre-shipment financing is especiallyimportant to smaller enterprises because the international sales cycle is usually longer than thedomestic sales cycle. Pre-shipment financing can take in the form of short term loans, overdraftsand cash credits.Pre shipment financing needs can be fulfilled by two methods, o Musharakah o MorabahaThe most appropriate method for financing exports is Musharkah or Mudarbah. Bank and exportercan make an agreement of Mudarbah if exporter is not investing; otherwise Musharakah agreementcan be made.Pre Shipment Finance is issued by a financial institution when the seller wants the payment of thegoods before shipment. The main objective behind pre shipment finance or pre export finance is toenable exporter to: o Procure raw materials o Carry out manufacturing process o Provide a secure warehouse for goods and raw materials o Process and pack the goods o Ship the goods to the buyers o Meet other financial cost of the business
TYPES OF PRE-SHIPMENT FINANCE o Packing Credit o Advance against Cheques/Draft etc. representing Advance Payments. Pre shipment finance is extended in the following forms : o Packing Credit in Indian Rupee o Packing Credit in Foreign Currency (PCFC) ELIGIBILITY & REQUIRMENT FOR PRESHIPMENT FINANCEo Requirements for Getting Packing Credit This facility is provided to an exporter who satisfies the following criteria o A ten digit importer exporter code number allotted by DGFT [ Directorate General of Foreign Trade (India) ] o Exporter should not be in the caution list of RBI. o If the goods to be exported are not under OGL (Open General Licence), the exporter should have the required license /quota permit to export the goods.Packing credit facility can be provided to an exporter on production of the following evidences tothe bank: 1. Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time limit. 2. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer. 3. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.
The confirmed order received from the overseas buyer should reveal the information about the fullname and address of the overseas buyer, description quantity and value of goods (FOB or CIF),destination port and the last date of payment.o EligibilityPre shipment credit is only issued to that exporter who has the export order in his own name.However, as an exception, financial institution can also grant credit to a third party manufacturer orsupplier of goods who does not have export orders in their own name.In this case some of the responsibilities of meeting the export requirements have been out sourcedto them by the main exporter. In other cases where the export order is divided between two morethan two exporters, pre shipment credit can be shared between them DISBURSEMENT OF PACKING CREDIT ADVANCEOnce the proper sanctioning of the documents is done, bank ensures whether exporter has executedthe list of documents mentioned earlier or not. Disbursement is normally allowed when all thedocuments are properly executed.Sometimes an exporter is not able to produce the export order at time of availing packing credit. So,in these cases, the bank provides a special packing credit facility and is known as Running AccountPacking.Before disbursing the bank specifically check for the following particulars in the submitteddocuments"a. Name of buyerb. Commodity to be exportedc. Quantityd. Value (either CIF or FOB)e. Last date of shipment / negotiation.f. Any other terms to be complied with
The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic valuesof goods, whichever is found to be lower. Normally insurance and freight charged are considered ata later stage, when the goods are ready to be shipped.In this case disbursals are made only in stages and if possible not in cash. The payments are madedirectly to the supplier by Drafts/Bankers/Cheques. The bank decides the duration of packing creditdepending upon the time required by the exporter for processing of goods. The maximum durationof packing credit period is 180 days, however bank may provide a further 90 days extension on itsown discretion, without referring to RBI. PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC)Authorised dealers are permitted to extend Pre shipment Credit in Foreign Currency (PCFC) withan objective of making the credit available to the exporters at internationally competitive price. Thisis considered as an added advantage under which credit is provided in foreign currency in order tofacilitate the purchase of raw material after fulfilling the basic export orders.The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). According toguidelines, the final cost of exporter must not exceed 0.75% over 6 month LIBOR, excluding thetax. The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling,Euro, Yen etc. However, the risk associated with the cross currency truncation is that of theexporter. The sources of funds for the banks for extending PCFC facility include the ForeignCurrency balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC),Resident Foreign Currency Accounts RFC(D) and Foreign Currency(Non Resident) Accounts.Banks are also permitted to utilize the foreign currency balances available under Escrow accountand Exporters Foreign Currency accounts. It ensures that the requirement of funds by the accountholders for permissible transactions is met. But the limit prescribed for maintaining maximumbalance in the account is not exceeded. In addition, Banks may arrange for borrowings from abroad.Banks may negotiate terms of credit with overseas bank for the purpose of grant of PCFC toexporters, without the prior approval of RBI, provided the rate of interest on borrowing does notexceed 0.75% over 6 month LIBOR.
PACKING CREDIT FACILITIES IN DEEMED EXPORTSDeemed exports made to multilateral funds aided projects and programs, under orders securedthrough global tenders for which payments will be made in free foreign exchange, are eligible forconcessional rate of interest facility both at pre and post supply stages. PACKING CREDIT FACILITIES FOR CONSULTING SERVICESIn case of consultancy services, exports do not involve physical movement of goods out of IndianCustoms Territory. In such cases, Pre shipment finance can be provided by the bank to allow theexporter to mobilize resources like technical personnel and training them. ADVANCE AGAINST CHEQUE / DRAFTS RECEIVED AS ADVANCE PAYMENTWhere exporters receive direct payments from abroad by means of Cheques/drafts etc. the bankmay grant export credit at concessional rate to the exporters of goods track record, till the time ofrealization of the proceeds of the Cheques or draft etc.
POST-SHIPPING FINANCING Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don‘t wait for the importer to deposit the funds. The ability to be competitive often depends on the trader‘s credit term offered to buyers. Post- shipment financing ensures adequate liquidity until the purchaser receives the products and the exporter receives payment. Post-shipment financing is usually short-term. FEATURES OF POST SHIPMENT FINANCING The features of post shipment finance are:1. Purpose of Finance Post shipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies.2. Basis of Finance Post shipment finances are provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency.3. Types of Finance Post shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self-liquidating. In that case it involves advance against undrawn balance, and is usually unsecured in nature. Further, the finance is mostly a funded advance. In few cases, such as financing of project
exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature.4. Quantum of Finance As a quantum of finance, post shipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of pre shipment stage.Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm.5. Period of Finance Post shipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment. FINANCING FOR VARIOUS TYPES OF EXPORT BUYERS CREDIT Post shipment finance can be provided for three types of export: o Physical exports Finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred. o Deemed export Finance is provided to the supplier of the goods which are supplied to the designated agencies.
o Capital goods and project exports Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter. POST SHIPMENT CREDITSr. No. Particular Condition1 SIGHT BILLS NOT MORE THAN 10%2 UPTO 90 DAYS NOT MORE THAN 10%3 91 DAYS TO 6 MONTHS 12%4 OVERDUE Left to the discretion of the bank, (Applicable only on the overdue portion) through it is most likely to be the unarranged overdraft rate5 Post shipment foreign currency loan Maximum of Libor + 1.5 pct TYPES OF POST SHIPMENT FINANCE The post shipment finance can be classified as: 1. Export Bills purchased/discounted. 2. Export Bills negotiated 3. Advance against export bills sent on collection basis. 4. Advance against export on consignment basis 5. Advance against undrawn balance on exports
6. Advance against claims of Duty Drawback1. Export Bills Purchased/ Discounted (DP & DA Bills)Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchasedby the banks. It is used in indisputable international trade transactions and the proper limit has to besanctioned to the exporter for purchase of export bill facility.2. Export Bills Negotiated (Bill under L/C)The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk isfurther reduced, if a bank guarantees the payments by confirming the LC. Because of the inbornsecurity available in this method, banks often become ready to extend the finance against bills underLC.However, this arises two major risk factors for the banks: 1. The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit. 2. The bank also faces the documentary risk where the issuing bank refuses to honor its commitment. So, it is important for the for the negotiating bank, and the lending bank to properly check all the necessary documents before submission.3. Advance against Export Bills Sent on Collection BasisBills can only be sent on collection basis, if the bills drawn under LC have some discrepancies.Sometimes exporter requests the bill to be sent on the collection basis, anticipating thestrengthening of foreign currency. Banks may allow advance against these collection bills to anexporter with a concessional rates of interest depending upon the transit period in case of DP Billsand transit period plus Usance period in case of Usance bill. The transit period is from the date ofacceptance of the export documents at the bank‘s branch for collection and not from the date ofadvance.
4. Advance against Export on Consignments BasisBank may choose to finance when the goods are exported on consignment basis at the risk of theexporter for sale and eventual payment of sale proceeds to him by the consignee. However, in thiscase bank instructs the overseas bank to deliver the document only against trust receipt /undertakingto deliver the sale proceeds by specified date, which should be within the prescribed date even ifaccording to the practice in certain trades a bill for part of the estimated value is drawn in advanceagainst the exports. In case of export through approved Indian owned warehouses abroad the timeslimit for realization is 15 months.5. Advance against Undrawn BalanceIt is a very common practice in export to leave small part undrawn for payment after adjustment dueto difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawnbalance is in conformity with the normal level of balance left undrawn in the particular line ofexport, subject to a maximum of 10 percent of the export value. An undertaking is also obtainedfrom the exporter that he will, within 6 months from due date of payment or the date of shipment ofthe goods, whichever is earlier surrender balance proceeds of the shipment.6. Advance against Claims of Duty DrawbackDuty Drawback is a type of discount given to the exporter in his own country. This discount isgiven only, if the in-house cost of production is higher in relation to international price. This type offinancial support helps the exporter to fight successfully in the international markets. In such asituation, banks grants advances to exporters at lower rate of interest for a maximum period of 90days. These are granted only if other types of export finance are also extended to the exporter by thesame bank.After the shipment, the exporters lodge their claims, supported by the relevant documents to therelevant government authorities. These claims are processed and eligible amount is disbursed aftermaking sure that the bank is authorized to receive the claim amount directly from the concernedgovernment authorities.
CRYSTALLIZATION OF OVERDUE EXPORT BILLSExporter foreign exchange is converted into Rupee liability, if the export bill purchase / negotiated/discounted is not realize on due date. This conversion occurs on the 30th day after expiry of theNTP in case of unpaid DP bills and on 30th day after national due date in case of DA bills, atprevailing TT selling rate ruling on the day of crystallization, or the original bill buying rate,whichever is higher. ROLE OF ECGCThe Export Credit Guarantee Corporation of India Limited (ECGC) is a company wholly owned bythe Government of India based in Mumbai, Maharashtra.It provides export credit insurance supportto Indian exporters and is controlled by the Ministry of Commerce. Government of India hadinitially set up Export Risks Insurance Corporation (ERIC) in July 1957. It was transformed intoExport Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guaranteeof India in 1983. ECGC of India Ltd was established in July, 1957 to strengthen the exportpromotion by covering the risk of exporting on credit. It functions under the administrative controlof the Ministry of Commerce & Industry, Department of Commerce, and Government of India. It ismanaged by a Board of Directors comprising representatives of the Government, Reserve Bank ofIndia, banking, and insurance and exporting community.ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. Thepresent paid-up capital of the company is Rs.900 crores and authorized capital Rs.1000 crores. FUNCTIONS OF ECGC o Provides a range of credit risk insurance covers to exporters against loss in export of goods and services. o Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them.
o Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan. BENEFITS TO EXPORTERS 1. Offers insurance protection to exporters against payment risks 2. Provides guidance in export-related activities 3. Makes available information on different countries with its own credit ratings 4. Makes it easy to obtain export finance from banks/financial institutions 5. Assists exporters in recovering bad debts 6. Provides information on credit-worthiness of overseas buyers
CONCLUSIONThis project has explained the need for trade finance and introduced some of the most commontrade finance tools and practices. A proactive role of governments in trade finance may alleviate thelack of trade finance in emerging economies and contribute to trade expansion and facilitation.However, the best long-term solution in resolving the constraints in trade financing is to encouragethe growth and development of a vibrant and competitive financial system, comprising mainlyprivate sector players. This point is important as some of the government-supported trade financingschemes may Trade Finance Trends in Asia.The recent economic slowdown is making the need for sound trade finance policies and strongfinancial systems more acute. Many companies are trying to preserve cash by delaying payment andthe number of SMEs in emerging Asian economies with high credit risk is growing. This is partlythe result of a regional trend toward unsecured, open-account type transactions. Large Westernbuyers are asking that their Asian suppliers sell goods on open-accounts terms, instead of usingguarantees like letters of credit (LCs). These buyers simply do not want to bear the extra cost ofpayment guarantees and will source their goods from somewhere else if they are not given open-accounts. These open-accounts allow the buyers to delay payments as needed, rising the need forcredit for Asian companies who choose to supply them. The economic slowdown also has mademany companies rethink their commitment to electronic trading and payment systems. While thesesystems may cut significant costs out of the labor-intensive trade finance process, they also makepayment delays more difficult to justify. Large Western buyers are not the only ones delayingpayments. In fact, many companies prefer dealing with these buyers than with the thinly capitalizedbuyers commonly found in many emerging Asian economies, mainly because these large buyersremain relatively punctual and have very low credit risk (i.e., even if they delay payment a little,they will pay).With the internationalization of supply chains.This kind of arrangement increases the financial riskexposure of the transformer manufacturer, and typically results in payment delays measured inweeks and sometime months. Because LCs or factoring in China and many other countries in Asia
are not yet commonly used or available, Asian suppliers can often do very little to protectthemselves in regional cross-border transaction, increasing the cost of regional trade transactionsrelative to that of direct transactions with Western companies. Increasingly be challenged bycompeting countries as unfair export subsidies under existing and future WTO rules. The role of thegovernment and other parties involved in trade finance will need to evolve along with the country‘seconomy. Underlying the functions provided by the different players is the need for a clear andeffective legal environment. The commercial legal system must be transparent. Laws of property,contract and arbitration must be clear. The commercial legal environment must be integrated withthe financial infrastructure framework in order for it to be effective.
BIBLIOGRAPHYThe Economic TimesThe AnalystInternational Trade FinanceIndian Overseas Bank Officers Training Booklet WEBLIOGRAPHYwww.export.gov.comwww.ecgc.inwww.exportscale.comwww.buyerscredit.wordpress.comwww.export-import-companies.comwww.eximguru.comwww.efic.gov.auwww.intracen.orgwww.un.orgwww.tedo.iridiuminteractive.inwww.fieo.org