This document discusses various terms and concepts related to trade finance. It begins by defining key trade finance instruments like letters of credit, and explains the roles of parties involved like applicant, issuing bank, beneficiary, etc. It then discusses types of payments and credits in international trade like open account, documents against payment, and confirmed letters of credit. The rest of the document covers topics like pre-shipment and post-shipment finance, types of credits, documents used, risks involved, and regulatory requirements for trade finance. Diagrams are provided to illustrate the process and flow of letters of credit and back-to-back credits.

1. TRADE FINANCE
Prof. B. B. Bhattacharyya
Dean, Banking

2. Questions
1. Terms of a sale contract provides
shipment of goods ‘FOB’. Who will bear
cost of freight – Seller or Buyer?
2. ‘A’ in Mumbai sells goods to ‘B’ in
Kolkata. How will payment be settled?
3. Who would approach bank for issuing a
Letter of Credit – Seller or Buyer?

3. Questions
4. Name three important documents
used in Trade Finance.
5. What is UCPDC?
6. What is FEDAI?
7. What is DGFT?
8. What is Post-Shipment Finance?
9. What is Buyer’s Credit?
10.What are risks in Trade Finance?

4. Trade Transaction consists of
• Movement of Goods
• Movement of Documents
• Movement of Funds

5. Open Account
Documents against Payment
Unconfirmed L/C
s
Highest risk
to exporter
Documents against Acceptance
Confirmed L/C
Advance Payment
Least risk to
importer
Least risk to
Exporter
Highest risk to
importer

6. International Chamber of
Commerce
• Objectives : Promotion of trade and investment,
opening of markets and free flow of capital
• Associations with more than 130 countries
• ICC International Court of Arbitration – the
world’s leading body for resolving international
commercial disputes by arbitration.

7. • UCPDC (originally in 1933 ) and the latest
one UCPDC 600 effective from
01.07.2007
• First nine Incoterms published in
1936.Incoterms 2000 came into force on
01.01.2000

8. Risks in International Trade
Finance
• Country Risks– Political Stability,
Economic Environment, Legal system,
Forex transactions
• Forex Risks
• Commercial Risks – Dependability, Trade
disputes

9. Buyer’s Credit
• Financial arrangement where a Financial
Institution in the exporter’s country or
other country extends credit directly or
indirectly to a foreign buyer to finance
purchase of goods and services from the
exporting country.

10. Various ways of payment in
international trade
Clean Payments
Bills for Collection – D/P, D/A
Documentary Credit – is a written
undertaking by the Importer’s Bank on
behalf of its customer, promising to effect
payment to exporter upto a stated sum of
money within a prescribed time limit and
against stipulated documents.

11. What is an L/C ?
LC is an arrangement whereby a bank acting
at the request of the customer
undertakes to pay a third party by a
given date according to agreed
stipulations and against presentation of
documents the counter-value of goods
and services supplied
BANKS DEAL ONLY IN DOCUMENTS AND NOT IN GOODS

12. Credit vs. Contracts
• Credits are separate transactions from the
sales or other contracts on which they
may be based and banks are in no way
concerned with or bound by such
contracts. An Issuing bank should
discourage any attempt by the applicant to
include, as an integral part of the credit,
copies of the underlying contract.

13. Parties to the L/C
Applicant
Issuing Bank
Beneficiary
Second beneficiary
Advising Bank
Confirming Bank
Negotiating Bank

14. Types of Credit
• Confirmed
• Sight / Usance
• Back-to-Back
• Transferable
• Red Clause
• Standby

15. Common documents used in
Documentary Credit
• Bill of Lading
• AirWay Bill
• Certificate of Origin
• Combined Transport Document
• Draft / Bill of Exchange
• Insurance Policy
• Packing List
• Inspection Certificate

16. DIAGRAMATIC EXPLANATION OF VARIOUS STEPS IN THE OPERATION OF A L/C
IMPORTER
BUYER
APPLICANT
CONTRACT
EXPORTER
SELLER
SHIP BENEFICIARY
GOODS
TAKE
DELIVERY
OF
GOODS
APPLY
L/C
RELEASE
DOCUMENTS
AGAINST
CASH OR
T/R
ISSUING
BANK
NEGOTIATION
OF EXPORT
BILLS
6
PREPARE
& PASS
DOCUMENTS
ADVISE
L/C
MAKE
PAYMENT
SEND
DOCUMENTS
L/C
ADVISING BANK /
CONFIRMING BANK
OR
NEGOTIATING
BANK
1
5
11
2
10
7 4
8
3
9

17. DIAGRAMMATIC EXPLANATION OF THE OPERATION OF A BACK TO BACK CREDIT
USA SINGAPORE
ULTIMATE
BUYER
APPLICANT
OF MASTER LC
MASTER LC
ISSUING BANK
ADVISING
BANK
MIDDLEMAN
BENEFICIARY OF
MASTER LC
APPLICANT OF
B/B LC
B/B LC
ISSUING BANK
ADVISING BANK /
NEGOTIATING
BANK
SUPPLIER
BENEFICIARY
OF B/B L/C
1
15
2 3
13 12 4
11 10 5
9 8 6
7
14
GOODS
INDIA

18. Risks associated with opening
of Import L/C
• Importers’ Credit Risk
• The goods
• The status of the exporter
• Country Risk
• Foreign Exchange Risk

19. Flow Chart of an L/C
The importer signs a purchase contract for buying certain goods.
The importer requests his bank to open an LC in favour of the exporter.
The importer’s bank opens an LC as per the application.
The opening bank will forward the original LC to the advising bank
in the exporter’s country.
The advising bank, after satisfying itself about the authenticity of the
credit, towards the same to the exporter.

20. Flow Chart of an L/C
The exporter scrutinizes the LC to ensure that it conforms to the
terms of the contract.
In case of any terms are not as agreed, the importer will be
Asked to make the required amendments to the LC.
In case the LC is as required, the exporter proceeds to make
Arrangements for the goods.
The exporter will effect the shipment of goods.
The exporter will prepare export documents and submit to his bank.

21. Flow Chart of an L/C
The exporter’s bank (negotiating bank) verifies all the documents
with the LC
If the documents are in conformity with the terms of LC and all
Other conditions are satisfied, then the bank will negotiate the bill
The exporter receives the payment in his bank account if he wants
Post-shipment finance.
The LC issuing bank receives the bill and documents from the
Exporter’s bank.
The importer receives the bill from the LC issuing bank and checks
the documents. He then accepts/pays the bill. On acceptance/payment,
he gets the shipping documents covering the goods purchased
by him.

22. Flow Chart of an L/C
The LC issuing bank reimburses the amount to the negotiating bank,
if the documents are found in order.
Exporter receives the payment upon realisation, if he has not
availed post-shipment finance.

23. Trade Finance
• Pre-Shipment and Post-Shipment Finance
• PRE-SHIPMENT FINANCE
Packing Credit, Advances against
receivables from Govt., etc., Advance
against cheques/drafts etc
• Packing credit in Indian Rupee
• Packing credit in Foreign Currency

24. Features of Packing Credit in Rupees (PC)
The banks extend packing credit (PC) to
exporters on production of either a letter of
credit (LC) or a confirmed order.
a) The packing credit availed against an LC /
order will be adjusted by the bank from out
of the proceeds of the export made against
that LC/order.

25. Features of Packing Credit in Rupees
b) Running account facility : This facility granted to
exporters with goods track record to avail PC
without lodging an LC/order. The liquidation
of PCs outstanding in the running account is
done on a ‘first in first’ basis out.
c) A packing credit is normally given for a period
not exceeding 180 days.

26. Features of Packing Credit in Rupees
d) PC is granted at a concessional rate of
interest. The prime lending rate is not
applicable to export finance.
e) Refinance can be available by banks from
the Reserve Bank against the packing credit
granted to the exporter.

27. Features of Packing Credit in Rupees
f) PC is available for both cash exports and
deemed exports.

28. Features of Pre-shipment Credit in Foreign
Currency (PCFC)
The Foreign Currency loans granted to exporters by
the banks are known as PCFC.
a) PCFC is available only for cash exports in foreign
currency.
b) The interest rate is less in PCFC, compared to that
of packing credit in rupees, exporters may not
prefer PCFC when they expect a fall in the value of
rupees.

29. Features of Pre-shipment Credit in Foreign
Currency (PCFC)
d) PCFCs can be maintained as running
accounts.
e) PCFC is self-liquidating in nature and is
liquidated by purchasing/ discounting of
bills.
f) Refinance from the Reserve Bank is not
available to banks against PCFC.

30. Post-Shipment Finance
Post-shipment credit is defined as any loan or advance
granted by a bank to an exporter of goods from the
date of extending the credit after the shipment of
goods to the date of realisation of the export proceeds.
Post-shipment finance is extended in the following
manner :-
a) Negotiation
b) Purchase
c) Discount of export bill under confirmed order/export
contracts
d) Advances against export bills sent on collection basis.

31. Features of Pre-shipment Credit in Foreign
Currency (PCFC)
c)For lending under the PCFC scheme,
banks can use the foreign currency
balances available with them, in
Exchange Earners Foreign Currency
(EEFC) account/Resident Foreign
Currency (RFC) accounts, Foreign
Currency Non-resident (FCNR) account,
Bank’s account etc.

32. Regulatory Requirements
• Trade Control Policy
• Exchange Control Policy
• UCPDC guidelines
• ISBP 2002
• FEDAI Guidelines
• Bank’s Internal rules and Regulations

33. • Post-Shipment Finance-
EBP/EBD
EBN
Advance against Export bills sent under
collection basis
Advance against Duty Drawback

34. INCOTERMS
EXW FOB CFR CIF
a) Packing Exp Exp Exp Exp
b) Carriage to Port (only a) (a to d) (a to e) (a to e)
c) Port Dues
d) Customs entry Imp Imp Imp Imp
e) Freight (b to i) (e to i) (f to i) (f to i)
f) Insurance
g) Imp duties
h) Port costs
i) Carrying from port

35. Thanks