International Trade Finance1

7/30/2019 International Trade Finance1

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DECLARATION

We completed this project on INTERNATIONAL TRADE FINANCE in partial

fulfillment of the requirements The information submitted is true and original to the best of

my knowledge.

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Summary

The project aims to understand the major issues in international trade finance. The

report at the outset defines Trade Finance in the international context. The report has been

divided into fourteen parts.

The first part gives an overview of international trade finance, reasons, balance of

payment and risks included in international trade finance. The second part deals with the

various methods of payments. The various methods of payments like - Advance Payment and

Advance Remittance, Open Account, Bills on Collection Basis, Documentary Credit (L/C),

etc

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The third part of the report focuses on the various documents involved in international

trade finance. The fourth part discusses the INCOTERMS. It is then followed in the fifth part

by INTERNATIONAL STANDARD BANKING PRACTICE (ISBP).

The sixth and the seventh parts deals with the URR (UNIFORM RULES FOR BANK

TO BANK REIMBURSEMENT) and the OPERATION OF DOCUMENTARY CREDIT

Further the report discusses the various factors of Export Finance and the Export

Credit Guarantee Corporation of India.

Finally the report concludes with a brief on External Commercial Borrowings and the

various Risk Management Tools that can be used.

Sr.

No.

TOPICS Page

No.

1. INTERNATIONAL TRADE

Introduction

Reasons for International Trade

Risks in International Trade

7-11

2. METHODS OF PAYMENT

Advance Payment

Advance Remittance

Open Account

12-14

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Bills on Collection Basis

Documentary Credit (L/C)

3. DOCUMENTS USED IN INTERNATIONAL TRADE

TRANSACTIONS

Financial Documents

Bill of Exchange (B/E)

Commercial Documents

Commercial Invoice

Certificate of origin

Transport documents

Bill of lading

Airway Bill

Postal Receipt

Multimodal Transport Document

Risk covering documents

Insurance policy

Regulatory documents

Export declaration form

Export certificate

15-21

4. INCOTERMS 22-27

5. INTERNATIONAL STANDARD BANKING PRACTICE (ISBP) 28-30

6. URR (UNIFORM RULES FOR BANK TO BANK

REIMBURSEMENT)

31-33

7. STANDBY L/C 34-38

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8. BANKERS ACCEPTANCE 39-42

9. FORFAITING AND FACTORING 43-50

10. RISK MANAGEMENT 51-52

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INTERNATIONAL TRADE:

International trade is the exchange of capital, goods and services across international

boundaries or territories. Industrialization, advanced transportation, globalization,

multinational corporations, and outsourcing are all having a major impact on the international

trade system. Increasing international trade is crucial to the continuance of globalization.

International trade is a major source of economic revenue for any nation that is considered a

world power. Without international trade, nations would be limited to the goods and services

produced within their own borders.

International trade is in principle not different from domestic trade as the motivation and the

behavior of parties involved in a trade does not change fundamentally depending on whether

trade is across a border or not. The main difference is that international trade is typically more

costly than domestic trade. The reason is that a border typically imposes additional costs such

as tariffs, time costs due to border delays and costs associated with country differences such

as language, the legal system or a different culture.

Another difference between domestic and international trade is that factors of production such

as capital and labor are typically more mobile within a country than across countries. Thusinternational trade is mostly restricted to trade in goods and services, and only to a lesser

extent to trade in capital, labor or other factors of production. Then trade in goods and

services can serve as a substitute for trade in factors of production. Instead of importing the

factor of production a country can import goods that make intensive use of the factor of

production and are thus embodying the respective factor. An example is the import of labor-

intensive goods by the United States from China. Instead of importing Chinese labor the

United States is importing goods from China that were produced with Chinese labor.

International trade is also a branch ofeconomics, which, together with international finance,

forms the larger branch ofinternational economics.

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http://en.wikipedia.org/wiki/Industrializationhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Outsourcinghttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/International_financehttp://en.wikipedia.org/wiki/International_economicshttp://en.wikipedia.org/wiki/Industrializationhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Outsourcinghttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/International_financehttp://en.wikipedia.org/wiki/International_economics


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The regulation of international trade is done through the World Trade Organization at the

global level, and through several other regional arrangements such as MERCOSURin South

America, NAFTA between the United States, Canada and Mexico, and the European Union

between 27 independent states.

REASONS FOR INTERNATIONAL TRADE

Domestic Non-availability

International trade is the exchange of goods and services between countries. An import is

the UK purchase of a good or service made overseas. An exportis the sale of a UK-made

good or service overseas.

A nation trades because it lacks the raw materials, climate, specialist labor, capital or

technology needed to manufacture a particular good. Trade allows a greater variety of

goods and services.

Principle of Comparative Advantage

The principle of comparative advantage states that countries will benefit by concentrating

on the production of those goods in which they have a relative advantage.

For instance, France has the climate and the expertise to produce better wine than Brazil.

Brazil is better able to produce coffee than France. Each country benefits by specializing

in the good it is most suited to making.

France then creates a surplus of wine which it can trade for surplus Brazilian coffee.

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Differences in Technology

Advantageous trade can occur between countries if the countries differ in their

technological abilities to produce goods and services. Technology refers to the techniques

used to turn resources (labor, capital, land) into outputs.

Differences in Demand

Advantageous trade can occur between countries if demands or preferences differ between

countries. Individuals in different countries may have different preferences or demands for

various products. The Chinese are likely to demand more rice than Americans, even if

facing the same price. Canadians may demand more beer, the Dutch more wooden shoes,

and the Japanese more fish than Americans would, even if they all faced the same prices.

Existence of Economies of Scale in Production

The existence of economies of scale in production is sufficient to generate advantageous

trade between two countries. Economies of scale refer to a production process in which

production costs fall as the scale of production rises. This feature of production is also

known as "increasing returns to scale."

Existence of Government Policies

Government tax and subsidy programs can be sufficient to generate advantages in

production of certain products. In these circumstances, advantageous trade may arise

solely due to differences in government policies across countries.

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IMPORTANCE OF INTERNATIONAL TRADE

Global trading provides countries and consumers the chance to be exposed to those

services and goods that are not available in their own country. Clothes, food, jewelry,

stocks, wines, spare parts etc. and many more products are available in international

market. Trading of services is also done like: banking, consulting and transportation,

tourism.

International trading lets the developed countries use their resources effectively like

technology, capital and labor. As many of the countries are gifted with natural resources

and different assets (labor, technology, land and capital), they can produce many products

more efficiently sell at cheaper prices than other countries. A country can obtain an itemfrom another country if it cannot effectively produce it within the national boundaries.

Global trading allows the different countries to participate in global economy

encouraging the foreign direct investors. These individuals invest their money in the

foreign companies and other assets. Hence the countries can become competitive global

participants.

International trading has become very important for every country of the world - be it

big or small, developing nation or developed nation. The concept of globalization started

way back 1980, developed due advancement of technology in areas transport and

communication. Another encouraging aspect is that the poor and developing nations are

trying hard to beat the competition and to satisfy the needs of the customers overseas. An

increase from less than twenty five percent to eighty percent has been observed after the

initiation of globalization. The major contribution is made by the countries like Hungry,

China, Mexico, India and Brazil.

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RISKS IN INTERNATIONAL TRADE:

The risks that exist in international trade can be divided into two major groups

1. Economic risks

Risk of insolvency of the buyer,

Risk of protracted default - the failure of the buyer to pay the amount due within six

months after the due date

Risk of non-acceptance

Surrendering economic sovereignty

Risk of Exchange rate

2. Political risks

Risk of cancellation or non-renewal of export or import licenses

War risks

Risk of expropriation or confiscation of the importer's company

Risk of the imposition of an import ban after the shipment of the goods

Transfer risk - imposition of exchange controls by the importer's country or foreign

currency shortages

Surrenderingpolitical sovereignty

Influence of political parties in importer's company

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METHODS OF PAYMENT:

1. ADVANCE PAYMENT:

When the buyer s credit is doubtful or the political or economic environment in the buyer`s

country is unstable, seller may demand advance payment, which will be to his advantage.

Without any assurance for supply of goods, blocking his capital prior to receipt of goods or

services the buyer will be at a disadvantageous position.

2. OPEN ACCOUNT:

By an arrangement between the buyer and the seller, manufactured goods will be

delivered to the buyer directly or to his order and the buyer will be at the end of the agreed

period. This type of trading requires a high degree of trust between the buyer and the

seller and it will be more advantageous to the buyer.

3. BILLS ON COLLECTION BASIS:

It is an arrangement by which the seller after shipping the goods submits the documents to

his bank as agent for collection. Documents are presented to the buyer through the

correspondent bank of the seller`s bank, which will be released upon buyer`s payment of

the amount specified.

4. DOCUMENTARY CREDITS: (LETTERS OF CREDIT) :

It is one the most convenient methods of selling payments in International Trade. It

provides complete financial security to the seller of goods. Seller may not know the credit

worthiness of the buyer and the prevailing regulations in the country of the buyer. But

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once the letter of credit is established by the buyer`s bank on behalf of the buyer in favor

of the seller and the seller submits then set of required documents to the opening bank or

to the nominated bank, the seller is assured of payment. Buyer also gets the advantage of

his banker`s assistance closely scrutinizing the documents and only after receiving the

relevant documentary evidence from the seller by the banker nominated in the credit, the

nominated banker releases payment.

Method of

payment

TIMING OF

PAYMENT

GOODS

AVAILABILITY

SELLER`S RISK BUYER`S

RISK

ADVANCE Before

shipment

At destination

arrival

None 100%

reliance on

seller

SIGHT L/C Presentation

of documents

after

shipment

When L/C is paid Minimal

Issuing/confirming

bank`s obligation to

pay if documents

confirm to L/C

Assurance

of

shipment,

but depends

on seller to

supply

goods

ordered.

USANCE L/C Maturity Date

or at discount

of the draft

At acceptance of

draft drawn under

the L/C.

Minimal, Bank`s

obligation to pay if

documents confirm

to L/C terms.

Regardless

of product

quality,

payment

due at

maturity.

D/P

COLLECTION

When

documents

are received

at Presenting

Bank

When payment is

made.

Non-Payment of

draft.

Assurance

of

shipment,

but depends

on seller to

supply

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goods

ordered

D/A

COLLECTION

When

accepted Bill

of exchange

matures.

At time Bill of

Exchange is

accepted.

Non-payment of Bill

of Exchange, even

though buyer has the

merchandise.

Minimal,

may refuse

to pay at

maturity.

OPEN A/C Buyer`s

discretion

Upon arrival 100% reliance on

buyer

Zero

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DOCUMENTS USED IN INTERNATIONAL TRADE

TRANSACTIONS:

Commercial documents used in international trade are broadly classified into 4 categories

namely

Financial documents

Commercial documents

Transport documents

Risk Covering documents

Regulatory documents

FINANCIAL DOCUMENTS:

These documents perform the function of obtaining finance, collection of payment etc. The

most common financial document used is bill of exchange.

Bill of Exchange: (B/E):

A B/E is also referred to as Draft or Hundi. In many countries a B/E is recognized as a

legal document. In India section 5 of the Negotiable Instruments Act, 1881 defines the B/E. A

B/E performs the 5 basic functions which are

Collecting payment: B/E shows that there is a commercial of trade transaction underlying the

B/E drawn and it is an instrument for collecting payment arising out of such a transaction.

Demanding Payment: When a B/E is drawn and presented to the drawee (buyer) for payment,

it amounts to having made a demand on the drawee to pay the payment.

Extending Credit: When a B/E is drawn for a particular tenure it means that the drawer

(seller) is allowing the drawee to make payment at a future date i.e. the seller is extending hisbuyer a credit.

Promise of Payment: Certain B/E`s are drawn on acceptance basis, i.e. the drawee will be

given the documents upon his acceptance to pay the bill at a specified tenure. Such an

accepted bill of exchange is sufficient evidence of promise of payment by the drawee.

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Receipt of Payment: When the amount shown on a B/E is paid by the drawee, the payee

endorses the B/E is received payment. Thus a discharged B/E acts as a receipt for having

paid the amount.

In International Trade B/E are drawn in sets of two so that each one can be sent with one set

of document. When they are drawn in sets of two, each one bears the exclusion clause makingthe other part of the draft invalid.

B/E can be classified into two categories:

SIGHT B/E: Under this the drawee has to make a payment on presentation/sight/demand.

Documents drawn under this credit will be delivered to the payee only on payment.

USANCE B/E: Under this the drawee is directed to make payment after a stated number of

days or a period from a particular date or event. There are two types of usance:

Usance documents against payment basis: In this the drawee is allowed to make the payment

after a stated tenure, but the documents covered by the draft will be delivered only on

payment of the draft amount.

Usance documents against acceptance basis: In this the documents will be delivered to the

drawee against his acceptance of the draft for the payment at the maturity on the due date.

As per Indian Stamp Act usance B/E drawn or made payable in India attract stamp duty.

Other common financial documents used are receipts, promissory notes, etc.

COMMERCIAL DOCUMENTS:

Documents which are needed by the buyer and the seller for their normal business

transactions are termed as commercial documents. Some of the common commercial

documents are:

Commercial Invoice: Also known as document of contents because it generally contains all

the information required for the preparation of all other documents. There is no standardformat for commercial invoice but it normally contains the following:

DATE

NAME & ADDRESS OF THE SELLER AND THE BUYER

ORDER NO. /CONTRACT NO. / PROFORMA INVOICE NO. Or DETAILS OF CREDIT

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DESCRIBTION

QUANTITY

QUALITY OF GOODS

TERMS OF SALE

PORT OF SHIPMENT AND PORT OF DESTINATION

VALUE OF GOODS & ANY ADJUSTMENTS like ADVANCE, DISCOUNT ETC. but the

total value payable must always be given.

SHIPPING MARKS or NO. ON PACAGES

ANY OTHER ADDITIONAL CERTIFICATIONS REQUIRED UNDER THE CREDIT

Certificate of origin: The certificate of origin indicates the country where the goods were

originally produced or manufactured. Generally an independent agency like Chamber of

Commerce, Export Promotion Council, Trade association or any other body which is

authorized in this behalf issues a certificate of origin of goods.

In many countries permission to import is refused unless a certificate of origins produced.

Further, this is also used to determine the concessional tariff rates applicable to the goods.

There are two categories of certificate of origin:

Preferential Certificate of origin:

Generalized System of Preferences (GSP) It is a non- contractual instrument by which

developed countries extend tariff concessions to developed countries. Normally the customs

of GSP offering countries require information in form a duly filled by the exporter of the

beneficiary country and certified by authorized agencies.

Global System of Trade Preferences (GSTP) In this the trade concessions are exchanged

among developing countries who have signed the agreement. Export Inspection Council is the

sole agencies authorized to issue certificate of origin under GSTP. The agreement

establishing SAPTA, the Bangkok agreement i.e. the Economic and Social Commission for

Asia and Pacific (ESCAP) and free trade agreement (FTA) between India and Sri Lanka are

some of the other preferential trading arrangement designed to liberalize and expand trade

inputs.

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Non-Preferential Certificate of Origin :

Non-Preferential Certificate of Origin merely evidences the origin of goods from a particular

country and does not bestow any tariff benefits for exports to the importing nations.

Packing List: It is a document which shows the nature and number of packages with

distinctive numbers or marks. This is generally needed by the importer when he is importing

different types or sizes of merchandise so that he may identify the nature of goods in each

package. It is also used by customs for checking the goods on random basis.

Weight Certificate: It is a certificate certifying the weight of the goods, generally given by

the exporter which may at times be counter signed by an independent agency. It may give the

net weight as well as the gross weight.

Certificate of Analysis and Quality: It is a certificate that indicates the quality, technical

composition and intricate nature of goods, described in the invoice. The certificate may be

given by the exporter himself or an institution which is competent or nominated to give such a

certificate.

Certificate of Inspection: It is a document certifying that the goods have been inspected. T

his document is generally desired by the importer, so that he can be sure that the right type of

goods ordered is being sent by the exporter. F or this purpose an agency called Export

Inspection Council was created. Certificate of analysis, inspection certificate and pre-

shipment inspection certificate or any other document may be dated after the date ofshipment.

TRANSPORT DOCUMENTS:

In international trade the goods moved from the warehouse of the exporter to the warehouse

of the importer. The goods may move by land, water or air or a combination of two or more.

One of the important aspects to be remembered with regard to any transport document is that

it must show the name of the carrier.

Bill of lading: It is a transport document representing movement of goods by water. A bill of

lading is a formal receipt given by the ship owners or their authorized agents that the goods

mentioned there in (quantity, quality, description, etc) are shipped to a specified date and

vessel and are deliverable to a person mentioned therein or to his order after payment of all

dues of the shipping company.

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There are three main functions of a bill of lading-

It is an evidence contract of affreightment because it contains detailed terms and conditions

on which the carrier has accepted the goods for shipment from the ship.

It is a receipt for the goods because the ship owner or their agents who have issued it declare

that the goods described wherein are received from the specified person for shipment to a

named port.

It is a document of title to goods because it states that the goods received for shipment by the

carrier are deliverable to the named person or his order.

Bill of lading is a Quasi Negotiable instrument. The title to the goods covered by a bill oflading can be transferred by endorsement and delivery of the instrument, it is still not a fully

negotiable instrument like bill of exchange, the simple reason being that it represents the title

to goods and is governed by a Sale of Goods Act, where as a bill of exchange represents title

to money and is governed by the Negotiable Instruments Act. For this reason a bill of lading

is termed as Quasi Negotiable Instrument as its negotiation may not be completed and free

from qualification.

Generally bills of lading are issued in a set of two or three and presentation of any one ofthem will entitle the holder to claim the goods and render the other negotiable copies void.

Airway Bill: It is an acknowledgement issued by an airline company or their authorized

agents stating that they have received the goods detailed therein for dispatch by air to the

named consignee at the address stated therein. Unlike a bill of lading, airway bill is not a

document of title to goods because it is merely an acknowledgement of goods and therefore a

not a negotiable document, and hence it is not necessary for a consignee to possess the airway

bill for delivery of goods. In case of airway bill it is obligatory on the part of the airlines tonotify the consignee on arrival of goods.

Postal Receipt: It can be a sea-mail receipt or airmail receipt depending on the mode by

which they are sent. Postal receipt is an acknowledgement of receipt of goods for delivery to

consignee and hence not a document of title to goods nor is it a negotiable instrument. Like

airway bill it is not considered a safe document from the banker`s point of view.

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Multimodal Transport Document: This document is issued when the movement of goods

involves more than one mode of transport. In multimodal transport carriers (called as

multimodal transport operators) take the liability for safe conduct of transport of goods by

various modes of transport from the place of receipt of goods to the place of delivery. It s also

a negotiable document and transferable. MTD is a safe document as it has the guarantee of

the operators for the safe conduct of goods.

Risk covering documents:

As the name indicates these are the documents which represent insurance cover against the

physical risks to the goods that are moving from exporter to overseas importer.

Insurance policy: It is a contract of insurance. In international trade marine insurance is the

most common document obtained either by exporter or importer for safety of goods. Thepolicies basically cover the perils of sea. Insurance policies are generally freely assignable to

anyone who acquires insurable interest. The assignment is usually effected b y blank

endorsement. There are two types of policies:

Specific policy: It is a policy issued for a particular voyage covering specific goods.

Open policy: It is a blank policy issued by the insurers for a specified amount and period and

exporter can cover any number of shipments within the stipulated amount and period.

In terms of UCP 600 Article 28 insurance to cover a minimum of 10% more than the CIF

(cost insurance freight) value of the goods and to cover the risks from date of shipment. T he

insurance cover should also be available in the same currency of drawing.

REGULATORY DOCUMENTS:

These documents are required for compliance of regulations of either exporters country or

importers country.

Export declaration form: As per Indian Exchange Control regulations detail of all goods,

by whatever means exported from India are required to be declared on certain specified

forms. These forms are evolved by RBI to ensure that the value of all the goods exported

from India is declared in the foreign exchange due is repatriated to India. These forms enable

RBI to compile vital foreign trade data and also to exercise control over the exporter/export

activities. All these forms bear distinct serial numbers with a two alphabet prefix followed by

a six digit numeral.

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G.R. /S.D.F. FORM: this form is in duplicate to be used when exports are made to all

countries otherwise than by post.

P.P. FORM: This form is also in duplicate and should be used when exports are made to any

country by post parcel.

SOFTEX FORM: this form is to be used when computer software is being exported in Non

Physical form. This form is to be submitted in triplicate.

Export certificate: Certain goods can be exported from India subject to conditions of export

licensing policy etc, In such cases the goods will be allowed to be exported only when an

export certificate is issued. Generally these certificates are issued by the agencies like

commodity boards, export promotion councils nominated by government of India. This

certificate may be needed for verification by customs of both exports and importers country.

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INCOTERMS

Parties to a contract are unaware of the different trading practices in their respective

countries. This can give rise to misunderstandings, dispute and litigation with all the waste of

time and money that this entails. In order to remedy these problems, the International Trade

of Commerce (ICC) first published in 1936 a set of international rules for the interpretation of

trade terms. These rules were known as INCOTERMS 1936. Amendments and additions

were later made in 1953, 1967, 1980, 1990 and presently 2000, in order to bring the rules in

line with current international trade practices and same is going to be replace by New

INCOTERMS 2010.

The purpose of INCOTERMS is to provide a set of international rules for the interpretation of

the most commonly used trade terms in foreign trade. Thus the uncertainties of different

interpretations of such terms in different countries can be avoided or at least reduced to a

considerable degree.

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THE STRUCTURE OF INCOTERMS 2000: 4 groups of terms

GROUP E Departure EXW: Ex works

GROUP F Main Carriage Unpaid FCA: Free Carrier

FAS: Free Alongside Ship

FOB: Free On Board

GROUP C Main Carriage Paid CRF: Cost and Freight

CIF: Cost Insurance and

Freight

CPT: Carriage Paid To

CIP: Carriage Insurance Paid

To

GROUP D Arrival DAF: Delivered at Frontier

DES: Delivered Ex Ship

DEQ: Delivered Ex Quay

DDU: Delivered Duty

Unpaid

DDP: Delivered Duty Paid

The terms have been grouped in four different categories starting with the term whereby the

seller makes the goods available to the buyer at the sellers own premises (the E term ex

works) followed by the second group whereby the seller is called upon to deliver the goods to

a carrier appointed by the buyer free of risk and expense to the buyer (the F terms FCA,

FAC & FOB) followed by the C terms where the seller has to contract for carriage but

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without assuming the risk of loss of or damage to the goods or additional costs due to events

occurring after shipment and dispatch (CFR, CIF, CPT & CIP) and finally the D whereby

the seller ahs to bear all costs and risks needed to bring the goods to the country of destination

(DAF, DES, DEQ, DDU, DDP).

Although INCOTERMS may become part of the contract of sale without express reference,

the parties are strongly advised to include in their contract in conjunction with the trade term,

the words INCOTERMS 2000.

The relation between the INCOTERMS and documentary credits concerns the sellers

obligation to deliver documents to the buyer in order to prove that the seller has fulfilled his

obligation under the INCOTERMS and the contract of sale and that the buyer is obliged to

pay him. Explanation of some of the most commonly used INCOTERMS are as follows:

EXW: {Ex-works (. Named place)}

Seller pays packing and delivery, cleared for export, into the charge of the carrier.

Delivering the goods at the named point into the custody of the carrier fulfills the sellers

obligations. INCOTERMS intend that this term should replace FOB Airport and the old

Free on RAIL or Free on TRUCK (FOT).

FAS : {Free Alongside Ship ( named port of shipment)}

This term means that the seller fulfills his obligation to deliver when the goods have been

placed alongside the vessel on the quay or in the lighters at the named port of shipment

and the buyer has to bear all costs and risk of loss of or damage to the goods from that

moment.

This term can only be used for sea or inland water way transport.

FOB {Free on board (..named port of shipment)}

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Seller pays for packing, delivery to the place of loading, any charges for loading on ship

plus export customs clearance and documentation charges.

This term is used for ocean transport only.

CFR{Cost and Freight (. Named port of destination)}

This term means that the seller pays all transport and documentation charges up to arrival

at named port of destination except marine insurance which has to be arranged by the

buyer. This term is also confined to ocean movement.

CIF {Cost Insurance and Freight (.named port of destination)}

This term is same as CFR except that the seller pays for the marine insurance.

CPT {Carriage paid to (named place of destination)}

Seller pays freight and charges to the named destination including additional freight from

port of arrival to named destination. This term is applicable for all modes ocean and air.

CIP { Carriage and Insurance paid to ( .named place of destination)}

Same as CPT except that seller has procedure and pay for cargo insurance.

DAF { Delivered at Frontier (named place)}

Frontier may be any frontier including that of the country of export. For example, an

Italian seller to the UK could quote DAF Italian Border.

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DES { Delivered Ex Ship ( named port of destination)}

This term means that the seller has to bear all the costs and risks involved in bringing the

goods to the named port of destination. This term can be used only for sea or inland

waterway transport.

DEQ {Delivered EX Quay (Duty Paid)(named port of destination)}

This term means that the seller has to bear all the risks and costs including duties, taxes

and other charges of delivering the goods at named port of destination except the import

clearance.

If the parties wish the buyer to clear the goods for importation and pay the duty the words

duty unpaid should be used. If the parties wish to exclude from the sellers obligations

some of the costs payable upon importation of the goods such as VAT, this should be

made clear by adding words delivered ex quay, VAT unpaid.

This term is used only for sea or inland waterway transport.

DDU {Delivered Duty Unpaid (..named place of destination)}

Seller is responsible for all charges up to delivery at the named place of destination but

excluding duty and taxes.

DDP {Delivered Duty Paid (.named place of destination)}

Same as DDU but includes payment of import duty. If the taxes such as VAT are also

required to be paid by the seller, then this must be incorporated by adding words to this

effect. INCOTERMS does not recommend that this term should be used for those

detonations where import licenses are a requirement.

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INTERNATIONAL STANDARD BANKING PRACTICES (ISBP):

Since the approval of International Standard Banking Practice (ISBP) by the ICC Banking

Commission in 2002, ICC Publication 645 has become an invaluable aid to banks, corporates,

logistics specialists and insurance companies alike, on a global basis. Participants in ICC

seminars and workshops have indicated that rejection rates have dropped due to the

application of the 200 practices that are detailed in ISBP.

As a means of creating a relationship between the UCP and ISBP, the introduction to UCP

600, states: During the revision process, notice was taken of the considerable work that had

been completed in creating the International Standard Banking Practice for the Examination

of Documents under Documentary Credits (ISBP), ICC Publication 645. It is the expectation

of the Drafting Group and the Banking Commission that the application of the principles

contained in the ISBP, including subsequent revisions thereof, will continue during the time

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UCP 600 is in force. At the time UCP 600 is implemented, there will be an updated version of

the ISBP to bring its contents in line with the substance and style of the new rules.

This publication reflects international standard banking practice for all parties to a

documentary credit. Since applicants obligations, rights and remedies depend upon their

undertaking with the issuing bank, the performance of the underlying transaction and the

timeliness of any objection under applicable law and practice, applicants should not assume

that they may rely on these provisions in order to excuse their obligations to reimburse the

issuing bank. The incorporation of this publication into the terms of a documentary credit

should be discouraged, as the requirement to follow agreed practices is implicit in UCP 600.

ISBP is conceived as an intelligent check list for procedures for document checkers to follow

in scrutinizing presented under credit. The revised ISBP consists of three parts covering 185

issues as under:

1. Preliminary considerations : 1-5

2. General principles : 6-42

3. Issues relating to documents:

Drafts : 43-56

Invoice : 57-67

Transport document : 68-169

Insurance documents : 170-180

Certificate of origin : 181-185

Some of the issues are highlighted in the following paragraphs:

1. PRELIMINARY CONSIDERATIONS:

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Even if the credit expressly refers to underlying sale contract on the basis of which the

credit might have been established, the terms of the documentary credit are

independent.

There are certain credits calling for presentation of documents that are to be issued or

countersigned by the applicant himself. For some reasons if the applicant decides not

to issue the prescribed document or not agreeing to countersign the document, the

credit, issued and/or countersigned by the applicant. If a credit includes such terms, the

beneficiary must seek an amendment deleting such terms or bear the risk.

2. GENERAL PRINCIPLES:

Use of generally accepted abbreviations should not make a document

discrepant. Using Slash Marks (/) may have different meaning. Slash Marks

should not be used as a substitute for a word.

Corrections and alterations in documents, other than documents created by the

beneficiary, must appear to be authenticated by the party who has issued the

documents or by a party authorized by the issuer to do so.

Drafts/transport documents/insurance must be dated even if the credit does not

require so. Any document may be dated after the date of shipment. However if

a credit requires a document evidencing a pre-shipment event the document

must indicate that the event took place prior to or on the date of shipment.

Any mis-spelling or typing error which occurs that does not affect the meaning

of the sentence in which it occurs do not make the document discrepant.

Documents issued in more than one original may be marked original,

duplicate, triplicate or 1st original, 2nd original, etc. None of these markings

disqualify a document as original.

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Even if not stated in the credit, drafts, certificates and declaration by their nature, they

require signatures. Transport documents, insurance must be signed in accordance with

a provision of UCP. A photocopy of a signed document or a signed document

transmitted to a fax machine does not qualify as the signed original document.

All documents except draft required in the credit would be treated as shipping

documents.

Stale documents are documents presented later than 21 days after the date of

shipment. These documents are acceptable as long as they are presented within

the validity of the credit.

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URR (UNIFORM RULES FOR BANK TO BANK

REIMBURSEMENT UNDER DOCUMENTARY CREDITS)

ICC BROCHURE NO. 725:

Reimbursement practice under documentary credits under the ICC uniform rules (URR) thefollowing remarks briefly summarizes some of the main provisions of the ICC uniform rules

for bank to bank reimbursements under documentary credits and outline some of the

procedures to be followed.

Application of URR:

The credit issuing bank provides for the application of the URR by incorporating them into

the text of the instructions that it sends to the reimbursing bank. When they are so

incorporated the URR are binding on all parties concern. The ICC working partyrecommended the use of the following standard clause:

This reimbursement authorization is subject to the uniform rules for bank to bank

reimbursements under documentary credits, ICC publication no. 725.

This is an arrangement between the issuing and the reimbursing banks only; the claiming

bank on the other hand is not a party to the reimbursement authorization.

NATURE OF REIMBURSEMENT OPERATION:

The URR makes it clear that the reimbursement procedures are separate transactions from the

underlying credits, and that reimbursing banks are not concerned with or bound by the terms

of such credits.

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Relationships between the banks:

There is an agency contract under which the reimbursing bank agrees to effect a

reimbursement on behalf of the issuing bank. The bank charged with making the

reimbursement acts merely as an intermediary in discharging the issuing banks

reimbursement obligation.

However in some cases the reimbursing bank is requested by the issuing bank to provide its

own independent reimbursement undertaking to the claiming bank. This provides the

claiming bank with assurance that it has a direct right of action against the bank from which it

claims the money.

The URR stresses the point made above that unless the reimbursing bank has such an

undertaking, it has no obligation to meet the claiming banks demand for reimbursement.

If the bank chosen to make the reimbursement decides at the outset that it is not prepared toact in accordance with instructions received, it must inform the issuing bank without delay.

The issuing bank is responsible in all cases for providing the information required by the

URR and for the consequences of failing to do so.

AUTHORIZATION & AMENDMENT:

All reimbursement authorizations and amendments to such authorizations must any issued in

the form of an authenticated tele-transmission or signed letter. This is partially safeguarded

with respect to authenticity of the instructions. At the same time authorizations have to set out

the following specific items of information: credit no., currency and amount, additional

amounts payable and tolerance, if any, claiming bank details and parties responsible for

charges.

If a draft is to be presented for acceptance, details of the tenure drawer and parties responsible

for any charges must also be specified.

In some cases, the issuing banks require the claiming bank to notify them before cleaning on

the reimbursing bank. This practice is referred to as pre-notification. Such requirement must

be included in the credit and not in the reimbursement instructions.

AMENDMENT & CANCELLATION:

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Except in cases where a reimbursement undertaking is involved, the issuing bank can at

anytime cancel or amend its reimbursement authorization by notice to the reimbursing bank.

The issuing bank has to provide the nominated advising bank with fresh instructions if the

original instructions are cancelled prior to the expiry of the credit.

The reimbursing bank cannot amend or cancel a reimbursement undertaking given to theclaiming bank without the agreement of that later bank.

EXPIRY:

URR specifies that an ordinary reimbursement authorization must not have an expiry date or

latest date for presentation of claims except as agreed to by the reimbursing bank. But if the

reimbursing bank is to issue an undertaking, the authorization and the undertaking must both

indicate the latest date for presentation of a claim including any applicable usance period.

CLAIMS PROCEDURE:

The claiming banks claim for reimbursement must be in the form of tele-transmission.

Reimbursing banks have a reasonable time (not to exceed 3 banking days) to process claims.

The reimbursing bank must inform the claiming bank and the issuing bank if it decides not to

reimburse.

CHARGES:

The reimbursing banks charges should normally be for the account of the issuing bank. In

cases where the charges are for the account of another party, it is the responsibility of the

issuing bank to provide the appropriate information in both the credit and the reimbursement

authorization.

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STANDBY LETTER OF CREDIT

Commercial Letter of credit issued to pay for shipments normally require that the beneficiary

present current bill of lading, insurance certificates, commercial invoices etc. Standby letters

of credit, on the other hand, are not typically used to pay for a current shipment of goods and,

therefore, documents evidencing a sale and shipment of goods are not required. Standby

letters of credit are frequently used as a form of payment guarantee in the case of non-

performance by the applicant of a contractual or other obligation owed by the applicant to the

beneficiary. Standby letter of credit are also frequently used to effect direct payment to thebeneficiary.

Before discussing the variety of purposes served by standby letters of credit, let us review the

two basic types the guarantee type (sometimes called default) and the payment type

(sometimes called direct-pay)

GUARANTEE (DEFAULT) TYPE : -

Standby Letter of credits may be issued to provide funds following a default by the banks

customer of its contractual or other obligations. They typically provide for payment against

receipt of the beneficiarys statement that the applicant is in default of its obligation to the

beneficiary and that the amount demanded is owed as a consequences of that default. Because

a letter of credit is independent of the underlying contract, the banks obligation to pay under

a standby letter of credit does not depend on whether there has in fact been a default.

PAYMENT (DIRECT PAY) TYPE

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In this case, beneficiary is expected to draw under the Standby Letter of Credit to obtain

payment when due on the underlying contract. The payment type standby letter of credit

functions as an immediate, no default payment mechanism, under which the beneficiary

receives the funds of the issuing bank, rather than the applicant.

What are the risks?

There are risks in any commercial or financial transaction. With a standby letter of credit, the

issuing bank substitutes its creditworthiness for that of its customer, the applicant. The

standby letter of credit entitles the beneficiary to payment from the issuing bank, up to a

stated amount, on presentation of strictly complying documents required by the Standby

Letter of Credit. The primary risks for the beneficiary are whether the irrevocable

commitment is given by a reputable and financially sound bank, and whether the beneficiary

can comply with the standby letter of credit terms and conditions in every contingency forwhich payment might be owed by the applicant to the beneficiary.

The applicant is obligated to the bank for any amount paid under the standby letter of credit.

The primary risks for the applicant arise from the fact that the documents to be presented

under a standby letter of credit typically lack intrinsic value. They are frequently statements

signed by the beneficiary. Therefore, the applicant must use sound business judgment when

entering into a contract with a party in whose favor the standby letter of credit will be issued

judgment that the beneficiary will use the standby letter of credit in a manner consistent with

the underlying agreement and understanding of the applicant. The need for integrity exists in

every business transaction. It is the applicant that assumes this risk.

Whether a standby letter of credit is intended to function as a guarantee or as a payment

mechanism, the terms and conditions of the issuing banks relationship with its customer are

established by the application and agreement.

When the banks customer applies for credit, the bank must decide whether it will assume the

credit risk and other risks arising fro the issuance of the standby letter of credit for the

account of that customer. Once the application is signed by the customer and the risks to bank

are accepted by the bank in reliance on application form, the standby letter of credit is issue

according to the applications specification.

Examples of Typical Standby Letters of Credit

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The terms and conditions contained in a standby letter of credit vary based on the transaction.

Standby letters of credit can be adapted to meet specific needs. The variety of illustrations

shown below demonstrates the versatility of Standby letter of credit.

Each standby letter of credit illustrated is addressed to a beneficiary. The opening paragraph

provides basic details, including the name of the applicant, the amount, the expiration date,and the place of presentation.

The second and succeeding paragraphs contain the standby letter of credits documentary

requirements. Each documentary requirement must be met exactly before the beneficiary is

entitled to payment.

The closing paragraphs state the issuing banks undertaking to honor, for e.g. by paying the

Beneficiary or reimbursing a nominated bank, incorporate practice rules such as the UCP or

the more recent and targeted International Standby Practices (ISP98), and chose the desired

law governing the undertaking and forum for resolving disputes.

Bid and Performance Standbys

It is a common business practice for firms to bid on projects and material purchases and to

accompany each bid with some form of collateral or assurance covering a percentage of the

bid price. A standby letter of credit may serve to assure that the bidder, if successful, will

either become party to the contract or pay the percentage of the bid price available under the

standby letter of credit.

Illustration is an example of a bid guarantee standby letter of credit. It enables the Applicant

Bidder to use the banks credit instead of cash or other form of collateral to support the bid.

Some contracts require that the successful bidder also submit a performance guarantee. A

standby letter of credit in favor of the purchaser protects the purchaser against a default by the

bidder. It is a similar to a bid guarantee standby letter of credit, except that its required form

of beneficiary statement covers performance completion under the contract instead of the bid.

Overseas Bank Guarantee

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Occasionally foreign laws and regulations require an overseas bank guarantee, which is a

guarantee or other undertaking issued by one of the countrys local banks in favor of one of

its nationals (a citizen, company or government agency).

To meet this requirement a U.S. firm could request that a bank issue a Standby Letter of

Credit in favor of a correspondent bank or branch located overseas. This type of StandbyLetter of Credit, depicted in Illustration, serves to protect the overseas bank or branch in

the issuance of its local guarantee or other undertaking. The overseas bank will be entitled to

draw under the standby letter of credit by presenting its own statement that it was required to

disburse the amount drawn under its local guarantee or undertaking.

Care must be exercised in negotiating contracts requiring overseas bank guarantees. In some

countries, local laws may provide that a guarantee or other undertaking covering a contract

cannot be terminated prior to the termination of the contract itself, or, in many cases, prior to

the beneficiarys formal acceptance of the product or service to which the guarantee relates.

Consequently, a standby letter of credit issued to protect a local banks issuance of its

guarantee or other undertaking may not expire on the stated expiration date. This means that

the applicant cannot be released from its obligation until all the intermediary banks have been

released.

A standby letter of credit of this type should have an expiration date not earlier than the

expiration date of the underlying contract, or if the expiry of the standby letter of credit

precedes the expiry of the contract, it should outline provisions for the local Beneficiary bank

to draw. If the local guarantee or other undertaking has not been terminated, the standby letter

of credit in favor of the local bank may need to be extended for one or more additionalperiods. If not extended, the terms of the standby letter of credit may permit the local bank to

draw on the standby letter of credit to ensure itself sufficient funds to cover potential future

drawings under its local guarantee or other undertaking.

Letter of Credit Support for Surety Bonds

Contracts, government regulations, and court proceedings sometimes require one party to post

a surety or indemnity bond. The primary issuers of the bonds are insurance and surety

companies. The party required to post bond applies for the bond. If the applicants financial

status is unknown to the bonding company, it may require that the Applicant obtain a Standby

Letter of Credit issued in its favor as protection. This step shifts financial risk associated with

the bond amount from the surety company to the bank issuing the Standby Letter of Credit. A

Standby Letter of Credit issued in favor of a surety company.

Municipal Bonds

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Standby Letters of Credit are used to enhance the credit rating of municipal and other bonds

and notes and may be structured as either a guarantee type or payment type Standby Letter of

Credit. By substituting the banks stronger credit rating for that of the bond issuer, the bonds

will receive an enhanced credit rating and may be marketed at lower rates.

Reinsurance

Standby Letter of Credit are frequently used to meet insurance industry requirements. The

precise form of such undertakings may be dictated by the insurers regulators. Illustration.

Is a typical Standby Letter of Credit supporting the obligations of a reinsurer to an insurer.

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BANKERS ACCEPTANCE

Introduction : - A banker's acceptance, or BA, is a negotiable instrument ortime draft drawn

on and accepted by abank. Before acceptance, the draft is not an obligation of the bank; it is

merely an order by the drawer to the bank to pay a specified sum of money on a specified date

to a named person or to the bearer of the draft. Upon acceptance, which occurs when an

authorized bank accepts and signs it, the draft becomes a primary and unconditional liability

of the bank. If the bank is well known and enjoys a good reputation, the accepted draft may

be readily sold in an active market. A banker's acceptance is also a money market instrument

a short-term discount instrument that usually arises in the course ofinternational trade.

A banker's acceptance starts as an order to a bank by a bank's customer to pay asum of money at a future date, typically within six months. At this stage, it is like a postdated

check. When the bank endorses the order for payment as "accepted", it assumes responsibility

for ultimate payment to the holder of the acceptance. At this point, the acceptance may be

traded in secondary markets much like any other claim on the bank.[1]

Bankers' acceptances are considered very safe assets, as they allow traders to substitute the

banks' credit standing for their own. They are used widely in international trade where the

creditworthiness of one trader is unknown to the trading partner. Acceptances sell at a

discount from face value of the payment order, just as US Treasury bills are issued and trade

at a discount frompar value. Bankers' acceptances trade at a spread over T-bills. The rates atwhich they trade are called bankers' acceptance rates. The Fed publishes BA rates in its

weekly H.15 bulletin. Those rates are a standard index used as an underlier in various interest

rate swaps and otherderivatives.

Acceptances arise most often in connection with international trade. For example, an

American importermay request acceptance financing from its bank when, as is frequently the

case in international trade, it does not have a close relationship with and cannot obtain

financing from the exporterit is dealing with. Once the importer and bank have completed an

acceptance agreement, in which the bank agrees to accept drafts for the importer and the

importer agrees to repay any drafts the bank accepts, the importer draws a time draft on the

bank. The bank accepts the draft and discounts it; that is, it gives the importer cash for the

draft but gives it an amount less than the face value of the draft. The importer uses the

proceeds to pay the exporter.

The bank may hold the acceptance in its portfolio or it may sell, or rediscount, it in the

secondary market. In the former case, the bank is making a loan to the importer; in the latter

38
http://en.wikipedia.org/wiki/Negotiable_instrumenthttp://en.wikipedia.org/wiki/Bankers'_acceptance#Comparison_with_other_draftshttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Money_markethttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Bankers'_acceptance#cite_note-0%23cite_note-0http://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Creditworthinesshttp://en.wikipedia.org/wiki/Face_valuehttp://en.wikipedia.org/wiki/Treasury_security#Treasury_billhttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Importerhttp://en.wikipedia.org/wiki/Exporterhttp://en.wikipedia.org/wiki/Negotiable_instrumenthttp://en.wikipedia.org/wiki/Bankers'_acceptance#Comparison_with_other_draftshttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Money_markethttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Bankers'_acceptance#cite_note-0%23cite_note-0http://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Creditworthinesshttp://en.wikipedia.org/wiki/Face_valuehttp://en.wikipedia.org/wiki/Treasury_security#Treasury_billhttp://en.wikipedia.org/wiki/Par_valuehttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Importerhttp://en.wikipedia.org/wiki/Exporter


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case, it is in effect substituting its credit for that of the importer, enabling the importer to

borrow in the money market. On or before the maturity date, the importer pays the bank the

face value of the acceptance. If the bank rediscounted the acceptance in the market, the bank

pays the holder of the acceptance the face value on the maturity date

FLOW OF BANKERS ACCEPTANCE

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Eligible Transactions : -

An eligible bankers acceptance must grow out of one of the following eligible transactions: -

The import or export of goods

The domestic shipment of goods or

The storage of readily marketable staples. (A readily marketable staples defined by the

Board to mean manufactured goods or raw materials which are non-perishable, generally

produced, well established in commerce and have an easily ascertainable price).

Ineligible Bankers acceptance: -

Although generally less attractive than eligible bankers acceptances, ineligible bankers

acceptance financing may be an attractive alternative to direct borrowing during periods when

bank funds are limited and customers borrowing needs are extraordinary.

An ineligible bankers acceptance involves a draft(s) drawn on and accepted by any member

bank of the federal reserve system or any foreign bank subject to the international banking act

reserve requirements and has the following characteristics

the transaction does not meet the boards requirements i.e. the draft has a tenor longer than six

months or does not involve the import or export of goods, the domestic shipment of goods, or

the storage of readily marketable staples.

the drafts are typically discounted at a higher rate;

the discounting bank may be required to post reserves; anf

the drafts are marked Ineligible: on their face.

Importers and exporters needing to finance merchandise, internationally or within the U.S.,

should investigate Bankers acceptance financing. At times, such financing may be more

advantageous than direct borrowing. During periods of tight money (when banks have

limited funds to meet all customer borrowing needs), banks may be willing to provide

bankers acceptance financing despite a limited availability of funds for direct loans.

B/A Financing: Advantages & Disadvantages

Advantages:

* Permits seller of goods to offer buyer extended payment terms while allowing for

immediate funding.

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* Foreign users access the U.S. dollar market at lower rates than might be available in their

own countries.

* Rates are often lower than rates tied to prime.

* Cash flow, i.e., when goods underlying the B/A are sold, the proceeds are used to repayB/A.

Disadvantages:

* Financing can only be extended for a maximum of six months for B/A to be considered

eligible.

* Federal Reserve regulations restrict this type of financing, e.g., underlying shipments must

correspond to the tenor (terms of agreement) of the B/A.

Clearly, the bankers' acceptance can be an attractive financing alternative for merchandise

acquired through the letter-of-credit vehicle. Although the B/A is frequently misunderstood, it

is a relatively uncomplicated instrument when the basic mechanics are clearly presented. In

summation, it is apparent that the use of bankers' acceptances has been instrumental in

alleviating the financing constraints often associated with global market activity.

BANKERS ACCEPTANCE FORMAT

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FORFAITING AND FACTRORING

Brief History

Factoring has a long and rich tradition, dating back 4000 years to the days of Hammurabi.

Hammurabi was the king of Mesopotamia, which gets credit as the Cradle of Civilization.

In addition to many other things, the Mesopotamians first developed writing, put structure

into business code and government regulation, and came up with the concept of factoring.

With the advent of the Industrial Revolution, factoring became more focused on the issue of

credit, although the basic premise remained the same. By assisting clients in determining

creditworthiness of their customers and setting credit limits, factors could actually guarantee

payment for approved customers. This is known as factoring without recourse (or non-

recourse factoring) and is quite common in business today.

Forfaiting and factoring

Forfaiting and factoring are similar services that serve to provide better cash flows and risk

mitigation to the seller. It may be mentioned that factoring is for short-term receivables

(under 90 days) and is more related to receivables against commodity sales. Forfeiting can be

for receivables against which payments are due over a longer term, over 90 days and even up

to 5 years. The difference in the risk profiles of the receivables is the fundamental difference

between factoring and forfeiting, which has implications for the cost of services.

Forfaiting

Forfaiting is a mechanism of financing exports : -

By discounting export receivable.

Evidenced by bills of exchange or promissory notes.

Without recourse to the seller (such as the exporter)

Carrying medium to long-term maturities.

On a fixed rate basis (discount).

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Up to 100% of the contract value.

In a forfeiting transaction, the exporter surrenders his rights to claim for payment on goods

delivered to an importer, in return for immediate cash payment from a forfeiter. As a result,

an exporter can convert a credit sale into a cash sale, with no recourse either to him or his

banker.

FORFAITING OPERATING PROCEDURE

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Process details

Exporter initiates negotiations with prospective overseas buyer, finalises the contract

and opens an LC through his Bank.

Exporter Ships the goods as per the schedule agreed with the buyer,

The exporter draws a series of bills of exchange and sends them along with the

shipping documents, to his banker for presentation to importer for acceptance through

latters bank. Bank returns avalised and accepted bills of exchange to his client (the

exporter).

Exporter informs the Importers bank about assignment of proceeds of transaction to

the Forfaiting bank.

Exporter endorses avalised Bill of Exchange (BOE) with the words Withoutrecourse and forwards them to the Forfaiting Agency (FA) through his bank.

The FA effects payments of discounted value after verifying the Avals Signature and

other particulars.

Exporters Bank Credits Exporters A/C.

On maturity of BOE/Promissory notes, the Forfaiting Agency presents the instruments

to the Aval (Importers Bank) for payment.

DOCUMENTARY REQUIREMENT

In case of Indian Exporters availing Forfaiting facility, the forfeiting transaction is to be

reflected in the following three documents associated with an export transaction, in the

manner suggested below

INVOICE : - Forfaiting discount, commitment fees, etc. need not be shown separately,

instead, these could be built into the FOB price, stated on the invoice.

SHIPPING BILL AND GR FORM : - Details of the forfeiting costs are to be included

along with the other details, such as FOB price, commission insurance, normally

included in the Analysis of Export Value on the Shipping Bill. The claim for duty

drawback if any is to be certified only with reference to the FOB value of the exports

stated on the Shipping Bill.

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BENEFIT TO EXPORTER

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 beexempt from the responsibility to repay the debt.

IMPROVED CASH FLOW : - Receivables become current cash inflow and it is

beneficial to the exporter to improve financial status and liquidation ability so as to

heighten further the fund raising capability.

RISK REDUCTION : - Forfaiting business enables the exporter to transfer various

risks resulted from deferred payment, such as interest-rate risk, currency risk, credit

risk and political risk to the forfeiting bank.

INCREASED TRADE OPPORTUNITY : - With forfeiting, the export is able to

grant credit to his buyer freely, and thus, be more competitive in the market.

BENEFIT TO BANK

Forfaiting services provide the bank with the following benefits : -

Banks can provide an innovative product range to clients, enabling the client to avail

100% finance, as against 80 85% in case of other discounting products.

Banks gain fee-based income.

Lower credit administration and credit follow up.

FACTORING

Factoring is a continuing arrangement between a financial institution (the Factor) and a

business concern (the client), selling goods or services to trade customers. The factor

purchases the clients book debts (account receivables) either with or without recourse to the

client.

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The Factor performs at least two of the following services : -

Factoring for the seller, by way of advance payments.

Maintenance of accounts relating to the account receivables.

Collection of account receivables.

Credit protection against default in payment by the buyer.

The buyer us informed in writing that all payments of receivables should be made to the

Factor.

DIFFERENT MODELS OF FACTORING

Export factoring can be done based on two distinct models : -

(1) A TWO FACTOR SYSTEM

It essentially involves an export factor in the country of the seller (exporter) and its

correspondent factor (import factor) in the country of the debtor (importer). The

correspondent factor typically performs a mutually agreed set of services for the export factor.

It could be any one or both the below mentioned services :

A. CREDIT GUARANTEE PROTECTION : -The import factor undertakes to pay the

export factor in the event the importer fails to pay by a specified period after due date. Theimport factor sets up limits on buyers present in that country and the export factor discounts

invoices for its customers based on these limits. The credit guarantee protection covers

insolvency/protracted default of buyer, However it does not cover trade disputes.

B. COLLECTION SERVICES : - The import factor undertakes to follow up with debtors

for payment and in cases where payment is not forthcoming they would be in a position to

detect early indications as they would be based in the same location and would be familiar

with local business intelligence as well as practices.

The factoring quotes given by various import factors would differ depending on their locationand comfort regarding the overseas buyer. In this situation, the export factor would need to

monitor its correspondent relations with various import factors across the globe.

Also, the possibility of undertaking any factoring business by the export factor would be

depend on the response of the import factors for each transaction.

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(2) DIRECT FACTORING WITH CREDIT INSURANCE AND TIE UP WITH A

GLOBAL COLLECTION AGENCY

Factoring can also be offered by availing credit insurance for the entire factoring portfolio.

Credit insurance wil cover insolvency/protracted default by the buyer as well as country risk

but it would not cover trade disputes. The credit insurer will set up limits on overseas buyersand based on these limits export bills would be discounted.

Thereafter, details of the invoice would be passed on to the collection agency that will follow

up for payment with the overseas buyer. Incase the overseas buyer does not respond, the

collection agent can monitor potential default cases, so that credit insurer can be informed in

advance.

BENEFITS OF FACTORING

TURNOVER LINKED FINANCE So as an exporter, you can finance a higherlevel of sales than before and plan growth more effectively.

FLEXIBLE CASH FLOW To finance working capital requirements and improve

profitability.

NO COLLATERAL/SECURITY So availing the financing is comparatively

easier.

MORE TIME FOR CORE BUSINESS Since sales ledger management and

collections are handled by the Factor.

CREDIT PROTECTION Reduces the incidence of bad debts.

PRE-ASSESSMENTS So buyers creditworthiness is checked before hand.

REGULAR MIS REPORTS MIS reports from Factors reduce the time spent on

reconciliation of outstanding.

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FACTORING : OPERATING PROCEDURE

Process Flow in a Factoring Transaction

For the factoring operations, the pre-requisite is the establishment of a factoring relationship

between the client and the factor. On the basis of credit evaluation, the factor fixes limits for

individual customers of the client indicating the extent to which, and the period for which the

Factor is prepared to accept the clients receivables for such customers.

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The client (Seller) sells the goods to the customer (buyer) and invoices him in the usual way

inscribing a notification to the effect that the debt due on the invoice is assigned to and must

be paid to the Factor.

The client offers the assigned invoices to the Factor under cover of schedule of offer

accompanied by copies of invoices and receipted delivery challans.

The factor provides immediate prepayment up to 80% of the value of the assigned invoices

and notifies the customer sending a statement of account.

Factor follow up with the customer and sends him the statement.

The Customer makes the payment to the Factor.

When the customer makes the payment for the invoice, the Factor will pay the balance 20%of the invoice value.

The Prominent features of the arrangement are :

The drawings in the clients account will be regulated on the basis of the drawing eligibility

available from time to time, against the debts so purchased by the Factor, less the amount of

retention money.

The client will be free to draw funds at any time up to the drawing eligibility, which will beadjusted for : (a) new debts factored (b) factored debts collected (c) charges debited.

The factor will send age-wise statements of accounts to the client at the agreed periodicity.

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RISK MANAGEMENT:

Derivative is a product whose value is derived from the value of one or more basic variables,

called bases (underlying asset, index, or reference rate), in a contractual manner. The

underlying asset can be equity, forex, commodity or any other asset. For example, wheat

farmers may wish to sell their harvest at a future date to eliminate the risk of a change in

prices by that date. This transaction is an example of a derivative. The price of this derivative

is driven by the spot price of wheat which is the underlying.

Risks of International Trade

Customer Risk:

One needs an assessment of the credit worthiness of the customer. This should includechecking the following:

The identification of customer. Do they exist as a legally established business in the country

of import?

The usual period of credit offered in customer's country;

The credit limit one is prepared to offer his customer;

The trading history of the customer. Are they a prompt payer? Have there been any changes

to their normal payment patterns?

Can the customer pay the bill?

Insolvency- A customer's insolvency can involve you in a pre credit risk, where losses can

occur if the customer becomes insolvent during the manufacturing process or at any time

before or after the dispatch of the export consignment.

One can obtain the information needed to carry out these checks either himself or through a

reputable credit agency or credit insurer.

Country Risk:

Along with the customer, their country can pose separate risks that need to be managed.

Country risks traditionally fall into five areas:

Sovereign: The willingness or ability of the government to pay its debts. This is affected by

the political climate within the country (the legislature, judiciary and government

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institutions); internal and external threats to the country; international trading performance

including balance of payments record; the level of national debt and the amount of foreign

exchange reserves. Other political decisions can also frustrate export sales; these include the

imposition of embargoes, tariff or other quotas, and import or export restrictions.

Private: The ability of the private sector to pay for its imports. This situation is affected bythe state of the domestic economy, the commercial institutions in the country, and the

competence of banking and financial services sector.

Natural: Some regions of the world suffer from regular climactic catastrophes (for example

annual flooding, drought, earthquakes and other disasters). When these occur they can

severely disrupt the operations of both the business sector and the government.

Fashion and Finance: International trading patterns often create a fashionable region or

country as an export market. In these circumstances trade finance is often readily available,

offering good credit terms to export customers. However, fashions change and countries canquickly go out of favor for both exports and trade finance.

Other: These include transfer risks such as the inconvertibility of the local currency;

transaction risks such as late or non-payment, and transition risks for emerging markets where

the threats are the effectiveness of the liberalization program, failure to complete economic

structural reforms and any possible de-stabilizing influences.

Foreign Exchange Risk:

In international trade there will be more than one currency involved. Thus trade is exposed tofluctuations in the foreign exchange market. When you trade internationally you will most

likely be dealing in more than one currency.

Other risks:

If ones manufactures goods to order he must include in export strategy a contingency that will

help manage the risk of a frustrated export - this is when the customer refuses the goods. One

must have a plan to either resell the product to another market or realize a salvage value for h

goods.

One must also have procedures in place for the collection of the invoice amount. Under the

contract one may have to collect money in the customer's country. This has risks as collection

maybe more uncertain or expensive, so one will have to consider the legal system in the

country.

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BIBLIOGRAPHY:

BOOK ISSUED BY TAXMAN ON TRADE FINANCE

DETAILS RECEIVED FROM INTERNAL NOTES AND SOME

FROM INTERNET

International Trade Finance1

Documents

Transcript of International Trade Finance1