INTERNATIONAL
TRADE
GROUP MEMBERS
Andrea Mathias
Kishore Patil
Nehal Ukani
Reiner D’Costa
Shruti Hosur
Shruti Shetty
Sushil Kaushik
PRESENTATION FLOW
• Introduction to International Trade
•Methods of Payment
•Pre-Shipment Finance
•Post-Shipment Finance
•Letter of Credit
• Open Account
•Documentary Collections
•Comparisons of the three
•Factoring
•Forfaiting
INTERNATIONAL TRADE
DEFINITION
International trade
Flow Of Commodity Flow of Productive
factors
INTERNATIONAL TRADE
INTERNATIONAL TRADE FINANCE
Trade Finance is the science that describes
the management of money, banking,
credit, investments and assets for
international trade transactions.
FISCAL INCENTIVES TO
PROMOTE EXPORT
Duty Drawback
Tax Concession
Market development assistance
Export promotion of capital goods scheme
Cash compensatory support
Air Freight Subsidiary
EXIM BANK
Corporate banking group
Project Finance/Trade Finance Group
EXIM BANK Line Of Credit Group
Small and Medium Enterprise group
Export Services Group
METHODS FOR INTERNATIONAL TRADE
FINANCE
According to stage of financing
Pre-shipment finance
Post-shipment finance
METHODS FOR INTERNATIONAL TRADE
FINANCE
Instruments/methods of financing
Letter of credit
Open account
Factoring
Forfaiting
Document collections
Pre-Shipment Finance
PRE-SHIPMENT FINANCE
Definition:
• “Financial assistance extended to the exporter from the date
of receipt of the export order till the date of shipment is
known as pre-shipment credit”.
• Such finance is extended to an exporter for the purpose of
procuring raw materials, processing, packing, transporting,
warehousing of goods meant for exports.
• Maximum period of 180 days
• Exporter can obtain 90% of the FOB value of the order or
75% of the CIF value of the order.
IMPORTANCE OF PRE-SHIPMENT
FINANCE
o Purchase raw material, and other inputs
o Assemble the goods in the case of
merchant exporters.
o Store the goods in suitable warehouses
till the goods are shipped.
o Packing, marking and labeling of goods.
o Pre-shipment inspection charges.
o Purchase of heavy machinery and other
capital goods
o Consultancy services.
o Export documentation expenses.
FORMS OR METHODS OF
PRE-SHIPMENT FINANCE
• Packing Credit
– Packing Credit in Indian Rupee
– Packing Credit in Foreign Currency (PCFC)
• Advance Against Hypothecation
• Advance Against Pledge
• Advance Against Red L/C
• Advance Against Back-To-Back L/C
• Advance Against Exports Through Export Houses
• Advance Against Duty Draw Back (DBK)
PACKING CREDIT IN FOREIGN
(PCFC)
• Available to exporting companies as well as commercial banks
for lending to the former.
• Additional window to rupee packing credit scheme available to
cover both the domestic i.e. indigenous & imported inputs.
• Can avail pre-shipment credit in rupees & then the post
shipment credit either in rupees or in foreign currency
• To avail of pre-shipment credit in foreign currency
discounting/rediscounting of the export bills in foreign
currency.
• FCPC will also be available both to the supplier EOU/EPZ unit
and the receiver EOU/EPZ unit.
REQUIREMENTS FOR GETTING
PACKING CREDIT
This facility is provided to an exporter who satisfies the
following criteria:
• A ten digit Importer - Exporter Code ( IE Code )
number allotted by DGFT.
• Exporter should not be in the caution list of RBI.
• If the goods to be exported are not under OGL (Open
General License), the exporter should have the
required license /quota permit to export the goods.
DIFFERENT STAGES OF PACKING
CREDIT
• Appraisal and Sanction of Limits
• Disbursement of Packing Credit Advance
• Follow up of Packing Credit Advance
• Liquidation of Packing Credit Advance
• Overdue Packing
INTEREST SUBVENTION SCHEME
• Government steps in by picking up a part of the interest
burden
• Interest subvention of 2 per cent on the pre-shipment credit
for seven employment-oriented export sector
Textiles including handlooms
Handicrafts
Carpets
Leather
Gems & Jewellery
Marine products
Small & Medium exporters.
• Extension beyond current deadline of September 30, 2009 to
March 31, 2010.
POST SHIPMENT FINANCE
• Definition:
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.
• 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.
FEATURES
• Purpose of Finance
• Basic of Finance
• Types of Finance
• Quantum of Finance
• Period of Finance
TYPES OF POST SHIPMENT
FINANCE
• Export Bills Purchased / Discounted
• Export Bills Negotiated
• Advance Against
– Export Bills Sent On Collection Basis
– Export On Consignments Basis
– Un-drawn Balance
– Claims Of Duty Drawback
BENEFITS TO EXPORTERS
• Competitiveness – Exporter able to offer credit
terms to buyer
• Energized Cash flows – Producer receives cash
from export proceeds upfront and can continue
production activities.
• Expansion Of Client Base – Exporter able to
expand client base due to availability of
financing
TYPES OF EXPORT BUYER’s
CREDIT
• Physical Exports
• Deemed Export
• Capital Goods And Project Exports
SUPPLIER’s CREDIT
Buyer's Credit is a special type of loan that a bank
offers to the buyers for large scale purchasing under
a contract.
Once the bank approved loans to the buyer, the
seller shoulders all or part of the interests incurred
LETTER OF CREDIT
• Definition:
A formal document issued by a bank on behalf of
customer, stating the conditions under which the
bank will honour the commitment of the customer
• The letter of credit is also known as banker’s
commercial credit or documentary letter of credit.
• L/C used in domestic trade are called inland
L/C’s.
PARTIES TO A LETTER OF CREDIT
• Importer or Applicant
• Issuing Bank
• Beneficiary
• Advising Bank
• Negotiating/ The Paying Bank.
LETTER OF CREDIT – THE
PROCESS
Seller 1. Contract Buyer
(Beneficiary) Applicant
2. Documentary
4. Advice of credit Application
Documentay
credit
Advising Bank 3. Documentary credit ISSUING
BANK.
TYPES OF LETTER OF CREDIT
• Irrevocable L/C • Back To Back Credits
• Revocable L/C • Red Clause L/C
• Negotiation Credit • Transferable Credits
• Confirmed or • Traveller’s L/C
Unconfirmed credit
• Special Credits
• Revolving credits
ADVANTAGES OF LETTER OF
CREDIT
• Immediate Payment
• Guaranteed Payment
• Performance
• Safe & Secure Method
• Political & Exchange Control risks
reduced.
OPEN ACCOUNT
Open Account
• Definition:
Open Account is a form of trade whereby sales
are made to the buyer without entering into any
formal contract. The system works on complete
trust between buyer & seller.
• An open account transaction means that the
goods are shipped and delivered before payment
is due, usually in 30 to 90 days.
OPEN ACCOUNT
Open Account
• Open Account is the most advantageous option
to the importer in cash flow and cost terms.
• It is consequently the highest risk option for an
exporter.
• Exporters may also wish to seek export working
capital financing to ensure that they have access
to financing for both the production for export
and for any credit while waiting to be paid.
OPEN ACCOUNT
• Open account terms may be offered in competitive
markets with the use of one or more of the following
trade finance techniques:
– Export Working Capital Financing
– Export Credit Insurance
– Export Factoring
– Forfaiting
OPEN ACCOUNT – PROS & CONS
Pros & Cons
• Pros:
Boost competitiveness in the global market.
Establish and maintain a successful trade
relationship.
• Cons:
Exposed significantly to the risk of nonpayment
Additional costs associated with risk mitigation
measures.
OPEN Open
ACCOUNT – PROCESS
Account - Process
TARGET VENDOR
BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process
TARGET Purchase order VENDOR
Pu der
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BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process
TARGET Purchase order VENDOR
Pu der Goods
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BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process
TARGET Purchase order VENDOR
Pu der Goods
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BANK
OPEN Open
ACCOUNT – PROCESS
Account - Process
TARGET Purchase order VENDOR
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BANK
DOCUMENTARY COLLECTIONS
• Process Overview
Sends
Documents +
Remitting Instructions for Collecting
Bank Payment Bank
Payment
Draft indicating
Entrusts Payment D/A or D/P
Payment
collection of
payment
Importer Exporter
DOCUMENTARY COLLECTIONS
Documentary Collections
Importer can collect documents by following
payment terms:
C. Document against acceptance (D/A)
Importer pays the face amount on a specified
date in the future. Transfer of title of goods and
documents is done on receipt of payment.
F. Document against payment (D/P)
Importer pays the face amount on sight of
goods. Transfer of title of goods and
documents is done immediately.
DOCUMENTARY COLLECTIONS
Documentary Collections
Advantages:
• Documentary collections involve use of drafts which is
less expensive than letter of credit.
Disadvantages:
• Although banks act as facilitators, no verification
process is present.
• Limited recourse in the event of non-payment.
FACTORING
• Definition –
“Financial transaction whereby a business sells
its accounts receivable to a third party called a
factor (financial institution) at a discount in
exchange for immediate money with which to
finance continued business.”
• Financial option for the management of
receivables
FLOW CHART OF FACTORING
(1) Credit Sale
of Goods
Customer Client
(2) Invoice
(5) Pays the amount (6) Pays
(In recourse type the (3)
customer pays balance Submit
through client) (4) Invoice
Payment Copy
upto 80%
initially
Factor
FACTORING ARRANGEMENTS
Factoring Arrangements
Recourse
Disclosed FACTORING Undisclosed
Non–Recourse
TYPES OF FACTORING
FACTORING
TWO DIRECT BACK TO
FACTOR IMPORT & BACK
SYSTEM EXPORT FACTORING
FACTORING
TWO FACTOR SYSTEM
• Use of two factors, one in each country, dealing with the
exporter and the importer
• Importer advances funds to the import factor who then transmits
them to the export factor
• System involves three agreements –
– exporter and the importer
– export factor and the exporter
– between the factors Importer Exporter
& Import & Export
Factor Factor
DIRECT IMPORT & EXPORT
FACTORING
• Direct import factoring: Connotes the
situation where the exporter assigns debts
to a factor in the country of the debtor
• Direct export factoring: Factor is
appointed in the exporter’s own country
and deals with all the aspects of the
factoring arrangement including the
provision of financing and the assessment
of the financial position of the importer
BACK TO BACK FACTORING
• Back to back factoring: Arrangement most
suitable for debts owed by the exclusive
distributors of products to their suppliers
• The exporter enters into a factoring
agreement with the export factor who
contracts with import factor.
• Difference is existence of a separate factoring
agreement between the import factor and the
distributor
• Right to set off credits arising from the
domestic sales of the distributor with his
debts to the supplier
FORFAITING
Forfaiting
• Definition –
Forfaiting is a method of trade finance that allows
exporters to obtain cash by selling their medium term
foreign account receivables at a discount on a
“without recourse” basis
• It virtually eliminates the risk of nonpayment, once
the goods have been delivered to the foreign buyer in
accordance with the terms of sale
FLOW CHART OF FORFAITING
Flow Chart - Forfaiting
STRENGTH OF FORFAITING
• Enables the exporter to offer his customers fixed rate credit
for the purchase of the goods
• Forfaiting is quick and simple to arrange; the procedures are
straightforward and the documentation is of standard format
• Forfaiting relieves the exporter from the risk of payment
default; financing is made without recourse
• Credit-based exports are turned into cash deals, thereby
improving liquidity and keeping bank credit lines open
• Currency risk is limited to the period from concluding the
sales contract until the date of discount
• 100% of contract value can be financed and the origin of the
goods is irrelevant
BENEFITS OF FORFAITING
• Eliminates Risk
• Enhances Competitive Advantage
• Improves Cash Flow
• Increases Speed and Simplicity of
Transactions
FACTORING VERSUS FORFAITING
• Factoring is the revolving sale of all or at least a
majority of a company’s receivables to a factoring
company. The acceptable tenor of the receivables is
usually maximum 180 days. A few factoring
companies accept also tenors of up to 360 days.
• Forfaiting is the single sale/purchase of a single
transaction. The deal itself has to be documented and
assigned properly. The maximum forfaitable tenor
depends on the possibilities of the Forfaiters in the
market i.e. their available country and banklimits.
