Basics of Trade & Trade Finance

Date : 2nd Aug 2024

What is Trade?
`
 Who are Trade Customers?
Customers engaging in
buying or selling of goods /
Importers and services across our borders:
Exporters tea, cotton, steel, or IT &
software, consultancy
services…

Contractors/ Vendors who

Domestic may require Bank
Traders Guarantees, Letter Of
Credit & LC Bill Discounting

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ABC wants to Export/Import goods How will
my buyer
How to trust How do I pay me?
Documentation/ What is the
my send/receive Safest mode
Regulatory
Buyer/Seller my Goods of Payment
Requirements

• Different cultures • Different nomenclatures

• Different language • Country policies
• Different currency • Geopolitical issues/environment

Buyers/Sellers Will I get

How to protect
currency is any low cost
from currency
different funds
fluctuation?
Regulatory Bodies involved in International Trade
International
Customs
DGFT RBI Chamber of
/STPI
Commerce

Regulates Foreign Goods/Services International

Formulates Foreign
Exchange Entry/Exit Governing Body
Trade Policy
Transactions

Goods Bifurcation
• Freely Importable FEMA 1999 Ports
AD Banks • UCPDC – For
Goods • Sea
• Category 1 LC
• Restricted Goods • Land
• Category 2 • URC – For Bills
• Prohibited Goods • Air
• Category 3 • URDG – For BG
• Softex (software
• Incoterms
HS Code – 8 Digit exports)

Prerequisites for Export Import

1 Business 2 3
Valid Importer Exporter Awareness of Foreign Requirement for export license for
Code (IEC) issued by Trade policy w.r.t restricted goods and prohibited
DGFT concerned product goods cannot be exported
Documents

Bill of Exchange

Promissory Note
Financial
Documents
• Bill of Lading
• Airway Bills
• Road, Rail or Inland Waterway Transport
Transport
Documents • Courier and Post Receipts

Commercial Invoice, Proforma Invoice

Purchase Order

Certificate of Analysis, Weight Certificate, Inspection Certificate
Commercial
Documents
Packing List

EDF Form / Softex Form

Shipping Bill

Bill of Entry
Regulatory
Documents
Export/Import License
How Banks Communicate?
SWIFT is a platform used by banks to communicate financial messages with banks in a secure
manner

SWIFT

• Society for World Wide Interbank Financial

Telecommunication
• International Chamber of Commerce
• Uniform Rules & Regulations
• Each Bank has a 11 Digit SWIFT Code

XXXX XX
I XX XXX
Bank Country City Branch Code
SWIFT MT 103 (Inward Remittance)
52A: Ordering Institution - FI BIC
Swift Output : FIN 103 Single Customer Credit Transfer BOPIPHMM
Sender : IRVTUS3NXXX BANK OF THE PHILIPPINE ISLANDS
THE BANK OF NEW YORK MELLON MANILA PH
NEW YORK,NY US 57A: Account With Institution - FI BIC
Receiver : XXXXINBBNRI XXXXXX
59: Beneficiary Customer-Name & Addr
(CROSS BORDER PAYMENT PROCESSING /003805001128
CENTRE) Mrs. XYZ
MUMBAI IN SHOP NO 456 CARTEL HOUSE 90 CHILL
MUR : F1S2210120560700 ROAD HARANDRA WEST MUMBAI
SLA ID : 001
UETR : 4e2b7d4e-a4ba-4bca-9ad1-f531e5e7c85c 70: Remittance Information
--------------------------- Message Text --------------------------- PURCHASED OF TICKETS VISAS AND
20: Sender's Reference OVERSEAS MEDICAL INSURANCE
F1S2210120560700 BNY CUST RRN - F1S2210120560700
23B: Bank Operation Code 71A: Details of Charges
CRED SHA
32A: Val Dte/Curr/Interbnk Settld Amt 71F: Sender's Charges
Date : 12 October 2022 Currency : USD (US DOLLAR)
Currency : USD (US DOLLAR) Amount : #20,#
Amount : #2495,# 72: Sender to Receiver Information
33B: Currency/Instructed Amount /ACC/
Currency : USD (US DOLLAR) /ACC//
Amount : #2515,#
50K: Ordering Customer-Name & Address
/0291042031
Mr. ABC 2195 MARASIO ST PASMARINAS
VILLAGE KARATI CITY PHILIPPINES
Case Study – Importer Flow of Funds
Dhanush Corporation is an importer of electronic equipment. They are having an account in ABC Bank, Khairatabad Branch. Dhanush
corporation imports electrical equipment from Glanco electricals. Glanco electricals is based out of Singapore. They are having an account in
DBS Bank. Seller has requested buyer to remit funds in USD. Buyer submits invoice and other related documents to ABC Bank for making the
payment in USD

5. JP Morgan Chase U.S. Credits HSBC U.S. Nostro Account

ABC Bank is having a Nostro Account DBS is having a Nostro Account

with JP Morgan Chase U.S. with HSBC Bank U.S.

`
3. Instructs 6. HSBC sends
4. JP Morgan debits
JP Morgan to confirmation to
ABC Nostro
make payment DBS & Credits
Account
DBS Nostro

Buyer’s Bank - ABC Bank

Seller’s Bank- DBS Bank
1. Customer 2. ABC Bank
7. DBS gives
submits documents Debits customer
credit to
at the branch Account
customer
account

Buyer Seller
Case Study – Exporter Flow of Funds
Kumar Corporation is an exporter of pharmaceutical products.They are having an account in ABC Bank, Salt lake Branch. Kumar corporation
export pharma products to Max pharma which is based out of U.K. Max Pharma is having an account in ANZ Bank. Buyer has agreed to make
payment in GBP.

5. Barclays Credits Natwest Bank Nostro Account

ABC Bank is having a Nostro Account ANZ Bank is having a

with Natwest Bank U.K. Nostro Account with Barclays Bank

6. Natwest Bank ` 4. Barclays
Barc
3. ANZ Instructs
Credits Debit
Barclays Bank
ABC Banks Nostro ANZ Nostro
To make payment
Account Account

Seller’s Bank-ABC Bank

Buyer’s Bank - ANZ Bank
7. Based on seller
1. Buyer gives 2. ANZ Debit’s
confirmation ABC
documents Buyers
Bank credit
and requests account
customer account.
ANZ bank to
make payment.
Seller Buyer
Currency conversion

Importer
• Need to pay their suppliers, hence they buy forex.
• Client buys FX ; Bank sells FX=Ask rate

Exporter
• Convert inward payment into Rupees, hence they sell forex.
• Client sells FX ; Bank buys FX=Bid rate

Quotations with Bid-Ask

• USD/INR 81.6500 / 6550

In the case of USD/INR above, the rate for an exporter is

______, while the rate for an importer is ______
Role of Banks in Cross-border trade
• Banks deal in documents related to trade, not goods
• Documents evidencing of movement of goods –
Transport document, Regulatory documents
Movement of Goods

• Handling of the documents on behalf of other bank –

Import bills received on collection
• Handling of the documents on behalf of exporters –
Movement of
export bills on collection
Documents Buyer & Seller’s
Bank
• Receipt & Payments of funds to other banks – Inward &
outward Remittances

Movement of Funds

• Fund based – Export Credit (EPC/PCFC), Export Bill

negotiation (EBN)
• Non fund based – LC, Bank Guarantee
Financing 16
Modes of Payment

Advance
1 Payment

Open
Account 2
Bills For
3 Collection

Documentary
Credit(LC) 4
Advance Payment

Risk for buyer

5. Couriers the  Non delivery of goods
documents to buyer
 Short shipment/Inferior
quality
4. Seller ships the
goods Seller
Buyer Documents Required
 Customer letter
1. Instructs Bank

3. Seller receives
Proforma Invoice
payment


to make

payment
2. Bank makes payment

Buyer’s Bank Seller’s Bank

Open Account

2. Couriers the
documents to buyer Risk for Seller
 Non payment

1. Seller ships the

goods Seller
Buyer
Documents Required
3. Instructs Bank

5. Seller receives
 Customer letter
payment
to make

payment
 Commercial Invoice
 Transport document
 Bill of entry (imports), or
Shipping Bill/EDF for
4. Bank makes payment Exports

Buyer’s Bank Seller’s Bank

Bills For Collection
Role of Bank
 Agent of the Seller
 Bank does not assume the
risk of non payment
1. Seller ships the
goods Seller
Buyer
Payment terms

5. Seller receives
against Payment

documents with

2. Instructs the
 Sight – Documents against
or acceptance

Bank to send
instructions
documents
4. Releases

payment
payment
Payment (D/P)
 Usance – Documents against
Acceptance (D/A)

Risk for Buyer

5. Bank makes payment  Inferior quality of goods
Risk for Seller
3. Bank couriers the  Non payment in case of
Buyer’s Bank documents Seller’s Bank usance bills
Letter of Credit (LC)

Need Trade involves risks for buyers and sellers - Buyer or Seller in different geographies,
different laws, languages customs, ethics, transportations, credit, currency and languages.

Letter of Credit(or Documentary Credit) is an arrangement whereby the issuing bank guarantees to
pay a third party (beneficiary) by a given date as per agreed terms and conditions and against Option
presentation of credit compliance documents.

Addresses risk of non payment by buyer

Onus of compliance to agreed terms – quality, timely delivery on the seller

Benefits
Helps business development in new geographies

Is also used as a financing instrument

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Letter of Credit – Flow

1. Sale contract

Seller(Beneficiary) Buyer (Applicant)

2. Apply for LC
Against acceptance
9. Releases documents
4. Advice LC

13. Credits Seller’s

acceptance
8. Provides
Shipper
Documents
6. Submits

Account

12. Makes payment on due date

Negotiating
Nominated/

10. Intimates acceptance to pay on due date

7. Couriers Documents
Bank

3. Issues LC
Seller’s Bank Buyer’s Bank
(Advising Bank) (Issuing Bank)

Note: Generally, Buyer is the applicant

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Parties to Letter of Credit

• Applicant - Person or company who has requested the letter of credit; normally the Buyer

• Beneficiary - Party in whose favor a credit is issued; normally the Seller

• Issuing bank - Bank that issues the credit, usually following a request from an Applicant

• Advising bank - Bank that advises the beneficiary when the credit has been issued, responsible for authenticating
LC. LCs can be advised by any bank as per clients’ instructions

• Negotiating bank - Bank that verifies documents and confirms the terms and conditions under LC on behalf of
beneficiary (seller). LCs can be negotiated by any bank/as per clients’ instructions

• Nominated bank - Bank with which the credit is available

• Drawee - The drawee is the LC issuing or confirming bank

• Reimbursing bank – Bank appointed by the Issuing Bank to make reimbursement to the negotiating, paying or
confirming bank
Export Finance backed by L/C (EBN)

Advises LC, Confirms LC by

blocking Bank Limits
Issues LC
Submits Documents
post Shipment Provides Acceptance
ABC Bank negotiates
the bill after Makes payment on due date
Exporter(Beneficiary) Acceptance ABC Bank Buyer’s Bank
(Advising/Confirming Bank) (Issuing Bank)

ABC Bank sends the

documents to Buyers
Bank
For acceptance
ABC Bank
Negotiates the Bill &
Document
Pays the seller Non Bank
ABC Complying
sendsPresentation
the documentsunder LC
to Buyers
upfront s
Bank
NotOk
Ok

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Why EBN?

Buyer is going to pay 180 Does the bank have a

days later, how to solution for me?
generate working capital

Features:
I got immediate • No collaterals/ limits on
funds with Export customers required
Bill Negotiation! • Better cash flow
• Helps to expand business in
new geographies

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Export Finance
Two types of loan are available to exporters for meeting their working capital requirements :
(a) WC till shipment – known as Packing Credit/ Pre-shipment credit
(b) WC after shipment – known as Post Shipment Credit

Pre-shipment Credit Post-shipment Credit

Features : Features :
(i) Can be in INR (known as EPC) or FCY (known (i) Can be in INR or FCY
as PCFC) (ii) Limits can be given against collateral or
(ii) Limits can be given against collateral or fixed fixed deposits
deposits (iii) Export bills to be submitted to ICICI Bank
(iii) Pricing is Repo based (for INR loans) for after shipment
Alternative Reference Rate (ARR) based for (iv) Pricing is Repo based (for INR loans) for
FCY loans Alternative Reference Rate (ARR) based
(iv) Maximum period – 360 days for FCY loans
(v) Can be running account basis or order basis (v) Maximum period – 365 days from the
date of shipment
(vi) Export documents can be under L/C or
non-LC bill

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Domestic Trade Products : -

1) LCBD
2) Bank Guarantee
What is Letter of Credit Bill Discounting (LCBD)

Letter of Credit is a guarantee given by

Discounting of a Bill backed by a Letter
the bank to pay to the seller for the
of Credit (LC) is a short-term credit
buyer’s obligation, in case buyer fails to
facility provided by the bank to the seller.
make the payment.

Letter of Credit • The seller gets immediate payment for his sale;
Bill Discounting • The buyer receives the goods along with the credit
period to pay

Therefore, LCBD acts as a win-win for both seller and buyer of the goods as the buyer gets
sufficient amount of time to make payment against the letter of credit on the other hand the
seller gets the payment for goods delivered at the required early date.

• CREDIT EVALUATION : Reputation of the seller

BASIC REQUIREMENTS • BANKING PARTNER : LCs issued by first class Banks and timely
conveying the Acceptance speeding up the entire process.
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Process Flow: Inland Bill Discounting (under Inland L/C)

4. Delivers goods to Buyer

Seller
Buyer

1. Apply for LC
Against acceptance
8. Releases documents
3. Advice LC

acceptance
7. Provides
10. Discounts Bill
vide Bank lines

Documents Required for LCBD

Documents
5. Submits

1. Customer Request Letter

2. Audited Financials of last Financial Year
3. Credit Sanction Letter, if any

9. Intimates acceptance to pay on due date

6. Couriers Documents
2. Issues LC
Seller’s Bank Buyer’s Bank
(ICICI Bank) (Issuing Bank)

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Why LCBD ?
Paying Buyers LC Cost is more
Let me show you with
beneficial than giving him discount on
an example
Cash payment

Assume Original Cost Price of the goods INR 10,00,000

Cash Discount Scenario LCBD Scenario

Discount Fee for LCBD 9.5%

Buyer’s cost for LCBD @1% INR 3288

Cash discount @2% p.m. for 90 days INR 59,178
Seller offers to pay buyer’s cost of LC INR 3,288
• Higher Cash flows
Seller to pay discounting Fee to Bank INR 23,425
• Risk Mitigation
• Longer Payment Terms
Total Cost to Seller INR 26,713

Hence, the benefit for opting LCBD INR 32,465

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Bank Guarantee
Bank Guarantee?

Bank Guarantee acts as an undertaking assuring the beneficiary that the bank would pay the
specified amount, in case of its applicant’s default in delivering the financial or performance
obligation as mentioned in the guarantee. It is to be noted that the obligation to pay is not of the
applicant, but of the bank, since bank acts as the guarantor.

Bank Guarantee is a surety that is provided by a bank or a financial institution that they will pay off
the debts and liabilities incurred by a business entity in case the entity is unable to do so. Bank
Guarantees are an important banking arrangement and play a vital role in promoting international
and domestic trade.

Why BGs?

Adds to Credit Worthiness Confidence of Performance

Business Assessment Risk Reduction

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Types of Bank Guarantees

Performance Guarantee Advance Payment Guarantee

01 Under a performance guarantee, compensation of
money will be made by the bank when there is
any delay in delivering the performance or
04 Under this kind of guarantee, an advance payment will
be made to the seller. It also guarantees that if the seller
fails to deliver the service or product accurately or
operation. promptly, the buyer will receive a refund of the payment.

Bid Bond Guarantee Deferred Payment Guarantee

02 Used for a supply bidding procedure, the
contractor of the project will guarantee that the
best bidder or the highest bidder will have the
capability and authority to implement a project as
05 It refers to a BG offered to the exporter for a deferred
period or for a certain time period. When a buyer
purchases capital goods or machinery, the seller will
give credit to the buyer if the buyer’s bank gives a
per his or her preferences. guarantee that it will pay the unsettled dues of the buyer
to the seller.

Financial Guarantee
03 Financial guarantee is an undertaking from a
bank to take responsibility for another company’s
financial obligation if that company does not meet
06 Foreign Bank Guarantee
A foreign bank guarantee is provided by a bank on
behalf of a borrower/Creditor. This will be issued for the
benefit of a foreign beneficiary.
its responsibility.

3
Know some basic trade terms
• IEC (Importer – Exporter Code) – Mandatory for customer to do export/import
• EEFC (Exchange Earners Foreign Currency A/c)
• SFCA (Special Foreign Currency Account) – Current a/c in foreign currencies for SEZ units
• SB (Shipping Bill) – Issued by customs as proof exports
• BOE (Bill of Entry) – Issued by customs as proof of imports
• BL (Bill of Lading) – Issued by shipping company as transport document (through sea)
• Softex (Software exports) – a document issued by Software technology parks for software exports
• FDI (Foreign Direct Investment) – Indian company receiving investment from overseas companies
• ODI (Overseas Direct Investment) – Indian company making investment in overseas companies
• ECB (External Commercial borrowing) – Indian company taking loan from overseas company
• SWIFT (Society for World Wide Interbank Financial Telecommunications) – platform to exchange financial
message between banks across the globe
Lets recapitulate ….
RBI has classified all Trade Transactions as
What we learnt till now ! “Current Account Transactions”

1. Domestic & International Trade

Export & Import transactions
2. Types of regulatory bodies
Letter of Credit
3. Flow of Goods, Documents & funds
Bank Guarantee
4. Documents involved in Trade
Discounting (EBN/ LCBD)
5. SWIFT, Nostro, Vostro
Export Finance
6. Exchange Rates
7. Modes of payment
8. Role of Banks
Transactions relating to cross border investments, loans,
etc are classified as “Capital Account Transactions

• Foreign Direct Investment (FDI)

• Overseas Direct Investment (ODI)
• External Commercial Borrowings (ECB)

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Thank You