Banking Project New

8/8/2019 Banking Project New

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TRADE FINANCE


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EXPORT FINANCE

FACTORING

FORFAITING

WORKING CAPITAL MANAGEMENT

LEASING


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Trade Finance

Trade finance is related to International Trade

While a seller (the exporter) can require the purchaser (an

importer) to prepay for goods shipped, the purchaser(importer) may wish to reduce risk by requiring the seller to

document that the goods have been shipped

Banks may assist by providing variousforms of support

In short, trade finance means money

lent to exporters or importers


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TradeFinancingInstruments

DocumentaryCredit

Countertrade

Factoring Forfaiting

BuyersCredit

SuppliersCredit


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Documentary Credits

This is the most common form of the commercialLETTER OF CREDIT

T LC is a precise document whereby the importers bank

extends credit to the importer and assumesresponsibility in paying the exporter

The issuing bank will make payment, either immediately

or at a prescribed date, upon the presentation ofstipulated documents


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Buyer

(Importer)Seller

(Exporter)

Importers Bank

(Issuing Bank)

Exporters Bank

(Advising Bank)

1. Sales

Contract

5. DeliverGoods

2. Request

for Credit

8.

Documents

and Claim for

payments

3. Send Credit

7. Present

Documents

6. Present

Documents

4. Deliver

Letter of

Credit

9. Payment

How the Letter ofCre it works


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Example ofIrrevocable etter of redit


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Open Account

It is now estimated that over 80% of global trade is

conducted on an open account basis

This form of trade saves costs and time and so has beenadopted by smaller corporates as they become more

comfortable with their buyer and supplier relationships

Open account transactions can be described as buy now,pay later and are more like regular payments for a

continuing flow of goods rather than specific transactions


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Comparison of the Payment Methods

MethodRisk to

ExporterRisk to

Importer

Letter ofCredit

OpenAccount


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Countertrade

The seller is required to accept goods or other instruments of trade in partial or whole payment for itsproducts.

Barter

This traditional typeof countertradeinvolving theexchange of goodsand services

against other goodsand services of equivalent value,with no monetaryexchange betweenexporter and

importer

Counterpurchase

The exporter undertakes to buygoods from theimporter or from acompany nominated

by the importer, or agrees to arrangefor the purchase bya third party

Buy Back

The exporter of heavy equipmentagrees to acceptproductsmanufactured by

the importer of theequipment aspayment


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Factoring

The accounts receivable are sold to a third party (thefactor), that then assumes all the responsibilities andexposure associated with collecting from the buyer

Forfaiting

The purchasing of an exporter's receivables (the amountimporters owe the exporter) at a discount by paying cash

The forfaiter, the purchaser of the receivables, becomesthe entity to whom the importer is obliged to pay its debt.


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Buyers Credit A financial arrangement whereby a financial institution in the

exporting country extends a loan directly or indirectly to aforeign buyer to finance the purchase of goods and servicesfrom the exporting country

This arrangement enables the buyer to make payments due tothe supplier under the contract

The overseas bank usually lend the Importer based on LCissued by the importers bank

Importers bank brokers between Importer and the Overseaslender for arranging buyers credit by issuing its Letter ofComfort for a fee

Buyers credit helps local importers access to cheaper foreign

funds close to LIBOR rates as against local sources of fundingwhich are costl com ared to LIBOR rates


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Suppliers Credit

A financing arrangement under which an exporterextends credit to the buyer in the importing country tofinance the buyers purchases.


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Export Credit Insurance

Commercial risk arises from factors like the non-acceptance of

goods by buyer, the failure of buyer to pay debt, and the failure

of foreign banks to honour documentary credits

olitical risk arises from factors like war, riots and civil

commotion, blockage of foreign exchange transfers and

currency devaluation

Export credit insurance involves insuring exporters against

such risks


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The benefits of export credit insurance include:

Ability of exporters to offer buyers competitive payment

terms rotection against risks and financial costs of non-

payment

rotection against losses from foreign exchange

fluctuations Reduction of need for tangible security when borrowing

from banks

Export credit insurance mitigates the financial impact ofthe risk


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Export Finance


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Export Credit

Export credit can be broadly classified into

re-shipment finance and

ost shipment finance

re-shipment finance refers to finance extended to purchase,

processing or packing of goods meant for exports

Financial assistance extended after the shipment of exportsfalls within the scope of post shipment finance


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Assessment f imits

ASSESSMENT OF LIMITS

Guiding principle is need based finance.

Limit is to be determined based on past performance and

future projections.

1. Turnover method.

2. M BF

3. Cash Budget method

FOB value of goods minus profit and credit margin

In the case of exports on CIF value basis C can be granted

towards insurance and freight also.

Quantum of Finance


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Credit Rules

eriod available for the specific period as per sanction not

exceeding 180 days.

Rate of interest : CROI

Upto 180 days respective LIBOR/EURO LIBOR of thecurrency plus 5 basis points lus upfront fees stipulated.

Beyond 180 days rate for the initial period of 180 days

prevailing at the time of extension plus 2%.

Exchange Rate Applicable spot buying rate irrespective ofthe period of CFC.

Reporting to FD.

Liability as applicable to C.


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Pre-shipment Credit in Foreign Currency

Authorised dealers are permitted to extend Preshipment Credit inForeign Currency (PCFC) with an objective of making the credit

available to the exporters at internationally competitive price. This is

considered as an added advantage under which credit is provided in

foreign currency in order to facilitate the purchase of raw material after

fulfilling the basic export orders

The rate of interest on PCFC is linked to London Interbank Offered

Rate (LIBOR). According to guidelines, the final cost of exporter must

not exceed 0. 5% over 6 month LIBOR, excluding the tax

The exporter has freedom to avail PCFC in convertible currencies like

USD, Pound, Sterling, Euro, Yen etc. However, the risk associated

with the cross currency truncation is that of the exporter.


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Requirement for Getting Packing Credit

This facility is provided to an exporter who satisfies the

following criteria

A ten digit importerexporter 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 (OpenGeneral Licence), the exporter should have the

required license /quota permit to export the goods


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Documents required

Packing credit facility can be provided to an exporter onproduction of the following evidences to the bank:

Formal application for release the packing credit withundertaking to the effect that the exporter would be

ship the goods within stipulated due date and submitthe relevant shipping documents to the banks withinprescribed time limit.

Firm order or irrevocable L/C or original cable / fax /telex message exchange between the exporter and the

buyer.License issued by DGFT if the goods to be exported

fall under the restricted or canalized category. If theitem falls under quota system, proper quota allotmentproof needs to be submitted.


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Follow up of Packing Credit Advance

Exporter needs to submit stock statement giving all the

necessary information about the stocks

It is then used by the banks as a guarantee for securing thepacking credit in advance

Bank also decides the rate of submission of this stocks


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Common discrepancies observed while grantingPC

1. Order not studied thoroughly.

2. Order/LC has expired or going to expire shortly.

3. OPL on the buyer not available.

4. ECGC buyers credit limit not available.5. Cost of production not calculated correctly.

6. Advance payment if any received not deducted.

After determining the quantum of advance, drawing power

not ensured.

8. End use not verified.

9. Date of shipment not followed and necessary extension not

obtained if overdue.


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Post Shipment Finance

DEFINITION

Loan or advance granted to an exporter from the time ofshipment of goods to the time of realization including against the

security of duty draw back or any receivable from the govt.

EligibilityTo the actual exporter or to an exporter in whose name the documents

are transferred In the case of deemed exports to the supplier of goods

to the designated agencies as per EXIM policy

Purpose: to finance the export receivable

Quantum: Up to 100% of the invoice value

Margin: Normally no margin stipulated. However the SA can stipulate

margin

Contingency Marine InsuranceTo be obtained in the case of FOB/CFR contracts


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Types of export

Post shipment finance can be provided for three types of

export

Physical exports: Finance is provided to the actual exporter

or to the exporter in whose name the trade documents aretransferred.

Deemed export: Finance is provided to the supplier of the

goods which are supplied to the designated agencies.

Capital goods and project exports: Finance is sometimes

extended in the name of overseas buyer. The disbursal of

money is directly made to the domestic exporter.


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Post shipment finance

The post shipment finance can be classified as :

1. Export Bills purchased/discounted.

2. Export Bills negotiated

3. Advance against export bills sent on collection basis.4. Advance against export on consignment basis

5. Advance against undrawn balance on exports

6. Advance against claims of Duty Drawback.


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FA TORING


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Factoring Services- Concept

Factoring covers financing and collection of accountsreceivables

Receivables on account of sale of goods or services aresold to the factor at a certain discount

Factor becomes responsible for all credit control, salesledger administration and debt collection from the

customers


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Factoring means an arrangement between afactor and his client which includes at least twoof the following services to be provided by thefactor:-

(i) finance,

(ii) maintenance of accounts,

(iii) collection of debts and

(iv) protection against credit risk


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Client Customer

Factor

2. Delivery of goods

1. Order placed

6. Customer

pays

5. Monthly

statements

4. Factor pre-

payment

3. Client submits

invoice


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Factoring Services - Mechanism

Buyer Buyer negotiates terms of purchasing the material

with the seller

Buyer receives delivery of goods with invoice andinstructions by the seller to make payment to factoron due date

Buyer makes payment to factor in time or getsextension of time or in the case of default is subject tolegal process at the hands of the factor


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Seller MoU with the buyer in the form of letter exchanged

between them or agreement

Sells goods to the buyer as per MoU/agreement

Delvers copies of invoice, delivery challan, MoU,instructions to make payment to factor given to buyer

Seller receives 80 percent or more payment inadvance from factor on selling the receivables frombuyer to factor

Seller receives balance payment from factor afterdeduction of factos service charges etc.


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Factor Factor enters into agreement with seller for renderingfactoring services

On receipt of copies of sale documents as referred to

above makes payment to seller of the 80 percent ofthe price of the debt

Factor receives payment from the buyer on due datesand remits money to seller after usual deductions


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Factor also ensures that the following conditionsmet give full effect to factoring arrangements

Invoice, bills or other documents drawn by the sellershould contain all required clauses

Confirmation that the payments arising out of these billsare free from any encumbrances, charge lien, pledge,etc.

Recovery method of the payment at the time or afterdefault should be decided

Confirmation that all conditions to sell-buy contract

have been complied with and the transactions complete

Seller should procure a letter of waiver from a bank infavor of factor


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Parties to factoring client, customer and factor

Cost of factoring Service fee (for administrating the sales ledger as

well as protection against bad debts as a

percentage of invoice value or number of invoices)

Discount charges (advance provided by factor and isinterest which is PLR plus or minus)


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Types of Factoring Services

Recourse and Non-recourse Factoring A brief discussion

Advance and Maturity Factoring Advance paid against invoice where as in maturity

factoring payment is made against guarantee orcollection of receivables

Full Factoring

Disclosed and Undisclosed Factoring

Name of the factor is disclosed in the invoice by thesupplier/client asking the customer to make paymentto the factor


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Two-Factor System of Factoring

There are usually four parties to a cross-border

factoring transactions

Exporter (client)

Importer (customer) Export Factor

Import Factor

Two factor system results in two separate but

inter-linked agreements

Between exporter and export factor

Between export factor import factor


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Exporter Importer

Country A Country B

Export Factor Import Factor

Goods and invoices Stage I

Copy Invoice Stage II

Prepayments Stage III

Copy Invoices Stage IV

Statements Stage V

PaymentsStage VI

Payments Stage VII

Payment of Commission Stage VIII


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Factoring Services in India

A factor gives the SME a 30-day grace period, but

charges a penal interest rate of 2-3 per cent after this

period

Choice is limited

Currently only seven companies offer factoring, with four

majors dominating: CanBank Factors and State Bank ofIndia Factors (with a combined clientele of 2,000 SMEs),

GTFL (over 360) and HSBC Bank (120)


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Forfaiting


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What Does ForfaitingMean?

The purchasing of an exporter's receivables (the amount

importers owe the exporter) at a discount by paying cash.The forfaiter, the purchaser of the receivables, becomes the

entity to whom the importer is obliged to pay its debt.

Forfaiting


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What forfaitor needs to know?

About buyer and his nationality

What goods are being sold

Detail of value & currency of contract

Date & duration of contract

Evidence of debt to be used

Identity of guarantor of payment


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What document is are required by forfaitor from the exporter?

Copy of supply contract, or of its payment terms

Copy of signed commercial invoice

Copy of shipping documents

Letter of assignment & notification to guarantor Letter of guarantee or aval


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How much will it cost?

Interest rate relevant to the currency of underlying contract

at the time of forfaitors commitment, credit risk related to

importer's country

Interest cost include a charge for money received by

seller

A charge for covering the political, commercial & transfer

risk attached to guarantor

Additional cost


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So how does it all works in practice?

Exporter approaches a forfaitorwho confirms that he is willing toquote on deal

The forfaitor will calculateamount of bill, so that afterdiscounting will receive theactual amount

The forfaitor will stipulate expirydate of commitment

Exporter to present documents &will get immediate cash


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1.Suitable for ongoing open account sales, not

backed by LC or accepted bills or exchange.

Oriented towards single transactions backed by

LC or bank guarantee.2. Usually provides financing for short-term credit

period of upto 180 days.

Financing is usually for medium to long-term

credit periods from 180 days upto years though

shorterm credit of 30180 days is also available

for large transactions

3.Requires a continuous arrangements between

factor and client, whereby all sales are routedthrough the factor.

Seller need not route or commit other business

to the forfaiter. Deals are concluded transaction-wise.

4.Factor assumes responsibility for collection,

helps client to reduce his own overheads

Forfaiters responsibility extends to collection of

forfeited debt only. Existing financing lines

remains unaffected.

5. Separate charges are applied for

financing collection

administration

credit protection and

provision of information.

Single discount charges is applied which depend

on guaranteeing bank and countryrisk,

credit period involved and

Currency of debt.

Only additional charges are commitment fee, if

firm commitment is required prior to draw down

during delivery period.

Fact ri V/ Forfaiti

6 Service is available for domestic and export Usually available for export receivables only


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6. Service is available for domestic and export

receivables.

Usually available for export receivables only

denominated in any freely convertible currency.

. Financing can be with or without recourse; the

credit protection collection and administrationservices may also be provided without financing

It is always without recourse and essentially a

financing product.

8. Usually no restriction on minimum size of

transactions that can be covered by factoring

Transactions should be of a minimum value of

USD 250,000.

9. Factor can assist with completing import

formalities in the buyers country and provide

ongoing contract with buyers.

Forfaiting will accept only clean documentation in

conformity with all regulations in the

exporting/importing countries

10. Factors work mostly with consumer goods Forfeiters usually work with capital goods,

commodities, and large projects


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Wor ing

apital

Management

f Of C


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Definition Of Working Capital

Funds deployed for managing business operations

Working Capital refers to that part of the firms capital,

which is required for financing short-term or current

assets such as cash, marketable securities, debtors and

inventories.

Funds thus invested in current assets keep revolving

fast and are constantly converted into cash and this

cash flows out again in exchange for other currentassets.

Working Capital is also known as revolving or

circulating capital or short-term capital.


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Factors Determining working Capital

Total Costs incurred on materials, wages andoverheads.

The length of time for which raw materials remain in

stores before they are issued to production.

The length of the Production Cycle or Work-in-

progress, i.e., the time taken for conversion of raw

materials to finished goods.

The length of the Sales Cycle during which finished

goods are to be kept waiting for sales.


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The average period of credit allowed to customers.

The amount of cash required to pay day-to-dayexpenses of the business.

The amount of cash required for advance

payments, if any.

The average period of credit to be allowed by

suppliers.

Time - lag in the payment of wages and other

overheads.


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EXCESS OR INADEQUATE WORKING CAPITAL

EveryEvery businessbusiness concernconcern shouldshould havehave adequateadequate

workingworking capitalcapital toto runrun itsits businessbusiness operationsoperations.. ItIt

shouldshould havehave neitherneither redundantredundant oror excessexcess workingworking

capitalcapital nornor inadequateinadequate oror shortageshortage ofof workingworkingcapitalcapital..

BothBoth excessexcess asas wellwell asas shortageshortage ofof workingworking capitalcapital

situationssituations areare badbad forfor anyany businessbusiness.. However,However, outout ofofthethe two,two, inadequacyinadequacy oror shortageshortage ofof workingworking capitalcapital isis

moremore dangerousdangerous fromfrom thethe pointpoint ofof viewview ofof thethe firmfirm..


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Working Capital Financing

Working capital financing using structured trade finance

products, to monetize accounts receivable, is a good

way to convert illiquid assets into cash

This particular form of accounts receivable financingallows a growing business to raise cash by pooling

accounts receivable

Known as structured trade finance, this technique is

used to generate cash for

(i) rapidly growing companies; (ii) companies

that have seasonal sales; and

(iii) companies involved in mergers and acquisitions.


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Why working capital financing?

You benefit from this type of working capital financing

(structured trade finance accounts receivable financing)

by being able to:

convert illiquid assets (accounts receivable) into

cash

raise cash based on pools of similar accounts

receivable;

improve your companys balance sheet; enhance

your companys creditworthiness; and

raise money at rates more favourable than direct

borrowing (commercial loans).


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Working Capital Financing StructuredTrade Finance defined

What is Structured Trade Finance?

Structured trade finance is a way of raising cash by

selling interests in a pool of similar assets

A form of accounts receivable financing, structured tradefinance involves the collection of similar accounts

receivable into pools

Individually, the accounts receivable would not be able

to support an accounts receivable loan.

However, pooled, similar accounts receivable can

support significant fund raising efforts.


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Interests in the pool of accounts receivable are then sold

to investors

Typically, institutional investors purchase the interests

The underlying support for the interests, the pool of

accounts receivable, is diversified, providing investorswith a degree of insulation from risk

Structured trade finance transactions also have other

built-in safeguards that decrease the risk of default

Because risks are minimized, investors are usually

satisfied with a reduced interest rate.


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Working Capital Financing using StructuredTrade Finance

1. Create a subsidiary or affiliate that is a special purpose

entity (SPE).

2. Transfer your companys accounts receivable to the

SPE.

3. The SPE issues securities (notes or trust certificates)

that are backed by the accounts receivable.

4. The SPE uses the proceeds from the issuance of

securities to purchase the accounts receivable from your

company.

5. You can now use the cash generated by the sale of the

accounts receivable to the SPE to fund working capital.


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Critical Objective of Structured TradeFinance

Structured trade finance is a type of working capital

financing that is dependent on the ability to insulate the

cash flow generated by the accounts receivable from any

financial difficulties.

The cash flow is insulated from both the financial

difficulties of the originator of the accounts receivable

(your company) and those of the SPE.


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Structured Trade Finance and Credit RatingAgencies

Unlike other forms of working capital financing,

structured trade finance involves the sale of securities to

institutional investors through the capital markets

These institutional investors rely on credit rating

agencies (Moodys; Standard & Poors) to comment on

the risk profile of the securities

The credit rating agencies do so by analyzing thetransaction and providing a credit rating

The more favourable the credit rating, the lower the

costs of borrowing (the interest rate).


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Credit Rating Agencies

While credit rating agencies review all aspects of a

transaction, particular focus is paid to the:

credit quality of the accounts receivable;

default history of the accounts receivable; extent to which the cash flow from the accounts

receivable has been insulated from financial

difficulties of the originator.


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Leasing


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Leasing

Leasing is defined as a means of financing under which

the customer (Lessee) pays a Lessor for the use of

equipment in regular installments over a contracted

period of time.

Lessee Uses the Asset

Lessor Owns the Asset


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More useful for long term financing, e.g.

For acquisition of equipment or machinery requiring

large sum of cash outlay

Helps Importer/Distributors acquire equipment vital to

business operations without major capital investment

Usually a leasing company will purchase and lease to a

company in need against monthly rental fare.


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Procedure

Importer lease the product intended from the banks

The leasing company signs a leasing agreement directly with

the importer (lessee)

The agreement is tailored to the specific needs of the supply

contract between the exporter and importer

The importer Lessee specifies the equipment and selects thevendor/supplier from whom it is purchased in accordance with

the Lessee's precise specifications


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The Lessee negotiates the purchase price of the

equipment with the vendor

The leasing company receives a lease application from

the Lessee and conducts a credit investigation

If the Lessee is approved, lease documents are

prepared and sent to the Lessee for execution

The executed lease documents are returned to the

Lessor

A purchase order is given to the vendor/supplier to

deliver the equipment to the Lessee and to invoice the

Lessor.


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Advantages

More liberal terms than purchase financing

Leased equipment can pay for itself as it generates profits

Requires minimal upfront costs, commonly only one or two

month's rent in advance

Preserves funds and bank credit for other expenditures.

Lease financing does not impact bank credit lines

Lease payments on business equipment are 100% tax

deductible

Enables companies to regularly upgrade their equipmentminimizing obsolescence


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Disadvantages

Lease financing is primarily for companies established

for over two years

Leasing can be more expensive than conventional

financing when potential tax implications are not taken

into consideration.

Most equipment leases are either non-cancelable or

impose a penalty for early termination.

Lease payments must be made on time.

Leasing does not enable a company accrue any equity in

the equipment.

Lessees need to pay all maintenance fees and taxes


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Potential Problems - Lease Agreement

Long, complex lease agreements designed to confuse

Additional fees that are built into a lease agreement.

Low advertised lease costs with extra fees to compensate

End of term options that cause you to pay a large sum of money to

terminate the agreement Credit fees to process a credit application

Commitment fees to hold the credit open

Broker Fees to pay for broker participation

Option to buy the equipment at a mutually acceptable price ratherthan at fair market value

Fees to obtain clean title to the equipment at end of lease term

Delayed payment to the vendor to increase yield


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Trade Finance Impediments and Challenges

Lack of Security/Collaterals

Absence of counter party willing to offer financing alternatives

outside the banking system

Promissory notes, Bill of Exchange, Counter trade,

Forfeiting, Suppliers credit etc

High costs of borrowing to compensate banks for credit risks

(Interest rates, application fee, facility fee)

Regulatory issues

Difficulties for importers and banks to comply with

regulatory requirements e.g. Foreign currency controls

Compliance to terms of Trade


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Compliance to terms of Trade

Documentations

Absence of reliable Market information about.

Counter party risks and trading requirements

Price Volatility for export especially commodities

Poor negotiations skills for some importers/exporters which

have caused them to become victims of unfavourable terms

in international trade


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Continued..

Overseas supplier insist on Advance payments, while

Exporters are forced to accept Open account terms

While overseas suppliers require L/Cs confirmed by firstclass bank

Even bank charges are not shared equally


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THANK YOU!!!

Mitalee Mehta(40)

Harsha Haridas(24)

Mohit Palesha(43)

Saurabh Jain(26)

Kamesh Gupta(23)

Taruna Gupta(21)