FIT Final

Team Members

Pushpjit Singh Malik – 32C

Ramil Sobti – 35C

Sachit Arora – 39C

Sakshi Garg – 40C

Shashwat Kant Sinha – 41C

Shreyash Agarwal – 42C

Surjodeb Sarkar – 44C

Sweta Jain – 45C

Vaibhav Gupta – 47C

Varundeep Sajja – 49C

Vineet Rohilla – 51C

Apoorv Harshal Jayavant – 52C

Nitin Krishna Menon- 53C

Financing of International Trade –

Project Report

MBA (IB) 2011-2013

Indian Institute of Foreign Trade, Delhi

Overview

Increasing globalization has created intense competition in international markets.

Importers and exporters are looking for any competitive advantage that would help them

to increase their sales. Trade Finance offers a means to convert export opportunities into

sales by managing the risks associated with doing business internationally, particularly the

challenges of getting paid on a timely basis.

There are different trade finance products and payment options available in the market

today. Some of the trade finance products are: Accounts Receivable Financing, Factoring

(Cross-Border Factoring), Letters of Credit (L/C), Bankers Acceptance, Working Capital

Financing, Medium-Term Capital Financing, Counter trade.

This project aims at exploring different kind of trade finance products used in the Indian

Market. We have contacted a lot of buyers in order to understand the different products

used by them and their preferences for the same. A standard questionnaire was prepared

and was used by most of the students in the group to ensure uniformity and convenience in

analysis.

The turnover of the exporters contacted varied from INR 2 crores to more than INR 1000

crores. We also analysed the banks which offer these products and the kind of products

offered by them. Not only this, we also analysed the payment options used by the exporters

to understand if it had any correlation with the trade finance products used.

Analysis of Trade Finance Methods

The table below gives a brief overview of the different trade finance methods being used by

each exporter:

Company Working capital

financing

Medium term

capital financing

Counter - trade

Letter of Credit

Bankers Acceptance

Factoring Account Receivable Financing

Polymedicure √ R D Ramnath

Company

Venus Exports

√ Al Naved

Frozen Food Exports

√

Motherson Sumi Systems

Limited

√ √ √ √

B. Jain Group √ √ √

Nalin Industries

√ √ √

TATA Agrico √ √ √ √ √

Aurokash √ S&D

International √

Auto Fibre Craft

Soma Puf

Metal Private Ltd.

1. ACCOUNTS RECEIVABLE FINANCING:

Exporters using this method:-

Nalin Industries (Export Copper Wires)- Turnover- Rs.5 crores

B. Jain Group- Turnover-Rs. 20 crores

Motherson Sumi Systems Limited- Turnover- Rs 1,045 Cr. for Q1 2012 – 2013

General information regarding this method (Based on exporters interviewed):-

• Total Credit: A small portion of total credit is financed through this method by an

exporter. It is majorly used as collateral for the total working capital financing

received by him from Allahabad bank.

• Margin: The bank has entered into an arrangement with an exporter company

which requires the latter to maintain a 30 % margin for this financing.

• Maturity: It is a short term financing arrangement- for less than a year and is

reviewed annually for an exporter interviewed

• Banks also have certain Terms & Conditions: One of the exporters had a

condition, Sundry debtors upto a maturity of maximum 90 days are considered by

the exporter’s bank for the purpose of this financing. The exporter company has to

submit quarterly stock and book debt statements to the bank under this

arrangement.

General reasons for using this method:-

• Some exporters believe this method is easy to avail with certain Indian banks.

• It is popular among SMEs.

• Very large organisations use most of the financing methods. Accounts receivable

financing is one of them. They use it depending on the type of business, customer,

etc.

• Many prefer pre-financing in this type of a method

• This method gives some liquidity and hence exporters go for this method

• It is also used for financing of domestic receivables. One of the exporters uses it for

financing of domestic receivables for 90 days.

• It is a very convenient method of obtaining short term finance for the purpose of

exports. It can be used if business the exporter deals in is very competitive and

involves a lot of small debts. Hence it suits the exporter to raise finance against

these book debts.

2. FACTORING



General information regarding this method (Based on exporters interviewed):-

• Not among the most prevalent method used by exporters

• Among the exporters interviewed, mainly large enterprises use the method

• Sometimes, to certain exporters credit period offered is small

Benefits of the method:-

• Liquidity increases

• Financing of export receivables on non recourse basis

• Responsibility of collection handed over to other

Deterrent to using this method (based on the exporters interviewed):-

• As for some exporters credit period offered is small this method is avoided

• The exporter does his business with his long-term clients and hence, generally,

the exporter does not face any major difficulty in collecting dues from them. As a

result factoring as a method of financing does not find relevance with the exporter,

nor is this method very prevalent in this business.

3. LETTER OF CREDIT



Polymedicure- Turnover -Rs 210 cr

Venus Exports

S&D International- Turnover-USD 4 million

General Information on this method (Based on information from the exporters)

• Very widely used

• Bank commission and charges are high sometimes

Benefits of using this method:-

• Protection against buyer changing his order

• Ability to get Pre-Export finance if needed

• Protection against buyers refusing payment on trivial reasons

• Much better option than prepayment that is sometimes asked for

• More favourable payment terms

• Creates trust for eventual movement onto Standby LC’s

• An exporter interviewed mainly uses this method to buy machines on credit

Deterrents for using L/C:-

• Mainly the commission and charges levied are very high

• Charges levied eat into the pockets of exporter’s profit and so exporters who work

on low margins avoid this sort of a provision

• One exporter even went onto the extent of saying that public sector banks are

better when it comes to L/Cs. It is because sometimes there are extra charges that

an exporter pays to the bank which should not have been paid. In case of PSU banks

its easier to retrieve these extra charges

4. BANKERS ACCEPTANCE Bankers Acceptance is basically a guarantee by a bank to the exporter that his payment will

be made within the due course of time. It is a short-term credit investment, and is traded in

the Secondary market. The banker's acceptance is mostly used to finance exports,

imports and other transactions in goods. The banker's acceptance need not be held till the

maturity date but the holder has the option to sell it off in the secondary market whenever

he finds it suitable.

The characteristics of bankers acceptance are:

� Trades at a discount. Prime bankers acceptances are of shorter maturities

� Credit Risk : Moderate to high. Ratings banks issuing the bankers acceptance should

be monitored.

� Liquidity Risk: Moderate. Depends on credit and stability of bank.

� Market Risk: Low to moderate, due to the short-term nature of this security

While discussing with various exporters, the following came out to be the reasons, why

Bankers Acceptance is used by buyers to finance the trade:

� As cited by Mr. Narinder Bhatia, Mr. Tarun and Mr. Kuldeep, it is used primarily

when the buyer is not trusted, or is new in the business.

� Insufficient working capital to pay off the L/C.

� Time basis L/Cs are usually not acceptable from a foreign supplier's point of view.

� B/A financing usually offers lower interest rates than conventional financing.

So, the advantages can be stated as:

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

immediate funding.

� Higher yield, specific maturity dates are chosen by the purchaser within a range of

180 days.

� Cheaper, as 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

repay B/A.

And, the primary reasons why a Bankers acceptance is not used in the trade are:

� As Mr. Kuldeep pointed out, this facility is rarely utilized by the exporter, as the

bank charges fees on per transaction basis as the exporter generally discounts the

acceptance with his bank to obtain immediate funds.

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

considered eligible.

� The term "Bankers Acceptance" is not very popular amongst the traders.

So, the disadvantages can be stated as:

� The six month clause makes Bankers Acceptance an unfavorable option for those

seeking credit for a longer period.

� The high Bank Fees makes it a costly option if the exporter and importer are familiar

with each other.

Comments: Clearly, the bankers acceptance can be an attractive financing alternative for

merchandise acquired through the letter-of-credit vehicle. But the term "B/A" is frequently

misunderstood even with the traders who practice it.

5. Working Capital Financing

By far the most popular method used by companies surveyed, four companies,

Polymedicure (sbi-30cr,citi-10cr), Motherson Sumi Systems Limited, B. Jain group, Nalin

Industries, Aurokash, and Tata Agrico have confirmed that they frequently use this

method. The benefits of this are it enables the exporters to fulfill sales orders, turn export

related inventory and accounts receivables into cash and exports access to financing.

The different funded working capital finance methods available for exporters in India from

EXIM bank today are working capital term loans which are a primary source of financing if

the time period is less than two years, long term capital financing (upto five years), export

bills discounting, export packing credit and cash flow financing.

6. Medium term capital financing

Of the firms interviewed only Motherson Sumi Systems Limited (from SBI) and TATA

Agrico have said that they use medium term capital financing. The primary reason for this

being not so popular is that because most of the companies claimed that they need

financing only for the short term.

Since medium term capital financing ranges over a period of three to seven years, this

involves exporter selling the note, without recourse, to the forfaiting bank but with the

time frame being quite high most Indian exporters do not prefer this method.

7. Countertrade

Except for TATA Agrico no other company is involved in countertrade. Following are the

different reasons that the companies gave for not being involved in countertrade:

1) We don’t need any raw materials, neither do we have a sister concern which

imports from these countries. This eliminates the scope of any sort of countertrade.

2) We feel our buyers might countertrade products we are not very familiar with and

thus we might face problems. Also, unless we need the goods as a raw material or

have a sister company which can use these – it becomes pretty tough for us to

handle these goods.

3) However it must be remembered that it is usually the Governments and the multi

nationals who are the primary participants in a countertrade and the survey results

confirm this with only TATA Agrico using this occasionally.

Overall Analysis

Payment Methods:

The graph below represents the payment options used by the exporters under our analysis.

As observed from the graphs, L/C is prevalent across all scales of exporters whereas

prepayment is dominant among large exporters due to their bargaining power.

Trade Finance Methods:

As observed from the analysis of the individual methods, Account Receivable Financing and

bankers acceptance is mostly used by small and medium level exporters. On the other hand

L/Cs are generally used by large exporters. Factoring is not very prevalent across exporters

and working capital financing is the most widely used method due to easy availability and

lower financing costs.

33%

45%

11%

11%

Large Exporters

25%

41%

17%

17%

SME Exporters

Prepayment L/C Open Account D/P

Documents

FIT Final