INTERNATIONAL INTERNATIONAL TRADETRADE

Andrea Mathias

Kishore Patil

Nehal Ukani

Reiner D’Costa

Shruti Hosur

Shruti Shetty

Sushil Kaushik

GROUP MEMBERS

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

DEFINITIONDEFINITION

INTERNATIONAL TRADE

International tradeInternational trade

Flow of Productive factors

Flow of Productive factorsFlow Of CommodityFlow Of Commodity

INTERNATIONAL TRADE

Advantages

•Market expansion

•Economies of scale

•Surplus not wasted

•BOP

•Global productivity

•Socio economic setup of country

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 DrawbackDuty Drawback

Tax ConcessionTax Concession

Market development assistanceMarket development assistance

Export promotion of capital goods schemeExport promotion of capital goods scheme

Cash compensatory supportCash compensatory support

Air Freight SubsidiaryAir Freight Subsidiary

EXIM BANKEXIM BANK

Project Finance/Trade Finance GroupProject Finance/Trade Finance Group

Corporate banking groupCorporate banking group

Line Of Credit GroupLine Of Credit Group

Small and Medium Enterprise groupSmall and Medium Enterprise group

Export Services GroupExport Services Group

EXIM BANK

METHODS FOR INTERNATIONAL TRADE FINANCE

According to stage of financingAccording to stage of financing

Pre-shipment financePre-shipment finance

Post-shipment financePost-shipment finance

METHODS FOR INTERNATIONAL TRADE FINANCE

Instruments/methods of financingInstruments/methods of financing

Letter of creditLetter of credit

Open accountOpen account

FactoringFactoring

ForfaitingForfaiting

Document collectionsDocument collections

Pre-Shipment FinancePre-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.

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.

IMPORTANCE 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)

FORMS OR METHODS OF PRE-SHIPMENT FINANCE

• 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.

PACKING CREDIT IN FOREIGN (PCFC)

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.

REQUIREMENTS FOR GETTING 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

DIFFERENT STAGES OF PACKING CREDIT

• 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 handloomsHandicraftsCarpetsLeatherGems & JewelleryMarine products Small & Medium exporters.

• Extension beyond current deadline of September 30, 2009 to March 31, 2010.

INTEREST SUBVENTION SCHEME

• 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.

POST SHIPMENT FINANCE

FEATURES

• Purpose of Finance

• Basic of Finance

• Types of Finance

• Quantum of Finance

• Period of 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

TYPES OF POST SHIPMENT FINANCE

• 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

BENEFITS TO EXPORTERS

• Physical Exports

• Deemed Export

• Capital Goods And Project Exports

TYPES OF EXPORT BUYER’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

SUPPLIER’s 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.

LETTER OF CREDIT

• Importer or Applicant

• Issuing Bank

• Beneficiary

• Advising Bank

• Negotiating/ The Paying Bank.

PARTIES TO A LETTER OF CREDIT

1. Contract

Seller(Beneficiary)

BuyerApplicant

2. Documentary credit Application

ISSUING BANK.

3. Documentary creditAdvising Bank

4. Advice of Documentay credit

LETTER OF CREDIT – THE PROCESS

• Irrevocable L/C

• Revocable L/C

• Negotiation Credit

• Confirmed or Unconfirmed credit

• Revolving credits

• Back To Back Credits

• Red Clause L/C

• Transferable Credits

• Traveller’s L/C

• Special Credits

TYPES OF LETTER OF CREDIT

• Immediate Payment

• Guaranteed Payment

• Performance

• Safe & Secure Method

• Political & Exchange Control risks reduced.

ADVANTAGES OF LETTER OF CREDIT

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:

1. Export Working Capital Financing

2. Export Credit Insurance

3. Export Factoring

4. Forfaiting

OPEN ACCOUNT

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 ACCOUNT – PROS & CONS

Open Account - Process

TARGET VENDOR

BANK

OPEN ACCOUNT – PROCESS

Open Account - Process

TARGET VENDOR

BANK

Purchase order

Purchase

order

OPEN ACCOUNT – PROCESS

Open Account - Process

TARGET VENDOR

BANK

Purchase order

Purchase

order

Goods

Doc

umen

ts

OPEN ACCOUNT – PROCESS

Open Account - Process

TARGET VENDOR

BANK

Purchase order

Purchase

order

Goods

Doc

umen

tsD

ocument status.

OPEN ACCOUNT – PROCESS

Open Account - Process

TARGET VENDOR

BANK

Purchase order

Purchase

order

Goods

Doc

umen

ts

Docum

ent status.

Payment

Paym

ent

OPEN ACCOUNT – PROCESS

• Process Overview

Remitting Bank Collecting Bank

Importer Exporter

Entrusts collection of payment

Sends Documents + Instructions for Payment

Draft indicating D/A or D/PPayment

Payment

Payment

DOCUMENTARY COLLECTIONS

Documentary Collections

Importer can collect documents by following payment terms:

A. 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.

B. 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.

DOCUMENTARY COLLECTIONS

• 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

FACTORING

Customer Client

Factor

(1) Credit Sale of Goods

(2) Invoice

(3) Submit Invoice Copy

(4) Payment upto 80% initially

(6) Pays the

balance

(5) Pays the amount (In recourse type

customer pays through client)

FLOW CHART OF FACTORING

Factoring Arrangements

FACTORING

Recourse

Non–Recourse

Disclosed Undisclosed

FACTORING ARRANGEMENTS

FACTORING

TWO FACTOR SYSTEM

DIRECT IMPORT &

EXPORT FACTORING

BACK TO BACK

FACTORING

TYPES OF FACTORING

• 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 factorsImporter & Import

Factor

Exporter & Export

Factor

TWO FACTOR SYSTEM

• 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

DIRECT IMPORT & EXPORT 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

BACK TO BACK FACTORING

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

FORFAITING

Flow Chart - ForfaitingFLOW CHART 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

STRENGTH OF FORFAITING

• Eliminates Risk

• Enhances Competitive Advantage

• Improves Cash Flow

• Increases Speed and Simplicity of Transactions

BENEFITS OF 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.

FACTORING VERSUS FORFAITING