SIP2010_IBS_Angir Gupta

A REPORT

ON

TRADE FINANCING: NAVIGATION

OF EMERGING AND DEVELOPED

ECONOMIES DURING GLOBAL

ECONOMIC CRISIS

By

Angir Gupta

Enrolment No – 09BSHYD0097

TATA Consultancy Services, Hyderabad

A REPORT

ON

TRADE FINANCING: NAVIGATION

OF EMERGING AND DEVELOPED

ECONOMIES DURING GLOBAL

ECONOMIC CRISIS

By

Angir Gupta

Enrolment No – 09BSHYD0097

TATA Consultancy Services, Hyderabad

A report submitted in partial fulfillment of the requirements of MBA

Program of IBS Hyderabad

Submitted to

Corporate Guide:

Mr. Tushar Bisht,

Assistant Systems Analyst, TBDA

Faculty Guide:

Prof. Manas Ranjan Pradhan,

IBS Hyderabad

Date of Submission: Friday, May 14, 2010

PROJECT COMPLETION CERTIFICATE

This is to certify that Mr. Angir Gupta, student of IBS Hyderabad, undergoing MBA program,

has successfully completed his Summer Internship Program with a project entitled “Trade

Financing: Navigation of Emerging and Developed economies during global Economic

crisis” at Tata Consultancy Services, Hyderabad (TCSH) for a period of 14 weeks from 16th

Feb 2010 till 21st May 2010. His performance on the project during this period was satisfactory.

Tushar Bisht,

Project Supervisor

Suryanarayana Kolachena,

Academic Relationship Manager

V. Rajanna,

Vice-President & Regional Head

Tata Consultancy services

Hyderabad

Tata Consultancy Services Ltd. 1 Software Units Layout Madhapur Hyderabad 500 081 Andhra Pradesh India

Tel +91 40 6667 2000 Fax +91 40 6667 2222 e-mail [email protected] website www.tcs.com Registered Office Bombay House Homi Mody Street Mumbai 400 001

mailto:[email protected]

http://www.tcs.com/

IBS HYDERABAD

CERTIFICATE

This is to certify that the thesis titled “Trade Financing: Navigation of Emerging and

Developed economies during global Economic crisis” is a bonafide work done by Mr. ANGIR

GUPTA, Enrolment No. 09BSHYD0097, Batch 2009-11 in partial fulfilment of the

requirements for the award of the degree MBA and submitted to the IBS Hyderabad.

This work was not submitted earlier at any other University or Institute for the award of the

degree.

Faculty Guide:

Prof. Manas Ranjan Pradhan,

IBS Hyderabad

Project Coordinator:

Prof. Hilda Amalraj,

IBS Hyderabad

SIP 2010 – Trade Financing: Navigation of Emerging and Developed economies during global economic crisis

Page i of 107

I. Acknowledgements

I would like to take this opportunity to thank all those who helped me in the successful completion of my

Summer Internship Program (SIP).

My Summer Internship Program at Tata Consultancy Services has been a rewarding experience. The

project undertaken during the internship was regarding ―Trade Finance‖.

First of all, I would like to thank Dr. V.P Gulati, Vice President and Head, Tata Business Domain

Academy, Tata Consultancy Services, for giving me an opportunity to work in the company, TATA

Consultancy Services and for providing his valuable guidance and support throughout the course of the

internship program.

I am immensely thankful to Prof. Manas Ranjan Pradhan, my faculty guide, for being a guiding force

in leading me through this immense learning project.

I am most grateful to Mr. Tushar Bisht, my mentor and company guide. He has been a constant source

of inspiration at each and every step of my research work and had always extended his valuable inputs

and guidance regarding my project.

I would also like to thank all the other mentors at TCS with whom our team worked.

Finally I would like to thank my friends and fellow interns at TCS who provided valuable inputs

throughout my internship, which helped me in formulating a comprehensive report.


Page ii of 107

II. Declaration

This is to certify that the thesis titled ―Trade Financing: Navigation of emerging and developed

economies during global economic crisis” is a bonafide work done by Mr. ANGIR GUPTA, Enrolment

No. 09BSHYD0097, in partial fulfillment of the requirements of MBA Program and submitted to IBS

Hyderabad.

I also declare that this project is a result of my own efforts and that has not been copied from anyone and I

have taken only citations from the literary resources which are mentioned in the Bibliography section.

This work was not submitted earlier at any other university or institute for the award of the degree.

Place: Hyderabad (ANGIR GUPTA)

Date: May 14, 2010


Page iii of 107

III. Abstract

This report presents the work done at the TCS Business Domain Academy, Hyderabad in the Summer

Internship Program, 2010. The different tasks like Asset Review, Asset development and the Research

Project work were done in this period.

Summer Internship Program at TCS is divided into three phases and each phase lasted for 4 weeks,

namely:

Phase I: Asset Review – Three Certificate courses in Wholesale Banking: Products and services,

Wholesale Banking: Trade Finance, Governance systems.

Phase II: Asset Development – Certificate course in Trade finance Advanced

Phase III: Research Project - “Trade financing: Navigation of Emerging and Developing economies

during recent global economic crisis”

The project topic is “Trade financing: Navigation of Emerging and Developed economies during global

economic crisis”. Trade finance is the blood and soul of the international trade, since around 80 to 90% of

the world trade relies on some form of trade finance. The financing of the trade become more crucial

during the times of economic crisis. The blockage of the free flow of the credit from the banks to the

exporters/importers lead to total disruption of the trade process, thereby affecting the company’s/

country’s growth. If this situation persists for a long time, the economic crisis can lead to a financial

Contagion, deepening and prolonging the recession. During the recent crisis, some companies/economies

manage to navigate safely and able to increase its market presence, to emerge as a global player.

This paper (Research Project) aims to study the trade financing options in the developing/emerging and

the developed countries, and perform a comparative analysis. It also investigates how exporters/

corporate and the SMEs manage to get their trade financed during the recent global crisis, measures to

navigate out of this crisis. It discusses the scope and advantage of the usage of IT products in trade

finance, proposed an IT solution (TradFinc) to trade finance by the help of a CASE STUDY, and finally

made recommendations to the TCS about the improvement of its IT products/ solutions.

By doing this project, I have suggested measures to navigate out of the financial economic crisis,

proposed a sample IT solution in form of case study, brought improvement areas into limelight, so as to

improve the overall trade finance solutions, and gave recommendations to a similar solution by TCS.


Page iv of 107

IV. Executive Summary

I, Angir Gupta, a student of IBS Hyderabad, did my Summer Internship training, for Tata Consultancy

Services (TCS), one of the leading IT Consultancy companies in the world. I worked in Tata Business

Domain Academy (TBDA), a department under TCS, which deals with training in domain assets, by

creating certification courses, and hosting of e-learning programs on the portal.

I worked for a project entitled “Financial technological Centre – Portal Development”. I have

performed different tasks of Asset Review, Asset Development and submitted a Research Work during

this period. For the Asset Review, I have reviewed the 3 Certification courses of Banking and Financial

services (BFS). Under the Asset Development phase, I have developed an entire certification course on

Trade Finance Advanced Level 3, including the Word documents, presentation files, Quizzes and

glossary.

I have submitted a Research work titled - “Trade financing: Navigation of Emerging and Developing

economies during recent global economic crisis”

Trade finance is the blood and soul of the international trade, and becomes more crucial during the times

of economic crisis. The blockage of the free flow of the credit from the banks to the exporters/importers

lead to total disruption of the trade process, thereby affecting the company’s/ country’s growth. Some

companies managed to navigate safely during the global recession of 2008.

I did a Comparative analysis to study the trade financing options in the developing/emerging as well as

developed countries. I investigated how exporters/ corporate and the SMEs manage to get their trade

financed during the recent global crisis. I have suggested some solid measures to navigate out of this

crisis. I covered the scope and advantage of the usage of IT products in trade finance.

Since TCS has different clients in this domain area, I proposed an IT solution (TradFinc), an integrated

end to end platform in form of a CASE STUDY. I also made recommendations to TCS trade finance

solution, TCS BαNCS Trade Finance regarding its improvement, to increase TCS clientage. An

analytical model can be developed in the future based upon the findings from my research work.

I can work on similar lines in future, and can publish Research papers and White papers on national/

international level.

I also got certified with Wholesale banking Certification course from TCS, with Grade B, during this

period.


Page v of 107

V. Table of Contents

I. Acknowledgements........................................................................................................................... i

II. Declaration ...................................................................................................................................... ii

III. Abstract ...................................................................................................................................... iii

IV. Executive Summary .................................................................................................................... iv

V. Table of Contents............................................................................................................................. v

VI. List of Figures............................................................................................................................. vi

VII. List of Tables .............................................................................................................................. vi

VIII. List of Abbreviations ................................................................................................................. vii

IX. Company Profile ...................................................................................................................... viii

1. Introduction ..................................................................................................................................... 1

1.1. Purpose of the report ................................................................................................................ 1

1.2. Scope of Report ....................................................................................................................... 1

1.3. Purpose of Project .................................................................................................................... 4

1.4. Scope of Project ....................................................................................................................... 5

1.5. Limitations of the Project ......................................................................................................... 5

1.6. Methodology ............................................................................................................................ 5

1.7. Learning................................................................................................................................... 5

1.8. Literature Survey ..................................................................................................................... 6

Main Text................................................................................................................................................ 7

2. Phase 1: Asset Review and Learning ................................................................................................ 9

3. Phase 2 - Asset Development ......................................................................................................... 15

4. Phase 3 - Research Project ............................................................................................................. 21

4.1 Study of Trade Finance .......................................................................................................... 25

4.2 Trade Finance for exporters/corporate and small and medium enterprises ............................... 39

4.3 Trends/Use of Instruments in developing and developed economies ....................................... 47

4.4 Navigation out of the crisis ..................................................................................................... 68

4.5 IT Products in Trade Finance.................................................................................................. 75

4.6 Case Study: TradFinc ............................................................................................................. 78

4.7 Recommendations for TCS Solution ....................................................................................... 84

5. Annexure ....................................................................................................................................... 86

6. Glossary [7]

..................................................................................................................................... 93

7. Bibliography .................................................................................................................................. 94


Page vi of 107

VI. List of Figures

Figure 1: Phases of SIP at TBDA, TCS .................................................................................................... 7

Figure 2: Gantt chart for the SIP .............................................................................................................. 7

Figure 3: Asset Review Sub tasks ............................................................................................................ 9

Figure 4: Traditional to Supply Chain Finance and Open Account trade ................................................. 26

Figure 5: Risk Ladder ............................................................................................................................ 35

Figure 6: Change in value of trade finance by Customer Segment .......................................................... 39

Figure 7: Short Term Export Credit Insurance........................................................................................ 45

Figure 8: SWIFT year-on-year growth in trade finance messages ........................................................... 52

Figure 9: Growth in World merchandise exports trade by region (% change in Dollar values) ................ 54

Figure 10: Trends in growth of trade volume (% change) ....................................................................... 59

Figure 11: Sharp drop in Trade Finance (Change in the ratio of insured export credit to export) ............. 64

Figure 12: Countertrade used in the Asia-Pacific region ......................................................................... 72

Figure 13: IT service providers and their products.................................................................................. 75

Figure 14: Open Account Suite (Bolero) ................................................................................................ 76

Figure 15: Letter of credit/ Documentary credit Suite (Bolero) ............................................................... 76

Figure 16: TradFinc - End to End integration of Global Trade Services .................................................. 81

Figure 17: DAR Report sample .............................................................................................................. 90

Figure 18: Asset Review Tracker ........................................................................................................... 91

Figure 19: Asset Development Tracker .................................................................................................. 92

VII. List of Tables

Table 1: Deliverables to Domain Academy ............................................................................................ 11

Table 2: Restructuring of Courses .......................................................................................................... 12

Table 3: Development of Chapters ......................................................................................................... 13

Table 4: Development: Trade Finance Advanced ................................................................................... 15

Table 5: Advantages and Risks in Open Account for Buyer and Seller ................................................... 27

Table 6: Pros and Con of the Open Account........................................................................................... 28

Table 7: Pros and Con of the Letter of Credit ......................................................................................... 29

Table 8: Pros and Con of the Documentary collection ............................................................................ 29

Table 9: Pros and Con of the Export credit Insurance ............................................................................. 31

Table 10: Trade developments in a country with financial crisis ............................................................. 62

Table 11: Measures implemented during Recession ............................................................................... 65

Table 12: Trade Finance Facilitation Programs – Mid-2008 to Mid-2009 ............................................... 71

Table 13: Measures and their Scope in region ........................................................................................ 73


Page vii of 107

VIII. List of Abbreviations

ADB Asian Development Bank

AFP Association for Financial Professionals

BAFT Bankers Association for Finance and Trade

BIS Bank of International Settlement

EBRD European Bank for Reconstruction and Development

GTA Global Trade Alert

ICC International Chamber of Commerce

IDB Inter-American Development Bank

IFC International Financial Corporation

IFSA International Financial Services Association

IT Information Technology

SIP Summer Internship Program

SMEs Small and Medium Enterprises

SWIFT Society for Worldwide Interbank Financial

Telecommunication

TBDA Tata Business Domain Academy

TCS Tata consultancy services

UCPDC Uniform Custom and Practice for Documentary Credit

WTO World Trade Organization


Page viii of 107

IX. Company Profile 1

Tata Consultancy services (TCS) is one of the leading IT Consultancy companies in the world. TCS is

providing its expertise to many of the world’s largest companies in the areas of IT Services, Business

Solutions, Outsourcing and Consultancy. TCS provides a comprehensive range of services & solutions for

the clients to focus on their core businesses. Such engagements require extensive and updated knowledge

of client business domain.

TCS has the lineage of Tata Group, one of India’s largest industrial conglomerates and most respected

brands. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled services delivered through

its unique Global Network Delivery Model™, recognized as the benchmark of excellence in software

development. TCS has over 160,000 of the world's best trained IT consultants in 42 countries. Financial

Information: Revenue of over $6.3 billion (fiscal year ending 31 March, 2010). [1]

TCS is headquartered in Mumbai, and operates in more than 42countries and has more than 170 offices

across the world. Natarajan Chandrasekaran is the Chief Executive Officer (CEO) and Managing Director

of the company.TCS is the world’s first organization to achieve an enterprise-wide Maturity Level 5 on

CMMI® and P-CMM® based on SCAMPISM, the most rigorous assessment methodology.TCS helps

clients optimize business processes for maximum efficiency and galvanize their IT infrastructure to be

both resilient and robust. TCS offers variety of solutions like IT Services, IT infrastructure services,

Enterprise solutions, Consulting, Business process outsourcing, Business process outsourcing, etc.

TCS helps clients from various industries solve complex problems, mitigate risks, and become

operationally excellent. Above 40% of the revenue generated by the gamut of services provided by TCS

is contributed by the BFSI vertical (Banking, Financial Services and Insurance). More than 33% of the

total employees of TCS are working on the BFSI projects. Therefore in view of the role of BFSI and the

employees working on such projects, FTC (Financial technology centre) was formed.

To build such domain knowledge, TCS piloted Financial Technology Centre (FTC) in July 2005 focusing

on banking and financial services (BFS). The success of FTC prompted expansion into other industries in

mid-2007, including insurance, e-governance, telecom, Life sciences & Healthcare, Energy Resources &

Utilities, Retail, Manufacturing, Hi-tech, Travel Transportation & Hospitality etc.

FTC got re-christened as TCS Business Domain Academy (TBDA) during April 2009 and is now creating

assets for other industry verticals also through its Domain Competency Centre (DCC) arm.

1 The Corporate facts and other information about TCS is taken from www.tcs.com

http://www.tcs.com/


Page 1 of 107

1. Introduction

1.1. Purpose of the report

The main purpose of Report is to give reader an overview regarding the work done in Summer Internship

Program.

1.2. Scope of Report Report covers the entire work done during Summer Internship Program in TCS.

It briefs about the progress of three phases of SIP in TCS in a systematic manner.

Below given is the phase wise work done during SIP.

PHASE I

Asset Review

Following tasks were assigned and completed in this phase:

To read and understand the basic concepts of 3 Certification Courses provided by Tata

Business Domain Academy.

To get the certification by giving the tests of individual modules and a final certification

test of 100 marks.

To review all 3 courses entirely and find the discrepancies and give recommendations if

any. A total number of 468 Review comments have been logged out of which 382

Review comments have been accepted.

To add some questions to existing question bank for chapters of the 3 Certification

Courses. A total number of 113 questions were added to the question bank.

The details are explained in main text.


Page 2 of 107

PHASE II

Asset Development: Trade finance Advanced

Following work was done during phase:

Development of following documents for each chapter was done:

1. Word document

2. Power point Presentation

3. Hot Potatoes File of Question bank with minimum 15 questions

4. Word document of Questions and Key

5. Glossary

Total 11 chapters have been developed. Chapters are clubbed together in a systematic fashion so as form

logical modules out of them. The logical clubbing is as follows

Overview of Foreign Trade– 1 Chapter

Domestic Trade finance Laws – 1 Chapter

International Trade theories and facilitation – 3 Chapters

Terms of trade and documentation – 2 Chapters

Risks involved in trade finance – 1 Chapter

Uniform customs and practice (UCP) 600 – 2 Chapters

Trade Finance: IT products- 1 Chapter

Total 11 chapters are further modularized. The details are explained in main text.


Page 3 of 107

PHASE III

Research Project: “Trade Finance: Navigation of Emerging and Developed economies during the

global economic crisis “.

Trade finance is the blood and soul of the international trade, since around 80 to 90% of the world trade

relies on some form of trade finance. During the global economic crisis, this financing becomes difficult

due to non availability of the credit. Since the countries/companies/small and medium enterprises relies

on this finance, blockage of it has disrupted the country’s trade and growth performance, and possibly

exacerbating the crisis.


the developed countries, and perform a comparative analysis. It also investigates how exporters/ corporate

and the SMEs manage to get their trade financed during the recent global crisis, measures to navigate out

of this crisis. It discusses the scope and advantage of the usage of IT products in trade finance, proposed

an IT solution (TradFinc) to trade finance by the help of a CASE STUDY, and finally made

recommendations to the TCS about the improvement of its IT products/ solutions.




The project is divided into the following parts or Stages.

1. Study of Trade Finance

a. Importance of Trade Finance

b. Trade Finance Instruments: Typology and significance

c. Risks involved in trade finance

d. Classification of Instruments by transaction volume

2. Trade finance for exporters/corporate and small and medium enterprises

a. Trends and patterns in trade finance during recent economic meltdown

b. How the companies, SMEs and the exporters/importers managed to get their trade

financed during the crisis period?


Page 4 of 107

3. Trends/Use of instruments in Developing and Developed economies

a. Trends/Use of instruments in developing and developed economies

b. Trade Finance during financial crisis

c. Trade Pattern (Exports/ Imports) during the economic crisis

d. Trade Credit during the recession

e. Impact of the recent economic crisis on Trade Credit

f. Measures taken by government and its Impact

4. Navigation out of the crisis

5. IT products in trade finance

6. Case Study

7. Recommendations for TCS Solution

1.3. Purpose of Project

Main Objective:

This paper (Research Project) aims to do the comparative analysis of the trade finance options in the

developing/emerging and the developed countries.

Ancillary Objectives:

How exporters/importers manage to get their trade finances during the recent global crisis,

Measures to navigate out of the crisis,

IT products used in the trade finance, and

Recommendations to TCS about the improvement of their products, to serve its clients better in

future.


Page 5 of 107

1.4. Scope of Project The entire study is based on my asset development topic: Trade Finance Advanced.

However it covers the recent global crisis time period with findings and recommendations making it a

complete project to look at Trade financing options at local/global perspective. Also IT products involved

in the trade finance are discussed and some recommendations have been given.

1.5. Limitations of the Project No matter how much work is done, there is still the scope of improvement in the research.

The project was selected keeping in mind two constraints- a) Time b) Scope

The project doesn’t deals with the primary data.

This Analysis is constraint to the time and resources such as access to some costly databases for the

countries and the company specific data. And hence the Research project is limited to data provided by

WTO Reports, different surveys done over global banks by international bodies like ICC, BAFT, and

AFP etc. Data has to be compiled from within these reports only.

1.6. Methodology The technique of secondary data collection is used for complete research process. It includes:

1. Surveys on Trade finance by ICC, BAFT, and AFP etc.

2. Online data collection from WTO reports

3. Research papers, white papers and journals

4. Online data collection for different IT service providers and products

1.7. Learning

The research work enhances my scope to work in the similar lines in future, and to present them

in the form of Research papers and White papers on national/ international level

An analytical model can be developed in future based upon the findings from the research work

Research methodology can be applied to the ―Management Research Project‖, which is an

integral part to fulfill the requirements of MBA, and performed in the last Semester.

Learned how to structure the research, analyze the broad issues and gradually focus on to the

main topic of the research.


Page 6 of 107

1.8. Literature Survey

Various survey reports, international trade body websites, research papers, white papers and journals are

read on the topic Trade finance.

Trade finance refers to the financing of import and export of goods and services in international trade.

Business across the globe is carried by import and export of goods and services as part of their

professional activities. These international trade transactions require facilitation of payment between

various concerned parties and complex structured financing is required through governments and various

financial institutions and banks. The main aim of trade finance is to promote international trade by

making available credit extensions or financing to meet the exporters’ and importers’ requirements. Trade

Finance acts as a boon for the small and undercapitalized businesses that have reached their credit limits.

The self-liquidating feature ensures that such business concerns get financing from the banks in form of

trade finance.

Trade finance becomes more crucial in times of economic crisis, where there is crunch of liquidity in the

market and there is higher growth rate of defaults and risks.

How technology can leverage Trade Finance:

Technology has changed the face of doing business in the past few years. Considering the ever growing

demand by the wholesale banks and financial institutions, IT solution vendors have prepared various IT

products to provide an integrated end to end solution covering all the minute aspects of trade. These

products apart from traditional pre shipment and post shipment financing issues also perform the

document and risk management.

The IT service providers can leverage by providing best solutions to their clients, by customizing the

different aspects as per the client’s requirements, eventually increasing their reach in the market, by

making them popular. Due to all the above reasons, I have taken up this study for my project.

This project analyzes the trade financing patterns both in emerging and developed economies during the

recent crisis, compares the trends with pre crisis and post crisis scenario.

The project aims to find out the trends in the trade financing activities, measures to come out of it, role of

IT products in the trade finance, and finally making recommendations. The findings and

recommendations can come handy for the companies and the TCS in particular if they incorporate them.


Page 7 of 107

Main Text

This section of report aims to describe in detail the works that have been done in Summer Internship

program.

The Summer Internship Program at TCS Business Domain Academy, Hyderabad is divided into 3 phases.

Figure 1: Phases of SIP at TBDA, TCS

As shown in the figure, an Intern has to undergo the above 3 phases, with certain deliverables to be

supplied to company. The First phase is of Asset Review, which includes the study of the asset, review

of asset, addition of questions in the quizzes. The second phase, i.e., Asset Development includes the

development of the new course, and the third phase of Research Project includes the research on the

allotted topic.

The three phases belong to the same Domain Area. i.e., Wholesale Banking. The Trade finance

also comes under the scope of Wholesale banking. The development and the Research project

work is performed simultaneously. The Gantt chart for the SIP is provided here.

Figure 2: Gantt chart for the SIP

Asset Review

Asset Development

Research Project


Page 8 of 107

PHASE 1

ASSET REVIEW


Page 9 of 107

2. Phase 1: Asset Review and Learning

TCS Business Domain academy (TBDA) deals with training in domain assets, by creating certification

courses, and hosting these e-learning programs on the portal. As per the quality cycle, there is an annual

review and up gradation of all the domain assets present in the portal. During SIP, intern is given domain

courses/assets (Certification course) for review.

In this first phase of the Summer Internship Program ,which is of 4 weeks, an intern has to do the

following tasks.

Figure 3: Asset Review Sub tasks

I have reviewed the following 3 courses in this phase of Asset Review:

1. Certificate in Wholesale Banking: Products and services – Level 1

2. Certificate in Wholesale Banking: Trade Finance – Level 2

3. Certificate in Governance Systems – Level 1

The above 2 courses of Wholesale banking: Products and services and Trade finance gives the overview

how wholesale banks in particular comes to the rescue of exporters/small and medium enterprises, when

exporters/importers trade their goods and services to the counterparties located in some other country.

Asset

• Study the Asset

•Review the Asset

Review

•Certification test

•Restructure of the course, if needed

•Draft of some chapters, if needed

Sub tasks

•Add questions in quizzes

•Modifications done after the Mentor review

•Deliverables to be submitted on time


Page 10 of 107

The 2nd

course i.e. Wholesale Banking: Trade Finance covers the basic concepts of Trade finance. It

covers the following topics:-

Different types of payment options available to the parties involved in the trade,

Different types of financing instruments with sub-types,

Documentation needed in trade,

Intricacies involved during the pre shipment and the post shipments,

Different types of risks and their mitigation,

Concepts of the working capital management, cash management, factoring/forfeiting and

securitization.

These 2 courses lay the basic foundation of my research work. They have helped me to obtain the

background knowledge of the trade financing activities.

The details of all the three courses have been provided in Annexure [8]

.

A. Study of the asset:

In this stage I studied allotted 3 courses, and got certified in the course of Wholesale Banking V 2.0,

with B grade. Certification in Wholesale banking V2.0 is the parent course for the allotted 2 courses

of wholesale banking.

B. Suggestions & recommendations:

Suggestions and recommendations have been made in 3 assets. Following deliverables were

submitted to the domain academy during this phase:


Page 11 of 107

Table 1: Deliverables to Domain Academy

Tasks Asset 1 - Wholesale

Banking: Products and

Services

Asset 2 - Wholesale

Banking: Trade

Finance

Asset 3 -

Governance

Systems

DOC PPT QUIZ DOC PPT QUIZ DOC PPT QUIZ

No. of

recommendations/

Suggestion

117 56 19 87 66 24 38 39 22

Total No. of

Review

Comments

192

177

99

Review

Comments

accepted

87 45 19 65 51 24 30 39 22

Total No. of

Review accepted

151 140 91

The table contains the total number of Reviews comments delivered, and the total number of review

comments accepted. These comments were written daily on an Asset Review tracker, PF3030A template

sheet, which is reviewed by the company mentor for closing. Also DAR (Daily activity Report) is filled

to record the daily activities of the Intern.

The review comments were filled in the PF3030A template, used by TBDA. The Sample Asset review

tracker (PF3030A template), and the DAR are provided in the Annexure. [10]


Page 12 of 107

C. Restructuring of the Courses

The courses of Certificate in Wholesale Banking: Products and Services and Certificate in Wholesale

Banking: Trade Finance have been restructured according to the academy standards and requirements.

Table 2: Restructuring of Courses

Tasks Asset 1 - Wholesale

Banking: Products and

Services

Asset 2 - Wholesale

Banking: Trade Finance

Asset 3 - Governance

Systems

Study

material

Redrafted

28

pages

30

slides

33

questions

28

pages

14

slides

15

questions

10

pages

16

slides

22

questions

Study

material

merged

18

pages

20

slides

30

questions

- - 10

questions

16

pages

20

slides

10

questions

Total No. of Pages Added in all the three courses = 28 + 28 + 10 = 66 pages

Total No. of Slides Added in all the three courses = 30 + 14 + 16 = 60 slides

Total No. of Questions Added in all the three courses = 33 + 15 + 22 = 70 questions

D. Development of some chapters

The 2 new chapters were developed to be included in the course. The total numbers of deliverables given

are:-


Page 13 of 107

Table 3: Development of Chapters

DOC file 28 pages

PPT file 25 slides

Quiz file: Products and services 22 questions

Quiz file: Trade Finance 21 questions

After the review of the above courses, the review comments have been checked by respective course

owners, after which final closure is performed.

E. Upload of the course on the Portal

After the course was reviewed in totality by passing through different stages, the courses were finally

uploaded on the TCS Business domain Academy Web Portal.

Learning from Asset Review Phase

The Exposure to different Banking and Financial Sector (BFS) courses which are applicable in the market

Got Certified in the course of the Wholesale banking from TCS, with Grade B

The first hand experience of delivering the work in stringent conditions

Gained knowledge about the concepts included in 3 certification courses of Wholesale Banking

It provided me a sound background to facilitate the research on the topic allotted to me.

Real corporate exposure, which will help my working in future

Valuable insights about the stringent quality processes used in an IT company

The Course outline and the description of the chapters of all the three courses have been provided in

Annexure. [11]


Page 14 of 107

PHASE 2

ASSET

DEVELOPMENT


Page 15 of 107

3. Phase 2 - Asset Development

This phase involves developing an e-learning certification course for TCS associates in 4 weeks. During

this stage the interns have to develop the course document containing

The Word documents for each chapter

Presentations for the chapter,

Quizzes (containing at least 15 questions) from each chapter

Glossary

The asset is developed as per the client’s requirements, and caters to various associates working in

various departments of TCS. This asset gets uploaded on the TBDA portal.

For asset development I have been allotted to develop the course on Certificate in Wholesale Banking:

Trade Finance Advanced – Level 3. The course outline contains 11 chapters which are completed in all

aspects.

Table 4: Development: Trade Finance Advanced

Certificate in Wholesale Banking: Trade Finance Advanced

Chapter Developed 11

Number of Pages Developed (Doc file) 151 Pages

Number of PPTs developed 158 Slides

Number of Quiz questions 166 Questions

TBDA Standards to be followed Different Font usage and font sizes, using corporate

templates for making the documents, Appropriate

headers and footers, ensuring each chapter conform

to the highest quality standards as put by Techcom in TCS.

In the Table shown above, the progress report of the development has been shown mentioning the Total

number of pages developed, total number of slides in the presentation and the total number of quiz

questions, keeping the TBDA standards in mind.

The development is on the same line with the Research topic. Hence the Development and the literature

review were done simultaneously. The Advance finance concepts of some chapters proved advantageous

to prepare the detailed outline of the project.


Page 16 of 107

The various chapters important topics developed in this phase are mentioned in the Annexure. Also main

topics have been mentioned to give the overview of the course.

The brief overview of each chapter is described below.

Chapter 1 –Meaning of Foreign Trade

In general terms, trade between two or more nations is called foreign trade or international trade. This

involves the exchange of goods and services between the two nations. In today’s era of globalization, no

country can remain in isolation. When the citizens/institutions/companies of one nation exchange goods

and services with the citizens of another nation, it is called foreign trade; for example, India's trade with

USA, UK, Australia, France and Pakistan. Foreign trade is also known as external trade. In this chapter,

the foreign trade, scope of foreign trade, importance of foreign trade, and terms of delivery of goods, risks

involved in foreign trade, balance of trade and balance of payments has been discussed.

This session provides a brief overview of all chapters in the certification course.

Chapter 2 – Trade Finance Laws

Trade finance is regulated by laws prevailing in both the importer and exporter countries. The laws

provide certain guidelines to the companies/institutions and vary from country to country. Trade finance

laws include the appropriate rules and customs for handling trade between countries or between

companies across borders that includes rules for transfer of goods, transfer of payment, settlement, dispute

resolution etc. In this chapter, it has been discussed that how these laws restrict the scope of the trade and

cover few important acts and the export-import policy of the country.

Chapter 3 – International Trade Theories

Various theories of international trade have been developed from time to time, to explain the diverse ideas

of exchange of goods and services across the global boundaries. Trade theory is supposed to provide the

insights into mechanisms of international trade and determinants of trade patterns. In this chapter different

theories of international trade and how these theories does affect the overall trade finance for a corporate

and institution has been discussed.


Page 17 of 107

Chapter 4 – Terms of trade and INCOTERMS

In the world of globalization, uniform terms and conditions need to be broadly and clearly specified in the

contract. The uniform practice helps in definition and recognition to avoid embarrassing re-negotiations

or loss of profits. Terms of trade are a critical component of international contract negotiations. These are

used to indicate responsibility and liability of both the seller and buyer in the movement of the goods and

are globally recognized and accepted. In this chapter, various terms of trade and the INCOTERMS in

detail, have been discussed.

Chapter 5 – Trade Documents

International or domestic trade involves various types of trade documents that need to be produced while

making transactions. They help to identify the import and export items in terms of description; quality,

value and ownership for both trade as well as control purposes. They also facilitate in the tracking of

cargo for the importers and exporters about their shipments are and provide them with the information

that when they will arrive at the final destination. In this chapter, various types of trade documents have

been discussed.

Chapter 6 – WTO and its impact

In an environment of increasing international trade, monitoring and public commitments to multilateral

free trade negotiations becomes necessary and is ensured by World trade organization (WTO), in order to

prevent the protectionism. WTO acts as a trade watchdog, and it provides a vehicle for committing in a

legally binding manner to trade and financial services. In this chapter, WTO functions and its impact on

the international trade in particular, has been discussed.

Chapter 7 – Trade Finance facilitators

In an environment of increasing international trade, trade credit is the lifeline of the business. Facilitation

of the trade is critical and it minimizes the transaction costs and complexity of international trade for

businesses. Trade facilitation is made ensured by facilitators like Export-Import Banks, Export credit

Guarantee Corporation etc. These bodies extend credit, and assist the exporters and importers from time

to time. In this chapter, different trade facilitators, their coordinate with the government, to assist the

international trade, has been discussed.


Page 18 of 107

Chapter 8 – Risks involved in Trade Finance

Success in international trade depends, largely, on the careful evaluation of risks and then attempting to

minimize or eliminate the risks to the greatest possible extent. Risks can be reduced, if not ruled out, by

covering the risks to the extent possible. In this chapter, different types of risks involved in trade finance,

their effect on the trade, has been discussed. Also the risk management and the risk transfer process have

been discussed.

Chapter 9 – UCP Overview

Exporter and importer reside in different nations. Each nation has its own laws. Contract in a country is

not only governed by the law of the land but also commercial practices of that country. In order to guard

against confusion and misunderstanding, opening and negotiation of letter of credit are governed by

―Uniform Customs & Practice for Documentary Credits‖ commonly known as UCP. In this chapter, the

importance of UCP, its help in the formulation of the letter of Credit, has been discussed.

Chapter 10 – UCP 600 Parts

Uniform customs & Practice for Documentary Credits (UCP 600) forms an important part in the

regulation of the letter of credit. It aids the wholesale banks, importers and exporters in letter of credit

transactions. In the previous chapter we have learnt about the salient features of UCP, structure of the

UCP and some of the important articles included in it. In this chapter, different parts included in the UCP,

how various documents are examined, different issues involved etc, have been discussed.

Chapter 11 –Trade Finance: IT Products

With the adoption of new technological tools and e-commerce, companies are now achieving new levels

of cost effectiveness and efficiency in their business. Manual processes are being replaced by paperless e-

trade services. Providing Speed, accuracy, access to various stakeholders these tools are changing the

landscape of how business is being done and how trade financial services can support these businesses.

Various trade finance products have been produced by different IT service providers. In this chapter,

various trade finance products offered and their help to the Trade finance, have been discussed.


Page 19 of 107

Asset Development Tracker

The asset development tracker is a template assisting the coordination between the Intern and the

Company guide. It is filled with the Intern who is developing the Asset. The Progress is constantly

tracked by the mentor, review comments are closed and the suggestions are provided. The Asset

development tracker sheet is shown in Annexure. [12]

In the Asset Development tracker, I have suggested for some changes to the Domain Academy, which are

as follows:

In the Course Outline, the proposed date and the Date of Completion columns have been added.

In the Chapters sheets, the No. of pages Box has been added to tell the no. of documents present

in each chapter DOC file.

Learning from Asset Development Phase

Collected the related data and developed the Course of the Level 3 completely, which will be

used by the Academy and its associates in future. This enhanced my scope to work in the similar

lines in future, and will publish Research papers and White papers on national/ international level

Detailed literature review will enhance the learning, ultimately helping me to work for my Project

work

Working in the structured methodology to create a deliverable, has helped me to attune my

working style to a more professional mode.


Page 20 of 107

PHASE - III

RESEARCH

PROJECT


Page 21 of 107

4. Phase 3 - Research Project

Title of the Project: “Trade Finance: Navigation of Emerging and Developed economies during the

global economic crisis “


the developed countries, and perform a comparative analysis. It also investigates how exporters/

corporate and the SMEs manage to get their trade financed during the recent global crisis, measures to

navigate out of this crisis. It discusses the scope and advantage of the usage of IT products in trade

finance, proposed an IT solution (TradFinc) to trade finance by the help of a CASE STUDY, and finally

made recommendations to the TCS about the improvement of its IT products/ solutions.




The project is divided into the following parts or Stages.

1. Study of Trade Finance

a. Importance of Trade Finance

b. Trade Finance Instruments: Typology and Significance

c. Risks involved in Trade finance

d. Classification of Instruments by transaction volume

2. Trade Finance for exporters/corporate and small and medium enterprises

a. Trends and patterns in trade finance during the recent economic meltdown

b. How the companies, SMEs and the exporters/importers managed to get their trade

financed during the crisis period?

3. Trends/Use of instruments in Developing and Developed economies

a. Trends/Use of instruments in developing and developed economies

b. Trade Finance during financial crisis

c. Trade Pattern (Exports/ Imports) during the economic crisis

d. Trade Credit during the recession

e. Impact of the recent economic crisis on Trade Credit

f. Measures taken by the government and its Impact


Page 22 of 107

4. Navigation out of the crisis

5. IT products in trade finance

6. Case Study

7. Recommendations for TCS Solution

Area of project: Banking & Finance (BFS)

Project Objectives: Major Objective

This paper (Research Project) aims to do the comparative analysis of the trade financing options

in the developing/emerging and the developed countries.

Ancillary Objectives:

To study how exporters/corporate manage to get their trade financed during the recent

global crisis,

To study the measures implemented to navigate out of this crisis,

To study the IT products used in the trade finance, and

To make Recommendations to TCS regarding the improvement in their products, to

serve the clientage

Project Scope The entire study is based on my asset development topic: Trade Finance Advanced

However it covers pre crisis, crisis and post crisis era with findings and recommendations making it a

complete project to look at Trade financing options at local/global perspective.

Also IT products involved in the trade finance are discussed and some recommendations have been

given.

Scope Statement

The research project would deliver a thesis on Trade financing patterns during the recent global

economic crisis.


Page 23 of 107

Proposed Solution

The research studies and analyzes the trade financing patterns in the emerging and the developing

economies during the recent economic crisis. The reasoning is provided to figure out the factors

behind it. The measures of the government and its impact on the trade are highlighted.

The measures were suggested to navigate out of the financial economic crisis, proposed a sample

IT solution in form of case study, brought improvement areas into limelight, so as to improve the

overall trade finance solutions, and gave recommendations to a similar solution by TCS.

Since TCS has different clients in this domain area, I proposed an IT solution (TradFinc), an

integrated end to end platform in form of a CASE STUDY.

Methodology The above steps were taken during the research:

In depth literature review of various surveys done specific to the trade finance, journals, Research

papers, White papers etc.

Secondary Research on the data sets gathered from the surveys and the literature review

Collection of the data sets of the trade credits, usage of the trade finance instruments in different

countries

Analysis of the data, trend analysis

Learning The research work enhances my scope to work in the similar lines in future, and to present them

in the form of Research papers and White papers on national/ international level

An analytical model can be developed in the future based upon the findings from the research

work

Research methodology can be applied to the ―Management Research Project‖, which is an

integral part to fulfill the requirements of MBA, and performed in the last Semester.

Got the structures and the proper manner of how to do a literature review

Learned how to structure the research, analyze the broad issues and gradually focus on to the

main topic of the research.


Page 24 of 107

PROJECT PART 1

Study of Trade Finance


Page 25 of 107

4.1 Study of Trade Finance

1. Importance of Trade Finance

Trade finance refers to the financing provided to exporters and importers, in terms of instruments

throughout the trade cycle. Importers do not want to pay cash in advance for imported goods and

services, since it risky for them to do so. Consequently exporters have to provide the credit and secure

financing until they receive payment. Moreover exporters themselves need to finance their own

production to support their export sales. In this scenario, Wholesale banks come to their rescue which

provides them with various types of confirmed letters of credit. They book acceptance and

discounting drafts. They offer fee-based services such as providing credit and country information on

buyers.

Trade transaction involves risks ranging from Credit risk to political risk, from currency risk to

operational and legal risks. Commercial risk is one where the buyer defaults in payment or in

acceptance of goods. Moreover, international trade transactions involve an exchange rate risk, which

firms operating in domestic countries or in single currency unions are protected from. Infrastructure

risk is one occurring when trading partners operate in very heterogeneous countries, with different

financial systems or different legal systems.

Various financing instruments have been designed to assist and facilitate the parties involved in

international trade as well as mitigate the risks associated to it. Among the methods and instruments

designed to effect a payment, the most commonly used ones are open account, collection of payment

against document and letter of credit. These transfer the commercial risk from the exporter to the

importer at different stages of the transaction.

Trade financing instruments offers a high degree of security to the trade transaction and its payment.


Page 26 of 107

2. Trade finance Instruments: Typology and Significance

Figure 4: Traditional to Supply Chain Finance and Open Account trade

Open accounts

Open account transactions is a form of instrument, where due to strong trading relationships, seller

ships the goods together with the necessary documents to the buyer before the payment is made and

without any form of guarantee. The seller also sends the buyer an invoice asking for payment within

the agreed credit terms, for example, 60 days from the invoice date. Here, buyer is given a liberty to

make the payment upon receipt of the goods with no backing other than the buyer's reputation.

The open account transactions are becoming popular in trade financing, since large corporations

demand trading from their smaller suppliers in form of open account, due to fierce competition

available in the market. Even middle-market companies are embracing open account transactions.

The banks' role in these kinds of transactions is minor or non-existent. Hence, banks' trade finance

revenues are likely to decline as open account transactions take hold.

Cash in Advance

Documentary Collections

Letters of Credits

Supply Chain

financing

Open Accounts

Traditional Risk Mitigation

and financing tools

New Risk Mitigation

and Financing tools


Page 27 of 107

Open account trade has brought savings and enhanced the efficiency throughout the entire supply

chain cycle, particularly for companies with a one-to-many relationship between themselves and their

overseas suppliers.

Open account form of trading is a win-win situation for both buyers and sellers. As buyers move their

overseas suppliers from L/Cs to open account, the electronic disbursement services are reducing buy-

side transaction processing and vendor management expenses. Open account trade enables the

financial supply chain to work more in sync with the physical supply chain. By providing greatly

improved visibility and transparency, it helps promotes liquidity for all stakeholders in the purchasing

cycle.

Open account trading has many merits of inducting competitiveness in the market, by enabling the

financial supply chain in sync with the physical supply chain. Also it improves visibility,

transparency and helps to generate the liquidity in the purchasing cycle.

Despite the current economic slowdown and the liquidity crunch, open account trading will remain

the dominant terms under which the continued growth in trade will take place in the future.

Table 5: Advantages and Risks in Open Account for Buyer and Seller

Advantage to Buyer Advantage to Seller

Control over the goods None

Pays when convenient

Risk to Buyer Risk to Seller

None No control over the goods or

payment

Buyer may refuse to pay


Page 28 of 107

Table 6: Pros and Con of the Open Account

PROS CON

Boosts competitiveness in the global market Significant exposure to the risk of non-payment

Helps establish and maintain a successful trade

relationship

Additional costs associated with risk mitigation

measures

Letter of credits/ Documentary Credits

Letter of Credit (L/Cs), otherwise called as Documentary credit is “an arrangement whereby a bank

acting at the request of the customer undertakes to pay a third party by a given date according to

agreed stipulations and against presentation of documents, the counter value of goods or services

dispatched/supplied, rendered or otherwise”(UCPDC). A key principle underlying letter of credits is

that banks deal only in documents and not in goods. High degree of involvement by banks in the

documentary credit process builds in trust into the transactions.

The introduction of Letter of credits (L/Cs) and their subsequent standardization over the years in the

UCP rules provided standard rules and act as a guard against confusion and misunderstanding

between parties from different countries, thus promoting global trade. The main advantages

associated with LCs include:

Once the underlying conditions in the contract are met, there is provision of guaranteed payment.

From the supplier point of view, a L/C transfers the credit risk from the buyer to a trusted third party,

typically the buyer's own bank, although the ability to receive funds is still contingent on the

L/C s is still a dominant tool in terms of volume of transactions in south-south trading, OECD

countries and Africa, and south/southeast Asia. In case of risk scenario, L/Cs is a superior instrument

to the Export credit insurance because of the provision of assurances within the L/C documentation.


Page 29 of 107

Confirmed Letter of Credit:

It is a L/C to which is confirmed by another bank (known by the seller). This increases the credibility

of the L/C. But it is costlier to the parties as the confirming bank will command a commission.

Table 7: Pros and Con of the Letter of Credit

PROS CON

Payment made after shipment Complex and labor-intensive process

A variety of payment, financing, and risk

mitigation options available

Relatively expensive method in terms of

transaction costs


A documentary collection (D/C) is a type of trading transaction whereby the exporter entrusts the

collection of a payment to the remitting bank (exporter’s bank), which sends documents to a

collecting bank (importer’s bank), along with instructions for payment. D/Cs involve using a draft

that requires the importer to pay the face amount either at sight (document against payment) or on a

specified date (document against acceptance).Here funds are received from the importer and then

shifted to the exporter through the banks involved in the collection in exchange for those documents.

Drafts are generally less expensive than LCs.

Table 8: Pros and Con of the Documentary collection

PROS CON

Bank assistance in obtaining payment Banks’ role is limited and they do not

guarantee payment

The process is simple, fast, and less costly

than LCs

Banks do not verify the accuracy of the

documents


Page 30 of 107

Documents against Payment: - (Cash against documents)

The collecting bank releases the documents of title only when the importer has paid the bill. The exporter

keeps the control of the goods till the importer pays. If the importer refuses to pay, the exporter can take

importer to the court or sell the goods to any other buyer.

Document against Acceptance

The exporter extends credit to the importer. The bank releases the document, once importer accepts the

draft and promises to make payment to the bank at set date in future.

Once the buyer has taken the documents, exporter loses the control on the goods. The exporter runs into

risk, if importer refuses to make payment thereafter. In that condition, exporter has only one choice, i.e.,

to protest the bill and take importer to court. But this option is expensive one, if the legal structure in

other country is complicated.

Advantages to Importer:

Will receive the goods before making the payment

Least risk to importer.

Disadvantages to exporter:

No guarantee of payment by the buyer.

Legal enforcement of unpaid obligations costly and time consuming

(2) Sight draft

and documents

(2) Sight draft and

documents

Exporter

(seller)

Importer

(buyer)

Collecting/

Presenting

Bank

Remit

ting

Bank

(6) Currency

(5) Currency

Currency

Goods

(1)

Sight Draft

and

Document

in trust


Page 31 of 107

Export credit insurance

Export Credit Insurance provided by the financial agencies insures exporters against political and

commercial risks. Export credit insurance seeks to create a favorable climate in which exporters

can get timely and liberal credit facilities from banks. For this purpose, export credit insurer

provides guarantees to banks to protect them from the risk of loss inherent in granting various

types of finance facilities to exporters.

There are four types of Export Credit Insurance:-

1. Short-term Export Credit Insurance – It is used for a shorter term, generally covers the

periods of 180days and less. It provides protection for pre-shipment and post-shipment

risks.

2. Medium and long-term credit insurance This type of insurance provides protection to

the companies for financing export of capital goods and services. It is generally issued for

medium and long-term credit protection, which is usually up to 3 years.

3. Investment insurance – It is the insurance for the investments made by exporters in

foreign countries.

4. Exchange rate insurance - Exchange rate insurance covers the losses due to the

fluctuations in exchange rates between the exporters’ and the importers’ currencies over a

period of time.

Table 9: Pros and Con of the Export credit Insurance

PROS

CON

Reduces the risk of non-payment by foreign

buyers

Cost of obtaining and maintaining an insurance

policy

Offer open account terms safely in the global

market

Risk sharing in the form of a deductible


Page 32 of 107

Some Findings from the typology and their answers:

Given below are some of the common questions and explanations that answer the increasing

popularity of the Open Accounts and the decline in the usage of the LCs. [2]

Q 1: Why are the probable reasons for the companies shifting to more open account trading? What

particular advantages, does the open account offers over the Traditional L/Cs?

A 1: Advantages of the Open account:-

Inexpensive and fast way of settling the transactions from the traditional documentary credits.

Companies have fewer and strategic trading partners, with which they have built long lasting

relationships. Hence they can exercise the Open account trading.

The advantage of open account over traditional L/C is that the credit lines will not be used to

underwrite transactions.

High bank charges in case of L/Cs bring supply chain hurdles, and hence the companies have

shifted to the open account trading.

Technology advancement and the related IT products have simplified the overall process of the

documentation. Also the trade link database can facilitate them

Q 2: Does shifting to open account trading from the L/C increases the trading administration?

A 2: Shifting to the open account trading reduces the administration, matching and reconciliation of the

documentation required for each trade.

In fact, a bank is the ideal central point of data collection for purchase orders, invoices and related

documentation and thus provides a one-stop shop for administration and settlement of the trade

transactions. Open account trading certainly reduces the paperwork.

Q 3: While processing the trade, some of the trading partners are less automated than the main exporter.

Does it pose problem. And if yes, what could be the solution?

A 3: Yes, there may be problems associated with the difference in automation. The possible solution can

be use of the various levels of technology integration-from paper to electronic data interchange. Since the


Page 33 of 107

partner may be closed to the paper work, imaging technology can be a viable solution to the misery. This

is where a leading global player can provide real added value/outsourcing to all types of operations of

small and medium players.

Q 4: Is the transition from the L/C s to open account will bring an end to the L/C?

A4: No. There will probably always be a need for L/Cs. For example, it may be advisable to use L/Cs for

the first few transactions with a new trading partner, and there are some volatile markets where the

security provided by L/Cs will always be required. Some of the disadvantages of the open account will

not allow the L/Cs to terminate.

In short, considerations of cost and inconvenience in case of Letter of credits have superseded aversion to

risk, associated with the open account trading. Therefore, Open account trading is more popular.


Page 34 of 107

3. Risks Involved in Trade Finance

When the companies/SMEs/exporters are doing business/ trade across international borders, they face

several types of risks as evident in strictly domestic transactions. Risks in international trade are the major

barriers for the growth to the same. These risks ranges from Credit risk to political risk, from currency

risk to operational and legal risks.

The various types of risks that an international trade faces are divided into the following categories:

1. Credit risk

2. Country Risk

3. Exchange risk

4. Legal risk

5. Product Risk

6. Operational Risk

7. Performance risk

Credit Risk

Credit risk (also known as commercial risk) is a customer-related risk that reflects the customer’s ability

to fulfill all obligations made to its counterparty in the contract.

Country Risk

Country risk is the possibility that the country in which the bank has business dealings may experience

internal instability that reduces the offshore lender’s ability to collect in a timely manner.

Exchange rate risk

There are foreign exchange fluctuations, wherein one currency may depreciate in terms of the other or

vice versa. This fluctuation makes the delivery amount higher, which leads to default by any party. The

risk associated by this phenomenon is known as the Exchange Rate risk.

Legal Risk

When a transaction is susceptible to the changing laws and regulations in the country of the exporter and

the importer, it is known as the Legal risk. Trade products that carry legal and regulatory risk include:

letters of credit, bankers’ acceptances, documentary collections, and bank-to bank reimbursements.

Product Risk

Product risk is the risk that the structure of a certain trade product or service is inadequate or faulty.

Letters of credit, bankers’ acceptances, documentary collections, and bank-to-bank reimbursements are

trade products that have this risk.


Page 35 of 107

Performance Risks

Performance risk is the possibility that an exporter may fail to perform under the contract established with

the importer.

Risks associated with different types of Instruments

Figure 5: Risk Ladder

From EXPORTER point of view:-

Open account is the riskiest option, with Cash in advance being the safest.

From IMPORTER point of view:-

Cash in advance is the most risky option, with Open account being the safest.

Apart from the risks associated in the open account trading, they have been superseded by the

considerations of cost and inconvenience in case of Letter of credits. Therefore, in the recent times, the

popularity of the Open account trading is increasing (which is visible by the Value figures of the trade

instruments).

Open Account

Documents against acceptance

Documents against payment

Confirmed letter of Credit

Cash in advance

High Risk

Exporter

Low Risk

Low Risk

Importer

High Risk


Page 36 of 107

4. Classification of Instruments by transaction volume

(ICC Global survey 2010)

In the global survey of ICC 2010 received from the responses from 161 leading wholesale banks in 75

countries, the major volume of Exports and Imports are done with the help of Letter of Credit

(Documentary and Standby).

In terms of Volume of trade transactions, most of the trading is done via Letter of credit (53%), which is

more secured form of transaction.

In terms of Trade value, Open Accounts is still the most favorable option constituting of 80-85% trade

transactions.

Export Transaction volumes (Usage %)

(Classification by Instrument)

Commercial Letter of Credit 45

Standby letter of credit 7

Bank Guarantees 11

Documentary Collections 20

Open Account 15

Others 2

Source: - ICC Global Survey, Rethinking Trade Finance 2010

Commercial Letter of Credit

45%

Standby letter of credit

7%Bank Guarantees

11%


20%

Open Account15%

Others2%

Export Transactions Volume

Import Transaction volumes (Usage %)

(Classification by Instrument)



Bank Guarantees 17


Open Account 12

Others 4


Page 37 of 107


Bank guarantees number increased from 8% in 2007, to about 12% during the meltdown, since they

provide greater security in trade, as they are designed to restore confidence by protecting the parties

against performance breaches without the need for businesses to post onerous cash deposits to secure their

performance duties.

Open Account number has decreased drastically from about 25% to 8% in terms of volume from 2007 to

the crisis period.

Commercial Letter of Credit

43%

Standby letter of credit

8%

Bank Guarantees17%


16%

Open Account12%

Others4%

Import Transaction Volumes


Page 38 of 107

Project Part 2

Trade Finance: Customer

Base


Page 39 of 107

4.2 Trade Finance for exporters/corporate and

small and medium enterprises

1. Trends and patterns in trade finance during recent economic

meltdown

According to the Global Survey of ICC 2010, 40% of respondents indicated that the trade credit lines

for corporate decreased 40% in 2009, which it must be remembered is on top of a similar sized

decrease indicated in last year’s Survey. Some 28% of respondents noted no change between 2008

and 2009. At the same time, 42% of respondents indicated that the trade credit lines for financial

institutions declined in 2009, with 30% of respondents mentioning no change between 2008 and

2009.

Figure 6: Change in value of trade finance by Customer Segment

Compiled from the below cited sources.


IMF-BAFT Trade Finance Survey, 2009

ICC Global Survey, Rethinking Trade Finance 2009

The main reasons given by the banks for difficulties in securing credit lines were the following:

76% – More stringent credit criteria being applied;

41% – Selective exiting of customer relationships due to credit deterioration;

26% – Exiting markets;

25% – Capital allocation restrictions; and

21% – Reduced inter-bank lending.


Page 40 of 107

Up until October, 2008, banks were reporting an increase in the overall value of their trade finance

business with their corporate customer base. This is particularly true with the large corporate

segment, where there was a near double digit increase over the prior year.

Source: - IMF-BAFT Trade Finance Survey, 2009

As visible from the graph, 44% of the respondents are of the view that there is a net increase in the trade

finance availability for SMEs and 57% increment for the Corporate.

Only 25% are of the view that the trade finance was decreased for SMEs and 19% for the corporate.

Source: - IMF-BAFT Trade Finance Survey, 2009

19

25

57

44

24

31

Large Corporate

SMEs

Availability of Trade Finance (2007-08)

No change Increased Decreased

49

50

24

22

27

28

Large Corporate

SMEs




Page 41 of 107

The pattern got reversed itself between October, 2008 and October, 2009 when each of the corporate

sectors evaluated reported a decline in value. The most noticeable change was within the large corporate

segment with a -22 point swing in value. Various factors were propagated and are mentioned above, due

to which there was a decrement in the availability of trade finance for both corporate and SMEs, as 50%

respondents supported the view for SMEs and 49% for large corporate.

As far as the availability of the trade finance in the early 2010 is concerned, from the initial trends got, the

Respondents from different banks were of the view that the situation somewhat improved, but still there

was a decrement in the trade finance availability for both the Exporters and the large corporate.


In short, considerations of cost and inconvenience in case of Letter of credits have superseded aversion to

risk, associated with the open account trading.

Large Corporate

Exporters

40

42

32

28

28

30




Page 42 of 107

The Big Question to answer: -

2. “How the companies, SMEs and the exporters/ importers managed

to get their trade financed during the crisis period?”

During the recession, the liquidity shortage and the disproportionate aversion to risk, that had driven up

interest rates on loans and advances in many countries.

The documentary credit (L/Cs) is a traditional form of international export payment and transaction,

especially in trade between distant partners. Bank guarantees were implemented as they provide greater

security in trade, as they are designed to restore confidence by protecting the parties against performance

breaches. Open account trade covers the 80-85% of world trade value.

The Customers i.e. corporate, SMEs and the exporters/importers are now shifting towards the confirmed

letters of credit, even though they previously had dealt under unconfirmed L/Cs, documentary collections

or open account. Due to the risk level present in the instruments like open accounts, unconfirmed L/Cs

they have chosen a safer option of confirmed letter of credit. Also, the bank perception of risk is leading

to a tightening of liquidity in some instances, therefore causing greater difficulty in obtaining bank

confirmations. This situation prevailed till April 2010.

According to the ICC global survey figures, 73% respondents from different banks have confirmed the

increment in the Confirmed letter of Credit.

Confirmed Letter of credit

(2009-10)

Increased 73

Decreased 27


The number of defaults and claims were quite high in the period of 2009-10. 44% of the respondents

indicated that there was an increase in the number of defaults in 2009 (while 29% said there had been a

decrease in the number of defaults in 2009 and 27% saying there was no change).

Increased73%

Decreased27%

Confirmed Letter of credit (2009-10)


Page 43 of 107

As far as the Claims under guarantees and the standby letter of credit are concerned, 44% of respondents

have gone for an increase in 2009 (with 25% reporting there was a decrease and 31% indicating there was

no change).


The big corporations are trying to simplify the trade finance processes both within the documentation

stream and within the trade finance stream. From getting a quote to sending a purchase order—and

ensuring that the details move into a letter of credit (LC) or some other instrument, they are looking for

the technology solutions by the service providers.

Credit Insurance Support:-

The support from the credit insurers proved crucial and vital for the small and medium corporate to

continue to trade and sell goods internationally. The insurance cover provided by the Export credit

insurance companies become even more important during the times if

economic crisis.

Exporters have protected themselves by purchasing Export Credit Insurance

against non-payment for his trade receivables arising from either commercial

(i.e. risks excluding political risk) or non-commercial risks. Also, exporters

got choice of selecting the type of export credit insurance, and can protect themselves from risks

associated with the non-acceptance of goods by the buyer, default on the part of the buyer to pay the debt,

the failure of foreign banks to honor documentary credits, as well as political risks associated with war,

riots and civil commotion, foreign currency risk.

Suppose an exporter is unable to cope with the lack of cash flow, and has risks of extending credit for the

contract. The wholesale bank is also not willing to lend large amount without a guarantee. The bank

Increased

44%Decreas

ed29%

No change

27%

Defaults and Discrepancies (2009-10)

Increased 44%

Decreased

25%

No change

31%

Claims under Guarantees and Standby (2009-10)


Page 44 of 107

arranged for a loan with the importer for certain per cent amount of the total contract value (Step 1) in the

figure below, if the Export Credit Insurance and Guarantee Service (ECIGS, generally backed by the

Government) provides a guarantee (Step 2).

This guarantee ensures that the bank will receive the loan value in case the buyer does not repay the loan.

Once the loan and guarantee are in place, the importer pays the exporter some amount of the contract

value (Step 3). After delivery of the goods (Step 4), the exporter claims the remaining amount of the

contract value from the bank. The bank remits the remaining amount of the contract value to the exporter

after deducting the fee payable to ECIGS (step 6).

EXPORTER IMPORTER

WHOLESALE BANK

ECIGS

1. Bank Arrange

Loan with Importer

2. Guarantee Loan

3. Down Payment

4. Delivery of goods

5. Bank pays Loan

Amt to Exporter

6. Payment of

Insurance fees


Page 45 of 107

Short term credit during 2005-2009

The Figure 7 gives the amount of the short term export credit insurance in US Million $, for the period

2005 to 2009. The export insurance increased during the period of 2008 due to the increase in the political

and commercial risks prevailing in the market after the global crisis.

Figure 7: Short Term Export Credit Insurance


The extension of the short term credit was at its peak during the recent economic crisis. It moved up at the

same time when there was a shift from the Open accounts to traditional instruments (Letter of Credits).

Risks involved in the open account have prompted increase in the Export credit insurance.

The companies, corporate and the SMEs have approached to the doors of the IFC, ADB, IDB and EBRD

etc, which took measures and economic crisis responses. The measures have been elaborated in the

section of Navigation out of the crisis, in detail.

High level of due diligence, and institutional relationships inherent in the development banks trade

facilitation programs together with quality technical assistance and training in trade finance operations

provided to their issuing banks greatly reduced the operational risks involved in the delivery of trade

finance.


Page 46 of 107

Project Part 3

Trade Finance: Trends/Use of

Instruments in Economies


Page 47 of 107

4.3 Trends/Use of Instruments in developing and

developed economies 1. Trends/Use of Instruments in developing and developed economies

Global Perspective

The above table gives the Export and Import transaction volumes of the world post economic crisis, as

acquired by the figures published in Trade finance survey of 2010 of ICC.

Export Transaction volumes (Classification by Instrument)



Bank Guarantees 11


Open Account 15

Others 2


The transaction volumes of the Open account have recovered from the dismal figures of about 5% to

about 12-13% post recession. The documentary credits (i.e. L/Cs) figures somewhat remains constant

after the crisis.

Regional Perspective

North America region containing the USA, Canada affected by the global recession the most, have

encountered a major dip in case of the Open account transactions.

% breakdown, by volume for Trade finance products by region (Exports)

North America Europe Asia

Letter of Credits 65 49 53

Open Account 4 14 16

Guarantees 4 16 7

Documentary Collections 26 19 22

Others 1 2 2


Import Transaction volumes (Classification by Instrument)



Bank Guarantees 17


Open Account 12

Others 4


Page 48 of 107

Asian economies containing the developing countries of China and India, having a adequate domestic

demand and long lasting relationships between the buyer and seller, were least affected by the Economic

crisis.

Asia’s exports Export transaction volume of the Open account was 16% which was much higher than the

4% of North America.

% breakdown, by volume for trade finance products by region (Imports)

North America Europe Asia


Open Account 5 10 9

Guarantees 3 21 15

Documentary

Collections

20 19 16

Others 1 5 6


North America breakdown in terms of Imports is somewhat similar to the exports. The open account is

minimal in case of it. On the other hand, the transaction by the Letter of Credits and documentary

collection is enormous.

Asia’s and Europe’s Import transaction volume of the Open account is somewhat similar.


Page 49 of 107

China

Data Sets Findings:-

In the year 2009, China has overtaken Germany as the world’s leading merchandise exporter, accounting

for almost 10% of world exports, and is second to the United States on the import side. The US share in

world merchandise imports is 13% compared to China’s 8%. [5]

The emergence of China as the world’s manufacturer—often of lower cost goods—has resulted in high

volumes of goods moving through supply chains that originate, pass through, or terminate in China. The

frequency of deliveries to China and exports from China is also greater as organizations work to keep

inventories thin. The favorable government policies help in more Export oriented economy.

The organizations that conduct business with suppliers and/or buyers located in China are prefer to use

the open accounts in their trade activity, since it provides them with the safest mode of operation.

As per the AFP Trade Finance Survey (2007), the findings suggest that,

China Trade Transactions (2006-07)

(In %)

Open Account 57

Letter of credits 29

Source: - AFP Trade Finance Survey, 2007

Fifty-seven percent (57%) of transactions for those organizations that conduct business in China do so via

open accounts, compared to 29 percent of transactions that are conducted via letters of credit. [1]

This preference for open accounts is likely due to the fact that other trade finance methods, such as letters

of credit, are paperwork-intensive and more expensive than open accounts.

Explanations

The Chinese companies, especially the exporters are very price conscious. They are very keen to

make themselves competitive in the global market. When they have a chance to substitute Letter

of credit with the new and popular instruments like Open Account, they are ready to take some

amount of risk.


Page 50 of 107

Asia Pacific including India, south/southeast Asia

In terms of volume, usage of the documentary credits is increasing in Asia-Pacific region and they remain

a primary tool for south-south trading and for trading between OECD countries and India, Southeast Asia,

Africa, and the Middle East.

ASIA % breakdown, by volume for trade finance products

Type of Instrument Exports Imports

Letter of Credits 53 54

Open Account 16 9

Guarantees 7 15

Documentary Collections 22 16

Others 2 6

As evident from the above table, Documentary credits (L/Cs) is still the most favored option in Asia.

Reasons:-

Asia-Pacific region is assumed to be more economically sound to bear the turbulence during the crisis due

to its sound economic fundamentals, substantial reserves, improved regulatory frameworks and generally

robust corporate balance sheets and banking sectors.

The sound economic fundamentals tend to build the trust amongst the importers and exporters, wherein

they are more prone to tilt in the favor of using more and more Open accounts, when compared to

traditional documentary credits.


Page 51 of 107

United States of America

United States Of America

% breakdown, by volume for trade finance products (2008-09)

Instrument Exports Imports

Letter of Credits 65 71

Open Account 4 5

Guarantees 4 3

Documentary Collections 26 20

Others 1 1

Source: - IFSA, Latest trends in Global Trade Finance, 2009

Although the L/Cs is the dominant instrument in terms of transaction volume for both exports and

imports. But when the amount of value comes into play, Open account is one of the most favored options.

It occupies around 80-85% of the amount of the total trade of US with other countries.

Q. Why open account terms have become so readily available to US buyers?

Since U.S. being the biggest player in trade transactions from decades, both in terms of exports and

imports, the players have developed long lasting relationships, as a result of which the counterparty has

no problem in doing business in terms of Open Account. Also the market of U.S. is friendly enough to

attract more and more exporters. The stiff competition between the exporters compels them to use the

Open Account type of trade instruments.

The US economy has become largely an import economy and the largest consumer economy in the world

today. That kind of clout in the marketplace helps shift the credit needs away from the traditional letter of

credit and toward creative open account purchasing options, such as factoring-based solutions.

The volume of trade in the US helps them to build the long lasting relationships between the buyers and

sellers, which in turn tends to motivate them to use the more risky but at the same time fast and paperless

option of Trade account.


Page 52 of 107

SWIFT Volume

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) operates a worldwide

financial messaging network which exchanges the messages between banks and other financial

institutions.

SWIFT provides a centralized store-and-forward mechanism, coupled with the transaction management.

Suppose, if bank A wants to send a message to bank B with an authorization needed of an institution C, it

will format the message according to the set standards, and will send it to SWIFT in a secured manner.

SWIFT guarantees its secure and trustworthy delivery to B after the appropriate action by C.

SWIFT also offers Trade services utility, a service which is designed to allow the Banks to integrate

effectively with their corporate customers, and their Suppliers.

Data from the SWIFT show that messages sent between banks for letters of credit, guarantees and

documentary collections during the recession have drastically gone down, but have steadily increasing

since January 2009. Still it has a long way to go in recovering to pre-crisis level.

Figure 8: SWIFT year-on-year growth in trade finance messages

The dip displays the reduction in the exchange of information between the banks and the financial

institutions. This is due to the reason that the trade volumes and the transactions have suddenly dipped

during the economic crisis period. As a result, use of the trade financing instruments become unpopular,

and had led to the new issuance of the letter of credits.


Page 53 of 107

Regional Distribution of the Trade traffic of the Category 4 and 7:

SWIFT category 4 messages are flows for Documentary Collections - with the exception of three little-

used ―cash letter‖ messages. SWIFT category 7 messages are flows for commercial and standby letters of

credit, and guarantees.


The above figure depicts the difference between the Category 4 and 7 across regions of the world,

between the 4th quarters of 2007 to 2009.

Use of category 4 is low in Asia-Pacific, as compared to the use of L/Cs, whereas in the Europe Euro

zone, use of category 4 is much higher as a percentage of the whole. This is also true of North America.

The use of commercial and standby letters of credit, and guarantees as depicted by the Category 7 is most

popular in the Asia Pacific region, followed by countries in Europe using Euro as a currency. North

America is also not far in the list.

In both Category 4 and 7, there was a dip in the 4th quarter of 2008, stressing the aftermaths of the

economic crisis.


Page 54 of 107

2. Trade Finance during financial crisis

The deepening world recession had profound impact on world trade. The US$16 trillion global trade

of 2008 collapsed, reaching US $ 5.8 trillion in the first half of 2009 compared to US$8.2 trillion in

the corresponding period of 2008. As a result, growth of world output and trade volume of goods and

services fell to (-) 0.8 and (-) 12.3 per cent respectively in 2009 according to the International

Monetary Fund’s (IMF) World Economic Outlook (WEO) January 2010.

The World Trade organization (WTO) in March 2009 forecast a 9 per cent decline in global trade for

2009, the largest in over 60 years. The decline was more marked in the case of advanced economies.

Figure 9: Growth in World merchandise exports trade by region (% change in Dollar values)

Source: http://www.wto.org/english/news_e/pres10_e/pr598_e.htm

Trend Analysis

The above figure shows the decline in the World exports during the period of 2007-09, due to the

global economic crisis. The largest decline is in the case of Commonwealth of Independent states

(CIS), i.e. around (-42%). This is because of the fact, that the CIS is a major exporter of

Petroleum and energy goods, whose demand fall drastically during the economic crisis.

The least impact of the crisis can be seen on the Asian region, due to presence of the major

exporters like China and India. The sound principles of these countries, and their competitive

stand on goods (expertise) kept them immune from the DIP in the merchandise exports.

http://www.wto.org/english/news_e/pres10_e/pr598_e.htm


Page 55 of 107

3. Trade Pattern (Exports/ Imports) during the economic crisis

Exports trends of the Developed and developing Countries

Country Exports in Million $

2005 2006 2007 2008 2009

China 761953 968978 1220060 1430693 1201534

India 99616 121808 150159 194828 155249

United

Kingdom 384477 448653 439091 459666 350728

United

States 901082 1025967 1148199 1287442 1056895 Source: - WTO_Home > Resources > Statistics > Statistics database > Time series

Web link: http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E

[Accessed on 26 April, 2010]

China being the leading exporter, has the maximum export value in the year 2009, surpassing

Germany and is shown by Green box (12051534 million $). China being a developing

country has picked up fast from the year 2005 and shown a constant increment in the value.

Both the developed and the developing countries have experienced a sharp decline in the year

2008, due to economic crisis. The dip in case of China is minimal due to its sound economic

fundamentals, and domestic consumption.

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

2005 2006 2007 2008 2009

Exp

ort

s in

Mill

ion

$

Trends of Exports (2005-09)

China

India

United Kingdom

United States

http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E


Page 56 of 107

Country Imports in Million $

2005 2006 2007 2008 2009

China 659953 791461 956115 1132567 1005688

India 142870 178410 229371 321031 243636

United

Kingdom 513673 601424 622897 632975 479890

United

States 1732706 1918077 2020403 2169487 1603768

Source: - WTO_Home > Resources > Statistics > Statistics database > Time series

Web link: http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E

[Accessed on 26 April, 2010]

In terms of Import, US is the leading importer of goods and services. The values are shown in

the Green box. There was a sudden dip from 2169487 million $ to 1603768 million $.

The decline in the world trade volume is available in both the cases of Emerging and

developed/ advanced economies. From the trend analysis, the projection of the year 2010 and

2011 has been provided.

0

500000

1000000

1500000

2000000

2500000

2005 2006 2007 2008 2009

Imp

ort

s in

Mill

ion

$

Trends of Imports (2005-09)

China

India

United Kingdom

United States



Page 57 of 107

Trade financing Instruments usage pattern (In terms of Volume of Transactions)

Pre- Crisis Period:

Due to new trends in the trade finance and the long lasting relationships developed between the parties,

the growth of the Open Account instrument in terms of the volume has been increasing and had reached

to around 36% till the Oct 2008. Due to the competition between the exporters, they are ready to take

ample amount of risk to go for the Open account option.

Trade finance

Instrument

Before Crisis (Before

Oct 2008)

During Crisis (Oct

2008 – 2009 last)

After Crisis(2009 4th

Quarter – 2010

April)


Open Account 36 13 11

Guarantees 8 12 20

Documentary

Collections

3 22 15

Others 6 4 2

Source: - ICC Global Survey, Rethinking Trade Finance 2010; IMF-BAFT Trade Finance Survey, 2009; ICC

Global Survey, Rethinking Trade Finance 2009


Page 58 of 107

During Crisis:

Due to shortage of liquidity and the proportionate default and counter party risk, the users have

gone for more safe options available like Letter of Credits, Guarantees and the documentary

collections. Bank guarantees increased from 8% to 12%.

Customers are asking for confirmed letters of credit, documentary collections where they

previously dealt with unconfirmed L/Cs, and open account. However, bank perception of risk is

leading to a tightening of liquidity in some instances and therefore greater difficulty in obtaining

bank undertakings.

Due to increase in number of defaults and the risk associated, the trust between the parties has

received a dent.

Also the IMPORTANT trend coming here is the increase in the documentary collections.

Documentary collections provide greater security in trade, and are designed to restore confidence

by protecting the parties against performance breaches.

Post Crisis:

The use of the different instruments remained on the same platform they were during the crisis. It

takes time to build the confidence once again. The parties are still skeptical about their partners.

These are only the early trends of the trade finance after the crisis. The situation may improve

and there may be a functional shift in the instruments in the Surveys done later in the year.

From the IMF BAFT survey 2009, Interesting phenomenon that happened was that the Value of

transactions has decreased. This was due to couple of reasons:

A fall in the demand for trade activities

Less credit availability at the financial institution

Less credit availability at counterparty banks

A fall in the price of transactions

Some secondary factors were like:-

Shift towards the cash in advance transactions and the Open account transactions

The shift towards these instruments have instigated the lower pricing by the companies because

they can’t afford to raise the cost, otherwise their clients may shift towards their competitors.


Page 59 of 107

Figure 10: Trends in growth of trade volume (% change)

Source: - IMF: WEO, January 2010

The contraction in international trade is coupled with a sharp decline in the availability of trade finance.

This decline is explained by the contraction in demand: according to a BAFT (Banker’s Association for

Trade and Finance) and International Monetary Fund (IMF) joint survey (2009). The contraction in value

of trade finance has also been accompanied by a sharp increase in its price. Fear that the decline in trade

finance and the increase in its cost would accelerate the slowdown of world trade has triggered a number

of government initiatives in support of trade finance.

Several measures were implemented by the government to facilitate the trade in the time of global

economic crisis.


Page 60 of 107

Explanation (Reasons for these trends):-

A. Market failure

“According to some theorists, the Herd behavior of the private operators is the main reason for the

decline in the trade finance. This becomes more crucial in particular when credit risk and country

risk are being confounded (for example in cases of rumour of sovereign default)” [4]

.

Herd Behaviour: The international providers of trade finance during crises makes judgment often

gets deviated by the perceptions, wherein a departure of one player tends to trigger similar actions by

other players. There is a tendency of ―rush for the exit‖ and any lack of information about the

situation of corporate clients can aggravate the risk perceptions and make a prophecy self-fulfilling.

Blockage of free flow of Credit: There is a tendency of some players in the Trade financing,

which blocks the free flow of the credit in the time of liquidity crunch. Their monopolistic interest

blocks the refinancing medium of the wholesale banks which in turn the raises cost of trade finance.

Regulatory Mechanism: On the other hand the wholesale bankers complain the regulatory

mechanism of the Basel II norms and ask for relaxation in the norms. They argue since with the

stringent measures of the Basel II norms, they are bound to maintain Risk Capital in buffer, to use in

the difficult times. This in turn blocks the free supply of credit.

Market Tightening: Also there is a phenomenon of the market tightening, the Risk capital

requirements allocated for the instruments of trade finance tend to increase more than proportionally

to the amount of risk, and present in case of the counterparty is resident of a developing country.

Ratings: Both the Global Western banks and the regional developing banks have complained that

international rating agencies give attractive ratings to the developed countries banks when compared

against the developing countries' banks.


Page 61 of 107

Steps that can be taken:

Formation of transparent Global International credit rating agency, which gives unbiased

ratings to all the corporations, and will publish that information on the web portal, accessible

even from the remotest part of the world. This portal should be accessible on the major

technology platforms popular in the market.

Since the relaxation in the Basel II norms are very difficult, the wholesale banks should try to

find other ways to get access to credit at the minimal costs.

B. Mismatch between demand and Supply

Increase in spreads of L/Cs: After the financial meltdown, there has been reduced demand of the

goods and services; the overall increase in the Spreads of the requests of the LETTER OF CREDIT

suggests the mismatch between the supply and the demand.

There are many theorists which argued for number of reasons for the shortage of trade finance. On

one hand, the private sector argues that the implementation of the Basel II accord is the main culprit

behind the shortage of trade finance, the public sector on the other hand, maintains that trade finance

gaps are a result of market failure, due to unavoidable circumstances emerged after the crisis.

The mismatch between the demand and supply is the common phenomena during the time of

economic crisis. But the point of concern here is that how the spread of the letter of credit is on the

increasing trend. This is an important phenomenon to have deep thought.

The different propositions derived here are:

The upward trend can be due to some other prevalent reason.

The cost of the letter of credit issue is on the higher side, and not the actual number of the

issue of the letter of credit.

The reason for this can be found after the detailed analysis of the various options.


Page 62 of 107

4. Trade Credit during the recession

Table 10: Trade developments in a country with financial crisis

Issues that affect trade

finance during recession

Effect of the issues on the

volume of exports from the

economy

Effect of the issues on the

volume of imports by the

economy

Credit crunch in the economy,

liquidity scarcity, interest rates

up, confidence loss amongst

banks to extend the trade

finance

Exports down, as no

liquidity available

Imports down, as no

liquidity available

Decline in domestic demand

of finished goods

If export demand is

there, the volume will

go up

If export demand is not

there, volume will go

down

Down, no demand so

less imports.

Financial and economic

contagion

Down ----

Foreign exchange fluctuations Fluctuations affect the

competitive

differentiation in

global market.

Fluctuations affect the

competitive

differentiation in

global market.

In the above table, different issues like the credit crunch, financial and economic contagions,

foreign exchange fluctuations, etc have been discussed which can affect the volume of Exports

and imports.

In early 2009, a World Bank survey of 425 firms and 78 banks and other financial institutions in

14 developing countries confirmed that trade finance became more expensive and less available,

with the banks becoming more risk averse and selective in the supply of credit.[6]


Page 63 of 107

Analysis

There are different reasons for the overall decline in the Overall Trade Credit during the recession

period.

The 12% drop in the volume of world trade in 2009 was larger than most economists had

predicted. This contraction also exceeded the WTO’s earlier forecast of a 10% decline. Also, the

overall trade value transactions decreased.

Less credit availability at both the banks and the corporations is also another factor that further

weakens the trade activities.

Due to the economic crisis, there is increased risk present at the global level. Because if in this

case, the counterparty defaults, no one can come to the party’s rescue. This forces

Exporters/importers to either hold the trade and wait for the situation to improve

To strategize on the untapped markets to seize the opportunity

They may take calculated risk and invest in some other options

5. Impact of the recent economic crisis on trade credit

The global economic crisis impacts the trade credit. During the survey done by World Bank,

International Monetary Fund (IMF) and Bankers Association for Finance and Trade (BAFT), the

banks responded that lack of trade credit and other forms of finance, such as working capital and pre-

export financing, has majorly affected growth in world trade. At the same time, the costs of trade

credit instruments charged by the banks to the customers have gone up and is higher than what it was

in the pre-crisis period, raising the challenge of affordability of credit for exporters. Higher funding

costs and increased risk continue to put upward pressure on the price of trade credit.

In the Figure 11, The ―Change‖ refers to percentage change from same quarter of previous year.

There is a sharp drop in the trade finance in case of both EMERGING and DEVELOPED economies.

The emerging economies example includes India, China etc, and the examples of developed

economies are United States, France and Russia.

The decline in the trade finance has been highlighted by the Red ellipses in the Figure 11.

The most affected region in world during this period was Russia. Russia Trade pattern is highly

dependent on the exports of minerals, petroleum goods etc. Due to the increase in the prices, the trade

of Russia got affected.


Page 64 of 107

The Dip is represented in the figures by the Encircled Regions (Ellipses). India and China trade

pattern somewhat remain strong enough, and showed less impact, as compared to developed countries

like US, France and Russia.

Figure 11: Sharp drop in Trade Finance (Change in the ratio of insured export credit to export)

Source: Joint BIS-IMF-OECD-World Bank Statistics on External Debt and CEIC database [3]

Some findings from the chart:

There is a sharp drop in the Trade finance, making difficult for the exporters, especially

SMEs to finance their trade during the financial crisis.

Asia-Pacific region is economically sound to bear the turbulence during the crisis due to

its sound economic fundamentals, substantial reserves, improved regulatory frameworks

and generally robust corporate balance sheets and banking sectors. But due to the rise in

Risk aversion, the corporations in these countries found difficult to finance their trade.

This trend continued for the 2nd and 3rd quarters of 2009. But it has shown an opposite

trend in initial results of 4th Quarter.


Page 65 of 107

Suggestions

Establishment of a Regional trade finance database to facilitate the information exchange

between the banks, trade facilitators and the corporations.

The strengthening of the domestic credit rating agencies is critical to reduce the cost of trade

credit and insurance. This can be only done when the creditworthiness of the buyer or seller can

be assessed.

Information sharing and recording mechanisms of the companies is very essential.

In the long run, sound macroeconomic fundamentals can help in availability of more credit in

similar financial crisis.

6. Measures taken by government and its Impact:-

The table shows the different types of measures employed by governments during the recession.

There was a wide array of measures ranging from Bail outs, Tariffs, Export measures to Import bans

and public procurement.

Table 11: Measures implemented during Recession

Total Red/Implemented Measures Implemented

during Nov 2008- Nov 2009

Type No of

measures

Bail outs/ subsidies 137

Total defense measures 66

Tariffs/Import bans/Quotas 62

Non-Tariff barriers 28

Export Measures 21

Local content/Public procurement 20

Other 8

Source: - Global Trade Alert, Jan 2010


Page 66 of 107

Out of these, some of the measures restrict imports and others favor/ support the exports. The red

measures are those which are highly discriminatory in nature.

In the below figure, there is a sudden drastic dip in the Bilateral trade, in 4th quarter of 2008 due

to the government measures. The Encircled portion is the most drastic drift from the usual trend.

Source: IMF working calculations

The measures had the negative impact on the bilateral trade flows. The measures taken by the

governments restricts the exports in most of the cases, the bilateral trade between the previously

trading partners gets broken. Here the countries follow the Close door policy, where they restrict

the exports outside the physical border of the country and consume the goods and services within

the country itself.

Bilateral trade flow, i.e. the trade between two countries got disrupted during the recessionary

period. As compared to the period before crisis, there was a sudden dip in the trade flow. The

measures restricted the trade between most of the countries.


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Project part 4

Trade Finance: Navigation

out of the Crisis


Page 68 of 107

4.4 Navigation out of the crisis

Immediate measures were needed during the recessionary period, to prevent the situation from becoming

a Financial Contagion. The contagion is a disaster for the nation’s economies. The measures can be

categorized in both short term as well as long term. Governments and the bodies thought at that time that

it is better to implement the short term measures, because it was the need of the hour. The long term

measures can be implemented anytime later once situation becomes normal.

The Short term measures that can be implemented to navigate out of the crisis are mentioned below:

Actions and Measures:-

1. Inter-firm trade finance

Inter firm trade finance means the finance provided to importers from exporters to buy the goods

from overseas, and that provided to exporters, to help them produce the goods to export as well as to

allow them to finance their extensions of credit to importers. This is one of the most important

sources of short-term financing for firms around the world. It tends to be relatively more important

for firms located in emerging countries.

It is also important to create among the trading partners all the conditions to exploit the

advantages of inter-firm trade finance, like removing the obstacles that might create

inefficiencies. For example, structured financing schemes might be a valuable instrument to

secure export financing to firms located in low-income countries.

Inter-firm trade finance helps in overcoming of the informational problems associated with

other lending relationships.

2. Coordination for a trade-Led Recovery

Private Banks (which account for some 80% of the trade finance market by way of lending),

export credit agencies and regional development banks can pool their resources to the extent

this is practicable.

Cooperation among the various players is crucial in the difficult times of crisis, because of an

absence of a comprehensive, continuous data set on trade finance flows.


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3. Liquidity pool by IFC

A liquidity pool allows the co-financing operations with banks in developing countries that

would likely have a high leverage and multiplier effect on trade.

The bodies proposed to design a small and targeted liquidity fund run by international

financial institutions and useful for smaller segments of the market or new countries, in

particular for those most likely to be hit by the contraction of trade credit supply.

4. Use of products like Factoring:-

Factoring is a form of commercial finance whereby a Business sells its Accounts

Receivables (in the form of invoices) at a discount. In this process, there is an agent (or

factor) that buys all or some of a business’s outstanding invoices, sometimes called Debt

Outright, in advance, and repays the remaining amount, minus a commission plus interest on

the advance when the accounts are settled.

Factoring is especially useful for generating working capital when a business needs cash

immediately and is willing to pay a commission. This is only a Short term Solution.

5. Global Measures:-

International level: At the international platform, the bodies like IMF, WTO, ICC can

relax their norms for the time being and can wait for this difficult time to pass. This

action will in turn have a positive impact on the investors. They will be motivated to

increase their trade activities.

Regional level:

Regional development banks provide funding for building infrastructures and private

businesses in emerging markets countries. Even if a project does not meet the necessary

criteria for financing from the development bank, assistance is still available to help

companies locate direct investment financing from other sources.

The most important regional development banks are owned by the governments of many

donor countries, both from the industrialized world and from emerging markets, and

serve mainly as central banks for local development banks. They also offer direct

financing to private sector-businesses.


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The most important development banks are:

The Inter-American Development Bank (for Latin America)

The African Development Bank and Fund (for Africa)

The European Bank for Reconstruction and Development (for Eastern Europe

and the Commonwealth of Independent States)

The European Investment Bank (for the funding of worldwide interests of the

European Union)

The Asian Development Bank (for Asia and the Pacific)

National level/ Action by various governments

The government regulations can have a favorable impact on the exporters/

importers.

Relaxation in the rules and regulations can increase the overall trade volume

6. Relaxation in the BASEL-II norms

The relaxation in the Basel- II norms will allow more proportionate capital weightings for traditional

trade finance transactions, so that the transactions becomes more secured. In addition, the private

sector is to be fully represented in the drafting of the new capital adequacy regime through a trade

finance working group.

7. Regional clearing houses:

Advantages of the regional clearing house:

A clearing house decouples the risk involved in a trade for counterparty

No need to take the matter to the distant bodies, which are located far

Quick disposal of the trade activities

A Regional Clearing House stands between two traders, located in a country and its purpose is to

reduce the risk of one (or more) trading firm failing to honor its trade settlement obligations. The

transactions are cleared.


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8. Trade Finance Facilitation programs by International/ Regional bodies

Development institutions have taken actions to help ease access to trade finance, during this period.

For example, in response to the financial crisis, the International Finance Corporation (IFC) has,

doubled its Global Trade Finance Program to $3 billion to facilitate trade by providing guarantees

that cover the payment risk in trade transactions.

To deal with the liquidity constraint, the IFC introduced a Global Trade Liquidity Program, in

collaboration with official and private partners, to provide up to $50 billion of trade liquidity

support.

Table 12: Trade Finance Facilitation Programs – Mid-2008 to Mid-2009

Mid-2008

International

Financial

Institutions

No. of

Transactions

Trade Credit/

Guarantees

extended

(In Billion $)

Issuing

Banks

Countries

Involved

IFC 1900 2.1 100 50

EBRD 7000 6.7 109 21

IDB 303 0.58 31 14

ADB 828 0.34 38 9

Mid-2009

International

Financial

Institutions

No. of

Transactions

Trade Credit/

Guarantees

extended

(In Billion $)

Issuing

Banks

Countries

Involved

IFC 5720 4.4 146 74

EBRD 8100 6.8 115 19

IDB 694 0.86 51 20

ADB 1293 0.7 59 9 Source: - www.ifc.org; www.ebrd.com; www.iadb.org; www.adb.org

Regional development banks such as the Asian Development Bank (ADB), the European Bank for

Reconstruction and Development (EBRD), African Development Bank (AfDB), and the Inter-American

Development Bank (IDB) have also launched or expanded their trade finance programs to extend

guarantee facilities, with a focus on small transactions in low-income countries that have little access to

international markets and no or low international ratings.

The trade facilitation programs have been immensely increased during the times of crisis.

Number of transactions and the trade credit lines in $ billions, both are increased, in the year 2009

when compared with the period of 2008

http://www.ifc.org/

http://www.ebrd.com/

http://www.iadb.org/

http://www.adb.org/


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In the context of the current economic crisis, the international bodies like the Bankers association for

foreign trade, International chamber of commerce, Business Europe, as well as individual wholesale

banks have been instrumental in recommending at the G20 Summit platform in London, in the following

given areas:

9. Cash-less forms of trade such as Barter or Countertrade

Cash less forms of trade are useful in times of insufficient liquidity and diminished availability of

trade finance. Modern countertrade is facilitated by advanced web-based technologies.

Figure 12: Countertrade used in the Asia-Pacific region

10. Sharing of risk with public sector backed institutions: It was suggested to encourage co-

finance between the various providers of trade finance. The Public sector actors, such as export

credit agencies and regional development banks, can be mobilized to counter some of the

private sector risk.

11. General Measures

Information gap in trade finance can be filled in particular in terms of business

performance data evidencing the loss history of different trade finance risk categories.

Preventing ethical risk and crowding out Wholesale banks by setting clear time limits and

exit strategies for the intervention programs and also creation of special guideline

wherein they have to share the risk rather than underwriting it.


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Table 13: Measures and their Scope in region

Type of Measure Effective In

Trade facilitation bodies like IFC, ADB and

EBRD

Low Income Countries, Underdeveloped and

developing economies

Inter firm trade finance Big corporations and companies

Developed economies

Factoring Worldwide (All)

Liquidity Pool Developed economies (Have a say on a

global level to influence the International

bodies)

Public sector backed institutions Developing Economies (Socialist

economies) like China

Regional clearing Houses Developed countries – coupled with IT

solutions

Basel II norms Worldwide (All)

Cash less form of Trade (Barter/ Countertrade) Asia-Pacific region

General Measure_ Information gap in Trade

finance

Worldwide (All)


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Project Part 5

IT Products in Trade Finance


Page 75 of 107

4.5 IT Products in Trade Finance

The paper intensive processes of the trade financing instruments prompted the wholesale banks to develop

the technological platforms which include the features like centralized procurement and payment

mechanisms. This in turn reduced the transaction charges of banks and made the delivery process

speedier. The advent of new features in these products has attracted the Corporate/Small and medium

enterprises to use them to their advantage. It is a win-win situation for both the wholesale banks and the

customers i.e. exporters and importers.

IT products provide Banks and their customers with the automation of the open account and the letter of

credit, complementary to the emerging SWIFT bank trade services utility.

Also, there is a better collaboration between the exporter and the importer due to flexible and modular

application features.

These products becomes more important in times of the recession, wherein due to the liquidity crunch in

the market, parties find it difficult to get finance and also the cost of trade credit increases.

There are many types of technological solutions developed by various IT service providers. Some of them

are:-

Figure 13: IT service providers and their products

• Bolero Advise

• Bolero Trusted trade platform

• Bolero Application suitesBOLERO

• IMEX

• a//NETT

• IBSnetSurecomp

• Bank Trade

• Client Trade

• Open TradeCSI

• DTTNTrade Link

• Open TradeTRADEPAQ


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Considering the new demand in the trade finance space, banks and financial institutions look to IT

solution vendors to provide a suitable solution enabling them to evaluate and assume risk besides the

traditional intermediating pre and post-shipment financing products. Also if they can provide them with

the facilities like indemnity, compliance and the Order collaboration, then the solution becomes

integrated.

Some of the existing Open Account and the documentary credit (L/C) suites are providing the solutions

like:

Figure 14: Open Account Suite (Bolero)

In the open account, the bank don’t have much role to play and therefore provides simple functions of

order collaboration, documentation if any, reconciliation of the order, payment and finance management.

Figure 15: Letter of credit/ Documentary credit Suite (Bolero)

Source: http://www.bolero.net/index.html

In documentary credit suite, the company provides the advice and collaboration in Purchase order. Then it

performs the documentation, keep the record in a database, and perform the document compliance. Also

the pre and post export finance is provided. The payment is made by the help of SWIFT trade service

utility and the finance management is done.

The TCS provides a trade finance solution of the name TCS BANCS Trade finance.

Apart from these basic services, the service providers also can leverage on the exposure and the credit/

market risk management by providing its clients with the updated information about the companies.

Inventory finance is another area they can look into.

Order Collaboration

Document Management

Order Reconciliation

Payment Management

Finance Management

Order collaboration

Document Credit

collaboration

Document Credit

Advising

Document Management

Complaint checking

Payment management

Credit Management

http://www.bolero.net/index.html


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Project Part 6

Case Study


Page 78 of 107

4.6 Case Study: TradFinc

A case study has been given here, where a hypothetical IT service provider is taken, which is

providing Trade finance solutions. The name of the company is ACECOMPT and the solution name

is TradFinc.

In the solution, the conceptualization of an Integrated Model or product is thought of and an end to

end integrated framework of the entire trading cycle. This solution framework can be refined upon

and be implemented by any trade finance IT service provider, like TCS.

1. Background

ACECOMPT was founded in 2000 by its parent company, ACEM Global Tech. (APT), a leading

global IT solutions provider. ACECOMP employs more than 10000 people servicing the clients need.

The company’s TradFinc Suite includes the solutions for trade services like, Open Account Trade,

documentary credit trade, risk management and Factoring. These applications integrate with the

existing core banking, cash management, or other systems to quick-start a new operation. The global

TradFinc Portal extends e- Trade services, to the customers, allowing them and other service

providers to access the trade services front Office and back office over Internet, and to enquire about

any process in the supply chain.

The company provides end-to-end, integrated IT solutions, focuses on the client’s business, the

industry perspective, and the competition and challenges in the market. The technology domain

expertise helps us to provide superior financial services.

Finally, ACECOMP best-in-class TradFinc Solution Integration Services helps to integrate, deploy

unequal systems and migrates the custom applications.

2. CHALLENGE/ Business Requirements

The convergence of Trade solutions with cash management system to an integrated platform provides

total visibility of the value chain. The Trade Services Utility (TSU) and Open account act as enablers

for the supply chain management initiatives and Trade Finance needs to evolve to provide these

capabilities. ACECOMP works concurrently with the banks, who want to re-invent itself in the area

of trade processing, by becoming a trade facilitator and in the process, create for itself a niche market

space by transcending customary banking vistas.


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There was an immediate business requirement of the business vertical to provide an integrated, end-

to-end trade portal that is highly secure, scalable and user-friendly to shorten trade cycle times,

coupled with higher process efficiency and reduce the cost and time involved.

3. SOLUTION

TradFinc is a state-of-the-art global Trade finance back and front-end system, complete trade cycle

support. Its multi-tier architecture ensures maximum safety and scalability while giving the optimal

performance. In its architecture, every step of the trade finance business flow is automated; reducing

the need for data entry at all levels of the process.

TradFinc converges the trade-related data of the companies/corporate of the open accounts,

documentary credits (L/Cs), documentary collections, and shipping details, and allows its clients to

access the real time information anywhere and anytime. The unique feature of this integrated

platform is that it permits even the third parties such as Insurers to access the information online, with

access controlled and secured by the client.

TradFinc provides an end to end integration of the trade services, on a global level. The explanation

of the Figure 16, given on the next figure is as follows: -

Corporate/Exporter or any consumer accesses online the Global platform of the TradFinc web portal

the component library of the solution. In this library, all the information about the exporters and

importers who are registered to the bank or to the TradFinc solution is shown.

Also, in the Bank interface provided by the TradFinc, the bank has all the options ranging from the

documentation to the risk management and from reconciliation to Pre or Post shipment finance.

The bank provides services at various ends:-

1. Corporate End: -

Here the options of Application, Pricing of the service or instrument and document management

are provided.

2. Front office End: -

The origination and the negotiation of the trade financing option are done here. Also the services

like Guarantees, Pre shipment finance and Guarantees are provided.


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3. Back Office: -

The processing of the entire sequential flow is done here. The various types of

amendments, remittances and the payment options are defined over here.

4. Management: -

Here the cash management of the accounts of the customers is performed. The processes

of Reconciliation and discrepancy handling are done over here. Important part of the

entire workflow is that, the credit reporting and the Risk management of the clients is

done here and maintained in the Component library.

Suppose a Corporate applies for an issue of a Letter of Credit (L/C), he will use the platform of

TradFinc for the application. The various price quotes are provided. The bank will complete all

the formalities regarding the request. The bank is connected to the Trade services utility of the

SWIFT, wherein the real time transactions and the movement of the cash is noted. The back

office systems will ensure that the payment is to be received by the Authorized person.

The process of the Cash management and Risk management is already calculated by the software

given by the company. The transactions between the exporters and the importers are noted on a

real time basis.

Even the third parties to the transaction, such as Insurers and forfeiters are allowed to access the

information online, provided they are allowed by their respective client.

The party is reminded periodically, to make the payments before the due date. If any party defaults in

between, the affected party gets the Real time alert, whereby he/she can action with the help of the

Insurer.

There is complete automation of the trade life cycle via Straight through processing (STP), where the

process of a stock transaction is made automatically by computer from beginning to end without manual.

This in turn improves the operational efficiency of the process.

At times, the documents templates are customized according to the needs and aspirations of the

exporter/corporate.


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TradFinc Solution to Bank

SWIFT

Payment

System

SWIFT

Adaptor

Cash

Management

COMPONENT LIBRARY

Corporate

TSU

Connecter

Bank Interface

Risk

Management

Figure 16: TradFinc - End to End integration of Global Trade Services


Page 82 of 107

4. Advantages of TradFinc

TradFinc provides the following advantages to its customers:-

Reduction in the Operational risk, involved in the process, by improving and refining the

work processes.

Automation of the trade life cycle via Straight through processing (STP), where the process

of a stock transaction is made automatically by computer from beginning to end without

manual.

Provides a holistic view of the client’s and the bank’s risks

Improvement in productivity and throughput of the entire business

Complete audit trail and tracking

User customisable document templates

Enhances customer relationship management

This solution can anytime be converted to the MODEL, wherein new features can be used in the existing

or the new products of TCS.

The solution can be implemented along with some re-engineered trade financed products. Also the

solution can encompass wide Industry spectrum.


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Project part 7

Recommendations


Page 84 of 107

4.7 Recommendations for TCS Solution Based on the analysis and the findings obtained in the previous sections, I would like to give the

following suggestions to the TCS Trade finance solution called TCS BαNCS Trade Finance so as to

improve its utility across the world and more specifically in India. The recommendations have been

divided into three degrees- First (being very important), Second (being the next important ones), and

Third (being not that important) and they are as follows:

First Degree:

• Develop a solution that is integrated and simplified (i.e., all types of transactions involved in the

trade financing activities and the various types of risks involved are mitigated using a single platform

or a single solution). This makes the work of the user much easier and such a solution would attract

customers in large numbers.

• Develop a solution that is an end-to-end one. This is an immediate requirement by the

exporters/importers and banks. An end-to-end solution means all kinds of activities right from

advising the purchase order, pre export finance, indemnity, documentation, document compliance,

post export finance, reconciliation process and payment. This makes the solution more simple and

hence trading movements are traced in real –time and more efficiently.

• New technology platforms enable buyer, sellers, banks, and other supply chain members to gain

visibility of the flow of goods and related information.

Provide a suitable solution enabling them to evaluate and assume risk besides intermediating pre and

post-shipment financing products.

• Try to expertise in Trade Finance Product engineering: Develop new breakthrough products by

reengineering the prevailing products. These products will be according to the recent trends in the

market.

• The Trade ecosystem is made up of diverse systems operated by a wide spectrum of organizations,

including financial institutions. The complete auditing processes of the customers are tracked and are

closely monitored, as it consists of cross-border transactions that may be vehicles for money

laundering or other illegal activities. This requires organizations and individuals involved in

international trade to coordinate with different partners, service providers, national and international

regulatory authorities, and other entities across the Financial Supply Chain.

• Hence the TCS solution can formulate an IT component library which can extend trade finance

solutions and the existing systems through automation, interoperability, SOA and workflow-

enablement, thus providing true solution integration benefits like compliance and risk management.


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Second Degree:

• Best-in-class IT's Solution Integration Services can be developed to integrate, deploy disparate systems

or develop and migrate custom applications.

• Interfaces to multiple Back Office systems, Integration with existing Business Workflow processes, and

Integration to Document Management should also integrated into the system.

Third Degree:

• Cost factor should be worked out, as the decisions taken by the institutions while buying a solution

from a particular vendor might be affected due to this constraint.

• TCS could concentrate on giving proper training facilities along with the implementation that might

stand out as very good service offered by TCS. Also, it could concentrate on giving secondary training to

the employees of the users of these solutions to leverage its position from other service providers.

Taking these recommendations into account, TCS’ solution can definitely improve its solution and

increase its penetration levels in the markets worldwide and in India also.


Page 86 of 107

5. Annexure

Certificate Program in Wholesale banking: Products and Services

Course Content

Certificate in Wholesale Banking: Products and services

Module I

Chapter 1 Overview of Wholesale Banking

Chapter 2 Deposit and Payment Systems

Chapter 3 Wholesale Banking: Current account and deposits

Chapter 4 Wholesale Banking: Loans and Advances

Module II

Chapter 5 Wholesale Banking: Payment Cards

Chapter 6 Trade Finance

Chapter 7 Project Finance

Chapter 8 Syndicate Lending

Module III

Chapter 9 Off Balance Sheet Activities

Chapter 10 Loan Pricing

Chapter 11 Wholesale Banking Risks

Chapter 12 Wholesale Banking Technology

Chapter 13 Regulations


Page 87 of 107

Certificate Program in Wholesale banking: Trade Finance

Course Content

Certificate in Wholesale Banking: Trade Finance

Module I

Chapter 1 Introduction to Trade Finance

Chapter 2 The Trade Environment

Chapter 3 Payment Options

Chapter 4 Financial and Commercial Documents

Chapter 5 Letter of Credit and UCPDC

Chapter 6 Bank Guarantees

Module II

Chapter 7 Extension of Credit

Chapter 8 Export Finance

Chapter 9 Import Finance

Chapter 10 Leasing and Hire Purchase

Module III

Chapter 11 Cash Management

Chapter 12 Working Capital Finance

Chapter1 3 Bill discounting, Overdrafts and cash credit

Chapter 14 Factoring and Forfeiting

Chapter 15 Securitization


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Certificate Program in Governance Systems

Course Content

Certificate in Governance Systems

Chapter

Number

Chapter Name

Module I

Chapter 1 Introduction to E-governance

Chapter 2 Organizational and Activity structure of the Government

Chapter 3 Federal/Central level Government

Chapter 4 State/ Province level Government

Chapter 5 Local/District level Government

Module II

Chapter 6 Work or File flow in e-form

Chapter 7 Mutual Interaction between Business Entity and Government

Chapter 8 Mutual Interaction between Government and Citizen

Chapter 9 Mutual Interaction between Government and Government

Module III

Chapter 10 E-procurement architecture

Chapter 11 Government Bills Payment Architecture

Chapter12 Ideal e-central Government and Government Web Portal

Chapter 13 The future of e-Government and issues


Page 89 of 107

Certificate program in Wholesale banking: Trade Finance Advanced

Course content

Certificate in Wholesale Banking: Trade Finance Advanced – L3

Chapter No. Chapter Name Important Topics Covered

Chapter 01 Meaning of Foreign

Trade

Meaning of foreign trade, terms of delivery of goods,

Balance of payment, Balance of trade


Laws

FEMA, NIACT, Indian stamp act, EXIM Policy, RBI

guidelines, FEDAI guidelines

Chapter 03 International Trade

Theories

Theory of Mercantilism, Theory of absolute advantage,

Theory of comparative advantage, Heckscher-Ohlin model,

Imitation-Gap theory, International product life cycle theory

Chapter 04 Terms of trade and

INCOTERMS

Different terms of trade, terms of Import, Terms of payment,

INCOTERMS different sections

Chapter 05 Trade Documents Bill of exchange, Invoice, Bill of lading, Airway bill,

Insurance Policy, Insurance including Marine Insurance, etc

Chapter 06 WTO and its

impact

Functions, activities, WTO secretariat, organizational

structure, Need of the trade agreement, Dispute settlement

mechanism, and criticisms)


Facilitators

Role of EXIM Bank, ECGC, UNCTAD, UNCEFACT,

WCO etc. in trade facilitation

Chapter 08 Risks involved in

trade finance

Country, Currency, Credit, Counterparty, Exchange,

Performance, Product, Legal Risk etc

Chapter 09 UCP 600 overview Overview of UCP 600, Various articles included for trade

finance

Chapter 10 UCP 600 Parts UCP 600 different parts and their description

Chapter 11 Trade Finance: IT

Products

IT products of Bolero, Surecomp, Eximbills, Trade Link,

TRADEPAQ, CSI, comparison between different products


Page 90 of 107

Sample DAR Report

Figure 17: DAR Report sample

Daily activity report tracker is the Standard TBDA template to facilitate the Mentor to keep track of the

Intern. The Intern fills the DAR daily, and gives the complete information regarding the activities specific

to the project work in TCS.


Page 91 of 107

Sample PF3030A Review Tracker Template

Figure 18: Asset Review Tracker

Sample PF3030A is the standard review tracker template used by TCS in the stage of Asset Review. The

Intern while reviewing the course/asset, he fills the PF3030A, and highlights the

discrepancies/suggestions/ recommendations. As a result, the asset is passed from the process of review

twice and helps in the improvement of it.


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Asset Development Tracker

Figure 19: Asset Development Tracker

The asset development tracker is a template assisting the coordination between the Intern and the

Company guide. It is filled with the Intern who is developing the Asset. The Progress is constantly

tracked by the mentor, review comments are closed and the suggestions are provided.

In the Asset Development tracker, I have suggested for some changes to the Domain Academy, which are

as follows:

In the Course Outline, the proposed date and the Date of Completion columns have been added.

In the Chapters sheets, the No. of pages Box has been added to tell the no. of documents present

in the chapter DOC file.


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6. Glossary [7]

Document against Acceptance

A notation on a draft issue in an export transaction stating that the documents attached to the draft and

giving title to the shipped goods should be handed to the buyer (drawee) only upon his acceptance of the

draft.

Documentary Collection

A type of trading transaction whereby the exporter entrusts the collection of a payment to the remitting

bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with

instructions for payment.

Factoring

Factoring may be defined as ―A contract by which the factor is to provide at least two of the services,

(finance, the maintenance of accounts, the collection of receivables and protection against credit risks)

and the supplier is to assigned to the factor on a continuing basis by way of sale or security, receivables

arising from the sale of goods or supply of services‖.

Letter of Credit

LOC is ―an undertaking by importer’s bank stating that payment will be made to the exporter if the

required documents are presented to the bank within the validity of the L/C‖.

Open Account

Open account transactions is a form of instrument, where due to strong trading relationships, seller ships

the goods together with the necessary documents to the buyer before the payment is made and without

any form of guarantee.

SWIFT

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a body that operates a

worldwide financial messaging network, and exchanges the messages between banks and other financial

institutions.


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7. Bibliography

Surveys and Reports:-

1. BAFT, I. (2009). IMF-BAFT Trade Finance Survey. ICC BAFT.

2. ICC. (2009). Rethinking Trade Finance 2009:An ICC Global Survey. International Chamber of

Commerce.

3. ICC. (2010). Rethinking Trade Finance 2010 Global Survey. International Chamber of

Commerce.

4. ICC_ScotiaBank. (2007). AFP Trade Finance Survey 2007. Association for financial

professionals.

5. Ronci, M. (2004). Report on the Trade Finance. IMF.

6. Thomas. (2009). IMF Report on Trade Finance in Developing countries. IMF.

7. Trade to expand by 9.5% in 2010 after a dismal 2009, WTO reports. (2010, March 26). Retrieved

April 26, 2010, from www.wto.org: http://www.wto.org/english/news_e/pres10_e/pr598_e.htm

Research Papers and Journals:-

1. [1] 2007 AFP (Association of financial professionals) Trade Finance Survey, October 2007,

Scotia bank

2. [2] Michael Klaussner, ABN AMRO Research paper

3. [3] Wei Liu and Yann Duval, Trade finance in times of crisis and beyond,2008

4. [4] Marc Auboin, Boosting the availability of trade finance in the current crisis: Background

analysis for a substantial G20 package, WTO Secretariat

5. Malouche, M. (2009). Trade and trade finance developments in 14 developing countries post

September 2008 - a World Bank Survey. World Bank Policy Research Working Paper 5138.

6. Anna Maria C. Menichini, Inter-Firm Trade Finance in Times of Crisis


Page 95 of 107

Database:- 1. Link_ WTO statistics database. (2010). Retrieved April 2010, from www.stat.wto.org:


2. [5] http://www.wto.org/english/news_e/pres10_e/pr598_e.htm, dated 26 March, 2010

[Date Accessed: 10 April, 2010]

3. Source:- WTO_Home > Resources > Statistics > Statistics database > Time series

[Date Accessed: 23 April, 2010]

Guides:- 1. Trade Finance Guide – A quick reference for U.S. Exporters

2. Trade Finance Infrastructure Development Handbook for Economies in Transition

Books:- 1. India Budget, Chapter-7 International Trade

2. Practitioners’ book on Trade finance, Taxmann publications, IIBF, 2005.

Literature Review:-

1. MARCIO RONCI, Report on the trade Finance, 2004 IMF

2. THOMAS, 2009 IMF report on trade finance in developing countries

Glossary 1. [7]

www.intracen.org/tfs/docs/glossary/de.htm

[Date Accessed: 11 May, 2010]


http://www.wto.org/english/news_e/pres10_e/pr598_e.htm

http://www.intracen.org/tfs/docs/glossary/de.htm