In A Project Report on

“TRADE FINANCE”

Submitted to
PUNJAB TECHNICAL UNIVERSITY
JALANDHAR

In partial fulfillment of the requirement for the

Award of degree of
Master of Business Applications

Submitted by
Name: Suman Verma
Uni. Roll no. 1174053

(Session 2011 – 2013)

GURU NANAK INSTITUTE OF MANAGEMENT AND TECNOLOGY

Ludhiana

1
 ACKNOWLEDGEMENT

In presentation of this report by me, I feel great pleasure because it gives me extensive
practical knowledge in my career. I get idea about Indian trade finance Industry by
this project.

I express my deep sense of gratitude to My Company Guide Mr. Anuvrat Sharma for
his valuable inspiration and guidance during my project work. They have patient and
critically gone the subject matter.

I also like to thank all staff of Kotak Mahindra bank who guides me in project
work.
I would like to take opportunity to express my gratitude towards all of them who have
contributed directly or indirectly in my project work.

Student Name: SUMAN VERMA

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 CERTIFICATE

This is to certify that the Summer Internship project titled “ TRADE FINANCE” a bona
fide w o r k o f S U M A N V E R M A , i s o r i g i n a l a n d h a s b e e n d o n e under my
supervision in partial fulfillment of the requirement for the award of M.B.A for the
period of 1.5 months from 25 th April2012 to 15 th June 2012. This report neither full
nor in part has ever before been submitted for awarding of any degree
of either this university or any other university. I am pleased to stay that his
performance during the period was extremely satisfactory.

College: GNIMT
City: LUDHIANA

3
 CONTENTS
 Introduction to study
 Objective to study
 Banking Industry Profile
 Introduction of kotak Mahindra bank
 Corporate identity of kotak Mahindra bank
 About company
 The journey
 Business of kotak Mahindra bank
 Senior management
 Awards
 Introduction of trade
 Key factors of trade
 Risk in international transaction
 INCOTERMS
 Mode of International trade
o Clean payment
o Bill of collection
o Documentary credit
 Introduction of trade
 Importance of trade finance
 Pre-shipment and post-shipment
 Forfeiting, factoring, bank guarantees and co acceptance
 Domestic trade finance services
 Trade finance in kotak Mahindra Bank
 International- Export
 International- Import
 Bank guarantee
 Domestic
 Statistical Analysis
 Conclusion
 Findings
 Bibliography

4
5
 Project title “TRADE FINANCE” is the study of trade facilitation aims at reducing
transaction cost and time by streamlining trade procedures and processes. One of the
most important challenges for traders involved in a transaction is to secure financing so
that the transaction may actually take place. The faster and easier the process of
financing an international transaction, the more trade will be facilitated.

Traders require working capital (i.e., short-term financing) to support their trading
activities. Exporters will usually require financing to process or manufacture products for
the export market before receiving payment. Such financing is known as pre-shipping
finance. Conversely, importers will need a line of credit to buy goods overseas and sell
them in the domestic market before paying for imports. In most cases, foreign buyers
expect to pay only when goods arrive, or later still if possible, but certainly not in
advance. They prefer an open account, or at least a delayed payment arrangement.
Being able to offer attractive payments term to buyers is often crucial in getting a
contract and requires access to financing for exporters.

Therefore, governments whose economic growth strategy involves trade development

should provide assistance and support in terms of export financing and development of
an efficient financial infrastructure.

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7
The main of the present study of is accomplish the following objective.

 P r o p e r u n d e r s t a n d i n g o f Tr a d e f i n a n c e d e p a r t m e n t .

 To know about brand awareness of kotak Mahindra bank and client’s ranking about
Kotak Mahindra bank.

 Factor responsible for performance of kotak Mahindra bank.

 To know the organization.

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9
 Indian Banking Industry

Banking in India originated in the first decade of 18th century with The General Bank of
India coming into existence in 1786. This was followed by Bank of Hindustan. Both
these banks are now defunct. The oldest bank in existence in India is the State Bank of
India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of
decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the
1850s. At that point of time, Calcutta was the most active trading port, mainly due to the
trade of the British Empire, and due to which banking activity took roots there and
prospered. The first fully Indian owned bank was the Allahabad Bank, which was
established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which
were founded under private ownership. The Reserve Bank of India formally took on the
responsibility of regulating the Indian banking sector from 1935. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers.

Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate
the development of the Indian economy. At the same time, it has emerged as a large
employer, and a debate has ensued about the possibility to nationalize the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalization." The paper was received with positive
enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an
ordinance and nationalized the 14 largest commercial banks with effect from the
midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described
the step as a "masterstroke of political sagacity." Within two weeks of the issue of the
ordinance, the Parliament passed the Banking Companies (Acquition and Transfer of
Undertaking) Bill, and it received the presidential approval on 9th August, 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The

stated reason for the nationalization was to give the government more control of credit
delivery. With the second dose of nationalization, the GOI controlled around 91% of the
banking business of India.

After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to
the average growth rate of the Indian economy.

10
 Liberalization

In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalization and gave licenses to a small number of private banks, which came to be
known as New Generation tech-savvy banks, which included banks such as UTI
Bank(now re-named as Axis Bank) (the first of such new generation banks to be set up),
ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of
India, kick started the banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private
banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in
the norms for Foreign Direct Investment, where all Foreign Investors in banks may be
given voting rights which could exceed the present cap of 10%, at present it has gone
up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks. All this led to the retail boom in India. People not just
demanded more from their banks but also received more.

11
Current Situation

Currently banking in India is generally fairly mature in terms of supply, product range
and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian
banks are considered to have clean, strong and transparent balance sheets relative to
other banks in comparable economies in its region. The Reserve Bank of India is an
autonomous body, with minimal pressure from the government. The stated policy of the
Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-
and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake
in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor
has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks
(that is with the Government of India holding a stake), 29 private banks (these do not
have government stake; they may be publicly listed and traded on stock exchanges)
and 31 foreign banks. They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector
banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively.

12
13
Corporate Identity of kotak Mahindra Bank

14
 ABOUT COMPANY
Kotak Mahindra Bank is a financial service firm established in 1985. It was previously
known as Kotak Mahindra Finance Limited, a non-banking financial company. In
February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given
the license to carry on banking business by the Reserve Bank of India (RBI). Kotak
Mahindra Finance Ltd. is the first company in the Indian banking history to convert to a
bank. Today it has more than 20,000 employees and Rs. 10,000 crore in revenue.
Mr. Uday Kotak is Executive Vice Chairman & Managing Director of Kotak Mahindra
Bank Ltd. In July 2011 Mr. C. Jayaram and Mr. Dipak Gupta, whole time directors of the
Bank, were appointed the Joint Managing Directors of Kotak Mahindra Bank.
Dr. Shankar Acharya is the chairman of board of Directors in the company.
The Bank has its registered office at Nariman Bhavan, Nariman Point, Mumbai.
It bought stressed assets from a number of banks, at full loan value of Rs 1,000 crore
in 2005. In January 2011, the bank reported a 32% rise in net profit to Rs188 crore for
the quarter ended December 2010 against Rs. 142 crore the corresponding quarter last
year. Kotak Mahindra bank also reached the top 100 most trusted brands of India in The
Brand Trust Report published by Trust Research Advisory in 2011.

15
THE JOURNY

2011-2005

2011
 Kotak Mahindra Bank Ltd entered into a Business Cooperation
arrangement with CIMB Group Sdn Bhd, Malaysia.

2010
 Ahemedabad Derivatives and Commodities Exchange, a kotak
anchored enterprise, became operational as a national
commodity exchange.

2009
 Kotak Mahindra Bank Ltd. opened a representative office in Dubai.
 Entered Ahmedabad commodity exchange as anchor investor.

2008
 Launched a Pension Fund under the New Pension System.

2006
 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra
Capital Company and Kotak Securities.

2005
 Kotak Group realigned joint venture in Ford Credit; their
stake in Kotak Mahindra Prime was bought out (formerly
known as Kotak Mahindra Primus Ltd) and Kotak group’s
stake in Ford credit Kotak Mahindra was sold.
 Launched a real estate fund.

2004-2000

2004
 Launched India Growth Fund, a private equity fund.

2003
 Kotak Mahindra Finance Ltd. converted into a commercial
bank - the first Indian company to do so.

2001
 Matrix sold to Friday Corporation

16
  Launched Insurance Services.
 Kotak Securities Ltd. was incorporated

2000
 Kotak Mahindra tied up with Old Mutual plc. for the Life
Insurance business.
 Kotak Securities launched its on-line broking site.
 Commencement of private equity activity through setting up of
Kotak Mahindra Venture Capital Fund.

1995-1999

1998
 Entered the mutual fund market with the launch of Kotak
Mahindra Asset Management Company.

1996
 The Auto Finance Business is hived off into a
separate company - Kotak Mahindra Prime Limited
(formerly known as Kotak Mahindra Primus Limited).
Kotak Mahindra takes a significant stake in Ford
Credit Kotak
 Mahindra Limited, for financing Ford vehicles. The launch of
Matrix Information Services Limited marks the Group's entry
into information distribution.

1995
 Brokerage and Distribution businesses incorporated into a
separate company - Securities. Investment banking division
incorporated into a separate company - Kotak Mahindra
Capital Company

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1994-1990

1992
 Entered the Funds Syndication sector

1991
 The Investment Banking Division was started. Took over
FICOM, one of India's largest financial retail marketing
networks

1990
 The Auto Finance division was started.

1989-1985

1987
 Kotak Mahindra Finance Ltd entered the Lease and Hire
Purchase market.

1986
 Kotak Mahindra Finance Ltd started the activity of Bill
Discounting.

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 Business of kotak Mahindra

Multiple businesses, one brand

Kotak Mahindra is one of India’s banking and financial services group, offering a wide
range of financial services.

Kotak Mahindra Bank Ltd.

Kotak Mahindra Bank Ltd is a one stop shop for all banking needs. The bank offers
personal finance solutions of every kind from savings accounts to credit cards,
distribution of mutual funds to life insurance products. Kotak Mahindra Bank offers
transaction banking, operates lending verticals, manages IPOs and provides working
capital loans. Kotak has one of the largest and most respected Wealth Management
teams in India, providing the widest range of solutions to high net worth individuals,
entrepreneurs, business families and employed professionals.

Kotak Mhindra Old Mutual Life Insurance Ltd.

Kotak Mahindra Old Mutual Life Insurance Ltd is a 74:26 joint venture between Kotak
Mahindra Bank Ltd., its affiliates and Old Mutual plc. A Company that combines its
international strengths and local advantages to offer its customers a wide range of
innovative life insurance products, helping them take important financial decisions at
every stage in life and stay financially independent. The company covers over 3 million
lives and is one of the fastest

Kotak Securities Ltd.

Kotak Securities is one of the largest broking houses in India with a wide geographical
reach. Kotak Securities operations include stock broking and distribution of various
financial products including private and secondary placement of debt, equity and mutual
funds.

Kotak Securities operate in five main areas of business:

 Stock Broking
 Depository Services
 Portfolio Management Services
 Distribution of mutual funds
 Distribution of kotak Mahindra old mutual life insurance ltd
products.

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 Kotak Mahindra Capital Company

Kotak Investment Banking (KMCC) is a full-service investment bank in India offering a

wide suite of capital market and advisory solutions to leading domestic and multinational
corporations, banks, financial institutions and government companies.
Our services encompass Equity & Debt Capital Markets, M&A Advisory, Private Equity
Advisory, Restructuring and Recapitalization services, Structured Finance services and
Infrastructure Advisory & Fund Mobilization.

Kotak Mahindra Prime Ltd.

Kotak Mahindra Prime Ltd is among India's largest dedicated passenger vehicle
finance companies. KMPL offers loans for the entire range of passenger cars, multi-
utility vehicles and pre-owned cars. Also on offer are inventory funding and
infrastructure funding to car dealers with strategic arrangements via various car
manufacturers in India as their preferred financier

Kotak International Business

Kotak International Business specialises in providing a range of services to overseas

customers seeking to invest in India. For institutions and high net worth individuals
outside India, Kotak International Business offers asset management through a range of
offshore funds with specific advisory and discretionary investment management
services

Kotak Mahindra asset management company

Kotak Mahindra Asset Management Company offers a complete bouquet of asset

management products and services that are designed to suit the diverse risk return
profiles of each and every type of investor. KMAMC and Kotak Mahindra Bank are the
sponsors of Kotak Mahindra Pension Fund Ltd, which has been appointed as one of six
fund managers to manage pension funds under the New Pension Scheme (NPS).

Kotak Private Equity Group

Kotak Private Equity Group helps nurture emerging businesses and mid-size
enterprises to evolve into tomorrow's industry leaders. With a proven track record of
helping build companies, KPEG also offers expertise with a combination of equity
capital, strategic support and value added services. What differentiates KPEG is not
merely funding companies, but also having a close involvement in their growth as board
members, advisors, strategists and fund-raisers.

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 Kotak Realty Fund

Kotak Realty Fund deals with equity investments covering sectors such as hotels, IT
parks, residential townships, shopping centres, industrial real estate, health care, retail,
education and property management. The investment focus here is on development
projects and enterprise level investments, both in real estate intensive businesses

Senior management

 Mr. Uday S. kotak

Executive Vice Chairman and managing director

Mr. Uday S. kotak Executive Vice Chairman and managing director of the bank, and its
principal founder and promoter. Mr. kotak is an alumnus of Jamnalal Bajaj institute of
management studies.
In 1985, where he was still in his early twenties, Mr. kotak thought of setting up a bank
when private Indian banks were not even seen in the game. First Kotak Capital
Management Finance Ltd (which later became Kotak Mahindra Finance Ltd), and then
with Kotak Mahindra Finance Ltd, Kotak became the first non-banking finance company
in India's corporate history to be converted into a bank. Over the years, Kotak Mahindra
Group grew into several areas like stock broking and investment banking to car finance,
life insurance and mutual funds
Among the many awards to Mr Kotak's credit are the CNBC TV18 Innovator of the
Year Award in 2006 and the Ernst & Young Entrepreneur of the Year Award in 2003. He
was featured as one of the Global Leaders for Tomorrow at the World Economic
Forum's annual meet at Davos in 1996. He was also featured among the Top Financial
Leaders for the 21st Century by Euromoney magazine. He was named as CNBC TV18
India Business Leader of the Year 2008 and as the most valued CEO by businessworld
in 2010.

 Mr. C Jayaram
Joint Managing Director

Mr. C. jayaram, is joint managing Director of the bank and is currently in change of
wealth Management Business of the Kotak Group. An alumnus of IIM Kolkata, he has
been with Kotak Group since 1990 and member of the Kotak board in October 1999. He
also oversees the international subsidiaries and the alternate asset management
business of the group. He is the Director of the Financial Planning Standards board,
India. He has varied experience

of over 25 years in many areas of finance and business, has built numerous business
for the group and was CEO ok kotak securities LTD. an avid player and follower of
tennis, he also has a keen interest in psephology.

 Mr. Dipak Gupta

Joint Managing director

21
 An electronics engineer and an alumnus of IIM Ahmadabad, Mr. Gupta has been with
the Kotak Group since 1992 and joined the board in October 1999.
He heads commercial banking, retail asset businesses and looks after group HR
function. Early on, he headed the finance function and was instrumental in the joint
venture between Kotak Mahindra and Ford Credit International. He was the first CEO of
the resulting entity, Kotak Mahindra Primus Ltd.
Awards

 ICAI Award
Excellence in Financial Reporting under Category 1 - Banking Sector for the year
ending 31st March, 2010

 Asiamoney
Best Local Cash Management Bank 2010

 IDG India
Kotak won the CIO 100 'The Agile 100' award 2010

 IDRBT
Banking Technology Excellence Awards Best Bank Award in IT Framework and
Governance Among Other Banks' - 2009
Banking Technology Award for IT Governance and Value Delivery, 2008

 IR Global Rankings
Best Corporate Governance Practices - Ranked among the top 5 companies in
Asia Pacific, 2009

 FinanceAsia
Best Private Bank in India, for Wealth Management business, 2009

 FinanceAsia
Best Private Bank in India, for Wealth Management business, 2009

 IBA Banking Technology Awards

Best Customer Relationship Achievement - Winner 2008 & 2009
Best overall winner, 2007
Best IT Team of the Year, 4 years in a row from 2006 to 2009
Best IT Security Policies & Practices, 2007

 Euromoney
Best Private Banking Services (overall), 2009
 Emerson Uptime Champion Awards
Technology Senate Emerson Uptime Championship Award in the BFSI category,
2008

22
23
 Trade finance is related to international trade.
While a seller (the exporter) can require the purchaser (an importer) to prepay for
goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller
to document the goods that have been shipped. Banks may assist by providing various
forms of support. For example, the importer's bank may provide a letter of credit to the
exporter (or the exporter's bank) providing for payment upon presentation of certain
documents, such as a bill of lading. The exporter's bank may make a loan (by
advancing funds) to the exporter on the basis of the export contract.
Other forms of trade finance can include Documentary collection, trade credit
insurance, export factoring, and forfaiting. Some forms are specifically designed to
supplement traditional financing, such as “transactional equity” (a product developed
by IIG Capital LLC), which can assist the borrower in funding the down payment
required by a bank before it extends credit. [ In many countries, trade finance is often
supported by quasi-government entities known as export credit agencies that work with
commercial banks and other financial institutions.
Since secure trade finance depends on verifiable and secure tracking of physical risks
and events in the chain between exporter and importer, the advent of new
methodologies in the information systems world has allowed the development of risk
mitigation models which have developed into new advanced finance models. This
allows very low risk payment advances to exporters to be made, while preserving the
importers normal payment credit terms and without burdening the importers balance
sheet. As the world progresses towards more flexible, growth oriented funding sources
post the global banking crisis, the demand for these new methodologies has increased
dramatically amongst exporters, importers and banks.
Trade finance refers to financing international trading transactions. In this financing
arrangement, the bank or other institution of the importer provides for paying for goods
imported on behalf of the importer.

24
Key Factors in Trade

Any Trade transaction can be broadly broken down into:

 Movement of Good.

 Movement of Document.

 Movement of Fund.

25
 Exporter’s Bank Importer’s Bank

Document exchange Transfer of fund

through bank

Exporter Direct exchange

of document Importer

Inland movement
Inland movement
of goods
of goods

Exporter Country Importers Country

Customer/ Customer/
Regulatory clearance Regulatory clearance

Traditionally, banks have played a role in the Movement of Document and Movement
of Funds, while Movement of Goods has been done through a whole range of logistics
players operating at different levels of supply chain.

26
Risks in International Transactions

In any business transition, there are risks. However, these risks are enlarged when
dealing internationally. Added to the commercial risk present in a domestic transaction
are foreign exchange risks as well as country risks.

 COUNTRY RISK
 Political stability
 Economic Environment
 Legal Infrastructure
 Foreign Exchange Restriction

 FOREIGN EXCHANGE RISKIS

 Foreign Currency Volatility

 COMMERCIAL RISKS
 Reliability of information
 Trade Dispute

Keeping these risks in mind, elaborate mechanisms and International trade

instruments have been developed over a period of time. These instruments are
designed to minimize risk for each of the parties involved. Depending upon the level of
trust between various parties and the international reputation of each of the parties,
different modes of business are adopted.
Before proceeding further, we should acquaint ourselves with the INCOTERMS that
are frequently used in international and domestic trade.

27
INCOTERMS

Trading between countries is fraught with difficulties. In order to facilitate exporting,

several international “set of rules” have been created. In the area of sending goods and
responsibility for delivery and customs clearance, most countries recognize
INCOTERMS 2000, published by the International Chamber of Commerce (ICC). This
set of definitions was first published in 1936 and is now in its 6 th revision.
There are 13 different Incoterms and they have been grouped into 4 different
categories.

 Group 1 – The E Term (Departure)

EXW - Ex works
 This group has only one term (EXW).
 Under this shipping term the seller provides the goods for collection by the buyer
at the seller’s own premises.
 The buyer arranges insurance against damage to the goods in transit.
 This term requires the least effort by the seller, but should not be used where the
buyer cannot carryout export formalities.

 Group 2 – The F Terms (Free, Main Carriage Unpaid)

FCA - Free Carrier FAS - Free alongside ship
FOB - Free on board
 The seller must deliver the goods to a carrier appointed by the buyer and located
in the seller’s country.
 The buyer arranges insurance against damage to the goods in transit.

 Group 3 – The C Terms (Main Carriage Paid)

CFR - Cost and Freight CIF - Cost, Insurance and Freight
CPT – Carriage paid to CIP – Carriage and Insurance paid to
 In this group the seller assumes the responsibility for the main contract of
carriage.
 These terms provide for the seller contracting for carriage on usual terms a t
his own expense.
 In the terms CIF and CIP the seller arranges and pays for insurance against
damage to the goods in transit.

 Group 4 – The D Terms (Delivered/Arrival)

DAF - Delivered at frontier DES - Delivered ex ship
DEQ - Delivered ex quay DDU - Delivered duty unpaid
DDP - Delivered duty paid
 In this group the seller has to bear all costs and risks of bringing the goods to the
country of destination.
 The seller arranges and pays for insurance against damage to the goods in
transit.

MODE OF INTERNATIONAL TRADE

28
There are 3 major recognized ways of effecting payment in international trade:

1. Clean payment
a. Advanced payment
b. Open account
2. Bill of collection
3. Documentary credit

1. CLEAN PAYMENT TRANSACTION

29
IINTRODUCTION
Clear Payments are characterized by trust. Either the exporter sends the goods and
trusts the importer to pay once the goods have been received, or the importer trusts the
exporter to send the goods after payment is effected.

In this case of clean payment transaction, all shipping documents, including title
documents, are handled directly by the trading parties. The role of banks is limited to
clearing funds as required.

HOW IT WORKS
There are two types of Clean Payment

 PAYMENT IN ADVANCE/ADVANCE PAYMNENT

The importer sends payment directly to the exporter and waits for the exporter to send
the goods and documents.

Advance Payment are usually adopted when the trading parties do not yet have a long
term relationship.

This mode of transaction is demanded by the exporter/ seller when the selling party is a
well-known and reputed company in its field. Thus the importer has a reasonable
amount of trust on the exporter by virtue of the exporter’s reputation.

30
 Process Flow in case of advance payment transaction

Exporter’s Bank Importer’s Bank

3 2

Transfer of fund

5 1
Direct exchange
Exporter Importer
of document

Inland movement Inland movement

of goods of goods

Exporter Country 4
Importers Country
Customer/ Customer/
Regulatory clearance Regulatory clearance

 OPEN ACCOUNT

31
 The exporter ships the goods and the documents directly to the Importer and waits for
the Importer to send payment.

This type of transition symbolizes a long-term regular relationship between the two
parties. A mutual level of trust between the two parties ensures that an open-account
system is carried on smoothly.

It is to be noted that as long as the exporter can trust the importer to make his
payments on time, an Open Account transaction is the simplest mode of doing long-
term business.

Exporter’s Bank Importer’s Bank

5 4 3

Transfer of fund

2 Direct exchange
Exporter Importer
of document

Inland movement Inland movement

of goods of goods

1
Exporter Country Importers Country
Customer/ Customer/
Regulatory clearance Regulatory clearance

Process Flow in case of Open Account transaction

2. DOCUMENTRY COLLECTION

32
 INTRODUCTION
Documentary Collection or ‘Collection Against Bills’ is a method of payment used in
international trade where by the exporter entrusts the handling of commercial and often
financial documents to banks and gives the banks instructions concerning the release of
these documents to the importer.
Banks involved do not provide any guarantee of payment. However, collections are
subject to the Uniform Rules for Collection published by the International Chamber of
commerce.

HOW IT WORKS
After the Importer and the exporter have established a sales contract and agree on a
Documentary Collection as the method of payment, the Exporter ships the goods. In a
Documentary, the Importer is the “Drawee” and Exporter is the “Drawer”.
After the goods are shipped, document originating with the exporter (e.g. commercial
invoice) and the transport company (e.g. bill of landing) are delivered to a bank, called
the Remitting Bank in the Collection process. The Remitting bank sends these
documents accompanied by a Collection Instruction, giving complete and precise
instructions, to a bank in the Importer’s country, referred to as the collecting/presenting
Bank in the Collection process.
The collection/presenting Bank acts in accordance with the instructions give in the
Collection Instruction and release the documents to the Importer against payment or
acceptance, according to the Remitting Bank’s Collection instructions.
Payment is forwarded to the Remitting Bank for the Exporter’s account. And the
Importer can now present the transport/title document to the carrier in exchange for the
goods.

ROLE OF VARIOUS PATIES

33
EXPORTER
Submit document to his bank with his instruction on how and when the buyer should
pay (the term of payment have been agreed already between buyer and seller)
EXPORTER’S BANK
The exporter’s bank is known as the REMITTING BANK, and they remit the Bill for
collection with instruction.
The role of the remitting bank is:
 Check documents are consistent with each other.
 Send document to bank in the buyer’s country with instruction on collecting
payment.
 Pay the exporter when it receives payment from the Collecting Bank.
BUYER/IMPORTER
The buyer/importer is the DRAWEE (of the Bill)
The role of the Importer is:
 Pay the bill (or promise to pay later).
 Take the shipping document (unless it is a clean bill) and clear his goods.
IMPORTER’S BANK
This is a bank in the importer’s country: usually a Branch or correspondent Bank of the
Remitting Bank – but any other bank may be used if the exporter requests it.
Importer’s bank is known as the Collecting/Presenting Bank. The role of the collection
bank is:
 Act as the Remitting Bank’s agent.
 Present the bill to the buyer for payment/acceptance.
 Release the document to the buyer when the exporter’s instructions have been
followed.
 Remit the proceeds of the bill according to the Remitting Bank’s schedule
instructions, usually less any charges.
If the bill is unpaid/ unaccepted, the Collecting Bank:
 May arrange storage and insurance for the goods as per Remitting Bank’s
instruction on the schedule.
 Protests on behalf of the Remitting Bank
 Requests further instruction from the Remitting Bank if there is a problem that
is not covered by the instruction in the schedule.
 Once payment is received from the importer, the collecting bank remits the
proceeds promptly to the Remitting Bank less is charges.

DISHONOR
34
 If the importer refuses payment / acceptance, and the collecting bank is required to
note / proceeds promptly to the Remitting Bank less its charges.

PROTEST BILLS
It refers to formal representation of dishonored bill of exchange. By protesting the bank
retains recourse to the exporter. When remitting banks or branches give instructions to
protest bills against either non-payment, or non-payment, or non-acceptance, or both,
particular care must be taken to ensure that such instructions are carried out promptly.
In effecting protest instruction, the bill should preferably be noted on the day of its
dishonor but in any event MUST BE NOTED within local legal time frame requirements.
When a bill has been duly noted, the protest may be subsequently extended as of the
date of the nothing. It must be remembered that if there are other endorses to bills, or if
advances have been made by the remitting banks / branches, then those parties will
only retain rights of recourse to the drawers if the bills are protested.

STATEMENT OF BILLS
The exporter will ask the importer to settle the bill in one of two ways, either D/P or
D/A.

DOCUMENT AGAINST PAYMENT (D/P):

35
 This is sometimes referred to as Cash against Document / Cash on Delivery. In effect
D/P means payable at sight (on demand). The collecting bank hands over the shipping
document including the documents of title (bill of Landing) only when the importer has
paid the bill. The drawee is usually expected to pay within 3 working days of
presentation. The attached instruction to the shipping document would show “Release
documents against Payment”.
Process Flow in case of D/P

6
Remitting Bank Collecting/Presenting Bank

7 3 4

Document Exchange 5 Transfer of fund

through bank

2
Exporter Importer

Inland movement
Inland movement
of goods
of goods
1

Export country customs/ Import country customs/

regulatory clearance regulatory clearance

DOCUMENT AGAINST ACCEPTANCE (D/A):

36
 Under document under acceptance, the exporter allows credit to the period of credit is
referred to as ‘usance’. The importer / drawee is required to ACCEPT the Bill i.e. to
make a signed promise to pay the bill at a set date in the future. When he has signed
the bill in acceptance, he can take the document and clear his goods.

Process Flow in case of (D/A)

6
Remitting Bank Collecting/Presenting Bank
5
3
7
Document Exchange Transfer of fund
through bank 4
Process Flow
Order reversed
Exporter Importer
2

Inland movement Inland movement

of goods of goods

1
Export country customs/ Import country customs/
regulatory clearance regulatory clearance

USANCE D/P BILLS:

37
 A Usance D/P Bill is an arrangement where the buyer accepts the bill payable at a
specified future date but does not receive the document until he has actually paid for
them. The reason is that airmailed documents may arrive much earlier than the goods
shipped by sea.

The buyer is not obliged to pay the bill before its due date, but he may want to do so if
the ship arrives before that date. This mode of payment is less usual but offers one
more settlement possibility.
There are still D/P terms so there is no extra risk to the exporter or his bank. As an
alternative the covering schedule may simply allow acceptance or payment to be
deferred awaiting arrival of carrying vessel.

There are different types of usance D/P bill, some of which do not required acceptance
e.g. those drawn payable at a fixed period after date or drawn payable at a fixed date.
Bills requiring acceptance are those drawn at a fixed period after sight, which is
necessary to establish the maturity date. If there are problem regarding storage of
goods under a usance D/P bill, the collecting bank should notify the remitting bank
without delay for instructions.

It should be noted however that the collecting bank does not have to do everything the
remitting bank’s schedule says.

Attached instructions would show “Release document against Payment”, and may
show PAYMENT may await arrival of carrying vessel”.

1 DOCUENTARY CREDIT

38
 Documentary Credits, otherwise popularly known as “letter of Credit” (LC) is an
instrument of settling trade payments. The international Chamber of Commerce (ICC) in
the Uniform custom and Practice for Documentary Credit (UCPDC) defines it as:
An arrangement however named or described, whereby a bank (the Issuing bank)
acting at the request and on the instructions of a customer (the applicant) or on its own
behalf:

2 Is to make a payment to or to the order of a third party (the beneficiary) or is to

accept bills of exchange (drafts) drawn by the beneficiary. OR
 Authorizes another bank to effect such payments or to accept and pay such bills
of exchange (draft). OR
 Authorizes another bank to negotiate against stipulate document provided that
the terms are complied with.

LC 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 stipulation and
against presentation of documents, the counter-value of goods or services
dispatched/supplied, rendered or otherwise.
A key principle underlying Letter of Credit is that banks deal only in documents and not
in goods. The decision to pay under a Letter of Credit will be based entirely on whether
the documents presented to the bank appear on their face to be in accordance with the
terms and conditions of the Letter of Credit.
It would be prohibitive for the banks to physically check whether merchandise has
been shipped exactly as per each Letter of Credit.
High degree of involvement by bank in the Documentary Credit process builds in trust
into the Transactions.
This inherent advantage of L/C based transaction has made has contributed to a large
extent to the growth of International Trade in modern times.

PARTIES TO LETTER OF CREDIT

39
 Applicant (Opener): Applicant is normally a buyer of the goods, who has to
make payment to beneficiary. LC is initiated and issued at his request and on
the basis of his instruction.
 Issuing Bank (Opening Bank): Issuing Bank is one which issues the credit i.e. it
is the bank that creates a letter of credit and undertakes to make payment.
 Beneficiary: Beneficiary is normally a seller of the goods, who has to receive
payment from the Applicant. A Credit is issued in his favor to enable him or his
agent to obtain payment on surrender of stipulated documents and comply with
the terms and condition of the LC.
If LC is a transferable one and he transfers the credit to another party, then he
is referred to as the First or Original beneficiary.
 Advising Bank: Advertising Bank advises the Credit to the Beneficiary, thereby
assuring the genuineness of the credit. It is normally situated in the
country/place of Beneficiary. The Advising bank may be correspondent bank of
the Issuing bank or could be specifically notified by the beneficiary.
 Confirming Bank: Confirming Bank adds its guarantee to the credit opened by
another bank, thereby undertaking responsibility of
payment/negotiation/acceptance under the credit, in addition to that of the
Issuing Bank.
 Negotiating Bank: negotiation is a process of giving value to the documents.
The negotiating bank is one with whom the documents may be negotiated.
 Reimbursing Bank: Reimbursing Bank is the bank authorized to honor the
reimbursement claim in settlement of negotiation/ acceptance/ payment lodged
with it by the negotiating bank.
 Second Beneficiary: second beneficiary is the person in whose name the first or
original beneficiary of credit has transferred the credit designated as
transferable.

INTER BANK COMUNICATION

40
 The inter-bank communication and transaction in documentary credit take place
through SWIFT (society for Worldwide Inter-bank Financial-Telecommunication)
network. SWIFT is an industry owned cooperative supplying secure messaging services
and interface software to over 7000 financial institution in 196 countries.

SWIFT messages are preset and referred to by category number called MT numbers.
For instance, MT800’s only deal with Traveller’s Check, MT300’s only deal with Foreign
Currency Exchanges. Each type of message or condition in each category is preset as
well. For instance, there are 89 different messages available under the category MT500.
This does not include the occasional sub code.

What this mean is that one cannot write SWIFT instructions that do not work with the
preset messages and expect the sending bank to accept them, or the receiving bank to
respond.

LETTER OF CREDIT PROCESS

41
The brief description of the LC process flow is given below:

Reimbursing bank
8
Instruction for
payment
Advising bank
1
9 Confirming bank 2 2
3
LC opened
6 7
1
Negotiating bank Issuing bank
1
0 11

Transfer of fund
Document Exchange
through bank

Exporter Importer
5

Inland movement Inland movement

of goods of goods

4
Export country Export country
custom custom

PROCESS DETAILS

42
1. The buyer and seller agree on the term of a sale and enter into the requisite
contracts encompassing the type of goods, delivery schedule, mode of payment, etc.
the buyer arranges for his bank to open a letter of credit in favor of the seller.
Typically the documents requested in an LC are the followed:
1. Commercial invoice.
2. Transport Document such as a bill of landing or Airway bill.
3. Insurance Document.
4. Inspection Document.
5. Certificate of origin.
In specifying documents required of the seller, it is very important to stipulate those that
are required for customs clearance and those that reflect the agreement reached
between the buyer and the seller. Price should be stated in the currency to the LC and
documents should supplied in the language of the LC.
2. The buyer’s bank sends the letter of credit to the advising bank in seller’s country.
The seller may request that a particular bank be the advising bank, or the buyer’s bank
may select one of its correspondents bank in the seller’s country.
3. The advising bank forwards the letter of credit to the seller. The advising bank
checks on the authenticity of the LC before forwarding to the seller. The seller carefully
reviews all conditions the buyer has stipulated in the letter of credit. If the seller cannot
comply with one or more of the provisions, the buyer Is immediately notified and asked
to make an amendment to the letter of credit.
4. After final term are agreed upon, the seller prepares the goods and arranges for
shipment to the appropriate port. The seller ships the goods, and obtains the bill of
landing and other documents as required by the buyer in the letter of credit. Some of
these documents may need to be obtained prior to shipment.
5,6,7. The seller presents the documents to the Negotiating bank, indicating full
compliance with term of the letter of credit. The Negotiating bank reviews the
documents. If they are in order, they are forwarded to the issuing bank. If there is a
confirming bank in the transaction the documents have to flow through the Confirming
bank.
8. The Negotiating bank forwards a reimbursement claim to ther Reimbursing bank.
9. The Reimbursing bank pays the Negotiating bank as per instructions issued to it by
the Issuing bank.
10. On receipt of the payment the negotiating bank, makes payment to the Beneficiary,
if he has not discounted the bill earlier.
11. Once the Issuing bank receives the documents it notifies the buyer who then
reviews them. If are in order the buyer sign off, makes payment to the bank, and
receives the documents, which enables the holder to take possession of the shipment.

The transfer of funds from the buyer to the bank, from the buyer’s bank to the bank,
from the buyer’s bank to the seller may be handled at the same time as the exchange of
documents, or under terms agreed upon in advance.

Amendment of a letter of credit

43
The process for amending an LC is as follows:-
1. Seller requests a modification of any Questionable terms in the letter of credit.
2. If the terms are agreed upon, buyer issues order to his or her (buyer’s) bank to
make an amendment to the term of letter of credit.
3. Buyer’s bank notifies seller’s bank of amendment, through the advising bank.
4. Seller’s bank notifies seller of amendment.

TYPES OF LETTER OF CREDIT

1. Revocable letter of Credit
Revocable letter of credit is a credit, which can be revoked, i.e. canceled or amended by
the bank issuing the credit, without the notice of other parties.
2. Irrevocable letter of Credit
Irrevocable Letter of credit is affirm undertaking on the part of issuing bank and can not
be cancelled or amended without the consent of the parties to LC, particularly the
beneficiary.
3. Confirmed letter of Credit
Confirmed letter of credit is a LC to which another bank (bank other than the issuing
bank) has added its conformation or guarantee. Thus, there is double guarantee in such
credit and it is more favorable to beneficiary
4. Sight Credit and Usance Credit
Sight credit states that the payment would be made by issuing bank at sight, on demand
or on presentation. In case of usance credit, drafts are drawn on the issuing bank or the
correspondent bank at specific usance period. The credit will be indicated whether the
usance drafts are to be drawn on the issuing bank or, in the case of confirmed credit on
the confirming bank.
5. Back-to-Back letter of Credit
It is also called as countervailing credit. When a LC is opened with security of another
LC, the credit thus opened in termed as Back-to-back Letter of credit’. The original
credit, which is offered as security for opening a back-to-back credit is called as
overriding credit/principal credit.
6. Transferable letter of Credit
It is a credit, which can be transferred by the Original Beneficiary in favor of second
beneficiary or several second beneficiaries. As per UCPDC a LC can be transferred
only if it is specifically stated as “Transferable” in the LC. Further, such Credit can be
transferred only once (i.e. from the First Beneficiary to a Second Beneficiary and not
(thereafter) from the second beneficiary to third beneficiary can also substitute his name
for that of the opener. The first Beneficiary can hide the name of the actual supplier to
the buyer (opener) and vice versa.
7. Stand by letter of Credit
These credits are generally used as a substitute for performance guarantee or for
securing secured loans. The documentary generally called for under such credit is a
simple statement of claim or proof of delivery of goods or certificate of non-performance.

IMPORT OPERATIONS UNDER LC

44
Banks in India normally open Importer Letter of Credit under following circumstances:
 When a resident in India is importing goods into India.
 When a resident merchant trader is purchasing goods from one country, for sale
to another country, for the purpose of merchandizing trade.
 When an India exporter who is executing a contract abroad requires importing
goods from a third country to the country where he is executing the contract.
The first category is the most common in the day-to-day banking.
FEES AND REIMBURSEMENTS
The different charges/fees payable under importer LC is briefly as follows-
The issuing bank charges the applicant fee for opening the letter of credit. The fee
charged depends on the credit of the applicant, and primarily comprises of:
a) Opening Charges: This would comprise commitment charges and usance
charges, to be charged upfront for the period of the LC COMMITME NT period is
the period from date of opening of the letter of credit until the last date of
negotiation of documents under the LC or the expiry of the LC, whichever is later.
The fee charged by the LC opening bank during the commitment period is
referred to as commitment fees.
Usance is the credit period agreed between the buyer and seller under the Letter
of Credit. This may vary from &7 days usance (sight) to 90/180 days. The fee
charged by the bank for the usance period is referred to as usance charges.
b) Retirement Charges:
1. This would be payable at the time of retirement of LCs. LC opening bank
scrutinizes the bills under the LCs according to UCPDC guidelines, and levies
charges based on value of goods.
2. The advising bank charges an advising fee to the beneficiary unless stated
otherwise. The fees could vary depending on the country of the beneficiary.
The advising bank charges may be eventually borne by the issuing bank or
reimbursed from the applicant.
3. The applicant is bound and liable to indemnify bank against all obligation and
responsibilities imposed by foreign law and usance.
4. The confirming Bank’s fee depends on the credit of the issuing bank and
would be borne by the beneficiary or the issuing bank depending on the terms
of contract.
5. The Reimbursing bank charges are to the account of the Issuing bank.

RISK ASSOCIATED WITH OPENING IMPORT LCs

1. The financial standing of the importer
2. The goods
3. The status of the exporter(or beneficiary of the LC)
4. Country risk
5. Foreign exchange risk

EXPORTER OPERATION UNDER LC:

45
Letter of Credit establishes in favor of Indian residents by persons resident outside India
for purchase of goods and services are referred to as Export Letter of Credit. Such
letters of credit may be received for following purposes:
1. For physical export of goods and services from India to a foreign country.
2. For execution of the projects (project exporters) outside India exporters by supply
of goods and services from India and partly from outside India (third country).
3. Toward deemed exporters where there is no physical movement of goods from
outside India but the supplies are being made to a project financed in foreign
exchange by multilateral agencies, UN Organization or project being executed in
India with the aid of external agencies.
4. For sale of goods by Indian exporter with total procurement and supply from
outside India (merchant trade by India intermediary). In all the above cases there
would be earning of foreign exchange or conservation of foreign exchange.
In every case the bank will be rendering services not only to the issuing bank as its
agent/correspondent bank but also to the exporter in advising financing his export
activity.
1. Advising an Export LC
The basic responsibility of an Advising Bank is to advise the credit received from its
overseas branch/ correspondent only after checking the apparent authenticity of the
credit established by the issuing bank. As a further step, as a prudent bank, it must also
go through the letter of credit, try to understand the underlying transaction, terms and
conditions of the credit and advice the beneficiary in the matter.
2. Advising of Amendments to LCs
For the various reasons LCs must be amended. All the procedures outlined for advising
the original LCs must be followed for the amendments also. While advising the
amendments normally the issuing Bank serializes the amendment number. Before
advising the amendment it has to be ensured that no previous amendment is missing.
Normally, whenever an amendment is effected there is a likelihood of LC (for example
whenever LC value is enhanced there should be a corresponding enhancement in the
quantity/or unit prices).
3. Confirmation or Export Letter of Credit
In confirmation the bank adds its guarantee to the undertaking given by the issuing
bank. Hence, adding of confirmation entails assessment of risk on the issuing bank.
4. Discounting/Negotiation of Export LCs
The exporter may require the funds before the due date in case of usance LCs. In this
scenario, the exporter can discount/ negotiate the LCs with the Negotiating Bank. The
Issuing Bank nominates the negotiating bank. Hence the negotiating bank takes the
credit risk on the issuing bank or confirming bank.

5. Reimbursement of Export LCs

46
In an LC transaction, the issuing Bank may nominate a Reimbursing bank allowing the
negotiating bank to the collect the money from the reimbursing bank. This is similar to a
cheque facility provided by banks, where in the Negotiating Bank can collect the money
once the goods have been shipped.
The reimbursement bank earns a commission per transaction and enjoys float income
from the balance kept with Reimbursement bank by issuing bank. The Reimbursing
Bank dose not involves itself in checking the documentation of the transaction. Its only
role is to either make the payment on the due date or the day on which the Negotiating
Bank demands the same.

Regulatory Requirements
Opening of Import LCs in India involve compliance of the following main regulation:
 Trade Control Requirements
 Exchange Control Requirements
 UCPDC Guidelines
 ISBP2002
 FEDAI Guidelines
 Bank’s Internal Procedures

IMPORTANT TRADE DOCUMENTS

47
Almost every party to international trade issues documents. These documents are very
important in international trade because they serve as evidence that some action has
been carried out.
These documents may be called for under the terms of a documentary credit, or they
may be those, which are required for documentary collection.
The following is a list of documents often used.
 Air Waybill
 Bill of Landing
 Certificate of Origin
 Combined Transport Document
 Draft (or Bill of Exchange)
 Insurance Policy(or Certificate)
 Packing List/Specification
 Inspection Certificate

Air Waybill
This is a receipt of goods from an airline company.
Because an air waybill is only a receipt it is not a document of title, and the goods will
be delivered to the named consignee without further formality once customs clearance
has been obtained.
Under a DC the air waybill is usually consigned to the issuing bank; this is to let the
exporter maintain control over the goods. In the case of non-DC bills when the exporter
wants to retain control of the goods, he will also have them consigned to a bank.
The copy marked “Original 3 (For Shipper)” is the copy that would normally be
presented under a documentary credit.
Bill of Landing (B/L)
This is a receipt given by the shipping company to the shipper for goods accepted for
carriage by sea. If in negotiable form it also convey title to the goods, and the goods will
only be released by the shipping company at destination against surrender of a signed
original of the bill of landing. It is also evidence for possible insurance claim.
It is usually issued in a set of 2 or 3 originals; presentation of 1 original is sufficient to
take possession of goods at port of discharge-so, a bank which finances a trade
transaction will need to control the complete set. When an original bill of landing is
submitted for delivery of goods, the remaining originals become null and void.
The bill of landing must be signed by the shipping company or its agent, and must show
how many signed originals were issued.

Certificate of Origin

48
This is a declaration that goods originated in a particular country.
It is always signed (may be signature of selling company official, or of a Chamber of
Commerce or other trade organization, or official of importing country specified in DC).
The certificate must provide the information required by the credit and be consistent
with all other document. It would normally include:

 The company name and address as consignor. Some countries may also require
the name and address of the manufacture if different.
 The party to whom the goods are addressed, usually the buyer or the issuing
bank
 Country of origin of the goods.
 Optional field which, if completed, must show the details on the transport
document.
 Package numbers, shipping marks and description of goods to agree with that on
other documents.
 Any weights or measurements must agree with those shown on other
documents.
 It must be stamped by the Chamber of Commerce.
Combined Transport Document
This lists the place of receipt, place of delivery and the different modes of transport
involved. It is also known as Multimodal Transport Document, inter-modal. Transport
Document or Combined Transport Bill of Landing.
The contract of carriage is for a combined transport from the place of receipt to the
place of delivery. Therefore, it evidences receipt of goods and not shipment on board. It
does evidence on board shipment if it complies with ICC 500 Art 26 (a).
The liability of the combined Transport Operator Starts at the place of receipt and ends
at the place of receipt and ends at the place of delivery.
The document should be signed, and should show the number of original in the full set
and evidence that transport charges have been paid or prepaid or payable at
destination.
Commercial Invoice
This is a statement of goods shipped, and is also a statement of payment due. It
describes the goods shipped and lists the price together with details as agreed between
the buyer and the seller.
In documentary credit transactions it must show the description of the goods
corresponding with the DC. Commercial Invoice must include the description of the
goods exactly as stated in the documentary credit.
Insurance Policy/ Certificate
The date on which the insurance becomes effective must be the same as or earlier than
the date of issuance of the transport documents.
If submitted under a DC, the insured amount must be in the same currency as the
credit, and usually for the bill amount plus 10 percent.

Insurance Policy

49
This provides actionable evidence of a contract of insurance and shows full details of
risks covered.
The right to claim from insures maybe assigned by the insured to someone else, usually
the overseas buyer or a bank, by endorsement and delivery.
Insurance Certificate
This provides evidence that cover has been taken out under an “open policy” but is not
actionable, and only gives brief details of risks covered.
Packing List/Specification
This lists contents of each crate, parcel etc. showing packing used and shipping marks
placed on the outside, some include measurements and weight of goods. The packing
list must:
 Have a description of the goods (“A”) consistent with the other documents.
 Have details of shipping marks (“B”) and number consistent with other
documents.

Inspection Certificate
In various cases the importer requests/requires the consignment to be inspected by a
third party at the port of shipment/exporter’s factory or warehouse before the goods are
sales and transported. This requirement is often incorporated into the terms and
conditions of the Letter of Credit. Thus the exporter needs to submit a valid Inspection
Certificate along with the other trade documents like Invoice, Packing List, Shipping Bill,
Bill of landing etc. to the bank for Negotiation.
Various internationally reputed Inspection agencies provide the inspection services for a
nominal charge, thus building in an element of comfort in the International transaction
by assuring the importer/buyer that goods being shipped are as per the standards agree
upon between the importer and exporter.

50
51
 IMPORTANCE OF TRADE FINANCE
Trade Finance is a specific topic within the financial services industry. It’s much
different, for example, than commercial lending, mortgage lending or insurance. A
product is sold and shipped overseas, therefore, it takes longer to get paid. Extra time
and energy is required overseas, therefore, it takes longer to get paid. Extra time and
energy is required to make sure that buyers are reliable and creditworthy.
In addition, foreign buyer- just like domestic buyer-prefer to delay payment until they
receive and resell the goods. Due diligence and careful financial management can
mean the differences between profit and loss on each transaction
Trade finance provides alternative solutions that balance risk and payment. In this
overview, we’ll outline the two broad categories to trade finance:
 Pre-shipment financing to produce or purchase the material and labor
necessary to fulfil the sales order.
 Post-shipment financing in order to generate immediate cash while offering
payment terms to buyers.

GENERAL CONSIDERATIONS
The following factors and considerations apply to financing general:
Financing can make the sale
In some cases, favorable payment terms make a product more competitive. If the
competition offers better terms and has a similar product, a sale can be lost. The
exporter may need financing to produce the goods or to finance other aspects of a sale,
such as promotion and selling cost, engineering modifications, and shipping costs.
Various financing sources are available to exporters, depending on the specifics of the
transaction and the exporter’s overall financing needs.
Financing Costs
The costs of borrowing including interest rates, insurance and fees will vary. The total
cost and its effect on the price of the product and profit from the transaction should be
well understood before a pro forma invoice is submitted to the buyer.
Financing Terms
Costs increase with the length of terms. Different methods of financing are available for
short, medium, and long terms. Exporter need to be fully aware of financing limitations
so that they secure the right solution with the most favorable terms for seller and buyer.
Risk Management
The greater the risks associated with the transaction, the greater the cost. The
creditworthiness of the buyer directly affects the probability of payment to an exporter,
but it is not the only factor of concern to a potential lender. The political and economic
stability of the buyer’s country are also taken into consideration.
Banks/lenders are generally concerned with two Questions:
 Can the exporter perform? They want to know that the exporter can produce
and ship the product on time, and that the product will be accepted by the
buyer.
 Can the buyer pay? They want to know that the buyer is reliable with a good
credit history. They will evaluate any commercial or political risk.

52
If a lender is uncertain about the exporter’s ability to perform, or if additional credit
capacity is needed, government guarantee programs are available that may enable the
lender to provide additional financing.
IMPORTER AND EXPORTER?
Though the pre-shipment and post-shipment finance option offered to importer and
exporter are fundamentally similar, their perspectives might be different.
Export Trade Finance
Exporters, using pre and/or post shipment finance, may improve their cash flow by
utilizing trade finance to fund their purchase and/or manufacture of goods pending
receipt of payment from their buyer. An exporter is also able to offer advantageous
credit terms to buyer as the repayment is usually made after the goods are sold.
Import Trade Finance
Importer may use pre and post shipment finance to improve their cash flow.
Post shipment trade finance can allow time for goods to be sold prior to payment being
made. It also enables importers to offer payment at a sight basis to the supplier, rather
than utilizing supplier terms. This provides an importer with a negotiating advantage in
realizing a potentially lower price.
Pre shipment trade finance enables an importer to pay for goods prior to shipment,
when the method of payment agreed upon with the exporter is ‘pre-payment by Clean
Remittance’.

53
 PRE-SHIPMENT TRADE FINANCE
Pre-shipment finance is credit granted to the exporter by a financial institution. Pre-
shipment credit is part of working capital finance. The main objective behind pre-
shipment finance is to enable exporter to:
 Procure raw materials
 Carry out manufacturing processes
 Provide a secure warehouse for goods and raw materials
 Process and pack the goods
 Ship the goods to the buyers
 Meet other financial costs of the business

TYPES OF PRE-SHIPMENT FINANCE

 Packing Credit
 Advances against receivables from government, like duty drawback etc.
 Advance against cheques/drafts etc., representing Advance Payment.
Pre-shipment finance is extended in the following forms:
 Packing Credit in Rupee.
 Packing Credit in Foreign Currency(PCFC)

REQUIREMENTS FOR GETTING PACKING CREDIT

This facility is provided to an exporter who satisfies the following criteria:

 Exporter should have a ten-digit importer-exporter code number allotted by
DGFT.
 Exporter should not be in the caution list of RBI.
 If the goods to be exported are not under OGL (open general license), the
exporter should have the required License/quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of following
evidences to the bank:
1. Formal application for releasing the packing credit with undertaking to the effect
that the exporter would ship the goods within stipulated due date and submit the
relevant shipping documents to the bank within prescribed time limit.
2. Firm order or irrevocable L/C or original Cable/Fax/telex message exchanged
between the exporter and buyer.
3. License issued by DGFT if the goods to be exporter fall under the restricted or
canalized category. If the item falls under quota allotment proof needs to be
submitted.
The confirmed order received from the overseas buyer should reveal the information
about the full name and address of the overseas buyer should reveal the information
about the full name and address of the overseas buyer, description, quantity and value
of goods (FOB or CIF), destination and last date of payment.
Eligibility
Pre-shipment credit is granted to an exporter who has the export order or LC in his own
name. The exporter is the person or company who actually delivers the goods to the
importer/buyer.

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However as an exception, financial institutions can also grant credit to a third party
manufacturer or supplier of goods who does not have export orders or LCs in their own
name, but some of the responsibilities of meeting the export requirements have been
out sourced to them, by the main exporter.
In case where the export order is divided between more than one exporter, pre-
shipment credit can be shared between them.
Quantum of Finance
There is no fixed formula to determine the quantum of finance that is granted to an
exporter against a specific order/LC or an expected order. The only guiding principle is
the concept of Need-Based Finance. Banks determine the percentage of Margin,
depending on factors such as:
 The nature of order.
 The nature of the commodity.
 The capacity of exporter to bring in the requisite contribution.

DIFFERENT STAGES OF PRE SHIPMENT FINANCE

Appraisal and sanction of limits

1. Pre-shipment finance, or packing Credit, is essential a working capital advance
made available for the specific purpose of procuring /processing/manufacturing
of goods meant for export. All costs before shipment would be eligible for being
financed under the packing credit. Packing Credit advance should be liquidated
from exporter proceeds only.
While considering Credit facilities for export activities, banks look specifically look
into the aspects of product profile, country profile and the commodity profile. The
bank also looks into the status report of the prospective buyer, with whom the
exporter proposes to do business. In order to get the status report on foreign
buyer, services of institutions like ECGC or International consulting agencies like
Dun and Brad steer etc. may be utilized.
Disbursement of Packing Credit Advance
2. After proper sanctioning of the limits, the bank ensures that the exporter has
executed proper documents. On the basis of these documents, disbursements
are normally allowed.
There are special types of exporter activities that may be seasonal in nature, in
which the exporter may not be able to produce the export order at time of availing
Packing Credit.
In these cases, the bank may provide a special packing credit facility, known as
Running Account Packing Credit.
Follow up of Packing Credit Advance
3. Exporter needs to submit stock statement reporting the stocks, which are under
pledge or hypothecation to the bank for securing the Packing Credit Advance.
The bank decides frequency of the submission of the stock statements at the
time of sanctioning the packing credit.

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Liquidation of Packing Credit
4. Packing Credit Advance will always be liquidated with exporter proceeds of the
relevant shipment. At this stage, the pre-shipment credit will be converted into
post-shipment credit.
Packing Credit Advance can also be liquidated with proceeds of payment
receivable from Government of India. This payment includes the duty drawback,
payment from the Market Development Fund (MDF) of the Central Government
or from any other relevant source.
For any reasons, if the export does not take place at all, the entire advance is
recovered at commercial interest rate plus a penal rate as decided by the bank.
Overdue Packing
5. If the borrower fails to liquidate the Packing Credit on the due date/extended due
date, the bank considers it an overdue.
In case the overdue position persists, the bank takes steps to realize its dues as
per usual recovery procedures. Nursing programme may be initiated, if found
feasible.

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 POST-SHIPMENT TRADE FINANCE
Post-shipment finance is a loan, advance or any other credit provided by an institution
to an exporter of goods from India. This finance is granted from the date of extending
the credit after shipment of the goods the realization date of export proceeds.
FEATURES
The features of post shipment finance are:
 Purpose of finance
Post-Shipment Finance is meant to finance export sales receivables after the
date of shipment of goods to the of realization of exports proceeds. In case of
deemed exports, it is extended to finance the receivables against supplies made
to designated agencies.
 Basis of finance
Post-shipment finance is provided against evidence of shipment of goods or
supplies made to the importer or any other designate agency.
 Form of finance
Post-shipment finance can be secured or unsecured. Since the finance is
extended against evidence of export shipment and banks obtain the documents
of title of goods, the finance is normally self-liquidating. In case that involve
advances against undrawn balance, it is unsecured in nature.
Further, the finance is mostly a funded advance. In few cases, such as financing
of project exports, the issue of Guarantees is involved, the financing is non-
funded in nature.
 Quantum of finance
Post-shipment finance can be extended up to 100% of the value of goods.
However, where the domestic value of the goods exceeds the value of the export
order or the invoice value, finance for the price difference can also be extended if
such a price difference is covered by receivables from the government. This form
of finance is not extended at the pre-shipment stage.
Banks can also finance undrawn balances. In such cases bank are free to
stipulate margin requirements as pre their usual lending norms.
 Period of finance
Post-shipment finance can be short term or long term, depending on the payment
terms offered by the exporter to the overseas buyer. In case of cash exports, the
maximum period allowed for realization of exports proceeds is six months from
the date of shipment. Bank can extend post-shipment finance at lower rate up to
normal transit period/notional due date, subject to a maximum of 180 days.
In case of deferred payment exports, requiring prior approval of the Authorized
dealer, RBI or Exim Bank, post-shipment finance can be extended at non-
concessional rates up to the approved period.

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FINANCING FOR VARIOUS TYPES OF EXPORTS
Post-shipment finance can be provided for three types of exports:
 Physical export
In case of physical exports, post-shipment finance is provided to the actual
exporter or to the exporter in whose name the trade documents are transferred.
 Deemed export
in case of deemed exports, finance is forwarded to the supplier of the goods are
supplied to the designated agencies.
 Capital goods and project exports
In case of exports of Capital goods and project exports, finance is sometimes
extended in the name of overseas buyer. The disbursal of money is directly made
to the domestic exporter.
BUYER’S CREDIT
As seen in the case Capital goods and project exports, credit is sometimes extended
directly to the foreign buyer.
Buyer’s Credit is a financial arrangement whereby a financial institution in the exporting
country, or another country, extends a loan directly or indirectly to a foreign buyer to
finance the purchase of goods and services from the exporting country. This
arrangement enables the buyer to make payments due to the supplier under the
contract.
SUPPLIER’S CREDIT
Finance extended by supplier to buyer in their own name is referred to as Supplier’s
Credit.
Hence, Supplier’s Credit is a financing arrangement under which an exporter extends
credit to the buyer in the importing country to finance the buyer’s purchases.
FORFAITING AND FACTORING
Forfaiting and factoring are similar services that serve to provide better cash flows and
risk mitigation to the seller. It may be mentioned that factoring is for short-term
receivables (under 90 days) and is more related to receivables against commodity
sales. Forfaiting can be for receivables against which payments are due over a longer
term, over 90 days and even up to 5 years. The difference in the risk profiles of the
receivables is the fundamental difference between factoring and forfaiting, which has
implications for the cost of services.
Both factoring and forfeiting are like discounting, but bill discounting is more domestic-
related and usually falls within the working capital limit set the bank for the customer.

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FORFATING
Forfeiting is a mechanism of financing exports:
 By discounting export receivables.
 Evidenced by bills of exchange or promissory notes.
 Without recourse to the seller (such as the exporter.)
 Carrying medium to long-term maturities.
 On a fixed rate basis (discount).
 Up to 100% of the contract value.
In a forfeiting transaction, the exporter surrenders his rights to claim for payment on
goods delivered to an importer, in return for immediate cash payment from a forfeiter. As
a result, an exporter can convert a credit sale into a cash sale, with no recourse either
to him or his banker.
Process details
1. Exporter initiates negotiations with prospective overseas buyer, finalizes the
contract and opens an LC through his Bank.
2. Exporter Ships the goods as per the schedule agreed with the buyer.
3. The exporter draws a series of bills of exchange and sends them along with the
shipping documents, to his banker for presentation to importer for acceptance
through latter’s bank. Bank returns avalised and accepted bills of exchange to his
client (the exporter).
4. Exporter informs the Importers bank about assignment of proceeds of
transaction to the Forfaiting bank.
5. Exporter endorses avalised Bill of Exchange (BOE) with the words “Without
recourse” and forwards them to the Forfaiting Agency (FA) through his bank.
6. The FA effects payments of discounted value after verifying the Aval’s signature
and other particulars.
7. Exporter’s Bank credits Exporter’s a/c.
8. On maturity of BOE/Promissory notes, the Forfaiting Agency presents the
instruments to the Aval (Importer’s Bank) for payment.
DOCUMENTARY REQUIREMENT
In case of Indian exporters availing Forfaiting facility, the forfaiting transaction is to be
reflected in the following three documents associated with an export transaction, in the
manner suggested below:
Invoice: Forfaiting discount, commitment fees, etc. need not be shown separately,
instead, these could be built into the FOB price, stated on the invoice.
Shipping Bill and GR form: Details of the forfaiting costs are to be included along with
the other details, such as FOB price, commission insurance, normally included in the
“Analysis of Export value” on the shipping Bill. The claim for duty drawback if any is to
be certified only with reference to the FOB value of the exports stated on the shipping
bill.

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FACTORING
Factoring is a continuing arrangement between a financial institution (the factor) and a
business concern (the client), selling goods or services to trade customers. The factor
purchase the client’s book debts (account receivables) either with without recourse to
the client.
The purchase of book debt or receivables in central to the functioning of factoring. The
supplier submits invoice arising from contracts of sale of goods to the Factor.
The factor performs at least two of the following services:
 Financing for the seller, by way of advance payments.
 Maintenance of accounts relating to the account receivables
 Collection of account receivables.
 Credit protection against default in payment by the buyer.
The buyer is informed in writing that all payment of receivables should be made to the
Factor.

DIFFERENT MODELS OF FACTORING

Export Factoring can be done based on two distinct models:
Two –factor system
Direct factoring
1. A two –factor system
It essentially invoice an export factor in the country of the seller (exporter) and its
correspondent factor (import factor) in the country of the debtor (importer). The
correspondent factor typically performs a mutually agreed set of services for the export
factor. It could be any one or both the below mentioned services:
A. Credit Guarantee Protection: the import factor undertakes to pay the export
factor in the event the importer fails to pay by a specified period after due date.
The import factor sets up limits on buyers present in that country and the export
factor discounts invoices for its customers based on these limits. The credit
guarantee protection covers insolvency/ protracted default of buyer. However it
does not cover trade disputes.
B. Collection Services: the import factor undertakes to the follow up with debtors
for payment and in cases where payment is not forthcoming they would be in a
position to detect early indications as they would be based in the same location
and would be familiar with local business intelligence as well as practices.
The factoring quotes given by various import factors would differ depending on
their location and comfort regarding the overseas buyer. In this situation, the
export factor would need to monitor its correspondent relations with various
import factor across the globe.
Also, the possibility of under any factoring business by the export factor would be
depend on the response of the import factors for each transaction.

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 2. Direct Factoring with credit insurance and tie up with a global collection
agency :
Factoring can also be offered by availing credit insurance for the entire factoring
portfolio Credit insurance will cover insolvency/protracted default by the buyer as well as
country risk but would not cover trade disputes. The credit insurer will set up limits on
overseas buyer and based on these limits export bills would be discounted.
Thereafter, details of the invoice would be passed on to the collection agency that will
follow up for payment with the overseas buyer, incase the overseas buyer does not
respond, the collection agent can monitor potential default cases, so that credit insurer
can be informed in advance.
Using services of a collection agency could reduce significantly the delay and to some
extent the uncertainty in payments from overseas buyers.
Process Details
For the factoring operations, the pre-requisite is the establishment of a factoring
relation-ship between the client and the factor. On the basis of credit evaluation, the
factor fixes limits for individual customers of the client indicating the extent to which, and
the period for which the Factor is prepared to accept the client’s receivables for such
customers.
1. The client (seller) sells the goods to the customer (buyer) and invoices him in the
usual way- inscribing a notification to the effect that the debt due on the invoice is
assigned to and must be paid to the Factor.
2. The client offers the assigned invoices to the Factor under cover of a schedule of
offer accompanied by copies of invoices and receipted delivery challans.
3. The Factor provides immediate prepayment up to 80% of the value of the
assigned invoices and notifies the customer sending a statement of account.
4. Factor follows up with the customer and sends him the statement.
5. The Customer makes the payment to the Factors.
6. When the customer makes the payment for the invoice, the Factor will pay the
balance 20% of the invoice value.

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BANK GUARANTEES
Guarantees are given by bank on behalf of its customer regarding specific
performance/obligation by the customer to the other party. The guarantees ensure
payment to the party the bank’s customer is doing business.
Under a bank guarantee/surety bond arrangement, the bank acts as guarantor of a
claim or obligation in lieu of the debtor. The bank cannot be held liable in the event that
the debtor fails to “perform”. The banks obligation is limited to its pledge to pay a
maximum specified amount on fulfillment of the terms of the commitment.
A bank guarantee/surety bond may only be issued if the customer has been granted a
line of credit. In certain cases, the bank may require adequate collateral.
One may note that even though in both Letter of Credit and Bank Guarantee ensure that
the issuing bank guarantee payment, the difference lies in that while LC is a ‘positive
action’ instrument, BG is a non-performance instrument. Hence, payment is released
under LC as and when all the terms of the underlying trade transaction are met.
On the other hand, payment is released under BG if and when the terms of the
underlying transactions are not complied with.
TYPES OF BANK GUARANTEES
DIRECT/INDIRECT GUARANTEE
In principle, there are two types of guarantee:
1. Direct guarantee
A direct guarantee occurs when the client instructs the bank to a guarantee
directly in favor of the beneficiary.
2. Indirect guarantee
With an indirect guarantee, a second bank is involved the second bank usually a
foreign bank with head office in the beneficiary’s country of domicile, is requested
by the initiating bank to issue a guarantee in return for the latter’s counter –
liability and counter- guarantee.
In this case, the initiating bank will cover the guaranteeing (foreign) bank against
the risk of any losses that it may incur in the event that a claim is made under the
guarantee upon first demand by the guaranteeing bank.

Depending on the purpose of the Guarantees may be classified as under:

1. Tend Bond
This type of bank guarantee is also known as a bid bond. The purpose of a
tender bond is to prevent a company from submitting a tender, winning the
contract and them declining to accept it on the grounds that the deals is no
longer lucrative. Tender bonds offer buyers security against dubious or
unqualified bids. They are often mandatory for public invitations to tender.
2. Performance Bond
This is also known as a performance guarantee. A performance bond/guarantee
provides security for any costs that may be incurred by the bond beneficiary on
non-performance of a contractually agreed service and/or non-performance of a
contractually agreed service and/or non-contractual deadline.

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3. Credit Guarantee
Borrowers are often required to provide collateral for a credit line or a loan. A
third party may also provide collateral. A bank guarantee is one of the options
creditors have to ensure that a loan will be repaid.
4. Payment Guarantee
A payment guarantee, or payment default guarantee, provides security against
default for the goods to be delivered, for example. If the debtor fails to make
payment when due, and the beneficiary has fulfilled his or her contractual
obligations, e.g. goods have been delivered and/or services have been provided
in accordance with the contract, a written declaration to this effect is generally
sufficient to redeem payment from the guaranteeing bank.
This instrument can be used instead of a letter of credit if, for example, the buyer
does not require or demand proof of delivery by means of the usual original
delivery documents.
5. Confirmed Payment Order
This is an irrevocable obligation on the part of the bank to pay a specified sum at
a specified time to the beneficiary (creditor) on behalf of the customer.
6. Advance Payment Guarantee
The advance payment guarantee is intended to bind the supplier to use the
advance payment for the purpose stated in the contract between the buyer and
the supplier. An advance payment provides the supplier with funds to purchase
equipment or components, for example, or to make other preparations
In general, the advance payment guarantee should contain a reduction clause
that automatically reduces the amount in proportion to the value of the (Partial)
delivery(ies). The advance payment guarantee should only become effective
once the advance payment has been received.
7. B/L Letter if Indemnity
This is also called a Letter of Indemnity. Individual bills of landing or the full set
can go missing or be held up in the mail. Carries may be liable for damages if
they deliver the consignment before receiving the original bill of landing.
A bank guarantee in the carrier’s favor for 100-200% of the value of the value of
the goods enables them to deliver the goods to the consignee without
presentation of the original documents.
8. Rental Guarantee
This is a guarantee of payment under a rental contract. The guarantee is either
limited to rental payment only, or includes all payments due under the rental
contract.
9. Credit Card Guarantee
In certain circumstances, credit card companies will not issued a high value
credit cared without a bank guarantee. Such kind of guarantee extended by a
Bank is known as a Credit Card Guarantee.

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CLAIM (GUARANTEE UTILIZATION)
If the beneficiary under the guarantee considers that the supplier has violated the
supplier’s contractual obligations, the former may utilize the guarantee. Claims must be
made during the period of validity and strictly in accordance with the guarantee
conditions.
STANDBY LETTER OF CREDIT
The standby letter of credit comes from the banking legislation of the United States,
which forbids US credit institutions from assuming guarantee obligations vis-à-vis third
parties. To circumvent this rule, the US banks created the standby letter of credit, which
is based on the uniform customs and practice for documentary credits.
SIMILARITIES WITH THE GUARANTEE
Like the guarantee, the standby letter of credit is of an abstract nature, i.e. legally
separated from the underlying transaction. In case of a standby letter of credit, the
documents stipulated in the claim must be submitted within the specified period. These
documents should show that the client (exporter) has not met or insufficiently fulfilled his
or her performance obligations or the debtor has not met a payment on time.
The standby basically fulfils the same purpose as a guarantee it is payable upon first
demand and without objections or defenses on the basis of the underlying transaction. It
is up to the beneficiary to decide whether a standby may be given.
AREA OF APPLICATION
Standby LCs are used in import-export business, primarily with the Americas and
frequently in the Far East as well, or whether the contracting parties decide to use this
legal from as a security instrument.
PURPOSE
To secure any claim by the oblige on the obligor due to non-contractual delivery or
performance by the agreed date or credit repayment on the due date
SPECIAL FEATURES
In contrast to the guarantee, a standby can be confirmed immediately provided the
standby conditions permit.
The standby letters of Credit (LCs) are issued subject to either Uniform customs and
Practices for Documentary Credit (UCPDC) Publication No.500 or International Standby
Practices issued by International Chamber of Commerce.

CO-ACCEPTANCE OF BILLS
Co-acceptance is a means of non-fund based import finance whereby a Bill of
Exchange drawn by an exporter on the importer is co-accepted by a Bank. By co-
accepting the Bill of Exchange, the Bank undertakes to make payment to the exporter
even if the importer fails to make payment on due date. The co-acceptance by the
importer’s banker acts as a guarantee for the exporter for timely receipt of proceeds
from the importer. For the Bank, it is a non-fund based exposure on the importer. It is an
increasingly used form of import

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DOMESTIC TRADE FINANCE
Fundamentally, the trade finance business in the domestic arena is similar to the trade
finance business on an International level. However, since no multi-currency or cross
country transactions occur, hence the regulatory framework is much simpler. The goods
do not require customs clearance and the remittances do not need to be reported to
Forex regulatory bodies. Naturally, export/import licenses are not required and export
quota restrictions do not limit growth.
Also, since both the buyer and seller operate within the same legal and administrative
framework, and are often well known to each other, the level of mutual confidence is
higher.
Modes of transaction in domestic trade within national boundaries are basically similar
to the modes of transaction in International Trade. These include:
 Clean Payment
 Open a/c transaction
 Advance payment
 Documentary Collections
 Delivery against payment
 Delivery against acceptance
 Documentary Credit
It is natural that due to higher degree of confidence enjoyed by the buyer and sellers
within the same regulatory and administrative boundaries, the easier to carry out and
less documentation intensive trade options like clean payment and documentary
collections are used more often.
Most of the trade finance options available in International trade are also available in
domestic trade. These have been touched in detail in the preceding chapters.
However, here we shall discuss some financing options that are specifically more
relevant in domestic trade.
CHANNEL FINANCING
Through Channel Financing, Dealer are able to leverage their relation with reputed
companies in sourcing low cost funds with support from their counterparts. Channel
Financing is a product that extends working capital finance to dealer having business
relationships with large companies in India. This may be in the form of either cash credit
facilities or as a bill discounting line of credit.
 Discounting of trade bills drawn by the reputed supplier and accepted by the
dealer/ distributor.
 Limited overdraft facility to the dealer/distributor for his business dealing with
large corporate.
By providing short term lending to clients utilizing qualified receivables as collateral,
value is added to the client by way of working capital support, reduced accounts
receivables and improved control of the sale/ distribution channels. In addition, payables
discounting serves to add value by improving supplier relationships and enhancing
cash-flow management.

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VENDOR FINANCING
Vendor can leverage their relationship with reputed companies by sourcing low cost bill
discounting line of credit. Vendor financing is a product to extend working capital finance
to vendor having business relationships with large corporate in India. Herein the bank
undertakes to discount bills drawn by the supplier/ vendor and accepted by the
corporate.

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TRADE FINANCE IN KOTAK MAHINDRA BANK

 International – Export
 International – Import
 Bank Guarantee
 Domestic

 International – Exporter

Kotak Mahindra Bank provides a wide range of exporter related services, assisting the
growth of organization into overseas market.
Key Features
 Tailor made solutions to suit all export needs.
 Experienced trade finance team that focuses on client requirements.
 Leverage our global network of correspondent banks.
Pre-Shipment Credit
Kotak offer pre-shipment credit to exporters by way of packing credit, enabling them to
finance operations like purchase/import of raw materials or processing and packing of
export goods. Exporters can avail of this pre-shipment credit either in rupee or foreign
currency.
Post-Shipment Credit
Kotak offer post-shipment credit to exporters, helping them finance export sales
receivable for the time lag between shipment of goods and date of realization of export
proceeds.
Exporters can avail of the following services:
 Negotiation/payment/acceptance of export documents under letter of credit.
 Purchase/discount of export documents under confirmed order/export contracts
etc.
 Advances against export bill sent on collection basis.
 Advances against exports on consignment basis.
 Advances against undrawn balance on exports.
 Advances against approved deemed exports
Exporters can avail of this post-shipment credit either in rupee or foreign currency.

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Bills & Collection
Kotak have a strong, experienced trade finance team that focuses on client trade-
related requirements, whether domestic or international. This team advises and guides
clients on documentation and transactions ensuring:
 Quick turnaround times through smooth document processing.
 Faster payment through constant follow-ups with correspondent banks for timely
recovery of funds.
 Cost effectiveness
 Better reach
 Excellent trade support
 Arrangement of credit reports of overseas parties.
 Specialized advice on international trade related issues as well as technical
issues such as ECM requirements, RBI reporting, new circulars and international
developments
Kotak have developed global network of correspondent banks that enables us to handle
large volume collection portfolios. We offer world-class facilities for handling collection
related to international trade.
It also handles documents where proceeds have been received by the exporter on an
advance payment basis and actual shipment takes place later. In such cases, the
documents need to be accompanied with a Foreign Inward Remittance Certificate
(FIRC) as proof of receipt of the advance payment.

Inward Remittances
We facilitate Foreign Inward Remittance (foreign exchange received by a person in
India through banking channels) and offer convenient modes of operations for quick and
easy disbursement. The facility is extended through arrangement with reputed,
correspondent banks located in most countries around the world.

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  International-Import

Kotak Mahindra Bank provides a comprehensive range of import related services,

helping to cover trading risks.
Key Features
 Tailor made solution suit all import needs
 Experienced trade finance team that focuses on client requirements.
 Leverage our global network of correspondent banks
Letter of Credit
We offer our customers import financing services through Letter of Credit (L/C) which
are well accepted globally and supported by strong trade finance setup.
We have correspondent banking arrangements with a large number of banks worldwide
for this service. Our trade team is equipped to structure solutions for a variety of
purchase requirements, ranging from simple L/C is to revolving L/C, bid bonds, standby
L/C and other performance guarantees.
Bill & Collection
We have a strong, experienced trade focuses on client trade-related requirements,
whether domestic or international. This team advises and guide clients on
documentation and transactions ensuring:
 Quick turnaround times through smooth document processing.
 Faster payments through constant follow-ups with correspondent banks for timely
recovery of funds.
 Cost effectiveness
 Better reach
 Excellent trade support
 Arrangement of credit reports of overseas parties
 Specialized advice on international trade issues as well as technical issues such
as ECM requirements, RBI reporting, new circulars and international
developments.
We have developed a global network of correspondent bank that enables us to handle
large volume collection portfolios. We offer world-class facilities for handling collection
related to international trade.

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Outward Remittances
Services in this area include:
 Payment of direct Import Bills: Processing and remittances for import Bill directly
received by importers in India.
 Advance payment toward import: Processing and remittances toward advance
payment for imports.
 Other outward remittances like divided payout, ECB payment, royalty, shipping
etc.

 Bank Guarantee

Kotak offer a wide spectrum of guarantee that address varying client requirements and
risk profiles. These include performance and financial guarantees, bid bond, tender and
customs guarantees, etc.
Key Features
 Experienced trade finance team that focuses on client requirements.
 Reduce risks.

 Domestic
Key Features
 Extensive range of trade –related services.
 Experienced trade finance team that focuses on client requirements.
 Tailor made solution to suit all trading needs.
Bill Discounting
Kotak experienced and dedicated trade finance team is focused on structuring bill
discounting products to meet customer needs- be it short term or medium term finance.
In fact, our services go beyond plan bill discounting to encompass a complete range of
supply chain management solutions. We aim at increasing the efficiency of the entire
cycle, ensuring that transactions are executed speedily and effectively. We will soon
offer integrated supply chain services on an electronic platform.
Invoice Discounting
Invoice discounting entails “discounting” an accepted invoice bill for the sale of goods to
provide working capital. We offer our clients the dual advantage of simple
documentation and absence of collateral requirements. Finance is extended either by
crediting the current account of the supplier or by issuing a pay order.
Purchase Order Financing
Purchase order financing is an innovative program where we offer flexible finance to
supply chain partners of corporates. This involves "discounting" a contract/ purchase
order to help finance the manufacturing cycle for goods ordered by the corporate. This
service is particularly useful for vendors with seasonal increases in working capital
requirements.
Highlights
 Service extended to key vendors identified by the corporate.
 Pre-shipment loan against Purchase Order from corporate.
 Corporate pays the bank directly for all supplies by the vendor
Maximum tenure is currently 45 days.

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Statistical Analysis

In this segment I will show my findings in the form of graphs and charts. All
the data which I got form the market will not be disclosed over here but extract of that in
the form of information will definitely be here
Detail:

Area: Ludhiana

Type of Data: 1. Primary 2. Secondary

Respondent: Customers

Industry: Banking

Methodology:
Methodology is the systematic method or an activity, which is used to
collect the information required to complete this project work. The data is collected by 2
methods:
1. Primary data

2. Secondary data

Primary data
Is collected through personal interaction with customers of kotak Mahindra bank and
office staff.

Secondary data
This is secondary in nature i.e. already, collected information. This secondary data is collected through:

 Internet
 Books

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72
 ANALYSIS AND INTERPRETATION

1). People know about kotak Mahindra Bank

Sr no. Attributes No of respondent percentage

1 Yes 80 80%
2 No 20 20%
100 100

Interpretation
The banks are very interested to know that how much people know about the bank.
From the study we can see that the 80% people know about bank and 20% of people
do not know about the bank.

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2). Rank the kotak Mahindra bank on following Features:-
Rank 1 for best and 5 for worse

Sr no. Attributes No of respondent percentage

1 Rank 1 15 15%
2 Rank 2 38 38%
3 Rank 3 28 28%
4 Rank 4 16 16%
5 Rank 5 3 3%
Total 100 100

Interpretation
It is clear that out of 100 respondent 15% of respondent rank the bank at 1 st rank, 38%
respondents rank the bank at 2nd rank, 28% of respondent rank the bank at 3 nd rank,
16% respondents rank the bank at 4nd rank, 3% respondents rank the bank at 5nd rank.

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3). People would like to be a customer of kotak Mahindra bank because:

Sr no. Attributes No of respondent percentage

1 Customer Services 29 29%
2 Efficient Services 39 39%
3 securities 8 8%
4 Brand Name 21 21%
5 Advertisement 3 3%
Total 100 100

Interpretation
People want to be the customer of bank because of various regions 29% of customer
like customer services of bank and 39% of customer like efficient service of bank, 8% of
customer like securities of bank, 21% of people like to be a customer of bank because
of brand name and only 3% of people like to be a customer of bank because of
advertisement.

4). kotak Mahindra Bank is a safe place for money processing or trade transaction:-

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Sr no. Attributes No of respondent percentage
1 Yes 85 85%
2 No 15 15%
Total 100 100

Interpretation
Bank want to know that is Bank is a safe place for money processing or trade
transaction so, result is that 85% of people think that kotak Mahindra bank is a safe
place for money processing or trade transaction and 15% of people think that kotak
Mahindra bank is a safe place for money processing or trade transaction.

5). Investment Preference:-

Sr no. Attributes No of respondent percentage

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1 Fixed Deposits 33 33%
2 Real estate 21 21%
3 Insurance 27 27%
4 Mutual Funds 9 9%
5 Gold 10 10%
Total 100 100

Interpretation
It is clear that out of 100 respondent 33% of customers invest in fixed deposits, 21% of
customers invest in real estate, 27% of customers invest in insurance, 9% of customers
invest in mutual funds and 10% of customers invest in gold.

6).Time Duration with Bank:-

Sr no. Attributes No of respondent percentage

1 -6 months 3 3%

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2 6 months to 1 year 30 30%
3 1 year to 2 year 50 50%
4 Above 2 year 17 17%
Total 100 100

Interpretation
It is clear that out of 100 respondents 3% of customer knows bank from less than 6
months, 30% of customer knows bank from 6 months to 1 year, 50% of customer knows
bank from 1 year to 2 year and 17% of customer knows bank from above 2 years.

7). Most frequent way to interaction with bank:-

Sr no. Attributes No of respondent percentage

1 Visit Branch 42 42%

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2 Internet 22 22%
3 Phone 36 36%
Total 100 100

Interpretation
Bank wants know that what is the frequent way to interaction with bank. Out of 100
respondents 42% of customer visit branch to interact with bank, 22% of customer use
internet to interact with bank, 36% of customer use phone to interact with bank.

8). Satisfaction level with bank:-

Sr no. Attributes No of respondent percentage

1 Very satisfy 14 14%

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2 Some what satisfy 36 36%
3 Neither satisfy nor 10 10%
dissatisfy
4 Some what 6 6%
dissatisfy
5 Very dissatisfy 0 0%
Total 100 100

Interpretation
Bank wants to know the satisfaction level of customer with bank. Out of 100
respondents 14% of customers are very satisfy with bank, 36% of customers are some
what satisfy with bank, 10% of customers are neither satisfy nor dissatisfy with bank,
6% of customers are some what dissatisfy with bank and 0% of customers are very
dissatisfy with bank.

9). Satisfaction level with staff:-

Sr no. Attributes No of respondent percentage

1 Very satisfy 15 15%
2 Some what satisfy 33 33%

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3 Neither satisfy nor 10 10%
dissatisfy
4 Some what 4 4%
dissatisfy
5 Very dissatisfy 0 0%
Total 100 100

Interpretation
Bank wants to know the satisfaction level of customer with staff. Out of 100 respondents
15% of customers are very satisfy with staff, 33% of customers are some what satisfy
with staff, 10% of customers are neither satisfy nor dissatisfy with staff, 4% of customers
are some what dissatisfy with staff and 0% of customers are very dissatisfy with staff.

10). Private bank provide superior services as compare to govt.:

Sr no. Attributes No of respondent percentage

1 Yes 79 79%
2 No 21 21%
100 100

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Interpretation
In this graph it is clear that out of 100 respondents 79% of customers thinks that Private
bank provide superior services as compare to government and 21% of customers thinks
that Private bank do not provide superior services as compare to government.

11). If you have option against Kotak you will go for:-

Sr no. Attributes No of respondent percentage

1 ICICI 39 39%
2 HDFC 27 27%
3 Axis 16 16%

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4 PNB 9 9%
5 SBI 9 9%
Total 100 100

Interpretation
In this graph it is clear that out of 100 respondents 39% of people choose ICICI against
kotak Mahindra bank, 27% of people choose HDFC against kotak Mahindra bank, 16%
of people choose Axis against kotak Mahindra bank, 9% of people choose PNB against
kotak Mahindra bank and 9% of people choose SBI against kotak Mahindra bank.

12). You would not like to be a customer of Bank because:-

Sr no. Attributes No of respondent percentage

1 Bad employee 35 35%
response
2 Bad customer 42 42%

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 services
3 Lack of 16 16%
transparency
4 Lack securities 7 7%
Total 100 100

Interpretation
Bank wants to know that why people not like to be a customer of Bank. Out of 100
respondents 35% people not like to be a customer of Bank because of Bad employee
response 42% people not like to be a customer of Bank because of Bad customer
services, 16% people not like to be a customer of Bank because of lack of transparency,
7% people not like to be a customer of Bank because of lack of securities.

Questioner

NAME - ______________________________________________

ADDRESS - ______________________________________________

____________________________________________________________

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AGE - (A) Below 25 (C) 40 to 55
(B) 25 to 40 (D) above 55

Do you know about kotak Mahindra bank:-

(A) Yes (B) No

IF YES THEN:

Rank the kotak Mahindra bank on following Features:-rank 1 for best and 5 for worse
(A) Rank 1 (D) Rank 4
(B) Rank 2 (E) Rank 5
(C) Rank 3

You would like to be a customer of kotak Mahindra bank because:

(A) Customer Services (D) Brand Name
(B) Efficient Services (E) Advertisement
(C) Security

Do you think kotak Mahindra Bank is a safe place for money processing or trade
transaction:-
(A) Yes (B) No

Your Investment Preference:-

(A) Fixed Deposits (D) Mutual Funds
(B) Real Estate (E) Gold
(C) Insurance

Time Duration with Bank:-

(A) Less then 6 months (C) 1year to 2 year

(B) 6 months to 1 year (D) Over 2 year

Most frequent way to interaction with bank:-

(A) Visit Branch (C) Phone
(B) Internet

Satisfaction level with bank :-

(A) Very satisfy (C) Some what satisfied
(B) Some what satisfy (D) very dissatisfy
(C) Neither satisfy nor Dissatisfy

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Satisfaction level with staff:-
(A) Very satisfy (C) Some what satisfied
(B) Some what satisfy (D) very dissatisfy
(D) Neither satisfy nor Dissatisfy

Private bank provide superior services as compare to govt.:-

(A) Yes (B) No

If you have option against Kotak you will go for:-

(A) ICICI (D) PNB
(B) HDFC (E) SBI
(C) Axis

You would not like to be a customer of Bank because:-

(A) Bad employee Response (C) lack of transparency
(B) Bad customer services (D) lack of securities

Conclusion

 Kotak have a strong, experienced trade finance team that focuses on client trade-
related requirements, whether domestic or international. This team advises and
guides clients on documentation and transactions

 Kotak Mahindra Bank provides a wide range of exporter related services like Pre-
Shipment Credit, Post-Shipment Credit, and Inward Remittances.

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 Kotak Mahindra Bank provides a wide range of exporter related services like Letter
of Credit, Bill & Collection, Outward Remittances

 Kotak offer a wide spectrum of guarantee that address varying client requirements
and risk profiles. These include performance and financial guarantees, bid bond,
tender and customs guarantees, etc.

 Kotak offers wide range of domestic trade related services like Bill Discounting,
Invoice Discounting, and Purchase Order Financing.

 Traders are aware about the risk involved in commodity features contract.

 Kotak Mahindra Bank is a leading Bank in the country, it provides a verity of product
and services to different segment of customers.

Findings

 Most people find kotak Mahindra Bank is a safe place for money processing.

 Because of efficient services people want to be a customer of kotak Mahindra bank.

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 Most of the customers find frequent way to interact with bank with Visiting Branch.
Bank is trying to make the customer’s first preference of interaction with bank are
internet and phone.

 Majority of people not like to be a customer of Bank because of Bad customer

services.

 Main competitor of kotak Mahindra bank is ICICI bank.

Limitation
 Due to time constraint, only limited numbers of respondents were taken.

 Some time it was difficult to obtain data and some times wrong information or
incomplete was provided by respondents which had to be cross checked and
verified.

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 Error during calculation and tabulation may arise.

 Due to cost and human element is involved, project area was limited.

 As per knowledge data was collected and analyzed, error may be there. Generally
the respondents were busy in their work and were not interested in responding out
rightly.

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 BIBILOGRAPHY

 REFERENCE TO A BOOK

 Finance and Banking Institute India, practitioner’s book on trade finance, 2010,
New Delhi

 WEB PAGES

 www.google.com

 en.wikipedia.org/wiki/Kotak_Mahindra_Bank

 www.kotak.com

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