INTERNATIONAL

TRADE
Andrea Mathias
Kishore Patil
Nehal Ukani
Reiner DCosta
Shruti Hosur
Shruti Shetty
Sushil Kaushik
GROUP MEMBERS
PRESENTATION FLOW
Introduction to International Trade
Methods of Payment
Pre-Shipment Finance
Post-Shipment Finance
Letter of Credit


Open Account
Documentary Collections
Comparisons of the three
Factoring
Forfaiting

DEFINITION

INTERNATIONAL TRADE
International trade
Flow of Productive
factors
Flow Of Commodity
INTERNATIONAL TRADE
Advantages
Market expansion
Economies of scale
Surplus not wasted
BOP
Global productivity
Socio economic setup of
country

Disadvantages
Annihilation of infant
industry
Exchange rate
fluctuation
Unequal distribution of
wealth




INTERNATIONAL TRADE FINANCE

Trade Finance is the science that
describes the management of money,
banking, credit, investments and assets
for international trade transactions.
FISCAL INCENTIVES TO PROMOTE
EXPORT
Duty Drawback
Tax Concession
Market development assistance
Export promotion of capital goods scheme
Cash compensatory support
Air Freight Subsidiary

EXIM BANK
Project Finance/Trade Finance Group
Corporate banking group
Line Of Credit Group
Small and Medium Enterprise group
Export Services Group
EXIM BANK
METHODS FOR INTERNATIONAL TRADE
FINANCE
According to stage of financing
Pre-shipment finance
Post-shipment finance
METHODS FOR INTERNATIONAL TRADE
FINANCE
Instruments/methods of financing
Letter of credit
Open account
Factoring
Forfaiting
Document collections
Definition:

Financial assistance extended to the exporter from the date
of receipt of the export order till the date of shipment is
known as pre-shipment credit.

Such finance is extended to an exporter for the
purpose of procuring raw materials, processing,
packing, transporting, warehousing of goods
meant for exports.

Maximum period of 180 days

Exporter can obtain 90% of the FOB value of the
order or 75% of the CIF value of the order.

PRE-SHIPMENT FINANCE
o Purchase raw material, and other inputs
o Assemble the goods in the case of
merchant exporters.
o Store the goods in suitable warehouses
till the goods are shipped.
o Packing, marking and labeling of goods.
o Pre-shipment inspection charges.
o Purchase of heavy machinery and other
capital goods
o Consultancy services.
o Export documentation expenses.
IMPORTANCE OF PRE-SHIPMENT
FINANCE
Packing Credit
Packing Credit in Indian Rupee
Packing Credit in Foreign Currency (PCFC)

Advance Against Hypothecation
Advance Against Pledge
Advance Against Red L/C
Advance Against Back-To-Back L/C
Advance Against Exports Through Export Houses
Advance Against Duty Draw Back (DBK)
FORMS OR METHODS OF
PRE-SHIPMENT FINANCE
Available to exporting companies as well as commercial banks
for lending to the former.

Additional window to rupee packing credit scheme available to
cover both the domestic i.e. indigenous & imported inputs.

Can avail pre-shipment credit in rupees & then the post
shipment credit either in rupees or in foreign currency

To avail of pre-shipment credit in foreign currency
discounting/rediscounting of the export bills in foreign currency.

FCPC will also be available both to the supplier EOU/EPZ unit
and the receiver EOU/EPZ unit.
PACKING CREDIT IN FOREIGN
(PCFC)
This facility is provided to an exporter who satisfies the
following criteria:
A ten digit Importer - Exporter Code ( IE Code )
number allotted by DGFT.

Exporter should not be in the caution list of RBI.

If the goods to be exported are not under OGL (Open
General License), the exporter should have the required
license /quota permit to export the goods.

REQUIREMENTS FOR GETTING
PACKING CREDIT
Appraisal and Sanction of Limits

Disbursement of Packing Credit Advance

Follow up of Packing Credit Advance

Liquidation of Packing Credit Advance

Overdue Packing
DIFFERENT STAGES OF PACKING
CREDIT
Government steps in by picking up a part of the interest
burden

Interest subvention of 2 per cent on the pre-shipment credit
for seven employment-oriented export sector
Textiles including handlooms
Handicrafts
Carpets
Leather
Gems & Jewellery
Marine products
Small & Medium exporters.

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

INTEREST SUBVENTION SCHEME
Definition:
Post Shipment Finance is a kind of loan
provided by a financial institution to an
exporter or seller against a shipment
that has already been made.

Export finance is granted from the date
of extending the credit after shipment of
the goods to the realization date of the
exporter proceeds. Exporters dont wait
for the importer to deposit the funds.
POST SHIPMENT FINANCE
FEATURES
Purpose of Finance

Basic of Finance

Types of Finance

Quantum of Finance

Period of Finance

Export Bills Purchased / Discounted

Export Bills Negotiated

Advance Against
Export Bills Sent On Collection Basis
Export On Consignments Basis
Un-drawn Balance
Claims Of Duty Drawback

TYPES OF POST SHIPMENT
FINANCE

Competitiveness Exporter able to offer credit
terms to buyer

Energized Cash flows Producer receives cash
from export proceeds upfront and can continue
production activities.

Expansion Of Client Base Exporter able to
expand client base due to availability of
financing

BENEFITS TO EXPORTERS
Physical Exports

Deemed Export

Capital Goods And Project Exports
TYPES OF EXPORT BUYERs
CREDIT
Buyer's Credit is a special type of loan that a bank
offers to the buyers for large scale purchasing under
a contract.

Once the bank approved loans to the buyer, the
seller shoulders all or part of the interests incurred
SUPPLIERs CREDIT
Definition:
A formal document issued by a bank on behalf of
customer, stating the conditions under which the
bank will honour the commitment of the customer

The letter of credit is also known as
bankers commercial credit or
documentary letter of credit.

L/C used in domestic trade are called
inland L/Cs.


LETTER OF CREDIT
Importer or Applicant

Issuing Bank

Beneficiary

Advising Bank

Negotiating/ The Paying Bank.
PARTIES TO A LETTER OF CREDIT
1. Contract

Seller
(Beneficiary)
Buyer
Applicant
2. Documentary
credit Application
ISSUING
BANK.
3. Documentary credit
Advising Bank
4. Advice of
Documentay
credit
LETTER OF CREDIT THE
PROCESS
Irrevocable L/C

Revocable L/C

Negotiation Credit

Confirmed or
Unconfirmed credit

Revolving credits

Back To Back Credits

Red Clause L/C

Transferable Credits

Travellers L/C

Special Credits
TYPES OF LETTER OF CREDIT
Immediate Payment

Guaranteed Payment

Performance

Safe & Secure Method

Political & Exchange Control risks
reduced.
ADVANTAGES OF LETTER OF
CREDIT
Open Account
Definition:
Open Account is a form of trade whereby sales
are made to the buyer without entering into any
formal contract. The system works on complete
trust between buyer & seller.

An open account transaction means that the
goods are shipped and delivered before
payment is due, usually in 30 to 90 days.
OPEN ACCOUNT
Open Account
Open Account is the most advantageous option
to the importer in cash flow and cost terms.

It is consequently the highest risk option for an
exporter.

Exporters may also wish to seek export working
capital financing to ensure that they have access
to financing for both the production for export
and for any credit while waiting to be paid.
OPEN ACCOUNT
Open account terms may be offered in competitive
markets with the use of one or more of the following
trade finance techniques:
1. Export Working Capital Financing

2. Export Credit Insurance

3. Export Factoring

4. Forfaiting
OPEN ACCOUNT
Pros & Cons
Pros:
Boost competitiveness in the global market.

Establish and maintain a successful trade
relationship.




Cons:
Exposed significantly to the risk of nonpayment

Additional costs associated with risk mitigation
measures.
OPEN ACCOUNT PROS & CONS
Open Account - Process
TARGET
VENDOR
BANK
OPEN ACCOUNT PROCESS
Open Account - Process
TARGET
VENDOR
BANK
Purchase order
OPEN ACCOUNT PROCESS
Open Account - Process
TARGET
VENDOR
BANK
Purchase order
Goods
OPEN ACCOUNT PROCESS
Open Account - Process
TARGET
VENDOR
BANK
Purchase order
Goods
OPEN ACCOUNT PROCESS
Open Account - Process
TARGET
VENDOR
BANK
Purchase order
Goods
OPEN ACCOUNT PROCESS
Process Overview

Remitting Bank Collecting Bank
Importer Exporter
Entrusts
collection of
payment
Sends Documents +
Instructions for
Payment
Draft indicating D/A
or D/P
Payment
Payment
Payment
DOCUMENTARY COLLECTIONS
Documentary Collections
Importer can collect documents by following
payment terms:

A. Document against acceptance (D/A)
Importer pays the face amount on a specified
date in the future. Transfer of title of goods and
documents is done on receipt of payment.

B. Document against payment (D/P)
Importer pays the face amount on sight of
goods. Transfer of title of goods and
documents is done immediately.




DOCUMENTARY COLLECTIONS
Documentary Collections

Advantages:
Documentary collections involve use of drafts which is
less expensive than letter of credit.

Disadvantages:
Although banks act as facilitators, no verification
process is present.

Limited recourse in the event of non-payment.
DOCUMENTARY COLLECTIONS
Definition
Financial transaction whereby a business sells
its accounts receivable to a third party called a
factor (financial institution) at a discount in
exchange for immediate money with which to
finance continued business.

Financial option for the management of
receivables
FACTORING
Customer Client
Factor
(1) Credit Sale
of Goods
(2) Invoice
(3)
Submit
Invoice
Copy
(4)
Payment
upto 80%
initially
(6) Pays
the
balance
(5) Pays the amount
(In recourse type
customer pays
through client)
FLOW CHART OF FACTORING
Factoring Arrangements
FACTORING

Recourse


NonRecourse


Disclosed


Undisclosed

FACTORING ARRANGEMENTS
FACTORING
TWO
FACTOR
SYSTEM

DIRECT
IMPORT &
EXPORT
FACTORING
BACK TO
BACK
FACTORING
TYPES OF FACTORING
Use of two factors, one in each country, dealing with the
exporter and the importer

Importer advances funds to the import factor who then transmits
them to the export factor

System involves three agreements
exporter and the importer
export factor and the exporter
between the factors

Importer
& Import
Factor
Exporter
& Export
Factor
TWO FACTOR SYSTEM
Direct import factoring: Connotes the
situation where the exporter assigns debts
to a factor in the country of the debtor

Direct export factoring: Factor is
appointed in the exporters own country
and deals with all the aspects of the
factoring arrangement including the
provision of financing and the assessment
of the financial position of the importer
DIRECT IMPORT & EXPORT
FACTORING
Back to back factoring: Arrangement most
suitable for debts owed by the exclusive
distributors of products to their suppliers
The exporter enters into a factoring
agreement with the export factor who
contracts with import factor.
Difference is existence of a separate factoring
agreement between the import factor and the
distributor
Right to set off credits arising from the
domestic sales of the distributor with his
debts to the supplier
BACK TO BACK FACTORING
Forfaiting
Definition
Forfaiting is a method of trade finance that allows
exporters to obtain cash by selling their medium term
foreign account receivables at a discount on a
without recourse basis

It virtually eliminates the risk of nonpayment, once
the goods have been delivered to the foreign buyer in
accordance with the terms of sale
FORFAITING
Flow Chart - Forfaiting
FLOW CHART OF FORFAITING
Enables the exporter to offer his customers fixed rate credit
for the purchase of the goods
Forfaiting is quick and simple to arrange; the procedures are
straightforward and the documentation is of standard format
Forfaiting relieves the exporter from the risk of payment
default; financing is made without recourse
Credit-based exports are turned into cash deals, thereby
improving liquidity and keeping bank credit lines open
Currency risk is limited to the period from concluding the
sales contract until the date of discount
100% of contract value can be financed and the origin of the
goods is irrelevant
STRENGTH OF FORFAITING
Eliminates Risk

Enhances Competitive Advantage

Improves Cash Flow

Increases Speed and Simplicity of
Transactions
BENEFITS OF FORFAITING
Factoring is the revolving sale of all or at least a
majority of a companys receivables to a factoring
company. The acceptable tenor of the receivables is
usually maximum 180 days. A few factoring
companies accept also tenors of up to 360 days.

Forfaiting is the single sale/purchase of a single
transaction. The deal itself has to be documented and
assigned properly. The maximum forfaitable tenor
depends on the possibilities of the Forfaiters in the
market i.e. their available country and banklimits.
FACTORING VERSUS FORFAITING