Professional Documents
Culture Documents
ON
SUBMITTED TO SUBMITTED BY
Mrs. Komal Seghal Pankaj
ASSISTANT PROFESSOR B.B.A (5THSEM.)
(Faculty of Management) ROLL NO:- 111615
I Pankaj roll no 111615 class of BBA 5th semester of the BMU hereby declare that the report
“CHALLENGES IN INTERNATIONAL TRADE” is an original work and the same has not
been submitted to any other institute for the award of any other degree. The interim report was
presented to the supervisor on and the pre-admission was made on feasible suggestions have
been duly incorporated in consultation with the supervisor.
Counter Signature
Dr. S.C.Batra
Head of Department
The internship opportunity I had with KOTAK MAHINDRA BANK. Was a great chance for
learning and professional development? Therefore, I consider myself as a very lucky individual
as I was provided with an opportunity to be a part of it. I am also grateful for having a chance to
meet so many wonderful people and professionals who led me though this internship period.
Bearing in mind previous I am using this opportunity to express my deepest gratitude and special
thanks to the BH of [KOTAK MAHINDRA BANK] who despite being extraordinarily busy with
her/his duties, took time out to hear, guide and keep me on the correct path and allowing me to
carry out my project at their esteemed organization and extending during the training.
I express my deepest thanks to MR. MOHINDR KUMAR, [Trade Finance Operations in the
Company] for taking part in useful decision & giving necessary advices and guidance and
arranged all facilities to make life easier. I choose this moment to acknowledge his/her
contribution gratefully.
I perceive as this opportunity as a big milestone in my career development. I will strive to use
gained skills and knowledge in the best possible way, and I will continue to work on their
improvement, to attain desired career objectives. Hope to continue cooperation with all of you in
the future,
Sincerely,
PANKAJ
Place:
Date:
PREFACE
The BBA training of the BABA MASTNATH UNIVERSITY, Asthal Bohar, Rohtak provides
the students an opportunity to have and insight of any large-scale unit so that we get the exposure
to an actual managerial environment of company. I am lucky to have vocational training in a
company like KOTAK MAHINDRA BANK which is one of the “largest trade finance
operations” in India. During this period, I had an overview of the human resource department
within which I could make a detailed study of all the section which comes under the roof of
managing director of KOTAK MAHINDRA BANK . This training will help me to correlate
theoretical knowledge and its practical applications. It was a thrilling experience while studying
working of KOTAK MAHINDRA BANK and understanding it. This programmer has led me to
realize the contribution of KOTAK MAHINDRA BANK to the food production industry of
India. I am grateful to all the employees of KOTAK MAHINDRA BANK for their cooperation
and interest in my project without which it could not have been possible to go ahead with my
project. With due honor, I present this project which consists of a brief study of KOTAK
MAHINDRA BANK.
(PANKAJ)
Table of Contents
i) Certificate
ii) Declaration
iii) Acknowledgement
iv) Preface
Research Methodology
In 1985 Uday Kotak established what became an Indian financial services conglomerate. In
February 2003, Kotak Mahindra Finance Ltd. (KMFL), the Group's flagship company, received a
banking license from the Reserve Bank of India (RBI). With this, KMFL became the first non-
banking finance company in India to be converted into a bank – Kotak Mahindra Bank Limited
(Kmbl).
Kotak Mahindra Bank is an Indian private sector bank headquartered in Mumbai, Maharashtra,
India. In February 2003, Reserve Bank of India (RBI) issued the license to Kotak Mahindra
Finance Ltd., the group's flagship company, to carry on banking business.
It offers a wide range of banking products and financial services for corporate and retail
customers through a variety of delivery channels and specialized subsidiaries in the areas of
personal finance, investment banking, general insurance, life insurance, and wealth
management.
In 2012, Kotak Mahindra Bank implemented the advanced core banking platform Finacle 10
universal solution across 355 bank branches in association with the IT bellwether Infosys.
In 2013, Kotak Mahindra Bank acquires the business loans portfolio of Barclays India -Kotak
Mahindra Bank launches Kotak Presidium.
In 2015, Kotak Mahindra Bank Ltd informed BSE that Reserve Bank of India has approved the
scheme of amalgamation of ING Vysya Bank Limited with Kotak Mahindra Bank Limited.
In 2018, it became the second largest private bank in India by market capitalization after HDFC
Bank.
2. Introduction to Trade Finance
Evolution of Trade Finance: From Maritime Trade to Block-chain Trade Finance, a commercial
activity, has been closely linked to the story of human trade evolution. It has for centuries
influenced economic conditions, public policy, living standards, and degree of financial
inclusion. The role of Trade Finance in trade is very important for us to understand, as the latter
rarely takes place safely and securely without the former. Trade Finance, where financial
institutions provide credit facilities such as short-term finance to guarantee exchange of goods
(domestic and international), involves multiple parties on both sides of the transaction; and
Payments generally through letters of credit (LC), or guarantees. Trade financing could also use
medium-term or long-term loans. It has evolved over the years and as of 2017, according to the
World Trade Organization (WTO), facilitated around 80% of world trade. Innovation over the
years has helped bring efficiency and wider coverage to Trade Finance, and as both buyers and
sellers, push for greater efficiencies, the focus on innovation is likely to further increase in 2018.
The financial sector has seen many innovations through the years. In the 1970’s, a global
financial-messaging network, the Society for Worldwide Interbank Financial Telecommunication
(SWIFT), started out using the telex, and was considered revolutionary. It created the first
global financial messaging service that used a common language for international financial
communication. In the 1980’s, dematerialization of stocks and bonds was introduced, allowing
paperless transactions of securities. In the 1990’s, central counter party clearinghouses helped
reduce risks such as counterparty, settlement, and default risk for traders, and in the first
decade of the twenty-first century, it was the application of trading systems and algorithmic
trading, bringing efficiencies such as speed.
Instruments such as receivable discounting, pre-shipment finance and factoring have in the past
played a crucial role in the growth of international trade. Today, we are again at the cusp of
enormous change with the advent of digital disruption by use of Blockchain, Artificial
intelligence (AI), Machine Learning (ML) and Robotic Process Automation (RPA). Banks are
automating financial and transactional information exchange through pilot projects in smart
contracts. Distributed ledger technologies (DLT) will allow stakeholders to digitally share
accurate and reliable trade information, while smart contracts supported by DLT, will allow
automated execution of payments on meeting pre-defined conditions in the contract. This also
means that reconciliation will no longer be a worry for banks as the ledger is shared and
updated in real time. Blockchain’s application for identity management and know your
customer looks quite promising. Innovation in AI is also moving very fast. It too has enormous
application to solve real problems. It could be used to detect transactions quality, or
opportunity to market cross channels, to ensure banks are utilizing their resources optimally.
3. Trade Finance – The Context
Trade finance relates to the process of financing activities related to commerce and
international trade. Companies involved with trade finance include importers and exporters,
banks and financiers, insurers and export credit agencies, and other service providers
The term "Trade Finance" means, finance for Trade. For any trade transaction there should be a
Seller to sell the goods or services and a Buyer who will buy the goods or use the services.
Various intermediaries such as banks, Financial Institutions facilitate these trade transactions by
financing the trade.
In its simplest form, an exporter requires an importer to prepay for goods shipped. The
importer naturally wants to reduce risk by asking the exporter to document that the goods
have been shipped. The importer’s bank assists by providing 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 to the exporter based on the export
contract.
The main factor in considering how a trader expects to be paid for a transaction is the potential
risk that they and their customer are willing to face between them - hence there are always two
sides to any situation. There are different types of risk that a Trader will face.
The main forms of trade finance include Open account, Advance payment, Documentary
Collection, Letters of credit, Guarantee (Standby letters of credits), Trade Credit Insurance,
Factoring, Forfaiting and Structured Finance.
Payment Risk Ladder: It is often a good idea, during, or even before contract negotiations, to
consider where, on the diagram below, you and your customer will be comfortable in placing
yourselves.
Open Account: This is the least secure method of trading for the exporter, but the most
attractive to buyers. Goods are shipped and documents are remitted directly to the buyer, with
a request for payment at the appropriate time (immediately, or at an agreed future date). An
exporter has little or no control over the process, except for imposing future trading terms and
conditions on the buyer. Clearly, this payment method is the most advantageous for the buyer,
in cash flow and cost terms. Therefore, Open Account trading should only be considered when
an exporter is sufficiently confident that payment will be received. The financial risk can often
be mitigated by obtaining a credit insurance policy to cover the potential insolvency of a
customer that provides reimbursement up to an agreed financial limit.
Advance Payment:The most secure method of trading for exporters and, consequently the
least attractive for buyers. Payment is expected by the exporter, in full, prior to goods being
shipped. As one might imagine, having covered the two extremes on the Payment Risk Ladder,
commercial decisions have to be made and this usually results in selecting one of the middle
rungs of the ladder. This is where banking products such as Bills for Collection and Letters of
Credit come in to play.
Bills for Collection: More secure for an exporter than Open Account trading, as the exporter's
documentation is sent from his bank to the buyer's bank. This invariably occurs after shipment
and contains specific instructions that must be obeyed. Should the buyer fail to comply, the
exporter does, in certain circumstances, retain title to the goods, which may be recoverable.
The buyer's bank will act on instructions provided by the exporter, via their own bank, and
often provides a useful communication route through which disputes are resolved. The Bills for
Collection process is governed by a set of rules, published by the International Chamber of
Commerce (ICC) called "Uniform Rules for Collections" document number 522 (URC522). Over
90% of the world's banks adhere to this document. There are two types of Bill for Collection,
which are usually determined by the payment terms agreed within a commercial contract. Each
affords different benefits to exporters and they are covered separately below:
Documents against Payment (D/P) Usually used where payment is expected from the buyer
immediately, otherwise known as "at sight". This process is often referred to as "Cash against
Documents".
The buyer's bank is instructed to release the exporter's goods only when payment has been
made. Where goods have been shipped by sea freight, covered by a full set of Bills of Lading,
the exporter retains title until these documents are properly released to the buyer.
Unfortunately, for airfreight items, unless the goods are consigned to the buyer's bank no such
control is available under an Air Waybill or Air Consignment Note, as these documents are
merely "movement certificates" rather than "documents of title".
Documents against Acceptance (D/A) Used where a credit period (e.g. 30/60/90 days - 'sight of
document' or from 'date of shipment') has been agreed between the exporter and buyer. The
buyer is able to collect the documents against their undertaking to pay on an agreed date in the
future, rather than immediate payment. The exporter's documents are usually accompanied by
a "Draft" or "Bill of Exchange" which looks something like a cheque, but is payable by (drawn
on) the buyer. When a buyer (drawee) agrees to pay on a certain date, they sign (accept) the
draft. It is against this acceptance that documents are released to the buyer. Up until the point
of acceptance, the exporter may retain control of the goods, as in the D/P scenario above.
However, after acceptance, the exporter is financially exposed until the buyer actually initiates
payment through their bank.
Letters of Credit (L/Cs) A Letter of Credit (also known as a Documentary Credit) is a bank-to-
bank commitment of payment in favour of an exporter (the Beneficiary), guaranteeing that
payment will be made against certain documents that, on presentation, are found to be in
compliance with terms set by the buyer (the Applicant). Like Bills for Collections, Letters of
Credit are governed by a set of rules from the ICC. In this case, the document is called; "Uniform
Customs and Practice" and the latest version is document number 600. In short, it is known as
UCP600 and, again, over 90% of the world's banks adhere to this document. Most popular types
of L/C are as follows:
Irrevocable: The terms and conditions within a L/C cannot be changed without the
express agreement of the Beneficiary. Under UCP600, revocable L/Cs are no longer
acceptable under any circumstances.
Unconfirmed: The payment commitment within the L/C is provided by the Applicant's
issuing bank.
Confirmed: If an exporter has any concerns about the circumstances which may prevent
payment being made from either the Issuing Bank or buyer's Country, the adding of
"Confirmation" moves the bank/country risk issues to the bank which adds its
confirmation (the confirming or advising bank) and notifies the DC to the exporter. The
price of such a confirmation will obviously depend upon the level of perceived risks to
be covered. Banks can often provide indicative pricing for confirmations prior to the
arrival of the DC, so that costs can be estimated.
The exporter and buyer can agree detailed terms, as part of the commercial contract.
This can include exactly what documents need to be produced and precisely what detail
such documents should quote. Letters of Credit, as well as offering a bank's
commitment to pay, also offer benefits in terms of finance.
Standby Letters of Credit (SBLCs) or Bank Guarantees A Bank guarantee is an
undertaking/promise given by a Bank on behalf of the Applicant and in favour of the
Beneficiary. Whereas, the Bank has agreed and undertakes that, if the Applicant failed
to fulfill his obligations either Financial or Performance as per the Agreement made
between the Applicant and the Beneficiary, then the Guarantor Bank on behalf of the
Applicant will make payment of the guarantee amount to the Beneficiary upon receipt
of a demand or claim from the Beneficiary.
SBLCs are similar to Bank Guarantees, in that they sit behind a transaction and are only
called upon if the buyer fails to pay in the normal course of business (which is often
Open Account). They can be particularly useful to cover an underlying Financial risk
where multiple payments are to be made, possibly as part of an agreed schedule.
However, they do not offer the documentary control of Letters of Credit to buyers and,
as such they are an unconditional guarantee.
The seller of the goods verifies through his bank that the letter of credit is valid and then ships
the buyer's order. The seller then takes the required documentation to the bank to collect on
the letter of credit, the seller's bank draws the money from the issuing bank, and the issuing
bank collects from the buyer. Step by step detailed process can be understood as below:
Buyer and seller agree to conduct business. The seller wants a letter of credit to
guarantee payment.
Buyer applies to his bank for a letter of credit in favor of the seller.
Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its
correspondent bank (advising or confirming). The correspondent bank is usually located
in the same geographical location as the seller (beneficiary).
Advising bank will authenticate the credit and forward the original credit to the seller
(beneficiary).
Seller (beneficiary) ships the goods, then verifies and develops the documentary
requirements to support the letter of credit. Documentary requirements may vary
greatly depending on the perceived risk involved in dealing with a particular company.
Seller presents the required documents to the advising or confirming bank to be
processed for payment.
Advising or confirming bank examines the documents for compliance with the terms
and conditions of the letter of credit.
If the documents are correct, the advising or confirming bank will claim the funds by:
o Debiting the account of the issuing bank.
o Waiting until the issuing bank remits, after receiving the documents.
o Reimburse on another bank as required in the credit.
Advising or confirming bank will forward the documents to the issuing bank.
Issuing bank will examine the documents for compliance. If they are in order, the issuing
bank will debit the buyer's account.
Issuing bank then forwards the documents to the buyer.
Beneficiary
The beneficiary is entitled to payment as long as he can provide the documentary evidence
required by the letter of credit. The letter of credit is a distinct and separate transaction from
the contract on which it is based. All parties deal in documents and not in goods. The issuing
bank is not liable for performance of the underlying contract between the customer and
beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to insure
that they meet all the terms and conditions of the credit. Upon requesting demand for payment
the beneficiary warrants that all conditions of the agreement have been complied with. If the
beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank.
Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute
upon the completion of the terms and conditions of the letter of credit. Under the provisions of
the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable
amount of time after receipt of the documents to honor the draft.
The issuing banks' role is to provide a guarantee to the seller that if compliant documents are
presented, the bank will pay the seller the amount due and to examine the documents, and
only pay if these documents comply with the terms and conditions set out in the letter of
credit.
Typically, the documents requested will include a commercial invoice, a transport document
such as a bill of lading or airway bill and an insurance document; but there are many others.
Letters of credit deal in documents, not goods.
Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the
beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter
of credit is valid. In addition, the advising bank would be responsible for sending the documents
to the issuing bank. The advising bank has no other obligation under the letter of credit. If the
issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.
Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the request of
the issuing bank, the correspondent obligates itself to insure payment under the letter of
credit. The confirming bank would not confirm the credit until it evaluated the country and
bank where the letter of credit originates. The confirming bank is usually the advising bank.
Negotiability
Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the
beneficiary, but also any bank nominated by the beneficiary. Negotiable instruments are passed
freely from one party to another almost in the same way as money. To be negotiable, the letter
of credit must include an unconditional promise to pay, on demand or at a definite time. The
nominated bank becomes a holder in due course. As a holder in due course, the holder takes
the letter of credit for value, in good faith, without notice of any claims against it. A holder in
due course is treated favorably under the UCC.
Revocability
Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be
revoked or modified for any reason, at any time by the issuing bank without notification. A
revocable letter of credit cannot be confirmed. If a correspondent bank is engaged in a
transaction that involves a revocable letter of credit, it serves as the advising bank.
Once the documents have been presented and meet the terms and conditions in the letter of
credit, and the draft is honored, the letter of credit cannot be revoked. The revocable letter of
credit is not a commonly used instrument. It is generally used to provide guidelines for
shipment. If a letter of credit is revocable it would be referenced on its face.
The irrevocable letter of credit may not be revoked or amended without the agreement of the
issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the
issuing bank insures the beneficiary that if the required documents are presented and the
terms and conditions are complied with, payment will be made. If a letter of credit is
irrevocable it is referenced on its face.
The beneficiary has the right to transfer or assign the right to draw, under a credit only when
the credit states that it is transferable or assignable. Credits governed by the Uniform
Commercial Code (Domestic) maybe transferred an unlimited number of times. Under the
Uniform Customs Practice for Documentary Credits (International) the credit may be
transferred only once. However, even if the credit specifies that it is nontransferable or non-
assignable, the beneficiary may transfer their rights prior to performance of conditions of the
credit.
All letters of credit require the beneficiary to present a draft and specified documents in order
to receive payment. A draft is a written order by which the party creating it, orders another
party to pay money to a third party. A draft is also called a bill of exchange.
There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented
for payment. The bank is allowed a reasonable time to review the documents before making
payment.
A time draft is not payable until the lapse of a particular time period stated on the draft. The
bank is required to accept the draft as soon as the documents comply with credit terms. The
issuing bank has a reasonable time to examine those documents. The issuing bank is obligated
to accept drafts and pay them at maturity.
When making payment for product on behalf of its customer, the issuing bank must verify that
all documents and drafts conform precisely to the terms and conditions of the letter of credit.
Although the credit can require an array of documents, the most common documents that
must accompany the draft include:
Commercial Invoice
The billing for the goods and services. It includes a description of merchandise, price, FOB
origin, and name and address of buyer and seller. The buyer and seller information must
correspond exactly to the description in the letter of credit. Unless the letter of credit
specifically states otherwise, a generic description of the merchandise is usually acceptable in
the other accompanying documents.
Bill of Lading
A document evidencing the receipt of goods for shipment and issued by a freight carrier
engaged in the business of forwarding or transporting goods. The documents evidence control
of goods. They also serve as a receipt for the merchandise shipped and as evidence of the
carrier's obligation to transport the goods to their proper destination.
Warranty of Title
A warranty given by a seller to a buyer of goods that states that the title being conveyed is good
and that the transfer is rightful. This is a method of certifying clear title to product transfer. It is
generally issued to the purchaser and issuing bank expressing an agreement to indemnify and
hold both parties harmless.
Letter of Indemnity
When a discrepancy is detected by the negotiating bank, a correction to the document may be
allowed if it can be done quickly while remaining in the control of the bank. If time is not a
factor, the exporter should request that the negotiating bank return the documents for
corrections.
If there is not enough time to make corrections, the exporter should request that the
negotiating bank send the documents to the issuing bank on an approval basis or notify the
issuing bank by wire, outline the discrepancies, and request authority to pay. Payment cannot
be made until all parties have agreed to jointly waive the discrepancy.
4. Trends in Trade Finance & Challenges
Over the last year, the trade finance ecosystem has continued to grow andadapt to new
technologies and regulatory conditions. But even as financial institutes increasingly implement
digital solutions, the Trade Finance gap persists.
Visibility and cash position - When working on international multi banking deals across
multiple banking products and portals, getting a real time view of a credit position in Trade
Finance is almost impossible. By the time the figure is calculated, the number is out of date with
the new advice and amendments made to the existing LCs. This inefficiency implies companies
fund excess working capital, as they do not have an accurate view of the financial supply chain.
Compliance and regulation – The cost and complexity of compliance has reduced the risk
appetite of many banks. These banks balance the costs and benefits when they select preferred
markets for participation. According to a 2016 Thomson Reuters survey on KYC procedures and
their escalating costs and complexity, financial institutes today spend upwards of USD 60
million, on this activity. Facing heightened competition and price sensitivities, many
organizations are very concerned about this. As a result, banks prefer to conduct KYC and AML
checks on larger clients which have higher revenue earning opportunities for the bank.
Therefore, there is a bias to only investigate high revenue and margin markets/clients. This to
an extent helps explain the reason behind why SMEs and emerging economies suffer from a
large Trade Finance gap and are the victims of a bank’s de-risking activities. LCs are credit
instruments and therefore are highly sensitive to security concerns. As labour intensive
processes such as compliance and regulation checks increase, banks are seeing their costs sky
rocket, and are therefore getting more selective with the markets, customers and the
geographies they operate in.
The Trade Finance market space has evolved over time, with the technological enhancements,
switches in corporate behaviour, regulatory reforms and increasing market competition.Import
and export trade is regulated by the Directorate General of Foreign Trade (DGFT) under the
Ministry of Commerce & Industry, Department of Commerce, and Government of India.
Additionally, Banks are required to comply with theForeign Exchange Management (Current
Account Transactions) Rules, 2000 framed by the Government of India and the directions issued
by the Reserve Bank of India.
The regulatory entity has drafted the India New Foreign Trade Policy (Exim Policy), 2015- 2020
along with the India New Foreign Trade Procedure 2015-2020.
RBI releases master circulars and directions on the import and export of goods and services,
from time to time.
The directions state the general guidelines for the import of goods and services through
remittance of import payments, import of foreign exchange, advance remittances, import
licenses, third party payment for import transactions, receipt from import bills/ documents by
the Importer directly from overseas suppliers, evidence of imports, issuance of bank guarantee,
import of gold and other precious metals, import factoring and merchanting trade37.
On the export side, the regulations cover aspects such as diamond dollar accounts, exemptions,
exchange earners foreign currency accounts, foreign currency account, advance payments
against exports, , Export Declaration Form (EDF) approval for export of goods for reimports,
consignment exports, invoicing of software exports, counter trade agreements, export of
goods, forfaiting, project exports and service exports, EFD/ Software Export Declaration
(SOFTEX) procedure, export claims, extension of time, write, etc.
The Foreign Exchange Management Act (1999) is an Act of the Parliament of India. The act
provides guidelines for the free flow of foreign exchange in India . The framework is consistent
with the World Trade Organization framework. The rules and regulations under FEMA include:
Export Import Bank of India established under the Export Import Bank of India Act, 1981 . The
financial institution offers financial products such as buyers’ credit, project finance and lines of
credit. Export advisory services are also offered by EXIM Bank.
The five-year FTP laid out an ambitious annual target of USD 900 billion of exports by
2020, despite the fact that exports have been sluggish over the last couple of years.
Focus on farm exports is currently limited, given the restrictions on agricultural trade.
The increasing international prices and loss of competitiveness due to currency
movements add to the declining farm export earnings.
High transaction costs and high logistic costs further add to the challenges faced by the
Trade Finance sector.
One of the major challenges faced is the submission of fake and fraudulent underlying
documents submitted by the exporter/ importer for availing of funded or non-funded
facilities. Several fraudulent cases due to fake submission of documents has been
recovered in the last couple of years.
An exporter was recently arrested for misuse of currency declaration forms, by forging
the same to claim remittances for exported goods. The exporter deposited large
amounts in foreign currency and claimed excise duty benefits from the government by
showing fake Currency Declaration forms (CDFs), wherein they sold goods to fictitious
individuals or companies. The fake CDFs allow the exporters black money to be
converted to white and avail government benefits.
CBI recently registered nine cases of bank frauds worth over INR 51 billion, wherein
standby letters of credit were opened by the Indian banks for the import of gold by the
alleged diamond firms from UAE based distributors. On investigation it was noted that
the promoter of the Indian companies, held a majority stake in the UAE based
companies and cheated their bank by diverting bank funds.
A case of hacking was discovered in early, 2017, wherein hackers infiltrated the systems
of three government owned banks, to create fake trade documents, to raise finance
abroad or facilitate dealings in banned items. The banks in question discovered that
their SWIFT system was compromised to create fake documents.
CBI investigations led to the arrest of 2 individuals for an alleged fraud of INR 246.4
million. It was alleged that the company through its director had obtained limits for
Open Cash Credit/ Overdraft against Book Debts.
(OCC/ODBD) of INR 100 million and Inland Letter of Credit/Foreign Letter of Credit
(ILC/FLC) of INR 100 million from a Bank. The limits were secured by hypothecation of
stocks and book debts of the company and fraudulently collaterally secured by the
equitable mortgage of two properties which were not in possession of the accused at
the time of sanction of the loan.
Another fraud was uncovered wherein the promoters of a certain company availed LC
facilities and various credit facilities fraudulently by submitting false documents and
inflated stocks and receivables statements to a public sector bank to get more drawing
power from their cash credit account.
The grand jury of USA has indicted promoters of an Indian listed company for alleged
financial irregularities. The promoters were accused of floating several sham companies
to create fake invoices in its favour and encash these using factoring service provided by
a US based service provider.
Regulatory initiatives undertaken to promote and ensure compliance over Trade Finance in
India and globally
There are no significant tax issues in Trade Finance when the transaction between a customer
and a bank, are within a country. The challenge typically arises in international trade in the
context of withholding tax.
The Gujarat High Court in a landmark judgment in the case of Vijay Ship Breaking in 2003 has
held that usance interest does not form part of the purchase price, and is in the nature of
interest for income-tax purposes. It was accordingly concluded that withholding tax applies on
such usance interest.
A related issue is the rate of withholding tax. The Indian tax law provides a concessional
withholding tax of 5% (plus surcharge and cess) on interest payments by Indian companies on
foreign currency borrowings, as approved by the Central Government, and subject to various
conditions. Some of the conditions in the general approval provided by the Central Government
for this purpose include borrowing under a loan agreement, compliance with specific provisions
of the foreign exchange regulations, obtaining a loan registration number (LRN) from the
Reserve Bank of India, etc. It may generally not be possible to satisfy these conditions, and
accordingly the 5% withholding tax rate is typically not available for Trade Finance. The
withholding tax issue gets compounded as generally overseas parties insist on grossing-up of
the withholding tax, leading to increased cost for, say, an Indian importer. Interestingly,
depending on facts, if the transactions of an Indian company are with an overseas branch of an
Indian bank, the Indian withholding tax issue could be mitigated.
The remuneration earned by nonresidents like fees, guarantee charges, etc. (i.e. non-interest
income) creates further complications, as withholding tax is based on characterization of such
remuneration for tax purposes. For example, in a recent case the Delhi Tribunal has held that
guarantee fee charged by a UK company to an Indian company, in relation to guarantee
provided to various bankers for extending loan facilities to such company was taxable as ‘other
income’. It would accordingly be necessary to consider judicial precedents surrounding
taxability of various types of income connected with trade financing activities.
Similar issues may arise in the reverse situation as well, say, where an Indian bank provides
Trade Finance to overseas companies. There could be withholding tax and other issues in the
jurisdiction where the overseas company is based.
To sum up, the tax impact in case of Trade Finance needs to be factored in, to determine the
overall cost of Trade Finance.
6. Problems of Foreign Trade Faced by Developing Countries
Here we detail about the ten problems of foreign trade faced by developing countries of the
world.
1. Primary Exporting:
Most of the developing countries, in its initial stage of development are exporting mostly
primary products and thus cannot fetch a good price of its product in the foreign market. In the
absence of diversification of its export, the developing countries have failed to raise its export
earnings.
Another problem of trade faced by these developing countries is that the terms of trade are
always going against it. In the absence of proper infrastructure and the quality enhancement
initiative, the terms of trade of these countries gradually worsened and ultimately went against
the interest of the country in general.
The developing countries are facing the problem of mounting growth of its developmental
imports which include various types of machineries and equipment’s for the development of
various types of industries as well as a huge growth of maintenance imports for collecting
intermediate goods and raw materials required for these industries. Such mounting volume of
imports has been creating a serious problem towards round management of international
trade.
Another peculiar problem faced by the developing countries is the higher import intensity in
the industries development resulting from import intensive industrialization process followed in
these countries for meeting the requirements of elitist consumption (viz., colour TVs, VCR,
Refrigerators, Motor cycle, cars etc.). Such increasing trend towards elitist consumption has
been resulting a huge burden of burgeoning imports in these developing countries, resulting
serious balance of payment of crisis.
5. BOP Crisis:
The developing countries are facing the problem of burgeoning imports and sluggish growth in
its exports resulting in growing deficit in its balance of payments position. In some countries,
this deficit has gone to such an extent at a particular point of time that ultimately it led to a
serious crisis in its international trade.
6. Lack of Co-ordination:
The developing countries are not maintaining a good co-ordination among themselves through
promotion of integration economies grouping, formation of union etc. Thus, in the absence of
such co-ordination, the developing countries could not realize those benefits of foreign trade
which they could have realized as a result of such economic grouping.
The developing countries are sometimes facing the problems of depleting foreign exchange
reserves because of growing volume of imports and continuous balance of payment crisis. Such
depleting foreign exchange reserve results in shorter import cover for the country.
8. Steep Depreciation:
Steep depreciation of the currency with dollar and other currencies in respect of developing
countries has been resulting in a considerable increase in the value of its imports which
ultimately leads to huge deficit in its balance of trade.
The worsening of the current account deficit in balance of payments of the developing
countries has been partly on account of higher price of POL imports charged by the oil
producing countries especially since the Gulf War.
10. International Liquidity Problem:
Most of the developing countries has been facing all the more serious international liquidity
problem. Accordingly, these countries are experiencing chronic deficiency of capital and
technology resulting heavy dependence on the developed countries for their scarce resources.
Foreign trade is more complicated as compared to home trade of a country. There are many
difficulties which are faced by a trader engaged in foreign trade. The following are the special
problems or difficulties of foreign trade:
1. Distance:
Usually foreign trade involves long distances. Distance between various countries is a great
difficulty in a foreign trade. Due to long distances it becomes difficult to establish close
relationship between the buyer and the sellers.
2. Diversity of Languages:
Different languages are spoken and written in different countries of the world. The difference
of language creates another problem in the foreign trade. It becomes difficult to understand
the language of traders in other countries. All correspondence has to be done in foreign
language.
Long distances in foreign trade create difficulties of proper and quick transport and
communication. Both of these involve considerable delay as well as cost. The high cost of
transport is a great hindrance in foreign trade.
Foreign trade is subject to greater risk and uncertainties as compared to home trade. As the
goods have to be transported to long distance they are exposed to many risks. Goods in transit
overseas are susceptible to the perils of the sea. These risks may be covered through marine
insurance but this involves extra cost in foreign trade transactions.
5. Lack of information about foreign traders:
In foreign trade since there is no direct and close relationship between the buyers and the
sellers, the seller has to take special steps to verify the credit worthiness of the buyer. It is
difficult to obtain information regarding credit worthiness, business standing and financial
position of persons living in foreign countries.
Every country has its own laws, customs and import and export regulations. Exporters and
importers must fulfil all the custom formalities as well as follow rules controlling exports and
imports.
7. Difficulties in Payments:
Foreign trade involves the exchange of currencies because the currency of one country is not
the legal tender in the other country. Exchange rates are determined for different currencies
for this purpose. But exchange rates go on fluctuating. Moreover, there is a wide gap between
the time when the goods are dispatched and the time when the goods are received and paid
for. Thus, there is a greater risk of bad debt also in foreign trade. Remittances of moneys for
payments in foreign trade are time consuming and expensive. Hence payments in foreign trade
create complications.
Foreign trade involves the preparation of a large number of documents both by the importer as
well as exporter. These documents may be required either under law or under customs of trade
of the two countries.
Every foreign market has it own characteristics. It has its own requirements customs, traditions,
weights, and measures, marketing methods etc. An extensive study of foreign markets is
required to be successful in foreign trade, which may not be possessed by an ordinary trader.
8. Difficulties Faced by Exporters in International Trade
When you get on the international trading, there are many aspects to consider as an exporter.
You need to be informed when it comes to the local norms in your country and the norms in
the country you aim to export to. Legal norms are crucial when it comes to international
trading, and they can ease or complicate the process. But besides these norms and the entire
legal aspect, there are other details to consider as well. The problems faced by exporters are
challenging and can delay the exporting process a lot.
When you start exporting goods or products, you have a real chance to reach a significant profit
and success. And if all goes well, your company will reach a new level of benefits in no-time, so
it is well worth the investment! But you need to keep your business safe just as you need to
take care of your products. Here are the main difficulties that exporters face when trading
internationally and the best approach to have on them!
One of the first exporting challenges that you might have to deal with is the distance. If you are
planning to export your goods to a country that is far away from your location, the process can
get a bit complicated. Especially if the country is in a different continent and therefore, a
different system can be utilized. And the longer the distance gets, the more complex
transportation gets.
Assuming your goods will have to travel to several other countries to reach their destination,
you should check the norms for those countries as well. It will help you avoid problems and
shipping delays. Also, if your goods will travel over the sea or ocean, you might need to
consider a different form of transportation such as a ship instead of an airplane. Prices vary as
well for different shipping methods and so does the time which is why you need to pay
attention to such details!
The good idea is to invest in some shipment insurance that will protect your products. You can
find many companies on this matter, but it can get tricky when you are looking for a company
that offers insurance internationally. Some exporters use more insurance companies to have all
the possibilities covered. You will have to check if your insurance company is covering all the
countries that get in contact with your goods. And of course, the main countries are your
country and the final destination of the package. Prices might vary here depending on factors
like total quantity that you want to ship and method of transportation.
2. Payment methods
The payment method is very important when it comes to international trading. Some countries
might not share the same fiscal system with your country. And you will need help and
assistance when trading with such countries. There are also some international forms of
payment that will cover such situations, but they need to be present in both countries. There
are several ways to reach one of these payment methods, and with proper research, you should
identify them. An accountant will also help you make the best choice.
Consider the different currencies and potential money loss along the way, so you don’t waste
your funds. It is especially important if you are trading with a country that doesn’t use euro or
USD currencies! Keep in mind that exchange rates change on a daily basis, so time is an
important factor when you make a payment. Good communication with a trusted importer will
ease your job a lot and save you from unexpected issues that might occur.
When it comes to possible problems of exporting goods, the legal systems is an important one.
It also implies the safety system of a certain country that you want to trade with. You should
stay informed regarding government laws for goods safety, especially when you export foods.
Some regulations might delay the export-import process and create issues for both you and the
local importer. The most important problems of import and export come from a bad legal
system in one country or another. You might be restricted when it comes to advertising your
goods or the quantity that you want to export. A good lawyer specialized in international
trading can help you overcome such issues and establish a quality business.
Some countries have a complex bureaucratic system that requires a variety of documents and
certificates. You might need to obtain certain licenses and permits when you export to certain
countries for the first time. While most of them are a one time deal, some will need to be
renewed. It all depends on the system the country of destination has. You will need certain
export documents just to be able to get the goods out of your country, separated from the
documents you need to import them into another country. All these documents can delay your
export-import process and even block it if you don’t know the legal norms. This is why having
an expert on the matter can be crucial.
4. Language barriers
Language barriers can be a real issue when trading internationally. If your importer doesn’t
speak the same language things might be lost in the translation. The main trading language can
be used in English. However, many countries don’t have English as their national language, so
importers might use different translation programs to communicate with you. You can still
make a deal as long as you keep the language simple and as standard as possible. Hiring a
translator will save you from a lot of struggle when it comes to communication problems. And it
is an investment worth making because no one needs misunderstandings when there’s a lot of
money involved!
You can hire a translator that speaks the local language of the country of destination. But then,
you will have to do the same for every country that uses a different language! At the end of this
article, you will find an easier way to deal with all these issues so keep reading! No one said
that international trade issues are easy to overcome, but they are worth for the positive
outcome that this trading brings to your company. However, experienced importers will be
familiar enough with using English so you shouldn’t have many issues. And if one of your
importers has significant problems with it, this should be a red flag on its own!
Maybe the most important part to take care of as an international trader is finding the right
importer. Your important will be your partner in the entire process, and they can become a
blessing or a curse for you. Always pay attention when you decide to do business with an
importer or another and do your best to avoid possible local scams. The risk of scams is present
in every country that you want to deal with, but you can still avoid it. Your lawyer can also help
you with finding a trustful importer by researching their past activity. Check the comments and
reviews that your importer might have from other exporters to get a general idea.
Also, once you end up with a good importer that helps you with the import-export process; do
your best to keep them. A long-term business relationship is important in the international
trading market. And good contacts can be hard to find, so it is wise to develop the good
relationships you already have in the matter. You can also find a good importer based on some
other exporters’ recommendations. There are many forums dedicated to exporters where you
can talk with others in similar situations.
Sometimes, these forums will expose potential scammers, so you know to keep your business
away from them. And remember that if something sounds too good to be true, it probably is!
Stay away from offers that sound too much to your advantage because real importers will
never make an offer that doesn’t benefit them. Also, don’t send free samples because these
can be resold without you even knowing.
When you are exporting into a new country, you need to consider their culture and traditions. It
may happen especially if you are exporting goods like food or even clothes. For instance,
certain types of meat might not be allowed to some countries due to cultural limitations. Or
some clothes might not be allowed, especially when it comes to women. It is crucial to do your
research on local traditions and adapt your export-import process to that.
Besides these differences between cultures, you should also consider what the country needs.
Some countries in Africa will always welcome rice imports because the demand is high. While
they will not be so interested in cotton imports, they can produce that more locally. It is a great
idea to start the import-export process by trading with a country that you are familiar with.
Analyse their local market and demands to identify their needs better and work with that kind
of data.
You can increase your potential for profit also by exporting items that don’t exist at all on the
local market. For instance, new gadgets and electronics have no competition. It will bring you
profit, and you will also become a “trendsetter” for that particular industry. As long as you
know and respect local traditions, you have a high rate of success in any foreign market!
9. Conclusion
Although there is an extremely robust positive correlation between various measures of trade and
financial development on the one hand, and economicgrowth, on the other, the evidence concerning
the direction of causation between economic growth, development, and other variables is not clear.
Moreover, there is increasing evidence (as witnessed by the 2008 Global Financial Crisis) that countries
can have financial sectors that are “too large.” This report reviews recent work, on the relationship
between geography, institutions, trade, and finance and economic growth and development.
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