Financing Trade & Services

Domestic

International

ExportsMerchandise

Services

Deemed Exports

International Trade Finance

Companies who are in foreign trade or are multinational corporations are exposed to international risks & have to manage the company in a different way.

International Risk
Political & Legal risk: Laws, Taxes are different Marine or transportation risk & Costs Business & Credit Risk Liquidity Risk Currency Risk
Transactional Risk Translational Risk Economic Risk

STATEMENT I : INDIA'S OVERALL BALANCE OF PAYMENTS Apr-June 2009 PR Credit Debit Net 2 3 4 July-Sept 2009 PR Credit Debit Net 5 6 7 Oct-Dec 2009 P Credit Debit Net 8 9 10 (US $ million) Oct-Dec 2008 PR Credit Debit Net 11 12 13

Item 1 A.CURRENT ACCOUNT I. MERCHANDISE II.INVISIBLES (a+b+c) a) Services i) Travel ii) Transportation iii) Insurance iv) G.n.i.e. v) Miscellaneous of which Software Services Business Services Financial Services Communication Services b) Transfers i) Official ii) Private c) Income i) Investment Income ii) Compensation of Employees Total Current Account (I+II)

37,910 64,804 -26,894 41,915 73,810 -31,895 44,648 75,374 -30,726 39,436 73,484 -34,049 36,946 16,412 20,534 39,894 19,939 19,955 39,879 21,183 18,696 41,139 18,757 22,381 20,652 10,963 9,689 20,877 13,647 7,230 23,642 15,959 7,683 26,950 13,099 13,851 2,297 2,004 293 2,530 2,393 137 3,098 2,251 847 2,924 1,946 979 2,490 2,777 -287 2,566 2,221 345 2,991 3,366 -375 2,713 3,241 -528 387 314 73 384 341 43 408 305 103 344 268 77 100 103 -3 100 130 -30 124 129 -5 97 233 -136 15,378 5,765 9,613 15,297 8,562 6,735 17,021 9,908 7,113 20,872 7,412 13,460 11,004 2,586 1,116 418 13,344 46 13,298 2,950 2,723 227 391 3,872 928 312 470 110 360 4,979 4,641 338 10,613 10,882 -1,286 2,504 188 732 106 307 12,874 14,268 -64 51 12,938 14,217 -2,029 4,749 -1,918 4,544 -111 205 438 4,620 1,135 313 568 108 460 5,724 5,367 357 10,444 12,998 -2,116 2,737 -403 785 -6 259 13,700 13,604 -57 309 13,757 13,295 -975 2,633 -823 2,382 -152 251 333 4,567 1,156 381 638 113 525 4,586 4,092 494 12,665 11,274 -1,830 4,185 -371 889 -122 493 12,966 10,997 196 285 12,770 10,712 -1,953 3,192 -1,710 3,000 -243 192 580 3,568 740 257 845 98 748 4,813 4,475 338 10,694 618 150 236 10,151 187 9,964 -1,621 -1,475 -146

74,856 81,216 -6,360 81,809 93,749 -11,940 84,527 96,557 -12,030 80,574 92,241 -11,668

Pre Shipment Finance

Packaging Credit Advances against receivables from Government like duty drawback Advances against cheques/ drafts representing advance payment Pre Shipment Finance in Foreign Currency Post Shipment Finance Export Bills purchased/ discounted, Factoring, Forfaiting Advances against bills sent on collection basis or on consignment basis Loans against Export Earners Foreign Currency Account

Invoice: Date, name & address of seller, buyer, order number, quantity, quality & description of goods, term of sales, port of shipment Transport Documents: Bill of Lading (by sea) or Airways bill, courier receipt Insurance Policy e.g. Marine Insurance Export Certificate Certificate of Inspection of Goods, Health Certificate Packing List, description of goods Weight Certificate Certificate of Analysis of Quality Certificate of Origin Bill of Exchange: Sight & Usance (Documents against payment, documents against acceptance) Letter of Credit: Inland & Foreign

Method of payment
Advance Sight LC

Timing of payment
Before shipment Presentation of documents after shipment

Goods availability
At Destination arrival When LC is paid

Sellers Risk
None Minimal, issuing banks obligation to pay in case of confirmed LC

Buyers Risk
100% reliance on seller Assurance of shipment, but depends on seller to supply goods ordered Assurance of shipment ,payment is due to maturity

Usance LC

Maturity date or at discount of the draft

At acceptance of draft under LC

Minimal, issuing banks obligation to pay in case of confirmed LC 100% reliance on buyer

Open account

Buyers discretion

Upon arrival

Zero

LC is a documentary undertaking issued by a bank, on behalf of the buyer(importer t0 to the seller (exporter) to pay for the goods and services provided that the seller presents documents, which comply the terms & conditions of LC. Importer (Applicant) Exporter (Beneficiary)

Issuing Bank Importers Bank

Advising Bank (Exporters Bank)

1. 2.

The exporter and importer sign a bill of sale contract. The importer applies to his bank, the issuing bank, to open a letter of credit.

3.

The issuing bank sends the advice of the credit to the advising bank.

4.

The exporter is advised of the credit.

5.

Following shipment of the goods, the exporter presents the

documents to the advising bank (the paying agent).

6.

After checking the documents and confirming that they agree with the letter of credit terms, payment is made to the exporter. At the same time, the advising bank sends the documents to the issuing bank and requests reimbursement for the letter of credit amount plus the advising bank's fees and expenses.

7.

The issuing bank sends the documents to the importer and debits his account for the letter of credit amount plus the fees and

expenses of the banks involved.

Revocable Letter of Credit: which can be modified/ cancelled

Irrevocable Letter of Credit: which can not be cancelled Transferable Letter of Credit: benefits can be transferred to third party Confirmed LC: apart from issuing bank another bank has added confirmation or guarantee

Sight LC: payment at sight

Usance Credit: payment after a period Revolving Letter of Credit: after a drawing is made, the credit reverts to original amount for reuse

Transit LC: Use of a big bank when exporter's as well as importers banks are small
Anticipatory LC: Payment is made in advance pre shipment

Red Clause Letter of Credit: for purchasing of Raw Material, processing, packaging Green Clause Letter of Credit: Extended to red clause, for warehousing & insurance also

Banks discount Export Bills and give exporters discounted value of billed amount upfront after charging the interest rate (discount) Under Rediscounting of Export Bills Abroad Scheme, the banks can rediscount Export Bills.

Factoring is a financial service designed to help firms manage their trade

credit or receivables effectively. Factoring as a fund based financial services provides resources to finance receivables as well as facilitates the collection of receivables. Factoring means as arrangement between a factor & his client, which includes at least two of the following services to be provided by the factor
Finance Maintenance of accounts Collection of debts Protection against credit risk

Client

Customer

6
Factor

The concept of factoring consists of six stages: 1. In this stage, the client concludes a credit sale. 2. Here, the client sells the customers account to the factor and notifies the same to the customer. 3. A partial payment is made by the factor after adjusting commission and interest in advance against the account

purchased.
4. Customers account is maintained by the factor and he undertakes any follow-ups for payment. 5. Any amount due from the customer is remitted to the factor. 6. On due date, the factor makes the final payment to the client

Recourse and Non Recourse Factoring

Advance and Maturity Factoring

Full Factoring
Disclosed & Undisclosed Factoring

Domestic and Export/ Cross Boarder/

International Factoring

The functions of factoring

Maintenance/ administration of sales ledger Collection facility of accounts receivable Financing facility Assumption of Credit Risk/ Credit Control & Credit

Protection
Provision of advisory services

Source of working capital.

Increase in Sales. Reduction in Credit Risk Improved efficiency Better Liquidity Management More time for planning, production & major activities Clients can extend credit to customers on large orders without having to ask

them pay Cash on Delivery

Off Balance Sheet Finance Improvement of Credit Ratio

Costs Associated with

In House Management With Recourse Factoring Without Recourse Factoring

Benefits Associated with

Recourse Factoring
Non Recourse Factoring

Similarities
Both provide short term financing by using accounts receivable

Differences
Credit Default Risk:
Bills discounting is always with recourse; factoring can be with or without recourse

Responsibility of collection:
In bill discounting the drawer undertakes the responsibility of collecting the bills and remitting the proceeds to the financing agency; Factor usually undertakes to collect the bills of client

Services
Bills discounting only provides financing Factoring also provides services with sales ledger maintenance &

advisory services

Rediscounting
Bills can be rediscounted, factoring can not be rediscounted

Bulk vs Individual transaction

Accounting
Factoring is an off balance mode of financing

Forfaiting is a form of non recourse financing receivables

pertaining to international trade

Features
Non Recourse: Covering the entire risk of non payment Financing trade bills/ promissory notes Only Pertaining to International Trade

Exporter 3 Forfaiter

Importer 2 4 Aval

1. 2. 3.

Exporter sells & delivers goods to importer Importer draws promissory notes in favor of exporter guaranteed by Bank called as Aval The exporter enters into forfaiting agreement with forfaiter. The discount rate is calculated depending upon Credit Rating of Avalling Bank, Country Risk Payment to exporter the face Value less discount.

4.

Payment to Foforfaiter by importer

1.

Forfaiting applies to international trade only, while factoring refers to domestic bills & international bills

purchase and discount.

2.

Risks taken are risks of debtor, debtor country, currency risk, goods at sea etc. these are specific to forfaiting.

3.

Guarantee of Avalling Bank is not present in case of Factoring

4.
5. 6.

Forfaiter discounts the entire value but factoring arrangement is only partial 75%-85%
Forfaiting is a pure financing arrangement while factoring also includes ledger administration, collection etc. Factoring is essentially a short term financing deal. Forfaiting finances notes/bills arising out of deferred credit transaction spread over 3-5 years

7.
8.

A factor does not guard against exchange rate fluctuation; a forfaiter charges a premium for such risk.
Forfaiting is always without Recourse

100 % Risk Cover

Country Risk (Political and Transfer Risk)

Currency Risk
Commercial Risk Interest Rate Risk Instant Cash Flexibility and Simplicity

RBIs support & control

FERA 1947, 1973 FEMA 2000

Exchange Control Authority/ Exchange Rate

Management
Authorized Dealers:
NASTRO & VASTRO ACCOUNT Export Earners Foreign Currency Account

Money Changers

Export Import Bank of India (EXIM Bank)

Established in March 1982 Gives credit to exporters, importers, export

oriented units, deemed exporters Consultancy & Technology Services Help to Small Scale industry export Planning, promoting & helping export oriented Units

Export Credit Guarantee Corporation of India (ECGC)

Established in 1957

Provides Credit risk insurance

Offers Guarantee to banks & financial institutions

to help exporters Assists exporters to recover bad debts Provides all kind of export insurance