INTERNATIONAL

TRADE FINANCE

PRESENTATION FLOW
‡ Introduction to International Trade ‡Methods of Payment ‡Pre-Shipment Finance ‡Post-Shipment Finance ‡Letter of Credit ‡ Open Account ‡Documentary Collections ‡Factoring

INTERNATIONAL TRADE FINANCE

Trade Finance is the science that describes the management of money, banking, credit, investments and assets for international trade transactions.

METHODS FOR INTERNATIONAL TRADE FINANCE According to stage of financing Prere-shipment finance Postost-shipment finance .

METHODS FOR INTERNATIONAL TRADE FINANCE Instruments/methods of financing Letter of credit Open account Factoring Document collections .

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‡ Such finance is extended to an exporter for the purpose of procuring raw materials. processing. . ‡ 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. packing. transporting.PRE-SHIPMENT FINANCE Definition: ‡ ³Financial 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´. warehousing of goods meant for exports.

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

FORMS OR METHODS 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) .

.e. ‡ FCPC will also be available both to the supplier EOU/EPZ unit and the receiver EOU/EPZ unit. ‡ 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. indigenous & imported inputs. ‡ Additional window to rupee packing credit scheme available to cover both the domestic i.PACKING CREDIT IN FOREIGN (PCFC) ‡ Available to exporting companies as well as commercial banks for lending to the former.

‡ If the goods to be exported are not under OGL (Open General License). ‡ Exporter should not be in the caution list of RBI. the exporter should have the required license /quota permit to export the goods.Exporter Code ( IE Code ) number allotted by DGFT. .REQUIREMENTS FOR GETTING PACKING CREDIT This facility is provided to an exporter who satisfies the following criteria: ‡ A ten digit Importer .

DIFFERENT STAGES OF 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 .

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Exporters don¶t wait for the importer to deposit the funds. ‡ Export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds.POST SHIPMENT FINANCE ‡ 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. .

FEATURES ‡ Purpose of Finance ‡ Basic of Finance ‡ Types of Finance ‡ Quantum of Finance ‡ Period of Finance .

TYPES OF POST SHIPMENT 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 .

SUPPLIER¶s CREDIT sss .

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‡ L/C used in domestic trade are called inland L/C¶s. stating the conditions under which the bank will honour the commitment of the customer ‡ The letter of credit is also known as banker¶s commercial credit or documentary letter of credit.LETTER OF CREDIT ‡ Definition: A formal document issued by a bank on behalf of customer. .

PARTIES TO A LETTER OF CREDIT ‡ Importer or Applicant ‡ Issuing Bank ‡ Beneficiary ‡ Advising Bank ‡ Negotiating/ The Paying Bank. .

LETTER OF CREDIT ± THE PROCESS Seller (Beneficiary) 1. Advice of Documentay credit Advising Bank 3. Contract Buyer Applicant 2. Documentary credit ISSUING BANK. Documentary credit Application 4. .

TYPES OF LETTER OF CREDIT ‡ Irrevocable L/C ‡ Revocable L/C ‡ Negotiation Credit ‡ Confirmed or Unconfirmed credit ‡ Revolving credits ‡ ‡ ‡ ‡ ‡ Back To Back Credits Red Clause L/C Transferable Credits Traveller¶s L/C Special Credits .

.ADVANTAGES OF LETTER OF CREDIT ‡ Immediate Payment ‡ Guaranteed Payment ‡ Performance ‡ Safe & Secure Method ‡ Political & Exchange Control risks reduced.

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usually in 30 to 90 days. . ‡ An open account transaction means that the goods are shipped and delivered and payment is due.OPEN ACCOUNT 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.

‡ 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 ‡ Open Account is the most advantageous option to the importer in cash flow and cost terms.

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 Pros & Cons ‡ Pros: Boost competitiveness in the global market.

OPENOpen ACCOUNT ± P ROCESS Account .Process TARGET Purchase order Goods VENDOR BANK .

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DOCUMENTARY COLLECTIONS ‡ Process Overview Sends Documents + Instructions for Payment Payment Entrusts collection of payment Payment Payment Draft indicating D/A or D/P Remitting Bank Collecting Bank Importer Exporter .

DOCUMENTARY COLLECTIONS Documentary Collections Importer can collect documents by following payment terms: A. Document against payment (D/P) Importer pays the face amount on sight of goods. 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. Transfer of title of goods and documents is done immediately. B.

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.

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FACTORING ‡ Definition ± ³Financial 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 .

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

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