TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Name : Shafia Ahmad Enrollment No. : 09BS0002138 Mobile No. : 9836661371 E-mail ID : shafia_05@hotmail.com

SHAFIA AHMAD (09BS0002138)

Page 1

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

A REPORT ON TRADE FINANCE FOR SME EXPORTS TO BANGLADESH SUBMITTED TO: FACULTY GUIDE PROF S.N.MOOKHERJEE ICFAI BUSINESS SCHOOL KOLKATA COMPANY GUIDE PRADIP BHATTACHARYA REGIONAL HEAD (GLOBAMARKETGROUP) INDUSIND BANK

SUBMITTED BY: SHAFIA AHMAD ENROLLMENT NO-09BS0002138

INDUSIND BANK

SHAFIA AHMAD (09BS0002138)

Page 2

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

SUMMER INTERNSHIP REPORT
An Interim report submitted in partial fulfillment of the requirements of MBA Program of ICFAI Business School, Kolkata.

Submitted by: SHAFIA AHMAD (09BS0002138) Submitted to:

FACULTY GUIDE PROF S.N.MOOKHERJEE ICFAI BUSINESS SCHOOL KOLKATA

COMPANY GUIDE PRADIP BHATTACHARYA REGIONAL HEAD (GLOBAL MARKET GROUP) INDUSIND BANK

SHAFIA AHMAD (09BS0002138)

Page 3

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

AUTHORIZATION
This report, “TRADE FINANCE FOR SME EXPORTS TO BANGLADESH” is authorized by Mr. Pradip Bhattacharya – the Company Guide and Prof.S.N. Mookherjee – the Faculty Guide with the partial fulfillment of the requirement of Summer Internship Program of the MBA Program of ICFAI Business School.

SHAFIA AHMAD (09BS0002138)

Page 4

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

ACKNOWLEDGEMENTS
It is well established fact that behind every achievement lays an unfathomable sea of gratitude to those who have extended their support and without whom the project would never have come into existence, without their help the present work would never have assumed its form. So with immense gratitude, I acknowledge all those whose guidance and encouragement served as a “beacon light” and crowned my efforts with success. I wish to express my gratitude to IndusInd Bank’s management for giving me an opportunity to be a part of their esteemed organization and enhance my knowledge by granting permission to pursue my Summer Internship Program under their kind guidance. I must thank my Company Guide Mr. Pradip Bhattacharya-Regional Head(Global Market Group), IndusInd Bank, for not only giving me the opportunity to work on an enriching area like this but also guiding me through the complexities of the project. I am especially thankful to my Faculty Guide Prof. S.N. Mookherjee, who gave me the necessary confidence and support to go ahead with this project and also for his helping hand when doubts bogged me down. I am grateful to Mr. Subir Kumar Kundu, Head Forex, for his invaluable guidance and cooperation during the course of the program. He provided me with his guidance and support whenever needed that has been instrumental in completion of this project.

Shafia Ahmad (09BS0002138)
SHAFIA AHMAD (09BS0002138) Page 5

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

TABLE OF CONTENTS
SERIAL NUMBER TOPIC

PAGE NUMBER 4 5 8 9 9 12 16

A. B. 1. 2. 2.1. 2.2. 2.3.

AUTHORIZATION ACKNOWLEDGEMENT ABSTRACT INTRODUCTION COMPANY PROFILE OPERATING RESULTS INTRODUCTION TO INTERNATIONAL TRADE FINANCE AND SME OBJECTIVE METHODOLOGY LIMITATIONS TRADE FINANCE 3.1. 3.2. 3.3. 3.4. 3.5. TRADE FINANCING INSTRUMENTS EXPORT CREDIT INSURANCE EXPORT CREDIT GUARANTEES LETTER OF CREDIT RISKS ASSOCIATED WITH TRADE FINANCING INDO-BANGLADESH TRADE RELATION 4.1. 4.2. BILATERAL TRADE AND EXCHANGE RATES INDO-BANGLADESH TRADE POLICIES DEFINATION OF SMESs IN INDIA

2.4 2.5 2.6 3.

18 18 19 20 21 22 23 23 29

4.

34

36

38

5.
SHAFIA AHMAD (09BS0002138)

40 Page 6

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

5.1. 5.2. 5.3. 5.4.

WHY FOCUS ON SMEs CONSTRAINTS OF SMEs IN INDIA SWOT ANALYSIS INDIAN SMEs-STRATEGIC THRUST FOR THE FUTURE FINDINGS CONCLUSION RECOMMENDATIONS ATTACHMENTS REFERENCES

41 43 45 46

6. 7. 8. 9. 10.

49 72 73 75 79

SHAFIA AHMAD (09BS0002138)

Page 7

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

1. ABSTRACT
Trade finance can serve as an important part of business as it offers various aspects of managing finances for the company. It helps generate, manage, and establish various finance practices like working capital, factoring solutions, banking solutions, loans, guarantees, discounting, etc. Trade finance companies help reduce marketing cost and increase your trade profitability. They also help in increasing the sales by promoting the products, services or the website around the world. Trade finance companies help in eliminating most of the commercial and political risk normally retained by the company or any small or medium business owner. As businesses continue to source overseas suppliers and open up new markets for their products, the impact on cash flow cannot be underestimated. Companies are now looking beyond traditional bank financing such as an overdraft to more creative methods that allow funding to be provided off the back of existing trade cycles. Businesses can then release capital which can be used to offer customer discounts or extend credit terms resulting in a competitive advantage for their company. Trade finance can serve as an important part of business as it offers various aspects of managing finances for the company. It helps generate, manage, and establish various finance practices like working capital, factoring solutions, banking solutions, loans, guarantees, discounting, etc. Trade finance companies help reduce marketing cost and increase your trade profitability. They also help in increasing the sales by promoting the products, services or the website around the world. Trade finance companies help in eliminating most of the commercial and political risk normally retained by the company or any small or medium business owner. The financing of small and medium-size enterprises (SMEs) has been a subject of great interest both to policy-makers and researchers because of the significance of SMEs in private sectors around the world.

SHAFIA AHMAD (09BS0002138)

Page 8

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

2.INTRODUCTION 2.1.COMPANY PROFILE
BRIEF HISTORY ABOUT INDUSIND BANK IndusInd Bank derives its name and inspiration from the Indus Valley civilisation - a culture described by National Geographic as 'one of the greatest of the ancient world' combining a spirit of innovation with sound business and trade practices. Mr. Srichand P. Hinduja, a leading Non-Resident Indian businessman and head of the Hinduja Group, conceived the vision of IndusInd Bank. The Bank, formally inaugurated in April 1994 by Dr. Manmohan Singh, Honourable Prime Minister of India who was then the country’s Finance Minister, started with a capital base of Rs.1,000 million (USD 32 million at the prevailing exchange rate), of which Rs.600 million was raised through private placement from Indian Residents while the balance Rs.400 million (USD 13 million) was contributed by NonResident Indians. IndusInd Bank is one of the new generation private-sector banks in India, which commenced its operations in 1994. The Bank caters to the needs of both Consumer & Corporate Clients and has a robust technology platform supporting multi – channel delivery capabilities. The Bank enjoys a patronage of 2 million customers and has a network of 209 branches and 427 ATMs spread over 168 geographical locations in 28 states and union territories across the country. The Bank also has a Representative Office in Dubai and London. The Bank’s total business (deposits plus advances) as on December 31, 2009 crossed Rs. 43,000 crore. The Bank is driven by state-of-the-art technology since its inception. It has imulti-lateral tie-ups with other banks providing access to more than 21000 ATMs for its customers. It enjoys clearing bank status for both major stock exchanges - BSE and NSE - and three major commodity exchanges in the country – MCX, NCDEX, and NMCE. The various services provided by the bank are Personal Banking, Wealth Management, Corporate Banking, International Banking, Investment Banking, Treasury, Capital/Commodities, ASBA and NRI Services. It also offers DP facilities for stock and commodity segments. Various facilities provided to exporters are Export Finance in Rupees, Foreign Currency Denominated Loans for Working Capital/Capital Goods/Services
SHAFIA AHMAD (09BS0002138) Page 9

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Requirements, Forward booking Facilities to Exporters , Exchange Earners Foreign Currency (EEFC) Accounts, Diamond Dollar Account Scheme (DDA). The Bank has been bestowed with the mandate of being a Settlement Banker for tea auctions at Kolkata, Siliguri, Coonoor, Coimbatore and Guwahati. During the quarter, in a pioneering initiative in ‘Green Banking’ the Bank became the first bank in Maharashtra to open a solar-power ATM. Subjects like sustainable development, social responsibility and climate change are fast becoming part of the corporate vocabulary and IndusInd is at the forefront of this change in the Indian banking sector. IndusInd Bank offers special schemes to provide timely credit to Importers/Exporters at competitive interest and exchange rates in Indian rupees well as foreign currency. The main categories of granting trade finance are as under: Importers to avail buyers’/ suppliers’ credit upto 6 months in foreign currency to finalise import. Suppliers’ credit is part of the contract between the importer in India and the supplier abroad. Buyers’ credit is arranged by banks at the instance of the importer. Exporter to avail pre-shipment credit and post-shipment credit in Indian rupee or foreign currency. Exchange Earners to keep certain percentage of receipts in Foreign Currency Account.(EEFC) Indian companies to avail foreign currency loans from banks in India out of banks foreign currency resources in the form of FCNR(B) deposit. Indian companies to avail foreign currency loan for exports at pre and post shipment stage from the credit lines, made available by correspondent bank abroad at the rate fixed by Reserve bank of India. Bank will advise Importer/Exporter to make the choice between rupee and foreign currency finance (or deposit) depending on what is likely to be cost effective. The economies of these facilities depends on the Rupee and foreign currency interest rates, ruling forward premium, exchange rates movements, etc. Some of the important aspects of economies are as under:
SHAFIA AHMAD (09BS0002138) Page 10

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Credit on Imports: a. Credit is limited to 6 months from the date of shipment or any longer period approved by RBI. b. Interest should not exceed prime or equivalent rate for currency of credit. c. Economics is based on: i. Rupee and forex interest rates ii. The exchange rate movement or iii. Cost of Hedging in the forward market iv. Difference in commission charged by banks abroad. v. Deduction/Charging of TDS, including withholding Tax Export Credit There are three alternatives available to exporters under export credit for availing bank finance: a. Pre-shipment credit in Rupees followed by post-shipment credit in rupees b. Pre-shipment in rupees followed by discount and re-discount of export bills in foreign currency. c. Pre-shipment credit in foreign currency followed by re-discount of export bills at the post-shipment stage(EBRD). Export post-shipment credit is available to exporters against the export documents submitted to bank and method of finance will be either purchase/discount or negotiation of bills or granting rupee advance against export credit receivable.The Bank has been awarded the highest P1+ rating for its Fixed Deposits and Certificates of Deposit by CRISIL. Recently, CRISIL has reaffirmed its P1+ rating of IndusInd Bank’s fixed deposits and certificates of deposit program. The rating continues to reflect the Bank’s established presence in the Commercial Vehicle (CV) financing business and the significant
SHAFIA AHMAD (09BS0002138) Page 11

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

improvement in its asset quality. The rating also features in the Bank’s modest resource and earnings profile, and average capitalisation levels.

2.2.OPERATING RESULTS(2008-2009)
 Total business crossed Rs. 37,800 crores  Net Profit up by 98%. to Rs. 148.34 crores  Net Interest Income up by 53% to Rs. 459.03 crores  Fee and Other Income up by 53% to Rs. 456.24 crores  Net NPA at 1.14 % as compared to 2.27% as on March 31, 2008.  Net worth moved to Rs. 1429 crores  Earning per share (Basic) increased to Rs 4.28 from Rs 2.35  Capital Adequacy Ratio stood at 12.33 % as against the minimum regulatory norm

of 9%.
 Highest A1+ rating for its Certificates of Deposit by ICRA and the highest P1+ rating

for its Fixed Deposits and Certificates of Deposit by CRISIL.
 Dividend declared 12% up from 6%.  Bagged The Economic Times Acer Intel Smart Workplace Award, in the Financial

Services category.
 Mandated as Settlement Banker for Tea auctions at Kolkata, Siliguri, Coonoor and

Guwati.
 Loans to grow at 30% CAGR over FY09-12E; SME to be sweet spot- Benefiting

from the small base, recovering economy and strong growth in corporate loan book, IndusInd bank has registered above industry loan growth during past 4 quarters (~20‐30%). As a strategy, going forward, bank intends to broad‐base its corporate customer profile and will be focusing on high yielding SME loans to drive‐in robust credit growth. Being a small bank, it makes sense for the bank to focus on SMEs offering its high end technology products & services at better pricing and create a niche for itself. We expect bank to register 30% CAGR in loans over FY09‐12E, primarily driven by strong growth in corporate loans (primarily SME) and vehicle loans. Bank has strong presence in consumer finance segment; however, off‐late share of corporate loans too has increased in bank’s loan portfolio, indicating
SHAFIA AHMAD (09BS0002138) Page 12

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

increased activity on corporate side, which should further boost banks fee income. Being a small bank, SME remains the key focus segment for the bank to generate fee income, where it can offer its high end technology products and create a niche for itself.

Loans to grow at 30% CAGR over FY09-12E

SHAFIA AHMAD (09BS0002138)

Page 13

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

COMPOSITION OF LOAN BOOK OF INDUSIND BANK

CONTIBUTION OF INDUSIND BANK(KOL) IN SME EXPORTS TO BANGLADESH

EXPORTS TO BANGLADESH(KOLKATA) LEATHER GOODS AUTOPARTS PHARMACEUTICALS MACHINERY FOODS

%COMPOSTION 40% 30% 18% 12%

SHAFIA AHMAD (09BS0002138)

Page 14

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

MAJOR SME CLIENT OF INDUSIND BANK(KOL) MAJOR SME CLIENTS OF INDUSIND BANK (KOL) RA INTERNATIONAL FALCON TYRES WONDER COMMODITIES DOKANIA EXIM NSA EXPORT ARUN ENTERPRISES VIBGOYR GOLD ORIENTAL TRADERS ARITRA TRADING %COMPOSITION 30% 18% 15% 11% 9% 8% 4% 3% 2%

SHAFIA AHMAD (09BS0002138)

Page 15

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

2.3. INTODUCTION TO INTERNATIONAL TRADE FINANCE AND SMALL AND MEDIUM ENTERPRISES

Global trade is the exchange of raw materials, goods and services across the geographical borders of countries across the globe. Foreign trade got its first impetus from the industrial revolution in the late eighteenth and early nineteenth century. Rapid development in transportation facilities resulted in a surge in international trade in the twentieth century. Today, international trade has taken the form of outsourcing and multinational companies (companies that have a presence in several countries). Trade among nations induces countries to specialize in particular products or in particular varieties of some products.
SHAFIA AHMAD (09BS0002138) Page 16

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

This results in a more efficient allocation and utilization of world resources. As the producers benefit from specialization and economies of scale and the customers get a wider range of products to choose from, the economic activities increases, thus giving a push to the economic growth of the world. In today’s global economy, many small and medium-sized companies are looking to banks, and commercial lending organizations to satisfy the financial needs of a growing business. International Trade Finance can offer Letters of Credit and coordinate with the nation’s top factors to meet your company’s Purchase Order Financing and Accounts Receivable Factoring needs. The absence of an adequate trade finance infrastructure is, in effect, equivalent to a barrier to trade. Limited access to financing, high costs, and lack of insurance or guarantees are likely to hinder the trade and export potential of an economy, and particularly that of small and medium sized enterprises. SMALL AND MEDIUM ENTERPRISES SMEs have been playing a pivotal role in country’s overall economic growth, and have achieved steady progress over the last couple of years. From the perspective of industrial development in India, and hence the growth of the overall economy, SMEs have to play a prominent role, given that their labour intensiveness generates employment. The SME segment also plays a major role in developing countries such as India in an effort to alleviate poverty and propel sustainable growth. They also lead to an equitable distribution of income due to the nature of business. Moreover, SMEs in countries such as India help in efficient allocation of resources by implementing labour intensive production processes, given the abundant supply of labour in these countries, wherein capital is scarce. SMEs in India: The Current Scenario Small & Medium industries definition laid down by Govt. in terms of investment in Plant & Machinery : SSI : upto INR 1 mn (USD 22,000 ) MSI : above INR 1mn and up to INR 10 mn (USD 220,000)
SHAFIA AHMAD (09BS0002138) Page 17

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

13 million plus SME units. Employment generation in SSI : 42 Million people. Share in Industrial Value Added: 39% Total No. of items Produced: Over 8000, No. of Reserved items: 675 Production : USD 100 bn, Exports : USD 27 bn (FY2007) SSIs account for 45% of industrial production, 40% of exports, around 17% share in GDP Ownership pattern : 78% proprietorships, 16% partnerships, 6% corporates & others 96% industrial units, 3% service enterprises, 1% ancillary units 2.4. OBJECTIVE OF THE PROJECT  The first and the foremost objective was to find out as to how to enhance trade volumes of Indian SME’s with Bangladesh to benefits the economy of both the countries.  Swot Analysis of Indian SME.  To what extent does the total exports of Indian SMEs contributes to Indian GDP.  To study current trade policies and improvements that can be made to ease the trade relations.  Comparative Data on Overall Industrial Growth Rate, Employment, number of Enterprises, Fixed Investment, Production of Micro, Small and Medium Enterprises 2.5. METHODOLOGY Interacting with bank officials and other staffs of the Foreign Exchange department in the bank to gain the knowledge of import and export finance and risk management and to learn the procedures taken by the bank Secondary Research based on: 1. Business Magazines 2. Internet Sources 3. Finance books. 4. Master Circular-Export, Import and Remittance
SHAFIA AHMAD (09BS0002138) Page 18

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

The project is divided into three phases:1st PHASE: Understanding the concept of Trade Finance. Studying the concept of SME’S and understanding the trade relation between India and Bangladesh. 2nd PHASE: Collection of the various data required for the project and analyzing them to identify as to how the SME’s of India can increase their trade with Bangladesh. 3rd PHASE: Tabulation of the collected data and on the basis of that doing a detailed analysis of the findings. On the basis of the detailed analysis giving the recommendations. 2.6.LIMITATIONS It is a known fact to all that nothing and nobody in this world is perfect! However hard one may try, but certain limitations – directly or indirectly are bound to crop up. Certain aspects which have put limitations on this project are listed below. The foremost limitation is the Time-Constraint. The time frame for the completion of this project is 14 weeks which is undoubtedly a little less. As a result, full utilization of ideas and creativity will remain limited. Only secondary data is used for the research.

SHAFIA AHMAD (09BS0002138)

Page 19

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

3.TRADE FINANCE
“Trade Finance is the science that describes the management of money, banking, credit, investments and assets for international trade transactions” Trade finance is a specific topic within the financial services industry. It is much different, for example than commercial lending, mortgage lending or insurance. It is concerned with international trade. A product is sold and shipped 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 buyers- just like domestic buyers- prefer to delay payment until they receive and resell the goods. Due diligence and careful financial management can mean the difference between profit and loss on each transaction.Trade Finance enables credit worthy businesses to fund purchases from suppliers (particularly wholesalers, distributors and manufacturers.)Trade finance provides alternative solutions that balance risk and payment Trade Finance refers to the institutions, laws, regulations and other systems related to the following three activities: 1. Provision of capital to firms that are engaging in international trade transactions, 2. Provision of support services to manage the risk involved in these transactions, and 3. Provision of international payment mechanisms.

Companies involved with trade finance include importers and exporters, financiers, insurers and other service providers. The Main Players are: • Government agencies • Banks & other Financial Institutions • International Agencies There are many types of financial tools and packages designed to facilitate the financing of trade transactions. They are:

SHAFIA AHMAD (09BS0002138)

Page 20

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

3.1.TRADE FINANCING INSTRUMENTS a) Documentary Credit This is the most common form of the commercial letter of credit. The issuing bank will make the payment, either immediately or at a prescribed date, on the presentation of stipulated documents. These documents include shipping and insurance documents, and commercial invoices. The documentary credit arrangement offers an internationally used method of attaining a commercially acceptable undertaking by providing for payment to be made against presentation of documentation representing the goods, and making possible the transfer of title to those goods. A letter of credit is a precise document whereby the importer’s bank extends credit to the importer and takes responsibility in paying the exporter. b) Countertrade Most emerging economies in today’s time face the problem of limited foreign exchange holdings. One way to overcome this constraint is to promote and encourage countertrade. Today’s modern countertrade appears in so many forms that it is difficult to devise a definition. It generally encompasses the idea of subjecting the agreement to purchase goods or services to an undertaking by the supplier to take on a compensating obligation. The seller is required to accept goods or other instruments of trade in partial or whole payment for its products. Some of the forms of counter trade include: (i) Barter exchange: In case of barter agreements, there are exchanges of goods for goods. For example: there can be exchange of cotton for wheat. This transaction is not a sale but it is a barter transaction. In a sale there is an exchange of goods for price and the price is paid in money. In case of exchange of money for money it is a transaction of exchange and not a sale.

(ii)Counter purchase – The exporter undertakes to buy goods from the importer or from a company nominated by the importer, or agrees to arrange for the purchase by a third party. The value of the counter purchased goods is an agreed percentage of the prices of the goods originally exported.

c) Pre-Shipping Financing
SHAFIA AHMAD (09BS0002138) Page 21

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

It is for the period prior to the shipment of goods, to support pre-export activities like wages and overhead costs. It is especially needed when the inputs for production must be imported. It provides additional working capital for the exporter. Pre-shipment financing is especially vital to smaller enterprises because the international sales cycle is usually longer than the domestic sales cycle. Pre-shipment financing can take the form of short term loans, overdrafts and cash credits. d) Post-Shipping Financing This is financing for the period following shipment. The ability to be competitive often depends on the trader’s credit term offered to buyers. Post-shipment financing ensures adequate liquidity until the purchaser receives the products and the exporter receives payment. Post-shipment financing is usually for a short term. e ) Buyer’s Credit A financial arrangement whereby a financial institution in the exporting 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. f) Supplier’s Credit A financing arrangement under which an exporter extends credit to the buyer in the importing country to finance the buyer’s purchases. 3.2.EXPORT CREDIT INSURANCE In addition to financing issues, traders are also subject to various other risks, which can be either commercial or political. Commercial risk arises from factors like the non-acceptance of goods by buyer, the failure of buyer to pay debt, and the failure of foreign banks to honour documentary credits. Political risk arises from factors like war, riots and civil commotion, blockage of foreign exchange transfers and currency devaluation. Export credit insurance involves insuring exporters against such risks. It is commonly used in Europe, and its vitality is increasing in the United States as well as in developing markets. The types of export credit insurance used vary from country to country and depends on traders’ perceived needs. The most commonly used ones are as follows:  Short-term Export Credit Insurance – Covers periods not more than 180 days.
SHAFIA AHMAD (09BS0002138) Page 22

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

 Protection includes pre-shipment and post-shipment risks, the former covering the period between the awarding of contract until shipment. Protection can also be covered against commercial and political risks.  Medium and Long-term Export Credit Insurance – Issued for credits extending longer periods, medium-term (up to three years) or longer.  Investment Insurance – Insurance offered to exporters investing in foreign countries.  Exchange Rate Insurance – Covers losses as a result of fluctuations in exchange rates between exporters’ and importers’ national currencies over a period of time. The benefits of export credit insurance include: Ability of exporters to offer buyers competitive payment terms. Protection against risks and financial costs of non-payment. Access to working capital. Protection against losses from foreign exchange fluctuations. Reduction of need for tangible security when borrowing from banks.

    

Export credit insurance mitigates the financial impact of the risk. There are specialized financial institutions available that offer insurance cover, with premiums dependent on the risk of the export markets and export products. 3.3.EXPORT CREDIT GUARANTEES Export credit guarantees are instruments to safeguard export-financing banks from losses that may occur from providing funds to exporters. While export credit insurance protects exporters, guarantees protect banks offering the loans. They do not involve the actual provision of funds, but the exporters’ access to financing is facilitated. An export credit guarantee is issued by a financial institution, or a government agency, set up to promote exports. Such guarantee allows exporters to secure pre-shipment financing or postshipment financing from a banking institution more easily. Even in situations where trade financing is commercially available, companies without sufficient track records may not be looked upon favourably by banks. Therefore, the provision of financial guarantees to the banking system for purveying export credit is an important element in helping local companies go into exporting. The agency providing this service has to carefully assess the risk associated in supporting the exporter as well as the buyer. 3.4. LETTER OF CREDIT A letter of credit (LC) is a document issued by a bank to carry out a buyer’s or importer’s specific instructions regarding a trade transaction. The LC specifies the nature of the trade
SHAFIA AHMAD (09BS0002138) Page 23

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

transaction to be conducted, including the dates and destination for shipping merchandise, the necessary documents to be sent by the seller, the method of payment, dates by which the transaction should be completed, and the condition the seller must satisfy to receive payment. These detailed instructions follow a standard format described in the Uniform Customs and Practices for Documentary Credits, International Chamber of Commerce (ICC) Publication Number 500, known as UCP500. The Uniform Commercial Code and the Uniform Customs and Practices for Documentary Credits published by the United States Council of the International Chamber of Commerce set forth the covenants governing the Issuance and negotiation of letters of credit. All letters of credit must be issued: • In favor of a specific beneficiary, • For a specific amount of money, • In a form clearly stating how payment to the beneficiary is to be made and under what conditions, and • With a specific expiration date. The major parties of LC transactions are the buyer (Applicant) and seller (Beneficiary) and their respective banks acting on their behalf. The issuing bank issues the LC and acts on behalf of the buyer. The advising bank acts as an financial agent on behalf of the beneficiary verifying the documents, authorizing the payment to the seller and submitting the documents to the issuing bank. The relationship between the buyer and the seller and their respective banks under an LC provides the buyer and the seller with additional protection against commercial and international risks. For the buyer using an LC substitutes the creditworthiness of the issuing bank for his own. For the seller this substitution reduces the risk of non payment as the issuing bank commits to pay the seller if the documents so provided is correct. The buyer has no right to inspect the merchandise under an LC. The role of the bank involved is solely to review the documents required by the LC. They do not concern themselves with the quality or the nature of the merchandise. For the buyer , once the LC has been successfully performed, the payment obligation must be honored. Letter of credit should be well-defined, written clearly, and understood by both the parties prior to engaging in the transaction to avoid the risk at a later stage. The 4 major parties of an LC are the buyer, the issuing bank, the advising bank, and the beneficiary. Their roles in the transactions are :  The buyer commonly called the account party submits an application requesting an LC with specific instructions on how to proceed with the LC.
SHAFIA AHMAD (09BS0002138) Page 24

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

 The beneficiary is also the seller who, by accepting the LC sent to him\her, must agree to its terms and conditions. The terms of an LC usually require shipping goods or services and submitting the necessary commercial and financial documents to the banks involved with the LC. Once all the obligations have been fulfilled, the beneficiary receives payment for his or her merchandise as stated in the LC.  The issuing bank issues the LC. By doing so the issuing bank substitutes its credit risk for that of the buyer. Once issued, the bank makes itself responsible for the payment outlined in the LC.  The advising bank receives the LC, verifies its authenticity, and delivers , it to the beneficiary. It is common for the advising bank to be a correspondent bank of the issuing bank. CHARACTERISTICS OF LETTER OF CREDIT: Applicability: Recommended for use in new or less-established trade relationships when you are satisfied with the creditworthiness of the buyer‟s bank. Risk: Risk is evenly spread between seller and buyer provided all terms and conditions are adhered to. Pros: Payment after shipment. A variety of payment, financing and risk mitigation options Cons: Process is complex and labor intensive Relatively expensive in terms of transaction costs. VARIOUS TYPES OF LETTER OF CREDIT  IRREVOCABLE An irrevocable LC cannot be revoked or cancelled unilaterally by any party once it has been issued, unless all the parties involved agree to the revocation or the cancellation in writing. This is a vital aspect of an LC as it protects the seller, and it is recommended that all LC’s be irrevocable.  REVOCABLE The opposite is a revocable LC. This type of LC can be cancelled by the issuing bank at any time without the permission of the other parties. Consequently, a revocable LC is seldom used in international trade transactions. To be revocable an LC must state that it is revocable.
SHAFIA AHMAD (09BS0002138) Page 25

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

 STRAIGHT A straight LC requires the beneficiary to present documents and to request payment at the counter of a specific bank. No other bank may be used to negotiate documents.  SIGHT A sight LC requires the banks to provide payment to the beneficiary immediately after determining compliance of the necessary commercial documents. They only acceptable delay to a sight credit is if a reimbursing bank is employed for payment.  USANCE A usance LC is one that calls for a payment at a future date rather than at sight. Under this type of LC, usance(time) drafts will be presented with the required documents. If the documents comply with the LC terms , the draft is “honoured the drawee bank by accepting it for payment at the specified future date. Because the accepted draft is a negotiable instrument, it has an additional advantage to the beneficiary. The beneficiary may elect to receive funds prior to the draft maturity date by requesting the drawee\accepting bank to pay the draft amount on a discounted basis.  NEGOTIABLE A negotiable LC allows the beneficiary to employ any bank as its intermediary to examine documents and request payment, even if this bank is not the advising bank. This bank can on its sole discretion pay the beneficiary provided that the beneficiary fulfills the terms of the credit and all commercial documents are in order.

 TRANSFERABLE A transferable LC allows the beneficiary the right to transfer the proceeds of an LC to another person or persons or beneficiaries. This additional beneficiary becomes a party to the term and conditions of the credit. The credit may be transferred as a whole or in parts to different persons and may involve a complete transfer or only a partial transfer. An LC can be transferred only once. It may not be retransferred. Most LCs today are in payment for goods shipped or services performed. Payment is
SHAFIA AHMAD (09BS0002138) Page 26

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

normally made against documents consisting of commercial invoices, packing lists, certificates of origin, and shipping documents for the goods shipped.

DIAGRAMATIC REPRESENTATION OF:

MECHANISM OF OPERATING OF LETTER OF CREDIT

A) OPENING OF THE LC

EXPORTER,INDIA (BENEFICIARY) SALES CONTRACT

IMPORTER,BANGLADESH (APPLICANT)

FORWARDS LC TO

OPENING OF LETTER OF CREDIT

APPLIES TO

INDUSIND BANK INDIA (ADVISING BANK)

AGRANI BANK,

OPENING LC AND FORWARDS TO

BANGLADESH (OPENING BANK)

SHAFIA AHMAD (09BS0002138)

Page 27

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

B) UTILIZATION OF LC

EXPORTER,INDIA (BENEFICIARY)

SHIPS GOODS

IMPORTER,BANGLADESH (APPLICANT)

MONEY MONEY
DOCUMENTS UTILISATION OF LETTER OF CREDIT DOCUMENTS

INDUSIND BANK INDIA (ADVISING BANK) MONEY DOCUMENTS

AGRANI BANK, BANGLADESH (OPENING BANK)

SHAFIA AHMAD (09BS0002138)

Page 28

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

3.5.RISKS ASSOCIATED WITH TRADE FINANCING From a supervisory perspective, risk is the potential that events, expected or unanticipated, may have an adverse impact on the bank’s capital or earnings. There are nine categories of risk for bank supervision purposes. These risks are: credit, interest rate, liquidity, price, foreign currency translation, transaction, compliance, strategic, and reputation..

The risks associated with trade financing are: credit, foreign currency translation, transaction, compliance, strategic, and reputation.

RISKS ASSOCIATED WITH TRADE FINANCING

CREDIT FOREIGN CURRENCY TRANSACTION COMPLIANCE STRATEGIC TRANSLATION

REPUTATION

These risks are discussed below: Credit Risk Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Credit risk is found in all activities in where success depends on counterparty, issuer, or borrower performance. It arises any time bank funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet.
SHAFIA AHMAD (09BS0002138) Page 29

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

In trade finance, many transactions are self-liquidating or supported by letters of credit and guarantees, and the examiner must review each transaction individually to properly identify and evaluate the sources of repayment. Although trade finance has a low loss ratio historically, it is a very specialized area, and a bank that lacks the appropriate expertise may experience losses because of improper structuring, poor documentation, unfamiliarity with a country’s business practices, or improper pricing. A bank should ensure that documents on shipments of goods are proper and thorough. Any bank engaging in trade finance should thoroughly analyze the risks. In issuing a letter of credit for a domestic importer, the bank must evaluate the importer’s repayment capacity as it would that of any other type of borrower. In confirming or accepting as collateral a foreign bank’s letter of credit, a U.S. bank must evaluate the risk that the foreign importer/bank may not be able to raise the dollars required to repay the transaction because of capital controls in the importing country. Foreign Currency Translation Risk Foreign currency translation risk is the current and prospective risk to earnings or capital arising from the conversion of a bank’s financial statements from one currency into another. It refers to the variability in accounting values for a bank’s equity accounts that result from variations in exchange rates which are used in translating carrying values and income streams in foreign currencies to U.S. dollars. Market-making and position taking in foreign currencies should be captured under price risk. In a trade transaction, foreign currency translation risk arises from the exposure to fluctuations in exchange rates whenever payments involve foreign currencies. The level of risk depends on the currency involved in the transaction, whether the bank creates an open position, the size of any maturity gap, and settlement uncertainties. A bank financing an exporter’s operation by discounting foreign-currency denominated drafts or acceptances encounters foreign currency translation risk because of the time lag between its discounting of the draft or acceptance and its collection from the foreign importer or bank. The U.S. bank will be exposed to foreign currency translation risk from the time it discounts the instrument and pays the local exporter the dollar equivalent of the draft or acceptance until it collects from the foreign counterpart in the foreign currency. If the foreign currency depreciates in relation to the dollar during the time it takes the bank to pay the exporter and to collect on the foreign instrument, the bank incurs a loss. When the U.S. exporter is paid by the foreign importer with a dollar denominated draft, exchange risk may arise from transfer problems. Transfer problems may occur when the foreign importer is located in a country that is having difficulties accumulating hard currency reserves. In those circumstances, the foreign importer may have the local
SHAFIA AHMAD (09BS0002138) Page 30

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

currency to repay its debt but be unable to purchase the dollars because of central bank controls over the sale of hard currency. The payment instructions to the foreign importer’s bank could allow payment to be received from the foreign importer in local currency with the stipulation that, when foreign exchange in U.S. dollars is allocated by the government authorities for the transaction, it should be remitted to the exporter’s U.S. bank. Depending on the scarcity of foreign exchange in the foreign importer’s nation, the wait may be longer than anticipated, exposing the U.S. bank to exchange risk if it discounted the draft. Transaction Risk Transaction risk is the current and prospective risk to earnings or capital arising from fraud, error, and the inability to deliver products or services, maintain a competitive position, and manage information. Risk is inherent in efforts to gain strategic advantage, and in the failure to keep pace with changes in the financial services marketplace. Transaction risk is evident in each product and service offered. Transaction risk encompasses: product development and delivery, transaction processing, systems development, computing systems, complexity of products and services, and the internal control environment. Transaction risk is also referred to as operating or operational risk. This risk is particularly high in trade transactions because of the high level of documentation required in letter of credit operations. Many transactions evolve readily from letters of credit to sight drafts or acceptances or to notes and advances, collateralized by trust or warehouse receipts. Repayment often depends on the eventual sale of goods and the accuracy of documentation. Thus, the documents required to secure payment under the letter of credit should be properly handled. Compliance Risk Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain bank products or activities of the bank’s clients may be ambiguous or untested. Compliance risk exposes the institution to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can lead to a diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential, and an inability to enforce contracts. Compliance risk can be overlooked because it often blends into transaction risk and operational processing. In trade transactions, failure to comply with domestic and
SHAFIA AHMAD (09BS0002138) Page 31

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

international laws, such as the anti-boycott provisions of the Export Administration Act or regulations enforced by the Department of the Treasury, Office of Foreign Asset Control may result in fines and prevent the bank from collecting on a transaction. The bank must be aware of the laws of the country in which the counterpart to the domestic customer is located. The bank must ensure that collection and penalty procedures stipulated in the contract are enforceable in the foreign country. For this reason many banks rely on foreign correspondent bank relationships in the countries where they are active but lack branches. Strategic Risk Strategic risk is the current and prospective risk on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. This risk is a function of the compatibility of an organization’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, delivery networks, and managerial capacities and capabilities. The organization’s internal characteristics must be evaluated against the impact of economic, technological, competitive, regulatory, and other environmental changes. Strategic risk in trade financing arises when a bank does not know enough about the region in which it is doing business or the financing product it is using. A bank considering whether to finance trade must carefully develop its financing strategy. Reputation Risk Reputation risk is the current and prospective impact on earnings and capital arising from negative public opinion. This affects the institution’s ability to establish new relationships or services or to continue servicing existing relationships. This risk may expose the institution to litigation, financial loss, or a decline in its customer base. Reputation risk exposure is present throughout the organization and includes the responsibility to exercise an abundance of caution in dealing with its customers and community. Trade financing is an area where reputation and market perception is particularly important. Trade financing requires expedient processing of operations and significant attention to details of documents. A bank’s failure to meet these requirements may result in financial losses to the bank and its customers, and may diminish its business opportunities in the trade financing community. To regain its foothold, the bank may have to lower prices on its products and fund expensive advertising/public relations efforts.
SHAFIA AHMAD (09BS0002138) Page 32

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Risk Management In reviewing risk, examiners should determine that a bank has adequate safeguards in place to identify, measure, monitor, and control risks inherent in the trade finance area. Such safeguards include policies, procedures, internal controls, and management information systems governing trade finance activities. The importance of strong internal controls in this area cannot be overemphasized. There is a growing incidence of counterfeit letters of credit, totaling millions of dollars. Often, these counterfeit instruments are not identified in a timely manner. A significant amount of funds can be released before the schemes are detected. Bankers should closely monitor every detail of a letter of credit transaction. Examiners should also assess the capabilities of the trade finance staff and the adequacy of their training. A bank’s trade finance policy should identify the target market, prospective customers, and desirable countries, and it should set country limits and minimum standards for documentation. The bank’s trade credit administration system should be documented in a complete and concise manner and should include, when appropriate, narrative descriptions, flowcharts, copies of forms, and other pertinent information. Adequate documentation is the principal means available to reduce or eliminate risks inherent in international trade. Therefore, operating policies and procedures should address the documentation requirements for each transaction, and internal controls should be established to ensure adequate reviews. A well-organized and efficient backroom operation is essential because of the amount of documentation involved. There is always the risk that a shipment will be damaged or destroyed, the wrong goods will be shipped, or the quality of goods (especially if the goods are agricultural) will be lower than stipulated. Insurance coverage is crucial to protect the buyer, the seller, and the issuing bank from loss. Banks should not issue commercial letters of credit without satisfactory insurance coverage.

SHAFIA AHMAD (09BS0002138)

Page 33

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

4.INDO-BANGLADESH TRADE RELATION
The two Governments i.e. India and Bangladesh recognized the need and requirement of each other in the context of their developing economies undertake to explore all possibilities, including economic and technical cooperation, for promotion, facilitation, expansion and diversification of trade between the two countries on the basis of equality and mutual benefit. Relationship with India is important for Bangladesh in its greater interest. This is because India is Bangladesh's close-door neighbour and has high 'geo-political' importance in the sub-continent. There have been various attempts to promote greater trade between India and Bangladesh under the provision of SAPTA (South Asian Preferential Trading Agreement) and SAFTA (South Asian Free Trade Area). The trading relationship between India and Bangladesh is currently of special interest in both countries for a number of reasons. Firstly, there are urgent and longstanding concerns in Bangladesh arising from the perennial, large bilateral trade deficit with India, and from the large volumes of informal imports from India across the land border which avoid Bangladesh import duties. These concerns have been particularly acute on the Bangladesh side in the context of discussions between the two governments of the possibility of a bilateral free trade agreement along the lines of the India-Sri Lanka FTA. Secondly, even though (because of the disparity in the size of the two economies) India’s trading relationship with Bangladesh is much less significant for it than it is for Bangladesh, closer economic integration with Bangladesh is nevertheless seen as a very important way of reducing the economic and political isolation of the seven Indian eastern and north eastern states from the rest of the country. Finally, both countries have long shared common objectives for closer economic integration within the South Asia region, and these have recently been re-emphasised by signing on to SAFTA, which is to come into force in January 2006. Under SAFTA, the preferential tariffs agreed in the various rounds of SAPTA- so far largely ineffective in generating much intra-regional trade-- will continue, but a number of ambitious new objectives have been enunciated. These include the eventual elimination of tariffs and non-tariff barriers on trade between the members, the harmonisation of Customs procedures and documentation, the facilitation of banking relationships, and cooperation and improvements in the infrastructure for regional trade and cross-border investments. Under four rounds of negotiations, India had offered concessions on 2,927 products (at 6digit HS Classification), of which 2,450 products were offered exclusively to least developed countries (LDCs) including Bangladesh. Later, India offered 100 per cent tariff concessions on 16 product groups consisting of 40 tariff lines to Bangladesh during the trade review

SHAFIA AHMAD (09BS0002138)

Page 34

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

talks in April 2002, held in Dhaka. Duty-free access was announced for items under another 39 tariff lines during the trade review talks held in March 2003.

INDIA’S MERCHANDISE TRADE WITH BANGLADESH

Indicator Exports Imports Trade Balance Total external debt Market borrowings Export credit Commercial borrowings

Units Rs.crore Rs.crore

Expression Ival Ival

Dec-01 201356 228307

Dec-02 209018 245200

Dec-03 255137 297206

Dec-04 293367 359108

Dec-05 375340 501065 125725 581802 137509

Dec-06 456418 660409 203991 616144 142166

Dec-07 571779 838048 266269 746918 211906

Dec-08 655864 1005159

Rs.crore Rs.crore Rs.crore

Ival Ival Ival

-26951 472625 141464

-36182 482328 140018

-42069 498804 130593

-65741 491078 116164

-349295 892912 290668

Rs.crore Rs.crore

Ival Ival

27625 113839

26110 113908

23750 106843

20553 95611

21976 115533

24175 117991

31237 180669

41413 249255

SHAFIA AHMAD (09BS0002138)

Page 35

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

INDIA’S TOP EXPORT COMMODITY GROUPS TO BANGLADESH IN 2004-05

HS-HARMONIZED CODE 4.1.BILATERAL TRADE AND EXCHANGE RATES In 2004 India’s officially recorded exports to Bangladesh were about $1.7 billion but its imports from Bangladesh were just $78 million. Indian exports to Bangladesh grew very rapidly during the 1990s, and have continued to grow since 2000. By contrast Bangladesh exports to India-almost zero in the early 90s-have stagnated at very low levels at well below $100 million annually. In inflation adjusted US dollars they are presently about the same as they were 20 years ago during the 1980s. Since 1996/97 Indian exports to Bangladesh (in nominal US dollars) have been growing at 9.1% annually, just slightly above the general rate of growth of its total merchandise exports (8.4%), but India’s imports from Bangladesh over the same period have grown on average at only 3% annually, compared to average growth of its total imports of 9.2%. Consequently Bangladesh’s bilateral trade deficit with India has been increasing rapidly, on average at about 9.5 % annually. For India, trade with Bangladesh is a very small part of its total trade-just over one percent since the mid-1990s, and currently about 3 percent of its total exports and a miniscule
SHAFIA AHMAD (09BS0002138) Page 36

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

share (0.01%) of its total imports. For Bangladesh, however, India has now become the largest single source of its imports. Prospects for bilateral trade to rise are greater when one country has a clear comparative advantage in products that figure prominently in the import structure of another country. India has a ‘revealed comparative advantage’ in many goods which is why Indian imports to Bangladesh have been growing over the years. Bangladesh, on the other hand, has relatively limited scope for enhancing its exports because it lacks a similar `revealed comparative advantage’

RECORDED INDIA-BANGLADESH TRADE 1990/01-2003/04

$USMILLION

SHAFIA AHMAD (09BS0002138)

Page 37

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

4.2.INDO-BANGLADESH TRADE POLICIES India’s Trade Polices include: Non-tariff barriers. Removing tariff from intermediate and capital goods. Specific duties protecting the textile and garment industries. India’s SAPTA(South Asian Prefrential Trade Agreement) preference for Bangladesh Export policies.

Bangladesh’s Trade Policies include: Non tariff barriers. Custom clearance at Land Border Custom Posts. Para-tariffs. “End-User” tariff concessions. Bangladesh Tariff Preference for India.

SHAFIA AHMAD (09BS0002138)

Page 38

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

INDIA’S EXPORT OF PRINCIPAL COMMODITIES

P: Provisional. R: Revised Note : 1. Figures in brackets represent percentage to total exports. 2. Leather & manufactures include finished leather, leather goods, leather garments, footwear of leather & its components and saddlery & harness. 3. Engineering goods comprise ferro alloys, aluminium other than products, non-ferrous metal, manufactures of metals, machine tools, machinery and equipments, transport equipments, residual engineering items, iron and steel bar/rod etc., primary and semi-finished iron and steel, electronic goods, computer software and project goods. 4. Textiles and Textile Products includes: (a) cotton yarn, fabrics, made-ups etc., (b) natural silk yarn, fabrics made-ups etc., (c) manmade yarn, fabrics, made-ups etc., (d) manmade staple fibre, (e) woolen yarn, fabrics, made-ups etc., (f) readymade garments, (g) jute and jute manufactures, (h) coir & coir manufactures and (i) carpets

SHAFIA AHMAD (09BS0002138)

Page 39

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

5.DEFINITION OF SMEs IN INDIA
With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. There is no universal definition of small and medium enterprises. In some countries, there are certain objective standards, which classify the units as micro, small or medium enterprises depending on the number of employees. In some other countries, annual turnover of the company determines the size of an enterprise. The concept of size is also a relative phenomenon with reference to the local economies, since a large company in a small country could possibly be considered as a small company in a larger country. The Micro, Small and Medium Enterprises Development Act, 2006 has come into force on 2nd Oct 2006. Under the Act, the SMEs category in India comprises: (A) Micro Enterprises (B) Small Enterprises (C) Medium Enterprises The criteria fixed for identification are tabulated below for easy reference:

Classification

Micro Enterprises

Small Enterprises

Investment in Plant and Machinery (For Manufacturing Enterprises) Investment in Plant and Machinery ceiling upto Rs.25 Lacs Investment in Plant and Machinery above Rs. 25 Lacs but upto ceiling of Rs.500 Lacs Investment in Plant and Machinery above Rs.500 Lacs but upto ceiling of Rs.1000 Lacs

Investment in Equipments (For Service sector Enterprises) Investment in Equipments ceiling upto Rs. 10 Lacs Investment in Equipment above Rs. 10 Lacs but upto ceiling of Rs. 200 Lacs Investment in Equipment above Rs.200 Lacs but upto ceiling of Rs. 500 Lacs

Medium Enterprises

Internationally, SME is categorized with no subtypes. The Ganguly Committee has recommended that on India, THREE TYPES OF SMEs recognized. 1. Tiny Type : Annual turnover upto Rs.2 crores. 2. Small Type : Annual turnover of more than Rs.2 crores but upto Rs.10 crores. 3. Medium Type : Annual turnover of more than Rs.10 crores but upto Rs.50 crores.
SHAFIA AHMAD (09BS0002138) Page 40

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

5.1. WHY FOCUS ON SMEs SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; non-concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. SMEs developed in a manner, which made it possible for them to achieve the following objectives:

• • • • • • • • • • •

High contribution to domestic production Significant export earnings Low investment requirements Operational flexibility Location wise mobility Low intensive imports Capacities to develop appropriate indigenous technology Import substitution Contribution towards defense production Technology oriented industries Competitiveness in domestic and export markets

SHAFIA AHMAD (09BS0002138)

Page 41

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

SMEs have been established in almost all-major sectors in the Indian industry such as: PRODUCTS OF SME Food Processing Chemicals & Pharmaceuticals Basic metal Industry Metal products Electrical and Machinery Parts Rubber and Plastic Products Others % composition 22% 12% 10% 8% 6% 6% 36%

SHAFIA AHMAD (09BS0002138)

Page 42

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

5.2.CONSTRAINTS OF SMEs IN INDIA The constraints those come across by the SMEs in India to be export competitive include product reservations, regulatory hassles– both at the entry and exit stages, insufficient finance at affordable terms, inflexible labor markets and infrastructure related problems like high power tariff, and insufficient export infrastructure. These are briefly elaborated below: a) Lack of entrepreneurial, managerial and marketing skills b) Bureaucracy and red tape c) Lack of accessibility to information and knowledge d) Difficulties accessing financial resources/Lack of capital e) Lack of accessibility to investment (technology equipment and know-how) f) Non-conformity of standardization, lack of quality awareness and lack of mutual recognition schemes g) Product and service range and usage differences h) Language barriers and cultural differences i) Risks in selling abroad j) Competition of indigenous SMEs in foreign markets k) Inadequate behaviors of multinational companies against domestic SMEs/Lack of government supply-supporting programs l) Complexity of trade documentation including packaging and labeling m) Lack of government incentives for internationalization of SMEs n) Inadequate intellectual property protection The following are the issues of SME financing: • They are unable to capture market opportunities, which require large production facilities and thus could not achieve economies of scale, homogenous standards and regular supply. • They are experiencing difficulties in purchase of inputs such as raw materials, machinery and equipments, finance, consulting services, new technology, highly skilled labor etc. • Small size hinders the internalization of functions such as market research, market intelligence, supply chain, technology innovation, training, and division of labor that impedes productivity. • Emphasis to preserve narrow profit margins makes the SMEs myopic about the innovative improvements to their product and processes and to capture new markets.

SHAFIA AHMAD (09BS0002138)

Page 43

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

• They are unable to compete with big players in terms of product quality, range of products, marketing abilities and cost. • And most importantly, absence of a wide range of Financing and other services those are available to raise money and sustain the business. • Absence of Infrastructure, quality labor, Business acumen and limited options / opportunities to widen the business. • Poor IT and Knowledge infrastructure.

SHAFIA AHMAD (09BS0002138)

Page 44

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

5.3.SWOT ANALYSIS-SMEs IN INDIA STRENGTH CONTRIBUTION INCOME GROWTH TO NATIONAL WEAKNESS LACK OF FUNDS LACK OF MARKETING SKILL LACK OF INFORMATION LACK OF MANAGEMENT SKILLS LACK OF ACCESS TO TECNOLOGICAL INFORMATION AND CONSULTANCY SERVICES NON-AVAILABILITY OF TECHNICALLY TRAINED HUMAN RESORCES POOR ADAPTIBILITY TO CHANGING TRADE TRENDS

REGIONAL DEVELOPMENT TECHNOLOGICAL INNOVATION EXPORT MARKET EXPANSION GENERATING EMPLOYMENT

OPPORTUNITY WTO REGIME ENHANCED CREDIT SUPPORT GROWING DOMESTIC AND INTERNATIONAL MARKETS MARKETING ASSISTANCE AND GROWING EXPORT PROMOTION SUPPORT COMPREHENSIVE SUPPORT FOR CLUSTER DEVELPOMENT SUPPORT FOR TECHNOLOGICAL UPGRADATION BILATERAL AND MULTILATERAL TRADE AGREEMENTS

THREAT DUMPING FROM DEVELOPED COUNTRIES DISTRUST BETWEEN SMEs AND FINANCIAL INSTITUTIONS POOR INCENTIVE STRUTURES FOR ENTREPRENEURS VIRTUAL ABSENCE OF ENTERPRISE EDUCATION NO TARIFF BARRIERS FROM DEVELOPED COUNTRIES SLOW IMPROVEMENT IN QUALITY TO MEET THE INTERNATIONAL STRANDARDS

SHAFIA AHMAD (09BS0002138)

Page 45

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

5.4.INDIAN SMEs - STRATEGIC THRUSTS FOR THE FUTURE Drawing from the experiences of countries that have successfully promoted the export competitiveness of SMEs, the following section lays down the strategy for Indian SMEs to achieve their export potential and make them increasingly export oriented. Promoting the export competitiveness of SMEs needs the active involvement of various stakeholders – government, the private sector and the international community. This section has addressed policy recommendations for them. ROLE OF GOVERNMENT Creating a business-friendly environment: The points for the creation and further development of a business-friendly environment enabling SMEs to start exporting, or to help consolidate the activities of SMEs that are already exporting are outlined below: a) Combating of corruption and redtapism that hinder the growth and export potential of SMEs. b) Creation or reform of administrative and legal institutions in order to guarantee SMEs a stable legal framework in which to operate, and to facilitate an antimonopolistic and competitive business environment. c) Delivery of an appropriate public infrastructure, especially in transportation, power, telecommunications and other infrastructure needed to enable domestic and external trade (e.g. testing and certification laboratories). Measures to improve SMEs’ access to finance: This may include, a) Providing credits directly from state owned banks to SMEs; b) Liquidity incentives to commercial banks that provide loans to SMEs (lowering of reserve requirements, access to discount lines, etc.); c) Interest rate subsidies; d) Guarantee programs; and so on and so forth. Measures to encourage TNCs to create linkages with SMEs: Provided the local suppliers’ capacities are sufficient to meet the needs of foreign investors efficiently, these measures include: a) Prescriptive measures like high tariffs on imports or local content requirements, Incentives: benefits such as tax exemptions, the possibility to treat costs related to linkages
SHAFIA AHMAD (09BS0002138) Page 46

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

formation as tax-deductible expenses and granting foreign investors a special status that entitles them to various types of fiscal or financial incentives. b) Contractual arrangements with foreign investors, such as privatization transactions and license concessions. SME trade promotion through public-private partnerships: Governments may approach domestic and foreign large corporations to design specific institutions or tools to provide exporting or promising SMEs with specific services. Such partnerships can take various forms, including: a) Training facilities, b) Technology upgrading centers, c) Research and testing labs, d) Scientific hubs, e) Investment funds, f) Incubators, etc. ROLE OF PRIVATE SECTOR A wide range of measures could also be considered at the B2B level to boost the export capacities of SMEs in India. Key factors and possible measures include: TNCs: In manufacturing, TNCs and their foreign affiliates can do more to drive or guide the competitiveness upgrading of selected local SMEs suppliers and subcontractors. Clusters: SMEs should be encouraged to work in a cluster environment ensuring complementarities, common activities, collective goods and institutional stability. This strategy requires sector specific actions, aimed at increasing the competitiveness of the cluster, promoting networks and cooperation amongst firms. National governments, local authorities, TNCs and SMEs associations should be involved in efforts to identify the optimal division of labor among individual SMEs, large firms and central/local governments in developing countries so as to enable duplication of the successes of the best exporting SME clusters and industrial districts Financial and non-financial business development services (BDS): Smooth access to financial and non-financial services can play a role in supporting some SMEs aiming at exporting or to consolidate regular foreign orders.

SHAFIA AHMAD (09BS0002138)

Page 47

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Combination of financial and non-financial support services: The rigid separation between financial and technical service providers should be reduced to improve proximity to the real multi-level needs of SME exporters. The combination and teamwork of financial and technical services should be much more systematically explored both by banks and by BDS providers to match SME export needs. ROLE OF INTERNATIONAL SOCIETY TNCs’ business linkages for exporting SMEs should be part of the UN agenda: TNCs and other large firms could play a more driving role in enhancing local SME development, and SME export competitiveness in particular, through various forms of FDI and business linkages. National policy versus international commitments: An important issue is the choice between incentives and subsidies for exporting SMEs, their compatibility and legality with existing international agreements needs further exploration. SMEs’ access to finance: The international community should play a more active role in facilitating SMEs’ access to finance. This can be achieved in the following ways: a) Enhancing SME export credit and long-term finance: Facilitating SME access not only to short-term export credit but also to long-term loans for the expansion of SME export capacity. The issue of credit collateral and guarantees should be revised. Foreign buyers, TNCs and other business linkage makers should be invited as facilitators or guarantors. b) Coordination between financial and non-financial support institutions: Agreements with selected financial institutions to enable SMEs to quickly access medium- to long term finance at preferential interest rates; and export development and investment funds (EDIF) designed to improve the export competitiveness of SMEs at low comparative interest rates.

SHAFIA AHMAD (09BS0002138)

Page 48

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

6.FINDINGS
COMPARATIVE DATA ON GROWTH RATES OF MSE SECTOR The MSE sector has maintained a higher rate of growth vis-à-vis the overall industrial sector as would be clear from the comparative data on growth rates of production.

**: IIP-INDEX OF INDUSTRIAL PRODUCTION *: PROJECTED

SHAFIA AHMAD (09BS0002138)

Page 49

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

As per the latest 4th Census the projected corresponding figure for the year 2008-09 was 285 lakh enterprises generating employment for about 659 lakh persons. The following chart depicts the number of enterprises, employment and the magnitude of fixed investment in MSMEsector. NUMBERS OF ENTERPRISES IN MSME SECTOR YEAR 2004-2005 2005-2006 2006-2007 2007-2008* 2008-2009* *PROJECTED DATA NO. OF ENTERPRISES(IN LACS) 118.59 123.42 261.01 272.79 285.16

SHAFIA AHMAD (09BS0002138)

Page 50

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

SIZE OF THE REGISTERED MSE SECTOR DETAILS OF WORKING ENTERPRISES NUMBER OF MANUFACTURING ENTERPRISES NUMBER OF SERVICE ENTERPRISES TOTAL NUMBER MSMEs %AGE DISTRIBUTION OF TOTAL UNITS %AGE SHARE OF MANUFACTURING UNITS %AGE SHARE OF SERVICE UNITS MICRO 974609 501072 1475681 95.05 94.16 96.85 SMALL 57666 15915 73581 4.74 5.57 3.08 MEDIUM 2828 402 3230 0.21 0.27 0.008 TOTAL 1035103 517389 15524292 100 66.67 33.33

SHAFIA AHMAD (09BS0002138)

Page 51

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

EMPLOYMENT IN MSME SECTOR

YEAR 2004-2005 2005-2006 2006-2007 2007-2008* 2008-2009* *PROJECTED DATA

EMPLOYMENT (NO. IN LAKHS) 282.57 294.91 594.61 626.34 659.35

SHAFIA AHMAD (09BS0002138)

Page 52

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

CONTRIBUTION OF MSMEs IN THE GROSS DOMESTIC PRODUCT (GDP)

*PROJECTED DATA

SHAFIA AHMAD (09BS0002138)

Page 53

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

FIXED INVESTMENT IN MSME SECTOR YEAR 2004-05 2005-06 2006-07 2007-08* 2008-09* *PROJE CTED DATA FIXED INVESTMENT(VALUE IN RS. CRORES) 178699 188113 500758 558190 621753

SHAFIA AHMAD (09BS0002138)

Page 54

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

PRODUCTION IN TERMS OF GROSS OUTPUT IN MSME SECTOR

YEAR 2004-05 2005-06 2006-07 2007-08* 2008-09* *PROJECTED DATA

PRODUCTION IN CURRENT PRICES(IN CRORES) 429796 497842 709398 790759 880805

SHAFIA AHMAD (09BS0002138)

Page 55

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

FOREIGN INVESTMENTS INFLOWS A. Direct investment Rs. US $ crore million 174 97 316 965 1838 4126 7172 10015 13220 10358 9338 18406 29235 24367 19860 27188 39674 103367 129 315 586 1314 2144 2821 3557 2462 2155 4029 6130 5035 4322 6051 8961 22826 B. Portfolio investment Rs. US $ crore million 11 6 10 748 11188 12007 9192 11758 6794 -257 13112 12609 9639 4738 52279 41854 55307 31713 4 244 3567 3824 2748 3312 1828 -61 3026 2760 2021 979 11377 9315 12492 7003 Total (A+B) Rs. US $ crore million 185 103 326 1713 13026 16133 16364 21773 20014 10101 22450 31015 38874 29105 72139 69042 94981 135080 248017 133 559 4153 5138 4892 6133 5385 2401 5181 6789 8151 6014 15699 15366 21453 29829 61633

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

2007-08 138276 34362 109741 27271 Note : 1 Data for 2007-08 and 2008-09 are provisional.

2. Data from 1995-96 onwards include acquisition of shares of Indian companies by nonresidents under Section 6 of FEMA, 1999. Data on such acquisitions are included as part of FDI since January 1996. 3. Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices. Data from 2000-01onwards are not comparable with FDI data for earlier years. 4. Negative (-) sign indicates outflow. 5. Direct Investment data for 2006-07 include swap of shares of 3.1 billion.

SHAFIA AHMAD (09BS0002138)

Page 56

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

YEAR

EXPORTS TO BANGLADESH(CRORES)

1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

990859 1043497 989351 1141530 1348151 1469298 2107519 1934143 1975885 1999187

SHAFIA AHMAD (09BS0002138)

Page 57

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

EXPORTS TO BANGLADESH IN CRORES

THROUGH THE ABOVE DATA I TRIED TO STUDY THE EFFECT OF FII ON INDIAN EXPORTS TO BANGLADESH.THE RESULT OF WHICH WAS THAT THE FII INVESTMENTS HAS NO SIGNIFICANT EFFECT ON THE INDIAN EXPORTS TO BANGLADESH

SHAFIA AHMAD (09BS0002138)

Page 58

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

DATA ON WHOLE PRICE INDEX (WPI) AND INDIAN EXPORTS TO BANGLADESH(19992009) YEARS Dec-99 Jan-00 Feb-00 MRC00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 1-Jan 1-Feb MRC01 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec 2-Jan 2-Feb MRC02
SHAFIA AHMAD (09BS0002138)

WPI INDIA 146.1 145.9 146.4 149.5 151.7 151.8 152.7 153.1 153.4 154.7 157.9 158.2 158.2 158.6 158.6 159.1 159.9 160.3 160.8 161.2 161.7 161.7 162.5 162.3 161.8 161 160.8 161.9

IND EXPORTS 26523.96 20837.76 24669.51 29688.46 27033.18 29301.59 24069.11 21193.13 15604.58 17896.48 21580.57 55563.23 61545.6 47926.4 35705.1 41398.62 29684.78 41115.94 40598.53 50893.51 40864.88 44350.93 36639.63 38934.23 24143.33 24848.39 27248.18 37202.52
Page 59

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

2-Apr 2-May 2-Jun 2-Jul 2-Aug 2-Sep 2-Oct 2-Nov 2-Dec 3-Jan 3-Feb MRC03 3-Apr 3-May 3-Jun 3-Jul 3-Aug 3-Sep 3-Oct 3-Nov 3-Dec 4-Jan 4-Feb MRC04 4-Apr 4-May 4-Jun 4-Jul 4-Aug 4-Sep 4-Oct 4-Nov 4-Dec
SHAFIA AHMAD (09BS0002138)

162.3 162.8 164.7 165.7 167.1 167.4 167.5 167.8 167.2 167.8 169.4 171.6 173.1 173.4 173.6 173.4 173.7 175.6 176.1 176.9 176.8 178.6 179.8 179.8 180.9 182.1 185.2 186.6 188.4 189.4 188.9 190.2 188.8

39041.34 22644.84 40517.23 37364.14 28376.68 32249.12 34406.28 41614.22 35516.95 34397.29 31226.06 69813.49 66347.77 40722.05 32224.18 62521.6 51484.86 59390.31 54904.57 61301.85 66364.23 66567.99 59004.69 88229.53 53136.07 45796.57 47147.42 56800.81 52833.27 52373.85 52991.51 70749.23 62050.95
Page 60

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

5-Jan 5-Feb MRC05 5-Apr 5-May 5-Jun 5-Jul 5-Aug 5-Sep 5-Oct 5-Nov 5-Dec 6-Jan 6-Feb MRC06 6-Apr 6-May 6-Jun 6-Jul 6-Aug 6-Sep 6-Oct 6-Nov 6-Dec 7-Jan 7-Feb MRC07 7-Apr 7-May 7-Jun 7-Jul 7-Aug 7-Sep
SHAFIA AHMAD (09BS0002138)

188.6 188.8 189.4 191.6 192.2 193.2 194.6 195.3 197.2 197.8 198.2 197.2 196.3 196.4 196.8 199 201.3 203.1 204 205.3 207.8 208.7 209.1 208.4 208.8 208.9 209.8 211.5 212.3 212.3 213.6 213.8 215.1

72413.73 68593.11 82473.28 65095.58 60126.31 53825.47 58593.4 43682.84 57273.81 57312.28 52176.98 78032.89 72811.74 68980.53 68344.19 67815.33 60510.83 60312.67 57048.3 61050.57 57747.15 53527.9 65934.16 56646.63 52469.7 61322.58 77200.39 76913.87 66951.45 52020.39 59575.37 79631.24 84401.61
Page 61

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

7-Oct 7-Nov 7-Dec 8-Jan 8-Feb MRC08 8-Apr 8-May 8-Jun 8-Jul 8-Aug 8-Sep 8-Oct 8-Nov 8-Dec 9-Jan 9-Feb MRC09 9-Apr 9-May 9-Jun 9-Jul 9-Aug 9-Sep 9-Oct 9-Nov 9-Dec .

215.2 215.9 216.4 218.1 219.9 225.5 228.5 231.1 237.4 240 241.2 241.5 239 234.2 229.7 228.9 227.6 228.2 231.5 234.3 235 238.7 240.8 242.6 242.5 247.2 248.3

75297.98 74953.74 89313.02 109911.4 118105.2 141666.9 95647 100824.1 115044.5 106037.9 93639.93 93225.13 80947.27 87345.8 91443.74 55721.27 70903.65 89174.06 89876.09 80987.09 74238.4 109056.1 85565.2 86012.88 95559.83 100608.5 99660.09

SHAFIA AHMAD (09BS0002138)

Page 62

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

WHOLE PRICE INDEX (1999-2009)

INDIAN EXPORTS TO BANGLADESH (1999-2009)

FROM THE GRAPHS WE CAN SEE THAT WPI PLAYS AN IMPORTANT ROLE IN BOOSTING INDIAN EXPORTS TO BANGLADESH.

SHAFIA AHMAD (09BS0002138)

Page 63

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

DATA ON INDEX OF INDUSTRIAL PRODUCTION AND INDIAN EXPORTS TO BANGLADESH YEARS Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02
SHAFIA AHMAD (09BS0002138)

IIP DATA 166.1 163.2 161.6 174.5 156.5 160 154.9 156.5 157.7 158.7 157.4 163.3 172.1 170.2 166.4 178.6 160.4 162.5 159 160.4 162.2 161.7 162.2 167 177.1 176.9 170.3 184.2 167 169.2 166.2 171.8 172.2 171.8

INDIAN EXPORTS TO BANGLADESH 26523.96 20837.76 24669.51 29688.46 27033.18 29301.59 24069.11 21193.13 15604.58 17896.48 21580.57 55563.23 61545.6 47926.4 35705.1 41398.62 29684.78 41115.94 40598.53 50893.51 40864.88 44350.93 36639.63 38934.23 24143.33 24848.39 27248.18 37202.52 39041.34 22644.84 40517.23 37364.14 28376.68 32249.12
Page 64

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05
SHAFIA AHMAD (09BS0002138)

173.6 173.9 188 188.8 182.2 195 174 180 177.3 183.1 182.1 184.7 184.4 188.2 202 203.9 197.3 210.7 189.5 192.3 190.3 198.7 197.8 202.8 204 202.7 220 219.2 208.9 231.4 204.9 213 213.6 208.1 212.9 217.4 223.9 214.8 232.5

34406.28 41614.22 35516.95 34397.29 31226.06 69813.49 66347.77 40722.05 32224.18 62521.6 51484.86 59390.31 54904.57 61301.85 66364.23 66567.99 59004.69 88229.53 53136.07 45796.57 47147.42 56800.81 52833.27 52373.85 52991.51 70749.23 62050.95 72413.73 68593.11 82473.28 65095.58 60126.31 53825.47 58593.4 43682.84 57273.81 57312.28 52176.98 78032.89
Page 65

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09
SHAFIA AHMAD (09BS0002138)

237.9 227.3 251.9 225.2 237.9 234.4 235.5 234.8 243.5 234 248.8 263.7 265.5 252.2 289.1 250.7 263.1 255.3 255 260.3 260.5 262.6 261 284.7 281.9 276.2 304.9 266.3 274.6 269.2 271.3 264.7 276.2 262.9 267.6 284 284.8 276.8 305.9

72811.74 68980.53 68344.19 67815.33 60510.83 60312.67 57048.3 61050.57 57747.15 53527.9 65934.16 56646.63 52469.7 61322.58 77200.39 76913.87 66951.45 52020.39 59575.37 79631.24 84401.61 75297.98 74953.74 89313.02 109911.4 118105.2 141666.9 95647 100824.1 115044.5 106037.9 93639.93 93225.13 80947.27 87345.8 91443.74 55721.27 70903.65 89174.06
Page 66

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Apr-09 269.3 May-09 280.3 Jun-09 291.6 Jul-09 290.8 Aug-09 292.8 Sep-09 302 Oct-09 289.7 Nov-09 299.8 Dec-09 334 INDEX OF INDUSTRIAL PRODUCTION DATA (1999-2009)

89876.09 80987.09 74238.4 109056.1 85565.2 86012.88 95559.83 100608.5 99660.09

INDIAN EXPORTS TO BANGLADESH (1999-2009)

FROM THE ABOVE GRAPHS WE CAN ANALYSE THAT INDEX OF INDUSTRIAL PRODUCTION IS PLAYING A PIVOTAL ROLE IN BOOSTING INDIAN EXPORTS.

SHAFIA AHMAD (09BS0002138)

Page 67

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

SHAFIA AHMAD (09BS0002138)

Page 68

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Note : 1) 2007-08 data are Provisional. 2) Since 2001-02, production figures are at 2001-02 prices. 3) The estimates of employment for the period 2002-03 to 2005-06 have been revised. The Third All-India Census surveyed the units registered upto 2000-01, while its reference period was 2001-02. Adjustments have been made in the estimates using the number of units registered with State/UTs Government after 31.3.2001. NEW INITIATIVES TO PROMOTE SMEs In the recent years, Indian authorities have taken several steps to address factors that constrain SME financing and developments, and the World Bank has provided support through an SME Financing and Development Project. The Government of India and the Small Industries Development Bank of India (SIDBI), which is the apex bank for SMEs in India) requested the World Bank to support efforts to remove constraints to SME access to finance (including term financing), and to foster SME development. A Bank project involving funding of US$120 million for SME financing and development was subsequently developed. The Project was approved on November 30, 2004, and became effective on April 4, 2005 and is currently scheduled to close on June 30, 2009. The objective of the Project was to improve SME access to finance and business development services, thereby fostering SME growth, competitiveness and employment. The Small and Medium Enterprises Financing and Development Project has been designed to improve access to finance for SMEs. The lending from the original project covered 927 SMEs spread across 10 Indian states. A US$ 400 million additional financing loan to the SIDBI was signed on 5 June, 2009 by representatives from the Government of India, SIDBI and the World Bank. The Securities and Exchange Board of India (SEBI), issued norms on separate stock exchanges for SMEs during November, 2009 so as to give them more options to raise capital. At present, around 90% of the 2.61 crore MSMEs depend on either banks or informal sources to finance their business. Setting up of a separate stock exchange for SMEs is not so simple. Two requirements are to be fulfilled. One is to reduce the cost of compliance and the second is to safeguard the investors from any undue risk. The SEBI has laid the groundwork to allow SMEs to list on SME Exchanges. SMEs have always complained of difficulty in accessing to both debt and equity capital. It is perceived that registration of companies from the SME sector is essential so as to raise capital from the stock exchange. SMERA is India’s premier credit rating agency in the micro, small, & medium enterprise segment. It focuses primarily on the Indian SME segment. The primary objective is to provide ratings that are comprehensive, transparent and reliable. It
SHAFIA AHMAD (09BS0002138) Page 69

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

takes into account the financial condition and several qualitative factors that have bearing on credit worthiness of the SME. The credit guaranty fund and credit linked capital subsidy scheme has been built in order to support the SMEs. Credit rating helps in cost efficiency and innovation to be undertaken by SMEs, and helps the bank to go for less riskier lending venture, provided the credit rating is done in a scientific way. The Exim Bank of India in India has also provided financial solutions to the SMEs. Outlook for SMEs  SMEs’ contribution to national GDP is projected to go up to by a minimum of 5% and touch 22% share of India’s GDP by 2012, since over 55% of SMEs are aggressively upgrading themselves technologically to reduce their input costs and increase production and exports.  The World Bank has approved 400 million dollar additional financing loan to the Small Industries Development Bank of India (SIDBI), which is aimed at improving access to finance for Small and Medium Enterprises (SMEs).  SMEs continue to be the thrust area for Government policies.  The growing economy and the tremendous market potential of the country augurs well for the sustained growth of SMEs in the country.  Panacea for employment and decentralised industrial development.  With the enactment of MSME Act, the sector is all set to emerge as the most significant player in national economy.  SIDBI as the apex institution will continue to play its key role in facilitating timely and adequate credit besides meeting the developmental needs of the sector.  The MSME Development Act 2006, came into being with effect from 2nd October, 2006, subsequent to which, both the Central and State Governments took effective measures towards implementation of the Act. In order to increase the competitive edge of the MSMEs vis-à-vis the multinational corporations (MNCs), the Government of India announced the National Manufacturing Competitiveness Programme (NMCP) during the budget speech 2005-06. One of the objectives of NMCP is to ensure healthy growth of the MSME sector. Under the National
SHAFIA AHMAD (09BS0002138) Page 70

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Manufacturing Competitiveness Programme (NMCP), five components have been made operational, which include quality management systems and quality technology tools, building awareness on intellectual property rights, support for entrepreneurial and managerial development through incubators, setting up of new mini tool rooms and marketing assistance/ support to MSEs.  An important component of the NMCP is “Building Awareness on Intellectual Property Rights (IPRs)” for the MSMEs. The objective here is to create and enhance awareness about Intellectual Property Rights (IPRs) among the MSME units so as to enable them to take appropriate measures for protecting their ideas and business strategies and also avoiding infringement of the intellectual property belonging to others. This has been deemed important since India is a signatory of the Trade related Intellectual Property Rights (TRIPs) under the World Trade Organisation (WTO) pact. However, it would have been better had the government taken steps towards open research, collaborative knowledge creation as well as innovation and adopted the idea of ‘scientific commons’. IPR protection and standards are required but it should not be based on: (i) frivolous patents; (ii) monopolistic practices; (iii) beating the system by incrementally modifying patents and getting extensions on the IPR, etc.

SHAFIA AHMAD (09BS0002138)

Page 71

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

7.CONCLUSION
My Project dealt with Trade Finance for SME Exports to Bangladesh as a part of International Trade Finance at IndusInd Bank. There are many types of financial tools and packages designed to facilitate the financing of trade transactions. Exporting is considered to be one way of stimulating growth of SMEs, gradually improving the quality standards of SME products, and capturing more global shares. Boosting the contribution of Small and Medium Enterprises in total exports of India is vital to India’s future Economic growth. According to the Union Ministry, MSMEs, with addition of Medium enterprises in their fold are now a sector that contributes up to 40% to the gross industrial manufacturing value added to the economy, 35% to India’s exports directly and around 8% to India’s GDP. Numbering more than 13 Mn units and employing around 33 Mn. people, as per the Ministry and no matter which other data set is used, the sector is proved to be the second largest employer after agriculture. My experience as an Intern at IndusInd Bank plays a very important role in the learning aspect of my MBA course which has helped me gain practical exposure and knowledge.

SHAFIA AHMAD (09BS0002138)

Page 72

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

8.RECOMMENDATIONS
SMEs which constitute more than 80 per cent of the total number of industrial enterprises and form the backbone of industrial development in India now are not export competitive and contribute only about 34 per cent of exports. Boosting the contribution of small and medium enterprises in total exports of India is vital to India’s future economic growth, which can be promoted in the following manner: a) Independent SMEs specializing in specific niches and highly profiled productions; SMEs that link up with TNCs or large domestic exporting firms; and SMEs that are part of clusters and networks in order to reinforce their external competitiveness be encouraged. b) Special emphasis should be put on linkages between TNCs and SMEs as a way to enhance the export competitiveness of SMEs. Linking up with TNCs is increasingly perceived as a way for SMEs to solve their traditional problem of access to certain critical resources, the most important of which are finance, technology and managerial skills, as well as to new markets. c) Policy intervention for SMEs could be particularly export-effective when it is based on the Triple C (Customer oriented, Collective and Cumulative) However, it is also essential to create and sustain a business environment that reinforces the international competitiveness of the export sector as a whole. This can be achieved by active collaboration between governments, the private sector and international agencies with a view to reaping the significant potential benefits of exports through SMEs. d) Exclusive Stock Exchange for SMEs- A stock exchange purely dedicated for SMEs seems to be the next big thing. A SME‐focused stock exchange is likely to boost the confidence of SMEs planning to tap the capital market to raise low cost capital. Currently only companies with a minimum paid up capital of Rs 100 million and a market capital of Rs 250 million are eligible to list on NSE while those with a post issue capital of Rs 30 million and a minimum market cap of Rs 50 million are eligible to list on the BSE. Thus SMEs which in spite of having a good track record of growth but do not meet this criteria are kept away from the listed category. Some examples of SME dedicated stock exchanges include AltX, Africa’s first alternative exchange for SMEs, a partnership between the Johannesburg Stock Exchange Ltd and the Department of Trade and Industry and AIM, a sub market of the London Stock Exchange that allows smaller companies to float shares with a more flexible regulatory system as compared to the main market. The creation of an SME stock exchange will also help in bridging the gap between private equity players, venture capitalists and the SMEs.
SHAFIA AHMAD (09BS0002138) Page 73

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

e) Providing Foreign currency export finance and much of that is extended to SME exporters who benefit from the lower cost and natural hedging that it provides. The relative lower cost of foreign currency funding helps SMEs become more competitive against exports from other countries. Assisting SME exporters in multiple ways including leveraging our relationship with large global retailers to extend finance to their Indian vendors who are typically SMEs. This helps the SME vendor meet their increasing working capital requirements since the reality is that more and more of the large buyers are extending their payment terms. Setting customized solutions, for example, we set up a special process where suppliers to one of the large buyers in the apparel segment, can now get payments against export documents in four days compared to 10-15 days. This process helps the SME client reduce their working capital borrowings, and consequently costs.

SHAFIA AHMAD (09BS0002138)

Page 74

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

9.ATTACHMENTS
BANK CERTIFICATE OF EXPORT AND REALISATION
FORM NO. 1 To ______________________________________(Name and address of Licensing Authority) We _____________________________________ (Name and address of the Exporters) hereby declare that we have forwarded a documentary export Bill to _____________________________ (Name and address of the bank i.e., Branch and City) for collection/negotiation/purchase as per particulars given hereunder. Invoice Export promotion copy of Shipping Bill duly authenticated by the Customs No. Date [3] [4] Description of goods as given in the customs authenticated Shipping Bill [5] Bill of Lading /PP Receipt/ Airways Bill No. [6] Date [7] Destination of goods Bill amount CIF/C&F/FOB (In foreign exchange

No. [1]

Date [2]

Country name [8] [9]

Freight Insurance Commissio Whether the FOB amount amount as n/ Discount export is in value/ as per per paid/ freely FOB value Bill of insurance payable convertible actually lading/ Company's currency or realised Freight bill/ in Indian in free memo Receipt Rupees Foreign Exchange /Rupees [10] [11] [12] [13] [14]

Date of realisation of export proceeds

GRI/PP/ SDF form No.

No. date & category of applicable licence

[15]

[16]

[17]

We further declare that the aforesaid particulars are correct. (Copies of invoices relevant to these exports and Customs attested EP. Copy of relevant Shipping Bill is attached for verification by the bank). Signature of the exporter Place: Official Seal/stamp Name in block letters Designation Full official address Full Residential address : .................... : .................... : .................... : .................... : .................... : ....................

SHAFIA AHMAD (09BS0002138)

Page 75

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

TRADE AGREEMENT BETWEEN INDIA AND BANGLADESH The Government of the Republic of India and the Government of the People’s Republic of Bangladesh, Being conscious of the urge of their two peoples to enlarge areas of mutual cooperation; Desirous of expanding trade and strengthening economic relations between the two countries on the basis of equality and mutual benefit; Have agreed as follows: Article I The two Governments recognizing the need and requirement of each other in the context of their developing economies undertake to explore all possibilities, including economic and technical cooperation, for promotion, facilitation, expansion and diversification of trade between the two countries on the basis of equality and mutual benefit. Article II The two Governments agree to take appropriate measures in accordance with the evolving international trading system for mutual benefit of developing countries and least developed countries in so far as such measures are consistent with their individual, present and future development, financial and trade facilitation. Article III The two Governments agree that expansion of their mutual trade exchanges would make an important contribution towards their development. To this end, they agree to take appropriate and special measures during periodic reviews taking into account the asymmetries between the two countries with a view to augmenting and diversifying their mutual trade specially in respect of specific products as may be agreed upon. Article IV All payments and charges in connection with trade between the two countries shall continue to be effected in freely convertible currencies in accordance with the foreign exchange regulations in force in each country from time to time. Article V

SHAFIA AHMAD (09BS0002138)

Page 76

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Imports and exports of commodities and goods produced or manufactured in India or Bangladesh, as the case may be, shall be permitted in accordance with the import, export and foreign exchange laws, regulations and procedures in force in either country from time to time taking into account asymmetries between the two countries. Article VI Each Government shall accord to the commerce of the country of the other Government, treatment no less than that accorded to the commerce of any third country. Article VII The provisions of Article VI shall not prevent the grant or continuance of:a) Privileges which are or may be granted by either of the two Governments in order to facilitate frontier trade by separate agreement(s); b) Advantages and privileges which are or may be granted by either of the respective neighbouring countries; c) Advantages resulting from any customs union, a free trade area or similar arrangements which either of the two Governments has concluded or may conclude in the future. d) Advantages or preferences accorded under any scheme for expansion of trade and economic cooperation among developing countries, which is open for participation by all developing countries, and to which either of the two Governments is or may become a party. Article VIII The two Governments agree to make mutually beneficial arrangements for the use of their waterways, roadways and railways for commerce between the two countries for passage of goods between two places in one country through the territory of the other. Article IX Each Government will grant merchant vessels of the other country while entering, putting off and lying at its ports the most-favoured-nation treatment accorded by their respective laws, rules and regulations to the vessels under the flag of any third country. Both the Governments agree on the basis of shipper’s preference, to utilize to the maximum extent possible, the vessels owned/chartered by shipping organizations of the two countries concerned for shipping cargoes imported or exported under this Agreement at competitive freight rates.
SHAFIA AHMAD (09BS0002138) Page 77

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

Article X The two Governments agree to cooperate effectively with each other to prevent infringement and circumvention of the laws, rules and regulations of either country in regard to matters relating to foreign exchange and foreign trade. Article XI The two Governments agree to accord, subject to their respective laws and regulations, reasonable facilities for the holding of trade fairs and exhibitions and visits of business and trade delegations sponsored by the Government concerned. Article XII In order to facilitate the implementation of this Agreement, the two Governments shall consult each other at least once in a year or earlier as and when necessary, and shall review the working of the Agreement with special attention to the asymmetries between the two countries. Article XIII This amended Agreement shall come into force on the 1 April, 2006. It shall remain in force for a period of three years. It may be extended by a further period of three years by mutual consent subject to such modifications as may be agreed upon.
st

SHAFIA AHMAD (09BS0002138)

Page 78

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

10.REFERENCES  ‘Big Change in Small Scale’, Business India, January 2-15, 1995.  Bank Financing for SMEs around the World Drivers, Obstacles, Business Models and Lending Practices. (The World Bank development Research Group Finance and Private sector Team November 2008).  K.D.RAJU, “Small and Medium Enterprises: Past, Present and Future in India”.  www.rbi.org  www.ciionline.org  www.indusind.com  S.K. Bakshi, Bank Finance for “Small and Medium Enterprises”  www.occ.gov/handbook/tradfin.pdf  http://trade.gov/media/publications/abstract/trade_finance_guide2008d esc.html  Alan C. Shapiro, “Multinational Financial Management”.  http://www.imf.org/external/pubs/ft/scr/2010/cr1055.pdf  http://www.msmementor.in/About_SIDBI.asp  http://www.iba.org.in/sme.asp  http://www.infodriveindia.com/Export-Import/Trade-Statistics.aspx  http://www.infodriveindia.com/Export-Import/Trade-Statistics/TradingPartners.aspx     http://msme.gov.in/MSME_AR_ENG_2009_10.pdf http://rbi.org.in/scripts/AnnualPublications.aspx?hea d=Handbook%20of%20Statistics%20on%20Indian%20Economy http://rbi.org.in/scripts/statistics.aspx http://www.smera.in/home.aspx
Page 79

SHAFIA AHMAD (09BS0002138)

Sign up to vote on this title
UsefulNot useful