PROJECT REPORT ON “ROLE OF BANKS IN INTERNATIONAL

TRADE”

EXECUTIVE SUMMARY

This project work has critically highlighted the compact of the Role of Banks
International Trade, the problems affecting the Role in Banks in international
trade have been identified and how they can be controlled is also includes in
the study and ways to solve them are inductive in the study.

The work is organized into chapters to easy comprehension and deduction.

Chapter one deals with the introduction, Background, statement of problems,
purpose / objective of the study, significance of the study, limitations of the
study and the definition of terms.

Chapter two involves a review of related literature, international trade, roles,

risk factor in international trade, major problems, trade restriction major and
international trade problems. This chapter also treat, the important of
international trade, and some underline issues towards the international trade
problem in.

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 TABLE OF CONTENT

Chapter Topic Page

No. No.
Introduction

• 1.1Conceptual Framework
• 1.2 Role of banks in strengthening international
trade
1. • 1.3 Role of Commercial Banks in International 08-40
Trade
• 1.4 EXIM Bank of India
• 1.5 International Trade Finance Products
• 1.6 Modes of Payment in International Trade

Research Methodology

• 2.1 Objectives of the study

2 • 2.2 Significance 40-41
• 2.3 Limitation
• 2.4 Data collection
Literature Review

3  3.1 Import Export Documentation 42-45

 3.2 Financing The Foreign Trade

4 Data Analysis & Interpretation 45-51

5 Conclusion & Suggestions 51-53
53-60
Webliography & Bibliography Annexure

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CHAPTER 1 1.1 CONCEPTUAL FRAMEWORK

The invention of internet influenced banking sector also. Internet totally

changed the face, figure and the personality of the bank! Internet has challenged
the physical identity of Banks. Banking has broken the shackles of time and
place, as internet has made banking possible 24hours in every corner of world!
Banks are now not big or small by building and banks are now not the meter of
few and fix hours of services. The world is changing at a staggering rate and
technology is considered to be the key driver for these changes around us. An
analysis of technology and its uses shows that it has permeated in almost every
aspect of our life. Many activities are handled electronically due to the
acceptance of information technology at home as well as at work place. Slowly
but steadily, the Indian customer is moving towards the internet banking.
Internet Banking transactions are slowly taking over the Physical Banking
Transaction happening at the counters. Customer always looks for simplicity
and ease in any service he wants to avail and the banking sector is matching its
steps to the march of technology to make financial life easy for its customers.
Ebanking or Online banking is a generic term for the delivery of banking
services and products through the electronic channels such as the telephone, the
internet, the cell phone etc. The concept and scope of ebanking is still evolving.
It facilitates an effective payment and accounting system thereby enhancing the
speed of delivery of banking services considerably. Several initiatives have been
taken by the Government of India as well as the RBI (Reserve Bank of India);
have facilitated the development of e-banking in India. The government of India
enacted the IT Act, 2000, which provides legal recognition to electronic
transactions and other means of electronic commerce. The RBI has been
preparing to upgrade itself as regulator and supervisor of the technologically
dominated financial system. It issued guidelines on the Chapter 1: Conceptual
Framework 4 risks and controls in computer and telecommunication systems to
all banks, advising them to evaluate the risks inherent in the systems and put in
place adequate control mechanisms to address these risks. The biggest invention
is the invention of internet. The invention of internet changes the personality of
bank and banking. It gives the modern touch to the banking services and it
carries number of other possibility of modern banking with it.

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 INTRODUCTION

International trade ensures export expansion and import contraction coupled

with the fact that it stimulates foreign exchange earnings, international
recognition and the provision of employment opportunities for the teeming
population.

International trade is synonymous with the production of goods and services for
the benefit of trade across the country. Thus we have the banking institution,
the food processing export/import trade and the sugar, tobacco export/import
trade and that of petroleum export trade is not left behind. Therefore,
international trade or external trade is a trade between two or more countries.

International trade does not mean the exchange of goods and services within a
country. The exchange of goods and services among the people of the same
country is called home or internal trade.

External trade is established for the purpose of stabilizing nation‟s economy

standard if living. External trade has been proved beyond doubts as very
important for a nation‟s survival therefore it is prevent that we explicably
manifest how the role of banks can be employed for the development of these
trade. In doing this, we will limit our study to short and long term scale
institutions which are very important to the economy.

Short term scale institutions as defined by the central bank credit guidelines is,
any service enterprise whose annual business turnover does not exceed
N500,000.00 (five hundred thousand naira).

There is no definition for long term scale institutions as these did not attract the
direct emphasis of the CBN.

The role of banks in international trade development of Nigeria, could be seen

through the various services which these banks provide for the sustenance of
international trade in the country.

These services include the provision of capital for these exporter/importers in

the business inform of loans, such as short term loans, medium and long term
loans, which the traders could use to finance their business goals. The banks
also provide overdraft facilities, which are necessary to finance the working
capital of the business.

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An overdraft could be defined as an arrangement whereby the banks allow their
customers to over-draw his account up to a credit position at the end of the
period, while short term loans refer to loans granted for periods between one to
five years. Then medium and long term loans are granted for periods between
five to ten years, even ten years respectively.

Apart from granting loans and over drafts facilities, there are still other roles
which banks could play in international trade development in Nigeria. These
roles include professional advice, opening of documentary letters of credit
(L/CS), bills for collection and negotiation/open account and bills of exchange,
foreign exchange example travellers cheques and foreign currencies,
information on trade and exchange restrictions, collection and transfer of funds
status enquires, etc. above all the determination of the actual external funds
required by an export/import borrower. There are accepts of such services
which help international trade growth or expansion.

It is not for fetched that the exporters/importers of international trade suffer their
own bank problems, which should be analysed and solved to ensure
international trade development. These problems such as the problem of
corruption in banking parastatals, obtaining capital from and operational
problems which are coursed by the dictates of the Nigeria environment and
society.

The irrational problem of manpower requirement and the poor knowledge of

trade across these external traders help to compound the general problems of
international trade development of which bank services can be gainfully
employed for the purpose of solving them.

Addition to the problems is loss of trust ship among the members or cooperators
of the trade fraudulent acts among members. In all, these problems the worst is
the problems of unstable political contradictions. These problems should be
totally exterminated by the government, and the society entirely to ensure the
steady growth of this important sector of the business of the economy.

In increasing this level of their financing emphasis should be placed on medium

and long term loans to enable these traders concretize their investments for
better results in its outputs; though the commercial banks borrow short from
their deposits, the commercial banks who also declare excess profits at the end
of each year should expand a lending pattern for medium and long terms loans
without adversely affecting their liquidity ratios.

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With the funds available from the banks, international traders should be made to
judiciously invest them and with other important a sound, solid firm and
concrete foundation must be laid for the international development of the
country.

DEFINITION OF TERMS.
(a) International Trade: As described by the Author, Norbert M Ile in his
published test “Economics of business studies” (1999, P. 278) defines an
international trade or external trade as “a trade between two or more countries;
it is the exchange of goods and services between two or more countries”.

(b) Banking Institution: We can define a bank as any organization that

handles people‟s money. It is a dealer in debts, but indebtedness has a
correlation to wealth and hence, a bank can be described as a liquefier of
wealth.

(c) Role: It is defined as “actors in a play; person‟s task or duty in

undertaking. (d) Foreign Exchange: This is a process by which a country
exchanges its goods/services to

another country‟s goods/services.

(e) Overdraft: This is a system whereby a customer drawn more money than
he has to his credit in a bank.

(f) Economy: It is a system of control and management of the money goods

and other resources of a society.

1.2 ROLE OF BANKS IN STRENGTHENING INTERNATIONAL

TRADE

International Trade shapes our everyday lives and the world we live in. In nearly
every instance that we make a purchase or sale, we are participating in the global
economy. Whole products and or their component parts come to our store
shelves from all over the world. Most international trade consists of the purchase
and sale of industrial equipment, consumer goods, oil and agricultural products.
Services such as banking, insurance, transportation,
telecommunications, engineering and tourism account for one-fifth of the world

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 global trade The current situation obtaining in Zimbabwe thus calls for
increased participation in international trade by local players, particularly by
exporters. With the country operating without its own currency, the sources of
the liquidity in the country comes largely from trading with the rest of the world.
It is therefore important to understand how the resources flow in international
trade and how policies can be tailor made so that the country is in a position to
generate as much revenue as possible for the benefit of our multicurrency
system. With the structure of the economy fast changing and the informal sector
leading in the productive system it is important that the players in this sector
understand and adapt to the use of the banking system to affect their
international payments and receive payments from their foreign buyers. Banks
are important facilitators of international trade. Besides providing liquidity they
guarantee payment for around a fifth of world trade. The banking sector thus
plays an important role in international business. Today, almost all Banks have
formed collaborative alliances and established correspondent banking
relationships with Banks in other countries to better serve their international
business community. Banks play a key role in forming a bond of trust between
buying and selling agents executing transactions in international markets. Local
Banks have intermediary Banks outside the country, which assist in effecting
international payments hence the receipt and payment for goods and services by
local people. Banks play a pivotal role in foreign trade through the provision of
the financial structure and instruments necessary for the conduct of business
transactions between foreign buyers and sellers. Banks ensure safety and
transparency in the flow of documents and money. Buyers (importers) of goods
from abroad, the sellers (exporters) will want to be assured of payment, and as a
buyer one would want assurance that all terms and conditions of the purchase
agreement are kept.

This requires then that the Banks come in to broker an agreement and work as an
intermediary between the importer and the exporter. Banks play a major role by
providing assistance in many ways to facilitate International Trade business
which encompasses financing working capital requirements, financing capital
goods, identification of potential markets for International Trade, identification
of buyers and sellers, facilitating payment for International Trade transactions,
issuing Import Letters of Credit, pre an post shipment financing and guaranteeing
payment under Letters of Credit issued by other Banks. the most common
instrument used for payment and shipment control is a letter of credit issued by
the bank of the buyer in favour of the seller. After the Bank of the buyer
approves the issuance of the letter of credit, the issued letter of credit is sent to
the advising bank that establishes the authenticity of the instrument and informs
the beneficiary of receipt. The advising bank may confirm the letter of credit
after checking the terms and conditions for payment by adding its own guarantee
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to that of the issuer. Commercial Banks facilitate trade and the payment of funds
through

1.3 ROLE OF COMMERCIAL BANKS IN INTERNATIONAL

BUSINESS

Banking section plays important role in international business. Today almost all
major banks have offices in major cities around the world. Many banks have
formed collaboration with banks in other countries to better serve their
international business community. Banks form a bond of trust between buying
and selling transactions in international market. For individual banks offer
services like foreign exchange, traveller‟s check, electronics transfer. For
businesses bank plays a role of trusty agent by offering services like
„Documentary Collection‟ and, Letter of Credit‟. One of the problem
international businesses encountering doing business internationally is lack of
trust. With the help financial devices commercial banks are able for a bond of
trust between international buyers and sellers. In commercial methods like
„Commercial Collection‟ and „Letter of Credit‟ banks act as agents to handle
payments as well as relevant documents. Letter of Credit is most wide
acceptable and used method of doing international transactions. Some banks and
government agencies offer export credit insurance to businesses. In some cases,
exporter has to forgo a letter of credit, in such cases banks offer export credit
insurance. Foreign exchange market is another area where international
commercial banks play vital role. Foreign exchange market serves two main
functions, convert the currency of one country into the currency of another and
provide some insurance against foreign exchange risk. Multinational
corporations constantly need various currencies for their operations and to hedge
against foreign exchange risk. International banks provide foreign exchange
services to their commercial business clients to complete their business
transactions. These banks act as a broker between commercial customer and
foreign exchanges around the world. International businesses receive payments
in
global trade. The current situation obtaining in Zimbabwe thus calls for
increased participation in international trade by local players, particularly by
exporters. With the country operating without its own currency, the sources of
the liquidity in the country comes largely from trading with the rest of the world.
It is therefore important to understand how the resources flow in international
trade and how policies can be tailor made so that the country is in a position to
generate as much revenue as possible for the benefit of our multicurrency
system. With the structure of the economy fast changing and the informal sector
leading in the productive system it is important that the players in this sector

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understand and adapt to the use of the banking system to affect their
international payments and receive payments from their foreign buyers. Banks
are important facilitators of international trade. Besides providing liquidity they
guarantee payment for around a fifth of world trade. The banking sector thus
plays an important role in international business. Today, almost all Banks have
formed collaborative alliances and established correspondent banking
relationships with Banks in other countries to better serve their international
business community. Banks play a key role in forming a bond of trust between
buying and selling agents executing transactions in international markets. Local
Banks have intermediary Banks outside the country, which assist in effecting
international payments hence the receipt and payment for goods and services by
local people. Banks play a pivotal role in foreign trade through the provision of
the financial structure and instruments necessary for the conduct of business
transactions between foreign buyers and sellers. Banks ensure safety and
transparency in the flow of documents and money. Buyers (importers) of goods
from abroad, the sellers (exporters) will want to be assured of payment, and as a
buyer one would want assurance that all terms and conditions of the purchase
agreement are kept. This requires then that the Banks come in to broker an
agreement and work as an intermediary between the importer and the exporter.
Banks play a major role by providing assistance in many ways to facilitate
International Trade business which encompasses financing working capital
requirements, financing capital goods, identification of potential markets for
International Trade, identification of buyers and sellers, facilitating payment for
International Trade transactions, issuing Import Letters of Credit, pre an post
shipment financing and guaranteeing payment under Letters of Credit issued by
other Banks. The most common instrument used for payment and shipment
control is a letter of credit issued by the bank of the buyer in favour of the seller.
After the Bank of the buyer approves the issuance of the letter of credit, the
issued letter of credit is sent to the advising bank that establishes the authenticity
of the instrument and informs the beneficiary of receipt. The advising bank may
confirm the letter of credit after checking the terms and conditions for payment
by adding its own guarantee to that of the issuer. Commercial Banks facilitate
trade and the payment of funds through documents. After all of the terms and
conditions for shipment and quality standards have been checked via the
presentation of proper documentation, the issuing bank pays the seller for the
goods. The Post Shipment facility provides short-term financing to exporting
manufacturers, distributors and service providers. Businesses receive financing
in the form of a loan equivalent to invoice value of export sales, which must be
repaid from the assigned proceeds of payments. The Post Shipment facility aims
to bridge the gap between the settlement of production costs and export sales
receipts, allowing a business to accelerate cash flow and shorten operating
cycles. The advantages of this financing mechanism are that the exporter‟s
working capital cycle is shortened therefore allowing for increased production
levels and exporters are able to convert a credit sale into a cash sale, thereby
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freeing up their capital for further exports. Pre-shipment financing is a short-
term loan or direct financing that a commercial bank extends to an approved
company to assist in the payment of inventory, may it be raw materials, semi-
finished or finished products. Once goods are received, the exporter can now
prepare products for local sale or export. The Pre Shipment Facility is offered at
competitive rates and is designed for trade transactions that are short-term and
self-liquidated. Advantages associated with this type of financing include; the
company is offered credit terms so that it can add flexibility to its cash flow and
thereby manage the business more efficiently; provides extra time for the goods
to clear customs and be resold before you need to pay for the goods and also
suppliers are assured payment upon request from the exported Many commercial
banks offers short as well as long term loan financing to international businesses.
Many countries have form banks backed b government funding’s to provide
funding’s for exporters and importers. In United States, Export-Import bank, an
independent agency of the US government, provides financial aid to facilitate
export and import of goods. Exim bank also
Guarantees repayment of loans US commercial banks make to foreign borrowers
for purchasing US exports. Banking sector plays vital role of catalysts in
international market. Due to technology advances in banking sector,
communication gap and delays in international business have really narrow
down a lot. Commercial banks do not create money--they are simply the
intermediaries that move money from the capital markets to businesses and
institutions. Banks get their money through business checking or deposit
accounts, service fees and by issuing certificates of deposit (CD) and banker's
acceptances--money market instruments that are collateralized by letters of
credit (LOC) used in trade finance--and commercial paper. Commercial banks
offer services such as trade finance, project finance, payroll, foreign exchange
transactions and trading, lock boxes for collecting payments and general
corporate finance.

Significance

Without commercial banks, the international finance and import-export industry

would not exist. Commercial banks make possible the reliable transfer of funds
and translation of business practices between different countries and different
customs all over the world. The global nature of commercial banking also
makes possible the distribution of valuable economic and business information
among customers and the capital markets of all countries. Commercial banking
also serves as a worldwide barometer of economic health and business trends.

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Foreign Branch Banking

Some small commercial banks limit their reach to the local business
community; but as business has gone global, so have commercial banks. Large
banks such as Citigroup, Bank of America and Chase are retail (consumer)
banks that also maintain full commercial banking activities in the United States
with branches in many countries. These larger banks may act as affiliates of
smaller banks that do not have branch presences in other countries. Through
foreign branch banking, U.S. based multinational companies can consolidate
their financial business at a single bank that handles their trade finance,
currency transactions, project loans, payroll, cash management investments and
deposit accounts throughout the world. Commercial banks also arrange deals
between their customers globally, including strategic partnerships and project
fulfilment agreements.

Trade Finance

Commercial banks doing international business are also called merchant banks
because they finance trade between companies and customers located in
different countries. This is done by issuing LOCs that indicate the customer has
deposited the full amount due on an order with a company located in a different
country. The seller company can then feel assured of being paid if it ships goods
to its offshore customer. The LOC may also be used by the company to
guarantee a manufacturer's loan, allowing it to finance the manufacture of the
goods to be delivered. Without LOCs, companies would face considerable
expense in investigating their foreign customers to make sure they are legitimate
and creditworthy, and complying with laws and regulations of the different
countries in which they do business.

Foreign Exchange

In order to facilitate international trade and development, commercial banks

convert and trade foreign currencies. When a company is doing business in
another country it may be paid in the currency of that country. While some of
these revenues will be used to pay workers in that country and for
administrative expense such as office rent, utilities and supplies, the company
may need to purchase goods from a neighbouring country in that country's
currency, or convert cash to its native currency for return to the home office.

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Corporate Finance

Companies always need to borrow money to cover purchases of raw materials,

machinery parts, inventory and/or payroll. Banks with overseas branches or
affiliates can simplify the process of corporate finance throughout a company's
organization by consolidating the transaction procedures, reporting and record
keeping. It is much easier for a company manager to do business in her own
language with a banker located nearby who handles her global business finance
needs than it would be for her to develop banking relationships in every country
where she does business. Her international commercial bank can also provide
referrals to professional service firms in other countries, as well as arrange
introductions to other companies appropriate as customers or for strategic
partnerships.

Miscellaneous Banking Services

Corporate checking accounts, currency specific credit cards and lock boxes are
also offered by commercial banking to help make foreign trade possible for a
company. Lock boxes are particularly helpful for collecting payments from
overseas customers and reporting receipts daily for cash management purposes.
Currency-specific credit cards are also important in eliminating the cost of cross
currency purchasing, which normally is done at expensive valuation levels.

1.4 EXIM BANK OF INDIA

The Export-Import Bank (Exim bank) was set up on January 1, 1982 to take over
the operations of international finance wing of the IDBI and to provide financial
assistance to exporters and importers and to function as a head financial
institution for coordinating the working of other institutions engaged in
financing of exports and imports of goods and services.The authorized capital of
Exim bank is Rs. 200 crore and paid-up-capital is Rs. 100 crore wholly subscribed
by the Central Government.

Organization and Management:

The Exim Bank is managed by a Board consisting of a Managing Director who is

the Chairman and 17 Directors representing different areas. They are Secretary
to the Department of Industrial Board, Commerce Secretary, Finance Secretary,
Secretary to Banking, Secretary IDBI, Secretary ECGC Secretary RBI, 3 directors
representing other scheduled commercial banks, 4 Directors chosen from
export community and 3 others representing ministries and departments.
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Functions of Exim Bank:

(i) It provides direct financial assistance to exporters of plant, machinery and

related service in the form of medium-term credit.

(ii) Underwriting the issue of shares, stocks, bonds, debentures of any company
engaged in exports.

(iii) It provides rediscount of export bills for a period not exceeding 90 days
against short-term since export bills discounted by commercial banks.

(iv) The bank gives overseas buyers credit to foreign importers for import of
Indian capital goods and related services.

(v) Developing and financing export oriented industries.

(vi) Collecting and compiling the market and credit information about foreign
trade.

Activities of Exim Bank:

The bank can raise additional resources through borrowing from Government of
India, from RBI and from the market through the issue of bonds and debentures.
Exam bank also provides refinance facilities to the commercial bank and
financial institutions against their export-import financing activities. During the
Year ending on 31 March, 2003, Exim Bank sanctioned loans of Rs. 7,828
crores while disbursements amounted to Rs. 5,320 crores, Net Profit (before
tax) of the bank for the period 2002-03 on account of General Fund amounted to
Rs. 268 crore. The Export-Import Bank of India was set up by the Government
of India on January 1, 1982. Its main objects are:

• To ensure and integrated and co-ordinate approach in solving the allied

problems encountered by exporters in India.
• To pay specific attention to the exports of capital goods;  Export
projection;

• To facilitate and encourage joint ventures and export of technical services

and international and merchant banking;

• To extend buyers‟ credit and lines of credit;

• To tap domestic and foreign markets for resources for undertaking
development and financial activities in the export sector.

The functions of Exim Bank include:

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 • Planning, promoting and developing exports and imports;
• Providing technical, administrative and managerial assistance for
promotion, management and expansion of export sector.

The functions of Exim Bank include:

• Planning, promoting and developing exports and imports;

• Providing technical, administrative and managerial assistance for
promotion, management and expansion of exports; and

• Undertaking market and investment surveys and techno-economic studies

related to development of exports of goods and services.

The Exim Bank has a 17-member Board of Directors, with Chairman and
Managing Director as the chief executive and full-time director. The
Board of Directors consists of the representative of the Government of India,
RBI, IDBI, ECGC, commercial banks and the exporting community. The
authorized capital of Exim Bank is Rs. 200 crores, of which Rs. 75 crores is paid
up. The banks have secured a long-term loan of Rs. 20 crores from the
Government of India. It can also borrow from the RBI. It is empowered to raise
resources in domestic and international markets.The Bank began its lending
operations from March, 1982. Till June, 1982, it has extended assistance up to
Rs. 133 crores to the export sector in various ways.The establishment of Exim
Bank may be regarded as a right step in the export promotion policy and
programme of the Government.During 1984, the Exim Bank sanctioned various
programmes of funded assistance of Rs. 430 crores. It also launched a new
programme to provide term finance for export-oriented units, under which
assistance was provided through a consortium for establishing a 100 per cent
export unit in the ceramics industry. The Exim Bank also extended its financial
assistance to Indian exports through letters of credit, re-lending facility, export
bills rediscounting, overseas investment finance, facilities for deemed exports
and assistance to hundred per cent export units and units in free trade zone. At
the end of December 1984, the Exim Bank’s outstanding underfunded and non
funded assistance amounted to Rs. 415 crores and Rs. 510 crores, respectively.
In 1984, the Exim Bank signed a loan agreement to borrow one billion yen from
the Japanese commercial yen market. In June 1986, the Exim Bank introduced a
new programme called the Export Marketing Fund (EMF), under which finance
is made available to Indian companies for undertaking export marketing
activities. The programme also covers activities like desk research, minor
product adaptation, overseas operations and travel to India by buyers overseas.

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During 1986, Rs. 78 lakhs were sanctioned, while Rs. 3.4 lakhs have been
utilized under the EMF. On whole, the Exim Bank concluded an agency credit
line of US $ 15 million with the International Finance Corporation (IFC).During
1994-95, Exim Bank sanctioned Rs. 2,466 crore and disbursed Rs. 2,130 crore of
financial assistance under various lending project.

1.5 INTERNATIONAL TRADE FINANCE PRODUCTS

A. Bankers Acceptance:

Since centuries, banker‟s acceptance (BA) has been widely used in financing
international trade. BA is the time draft or bill of exchange drawn on and
accepted by a bank. By „accepting‟ the draft, the bank makes an unconditional
promise to pay the holder of the draft the specified amount of money on
maturity. Thus, the bank effectively substitutes its own credit with that of a
borrower. BA is a negotiable instrument that can be freely traded. The bank
buys (discounts) the BA and pays the drawer (exporter) a sum less than the face
value of the draft followed by selling (rediscounting) to an investor in the
money market. The discount reflects the time value of money. The bank makes
full payment at maturity to the investor who presents it. Banker‟s drafts by
definition are time drafts with varying maturity of 30, 60, 90, or 180 days. The
fee charged by the accepting bank varies, depending upon the maturity period
and the creditworthiness of the borrower.

B. Discounting: Exporters can convert their credit sales into cash by way of
discounting the draft even if it is not accepted by the bank. The draft is
discounted by the bank. If the importer fails to pay, the bank can collect from
the exporter in case of on its face value minus interest and commissions. The
discounting may be with or without‟ recourse with recourse discounting,
whereas the collection risk is borne by the bank in case of „without recourse‟
discounting. Usually the discounting rates are lower in many countries including
India than other means of financing, such as loans, overdraft, etc., mainly due to
government‟s export promotion schemes and subsidies.

C. Accounts Receivable Financing:

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In an open account shipment or time draft, goods are shipped to the importer
without assurance of payment from a bank. Banks often provide loans to the
exporter based on its creditworthiness secured by an assignment of the accounts
receivables. The exporter is responsible for repaying the loan to the bank even if
the importer fails to pay the exporter for whatever reasons. Usually the period of
such financing is one to six months. As additional risks such as government
control and exchange restrictions are involved in case of foreign receivables,
banks often insist upon export credit insurance before financing

D. Factoring: Factoring is widely used in short-term transactions as a

continuous arrangement. It involves purchase of export receivables by the factor
at a discounted price, i.e., generally 2 per cent to 4 per cent less than the full
value. However, the discount depends upon a number of other factors such as
the type of product, terms of the contract, etc. Generally, factors advance up to
85 per cent of the value of outstanding invoices. The factoring service may be
undertaken by the factor with recourse to the seller, wherein the exporter
remainsexposed to the risk of non-payment by the importer. Besides, the
factoring may be without recourse, wherein the factor assumes the credit and
non-payment risks.

The operation of export factoring is depicted in Fig. 15.10, which involves

the following steps:
i. The importer and exporter enter into a sales contract and agree on the terms
of sale (i.e., open account) the exporter ships the goods to the importer.

iii. The exporter submits the invoice to the export factor.

iv. The export factor pays cash in advance to the exporter against receivables
until the payment is received from the importer.

v. However, the exporter pays interest to the factor on the money received or
the factor deducts commission charges before making payment to the exporter.

vi. The export factor transfers the invoice to the import factor that in turn
assumes the credit risks and undertakes administration and collection of
receivable.

vii. The import factor presents the invoice to the importer on the due date for
payment.

viii. The importer makes payment to the import factor

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ix. The import factor in turn pays to the export factor (8).

Benefits to exporters:
The benefits of using a factoring service for the exporter are:

i. It facilitates expanding sales in international markets by offering

prospective customers the same terms and conditions as local competitors.

ii. It facilitates immediate payment against receivables and increases

working capital.

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iii. Tasks related to credit investigations, collecting account receivables from
the importer, and providing other book-keeping services are carried out by
the factors.
iv. In the event of buyer‟s default or refusal to pay, factors assume credit risk
v. Factoring often serves as a good substitute for the bank credit especially
when the bank credit is either uneconomical too restrictive.

Besides, factoring is also beneficial for the importers as it:

i. Increases their purchasing power without drawing on

bank credit lines

ii. Facilitates procurement of goods with little

hassles

E. Forfeiting:

The term „forfeiting‟ is derived from the French word for fait, which means to
relinquish or surrender the rights. Thus, forfeiting refers to the exporter
relinquishing his/her rights to a receivable due at a future date in exchange for
immediate cash payment at an agreed discount, passing all risks and the
responsibility for collecting the debt to the forfeiter. Forfeiting is particularly
used for medium-term credit sales (1 to 3 years) and involves the issue of a bill
of exchange by the exporter or promissory notes by the buyer on which a bank
and the buyer’s country guarantee payment. Forfeiting is the discounting of
receivables, typically by negotiating bills drawn under an L/C or co-accepted
bills of exchange. Generally, forfeiting is applicable in cases where export of
goods is on credit terms and the export receivables are guaranteed by the
importer’s bank.

This allows the forfeiting bank to buy the risk „without recourse‟ to the exporter.
The financing terms mainly depend on the country risk of the buyer, size of the
contract, financial standing of the L/C opening bank or guarantor bank.

By forfeiting, the exporter surrenders without recourse the right to claim for
payment of goods exported in return for immediate cash payment. As a result,
an exporter can convert a credit sale into a cash sale, on a no-recourse basis.

Thus, forfeiting is a mechanism for financing exports:

i. By discounting export receivables evidenced by bills of exchange or

promissory notes
ii. On a fixed rate basis (discount) Avalisation (co-acceptances):

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 iii. Avalisation or co-acceptance is a means of non-fund based import
finance whereby a bill of
iv.exchange drawn by an exporter on the importer is co-accepted by a bank.
By co-accepting the bill of exchange, the bank undertakes to make payment
to the exporter even if the importer fails to make payment on due date.
Operation of a forfeiting transaction:
Receivables under a deferred payment contract for export of goods, evidenced
by bills of exchange or promissory notes (pro notes), can be forfeited. Bills of
exchange or promissory notes backed by avalisation (co-acceptance) of
Without recourse to the exporter Carrying medium-to long-term maturities
(usually over 120 days) Up to 100 per cent of the contract value the importer‟s
bank are endorsed by the exporter, without recourse, in favour of the forfeiter in
exchange for discounted cash proceeds.Some transactions are taken without
such a guarantee or co-acceptance, provided the importer is of an acceptable
standing to the forfeiter. The operation of a forfeiting transaction is briefly
discussed below.
Step 1: Pre-shipment stage:

i. As the exporter is in the process of negotiating a contract with the

overseas buyer, s/he provides the bank the following details to enable it to
give an „indicative quote‟: Name and full address of the foreign buyer 2.
Details of goods (quantity, base price, etc.) Amount of the contract
Number and expected dates/period of shipments Security-banker‟s name
(under L/C or bills of exchange avalized by bank) Repayment schedule
Country to which exports are to be made

ii. Based on the details provided, the bank contacts the forfeiting
agencies/exim banks, who are given an indicative quote with details of
discounting cost, commitment fees, etc.

iii. After confirming that the terms are acceptable, the exporter informs the
bank, who accordingly calls for the final quote.
iv. After confirming acceptance of the forfeiting terms to the bank, the
exporter signs off the commercial contract with her/his buyer. The
contract must provide for the buyer to furnish availed bills of exchange.
Simultaneously, a forfeiting contract is entered into with the forfeiting
agency through the bank.

v. Once the forfeiting contact is duly signed, the bank issues the following
certificates certificate giving permission to the exporter to remit
commitment fees,

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vi. A certificate showing the discount payable by the exporter to the
forfeiting agency to enable them to declare the same on the GR form.
Otherwise, the customs clearance of the goods would be held up.

Step II: Post-shipment stage:

i. On shipment of goods, the exporter presents the documents to the bank

who in turn forwards them to the buyer or buyer‟s bank. The set of
documents being forwarded must contain the bills of exchange for the
total amount (inclusive of the forfeiting cost, drawn on the importer or
importer‟s bank).

ii. The importer’s bank would accept, co-accept, or a valise the bill of
exchange and send it back to the exporter’s bank.
iii. The exporter’s bank would ensure that the bill of exchange is endorsed
without recourse in favour of the forfeiting agency.

iv. After checking the documents, the forfeiter would deposit the forfeited
proceeds in the specified account.
v. The bank after checking the proceeds would issue a foreign inward
remittance certificate (FIRC) and the GR form.

Costs involved in a forfeiting transaction:

A forfeiting transaction generally has three cost elements.

Commitment fee:

The commitment fee is payable by the exporter to the forfeiter for his/her
commitment to execute a specific forfeiting transaction at a discount. Generally,
the commitment fee ranges from 0.5 per cent to 1.5 per cent per annum of the
utilized amount to be forfeited. Besides, the commitment fee is payable
regardless of whether or not the export contract is ultimately executed.

Discount fee:

It is the interest payable by the exporter for the entire period of credit involved
and is deducted by the forfeiter from the amount paid to the exporter against the
availised promissory notes or bills of exchange. The discount fee is based on the
market interest rates as determined by the prevailing London Inter-Bank
Offered Rate (LIBOR) for the credit period and the currency involved plus a
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premium for the risk assumed by the forfeiter. The discount rate is agreed upon
at the time of executing the contract for forfeiting.

Documentation fee:

Generally, no documentation fee is incurred in a straight forfeit transaction.

However, a documentation fee may be levied in case extensive documentation
and legal work is required.

Benefits to the exporter:

The major advantages of forfeiting to exporters are summarized below:

i. In India, post-shipment finance extended by bankers is limited to 180

days at subsidized rates. The exporter converts a deferred payment export
into a cash transaction, improving liquidity and freeing the balance sheet
of debt, thus also improving leverage.
ii. Forfeiting frees the exporter from cross-border political risks and
commercial risks associated with export receivables. There is no
contingent liability in the balance sheet of the exporter.

iii. As forfeiting offers „without recourse‟ finance, it does not impact the
exporter‟s borrowing limits. It represents an additional source of finance,
outside working capital limits, providing a convenient option if funded
limits are not sufficient.

iv. Since it is fixed rate finance, it hedges against interest and exchange risks
arising out of deferred export payments.

v. The exporter saves on insurance costs as forfeiting obviates the need for
export credit insurance.

vi. Forfeiting is transaction-specific as the exporter need not have a long-

term relationship with the forfeiting agency abroad.

vii. There is simplicity of documentation as the documents being submitted

are readily available with the exporter.

viii. Forfeiting is not bound by any retention percentages. It offers 100 per
cent financing and there is no restriction on the type, condition, or age of
the products.
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F. Letters of Credit:

One of the oldest forms of international finance is still used in international

transactions. The issuing bank undertakes a written guarantee to make the
payment to the beneficiary, i.e., the exporter, subject to the fulfilment of its
specified conditions. In the process, a debt relationship exists between the
issuing bank and beneficiary. Terms credit is often used as financing instrument
for the importer who gets delivery of the goods without making payment to the
exporter.

G. Counter-Trade:

Counter-trade is used to combine trade financing and price setting in one

transaction. It involves various forms of reciprocal transactions such as barter,
clearing arrangements, switch trading, counter purchase, buy-back, and off-set.
Counter-trade finances imports in form of reciprocal commitments from
countries that have payment problems, especially in hard currencies.

1.6 MODES OF PAYMENT IN INTERNATIONAL TRADE

• Advance Payment:

Under this, the payment is remitted by the buyer in advance, either by a draft
mail or telegraphic transfer (TT). Generally, such payments are made on the
basis of a sample receipt and its approval by the buyer. The clean remittance is
made after accepting the order but before the shipment, through banking
channels. It is the simplest and the least risky form of payment from the
exporter‟s point of view. Besides, no post-shipment finance is required if the
payment is received in advance. There is no payment of interest on the funds
and no commission is required to be paid as in other modes of payment, which
makes it the cheapest mode of receiving payment. As it involves the highest
level of risk for the buyer, advance payment is used only in cases where the

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exporter is in a position to dictate his/her terms. For instance, advance payment
is often used if the product supplied is unique or has some sort of monopolistic
power. However, such forms of payment are common mainly in case of
overseas affiliates of the exporting firm.

• Documentary Credit:

In a typical international transaction, an exporter deals with an overseas buyer

who is situated in a significantly different regulatory and business environment.
The exporter is unwilling to part with

his/her goods unless she/he is assured of the receipt of the payment from the
importer. On the other hand, the importer is unwilling to part with the money
unless assured of receiving the goods. In such a situation, the bank plays the
crucial role of an intermediary, providing assurance to both the importer and
the exporter in an international transaction. The payment collection mechanism
that allows exporters to retain ownership of the goods or reasonably ensures
their receiving payments is known as documentary collection. The bank acts as
the exporter‟s agent in a documentary collection and regulates the timing and
the sequence of the exchange of goods for value by holding the title of the
documents until the importer fulfils his/her obligation as given in the Uniform
Customs and Practices of Documentary Credits (UCPDC), brought out by the
International Chamber of Commerce (ICC) in its publication no. 600, widely
known as UCPDC 600, implemented on 1 July 2007. The two principal
documents used in documentary collection are the bills of lading (B/L) issued
bythe shipping company and the draft (bill of exchange) drawn by the
exporter. B/L are issued by the shipping company to the shipper for accepting
the merchandise for the carriage. As the document of title, it has a unique
significance in shipping that only its legitimate holder is entitled to claim
ownership of the goods covered therein.The importer simply cannot take
possession of the goods unless the B/L is surrendered in original to the
shipping company at destination. The procedure and the process involved in
documentary credit employing banking channels assures both the exporter and
the importer that the former gets the payment and the later receives the
goods. The draft, commonly known as bill of exchange, is used as an
instrument to effect payment in international commerce. It is an unconditional
order in writing, signed by the seller (exporter), also known as drawer,
addressed to the buyer (importer) or importer‟s agent, known as drawee,
ordering the importer to pay on demand or at a fixed or determinable future
date, the amount specified on its face. The draft provides written evidence of a
financial obligation in clear and simple terms. Besides, it is a negotiable and

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unconditional instrument, which means payment must be made to any holder
in due course despite any disputes over the underlying commercial
transaction. Using a draft enables an exporter to employ its bank as a
collection agent.The exporter‟s bank forwards the draft or bill of exchange to
the importer, generally through a correspondent bank, collects the draft, and
then remits the proceeds to the exporter. Thus, in the process, the bank has all
the necessary documents for control of the merchandise, which are handed
over to the importer only when the draft has been paid or accepted in strict
accordance with the exporter’s instructions.

• Documentary credit with letter of credit:

A documentary credit represents a commitment of a bank to pay the seller of

goods or services a certain amount, provided s/he presents stipulated documents
evidencing the shipment of goods or performance of services within a specified
period. The modus operandi of an L/C is depicted in the form of a self-
explanatory diagram in Fig. 15.6.

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The exporter gets in touch with the importer and based on mutual
communications, either by telephone, fax, or electronic messaging, and
mutually agrees on terms of sale and enters into a sales contract:

• The importer, also known as applicant, applies to the issuing bank located
in his/her country
• For opening an L/C in accordance with the terms already agreed upon
between the buyer and the seller in the sales contract. The issuing bank
opens the L/C and delivers it
• To the corresponding bank located in the exporter‟s country, which in
turn advises.
• It to the exporter, also known as beneficially. The exporter carefully
scrutinizes the L/C and ensures that all the terms and conditions agreed
upon in the sales contract are mentioned. Incase there is any variation or
discrepancy, it is brought to the notice of the applicant (i.e., importer) and
got rectified. Once the exporter gets satisfied of the terms and conditions
contained in the L/C, s/he makes shipment Soon after delivering goods to
the shipping company, the B/L are obtained.
• Which serve as the cargo receipt, contract of carriage, and the document
for the tide of the goods. The exporter submits the complete set of
documents as mentioned in the L/C, including the B/L along with the
draft drawn by the exporter To the advising bank, which in turn sends it
to the issuing bank The issuing bank scrutinizes the documents and if
found in accordance with the terms and conditions contained in the L/C,
it accepts the documents and in the case of a sight L/C, releases the
payment.
To the issuing bank. The issuing bank in turn makes the payment to the
exporter However, in the case of a usance L/C, payment is made at a later
date as contained in the L/C. The issuing bank presents the draft to the
applicant (i.e., importer), who releases the payment.

Upon which it handovers the B/L along with other documents o To the
importer, who in turn hands over the B/L To the shipping company at the
destination and takes delivery of the cargo (13). The operation of L/C is
governed by the UCPDC as prescribed by the ICC. As per the UCPDC,
payment is made only if the documents strictly conform to the terms and
conditions of the documentary credit. Under article 4 of the UCPDC,
banks deal in documents and not in goods and services.

Therefore, an exporter should carefully examine the L/C and ensure that:

i. The names and addresses are complete and spelled correctly

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 ii. The L/C is irrevocable and preferably confirmed by the advising bank,
conforming to sales contract. However, the confirmation of an L/C,
although preferable by the exporter depends upon the terms of the sales
deal

iii. The amount is sufficient to cover the consignment

iv. The description of goods is correct

v. The quantity is correct

vi. The unit price of goods, if stated in the L/C, conforms to the contract
price

Vii The latest date for shipment or the shipping date is sufficient to dispatch the
consignment vii. The latest date for negotiation or the expiry date is sufficient
to present the documents and draft(s) to the bank
 The port (or point) of shipment and the port (or point) of destination are
correct.
 The partial shipment/drawing is permitted or prohibited.
 The trans-shipment is permitted or prohibited The L/C is transferable or
non-transferable.
 The type of risk and the amount of insurance coverage, if required.
 The documents required are obtainable.

The following words, or similar, are present in the L/C:

Unless otherwise expressly stated, this credit is subject to the Uniform Customs
and Practice for Documentary Credits, International Chamber of Commerce
Publication No. 600 Under a documentary credit, a debt relationship exists
between the issuing bank and the beneficiary. Therefore, it is advisable to assess
the issuing bank’s standing, besides the sovereign and transfer risk of the
importing country. The issuing bank authorizes a corresponding bank in the
beneficiary‟s country to honour the documents in its place.
Under the UCPDC, unless the credit stipulates that it is available only with the
issuing bank, all credits should nominate the bank (the „nominated bank‟),
which is authorized to pay (to incur a deferred payment undertaking to accept
drafts) or negotiate. However, in a freely negotiable credit any bank is treated as
a nominated bank.

Types of letters of credit:

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According to methods of payments, the letters of credit may be of following
types:

a. Irrevocable:

The issuing bank irrevocably commits itself to make payment if the credit terms
as given in the L/C are satisfied under article 9A of UCPDC. A unilateral
amendment or cancellation of an irrevocable L/C is not possible.

b. Revocable:

A revocable L/C is highly risky for the exporters as it can be revoked any time
without consent of or notice to the beneficiary. For an L‟C to be revocable, it
should explicitly indicate as „revocable‟, otherwise under article 5C of UCPDC,
in absence of any explicit indication that the credit is revocable, it is deemed as
irrevocable. Nowadays, revocable letters of credit are rare, although these were
not uncommon in the 1970s and earlier, especially when dealing with less
developed countries.

c. Confirmed:

The confirming bank (generally a local bank in the exporter‟s country) commits
itself to irrevocably make payment on presentation of documents under a
confirmed L/C.

The issuing bank asks the corresponding bank to confirm the L/C.
Consequently, the corresponding bank confirms the L/C by adding a clause,
„The above credit is confirmed by us and

we hereby undertake to honour the drafts drawn under this credit on

presentation provided that all terms and conditions of the credit are duly
satisfied.‟

A confirmed L/C provides additional protection to the exporter by localizing the

risk of payment. Thus, the exporter enjoys two independent recognitions: one by
the issuing bank and the other by the confirming bank.

However, the confirming banks require the following criteria to be fulfilled:

The L/C should be irrevocable. The credit should clearly instruct or authorize
the corresponding bank to add its confirmation.

i. The credit should be available at the confirming bank.

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ii. The contents of credits should be unambiguous and free of „stop‟ clauses
(that allows buyer to prevent the terms of credit being fulfilled).

d. Unconfirmed:

Under such credit, the issuing bank asks the corresponding bank to advise about
the L/C without

any confirmation on its part. It mentions, „The credit is irrevocable on the part
of the issuing bank but is not being confirmed by us.‟

e. Sight:

The beneficiary receives payment upon presentation and examination of

documents in a sight L/C. However, the bank is given a reasonable time
(generally not more than seven banking days) to examine the documents after
its receipt.

f. Term credits:

Term credits are used as financing instruments for the importer. During the
deferred time period, the importer can often sell the goods and pay the due
amount with the sales proceeds.

g. Acceptance credit:

The exporter draws a time draft, either on the issuing or confirming bank or the
buyer or on another bank depending upon the terms of credit. When the
documents are presented, the draft is accepted instead of payment being made.
For instance, the payment date may be 60 or 90 days after the invoice date or
the date of transport documents.

h. Deferred payment credit:

Such credits differ from the time draft in terms of lack of acceptance of a draft.
The bank issues a written promise to make the payment on due date upon
presentation of the documents. The due date is calculated on the basis of the
terms of the credit. The deferred payment credit is generally more economical
from the point of view of commission than the credit with time draft. However,
an advance payment of credit amount may normally be obtained only from the
issuing or confirming bank whereas there are various possibilities for
discounting a draft.

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i. Revolving:

Under „revolving letters of credit‟ the amount involved is reinstated when

utilized, i.e., the amount becomes available again without issuing another L/C
and usually under the same terms and conditions.

j. Back to back:

Such back-to-back letters of credit are used when exporter uses them as a cover
for opening a credit in favour of the local suppliers. As the credits are intended
to cover same goods, it should be ensured that the terms are identical except that
the price is lower and validity earlier.

k. Documentary credit without letter of credit:

Documents are routed through banking channels that also act as the seller‟s
agent along with the bill of exchange. The major documents should include a
full set of B/L, commercial invoice, marine insurance policy, and other
stipulated documents.

Sight draft (documents against payment) Similar to L/C, exporter and the
importer enter

into a sales contract:

• On mutually agreed terms. Upon finalization of contract, the exporter

(drawer) ships
• The goods and submits the documents along with the bill of exchange
through his/her bank, also known as the remitting bank

• To the corresponding bank, also known as collecting bank

• In the importer‟s country. The corresponding bank presents the draft to
the importer (drawee) who makes payment at sight And thereafter the
documents Are handed over. The collecting bank transfers the payment

• To the remitting bank in exporter‟s country, which in turn makes

payment
• To the exporter (Fig. 15.7).

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Thus, under „documents against payment‟, the importer can take physical
possession of the goods only when s/he has made the payment before getting the
documents from the bank. Sight drafts are generally considered safer as the
exporter has possession and title of the goods till the time payment is made.

Time draft (documents against acceptance): Once a sales contract:

• Is signed between the exporter and the importer, the exporter (drawer)
ships the goods

• And submits the draft along with documents and the collection order
• To the bank located in his/her country, known as the remitting bank,
which in turn sends

• The draft along with documents to a corresponding bank, also known as

the collecting bank, in the importer‟s country. The collecting bank presents the
draft to the importer (drawee), who indicates his/her acceptance of the payment
obligations

o By signing the draft, upon which the B/L along with other documents is
handed over to the importer o For taking delivery of the goods. The
payment under time draft is usually to be made at a later date, after 30, 60,
90 or more days.
However, the bill of exchange already accepted by the drawee (i.e.,
importer) is again presented to the buyer

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• On the due date, who in turn releases the payment The
collecting bank transfers the funds to the remitting bank For
onward payment to the exporter. (Fig. 15.8).

This mode of payment poses a much greater risk as the documents are delivered
to the importer, who subsequently takes tide of the goods before the payment is
released. In case the importer fails. to make payment, the recovery of the sales
proceeds is difficult and involves a cumbersome process.

l. Consignment Sales:

Under the consignment sales, the shipment of goods is made to the overseas
consignee and the title of goods is retained with the exporter until it is finally
sold. As the title of goods lies with the exporter, the funds are blocked and the
payment period is uncertain. Consignment sales involve certain additional costs,
such as warehousing charges, insurance, interest, and commission of the agents.
Besides, the liability and risks lie with the exporter unless the consignment is
sold. The risk of violating the terms of consignment is much higher in
consignment sales. Besides, the price realization is also uncertain, over which
the exporter has little control. Selling goods on consignment basis in
international markets also provide opportunity to the exporter to realize higher
prices based on the buyers‟ satisfaction. Generally, such a mode of payment is
restricted to dealing with trusted counterparts in the overseas markets. Export of
precious or semiprecious stones and cut flowers is generally made on
consignment basis. However, the exporters are required to declare the expected
value of consignment on the guaranteed remittance (GR) form.

2. Open Account:

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The exporter and importer agree upon the sales terms without documents calling
for payments. However, the invoice is prepared by the exporter, and the
importer can take delivery of goods without making the payment first.
Subsequently, the exporting and importing firms settle their accounts through
periodic remittances. As the payment is to be released later, it serves as an
instrument to finance the importer for the transaction and the importer saves
the cost of getting bank finances. It requires sufficient financial strength on the
part of the exporter. The operation of open account is hassle free and simple.
The major drawback of an open account is the lack of safeguard measures
against non-payment by the importer.

Therefore, the open account is generally restricted to firms with longstanding

dealing and business relationship and intra-company transactions among
subsidiaries and affiliates. The statutory provisions related to foreign exchange
often restrict using open account for receiving payments in international
transactions. Generally, the central banks in most counties permit open
accounts to foreign firms operating in their country and restrict it for domestic
firms.

CHAPTER 2 :- RESEARCH METHODOLOGY

2.1 OBJECTIVES OF THE STUDY

• To find out if commercial banks play any role in international trade

in
• To find out if merchant banks play any role in international trade 
To find out if development banks play any role in international
trade  To find out if commercial banks play any role in
international trade.  And equally to find out if people‟s bank
play any role in international trade

2.2 SIGNIFICANCE OF THE STUDY

The research study will be of high benefit to banking sectors,

importers/exporters and to the society in general to embark of the
effectiveness of their business, which in turn will change of the society.
Also the study will determine the census and problems of banks role in
international trade in Nigeria and thereby should be taken as a corrective
measure.

Through this investigation, therefore, the banks and the society will then
know their weak points and willingly adopt measure aimed at enhancing
its business effectiveness.
Page | 32
 The government will be in the position to adopt the right strategies to
enable the society achieve its business expectations or goals.

2.3 Limitation

1. The time span for the project is limited.

2. Survey report analysis is based on only 50 responses.
3. Research was conducted online which leads to unbiased conclusion.

2.4 Data Collection

There are two methods of data collection that can be considered when collecting
data for research purpose. These data collection types include the following:

1. Primary Data

Primary data are original and are like raw materials. It is the most crude form of
information. The investigator himself collects primary data or supervises its
collection. It may be collected on a sample or census basis or from case studies.

2. Secondary Data

In this study data required was collected from both primary and secondary data.
The data collected for the survey was collected with the help of questionnaire.
The data collected for the research was collected from books, newspaper and
internet websites.

CHAPTER 3 :- LITERATURE REVIEW

3.1 IMPORT EXPORT DOCUMENTATION

Introduction

MK Industries, is a trading firm, imports large quantity of polymers in India. To

facilitate these transactions, MK Industries takes help of various banking
channels and instruments in accordance with international guidelines and laws.
A typical transaction involves –

1. Negotiating price with counter part

2. Obtaining Pro-forma invoice
3. Preparing Letter of Credit Application based on pro-forma invoice

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 4. Submitting the application to bank, which in-turn gives promissory notes
to corresponding

bank

5. Prepare Application to release the document from Bank along with

mandatory government

forms such as Form A1 or 15c or 15d .

6. In addition, it may also involve filling up another application for Buyers

Credit.

In all the process involves at least 6 set of different forms and documents which
are interlinked with each other. The Problem For small number of transactions,
one can easily make these document either by hand or in some word processor.
Once the number of transaction increases, it becomes really difficult to handle
and
keep track of various documents generated. Also as the number of documents
increase, so will the human error rate. Especially when document are interlinked.
Also almost 80% of the information is carried forward the next document in
workflow chain, hence typing these documents manually involved lot of
repetitive work which costs lots of time.
The Solution Each document in the workflow chain, was designed to export its
content to the next document. All the document were validated for common
errors and all ambiguity across entire set of document was removed, as the
information captured was very minimal. So the document flow chain looked
something like this -
1. Letter of Credit Application Form
2. Letter of Credit Request letter ( imported from 1)
3. Government declarations importedfrom
4. RBI Form A1 ( imported from 1 )
5. Letter for release of document ( imported from 4)
6. Buyers Credit Application ( imported from 4)
As you can see, at stage we only capture incremental information, importing the
rest from previous document in the chain. The whole process reduced the time to
generate these documents from an hour to 10 minutes. That too without any
errors.

3.2 FINANCING THE FOREIGN TRADE: THE CASE OF AN INDIA

TEXTILE EXPORTER

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Author(s):

Namita Rajput , (University of Delhi, New Delhi, India.) Abstract:

Subject area Trade Finance, International Trade, International Business,

Emerging Markets, Textile Industry. Study level/applicability This case has been
designed for the students studying courses on International Business during their
graduation/post-graduation. Students are expected to have basic knowledge of
International Trade and are also expected to study the different ways of financing
the foreign trade to appreciate the case.

Case overview :

The case describes the various ways of financing of foreign trade. The case has
been designed in the context of an Indian Textile Exporter who has grown
steadily over the past years. As business has increased, simultaneously the
requirement of funds for the exporter has also increased. Through the medium of
conversations, the different ways of financing the foreign trade have been
explained in detail. Equipped with this knowledge, students are required to
discuss the pros and cons of the different ways of financing the foreign trade. The
case also discusses the dilemma of foreign currency hedging. This is a common
dilemma faced by importers and exporters as they grow over a period of time.
Expected learning outcomes This case has been designed to: understand the
various ways of financing the foreign trade and understand their merits and
demerits; understand the difference between factoring and forfeiting understand
how the Exim Bank of India plays an important role in supporting exporters and
importers in India; and understand the various ways of hedging the foreign
currency risk.

Supplementary materials

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Keywords:

Textile industry, Emerging markets, International business, International trade,

Trade finance

Publisher:

Emerald Group Publishing Limited

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Copyright:

© Emerald Group Publishing Limited 2015 Published by Emerald Group

Publishing Limited Licensed re-use rights only

Citation:

Namita Rajput, Rohit Bhagat, Saachi Bhutani Bhagat, "Financing the foreign
trade: the case of an India textile exporter", Emerald Emerging Markets Case
Studies, (2015) , https://doi.org/10.1108/EEMCS-08-2014-0201

CHAPTER 4 :- DATA ANALYSIS & INTERPRETATION

• Most of the people have preferred private banks over public banks and
cooperative banks as the services offered by then are more efficient and the
services by them are also up to the mark.

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• Most of the people here give a positive response towards banks playing a
crucial role in international trade as without banks there would be a leap of faith
between both the exchanging parties and the transactions would also not happen
so easily and quickly as it is possible today.

• Out of all the major responses majority of the people say that commercial
banks play a very critical or crucial role in international business as without it ,it
would not be possible to carry on the transactions over a period of time

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• Yes a major response points that EXIM bank play a crucial role in
internationals trade as it is the most important aspect of international trade as all
of the export or import transaction would not be able to happen without the help
of EXIM Bank as it keeps a proper check on all the exports or import happening
in the country.

• out of all the four payment options mentioned in the chart majority of the
people use advance payment as it gives an assurance to the exporter that the
trade will not be a bad debt and other than that mode another major mode used
is documentary credit or letter of credit as in that banks gives a credit letter to

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the concerning authority that it will pay on behalf of the concerned person if
they fail to do so.

• A majority of the people responded that they participate weekly in

international trade it states that the usage of international trade by the people is
used mostly by the people in week to week basis it means that the export or
import function performed by them is mostly weekly other than using daily or
monthly or yearly.

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• Yes according to the responses received it Clearly states that banks
reduce exporting risks by providing trade finance products as it minimizes the
trade risks and it diversifies the risk among various participants or various other
persons

• A majority of the people say that they use the product bankers‟
acceptance and then they use letter of credit as they are first accepted by the
bank and then they are given to the respected customers for further use of it

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• Mostly people prefer irrevocable or confirmed or acceptance credit as
they are confirmed or perfectly approved letter of credit and there are no
chances to change or make any changes to it as it s duly checked and approved
by the concerned authority without giving any second thought to it.

• The most of the people say that it is advisable to trade through

international trade finance products as it gives an assurance to the supplier that
there is a middleman to watch their trade and give a backing to the trade if
anything does not happen as per the required guidelines.

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• India is eyeing giving a boost to its exports of food and agro products,
pharmaceuticals, information technology (IT) and services such as tourism to
China as it participates in the first China International Import Expo (CIIE). ...

China is India’s largest trading partner with a total trade of $89.71 billion in
2017-18.Nov 5, 2018.

CHAPTER 5 :- CONCLUSION & SUGGESION

5.1 CONCLUSION

International trade theory has historically struggled to hold up empirically in

terms of being able to predict countries‟ trade patterns and volume.
This is most famously demonstrated by the “Leontief Paradox”, which exposed
the inconsistencies of the United States‟ trade flows based on its resource
abundance. Indeed, even after correcting for the misspecifications of Leontief‟s
model, Leaner (1984) shows that it is still difficult to accurately predict trade
between countries based on the neoclassical principles.

• However, the classical and neo-classical trade theories remain a valid and solid
theoretical and applied premise in international trade discussions and
formulation of policies in areas pertaining to pattern of trade across regions,
factor price determination, negotiation with labour union and policies relating to
trade barriers.
• It gives us the basic knowledge for understanding the underlying framework
and complexities of international trade.
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5.1 SUGGESTION

• Five recommendations to help alleviate some of the costs and concerns

affecting correspondent banking activities were set out in a report released
today by the Committee on Payments and Market Infrastructures (CPMI).

• Until recently, banks have maintained a broad network of correspondent

relationships, but there are growing indications that this situation might be
changing. This implies a threat that cross-border payment networks might
fragment and that the range of available options for these transactions could
narrow.

• Correspondent banking is an essential component of the global payment

system, especially for cross-border transactions. Through correspondent
banking

relationships, banks can access financial services in different jurisdictions and

provide cross-border payment services to their customers, supporting, inter alia,
international trade and financial inclusion.

• The Correspondent banking report provides some basic definitions, outlines

the main types of correspondent banking arrangement, summarizes recent
developments and touches on the underlying drivers. The report then develops
recommendations on certain measures relating to (i) know-your-customer
(KYC)

utilities; (ii) use of the Legal Entity Identifier (LEI) in correspondent banking;
(iii) information-sharing initiatives; (iv) payment messages; and (v) use of the
LEI as additional information in payment messages.

• The report was issued for public consultation in October 2015. Based on the
comments received and further interactions with relevant stakeholders, some
changes have been made to strengthen the analysis and sharpen the message
and the recommendations. In addition, the report now contains a quantitative
analysis using SWIFT transaction data on correspondent banking activities.
The data set comprises more than 200 countries and territories, and the
analysis shows a trend towards concentration in correspondent banking
activity as measured by payment traffic.

• CPMI believes that, as the next step towards implementation, these measures
should be further analysed by all relevant authorities and stakeholders in order to
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gauge the potential impact of each measure and to avoid unintende consequences.
The CPMI expects that the relevant stakeholders will initiate any necessary
reviews or investigations in the light of the five recommendations as soon as
possible.
Notes
The CPMI promotes the safety and efficiency of payment, clearing, settlement
and related arrangements, thereby supporting financial stability and the wider
economy. The CPMI monitors and analyses developments in thesearrangements,
both within and across jurisdictions. It also serves as a forum for central bank
cooperation in related oversight, policy and operational matters, including the
provision of central bank services. The CPMI is a global standard setter in this
area. It aims at strengthening regulation, policy and practices regarding such
arrangements worldwide. The CPMI secretariat is hosted by the BIS. More
information about the CPMI, and all its publications, can be found on the BIS
website.

• The report on Correspondent banking was prepared for the CPMI by a working
group comprising representatives from CPMI central banks. The working group
was chaired by Jochen Metzger (Director General, Directorate General Payments
and Settlement Systems, Deutsche Bundesbank).

WEBLIOGRAPHY

• www.export.gov.com 15/01/2019

• www.ecgc.in 15/01/2019

• www.exportscale.com 15/01/2019

• www.buyerscredit.wordpress.com 15/01/2019

• www.export-import companies.com 21/01/2019

• www.un.org 24/01/2019

• www.tedo.iridiuminteractive.in 24/01/2019

• www.fieo.org 24/01/2019

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 BIBLOIGRAPHY

• Export Incentives. Delhi s Anupam.

• Export Strategy in India - Since Independence. New Delhi s S. Chand.

• International Trade and Export Management. Bom bay . Mrna I aya .
• Indian Export Trade - A Critical Analysis. Bombay
• Export Performance in Indian Engineering Industry. Delhi s Seema.
• India's Exports and Export Policy in the 1960's.
• International Trade - Policies and Prospective in Developing Economy.
Jaipur Prateeksho.
• .Export Strategy for India. New Delhi

www.eximguru.com 21/01/2019
www.efic.gov.au 21/01/2019
www.intracen.org 21/01/2019

ANNEXURE

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Study On Role Of Banks In International Trade

Banks play a critical role in international trade by providing trade finance

products that reduce the risk of exporting. ... Letters of credit are employed the
most for exports to countries with intermediate degrees of contract enforcement.
Compared to documentary collections, they are used for riskier destinations.

1. Name

2. Name Of The Firm

3. Gender

Male

Female

4. Age :-

5. Qualification

S.S.C

H.S.C

Graduate

Post Graduate

Other

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6. Occupation

Business

Profession

Other

Service

7. Turnover of the firm 10 - 15 lakh

15 - 25 lakh

25 - 35 lakh

35 - 50 lakh

50 lakh & above

Other:

8. Which type of banks do you prefer

Private Banks

Public Banks

Co-operative Banks

9. Are the banks playing a crucial role in international trade

Yes

No

Maybe
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10.Do you think commercial banks play a crucial role in International
Business

Yes

No

Maybe

11.Do you think the functions of EXIM BANK play a crucial role in
International Trade

Yes

No

Maybe

12.which modes are mostly used for payment in international trade ?

Advance Payment

Documentary Credit

Documentary Credit with Letter Of Credit

Other

13.How often do you participate in International Trade

Daily weekly

Monthly

Yearly

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14.Do banks reduce exporting risk by providing trade finance products

Yes

No

Maybe

15.Which product do you chose in international trade finance

Bankers Acceptance

Discounting

Accounts Receivable Financing

Factoring

Forfeiting

Letter Of Credit Counter

Trade

All of the above

16.Which Type of letter of credit do you prefer

Irrevocable

Revocable

Confirmed

Unconfirmed

Sight

Term Credits

Acceptance Credit
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Deferred Payment Credit

Revolving

Other

17.According to you is it advisable to trade through international finance

products

Yes

No

Maybe

18.On overall basis do you think role of banks in International Trade will
help to boost the growth of India

Yes

No

Maybe

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