This action might not be possible to undo. Are you sure you want to continue?
(Ministry of Tou rism, Go v ernmen t of In dia)
Prog ram: PGDM (I ntern ational Business ) IInd Se mester Ro ll No : 209400 1
I would like to express my gratitude to Faculty of Business Research this Methodology and (Mrs. Sareeta the vital Pradhan), information for and guiding and providing us with valuabl e feedback throughout project providing knowledge of this topic. Furthermore, I would also like to acknowledge my friends and relatives, with whom I have worked side-by-side during the entire process Finally, my sincere thanks goes to the entire respondent for sharing their valuable time and voicing their opinions and for scribing idea, without whose co -operation the research would have bee n impossible.
Place: Bhubaneswar Date: Signature
IMPORTANCE OF TRADE FINANCE
PRE-SHIPMENT TRADE FINANCE
POST-SHIPMENT TRADE FINANCE
FORFAITING AND FACTORING
DOMESTIC TRADE FINANCE
IMPORTANCE OF TRADE FINANCE
Trade Finance is a specific topic within the financial services industry. It‟s much different, for example, than commercial lending, mortgage lending or insurance. A product is sold and shipped overseas, therefore, it takes longer to get paid. Extra time and energy is required to male sure that buyers are reliable and creditworthy. In addition, foreign buyers are 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 provide alternative solution that balance risk and payment. In this overview, we‟ll outline the two broad categories of trade finance: Pre-shipment Financing to produce or purchase the material and labor necessary to fulfill the sales order. Post-shipment Financing in order to generate immediate cash while offering payment to buyers.
GENERAL CONSIDERATION The following factors and considerations apply to financing in general: Financing can make the sale In some cases, favorable payment terms make a product more competitive. If the competition offers better terms and has a similar product, a sale can be lost. In other cases, the exporter may need financing to produce the goods or to other aspects of sale, such as promotion and selling cost, engineering modification, and shipping cost. Various financing source are available to
Different methods of financing are available for short. Exporters need to be fully aware of financing limitations so that they secure the right solution with the most favorable terms for seller and buyer. Can the buyer pay? They want to know that the buyer is reliable with the good credit history. Financing Terms Costs increase with the length of terms. insurance and fees will vary. The creditworthiness of the buyer directly affects the probability of payment to an exporter. They will evaluate any commercial or political risk. and long terms. the grater the cost. Financing Costs The costs of borrowing. The total cost and its effects on the price of the product and profit from the transaction should be well understood before a pro-forma invoice is submitted to the buyer. including interest rates. Banks/Lenders are generally concerned with two questions: Can the exporter perform? They want to know that the exporter can produce and ship the product on time. 6 .exporters. medium. The political and economic stability of the buyer‟s country are also taken into consideration. but it is not the only factor of concern to potential lender. Risk Management The greater the risk associated with the transaction. depending on the specifics of the transaction and the exporter‟s overall financing needs. and that the product will be accepted by the buyer.
Working Capital Loans For exporters. or if additional credit capacity is needed.If a lender is uncertain about the exporter‟s ability to perform. In addition. Many small businesses need pre-export financing to cover the operating costs related to a sales order or contract. undercapitalized businesses. Lender who may otherwise have reached their lending limits for such businesses may nevertheless finance individual export sales. The self-liquidating feature of trade finance is critical to many small. Material: The raw material needed to produce the export product. if the lenders are assured that the loan proceeds will be first be collected by them before the balance is passed on to the exporter. The remainder is credited to the exporter‟s account. government guarantee programs are available that may enable the lender to provide additional financing. working capital loan programs are normally associated with pre-shipment financing. FEATURES OF TRADE FINANCE PRESPECTIVES Trade Finance generally refers to the financing of individual transaction or a series of revolving transactions. Inventory: The costs associated with buying the export product. 7 . trade finance can be less risky for banks/lenders then general working capital loans. trade finance loans are often self liquidating that is the lending bank stipulates that all sales proceeds are to be collected. Loans proceeds are commonly used to finance three different areas: Labor: The people needed to built or but the export product. Given the extent of the control lenders can exercise over such transaction and existence of guaranteed payment mechanisms unique to or established for international trade. and then applied to payoff the loan.
The foreign buyer benefit because they get extended credit terms at market rate or better. Few exporters can manage the cash flow dilemma or commercial or political risk caused by these long term contracts. This is an effective solution that benefits the exporter. So the buyers ask for extended credit terms and/or financing. 8 . The payment is usually made directly to the exporter. foreign buyers don‟t have the cash on hand to pay for major purchase. many backed by the respective governments. Exporting country‟s government institutions often back buyer credit programs.Term Financing for Foreign Buyers Frequently. IMPORTER AND EXPORTER? Through the Pre-shipment and Post-shipment finance options offered to importers and exporters are fundamentally similar. their perspectives might be different. Under this program. using pre and/or post shipment finance. Export Trade Finance Exporters. may improve their cash flow by utilizing trade finance to fund their purchase and/or manufacturing of goods pending receipt of payment form their buyer. the exporting country‟s financial institution lend credit to the foreign buyer in order allow the foreign importer to pay the exporter immediately. means fully repayment of loan and a reasonable return of funds lent. An exporter is also able to offer advantageous credit terms to buyers as te repayment is usually made after the goods were sold. their buyer and commercial lender providing the loans. The lender benefits because guarantees. The exporter benefit because they‟re paid cash on delivery and acceptance of the product or service.
when the method of payment agreed upon with the exporter is ‘Pre-payment by Clean Remittance’ 9 . It also enables importers to offer payment at a sight basis to the supplier. Post-shipment trade finance can allow time for goods to be sold prior to the payment being made. rather than utilizing supplier terms(prices are often increase to cover supplier terms).Import Trade Finance Importers may use pre and post shipment finance to improve their cash flow. This provides a importer with a negotiating advantage in realizing a potentially lower price. Pre-shipment trade finance enables an importer to pay for goods prior to shipment.
The main objectives behind pre-shipment finance are: Procure raw materials. Pre-shipment credit is a part of working capital finance. Advance against receivables from government. Advance against cheques/drafts etc. If the goods to be exported are not under OGL (Open General License). like duty drawback etc. Carry out manufacturing process. Ship the goods to the buyers. Packing credit in Foreign Currency (PCFC). Exporter should not be in the caution list of RBI.. 11 .PRE-SHIPMENT TRADE FINANCE Pre-shipment finance is credit granted to the exporters by a financial institution. Meet other financial costs of the business. TYPES OF PRE-SHIPMENT FINANCE Packing credit. Provide a secure warehouse for goods and raw material. the exporter should have the required license/quota permit to export the goods. Process and pack the goods. representing advance payment pre-shipment finance is extended in the following forms: Packing credit in Indian Rupee. REQUIREMENT FOR GETTING PACKING CREDIT This facility is provided to an exporter who satisfies the following criteria: Exporter should have a ten-digit importer-exporter code number allotted by DGFT.
Firm order or irrevocable L/C or original Cable/Fax/Telex message exchange between the exporter and the buyer. Formal application for realizing the packing credit with undertaking to the effect that the exporter would ship the goods within stipulated due date and submit the relevant shipping document to the bank within prescribed time limit. proper quota allotment proof needs to be submitted.Packing credit facility can be provided to an exporter on production of following evidences to the bank: 1. 3. but some of the responsibilities of meeting the export requirement have been out sourced to them. Quantum of Finance There is no fixed formula to determine the quantum of finance that is granted to an exporter against a specific order/LC or an expected order. financial institution also grant credit to the third-party manufacturer or supplier of goods who does not have export orders or LCs in their name. Eligibility Pre-shipment credit is granted to an exporter who has the export order or LC in his own name. In cases where the export order is divided between more than one exporter. If the item falls under quota system. 12 . The only guiding principle is the concept of Need-Based-Finance. License issued by DGFT if the goods to be exported fall under the restricted or canalized category. as an exception. the exporter is the person or the company who actually delivers the goods to the importers/buyers. The confirmed order received from the overseas buyer should reveals the information about the full name and address of the overseas buyer. However. destination and last date of payment. quantity and value of goods (FOB or CIF). by the main exporter. description. 2. pre-shipment credit can be shared between them.
Disbursement of Packing Credit Advance 2. The Bank extends the packing credit facilities after ensuring the following: The exporter is a regular customer. All costs before shipment would be eligible for being financed under the packing credit. Whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries (RCC). While considering credit facilities for export activities. with whom the exporter proposes to do business. disbursements are normally allowed. 13 .Banks determine the percentage of margin. country profile and the commodity profile. the bank ensures that the exporter has executed proper documents. After proper sanctioning of the limits. depending on factor such as: The nature of order. The bank also look into the status report of the prospective buyer. Pre-shipment finance or packing credit is essentially a working capital advance made available for the specific purpose for procuring/processing/manufacturing of goods meant for export. banks look specifically into the aspects of product profile. On the basis of these documents. The nature of the commodity. In order to get the status report on foreign buyer. service of the institutions like ECGC or international consulting agencies like Dun and Brad Street etc may be utilized. Packing credit advance should be liquidated from export proceeds only. a bona-fide exporter and has a good standing in the market. The exporter has the necessary licenses and quota permits. DIFFERENT STAGES OF PRE-SHIPMENT FINANCE Appraisal and sanction of limits 1. The capability of exporter to bring in the requisite contribution.
14 . known as Running Account Packing Credit. Exporter needs to submit stock statement reporting the stocks. when the goods are ready to be shipped. Normally the Packing Credit period should not exceed 180 days. the bank may provide a special packing credit facility. The bank decides frequency of submission of the stock statements at the time of sanctioning the Packing Credit.There are special types of export activities that may be seasonal in nature. The period for which the packing credit is provided is decided by the bank depending upon the time required by the exporter for procuring and manufacturing/processing the goods. Before disbursing. e) Last date of shipment/negotiation. c) Quantity. Disbursals are made only in stages and preferably. The payments are made directly to the suppliers by drafts/Banker‟s cheques. not in cash. The quantum of finance is fixed based on the FOB value of contract/LC or on the domestic value of goods. Follow-up of Packing Credit Advance 3. d) Value (either CIF or FOB). b) Commodity to be exported. f) Any other terms to be compiled with. whichever is lower. Normally insurance and freight charges are considered at later stage. in which the exporter may not be able to produce the export order at time of availing Packing Credit. which are under pledge or hypothecation to the bank for securing the Packing Credit Advance. without referring to RBI. In these cases. the bank specifically checks for the following particulars in the submitted documents: a) Name of the Buyer. The bank may provide a further 90 days extension on its own discretion.
the entire advance is recovered at commercial interest rate plus a penal rate as decided by the bank. if found feasible. Nursing programme may be initiated. the pre-shipment credit will be converted into post-shipment credit will be converted into post-shipment credit. the sub-supplier‟s bank may grant a packing 15 . SPECIAL CASES Packing Credit to sub-supplier 1. Overdue Packing 5. On the basis of such an L/C. At this stage. payment from the Market Development Fund (MDF) of the Central Government or from any other relevant source. if the export does not take place at all. the bank considered it an overdue. For any reason. Packing Credit Advance can also be liquidated with proceeds of payment receivable from Government of India. Packing Credit Advance will always be liquidated with export proceed of the relevant shipment. the bank takes steps to realize its dues as per usual recovery procedures. The banker of EOH may open an inland L/C specifying the goods to be supplied by the sub-supplier to the EOH as part of the export transaction. In case of overdue position persists. Packing Credit may be shared between an Export Order Holder (EOH) and the manufacturer of goods on the basis of a disclaimer issued by EOH to the effect that he has not availed/is not availing credit facility against the portion of the order transferred in the name of the manufacturer. If the borrower fails to liquidate the packing credit on the due date/extended due date. This disclaimer may preferably be countersigned by the banker of EOH. Liquidation of Packing Credit Advance 4.The authorized dealer (Banks) also physically inspect the stock at regular intervals. This payment includes the duty drawback.
ensure that there is no double financing and the total period of packing credit does not exceed the actual cycle of production of the commodity. Banks have been authorized to grant pre-shipment advances for export of any commodity without insisting on prior lodgment of L/C or firm export order under „Running Account‟ facility. On supply of goods. In case the EOH is a trading house. on a “First In First Out” (FIFO) basis. and is not to be extended to cover supplies of raw material etc. Banks however. The bank may extend the facility provided the exporter has a good track record and the need for „Running Account‟ has been established by the exporter to the satisfaction of the bank. 16 . the L/C opening bank will pay to the subsupplier‟s bank against the inland documents received on the basis of inland L/C opened by them. The scheme is intended to cover only the first stage of production cycle. In case where this facility has been provided. Running account facility is not granted to the sub-suppliers. Running Account Facility 2. the facility is available commencing from the manufacturer to whom the order has been passed by the trading house. the exporter should produce L/C or firm export order within a reasonable period of time. with the objective of making credit available to the exporters at internationally competitive rates . Authorized dealers have been permitted to extend Pre-shipment Credit in Foreign Currency(PCFC) to exporters. Banks mark off the individual export bill as and when they are received for negotiation/collection against the early outstanding pre-shipment credit.credit to the sub-supplier to manufacture the components required for exports. The EOH is finally responsible for exporting the goods as per export order and any delay in the process will subject him to penal provisions issued from time to time. Pre-shipment Credit in Foreign Currency (PCFC) 3.
In such cases. Under this scheme credit is provided in foreign currency in order to facilitate the purchase of raw material. exports do not involve physical movement of goods out of Indian Custom Territory. In case of consultancy services. 17 . The procurement of raw material. Deemed exports made to multilateral funds aided projects and programmes. Where exporters receive direct payments from abroad by means of Cheques/Drafts etc. under order secured through global tender for which payment will be made in foreign exchange. Packing Credit Facilities for Consulting Services 5. components etc. Packing Credit Facilities to Deemed Exports 4. may be made from the international market or from the domestic market. must satisfy themselves that the proceeds are against an export order. the bank may grant export credit at concessional rate to the exporter of good track record. The banks. till the time of realization of the proceeds of the cheques or drafts etc. along with the existing INR packing credit. Advance Against Cheques/Drafts received as Advance Payment 6.This is an additional window available to Indian exporters. preshipment finance can be provided by the bank to allow the export to mobilize resource like technical personnel and training them. however. required to fulfill the export order. components etc. are eligible for concessional rate of interest facility both at pre and post supply stages.
19 . advance or any other credit provided by an institution to an exporter of goods from India. Further. it is extended to finance the receivables against supplies made to designated agencies. In case that involve advances against undrawn balance.POST-SHIPMENT TRADE FINANCE Post-shipment finance is a loan. This finance is granted from the date of extending the credit after shipment of the goods to the realization date of the export proceeds. Basis of Finance Post-shipment finance is provided against evidence of shipment of goods or supplies made to the importer or any other designated agency. In few cases. the financing is non funded in nature. the finance is mostly a funded advance. the issue of guarantees (retention money guarantees) is involved. In case of deemed exports. such as financing of project exports. the finance is normally self liquidating. Form of Finance Post-shipment finance can be secured or unsecured. it is unsecured in nature. Since the finance is extended against evidence of export shipment and banks obtain the document of title of goods. FEATURES The features of post-shipment finance are: Purpose of Finance Post-shipment Finance is meant to finance export sales receivables after the date of shipment of goods to the date of realization of exports proceeds.
In case of cash export. Deemed Exports In case of deemed exports. depending on the payment term offered by the exporter to the overseas buyer. subject to maximum of 180 days. However. This form of finance is not extended at the pre-shipment stage. requiring prior approval of the Authorized dealer. Quantum of Finance Post-shipment finance can be extended upto 100% of the value of goods. FINANCING FOR VARIOUS TYPES OF EXPORTS Post-shipment finance can be provided for three types of exports: Physical Exports In case of physical exports. These goods are supplied to the designated agencies. 20 . In case of deferred payment exports. the maximum period allowed for realization of exports proceeds is six months from the date of shipment. finance for the price difference can also be extended if such a price difference is covered by receivables from the government. Banks can extend post-shipment finance at lower rate up to normal transit period/notional due date. post-shipment finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred. In such cases banks are free to stipulate margin requirements as per their usual lending norms. Banks can also finance undrawn balance. finance is forwarded to the supplier of the goods. where the domestic value of goods exceeds the value of the export order or the invoice value. RBI or EXIM Bank. Period of Finance Post-shipment finance can be short term or long term. post-shipment finance can be extended at non-concessional rates up to the approved period.
Advance against export bills sent on collection basis. Advance against receivables from Government of India. or another country. strictly drawn in terms of sale contract/live firm 21 . 2. Advance against export on consignment basis. 6. Export bills (Non-L/C Bills) representing genuine international trade transactions. Buyer‟s Credit is a financial arrangement whereby a financial institution in the exporting country. Capital Goods and Project Exports In case of export of capital goods and project exports. The disbursal of money is directly made to the domestic (Indian) exporter. extends a loan directly or indirectly to a foreign buyer to finance the purchase of goods and services from the exporting country. Export Bills purchased/discounted. This arrangement enables the buyer to make payment due to the supplier under the contract. SUPPLIER’S CREDIT Finance extended by supplier to buyers in their own name is referred to as Supplier‟s Credit. 4. Advance against undrawn balance on exports. Supplier‟s Credit is a financing agreement under which an exporter extends credit to the buyer in the importing country to finance the buyer‟s purchases. TYPES OF POST-SHIPMENT FINANCE The post-shipment finance can be classified as : 1. credit is sometime extended directly to the foreign buyer. Export Bills negotiated. 3. BUYER’S CREDIT As seen in the case of capital goods and project exports. 5. finance is sometimes extended in the name of overseas buyer. Hence. Export Bills Purchased/Discounted (DP & DA Bills) 1.
if a reputed bank guarantees the payment by confirming the L/C. it may refuse to honor the commitment. Proper limit has to be sanctioned to the exporter for the purchase of export bill facility. risk of non-payment may arise. and the lending bank to thoroughly scrutinize the terms and conditions of the L/C and the document submitted by the beneficiary in support of the same. the issuing bank would not honor the L/C. If the export is not covered under L/C. anticipating the strengthening of foreign currency. Advance Against Export Bills Sent on Collection Basis 3. the exporter might have fully utilized his bills limit and in certain cases the bills drawn under L/C may have some discrepancies. However. the exporter himself may request the bill to be sent on collection basis. Hence it becomes extremely important for the negotiating bank. the bills will be sent on collection basis. the risk is reduced further. banks are often ready to extend finance against bill under L/C. Letter of Credit is a secure mode of trade transaction. The risk is more pronounced in case of documents under acceptance. Also. In some cases. Due to this inherent security provided by this mode. At times. since the issuing bank guarantees payment. the bank also faces the documentary risk. wherein if the issuing bank notices some discrepancy in the document supplied. it is to be noted that the bank still faces two major risk in this case. In such cases. Concessional rates of interest can be charged for this advance until the 22 . hence the risk of payment is low. Secondly. subject to the condition that the beneficiary meets the terms and condition of the L/C. First is the risk of non performance by the exporter.contract/order may be discounted or purchased by the banks. wherein case the exporter is unable to meet his terms and conditions. Banks may allow advance against these collection bills to an exporter. Export Bills Negotiated (Bills under L/C) 2.
ascertained after arrival and inspection of goods. depending upon the type of drawing. The overseas branch/correspondent of the bank is instructed to deliver the documents against trust receipt. Advance Against Export on Consignment Basis 4. Eventual remittance of sale proceeds is made by agent/consignee. such advance can be provided at concessional rate up to a maximum period of 90 days. For computing the Eligible Transit Period. In case of exports through approved Indian owned warehouses abroad. In certain lines of export trade. Adjustments are made by buyer for difference in weight. Advance Against Undrawn Balance on Exports 5. Goods are exported on consignment basis at the risk of the exporter. the time limit for realization is 15 months. the period commences from the date of acceptance of the export documents at the bank‟s branch for collection and not from the date of advance. quality etc. subject to the maximum of 10% of the full export value. The export has to give an undertaking that he shall surrender or account for the balance of the proceeds within a period prescribed realization. conforming to relevant RBI guidelines. Advances granted against export bills covering goods sent on consignment basis are liquidate from remittance of the sale proceeds within 6 months from the date of shipment. 23 . Authorized Dealer (Banks) can handle such bills provided the undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export trade. it is common practice to leave a certain amount as undrawn balance.transit period in case of DP Bills and transit period plus usance period in case of Usance Bills.
This can be in the form of refund of Excise and Custom duty. The Government of India and other agencies provide support to exporter under the Export Promotion Scheme. CRYSTALLIZATION OF OVERDUE EXPORT BILLS If the export bill purchased /negotiated/discounted is not realized on due date (in case of Demand Bills within Normal Transit Period and in case of Usance Bills on notional due date). Just as in the case of various foreign governments. where the domestic cost of production of goods is higher in relation to international price. These are granted only if other types of export finance are also extended to the exporter by the same bank. After the shipment. It has to be ensured that the bank is authorized to receive the claim amount directly from the concerned government authorities. These advance are liquidated out of the settlement of claims lodged by the exporters. the exporter may get support from the government so that he may compete effectively in the overseas market. If the crystallized export bill realizes subsequently.Advance Against Receivables from Government of India 6. at prevailing TT selling rate ruling on the day of crystallization. whichever is higher. supported by relevant documents to the relevant government authorities. conversion of foreign exchange will be made at the market rate prevailing 24 . or the original bill buying rate. exporter‟s foreign exchange liability is converted into Rupee liability on the 30th day after the expiry of NTP in case of DA bills. known as Duty Drawback. These advances being in the nature of unsecured advances cannot be granted in isolation. However. These claims are processed and eligible amount is disbursed. if the exporter want to crystallize the overdue export bills earlier he apply in writing to the AD even before the 30th day after the notional due date. the exporter lodge their claims. Banks can grant advances to exporters against their entitlement under this category at lower rate of interest at maximum period of 90 days.
Resident Foreign Currency Account and Foreign Currency (nonresident) account schemes. ADs have been permitted to utilize the on-shore foreign exchange funds available with them by way of balances in Exchange Earner‟s Foreign Currency account (EEFC). Under the scheme of Ads rediscount the export bills in overseas market by arranging with an overseas agency/bank by way of line of credit or banker‟s acceptance facility or any other similar facility at rates linked to 6 month LIBOR rates. Spread between borrowing and lending is left to the discretion of the bank concerned. EXPORT BILLS ARE RE-DISCOUNTED FACILITY (EBRD) This is an additional window available to exporters. excluding withholding tax. Exporters can also directly arrange for rediscounting facilities abroad without prior permission from the RBI. The facility is available in all convertible currencies. we see that the exporter has the following financing options: 1. Ultimately. the cost to the exporter should not exceed 0. the credit limits of the exporter are restored immediately. 2. along with the existing financing scheme at post-shipment stage. the exchange profit/loss is borne by the exporter. In this case. 25 . OPTIONS FOR THE EXPORTER Having gone through the detail of various pre-shipment and postshipment Trade Finance options. if any applicable). The scheme covers export bills up to 180 days from the date of shipment (inclusive of normal transit period and grace period. In case of re-discounting of export bills on without – recourse basis.75% above 6 month LIBOR/EURILIBOR/EURIBOR.on the day of the payment. Pre-shipment in Rupees and post-shipment under export bill rediscounting in foreign currency. EBRD. Pre-shipment credit and post-shipment credit in rupees. subject to compliance of guidelines prescribed by the Reserve Bank.
depending on the premium/discount factor of the currency in which he has got exposure. the exporter may prefer to avail a Rupee loan and try to earn the premium factor of the foreign currency.3. 26 . the exporter may not want to avail any facility in foreign currency. Instead. For example. if the exporter has got an exposure in Euro and this currency is at a premium. under EBRD. An exporter may avail any facility in a denominated foreign currency. Pre-shipment in Foreign Currency (PCFC) and post-shipment under export bill re-discounting in foreign currency.
the “factors” of colonial times made advances against the accounts receivable of clients. This is known as factoring without recourse (or nonrecourse factoring) and is quite common in business today. The bank would have waited to collect from the European buyers of the raw material before paying the seller of these goods. cottons. factors could actually guarantee payment for approved customer. By assisting clients in determining the creditworthiness of their customers and setting credit limits. factors exist in all shapes and sizes as division of large financial institution or. although the basic premise remained the same. the Mesopotamians first developed writing. Today.FORFAITING AND FACTORING BRIEF HISTORY Factoring has a long and rich tradition. 28 . in large numbers. This enabled the colonist to continue to harvest their new land. During this time. furs and timber were shipped from the colonies.000 years to the days of Hammurabi. In addition to many other things. put structure into business codes and government regulation and came up with the concept of factoring. So. as individually owned and operated entrepreneurial endeavors. Hammurabi was the king of Mesopotamia. factoring become more focused on the issue of credit. as they exist today. If the colonist had been forced to use modern banking services in eighteenth century England. Merchant bankers in London and other parts of Europe advanced fund to the colonist for these raw materials. documented use of factoring occurred in the American colonies before the revolution. the process would have been much slower. These were not banking relationships. The first widespread. dating back 4. With the advent of Industrial Revolution. before they reached the continent. just as today. This was not practical for anyone involved. free from the burden of waiting to be paid by their European customer. which gets credit as the “cradle of civilization”.
in return for immediate cash payment from a forfaiter. It may be mentioned that factoring is for short term receivables (under 90 days) and is more related to receivables against commodity sales. 29 . As a result. Carrying medium to long term maturities. Up to 100% of the contract value. Without recourse to the seller (such as exporter). In a forfaiting transaction. FORFAITING – OPERATING PROCEDURE 1. Exporter initiates negotiations with prospective overseas buyer. On a fixed rate basis (discount).Forfaiting and Factoring Forfaiting and factoring are similar services that serve to provide better cash flows and risk mitigation to the seller. an exporter can convert a credit sale into cash sale. 2. finalizes the contract and open an L/C through this bank. but the bill discounting is more domestic-related and usually falls within the working capital limit set by the bank for the customer. Evidence by bills of exchange or promissory notes. Both factoring and forfaiting are like bill discounting. FORFAITING Forfaiting is a mechanism of financing exports: By discounting export receivables. over 90 days and even up to 5 years. The difference in the risk profiles of receivables is the fundamental difference between factoring and forfaiting. Forfaiting can be for receivables against which payments are due over a longer term. Exporter ships the goods as per the schedule agreed with the buyer. the exporter surrenders his rights to claim for payment on goods delivered to an importer. which has implications for the cost of services. with no recourse either to him or his banker.
The FA effects payments of discounted value after verifying the Aval‟s signature and other particulars. The exporter draws a series of bills of exchange and send them along with the shipping documents. instead. On maturity of BOE/Promissory notes. the forfaiting transaction is to be reflected in the following three documents associated with an export transaction. 8. The claim for duty drawback if any is to be certified only with reference to the FOB value of the export stated on the shipping bill. stated on the invoice. commission insurance. commitment fees. Exporter‟s bank credits Exporter‟s A/C. the Forfaiting Agency presents the instruments to the Aval (Importer‟s Bank) for payment. 7. these could be built into the FOB price. Shipping Bill and GR form: Details of the forfaiting costs are to be included along with the other details.3. 30 . 6. Exporter endorses avalised Bill of Exchange (BOE) with a word “without re-course” and forwards them to the Forfaiting Agency (FA) through his bank. Exporter informs the Importers bank about assignment of proceeds of transaction to the forfaiting bank. in the manner suggested below: Invoice: Forfaiting discount. normally included in the “Analysis of Export Value” on the Shipping Bill. 4. 5. such as FOB price. to his banker for presentation to importer for acceptance through latter‟s bank. need to be shown separately. Bank returns avalised and accepted bills of exchange to his client (the exporter). DOCUMENTARY REQUIREMENT In case of Indian exporters availing Forfaiting facility. etc.
That is to say once the exporter obtains the financed fund. the export is able to grant credit to his buyer freely. Risk Reduction – Forfaiting business enables the exporters to transfer various risks resulted from deferred payment. The relative costs. the exporter will spare from the management of the receivables. 31 . he will be except from the responsibility to repay the debt. currency risk.5% to 1. Improved Cash Flow – Receivables become current cash inflow and it is beneficial to the exporter to improve financial status and liquidation ability so as to heighten further the fund raising capabilities. as a results are reduced greatly. whichever is earlier. such as interest-rate risk. Reduced Administration Cost – By using forfaiting. It ranges between 0. be more competitive in the market. and thus. FEE TYPE DESCRIPTION COMMITMENT FEE This is payable to the forfaiter for his commitment to execute a specific forfaiting transaction at a firm discount rate within a specified time. Increased Trade Opportunity – With forfaiting. credit risk and political risk to the forfaiting bank. the exporter can make the verification of export and get tax refund in advance just after financing .BENEFIT TO EXPORTER 100% Financing – Without recourse and not occupying exporter‟s credit line.5% per annum of the unutilized amount to be forfaited and is charged for the period between the date the discounting takes place or until the validity of the forfait contract. Advanced Tax Refund – Through Forfaiting.
Credit protection against default in payment by the buyer. Lower credit administration and credit follow up. Banks gain fee-based income. The purchase of book debts or receivables is central to the functioning of factoring. enabling the client to avail 100% finance. The supplier submits invoices arising from contracts of sale of goods to the factor. BENEFIT TO BANK Forfaiting services provide the bank with the following benefits: Banks can provide an innovative product range to clients. as against 80-85% in case of other discounting products. Maintenance of accounts relating to the account receivables. FACTORING Factoring is a continuing arrangement between a financial institution (the Factor) and a business concern (the Client). Collection of account receivables. by way of advance payments.DISCOUNT FEE This is the interest cost payable by the exporter for the entire period of credit involved and is deducted by the forfaiter from the amount paid to the exporter against the availed promissory notes or bills of exchange. The Factor purchases the client‟s book debt (account receivables) either with or without recourse to the client. The buyer is informed in writing that all payment of receivables should be made to the Factor. selling goods or services to trade customers. The Factor performs at least two of the following services: Financing for the seller. 32 .
33 . B. However it does not cover trade disputes. Also the possibility of undertaking any factoring business by the export factor would be depend on the response of the import factors for each transaction. The credit guarantee protection cover insolvency/protracted default of buyer. 2.DIFFERENT MODELS OF FACTORING Export Factoring can be done based on two distinct models: 1. A TWO-FACTOR SYSTEM It essentially involves an export factor in the country of the seller (exporter) and its correspondent factor (import factor) in the country of the debtor (importer). Collection Services: The import factor undertakes to follow up with debtors for payment and in cases where payment is not forthcoming they would be in a position to detect early indications as they would be based in the same location and would be familiar with local business intelligence as well as practices. Credit Guarantee Protection: The import factor undertakes to pay the export factor in the event the importer fails to pay by a specified period after due date. Two-Factor System. The import factor sets up limits on buyers present in that country and the export factor discounts invoices for its customers based on these limits. The correspondent factor typically performs a mutually agreed set of services for the export factor. In this situation. It could be any one or both the below mentioned services: A. the export factor would need to monitor its correspondent relation with various import factors across the globe. 1. Direct Factoring. The factoring quotes given by various import factors would differ depending on their location and comfort regarding the overseas buyer.
the pre-requisite is the establishment of a factoring relationship between the client and the factor. Flexible Cash Flow – To finance working capital requirements and improve profitability. FACTORING: OPERATING PROCEDURE For the factoring operation. Pre-assessments beforehand. Thereafter. Using services of a collection agency could reduce significantly the delays and to some extent the uncertainty in payments from overseas buyers. On the basis of credit evaluation. Credit Protection – Reduces the incidence of bad-debts. Regular MIS Report – MIS reports from Factors reduce the time spend on reconciliation of outstanding. the factor fixes limits for individual customers of the – So buyers‟ creditworthiness is checked 34 . DIRECT FACTORING Factoring can also be offered by availing credit insurance for the entire factoring portfolio. More Time for Core Business – Since sales ledger management and collections are handled by the factor. In case the overseas buyer does not respond. Credit insurance will cover insolvency/protracted default by the buyer as well as country risk but it would not cover trade disputes. the collection agent can monitor potential default cases. BENEFITS OF FACTORING Turnover Linked Finance – So as an exporter. you can finance a higher level of sales than before and plan growth more effectively. The credit insurer will set up limits on overseas buyers and based on these limits export bills would be discounted. so that credit insurer can be informed in advance. detail of the invoice would be passed on to the collection agency that will follow up for payment with the overseas buyer. No Collateral/Security – So availing the financing is comparatively easier.2.
5. 2. against the debt so purchased by the Factor. 4. Factor follows up with the customer and sends him the statement. which will be adjusted for: New debts factored. charges debited. 1. Factored debts collected. 3. and the period for which the Factor is prepared to accept the client‟s receivables for such customers. The prominent features of the arrangement are: 1. The client offers the assigned invoices to the Factor under cover of a schedule of offer accompanied by copies of invoices and receipted delivery challans. 2. 35 . The client will be free to draw funds at any time up to the drawing eligibility. The customer makes the payment to the Factor. When the customer makes the payment for the invoice. The drawings in the client‟s account will be regulated on the basis of the drawing eligibility available from time to time. The client (seller) sells the goods to the customer (buyer) and invoices him in the usual way inscribing a notification to the effect that the debt due on the invoice is assigned to and must be paid to the Factor. The Factor provides immediate prepayment up to 80% of the value of the assigned invoices and notifies the customer sending a statement of account.client indicating the extent to which. 6. the Factor will pay the balance 20% of the invoice value. less the amount of retention money. The Factor will send age-wise statements of accounts to the client at the agreed periodicity. 3. FEE TYPE DESCRIPTION FINANCE CHARGE Finance charge is computed on the pre-payment outstanding in export‟s account at monthly intervals.
SERVICE FEE Service charge is a nominal charge levied at monthly intervals to cover the cost of services. sales ledger management and periodical MIS reports.3% on the total value of invoices factored/collected by the bank. 36 .1% to 0. For example collection. It ranges from 0.
payment is released under BG if and when the term of underlying transactions are not compiled with. a second bank is involved. there are two types of guarantee: 1. the bank acts as guarantor of a claim or obligation in lieu of the debtor. The guarantees ensure payment to the party the bank‟s customer is doing business. One may note that even though in both Letter of Credit and Bank Guarantee ensure that the issuing bank guarantees payment. Indirect Guarantee Within an Indirect Guarantee. TYPES OF BANK GUARANTEES In principle. Under a bank guarantee/surety bond arrangement. BG is a non-performance instrument. Direct Guarantee A Direct Guarantee occurs when the client instructs the bank to issue a guarantee directly in favor of the beneficiary. In certain cases. payment is released under L/C as and when all the terms of the underlying trade transaction are met. On the other hand.BANK GUARANTEES Guarantees are given by bank on behalf of its customer regarding specific performance/obligation by the customer to the other party. 2. The banks obligation is limited to its pledge to pay a maximum specified amount on fulfillment of the term of commitment. The second bank usually a foreign bank with a head office in the beneficiary‟s country of domicile. the bank may require adequate collateral. A bank guarantee/surety bond may only be issued if the customer has been granted a line of credit. 38 . The bank cannot be held liable in the event that the debtor fails to “perform”. Hence. the difference lies in that fact that while L/C is a „positive action‟ instrument. is requested by the initiating bank to issue a guarantee in return for the latter‟s country-liability and counter-guarantee.
or payment default guarantee. A third party may also provide collateral. the initiating bank will cover the guaranteeing (foreign) bank against the risk of any losses that it may incur in the event that a claim is made under the guarantee. They are often mandatory for public invitations to tender. winning the contract and then declining to accept it on the grounds that the deal is no longer lucrative.(On the condition that the lending and guaranteeing banks are not identical. It formally pledges to pay the amount claimed under the guarantee upon first demand by the guaranteeing bank.In this case. The purpose of a tender bond is to prevent a company from submitting a tender. 3. Credit Guarantee Borrowers are often required to provide collateral for a credit line or a loan. If the debtor fails to make payment when due. 2. Tender bonds offer buyers security against dubious or unqualified bids. Depending on the purpose of the Guarantee. Tender Bond This type of bank guarantee is also known as bid bond. Performance Bond This is also known as performance guarantee. A bank guarantee is one of the options creditors have to ensure that a loan will be repaid. e. provides security against default for the goods to be delivered.) 4.g. goods have been 39 . and beneficiary has fulfilled his or her contractual obligations . for example. A performance bond/guarantee provides security for any costs that may be incurred by the bond beneficiary and/or on non-performance with of a the contractually agreed service non-compliance contractual deadline. the Bank Guarantees may be classified as under: 1. Payment Guarantee A payment guarantee.
6. 7. Rental Guarantee This a guarantee of payment under a rental contract. In general. A bank guarantee in the carrier‟s favor for 100-200% of the value of the goods enables them to delivers the goods to the consignee without presentation of the original documents. This instrument can be used instead of a Letter of Credit if. the buyer does not require or demand proof of delivery by means of the usual original delivery documents. The advance payment guarantee should only become effective once the advance payment has been received. the advance payment guarantee should contain a reduction clause that automatically reduces the amount in proportion to the value of the (partial) delivery(ies). Individual bill of lading or the full set can go missing or be held up in the mail. An advance payment provides the supplier with funds to purchase equipment or components. for example. B/L Letter of Indemnity This is also called a Letter of Indemnity. or includes all payments 40 . Advance Payment Guarantee The advance payment guarantee is intended to bind the supplier to use the advance payment for the purpose stated in the contract between the buyer and the supplier. 8. a written declaration to this effect is generally sufficient to redeem payment from the guaranteeing bank. 5. The guarantee is either limited to rental payments only. Confirmed Payment Order This is an irrevocable obligation on the part of the bank to pay a specified sum at a specified time to the beneficiary (creditor) on behalf of the customer.delivered and/or services have been provided in accordance with the contract. Carriers may be liable for damages if they deliver the consignment before receiving the original bill of lading.
the Authorized Dealers/EXIM Bank/Working Group may consider and approve project export proposal/service contracts abroad.g. As per the recent guidelines. the following safeguards are observed: In the case of Financial Guarantees. including cost of repairs on termination of the rental contract). The Authorized Dealer/EXIM Bank have been authorize to furnish (without prior permission of Reserve Bank). available at RBI‟s website: While issuing guarantees on behalf of customers. (e. 9. one should refer to relevant circulars of RBI. bid bonds/tender guarantees and advance payment/performance guarantees in cases where the RBI has been authorized to approve proposals of exporters. In order to get the latest updates on these guidelines. Credit Card Guarantee In a certain circumstances. These may involve all types of guarantees to be furnished in connection with execution of projects/contract abroad. Claims must be made during the period of validity and strictly in accordance with the guarantee conditions. 41 . CLAIM (GUARANTEE UTILIZATION) If the beneficiary under the guarantee considers that the supplier has violated the supplier‟s contractual obligation.due under the rental contract. Such kind of guarantee extended by a bank is known as a Credit Card Guarantee. banks should ensure that the customer would be in a position to reimburse the amount in case the bank is required to make the payment under the guarantee. the former may utilize the guarantee. credit card companies will not issue a high value credit card without a bank guarantee. GENERAL GUIDELINES The RBI has issued some general guidelines for bankers to follow while doing the guarantee business.
Banks should normally refrain from issuing guarantees on behalf of customers who do not enjoy credit facilities with them. 42 . In the case of Performance Guarantees. and leave longer maturities to be guaranteed by other institutions. banks should exercise due caution and should know the customer sufficiently well. A Bank should ensure that 20% of its outstanding unsecured guarantees plus the total of its unsecured outstanding unsecured advances should not exceed 15% of its total outstanding advances. Banks should ideally guarantee shorter maturities. to satisfy themselves that he has the necessary experience. A Bank Guarantee should ideally not have tenure for more than 10 years. capacity and means to perform the obligations under the contract and is not likely to commit any default.
44 . since both the buyer and the seller operates within the same legal and administrative framework. Documentary collections. These include: Clean payments. Delivery against acceptance. since no multi-currency or cross country transactions occurs.DOMESTIC TRADE FINANCE Fundamentally. Also. some financing options that are specifically more relevant in domestic trade. the level of mutual confidence is higher. Documentary credit. and are often known to each other. Open A/C transactions. Modes of transactions in domestic trade within national boundaries are basically similar to the modes of transaction in International Trade. The goods do not require customs clearance and the remittance do not need to be reported to the Forex regulatory bodies. Most of the Trade Finance options available in International Trade are also available in domestic trade. the trade finance business is the domestic arena is similar to the trade finance business on an international level. It is natural that due to higher degree of confidence enjoyed by the buyers and sellers within the same regulatory and administrative boundaries. Delivery against payment. However. Naturally. Advance payments. However. export/import licenses are not required and export quota restrictions do not limit growth. the easier to carry out and less documentation intensive trade option like clean payments and documentary collections are used more often. hence the regulatory framework is much simpler.
Vendor Financing is a product to extend working capital finance to vendors having business relationships with large corporate in India. Channel Financing is a product that extends working capital finance to dealer having business relationships with large companies in India. In addition.CHANNEL FINANCING Through channel financing. Dealers are able to leverage their relationship with reputed companies in sourcing low cost funds with support from their counterparts. This may be in the form of either cash credit facilities or as a bill discounting line of credit. Limited overdraft facility to the dealer/distributor for his business dealing with large corporate. Under this. By providing short term lending to clients utilizing qualified receivables and improved control of the sales/distribution channels. payables discounting serves to add value by improving supplier relationships and enhancing cash-flow management. 45 . Herein the bank undertakes to discount bills drawn by the supplier/vendor and accepted by the corporate. the bank can extend: Discounting of trade bills drawn by the reputed supplier and accepted by the dealer/distributor. VENDOR FINANCING Vendors can leverage their relationship with reputed companies by sourcing low cost bill discounting line of credit.
As a result. Oracle. However. In the information age. are all examples wherein all the members of the network operates in tandem with each other through 47 .g. through various stage of value addition. process and distribute information to serve a particular purpose. GE. commencing from raw material procurement. The competitive advantage and profitability of the company was determined by its strength relative to the strength of the next member of the supply chain. GM. The trade was transaction specific and each deal could be looked at and dealt with independently. Traditionally. In such a scenario. It is to be noted that an organization can be a member of more than one. Ford Motor Company. wherein disparate parties engaged in trade of goods. a network can be defined as the summation of organizations that create. the survival/growth of each member in the networks depends on the strength of the network as a whole and vice-versa. Dell Computers. a “Networks” can be loosely described as the summation of the entire supply chain. Wal-Mart etc. usually dominated by one dominant member that competes with other networks. Boeing. Toyota. In knowledge industries. a combination of all the member of the network would make a unique supply chain structure. In this context. and finally to the end user. E. Trade Finance services have been suited to meet the needs of the industrial age. Such „networks‟ are already becoming dominant in the International market. the relationship between various member of the supply chain changes from a „Buyer-Seller‟ relationship to that of a „partner-in-growth‟ relationship. sometimes rival „networks‟. it is not the companies that compete with each other rather it‟s the “Networks” that compete with each other networks. Microsoft.CHALLENGES BEFORE TRADE FINANCE SERVICE PROVIDERS Traditional standardized trade finance products are outdated and belong to a bygone era.
The real added value to customer in the trade business today stems from the merger of trade finance with supply chain and cash management. New age trade finance solutions should strive to achieve 2 goals: 1. Just putting an “e” before a “LC” (Letter of Credit) won‟t make the e-LC a killer app. THE WAY AHEAD The challenge before the banks is to provide solution that are „network‟ specific and not just transaction specific. This step is very similar to integrating third-party solutions. Even if this move has created efficiencies. and 48 . either via proprietary solutions or by outsourcing the operation to another institution. Customize and package solutions that are relevant to a particular customer. Domestic and International trade has experienced dramatic changes due to the introduction of supply chain management techniques that have reduced the dollar size of individual shipments. because traditional trade finance solutions such as letters of credit are far less relevant to this new reality of international trade business. Managing the supply chain carefully reduces inventory and brings companies close to just-in-time production. which cannot alone completely address customer needs. In 2001.careful information processing and Supply Chain Management by sharing critical data on a continuous basis. for reason of efficiency and cost reduction. Move from a transaction focus solution to network management solution. it has failed to address the issue of today‟s trade finance business. the average value of an international shipment was 42% of what it was in the 1970s. 2. and fulfilled clients‟ needs. Most banks operating in the trade finance business have moved their trade features online. Moving traditional Trade Finance tools to the internet is not the answer. This change has had a tremendous impact on the trade finance business. reduced costs.
49 .packaging and providing the information on real-time basis to the customer in an easily accessible manner. As Businesses move towards operating in a more integrated manner across political boundaries. This would require banks to provide for internationally integrated financial solutions. like Global cash management solutions and integrated multinational treasury solutions. The underlying principal towards all future growth would be integration – integration of markets leading to integration of services. further leading to integration of processes and databases. so would their supporting financial structures.
eximin.iibf.com www.fieo.in www.org www.investopedia.com/enterprise/scm BOOKS PRACTITIONERS‟ BOOK ON TRADE FINANCE By IIBF INTERNATIONAL TREASURY MANAGEMENT By IIBF 50 .BIBLIOGRAPHY www.cio.rbi.com www.in www.net www.org.eximbankindia.org.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.