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International Trade:

1. Why international trade is important to India? ( small paragraph)


2. Components of Current account, our trade balance and Balance of
Payment position a small brief with statistics. ( small paragraph).

Chapter -1
International Trade role played by UCO Bank.

Banks have been providing financial services to corporates for a long time.
The key services that UCO Bank provide in order to facilitate the trade
business of corporates involved in international trade are

1. Payment and Clearing sevices


2. Financing Services and Forex/Risk management Services.

For international trade, the supply chain process generally proceeds as


under:

Step1 Overseas Buyer places a purchase


order on the Indian Seller ( Vice-
versa)
Step2 Seller procures raw material,
produces the finished products and
delivers for shipment.
Step3 Seller raises invoice on the buyer
Step4 The buyer accepts the invoice
Step-5 The buyer pays to seller as per
agreed terms.

A commercial bank like UCO Bank gets involved in each of these steps:

1. As the invoice price is quoted in foreign currency, the exporter needs


to cover his exchange risk arising out of the transaction (transaction
risk). Bank gets involved to book forward contract.
2. Bank provides credit facility to the exporter for pre-shipment.
3. Bank finances the post shipment.

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4&5: Bank involves in the payment and clearing services for settlement
of the value of goods sold.

In a similar way for the importer, bank books forward contract (step-1),
issues LC/ Provides import finance to facilitate trade.
Introduction to Financial Supply Chain

The supply chain represents the processes involved in Trade-Which can be


categorized into two different parts: The physical and the financial Supply
chain. The physical supply chain comprises of processes involved in the
physical movement of goods e.g.: Inventory management, shipment tracking
etc. The financial supply chain includes the movement of funds resulting
from the physical supply chain.

Specialized trade departments in UCO Bank service the physical supply chain
with very highly specialized and specific products. The international trade
finance business of the bank starts with finance of the buyer and supplier.
The bank finance for trade is extended to both the buyers (Importers) and
suppliers (Exporters) in various circumstances and under various names:
some of which are described here

1. Pre-Shipment Credit (Packing Credit): Finance to Exporter ( Seller) to


procure raw material for production and packaging.
2. Post-shipment Credit (Foreign Bills purchased/ negotiated): Finance to
Exporter (Seller) after shipment of goods and before sales realization
is received by the seller.
3. Finance to Importer (buyer) for making payment to seller.

The financial standing and market reputation of the buyer and that of the
seller may be vastly different. This gives rise to risks which the buyer and
seller are exposed to. Banks step in to mitigate this risk through the
mechanism of: Letter of Credit (LC) also known as documentary credit and
has been one of the key innovations in trade finance.

Letter of Credit or Documentary Credit an introduction

Generally, the seller perceives a risk that if they have completed the
manufacturing and delivered the goods to thy buyer and the buyer does not

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pay them they run a payment risk. In such a case of non-payment by the
buyer, the seller may not be able to repossess the goods. The buyer on the
other hand runs a risk of making the payment and then finding that the
delivery has not been made at all or the quality of the delivery is not as per
their expectation.

So, UCO bank acts as an intermediary between the buyer and the seller to
mitigate the risks for both. The letter of credit is a guarantee issued to the
seller by the bank on behalf of its importer client guaranteeing payment to
the seller if he presents trade documents as specified in the letter of
credit. So the LC document, which is issued by the buyer’s bank, contains the
terms and conditions that the seller has to fulfill in order to receive the
payment. The bank can only examine the trade documents to verify if the
conditions have been fulfilled. Therefore, the bank specifies conditions for
all the documents that it expects to receive from the seller in order to
verify that the seller has met their obligations.

When the buyer’s bank receives the documents it verifies the documents
against the specifications mentioned in the letter of credit. If the
documents are satisfactory it will make payment to the seller on due date.
The buyer’s bank will have to make the payment irrespective of whether or
not it receives payment from the buyer! Therefore the buyer’s bank takes a
credit risk when it issues an LC. This credit risk is evaluated when the
working capital credit facility is sanctioned by the bank.

In practice some more parties are involved in the process, the main one
being the seller’s bank, which receives the documents from the seller and
forwards them to the buyer’s bank. This is required as the buyers bank will
not be in a position to know the authenticity of the seller directly especially
if they are in a different country.

The 10-Steps involved in LC

1 Buyer Requests UCO Bank to


issue LC
2 Buyer’s bank Issues LC and informs
seller’s bank
3 Seller’s bank Advises LC to the seller

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4 Seller Ships the goods
5 Seller Gives documents to his
bank with the LC for
negotiation, where upon
the seller’s bank credits
the importers account
by sanctioning an
advance.
6 Seller’s bank Forward’s the
documents to the
buyers bank
7 Buyer Gives acceptance to pay
later or pays
immediately
8 Buyer’s bank Verifies documents
against the LC and
conveys
acceptance/payment to
sellers bank
9 Sellers bank Adjusts the credit
facility availed by the
importer
10 Buyer Collects documents
from the bank and then
takes the goods.

Bank’s as intermediaries gain as follows

Importers bank: Gains exchange income from opening LC, gains interest
income from importer, gains forex exchange income as the importer needs
to pay in foreign currency.

Exporters bank: Gains exchange income from LC advising fee, Gets interest
income from Negotiation of Export bill. Gains forex income as the foreign
currency received from exporter is converted to domestic currency (INR).

Trade documents:

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Under a letter of credit or documentary credit, the banks depend upon the
underlying trade documents to verify the performance of the seller before
making the required payment.

When a seller sells goods to a buyer:


• The goods will generally be transported either by ship or airplane.
• The sale of goods will be accompanied by some documentation such
as: Invoice, Packing list, Transport Document( Bill of lading/Airway
bill), Insurance, Quality Certificate and Certificate of Origin.

(She may refer the FEDAI book on documentary credits and give a small
brief on the significance of these documents).

Standardization and progress in Trade Services

International trade through LC requires a sound legal frame work to resolve


the disputes that arises. International Chamber of Commerce( ICC) was
founded in 1919 with this aim came out with “Uniform Customs and Practices
for Documentary Credit ( UCPDC). This guiding document laid down in great
details:

• Model conditions that could be used in establishing letter of credit.


• The interpretation and guidelines for verifying the documents verses
the documentary conditions set out in the letter of credit.
• Some model practices for handling the uncertainties around the
courier and receipt of documents.

Chapter-2: Govt. Agencies involved in “International Trade”.

1. How international trade is regulated?


(Role of DGFT, various licenses and its importance).
2. Role of Customs in the physical supply chain.
3. Role of RBI in the documentation chain. GR form / Bill of Entry etc

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Chapter-3

The Regulatory environment related to exports / imports. RBI


guidelines/FEMA.

Chapter -4: Corporate finance ( International sourcing)

1. Various avenues for corporate to raise working capital finance for


funding trade (pre/post shipment finance, buyers credit/suppliers
credit).
2. A small brief on international debt market ( ECB/ADR/GDR etc.)

3. Transaction risk , Translation risk for corporates

Chapter -5
Various Risks and its mitigation both from the corporate perspective and
bank’s perspective

A detailed study of how a typical corporate manages his exchange risk. How
he decides whether to borrow in foreign currency or domestic currency etc.
Derivatives used for risk mitigation.

2. Economic Risk :( A competitor sourcing goods from another country


benefits from exchange rate and therefore is able to sell at cheaper price)

3. Risk inherent in supply chain. (For instance many corporates who were
sourcing components from ‘Japan’ faced supply constraints when the huge
earthquake had hit Japan).

4. How bank manages its Risks on exposures to corporate?

Chapter -6

A case study of a corporate can be included covering all the above aspects.