2019

Important Terms in
Trade Finance

TRADE FINANCE TERMS

SUMIT CHAUDHARI

QUALITYKIOSK TECHNOLOGIES PRIVATE LIMITED©

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Table of Contents
1. International Chamber of Commerce ............................................................ 2
2. Uniform Customs and Practice for Documentary Credits (UCP600) ........................ 2
3. Uniform Rules for Demand Guarantee (URDG758)............................................. 2
4. Uniform Rules for Collection (URC522) .......................................................... 2
5. Import Data Processing & Monitoring System (IDPMS) ........................................ 2
6. Export Data Processing & Monitoring System (EDPMS) ........................................ 3
7. SWIFT................................................................................................... 3
8. Types of Account..................................................................................... 3
8.1. Current Account .............................................................................. 3
8.2. Loan Account ................................................................................. 3
8.3. Nostro Account ............................................................................... 4
8.4. Vostro Account ............................................................................... 4
9. Types of Fund Transfer ............................................................................. 4
9.1. Demand Draft ................................................................................. 4
9.2. Pay Order or Banker’s Cheques ........................................................... 4
9.3. Electronic Fund Transfers (NEFT/RTGS/IMPS) .......................................... 4
10. Receivables ......................................................................................... 4
11. Amortization ....................................................................................... 4
12. Accruals ............................................................................................. 5
13. Crystallization ...................................................................................... 5
14. Demurrage .......................................................................................... 5
15. AVAL/Avalisation .................................................................................. 5
16. Partial Shipment ................................................................................... 5
17. Transshipment ..................................................................................... 6
18. Period of Presentation ........................................................................... 6
19. Assignments of Proceeds ......................................................................... 6

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1. International Chamber of Commerce

The International Chamber of Commerce was founded in 1919 to serve world business
by promoting trade and investment, open markets for goods and services, and the free flow of
capital. The organization's international secretariat was established in Paris and the ICC's
International Court of Arbitration was created in 1923.
ICC plays a key role in international trade through its Uniform Customs and Practice
for Documentary Credits (UCP) and other regulatory articles that provide the infrastructure
for trade among over 160 nations that have voluntarily agreed to be bound by these articles.
The ICC has several key expert groups, and provides interpretations and opinions on the UCP
as well as arbitration services in the event of disputes between parties involved in
international commerce.

2. Uniform Customs and Practice for Documentary Credits (UCP600)

The Uniform Customs & Practice for Documentary Credits (UCP600) is a set of rules
agreed by the International Chamber of Commerce, which apply to finance institutions which
issue Letters of Credit – financial instruments helping companies finance trade. Many banks
and lenders are subject to this regulation, which aims to standardize international trade,
reduce the risks of trading goods and services, and govern trade. The UCP was created in 1933
and has been revised by the ICC up to the point of the UCP600. The UCP600 came into force
on 1 July 2007.

3. Uniform Rules for Demand Guarantee (URDG758)

Uniform Rules for Demand Guarantees (URDG) refers to a set of guidelines first
adopted by the International Chamber of Commerce (ICC) in 1991 that sets forth generally
agreed-upon rules governing securing payments and meeting performance guarantees in
contracts among global trading partners

4. Uniform Rules for Collection (URC522)

The ICC Uniform Rules for Collections are a practical set of Rules to aid bankers,
buyers, and sellers in the collections process. The rules have been prepared to resolve
problems that practitioners have experienced in their everyday operations since 1979.

5. Import Data Processing & Monitoring System (IDPMS)

RBI constituted a working group which included FED,DGFT,SEZ,FEDAI & selected
authorized dealers banks (AD banks), to frame a comprehensive IT system to facilitate
efficient processing of all import transactions and effective monitoring thereof. The working
group had recommended development of a robust and effective IT- based system referred as
“Import Data Processing and Monitoring System (IDPMS)”.

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6. Export Data Processing & Monitoring System (EDPMS)

The Reserve Bank of India had launched a comprehensive IT- based system called
“Export Data Processing and Monitoring System (EDPMS)” for better monitoring of export of
goods and software and facilitating AD banks to report various returns through a single
platform.

7. SWIFT
Swift is the “Society for Worldwide Interbank Financial Telecommunication”, a
member-owned cooperative through which the financial world conducts its business
operations with speed, certainty and confidence. Over 8,300 banking organizations, securities
institutions and corporate customers in more than 208 countries trust Swift every day to
exchange millions of standardized financial messages.

8. Types of Account
8.1. Current Account

Current accounts are maintained as running accounts in the name of customers.

Individuals, Partnership firms, Private Limited or Public Limited Companies can have
Current accounts for Business Purposes. One customer can have more than one current
account. Current accounts do not bear interest. i.e., banks will not pay any interest on
the credit balance held in the current accounts.
Banks normally stipulate minimum daily balance or average monthly balance in the
current accounts. Banks will debit service charges if the minimum/average balance not
maintained and/or number of cheque books issued etc.
Normally Current accounts will have credit balance only. Whenever the current
accounts are overdrawn i.e., if the closing balance in a current account on any day is a
debit balance then the bank will charge interest/penal interest on such temporary
overdrawing.

8.2. Loan Account

Loans are granted to borrowers for various purposes like buying vehicles, home or
utility products and for other business purposes. Loans will be extended only against
credit limits. Loans accounts can be maintained either in the form of running account or
deal type.
Deal type loan account is input with following details: Name of the Borrower, Principal
Amount, Start Date, Tenor, and Maturity date, Rate of interest and method/frequency of
interest and/or principal re-payment.
Normally consumer loans or retail loans will have EMI repayment and maintained in
running account type. Business or corporate loans are maintained in deal type with either
bullet repayment or regular monthly/quarterly repayment schedules.

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8.3. Nostro Account

Used to facilitate international payments, this is the account of a bank with its agent
or correspondent in a foreign country which is recorded in the currency of that country.
In simple term “A Nostro is our account of our money, held by the other bank in their
currency”

8.4. Vostro Account

Used to facilitate international payments, this is the account of a bank with an agent
or correspondent in a foreign country which is recorded in the currency of the bank’s own
country. In simple term “A vostro is account of other bank of their money, held by us in
our currency”.

9. Types of Fund Transfer

9.1. Demand Draft
Banks issue Demand Draft at the request of their customers favoring the beneficiary. DDs are
payable at other cities. Before issuing DD, the amount plus commission will be debited to the
account of the applicant.

9.2. Pay Order or Banker’s Cheques

Banks issue PO at the request of their customers favoring the beneficiary. POs are payable at
the same city of the issuing branch. Before issuing PO, the amount plus commission will be
debited to the account of the applicant.

9.3. Electronic Fund Transfers (NEFT/RTGS/IMPS)

Customers can request for NEFT/RTGS/IMPS by furnishing following mandatory details: Name of
Beneficiary, IFSC code of beneficiary’s bank, Account Number, Details, Mobile number or email id.
Before effecting NEFT/RTGS/IMPS, the amount plus commission will be debited to the account of
the applicant.

10. Receivables
An asset designation applicable to all debts, unsettled transactions or other monetary
obligations owed to a company by its debtors or customers. Receivables are recorded by a
company’s accountants and reported on the balance sheet, and they include all debts owed
to the company, even if the debts are not currently due.

11. Amortization
In accounting, the amortization of intangible assets refers to distributing the cost of
an intangible asset over time. You pay installments using a fixed amortization schedule
throughout a designated period. And, you record the portions of the cost as amortization

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expenses in your books. Amortization reduces your taxable income throughout an asset’s
lifespan.
E.g. you have a $5,000 loan outstanding. If you pay $1,000 of the principal every year, $1,000
of the loan has amortized each year. You should record $1,000 each year in your books as an
amortization expense.

12. Accruals
Accruals are earned revenues and incurred expenses that have an overall impact on an
income statement. They also affect the balance sheet, which represents liabilities and non-
cash-based assets used in accrual-based accounting. These accounts include, among many
others, accounts payable, accounts receivable, goodwill, future tax liabilities and future
interest expenses.

13. Crystallization
In simple words, crystallization is a process of converting foreign currency liability of
the exporter into Indian Rupee liability is called “Crystallization of foreign currency import of
export bills”.
As you know, once after shipping of goods, most of the exporters discount or negotiate
the export bills with bank by submitting necessary export documents like Bill of Lading /
Airway Bill, Invoice, Packing list and other required export documents. Most of the
government supports exporters by extending financial assistance by providing them loan
against export documents with very low rate of interest. Bank is expected to receive amount
of such exports from overseas buyer on due date agreed mutually between buyer and seller.
However, if export bills are not realized even after 30 days of its maturity, bank withdraws
the facility of low interest rate by delinking the bills and by converting it to commercial rate
of interest. This is called crystallization of export bills.

14. Demurrage
Charges incurred when a shipment must be stored in a warehouse during transit from
the exporter to the importer. These charges may be incurred in the event of dispute between
parties to a letter of credit (L/C) and can become substantial in a short period of time.

15. AVAL/Avalisation
An unconditional, irrevocable, divisible and freely transferable guarantee to pay the
beneficiary on the due date.

16. Partial Shipment

Partial shipment or part shipment is a special kind of the distribution process and means
the delivery of an order in two or more consignments. These kind of delivery has to be
allowed by the customer within the terms and conditions of the order.

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17. Transshipment
Transshipment or transhipment is the shipment of goods or containers to an intermediate
destination, then to another destination
E.g. change of shipment mode from ship transport to road transport

18. Period of Presentation

Period for Presentation is a field under the MT 700 Issue of a Documentary Credit swift
message. This field specifies the period of time after the date of shipment within which the
documents must be presented for payment, acceptance or negotiation.
According to current letter of credit rules a presentation including one or more original
transport documents must be made by or on behalf of the beneficiary not later than 21
calendar days after the date of shipment as described in these rules, but in any event not
later than the expiry date of the credit.

19. Assignments of Proceeds

Another method of paying a Supplier is for the Beneficiary of a Letter of Credit to
assign a part of the proceeds. The Beneficiary (Agent) will provide written, irrevocable
instructions to the Advising Bank to the effect that upon successful negotiation and payment
of documents under the Letter of Credit, the Bank is instructed to pay specific amount or
percentage to the Supplier.
This is not always acceptable to the Supplier as he is relying on the Agent to provide
credit conforming documents to obtain payment under the Letter of Credit. If no payment
comes through the Letter of Credit then the assignment of proceeds is worthless.

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