International Trade Finance Anim Ppt 3zd73

INTERNATIONAL TRADE

GROUP Andrea Mathias Kishore Patil Nehal Ukani Reiner D’Costa Shruti Hosur Shruti Shetty Sushil Kaushik

PRESENTATION FLOW • Introduction to International Trade •Methods of Payment •Pre-Shipment Finance •Post-Shipment Finance •Letter of Credit • Open •Documentary Collections •Comparisons of the three •Factoring •Forfaiting

INTERNATIONAL TRADE DEFINITION International trade

Flow Of Commodity

Flow of Productive factors

INTERNATIONAL TRADE

INTERNATIONAL TRADE FINANCE

Trade Finance is the science that describes the management of money, banking, credit, investments and assets for international trade transactions.

FISCAL INCENTIVES TO PROMOTE EXPORT Duty Drawback Tax Concession Market development assistance Export promotion of capital goods scheme Cash compensatory Air Freight Subsidiary

EXIM BANK Corporate banking group Project Finance/Trade Finance Group EXIM BANK

Line Of Credit Group Small and Medium Enterprise group Export Services Group

METHODS FOR INTERNATIONAL TRADE FINANCE According to stage of financing Pre-shipment finance Post-shipment finance

METHODS FOR INTERNATIONAL TRADE FINANCE Instruments/methods of financing Letter of credit Open Factoring Forfaiting Document collections

Pre-Shipment Finance

PRE-SHIPMENT FINANCE Definition: • “Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as pre-shipment credit”. • Such finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of goods meant for exports. • Maximum period of 180 days • Exporter can obtain 90% of the FOB value of the order or 75% of the CIF value of the order.

IMPORTANCE OF PRE-SHIPMENT FINANCE o Purchase raw material, and other inputs o Assemble the goods in the case of merchant exporters. o Store the goods in suitable warehouses till the goods are shipped. o Packing, marking and labeling of goods. o Pre-shipment inspection charges. o Purchase of heavy machinery and other capital goods o Consultancy services. o Export documentation expenses.

FORMS OR METHODS OF PRE-SHIPMENT FINANCE • Packing Credit – Packing Credit in Indian Rupee – Packing Credit in Foreign Currency (PCFC) • • • • • •

Advance Against Hypothecation Advance Against Pledge Advance Against Red L/C Advance Against Back-To-Back L/C Advance Against Exports Through Export Houses Advance Against Duty Draw Back (DBK)

PACKING CREDIT IN FOREIGN (PCFC) • Available to exporting companies as well as commercial banks for lending to the former. • Additional window to rupee packing credit scheme available to cover both the domestic i.e. indigenous & imported inputs. • Can avail pre-shipment credit in rupees & then the post shipment credit either in rupees or in foreign currency • To avail of pre-shipment credit in foreign currency discounting/rediscounting of the export bills in foreign currency. • FC will also be available both to the supplier EOU/EPZ unit and the receiver EOU/EPZ unit.

REQUIREMENTS FOR GETTING PACKING CREDIT This facility is provided to an exporter who satisfies the following criteria: • A ten digit Importer - Exporter Code ( IE Code ) number allotted by DGFT. • Exporter should not be in the caution list of RBI. • If the goods to be exported are not under OGL (Open General License), the exporter should have the required license /quota permit to export the goods.

DIFFERENT STAGES OF PACKING CREDIT • Appraisal and Sanction of Limits • Disbursement of Packing Credit Advance • Follow up of Packing Credit Advance • Liquidation of Packing Credit Advance • Overdue Packing

INTEREST SUBVENTION SCHEME • Government steps in by picking up a part of the interest burden • Interest subvention of 2 per cent on the pre-shipment credit for seven employment-oriented export sector Textiles including handlooms Handicrafts Carpets Leather Gems & Jewellery Marine products Small & Medium exporters. • Extension beyond current deadline of September 30, 2009 to March 31, 2010.

POST SHIPMENT FINANCE • Definition: Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. • Export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don’t wait for the importer to deposit the funds.

FEATURES • Purpose of Finance • Basic of Finance • Types of Finance • Quantum of Finance • Period of Finance

TYPES OF POST SHIPMENT FINANCE • Export Bills Purchased / Discounted • Export Bills Negotiated • Advance Against – Export Bills Sent On Collection Basis – Export On Consignments Basis – Un-drawn Balance – Claims Of Duty Drawback

BENEFITS TO EXPORTERS • Competitiveness – Exporter able to offer credit to buyer • Energized Cash flows – Producer receives cash from export proceeds upfront and can continue production activities. • Expansion Of Client Base – Exporter able to expand client base due to availability of financing

TYPES OF EXPORT BUYER’s CREDIT •

Physical Exports

•

Deemed Export

•

Capital Goods And Project Exports

SUPPLIER’s CREDIT

Buyer's Credit is a special type of loan that a bank offers to the buyers for large scale purchasing under a contract. Once the bank approved loans to the buyer, the seller shoulders all or part of the interests incurred

LETTER OF CREDIT • Definition: A formal document issued by a bank on behalf of customer, stating the conditions under which the bank will honour the commitment of the customer • The letter of credit is also known as banker’s commercial credit or documentary letter of credit. • L/C used in domestic trade are called inland L/C’s.

PARTIES TO A LETTER OF CREDIT • Importer or Applicant • Issuing Bank • Beneficiary • Advising Bank • Negotiating/ The Paying Bank.

LETTER OF CREDIT – THE PROCESS Seller (Beneficiary)

4. Advice of Documentay credit Advising Bank

Buyer Applicant

1. Contract

2. Documentary credit Application

3. Documentary credit

ISSUING BANK.

TYPES OF LETTER OF CREDIT • Irrevocable L/C

•

Back To Back Credits

• Revocable L/C

•

Red Clause L/C

• Negotiation Credit

•

Transferable Credits

• Confirmed or Unconfirmed credit

•

Traveller’s L/C

•

Special Credits

• Revolving credits

ADVANTAGES OF LETTER OF CREDIT • Immediate Payment • Guaranteed Payment • Performance • Safe & Secure Method • Political & Exchange Control risks reduced.

OPEN Open

• Definition: Open is a form of trade whereby sales are made to the buyer without entering into any formal contract. The system works on complete trust between buyer & seller. • An open transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days.

OPEN Open

• Open is the most advantageous option to the importer in cash flow and cost . • It is consequently the highest risk option for an exporter. • Exporters may also wish to seek export working capital financing to ensure that they have access to financing for both the production for export and for any credit while waiting to be paid.

OPEN •

Open may be offered in competitive markets with the use of one or more of the following trade finance techniques: – Export Working Capital Financing – Export Credit Insurance – Export Factoring – Forfaiting

OPEN – PROS & CONS Pros & Cons

• Pros: Boost competitiveness in the global market. Establish and maintain a successful trade relationship.

• Cons: Exposed significantly to the risk of nonpayment Additional costs associated with risk mitigation measures.

OPEN Open – PROCESS - Process

TARGET

VENDOR

BANK

OPEN Open – PROCESS - Process

TARGET

Purchase order

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BANK

VENDOR

OPEN Open – PROCESS - Process

VENDOR

Purchase order

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Goods

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TARGET

BANK

OPEN Open – PROCESS - Process

TARGET

VENDOR

Purchase order

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Goods

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BANK

OPEN Open – PROCESS - Process

VENDOR

Purchase order

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BANK

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DOCUMENTARY COLLECTIONS •

Process Overview

Remitting Bank

Sends Documents + Instructions for Payment

Collecting Bank

Payment Entrusts collection of payment

Payment

Importer

Payment

Draft indicating D/A or D/P

Exporter

DOCUMENTARY COLLECTIONS Documentary Collections Importer can collect documents by following payment : C. Document against acceptance (D/A) Importer pays the face amount on a specified date in the future. Transfer of title of goods and documents is done on receipt of payment. F. Document against payment (D/P) Importer pays the face amount on sight of goods. Transfer of title of goods and documents is done immediately.

DOCUMENTARY COLLECTIONS Documentary Collections

Advantages: • Documentary collections involve use of drafts which is less expensive than letter of credit. Disadvantages: • Although banks act as facilitators, no verification process is present. • Limited recourse in the event of non-payment.

FACTORING • Definition – “Financial transaction whereby a business sells its s receivable to a third party called a factor (financial institution) at a discount in exchange for immediate money with which to finance continued business.” • Financial option for the management of receivables

FLOW CHART OF FACTORING (1) Credit Sale of Goods

Customer

Client (2) Invoice (6) Pays the balance

(5) Pays the amount (In recourse type customer pays through client)

Factor

(4) Payment upto 80% initially

(3) Submit Invoice Copy

FACTORING ARRANGEMENTS Factoring Arrangements Recourse

Disclosed

FACTORING

Non–Recourse

Undisclosed

TYPES OF FACTORING FACTORING

TWO FACTOR SYSTEM

DIRECT IMPORT & EXPORT FACTORING

BACK TO BACK FACTORING

TWO FACTOR SYSTEM • Use of two factors, one in each country, dealing with the exporter and the importer • Importer advances funds to the import factor who then transmits them to the export factor • System involves three agreements – – exporter and the importer – export factor and the exporter – between the factors

Importer & Import Factor

Exporter & Export Factor

DIRECT IMPORT & EXPORT FACTORING • Direct import factoring: Connotes the situation where the exporter assigns debts to a factor in the country of the debtor • Direct export factoring: Factor is appointed in the exporter’s own country and deals with all the aspects of the factoring arrangement including the provision of financing and the assessment of the financial position of the importer

BACK TO BACK FACTORING • Back to back factoring: Arrangement most suitable for debts owed by the exclusive distributors of products to their suppliers • The exporter enters into a factoring agreement with the export factor who contracts with import factor. • Difference is existence of a separate factoring agreement between the import factor and the distributor • Right to set off credits arising from the domestic sales of the distributor with his debts to the supplier

FORFAITING

Forfaiting

• Definition – Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium term foreign receivables at a discount on a “without recourse” basis • It virtually eliminates the risk of nonpayment, once the goods have been delivered to the foreign buyer in accordance with the of sale

FLOW CHART OF FORFAITING Flow Chart - Forfaiting

STRENGTH OF FORFAITING • Enables the exporter to offer his customers fixed rate credit for the purchase of the goods • Forfaiting is quick and simple to arrange; the procedures are straightforward and the documentation is of standard format • Forfaiting relieves the exporter from the risk of payment default; financing is made without recourse • Credit-based exports are turned into cash deals, thereby improving liquidity and keeping bank credit lines open • Currency risk is limited to the period from concluding the sales contract until the date of discount • 100% of contract value can be financed and the origin of the goods is irrelevant

BENEFITS OF FORFAITING • Eliminates Risk • Enhances Competitive Advantage • Improves Cash Flow • Increases Speed and Simplicity of Transactions

FACTORING VERSUS FORFAITING • Factoring is the revolving sale of all or at least a majority of a company’s receivables to a factoring company. The acceptable tenor of the receivables is usually maximum 180 days. A few factoring companies accept also tenors of up to 360 days. • Forfaiting is the single sale/purchase of a single transaction. The deal itself has to be documented and assigned properly. The maximum forfaitable tenor depends on the possibilities of the Forfaiters in the market i.e. their available country and banklimits.