Trade finance is related to international trade. The term Trade Finance which means, financing a Trade.

For a trade to happen, we have a seller to sell the goods and we have a buyer to buy the goods. Various intermediateries such as banks, Financial Institutions can facilitate the Trade by financing the trade. While a seller (the exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract. Other forms of trade finance can include Documentary collection, trade credit insurance, export factoring, and forfeiting. Some forms are specifically designed to supplement traditional financing. In many countries, trade finance is often supported by quasigovernment entities known as export credit agencies that work with commercial banks and other financial institutions. Since secure trade finance depends on verifiable and secure tracking of physical risks and events in the chain between exporter and importer, the advent of new methodologies in the information systems world has allowed the development of risk mitigation models which have developed into new advanced finance models. This allows very low risk payment advances to exporters to be made, while preserving the importers normal payment credit terms and without burdening the importers balance sheet. As the world progresses towards more flexible, growth oriented funding sources post the global banking crisis, the demand for these new methodologies has increased dramatically amongst exporters ,importers and banks. Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other institution of the importer provides for paying for goods imported on behalf of the importer. The absence of an adequate trade finance infrastructure is, in effect, equivalent to a barrier to trade. Limited access to financing, high costs, and lack of insurance or guarantees are likely to hinder the trade and export potential of an economy, and

particularly that of small and medium sized enterprises. As explained earlier, trade facilitation aims at reducing transaction cost and time by streamlining trade procedures and processes. One of the most important challenges for traders involved in a transaction is to secure financing so that the transaction may actually take place. The faster and easier the process of financing an international transaction, the more trade will be facilitated. Traders require working capital (i.e., short-term financing) to support their trading activities. Exporters will usually require financing to process or manufacture products for the export market before receiving payment. Such financing is known as pre-shipping finance. Conversely, importers will need a line of credit to buy goods overseas and sell them in the domestic market before paying for imports. In most cases, foreign buyers expect to pay only when goods arrive, or later still if possible, but certainly not in advance. They prefer an open account, or at least a delayed payment arrangement. Being able to offer attractive payments term to buyers is often crucial in getting a contract and requires access to financing for exporters. Therefore, governments whose economic growth strategy involves trade development should provide assistance and support in terms of export financing and development of an efficient financial infrastructure. There are many types of financial tools and packages designed to facilitate the financing of trade transactions. This introduces three types, namely: o Trade Financing Instruments; o Export Credit Insurances; and o Export Credit Guarantees The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business' income is in US dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began

forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. FEMA ACT 1999 Defines Foreign Exchange as Foreign Exchange means & includes: a) All deposits, credits and balances payable in foreign currency, and any drafts, travelers Cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency and payable in any foreign currency. b) Any instrument payable at the option of the drawee or holder, thereof or any other party thereto, either in Indian currency or in foreign currency, or partly in one and partly in the other. The following are the most famous products / services offered by various Financial Institutions in Trade Finance 1. Letters of Credit: It is a brief undertaking / promise given by the buyers financial institution to the seller / seller's financial institutions that, it guarantees the payment to seller / seller bank, on behalf of the buyer. In other words, if the buyer defaults the payment, it is the responsibility of the buyers bank to make the payment. This undertaking can be given either in writing or through authroized electronic medium. 2. Bill Collection: It is a major service offered in banks. Seller's Bank collects the payment proceeds for the exported goods, on behalf of the goods from the buyer's Bank.

DEALING IN FOREIGN EXCHANGE In India dealing in foreign exchange is permitted only with the approval of RBI. RBI is the authority to administer exchange control in India. It also has the responsibility to maintain the external value of rupee.AD is person authorised by RBI in the form of a license to deal in foreign exchange. In addition to above category to buy & sell foreign currency / coins and FTC called money changers like hotels and business establishments. Sr. No. SOURCES / INFLOW USES / OUTFLOW

INWARD REMITTANCE DD/MT/TT/CREDIT CARD

OUTWARD REMITTANCE DD/MT/TT/CREDIT CARD

REMITTANCE TO NRE/FCNR(B)/NRO ACCOUNTS

OUTWARD REMITTANCE

EXPORT RECEIVABLES

IMPORT PAYMENTS

BORROWINGS BY COMPANIES, AID & LOANS

LOAN REPAYMENT, LOAN SERVICING

TOURIST INCOME

TOUR, TRAVEL RELATED PAYMENTS, EXPORT RELATED PAYMENTS LIKE COMMISSION etc.

SETTLEMENTS OF ACCOUNTS Whenever, there is an international trade and inflow and outflow of foreign exchange, there must be some mechanism for settlement of these transactions. The need for settlement leads to opening of accounts by banks in other countries.

1] NOSTRO ACCOUNT Banks in India are permitted to open foreign currency accounts with bank abroad. IOB having an account with American Express Bank New York is a Nostro Account. It is OUR ACCOUNT WITH YOU. When an Indian bank issue a foreign currency draft, payable abroad on a correspondent bank, the Nostro Account of the Indian bank is debited and the amount paid to the beneficiary. In the same way when the bill or Cheques is received for collection the proceeds will be credit to the Nostro Account Only. Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesn't need to be converted. Nostro is derived from the latin term "ours." 2] VOSTRO ACCOUNT It is the account in India in Indian rupees maintained by overseas bank. It Citi Bank, New York opens an account with IOB in India it is a Vostro Account. It is YOUR ACCOUNT WITH US. Any draft, TC, issued by overseas correspondent in Indian rupees is paid in India, to the debt of vostro account. The account a correspondent bank, usually U.S. or UK, holds on behalf of a foreign bank. Also known as a loro account. 3] LORO ACCOUNT This terminology is used when one bank refeers to the NOSTRO account of another bank. If IOB and SBI maintain nostro account with ABN AMRO Frankfurt, IOB, will refer to SBI account as LORO account IT IS THEIR ACCOUNT WITH YOU

4] MIRROR ACCOUNT As the very name suggests it is the reflection of NOSTRO ACCOUNT. The banks maintain the REPLICA of the NOSTRO account they have with the foreign banks. There

mirror accounts mainly helps in reconciliation of the account and is maintained in both foreign currency and in Indian rupees.

METHODS OF PAYMENT IN INTERNATIONAL TRADE

To succeed in todays global marketplace, exporters must offer their customers attractive sales terms supported by the appropriate payment method to win sales against foreign

competitors. As getting paid in full and on time is the primary goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer. As shown below, there are four primary methods of payment for international transactions. During or before contract negotiations, it is advisable to consider which method in the diagram below is mutually desirable for you and your customer. Ninety-five percent of the worlds consumers live outside of the United States, so if you are only selling domestically, you are reaching just a small share of potential customers. Exporting enables small and medium-sized exporters (SMEs) to diversify their portfolios and insulates them against periods of slower growth. Free trade agreements have opened in markets such as Australia, Canada, Central America, Chile, Israel, Jordan, Mexico, and Singapore, creating more opportunities for U.S. businesses.

DETERMINANTS OF INTERNATIONAL PAYMENT

1] TRADE FINANCE Offers a means to convert export opportunities into sales by managing the risks associated with doing business internationally, particularly the challenges of getting paid on a timely basis. 2] OPPORTUNITIES a) Helps companies reach the 95 percent of non-U.S. customers worldwide b) Diversifies SME customer portfolios 3] RISKS a) Nonpayment or delayed payment by foreign buyers

b) Political and commercial risks; cultural influences

KEY POINTS
o International trade presents a spectrum of risk, causing uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer) o To exporters, any sale is a gift until payment is received o Therefore, the exporter wants payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer

o To importers, any payment is a donation until the goods are received o Therefore, the importer wants to receive the goods as soon as possible, but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to make payment to the exporter. Cash-in-Advance

With this payment method, the exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring Payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms.

Characteristics of a Cash -in -Advance Payment Method

1. Applicability Recommended for use in high-risk trade relationships or export markets, and ideal for Internet-based businesses. 2. Risk Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the importer. 3. Pros a) Payment before shipment

b) Eliminates risk of nonpayment 4. Cons a) May lose customers to competitors over payment terms b) No additional earnings through financing operations Key Points o Full or significant partial payment is required, usually via credit card or bank/wire transfer, prior to the transfer of ownership of the goods. o Cash-in-advance, especially a wire transfer, is the most secure and favorable method of international trading for exporters and consequently, the least secure and attractive option for importers. However, both the credit risk and the competitive landscape must be considered. o Insisting on these terms ultimately could cause exporters to lose customers to competitors who are willing offer more favorable payment terms to foreign buyers in the global market. o Creditworthy foreign buyers, who prefer greater security and better cash utilization, may find cash-in-advance terms unacceptable and may simply walk away from the deal.

WIRE TRANSFER - CASH-IN-ADVANCE METHOD

An international wire transfer is commonly used and has the advantage of being almost immediate. Exporters should provide clear routing instructions to the importer when using this method, including the name and address of Silicon Valley Bank (SVB), the banks SWIFT address, and ABA numbers, and the sellers name and address, bank account title, and account number. This option is more costly to the importer than other options of cash-in-advance method, as the fee for an international wire transfer is usually paid by the sender.

CREDIT CARDA VIABLE CASH-IN-ADVANCE METHOD

Exporters who sell directly to the importer may select credit cards as a viable method of cash-in-advance payment, especially for consumer goods or small transactions. Exporters should check with their credit card company(s) for specific rules on international use of credit cards as the rules governing international credit card transactions differs from those for domestic use. As international credit card transactions are typically placed via online, telephone, or fax methods that facilitate fraudulent transactions, proper precautions should be taken to determine the validity of transactions before the goods are shipped. Although exporters must endure the fees charged by credit card companies, this option may help the business grow because of its convenience.

PAYMENT

BY

CHECKA

LESS-ATTRACTIVE

CASH-IN-

ADVANCE METHOD
Advance payment using an international check may result in a lengthy collection delay of several weeks to months. Therefore, this method may defeat the original intention of receiving payment before shipment. If the check is in U.S. dollars or drawn on a U.S. bank, the collection process is the same as any U.S. check. However, funds deposited by

non-local check may not become available for withdrawal for up to 11 business days due to Regulation CC of the Federal Reserve. In addition, if the check is in a foreign currency or drawn on a foreign bank, the collection process is likely to become more complicated and can significantly delay the availability of funds. Moreover, there is always a risk that a check may be returned due to insufficient funds in the buyers account.

WHEN TO USE CASH-IN-ADVANCE TERMS

o The importer is a new customer and/or has a less-established operating history o The importers creditworthiness is doubtful, unsatisfactory, or unverifiable o The political and commercial risks of the importers home country are very high o The exporters product is unique, not available elsewhere, or in heavy demand o The exporter operates an Internet-based business where the use of convenient payment methods is a must to remain competitive

LETTERS OF CREDIT
Letters of credit (LCs) are among the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter provided that the terms and conditions have been met, as verified through the presentation of all required documents. The buyer pays its bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyers foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped or delivered as promised.

CHARACTERISTICS OF A LETTER OF CREDIT

1] APPLICABILITY Recommended for use in new or less-established trade relationships when you are satisfied with the creditworthiness of the buyers bank. 2] RISK Risk is evenly spread between seller and buyer provided all terms and conditions are adhered to. 3] PROS Payment after shipment A variety of payment, financing and risk mitigation options

4] CONS Requires detailed, precise documentation Relatively expensive in terms of transaction costs

KEY POINTS
An LC, also referred to as a documentary credit, is a contractual agreement whereby a bank in the buyers country, known as the issuing bank, acting on behalf of its customer (the buyer or importer), authorizes a bank in the sellers country, known as the advising bank, to make payment to the beneficiary (the seller or exporter) against the receipt of stipulated documents. The LC is a separate contract from the sales contract on which it is based and, therefore, the bank is not concerned whether each party fulfills the terms of the sales contract.

The banks obligation to pay is solely conditional upon the sellers compliance with the terms and conditions of the LC. In LC transactions, banks deal in documents only, not goods.

ILLUSTRATIVE LETTER OF CREDIT TRANSACTION

The importer arranges for the issuing bank to open an LC in favor of the exporter

The issuing bank transmits the LC to the advising bank, which forwards it to the exporter.

The exporter forwards the goods and documents to a freight forwarder.

The freight forwarder dispatches the goods and submits documents to the advising bank.

The advising bank checks documents for compliance with the LC and pays the exporter.

The importers account at the issuing bank is debited.

The issuing bank releases documents to the importer to claim the goods from the carrier.

IRREVOCABLE LETTER OF CREDIT

LCs can be issued as revocable or irrevocable. Most LCs is irrevocable, which means they may not be changed or cancelled unless both the buyer and seller agree. If the LC does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable. Revocable LCs is occasionally used between parent companies and their subsidiaries conducting business across borders.

CONFIRMED LETTER OF CREDIT

A greater degree of protection is afforded to the exporter when a LC issued by a foreign bank (the importers issuing bank) and is confirmed by Silicon Valley Bank (the exporters advising bank). This confirmation means that Silicon Valley Bank adds its guarantee to pay the exporter to that of the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the foreign bank and the political risk of the importing country. Exporters should consider confirming LCs if they are concerned about the credit standing of the foreign bank or when they are operating in a high-risk market, where political upheaval, economic collapse, devaluation or exchange controls could put the payment at risk.

SPECIAL LETTERS OF CREDIT

LCs can take many forms. When an LC is issued as transferable, the payment obligation under the original LC can be transferred to one or more second beneficiaries. With a revolving LC, the issuing bank restores the credit to its original amount once it has been drawn down. Standby LCs can be used in lieu of security or cash deposits as a secondary payment mechanism.

DOCUMENTARY COLLECTIONS
A documentary collection is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporters bank), which sends documents to a collecting Bank (importers bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. Documentary collections involve the use of a draft that requires the importer to pay the face amount either on sight (document against payment D/P) or on a specified date in the future (document against acceptanceD/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit. Open Account an open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, with the use of one or more of the appropriate trade finance techniques, such as export credit insurance, the exporter can offer open competitive account terms in the global market while substantially mitigating the risk of nonpayment by the foreign buyer.

CHARACTERISTICS OF A DOCUMENTARY COLLECTION

1. APPLICABILITY Recommended for use in established trade relationships and in stable export markets. 2. RISK Exporter is exposed to more risk as D/C terms are more convenient and cheaper than an LC to the importer. 3. PROS a) Bank assistance in obtaining payment b) The process is simple, fast, and less costly than LCs c) DSO improved if using a draft with payment at a future date 4. CONS a) Banks role is limited and they do not guarantee payment b) Banks do not verify the accuracy of the documents

KEY POINTS
o D/Cs is less complicated and more economical than LCs. o Under a D/C transaction, the importer is not obligated to pay for goods prior to shipment. o The exporter retains title to the goods until the importer either pays the face amount on sight or accepts the draft to incur a legal obligation to pay at a specified later date.

o SVB plays an essential role in transactions utilizing D/Cs as the remitting bank (exporters bank) and in working with the collecting bank (importers bank). o While the banks control the flow of documents, they do not verify the documents nor take any risks, but can influence the mutually satisfactory settlement of a D/C transaction.

DOCUMENTS

AGAINST

PAYMENT

(D/P)

COLLECTION

A greater degree of protection is afforded to the exporter when an LC is issued by a foreign bank (the importers issuing bank) and is confirmed by Silicon Valley Bank (the exporters advising bank). This confirmation means that Silicon Valley Bank adds its guarantee to pay the exporter to that of the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the foreign bank and the political risk of the importing country. Exporters should consider confirming LCs if they are concerned about the credit standing of the foreign bank or when they are operating in a high-risk market, where political upheaval, economic collapse, devaluation or exchange controls could put the payment at risk. 1. Time of Payment 2. Transfer of Goods 3. Exporter Risk : After shipment, but before documents are released : After payment is made on sight : If draft is unpaid, goods may need to be disposed

DOCUMENTS AGAINST ACCEPTANCE (D/A) COLLECTION

Under a D/A collection, the exporter extends credit to the importer by using a time draft. In this case, the documents are released to the importer to receive the goods upon acceptance of the time draft. By accepting the draft, the importer becomes legally obligated to pay at a future date. At maturity, the collecting bank contacts the importer

for payment. Upon receipt of payment, the collecting bank transmits the funds to SVB for payment to the exporter. 1. Time of Payment 2. Transfer of Goods 3. Exporter Risk : On maturity of draft at a specified future date : Before payment, but upon acceptance of draft : Has no control of goods and may not get paid at due date

 OPEN ACCOUNT
An open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, with the use of one or more of the appropriate trade finance techniques, such as export credit insurance, the exporter can offer open competitive account terms in the global market while substantially mitigating the risk of nonpayment by the foreign buyer.

CHARACTERISTICS OF AN OPEN ACCOUNT

1. APPLICABILITY Recommended for use (1) In secure trading relationships or markets or (2) In competitive markets to win customers with the use of one or more appropriate trade finance techniques. 2. RISK Exporter faces significant risk as the buyer could default on payment obligation after shipment of the goods. 3. PROS o Boost competitiveness in the global market o Establish and maintain a successful trade relationship 4. CONS

o Exposed significantly to the risk of nonpayment o Additional costs associated with risk mitigation measures

KEY POINTS
o The goods, along with all the necessary documents, are shipped directly to the importer who agrees to pay the exporters invoice at a future date, usually in 30 to 90 days. o Exporter should be absolutely confident that the importer will accept shipment and pay at agreed time and that the importing country is commercially and politically secure. o Open account terms may help win customers in competitive markets, if used with one or more of the appropriate trade finance techniques that mitigate the risk of nonpayment.

 EXPORT CREDIT INSURANCE

Export credit insurance provides protection against commercial lossesdefault, insolvency, bankruptcy, and political losseswar, nationalization, currency inconvertibility, etc. It allows exporters to increase sales by offering liberal open account terms to new and existing customers. Insurance also provides security to SVB in the event it considers providing working capital to finance exports. Forfeiting (Medium-term Receivables Discounting) Forfeiting is a method of trade financing that allows the exporter to sell its medium-term receivables (180 days to 7 years) to SVB at a discount, in exchange for cash. With this method, the forfeiter assumes the risk of non-payment, enabling the exporter to extend open account terms and incorporate the discount into the selling price.

 CHARACTERISTICS OF EXPORT CREDIT INSURANCE

1. APPLICABILITY Recommended for use in conjunction with open account terms and export working capital financing. 2. RISK Exporters share the risk of the uncovered portion of the loss and their claims may be denied in case of non-compliance with requirements specified in the policy. 3. PROS o Reduce the risk of nonpayment by foreign buyers o Offer open account terms safely in the global market

4. CONS o Cost of obtaining and maintaining an insurance policy o Deductiblecoverage is usually below 100 percent incurring additional costs

KEY POINTS
o ECI allows you to offer competitive open account terms to foreign buyers while minimizing the risk of nonpayment. o Creditworthy buyers could default on payment due to circumstances beyond their control. o With reduced nonpayment risk, you can increase your export sales, establish market share in emerging and developing countries, and compete more vigorously in the global market.

o With insured foreign account receivables, banks are more willing to increase your borrowing capacity and offer attractive financing terms.

COVERAGE
Short-term ECI, which provides 90 to 95 percent coverage against buyer payment defaults, typically covers (1) Consumer goods, materials, and services up to 180 days, and (2) Small capital goods, consumer durables and bulk commodities up to 360 days. Medium-term ECI, which provides 85 percent coverage of the net contract value, usually covers large capital equipment up to five years.

PRICING
Premiums are individually determined on the basis of risk factors such as country, buyers creditworthiness, sales volume, sellers previous export experience, etc. Most multi-buyer policies cost less than 1 percent of insured sales while the prices of singlebuyer policies vary widely due to presumed higher risk. However, the cost in most cases is significantly less than the fees charged for letters of credit. ECI, which is often incorporated into the selling price, should be a proactive purchase, in that you have coverage in place before a customer becomes a problem.

FEATURES OF EX-IM BANKS EXPORT CREDIT INSURANCE

o Offers coverage in emerging foreign markets where private insurers may not operate. o Exporters electing an Ex-Im Bank Working Capital Guarantee may receive a 25 percent premium discount on Multi-buyer Insurance Policies.

o Offers enhanced support for environmentally beneficial exports. o The products must be shipped from the United States and have at least 50 percent U.S. content. o Unable to support military products or purchases made by foreign military entities. o Support for exports may be closed or restricted in certain countries per U.S. foreign policy.

 GOVERNMENT ASSISTED FOREIGN BUYER FINANCING

The role of government in trade financing is crucial in emerging economies. In the presence of underdeveloped financial and money markets, traders have restricted access to financing. Governments can either play a direct role like direct provision of trade finance or credit guarantees; or indirectly by facilitating the formation of trade financing enterprises. Governments could also extend assistance in seeking cheaper credit by offering or supporting the following: o Central Bank refinancing schemes; o Specialized financing institutes like o Export-Import Banks or Factoring Houses; o Export credit insurance agencies; o Assistance from the Trade Promotion Organisation; and o Collaboration with Enterprise Development o Corporations (EDC) or State Trading o Enterprises (STE).

CHARACTERISTICS OF GOVERNMENT ASSISTED FOREIGN BUYER FINANCING

1] APPLICABILITY Suitable for the export of high-value capital goods that require extended-term financing. 2] RISK Ex-Im Bank assumes all risks. 3] PROS o Buyer financing as part of an attractive sales package
o Cash payment upon shipment of the goods or services

4] CONS o Subject to certain restrictions per U.S. foreign policy o Possible lengthy process of approving financing

KEY POINTS
o Helps turn business opportunities, especially in emerging markets, into real transactions for large U.S. exporters and their small business suppliers. o Enables creditworthy foreign buyers to obtain loans needed for purchases of U.S. goods and services, especially high-value capital goods or services. o Provides fixed-rate direct loans or guarantees for term financing o Available for medium-term (up to five years) and for certain environmental exports up to 15 years.

KEY FEATURES OF EX-IM BANK LOAN GUARANTEES

I. II. Loans are made by SVB and guaranteed by Ex-Im Bank. 100 percent principal and interest cover for 85 percent of U.S. contract price.

 INTRODUCTION OF FORFEITING
Forfeiting and Factoring are services in international market given to an exporter or seller. Its main objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is short termed receivables (within 90 days) and is more related to receivables against commodity sales.

DEFINITION OF FORFEITING
The terms forfeiting is originated from a old french word forfait, which means to surrender ones right on something to someone else. In international trade, forfeiting may be defined as the purchasing of an exporters receivables at a discount price by paying cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment from the Importer.

HOW FORFEITING WORKS IN INTERNATIONAL TRADE

The exporter and importer negotiate according to the proposed export sales contract. Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate. The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. Export takes place against documents guaranteed by the importers bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date.

 COST ELEMENT
The forfeiting typically involves the following cost elements: 1. Commitment fee, payable by the exporter to the forfeiter for latters commitment to execute a specific forfeiting transaction at a firm discount rate within a specified time. 2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfeiter from the amount paid to the exporter against the availed promissory notes or bills of exchange.

SIX PARTIES IN FORFEITING

1. Exporter (India) 2. Importer (Abroad) 3. Exports Bank (India) 4. Imports Bank / Avalising Banks (Abroad) 5. EXIM Bank (India) 6. Forfaiter (Abroad)

BENEFITS TO EXPORTER

i.

100 per cent financing

Without recourse and not occupying exporter's credit line that is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt.

ii.

Improved cash flow

Receivables become current cash inflow and its is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability.

iii.

Reduced administration cost

By using forfeiting, the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly.

iv.

Advance tax refund

Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing.

v.

Risk reduction
Forfeiting business enables the exporter to transfer various risk resulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank.

vi.

Increased trade opportunity

With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more competitive in the market.

BENEFITS TO BANKS
Banks can offer a novel product range to clients, which enable the client to gain 100% finance, as against 8085% in case of other discounting products. Bank gain fee based income. Lower credit administration and credit follow up.

DRAWBACKS OF FORFEITING

i. ii. iii. iv.

Non Availability of short periods Non availability for financially weak countries Dominance of western countries Difficulty in procuring international banks guarantee

DEFINITION OF FACTORING
This involves the sale at a discount of accounts receivable or other debt assets on a daily, weekly or monthly basis in exchange for immediate cash. The debt assets are sold by the exporter at a discount to a factoring house, which will assume all commercial and political risks of the account receivable. In the absence of private sector players, governments can facilitate the establishment of a state-owned factor; or a joint venture set-up with several banks and trading enterprises. Definition of factoring is very simple and can be defined as the conversion of credit sales into cash. Here, a financial institution which is usually a bank buys the accounts receivable of a company usually a client and then pays up to 80% of the amount immediately on agreement. The remaining amount is paid to the client when the customer pays the debt. Examples includes factoring against goods purchased, factoring against medical insurance, factoring for construction services etc.

CHARACTERISTICS OF FACTORING
1. The normal period of factoring is 90 to 150 days and rarely exceeds more than 150 days. 2. It is costly. 3. Factoring is not possible in case of bad debts. 4. Credit rating is not mandatory. 5. It is a method of off balance sheet financing.

6. Cost of factoring is always equal to finance cost plus operating cost.

 DIFFERENT TYPES OF FACTORING 1. Disclosed factoring

In disclosed factoring, clients customers are aware of the factoring agreement.

Disclosed factoring is of two types: Recourse factoring

The client collects the money from the customer but in case customer dont pay the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of interest and is in very common use.

Nonrecourse factoring
In nonrecourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.

2. Undisclosed
In undisclosed factoring, client's customers are not notified of the factoring arrangement. In this case, client has to pay the amount to the factor irrespective of whether customer has paid or not.

 BUYERS CREDIT
A financial arrangement whereby a financial institution in the exporting country extends a loan directly or indirectly to a foreign buyer to finance the purchase of goods and services from the exporting country. This arrangement enables the buyer to make payments due to the supplier under the contract.

A loan or credit line that a bank or other institution provides a company to buy goods needed to conduct its business operations. For example, a bank may extend buyer credit for a company to buy inventory, which it then sells to customers. The term is sometimes used with regard to international commerce.

Buyer's credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the Letter of comfort (a Bank Guarantee) issued by the Importers (Buyer's) Bank. Importers Bank / Buyers Credit Consultant / Importer arrange buyers credit from international branches of Indian Bank or other international bank. For this services Importers Bank / Buyers credit consultant charges a fee call arrangement fee. Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates. Buyers credit can be availed for 1 year in case the Import is for trade-able goods and for 3 years if the Import is for Capital Goods. Every six months the interest on Buyers credit may get reset.

 BENEFITS OF BUYERS CREDIT TO IMPORTER

a) The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows b) The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing. c) The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer. d) The importer can use this financing for any form of trade viz. open account, collections, or LCs. e) The currency of imports can be different from the funding currency, which enables importers to take a favorable view of a particular currency.

STEP INVOLVED IN BUYERS CREDIT

1. The Indian customer will import the goods either under DC, Collections or open account 2. The Indian customer request the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing 3. Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer 4. Overseas Bank to fund your existing bank Nostro account for the required amount 5. Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment) 6. On due date existing bank to recover the principal and amount from the importer and remit the same to Overseas Bank on due date.

 RESTRICTIONS IN BUYERS CREDIT

Type of transaction where buyers credit can be done for limited amountcase where import bill are directly received by importer from his overseas supplier, buyers credit amount is restricted upto $ 3, 00,000. Except for the followings Import bill received by wholly owned Indian subsidiary of foreign companies from their principal Import bill received by Status Holder Exporters as defined in the Foreign Trade Policy, 100% Export Oriented Units, Units in Special Economic Zones, Public Sector Undertakings and Limited Companies Import bills received by all limited companies viz. public limited companies, deemed public limited and private limited companies.

MEANING OF LIBOR
LIBOR stands for London Interbank Offered Rate. LIBOR is an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Although reference is often made to the LIBOR interest rate, there are actually 150 different LIBOR interest rates. LIBOR is calculated for 15 different maturities and for 10 different currencies. The official LIBOR interest rates (bbalibor) are announced once a day at around 11:45 a.m. London time by Thomson Reuters on behalf of the British Bankers Association (BBA). At the start of the nineteen eighties there was a growing need amongst the financial institutions in London for a benchmark for lending rates. This benchmark was particularly needed in order to calculate prices for financial products such as interest swaps and options. Under the leadership of the BBA a number of steps were taken from 1984 onwards which led in 1986 to the publication of the first LIBOR interest rates (bbalibor).

LIBOR PANEL BANKS

As has already been indicated, LIBOR is an average interest rate at which a selection of banks will lend one another funds. These banks are called panel banks. The selection is made every year by the British Bankers Association (BBA) with assistance from the Foreign Exchange and Money Markets Committee (FX&MMC). A panel is made up for each currency consisting of at least 8 and a maximum of 16 banks which are deemed to be representative for the London money market. Banks are assessed on market volume, reputation and assumed knowledge of the currency concerned. Because the criteria applied are strict, the rates can generally be considered to be the lowest interbank lending rates on the London money market.

LIBOR CALCULATION METHOD

The LIBOR interest rates are not based on actual transactions. On every working day at around 11 a.m. (London time) the panel banks inform Thomson Reuters for each maturity at what interest rate they would expect to be able to raise a substantial loan in the interbank money market at that moment. The reason that the measurement is not based on actual transactions is because not every bank borrows substantial amounts for each maturity every day. Once Thomson Reuters has collected the rates from all panel banks, the highest and lowest 25% of value are eliminated. An average is calculated of the 50% remaining mid values in order to produce the official LIBOR (bbalibor) rate.

SIGNIFICANCE OF LIBOR INTEREST

LIBOR is viewed as the most important benchmark in the world for short-term interest rates. On the professional financial markets LIBOR is used as the base rate for a large number of financial products such as futures, options and swaps. Banks also use the LIBOR interest rates as the base rate when setting the interest rates for loans, savings and mortgages. The fact that LIBOR is often treated as the base rate for other products is the reason why LIBOR interest rates are monitored with great interest by a large number of professionals and private individuals worldwide.

 LIBOR CURRENCIES
Originally (in 1986) LIBOR was published for 3 currencies: the US dollar, the pound sterling and the Japanese yen. Over the years that followed the number of LIBOR currencies grew to a maximum of 16. A number of these currencies merged into the euro in 2000. At the moment we have LIBOR rates in the following 10 currencies (click on the currency for the current interest rate for each maturity):
o o o o o o o o o o

American dollar USD LIBOR Australian dollar- AUD LIBOR British pound sterling GBP LIBOR Canadian dollar- CAD LIBOR Danish krone DKK LIBOR European euro EUR LIBOR Japanese yen JPY LIBOR New Zealand dollar NZD LIBOR Swedish krona SEK LIBOR Swiss franc CHF LIBOR

LIBOR MATURITIES
Because there are 15 different maturities there are 15 different LIBOR rates in total. There have not always been 15 maturities. Up until 1998 the shortest maturity was 1 month. In 1998 the 1 week rate was added, and only in 2001 were the overnight and 2 week LIBOR rates introduced.

 EXPORT FINANCING
Export or perish Our imports are more than exports. Hence there is a necessity to encourage exports. Govt. and RBI extend various concessions to boost exports. Conventional Banks play two very important roles in Exports. o They act as a negotiating bank and charge a fee for this purpose which is allowed in Shariah. o Secondly they provide export-financing facility to the exporters and charge Interest on this service. These services are of two types o Pre Shipment Financing o Post Shipment Financing As interest cannot be charged in any case, Shariah experts have proposed certain methods for financing exports.

 PRE-SHIPPING FINANCING
This is financing for the period prior to the shipment of goods, to support pre-export activities like wages and overhead costs. It is especially needed when inputs for production must be imported. It also provides additional working capital for the exporter. Pre-shipment financing is especially important to smaller enterprises because the international sales cycle is usually longer than the domestic sales cycle. Pre-shipment financing can take in the form of short term loans, overdrafts and cash credits. Pre shipment financing needs can be fulfilled by two methods, o Musharakah o Morabaha The most appropriate method for financing exports is Musharkah or Mudarbah. Bank and exporter can make an agreement of Mudarbah if exporter is not investing; otherwise Musharakah agreement can be made. Pre Shipment Finance is issued by a financial institution when the seller wants the payment of the goods before shipment. The main objective behind pre shipment finance or pre export finance is to enable exporter to:
o o o o o o

Procure raw materials Carry out manufacturing process Provide a secure warehouse for goods and raw materials Process and pack the goods Ship the goods to the buyers Meet other financial cost of the business

 TYPES OF PRE-SHIPMENT FINANCE

o Packing Credit o Advance against Cheques/Draft etc. representing Advance Payments. Pre shipment finance is extended in the following forms : o Packing Credit in Indian Rupee o Packing Credit in Foreign Currency (PCFC)

ELIGIBILITY & REQUIRMENT FOR PRESHIPMENT FINANCE

Requirements for Getting Packing Credit This facility is provided to an exporter who satisfies the following criteria
o

A ten digit importer exporter code number allotted by DGFT [ Directorate General of Foreign Trade (India) ] Exporter should not be in the caution list of RBI. If the goods to be exported are not under OGL (Open General Licence), the exporter should have the required license /quota permit to export the goods.

o o

Packing credit facility can be provided to an exporter on production of the following evidences to the bank: 1. Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time limit. 2. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer. 3. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.

The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.
o

Eligibility

Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not have export orders in their own name. In this case some of the responsibilities of meeting the export requirements have been out sourced to them by the main exporter. In other cases where the export order is divided between two more than two exporters, pre shipment credit can be shared between them

DISBURSEMENT OF PACKING CREDIT ADVANCE

Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed. Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provides a special packing credit facility and is known as Running Account Packing.

Before disbursing the bank specifically check for the following particulars in the submitted documents" a. Name of buyer b. Commodity to be exported c. Quantity d. Value (either CIF or FOB) e. Last date of shipment / negotiation.

f. Any other terms to be complied with The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of goods, whichever is found to be lower. Normally insurance and freight charged are considered at a later stage, when the goods are ready to be shipped. In this case disbursals are made only in stages and if possible not in cash. The payments are made directly to the supplier by Drafts/Bankers/Cheques. The bank decides the duration of packing credit depending upon the time required by the exporter for processing of goods. The maximum duration of packing credit period is 180 days, however bank may provide a further 90 days extension on its own discretion, without referring to RBI.

PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC)

Authorised dealers are permitted to extend Pre shipment Credit in Foreign Currency (PCFC) with an objective of making the credit available to the exporters at internationally competitive price. This is considered as an added advantage under which credit is provided in foreign currency in order to facilitate the purchase of raw material after fulfilling the basic export orders.

The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). According to guidelines, the final cost of exporter must not exceed 0.75% over 6 month LIBOR, excluding the tax. The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency truncation is that of the exporter. The sources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign Currency(Non Resident) Accounts.

Banks are also permitted to utilize the foreign currency balances available under Escrow account and Exporters Foreign Currency accounts. It ensures that the requirement of

funds by the account holders for permissible transactions is met. But the limit prescribed for maintaining maximum balance in the account is not exceeded. In addition, Banks may arrange for borrowings from abroad. Banks may negotiate terms of credit with overseas bank for the purpose of grant of PCFC to exporters, without the prior approval of RBI, provided the rate of interest on borrowing does not exceed 0.75% over 6 month LIBOR.

PACKING CREDIT FACILITIES IN DEEMED EXPORTS

Deemed exports made to multilateral funds aided projects and programs, under orders secured through global tenders for which payments will be made in free foreign exchange, are eligible for concessional rate of interest facility both at pre and post supply stages.

PACKING CREDIT FACILITIES FOR CONSULTING SERVICES

In case of consultancy services, exports do not involve physical movement of goods out of Indian Customs Territory. In such cases, Pre shipment finance can be provided by the bank to allow the exporter to mobilize resources like technical personnel and training them.

ADVANCE AGAINST CHEQUE / DRAFTS RECEIVED AS ADVANCE PAYMENT

Where exporters receive direct payments from abroad by means of Cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of realization of the proceeds of the Cheques or draft etc.

POST-SHIPPING FINANCING

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. This type of 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 dont wait for the importer to deposit the funds. The ability to be competitive often depends on the traders credit term offered to buyers. Post-shipment financing ensures adequate liquidity until the purchaser receives the products and the exporter receives payment. Post-shipment financing is usually short-term.

FEATURES OF POST SHIPMENT FINANCING

The features of post shipment finance are:
1.

Purpose of Finance Post shipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies.

2.

Basis of Finance Post shipment finances are provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency.

3.

Types of Finance Post shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self-liquidating. In that case it involves advance

against

undrawn

balance,

and

is

usually

unsecured

in

nature.

Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature.
4.

Quantum of Finance As a quantum of finance, post shipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of pre shipment stage.Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm.

5.

Period of Finance Post shipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.

FINANCING FOR VARIOUS TYPES OF EXPORT BUYERS CREDIT

Post shipment finance can be provided for three types of export:
o

Physical exports

Finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred.
o

Deemed export Finance is provided to the supplier of the goods which are supplied to the designated agencies.

Capital goods and project exports Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter.

POST SHIPMENT CREDIT

Sr. No. 1 Particular SIGHT BILLS Condition NOT MORE THAN 10%

UPTO 90 DAYS

NOT MORE THAN 10%

91 DAYS TO 6 MONTHS

12%

OVERDUE (Applicable only on the overdue portion)

Left to the discretion of the bank, through it is most likely to be the unarranged overdraft rate

Post shipment foreign currency loan

Maximum of Libor + 1.5 pct

TYPES OF POST SHIPMENT FINANCE

The post shipment finance can be classified as:

1. Export Bills purchased/discounted. 2. Export Bills negotiated 3. Advance against export bills sent on collection basis. 4. Advance against export on consignment basis 5. Advance against undrawn balance on exports 6. Advance against claims of Duty Drawback 1. Export Bills Purchased/ Discounted (DP & DA Bills) Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. 2. Export Bills Negotiated (Bill under L/C) The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks: 1. The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit. 2. The bank also faces the documentary risk where the issuing bank refuses to honor its commitment. So, it is important for the for the negotiating bank, and the lending bank to properly check all the necessary documents before submission. 3. Advance against Export Bills Sent on Collection Basis Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon

the transit period in case of DP Bills and transit period plus Usance period in case of Usance bill. The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance. 4. Advance against Export on Consignments Basis Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months. 5. Advance against Undrawn Balance It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within 6 months from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment. 6. Advance against Claims of Duty Drawback Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the in-house cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets. In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank.

After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities.

CRYSTALLIZATION OF OVERDUE EXPORT BILLS

Exporter foreign exchange is converted into Rupee liability, if the export bill purchase / negotiated /discounted is not realize on due date. This conversion occurs on the 30th day after expiry of the NTP in case of unpaid DP bills and on 30th day after national due date in case of DA bills, at prevailing TT selling rate ruling on the day of crystallization, or the original bill buying rate, whichever is higher.

ROLE OF ECGC
The Export Credit Guarantee Corporation of India Limited (ECGC) is a company wholly owned by the Government of India based in Mumbai, Maharashtra.It provides export credit insurance support to Indian exporters and is controlled by the Ministry of Commerce. Government of India had initially set up Export Risks Insurance Corporation (ERIC) in July 1957. It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guarantee of India in 1983. ECGC of India Ltd was established in July, 1957 to strengthen the export promotion by covering the risk of exporting on credit. It functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, and Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, and insurance and exporting community.

ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.900 crores and authorized capital Rs.1000 crores.

 FUNCTIONS OF ECGC
o Provides a range of credit risk insurance covers to exporters against loss in export of goods and services. o Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them. o Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan.

BENEFITS TO EXPORTERS
1. Offers insurance protection to exporters against payment risks 2. Provides guidance in export-related activities 3. Makes available information on different countries with its own credit ratings 4. Makes it easy to obtain export finance from banks/financial institutions 5. Assists exporters in recovering bad debts 6. Provides information on credit-worthiness of overseas buyers

Conclusion This project has explained the need for trade finance and introduced some of the most common trade finance tools and practices. A proactive role of governments in trade finance may alleviate the lack of trade finance in emerging economies and contribute to trade expansion and facilitation. However, the best long-term solution in resolving the constraints in trade financing is to encourage the growth and development of a vibrant and competitive financial system, comprising mainly private sector players. This point is important as some of the government-supported trade financing schemes may Trade Finance Trends in Asia. The recent economic slowdown is making the need for sound trade finance policies and strong financial systems more acute. Many companies are trying to preserve cash by delaying payment and the number of SMEs in emerging Asian economies with high credit risk is growing. This is partly the result of a regional trend toward unsecured, openaccount type transactions. Large Western buyers are asking that their Asian suppliers sell goods on open-accounts terms, instead of using guarantees like letters of credit (LCs). These buyers simply do not want to bear the extra cost of payment guarantees and will source their goods from somewhere else if they are not given open-accounts. These openaccounts allow the buyers to delay payments as needed, rising the need for credit for Asian companies who choose to supply them. The economic slowdown also has made many companies rethink their commitment to electronic trading and payment systems. While these systems may cut significant costs out of the labor-intensive trade finance process, they also make payment delays more difficult to justify. Large Western buyers are not the only ones delaying payments. In fact, many companies prefer dealing with these buyers than with the thinly capitalized buyers commonly found in many emerging Asian economies, mainly because these large buyers remain relatively punctual and have very low credit risk (i.e., even if they delay payment a little, they will pay).

With the internationalization of supply chains.This kind of arrangement increases the financial risk exposure of the transformer manufacturer, and typically results in payment delays measured in weeks and sometime months. Because LCs or factoring in China and many other countries in Asia are not yet commonly used or available, Asian suppliers can often do very little to protect themselves in regional cross-border transaction, increasing the cost of regional trade transactions relative to that of direct transactions with Western companies. Increasingly be challenged by competing countries as unfair export subsidies under existing and future WTO rules. The role of the government and other parties involved in trade finance will need to evolve along with the countrys economy. Underlying the functions provided by the different players is the need for a clear and effective legal environment. The commercial legal system must be transparent. Laws of property, contract and arbitration must be clear. The commercial legal environment must be integrated with the financial infrastructure framework in order for it to be effective