International Trade Finance

1
ANALYSIS OF INTERNATIONAL TRADE FINANCE AT CATEGORY B BRANCH
A PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENT

OF THE
TWO YEARS POST GRADUATE DIPLOMA IN MANAGEMENT 2010-2012
BY
HARSH KHANNA
09/10 F
UNDER THE GUIDANCE OF

(Dr DEEPAK TANDON)
LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT,

DELHI
FEBRUARY 2012
HARSH KHANNA, PGDM(F
LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT,

DELHI
Dated: 01/02/2012
CERTIFICATE
Certified that HARSH KHANNA has successfully completed Project Study

entitled Analysis Of International Trade Finance at Category B Branch
under my guidance. It is his / her original work, and is fit for evaluation in partial
fulfillment for the requirement of the Two Years Post Graduate Diploma in
Management.
Mr. HARSH KHANNA

Sig:
Dr. DEEPAK TANDON

Sig:
Acknowledgements
First, I must acknowledge, Mr Subodh Kala Chief Manager Punjab National International
Banking branch, Jalandhar and Mrs Geeta Khanna AGM Jalandhar Branch, Punjab
National Bank for providing me the opportunity to have access on the confidential data
regarding Trade Finance. My sincere gratitude to Mr. Jagpreet Singh who helped me to
gather information and know about the intricacies involved in carrying out foreign exchange
business transactions in any category B authorized dealers branch .My thanks to rest of the
members of Forex department who always helped me in clarifying my doubts
I am highly indebted to my project guide Dr. Deepak Tandon under whose consistent
guidance I was able to complete my end term project report.
HARSH KHANNA, PGDM(F)
Table of Contents
1. Objective of the study..5
2. Rationale of the Study.5
3. Methodology..5
4. Literature Riview6
5. Indian Banking Industry7
6. Indian Foreign Exchange Market10
7. Different categories of Authorized Dealers...11
8. Foreign Exchange Business Operations...13
9. Exchange Arithmetic.14
10. FEMA Vs FERA.15
11. Modalities of Trade Finance18
12. Modes of Trade Finance..19
13. Letter of Credit Process26
14. Types of L/C...28
15. Pre shipment Financing30
16. Post Shipment Financing.32
17. Factoring and Forfeiting...35
18. Kinds Of documents in Trade Finance..38
19. SWIFT.41
20. Export Financing Case lets and Analysis..42
21. Credit Appraisal and Technical Analysis...46
22. Risk Management in International Trade Finance...61
23. Recommendations and Conclusion65
24. Glossary..66
25. References.67
26. Bibliography67
27. Annexure.68
OBJECTIVES OF THE STUDY

The main broad objective of the study is to analyze each and every aspect of the
international trade finance, but major focus has been put on the following sub objectives:
a) To study the Trade Finance at macro level at the PSU (category B branch)
b) To understand the modalities and components of trade
c) To analyze the export and import financing by the bank using case lets
d) To perform Credit Appraisal of banks customer
e) To Study the risk management in Trade Financing and possible solutions to hedge
against the risk
Rationale of the study

Since the authorized dealers deal in documents and not in goods there is a need for
simplification and standardization of export credit documents and timely sanction of the
export credit proposals for different stages of the export finance should be done on a
proactive basis to the corporate exporters. All export credit in India is on a without recourse,
irrevocable and thus there is definitely a bar on the banks to utilize in the foreign exchange
resources available to them
Methodology
Primary Research
At Punjab National Bank GT road Jalandhar Branch B branch
Interaction with various importers and exporters at the bank
Secondary Research
RBI Guidelines
FEMA Rules and Regulations
FEDAI Guidelines
I
The Study has been substantiated by original cases related to trade finance
REVIEW OF THE EARLIER STUDIES

Extensive research has been conducted by various Academicians, Professionals and
Journalists on International Trade Finance. Major concern has been shown by various
researchers post 2008-09 recession. Some of the studies has reviewed here:
Ahn JaeBin, Amiti Mary, and E. Weinstein David Trade Finance and the Great Trade
Collapse (2010)
In this study, researchers tried to examine the impact of Trade Finance by banks on
Exporter as well as importer trade market. Also they tried to find the relationship between
price movement and Exporter Supply Shock using various statistical techniques like
regression test. They found out that exporters whose financial institutions became unhealthy
cut back on exports more than other firms, and imports declined more in sectors that had
greater external financial dependence. some of these shocks may\also have appeared in
price movements. Export prices rose relative to domestic manufacturing prices during the
crisis, and the prices of seaborne imports and exportswhich are more sensitive to financial
shocksrose relative to goods sent by land or air
Korinek* Jane, Cocguic Le Jean,Sourdin Patricia The Availability and Cost of ShortTerm Trade Financeand its Impact on Trade (2010)
In this study, researchers tried to examines one potential reason for the drop in trade
between mid-2008 and the first quarter of 2009 changes in the cost and availability of
trade finance to potential exporters and importers. Results from an econometric model
developed to examine this question show that short-term trade finance availability has had
an effect on trade flows during the crisis period, but that its impact has been smaller than
that of falling demand.
It also shows that the availability and cost of trade finance seem to have had a limited
impact on trade outside crisis periods. During the crisis period, the cost of financing
negatively impacted trade overall due to an increase in spreads. This indicates that financing
was probably prohibitively expensive for some traders, thereby severely constraining their
ability to trade.
The researchers also highlighted one of the major difficulties regarding policymaking in the
area of trade finance that there is little reliable quantitative information.
Appiah E. Asiedu TRADE FINANCE AN INSTRUMENT FOR EFFECTIVE TRADE
DELIVERY (2009)
In this study, researcher tried to study the behavioral attitude of the commercial banks towards the
export sector and the evidences indicate that commercial banks in developing economies would
rather invest their funds in less risky ventures than to place such funds in the development of the
export sector which is seen as being very risky
The Indian Banking Industry

India has a long history of both public and private banking. Modern banking in India began in
the 18th century, with the founding of the English Agency House in Calcutta and Bombay. In
the first half of the 19th century, three Presidency banks were founded. After the 1860
introduction of limited liability, private banks began to appear, and foreign banks entered the
market. The beginning of the 20th century saw the introduction of joint stock banks. In 1935,
the presidency banks were merged together to form the Imperial Bank of India, which was
subsequently renamed the State Bank of India. Also that year, India's central bank, the
Reserve Bank of India (RBI), began operation. Following independence, the RBI was given
broad regulatory authority over commercial banks in India. In 1959, the State Bank of India
acquired the state-owned banks of eight former princely states. Thus, by July 1969,
approximately 31 percent of scheduled bank branches throughout India were government
controlled, as part of the State Bank of India. The post-war development strategy was in
many ways a socialist one, and the Indian government felt that banks in private hands did
not lend enough to those who needed it most. In July 1969, the government nationalized all
banks whose nationwide deposits were greater than Rs. 500 million, resulting in the
nationalization of 54 percent more of the branches in India, and bringing the total number of
branches under government control to 84 percent.
After nationalization, the breadth and scope of the Indian banking sector expanded at a rate
perhaps unmatched by any other country. Indian banking has been remarkably successful at
achieving mass participation. Between the time of the 1969 nationalizations and the present,
over 58,000 bank branches were opened in India; these new branches, as of March 2003,
had mobilized over 9 trillion Rupees in deposits, which represent the overwhelming majority
of deposits in Indian banks. This rapid expansion is attributable to a policy, which required
banks to open four branches in unbanked locations for every branch opened in banked
locations. Between 1969 and 1980, the number of private branches grew more quickly than
public banks, and on April 1, 1980, they accounted for approximately 17.5 percent of bank
branches in India.
In April of 1980, the government undertook a second round of nationalization, placing under
government control the six private banks whose nationwide deposits were above Rs. 2
billion, or a further 8 percent of bank branches, leaving approximately 10 percent of bank
branches in private hands. The share of private bank branches stayed fairly constant
between 1980 to 2000.
Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake), 31 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 38
foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.
TYPES OF BANKS
Banks' activities can be divided into
Retail banking, dealing directly with individuals and small businesses
Business banking, providing services to mid-market business; corporate banking, directed
at large business entities
Private banking, providing wealth management services to high net worth individuals and
families;
Investment banking, relating to activities on the financial markets. Most banks are profitmaking, private enterprises. However, some are owned by government, or are non-profit
organizations
Central banks are normally government-owned and charged with quasi-regulatory
responsibilities, such as supervising commercial banks, or controlling the cash interest rate.
They generally provide liquidity to the banking system and act as the lender of last resort in
event of a crisis
Structure of the Indian Banking Industry

INDIAN
BANKING
INDUSTRY
SCHEDULED
BANK
NONSCHEDULED
BANK
CENTAL COOPERATIVE
BANKS
PRIMARY
CREDIT
SOCIETIES
STATE COOPERATIVE
BANKS
STATE BANK
OF INDIA
GROUP
COMMERCIAL
BANKS
PRIVATE
SECTOR
BANKS
REGIONAL
RURAL
BANKS
FOREIGN
BANKS
SBI
SB of Patiala
SB of Indore
OLD SECTOR
PRIVATE
BANKS
NEW SECTOR
PRIVATE
BANKS
SB of
Hyderabad
SB of Mysore
SB of Bikaner
& Jaipur
SB of
Travancore
SB of
Saurastra
NATIONALIZED
/ PUBLIC
SECTOR
BANKS
19
10
Indian Foreign Exchange Market - Basic Information

Indian Rupee serves as the medium of exchange backed by legal tender status for making
payments towards purchases and towards discharging all other types of payment obligations
within the country. But as modern trade and commerce extend beyond the boundaries of a
country, the question naturally arises as to how to settle payments for cross-border sales,
purchases and other money dealings? We also need to incur expenditure in foreign
countries towards travel and temporary halt, medical care, educational purposes,
maintenance of an office at the foreign centre etc. This is a widespread and frequent need of
many persons in every country. But each country has a different currency, serving as a
medium of exchange exclusively within its boundaries. Then how to make payment in Indian
Rupees in our country and enable the foreign seller to get payment in his currency? Let us
look at the answer.
If an exporter in India sells readymade garment, say to a Canadian firm, the Canadian
importer can make payment in Canadian Dollars, while the Indian Exporter desires to be
provided with Indian Rupees. This problem is solved by the Canadian Importer in the first
instance purchasing Indian Rupees against payment of Canadian Dollars in his country from
an authorized source dealing with foreign money (foreign exchange) and remitting Indian
Rupees to the Indian Exporter. Or in case the consignment is invoiced in Canadian Dollars,
the Indian exporter gets Canadian Dollars, which he sells in this country to an authorized
dealer (of foreign exchange) to get Indian Rupees. Thus as money is used as a medium of
exchange to secure supplies of goods and services, it can also be so used to secure supply
of currency/money of another country, which can thereafter be used to discharge our
payment obligations in that country.
Composition of the Indian Market

Foreign exchange market in India is totally structured, well regulated both of RBI and also by
a voluntary association (Foreign Exchange Dealers Association). Only Dealers authorized
by RBI can undertake such transactions. All inter-bank dealings in the same centre must be
affected through accredited brokers, who are the second arm in the market-structure.
However, dealings between the authorized dealers and the RBI and also between the AD
(Authorized Dealers) and overseas Banks are affected directly without the intervention of the
brokers. In addition to the authorized dealers covering commercial banks, who undertake
comprehensive transactions covering all spheres of foreign exchange, there are also a
peripheral market consisting of licensed money changers and travel agents, who enjoy
limited authorization especially for encashment of travelers cheques, notes. Specified hotels
and Government owned Shops are also given restricted licenses to accept payment from
non-residents in foreign currencies.
IDBI, and Exim Bank are permitted handle and hold foreign currencies in a restricted way.
11
AUTHORISED DEALERS
Authorized persons are Banks and Institutions authorized by RBI to deal in FX. Certain
financial institutions like EXIM, SIDBI etc have been given restricted authorization to deal in
specific FX transactions incidental to their business.RBI has granted Money Changers
licenses to certain Firms, hotels and other organizations permitting them to deal in FX notes,
coins and Travellers cheques. Full Fledged Money Changers [both purchase and sale]
Restricted Money Changers [ only to purchase FX notes, coins and TC s, subject to the
condition that all such collections are surrendered by them in turn to Ads in FX / Full fledged
money changers].
For the purpose of Foreign Exchange business authorized dealers are classified as
Category A Branches maintaining independent foreign currency accounts in their own
names
Category B Branches not maintaining independent foreign currency accounts but having
powers of operating on the accounts maintained by A category branch.
Category C All other branches handling FX business through A or B branches.
Category D It included Money changers and regional rural banks
12
Functions of Authorized Dealers:

Authorized Dealer can handle all kinds of Foreign Exchange
transaction as per FER Act 1947 under the instruction of Central Bank. Following are the
main function of an Authorized Dealer.
Exchange of Foreign Currencies.
To make arrangement with Foreign Correspondent.
Buying and Selling foreign Currencies
Handling of Inward and Outward Remittance
Opening of L/C and Settlement of Payment
Investment in Foreign Trade
Opening & maintenance of Accounts with Foreign Banks under intimation of

Bangladesh Bank
Export Documents handling.
International Trade Financing
13
Foreign Exchange Business Operation
IB
REMITT
EXPOR
T
Pre
Shipment
-ANCES
Issue of DD,
MT, TT etc.
STATIS IMPOR
T-ICS
DEALIN
GS
Submission
Opening of
of returns
LC
Advances
Purchase of
Foreign
Bills
Negotiation
of Foreign
Bills
Export
Guarantees
n
Payment of
DD, MT, TT
etc.
Issue &
encashmen
t of TCs
Sale &
encashment
of Foreign
currency
Notes
Non-
Advising /
Conforming
LC
Rate
computatio
resident
accounts
Collection
of credit
information
Advance
Bills
Maintenanc
e of foreign
currency
Bills for
accounts
Forward
collection
contracts
Import
loans &
guarantees
Exchange
positions &
Cover
positions
Arranging
Foreign
Currency
funding
Advancemen
t for
deferred
payment
exports
Advance
against bills
for
collection
14
Exchange Arithmetic
Knowing the mechanism of exchange rates will give us insight into forex business and will
helps authorized dealers in customer service
Exchange rate is a rate at which one currency is converted into another currency
The exchange rate for sale and purchase transaction will not be same . The foreign currency
is purchased at a lower rate and sold at a higher rate which gives the margin of profit. It is
therefore said Buy low Sell High for direct quotation.
The rates for the transactions are obtained from Forex market which consists of players like
Banks, Financial Insitutions, Brokers, Central Banks, Corporates and the Public at large etc
The foreign currency rates are quoted in two ways :1) Direct Quotation or Hom Currency Quotataion e.g 1USD = 47.5 INR i.e amount of
foreign currency is fixed while the equivalent amount of home currency is variable.
Bank always buy foreign currency at lower rate and while selling the foreign currency
banks will acquire as much of home currency as possible
e.g Buying Transaction 1USD = 47.5 INR
Selling Transaction 1USD = 47.7 INR
2) Indirect Quotation or Foreign Currency Quotation In this case home currency unit is
fixed while the foreign currency unit is variable e.g 100 INR = 1.97 USD i.e amount of
home cuurency is fixed while the while the equivalent amount of foreign currency is
variable. Bank always buy home currency at lower rate and while selling the home
currency banks will acquire as much of foreign currency as possible
e.g Buying Transaction - 100 INR = 1.9794 USD
Selling Transaction 100 INR = 1.9755 USD
3) Two way quotes In all foreign exchange quotations offered by a dealer, there will
always be two-figures buying rate and the selling rate
The buying rate is also known as Bid Rate and the selling rate as the Offer rate. The
difference between the two is a profit margin and also known as spread between the two
rates
15
FEMA Vs FERA
With the introduction of the Foreign Exchange Management Act 1999, (FEMA) with effect from June
1, 2000, the objective of the Foreign Exchange Department has shifted from conservation of foreign
exchange to "facilitating external trade and payment and promoting the orderly development and
maintenance of foreign exchange market in India". FEMA replaced the Foreign Exchange Regulation
Act (FERA).
There are certain basic differences between the two

FEMA
FERA
Civil Offence provides a fair
Violation under FERA - treated as
redressal machinery
a criminal offence
Onus on the enforcement agency Onus lies with the accused to

to prove guilt
prove innocence
However, cases under FERA can be initiated within two years from repeal of FERA, i.e. up
to May 31st 2002.
* FEMA Guidelines:
These guidelines oversee external payments and receipts. The FEMA 1999 incorporates
directions of a standing nature to authorized persons etc. Directions on Project and Service
exports are spelt out in separate Memoranda. Amendments / changes are informed to
authorized persons from Time to time by RBI through AP (Dir) series circulars & other
notifications /directions.
The new law is more transparent in its application. It has laid down the areas Where specific
permission of the Reserve Bank/Government of India is required. In the rest of the cases, no
such permission would be needed and a person can remit funds and acquire assets, incur
liability in accordance with the specific provisions laid down in the Act or notifications issued
by the Reserve Bank/Government of India under the Act without seeking approval of
Reserve Bank / Government of India.
The new Act has brought about structural changes in the exchange Control administration.
Regulations have been framed for dealing with various types of transactions. These
regulations are transparent and have eliminated case-by-case approvals.
16
Revised limits (in
Earlier Limits (in
US$)
US$)
Basic Travel Quota
5,000
3,000
Gifts
5,000
1,000
Donations
5,000
1,000
Employment
5,000
2,500
Emigration
5,000
3,000
Maintenance of close
5,000
5,000
relatives
* FEDAI
[Foreign Exchange Dealers Association of India]- established in 1958 under the Section 25
of the Companies Act (1956).It is an association of Ads in FX operating in India. FEDAI aims
at promoting sound FX policy and is closely associated with the developmental steps in
respect of FOREX market. The objectives of FEDAI include, bringing uniformity in terms and
conditions for FX business between Banks and Customers. An undertaking has been given
by each AD to RBI to abide by the Guidelines and conditions prescribed by FEDAI for
transacting FX business.
* EXIM POLICY
Every 5 year Ministry of Commerce, GOI notifies EXIM Policy. Like EXIM Policy (2007-2012)
lays down the guidelines / procedures for Trade control, Relating to the physical movement
of goods into / out of India. The Policy States, that exports and imports shall be free except
in cases where they are regulated by the provisions of this policy or any other law for the
time being in force.
* ICC RULES
[International Chamber of Commerce]
ICC had in 1933 codified the rules regarding the operation of LC, which Received
acceptance in about in about 115 countries. The UCPDC [Uniform Customs and Practices
for Documentary Credit] was last revised by its Brochure number 600 and hence is now
referred to as UCP 600.
17
VARIOUS PRODUCTS IN Foreign Exchange Business Segment

Import Services
Letter of credit
Import Collection Bill Services
Advance Payment towards Imports
Arranging for Buyers & Suppliers Credit
Export Services
Export Packing Credit
Export Bill Negotiation
Export Bill Purchase & Discounting
Rupee Advance against Export Bills
Bank Guarantees
Export LC Advising
Export LC Confirmation
Remittance Services
Inward Remittances
Outward Payments
Deposit
NRE
NRO
FCNR (B)
Derivative Instruments
Forward Contract
18
MODALITIES OF TRADE FINANCE

Key Factors in Trade
Any trade transaction can be broadly broken down into:
Movement of Goods
Movement of Documents
Movement of Funds as consideration for goods
Traditionally, Banks have played a role in the Movement of Document and Movement of
Funds, while Movement of Goods has been done through a whole range of logistics
players operating at different levels of supply chain.
Simplified Process Flow in case of a typical International Transaction:
Banks are concerned with:

Movement of Funds
Movement of Documents
19
Mode of Movement of funds can be as follows:

Wire Transfers or Money Transfer
Demand Drafts
Cheque Collections
Physical Currency received/ paid
Travellers Cheques
Payment received/ made through Credit Card/ Online Payment Systems
Documents ascertaining movement of goods, which consists of:

Financial Documents
Commercial Documents
Transport Documents
Regulatory Documents
Insurance Documents
Modes of International trade finance

There are 3 major recognized ways of effecting payment in international trade:
A. Clean payments
Advance Payments
I.
Open Account
II.
B. Bills of Collection
C. Documentary Credit
20
A) Clean payments
Clean payments are characterized by trust. Either the exporter sends the goods and trusts
the Importer to pay once the goods have been received, or the Importer trusts the Exporter
to send the goods after payment in effected.
In the case of clean payment transactions, all shipping documents, including title
documents, are handled directly by the trading parties. The role of banks is limited to
clearing funds as required.
There are two types of Clean Payments:
I) Payment in Advance: The Importer sends payment directly to the Exporter and waits for
the Exporter to send the goods and documents.
This mode of transaction is demanded by the exporter/ seller when the selling party is a
well-known and reputed company in its field. Thus the importer has a reasonable amount of
trust on the exporter by virtue of the exporters reputation.
21
II) Open Account: The Exporter ships the goods and the documents directly to the Importer
and waits for the Importer to send payment.
A mutual level of trust between the two parties ensures that an open account system is
carried on smoothly.
It is to be noted that as long as the exporter can trust the importer to make his payment on
time, an Open Account transaction is the simplest mode of doing long-term business.
22
Risk Spectrum
Least Risk
Highest Risk
To exporters
Least Risk
To exporters
Open Account
To importers
Advance Payment
Highest Risk
To importers
23
B)Documentary collections
Documentary Collection or Collection against bills is a method of payment
used in International trade whereby the Exporter entrusts the handling of
commercial and often financial documents to banks and gives the banks
instructions concerning the release of these documents to the Importer.
Banks involved
do
not
provide any guarantee of payment.
However,
collections are subject to the Uniform Rules for Collections published by the
International Chamber of Commerce.
After the Importer and the Exporter have established a sales contract and
agree on a Documentary Collection as the method of payment, the Exporter
ships the goods. In a Documentary Collection, the Importer is the drawee
and the Exporter is the drawer. After the goods are shipped, documents
originating with the Exporter (e.g. Commercial Invoice) and the transport
company (e.g. bill of lading) are delivered to a bank, called the Remitting Bank
in the Collection process. The remitting bank sends these documents
accompanied by a Collection Instruction, giving complete and precise
instructions, to a bank in the Importers country, referred to as the Collecting/
Presenting Bank in the Collection process.
The Collecting/ Presenting Bank acts in accordance with the instructions
given in the Collection Instruction and releases the documents to the
Importer against payment or acceptance, according to the Remitting Banks
Collection instructions.
Payment is forwarded to the Remitting Bank for the Exporters account. And the
Importer can now present the transport/ title document to the carrier in
exchange for the goods.
The Exporter will ask the importer to settle the bill in one of two ways, either D/P
or D/A.
Document against Payment (D/P)
This is sometimes referred to as Cash against Documents/ Cash on Delivery. In
effect D/P means payable at sight (on demand). The collecting bank hands
over the shipping documents including the document of title (Bill of Lading)
only when the importer has paid the bill. The drawee is usually expected
to pay within 3 working days of presentation. The attached instructions to
the shipping documents would show Release documents against Payment.
24
Document against Acceptance (D/A)

Under documents under acceptance, the exporter allows credit to the importer; the period of
credit is referred to as usance. The importer/ drawee is required to accept the Bill i.e, to
make a signed promise to pay the bill at a set date in future. When he has signed the bill in
acceptance, he can take the documents and clear his goods.
25
The payment date is calculated from the term of the bill the term is usually a multiple of
30 days and starts either from sight or from the date of shipment whichever is stated on the
bill of exchange. The attached instructions would show Release documents against
Acceptance.
Documentary Collections offer more of a compromise in risk-taking between the Importer
and the Exporter than Clean Payments.
RISK SPECTRUM
Least Risk
Highest Risk
To Exporter
Open Account
To Importer
Documents Against Acceptance

Documents Against Payment
Least Risk
To Exporter
Advance Payment
Highest Risk
To Importer
C) Documentary Credit
Documentary Credits, otherwise popularly known as Letters of Credit (LC), is an
instrument of settling trade payments. LC is an arrangement whereby a bank acting at the
request of the customer undertakes to pay a third party by a given date according to agreed
stipulations and against presentation of documents, the counter-value of goods or services
dispatched/ supplied, rendered or otherwise.
A key principle underlying Letters of Credit is that banks deal only in documents and not in
goods. The decision to pay under a Letter of Credit will be based entirely on whether the
documents presented to the bank appear on their face to be in accordance with the terms
and conditions of the Letters of Credit.
26
Letter of Credit Process:
1. The buyer and seller agree on the terms of sale and enter into the requisite contract
encompassing the type of goods, delivery schedule, mode of payment, etc. the buyer
arranges for his bank to open a letter of credit in favour of the seller.
2. The buyers bank sends the letter of credit to the advising bank in the sellers country.
The seller may request that a particular bank be the advising bank, or the buyers
bank may select one of its correspondent banks in the sellers country.
3. The advising bank forwards the LC to the seller. The advising bank checks on the
authenticity of the LC before forwarding it to the seller. The seller carefully reviews all
conditions the buyer has stipulated in the letter of credit. If the seller cannot comply
with one or more of the provisions, the buyer is immediately notified and asked to
make an amendment to the letter of credit.
4. After final terms are agreed upon, the seller prepares the goods and arranges for
shipment to the appropriate port. The seller ships the goods, and obtains a bill of
lading and other documents as required by the buyer in the letter of credit.
5. The seller presents the documents to the Negotiating Bank, indicating full compliance
with the terms of the letter of credit. The Negotiating bank reviews the documents. If
they are in order, they are forwarded to the Issuing bank. If there is a confirming bank
in the transaction the documents have to flow through the Confirming Bank.
6. The Negotiating bank forwards a reimbursement claim to the Reimbursing bank.
7. The Reimbursing bank pays the Negotiating bank as per instructions issued to it by
the Issuing Bank.
8. On receipt of payment the Negotiating Bank makes payment to the Beneficiary if he
has not discounted the bill earlier.
9. Once the Issuing bank receives the documents it notifies the buyer who then reviews
them. If they are in order the buyer signs off, makes payment to the bank, and
receives the documents, which enable the holder to take possession of the shipment.
10. The transfer of funds from the buyer to the bank, from the buyers bank to the sellers
bank, and from the sellers bank to the seller may be handled at the same time as the
exchange of documents, or under terms agreed upon in advance.
27
28
Risk Analysis
Open Account
Highest Risk
To Exporter
Documents against Acceptance
Least Risk
To Importer
Documents against Payment

Unconfirmed LC
Confirmed LC
Least Risk
Advance Payment
To Exporter
Highest Risk
To Importer
Types of Letter of Credit

There are seven types of Letter of Credit:
1. Revocable Letter of Credit
Revocable Letter of Credit is a Credit, which can be revoked, i.e., cancelled or amended by
the bank issuing the Credit, without the notice of other parties. Revocable Letter of Credit is
rarely used. From an exporters point of view this type of LC is not a satisfactory one. But, it
is advantageous to the importer and the Issuing Bank.
2. Irrevocable Letter of Credit
Irrevocable Letter of Credit is a firm undertaking on the part of the Issuing Bank and cannot
be cancelled or amended without the consent of the parties to LC, particularly the
Beneficiary. From an exporters point of view this is more favourable. The irrevocable nature
of the letter of credit has enabled building up an elaborate commercial system on the basis
of irrevocable bankers credit.
3. Confirmed Letter of Credit
Confirmed Letter of Credit is a LC to which another Bank (Bank other than the Issuing Bank)
has added its confirmation or guarantee. Thus, there is a double guarantee in such Credit
and it is more favorable to Beneficiary. Generally, the confirmation is desired by Beneficiary
from a bank known to him, preferably the one located in his country so that his risk becomes
localised and he can deal easily with a local bank rather than deal with a bank abroad, which
29
has issued the Credit. But this type of LC is costlier to the parties concerned, since there
would be charges of confirming bank.
4. Sight Credit and Usance Credit
Sight Credit states that the payment would be made by the Issuing Bank at sight, on
demand or on presentation. In case of usance credit, drafts are drawn on the issuing bank or
the correspondent bank at specified usance period. The credit will indicate whether the
usance drafts are to be drawn on the issuing bank or, in the case of confirmed credit on the
confirming bank.
5. Back-to-Back Letter of Credit
When a LC is opened with security of another LC, the credit thus opened is termed as
Back-to-Back Letter of Credit. This original credit, which is offered as security for opening a
back-to-back credit is called an over-riding credit/ principal credit.
The practical use of this credit is seen when LC is opened by the ultimate buyer in favour of
a particular beneficiary, who may not be the actual supplier or manufacturer. He will open
another credit with near identical terms in favor of the actual supplier/ manufacturer offering
the main credit opened in his favor as security and will be able to obtain reimbursement by
presenting the documents received under back-to-back credit under the main LC.
6. Transferable Letter of Credit
It is a credit, which can be transferred by the Original Beneficiary in favor of a second
beneficiary or several second beneficiaries. As per UCPDC a LC can be transferred only if it
is specifically stated as Transferable in the LC. Further, such credit can be transferred only
once (i.e., from the first beneficiary to the second beneficiary and not thereafter) and subject
only to the original terms and conditions of the Credit.
7. Standby Letter of Credit
There credits are generally used as a substitute for performance guarantee or for securing
secured loans. The document generally called for under such credit is a simple statement of
claim or proof of delivery of goods or certificate of non-performance.
Categories of Trade finance

Two Broad categories of Trade Finance are:
1.Pre-shipment financing
2.Post-shipment financing
30
Pre-shipment financing
Pre-shipment finance is credit granted to the exporters by a financial institution. Preshipment credit is part of working capital finance.
The main objective behind pre-shipment finance is to enable exporters to:
a) Procure raw materials
b) Carry out manufacturing processes
c) Provide a secure warehouse for goods and raw materials
d) Process and pack the goods
e) Ship the goods to the buyers
f) Meet other financial costs of the business
Different Stages of Pre Shipment Finance

1. Appraisal and sanction of Limits
Pre-Shipment Finance, or Packaging Credit, is essentially a working Capital advance made
available for the specific purpose of procuring/ processing/ manufacturing of goods meant
for export. All costs before shipment would be eligible for being financed under the
packaging credit. While considering Credit Facilities for export activities, Bank specifically
looks into the aspects of product profile, country profile and commodity profile. The Bank
also looks into the status report of the prospective buyer, with whom the exporter proposes
to do business. In order to get the status report on foreign buyer, services of institutions like
ECGC may be utilized.
Bank extends the Packaging Credit facilities after ensuring the following:
1. The exporter is a regular customer, a bonafide exporter and has a good standing in the
market.
2. The exporter has the necessary licenses and quota permits.
3. Whether the country with which the exporter wants to deal is under the list of Restricted
Cover Countries (RCC).
31
2. Disbursement of Packing Credit Advance

After proper sanctioning of the limits, the bank ensures that the exporter has executed
proper documents. On the basis of these documents, disbursements are normally allowed.
Before disbursing the Bank specifically checks for the following particulars in the submitted
documents:
Name of the Buyer
Commodity to be exported
Quantity
Value (either CIF or FOB)
Last date of shipment
Any other terms to be complied with
The quantum of finance is fixed based on the FOB value of contract/ LC or on the domestic
value of goods, whichever is lower. Normally insurance and freight charges are considered
at a later stage, when the goods are ready to be shipped.
Disbursals are made only in stages and preferably, not in cash. The payments are made
directly to the suppliers by Drafts/ Bank Cheques.
The period for which the packing credit is provided is decided by the bank depending upon
the time required by the exporter for procuring and manufacturing/ processing the goods.
Normally the Packing Credit period should not exceed 180 days. The Bank may provide a
further 90-day extension on its own discretion.
3. Follow up of Packing Credit
Exporters need to submit stock statement reporting the stocks, which are under pledge or
hypothecation to the bank for securing the Packing Credit Advance. The bank decides the
frequency of submission of the stock statements at the time of sanctioning the Packing
Credit.
The Authorized Dealers (Banks) also physically inspect the stock at regular intervals.
4. Liquidation of Packing Credit Advance
Packing Advance will always be liquidated with export proceeds of the relevant shipment.
Packing Credit Advance can also be liquidated with proceeds of payment receivable from
Government of India or from any other relevant source.
For any reason, if the export does not take place at all, the entire advance is recovered at
commercial interest rate plus a penal rate as decided by the bank.
32
5. Overdue Packing Credit

If the borrower fails to liquidate the Packing Credit on the due date/ extended due date, the
bank considers it overdue.
In case the overdue position persists, the bank takes steps to realise its dues as per usual
recovery procedures.
Post-shipment financing
Post-shipment finance is a loan, advance or any other credit provided by an institution to an
exporter of goods from India. This finance is granted from the date of extending the credit
after shipment of the goods to the realization date of the export proceeds.
Purpose of Finance:
Post- shipment Finance is meant to finance export sales receivables after the date of
shipment of goods to the date of realisation of exports proceeds.
Basis of Finance:
Post-Shipment Finance is provided against evidence of shipment of goods or supplies made
to the importer or any other designated agency.
Form of Finance
Post-Shipment Finance can be secured or unsecured. Since the finance is extended
against evidence of export shipment and banks obtain the documents of title of goods, the
finance is normally self-liquidating. In cases that involve advances against undrawn balance,
it is unsecured in nature.
Quantum of Finance:
Post-shipment Finance can be extended up to 100% of the value of goods. However, where
the domestic value of the goods exceeds the value of the export order or the invoice value,
finance for the price difference can also be extended if such a price difference is covered by
receivables from the Government.
Period of Finance:
Post-Shipment Finance can be short term or long term, depending on the payment terms
offered by the exporter to the overseas buyer. In case of cash exports, the maximum period
allowed for realisation of export proceeds is six months from the date of shipment. Banks
can extend post-shipment finance at lower rate up to normal transit period/ notional due
date, subject to a maximum of 180 days.
33
Financing for various types of Exports

Post Shipment Finance can be provided for three types of exports:
Physical Exports:
In case of Physical Exports, Post-Shipment Finance is provided to the actual exporter or to
the exporter in whose name the trade documents are transferred.
Deemed Exports:
In case of deemed exports, Finance is forwarded to the supplier of the goods. These goods
are supplied to the designated agencies.
Capital Goods and Project exports:
In case of exports of 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
(Indian) exporter.
Buyers Credit
As seen in the case of capital goods and project exports, credit is sometimes extended
directly to the foreign buyer.
Buyers Credit is a financial arrangement whereby a financial institution in the exporting
country, or another 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 the payments due to the supplier under the contract.
Suppliers Credit
Finance extended by suppliers to buyers in their own name is referred to as Suppliers
Credit. Hence, Suppliers Credit is a financing arrangement under which an exporter extends
credit to the buyer in the importing country to finance the buyers purchases.
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
34
4. Advance against export on consignment basis

5. Advance against undrawn balance on exports
6. Advance against receivables from Government of India
1) Export Bills purchased/ discounted (DA & DP Bills)
Export Bills (Non LC Bills) representing genuine international trade transactions, strictly
drawn in terms of sale contract may be discounted or purchased by the banks. Proper limit
ahs to be sanctioned to the exporter for purchase of export bill facility.
If the exporter is not covered under L/C, risk of non-payment may arise. This risk is more
pronounced in case of Documents under Acceptance.
2) Export Bill Negotiated (Bills under L/C)

Letter of Credit is a secure mode of trade transaction. Since the issuing bank guarantees
payment, subject to the condition that the beneficiary meets the terms and conditions of the
LC, hence the risk of payment is low. Also, if a reputed bank guarantees the payment by
confirming the LC, the risk is reduced further.
Due to this inherent security provided by this mode, banks are often ready to extend finance
against bills under LC. However, it is to be noted that the bank still faces two major risks in
this case. First is the risk of non-performance by the exporter, wherein in case the exporter
is unable to meet his terms and conditions, the issuing bank would not honor the LC.
Secondly, the bank also faces the Documentary Risk, wherein if the issuing bank notices
some discrepancy in the documents supplied, it may refuse to honor its commitment. Hence,
it becomes extremely important for the negotiating bank and the lending bank to thoroughly
scrutinize the terms and conditions of the LC and the documents submitted by the
beneficiary in support of the same.
3) Advance against Export Bills sent on collection basis

At times the exporter might have fully utilized his bills limit and in certain cases the bills
drawn under LC may have some discrepancies. In such cases, the bills will be sent on
collection basis. In some cases the exporter himself may request the bill to be sent on
collection basis, anticipating the strengthening of foreign currency.
Banks may allow advance against these collection bills to an exporter.
35
4) Advance against Export on Consignment Basis

Goods are exported on consignment basis at the risk of the exporter. The overseas branch/
correspondent of the bank is instructed to deliver the documents against trust receipt.
Advances granted against export bill covering goods sent on consignment basis are
liquidated from remittance of the sale proceeds within 6 months from the date of shipment,
conforming to relevant RBI Guidelines.
5) Advance against Undrawn Balance on Exports
In certain line of export trade, it is common practice to leave a certain amount as undrawn
balance. Adjustments are made by buyer for difference in weight, quality, etc, ascertained
after arrival and inspection of goods. Authorized Dealers (Banks) can handle such Bills
provided the undrawn balance is in conformity with the normal level of balance left undrawn
in the particular line of export trade, subject to the maximum of 10% of the full export value.
Such advances can be provided at a concessional rate up to a maximum period of 90 days.
6) Advance against Receivables from Government

Where the domestic cost of production of goods is higher in relation to international price,
the exporter may get support from the government so that he may compete effectively in the
overseas market. Just as in the case of various foreign governments, the Government of
India and other agencies provide support to the exporters under the Export Promotion
Scheme. This can be in the form of refund of Excise and Customs duty, known as Duty
Drawback.
Banks can grant advances to exporters against their entitlements under this category at
lower rate of interest for a maximum period of 90 days. These advances being in the nature
of unsecured advances cannot be granted in isolation. 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 relevant documents to the
relevant government authorities. These claims are processed and eligible amount is
disbursed.
Factoring and Forfeiting
Forfeiting and factoring are similar services that serve to provide better cash flows and risk
mitigation to the seller. It may be mentioned that factoring is for short-term receivables
(under 90 days) and is more related to receivables against commodity sales. Forfeiting can
be for receivables against which payments are due over a longer term, over 90 days and
even upto 5 years. Both factoring and forfeiting are like bill discounting, but bill discounting is
more domestic-related and usually falls within the working capital limit set by the bank for
the customer.
36
Forfeiting
Forfaiting is a mechanism of financing exports:
By discounting export receivables
Evidenced by bills of exchange or promissory notes
Without recourse to the seller (such as the exporter)
Carrying medium to long-term maturities
On a fixed rate basis (discount)
Up to 100% of the contract value
In a forfeiting transaction, the exporter surrenders his rights to claim for payment on goods
delivered to an importer, in return for immediate cash payment from a forfeiting agency. As a
result, an exporter can convert a credit sale into a cash sale, with no recourse either to him
or his banker.
Process:
Exporter initiates negotiations with prospective overseas buyer, finalizes the contract
and the importer opens an LC through his bank in favor of the seller (exporter).
Exporter ships the goods as per the schedule agreed with the buyer.
The exporter draws a series of bills of exchange and sends them along with the
shipping documents, to his banker for presentation to importer for acceptance
through latters Bank. Bank returns availed and accepted bills of exchange to his
client (the exporter)
Exporter informs the importers Bank about assignment of proceeds of transaction to
the Forfaiting Bank
Exporter endorses avalised Bill of Exchange (BOE) with the words without recourse
and forwards them to the Forfaiting Agency (FA) through his bank
The FA effects payments of discounted value after verifying the Avals signatures and
other particulars.
37
Exporters Bank credits Exporters Account

On maturity of BOE/ Promissory Notes, the Forfeiting Agency presents the
instruments to the Aval (Importers Bank) for payment.
Factoring
Factoring is a continuing arrangement between a financial institution (the Factor) and a
business concern (the client), selling goods to trade customers. The Factor purchases the
clients book debts (account receivables) either with or without recourse to the client.
For the factoring operations, the pre-requisite is the establishment of a factoring relationship
between the client and the factor. On the basis of credit evaluation, the factor fixes limits for
individual customers of the client indicating the extent to which, and the period for which the
Factor is prepared to accept the clients receivables for such customers.
The client (seller) sells the goods to the customer (buyer) and invoices him in the
usual way inscribing a notification to the effect that the debt due on the invoice is
assigned to and must be paid to the Factor
The client offers the assigned invoices to the factor under cover of a schedule of offer
accompanied by copies of invoices and receipted delivery challans
The factor provides immediate prepayment up to 80% of the value of the assigned
invoices and notifies the customer sending a statement of account.
Factor follows up with the customer and sends him the statement.
The customer makes the payment to the Factor
When the customer makes the payment for the invoice, the factor will pay the balance
20% of the invoice value.
Bank Guarantees
Guarantees are given by bank on behalf of its customer regarding specific performance/
obligation by the customer to the other party. The guarantee ensures payment to the party
with whom the banks customer is doing business.
Under this, the bank acts as guarantor of a claim or obligation in lieu of the debtor. The bank
cannot be held liable in the event that the debtor fails to perform. The banks obligation is
38
limited to its pledge to pay a maximum specified amount on fulfillment of the terms of the
commitment.
One may note that even though both letter of credit and bank guarantee ensure that the
issuing bank guarantees payment, the difference lies in the fact that while LC is a positive
action instrument, BG is a non performance instrument. Hence, payment is released under
LC as and when all the terms of the underlying trade transaction are met. On the other hand,
payment is released under BG if and when the terms of the underlying transactions are not
complied with.
Kinds of Documents
In Trade Finance various documents used are as follows:
1 bill of exchange:
A bill of exchange is a negotiable instrument and can be defined as a document in writing
drawn by the seller on the buyer for a stated sum of money. A bill of exchange may be
drawn on the issuing bank or another drawee bank, but not the importer.
D/A means document against acceptance, which means the collecting bank will deliver all
the documents to the drawee on the acceptance of the bill of exchange. The payment will be
made on the due date by the drawee.
D/P means documents against payment; hence in this case unless the payment is made the
collecting bank will not release the document to the drawee of bill.
2 Commercial Invoices:
A commercial invoice is the most comprehensive commercial document among the entire
set of export document or bills. It is the only document in the whole set that carries complete
information about the specific commercial transaction between the buyer and seller. A
commercial invoice although not a negotiable instrument is also a claim for payment of
goods under the term of the commercial contract. It is addressed to buyer by the seller and
signed by the seller. In addition a detailed description of the goods together with unit prices
total amount payable showing discount or advance payment made if any, terms of payment,
weight and packing details, shipping details and marks. It serves as a checklist to all
concerned and help to identify a particular consignment. It is also used as main evidence in
any assessment of custom duty.
3 Packing list:
A packing list is usually accompanies an invoice if there are several packages in one
consignment. A packing list identifies the content of each package and also its weight
marking and measurement. As the name suggests the list for the convenience of inspection
agency at the point of import or cartoon open a selected package, if needed. Packaging list
39
is often required by the importing country for custom inspection. The details of the goods
contained in the packing list must agree in general terms with those in other document. It
must also be signed where ever necessary.
4 Certificate of inspection:
A certificate of inspection lends a considerable degree of comfort to the importer with regard
to the specification of the goods being purchased. Importer can thus safeguard their interest
by arranging for the goods to be inspected by a reputed, independent organization prior to
shipment. The inspection certificate forms a part of the document presented by the exporter
to the negotiating bank .The certificate of inspection usually contains details such as weighs
measurement, composition, quality, packaging and bear the signature and seal of the
inspecting organization.
5 Bill of lading:
In international trade shipping occupies an important place as a mode of transport. The
document evidencing the carriage of goods by sea is called the bill of lading .A bill of lading
is a document issued by the shipping company or its agent acknowledging the receipt of
goods for carriage ,which are deliverable to the consignee or assignee in the same condition
as they were received.
A bill of lading is all of the following:
1. Evidence of contract of carriage.
2. Receipt of goods received by the carrier.
3. A document of title to goods, that is, a right to receive the goods therein mentioned.
6 Certificate of Origin:
This is a declaration that specifies the country of origin of goods. They are called by the
countries wishing to identify the origin of all imported goods for their own reason, i.e.
statistical analysis, policy decisions or where there are quotas or other importer restrictions
in force or to qualify for special rate of custom duty.
It contents normally include:
1. The name and address of the consignor and occasionally the name and address of the
manufacture if different.
2. The name and address of the consignee usually the buyer or issuing bank. If the bill of
lading is issued to order it may also contain the actual buyer name and details.
3. The country of origin of the goods which may not necessarily be the country from which
its being shipped.
4. The mode of transport may be optional but if completed must show the details of the
transport document.
5. The number of package, gross or net weight, relevant shipping marks and description of
goods which should confirm to other documents.
40
7 Bill of Entry:
Bill of entry is the documents which are issued by custom department for import of goods
and when goods can enter in the importer country .These documents specially detailed
includes shipper name, importer and exporter name and details, goods declaration and
custom duty explanation and authority sign of clearness of goods.
41
SWIFT
The Society for Worldwide Interbank Financial Telecommunication ("SWIFT") operates
a worldwide financial messaging network which exchanges messages between banks and
other financial institutions.
The majority of international interbank messages use the SWIFT network. As of September
2010, SWIFT linked more than 9,000 financial institutions in 209 countries and territories,
who were exchanging an average of over 15 million messages per day. SWIFT transports
financial messages in a highly secure way, but does not hold accounts for its members and
does not perform any form of clearing or settlement.
SWIFT does not facilitate funds transfer, rather, it sends payment orders, which must be
settled via correspondent accounts that the institutions have with each other.
Nostro, Vostro &Loro

To facilitate dealings in foreign exchange, a bank in India maintains accounts with banks
abroad. Similarly some foreign banks may maintain accounts with bank of India. In banking
terminology these are known as Nostro account, Vostro account, and Loro account.
a) Nostro Account:
Nostro means our account with u.
e.g.: Punjab national Bank maintains an account with JP Morgan Chase.
b) Vostro Account:
The account opened by a foreign bank in Indian rupee with an Indian bank would be referred
by all correspondence by Indian banks as vostro account, meaning your account with us.
c) Loro Account:
Loro account means their account with you.
42
ANALYSIS
EXPORT FINANCING CASES
CASE I
On 29.01.05 punjab national bank jalandhar branch Purchased an Export bill for US Dollar
28000 from a party ABC LTD under invoice, packing list, certificate of origin, shipping bill of
exports, bill of exchange, Form A.R.E 1. ABC Ltd is into business of Flat transmission
Rubber belts. On 29.01.05 bank issued L/C to the party (ABC Ltd) who is exporting the
goods to the party in Dar es Salaam, Tanzania. L/C is expiring on 15.03.05. All documents
of negotiation are annexed in annexure 1. The shipment as been loaded on 20.02.05 on
FOB (freight on board ) from Mumbai port and the payment is received from the importer in
Tanzania by the exporter in Jalandhar .The exchange rate applied by the Punjab National
bank is BC buying which Is Rs 44.0660/ USD as on 29.01.05. Bank has applied exchange
margin of 0.15%.
L/C amount = $ 28,000
Rate applied = Rs 44.0660/ USD
Exchange Margin = 0.15%
Net Rate applied = 44.0660 0.15% of 44.0660 = 44.0000
Amount in Rs= 28000 * 44.0000= Rs 1232000
Transit period = 45 days

Bank Rate applied= 8.75%
Therefore Interest charged by bank = (1232000*8.75*45)/ 100 *365
= Rs 13290.00
Net Amount Payable to L/C holder = Rs 1232000- 13290

= Rs 1218710
Amount Credited in
L/C holders (ABC LTD) A/C is Rs 1218710
43
Amount Remunerated in Banks A/C in lieu of foreign exchange is ( Interest + Margin)

which is Rs 15138
Amount Debited
From Foreign Outward Bill Negotiated Under L/C (FOBNLC) by Rs 1233848
CASE II
45,000 from a party ABC LTD under invoice, packing list, certificate of origin, shipping bill of
exports, bill of exchange, Form A.R.E 1. ABC Ltd is into business of Sports Goods. On
12.11.06 bank issued L/C to the party (ABC Ltd) who is exporting the goods to the party in
London, U.K. L/C is expiring on 15.01.07. All documents of negotiation are annexed in
annexure 2. The shipment as been loaded on 31.12.06 on FOB (freight on board ) from
Mumbai port and the payment is received from the importer in UK by the exporter in
Jalandhar .The exchange rate applied by the Punjab National bank is BC buying which Is
Rs 46.0691/ USD as on 12.11.06. Bank has applied exchange margin of 0.15%.
L/C amount = $ 45,000

Amount in Rs= 45000 * 46.0000= Rs 20,70,000

= Rs 31759

= Rs 2038241
44
Amount Credited in
which is Rs 34868.5
Amount Debited
From Foreign Outward Bill Negotiated Under L/C (FOBNLC) by Rs 2073109.5
CASE III
23,020 from a party ABC LTD under invoice, packing list, certificate of origin, shipping bill of
exports, bill of exchange, Form A.R.E 1. ABC Ltd is into business of Automobile Tyres.
On 13.12.06 bank issued L/C to the party (ABC Ltd) who is exporting the goods to the party
in Nigeria. L/C is expiring on 15.01.07. All documents of negotiation are annexed in
annexure 3. The shipment as been loaded on 29.12.06 on FOB (freight on board ) from
Mumbai port and the payment is received from the importer in Nigeria by the exporter in
Jalandhar .The exchange rate applied by the Punjab National bank is BC buying which Is
Rs 44.6770/ USD as on 13.12.06. Bank has applied exchange margin of 0.15%.
L/C amount = $ 23,020

Amount in Rs= 45000 * 44.6100= Rs 10,26,922

= Rs 8124
= Rs 1018798
45
Amount Credited in
which is Rs 9666
Amount Debited
From Foreign Outward Bill Negotiated Under L/C (FOBNLC) by Rs 1028464
46
CREDIT APPRAISAL FOR INTERNATIONAL TRADE FINANCE
(S.H FIBRES LTD)

Introduction- This is a Public Ltd. Company which is engaged in the manufacturing and
export of Mink Blankets. The company is availing term loan and working capital limits from
the bank. It has approached the bank for sanction of fresh term loan of Rs.5.00 crores for
purchase of plant and machinery under Revised TUF Scheme and enhancement in the
CC(H) limits from Rs.27.00 crore to Rs.32 crores.
YEAR OF INCORPORATION: 14.05.1993.

DATE OF COMMENCEMENT OF PRODUCTION : 18.05.1993.
ACTIVITY : Manufacturing and export of Mink Blankets, Non-woven/woven carpets.
DIRECTORS :
The following are the directors of the company :
Sh. Shital Vij Managing Director
1. Smt. Vani Vij
2. Sh. Sheetesh Vij
3. Ms. Ruchi Vij.
4. Sh. Abhishek Vij.
5.
Sh. Shital Vij is in the line of activity for the last two decades.
RESOLUTION OF DIRECTORS :
The directors have resolved on 23.04.2012, for sanction of fresh term loan of Rs.5.00 crores
and enhancement in working capital limits from Rs.27 crores to Rs.32 crores from PNB
Industrial Area Jalandhar.
The proposed installed capacity of the units is as under :
I. 2.8 millions mink blankets per annum. At the average sale price of Rs.1000/- per blanket ,
it comes out to be Rs.280 crores per annum.
II. 2.80 millions metre of Polyester/polypropylene lining and non-woven carpets per annum.
At the average sale price of Rs.103.75/- per non-woven carpet/lining , it comes out to be
Rs.29.05 Crores per annum.
III. The installed capacity of the weaving cloth is 2.20 million meters per annum. At the
average sale price of Rs.124/- per metre , it comes out to be Rs.27.28 Crores per annum.
47
Total installed capacity of the unit is around Rs.336.00 crores , after addition of the proposed
machinery.
TECHNICAL ANALYSIS OF S.H FIBRES LTD

PAST PERFORMANCE OF THE COMPANY:
(Amt. in Lacs)
Sr.
No.
Particulars
2009-10
2010-11
2011-12
last Year
last year
current
year
actual
actual
provisional
9081.51
10910.60
13727.09
815.37
867.32
906.53
29.72
40.47
28.10
Gross Sales
i
Domestic Sales
ii
Export Sales
iii
Other Revenue Income
Total
Less: Excise Duty
Net Sales (items 1-2)
9926.60
0.00
11818.39
0.00
14661.72
0.00
9926.60
11818.39
14661.72
Profit Before Tax/ Loss
319.35
499.41
515.83
Net Profit /Loss
226.54
414.54
424.83
Tangible Net Worth
5136.21
5481.81
5901.76
Net Working Capital
1992.66
1328.08
1713.96
Current Ratio
1.47
1.29
1.26
Total Outside Liab/Tangible Net Worth
1.01
1.25
1.68
48
10
Total Term liab/Tangible Net Worth
0.19
0.41
0.56
COMMENTS :
SALES :
The sales of the company have improved from Rs.11800.39 lacs to Rs.14661.72 lacs during
2011-12, showing a growth of 24.06%.
NET WORIKING CAPITAL :
NWC available with the company has increased from Rs.1328.08 lacs to Rs.1713.96lacs
during 2011-12.
CURRENT RATIO :
Current ratio of the company has declined from 1.29:1 to 1.26:1 , but is still within
acceptable parameters, being an export oriented unit.
DEBT EQUITY RATIO :

Debt Equity Ratio of the company has increased from 0.41:1 to 0.56:1, during 2011-12, but it
is well within norms.
ALLIED CONCERNS :
Details of allied concerns, alongwith balance sheets thereof , may be obtained from the
company.
DETAILS OF EXISTING CREDIT FACILITIES :

The following credit facilities have been sanctioned by the bank on 02.03.2011, the
proposed credit facilities have been mentioned under the Head proposed
Nature
Existing
Proposed
CC(H/ BD)*
27.00
32.00
Packing Credit
3.50
3.50
FOBP/ FOUBP/ FAUBC
2.00
2.00
FBWC
49
Nature
Existing
Proposed
FOBNLC
3.00
3.00
LOU Limit
5.00
5.00
27.00
32.00
FLC /ILC(DP/ DA) Raw Material
15.00
15.00
FLC ( DP/DA) Spares
0.50
0.50
FLC ( DP/DA) Machinery
3.00
3.00
ILG/FLG
1.00
1.00
NFB Limit Ceiling
15.00
15.00
Total FBWC + NFB
42.00
47.00
Term Loans Existing to continue
25.34
25.34
Fresh Term Loan
0.00
5.00
Total Term Loans
25.34
30.34
Total Exposure
67.34
77.34
( To be allowed within PBF for

FBWC
limits)
PBF
Ceiling
Non Fund Based Limits
Term Loans
50
SWOT ANALYSIS :
STRENGTH
Promoters have vast experience of textile industry
Closely held public limited company
Leader in manufacturing of mink blankets and carpets
Location Advantages
WEAKNESS
Unit not highly professionally organized. Similar types of units are not available
locally, hence there may be problem of skilled labour at any point of time
OPPORTUNITIES
Company has
diversified
into in-house manufacturing
of yarn and non-woven
carpets.
THREATS
The unit is facing stiff competition from cheaper Chinese goods. Strong Indian rupee
may affect exports adversely
51
PROJECTED PROFITABILITY STATEMENT :

Amt. in lacs
This has been explained as under
2009-10
2010-11
2011-12
2012-13
2013-14
last Year
last year
last year
Current
year
following
actual
actual
provisional
project
year
project
9081.51
10910.60
13727.09
16000.00
16200.00
815.37
867.32
906.53
1500.00
1600.00
29.72
40.47
28.10
20.00
20.00
Total
9926.60
11818.39
14661.72
17520.00
17820.00
Net Sales
9926.60
11818.39
14661.72
17520.00
17820.00
8922.15
10421.47
13057.88
15393.65
15579.96
8915.16
10454.91
13022.23
15319.19
15575.69
Sr.
No.
Particulars
Gross Sales
i
Domestic Sales
ii
Export Sales
iii
Other Revenue Income
Cost of Production
Cost of Sales
Profit Before Tax/ Loss
319.35
499.41
515.83
856.89
949.71
Net Profit /Loss
226.54
414.54
424.83
571.97
633.93
COMMENTS :
The company has projected a sale figure of Rs.17520 lacs for the year 2012-13. During the
year 2011-12, the company has achieved a sale figure of Rs.14661.72lacs, after achieving
24.06% growth. Now with the installation of proposed plant and machinery, sale of the unit is
likely to get a boost, on account of balancing of machinery & variety available in the unit.
52
COST OF PROJECT & MEANS OF FINANCE: Cost of project and means of finance of the new
unit
have been shown under, which is considered to be in order.
Total estimated cost of project & Means of Finance is as under:(Amt. in lacs)

COST OF PROJECTS
As at end
of
Addition / Deletion
upto
Total
As at end
of
2012-13
2011-12
Fixed Assets (Gross)
10062.84
711.63
711.63
10774.47
Long Term Investment
137.26
0.00
0.00
137.26
Margin Money for NFB
142.00
8.00
8.00
150.00
Security Deposit
62.80
0.00
0.00
62.80
Other Investment
0.00
0.00
0.00
0.00
550.05
-105.05
-105.05
445.00
0.00
0.00
0.00
0.00
1713.96
319.73
319.73
2033.69
1
Land
i
Building
ii
Plant & Machinery
iii
Furniture & Fixtures
iv
Other Fixed Assets
v
2
3
4
5
Other Non Current Assets
6
Preliminary Expenses W/O
7
Net Working Capital
8
12668.91
0.00
934.31
934.31 13603.22
TOTAL
MEANS OF FINANCE
Shareholders Fund
1
137.50
0.00
0.00
137.50
Share Application Money
0.00
0.00
0.00
0.00
Share Premium
0.00
0.00
0.00
0.00
5173.32
544.47
544.47
5717.79
590.94
0.00
0.00
590.94
Share Capital
a
d
c
Free Reserves
d
Deferred Tax Liabities
e
Loan Funds
2
Unsecured
Loan
Bank
Term Loans
909.02
0.00
0.00
909.02
2376.53
50.25
50.25
2426.78
53
Debentures
0.00
0.00
0.00
0.00
Preference Share Capital
0.00
0.00
0.00
0.00
Deferred Payment Credit
0.00
0.00
0.00
0.00
Other Term Liabilities
0.00
0.00
0.00
0.00
3481.60
339.59
339.59
3821.19
Depreciation Reserves
TOTAL
12668.91
0.00
934.31
934.31 13603.22
COMMENTS : The company has proposed to raise fixed assets amounting to Rs.675lacs
(plus contingencies +pre-operative intt + up front fee) during 2012-13 and has requested for
a fresh term loan of Rs.5 crores during 2012-13.
COMPUTATION OF WORKING CAPITAL REQUIREMENTS :

The working capital limits (PBF) of Rs.27.00 crores ( for 2011-12) have been sanctioned by
bank on 02.03.2011. Now the company has requested for enhancement in the PBF from
Rs.27.00 crores to Rs.32 crores. The level of projected sales has been kept as per trend
during 2011-12. The matter was taken up with the company who have given the justification
as under :
JUSTIFICATIONS :
The company is in process of up gradation/ modernization of their existing manufacturing
facilities. Quality improvement of the products and simultaneously making them cost
effective to keep the price of finished products low with edge towards its competitors. In this
process besides increase in turnover as well as cost reduction is seen. The company is
adding plant and machinery to balance the existing set up, identify latest and hi-tech
equipment as a continuous process and improve the quality of the finished products in terms
of its lustrous looks and utility.
For the proposed working of the units, level of current assets and current liabilities have
been taken as under :
RAW MATERIAL
EXISTING
LEVEL
(Months) 20101.68
EXISTING
LEVEL
(Months)
3.40
PROPOSED
LEVEL
(Months) 2012-13
1.75
SPARES
8.81
6.40
9.00
STOCK IN PROCESS
0.50
0.50
0.50
FINISHED GOODS
0.17
0.17
0.20
RECEIVABLESDOMESTIC
RECEIVABLESEXPORT
3.23
3.14
3.00
3.56
2.69
2.00
NATURE
54
1.90
CREDITORS
3.40
2.00
The level of raw materials & spares has been taken as per requirements of the unit., Levels
of finished goods , debtors have been taken as per past trend. Level of sundry creditors is
expected to come down after sanction of enhanced limits. The level of stock in process has
been taken as 0.50months, keeping in view the processes involved. The PBF proposed by
the company is within the acceptable norms of the bank. Therefore, proposed PBF is
considered need based and reasonable at the proposed level of business activity of the
company
DEBT SERVICE COVERAGE RATIO : Average DSCR , comes out to 2.38:1, which is
considered as satisfactory.
BREAK EVEN POINT : Break even point and cash break even point for the year 2012-13,
come out to be 53.61 % and 35.23 % respectively, which is considered as satisfactory.
ASSUMPTION FOR CALCULATION OF ESTIMATES OF PROFITABILITY
1.
2.
3.
4.
5.
6.
7.
The Unit will work for 300days in a year, 8 hours per day. The Unit will operate at
52.14% C.U. in the first year, 53.04% in the 2 nd year,53.93% in the third year ,
54.82% in the 4th year, 55.71% in the 5th year and so on.
The purchase will be made from global market.
The expenses for the projected years are worked out on the basis of the past working
of the company by keeping in view same trend for the future.
Admn. & selling expenses have been taken at 3.50% of the total sale receipts.
Depreciation on SLM basis has been calculated as per rates provided in the
companies Act.
Average interest on CC(H)/PC has been taken as 12.00%, Existing Term Loan at
13.50% and Fresh Term Loan at 13.50%.
Repayment of term loan(mach) in 72 equal monthly installments w.e.f. April 2013.
MPBF ANALYSIS
PARTICULARS
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
Total Current Assets
6223.49
5927.73
8326.56
7913.20
8297.53
8832.80
9225.81
9659.50
9989.34
11010.63
Other
Current
Liabilities
2448.50
2377.90
3535.36
2679.51
2727.82
2811.86
2891.44
2965.87
3034.97
3146.26
Working Capital Gap
3774.99
3549.83
4791.20
5233.69
5569.71
6020.94
6334.37
6693.63
6954.37
7864.37
55
NWC - Stipulated
1509.37
1417.68
2030.89
1915.80
2007.71
2137.37
2231.45
2335.71
2414.00
2665.16
NWC - Projected
1992.66
1328.08
1713.96
2033.69
2369.71
2820.94
3134.37
3493.63
3754.37
4664.37
PBF - I
1782.33
2221.75
3077.24
3200.00
3200.00
3200.00
3200.00
3200.00
3200.00
3200.00
PBF - II
1782.33
2132.15
2760.31
3200.00
3200.00
3200.00
3200.00
3200.00
3200.00
3200.00
MPBF
1782.33
2132.15
2760.31
3200.00
3200.00
3200.00
3200.00
3200.00
3200.00
3200.00
The company has requested a Fund Based finance of Rs. 3200 lakhs. As per the table
above, the Fund Based finance (MPBF) available to S.H FIBRES LTD
Ltd is Rs.3200 lakhs for financial year 2012 2013.
POSITION OF A/C
Nature
Limit
VS
DP
Balance
FB
CC(H) 8716068
1500
2539 1904.3
1632.16
CC (Interchangeability)
700
Packing credit
350
470
350
349.47
FOBP/FOUBP/FAUBC(UF)27
200
32.16
32.16
8.47
FOBNLC/FOUBNLC
300
PBF Ceiling
2200.00
(1500+700)
1990.1
NFB
FLC (DP)- Raw Mater
FLC (DP) - Spares
FLC (DP)-Machinery
FLC (DA)
Ceiling of FLC
ILC (DA/DP)
600(1300-700)
285.71
50
17.34
300
*354.67
1000
600.00 (1300700)
150
657.72
150
56
ILG/flg
80
48.3
11.06
FLG
CEILING NFB
Total Commitment
Term Loan IB20207
1500.00700.00=800.00
867.08
3000
2857.18
120
133
52.57
500
767 374.81
52.57
374.81
Term loan - IB20377

Term loan IB20386
Term Loan IB 20465
Term loan IB20553
Term loan IB 20562
Term loan IB 20571
66
135
52.22
900 1519.5 761.83

5.35
8.1
52.22
761.83
4.9
4.9
435 329.68
435
435
65 109.27
65
65
1746.33
PBF ANALYSIS
Calculation of PBF
Actual
31.03.11
Last
Accepted
31.03.11
Projected
Projected
31.03.12
31.03.13
by HO
Chargeable current assets
74.26
64.48
Other current assets
69.53
70.40
9.61
12.58
7.32
9.01

83.27
71.80
79.14
82.98
28.87
21.89
20.19
20.26
Minus Creditors
Minus OCL
4.47
57
6.49
6.61
7.02
Working Capital Gap (A)
Minimum required NWC (25 %

of CCA other than Export
Receivables) - B
47.91
45.44
52.34
55.70
20.31
17.26
19.16
20.08
17.14
18.44
20.34
23.70
27.60
28.18
33.18
35.62
30.77
27.00
32.00
32.00
30.77
27.00
32.00
32.00
Projected NWC ( C )
Item A minus B
Item A minus C
MPBF Accepted
BALANCE SHEET ANALYSIS
LIABILITIES
Capital Authorised
Capital Paid Up
Audited
Audited
Prov.
Projected
Projected
31.03.09
31.03.10
31.03.11
31.03.12
31.03.13
1.50
1.50
1.50
1.50
1.50
1.38
1.38
1.38
1.38
1.38
57.17
63.24
5.91
5.91
64.46
70.53
9.09
9.09
24.27
18.17
97.82
97.79
32.00
32.00
Reserve & Surplus
46.91
51.73
47.53
Less Integible Assets

Deferred Tax Liabilities
3.07
Tangible Net Worth
Unsecured Loans
5.91
51.36
5.91
59.02
54.82
5.51
6.32
4.01
16.08
9.09
Dealer Security
Secured Loans
Total Long Term Funds
60.88
Bank Borrowing
17.82
77.22
22.22
23.76
91.87
30.77
58
S. Creditors - Trade
S. Creditors - Capital Goods
S. Creditors - Non Trade
18.07
0.83
1.66
2.18
5.79
Total Creditors
Adv. From Buyers
Taxatioin Prov.
Other current Liabilities
21.08
20.26
20.19
20.26
0.80
2.71
0.90
1.00
0.72
0.85
0.91
2.85
3.16
1.77
1.24
2.87
2.86
2.86
58.80
59.28
42.31
Total Liabilities
33.76
66.13
46.00
103.19
Fixed Assets - Net
Security Deposits
28.87
20.89
20.19
0.92
Total Current Liabilities
Investments
28.87
13.44
123.22
158.00
65.81
56.12
157.07
156.62
69.53
66.14
1.37
1.37
1.37
1.37
1.37
0.21
0.30
0.63
0.63
0.63
0.94
1.50
1.42
1.50
1.50
73.03
69.64
17.50
17.56
Debtor & adv. doubtful of recovery

Margin Money for NFB
Total Long Term Outlay
36.28
Stocks in Hand- Raw Material
16.20
Stocks - Other Consumable Store
Stocks in Hand- S.I.P.
Stocks in Hand- Finished Goods
69.23
59.29
28.56
15.26
0.50
0.43
0.50
0.57
0.58
2.07
0.83
5.44
6.41
6.49
1.78
1.46
1.81
2.55
2.60
27.03
27.23
40.00
40.50
Stocks in Hand- Total
20.55
S. Debtors Inland
23.43
17.98
26.79
36.31
35.92
S. Debtors Export
59
1.86
Debtors Total
Loans & Advances
Cash & Bank Bl.
Other Current Assets
25.29
Profit After Tax
43.17
6.77
8.39
7.02
3.36
3.60
4.26
5.73
3.47
3.13
0.55
1.55
79.14
82.98
4.45
4.45
62.23
4.68
83.27
59.26
4.67
5.50
103.19
123.22
158.00
31.03.10
90.82
109.11
31.03.11
137.27
157.07
156.62
31.03.12
31.03.13
162.00
160.00
8.15
8.67
9.07
15.00
16.00
0.30
0.40
0.28
0.20
0.20
Gross Sales/ Receipts
Tax
42.50
5.46
Sales - Domestic
Profit Before Tax
2.67
2.52
31.03.09
Income Receipts Others
37.95
29.36
2.50
1.43
Total Assets
Sales - Exports
2.03
2.27
Non Current Assets
2.57
99.27
118.18
146.62
178.20
175.20
3.19
4.99
5.16
8.57
9.50
0.93
0.85
0.91
2.85
3.16
2.26
4.14
4.25
5.72
6.34
2.57
3.32
4.10
3.40
3.40
4.83
7.46
8.35
9.12
9.74
64.46
70.53
20.34
23.70
1.35
1.40
Intt. on capital + Partner salaries

Depriciation
Cash Accrual - Post Tax
Net Worth
51.36
Net Working Capital
19.92
Current Ratio
1.47
59.02
54.82
17.14
13.26
1.29
1.26
Debt Equity Ratio

60
TOL/TNW
0.19
0.41
0.56
0.52
0.39
1.01
1.25
1.68
1.43
1.23
COMMENTS
Taking the past and projected financials of the enterprise into consideration it can be
inferred that the future performance of the company is expected to be favorable. The sales
of the enterprise are expected to rise. Ratios such as the Debt Equity Ratio, Interest
Coverage Ratio and TOL/TNW Ratio are within the benchmark levels. In addition, Fixed
Assets and Net Worth of the enterprise is rising which again indicates the strengthening
financial position of the enterprise.
FINAL VERDICT
the exports from India are rising and the potential of growth for international Trade for
enterprises like SH Fibres Ltd is large. Therefore, the project can be considered promising
and viable.
The credit usage is technically feasible & economically viable. So bank should not think
twice before increasing the credit limit and working capital requirement of the company.
61
RISK MANAGEMENT IN INTERNATIONAL TRADE:

Risk is inherent in International transactions due to the following reasons:
1) Trade across countries involves dealings with parties Importers and Exporters who
are unknown and whose creditworthiness is uncertain.
2) Foreign Trade involves dealing in currencies other than the domestic currency which is
subject to fluctuations.
1. Creditworthiness of Importer:
Exporters and Importers are unknown to each other, therefore, most of the International
Trade transactions take place only with a Letter of Credit document issued by the importers
bank and negotiated through the Exporters bank. In cases where there is no Letter of Credit
document involved in the trade transaction it is because the parties involved in trade are
known to each other. A bank would issue a Letter of Credit only after ensuring that the client
is capable of fulfilling the financial liability involved in the contract.
Kids Ware Pvt. Ltd. was approved a credit limit of Rs.5,482.5 lakhs for LC from all sources.
Any credit required in the form of LC cannot exceed the approved amount unless there are
any significant changes in the financial position or requirements of the enterprise.
2. Creditworthiness of Exporter:
Banks are subject to risk when the Exporter applies for Export Finance for procuring raw
materials for manufacturing the ordered goods or other purposes. While disbursing credit to
the exporter the banks ensure that the client has a sound financial position. An in depth
study of the clients past balance sheet, Profit and Loss Statements and Cash Flows is
carried out.
In addition,the future outlook of the sector in which the client is dealing is assessed. The
credit facility is awarded only after suitable collateral is submitted to the bank.
In case of a new project, the financial viability of the project is also an important
consideration.
Kids Ware Pvt. Ltd. was assigned a credit limit of Rs. 10,499.25 lakhs (from all sources) as
fund based finance for Packing Credit, Foreign and Inland Bill Purchase/ Negotiation based
on its past performance and the favourable outlook for manufacturing sector.
3. Country Risk:
Many countries are having political and economic problems, racial, and communal riots or
other disturbances. There is no certainty about their economic and financial policies and
their willingness and capacity to repay their loans or service them through their inward
remittances.
Fundamentals in the economy may be in doubt and there may be inflation and other
problems of the country, such as unemployment, poverty, low rates of growth in the
economy. They are unable to service or repay their debts to foreigners.
To overcome this risk, the banks require the exporter obtain a cover from ECGC. ECGC
helps carry the credit risk for the commercial banks and guarantees payment in case of risks
relating to buyer, buyers country and other unforeseen contingencies.
62
4. Loss of Goods in Transit:

After manufacturing, the exporter ships the goods to the importer. Goods are subject to risk
of damage while in transit from the exporter to the importer. Therefore, to ensure that there
are no losses incurred due to damage of goods in transit the banks require the exporter to
obtain a marine insurance. The loss of goods increases the probability of bad debts for the
bank.
In case of any damage to goods while they are in transit, the marine insurance/ air insurance
compensates up to the value of loss suffered or the sum assured whichever is lower. Marine
Insurance/ Air Insurance, covers risk of loss only from the time the goods are loaded into the
port of shipment and up to the time they arrive the port of delivery.
5. Exchange Rate Risk:

Foreign Exchange is subject to fluctuations. As a result of continuous change in prices of
currencies exporters and importers are subject to a high degree of risks.
Appreciation in domestic currency result in loss for exporter and depreciation of currency
results in loss for importers. Exporters and Importers can hedge against the risk of currency
fluctuations in the following ways:
5.1. Currency Forward Contracts:
When an importer has to make payments (in foreign currency) to the exporter at a future
date, he can book a buy (long) position for currency forward by paying a premium. On the
date when the payment is due to be made by the importer the required currency amount is
available at the strike price of the currency futures. Hence, the importer is safeguarded from
the any depreciation in the value of his currency.
Similarly, when an Exporter is expecting payments from the importers in a foreign currency,
they can invest in a sell (short) position for currency forward in which payment is to be
received. When the payments are received by the exporter even if the domestic currency
has appreciated in comparison to the currency in which payments have been received the
exporter does not suffer any losses. The exporter can accept the payment and the sell the
currency in the derivative market at the pre decided strike price.
5.2. Currency Futures Contracts:
The futures contract work in the same manner as the forward contracts. The only difference
in Futures contract is that the exchange traded contracts and the buyer has the freedom to
liquidate the contract at any time before the date of maturity. The clearing house is the
counter party which reduces the risk of default.
Just as forwards, in futures the receipt of currency is hedged by booking a short position and
payment of currency is hedged by booking a long position in the futures market.
Kids Ware Pvt. Ltd. can hedge the risk for currency fluctuations for import payments and
export receipts by booking long and short position respectively in the same manner as in
case of currency forwards. Since currency futures are exchange traded therefore the
possibility of counter party default is also taken care of.
63
5.3. Currency Options:

Currency Forwards and Futures protect the holder against the adverse exchange rate
changes, but they deny them the possibility of windfall gains. An Option gives the holder the
right but not the obligation to buy/ sell.
If an importer has to make payments at a future date, he can purchase a call option by
paying a premium. On the due date, if the spot rate of the currency is greater than the call
rate then the importer can utilize the call option. However, if the spot rate is less than the call
rate then the importer may not utilize the call option and make payment by obtaining
currency at the market exchange rate.
Similarly, in case of exports a put option can be purchased. On the date when the payments
are to be received, if the spot rate of the currency is lower than the put option then the
exporter can utilize the put option and if the spot rate is greater than the put option then the
exporter may not utilize the put option and sell the currency at market exchange rate.
In future, if the spot rate is less than the call rate and if the spot rate is greater than the put
rate the importer and the exporter make a windfall gain respectively.
Similarly, to safeguard against the exchange value of export payments Kids ware Pvt. Ltd.
Can book a put option at the spot rate which is USD 1 = Rs. 45. On the date when payments
are received, then the put option can be utilized if the exchange rate is below Rs. 45.
However, in case the exchange rate is greater than Rs. 45 for a dollar then the client may
not utilize the put option and sell the received dollar payment in the open market. The
expense for mitigation of risk of changes in the exchange rate is limited to the extent of
premium paid for booking the currency options.
5.4. Currency Swaps:
Currency Swap is the exchange of loan by one party in a particular currency with another
party in another currency.
In case Exporter I is expecting payment in a foreign currency and at the same time the
exporter has obtained a Packing Credit in domestic currency. Now, another Exporter II is
also expecting payment in the foreign currency and has obtained a Packing Credit in his
domestic currency. To counter against the risk of loss due to currency fluctuations Exporter I
and II can exchange their loans and fulfill each others loan obligation. By exchanging the
loan obligations both the exporter are changing their liabilities in the currency in which they
will be receiving their payment. On the due date when the payments are received by the
Exporters then they can fulfill the loan obligations of the other party which is denominated in
the same currency in which the payments are received and hedge themselves against
currency exchange rate fluctuations.
6. Interest Rate Swaps:

Loans taken by importers and exporters are subject to risk of interest rate fluctuations. If an
exporter has borrowed in floating rate and expects that floating interest rate will increase,
then it can swap the loan with an enterprise which has a loan commitment in fixed rate of
interest and its expectations are vice versa.
The option of Interest Rate Swap as a hedging mechanism is very convenient and does not
involve any significant costs.
64
While disbursing credit to the exporter the banks ensure that the client has a sound
financial position.
The future outlook of the sector in which the client is dealing is assessed.
Keeping in mind, elaborate mechanisms and International trade instruments have been
developed over a period of time. These instruments are designed to minimize risks of each
of the parties involved. Depending upon the level of trust between various parties and the
International reputation of each of the parties, different modes of business are adopted.
65
RECOMMENDATIONS
CONSULTANCY IN INTERNATIONAL TRADE TO SMALL AND
MEDIUM ENTERPRISES:
Currently Indian Bank provides all services associated with International Trade to well
established enterprises engaged in export and import of goods and services from abroad. In
such cases banks role is limited to the extent of providing the specific service required by
the client.
However, in India there are a number of Small and Medium Size enterprises engaged in
export and import which do not have the expertise required in the management of trade
transactions conducted internationally. Recently, a number of export houses suffered huge
losses due fluctuations in rupee dollar exchange rates. In addition, such Small and Medium
Size enterprises cannot bear the expenses of hiring specialized personnel for taking care of
these transactions.
Indian Bank can provide consultancy services of supporting Small and Medium Sized
enterprises in conducting their International Trade transactions effectively. Apart from
advising on the regular export finance and import payment services, Indian Bank can also
support the enterprises by advising them as to how should they mitigate the risks associated
with International Trade transactions. The bank can guide them as to which financial product
should they invest in with regard mitigation of Credit, Market or Operational Risks.
PROMOTING GREATER RELIANCE ON TECHNOLOGY:
Indian Bank is the most advanced bank as far as technology and its implementation in
banking transactions are concerned. Despite this a good percentage of transactional work is
carried out manually. There is huge scope for automation of process which can help the
bank provide services with greater efficiency and accuracy.
In addition a section of work is carried out manually and eventually transferred in the
electronic format. This indicates that still complete reliability on the technology does not
exist. Therefore, a training program explaining the technology and the contingency
arrangements in place can help promote reliance on technology. Hence, it can greatly
contribute in effective and efficient functioning of banking processes.
Appointing more number of Relationship Managers:
A relationship manager should be attached with each client, who not only will collect the
documents required for processing but will also make the client aware of the risk associated
with forex.
Also bank should promote its employees working in Trade Finance to take up an exam in
Documentary Credit so that they get a better understanding of the subject. Also they will find
themselves growing.
Organizing workshops related to trade finance
Bank should organize workshops on import and export business credit facilities available for
export and import of goods and services, risk management while exporting and importing,
various opportunities available for benefits of existing and potential exporters.
66
GLOSSARY OF TERMS
1. Invoice: A commercial document issued by the seller, indicating the products,
quantities and agreed price for the products or services provided to the buyer.
2. Packing List: A document containing information regarding details of the goods
shipped (materials contained, quantity and so on) to the buyer.
3. Certificate of Test: A quality certificate issued to confirm that the goods confirm to
the quality standards as required in the original Purchase Order.
4. Certificate of Origin: A document issued by Chambers of Commerce and Industry
confirming that the goods exported have been manufactured in India.
5. Bill of Lading: Issued by a shipping company to the shipper as a receipt for the
goods, a memorandum of the contract of carriage and a document of title.
6. Bill of Entry: A document issued by the customs department indicating that the
goods have arrived at the Port of Destination.
7. Shipping Bill: A document issued by the customs department indicating that the
goods have reached the Port of Loading.
8. Airway Bill: It refers to a receipt issued by an international courier company for
goods as an evidence of the contract of carriage.
9. Issuing Bank: Bank which issues Letter of Credit on behalf of the Importer to
facilitate the contract of trade.
10. Advising Bank: Bank which scrutinizes the Letter of Credit issued by the issuing
bank and confirms that the exporter can execute the contract of trade.
11. Fund Based Credit: A credit facility in which there is transfer of funds from the
bank into the account of the borrower.
12. Non Fund Based Credit: A facility in which there is no transfer of fund from the
bank to the borrower. However, the responsibility of the bank arises when there is a
default on the part of the banks client.
13. 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.
14. 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 banks own country.
.
67
REFERENCES
http://www.pnbindia.in/
http://www.dgft.gov.in/
http://www.eximguru.com/exim/guides/export finance/ch_1_payment_methods_in_export_import.aspx
http://en.wikipedia.org/wiki/Trade_finance
http://www.tradefinancemagazine.com/AboutUs/Stub/WhatIsTradeFinance.html
http://www.tradefinance.com/
http://www.tradefinancepaths.com/4903.html
http://en.wikipedia.org/wiki/Letter_of_credit
http://banking.about.com/od/businessbanking/a/letterofcredit.htm
http://rbi.org.in/
http://www.iibf.org.in/scripts/pns1_ru_ucp.asp
http://files.myopera.com/eictms/files/UCP600vsUCP500.pdf
BIBLIOGRAPHY
Trade Finance, Indian Institute of Banking & Finance, 3rd Edition, Taxxman Publications
(P) Limited
Export Import Procedures & Documentations, khushpat S Jain, 8th edition, Himalyan
Publishing House
Cowdell P, Hyde D, International Trade Finance, 6th Edition
68
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1

ANALYSIS OF INTERNATIONAL TRADE FINANCE AT CATEGORY B BRANCH

A PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENT

UNDER THE GUIDANCE OF

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT,

HARSH KHANNA, PGDM(F

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT,

Certified that HARSH KHANNA has successfully completed Project Study

Mr. HARSH KHANNA

Dr. DEEPAK TANDON

HARSH KHANNA, PGDM(F

HARSH KHANNA, PGDM(F)

HARSH KHANNA, PGDM(F)

OBJECTIVES OF THE STUDY

Rationale of the study

Interaction with various importers and exporters at the bank

FEMA Rules and Regulations

HARSH KHANNA, PGDM(F

REVIEW OF THE EARLIER STUDIES

HARSH KHANNA, PGDM(F)

The Indian Banking Industry

HARSH KHANNA, PGDM(F)

HARSH KHANNA, PGDM(F)

Structure of the Indian Banking Industry

HARSH KHANNA, PGDM(F

Indian Foreign Exchange Market - Basic Information

Composition of the Indian Market

HARSH KHANNA, PGDM(F)

HARSH KHANNA, PGDM(F)

Functions of Authorized Dealers:

To make arrangement with Foreign Correspondent.

Buying and Selling foreign Currencies

Handling of Inward and Outward Remittance

Opening of L/C and Settlement of Payment

Investment in Foreign Trade

Opening & maintenance of Accounts with Foreign Banks under intimation of

International Trade Financing

HARSH KHANNA, PGDM(F

Foreign Exchange Business Operation

HARSH KHANNA, PGDM(F

HARSH KHANNA, PGDM(F)

There are certain basic differences between the two

Civil Offence provides a fair

Violation under FERA - treated as

Onus on the enforcement agency Onus lies with the accused to

HARSH KHANNA, PGDM(F)

Revised limits (in

Earlier Limits (in

Basic Travel Quota

HARSH KHANNA, PGDM(F)

VARIOUS PRODUCTS IN Foreign Exchange Business Segment

HARSH KHANNA, PGDM(F

MODALITIES OF TRADE FINANCE

Simplified Process Flow in case of a typical International Transaction:

Banks are concerned with:

HARSH KHANNA, PGDM(F)

Mode of Movement of funds can be as follows:

Documents ascertaining movement of goods, which consists of:

Modes of International trade finance

HARSH KHANNA, PGDM(F

HARSH KHANNA, PGDM(F)

HARSH KHANNA, PGDM(F)

HARSH KHANNA, PGDM(F

provide any guarantee of payment.