TRADE FINANCE PRODUCTS

Group No 1

Banking & Insurance presentation

INTRODUCTION

Trade finance is related to international trade Banks, Financial Institutions can facilitate the Trade by financing the trade. Important to both Importer & Exporter Exporting enables SMEs to diversify their portfolios and insulates them against periods of slower growth most famous products / services offered by various Financial Institutions in Trade Finance- LC

PURPOSE

Trade finance is of vital importance to the global economy, with the World Trade Organization estimating that 80 to 90% of global trade is reliant on this method of financing.

TRADE FINANCE PRODUCTS

Letter of credit Documentary collections Forfaiting Open account Working capital Promissory note Export factoring Export credit insurance Counter trade and consignment Structured commodity finance

LETTER OF CREDIT (LC)

A letter of credit is a promise by a bank on behalf of the buyer to pay the seller a specified sum in the agreed currency, provided that the seller submits the required documents by a predetermined deadline.

Advantage for the seller : The security that the supply of goods will be paid.
Advantage for the buyer : The security that payment will be effected only against delivery of the agreed documents. Documents : B/L , Commercial Invoice Packing List, Weight List, Certificate of Origin, Insurance Doc, Forwarder's Certificate of Receipt,Sea Waybill

Illustrative Letter of Credit Transaction

DOCUMENTARY COLLECTIONS

Recommendation documentary collections under following circumstances: There needs to be a relationship of trust between the exporter and the importer. There must be no doubt as to the importer's willingness and ability to pay. The importing country must be politically, economically and legally stable.

International payment transactions with the importing country must not be hampered or threatened by currency controls or any other such restrictions.

Forfaiting

Forfaiting is the discounting of international trade receivable on a 100% "without recourse" basis. These are normally supported by the buyers bank and hence have an implicitly obligor risk, which is primarily a bank or financial institution risk. The forfeiter deducts interest (in form of discount) and pays the residual proceeds to you on non-recourse basis.

How it works ?

You ship goods or provide services as per contract and submit necessary documentation to India Factoring or India Factorings Bankers. Trade documents are transmitted to the importers bank for acceptance and assignment of proceeds to India Factoring. On receipt of such confirmation, India Factoring pays discounted proceeds to you on a non-recourse basis.

Benefits

Forfaiting eliminates virtually all risk to the exporter, with 100 percent financing of contract value. Exporters can offer medium and long-term financing in markets where the credit risk would otherwise be too high. Eliminates the risk of non-payment by foreign buyers

Why forfaiting has not developed?

Relatively new concept in India. Depreciating Rupee High minimum cost of transactions (USD 250,000/-) RBI Guidelines are vague. Very few institutions offer the services in India. Exim Bank alone does.

Lack of awareness.

Open account

An open account transaction in international trade is a sale where the goods are shipped and delivered before payment is due, which is typically in 30, 60 or 90 days. Obviously, this option is advantageous to the importer in terms of cash flow and cost, but it is consequently a risky option for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms.

Characteristics of an Open Account Transaction

Applicability Risk Pros Cons

How to Offer Open Account Terms in Competitive Markets

(a)Export working capital financing: Exporters

who lack sufficient funds to extend open accounts in the global market need export working capital financing that covers the entire cash cycle, from the purchase of raw materials through the ultimate collection of the sales proceeds.

(b) Export credit insurance: It allows exporters to increase

sales by offering more liberal open account terms to new and existing customers.
(c) Export factoring: It allows an exporter to ship on open

account as the factor assumes the financial liability of the importer to pay and handles collections on the receivables.

Export Working Capital Financing

EWC allows exporter to purchase goods and services needed to support their export sales EWC facilities are provided by commercial bank who lack internal liquidity EWC funds are used to finance three different areas Material

Labor
Inventory EWC helps the exporter to ease the cash flow problem of exporter and grow in the competitive market

Where and how to obtain EWC

To obtain EWC ,exporter generally need to be: To be in business profitably for at least 12 months (not necessarily in exporting) demonstrate a need for transaction-based financing provide documents to demonstrate that a viable transaction exists.

To ensure repayment of loan lending bank place a lien on the exporter

Fees and interest are negotiable

Types of EWC loan

Short term loan

Resolving line of credit

Characteristics

Funds may be used to acquire materials, labour, inventory, goods and services for export. The term of a transaction specific loan is generally up to one year and a revolving line of credit may extend up to three years A government guarantee may be needed to obtain a facility that can meet your export needs. Risk mitigation may be needed to offer open account terms confidently in the global market.

Promissory note

A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date The specified time of payment may be written as:

a) whenever there is a demand, b) on a specific date, c) Installments with or without the interest included in each installment

Legal limitation to the amount of interest charged Usury

uncollectible.

Export credit Insurance

It is not available to individuals. Premium is charged monthly. Characteristics Applicability

Risk
Pros cons

Key points

Even creditworthy buyers could default Exporters can increase export sales lenders are more willing to increase the exporters borrowing capacity ECI does not cover physical loss or damage to the goods

Coverage

Short term ECI Medium term ECI

EXPORT FACTORING

FACTOR is a bank or a specialized financial firm that performs financing through the purchase of accounts receivable. It is offered under an agreement between the factor and exporter. Risk of non-payment by buyer is VIRTUALLY eliminated.

characteristics

APPLICATION RISK PROS CONS

WORKING

Countertrade

1.
2.

Some of the forms of counter trade include:

Barter - direct exchange of goods between two parties
Counter purchase - parallel barter

Continued sale and purchase of goods 3. Buy-back - repayment of exports made by the sale of related product.

Consignment

Method of payment in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. whatever the importer sells is paid for and goods not sold returned

Characteristics of Consignment
Applicability Recommended for use in competitive environments to enter new markets and increase sales in partnership with a reliable and trustworthy foreign distributor Risk Significant risk to the exporter because payment is required only after the goods have been sold to the end customer

Advantages Help enhance export competitiveness on the basis of greater availability and faster delivery of goods Help reduce the direct costs of storing and managing inventory Disadvantages Exporter is not guaranteed payment Additional costs associated with risk mitigation measures

Structured Commodity Finance

Traditional trade finance method Applicable to 3 main trade finance commodity groups:

Metals & mining Energy products Soft commodities (agricultural crops) Commodity producers Trading companies Liquidity management Risk mitigation

Finance technique utilized by;

It provides;

Contd...

Process SCF techniques include ;

Pre export finance Barter Inventory finance

Mostly used in new emerging market as high risk is involved.

Role of government in trade finance

Crucial in emerging economies. Traders have restricted access to financing. Govt. can play;

Direct role : Direct provision of trade finance or credit guarantees Indirectly : by facilitating the formation of trade financing enterprises.

Government can also extend the assistance by supporting multiple cheaper credit or other financial schemes.

Central Bank Refinancing Schemes Export-Import Bank (EXIM Bank) Export credit insurance agencies

Central Bank Refinancing Schemes :

Rediscount the commercial bills of exporters at preferential rates. Provide the cheap post-shipment financing necessary for exporters. Quickly turn around funds for further export business.

Export-Import Bank (EXIM Bank): Caters the needs of exporters, importers & foreign investors. Long term direct loans to foreign buyers. Ex. United states EXIM Bank ,1934. Financing of US exports and Medium Term Transaction (181 days to 5 years ).

Export Credit Insurance Agencies : Bridge between Banks & Exporters. Secure & beneficial to have export agency. Support from Trade Promotion Organisations: Credit to traders is risk to Bank. Strength & Weakness of Traders. TPOs are government agencies.

Conclusion

A proactive role of governments in trade finance may alleviate the lack of trade finance in emerging economies and contribute to trade expansion and facilitation. However, the best long-term solution in resolving the constraints in trade financing is to encourage the growth and development of a vibrant and competitive financial system, comprising mainly private sector players.