Appendix: 1 INTERNATIONAL TRADE FINANCE Project submitted to H & G H Mansukhani Institute of Management in partial fulfillment of the requirements for Master in Management Studies By KAPIL P. ISRANI Roll No: 16 Specialization MMS (FINANCE) Batch: 2010 - 2012
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Appendix: 1
INTERNATIONAL TRADE FINANCE
Project submitted to
H & G H Mansukhani Institute of Management
in partial fulfillment of the requirements for
Master in Management Studies
By
KAPIL P. ISRANI Roll No: 16
Specialization MMS (FINANCE)Batch: 2010 - 2012
Under the guidance of
(Prof. ANJALI SAWLANI)
Appendix 2:
INTERNATIONAL TRADE FINANCE
Project submitted to
H & G H Mansukhani Institute of Management
in partial fulfillment of the requirements for
Master in Management Studies
By
KAPIL P. ISRANIRoll No: 16
Specialization MMS (FINANCE)Batch: 2010 - 2012
Under the guidance of
(Prof. ANJALI SAWLANI)
Appendix: 3
H & G H Mansukhani Institute of ManagementUlhasnagar
Student’s Declaration
I hereby declare that this report submitted in partial fulfillment of the requirement of MMS Degree
of University of Mumbai to H & G H Mansukhani Institute of Management. This is my original
work and is not submitted for award of any degree or diploma or for similar titles or prizes.
Name : KAPIL P. ISRANI
Class : MMS FINANCE
Roll No. : 16
Place : Ulhasnagar
Date :
Students Signature :
Appendix: 4
Certificate
This is to certify that the dissertation submitted in partial fulfillment for the award of MMS degree
of University of Mumbai to H & G H Mansukhani Institute of Management is a result of the
bonafide research work carried out by Mr. KAPIL P. ISRANI under my supervision and
guidance, no part of this report has been submitted for award of any other degree, diploma or other
similar titles or prizes. The work has also not been published in any journals/Magazines.
Date
Place: Ulhasnagar
Internal Guide External Guide
(Miss Anjali Sawlani) (Mr. K.V. Bandekar)
Director
Dr. Swati Sabale
EXECUTIVE SUMMARY
The project ‘INTERNATIONAL TRADE FINANCE’ is a detailed study of the Import, Export, &
Foreign Exchange Market of India with the main objective of making a successful career in the
sector by getting placed with one of the Foreign Exchange companies.
The project has explored the need for trade finance and introduced some of the most common trade
finance tools and practices. A proactive role of governments in trade finance may alleviate the lack
of trade finance in emerging economies and contribute to trade expansion and facilitation.
Recent times have witnessed remarkable growth in international transactions. With the fast growing
international oriented transactions in business enterprise. The different areas which play vital role in
growth of Global Trade Finance market such as Methods of Payments of International Trade, Letter
of credit, and concept of Forfeiting, Factoring, and Buyers Credit, Pre shipment & Post Shipment
Financing and Role of ECGC in foreign exchange market.
While doing this project, different aspect of ECB, Buyers Credit, concept of LIBOR & Margins in
Interest Rate were studied. Trade financing in India is in nascent stage in order to explore foreign
exchange market & smooth functioning of transactions the government should undertake some
initiative to with-stand among the developed countries.
Needless to say, no text paper or text book by itself can convey the full richness of either the
theoretical development or subtleness if practice in its chosen fields. This Project is a sincere
attempt to provide a basic understanding of the complexities of international trade of world finance
in simple manner.
INTRODUCTION
The absence of an adequate trade finance infrastructure is, in effect, equivalent to a barrier to trade.
Limited access to financing, high costs, and lack of insurance or guarantees are likely to hinder the
trade and export potential of an economy, and particularly that of small and medium sized
enterprises. As explained earlier, trade facilitation aims at reducing transaction cost and time by
streamlining trade procedures and processes. One of the most important challenges for traders
involved in a transaction is to secure financing so that the transaction may actually take place. The
faster and easier the process of financing an international transaction, the more trade will be
facilitated. Traders require working capital (i.e., short-term financing) to support their trading
activities. Exporters will usually require financing to process or manufacture products for the export
market before receiving payment. Such financing is known as pre-shipping finance. Conversely,
importers will need a line of credit to buy goods overseas and sell them in the domestic market
before paying for imports. In most cases, foreign buyers expect to pay only when goods arrive, or
later still if possible, but certainly not in advance. They prefer an open account, or at least a delayed
payment arrangement. Being able to offer attractive payments term to buyers is often crucial in
getting a contract and requires access to financing for exporters. Therefore, governments whose
economic growth strategy involves trade development should provide assistance and support in
terms of export financing and development of an efficient financial infrastructure. There are many
types of financial tools and packages designed to facilitate the financing of trade transactions. This
introduces three types, namely:
o Trade Financing Instruments;
o Export Credit Insurances; and
o Export Credit Guarantees
The primary purpose of the foreign exchange is to assist international trade and investment, by
allowing businesses to convert one currency to another currency. For example, it permits a US
business to import British goods and pay Pound Sterling, even though the business' income is in US
dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation
on the change in interest rates in two currencies.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a
quantity of another currency. The modern foreign exchange market began forming during the 1970s
after three decades of government restrictions on foreign exchange transactions (the Bretton Woods
system of monetary management established the rules for commercial and financial relations among
the world's major industrial states after World War II), when countries gradually switched
to floating exchange rates from the previous exchange rate regime, which remained fixed as per
the Bretton Woods system.
FEMA ACT 1999 Defines Foreign Exchange as “Foreign Exchange means & includes:
a) All deposits, credits and balances payable in foreign currency, and any drafts, traveler’s
Cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency and payable
in any foreign currency.
b) Any instrument payable at the option of the drawee or holder, thereof or any other party thereto,
either in Indian currency or in foreign currency, or partly in one and partly in the other”.
DEALING IN FOREIGN EXCHANGE
In India dealing in foreign exchange is permitted only with the approval of RBI. RBI is the
authority to administer exchange control in India. It also has the responsibility to maintain the
external value of rupee. AD is person authorised by RBI in the form of a license to deal in foreign
exchange. In addition to above category to buy & sell foreign currency / coins and FTC called
money changers like hotels and business establishments.
Sr. No. SOURCES / INFLOW USES / OUTFLOW
1 INWARD REMITTANCE OUTWARD
DD/MT/TT/CREDIT
CARD
REMITTANCE
DD/MT/TT/CREDIT
CARD
2 REMITTANCE TO
NRE/FCNR(B)/NRO
ACCOUNTS
OUTWARD
REMITTANCE
3 EXPORT RECEIVABLES IMPORT PAYMENTS
4 BORROWINGS BY
COMPANIES, AID &
LOANS
LOAN REPAYMENT,
LOAN SERVICING
5 TOURIST INCOME TOUR, TRAVEL
RELATED PAYMENTS,
EXPORT RELATED
PAYMENTS LIKE
COMMISSION etc.
SETTLEMENTS OF ACCOUNTS
Whenever, there is an international trade and inflow and outflow of foreign exchange, there
must be some mechanism for settlement of these transactions. The need for settlement leads to
opening of accounts by banks in other countries.
1. NOSTRO ACCOUNT
Banks in India are permitted to open foreign currency accounts with bank abroad. IOB
having an account with American Express Bank – New York is a Nostro Account. It is
“OUR ACCOUNT WITH YOU”. When an Indian bank issue a foreign currency draft,
payable abroad on a correspondent bank, the Nostro Account of the Indian bank is debited
and the amount paid to the beneficiary. In the same way when the bill or Cheques is received
for collection the proceeds will be credit to the Nostro Account Only.
Nostro accounts are usually in the currency of the foreign country. This allows for easy cash
management because currency doesn't need to be converted.
Nostro is derived from the latin term "ours."
2. VOSTRO ACCOUNT
It is the account in India in Indian rupees maintained by overseas bank. It Citi Bank, New York
opens an account with IOB in India it is a Vostro Account. It is “YOUR ACCOUNT WITH
US”. Any draft, TC, issued by overseas correspondent in Indian rupees is paid in India, to the
debt of vostro account.
The account a correspondent bank, usually U.S. or UK, holds on behalf of a foreign bank. Also known as a loro
account.
3. LORO ACCOUNT
This terminology is used when one bank refeers to the NOSTRO account of another bank. If
IOB and SBI maintain nostro account with ABN AMRO Frankfurt, IOB, will refer to SBI
account as LORO account “IT IS THEIR ACCOUNT WITH YOU”
4. MIRROR ACCOUNT
As the very name suggests it is the reflection of “NOSTRO ACCOUNT”. The banks maintain
the REPLICA of the NOSTRO account they have with the foreign banks. There mirror accounts
mainly helps in reconciliation of the account and is maintained in both foreign currency and in
Indian rupees.
METHODS OF PAYMENT IN INTERNATIONAL TRADE
To succeed in today’s global marketplace, exporters must offer their customers attractive sales
terms supported by the appropriate payment method to win sales against foreign competitors. As
getting paid in full and on time is the primary goal for each export sale, an appropriate payment
method must be chosen carefully to minimize the payment risk while also accommodating the needs
of the buyer. As shown below, there are four primary methods of payment for international
transactions. During or before contract negotiations, it is advisable to consider which method in the
diagram below is mutually desirable for you and your customer.
Ninety-five percent of the world’s consumers live outside of the United States, so if you are only
selling domestically, you are reaching just a small share of potential customers. Exporting enables
small and medium-sized exporters (SMEs) to diversify their portfolios and insulates them against
periods of slower growth. Free trade agreements have opened in markets such as Australia, Canada,
Central America, Chile, Israel, Jordan, Mexico, and Singapore, creating more opportunities for U.S.
businesses.
DETERMINANTS OF INTERNATIONAL PAYMENT
o TRADE FINANCE
Offers a means to convert export opportunities into sales by managing the risks associated with
doing business internationally, particularly the challenges of getting paid on a timely basis.
O OPPORTUNITIES
a) Helps companies reach the 95 percent of non-U.S. customers worldwide
b) Diversifies SME customer portfolios
O RISKS
a) Nonpayment or delayed payment by foreign buyers
b) Political and commercial risks; cultural influences
KE
Y
POINTS
o International trade presents a spectrum of risk, causing uncertainty over the timing of payments
between the exporter (seller) and importer (foreign buyer)
o To exporters, any sale is a gift until payment is received
o Therefore, the exporter wants payment as soon as possible, preferably as soon as an order is
placed or before the goods are sent to the importer
o To importers, any payment is a donation until the goods are received
o Therefore, the importer wants to receive the goods as soon as possible, but to delay payment as
long as possible, preferably until after the goods are resold to generate enough income to make
payment to the exporter.
CASH-IN-ADVANCE
With this payment method, the exporter can avoid credit risk, since payment is received prior to the
transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used
cash-in-advance options available to exporters. However, requiring
Payment in advance is the least attractive option for the buyer, as this method creates cash flow
problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in
advance. Thus, exporters that insist on this method of payment as their sole method of doing
business may find themselves losing out to competitors who may be willing to offer more attractive
payment terms.
CHARACTERISTICS OF A CASH -IN -ADVANCE PAYMENT METHOD
1. APPLICABILITY
Recommended for use in high-risk trade relationships or export markets, and ideal for Internet-
based businesses.
2. RISK
Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the
importer.
3. PROS
a) Payment before shipment
b) Eliminates risk of nonpayment
4. CONS
a) May lose customers to competitors over payment terms
b) No additional earnings through financing operations
KEY POINTS
o Full or significant partial payment is required, usually via credit card or bank/wire transfer,
prior to the transfer of ownership of the goods.
o Cash-in-advance, especially a wire transfer, is the most secure and favorable method of
international trading for exporters and consequently, the least secure and attractive option
for importers. However, both the credit risk and the competitive landscape must be
considered.
o Insisting on these terms ultimately could cause exporters to lose customers to competitors
who are willing offer more favorable payment terms to foreign buyers in the global market.
o Creditworthy foreign buyers, who prefer greater security and better cash utilization, may
find cash-in-advance terms unacceptable and may simply walk away from the deal.
WIRE TRANSFER - CASH-IN-ADVANCE METHOD
An international wire transfer is commonly used and has the advantage of being almost immediate.
Exporters should provide clear routing instructions to the importer when using this method,
including the name and address of Silicon Valley Bank (SVB), the bank’s SWIFT address, and
ABA numbers, and the seller’s name and address, bank account title, and account number. This
option is more costly to the importer than other options of cash-in-advance method, as the fee for an
international wire transfer is usually paid by the sender.
CREDIT CARD—A VIABLE CASH-IN-ADVANCE METHOD
Exporters who sell directly to the importer may select credit cards as a viable method of cash-in-
advance payment, especially for consumer goods or small transactions. Exporters should check with
their credit card company(s) for specific rules on international use of credit cards as the rules
governing international credit card transactions differs from those for domestic use. As international
credit card transactions are typically placed via online, telephone, or fax methods that facilitate
fraudulent transactions, proper precautions should be taken to determine the validity of transactions
before the goods are shipped. Although exporters must endure the fees charged by credit card
companies, this option may help the business grow because of its convenience.
PAYMENT BY CHECK—A LESS-ATTRACTIVE CASH-IN-ADVANCE
METHOD
Advance payment using an international check may result in a lengthy collection delay of several
weeks to months. Therefore, this method may defeat the original intention of receiving payment
before shipment. If the check is in U.S. dollars or drawn on a U.S. bank, the collection process is the
same as any U.S. check. However, funds deposited by non-local check may not become available
for withdrawal for up to 11 business days due to Regulation CC of the Federal Reserve. In addition,
if the check is in a foreign currency or drawn on a foreign bank, the collection process is likely to
become more complicated and can significantly delay the availability of funds. Moreover, there is
always a risk that a check may be returned due to insufficient funds in the buyer’s account.
WHEN TO USE CASH-IN-ADVANCE TERMS
o The importer is a new customer and/or has a less-established operating history
o The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable
o The political and commercial risks of the importer’s home country are very high
o The exporter’s product is unique, not available elsewhere, or in heavy demand
o The exporter operates an Internet-based business where the use of convenient payment
methods is a must to remain competitive
LETTERS OF CREDIT
Letters of credit (LCs) are among the most secure instruments available to international traders. An
LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter
provided that the terms and conditions have been met, as verified through the presentation of all
required documents. The buyer pays its bank to render this service. An LC is useful when reliable
credit information about a foreign buyer is difficult to obtain, but you are satisfied with the
creditworthiness of your buyer’s foreign bank. An LC also protects the buyer since no payment
obligation arises until the goods have been shipped or delivered as promised.
CHARACTERISTICS OF A LETTER OF CREDIT
1. APPLICABILITY
Recommended for use in new or less-established trade relationships when you are satisfied
with the creditworthiness of the buyer’s bank.
2. RISK
Risk is evenly spread between seller and buyer provided all terms and conditions are
adhered to.
3. PROS
a) Payment after shipment
b) A variety of payment, financing and risk mitigation options
4. CONS
a) Requires detailed, precise documentation
b) Relatively expensive in terms of transaction costs
KEY POINTS
o An LC, also referred to as a documentary credit, is a contractual agreement whereby a bank
in the buyer’s country, known as the issuing bank, acting on behalf of its customer (the
buyer or importer), authorizes a bank in the seller’s country, known as the advising bank, to
make payment to the beneficiary (the seller or exporter) against the receipt of stipulated
documents.
o The LC is a separate contract from the sales contract on which it is based and, therefore, the
bank is not concerned whether each party fulfills the terms of the sales contract.
o The bank’s obligation to pay is solely conditional upon the seller’s compliance with the
terms and conditions of the LC. In LC transactions, banks deal in documents only, not
goods.
ILLUSTRATIVE LETTER OF CREDIT TRANSACTION
1. The importer arranges for the issuing bank to open an LC in favor of the exporter
2. The issuing bank transmits the LC to the advising bank, which forwards it to the exporter.
3. The exporter forwards the goods and documents to a freight forwarder.
4. The freight forwarder dispatches the goods and submits documents to the advising bank.
5. The advising bank checks documents for compliance with the LC and pays the exporter.
6. The importer’s account at the issuing bank is debited.
7. The issuing bank releases documents to the importer to claim the goods from the carrier.
IRREVOCABLE LETTER OF CREDIT
LCs can be issued as revocable or irrevocable. Most LCs is irrevocable, which means they may not
be changed or cancelled unless both the buyer and seller agree. If the LC does not mention whether
it is revocable or irrevocable, it automatically defaults to irrevocable. Revocable LCs is occasionally
used between parent companies and their subsidiaries conducting business across borders.
CONFIRMED LETTER OF CREDIT
A greater degree of protection is afforded to the exporter when a LC issued by a foreign bank (the
importer’s issuing bank) and is confirmed by Silicon Valley Bank (the exporter’s advising bank).
This confirmation means that Silicon Valley Bank adds its guarantee to pay the exporter to that of
the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the foreign
bank and the political risk of the importing country. Exporters should consider confirming LCs if
they are concerned about the credit standing of the foreign bank or when they are operating in a
high-risk market, where political upheaval, economic collapse, devaluation or exchange controls
could put the payment at risk.
SPECIAL LETTERS OF CREDIT
LCs can take many forms. When an LC is issued as transferable, the payment obligation under the
original LC can be transferred to one or more “second beneficiaries.” With a revolving LC, the
issuing bank restores the credit to its original amount once it has been drawn down. Standby LCs
can be used in lieu of security or cash deposits as a secondary payment mechanism.
DOCUMENTARY COLLECTIONS
A documentary collection is a transaction whereby the exporter entrusts the collection of
a payment to the remitting bank (exporter’s bank), which sends documents to a collecting
Bank (importer’s bank), along with instructions for payment. Funds are received from the importer
and remitted to the exporter through the banks involved in the collection in exchange for those
documents. Documentary collections involve the use of a draft that requires the importer to pay the
face amount either on sight (document against payment—D/P) or on a specified date in the future
(document against acceptance—D/A). The draft lists instructions that specify the documents
required for the transfer of title to the goods. Although banks do act as facilitators for their clients
under collections, documentary collections offer no verification process and limited recourse in the
event of nonpayment. Drafts are generally less expensive than letters of credit. Open Account an
open account transaction means that the goods are shipped and delivered before payment is due,
usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash
flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense
competition for export markets, foreign buyers often press exporters for open account terms since
the extension of credit by the seller to the buyer is
more common abroad. Therefore, exporters who are reluctant to extend credit may face the
possibility of the loss of the sale to their competitors. However, with the use of one or more of the
appropriate trade finance techniques, such as export credit insurance, the exporter can offer open
competitive account terms in the global market while substantially mitigating the risk of
nonpayment by the foreign buyer.
CHARACTERISTICS OF A DOCUMENTARY COLLECTION
1. APPLICABILITY
Recommended for use in established trade relationships and in stable export markets.
2. RISK
Exporter is exposed to more risk as D/C terms are more convenient and cheaper than an LC
to the importer.
3. PROS
a) Bank assistance in obtaining payment
b) The process is simple, fast, and less costly than LCs
c) DSO improved if using a draft with payment at a future date
4. CONS
a) Banks’ role is limited and they do not guarantee payment
b) Banks do not verify the accuracy of the documents
KEY POINTS
o D/Cs is less complicated and more economical than LCs.
o Under a D/C transaction, the importer is not obligated to pay for goods prior to shipment.
o The exporter retains title to the goods until the importer either pays the face amount on sight
or accepts the draft to incur a legal obligation to pay at a specified later date.
o SVB plays an essential role in transactions utilizing D/Cs as the remitting bank (exporter’s
bank) and in working with the collecting bank (importer’s bank).
o While the banks control the flow of documents, they do not verify the documents nor take
any risks, but can influence the mutually satisfactory settlement of a D/C transaction.
DOCUMENTS AGAINST PAYMENT (D/P) COLLECTION
A greater degree of protection is afforded to the exporter when an LC is issued by a foreign bank
(the importer’s issuing bank) and is confirmed by Silicon Valley Bank (the exporter’s advising
bank). This confirmation means that Silicon Valley Bank adds its guarantee to pay the exporter to
that of the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the
foreign bank and the political risk of the importing country. Exporters should consider confirming
LCs if they are concerned about the credit standing of the foreign bank or when they are operating
in a high-risk market, where political upheaval, economic collapse, devaluation or exchange
controls could put the payment at risk.
1. Time of Payment : After shipment, but before documents are released
2. Transfer of Goods : After payment is made on sight
3. Exporter Risk : If draft is unpaid, goods may need to be disposed
DOCUMENTS AGAINST ACCEPTANCE (D/A) COLLECTION
Under a D/A collection, the exporter extends credit to the importer by using a time draft. In this
case, the documents are released to the importer to receive the goods upon acceptance of the time
draft. By accepting the draft, the importer becomes legally obligated to pay at a future date. At
maturity, the collecting bank contacts the importer for payment. Upon receipt of payment, the
collecting bank transmits the funds to SVB for payment to the exporter.
1. Time of Payment : On maturity of draft at a specified future date
2. Transfer of Goods : Before payment, but upon acceptance of draft
3. Exporter Risk : Has no control of goods and may not get paid at due date
OPEN ACCOUNT
An open account transaction means that the goods are shipped and delivered before payment is due,
usually in 30 to 90 days. Obviously this is the most advantageous option to the importer in cash
flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense
competition for export markets, foreign buyers often press exporters for open account terms since
the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who
are reluctant to extend credit may face the possibility of the loss of the sale to their competitors.
However, with the use of one or more of the appropriate trade finance techniques, such as export
credit insurance, the exporter can offer open competitive account terms in the global market while
substantially mitigating the risk of nonpayment by the foreign buyer.
CHARACTERISTICS OF AN OPEN ACCOUNT
1. APPLICABILITY
Recommended for use
(1) In secure trading relationships or markets or
(2) In competitive markets to win customers with the use of one or more appropriate
trade finance techniques.
2. RISK
Exporter faces significant risk as the buyer could default on payment obligation after shipment
of the goods.
3. PROS
o Boost competitiveness in the global market
o Establish and maintain a successful trade relationship
4. CONS
o Exposed significantly to the risk of nonpayment
o Additional costs associated with risk mitigation measures
KEY POINTSo The goods, along with all the necessary documents, are shipped directly to the importer who
agrees to pay the exporter’s invoice at a future date, usually in 30 to 90 days.
o Exporter should be absolutely confident that the importer will accept shipment and pay at
agreed time and that the importing country is commercially and politically secure.
o Open account terms may help win customers in competitive markets, if used with one or
more of the appropriate trade finance techniques that mitigate the risk of nonpayment.
EXPORT CREDIT INSURANCE
Export credit insurance provides protection against commercial losses—default, insolvency,
bankruptcy, and political losses—war, nationalization, currency inconvertibility, etc. It allows
exporters to increase sales by offering liberal open account terms to new and existing customers.
Insurance also provides security to SVB in the event it considers providing working capital to
finance exports. Forfeiting (Medium-term Receivables Discounting) Forfeiting is a method of trade
financing that allows the exporter to sell its medium-term receivables (180 days to 7 years) to SVB
at a discount, in exchange for cash. With this method, the forfeiter assumes the risk of non-payment,
enabling the exporter to extend open account terms and incorporate the discount into the selling
price.
CHARACTERISTICS OF EXPORT CREDIT INSURANCE1. APPLICABILITY
Recommended for use in conjunction with open account terms and export working capital
financing.
2. RISK
Exporters share the risk of the uncovered portion of the loss and their claims may be denied in
case of non-compliance with requirements specified in the policy.
3. PROS
o Reduce the risk of nonpayment by foreign buyers
o Offer open account terms safely in the global market
4. CONS
o Cost of obtaining and maintaining an insurance policy
o Deductible—coverage is usually below 100 percent incurring additional costs
KEY POINTS
o ECI allows you to offer competitive open account terms to foreign buyers while minimizing
the risk of nonpayment.
o Creditworthy buyers could default on payment due to circumstances beyond their control.
o With reduced nonpayment risk, you can increase your export sales, establish market share in
emerging and developing countries, and compete more vigorously in the global market.
o With insured foreign account receivables, banks are more willing to increase your borrowing
capacity and offer attractive financing terms.
COVERAGE
Short-term ECI, which provides 90 to 95 percent coverage against buyer payment defaults, typically
covers
(1) Consumer goods, materials, and services up to 180 days, and
(2) Small capital goods, consumer durables and bulk commodities up to 360 days. Medium-term
ECI, which provides 85 percent coverage of the net contract value, usually covers large capital
equipment up to five years.
PRICING
Premiums are individually determined on the basis of risk factors such as country, buyer’s
creditworthiness, sales volume, seller’s previous export experience, etc. Most multi-buyer policies
cost less than 1 percent of insured sales while the prices of single-buyer policies vary widely due to
presumed higher risk. However, the cost in most cases is significantly less than the fees charged for
letters of credit. ECI, which is often incorporated into the selling price, should be a proactive
purchase, in that you have coverage in place before a customer becomes a problem.
FEATURES OF EX-IM BANK’S EXPORT CREDIT INSURANCE
o Offers coverage in emerging foreign markets where private insurers may not operate.
o Exporters electing an Ex-Im Bank Working Capital Guarantee may receive a 25 percent
premium discount on Multi-buyer Insurance Policies.
o Offers enhanced support for environmentally beneficial exports.
o The products must be shipped from the United States and have at least 50 percent U.S.
content.
o Unable to support military products or purchases made by foreign military entities.
o Support for exports may be closed or restricted in certain countries per U.S. foreign policy.
GOVERNMENT ASSISTED FOREIGN BUYER FINANCING
The role of government in trade financing is crucial in emerging economies. In the presence of
underdeveloped financial and money markets, traders have restricted access to financing.
Governments can either play a direct role like direct provision of trade finance or credit guarantees;
or indirectly by facilitating the formation of trade financing enterprises. Governments could also
extend assistance in seeking cheaper credit by offering or supporting the following:
o Central Bank refinancing schemes;
o Specialized financing institutes like
o Export-Import Banks or Factoring Houses;
o Export credit insurance agencies;
o Assistance from the Trade Promotion Organisation; and
o Collaboration with Enterprise Development
o Corporations (EDC) or State Trading
o Enterprises (STE).
CHARACTERISTICS OF GOVERNMENT ASSISTED FOREIGN BUYER
FINANCING
1. APPLICABILITY
Suitable for the export of high-value capital goods that require extended-term financing.
2. RISK
Ex-Im Bank assumes all risks.
3. PROS
o Buyer financing as part of an attractive sales package
o Cash payment upon shipment of the goods or services
4. CONS
o Subject to certain restrictions per U.S. foreign policy
o Possible lengthy process of approving financing
KEY POINTS
o Helps turn business opportunities, especially in emerging markets, into real transactions for
large U.S. exporters and their small business suppliers.
o Enables creditworthy foreign buyers to obtain loans needed for purchases of U.S. goods and
services, especially high-value capital goods or services.
o Provides fixed-rate direct loans or guarantees for term financing
o Available for medium-term (up to five years) and for certain environmental exports up to 15
years.
KEY FEATURES OF EX-IM BANK LOAN GUARANTEESI. Loans are made by SVB and guaranteed by Ex-Im Bank.
II. 100 percent principal and interest cover for 85 percent of U.S. contract price.
INTRODUCTION OF FORFEITINGForfeiting and Factoring are services in international market given to an exporter or seller. Its main
objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting
and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while
factoring is short termed receivables (within 90 days) and is more related to receivables against
commodity sales.
DEFINITION OF FORFEITINGThe terms forfeiting is originated from a old french word ‘forfait’, which means to surrender ones
right on something to someone else. In international trade, forfeiting may be defined as the
purchasing of an exporter’s receivables at a discount price by paying cash. By buying these
receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment
from the Importer.
HOW FORFEITING WORKS IN INTERNATIONAL TRADEThe exporter and importer negotiate according to the proposed export sales contract. Then the
exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details
about the importer, and other necessary documents, forfeiter estimates risk involved in it and then
quotes the discount rate.
The exporter then quotes a contract price to the overseas buyer by loading the discount rate and
commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter.
Export takes place against documents guaranteed by the importer’s bank and discounts the bill with
the forfeiter and presents the same to the importer for payment on due date.
COST ELEMENTThe forfeiting typically involves the following cost elements:
1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to execute a
specific forfeiting transaction at a firm discount rate within a specified time.
2. Discount fee, interest payable by the exporter for the entire period of credit involved and
deducted by the forfeiter from the amount paid to the exporter against the availed promissory notes
or bills of exchange.
SIX PARTIES IN FORFEITING
1. Exporter (India)
2. Importer (Abroad)
3. Export’s Bank (India)
4. Import’s Bank / Avalising Banks (Abroad)
5. EXIM Bank (India)
6. Forfaiter (Abroad)
BENEFITS TO EXPORTER
i. 100 per cent financingWithout recourse and not occupying exporter's credit line that is to say once the exporter
obtains the financed fund, he will be exempted from the responsibility to repay the debt.
ii. Improved cash flowReceivables become current cash inflow and its is beneficial to the exporters to improve
financial status and liquidation ability so as to heighten further the funds raising capability.
iii. Reduced administration costBy using forfeiting, the exporter will spare from the management of the receivables. The
relative costs, as a result, are reduced greatly.
iv. Advance tax refundThrough forfeiting the exporter can make the verification of export and get tax refund in
advance just after financing.
v. Risk reduction Forfeiting business enables the exporter to transfer various risk resulted from deferred
payments, such as interest rate risk, currency risk, credit risk, and political risk to the
forfeiting bank.
vi. Increased trade opportunity With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more
competitive in the market.
BENEFITS TO BANKSBanks can offer a novel product range to clients, which enable the client to gain 100% finance,
as against 8085% in case of other discounting products. Bank gain fee based income. Lower
credit administration and credit follow up.
DRAWBACKS OF FORFEITINGi. Non Availability of short periods
ii. Non availability for financially weak countries
iii. Dominance of western countries
iv. Difficulty in procuring international bank’s guarantee
DEFINITION OF FACTORING
This involves the sale at a discount of accounts receivable or other debt assets on a daily, weekly or
monthly basis in exchange for immediate cash. The debt assets are sold by the exporter at a discount
to a factoring house, which will assume all commercial and political risks of the account receivable.
In the absence of private sector players, governments can facilitate the establishment of a state-
owned factor; or a joint venture set-up with several banks and trading enterprises.
Definition of factoring is very simple and can be defined as the conversion of credit sales into cash.
Here, a financial institution which is usually a bank buys the accounts receivable of a company
usually a client and then pays up to 80% of the amount immediately on agreement. The remaining
amount is paid to the client when the customer pays the debt. Examples includes factoring against
goods purchased, factoring against medical insurance, factoring for construction services etc.
CHARACTERISTICS OF FACTORING
1. The normal period of factoring is 90 to 150 days and rarely exceeds more than 150 days.
2. It is costly.
3. Factoring is not possible in case of bad debts.
4. Credit rating is not mandatory.
5. It is a method of off balance sheet financing.
6. Cost of factoring is always equal to finance cost plus operating cost.
DIFFERENT TYPES OF FACTORING
1. Disclosed factoringIn disclosed factoring, client’s customers are aware of the factoring agreement.
Disclosed factoring is of two types:
Recourse factoringThe client collects the money from the customer but in case customer don’t pay the amount on
maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of
interest and is in very common use.
Nonrecourse factoringIn nonrecourse factoring, factor undertakes to collect the debts from the customer. Balance amount
is paid to client at the end of the credit period or when the customer pays the factor whichever
comes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate the
need for credit and collection departments in the organization.
2. UndisclosedIn undisclosed factoring, client's customers are not notified of the factoring arrangement. In this
case, client has to pay the amount to the factor irrespective of whether customer has paid or not.