Trade Finance

TOLANI COLLEGE OF COMMERCE
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INDEX
1. WHAT IS TRADE FINANCE
2. HISTORY OF TRADE FINANCE
3. METHODS OF PAYMENT SYSTEM
3.1. KEY POINTS
3.2. CASH-IN-ADVANCE
3.3. LETTER OF CREDIT
3.4. DOCUMENTARY COLLECTION
3.5. OPEN ACCOUNT
4. REAL TIME GROSS SETTELMENT
4.1. IMPORTANCE OF REAL TIME GROSS SETTELMENT
4.1. i. CHIPS
4.1. ii . SWIFT
4.1. iii . FEDWIRE
4.1. iv. CHAPS
5. IMPORTANCE OF TRADE FINANCE
5.1. GENERAL CONSIDERATION
5.1. i. FINANCING CAN MAKE THE SALE
5.1. ii. FINANCING COST
5.1. iii. FINANCING TERM
5.1. iv. RISK MANAGEMENT


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5.2. BANKS/ LENDERS ARE GENERAL CONCERED
6. DOCUMETARY COLLECTION (D/C)
6.1. KEY POINTS
6.2. TYPICAL SIMPLIFIED D/C TRANSACTION FLOW
6.3. DOCUMENTS AGAINSTS PAYMENT (D/P) COLLECTION
6.4. DOCUMENTS AGAINSTS ACCEPTANCE (D/A) COLLECTION
7. TYPES OF PAYMENT SYSTEM
7.1. PRE-SHIPPMENT TRADE FINANCE
7.1.i. DIFFERENT STAGES OF PRE-SHIPMENT TRADE FINANCE
7.2. POST-SHIPMENT TRADE FINANCE
7.2.i. FEATURES OF POST-SHIPMENT TRADE FINANCE
7.2.ii. FINANCING FOR VARIOUS POST-SHIPMENT FINANCE
7.2.iii. TYPES OF EXPORTERS OF POST-SHIPMENTFINANCE
7.3. FACTORING AND FORFITING
DIFFERNCE BETWEEN FACTORING & FORFITING
7.3. i. a. EXPORT FACTORING
7.3. i. b. FACTORING OF MECHANISM
7.3. i. c. TYPES OF FACTORING
7.3. i. d. DIFFERENT MODEL OF FACTORING
I. TWO FACTOR SYSTEM
II. DIRECT FACTORING
7.3. i. e. FEE TYPE DESCRIPTION


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7.3. ii. a. EXPORT FORFITING
7.3. ii. b. FORFITING MECHANISM
7.3. ii. c. DOCUMENTARY REQUIREMENT
7.3. ii. d. BENEFITS TO EXPORTER
7.3. ii. e. FEE TYPE DESCRIPTION
7.4. EXPORT WORKING CAPITAL
7.4. i. KEY POINTS
7.4. ii. WAYS IN WHICH WORKING CAPITAL IS PROVIDED
7.4. iii. CHARACTERISTICS OF AN EXPORT WORKING CAPITAL
7.5. EXPORT CREDIT INSURANCE
7.5. i. KEYPOINTS
7.5. ii. COVERAGE
7.5. iii. PROS & CONS OF EXPORT IMPORT BANKS
7.5. iv. AN EXPORT PROMATION INSTITUTION
7.5. v. CHARACTERISTICS OF EXPORT CREDIT INSURANCE
7.6. LETTER OF CREDIT
7.6. i. DEFINITION
7.6. ii. ILLSTRATIVE LETTER OF CREDIT TRANSACTIONS
7.6. iii. TYPES OF LETTER OF CREDIT


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8. CASE STUDY
BANKERS GET READY FOR REBOUND IN WORLD WIDE
9. CONCLUSION
10. BIBLOGRAPHY


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What is trade finance?
Trade Finance has been reviewing the global trade market since 1983. The remit of what we
cover is somewhat broad, and as the market evolves to meet the requirements of financing
global trade, so our content has changed.
There are various definitions to be found online as to what trade finance is, and the choice
of words used is interesting. It is described both as a science and as an imprecise term
covering a number of different activities. As is the nature of these things, both are accurate.
In one form it is quite a precise science managing the capital required for international
trade to flow. Yet within this science there are a wide range of tools at the financiers
disposal, all of which determine how cash, credit, investments and other assets can be
utilized for trade.
In its simplest form, an exporter requires an importer to prepay for goods shipped. The
importer naturally wants to reduce risk by asking the exporter to document that the goods
have been shipped. The importers bank assists by providing a letter of credit to the
exporter (or the exporter's bank) providing for payment upon presentation of certain
documents, such as a bill of lading. The exporter's bank may make a loan to the exporter on
the basis of the export contract.


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Below I have outlined the various ways in which trade is financed by banks beyond the
basic financial transaction described above which I would refer to as traditional trade
finance. I have divided this extended definition into the sectors which Trade Finance as a
channel for the latest news and analysis for this market strives to cover.
Other forms of trade finance can include Documentary collection, trade credit insurance,
export factoring, and forfaiting. Some forms are specifically designed to supplement
traditional financing, such as transactional equity (a product developed by IIG Capital
LLC), which can assist the borrower in funding the down payment required by a bank
before it extends credit.
[1]
In many countries, trade finance is often supported by quasi-
government entities known as export credit agencies that work with commercial banks and
other financial institutions.
Since secure trade finance depends on verifiable and secure tracking of physical risks and
events in the chain between exporter and importer, the advent of new methodologies in the
information systems world has allowed the development of risk mitigation models which
have developed into new advanced finance models.
[citation needed]
This allows very low risk
payment advances to exporters to be made, while preserving the importers normal payment
credit terms and without burdening the importers balance sheet. As the world progresses
towards more flexible, growth oriented funding sources post the the global banking crisis,
the demand for these new methodologies has increased dramatically amongst exporters,
importers and banks.
Trade finance refers to financing international trading transactions. In this financing
arrangement, the bank or other institution of the importer provides for paying for goods
imported on behalf of the


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HISTORY OF TRADE FINANCE

History of international trade in ancient times-Important happenings:

The important trading activities, which took place in the ancient period can be summarized
as under:
According to Periplus Maris Erythraei, which is a Greek travel manuscript, written in
the 1st century CE, there used to be extensive trade between Romans and the Indians.
The Arabian nomads carried out long distance trading activities with the help of
camels. They traded silk and spices in Far East.
The Tyrian fleet of ships known as "Ships of Tarshish", sailed back with ivory, silver,
gold and precious stones from the east.
The Egyptians carried out extensive trading activities in the Red Sea. They imported
spices from Arabia and from the "Land of Punt".
Ptolemaic dynasty, which is a Greek dynasty, was the first to carry out trade with
India, long before the Romans did.
People belonging to the Kingdom of Qataban, cultivated and traded aromatics as well
as spices. The Kingdom's economy was dependent on this trade. Spices and aromatics
were exported to Abyssinia, Mediterranean and Arabia.
Berencie and Myos Hormos became important trading ports during the 1st century
BCE.
There was an increased demand in aromatics with Indian culture being introduced in
Java and Borneo. These places assume importance as reputed trading points. These
were to cater to the Arab as well as Chinese markets, in the years to come.
Pre Islamic Meccans benefited from demand of Romans for luxury articles. For this,
the Pre Islamic Meccans used the Incense Route.
Myos Hormos, Arsinoe and Berenice were three main Roman ports, where goods
brought in from East Africa were set ashore.
In the above paragraphs, we also get to see some of the important trading ports during the
ancient times. These trading ports served as corridors to other nations.


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History of international trade in the middle ages- Important events
The Song Dynasty created the first paper printed money. Aden, Siraf, Damietta and
Alexandria were used as ports through, which the Abassids entered China and India.
Industrial manufacturing, processing and distribution of wine, tea, salt was
nationalized by Wang Anshi of China.
Market rights as well as trading privileges were secured by Hanseatic League in
England for goods in the year 1157.
Brocade workshops as well as silk mills were supported by the Song Dynasty in Kafeing
and eastern province.
History of international trade in modern times- some important events:
Foreign trade licenses were introduced by Japan to prevent piracy and smuggling in
the year 1592.
Dutch convoys sails back in the year 1599 with products from East India. The convoy
also brings in spices.(600,000 pounds).
Dutch East India Company is established in the year 1602. The company declares
bankruptcy in 1799 because of a rise in competition in free trade.
The French constructed military forts during the eighteenth century. These forts acted
as trading and communication ports for trade of fur.
History of international trade in later modern era:
During the reign of Napoleon III, the Free Trade Agreement(year-1860) was struck
between France and Britain.
In the year 1815, first nutmeg shipment sailed back from Europe.
In 1868, Japanese Meiji Restoration opened its doors for industrialization by means
of free trade.
In the year 1946, the Bretton Woods System was introduced. This international
economic model was introduced to stop wars and depressions.
In 1947, as many as 23 nations give their consent to the implementation of GATT
(General Agreement On Tariffs And Trade).
Formation of Zangger Committee takes place in 1971. It was set up with a view of
interpreting nuclear goods in perspective of international trade.
International trade of nuclear goods was moderated by Nuclear Suppliers Group or
NSG, which was established in the year 1974.
NAFTA was formed on 1st January, 1994.
On 1st January, 1995, the World Trade Organization or the WTO came into being to
promote free trade between various nations.


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The journey from the "Land of Punt" to the WTO, has been a long one and in each
step, people have responded to situations depending on the needs of the time.


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Methods of Payment in International Trade
To succeed in todays global marketplace, exporters must offer their customers attractive
sales terms supported by the appropriate payment method to win sales against foreign
competitors. As getting paid in full and on time is the primary goal for each export sale, an
appropriate payment method must be chosen carefully to minimize the payment risk while
also accommodating the needs of the buyer. As shown below, there are four primary
methods of payment for international transactions. During or before contract negotiations, it
is advisable to consider which method in the diagram below is mutually desirable for you
and your

Key Points
International trade presents a spectrum of risk, causing uncertainty over the timing of
payments between the exporter (seller) and importer (foreign buyer).
To exporters, any sale is a gift until payment is received.
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.
To importers, any payment is a donation until the goods are received. 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.


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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.
Letters of Credit
Letters of credit (LCs) are among the most secure instruments available to international
traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made
to the exporter provided that the terms and conditions have been met, as verified through the
presentation of all required documents. The buyer pays its bank to render this service. An
LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but
you are satisfied with the creditworthiness of your buyers foreign bank. An LC also
protects the buyer since no payment obligation arises until the goods have been shipped or
delivered as promised.
Documentary Collections
A documentary collection is a transaction whereby the exporter entrusts the collection of a
payment to the remitting bank (exporters bank), which sends documents to a collecting
bank (importers bank), along with instructions for payment. Funds are received from the
importer and remitted to the exporter through the banks involved in the collection in
exchange for those documents. Documentary collections involve the use of a draft that
requires the importer to pay the face amount either on sight (document against payment
D/P) or on a specified date in the future (document against acceptanceD/A). The draft
lists instructions that specify the documents required for the transfer of title to the goods.
Although banks do act as facilitators for their clients under collections, documentary
collections offer no verification process and limited recourse in the event of nonpayment.
Drafts are generally less expensive than letters of credit.


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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.


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REAL TIME GROSS SETTLEMENT (RTGS)

RTGS system is a transfer mechanism where transfer of money
takes place from one bank to another on a real time and on
gross basis. This is the fastest possible money transfer system
through the banking channel. Settlement in real time means
payment transactions are settled as soon as they are processed.
Gross settlement means the transaction is settled on one to one
basis without bunching with any other transaction.
World over, the central banks manage RTGS systems because the
all banks in a country maintain a current account with the central
bank.

IMPORTANCE OF REAL TIME GROSS SETTLEMENT
(RTGS) PAYMENT SYSTEMS AND FACILITIES
WORLDWIDE:
CHIPS:
Technology is now central to the clearing of transactions. In United
States, where almost all foreign exchange transactions are cleared,
a computer based Clearing House Interbank Payment System
(CHIPS) handles tens of thousands of payment s representing
transactions worth several hundred billion dollars each day.
CHIPS can be thought of as a sort of international bankers play
money. During the day, all international banks making dollar
payments to one another pass this CHIPSS money to one another


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in lieu of real money. At the end of the day the game master totals
up everybodys CHIPS money to see the net amount that is owed
by who to whom ,and real money (Fed Funds) is transferred in
that amount. Also known as CHAPS, Clearing House Automated
Payment System.
SWIFT:
The improvement in the domestic US clearing system utilized for
international transactions has been followed by improvement in
international bank communications that link national clearing
system. Banks from 17 countries formed the Society for
Worldwide Interbank Financial Telecommunications i.e. SWIFT
that began operations at the end of1977.SWIFT consist of national
data concentration centers, which are connected by leased
telephone lines to operating centers in Belgium ,the Netherlands,
and United States. SWIFT uses internet/intranet messaging with
high level security. SWIFT has largely replaced interbank transfer
made by drafts and checks. The system today offers global
coverage. There are provisions for non-bank clients to plug-in the
system directly. SWIFT provides member banks that operate to
correspondents the same payment service as that available to the
few multinational banks that have an extensive network of wholly
owned affiliates.


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FEDWIRE
The international financial community has worked over time on
initiative to strengthen the global financial infrastructure. As one
of these initiatives, the Committee Payment and Settlement System
(CPPS) of the central banks of the Group of Ten countries develop
the Core Principles for Systemically Important Payment Systems
(core Principles).
As RTGS system for the United States and U.S. dollar, the Federal
Reserve Banks Fedwire Funds Service (Fedwire) plays a critical
role in the implementation of United States monetary policy
through the settlement of domestic money market transactions.
Fedwire is also an important vehicle for time-critical payments
related to the settlement of commercial payments and financial
market transactions.
Fedwire is an automated communications and settlement system
linking the Federal Reserve Bank (US) with other banks and with
depository institutions. Fedwire is a RTGS system owned and
operated by the Reserve Banks that enables participants to make
final payments in central bank money. Fedwire consist of set of a
computer applications that route and settle payment orders.


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CHAPS (United Kingdom)
CHAPS is one of the largest RTGS in the world offering Members,
and around 400 financial institutions utilizing agency arrangement
through direct mechanism for both their sterling and euro RTGS
payment requirements. CHAPS Euro is accepted as an efficient
means of accessing RTGS services in Europe and indeed, is the
second largest component in the cross border payments element of
the European RTGS mechanism.


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IMPORTANCE OF TRADE FINANCE

Trade Finance is a specific topic within the financial services industry. Its
much different, for example, than commercial lending, mortgage lending or insurance. A
product is sold and shipped overseas, therefore, it takes longer to get paid. Extra time and
energy is required to male sure that buyers are reliable and creditworthy. In addition,
foreign buyers are just like domestic buyers prefer to delay payment until they receive and
resell the goods. Due diligence and careful financial management can mean the difference
between profit and loss on each transaction. Trade Finance provide alternative solution that
balance risk and payment.
In this overview, Well outline the two broad categories of trade finance:
-shipment Financing to produce or purchase the material and labor necessary to
fulfill the sales order.
Post-shipment Financing in order to generate immediate cash while offering payment to
buyers.

GENERAL CONSIDERATION
The following factors and considerations apply to financing in general:

(i)FINANCING CAN MAKE THE SALE
In some cases, favorable payment terms make a product more competitive. If the
competition offers better terms and has a similar product, a sale can be lost. In other cases,
the exporter may need financing to produce the goods ort o other aspects of sale, such as
promotion and selling cost, engineering modification, and shipping cost. Various financing
source are available to exporters, depending on the specifics of the transaction and to
exporters overall financing needs.
(ii) FINANCING COST
The costs of borrowing, including interest rates, insurance and fees will vary. The total cost
and its effects on the price of the product and profit from the transaction should be well
understood before a pro-forma invoice is submitted to the buyer.

(iii) FINANCING TERM
Costs increase with the length of terms. Different methods of financing are available for
short, medium, and long terms. Exporters need to be fully aware of financing limitations so
that they secure the right solution with the most favorable terms for seller and buyer.


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(iv)RISK MANAGEMENT
The greater the risk associated with the transaction, the grater the cost. The creditworthiness
of the buyer directly affects the probability of payment to an exporter, but it is not the only
factor of concern to potential lender. The political and economic stability of the buyers
country are also taken into consideration.

Banks/Lenders are generally concerned with two questions:
Can the exporter perform?
They want to know that the exporter can produce and ship the product on time, and that the
product will be accepted by the buyer.
Can the buyer pay?
They want to know that the buyer is reliable with the good credit history. They will evaluate
any commercial or political risk.

If a lender is uncertain about the exporters ability to perform, or if additional credit capacity
is needed, government guarantee programs are available that may enable the lender to
provide additional financing.


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Documentary Collections

A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection
of payment to the remitting bank (exporters bank), which sends documents to a collecting
bank (importers bank), along with instructions for payment. Funds are received from the
importer and remitted to the exporter through the banks involved in the collection in
exchange for those documents. D/Cs involve the use of a draft that requires the importer to
pay the face amount either on sight (document against paymentD/P) or on a specified date
in the future (document against acceptanceD/A). The draft lists instructions that specify
the documents required for the transfer of title to the goods. Although banks do act as
facilitators for their clients under collections, documentary collections offer no verification
process and limited recourse in the event of nonpayment. Drafts are generally less expensive
than letters of credit (LCs).


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Key Points
D/Cs are less complicated and less expensive than LCs.
Under a D/C transaction, the importer is not obligated to pay for goods prior to
shipment.
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.
Banks that play essential roles in transactions utilizing D/Cs are the remitting bank
(exporters bank) and the collecting bank (importers bank).
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.

Typical Simplified D/C Transaction Flow
1. The exporter ships the goods to the importer and receives in exchange the documents.
2. The exporter presents the documents with instructions for obtaining payment to its
bank.
3. The exporters remitting bank sends the documents to the importers collecting bank.
4. The collecting bank releases the documents to the importer upon receipt of payment.
5. Or the collecting bank releases the documents on acceptance of draft from the
importer.
6. The importer then presents the documents to the carrier in exchange for the goods.
7. Having received payment, collecting bank forward proceeds the remitting bank.
8. Once payment is received ,the remitting bank credits the exporters account.
Documents Against Payment (D/P) Collection

Under a D/P collection, the exporter ships the goods, and then gives the documents to his
bank, which will forward them to the importers collecting bank, along with instructions on
how to collect the money from the importer. In this arrangement, the collecting bank
releases the documents to the importer only on payment for the goods. Upon receipt of
payment, the collecting bank transmits the funds to the remitting bank for payment to the
exporter.
Time of Payment: After shipment, but before documents are released
Transfer of Goods: After payment is made on sight
Exporter Risk: If draft is unpaid, goods may need to be disposed


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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 the remitting bank for payment to the
exporter.

Time of Payment: On maturity of draft at a specified future date
Transfer of Goods: Before payment, but upon acceptance of draft
Exporter Risk: Has no control of goods and may not get paid at due date

When to Use Documentary Collections
Under D/C transactions, the exporter has little recourse against the importer in case of
nonpayment. Thus, the D/C mechanism should only be used under the following conditions:
The exporter and importer have a well-established relationship.
The exporter is confident that the importing country is stable politically and
economically.
An open account sale is considered too be risky, but LC is also to expensive for the
importer.

CHARASTERISTIC OF A DOCUMENTS COLLECTION:
Applicability
Recommended for use in established trade relationships and in stable export markets.
Risk
Exporter is exposed to more risk as D/C terms are more convenient and cheaper than an LC
to
the importer.
Pros
Bank assistance in obtaining payment
The process is simple, fast, and less costly than LCs
Cons
Banks role is limited and they do not guarantee payment
Banks do not verify the accuracy of the documents0 U.S. Department of Commerce


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TYPE OF PAYMENT SYSTEM


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PRE-SHIPMENT TRADE FINANCE

Pre-shipment finance is credit granted to the exporters by a financial institution. Pre-
shipment credit is a part of working capital finance. The main objectives behind pre-
shipment finance are:

(a) Procure raw materials.

(b) Carry out manufacturing process.

(c) Provide a secure warehouse for goods and raw material.
(d)Process and pack the goods.
(e) Ship the goods to the buyers.
(f)Meet other financial costs of the business.

TYPES OF PRE-SHIPMENT FINANCE

-shipment
finance is extended in the following forms:

t in Foreign Currency (PCFC).


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DIFFERENT STAGES OF PRE-SHIPMENT FINANCE

The following are different stages of pre-shipment finance :

(1)APPRISAL AND SANCTION OF LIMITS

Pre-shipment finance or packing credit is essentially a working capital advance made
available for the specific purpose for procuring/processing/manufacturing of goods meant
for export. All costs before shipment would be eligible for being financed under the packing
credit. Packing credit advance should be liquidated from export proceeds only. While
considering credit facilities for export activities, banks look specifically into the aspects of
product profile, country profile and the commodity profile. The bank also look 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, service of the institutions like ECGC or
international consulting agencies like Dun and Brad Street ,etc may be utilized.

The Bank extends the packing credit facilities after ensuring the following:
-fide exporter and has a good standing
in the market.

to deal is under the list of
Restricted Cover Countries (RCC).

(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.

There are special types of export activities that may be seasonal in nature, in which the
exporter may not be able to produce the export or derat time of availing Packing Credit. In
these cases, the bank may provide a special packing credit facility, known as Running
Account Packing Credit. Before disbursing, the bank specifically checks for the following
particulars in the submitted documents:
a) Name of the Buyer.
b) Commodity to be exported.
c) Quantity.
d) Value (either CIF or FOB).
e) Last date of shipment/negotiation.
f) Any other terms to be compiled with.


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The quantum of finance is fixed on the FOB value of the contract / LC or on the domestic
value of goods, whichever is lower. Normally insurance and freight charges are considered
at 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/Bankers 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 days extension on its own discretion, without referring to RBI.

(3)FOLLOW-UP OF PACKING CREDIT ADVANCE

Exporter needs 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
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 interval.

(4)LIQUIDIATION OF PACKING CREDIT ADVANCE

Packing Credit Advance will always be liquidated with export proceed of the relevant
shipment. At this stage, the pre-shipment credit will be converted into post-shipment credit
will be converted into post-shipment credit. Packing Credit Advance can also be liquidated
with proceeds of payment receivable from Government of India. This payment includes the
duty drawback, payment from the Market Development Fund (MDF) of the Central
Government 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.

(5)OVERDUE PACKING

If the borrower fails to liquidate the packing credit on the due date/extended due date, the
bank considered it an over due. In case of overdue position persists, the bank takes steps to
realize its dues as per usual recovery procedures. Nursing programm may be initiated, if
found feasible.


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POST SHIPPMENT TRADE FINANCE

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.

FEATURES
The features of post-shipment finance are:

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

Post-shipment finance is provided against evidence of shipment of goods or supplies made
to the importer or any other designated agency.

Post-shipment finance can be secured or unsecured, Since the finance is extended against
evidence of export shipment and banks obtain the document of title of goods, the finance is
normally self liquidating. In case that involve advances against undrawn balance, it is
unsecured in nature. Further, the finance is mostly a funded advance. In few cases, such as
financing of project exports, the issue of guarantees (retention money guarantees) is
involved, the financing is non funded in nature.

Post-shipment finance can be extended up to 100% of the value of goods. However, where
the domestic value of 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. This form of finance is not extended at the pre-shipment
stage.
Banks can also finance undrawn balance. In such cases banks are free to stipulate margin
requirements as per their usual lending norms.


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Post-shipment finance can be short term or long term, depending on the payment term
offered by the exporter to the overseas buyer. In case of cash export, the maximum period
allowed for realization of exports 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 maximum of 180 days. In case of deferred payment exports, requiring prior
approval of the Authorized dealer, RBI or EXIM Bank, post-shipment finance can be
extended at non-concessional rates up to the approved period.

FINANCING FOR VARIOUS TYPES OF EXPORTS
Post-shipment finance can be provided for three types of 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 export of capital goods and project exports, finance is sometime extended in the
name of overseas buyers. The disbursal of money is directly made to the domestic(Indian)
exporter.


28

TYPES OF POST-SHIPMENT FINANCE
The post-shipment finance can be classified as :

1. Export Bills purchased/discounted.
2. Export Bills negotiated.
3. Advance against export bills sent on collection basis.
4. Advance against export on consignment basis.
5. Advance against undrawn balance on exports.
6. Advance against receivables from Government of India.


29

FACTORING & FORFITING


30
EXPORT FACTORING

Export factoring is a complete financial package that combines export working capital
financing, credit protection , foreign accounts receivable bookkeeping and collection
services. A factor is a bank or a specialized financial firm that performs financing through
the purchase of invoices or accounts receivable. Export factoring is offered under an
agreement between the factor and exporter, in which the factor purchases the exporters
short-term foreign accounts receivable for cash at a discount from the face value, normally
without recourse, and assumes the risk on the ability of the foreign buyer to pay, and
handles collections on the receivables. Thus, by virtually eliminating the risk of nonpayment
by foreign buyers, factoring allows the exporter to offer open accounts, improves liquidity
position, and boosts competitiveness in the global marketplace. Factoring foreign accounts
receivables can be a viable alternative to export credit insurance, long-term bank financing,
expensive short-term bridge loans or other types of borrowing that will create debt on the
balance sheet.


31
FACTORING OF MECHANISM

(i)Financing for the seller by way of advance payments.
(ii) Maintenances of account relating of account receivables.
(iii) Collection of account receivable.
(iv) Credit protection against default in payment by the buyer.

TYPE OF FACTORING
Domestic Factoring: Factoring that arises from transactions relating to domestic sales is
known as Domestic Factoring.
Disclosed Factoring: In this case, the name of the proposed Factor is mentioned on the face
of the invoice made out by the seller of goods. In this type of factoring, the payment has to
be made by the buyer directly to the Factor named in the invoice.
Undisclosed Factoring: Under undisclosed factoring, the name of the proposed Factor
finds no mention on the invoice made out by the seller of goods.
Discount Factoring: Under this, the Factor discounts the invoices of the seller at a pre-
agreed credit himself with the institutions providing finder.
Export Factoring: When the claims of an exporter are assigned to a banker or any financial
institution, and financial assistance is obtained on the strength of export documents and
guaranteed payments, it is called export factoring.
Cross Boarder Factoring: Cross Border Factoring involves the claims of an exporter
which are assigned to a banker or any finance institution in the importers country and
financial assistance is obtained on the export documents and guaranteed payments.
Full Service Factoring: It is also called old line factoring, whereby the Factor has no
recourse to the seller in the event of the failure of the buyers to make prompt payment of
their dues to the Factor, which might result from financial inability / insolvency /
bankruptcy of the buyer.


32

DIFFERENT MODEL OF FACTORING
It can be done in two distinct model

1. A TWO-FACTOR SYSTEM
It essentially involves in export factor in the country of seller (exporter) and its corresponding factor in
(import factor) in the country of debtor (importer). The corresponding factor typically performs a mutually
agreed set of services to the export factor. It could be any one or both the below mentioned services:

(i) Credit Guarantee Protection: The import factor undertakes to pay the export factor in the
events the importer fails to pay by specified period after the due date. The importer factor
sets up the limits in the buyer present in that country and the export factor discount invoice
for the customers based on these limits. The credit guarantee protection cover insolvency/
protection defaults of the buyer, However it dose not cover trade dispute.
(ii) Collection Services: The import factor undertakes to follow up with debtors for payment
and incase were the payment is not forthcoming they would be in a position detect early
indication as they would be based in the same location and they would be familiar with the
local business intelligence as well as practices.
The factoring quotes given by various import factors would differ depending on their
location and comfort regarding the overseas buyer. In this situation, the export factor
would need to monitor its correspondent relation with various import factors across the
globe. Also the possibility of undertaking any factoring business by the export factor
would be depend on the response of the import factors for each transaction.
2. DIRECT FACTORING
Factoring can also be offered by availing credit insurance for the entire factoring portfolio.
Credit insurance will cover insolvency/protracted default by the buyer as well as country
risk but it would not cover trade disputes. The credit insurer will set up limits on overseas
buyers and based on these limits export bills would be discounted. There after, detail of the
invoice would be passed on to the collection agency that will follow up for payment with
the overseas buyer. In case, the overseas buyer does not respond, the collection agent can
monitor potential default cases, so that credit insurer can be informed in advance. Using
services of a collection agency could reduce significantly the delay sand to some extent the
uncertainty in payments from overseas buyers.


33
FEE TYPE DESCRIPTION
FINANCE CHARGE:
This computed on pre -payment outstanding in the exports account at monthly intervals.
SERVICE FEE:
Service charge is a nominal charge levied at monthly intervals to cover
the cost of services, For example collection, sales ledger management and
periodical MIS reports. It ranges from 0.1% to 0.3% on the total value of invoices
factored/collected by the bank.


34
EXPORT FORFAITING

Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their
medium term foreign account receivables at a discount on a without recourse basis. A
forfaiter is a specialized finance firm or a department in banks that performs non-recourse
export financing through the purchase of medium-term trade receivables. Similar to
factoring, forfaiting virtually eliminates the risk of nonpayment, once the goods have been
delivered to the foreign buyer in accordance with the terms of sale. However, unlike factors,
forfaiters typically work with the exporter who sells capital goods, commodities, or large
projects and needs to offer periods of credit from 180 days to up to seven years. In
forfaiting, receivables are normally guaranteed by the importers bank, allowing the
exporter to take the transaction off the balance sheet to enhance its key financial ratios. The
current going minimum transaction size for forfaiting is $100,000. In the United States,
most users of forfaiting have been large established corporations, although small- and
medium-size companies are slowly embracing forfaiting as they become more aggressive in
seeking financing solutions for countries considered high risk.


35

FORFITING IS A MECHANISMOF FINANCING OF EXPORTER:

(i)By discounting export receivables.
(ii) Evidence of bill of exchange or promissory note.
(iii) Without recourse the seller (the exporter).
(iv) Carrying medium to long term matuirites.
(v) On a fixed rate basis (discount).
(vi) Up to 100% of the contract value.


36


37
DOCUMENTARY REQUIREMENT
In case of Indian exporters availing forfaiting facility, the forfeiting transaction is to be
reflected in the following three documents associated with an export transaction, in the
manner suggested below:
Invoice:
Forfaiting discount, commitment fees, etc. need to be shown separately, instead, these could
be built into the FOB price, stated on the invoice.
Shipping Bill and GR form:
Details of the forfaiting costs are to be included along with the other details, such as FOB
price, commission insurance, normally included in the Analysis of Export Value on the
Shipping Bill. The claim for duty drawback if any is to be certified only with reference to
the FOB value of the export stated on the shipping bill and GR form.


38
BENEFIT TO EXPORTER

Without recourse and not occupying exporters credit line. That is to say once the exporter
obtains the financed und, he will be except from the responsibility to repay the debt.

Receivables become current cash inflow and it is beneficial to the exporter to improve
financial status and liquidation ability so as to heighten further the fund raising capabilities.

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

Advanced Tax Refund
Through Forfaiting, the exporter can make the verification of export and get tax refund in
advance just after financing .

Forfaiting business enables the exporters to transfer various risks resulted from deferred
payment, such as interest-rate risk, currency risk, credit risk and political risk to the
forfaiting bank.

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


39
FEE TYPE DISCRIPTION
COMMITMENT FEE:
This is payable to the forfaiter for his commitment to execute a specific forfaiting
transaction at a firm discount rate within a specified time. It ranges between 0.5% to 1.5%
per annum of the unutilized amount to be forfaited and is charged for the period between the
date the discounting takes place or until the validity of the forfait contract, whichever is
earlier.
DISCOUNT FEE:
This is the interest cost payable by the exporter for the entire period of credit involved and
is deducted by the forfaiter from the amount paid to the exporter against the availed
promissory notes or bills of exchange.


40
EXPORT WORKING CAPITAL :

Export working capital (EWC) financing allows exporters to purchase the goods
and services they need to support their export sales. More specifically, EWC
facilities extended by commercial banks can provide a means for exporters who
lack sufficient internal liquidity to process and acquire goods and services to
fulfill export orders and extend open account terms to their foreign buyers. EWC
funds are commonly used to finance three different areas: (1) materials, (2)
labor, and (3) inventory(stock), but they can also be used to finance receivables
generated from export sales and/or standby letters of credit used as performance
bonds or payment guarantees to foreign buyers. An unexpected large export
order or many incremental export orders can often place challenging demands
on working capital. EWC financing helps to ease and stabilize the cash flow
problems of exporters while they fulfill export sales and grow competitively in
the global market.


41
Key Points
Funds may be used to acquire materials, labor, inventory, goods and services
for export.
A facility can support a single export transaction (transaction specific short-
term loan) or multiple export transactions (revolving line of credit) on open
account terms.
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.


42
WAYS IN WHICH WORKING CAPITAL IS PROVIDED:
Where and How to Obtain an Export Working Capital Facility
Commercial banks offer facilities for export activities. To qualify, exporters
generally need to
(1) Be in business profitably for at least 12 months (not necessarily in
exporting),
(2) Demonstrate a need for transaction-based financing, and
(3) Provide documents to demonstrate that a viable transaction exists.
To ensure repayment of a loan, the lending bank may place a lien on the assets
of the exporter, such as inventory and accounts receivable. In addition, all export
sale proceeds will usually be collected by the lending bank before the balance is
passed on to the exporter. Fees and interest rates are usually negotiable between
the lender and the exporter.

Short-term Loans or Revolving Lines of Credit
There are basically two types of export working capital facilities: transaction
specific short-term loans and revolving lines of credit. Short-term loans, which
are appropriate for large and periodic export orders, are typically used in
situations where the outflows and inflows of funds are accurately predictable in
time. These loans can be contracted for 3, 6, 9, or 12 months and the interest
rates are usually fixed over the requested tenors. Revolving lines of credit, on
the other hand, are appropriate for a series of small fractional export orders as
they are designed to cover the temporary funding needs that cannot always be
predictable. These revolving lines of credit have a very flexible structure so that
you can draw funds against your current account at any time and up to a
specified limit.
Why a Government Guarantee May Be Needed
The Export-Import Bank of the United States and the U.S. Small Business
Administration offer programs that guarantee export working capital facilities to
U.S. exporters. With these programs, U.S. exporters are able to obtain needed
facilities from commercial lenders when financing is otherwise not available or
when their borrowing capacity needs to be increased. Advance rates offered by


43
commercial banks on export inventory and foreign accounts receivables are not
always sufficient to meet the needs of exporters. In addition, some lenders do
not lend to exporters without a government guarantee due to repayment risk
associated with export sales. More detailed information is provided in Chapter 7.

Why Risk Mitigation May Be Needed
While export working capital financing will certainly make it possible for
exporters to offer open account terms in todays highly competitive global
markets, the use of such financing itself does not necessarily eliminate the risk
of nonpayment by foreign customers. In order to offer open credit terms more
confidently in the global market, the use of some forms of risk mitigation may
be needed. In addition, the use of risk mitigation may be necessary for exporters
to obtain export working capital financing. For example, the bank may require
the exporter to obtain export credit insurance as a condition of providing
working capital and financing exports.

Characteristics of An ExPORT WorkingCapital Facility
Applicability: To purchase raw materials, supplies, and equipment to fulfill a
large export sales order or many Small exporter sales order.

Risk: Without the use of proper risk mitigation measures, the exporter is
exposed to significant risk of nonpayment.

Pros
Can fulfill export sales orders
Can offer open account terms to remain competitive

Cons
Cost of financing a facility
Risk mitigation may be needed, incurring additional costs


44

EXPORT CREDIT INSURANCE

Export credit insurance (ECI) protects an exporter of products and/or services against the
risk of nonpayment by a foreign buyer. In other words, ECI significantly reduces the
payment risks associated with doing business internationally by giving the exporter
conditional assurance that payment will be made in the event that the foreign buyer is
unable to pay. Simply put, with an ECI policy, exporters can protect their foreign
receivables against a variety of risks, which could result in nonpayment by foreign buyers.
The policy generally covers commercial risksinsolvency of the buyer, bankruptcy or
protracted defaults (slow payment), and certain political riskswar, terrorism, riots, and
revolution, as well as currency inconvertibility, expropriation, and changes in import or
export regulations. The insurance is offered either on a single-buyer or portfolio multi-buyer
basis for short-term (up to one year) and medium-term (one to five years) repayment
periods.


45
Key Points
ECI allows you to offer competitive open account terms to foreign buyers while
minimizing the risk of nonpayment.
Creditworthy buyers could default on payment due to circumstances beyond their
control.
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.
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.
How Much Does It Cost?
Premiums are individually determined on the basis of risk factors such as country, buyers
creditworthiness, sales volume, sellers previous export experience, etc. Most multi-buyer
policies cost less than 1 percent of insured sales while the prices of 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.
Where Can I Get Export Credit Insurance?
ECI policies are offered by many private commercial risk insurance companies as well as
the Export-Import Bank of the United States (Ex-Im Bank), the government agency that
assists in financing the export of U.S. goods and services to international markets. U.S.
exporters are strongly encouraged to shop for a good specialty insurance broker who can
help them select the most cost-effective solution for their needs. Reputable, well-established
companies that sell commercial ECI policies can be easily found on the Internet. You may
also buy ECI policies directly from Ex-Im Bank. In addition, a list of active insurance
brokers registered with Ex-Im Bank is available at www.exim.gov or you may call 1-800-
565-EXIM for more information.


46
Pros and Cons of Ex-Im Banks Export Credit Insurance
Offers coverage in emerging foreign markets where private insurers may not operate.
Exporters electing an Ex-Im Bank Working Capital Guarantee may receive a 25
percent premium discount on Multi-buyer Insurance Policies.
Ex-Im Bank insurance policies are backed by the full faith and credit of the U.S.
government.
Offers enhanced support for environmentally beneficial exports.
The products must be shipped from the United States and have at least 50 percent
U.S. content.
Unable to support military products or purchases made by foreign military entities.
Support for exports may be closed or restricted in certain countries per U.S. foreign policy

AN EXPORT PROMOTION INSTITUTION:

1. Provides credit risk covers to Exporters against non payment risks of the overseas buyers
country in respect of the exports made.
2. Provides credit Insurance covers to banks against lending risks of exporters
3. Assessment of buyers for the purpose of underwriting
4. Preparation of country reports
5. International experience to enhance Indian capabilities
6. An ISO organization excelling in credit insurance services
7. Rated AAA by CRISIL for claim paying ability


47

CHARACTERISTICS OF EXPORT CREDIT INSURANCE:
Applicability
Recommended for use in conjunction with open account terms and export working capital
financing.
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.
Pros
Reduce the risk of nonpayment by foreign buyers
Offer open account terms safely in the global market
Cons
Cost of obtaining and maintaining an
insurance policy
Deductiblecoverage is usually below 100 percentage


48
LETTER OF CREDIT


49
DEFINITION
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the
correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be
required to cover the full or remaining amount of the purchase

Letters of credit are often used in international transactions to ensure that payment will be
received. Due to the nature of international dealings including factors such as distance, differing
laws in each country and difficulty in knowing each party personally, the use of letters of credit
has become a very important aspect of international trade. The bank also acts on behalf of the
buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank
receives a confirmation that the goods have been shipped. A letter of credit is a document that a
financial institution or similar party issues to a seller of goods or services which provides that the
issuer will pay the seller for goods or services the seller delivers to a third-party buyer.The issuer
then seeks reimbursement from the buyer or from the buyer's bank. The document serves
essentially as a guarantee to the seller that it will be paid by the issuer of the letter of credit
regardless of whether the buyer ultimately fails to pay. In this way, the risk that the buyer will
fail to pay is transferred from the seller to the letter of credit's issuer.
Letters of credit are used primarily in international trade for large transactions between a supplier
in one country and a customer in another. In such cases, the International Chamber of Commerce
Uniform Customs and Practice for Documentary credits applies (UCP 600 being the latest
version). They are also used in the land development process to ensure that approved public
facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit
are the supplier, usually called the beneficiary, 'theissuing bank,' of whom the buyer is a client,
and sometimes an advising bank, of whom the beneficiary is a client. Almost all letters of credit
are irrevocable, i.e., cannot be amended or canceled without the consent of the beneficiary,
issuing bank, and confirming bank, if any. In executing a transaction, letters of credit incorporate
functions common to giros and Traveler's cheques.


50
ILLSTRATIVE LETTER OF CREDIT TRANSACTIONS
The importer arranges for the issuing bank to open an letter of credit in favor of the exporter
.
The issuing bank transmits the letter of credit to the advising bank, forwards it to the exporter.
The exporters forwards the goods and documents to a freight forwarder.
The freight forwarder he goods and submits the documents to the advising bank.
The advising bank checks the documents for compliance with letter of credit and pays to the
exporter.
The importers account at the issuing bank is debited.
The issuing bank releases the documents to the importer to the claims the goods from the
carrier.


51
TYPES OF LETTER OF CREDIT
IRREVOCABLE LETTER OF CREDIT
Letter of credit can be issued as revocable or irrevocable. Most of letter of credits are
irrevocable, which means they not be changed or cancelled unless both the buyers and sellers
agree. If the letter of credit does not whether it is revocable or irrevocable, it automatically
defaults to irrevocable. Revocable letter of credits are occasionally used between they parent
company and their subsidiaries conducting business across borders.
CONFIRMED LETTER OF CREDIT
A greater degree of protection is afforded to exporter when a letter of credit is issued by foreign
bank (the importers issuing bank) is confirmed by U.S. bank (the exporters advising bank). This
confirmation means that the U.S. bank adds its guarantee to pay the exporter to that of foreign
bank .If the letter of credit is not confirmed, the exporter is to the payment risk of foreign bank
and the political risk of the importing country .Exporter must consider confirming letter of
credits if they are credit standing of foreign bank or when they are operating in high-risk market,
where political upheaval, economics collapse ,devaluation or exchange controls put the payment
at high risk.
SPECIAL LETTER OF CREDIT
Letter of credits can take many forms. When letter of credit is issued transferable, the payment
obligation under the original letter of credit can be transferred to one or more second
beneficiaries. With revolving letter of credit, the issuing bank restores the credits to its original
amount once it has been drawn down. Standby letter of credits can be used in lieu of security or
cash deposits as secondary payment mechanism.


52
CASE STUDY
BANKERS GET READY FOR REBOUND IN WORLD TRADE

Trade finance and risk management services are in growing demand as world trade
recovers and credit issues remain a concern.

By Gordon Platt

The outlook for global trade is improving as the world economy recovers, and trade bankers are
gearing up to handle the growing volumes while helping their customers introduce new
efficiencies in their global supply chains. Some 90% of world trade involves some type of credit,
insurance or guarantee, according to the World Trade Organization.

Lack of financing was part of the reason for a decline in world trade last year, the first time
global trade shrank since 1982. Normally, structured trade finance is countercyclical. When the
economy slows and liquidity dries up, traders demand letters of credit to lower the risk of doing
business. This time around was different in some important ways, however, due to the scope and
severity of the financial crisis.

Before the crisis hit, it was normal to treat credit as a commodity that was available when needed
at an affordable price. With the popping of the credit bubble following the bankruptcy of
Lehman Brothers, liquidity became scarce, and financial institutions became fearful to lend.
Banks and corporations became extremely cautious about whom they chose to do business with.

Emerging markets were especially threatened when the withdrawal of trade credits in late 2008
severed their lifeline to the global markets. Trade finance pricing went through the roof, and a lot
of transactions did not get done because credit was simply not available.

Major trade banks, working with export credit agencies (ECAs) and multilateral institutions,
such as the International Finance Corporation (IFC), developed innovative financial products and
stood behind their customers during the credit crunch. They found new ways to lower risks,
restore trust and accelerate trade cash flows for their customers.


53

Global Finance editors, with input from industry analysts, corporate executives and technology
experts, selected the best trade finance providers in 71 countries or regions. Criteria for choosing
the winners included transaction volume, scope of global coverage, customer service,
competitive pricing and innovative technology.

Most banks integrate trade finance services with cash
management and foreign exchange advisory services. Besides issuing documentary credits and
guarantees, banks lend against invoices, issue packing credits, handle credit inquiries from
overseas counterparties and offer many other trade-related services.

Bankers say there is enough trade finance capability in the market to handle current needs, but
they are working to ensure that they are in a position to support their customers when demand
grows. During the next 18 months there will be a lot of government involvement in economies
around the world, as large infrastructure and power plant projects are started, bankers say. The
weak dollar puts the United States in a very price-competitive position. US-based companies will
be able to bid aggressively to build power plants in India, for example. The need for alternative
energy sources is growing to forestall climate change, and the US is the leading center of green
technology, creating opportunities for export gains. Trade bankers are optimistic about their
prospects in the year ahead, not only in the US but all around the world.


54
CONCLUSION
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 GMS economies and contribute to
trade expansion and facilitation. However, the best long-term solution in resolving
the constraints in trade financing is to encourage the growth and development of a
vibrant and competitive financial system, comprising mainly private sector players.
This point is important as some of the government-supported trade financing
schemes may increasingly challenged by competing countries as unfair export
subsidies under existing and future WTO rules.

The role of the government and other parties involved in trade finance will need to
evolve along with the countrys economy. Underlying the functions provided by
the different players is the need for a clear and effective legal environment. The
commercial legal system must be transparent. Laws of property, contract and
arbitration must be clear. The commercial legal environment must be integrated
with the financial infrastructure framework in order for it to be effective.


55

BIBLOGRAPHY

http://www.eximbank.com
http://www.exim.net.
http:// www.investopedia.com
http:// www.forex.com
http:// www.jpg.

BOOKS
International Treasury Management
By IIBF
International Banking & Finance
By K.Viswanathan
Trade Finance Guide
By U.S. Department of commerce

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