PROJECT REPORT ON “ROLE OF BANKS IN INTERNATIONAL

TRADE”

Bachelor of Commerce (Banking & Insurance) Semester (V)

(2019-2020) Submitted By

LAKSHYA KATYAL (20)

Project Guide

PROF. VINAY JADHAV

Mithibai College of Arts, Chauhan Institute of Science & Amruthben Jivanlal

College of Commerce and Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile Parle (W),
Mumbai, Maharashtra 400056

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 “ROLE OF BANKS IN INTERNATIONAL TRADE”

Bachelor of Commerce (Banking & Insurance) Semester (V)

Submitted
In Partial Fulfilment of the requirements For the Award of Degree of

Bachelor of Commerce (Banking & Insurance)

By:

LAKSHYA KATYAL Roll No.: 20

Mithibai College of Arts, Chauhan Institute of Science & Amruthben Jivanlal

College of Commerce and Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile Parle (W),
Mumbai, Maharashtra 400056

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 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous, and
the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank Mithibai College for giving me chance to do this
project.

I would like to thank my Principal, Dr. Rajpal Shripat Hande for providing
the necessary facilities required for completion of this project.

I take this opportunity to thank our Head of Department Mr. Mandar Thakur,
for his moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Asst.
Prof. Mr. VINAY JADHAV whose guidance and care made the project
successful

Lastly, I would like to thank every person who directly or indirectly helped me
in the completion of the project especially my Parents and Peers who supported
me throughout my project.

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 DECLARATION

I, LAKSHYA KATYAL the student of T.Y.B.B.I. Semester V (2019-2020)

hereby declare that I have completed the project on “ROLE OF BANKS IN
INTERNATIONAL TRADE”.

The information submitted is true and original to the best of my knowledge.

_____________________

LAKSHYA KATYAL Roll No.: (20)

Mithibai College of Arts, Chauhan Institute of Science & Amruthben Jivanlal

College of Commerce and Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile Parle (W),
Mumbai, Maharashtra 400056

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 CERTIFICATE

This is to certify that Mr. LAKSHYA KATYAL, Roll No. (20) of Third Year
B.B.I., Semester V (2019-2020) has successfully completed the project on

“ROLE OF BANKS IN INTERNATIONAL TRADE”

under the guidance of Asst. Prof. Mrs. VINAY JADHAV.

Project Guide/ Internal Examiner Principal (Asst. Prof. Mr. VINAY

JADHAV)

External Examiner

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 EXECUTIVE SUMMARY

This project work has critically highlighted the compact of the Role of Banks
International Trade, the problems affecting the Role in Banks in international
trade have been identified and how they can be controlled is also includes in the
study and ways to solve them are inductive in the study.

The work is organized into chapters to easy comprehension and deduction.

Chapter one deals with the introduction, Background, statement of problems,
purpose / objective of the study, significance of the study, limitations of the
study and the definition of terms.

Chapter two involves a review of related literature, international trade, roles,

risk factor in international trade, major problems, trade restriction major and
international trade problems. This chapter also treat, the important of
international trade, and some underline issues towards the international trade
problem in.

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 TABLE OF CONTENT

Chapter Topic Page

No. No.
Introduction

 1.1Conceptual Framework
 1.2 Role of banks in strengthening international
trade
1.  1.3 Role of Commercial Banks in International 08-40
Trade
 1.4 EXIM Bank of India
 1.5 International Trade Finance Products
 1.6 Modes of Payment in International Trade

Research Methodology

 2.1 Objectives of the study

2  2.2 Significance 40-41
 2.3 Limitation
 2.4 Data collection

Literature Review

3  3.1 Import Export Documentation 42-45

 3.2 Financing The Foreign Trade

4 Data Analysis & Interpretation 45-51

5 Conclusion & Suggestions 51-53
53-60
Webliography & Bibliography Annexure

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 CHAPTER 1
1.1 CONCEPTUAL FRAMEWORK

The invention of internet influenced banking sector also. Internet totally

changed the face, figure and the personality of the bank! Internet has challenged
the physical identity of Banks. Banking has broken the shackles of time and
place, as internet has made banking possible 24hours in every corner of world!
Banks are now not big or small by building and banks are now not the meter of
few and fix hours of services. The world is changing at a staggering rate and
technology is considered to be the key driver for these changes around us. An
analysis of technology and its uses shows that it has permeated in almost every
aspect of our life. Many activities are handled electronically due to the
acceptance of information technology at home as well as at work place. Slowly
but steadily, the Indian customer is moving towards the internet banking.
Internet Banking transactions are slowly taking over the Physical Banking
Transaction happening at the counters. Customer always looks for simplicity
and ease in any service he wants to avail and the banking sector is matching its
steps to the march of technology to make financial life easy for its customers. E-
banking or Online banking is a generic term for the delivery of banking services
and products through the electronic channels such as the telephone, the internet,
the cell phone etc. The concept and scope of ebanking is still evolving. It
facilitates an effective payment and accounting system thereby enhancing the
speed of delivery of banking services considerably. Several initiatives have
been taken by the Government of India as well as the RBI (Reserve Bank of
India); have facilitated the development of e-banking in India. The government
of India enacted the IT Act, 2000, which provides legal recognition to electronic
transactions and other means of electronic commerce. The RBI has been
preparing to upgrade itself as regulator and supervisor of the technologically
dominated financial system. It issued guidelines on the Chapter 1: Conceptual
Framework 4 risks and controls in computer and telecommunication systems to
all banks, advising them to evaluate the risks inherent in the systems and put in
place adequate control mechanisms to address these risks. The biggest invention
is the invention of internet. The invention of internet changes the personality of
bank and banking. It gives the modern touch to the banking services and it
carries number of other possibility of modern banking with it.

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 INTRODUCTION

International trade ensures export expansion and import contraction coupled

with the fact that it stimulates foreign exchange earnings, international
recognition and the provision of employment opportunities for the teeming
population.

International trade is synonymous with the production of goods and services for
the benefit of trade across the country. Thus we have the banking institution, the
food processing export/import trade and the sugar, tobacco export/import trade
and that of petroleum export trade is not left behind. Therefore, international
trade or external trade is a trade between two or more countries.

International trade does not mean the exchange of goods and services within a
country. The exchange of goods and services among the people of the same
country is called home or internal trade.

External trade is established for the purpose of stabilizing nation‟s economy

standard if living. External trade has been proved beyond doubts as very
important for a nation‟s survival therefore it is prevent that we explicably
manifest how the role of banks can be employed for the development of these
trade. In doing this, we will limit our study to short and long term scale
institutions which are very important to the economy.

Short term scale institutions as defined by the central bank credit guidelines is,
any service enterprise whose annual business turnover does not exceed
N500,000.00 (five hundred thousand naira).

There is no definition for long term scale institutions as these did not attract the
direct emphasis of the CBN.

The role of banks in international trade development of Nigeria, could be seen

through the various services which these banks provide for the sustenance of
international trade in the country.

These services include the provision of capital for these exporter/importers in

the business inform of loans, such as short term loans, medium and long term
loans, which the traders could use to finance their business goals. The banks
also provide overdraft facilities, which are necessary to finance the working
capital of the business.

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An overdraft could be defined as an arrangement whereby the banks allow their
customers to over-draw his account up to a credit position at the end of the
period, while short term loans refer to loans granted for periods between one to
five years. Then medium and long term loans are granted for periods between
five to ten years, even ten years respectively.

Apart from granting loans and over drafts facilities, there are still other roles
which banks could play in international trade development in Nigeria. These
roles include professional advice, opening of documentary letters of credit
(L/CS), bills for collection and negotiation/open account and bills of exchange,
foreign exchange example travellers cheques and foreign currencies,
information on trade and exchange restrictions, collection and transfer of funds
status enquires, etc. above all the determination of the actual external funds
required by an export/import borrower. There are accepts of such services
which help international trade growth or expansion.

It is not for fetched that the exporters/importers of international trade suffer

their own bank problems, which should be analysed and solved to ensure
international trade development. These problems such as the problem of
corruption in banking parastatals, obtaining capital from and operational
problems which are coursed by the dictates of the Nigeria environment and
society.

The irrational problem of manpower requirement and the poor knowledge of

trade across these external traders help to compound the general problems of
international trade development of which bank services can be gainfully
employed for the purpose of solving them.

Addition to the problems is loss of trust ship among the members or cooperators
of the trade fraudulent acts among members. In all, these problems the worst is
the problems of unstable political contradictions. These problems should be
totally exterminated by the government, and the society entirely to ensure the
steady growth of this important sector of the business of the economy.

In increasing this level of their financing emphasis should be placed on medium

and long term loans to enable these traders concretize their investments for
better results in its outputs; though the commercial banks borrow short from
their deposits, the commercial banks who also declare excess profits at the end
of each year should expand a lending pattern for medium and long terms loans
without adversely affecting their liquidity ratios.
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With the funds available from the banks, international traders should be made to
judiciously invest them and with other important a sound, solid firm and
concrete foundation must be laid for the international development of the
country.

DEFINITION OF TERMS.
(a) International Trade: As described by the Author, Norbert M Ile in his
published test “Economics of business studies” (1999, P. 278) defines an
international trade or external trade as “a trade between two or more countries;
it is the exchange of goods and services between two or more countries”.

(b) Banking Institution: We can define a bank as any organization that handles
people‟s money. It is a dealer in debts, but indebtedness has a correlation to
wealth and hence, a bank can be described as a liquefier of wealth.

(c) Role: It is defined as “actors in a play; person‟s task or duty in undertaking.

(d) Foreign Exchange: This is a process by which a country exchanges its
goods/services to

another country‟s goods/services.

(e) Overdraft: This is a system whereby a customer drawn more money than he
has to his credit in a bank.

(f) Economy: It is a system of control and management of the money goods and
other resources of a society.

1.2 ROLE OF BANKS IN STRENGTHENING INTERNATIONAL

TRADE

International Trade shapes our everyday lives and the world we live in. In
nearly every instance that we make a purchase or sale, we are participating in
the global economy. Whole products and or their component parts come to our
store shelves from all over the world. Most international trade consists of the
purchase and sale of industrial equipment, consumer goods, oil and agricultural
products. Services such as banking, insurance, transportation,
telecommunications, engineering and tourism account for one-fifth of the world

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global trade.

The current situation obtaining in Zimbabwe thus calls for increased

participation in international trade by local players, particularly by exporters.
With the country operating without its own currency, the sources of the liquidity
in the country comes largely from trading with the
rest of the world. It is therefore important to understand how the resources flow
in international trade and how policies can be tailor made so that the country is
in a position to generate as much
revenue as possible for the benefit of our multicurrency system. With the
structure of the economy fast changing and the informal sector leading in the
productive system it is important that the players in this sector understand and
adapt to the use of the banking system to affect their international payments and
receive payments from their foreign buyers.

Banks are important facilitators of international trade. Besides providing

liquidity they guarantee payment for around a fifth of world trade. The banking
sector thus plays an important
role in international business. Today, almost all Banks have formed
collaborative alliances and established correspondent banking relationships with
Banks in other countries to better serve their
international business community. Banks play a key role in forming a bond of
trust between buying and selling agents executing transactions in international
markets. Local Banks have intermediary Banks outside the country, which
assist in effecting international payments hence the receipt and payment for
goods and services by local people.

Banks play a pivotal role in foreign trade through the provision of the financial
structure and instruments necessary for the conduct of business transactions
between foreign buyers and sellers. Banks ensure safety and transparency in the
flow of documents and money. Buyers (importers) of goods from abroad, the
sellers (exporters) will want to be assured of payment, and as a buyer one would
want assurance that all terms and conditions of the purchase agreement are kept.
This requires then that the Banks come in to broker an agreement and work as
an intermediary between the importer and the exporter.
Banks play a major role by providing assistance in many ways to facilitate
International Trade business which encompasses financing working capital
requirements, financing capital goods, identification of potential markets for
International Trade, identification of buyers and sellers, facilitating payment for
International Trade transactions, issuing Import Letters of Credit, pre an post
shipment financing and guaranteeing payment under Letters of Credit issued by
other Banks.

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The most common instrument used for payment and shipment control is a letter
of credit
issued by the bank of the buyer in favour of the seller. After the Bank of the
buyer approves the issuance of the letter of credit, the issued letter of credit is
sent to the advising bank that establishes the authenticity of the instrument and
informs the beneficiary of receipt. The advising bank may confirm the letter of
credit after checking the terms and conditions for payment by adding its own
guarantee to that of the issuer. Commercial Banks facilitate trade and the
payment of funds through
documents. After all of the terms and conditions for shipment and quality
standards have been checked via the presentation of proper documentation, the
issuing bank pays the seller for the goods.

The Post Shipment facility provides short-term financing to exporting

manufacturers, distributors and service providers. Businesses receive financing
in the form of a loan equivalent to invoice value of export sales, which must be
repaid from the assigned proceeds of payments. The
Post Shipment facility aims to bridge the gap between the settlement of
production costs and export sales receipts, allowing a business to accelerate
cash flow and shorten operating cycles. The advantages of this financing
mechanism are that the exporter‟s working capital cycle is shortened therefore
allowing for increased production levels and exporters are able to convert a
credit sale
into a cash sale, thereby freeing up their capital for further exports.
Pre-shipment financing is a short-term loan or direct financing that a
commercial bank

extends to an approved company to assist in the payment of inventory, may it be

raw materials, semi-finished or finished products. Once goods are received, the
exporter can now prepare products for local sale or export. The Pre Shipment
Facility is offered at competitive rates and is designed for trade transactions that
are short-term and self-liquidated. Advantages associated with this type of
financing include; the company is offered credit terms so that it can add
flexibility to
its cash flow and thereby manage the business more efficiently; provides extra
time for the goods to clear customs and be resold before you need to pay for the
goods and also suppliers are assured
payment upon request from the exporter.

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 1.3 ROLE OF COMMERCIAL BANKS IN INTERNATIONAL
BUSINESS

Banking section plays important role in international business. Today almost all
major
banks have offices in major cities around the world. Many banks have formed
collaboration with banks in other countries to better serve their international
business community. Banks form a bond of trust between buying and selling
transactions in international market. For individual banks offer services like
foreign exchange, traveller‟s check, electronics transfer. For businesses bank
plays a
role of trusty agent by offering services like „Documentary Collection‟ and
„Letter of Credit‟. One of the problem international businesses encountering
doing business internationally is
lack of trust. With the help financial devices commercial banks are able for a
bond of trust between international buyers and sellers. In commercial methods
like „Commercial Collection‟ and „Letter of Credit‟ banks act as agents to
handle payments as well as relevant documents. Letter of Credit is
most wide acceptable and used method of doing international transactions.
Some banks and government agencies offer export credit insurance to
businesses. In some cases, exporter has to forgo a letter of credit, in such cases
banks offer export credit insurance.

Foreign exchange market is another area where international commercial banks

play vital role. Foreign exchange market serves two main functions, convert the
currency of one country into the currency of another and provide some
insurance against foreign exchange risk. Multinational
corporations constantly need various currencies for their operations and to
hedge against foreign exchange risk. International banks provide foreign
exchange services to their commercial business clients to complete their
business transactions. These banks act as a broker between commercial
customer and foreign exchanges around the world. International businesses
receive payments in
foreign currencies for their export, the income it receives from foreign
investments and income received from licensing agreements with foreign firms.
International business use foreign exchange market to pay foreign firms for its
products and services and when it makes direct investment in foreign country.
International banks play major roles in these transactions.
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Many commercial banks offers short as well as long term loan financing to
international businesses. Many countries have form banks backed by
government funding‟s to provide funding‟s
for exporters and importers. In United States, Export-Import bank, an
independent agency of the US government, provides financial aid to facilitate
export and import of goods. Exim bank also
guarantees repayment of loans US commercial banks make to foreign borrowers
for purchasing US exports.

Banking sector plays vital role of catalysts in international market. Due to

technology advances in banking sector, communication gap and delays in
international business have really narrow down a lot.
Commercial banks do not create money--they are simply the intermediaries that
move money from the capital markets to businesses and institutions. Banks get
their money through business checking or deposit accounts, service fees and by
issuing certificates of deposit (CD) and banker's acceptances--money market
instruments that

are collateralized by letters of credit (LOC) used in trade finance--and

commercial paper.
Commercial banks offer services such as trade finance, project finance, payroll,
foreign exchange transactions and trading, lock boxes for collecting payments
and general corporate finance.

Significance

Without commercial banks, the international finance and import-export industry

would not exist. Commercial banks make possible the reliable transfer of funds
and translation of business practices between different countries and different
customs all over the world. The global nature of commercial banking also
makes possible the distribution of valuable economic and business information
among customers and the capital markets of all countries. Commercial banking
also serves as a worldwide barometer of economic health and business trends.

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Foreign Branch Banking

Some small commercial banks limit their reach to the local business
community; but as business has gone global, so have commercial banks. Large
banks such as Citigroup, Bank of America and Chase are retail (consumer)
banks that also maintain full commercial banking activities in the United States
with branches in many countries. These larger banks may act as affiliates of
smaller banks that do not have branch presences in other countries. Through
foreign branch banking, U.S. based multinational companies can consolidate
their financial business at a single bank that handles their trade finance,
currency transactions, project loans, payroll, cash management investments and
deposit accounts throughout the world. Commercial banks also arrange deals
between their customers globally, including strategic partnerships and project
fulfilment agreements.

Trade Finance

Commercial banks doing international business are also called merchant banks
because they finance trade between companies and customers located in
different countries. This is done by issuing LOCs that indicate the customer has
deposited the full amount due on an order with a company located in a different
country. The seller company can then feel assured of being paid if it ships goods
to its offshore customer. The LOC may also be used by the company to
guarantee a manufacturer's loan, allowing it to finance the manufacture of the
goods to be delivered. Without LOCs, companies would face considerable
expense in investigating their foreign customers to make sure they are
legitimate and creditworthy, and complying with laws and regulations of the
different countries in which they do business.

Foreign Exchange

In order to facilitate international trade and development, commercial banks

convert and trade foreign currencies. When a company is doing business in
another country it may be paid in the currency of that country. While some of
these revenues will be used to pay workers in that country and for
administrative expense such as office rent, utilities and supplies, the company
may need to purchase goods from a neighbouring country in that country's
currency, or convert cash to its native currency for return to the home office.

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Corporate Finance

Companies always need to borrow money to cover purchases of raw materials,

machinery parts, inventory and/or payroll. Banks with overseas branches or
affiliates can simplify the process of corporate finance throughout a company's
organization by consolidating the transaction procedures, reporting and record
keeping. It is much easier for a company manager to do business in her own
language with a banker located nearby who handles her global business finance
needs than it would be for her to develop banking relationships in every country
where she does business. Her international commercial bank can also provide
referrals to professional service firms in other countries, as well as arrange
introductions to other companies appropriate as customers or for strategic
partnerships.

Miscellaneous Banking Services

Corporate checking accounts, currency specific credit cards and lock boxes are
also offered by commercial banking to help make foreign trade possible for a
company. Lock boxes are particularly helpful for collecting payments from
overseas customers and reporting receipts daily for cash management purposes.
Currency-specific credit cards are also important in eliminating the cost of cross
currency purchasing, which normally is done at expensive valuation levels.

1.4 EXIM BANK OF INDIA

The Export-Import Bank (Exim bank) was set up on January 1, 1982 to take
over the operations of
international finance wing of the IDBI and to provide financial assistance to
exporters and importers and to function as a head financial institution for
coordinating the working of other institutions engaged in financing of exports
and imports of goods and services.

The authorized capital of Exim bank is Rs. 200 crore and paid-up-capital is Rs.
100 crore wholly subscribed by the Central Government.
Organization and Management:

The Exim Bank is managed by a Board consisting of a Managing Director who

is the Chairman
and 17 Directors representing different areas. They are Secretary to the
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Department of Industrial Board, Commerce Secretary, Finance Secretary,
Secretary to Banking, Secretary IDBI, Secretary ECGC Secretary RBI, 3
directors representing other scheduled commercial banks, 4 Directors chosen
from export community and 3 others representing ministries and departments.

Functions of Exim Bank:

(i) It provides direct financial assistance to exporters of plant, machinery and
related service in the form of medium-term credit.
(ii) Underwriting the issue of shares, stocks, bonds, debentures of any company
engaged in exports.
3. (iii) It provides rediscount of export bills for a period not exceeding 90
days against short-term usance export bills discounted by commercial
banks.
4. (iv) The bank gives overseas buyers credit to foreign importers for
import of Indian capital goods and related services.

5. (v) Developing and financing export oriented industries.

6. (vi) Collecting and compiling the market and credit information about
foreign trade.

Activities of Exim Bank:

The bank can raise additional resources through borrowing from Government of
India, from RBI and from the market through the issue of bonds and debentures.
Exam bank also provides refinance facilities to the commercial bank and
financial institutions against their export-import financing activities.

During the Year ending on 31 March, 2003, Exim Bank sanctioned loans of Rs.
7,828 crores while disbursements amounted to Rs. 5,320 crores, Net Profit
(before tax) of the bank for the period 2002-03 on account of General Fund
amounted to Rs. 268 crore.

The Export-Import Bank of India was set up by the Government of India on

January 1, 1982. Its main objects are:

 To ensure and integrated and co-ordinate approach in solving the allied

problems encountered by exporters in India.
 To pay specific attention to the exports of capital goods;
 Export projection;

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  To facilitate and encourage joint ventures and export of technical services
and international

and merchant banking;

 To extend buyers‟ credit and lines of credit;

 To tap domestic and foreign markets for resources for undertaking
development and

financial activities in the export sector.

The functions of Exim Bank include:

 Planning, promoting and developing exports and imports;

 Providing technical, administrative and managerial assistance for
promotion, management

and expansion of export sector.

The functions of Exim Bank include:

 Planning, promoting and developing exports and imports;

 Providing technical, administrative and managerial assistance for
promotion, management

and expansion of exports; and

 Undertaking market and investment surveys and techno-economic studies

related to

development of exports of goods and services.

The Exim Bank has a 17-member Board of Directors, with Chairman and
Managing Director as the chief executive and full-time director. The
Board of Directors consists of the representative of the Government of
India, RBI, IDBI, ECGC, commercial banks and the exporting
community.

The authorized capital of Exim Bank is Rs. 200 crores, of which Rs. 75
crores is paid up. The banks have secured a long-term loan of Rs. 20
crores from the Government of India. It can also borrow from the RBI. It
is empowered to raise resources in domestic and international markets.

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 The Bank began its lending operations from March, 1982. Till June,
1982, it has extended assistance up to Rs. 133 crores to the export sector
in various ways.

The establishment of Exim Bank may be regarded as a right step in the

export promotion policy and programme of the Government.

During 1984, the Exim Bank sanctioned various programmes of funded

assistance of Rs. 430 crores. It also launched a new programme to
provide term finance for export-oriented units, under which assistance
was provided through a consortium for establishing a 100 per cent export
unit in the ceramics industry.

The Exim Bank also extended its financial assistance to Indian exports
through letters of credit, re-lending facility, export bills rediscounting,
overseas investment finance, facilities for deemed exports and assistance
to hundred per cent export units and units in free trade zone.
At the end of December 1984, the Exim Bank‟s outstanding underfunded
and non-funded assistance amounted to Rs. 415 crores and Rs. 510
crores, respectively.

In 1984, the Exim Bank signed a loan agreement to borrow one billion
yen from the Japanese commercial yen market.

In June 1986, the Exim Bank introduced a new programme called the Export
Marketing Fund (EMF), under which finance is made available to Indian
companies for undertaking export marketing activities. The programme also
covers activities like desk research, minor product adaptation, overseas
operations and travel to India by buyers overseas. During 1986, Rs. 78 lakhs
were sanctioned, while Rs. 3.4 lakhs have been utilized under the EMF.

On whole, the Exim Bank concluded an agency credit line of US $ 15 million

with the International Finance Corporation (IFC).

During 1994-95, Exim Bank sanctioned Rs. 2,466 crore and disbursed Rs. 2,130
crore of financial assistance under various lending project.

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 1.5 INTERNATIONAL TRADE FINANCE PRODUCTS

A. Bankers Acceptance:

Since centuries, banker‟s acceptance (BA) has been widely used in financing
international trade. BA is the time draft or bill of exchange drawn on and
accepted by a bank. By „accepting‟ the draft, the bank makes an unconditional
promise to pay the holder of the draft the specified amount of money on
maturity.

Thus, the bank effectively substitutes its own credit with that of a borrower. BA
is a negotiable instrument that can be freely traded.

The bank buys (discounts) the BA and pays the drawer (exporter) a sum less
than the face value of the draft followed by selling (rediscounting) to an
investor in the money market. The discount reflects the time value of money.

The bank makes full payment at maturity to the investor who presents it.
Banker‟s drafts by definition are time drafts with varying maturity of 30, 60, 90,
or 180 days. The fee charged by the accepting bank varies, depending upon the
maturity period and the creditworthiness of the borrower.

B. Discounting:

Exporters can convert their credit sales into cash by way of „discounting‟ the
draft even if it is not accepted by the bank. The draft is discounted by the bank
on its face value minus interest and commissions. The discounting may be
„with‟ or „without‟ recourse.

If the importer fails to pay, the bank can collect from the exporter in case of
„with recourse‟ discounting, whereas the collection risk is borne by the bank in
case of „without recourse‟ discounting. Usually the discounting rates are lower
in many countries including India than other means of financing, such as loans,
overdraft, etc., mainly due to government‟s export promotion

schemes and subsidies.

C. Accounts Receivable Financing:

In an open account shipment or time draft, goods are shipped to the importer
without assurance of
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payment from a bank. Banks often provide loans to the exporter based on its
creditworthiness secured by an assignment of the accounts receivables.

The exporter is responsible for repaying the loan to the bank even if the
importer fails to pay the exporter for whatever reasons. Usually the period of
such financing is one to six months. As additional risks such as government
control and exchange restrictions are involved in case of foreign receivables,
banks often insist upon export credit insurance before financing.

D. Factoring:

Factoring is widely used in short-term transactions as a continuous arrangement.

It involves purchase of export receivables by the factor at a discounted price,
i.e., generally 2 per cent to 4 per

cent less than the full value.

However, the discount depends upon a number of other factors such as the type
of product, terms of the contract, etc.

Generally, factors advance up to 85 per cent of the value of outstanding

invoices. The factoring service may be undertaken by the factor with recourse to
the seller, wherein the exporter remains

exposed to the risk of non-payment by the importer. Besides, the factoring may
be without recourse, wherein the factor assumes the credit and non-payment
risks.

The operation of export factoring is depicted in Fig. 15.10, which involves

the following steps:

i. The importer and exporter enter into a sales contract and agree on the
terms of sale (i.e., open account)

ii. The exporter ships the goods to the importer

iii. The exporter submits the invoice to the export factor

iv. The export factor pays cash in advance to the exporter against receivables
until the payment is received from the importer

v. However, the exporter pays interest to the factor on the money received or the
factor
deducts commission charges before making payment to the exporter.
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vi. The export factor transfers the invoice to the import factor that in turn
assumes the
credit risks and undertakes administration and collection of receivables

vii. The import factor presents the invoice to the importer on the due date for
payment
viii. The importer makes payment to the import factor
ix. The import factor in turn pays to the export factor (8).

Benefits to exporters:
The benefits of using a factoring service for the exporter are:

i. It facilitates expanding sales in international markets by offering prospective

customers the same terms and conditions as local competitors.

ii. It facilitates immediate payment against receivables and increases

working capital.
iii. Tasks related to credit investigations, collecting account receivables from
the importer, and providing other book-keeping services are carried out
by the factors.
iv. In the event of buyer‟s default or refusal to pay, factors assume credit risk
v. Factoring often serves as a good substitute for the bank credit especially
when the bank credit is either uneconomical too restrictive.

Besides, factoring is also beneficial for the importers as it:

i. Increases their purchasing power without drawing on bank credit lines

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ii. Facilitates procurement of goods with little hassles

E. Forfeiting:

The term „forfeiting‟ is derived from the French word for fait, which means to
relinquish or surrender the rights. Thus, forfeiting refers to the exporter
relinquishing his/her rights to a receivable due at a future date in exchange for
immediate cash payment at an agreed discount, passing all risks and the
responsibility for collecting the debt to the forfeiter.

Forfeiting is particularly used for medium-term credit sales (1 to 3 years) and

involves the issue of a bill of exchange by the exporter or promissory notes by
the buyer on which a bank and the buyer‟s country guarantee payment.

Forfeiting is the discounting of receivables, typically by negotiating bills drawn

under an L/C or co-accepted bills of exchange. Generally, forfeiting is
applicable in cases where export of goods is

on credit terms and the export receivables are guaranteed by the importer‟s
bank.

This allows the forfeiting bank to buy the risk „without recourse‟ to the
exporter. The financing terms mainly depend on the country risk of the buyer,
size of the contract, financial standing of the L/C opening bank or guarantor
bank.

By forfeiting, the exporter surrenders without recourse the right to claim for
payment of goods exported in return for immediate cash payment. As a result,
an exporter can convert a credit sale into a cash sale, on a no-recourse basis.

Thus, forfeiting is a mechanism for financing exports:

i. By discounting export receivables evidenced by bills of exchange or

promissory notes
ii. On a fixed rate basis (discount)

Avalisation (co-acceptances):

Avalisation or co-acceptance is a means of non-fund based import finance

whereby a bill of
exchange drawn by an exporter on the importer is co-accepted by a bank. By
co-accepting the bill of exchange, the bank undertakes to make payment to the
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exporter even if the importer fails to make payment on due date.

Operation of a forfeiting transaction:

Receivables under a deferred payment contract for export of goods, evidenced

by bills of exchange or promissory notes (pro notes), can be forfeited. Bills of
exchange or promissory notes backed by avalisation (co-acceptance) of
iii. Without recourse to the exporter
iv. Carrying medium-to long-term maturities (usually over 120 days)
v. Up to 100 per cent of the contract value

the importer‟s bank are endorsed by the exporter, without recourse, in favour of
the forfeiter in exchange for discounted cash proceeds.

Some transactions are taken without such a guarantee or co-acceptance,

provided the importer is of an acceptable standing to the forfeiter. The operation
of a forfeiting transaction is briefly discussed below.

Step 1: Pre-shipment stage:

i. As the exporter is in the process of negotiating a contract with the overseas

buyer, s/he provides the bank the following details to enable it to give an
„indicative quote‟:

1. Name and full address of the foreign buyer

2. Details of goods (quantity, base price, etc.)
3. Amount of the contract
4. Number and expected dates/period of shipments
5. Security-banker‟s name (under L/C or bills of exchange avalized by
bank)

6. Repayment schedule
7. Country to which exports are to be made

ii. Based on the details provided, the bank contacts the forfeiting
agencies/exim banks, who are given an indicative quote with details of
discounting cost, commitment fees, etc.

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iii. After confirming that the terms are acceptable, the exporter informs the
bank, who accordingly calls for the final quote.
iv. After confirming acceptance of the forfeiting terms to the bank, the
exporter signs off the commercial contract with her/his buyer. The
contract must provide for the buyer to furnish

avalised bills of exchange. Simultaneously, a forfeiting contract is entered into

with the

forfeiting agency through the bank.

v. Once the forfeiting contact is duly signed, the bank issues the following
certificates

a. A certificate giving permission to the exporter to remit commitment fees,

b. A certificate showing the discount payable by the exporter to the forfeiting
agency to enable them to declare the same on the GR form. Otherwise, the
customs clearance of the goods would be held up.

Step II: Post-shipment stage:

i. On shipment of goods, the exporter presents the documents to the bank who
in turn forwards them to the buyer or buyer‟s bank. The set of documents being
forwarded must contain the bills of exchange for the total amount (inclusive of
the forfeiting cost, drawn on the importer or importer‟s bank).

ii. The importer‟s bank would accept, co-accept, or avalise the bill of
exchange and send it back to the exporter‟s bank.
iii. The exporter‟s bank would ensure that the bill of exchange is endorsed
„without

recourse‟ in favour of the forfeiting agency.

iv. After checking the documents, the forfeiter would deposit the forfeited
proceeds in the specified account.
v. The bank after checking the proceeds would issue a foreign inward
remittance certificate (FIRC) and the GR form.

Costs involved in a forfeiting transaction:

A forfeiting transaction generally has three cost elements.

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Commitment fee:

The commitment fee is payable by the exporter to the forfeiter for his/her
commitment to execute a

specific forfeiting transaction at a discount. Generally, the commitment fee

ranges from 0.5 per cent to 1.5 per cent per annum of the utilized amount to be
forfeited. Besides, the commitment fee is payable regardless of whether or not
the export contract is ultimately executed.

Discount fee:

It is the interest payable by the exporter for the entire period of credit involved
and is deducted by the forfeiter from the amount paid to the exporter against the
availised promissory notes or bills of exchange.

The discount fee is based on the market interest rates as determined by the
prevailing London Inter-Bank Offered Rate (LIBOR) for the credit period and
the currency involved plus a premium for the risk assumed by the forfeiter. The
discount rate is agreed upon at the time of executing the contract for forfeiting.

Documentation fee:

Generally, no documentation fee is incurred in a straight forfeit transaction.

However, a documentation fee may be levied in case extensive documentation
and legal work is required.

Benefits to the exporter:

The major advantages of forfeiting to exporters are summarized below:

i. In India, post-shipment finance extended by bankers is limited to 180

days at subsidized rates. The exporter converts a deferred payment export
into a cash transaction, improving liquidity and freeing the balance sheet
of debt, thus also improving leverage.
ii. Forfeiting frees the exporter from cross-border political risks and
commercial risks associated with export receivables. There is no
contingent liability in the balance sheet of the exporter.

iii. As forfeiting offers „without recourse‟ finance, it does not impact the
exporter‟s borrowing limits. It represents an additional source of finance,
outside working capital limits, providing a convenient option if funded limits

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are not sufficient.
iv. Since it is fixed rate finance, it hedges against interest and exchange risks
arising out of deferred export payments.
v. The exporter saves on insurance costs as forfeiting obviates the need for
export credit insurance.

vi. Forfeiting is transaction-specific as the exporter need not have a long-term

relationship with the forfeiting agency abroad.
vii. There is simplicity of documentation as the documents being submitted
are readily available with the exporter.
viii. Forfeiting is not bound by any retention percentages. It offers 100 per
cent financing and there is no restriction on the type, condition, or age of
the products.

F. Letters of Credit:

One of the oldest forms of international finance is still used in international

transactions. The issuing bank undertakes a written guarantee to make the
payment to the beneficiary, i.e., the exporter, subject to the fulfilment of its
specified conditions. In the process, a debt relationship exists between the
issuing bank and beneficiary.

Terms credit is often used as financing instrument for the importer who gets
delivery of the goods without making payment to the exporter.

G. Counter-Trade:

Counter-trade is used to combine trade financing and price setting in one

transaction. It involves

various forms of reciprocal transactions such as barter, clearing arrangements,

switch trading, counter purchase, buy-back, and off-set. Counter-trade finances
imports in form of reciprocal

commitments from countries that have payment problems, especially in hard

currencies.

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 1.6 MODES OF PAYMENT IN INTERNATIONAL TRADE

• Advance Payment:

Under this, the payment is remitted by the buyer in advance, either by a draft
mail or telegraphic transfer (TT). Generally, such payments are made on the
basis of a sample receipt and its approval by the buyer. The clean remittance is
made after accepting the order but before the shipment, through banking
channels.

It is the simplest and the least risky form of payment from the exporter‟s point
of view. Besides, no post-shipment finance is required if the payment is
received in advance. There is no payment of interest on the funds and no
commission is required to be paid as in other modes of payment, which makes it
the cheapest mode of receiving payment.

As it involves the highest level of risk for the buyer, advance payment is used
only in cases where the exporter is in a position to dictate his/her terms. For
instance, advance payment is often used if the product supplied is unique or has
some sort of monopolistic power. However, such forms of payment are
common mainly in case of overseas affiliates of the exporting firm.

• Documentary Credit:

In a typical international transaction, an exporter deals with an overseas buyer

who is situated in a significantly different regulatory and business environment.
The exporter is unwilling to part with

his/her goods unless she/he is assured of the receipt of the payment from the
importer.

On the other hand, the importer is unwilling to part with the money unless
assured of receiving the goods. In such a situation, the bank plays the crucial
role of an intermediary, providing assurance

to both the importer and the exporter in an international transaction.

The payment collection mechanism that allows exporters to retain ownership of

the goods or reasonably ensures their receiving payments is known as
documentary collection.

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The bank acts as the exporter‟s agent in a documentary collection and regulates
the timing and the sequence of the exchange of goods for value by holding the
title of the documents until the importer fulfils his/her obligation as given in the
Uniform Customs and Practices of Documentary

Credits (UCPDC), brought out by the International Chamber of Commerce

(ICC) in its publication
no. 600, widely known as UCPDC 600, implemented on 1 July 2007.
The two principal documents used in documentary collection are the bills of
lading (B/L) issued by
the shipping company and the draft (bill of exchange) drawn by the exporter.
B/L are issued by the shipping company to the shipper for accepting the
merchandise for the carriage.

As the document of title, it has a unique significance in shipping that only its
legitimate holder is
entitled to claim ownership of the goods covered therein.
The importer simply cannot take possession of the goods unless the B/L is
surrendered in original
to the shipping company at destination. The procedure and the process involved
in documentary credit employing banking channels assures both the exporter
and the importer that the former gets
the payment and the later receives the goods.

The draft, commonly known as bill of exchange, is used as an instrument to

effect payment in international commerce. It is an unconditional order in
writing, signed by the seller (exporter), also known as drawer, addressed to the
buyer (importer) or importer‟s agent, known as drawee,
ordering the importer to pay on demand or at a fixed or determinable future
date, the amount specified on its face.

The draft provides written evidence of a financial obligation in clear and simple
terms. Besides, it
is a negotiable and unconditional instrument, which means payment must be
made to any holder in due course despite any disputes over the underlying
commercial transaction. Using a draft enables an exporter to employ its bank as
a collection agent.

The exporter‟s bank forwards the draft or bill of exchange to the importer,
generally through a correspondent bank, collects the draft, and then remits the
proceeds to the exporter. Thus, in the process, the bank has all the necessary
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documents for control of the merchandise, which are
handed over to the importer only when the draft has been paid or accepted in
strict accordance with the exporter‟s instructions.

• Documentary credit with letter of credit:

A documentary credit represents a commitment of a bank to pay the seller of

goods or services a certain amount, provided s/he presents stipulated documents
evidencing the shipment of goods or performance of services within a specified
period. The modus operandi of an L/C is depicted in the

form of a self-explanatory diagram in Fig. 15.6.

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The exporter gets in touch with the importer and based on mutual
communications, either by telephone, fax, or electronic messaging, and
mutually agrees on terms of sale and enters into a sales contract:

 The importer, also known as applicant, applies to the issuing bank located
in his/her country
 For opening an L/C in accordance with the terms already agreed upon
between the buyer and the seller in the sales contract. The issuing bank
opens the L/C and delivers it
 To the corresponding bank located in the exporter‟s country, which in
turn advises
 It to the exporter, also known as beneficially. The exporter carefully
scrutinizes the L/C and ensures that all the terms and conditions agreed
upon in the sales contract are mentioned. In

case there is any variation or discrepancy, it is brought to the notice of the

applicant (i.e., importer) and got rectified. Once the exporter gets satisfied of the
terms and conditions contained in the L/C, s/he makes shipment
• Soon after delivering goods to the shipping company, the B/L are obtained,

 Which serve as the cargo receipt, contract of carriage, and the document
for the tide of the goods. The exporter submits the complete set of
documents as mentioned in the L/C, including the B/L along with the
draft drawn by the exporter
 To the advising bank, which in turn sends it to the issuing bank
 The issuing bank scrutinizes the documents and if found in accordance
with the terms and conditions contained in the L/C, it accepts the
documents and in the case of a sight L/C, releases the payment

 To the issuing bank. The issuing bank in turn makes the payment to the
exporter
 However, in the case of a usance L/C, payment is made at a later date as
contained in the L/C. The issuing bank presents the draft to the applicant
(i.e., importer), who releases the payment

o Upon which it handovers the B/L along with other documents o To the
importer, who in turn hands over the B/L

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• To the shipping company at the destination and takes delivery of the cargo
(13).

The operation of L/C is governed by the UCPDC as prescribed by the ICC. As

per the UCPDC, payment is made only if the documents strictly conform to the
terms and conditions of the

documentary credit. Under article 4 of the UCPDC, banks deal in documents

and not in goods and

services.

Therefore, an exporter should carefully examine the L/C and ensure that:

i. The names and addresses are complete and spelled correctly

ii. The L/C is irrevocable and preferably confirmed by the advising bank,
conforming to sales contract. However, the confirmation of an L/C,
although preferable by the exporter depends upon the terms of the sales
deal

iii. The amount is sufficient to cover the consignment

iv. The description of goods is correct

v. The quantity is correct

vi. The unit price of goods, if stated in the L/C, conforms to the contract
price

Vii The latest date for shipment or the shipping date is sufficient to dispatch the
consignment

vii. The latest date for negotiation or the expiry date is sufficient to
present the documents
and draft(s) to the bank

viii. The port (or point) of shipment and the port (or point) of
destination are correct
ix. The partial shipment/drawing is permitted or prohibited
x. The trans-shipment is permitted or prohibited

xi. The L/C is transferable or non-transferable

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 xii. The type of risk and the amount of insurance coverage, if
required

xii. The documents required are obtainable

xiii. The following words, or similar, are present in the L/C:

„Unless otherwise expressly stated, this credit is subject to the Uniform

Customs and Practice for Documentary Credits, International Chamber
of Commerce Publication No. 600‟

Under a documentary credit, a debt relationship exists between the

issuing bank and the beneficiary. Therefore, it is advisable to assess the
issuing bank‟s standing, besides the sovereign
and transfer risk of the importing country.

The issuing bank authorizes a corresponding bank in the beneficiary‟s

country to honour the documents in its place.
Under the UCPDC, unless the credit stipulates that it is available only
with the issuing bank, all credits should nominate the bank (the
„nominated bank‟), which is authorized to pay (to incur a deferred
payment undertaking to accept drafts) or negotiate. However, in a freely
negotiable credit any bank is treated as a nominated bank.

Types of letters of credit:

According to methods of payments, the letters of credit may be of following
types:

a. Irrevocable:

The issuing bank irrevocably commits itself to make payment if the credit terms
as given in the L/C are satisfied under article 9A of UCPDC. A unilateral
amendment or cancellation of an irrevocable L/C is not possible.

b. Revocable:

A revocable L/C is highly risky for the exporters as it can be revoked any time
without consent of

or notice to the beneficiary. For an L‟C to be revocable, it should explicitly

indicate as „revocable‟, otherwise under article 5C of UCPDC, in absence of
any explicit indication that the credit is revocable, it is deemed as irrevocable.

Page | 34
Nowadays, revocable letters of credit are rare, although these were not
uncommon in the 1970s and earlier, especially when dealing with less
developed countries.

c. Confirmed:

The confirming bank (generally a local bank in the exporter‟s country) commits
itself to irrevocably make payment on presentation of documents under a
confirmed L/C.

The issuing bank asks the corresponding bank to confirm the L/C.
Consequently, the corresponding bank confirms the L/C by adding a clause,
„The above credit is confirmed by us and

we hereby undertake to honour the drafts drawn under this credit on

presentation provided that all terms and conditions of the credit are duly
satisfied.‟

A confirmed L/C provides additional protection to the exporter by localizing the

risk of payment. Thus, the exporter enjoys two independent recognitions: one
by the issuing bank and the other by the confirming bank.

However, the confirming banks require the following criteria to be

fulfilled:

i. The L/C should be irrevocable.

ii. The credit should clearly instruct or authorize the corresponding bank to add
its

confirmation.

iii. The credit should be available at the confirming bank.

iv. The contents of credits should be unambiguous and free of „stop‟ clauses
(that allows buyer to prevent the terms of credit being fulfilled).

d. Unconfirmed:

Under such credit, the issuing bank asks the corresponding bank to advise about
the L/C without

any confirmation on its part. It mentions, „The credit is irrevocable on the part
of the issuing bank but is not being confirmed by us.‟
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e. Sight:

The beneficiary receives payment upon presentation and examination of

documents in a sight L/C. However, the bank is given a reasonable time
(generally not more than seven banking days) to examine the documents after
its receipt.

f. Term credits:

Term credits are used as financing instruments for the importer. During the
deferred time period, the importer can often sell the goods and pay the due
amount with the sales proceeds.

g. Acceptance credit:

The exporter draws a time draft, either on the issuing or confirming bank or the
buyer or on another bank depending upon the terms of credit. When the
documents are presented, the draft is accepted instead of payment being made.
For instance, the payment date may be 60 or 90 days after the invoice date or
the date of transport documents.

h. Deferred payment credit:

Such credits differ from the time draft in terms of lack of acceptance of a draft.
The bank issues a

written promise to make the payment on due date upon presentation of the
documents. The due date is calculated on the basis of the terms of the credit.

The deferred payment credit is generally more economical from the point of
view of commission than the credit with time draft. However, an advance
payment of credit amount may normally be
obtained only from the issuing or confirming bank whereas there are various
possibilities for discounting a draft.

i. Revolving:

Under „revolving letters of credit‟ the amount involved is reinstated when

utilized, i.e., the amount becomes available again without issuing another L/C
and usually under the same terms and conditions.

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j. Back to back:

Such back-to-back letters of credit are used when exporter uses them as a cover
for opening a

credit in favour of the local suppliers. As the credits are intended to cover same
goods, it should be ensured that the terms are identical except that the price is
lower and validity earlier.

k. Documentary credit without letter of credit:

Documents are routed through banking channels that also act as the seller‟s
agent along with the bill of exchange. The major documents should include a
full set of B/L, commercial invoice, marine insurance policy, and other
stipulated documents.

Sight draft (documents against payment) Similar to L/C, exporter and the
importer enter

into a sales contract:

 On mutually agreed terms. Upon finalization of contract, the exporter

(drawer) ships
 The goods and submits the documents along with the bill of exchange
through his/her bank,

also known as the remitting bank

 To the corresponding bank, also known as collecting bank

 In the importer‟s country. The corresponding bank presents the draft to
the importer (drawee) who makes payment at sight

o And thereafter the documents

o Are handed over. The collecting bank transfers the payment

 To the remitting bank in exporter‟s country, which in turn makes

payment
 To the exporter (Fig. 15.7).

Page | 37
Thus, under „documents against payment‟, the importer can take physical
possession of the goods only when s/he has made the payment before getting
the documents from the bank. Sight drafts are generally considered safer as the
exporter has possession and title of the goods till the time payment is made.

Time draft (documents against acceptance): Once a sales contract:

• Is signed between the exporter and the importer, the exporter (drawer) ships
the goods

 And submits the draft along with documents and the collection order
 To the bank located in his/her country, known as the remitting bank,
which in turn sends

• The draft along with documents to a corresponding bank, also known as the
collecting bank, in the importer‟s country. The collecting bank presents the draft
to the importer (drawee), who indicates his/her acceptance of the payment
obligations

o By signing the draft, upon which the B/L along with other documents is
handed over to the importer

o For taking delivery of the goods.

The payment under time draft is usually to be made at a later date, after 30, 60,
90 or more days.
However, the bill of exchange already accepted by the drawee (i.e., importer) is
Page | 38
again presented to the buyer

• On the due date, who in turn releases the payment

o The collecting bank transfers the funds to the remitting bank

 For onward payment to the exporter

 (Fig. 15.8).

This mode of payment poses a much greater risk as the documents are delivered
to the importer, who subsequently takes tide of the goods before the payment is
released. In case the importer fails

to make payment, the recovery of the sales proceeds is difficult and involves a
cumbersome

process.

l. Consignment Sales:

Under the consignment sales, the shipment of goods is made to the overseas
consignee and the title of goods is retained with the exporter until it is finally
sold. As the title of goods lies with the exporter, the funds are blocked and the
payment period is uncertain.

Consignment sales involve certain additional costs, such as warehousing

charges, insurance, interest, and commission of the agents. Besides, the liability

Page | 39
and risks lie with the exporter unless the consignment is sold. The risk of
violating the terms of consignment is much higher in consignment sales.
Besides, the price realization is also uncertain, over which the exporter has little
control.

Selling goods on consignment basis in international markets also provide

opportunity to the exporter to realize higher prices based on the buyers‟
satisfaction. Generally, such a mode of

payment is restricted to dealing with trusted counterparts in the overseas

markets.

Export of precious or semiprecious stones and cut flowers is generally made on

consignment basis. However, the exporters are required to declare the expected
value of consignment on the guaranteed remittance (GR) form.

2. Open Account:

The exporter and importer agree upon the sales terms without documents calling
for payments.

However, the invoice is prepared by the exporter, and the importer can take
delivery of goods without making the payment first. Subsequently, the
exporting and importing firms settle their accounts through periodic
remittances.

As the payment is to be released later, it serves as an instrument to finance the

importer for the transaction and the importer saves the cost of getting bank
finances. It requires sufficient financial strength on the part of the exporter.
The operation of open account is hassle free and simple. The major drawback of
an open account is the lack of safeguard measures against non-payment by the
importer.

Therefore, the open account is generally restricted to firms with longstanding

dealing and business relationship and intra-company transactions among
subsidiaries and affiliates. The statutory
provisions related to foreign exchange often restrict using open account for
receiving payments in international transactions.

Generally, the central banks in most counties permit open accounts to foreign
firms operating in their country and restrict it for domestic firms.

Page | 40
 CHAPTER 2 :- RESEARCH METHODOLOGY

2.1 OBJECTIVES OF THE STUDY

 To find out if commercial banks play any role in international trade in

 To find out if merchant banks play any role in international trade
 To find out if development banks play any role in international trade
 To find out if commercial banks play any role in international trade.
 And equally to find out if people‟s bank play any role in international
trade

2.2 SIGNIFICANCE OF THE STUDY

The research study will be of high benefit to banking sectors,

importers/exporters and to the society in general to embark of the
effectiveness of their business, which in turn will change of the society.
Also the study will determine the census and problems of banks role in
international trade in Nigeria and thereby should be taken as a corrective
measure.

Through this investigation, therefore, the banks and the society will then
know their weak points and willingly adopt measure aimed at enhancing
its business effectiveness.

The government will be in the position to adopt the right strategies to

enable the society achieve its business expectations or goals.

2.3 Limitation

1. The time span for the project is limited.

2. Survey report analysis is based on only 50 responses.
3. Research was conducted online which leads to unbiased conclusion.

2.4 Data Collection

There are two methods of data collection that can be considered when collecting
data for research purpose. These data collection types include the following:

1. Primary Data

Primary data are original and are like raw materials. It is the most crude form of
information. The investigator himself collects primary data or supervises its
collection. It may be collected on a sample or census basis or from case studies.
Page | 41
2. Secondary Data

In this study data required was collected from both primary and secondary data.
The data collected for the survey was collected with the help of questionnaire.
The data collected for the research was collected from books, newspaper and
internet websites.

CHAPTER 3 :- LITERATURE REVIEW

3.1 IMPORT EXPORT DOCUMENTATION

Introduction

MK Industries, is a trading firm, imports large quantity of polymers in India. To

facilitate these transactions, MK Industries takes help of various banking
channels and instruments in accordance with international guidelines and laws.
A typical transaction involves –

1. Negotiating price with counter part

2. Obtaining Pro-forma invoice
3. Preparing Letter of Credit Application based on pro-forma invoice
4. Submitting the application to bank, which in-turn gives promissory notes
to corresponding

bank

5. Prepare Application to release the document from Bank along with

mandatory government

forms such as Form A1 or 15c or 15d .

6. In addition, it may also involve filling up another application for Buyers

Credit.

In all the process involves at least 6 set of different forms and documents which
are interlinked
with each other.

The Problem

For small number of transactions, one can easily make these document either by
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hand or in some word processor. Once the number of transaction increases, it
becomes really difficult to handle and
keep track of various documents generated. Also as the number of documents
increase, so will the human error rate. Especially when document are inter-
linked. Also almost 80% of the information is carried forward the next
document in workflow chain, hence typing these documents manually involved
lot of repetitive work which costs lots of time.

The Solution

Each document in the workflow chain, was designed to export its content to the
next document .
All the document were validated for common errors and all ambiguity across
entire set of document was removed, as the information captured was very
minimal. So the document flow chain looked something like this -
a. Letter of Credit Application Form
2. Letter of Credit Request letter ( imported from 1)
3. Government declarations ( imported from 1)

d. RBI Form A1 ( imported from 1 )

5. Letter for release of document ( imported from 4)
6. Buyers Credit Application ( imported from 4)

As you can see, at stage we only capture incremental information, importing the
rest from previous document in the chain. The whole process reduced the time
to generate these documents from an hour to 10 minutes. That too without any
errors.

3.2 FINANCING THE FOREIGN TRADE: THE CASE OF AN INDIA

TEXTILE
EXPORTER

Author(s):

Namita Rajput , (University of Delhi, New Delhi, India.) Abstract:

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Subject area

Trade Finance, International Trade, International Business, Emerging Markets,

Textile Industry.

Study level/applicability

This case has been designed for the students studying courses on International
Business during their graduation/post-graduation. Students are expected to have
basic knowledge of International Trade and are also expected to study the
different ways of financing the foreign trade to appreciate the case.

Case overview

The case describes the various ways of financing of foreign trade. The case has
been designed in the context of an Indian Textile Exporter who has grown
steadily over
the past years. As business has increased, simultaneously the requirement of
funds for the exporter has also increased. Through the medium of conversations,
the different ways of financing the foreign trade have been explained in detail.
Equipped with this knowledge, students are required to discuss the pros and
cons of the different ways of financing the foreign trade. The case also discusses
the dilemma of foreign currency hedging. This is a common dilemma faced by
importers and
exporters as they grow over a period of time.

Expected learning outcomes

This case has been designed to: understand the various ways of financing the
foreign trade and understand their merits and demerits; understand the
difference between factoring and forfeiting understand how the Exim Bank of
India plays an important role in supporting exporters and importers in India; and
understand the various ways of hedging the foreign currency risk.

Supplementary materials

Teaching notes are available for educators only. Please contact your library to
gain login details or email [email protected] to request teaching
notes.

Keywords:

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Textile industry, Emerging markets, International business, International trade,
Trade finance

Publisher:

Emerald Group Publishing Limited

Copyright:

© Emerald Group Publishing Limited 2015 Published by Emerald Group

Publishing Limited

Licensed re-use rights only

Citation:

Namita Rajput, Rohit Bhagat, Saachi Bhutani Bhagat, "Financing the foreign
trade: the case of an India textile exporter", Emerald Emerging Markets Case
Studies, (2015) , https://doi.org/10.1108/EEMCS-08-2014-0201

CHAPTER 4 :- DATA ANALYSIS & INTERPRETATION

Page | 45
• Most of the people have preferred private banks over public banks and co-
operative banks as the services offered by then are more efficient and the
services by them are also up to the mark.

• Most of the people here give a positive response towards banks playing a
crucial role in international trade as without banks there would be a leap of faith
between both the exchanging parties and the transactions would also not happen
so easily and quickly as it is possible today.

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• Out of all the major responses majority of the people say that commercial
banks play a very critical or crucial role in international business as without it ,it
would not be possible to carry on the transactions over a period of time

• Yes a major response points that EXIM bank play a crucial role in
internationals trade as it is the most important aspect of international trade as all
of the export or import transaction would not be able to happen without the help
of EXIM Bank as it keeps a proper check on all the exports or import happening
in the country.

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• out of all the four payment options mentioned in the chart majority of the
people use advance payment as it gives an assurance to the exporter that the
trade will not be a bad debt and other than that mode another major mode used
is documentary credit or letter of credit as in that banks gives a credit letter to
the concerning authority that it will pay on behalf of the concerned person if
they fail to do so.

• A majority of the people responded that they participate weekly in

international trade it states that the usage of international trade by the people is
used mostly by the people in week to week basis it means that the export or

Page | 48
import function performed by them is mostly weekly other than using daily or
monthly or yearly.

• Yes according to the responses received it Clearly states that banks reduce
exporting risks by providing trade finance products as it minimizes the trade
risks and it diversifies the risk among various participants or various other
persons

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• A majority of the people say that they use the product bankers‟ acceptance and
then they use letter of credit as they are first accepted by the bank and then they
are given to the respected customers for further use of it

• Mostly people prefer irrevocable or confirmed or acceptance credit as they are

confirmed or perfectly approved letter of credit and there are no chances to
change or make any changes to it as it s duly checked and approved by the
concerned authority without giving any second thought to it.

Page | 50
• The most of the people say that it is advisable to trade through international
trade finance products as it gives an assurance to the supplier that there is a
middleman to watch their trade and give a backing to the trade if anything does
not happen as per the required guidelines.

• India is eyeing giving a boost to its exports of food and agro products,
pharmaceuticals, information technology (IT) and services such as tourism to
China as it participates in the first China International Import Expo (CIIE). ...

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China is India’s largest trading partner with a total trade of $89.71 billion in
2017-18.Nov 5, 2018.

CHAPTER 5 :- CONCLUSION & SUGGESION

5.1 CONCLUSION

•••

International trade theory has historically struggled to hold up empirically in

terms of being able to predict countries‟ trade patterns and volume.

This is most famously demonstrated by the “Leontief Paradox”, which exposed

the inconsistencies of the United States‟ trade flows based on its resource
abundance.

Indeed, even after correcting for the misspecifications of Leontief‟s model,

Leaner
(1984) shows that it is still difficult to accurately predict trade between
countries

based on the neoclassical principles.

• However, the classical and neo-classical trade theories remain a valid and
solid

theoretical and applied premise in international trade discussions and

formulation of policies in areas pertaining to pattern of trade across regions,
factor price determination, negotiation with labour union and policies relating to
trade barriers.
• It gives us the basic knowledge for understanding the underlying framework
and complexities of international trade.

5.1 SUGGESTION

• Five recommendations to help alleviate some of the costs and concerns

affecting correspondent banking activities were set out in a report released
today by the Committee on Payments and Market Infrastructures (CPMI).

Page | 52
• Until recently, banks have maintained a broad network of correspondent
relationships, but there are growing indications that this situation might be
changing. This implies a threat that cross-border payment networks might
fragment and that the range of available options for these transactions could
narrow.

• Correspondent banking is an essential component of the global payment

system, especially for cross-border transactions. Through correspondent
banking

relationships, banks can access financial services in different jurisdictions and

provide cross-border payment services to their customers, supporting, inter alia,

international trade and financial inclusion.

• The Correspondent banking report provides some basic definitions, outlines

the main types of correspondent banking arrangement, summarizes recent
developments and touches on the underlying drivers. The report then develops
recommendations on certain measures relating to (i) know-your-customer
(KYC)

utilities; (ii) use of the Legal Entity Identifier (LEI) in correspondent banking;
(iii) information-sharing initiatives; (iv) payment messages; and (v) use of the
LEI as additional information in payment messages.

• The report was issued for public consultation in October 2015. Based on the
comments received and further interactions with relevant stakeholders, some
changes have been made to strengthen the analysis and sharpen the message and
the recommendations. In addition, the report now contains a quantitative
analysis using SWIFT transaction data on correspondent banking activities. The
data set comprises more than 200 countries and territories, and the analysis
shows a trend towards

concentration in correspondent banking activity as measured by payment traffic.

• CPMI believes that, as the next step towards implementation, these measures
should be further analysed by all relevant authorities and stakeholders in order
to gauge the potential impact of each measure and to avoid unintended
consequences. The CPMI expects that the relevant stakeholders will initiate any
necessary reviews or
investigations in the light of the five recommendations as soon as possible.

Page | 53
Notes

• The CPMI promotes the safety and efficiency of payment, clearing, settlement
and
related arrangements, thereby supporting financial stability and the wider
economy. The CPMI monitors and analyses developments in these
arrangements, both within and across jurisdictions. It also serves as a forum for
central bank cooperation in
related oversight, policy and operational matters, including the provision of
central bank services. The CPMI is a global standard setter in this area. It aims
at
strengthening regulation, policy and practices regarding such arrangements
worldwide. The CPMI secretariat is hosted by the BIS. More information about
the CPMI, and all its publications, can be found on the BIS website.

• The report on Correspondent banking was prepared for the CPMI by a

working group comprising representatives from CPMI central banks. The
working group was
chaired by Jochen Metzger (Director General, Directorate General Payments
and Settlement Systems, Deutsche Bundesbank).

WEBLIOGRAPHY

 www.export.gov.com 15/01/2019
 www.ecgc.in 15/01/2019
 www.exportscale.com 15/01/2019
 www.buyerscredit.wordpress.com 15/01/2019
 www.export-import companies.com 21/01/2019 •

••

 www.un.org 24/01/2019
 www.tedo.iridiuminteractive.in 24/01/2019
 www.fieo.org 24/01/2019

BIBLOIGRAPHY

 Export Incentives. Delhi s Anupam.

Page | 54
  Export Strategy in India - Since Independence. New Delhi s S. Chand.
 International Trade and Export Management. Bom bay . Mrna I aya .
 Indian Export Trade - A Critical Analysis. Bombay
 Export Performance in Indian Engineering Industry. Delhi s Seema.
 India's Exports and Export Policy in the 1960's.
 International Trade - Policies and Prospective in Developing Economy.
Jaipur Prateeksho.
 .Export Strategy for India. New Delhi

www.eximguru.com 21/01/2019
www.efic.gov.au 21/01/2019
www.intracen.org 21/01/2019

ANNEXURE
Study On Role Of Banks In International Trade

Banks play a critical role in international trade by providing trade finance

products that reduce the risk of exporting. ... Letters of credit are employed the
most for exports to countries with intermediate degrees of contract enforcement.
Compared to documentary collections, they are used for riskier destinations.

1. Name

2. Name Of The Firm

Page | 55
3. Gender

Male

Female

4. Age :-

5. Qualification

S.S.C

H.S.C

Graduate

Post Graduate

Other

6. Occupation

Service

Business

Profession

Other

Page | 56
7. Turnover of the firm 10 - 15 lakh

15 - 25 lakh

25 - 35 lakh

35 - 50 lakh

50 lakh & above

Other:

8. Which type of banks do you prefer

Private Banks

Public Banks

Co-operative Banks

9. Are the banks playing a crucial role in international trade

Yes

No

Maybe

10.Do you think commercial banks play a crucial role in International

Business

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Yes

No

Maybe

11.Do you think the functions of EXIM BANK play a crucial role in
International Trade

Yes

No

Maybe

12.which modes are mostly used for payment in international trade ?

Advance Payment

Documentary Credit

Documentary Credit with Letter Of Credit

Other

13.How often do you participate in International Trade

Daily

weekly

Monthly

Yearly
Page | 58
14.Do banks reduce exporting risk by providing trade finance products

Yes

No

Maybe

15.Which product do you chose in international trade finance

Bankers Acceptance

Discounting

Accounts Receivable Financing

Factoring

Forfeiting

Letter Of Credit

Counter Trade

All of the above

16.Which Type of letter of credit do you prefer

Irrevocable

Revocable

Confirmed

Unconfirmed

Sight

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Term Credits

Acceptance Credit

Deferred Payment Credit

Revolving

Other

17.According to you is it advisable to trade through international finance

products

Yes

No

Maybe

18.On overall basis do you think role of banks in International Trade will
help to boost the growth of India

Yes

No

Maybe

Page | 60