In A Project Report on

“TRADE FINANCE”

Submitted to
PUNJAB TECHNICAL UNIVERSITY
JALANDHAR

In partial fulfillment of the requirement for

the Award of degree of
Master of Business Applications

Submitted by
Name: Suman
Verma Uni. Roll no.
1174053

(Session 2011 – 2013)

GURU NANAK INSTITUTE OF MANAGEMENT AND TECNOLOGY

Ludhiana

1
 ACKNOWLEDGEMENT

In presentation of this report by me, I feel great pleasure because it gives me extensive practical
knowledge in my career. I get idea about Indian trade finance Industry by this project.

I express my deep sense of gratitude to My Company Guide Mr. Anuvrat Sharma for his
valuable inspiration and guidance during my project work. They have patient and critically gone
the subject matter.

I also like to thank all staff of Kotak Mahindra bank who guides me in project work.
I would like to take opportunity to express my gratitude towards all of them who have
contributed directly or indirectly in my project work.

Student Name: SUMAN VERMA

 CERTIFICATE

This is to certify that the Summer Internship project titled “ TRADE FINANCE” a bona fide w
or k of S UM A N V ER M A , i s or i g i n al an d h as b een d on e under my supervision
in partial fulfillment of the requirement for the award of M.B.A for the period of 1.5 months
from 25th April2012 to 15th June 2012. This report neither full nor in part has ever before
been submitted for awarding of any degree of either this university or any other
university. I am pleased to stay that his performance during the period was extremely
satisfactory.

College: GNIMT
City:
LUDHIANA
 CONTENTS
 Introduction to study
 Objective to study
 Banking Industry Profile
 Introduction of kotak Mahindra bank
 Corporate identity of kotak Mahindra bank
 About company
 The journey
 Business of kotak Mahindra bank
 Senior management
 Awards
 Introduction of trade
 Key factors of trade
 Risk in international transaction
 INCOTERMS
 Mode of International trade
o Clean payment
o Bill of collection
o Documentary credit
 Introduction of trade
 Importance of trade finance
 Pre-shipment and post-shipment
 Forfeiting, factoring, bank guarantees and co acceptance
 Domestic trade finance services
 Trade finance in kotak Mahindra Bank
 International- Export
 International- Import
 Bank guarantee
 Domestic
 Statistical Analysis
 Conclusion
 Findings
 Bibliography
 Project title “TRADE FINANCE” is the study of trade facilitation aims at reducing transaction
cost and time by streamlining trade procedures and processes. One of the most important
challenges for traders involved in a transaction is to secure financing so that the transaction may
actually take place. The faster and easier the process of financing an international transaction, the
more trade will be facilitated.

Traders require working capital (i.e., short-term financing) to support their trading activities.
Exporters will usually require financing to process or manufacture products for the export market
before receiving payment. Such financing is known as pre-shipping finance. Conversely,
importers will need a line of credit to buy goods overseas and sell them in the domestic market
before paying for imports. In most cases, foreign buyers expect to pay only when goods arrive,
or later still if possible, but certainly not in advance. They prefer an open account, or at least a
delayed payment arrangement. Being able to offer attractive payments term to buyers is often
crucial in getting a contract and requires access to financing for exporters.

Therefore, governments whose economic growth strategy involves trade development should
provide assistance and support in terms of export financing and development of an efficient
financial infrastructure.
 The main of the present study of is accomplish the following objective.

 P r op er u nd er s t an d i n g of Tr ad e f in an c e d ep ar tm en t .

 To know about brand awareness of kotak Mahindra bank and client’s ranking about Kotak Mahindra
bank.

 Factor responsible for performance of kotak Mahindra bank.

 To know the organization.

 Indian Banking Industry

Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are
now defunct. The oldest bank in existence in India is the State Bank of India being established as
"The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like
Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was
the most active trading port, mainly due to the trade of the British Empire, and due to which
banking activity took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab National
Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded
under private ownership. The Reserve Bank of India formally took on the responsibility of
regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve
Bank was nationalized and given broader powers.

Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-
then Prime Minister of India expressed the intention of the GOI in the annual conference of the
All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The
paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and
the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from
the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the
step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the
Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and it
received the presidential approval on 9th August, 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second dose of nationalization, the GOI controlled around 91% of the banking business of
India.

After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the
average growth rate of the Indian economy.
 Liberalization

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization
and gave licenses to a small number of private banks, which came to be known as New
Generation tech-savvy banks, which included banks such as UTI Bank(now re-named as Axis
Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, kick started the banking sector in
India, which has seen rapid growth with strong contribution from all the three sectors of banks,
namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms
for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights
which could exceed the present cap of 10%, at present it has gone up to 49% with some
restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this
led to the retail boom in India. People not just demanded more from their banks but also received
more.
Current Situation

Currently banking in India is generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private sector and foreign
banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable economies in
its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage volatility but
without any fixed exchange rate- and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time- especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As, takeovers, and asset
sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They
have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by
ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
Corporate Identity of kotak Mahindra Bank
 ABOUT COMPANY
Kotak Mahindra Bank is a financial service firm established in 1985. It was previously
known as Kotak Mahindra Finance Limited, a non-banking financial company. In February
2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry
on banking business by the Reserve Bank of India (RBI). Kotak Mahindra Finance Ltd. is the
first company in the Indian banking history to convert to a bank. Today it has more than 20,000
employees and Rs. 10,000 crore in revenue.
Mr. Uday Kotak is Executive Vice Chairman & Managing Director of Kotak Mahindra Bank
Ltd. In July 2011 Mr. C. Jayaram and Mr. Dipak Gupta, whole time directors of the Bank, were
appointed the Joint Managing Directors of Kotak Mahindra Bank. Dr. Shankar Acharya is
the chairman of board of Directors in the company.
The Bank has its registered office at Nariman Bhavan, Nariman Point, Mumbai.
It bought stressed assets from a number of banks, at full loan value of Rs 1,000 crore in 2005.
In January 2011, the bank reported a 32% rise in net profit to Rs188 crore for the quarter ended
December 2010 against Rs. 142 crore the corresponding quarter last year. Kotak Mahindra bank
also reached the top 100 most trusted brands of India in The Brand Trust Report published by
Trust Research Advisory in 2011.
 THE JOURNY

2011-2005

2011
 Kotak Mahindra Bank Ltd entered into a Business Cooperation arrangement
with CIMB Group Sdn Bhd, Malaysia.

2010
 Ahemedabad Derivatives and Commodities Exchange, a kotak anchored
enterprise, became operational as a national
commodity exchange.

2009
 Kotak Mahindra Bank Ltd. opened a representative office in Dubai.
 Entered Ahmedabad commodity exchange as anchor investor.

2008
 Launched a Pension Fund under the New Pension System.

2006  Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital
Company and Kotak Securities.

2005
 Kotak Group realigned joint venture in Ford Credit; their stake in Kotak
Mahindra Prime was bought out (formerly known as Kotak Mahindra Primus Ltd)
and Kotak group’s stake in Ford credit Kotak Mahindra was sold.
 Launched a real estate fund.

2004-2000

2004
 Launched India Growth Fund, a private equity fund.

2003
 Kotak Mahindra Finance Ltd. converted into a commercial bank - the
first Indian company to do so.

2001
 Matrix sold to Friday Corporation
 Launched Insurance Services.
 Kotak Securities Ltd. was incorporated

2000
 Kotak Mahindra tied up with Old Mutual plc. for the Life Insurance
business.
 Kotak Securities launched its on-line broking site.
 Commencement of private equity activity through setting up of
Kotak Mahindra Venture Capital Fund.

1995-1999

1998
 Entered the mutual fund market with the launch of Kotak Mahindra
Asset Management Company.

1996
 The Auto Finance Business is hived off into a separate company - Kotak
Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited).
Kotak Mahindra takes a significant stake in Ford Credit Kotak
 Mahindra Limited, for financing Ford vehicles. The launch of Matrix
Information Services Limited marks the Group's entry into
information distribution.

1995
 Brokerage and Distribution businesses incorporated into a
separate company - Securities. Investment banking division
incorporated into a separate company - Kotak Mahindra Capital
Company
1994-1990
1992
 Entered the Funds Syndication sector

1991
 The Investment Banking Division was started. Took over FICOM,
one of India's largest financial retail marketing networks

1990
 The Auto Finance division was started.

1989-1985

1987
 Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase
market.

1986
 Kotak Mahindra Finance Ltd started the activity of Bill Discounting.
Business of kotak Mahindra
 Multiple businesses, one brand
Kotak Mahindra is one of India’s banking and financial services group, offering a wide range of
financial services.

Kotak Mahindra Bank Ltd.

Kotak Mahindra Bank Ltd is a one stop shop for all banking needs. The bank offers personal
finance solutions of every kind from savings accounts to credit cards, distribution of mutual
funds to life insurance products. Kotak Mahindra Bank offers transaction banking, operates
lending verticals, manages IPOs and provides working capital loans. Kotak has one of the largest
and most respected Wealth Management teams in India, providing the widest range of solutions
to high net worth individuals, entrepreneurs, business families and employed professionals.

Kotak Mhindra Old Mutual Life Insurance Ltd.

Kotak Mahindra Old Mutual Life Insurance Ltd is a 74:26 joint venture between Kotak
Mahindra Bank Ltd., its affiliates and Old Mutual plc. A Company that combines its
international strengths and local advantages to offer its customers a wide range of innovative life
insurance products, helping them take important financial decisions at every stage in life and stay
financially independent. The company covers over 3 million lives and is one of the fastest

Kotak Securities Ltd.

Kotak Securities is one of the largest broking houses in India with a wide geographical reach.
Kotak Securities operations include stock broking and distribution of various financial products
including private and secondary placement of debt, equity and mutual funds.

Kotak Securities operate in five main areas of business:

 Stock Broking
 Depository Services
 Portfolio Management Services
 Distribution of mutual funds
 Distribution of kotak Mahindra old mutual life insurance ltd products.

Kotak Mahindra Capital Company

 Kotak Investment Banking (KMCC) is a full-service investment bank in India offering a
wide suite of capital market and advisory solutions to leading domestic and multinational
corporations, banks, financial institutions and government companies.
Our services encompass Equity & Debt Capital Markets, M&A Advisory, Private Equity
Advisory, Restructuring and Recapitalization services, Structured Finance services and
Infrastructure Advisory & Fund Mobilization.

Kotak Mahindra Prime Ltd.

Kotak Mahindra Prime Ltd is among India's largest dedicated passenger vehicle finance
companies. KMPL offers loans for the entire range of passenger cars, multi- utility vehicles and
pre-owned cars. Also on offer are inventory funding and infrastructure funding to car dealers
with strategic arrangements via various car manufacturers in India as their preferred financier

Kotak International Business

Kotak International Business specialises in providing a range of services to overseas customers

seeking to invest in India. For institutions and high net worth individuals outside India, Kotak
International Business offers asset management through a range of offshore funds with specific
advisory and discretionary investment management services

Kotak Mahindra asset management company

Kotak Mahindra Asset Management Company offers a complete bouquet of asset management
products and services that are designed to suit the diverse risk return profiles of each and every
type of investor. KMAMC and Kotak Mahindra Bank are the sponsors of Kotak Mahindra
Pension Fund Ltd, which has been appointed as one of six fund managers to manage pension
funds under the New Pension Scheme (NPS).

Kotak Private Equity Group

Kotak Private Equity Group helps nurture emerging businesses and mid-size enterprises to
evolve into tomorrow's industry leaders. With a proven track record of helping build companies,
KPEG also offers expertise with a combination of equity capital, strategic support and value
added services. What differentiates KPEG is not merely funding companies, but also having a
close involvement in their growth as board members, advisors, strategists and fund-raisers.

Kotak Realty Fund

 Kotak Realty Fund deals with equity investments covering sectors such as hotels, IT parks,
residential townships, shopping centres, industrial real estate, health care, retail, education and
property management. The investment focus here is on development projects and enterprise level
investments, both in real estate intensive businesses

Senior management

 Mr. Uday S. kotak

Executive Vice Chairman and managing director

Mr. Uday S. kotak Executive Vice Chairman and managing director of the bank, and its
principal founder and promoter. Mr. kotak is an alumnus of Jamnalal Bajaj institute of
management studies.
In 1985, where he was still in his early twenties, Mr. kotak thought of setting up a bank
when private Indian banks were not even seen in the game. First Kotak Capital
Management Finance Ltd (which later became Kotak Mahindra Finance Ltd), and then with
Kotak Mahindra Finance Ltd, Kotak became the first non-banking finance company in India's
corporate history to be converted into a bank. Over the years, Kotak Mahindra Group grew into
several areas like stock broking and investment banking to car finance, life insurance and mutual
funds
Among the many awards to Mr Kotak's credit are the CNBC TV18 Innovator of the Year
Award in 2006 and the Ernst & Young Entrepreneur of the Year Award in 2003. He was featured
as one of the Global Leaders for Tomorrow at the World Economic Forum's annual meet at
Davos in 1996. He was also featured among the Top Financial Leaders for the 21st Century by
Euromoney magazine. He was named as CNBC TV18 India Business Leader of the Year 2008
and as the most valued CEO by businessworld in 2010.

 Mr. C Jayaram Joint

Managing Director

Mr. C. jayaram, is joint managing Director of the bank and is currently in change of wealth
Management Business of the Kotak Group. An alumnus of IIM Kolkata, he has been with Kotak
Group since 1990 and member of the Kotak board in October 1999. He also oversees the
international subsidiaries and the alternate asset management business of the group. He is the
Director of the Financial Planning Standards board, India. He has varied experience

of over 25 years in many areas of finance and business, has built numerous business for the
group and was CEO ok kotak securities LTD. an avid player and follower of tennis, he also has a
keen interest in psephology.

 Mr. Dipak Gupta

Joint Managing director
An electronics engineer and an alumnus of IIM Ahmadabad, Mr. Gupta has been with the
Kotak Group since 1992 and joined the board in October 1999.
 He heads commercial banking, retail asset businesses and looks after group HR function. Early
on, he headed the finance function and was instrumental in the joint venture between Kotak
Mahindra and Ford Credit International. He was the first CEO of the resulting entity, Kotak
Mahindra Primus Ltd.
Awards

 ICAI Award
Excellence in Financial Reporting under Category 1 - Banking Sector for the year ending
31st March, 2010

 Asiamoney
Best Local Cash Management Bank 2010

 IDG India
Kotak won the CIO 100 'The Agile 100' award 2010

 IDRBT
Banking Technology Excellence Awards Best Bank Award in IT Framework and
Governance Among Other Banks' - 2009
Banking Technology Award for IT Governance and Value Delivery, 2008

 IR Global Rankings
Best Corporate Governance Practices - Ranked among the top 5 companies in Asia
Pacific, 2009

 FinanceAsia
Best Private Bank in India, for Wealth Management business, 2009

 FinanceAsia
Best Private Bank in India, for Wealth Management business, 2009

 IBA Banking Technology Awards

Best Customer Relationship Achievement - Winner 2008 & 2009 Best
overall winner, 2007
Best IT Team of the Year, 4 years in a row from 2006 to 2009 Best
IT Security Policies & Practices, 2007

 Euromoney
Best Private Banking Services (overall), 2009
 Emerson Uptime Champion Awards
Technology Senate Emerson Uptime Championship Award in the BFSI category, 2008
Trade finance is related to international trade.
 While a seller (the exporter) can require the purchaser (an importer) to prepay for goods
shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the
goods that have been shipped. Banks may assist by providing various forms of support. For
example, the importer's bank may provide 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 (by advancing funds) to the exporter on the basis of the
export contract.
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.[ 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. 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 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 importer.
Key Factors in Trade

Any Trade transaction can be broadly broken down into:

 Movement of Good.

 Movement of Document.

 Movement of Fund.
 Exporter’s Bank Importer’s Bank

Document exchange through bank Transfer of fund

Exporter Direct exchange of document

Importer

Inland movement of goods

Inland movement
of goods

orter Country Customer/ Regulatory clearance Importers Country

Customer/
Regulatory clearance

Traditionally, banks have played a role in the Movement of Document and Movement of
Funds, while Movement of Goods has been done through a whole range of logistics players
operating at different levels of supply chain.
Risks in International Transactions

In any business transition, there are risks. However, these risks are enlarged when dealing
internationally. Added to the commercial risk present in a domestic transaction are foreign
exchange risks as well as country risks.

 COUNTRY RISK
 Political stability
 Economic Environment
 Legal Infrastructure
 Foreign Exchange Restriction

 FOREIGN EXCHANGE RISKIS

 Foreign Currency Volatility

 COMMERCIAL RISKS
 Reliability of information
 Trade Dispute

Keeping these risks in mind, elaborate mechanisms and International trade instruments have
been developed over a period of time. These instruments are designed to minimize risk for each
of the parties involved. Depending upon the level of trust between various parties and the
international reputation of each of the parties, different modes of business are adopted.
Before proceeding further, we should acquaint ourselves with the INCOTERMS that are
frequently used in international and domestic trade.
INCOTERMS

Trading between countries is fraught with difficulties. In order to facilitate exporting, several
international “set of rules” have been created. In the area of sending goods and responsibility for
delivery and customs clearance, most countries recognize INCOTERMS 2000, published by the
International Chamber of Commerce (ICC). This set of definitions was first published in 1936
and is now in its 6th revision.
There are 13 different Incoterms and they have been grouped into 4 different categories.

 Group 1 – The E Term (Departure)

EXW - Ex works
 This group has only one term (EXW).
 Under this shipping term the seller provides the goods for collection by the buyer at the
seller’s own premises.
 The buyer arranges insurance against damage to the goods in transit.
 This term requires the least effort by the seller, but should not be used where the buyer
cannot carryout export formalities.

 Group 2 – The F Terms (Free, Main Carriage Unpaid) FCA

- Free Carrier FAS - Free alongside ship FOB
- Free on board
 The seller must deliver the goods to a carrier appointed by the buyer and located in the
seller’s country.
 The buyer arranges insurance against damage to the goods in transit.

 Group 3 – The C Terms (Main Carriage Paid)

CFR - Cost and Freight CIF - Cost, Insurance and Freight CPT –
Carriage paid to CIP – Carriage and Insurance paid to
 In this group the seller assumes the responsibility for the main contract of carriage.
 These terms provide for the seller contracting for carriage on usual terms a t his own
expense.
 In the terms CIF and CIP the seller arranges and pays for insurance against damage to
the goods in transit.

 Group 4 – The D Terms (Delivered/Arrival)

DAF - Delivered at frontier DES - Delivered ex ship DEQ -
Delivered ex quay DDU - Delivered duty unpaid
DDP - Delivered duty paid
 In this group the seller has to bear all costs and risks of bringing the goods to the country
of destination.
 The seller arranges and pays for insurance against damage to the goods in transit.
MODE OF INTERNATIONAL TRADE

There are 3 major recognized ways of effecting payment in international trade:

1. Clean payment
a. Advanced payment
b. Open account
2. Bill of collection
3. Documentary credit
 1. CLEAN PAYMENT TRANSACTION

IINTRODUCTION
Clear Payments are characterized by trust. Either the exporter sends the goods and trusts the
importer to pay once the goods have been received, or the importer trusts the exporter to send the
goods after payment is effected.

In this case of clean payment transaction, all shipping documents, including title documents, are
handled directly by the trading parties. The role of banks is limited to clearing funds as required.

HOW IT WORKS
There are two types of Clean Payment

 PAYMENT IN ADVANCE/ADVANCE PAYMNENT

The importer sends payment directly to the exporter and waits for the exporter to send the goods
and documents.

Advance Payment are usually adopted when the trading parties do not yet have a long term
relationship.

This mode of transaction is demanded by the exporter/ seller when the selling party is a well-
known and reputed company in its field. Thus the importer has a reasonable amount of trust on
the exporter by virtue of the exporter’s reputation.
 Process Flow in case of advance payment transaction

Importer’s Bank
Exporter’s Bank 2
3

Transfer of fund

5 1
Direct exchange of document
Exporter Importer

Inland movement of goods Inland movement

of goods

xporter Country Customer/ Regulatory clearance Importers Country

Customer/
Regulatory clearance
  OPEN ACCOUNT
The exporter ships the goods and the documents directly to the Importer and waits for the
Importer to send payment.

This type of transition symbolizes a long-term regular relationship between the two parties. A
mutual level of trust between the two parties ensures that an open-account system is carried on
smoothly.

It is to be noted that as long as the exporter can trust the importer to make his payments on
time, an Open Account transaction is the simplest mode of doing long- term business.

Importer’s Bank
Exporter’s Bank
4 3
5
Transfer of fund

Exporter 2 Direct exchange of document Importer

Inland movement of goods

Inland movement of goods

1
xporter Country Customer/ Regulatory clearance Importers Country Customer/ Regulatory clearance

Process Flow in case of Open Account transaction

 2. DOCUMENTRY
COLLECTION INTRODUCTION
Documentary Collection or ‘Collection Against Bills’ is a method of payment used in
international trade where by the exporter entrusts the handling of commercial and often financial
documents to banks and gives the banks instructions concerning the release of these documents
to the importer.
Banks involved do not provide any guarantee of payment. However, collections are subject to
the Uniform Rules for Collection published by the International Chamber of commerce.

HOW IT WORKS
After the Importer and the exporter have established a sales contract and agree on a
Documentary Collection as the method of payment, the Exporter ships the goods. In a
Documentary, the Importer is the “Drawee” and Exporter is the “Drawer”.
After the goods are shipped, document originating with the exporter (e.g. commercial invoice)
and the transport company (e.g. bill of landing) are delivered to a bank, called the Remitting
Bank in the Collection process. The Remitting bank sends these documents accompanied by a
Collection Instruction, giving complete and precise instructions, to a bank in the Importer’s
country, referred to as the collecting/presenting Bank in the Collection process.
The collection/presenting Bank acts in accordance with the instructions give in the Collection
Instruction and release the documents to the Importer against payment or acceptance, according
to the Remitting Bank’s Collection instructions.
Payment is forwarded to the Remitting Bank for the Exporter’s account. And the Importer can
now present the transport/title document to the carrier in exchange for the goods.
ROLE OF VARIOUS PATIES

EXPORTER
Submit document to his bank with his instruction on how and when the buyer should pay (the
term of payment have been agreed already between buyer and seller) EXPORTER’S BANK
The exporter’s bank is known as the REMITTING BANK, and they remit the Bill for collection
with instruction.
The role of the remitting bank is:
 Check documents are consistent with each other.
 Send document to bank in the buyer’s country with instruction on collecting payment.
 Pay the exporter when it receives payment from the Collecting Bank.
BUYER/IMPORTER
The buyer/importer is the DRAWEE (of the Bill)
The role of the Importer is:
 Pay the bill (or promise to pay later).
 Take the shipping document (unless it is a clean bill) and clear his goods.
IMPORTER’S BANK
This is a bank in the importer’s country: usually a Branch or correspondent Bank of the Remitting
Bank – but any other bank may be used if the exporter requests it.
Importer’s bank is known as the Collecting/Presenting Bank. The role of the collection bank is:
 Act as the Remitting Bank’s agent.
 Present the bill to the buyer for payment/acceptance.
 Release the document to the buyer when the exporter’s instructions have been followed.
 Remit the proceeds of the bill according to the Remitting Bank’s schedule instructions,
usually less any charges.
If the bill is unpaid/ unaccepted, the Collecting Bank:
 May arrange storage and insurance for the goods as per Remitting Bank’s instruction on
the schedule.
 Protests on behalf of the Remitting Bank
 Requests further instruction from the Remitting Bank if there is a problem that is not
covered by the instruction in the schedule.
 Once payment is received from the importer, the collecting bank remits the proceeds
promptly to the Remitting Bank less is charges.
 DISHONOR
If the importer refuses payment / acceptance, and the collecting bank is required to note /
proceeds promptly to the Remitting Bank less its charges.

PROTEST BILLS
It refers to formal representation of dishonored bill of exchange. By protesting the bank retains
recourse to the exporter. When remitting banks or branches give instructions to protest bills
against either non-payment, or non-payment, or non-acceptance, or both, particular care must be
taken to ensure that such instructions are carried out promptly.
In effecting protest instruction, the bill should preferably be noted on the day of its dishonor but
in any event MUST BE NOTED within local legal time frame requirements.
When a bill has been duly noted, the protest may be subsequently extended as of the date of the
nothing. It must be remembered that if there are other endorses to bills, or if advances have been
made by the remitting banks / branches, then those parties will only retain rights of recourse to
the drawers if the bills are protested.

STATEMENT OF BILLS
The exporter will ask the importer to settle the bill in one of two ways, either D/P or D/A.
 DOCUMENT AGAINST PAYMENT (D/P):
This is sometimes referred to as Cash against Document / Cash on Delivery. In effect D/P
means payable at sight (on demand). The collecting bank hands over the shipping document
including the documents of title (bill of Landing) only when the importer has paid the bill. The
drawee is usually expected to pay within 3 working days of presentation. The attached
instruction to the shipping document would show “Release documents against Payment”.
Process Flow in case of D/P

Remitting Bank Collecting/Presenting Bank

7 3 4

Document Exchange through bank 5

Transfer of fund

2
Exporter Importer

Inland movement of goods Inland movement

1 of goods

Export country customs/ regulatory clearance Import country customs/

regulatory clearance
 DOCUMENT AGAINST ACCEPTANCE (D/A):

Under document under acceptance, the exporter allows credit to the period of credit is referred to
as ‘usance’. The importer / drawee is required to ACCEPT the Bill i.e. to make a signed promise
to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take
the document and clear his goods.

Process Flow in case of (D/A)

6
Remitting Bank 3 Collecting/Presenting Bank
5

7
Document Exchange through bank Transfer of fund
4

Process Flow Order reversed

Exporter Importer
2

Inland movement of goods Inland movement

of goods

1
Export country customs/ regulatory clearance Import country customs/
regulatory clearance
USANCE D/P BILLS:
A Usance D/P Bill is an arrangement where the buyer accepts the bill payable at a specified
future date but does not receive the document until he has actually paid for them. The reason is
that airmailed documents may arrive much earlier than the goods shipped by sea.

The buyer is not obliged to pay the bill before its due date, but he may want to do so if the ship
arrives before that date. This mode of payment is less usual but offers one more settlement
possibility.
There are still D/P terms so there is no extra risk to the exporter or his bank. As an alternative
the covering schedule may simply allow acceptance or payment to be deferred awaiting arrival of
carrying vessel.

There are different types of usance D/P bill, some of which do not required acceptance
e.g. those drawn payable at a fixed period after date or drawn payable at a fixed date.
Bills requiring acceptance are those drawn at a fixed period after sight, which is necessary to
establish the maturity date. If there are problem regarding storage of goods under a usance D/P
bill, the collecting bank should notify the remitting bank without delay for instructions.

It should be noted however that the collecting bank does not have to do everything the
remitting bank’s schedule says.

Attached instructions would show “Release document against Payment”, and may show
PAYMENT may await arrival of carrying vessel”.
 3. DOCUENTARY CREDIT

Documentary Credits, otherwise popularly known as “letter of Credit” (LC) is an instrument

of settling trade payments. The international Chamber of Commerce (ICC) in the Uniform
custom and Practice for Documentary Credit (UCPDC) defines it as:
An arrangement however named or described, whereby a bank (the Issuing bank) acting at the
request and on the instructions of a customer (the applicant) or on its own behalf:

 Is to make a payment to or to the order of a third party (the beneficiary) or is to accept

bills of exchange (drafts) drawn by the beneficiary. OR
 Authorizes another bank to effect such payments or to accept and pay such bills of
exchange (draft). OR
 Authorizes another bank to negotiate against stipulate document provided that the terms
are complied with.

LC is an arrangement whereby a bank acting at the request of the customer undertakes to pay a
third party by a given date according to agreed stipulation and against presentation of documents,
the counter-value of goods or services dispatched/supplied, rendered or otherwise.
A key principle underlying Letter of Credit is that banks deal only in documents and not in
goods. The decision to pay under a Letter of Credit will be based entirely on whether the
documents presented to the bank appear on their face to be in accordance with the terms and
conditions of the Letter of Credit.
It would be prohibitive for the banks to physically check whether merchandise has been
shipped exactly as per each Letter of Credit.
High degree of involvement by bank in the Documentary Credit process builds in trust into the
Transactions.
This inherent advantage of L/C based transaction has made has contributed to a large extent to
the growth of International Trade in modern times.
PARTIES TO LETTER OF CREDIT
 Applicant (Opener): Applicant is normally a buyer of the goods, who has to make
payment to beneficiary. LC is initiated and issued at his request and on the basis of his
instruction.
 Issuing Bank (Opening Bank): Issuing Bank is one which issues the credit i.e. it is the
bank that creates a letter of credit and undertakes to make payment.
 Beneficiary: Beneficiary is normally a seller of the goods, who has to receive payment
from the Applicant. A Credit is issued in his favor to enable him or his agent to obtain
payment on surrender of stipulated documents and comply with the terms and condition
of the LC.
If LC is a transferable one and he transfers the credit to another party, then he is referred
to as the First or Original beneficiary.
 Advising Bank: Advertising Bank advises the Credit to the Beneficiary, thereby assuring
the genuineness of the credit. It is normally situated in the country/place of Beneficiary.
The Advising bank may be correspondent bank of the Issuing bank or could be
specifically notified by the beneficiary.
 Confirming Bank: Confirming Bank adds its guarantee to the credit opened by another
bank, thereby undertaking responsibility of
payment/negotiation/acceptance under the credit, in addition to that of the Issuing Bank.
 Negotiating Bank: negotiation is a process of giving value to the documents. The
negotiating bank is one with whom the documents may be negotiated.
 Reimbursing Bank: Reimbursing Bank is the bank authorized to honor the reimbursement
claim in settlement of negotiation/ acceptance/ payment lodged with it by the
negotiating bank.
 Second Beneficiary: second beneficiary is the person in whose name the first or original
beneficiary of credit has transferred the credit designated as transferable.
 INTER BANK COMUNICATION

The inter-bank communication and transaction in documentary credit take place through
SWIFT (society for Worldwide Inter-bank Financial-Telecommunication) network. SWIFT is an
industry owned cooperative supplying secure messaging services and interface software to over
7000 financial institution in 196 countries.

SWIFT messages are preset and referred to by category number called MT numbers. For
instance, MT800’s only deal with Traveller’s Check, MT300’s only deal with Foreign Currency
Exchanges. Each type of message or condition in each category is preset as well. For instance,
there are 89 different messages available under the category MT500. This does not include the
occasional sub code.

What this mean is that one cannot write SWIFT instructions that do not work with the preset
messages and expect the sending bank to accept them, or the receiving bank to respond.
LETTER OF CREDIT PROCESS

The brief description of the LC process flow is given below:

Reimbursing bank
8
Instruction for payment
Advising bank
1
9 Confirming bank 2
3 2
LC opened
6 7

Negotiating bank 1
Issuing bank
1
0
11
Transfer of fund
Document Exchange through bank

Exporter Importer

Inland movement Inland movement

of goods of goods

4
Export country Export country
custom custom
PROCESS DETAILS

1. The buyer and seller agree on the term of a sale and enter into the requisite contracts
encompassing the type of goods, delivery schedule, mode of payment, etc. the buyer arranges for
his bank to open a letter of credit in favor of the seller.
Typically the documents requested in an LC are the followed:
1. Commercial invoice.
2. Transport Document such as a bill of landing or Airway bill.
3. Insurance Document.
4. Inspection Document.
5. Certificate of origin.
In specifying documents required of the seller, it is very important to stipulate those that are
required for customs clearance and those that reflect the agreement reached between the buyer
and the seller. Price should be stated in the currency to the LC and documents should supplied in
the language of the LC.
2. The buyer’s bank sends the letter of credit to the advising bank in seller’s country. The seller
may request that a particular bank be the advising bank, or the buyer’s bank may select one of its
correspondents bank in the seller’s country.
3. The advising bank forwards the letter of credit to the seller. The advising bank checks on the
authenticity of the LC before forwarding to the seller. The seller carefully reviews all conditions
the buyer has stipulated in the letter of credit. If the seller cannot comply with one or more of the
provisions, the buyer Is immediately notified and asked to make an amendment to the letter of
credit.
4. After final term are agreed upon, the seller prepares the goods and arranges for shipment to
the appropriate port. The seller ships the goods, and obtains the bill of landing and other
documents as required by the buyer in the letter of credit. Some of these documents may need to
be obtained prior to shipment.
5,6,7. The seller presents the documents to the Negotiating bank, indicating full compliance with
term of the letter of credit. The Negotiating bank reviews the documents. If they are in order,
they are forwarded to the issuing bank. If there is a confirming bank in the transaction the
documents have to flow through the Confirming bank.
8. The Negotiating bank forwards a reimbursement claim to ther Reimbursing bank.
9. The Reimbursing bank pays the Negotiating bank as per instructions issued to it by the
Issuing bank.
10. On receipt of the payment the negotiating bank, makes payment to the Beneficiary, if he has
not discounted the bill earlier.
11. Once the Issuing bank receives the documents it notifies the buyer who then reviews them.
If are in order the buyer sign off, makes payment to the bank, and receives the documents, which
enables the holder to take possession of the shipment.

The transfer of funds from the buyer to the bank, from the buyer’s bank to the bank, from the
buyer’s bank to the seller may be handled at the same time as the exchange of documents, or
under terms agreed upon in advance.
Amendment of a letter of credit
The process for amending an LC is as follows:-
1. Seller requests a modification of any Questionable terms in the letter of credit.
2. If the terms are agreed upon, buyer issues order to his or her (buyer’s) bank to make an
amendment to the term of letter of credit.
3. Buyer’s bank notifies seller’s bank of amendment, through the advising bank.
4. Seller’s bank notifies seller of amendment.

TYPES OF LETTER OF CREDIT

1. Revocable letter of Credit
Revocable letter of credit is a credit, which can be revoked, i.e. canceled or amended by the bank
issuing the credit, without the notice of other parties.
2. Irrevocable letter of Credit
Irrevocable Letter of credit is affirm undertaking on the part of issuing bank and can not be
cancelled or amended without the consent of the parties to LC, particularly the beneficiary.
3. Confirmed letter of Credit
Confirmed letter of credit is a LC to which another bank (bank other than the issuing bank) has
added its conformation or guarantee. Thus, there is double guarantee in such credit and it is more
favorable to beneficiary
4. Sight Credit and Usance Credit
Sight credit states that the payment would be made by issuing bank at sight, on demand or on
presentation. In case of usance credit, drafts are drawn on the issuing bank or the correspondent
bank at specific usance period. The credit will be indicated whether the usance drafts are to be
drawn on the issuing bank or, in the case of confirmed credit on the confirming bank.
5. Back-to-Back letter of Credit
It is also called as countervailing credit. When a LC is opened with security of another LC, the
credit thus opened in termed as Back-to-back Letter of credit’. The original credit, which is
offered as security for opening a back-to-back credit is called as overriding credit/principal
credit.
6. Transferable letter of Credit
It is a credit, which can be transferred by the Original Beneficiary in favor of second beneficiary
or several second beneficiaries. As per UCPDC a LC can be transferred only if it is specifically
stated as “Transferable” in the LC. Further, such Credit can be transferred only once (i.e. from
the First Beneficiary to a Second Beneficiary and not (thereafter) from the second beneficiary to
third beneficiary can also substitute his name for that of the opener. The first Beneficiary can
hide the name of the actual supplier to the buyer (opener) and vice versa.
7. Stand by letter of Credit
These credits are generally used as a substitute for performance guarantee or for securing secured
loans. The documentary generally called for under such credit is a simple statement of claim or
proof of delivery of goods or certificate of non-performance.
IMPORT OPERATIONS UNDER LC
Banks in India normally open Importer Letter of Credit under following circumstances:
 When a resident in India is importing goods into India.
 When a resident merchant trader is purchasing goods from one country, for sale to
another country, for the purpose of merchandizing trade.
 When an India exporter who is executing a contract abroad requires importing goods
from a third country to the country where he is executing the contract.
The first category is the most common in the day-to-day banking.
FEES AND REIMBURSEMENTS
The different charges/fees payable under importer LC is briefly as follows-
The issuing bank charges the applicant fee for opening the letter of credit. The fee charged
depends on the credit of the applicant, and primarily comprises of:
a) Opening Charges: This would comprise commitment charges and usance charges, to be
charged upfront for the period of the LC COMMITME NT period is the period from date
of opening of the letter of credit until the last date of
negotiation of documents under the LC or the expiry of the LC, whichever is later. The
fee charged by the LC opening bank during the commitment period is referred to as
commitment fees.
Usance is the credit period agreed between the buyer and seller under the Letter of Credit.
This may vary from &7 days usance (sight) to 90/180 days. The fee charged by the bank
for the usance period is referred to as usance charges.
b) Retirement Charges:
1. This would be payable at the time of retirement of LCs. LC opening bank scrutinizes
the bills under the LCs according to UCPDC guidelines, and levies charges based on
value of goods.
2. The advising bank charges an advising fee to the beneficiary unless stated otherwise.
The fees could vary depending on the country of the beneficiary. The advising bank
charges may be eventually borne by the issuing bank or reimbursed from the
applicant.
3. The applicant is bound and liable to indemnify bank against all obligation and
responsibilities imposed by foreign law and usance.
4. The confirming Bank’s fee depends on the credit of the issuing bank and would be
borne by the beneficiary or the issuing bank depending on the terms of contract.
5. The Reimbursing bank charges are to the account of the Issuing bank.

RISK ASSOCIATED WITH OPENING IMPORT LCs

1. The financial standing of the importer
2. The goods
3. The status of the exporter(or beneficiary of the LC)
4. Country risk
5. Foreign exchange risk
EXPORTER OPERATION UNDER LC:
Letter of Credit establishes in favor of Indian residents by persons resident outside India for
purchase of goods and services are referred to as Export Letter of Credit. Such letters of credit
may be received for following purposes:
1. For physical export of goods and services from India to a foreign country.
2. For execution of the projects (project exporters) outside India exporters by supply of
goods and services from India and partly from outside India (third country).
3. Toward deemed exporters where there is no physical movement of goods from outside
India but the supplies are being made to a project financed in foreign exchange by
multilateral agencies, UN Organization or project being executed in India with the aid of
external agencies.
4. For sale of goods by Indian exporter with total procurement and supply from outside
India (merchant trade by India intermediary). In all the above cases there would be
earning of foreign exchange or conservation of foreign exchange.
In every case the bank will be rendering services not only to the issuing bank as its
agent/correspondent bank but also to the exporter in advising financing his export activity.
1. Advising an Export LC
The basic responsibility of an Advising Bank is to advise the credit received from its overseas
branch/ correspondent only after checking the apparent authenticity of the credit established by
the issuing bank. As a further step, as a prudent bank, it must also go through the letter of credit,
try to understand the underlying transaction, terms and conditions of the credit and advice the
beneficiary in the matter.
2. Advising of Amendments to LCs
For the various reasons LCs must be amended. All the procedures outlined for advising the
original LCs must be followed for the amendments also. While advising the amendments
normally the issuing Bank serializes the amendment number. Before advising the amendment it
has to be ensured that no previous amendment is missing.
Normally, whenever an amendment is effected there is a likelihood of LC (for example whenever
LC value is enhanced there should be a corresponding enhancement in the quantity/or unit
prices).
3. Confirmation or Export Letter of Credit
In confirmation the bank adds its guarantee to the undertaking given by the issuing bank. Hence,
adding of confirmation entails assessment of risk on the issuing bank.
4. Discounting/Negotiation of Export LCs
The exporter may require the funds before the due date in case of usance LCs. In this scenario,
the exporter can discount/ negotiate the LCs with the Negotiating Bank. The Issuing Bank
nominates the negotiating bank. Hence the negotiating bank takes the credit risk on the issuing
bank or confirming bank.
 5. Reimbursement of Export LCs
In an LC transaction, the issuing Bank may nominate a Reimbursing bank allowing the
negotiating bank to the collect the money from the reimbursing bank. This is similar to a cheque
facility provided by banks, where in the Negotiating Bank can collect the money once the goods
have been shipped.
The reimbursement bank earns a commission per transaction and enjoys float income from the
balance kept with Reimbursement bank by issuing bank. The Reimbursing Bank dose not
involves itself in checking the documentation of the transaction. Its only role is to either make
the payment on the due date or the day on which the Negotiating Bank demands the same.

Regulatory Requirements
Opening of Import LCs in India involve compliance of the following main regulation:
 Trade Control Requirements
 Exchange Control Requirements
 UCPDC Guidelines
 ISBP2002
 FEDAI Guidelines
 Bank’s Internal Procedures
IMPORTANT TRADE DOCUMENTS

Almost every party to international trade issues documents. These documents are very important
in international trade because they serve as evidence that some action has been carried out.
These documents may be called for under the terms of a documentary credit, or they may be
those, which are required for documentary collection.
The following is a list of documents often used.
 Air Waybill
 Bill of Landing
 Certificate of Origin
 Combined Transport Document
 Draft (or Bill of Exchange)
 Insurance Policy(or Certificate)
 Packing List/Specification
 Inspection Certificate

Air Waybill
This is a receipt of goods from an airline company.
Because an air waybill is only a receipt it is not a document of title, and the goods will be
delivered to the named consignee without further formality once customs clearance has been
obtained.
Under a DC the air waybill is usually consigned to the issuing bank; this is to let the exporter
maintain control over the goods. In the case of non-DC bills when the exporter wants to retain
control of the goods, he will also have them consigned to a bank.
The copy marked “Original 3 (For Shipper)” is the copy that would normally be presented under
a documentary credit.
Bill of Landing (B/L)
This is a receipt given by the shipping company to the shipper for goods accepted for carriage by
sea. If in negotiable form it also convey title to the goods, and the goods will only be released by
the shipping company at destination against surrender of a signed original of the bill of landing.
It is also evidence for possible insurance claim.
It is usually issued in a set of 2 or 3 originals; presentation of 1 original is sufficient to take
possession of goods at port of discharge-so, a bank which finances a trade transaction will need
to control the complete set. When an original bill of landing is submitted for delivery of goods,
the remaining originals become null and void.
The bill of landing must be signed by the shipping company or its agent, and must show how
many signed originals were issued.
Certificate of Origin
This is a declaration that goods originated in a particular country.
It is always signed (may be signature of selling company official, or of a Chamber of Commerce or
other trade organization, or official of importing country specified in DC).
The certificate must provide the information required by the credit and be consistent with all
other document. It would normally include:

 The company name and address as consignor. Some countries may also require the name
and address of the manufacture if different.
 The party to whom the goods are addressed, usually the buyer or the issuing bank
 Country of origin of the goods.
 Optional field which, if completed, must show the details on the transport document.
 Package numbers, shipping marks and description of goods to agree with that on other
documents.
 Any weights or measurements must agree with those shown on other documents.
 It must be stamped by the Chamber of Commerce.
Combined Transport Document
This lists the place of receipt, place of delivery and the different modes of transport involved. It
is also known as Multimodal Transport Document, inter-modal. Transport Document or
Combined Transport Bill of Landing.
The contract of carriage is for a combined transport from the place of receipt to the place of
delivery. Therefore, it evidences receipt of goods and not shipment on board. It does evidence on
board shipment if it complies with ICC 500 Art 26 (a).
The liability of the combined Transport Operator Starts at the place of receipt and ends at the
place of receipt and ends at the place of delivery.
The document should be signed, and should show the number of original in the full set and
evidence that transport charges have been paid or prepaid or payable at destination.
Commercial Invoice
This is a statement of goods shipped, and is also a statement of payment due. It describes the
goods shipped and lists the price together with details as agreed between the buyer and the seller.
In documentary credit transactions it must show the description of the goods corresponding with
the DC. Commercial Invoice must include the description of the goods exactly as stated in the
documentary credit.
Insurance Policy/ Certificate
The date on which the insurance becomes effective must be the same as or earlier than the date
of issuance of the transport documents.
If submitted under a DC, the insured amount must be in the same currency as the credit, and
usually for the bill amount plus 10 percent.
Insurance Policy
This provides actionable evidence of a contract of insurance and shows full details of risks
covered.
The right to claim from insures maybe assigned by the insured to someone else, usually the
overseas buyer or a bank, by endorsement and delivery.
Insurance Certificate
This provides evidence that cover has been taken out under an “open policy” but is not
actionable, and only gives brief details of risks covered.
Packing List/Specification
This lists contents of each crate, parcel etc. showing packing used and shipping marks placed on
the outside, some include measurements and weight of goods. The packing list must:
 Have a description of the goods (“A”) consistent with the other documents.
 Have details of shipping marks (“B”) and number consistent with other documents.

Inspection Certificate
In various cases the importer requests/requires the consignment to be inspected by a third party
at the port of shipment/exporter’s factory or warehouse before the goods are sales and
transported. This requirement is often incorporated into the terms and conditions of the Letter of
Credit. Thus the exporter needs to submit a valid Inspection Certificate along with the other trade
documents like Invoice, Packing List, Shipping Bill, Bill of landing etc. to the bank for
Negotiation.
Various internationally reputed Inspection agencies provide the inspection services for a nominal
charge, thus building in an element of comfort in the International transaction by assuring the
importer/buyer that goods being shipped are as per the standards agree upon between the
importer and exporter.
 IMPORTANCE OF TRADE FINANCE
Trade Finance is a specific topic within the financial services industry. It’s 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 overseas,
therefore, it takes longer to get paid. Extra time and energy is required to make sure that buyers
are reliable and creditworthy.
In addition, foreign buyer- just like domestic buyer-prefer to delay payment until they receive
and resell the goods. Due diligence and careful financial management can mean the differences
between profit and loss on each transaction
Trade finance provides alternative solutions that balance risk and payment. In this overview,
we’ll outline the two broad categories to trade finance:
 Pre-shipment financing to produce or purchase the material and labor necessary to fulfil
the sales order.
 Post-shipment financing in order to generate immediate cash while offering payment
terms to buyers.

GENERAL CONSIDERATIONS
The following factors and considerations apply to financing general:
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. The exporter may need financing
to produce the goods or to finance other aspects of a sale, such as promotion and selling cost,
engineering modifications, and shipping costs. Various financing sources are available to
exporters, depending on the specifics of the transaction and the exporter’s overall financing
needs.
Financing Costs
The costs of borrowing including interest rates, insurance and fees will vary. The total cost and
its effect 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.
Financing Terms
Costs increase with the length of terms. Different methods of financing are available for short,
medium, and long terms. Exporter need to be fully aware of financing limitations so that they
secure the right solution with the most favorable terms for seller and buyer. Risk Management
The greater the risks associated with the transaction, the greater 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 a potential lender. The political and economic stability of the buyer’s 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 a good credit
history. They will evaluate any commercial or political risk.
If a lender is uncertain about the exporter’s ability to perform, or if additional credit capacity is
needed, government guarantee programs are available that may enable the lender to provide
additional financing.
IMPORTER AND EXPORTER?
Though the pre-shipment and post-shipment finance option offered to importer and exporter are
fundamentally similar, their perspectives might be different.
Export Trade Finance
Exporters, using pre and/or post shipment finance, may improve their cash flow by utilizing trade
finance to fund their purchase and/or manufacture of goods pending receipt of payment from
their buyer. An exporter is also able to offer advantageous credit terms to buyer as the repayment
is usually made after the goods are sold.
Import Trade Finance
Importer may use pre and post shipment finance to improve their cash flow.
Post shipment trade finance can allow time for goods to be sold prior to payment being made. It
also enables importers to offer payment at a sight basis to the supplier, rather than utilizing
supplier terms. This provides an importer with a negotiating advantage in realizing a potentially
lower price.
Pre shipment trade finance enables an importer to pay for goods prior to shipment, when the
method of payment agreed upon with the exporter is ‘pre-payment by Clean Remittance’.
 PRE-SHIPMENT TRADE FINANCE
Pre-shipment finance is credit granted to the exporter by a financial institution. Pre- shipment
credit is part of working capital finance. The main objective behind pre- shipment finance is to
enable exporter to:
 Procure raw materials
 Carry out manufacturing processes
 Provide a secure warehouse for goods and raw materials
 Process and pack the goods
 Ship the goods to the buyers
 Meet other financial costs of the business

TYPES OF PRE-SHIPMENT FINANCE

 Packing Credit
 Advances against receivables from government, like duty drawback etc.
 Advance against cheques/drafts etc., representing Advance Payment. Pre-
shipment finance is extended in the following forms:
 Packing Credit in Rupee.
 Packing Credit in Foreign Currency(PCFC)

REQUIREMENTS FOR GETTING PACKING CREDIT

This facility is provided to an exporter who satisfies the following criteria:

 Exporter should have a ten-digit importer-exporter code number allotted by DGFT.
 Exporter should not be in the caution list of RBI.
 If the goods to be exported are not under OGL (open general license), the exporter should
have the required License/quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of following evidences to
the bank:
1. Formal application for releasing the packing credit with undertaking to the effect that the
exporter would ship the goods within stipulated due date and submit the relevant shipping
documents to the bank within prescribed time limit.
2. Firm order or irrevocable L/C or original Cable/Fax/telex message exchanged between
the exporter and buyer.
3. License issued by DGFT if the goods to be exporter fall under the restricted or canalized
category. If the item falls under quota allotment proof needs to be submitted.
The confirmed order received from the overseas buyer should reveal the information about the
full name and address of the overseas buyer should reveal the information about the full name
and address of the overseas buyer, description, quantity and value of goods (FOB or CIF),
destination and last date of payment.
Eligibility
Pre-shipment credit is granted to an exporter who has the export order or LC in his own name.
The exporter is the person or company who actually delivers the goods to the importer/buyer.
However as an exception, financial institutions can also grant credit to a third party manufacturer
or supplier of goods who does not have export orders or LCs in their own name, but some of the
responsibilities of meeting the export requirements have been out sourced to them, by the main
exporter.
In case where the export order is divided between more than one exporter, pre- shipment credit
can be shared between them.
Quantum of Finance
There is no fixed formula to determine the quantum of finance that is granted to an exporter
against a specific order/LC or an expected order. The only guiding principle is the concept of
Need-Based Finance. Banks determine the percentage of Margin, depending on factors such as:
 The nature of order.
 The nature of the commodity.
 The capacity of exporter to bring in the requisite contribution.

DIFFERENT STAGES OF PRE SHIPMENT FINANCE

Appraisal and sanction of limits

1. Pre-shipment finance, or packing Credit, is essential a working capital advance made
available for the specific purpose of procuring /processing/manufacturing of goods meant
for export. All costs before shipment would be eligible for being financed under the
packing credit. Packing Credit advance should be liquidated from exporter proceeds only.
While considering Credit facilities for export activities, banks look specifically look into
the aspects of product profile, country profile and the commodity profile. The bank also
looks into the status report of the prospective buyer, with whom the exporter proposes to
do business. In order to get the status report on foreign buyer, services of institutions like
ECGC or International consulting agencies like Dun and Brad steer etc. may be utilized.
Disbursement of Packing Credit Advance
2. 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 exporter activities that may be seasonal in nature, in which the
exporter may not be able to produce the export order at time of availing Packing Credit.
In these cases, the bank may provide a special packing credit facility, known as Running
Account Packing Credit.
Follow up of Packing Credit Advance
3. 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 the submission of the stock statements at the time of sanctioning the packing
credit.
Liquidation of Packing Credit
4. Packing Credit Advance will always be liquidated with exporter proceeds of the relevant
shipment. At this stage, the pre-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 reasons, 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.
Overdue Packing
5. If the borrower fails to liquidate the Packing Credit on the due date/extended due date,
the bank considers it an overdue.
In case the overdue position persists, the bank takes steps to realize its dues as per usual
recovery procedures. Nursing programme may be initiated, if found feasible.
 POST-SHIPMENT 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 the realization date of export proceeds.
FEATURES
The features of post shipment finance are:
 Purpose of finance
Post-Shipment Finance is meant to finance export sales receivables after the date of
shipment of goods to the of realization of exports proceeds. In case of deemed exports, it
is extended to finance the receivables against supplies made to designated agencies.
 Basis of finance
Post-shipment finance is provided against evidence of shipment of goods or supplies
made to the importer or any other designate agency.
 Form of finance
Post-shipment finance can be secured or unsecured. Since the finance is extended against
evidence of export shipment and banks obtain the documents of title of goods, the finance
is normally self-liquidating. In 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 is involved, the financing is non- funded in nature.
 Quantum of finance
Post-shipment finance can be extended up to 100% of the value of goods. However,
where the domestic value of the goods exceeds the value of the export order or the
invoice value, finance for the price difference can also be extended if such a price
difference is covered by receivables from the government. This form of finance is not
extended at the pre-shipment stage.
Banks can also finance undrawn balances. In such cases bank are free to stipulate margin
requirements as pre their usual lending norms.
 Period of finance
Post-shipment finance can be short term or long term, depending on the payment terms
offered by the exporter to the overseas buyer. In case of cash exports, the maximum
period allowed for realization of exports proceeds is six months from the date of
shipment. Bank can extend post-shipment finance at lower rate up to normal transit
period/notional due date, subject to a 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:
 Physical export
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 export
in case of deemed exports, finance is forwarded to the supplier of the goods are supplied
to the designated agencies.
 Capital goods and project exports
In case of exports of Capital goods and project exports, finance is sometimes extended in
the name of overseas buyer. The disbursal of money is directly made to the domestic
exporter.
BUYER’S CREDIT
As seen in the case Capital goods and project exports, credit is sometimes extended directly to
the foreign buyer.
Buyer’s Credit is a financial arrangement whereby a financial institution in the exporting
country, or another country, extends a loan directly or indirectly to a foreign buyer to finance the
purchase of goods and services from the exporting country. This arrangement enables the buyer
to make payments due to the supplier under the contract.
SUPPLIER’S CREDIT
Finance extended by supplier to buyer in their own name is referred to as Supplier’s Credit.
Hence, Supplier’s Credit is a financing arrangement under which an exporter extends credit to
the buyer in the importing country to finance the buyer’s purchases.
FORFAITING AND FACTORING
Forfaiting and factoring are similar services that serve to provide better cash flows and risk
mitigation to the seller. It may be mentioned that factoring is for short-term receivables (under 90
days) and is more related to receivables against commodity sales. Forfaiting can be for
receivables against which payments are due over a longer term, over 90 days and even up to 5
years. The difference in the risk profiles of the receivables is the fundamental difference between
factoring and forfaiting, which has implications for the cost of services.
Both factoring and forfeiting are like discounting, but bill discounting is more domestic- related
and usually falls within the working capital limit set the bank for the customer.
FORFATING
Forfeiting is a mechanism of financing exports:
 By discounting export receivables.
 Evidenced by bills of exchange or promissory notes.
 Without recourse to the seller (such as the exporter.)
 Carrying medium to long-term maturities.
 On a fixed rate basis (discount).
 Up to 100% of the contract value.
In a forfeiting transaction, the exporter surrenders his rights to claim for payment on goods
delivered to an importer, in return for immediate cash payment from a forfeiter. As a result, an
exporter can convert a credit sale into a cash sale, with no recourse either to him or his banker.
Process details
1. Exporter initiates negotiations with prospective overseas buyer, finalizes the contract and
opens an LC through his Bank.
2. Exporter Ships the goods as per the schedule agreed with the buyer.
3. The exporter draws a series of bills of exchange and sends them along with the shipping
documents, to his banker for presentation to importer for acceptance through latter’s
bank. Bank returns avalised and accepted bills of exchange to his client (the exporter).
4. Exporter informs the Importers bank about assignment of proceeds of transaction to
the Forfaiting bank.
5. Exporter endorses avalised Bill of Exchange (BOE) with the words “Without recourse”
and forwards them to the Forfaiting Agency (FA) through his bank.
6. The FA effects payments of discounted value after verifying the Aval’s signature and
other particulars.
7. Exporter’s Bank credits Exporter’s a/c.
8. On maturity of BOE/Promissory notes, the Forfaiting Agency presents the instruments to
the Aval (Importer’s Bank) for payment.
DOCUMENTARY REQUIREMENT
In case of Indian exporters availing Forfaiting facility, the forfaiting 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 not 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 exports stated on the shipping bill.
FACTORING
Factoring is a continuing arrangement between a financial institution (the factor) and a business
concern (the client), selling goods or services to trade customers. The factor purchase the client’s
book debts (account receivables) either with without recourse to the client.
The purchase of book debt or receivables in central to the functioning of factoring. The supplier
submits invoice arising from contracts of sale of goods to the Factor.
The factor performs at least two of the following services:
 Financing for the seller, by way of advance payments.
 Maintenance of accounts relating to the account receivables
 Collection of account receivables.
 Credit protection against default in payment by the buyer.
The buyer is informed in writing that all payment of receivables should be made to the Factor.

DIFFERENT MODELS OF FACTORING

Export Factoring can be done based on two distinct models: Two
–factor system
Direct factoring
1. A two –factor system
It essentially invoice an export factor in the country of the seller (exporter) and its correspondent
factor (import factor) in the country of the debtor (importer). The correspondent factor typically
performs a mutually agreed set of services for the export factor. It could be any one or both the
below mentioned services:
A. Credit Guarantee Protection: the import factor undertakes to pay the export factor in
the event the importer fails to pay by a specified period after due date. The import factor
sets up limits on buyers present in that country and the export factor discounts invoices
for its customers based on these limits. The credit guarantee protection covers
insolvency/ protracted default of buyer. However it does not cover trade disputes.
B. Collection Services: the import factor undertakes to the follow up with debtors for
payment and in cases where payment is not forthcoming they would be in a position to
detect early indications as they would be based in the same location and would be
familiar with 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 relations with various import factor across the
globe.
Also, the possibility of under any factoring business by the export factor would be
depend on the response of the import factors for each transaction.
 2. Direct Factoring with credit insurance and tie up with a global collection agency :
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 would
not cover trade disputes. The credit insurer will set up limits on overseas buyer and based on
these limits export bills would be discounted.
Thereafter, details of the invoice would be passed on to the collection agency that will follow up
for payment with the overseas buyer, incase 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 and to some extent the
uncertainty in payments from overseas buyers.
Process Details
For the factoring operations, the pre-requisite is the establishment of a factoring relation-ship
between the client and the factor. On the basis of credit evaluation, the factor fixes limits for
individual customers of the client indicating the extent to which, and the period for which the
Factor is prepared to accept the client’s receivables for such customers.
1. The client (seller) sells the goods to the customer (buyer) and invoices him in the usual
way- inscribing a notification to the effect that the debt due on the invoice is assigned to
and must be paid to the Factor.
2. The client offers the assigned invoices to the Factor under cover of a schedule of offer
accompanied by copies of invoices and receipted delivery challans.
3. The Factor provides immediate prepayment up to 80% of the value of the assigned
invoices and notifies the customer sending a statement of account.
4. Factor follows up with the customer and sends him the statement.
5. The Customer makes the payment to the Factors.
6. When the customer makes the payment for the invoice, the Factor will pay the balance
20% of the invoice value.
BANK GUARANTEES
Guarantees are given by bank on behalf of its customer regarding specific
performance/obligation by the customer to the other party. The guarantees ensure payment to the
party the bank’s customer is doing business.
Under a bank guarantee/surety bond arrangement, the bank acts as guarantor of a claim or
obligation in lieu of the debtor. The bank cannot be held liable in the event that the debtor fails to
“perform”. The banks obligation is limited to its pledge to pay a maximum specified amount on
fulfillment of the terms of the commitment.
A bank guarantee/surety bond may only be issued if the customer has been granted a line of
credit. In certain cases, the bank may require adequate collateral.
One may note that even though in both Letter of Credit and Bank Guarantee ensure that the
issuing bank guarantee payment, the difference lies in that while LC is a ‘positive action’
instrument, BG is a non-performance instrument. Hence, payment is released under LC as and
when all the terms of the underlying trade transaction are met.
On the other hand, payment is released under BG if and when the terms of the underlying
transactions are not complied with.
TYPES OF BANK GUARANTEES
DIRECT/INDIRECT
GUARANTEE
In principle, there are two types of guarantee:
1. Direct guarantee
A direct guarantee occurs when the client instructs the bank to a guarantee directly in
favor of the beneficiary.
2. Indirect guarantee
With an indirect guarantee, a second bank is involved the second bank usually a foreign
bank with head office in the beneficiary’s country of domicile, is requested by the
initiating bank to issue a guarantee in return for the latter’s counter – liability and
counter- guarantee.
In this case, the initiating bank will cover the guaranteeing (foreign) bank against the risk
of any losses that it may incur in the event that a claim is made under the guarantee upon
first demand by the guaranteeing bank.

Depending on the purpose of the Guarantees may be classified as under:

1. Tend Bond
This type of bank guarantee is also known as a bid bond. The purpose of a tender bond is
to prevent a company from submitting a tender, winning the contract and them declining
to accept it on the grounds that the deals is no longer lucrative. Tender bonds offer buyers
security against dubious or unqualified bids. They are often mandatory for public
invitations to tender.
2. Performance Bond
This is also known as a performance guarantee. A performance bond/guarantee provides
security for any costs that may be incurred by the bond beneficiary on non-performance
of a contractually agreed service and/or non-performance of a contractually agreed
service and/or non-contractual deadline.
3. Credit Guarantee
Borrowers are often required to provide collateral for a credit line or a loan. A third party
may also provide collateral. A bank guarantee is one of the options creditors have to
ensure that a loan will be repaid.
4. Payment Guarantee
A payment guarantee, or payment default guarantee, provides security against default for
the goods to be delivered, for example. If the debtor fails to make payment when due, and
the beneficiary has fulfilled his or her contractual obligations, e.g. goods have been
delivered and/or services have been provided in accordance with the contract, a written
declaration to this effect is generally sufficient to redeem payment from the guaranteeing
bank.
This instrument can be used instead of a letter of credit if, for example, the buyer does
not require or demand proof of delivery by means of the usual original delivery
documents.
5. Confirmed Payment Order
This is an irrevocable obligation on the part of the bank to pay a specified sum at a
specified time to the beneficiary (creditor) on behalf of the customer.
6. Advance Payment Guarantee
The advance payment guarantee is intended to bind the supplier to use the advance
payment for the purpose stated in the contract between the buyer and the supplier. An
advance payment provides the supplier with funds to purchase equipment or components,
for example, or to make other preparations
In general, the advance payment guarantee should contain a reduction clause that
automatically reduces the amount in proportion to the value of the (Partial) delivery(ies).
The advance payment guarantee should only become effective once the advance payment
has been received.
7. B/L Letter if Indemnity
This is also called a Letter of Indemnity. Individual bills of landing or the full set can go
missing or be held up in the mail. Carries may be liable for damages if they deliver the
consignment before receiving the original bill of landing.
A bank guarantee in the carrier’s favor for 100-200% of the value of the value of the
goods enables them to deliver the goods to the consignee without presentation of the
original documents.
8. Rental Guarantee
This is a guarantee of payment under a rental contract. The guarantee is either limited to
rental payment only, or includes all payments due under the rental contract.
9. Credit Card Guarantee
In certain circumstances, credit card companies will not issued a high value credit cared
without a bank guarantee. Such kind of guarantee extended by a Bank is known as a
Credit Card Guarantee.
CLAIM (GUARANTEE UTILIZATION)
If the beneficiary under the guarantee considers that the supplier has violated the supplier’s
contractual obligations, the former may utilize the guarantee. Claims must be made during the
period of validity and strictly in accordance with the guarantee conditions.
STANDBY LETTER OF CREDIT
The standby letter of credit comes from the banking legislation of the United States, which
forbids US credit institutions from assuming guarantee obligations vis-à-vis third parties. To
circumvent this rule, the US banks created the standby letter of credit, which is based on the
uniform customs and practice for documentary credits.
SIMILARITIES WITH THE GUARANTEE
Like the guarantee, the standby letter of credit is of an abstract nature, i.e. legally separated from
the underlying transaction. In case of a standby letter of credit, the documents stipulated in the
claim must be submitted within the specified period. These documents should show that the
client (exporter) has not met or insufficiently fulfilled his or her performance obligations or the
debtor has not met a payment on time.
The standby basically fulfils the same purpose as a guarantee it is payable upon first demand and
without objections or defenses on the basis of the underlying transaction. It is up to the
beneficiary to decide whether a standby may be given.
AREA OF APPLICATION
Standby LCs are used in import-export business, primarily with the Americas and frequently in
the Far East as well, or whether the contracting parties decide to use this legal from as a security
instrument.
PURPOSE
To secure any claim by the oblige on the obligor due to non-contractual delivery or performance
by the agreed date or credit repayment on the due date
SPECIAL FEATURES
In contrast to the guarantee, a standby can be confirmed immediately provided the standby
conditions permit.
The standby letters of Credit (LCs) are issued subject to either Uniform customs and Practices
for Documentary Credit (UCPDC) Publication No.500 or International Standby Practices issued
by International Chamber of Commerce.

CO-ACCEPTANCE OF BILLS
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 exporter even if the importer fails to make payment
on due date. The co-acceptance by the importer’s banker acts as a guarantee for the exporter for
timely receipt of proceeds from the importer. For the Bank, it is a non-fund based exposure on
the importer. It is an increasingly used form of import
DOMESTIC TRADE FINANCE
Fundamentally, the trade finance business in the domestic arena is similar to the trade finance
business on an International level. However, since no multi-currency or cross country
transactions occur, hence the regulatory framework is much simpler. The goods do not require
customs clearance and the remittances do not need to be reported to Forex regulatory bodies.
Naturally, export/import licenses are not required and export quota restrictions do not limit
growth.
Also, since both the buyer and seller operate within the same legal and administrative
framework, and are often well known to each other, the level of mutual confidence is higher.
Modes of transaction in domestic trade within national boundaries are basically similar to the
modes of transaction in International Trade. These include:
 Clean Payment
 Open a/c transaction
 Advance payment
 Documentary Collections
 Delivery against payment
 Delivery against acceptance
 Documentary Credit
It is natural that due to higher degree of confidence enjoyed by the buyer and sellers within the
same regulatory and administrative boundaries, the easier to carry out and less documentation
intensive trade options like clean payment and documentary collections are used more often.
Most of the trade finance options available in International trade are also available in domestic
trade. These have been touched in detail in the preceding chapters.
However, here we shall discuss some financing options that are specifically more relevant in
domestic trade.
CHANNEL FINANCING
Through Channel Financing, Dealer are able to leverage their relation with reputed companies in
sourcing low cost funds with support from their counterparts. Channel Financing is a product
that extends working capital finance to dealer having business relationships with large companies
in India. This may be in the form of either cash credit facilities or as a bill discounting line of
credit.
 Discounting of trade bills drawn by the reputed supplier and accepted by the dealer/
distributor.
 Limited overdraft facility to the dealer/distributor for his business dealing with large
corporate.
By providing short term lending to clients utilizing qualified receivables as collateral, value is
added to the client by way of working capital support, reduced accounts receivables and
improved control of the sale/ distribution channels. In addition, payables discounting serves to
add value by improving supplier relationships and enhancing cash-flow management.
VENDOR FINANCING
Vendor can leverage their relationship with reputed companies by sourcing low cost bill
discounting line of credit. Vendor financing is a product to extend working capital finance to
vendor having business relationships with large corporate in India. Herein the bank undertakes to
discount bills drawn by the supplier/ vendor and accepted by the corporate.
TRADE FINANCE IN KOTAK MAHINDRA BANK

 International – Export
 International – Import
 Bank Guarantee
 Domestic

 International – Exporter

Kotak Mahindra Bank provides a wide range of exporter related services, assisting the growth of
organization into overseas market.
Key Features
 Tailor made solutions to suit all export needs.
 Experienced trade finance team that focuses on client requirements.
 Leverage our global network of correspondent banks.
Pre-Shipment Credit
Kotak offer pre-shipment credit to exporters by way of packing credit, enabling them to finance
operations like purchase/import of raw materials or processing and packing of export goods.
Exporters can avail of this pre-shipment credit either in rupee or foreign currency.
Post-Shipment Credit
Kotak offer post-shipment credit to exporters, helping them finance export sales receivable for
the time lag between shipment of goods and date of realization of export proceeds.
Exporters can avail of the following services:
 Negotiation/payment/acceptance of export documents under letter of credit.
 Purchase/discount of export documents under confirmed order/export contracts etc.
 Advances against export bill sent on collection basis.
 Advances against exports on consignment basis.
 Advances against undrawn balance on exports.
 Advances against approved deemed exports
Exporters can avail of this post-shipment credit either in rupee or foreign currency.
Bills & Collection
Kotak have a strong, experienced trade finance team that focuses on client trade- related
requirements, whether domestic or international. This team advises and guides clients on
documentation and transactions ensuring:
 Quick turnaround times through smooth document processing.
 Faster payment through constant follow-ups with correspondent banks for timely
recovery of funds.
 Cost effectiveness
 Better reach
 Excellent trade support
 Arrangement of credit reports of overseas parties.
 Specialized advice on international trade related issues as well as technical issues such as
ECM requirements, RBI reporting, new circulars and international developments
Kotak have developed global network of correspondent banks that enables us to handle large
volume collection portfolios. We offer world-class facilities for handling collection related to
international trade.
It also handles documents where proceeds have been received by the exporter on an advance
payment basis and actual shipment takes place later. In such cases, the documents need to be
accompanied with a Foreign Inward Remittance Certificate (FIRC) as proof of receipt of the
advance payment.

Inward Remittances
We facilitate Foreign Inward Remittance (foreign exchange received by a person in India
through banking channels) and offer convenient modes of operations for quick and easy
disbursement. The facility is extended through arrangement with reputed, correspondent banks
located in most countries around the world.
  International-Import

Kotak Mahindra Bank provides a comprehensive range of import related services, helping to
cover trading risks.
Key Features
 Tailor made solution suit all import needs
 Experienced trade finance team that focuses on client requirements.
 Leverage our global network of correspondent banks
Letter of Credit
We offer our customers import financing services through Letter of Credit (L/C) which are well
accepted globally and supported by strong trade finance setup.
We have correspondent banking arrangements with a large number of banks worldwide for this
service. Our trade team is equipped to structure solutions for a variety of purchase requirements,
ranging from simple L/C is to revolving L/C, bid bonds, standby L/C and other performance
guarantees.
Bill & Collection
We have a strong, experienced trade focuses on client trade-related requirements, whether
domestic or international. This team advises and guide clients on documentation and transactions
ensuring:
 Quick turnaround times through smooth document processing.
 Faster payments through constant follow-ups with correspondent banks for timely
recovery of funds.
 Cost effectiveness
 Better reach
 Excellent trade support
 Arrangement of credit reports of overseas parties
 Specialized advice on international trade issues as well as technical issues such as ECM
requirements, RBI reporting, new circulars and international developments.
We have developed a global network of correspondent bank that enables us to handle large
volume collection portfolios. We offer world-class facilities for handling collection related to
international trade.
Outward Remittances
Services in this area include:
 Payment of direct Import Bills: Processing and remittances for import Bill directly
received by importers in India.
 Advance payment toward import: Processing and remittances toward advance payment
for imports.
 Other outward remittances like divided payout, ECB payment, royalty, shipping etc.

 Bank Guarantee

Kotak offer a wide spectrum of guarantee that address varying client requirements and risk
profiles. These include performance and financial guarantees, bid bond, tender and customs
guarantees, etc.
Key Features
 Experienced trade finance team that focuses on client requirements.
 Reduce risks.

 Domestic
Key Features
 Extensive range of trade –related services.
 Experienced trade finance team that focuses on client requirements.
 Tailor made solution to suit all trading needs.
Bill Discounting
Kotak experienced and dedicated trade finance team is focused on structuring bill discounting
products to meet customer needs- be it short term or medium term finance. In fact, our services
go beyond plan bill discounting to encompass a complete range of supply chain management
solutions. We aim at increasing the efficiency of the entire cycle, ensuring that transactions are
executed speedily and effectively. We will soon offer integrated supply chain services on an
electronic platform.
Invoice Discounting
Invoice discounting entails “discounting” an accepted invoice bill for the sale of goods to
provide working capital. We offer our clients the dual advantage of simple documentation and
absence of collateral requirements. Finance is extended either by crediting the current account of
the supplier or by issuing a pay order.
Purchase Order Financing
Purchase order financing is an innovative program where we offer flexible finance to supply
chain partners of corporates. This involves "discounting" a contract/ purchase order to help
finance the manufacturing cycle for goods ordered by the corporate. This service is particularly
useful for vendors with seasonal increases in working capital requirements.
Highlights
 Service extended to key vendors identified by the corporate.
 Pre-shipment loan against Purchase Order from corporate.
  Corporate pays the bank directly for all supplies by the vendor
Maximum tenure is currently 45 days.
Statistical Analysis

In this segment I will show my findings in the form of graphs and charts. All the data
which I got form the market will not be disclosed over here but extract of that in the form of
information will definitely be here
Detail:

Area: Ludhiana

Type of Data: 1. Primary 2. Secondary

Respondent: Customers

Industry: Banking

Methodology:
Methodology is the systematic method or an activity, which is used to collect the
information required to complete this project work. The data is collected by 2 methods:
1. Primary data

2. Secondary data

Primary data
Is collected through personal interaction with customers of kotak Mahindra bank and
office staff.

Secondary data
This is secondary in nature i.e. already, collected information. This secondary data is collected through:

 Internet
 Books
 ANALYSIS AND INTERPRETATION

1). People know about kotak Mahindra Bank

Sr no. Attributes No of respondent percentage

1 Yes 80 80%
2 No 20 20%
100 100

80%
70%
60%
50%
40%
30%
20%
10%
Yes No
0%

Interpretation
The banks are very interested to know that how much people know about the bank. From the
study we can see that the 80% people know about bank and 20% of people do not know about
the bank.
2). Rank the kotak Mahindra bank on following Features:-

Rank 1 for best and 5 for worse

Sr no. Attributes No of respondent percentage

1 Rank 1 15 15%
2 Rank 2 38 38%
3 Rank 3 28 28%
4 Rank 4 16 16%
5 Rank 5 3 3%
Total 100 100

40%
35%
30%
25%
20%
15%
10%
5%
rank1 rank2 rank3 rank4 rank5
0%

Interpretation
It is clear that out of 100 respondent 15% of respondent rank the bank at 1 st rank, 38%
respondents rank the bank at 2nd rank, 28% of respondent rank the bank at 3nd rank, 16%
respondents rank the bank at 4nd rank, 3% respondents rank the bank at 5nd rank.
3). People would like to be a customer of kotak Mahindra bank because:

Sr no. Attributes No of respondent percentage

1 Customer Services 29 29%
2 Efficient Services 39 39%
3 securities 8 8%
4 Brand Name 21 21%
5 Advertisement 3 3%
Total 100 100

40%
35%
30%
25%
20%
15%
10%
5%
CS ES SECU BN AD
0%

Interpretation
People want to be the customer of bank because of various regions 29% of customer like
customer services of bank and 39% of customer like efficient service of bank, 8% of customer
like securities of bank, 21% of people like to be a customer of bank because of brand name and
only 3% of people like to be a customer of bank because of advertisement.
4). kotak Mahindra Bank is a safe place for money processing or trade transaction:-

Sr no. Attributes No of respondent percentage

1 Yes 85 85%
2 No 15 15%
Total 100 100

90%
80%
70%
60%
50%
40%
30%
20%
10%
Yes No
0%

Interpretation
Bank want to know that is Bank is a safe place for money processing or trade transaction so,
result is that 85% of people think that kotak Mahindra bank is a safe place for money processing
or trade transaction and 15% of people think that kotak Mahindra bank is a safe place for money
processing or trade transaction.
5). Investment Preference:-

Sr no. Attributes No of respondent percentage

1 Fixed Deposits 33 33%
2 Real estate 21 21%
3 Insurance 27 27%
4 Mutual Funds 9 9%
5 Gold 10 10%
Total 100 100

35%

30%

25%

20%

15%

10%

5%

0%
FD RE INSU MF Gold

Interpretation
It is clear that out of 100 respondent 33% of customers invest in fixed deposits, 21% of
customers invest in real estate, 27% of customers invest in insurance, 9% of customers invest in
mutual funds and 10% of customers invest in gold.
6).Time Duration with Bank:-

Sr no. Attributes No of respondent percentage

1 -6 months 3 3%
2 6 months to 1 year 30 30%
3 1 year to 2 year 50 50%
4 Above 2 year 17 17%
Total 100 100

50%
45%
40%
35%
30%
25%
20%
15%
10%
5% - 6months 6monthsto 1 1year to 2year over 2year
0% year

Interpretation
It is clear that out of 100 respondents 3% of customer knows bank from less than 6 months, 30%
of customer knows bank from 6 months to 1 year, 50% of customer knows bank from 1 year to 2
year and 17% of customer knows bank from above 2 years.
7). Most frequent way to interaction with bank:-

Sr no. Attributes No of respondent percentage

1 Visit Branch 42 42%
2 Internet 22 22%
3 Phone 36 36%
Total 100 100

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Visit Branch Internet Phone

Interpretation
Bank wants know that what is the frequent way to interaction with bank. Out of 100 respondents
42% of customer visit branch to interact with bank, 22% of customer use internet to interact with
bank, 36% of customer use phone to interact with bank.
8). Satisfaction level with bank:-

Sr no. Attributes No of respondent percentage

1 Very satisfy 14 14%
2 Some what satisfy 36 36%
3 Neither satisfy nor 10 10%
dissatisfy
4 Some what 6 6%
dissatisfy
5 Very dissatisfy 0 0%
Total 100 100

40%
35%
30%
25%
20%
15%
10%
5%
0% very satisfy some what neither satisfy some what dis very dis
satisfy nor dis atisafy atisfy

Interpretation
Bank wants to know the satisfaction level of customer with bank. Out of 100 respondents 14% of
customers are very satisfy with bank, 36% of customers are some what satisfy with bank, 10% of
customers are neither satisfy nor dissatisfy with bank, 6% of customers are some what dissatisfy
with bank and 0% of customers are very dissatisfy with bank.
9). Satisfaction level with staff:-

Sr no. Attributes No of respondent percentage

1 Very satisfy 15 15%
2 Some what satisfy 33 33%
3 Neither satisfy nor 10 10%
dissatisfy
4 Some what 4 4%
dissatisfy
5 Very dissatisfy 0 0%
Total 100 100

35%
30%
25%
20%
15%
10%
5%
0% very satisfy some what neither satisfy some what very dis
satisfy nor dis dis atisafy atisfy

Interpretation
Bank wants to know the satisfaction level of customer with staff. Out of 100 respondents 15% of
customers are very satisfy with staff, 33% of customers are some what satisfy with staff, 10% of
customers are neither satisfy nor dissatisfy with staff, 4% of customers are some what dissatisfy
with staff and 0% of customers are very dissatisfy with staff.
10). Private bank provide superior services as compare to govt.:

Sr no. Attributes No of respondent percentage

1 Yes 79 79%
2 No 21 21%
100 100

80%
70%
60%
50%
40%
30%
20%
10%
0%
Yes No

Interpretation
In this graph it is clear that out of 100 respondents 79% of customers thinks that Private bank
provide superior services as compare to government and 21% of customers thinks that Private
bank do not provide superior services as compare to government.
11). If you have option against Kotak you will go for:-

Sr no. Attributes No of respondent percentage

1 ICICI 39 39%
2 HDFC 27 27%
3 Axis 16 16%
4 PNB 9 9%
5 SBI 9 9%
Total 100 100

40%
35%
30%
25%
20%
15%
10%
5%
0%
ICICI HDFC Axis PNB SBI

Interpretation
In this graph it is clear that out of 100 respondents 39% of people choose ICICI against kotak
Mahindra bank, 27% of people choose HDFC against kotak Mahindra bank, 16% of people
choose Axis against kotak Mahindra bank, 9% of people choose PNB against kotak Mahindra
bank and 9% of people choose SBI against kotak Mahindra bank.
12). You would not like to be a customer of Bank because:-

Sr no. Attributes No of respondent percentage

1 Bad employee 35 35%
response
2 Bad customer 42 42%
services
3 Lack of transparency 16 16%

4 Lack securities 7 7%
Total 100 100

45%
40%
35%
30%
25%
20%
15%
10%
5%
Bad employe Bad customer lack of lack of securities
0% service transparency

Interpretation
Bank wants to know that why people not like to be a customer of Bank. Out of 100 respondents 35%
people not like to be a customer of Bank because of Bad employee
response 42% people not like to be a customer of Bank because of Bad customer services, 16%
people not like to be a customer of Bank because of lack of transparency, 7% people not like to
be a customer of Bank because of lack of securities.

Questioner

NAME -

ADDRESS -

AGE - (A) Below 25 (C) 40 to 55

(B) 25 to 40 (D) above 55

Do you know about kotak Mahindra bank:-

(A) Yes (B) No

IF YES THEN:

Rank the kotak Mahindra bank on following Features:-rank 1 for best and 5 for worse

(A) Rank 1 (D) Rank 4

(B) Rank 2 (E) Rank 5

(C) Rank 3

You would like to be a customer of kotak Mahindra bank because:

(A) Customer Services (D) Brand Name

 (B) Efficient Services (E) Advertisement

(C) Security

Do you think kotak Mahindra Bank is a safe place for money processing or trade transaction:-

(A) Yes (B) No

Your Investment Preference:-

(A) Fixed Deposits (D) Mutual Funds

(B) Real Estate (E) Gold

(C) Insurance

Time Duration with Bank:-

(A) Less then 6 months (C) 1year to 2 year

(B) 6 months to 1 year (D) Over 2 year

Most frequent way to interaction with bank:-

(A) Visit Branch (C) Phone

(B) Internet

Satisfaction level with bank :-

(A) Very satisfy (C) Some what satisfied

(B) Some what satisfy (D) very dissatisfy

(C) Neither satisfy nor Dissatisfy

Satisfaction level with staff:-

 (A) Very satisfy (C) Some what satisfied

(B) Some what satisfy (D) very dissatisfy

(D) Neither satisfy nor Dissatisfy

Private bank provide superior services as compare to govt.:-

(A) Yes (B) No

If you have option against Kotak you will go for:-

(A) ICICI (D) PNB

(B) HDFC (E) SBI

(C) Axis

You would not like to be a customer of Bank because:-

(A) Bad employee Response (C) lack of transparency

(B) Bad customer services (D) lack of securities

Conclusion
 Kotak have a strong, experienced trade finance team that focuses on client trade- related
requirements, whether domestic or international. This team advises and guides clients on
documentation and transactions

 Kotak Mahindra Bank provides a wide range of exporter related services like Pre- Shipment
Credit, Post-Shipment Credit, and Inward Remittances.

 Kotak Mahindra Bank provides a wide range of exporter related services like Letter of
Credit, Bill & Collection, Outward Remittances

 Kotak offer a wide spectrum of guarantee that address varying client requirements and risk
profiles. These include performance and financial guarantees, bid bond, tender and customs
guarantees, etc.

 Kotak offers wide range of domestic trade related services like Bill Discounting, Invoice
Discounting, and Purchase Order Financing.

 Traders are aware about the risk involved in commodity features contract.

 Kotak Mahindra Bank is a leading Bank in the country, it provides a verity of product and
services to different segment of customers.


Findings
 Most people find kotak Mahindra Bank is a safe place for money processing.

 Because of efficient services people want to be a customer of kotak Mahindra bank.

 Most of the customers find frequent way to interact with bank with Visiting Branch. Bank is
trying to make the customer’s first preference of interaction with bank are internet and
phone.

 Majority of people not like to be a customer of Bank because of Bad customer services.

 Main competitor of kotak Mahindra bank is ICICI bank.

Limitation
 Due to time constraint, only limited numbers of respondents were taken.
 Some time it was difficult to obtain data and some times wrong information or incomplete
was provided by respondents which had to be cross checked and verified.

 Error during calculation and tabulation may arise.

 Due to cost and human element is involved, project area was limited.

 As per knowledge data was collected and analyzed, error may be there. Generally the
respondents were busy in their work and were not interested in responding out rightly.
 BIBILOGRAPHY

 REFERENCE TO A BOOK

 Finance and Banking Institute India, practitioner’s book on trade finance, 2010, New
Delhi

 WEB PAGES

 www.google.com

 en.wikipedia.org/wiki/Kotak_Mahindra_Bank

 www.kotak.com