factors for choosing a bank
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Executive summary
In the modern customer centric competitive arena, satisfaction, quality and loyalty prove tobe key factors. The higher the (perceived) service quality, the more satisfied and loyal are thecustomers. In particular, financial institutions (i.e. banks) realized the strategic importance of customer value and seem to be continuously seeking innovative ways to enhance customerrelationships. In fact, as the offers of many financial services are very similar and slightlydifferentiable, loyal customers have a huge value, since they are likely to spend and buymore, spread positive word-of- mouth, resist competitors offers, wait for a product to becomeavailable and recommend the service provider to other potential customers.
This paper focuses on those factors t hat affect customers choice in corporate banking.Firstly, the paper tries to investigate about the factors which influence the exporters inchoosing a bank. Secondly, this paper also tries to investigate which banking services aregiven more importance by the exporters. Factor analysis to found out the factors whichinfluence exporters in choosing a bank, chi-square to find out the goodness of fit and cross
tabs to know the relationship between variables.
INTRODUCTIONNeed of the study
Growth of trade made banking boom:
Due to the growth of trade there is a tremendous demand for banking services to averse the
risk from the others. Therefore there is boom in banking services for trading like trade
finance related services and forex related factors.
Trend of exports
Indias exports have been witnessingrobust growth and displaying a tendency of moving to a
higher growth trajectory since. The sharp recovery witnessed was further consolidated with
exports registering a growth rate (in US dollar value and on customs basis) of 21.1 per cent
on top of a rise of 20.3 per cent in the preceding fiscal. Volume increase was the main
contributor to this strengthening of export performance. Net terms of trade, which had
increased on an average by 1.5 per cent per annum, have witnessed a continuous decline. This
deterioration in prices of exports relative to imports has been significant in the last two years
and seems to have been affected, inter alia, by the resurgence in international crude oil prices.
However, given the strong growth in exports in volume terms, the income terms of trade,
which measure the import purchasing power of exports, has consistently improved. In the
recent past, this capacity to import on the basis of exports increased by 10.0 per cent per year.
It reflects the growing competitiveness of Indian exports, with volumes increasing with
decline in relative unit prices.
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Objective of the Study
The primary objective of the study is to study the major factors responsible for
choosing a bank by exporters.
The Secondary objective is to assess which banking services are given importance the
most by exporters .
Research Methodology used
Descriptive research design was used to study the factors for choosing a Bank. The primary
data was collected based on stratified sampling method. The secondary data was collected
from the articles, newspapers, books and internet. The factor analysis and chi-square were
used to find factors for choosing a Bank. The collected data have been analyzed with the help
of SPSS16.0 package. The scope of this study is to know which factors influence exporters
and importers to choose a bank. This study shows the present level of factors which influence
and indicates the area for improvement. Factor analysis and chi-square are done to find out
the factors which influence the most and on what services banks have to concentrate
respectively.
The factors that have been taken are:
General Factors:
Speed
Cost
Reach Customer friendly
Already having an account
All banking services
Trade finance factors:
Importers choice of bank
Credit limit
Factoring and forfaitingForex factors:
Forex limits
Better forex offers
Limitations of the Research: Some respondents are not comfortable in revealing their information.
Stratified and judgmental sampling method is used of my own choice.
The selected exporters are surveyed and are the results are generalized to all the
exporters of vizag.
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Role of Banks in International Trade
It is hardly possible to be in foreign trade without involving banks for all the services they
provide such as advice on financial issues and the potential risks involved. Although one
critical hurdle for small and medium enterprises is the documentation, lack of information on
international trade processes and banking procedures necessary to carry on with business
abroad. For result oriented and cost effective international trade, you will very definitely need
access to accurate and timely information and a sound knowledge of banking. All the
payments of foreign trade are made by the banks; they have no alternatives without using
banks. So a foreigner has to know that which bank offering the best services for the foreign
trade from the others.
Payment of foreign trade
Letter of credit: if the exporter does not know the foreign importer or if he has no
confidence about the credit worthiness of the foreign importer, he requests the importer to
arrange for the letter of credit from a bank. A letter of credit is an advice issued for
undertaking given by a bank that bills drawn on the banker by the exporter, according to the
terms of letter of credit, will be honored. All importers usually request the bank to issue a
letter of credit in favor of the exporter.
Preparing invoice: The next task of the exporter is to prepare several copies of the invoice
to be sent to the importer through the bank. The invoice contains the prices to be paid,
quantity, and quality of goods etc. several copies of the invoice are sent to the importer both
directly and through bank along with other documents, namely, bill of lading, marine
insurance policy, consular invoice, certificate of origin etc.
Receiving payment : After the goods are dispatched, the exporter is to receive the amount of
the goods. For this, he draws bill of exchange in sets of three and sends all these bill to an
exchange bank having branch or agent at the importing country along with other documents,
namely, bill of lading, trade invoice, consular invoice, certificate of origin, insurance policyetc. This bill may again be D/A (document against acceptance) or D/P (document against
payment) bill. In case of D/A bill documents are handed over to the importer on his
acceptance of the bill. In that case the exporter must wait till maturity of the bill for securing
payment. For this, the banker demands from the exporter a letter of Hypothecation which
empowers the bank to sell the goods in case the importer dishonors the bill. In the case of
D/P bill the documents are given to the importer when the payment is made.
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In most financial systems banks play a major role being intermediaries between lenders and
depositors. If due to macroeconomic shocks or risky operation a bank starts failing,
contagion effect can happen.
Overcoming and prevention of the system banking crises can be achieved only through the
complex solution of the global instability problem. Nevertheless, often politicians and
economists see different solution of this problem, sometimes even diametrically opposite.
There are many Development. Attaches offered to modified IMF into International
gendarmes, authorized with resources and real authorities supporters of the further
Globalization for the purpose of increase in the role of International Institutions. This way,
the ex-president of the European Bank of Reconstruction and on the long term supervision
over economic in different countries, imposing certain sanctions on them for not fulfilling
the agreements setting Trusteeship over economies of troublesome countries.
COMPANY PROFILE
Indusind Bank Ltd.
Genesis
IndusInd Bank derives its name and inspiration from the Indus Valley civilisation -a culture
described by National Geographic as 'one of the greatest of the ancient world' combining a
spirit of innovation with sound business and trade practices.
Mr. Srichand P. Hinduja, a leading Non-Resident Indian businessman and head of the
Hinduja Group, conceived the vision of IndusInd Bank -the first of the new-generation
private banks in India -and through collective contributions from the NRI community towards
India's economic and social development, brought our Bank into being.
The Bank, formally inaugurated in April 1994 by Dr. Manmohan Singh, Honorable Prime
Minister of India who was then the countrys Finance Minister, started with a capital base of
Rs.1,000 million (USD 32 million at the prevailing exchange rate), of which Rs.600 million
was raised through private placement from Indian Residents while the balance Rs.400 million
(USD 13 million) was contributed by Non-Resident Indians.
A New Era
IndusInd Bank, which commenced its operations in 1994, caters to the needs of both
consumer and corporate customers. It has a robust technology platform supporting multi-
channel delivery capabilities. IndusInd Bank has 365 branches, and 674 ATMs spread across
254 geographic locations of the country as on December 31, 2011.The Bank also has 2Representative offices, one each in London and Dubai.
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The Bank believes in driving its business through technology. It has multi-lateral tie-ups with
other banks providing access to their ATMs for its customers. It enjoys clearing bank status
for both major stock exchanges - BSE and NSE - and three major commodity exchanges in
the country - MCX, NCDEX, and NMCE. It also offers DP facilities for stock and
commodity segments. The Bank has been bestowed with the mandate of being a Settlement
Banker for six tea auction centers.
Ratings:
ICRA AA for Lower Tier II subordinate debt program and ICRA AA- for Upper Tier II
bond program by ICRA. CRISIL A1+ for certificate of deposit program by CRISIL. CARE
AA for Lower Tier II subordinate debt program by CARE. Fitch AA- for Long Term Debt
Instruments and Fitch A1+ for Short Term Debt Instruments by Fitch Ratings.
Mission & Vision
Mission
We will consistently add value to all our stakeholders and emerge as the Best in class in the
chosen parameters amongst the comity of banks, by doubling our profits, clients and branches
within the next three years.
Vision
IndusInd Bank will be:
A relevant business and banking partner to its clients
Customer Responsive, striving at all times to collaborate with clients in providing
solutions for their Banking needs
A forerunner in the market place in terms of profitability, productivity and efficiency
Engaged with all our stakeholders and will deliver sustainable and compliant returns
Brand
IndusInd Bank has been aggressive in its brand building program since last year. As a part of
the brand building exercise, the bank has taken many initiatives which have helped the brand
connect up with the customers & enhance the visibility quotient. IndusInd Bank had launched
its first ever mass media campaign in May- June 2009 along with its punch line Makes you
feel richer and since then, the bank has been consistent in communication through
Television, Radio, and Outdoor & print advertising.
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IndusInd Bank u nderstands its customers money is not just money. It is the vehicle to realise
their dreams! Hence, the bank aims to ensure that the customers experience with the bank is
pleasant and enriching. That they get value for their money, enabling them to lead a richer,
fuller, content life... For this, the bank:
Offers a new level of banking better services, better understanding of unique needsand better management of finances
Demystifies the banking process and makes it more accessible
Apart from fulfilling traditional banking responsibilities, advises customers on how
and where to use their money to get the best out of it
Projects an image of being a young, energetic, modern bank with values of dynamism,
confidence and progression
Businesses IndusInd Bank operates in a diverse range of businesses, which include Corporate Banking,
Retail Banking, Treasury and Foreign Exchange, Investment Banking, Capital Markets, Non-
Resident Indian (NRI) / High Net worth Individual (HNI) Banking and Information
Technology (through a subsidiary). It also claims the distinction of being the first bank in
India that received ISO 9001:2000 certification for its Corporate Office and its entire network
of branches.
Products & Services
IndusInd Bank provides multi-channel facilities, which comprise of ATMs, Net Banking,
Mobile Banking, Phone Banking, Multi-city Banking and International Debit Cards. It is also
credited for being one of the first banks to become a part of RBIs Real Time Gross
Settlement (RTGS) system. Enlisting the help of KPMG, IndusInd Bank has adopted an
enterprise-wide risk management system, including global best practices in the area of Risk
Management. The other products and services offered by the bank include:
Personal Banking
Accounts
Deposits
Loans
Cards - Debit Card, Credit Card, Gold Debit Card, Indus Money
Indus Protect
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Wealth Management Services
Portfolio Management
Investments
Insurance
Corporate Banking
Fund Based Facilities
Non Fund Based Facilities
Value Added Facilities
Supply Chain Management
International Banking
Correspondent Banking
SWIFT
Rupee Drawing Arrangement R
Advisory Services A
Facilities to Exporters
Trade Finance
RFC Account for Residents R
Gold Banking
Remittance Services
Suvarna Mudra
Others
Investment Banking
Treasury
NRI Services
Online Banking
RTGS/ NEFT
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Branches & ATMs
Within a few years of its foundation, IndusInd Bank started climbing the ladder of success
and became one of the fastest-growing banks in the Indian banking sector. By 2006, it had
expanded its branch network, from 61 in 2004, to 137. Apart from setting up 150 ATM
centers of its own, the bank also concluded multilateral arrangements with other banks,taking the total number of authorized ATM outlets to 15,000. All the branches as well as
ATMs of IndusInd Bank are connected to its central database, via a satellite that operates on
the latest version of IBMs AS400-720 hardware & Midas Kapiti (now Misys) software.
Mile stones
2011 - 2012
Awarded as the Best Bank Mid-sized in Business world PwC Best Banks Survey2011
Awarded M.IT.R- 50 Marketing & IT Recognition Program amongst top 50 brands
organised by Paul Writer in association with IBM
Awarded the CII Environment Best Practice Award 2012 for the Most Innovative
Environmental Project
Awarded in the Business Enterprise Services category for running ATMs on solar
power Organised by Panasonic Green Globe Foundation
2010 - 2011
Winner of Best Use of technology in training and e-Learning Initiatives awarded by
IBA Banking Technology Awards 2010
2009 - 2010
Tier II Issue raised Rs. 4200 million in March 2010
Received the prestigious ISO 27001 certification for IT operations
2008 - 2009
Appointed as Clearing & Settlement Bank at 6 major Tea Auction centers (includes 2
which were added in 2010)
2007 - 2008
Extended microfinance to 300,000+ women by partnering leading MFIs like SKS
Microfinance
Became clearing/settlement bank for NSE currency futures exchange
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2006 - 2007
GDR - raised Rs 1,460 million, tied up with Chola mandalam MS for bancassurance
Signed an agreement with National Multi Commodity Exchange Ltd as clearing
banker
2005 - 2006
Tied-up with Religare Securities for offering 3-in-1 account covering banking,
depository & securities trading
Tied up with Aviva Life Insurance for bank assurance
2004 - 2005
Signed an agreement with NCDEX as clearing banker
Opened its second representative office in London.
2001 - 2002
Tie ups with exchange houses in Middle East and banks in the United States1994 - 2000
IPO - raised Rs 1,800 million, became clearing bank to First Commodities Clearing
Corporation of India
2000 Became clearing/settlement bank for BSE/NSE
Raised Rs 1,000 million through preferential issue of shares
Incorporated in 1994; Promoted by a group of Non Resident Indians. Started
operations with Rs 1000 Mn Capital
Further, as a banking partner, the bank also aims to help its customers discover how they can
do more things with their money.
In the recent advertising campaign, the Bank reinforces its focus on Innovative banking based
on the philosophy of Responsive Innovation. The bank is taking responsiveness themeto
customers and reinforces its commitment to give best-of-class services in the industry.
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Literature review
Thomas Foscht, Judith Schloffer, Cesar Maloles III, Swee L. Chia (2009) found the
differences among the three age groups contained in Generation Y in terms of their sources of
information, financial services used, likelihood of switching, and number of banks utilized. In
addition, determinants of satisfaction, loyalty, and behavioural intention are primarily
affected by satisfaction with employees and services rendered. There results indicated that as
young people reach certain milestones, their needs become more multifaceted. Consequently,
the determinants of satisfaction have also changed. A study conducted by Mamunur Rashid,
M. Kabir Hassan (2009) in Bangladesh in six full fledged Islamic banks found non-Islamic
factors such as Corporal efficiency, Core- Banking Services, Confidence, etc. were given
higher weights by majority of the respondents. The report recommends introducing complete
E-Banking solution, to increase advanced marketing efforts and to hire experienced human
resources for better Islamic Banking activities in Bangladesh.
Charles Blankson , Ogenyi Ejye Omar , Julian Ming-Sung Cheng (2009) identified four key
factors - convenience, competence, recommendation by parents, and free banking and/or no
bank charges - to be consistent across the two economies. The recommendation of the study
is that in the context of an open and liberalized market environment, retail bank marketing
strategies should be standardized irrespective of the national development stage. It concludes
that retail bank managers particularly in developing countries should learn to provide
consistent and good customer care.
Omar Masood, Jamel E. Chichti, Walid Mansour , Muzafar Iqbal (2009) research attempt is
made to assess the degree of customer awareness, satisfaction as well as selection criteria. A
sample of 200 respondents took part in this study. The responses where shows a certain
degree of satisfaction, there few respondents also have expressed their dissatisfaction with
some of the Islamic bank's services.
Dominic Celestine Fernandez (2008) conducted a survey and results indicated no attributeobtained was an outright determinant of bank selection choices. This was attributed to the
diverse needs of respondents as revealed by this survey. While some determinants such as
location was of prime importance when selecting a bank, other factors that emphasize of
better social interaction between banker and client, is gaining prominence partly due to the
influence of Asian culture. It also revealed the use of the consumer decision making model
when selecting bank choices.
Charles Blankson, Julian Ming-Sung Cheng, Nancy Spears (2007) study reveals three keydimensions, factors, strategies that are consistent across all three economies. The paper
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concludes that open and liberalized business climate appear to explain consumers' decisions.
This research is based on the college student cohort and thus the results do not represent the
public. This poses generalizability questions without further replications and validations. This
study did not examine whether there were consumers' switching behaviours involving banks.
A study conducted by Erdener Kaynak, Talha D. Harcar (2005) revealed banks were
evaluated more positively by customers in areas such as extra services offered by the bank,
image of the bank, and convenience of the bank.
James F. Devlin and Philip Gerrard (2004) presented an analysis of trends in the relative
importance of choice criteria in respect of selecting a retail bank. And pointed that the
influence of recommendations has increased significantly and is now the most important
choice criterion. Other factors which have also increased in importance are the offering of
incentives, having a wide product range and economic factors, such as interest rate paid and
fees and charges levied. Locational factors, such as choosing a bank close to home or work
place, have decreased significantly in importance in motivating choice. Certain criteria have
remained broadly constant through time, amongst them, and perhaps surprisingly, are
choosing on the basis of a bank's image and reputation and expectations about level of
service.
Ron Shevlin and Catherine Graeber (2001) explored the various factor the influence a
customer in choosing a particular bank. They pointed out that ATM (Automatic TellerMachine) being the primary reason for a customer choice for a bank and further branch visit
and referral from friends and relatives are most prevalent sources of influence in Texas, USA.
Findings of Mohammed Almossawi (2001) reveal that the chief factors determining college
students bank selection are: banks reputation,availability of parking space near the bank,
friendliness of bank personnel, and availability and location of automated teller machines
(ATM).
Findings of Huu Phuong Ta, Kar Yin Har (2000) indicated indicate that undergraduates place
high emphasis on the pricing and product dimensions of bank services. The results are of
interest to bank managers because they provide information on the importance of the
selection criteria as well as areas of strengths and weaknesses of banks.
Burc lengins (1998) findingsconcluded that respondents prefer the extended loyalty
programs, the continuous information flow from the bank, the off-site ATMs, the maximum
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five-minutes waiting time in the branches and a simple application for all the accounts the
bank offers.
Carolyn Kennington, Jeanne Hill, Anna Rakowska (1996) pointed that most important
variable influencing customer choice are reputation price and service.
Josee Bloemer, Kode Ruyter and Pascel Peeters (1998) investigated how image, perceivedservice quality and satisfaction determine loyalty in retail banking.
The key findings by Laroche, Rosenblatt, and Manning (1986) on diverse demographic
segments included importance of location convenience, speed of service, competence and
friendliness of bank employees.
Meidan (1976) revealed that about 90% of the respondents banked at the branch nearest to
their home place and place of work. Convenience, in terms of location, was also found to be
the single most important factor for selecting a bank.
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Theoretical framework
The study is based on general factors, trade finance factors and forex factors. So first of all it
is essential to know about the trade finance and forex.
Trade finance
What is trade finance?Trade Finance has been reviewing the global trade market since 1983. The remit of what we
cover is somewhat broad, and as the market evolves to meet the requirements of financing
global trade, so our content has changed.
What is trade finance?
There are various definitions to be found online as to what trade finance is, and the choice of
words used is interesting. It is described both as a science and as an imprecise term
covering a number of different activit ies. As is the nature of these things, both are accurate.
In one form it is quite a precise science managing the capital required for international trade
to flow. Yet within this science there are a wide range of tools at the financiers disposal, all
of which determine how cash, credit, investments and other assets can be utilised for trade.In
its simplest form, an exporter requires an importer to prepay for goods shipped. The importer
naturally wants to reduce risk by asking the exporter to document that the goods have been
shipped. The importers bank assists by providing a letter of credit to the exporter (or the
exporter's bank) providing for payment upon presentation of certain documents, such as a
bill of lading. The exporter's bank may make a loan to the exporter on the basis of the export
contract.
Trade services and supply chain
Building on what I have termed traditional trade finance, there are a number of ways in
which banks can help corporate clients trade (both domestically and cross-border) for a
fee.A typical service offering from a bank will include:
Letters of credit (LC), import bills for collection, shipping guarantees, import financing,
performance bonds, export LC advising, LC safekeeping, LC confirmation, LC checking and
negotiation, pre-shipment export finance, export bills for collections, invoice financing, and
all the relevant document preparation.Despite this focus on the LC, over the years the term
trade finance has been shifting away from this sometimes cumbersome method of
conducting business. It is now estimated that over 80% of global trade is conducted on an
open account basis.
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Led by large corporates, this form of trade saves costs and time and so has been adopted by
smaller corporates as they become more comfortable with their buyer and supplier
relationships. Open account transactions can be described as buy now, pay later and are
more like regular payments for a continuing flow of goods rather than specific transactions.
This is much cheaper for corporates.
In response to this development, the organisation SWIFT launched the TSU (trade services
utility), a collaborative centralised data matching utility, which allows banks to build
products around its core functionality to improve the speed and flow of open account trade.
This is helping banks re-intermediate themselves into these trade flows.While volumes of
LCs have remained flat in recent years, their value actually increased and they remain an
essential part of emerging market trade and trade in countries where exchange controls are in
force. This increase in value is also a reflection of the commodity price boom of 2007/08 .
Factoring & Forfaiting Factoring, or invoice discounting, receivables factoring or debtor financing, is where a
company buys a debt or invoice from another company. In this purchase, accounts
receivable are discounted in order to allow the buyer to make a profit upon the settlement of
the debt. Essentially factoring transfers the ownership of accounts to another party that then
chases up the debt. Factoring therefore relieves the first part of a debt for less than the total
amount providing them with working capital to continue trading, while the buyer, or factor,
chases up the debt for the full amount and profits when it is paid.Forfaiting is the purchase of an exporter's receivables (the amount importers owe the
exporter) at a discount by paying cash. The purchaser of the receivables, or forfeiter, must
now be paid by the importer to settle the debt. As the receivables are usually guaranteed by
the importer's bank, the forfeiter frees the exporter from the risk of non-payment by the
importer. The receivables have then become a form of debt instrument that can be sold on
the secondary market as bills of exchange or promissory notes.
Structured Commodity Finance
Structured commodity finance (SCF) as covered by Trade Finance is split into three main
commodity groups: metals & mining, energy, and soft commodities (agricultural crops). It is
a financing technique utilised by commodity producers and trading companies conducting
business in the emerging markets. SCF provides liquidity management and risk mitigation
for the production, purchase and sale of commodities and materials. This is done by isolating
assets, which have relatively predictable cash flow attached to them through pricing
prediction, from the corporate borrower and using them to mitigate risk and secure credit
from a lender. A corporate therefore bor rows against a commoditys expected worth.
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If all proceeds to plan then the lender is reimbursed through the sale of the assets. If not then
the lender has recourse to some or all of the assets. Volatility in commodity prices can make
SCF a tricky business. Lenders charge interest any funds disbursed as well as fees for
arranging the transaction. SCF funding techniques include pre-export finance, countertrade,
barter, and inventory finance. These solutions can be applied across part or all of the
commodity trade value chain: from producer to distributor to processor, and the physical
traders who buy and deliver commodities.
Export & Agency Finance
This part of Trade Finances remit covers the roles of the export credit agencies, the
development banks, and the multilateral agencies. Their traditional role is complement
lending by commercial banks at interest by guaranteeing payment.
These agencies have once again become of vital importance to the trade finance market due
to the role that they play in facilitating trade, insuring transactions, promoting exports,
creating jobs, and increasingly through direct lending. All are important in the current global
downturn.
ECAs are private or governmental institutions that provide export finance, or credit
insurance and guarantees, or both. ECAs can have very different mandates which we will not
delve into here (please refer to Trade Finances annualWorld Official Agency Guide).The
development banks, sometimes referred to as DFIs (development finance institutions), and
the multilaterals similarly have different mandates depending on their ownership or regional
remit. Most will have a form of trade facilitation programme that promotes trade through the
provision of guarantees.
ECAs and multilaterals are becoming a crucial part of the financing of large infrastructure
projects around the world as credit from commercial banks remains scarce.
Make sure you stay abreast of the latest news and analysis across the spectrum of global
trade with Trade Finance the information source on the trade, supply chain, commodity
and export finance markets.
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DESCRIPTION OF FACTORS FOR CHOOSING A BANK BY EXPORTERS
The factors that have been taken are:
General Factors:
Speed
Cost
Reach
Customer friendly
Already having an account
All banking services
Trade finance factors:
Importers choice of bank
Credit limit
Factoring and forfaitingForex factors:
Forex limits
Better forex offers
Costs
Lower costs related to preparation, submission and approval of documents; lower
cost of clearance and transportation of goods.
The elements involved in the cost are described in annexture-2.
Speed
Because procedures and processes are rationalized and transparent, facilitation of
just intime delivery is done by almost all the banks.
Payments:
There are 3 standard ways of payment methods in the export import trade international trade
market:
1. Clean Payment
2. Collection of Bills
3. Letters of Credit L/c
Clean Payments
In clean payment method, all shipping documents, including title documents are handled
directly between the trading partners. The role of banks is limited to clearing amounts as
required. Clean payment method offers a relatively cheap and uncomplicated method of
payment for both importers and exporters.
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There are basically two type of clean payments:
Advance Payment
In advance payment method the exporter is trusted to ship the goods after receiving payment
from the importer.
Open Account
In open account method the importer is trusted to pay the exporter after receipt of goods.
The main drawback of open account method is that exporter assumes all the risks while the
importer get the advantage over the delay use of company's cash resources and is also not
responsible for the risk associated with goods.
2. Payment Collection of Bills in International Trade
The Payment Collection of Bills also called Uniform Rules for Collections is published by
International Chamber of Commerce (ICC) under the document number 522 (URC522) and
is followed by more than 90% of the world's banks.
In this method of payment in international trade the exporter entrusts the handling of
commercial and often financial documents to banks and gives the banks necessary
instructions concerning the release of these documents to the Importer. It is considered to be
one of the cost effective methods of evidencing a transaction for buyers, where documents
are manipulated via the banking system.
There are two methods of collections of bill :
Documents Against Payment D/P
In this case documents are released to the importer only when the payment has been done.
Documents Against Acceptance D/A
In this case documents are released to the importer only against acceptance of a draft.
3. Letter of Credit L/c
Letter of Credit also known as Documentary Credit is a written undertaking by the importersbank known as the issuing bank on behalf of its customer, the importer (applicant), promising
to effect payment in favour of the exporter (beneficiary) up to a stated sum of money, within
a prescribed time limit and against stipulated documents. It is published by the International
Chamber of Commerce under the provision of Uniform Custom and Practices (UCP)
brochure number 500.
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Various types of L/Cs are :
Revocable & Irrevocable Letter of Credit (L/c)
A Revocable Letter of Credit can be cancelled without the consent of the exporter. An
Irrevocable Letter of Credit cannot be cancelled or amended without the consent of all parties
including the exporter.
Sight & Time Letter of Credit
If payment is to be made at the time of presenting the document then it is referred as the Sight
Letter of Credit. In this case banks are allowed to take the necessary time required to check
the documents. If payment is to be made after the lapse of a particular time period as stated
in the draft then it is referred as the Term Letter of Credit.
Confirmed Letter of Credit (L/c)
Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its
commitment to that of the issuing bank. By adding its commitment, the Confirming Bank
takes the responsibility of claim under the letter of credit, assuming all terms and conditions
of the letter of credit are met.
Documentary collections
Payment Collection Against Bills also known documentary collection as is a payment
method used in international trade all over the world by the exporter for the handling of
documents to the buyer's bank and also gives the banks necessary instructions indicating
when and on what conditions these documents can be released to the importer.
It is different from the letters of credit, in the sense that the bank only acts as a medium for
the transfer of documents but does not make any payment guarantee. However, collection of
documents are subjected to the Uniform Rules for Collections published by the International
Chamber of Commerce (ICC).
Role of Various Parties
Exporter
The seller ships the goods and then hands over the document related to the goods to theirbanks with the instruction on how and when the buyer would pay.
Exporter's Bank
The exporter's bank is known as the remitting bank , and they remit the bill for collection
with proper instructions. The role of the remitting bank is to :
Check that the documents for consistency.
Send the documents to a bank in the buyer's country with instructions on collecting
payment. Pay the exporter when it receives payments from the collecting bank.
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Buyer/Importer
The buyer / importer is the drawee of the Bill.
The role of the importer is to :
Pay the bill as mention in the agreement (or promise to pay later).
Take the shipping documents (unless it is a clean bill) and clear the 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 can also be used on the request of exporter.
The collecting bank act as the remitting bank's agent and clearly follows the instructions on
the remitting bank's covering schedule. However the collecting bank does not guarantee
payment of the bills except in very unusual circumstance for undoubted customer , which is
called availing. Importer's bank is known as the collecting / presenting bank. The role of the
collecting banks is to : Act as the remitting bank's agent
Present the bill to the buyer for payment or acceptance.
Release the documents to the buyer when the exporter's instructions have been
followed.
If the bill is unpaid / unaccepted, the collecting bank :
May arrange storage and insurance for the goods as per remitting bank instructions on
the schedule.
Protests on behalf of the remitting bank (if the Remitting Bank's schedule states
Protest)
Requests further instruction from the remitting bank, if there is a problem that is not
covered by the instructions in the schedule.
Once payment is received from the importer, the collecting bank remits the proceeds
promptly to the remitting bank less its charges.
Documents Against Payments (D/P)This is sometimes also referred as Cash against Documents/Cash on Delivery. In effect D/P
means payable at sight (on demand). The collecting bank hands over the shipping documents
including the document of title (bill of lading) only when the importer has paid the bill. The
drawee is usually expected to pay within 3 working days of presentation. The attached
instructions to the shipping documents would show "Release Documents Against Payment"
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Risks :
Under D/P terms the exporter keeps control of the goods (through the banks) until the
importer pays. If the importer refuses to pay, the exporter can:
Protest the bill and take him to court (may be expensive and difficult to control from
another country).
Find another buyer or arrange a sale by an auction.
With the last two choices, the price obtained may be lower but probably still better than
shipping the goods back, sometimes, the exporter will have a contact or agent in the
importer's country that can help with any arrangements.
If the importers refuses to pay, the collecting bank can act on the exporter's instructions
shown in the Remitting Bank schedule. These instructions may include:
Removal of the goods from the port to a warehouse and insure them.
Contact the case of need who may negotiate with the importer. Protesting the bill through the bank's lawyer.
Documents Against Acceptance (D/A)
Under Documents Against Acceptance, the Exporter allows credit to Importer, the period of
credit is referred to as Usance, The importer/ drawee is required to accept the bill 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 documents and clear his goods.
The payment date is calculated from the term of the bill, which is usually a multiple of 30days and start either from sight or form the date of shipment, whichever is stated on the bill
of exchange. The attached instruction would show "Release Documents Against
Acceptance".
Risk
Under D/A terms the importer can inspect the documents and , if he is satisfied, accept the
bill for payment o the due date, take the documents and clear the goods; the exporter loses
control of them.
The exporter runs various risk. The importer might refuse to pay on the due date because :
He finds that the goods are not what he ordered.
He has not been able to sell the goods.
He is prepared to cheat the exporter (In cases the exporter can protest the bill and take
the importer to court but this can be expensive).
The importer might have gone bankrupt, in which case the exporter will probably
never get his money.
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Usance D/P Bills
A Usance D/P Bill is an agreement where the buyer accepts the bill payable at a specified
date in future but does not receive the documents 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 responsible 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 payments is less usual, but offers more
settlement possibility.
These are still D/P terms so there is no extra risk to the exporter or his bank. As an alternative
the covering scheduled may simply allow acceptance or payments to be deferred awaiting
arrival of carrying vessel. There are different types of usance D/P bills, some of which do not
require acceptance specially those drawn payable at a fix period after date or drawn payable
at a fixed date. Bills requiring acceptance are those drawn at a fix period after sight, which is
necessary to establish the maturity date.
LETTER OF CREDIT
Letter of Credit L/c also known as Documentary Credit is a widely used term to make
payment secure in domestic and international trade. The document is issued by a financial
organization at the buyer request.The International Chamber of Commerce (ICC) in the
Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C 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 :
1. Is to make a payment to or to the order third party ( the beneficiary ) or is to accept
bills of exchange (drafts) drawn by the beneficiary.
2. Authorised another bank to effect such payments or to accept and pay such bills of
exchange (draft).
3. Authorised another bank to negotiate against stipulated documents provided that the
terms are complied with.
A key principle underlying letter of credit (L/C) is that banks deal only in documents and notin 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.
Parties to Letters of Credit
Applicant (Opener) : Applicant which is also referred to as account party is normally
a buyer or customer of the goods, who has to make payment to beneficiary. LC is
initiated and issued at his request and on the basis of his instructions.
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Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of
credit and takes the responsibility to make the payments on receipt of the documents
from the beneficiary or through their banker. The payments has to be made to the
beneficiary within seven working days from the date of receipt of documents at their
end, provided the documents are in accordance with the terms and conditions of the
letter of credit. If the documents are discrepant one, the rejection thereof to be
communicated within seven working days from the date of of receipt of documents at
their end.
Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to
receive payment from the applicant. A credit is issued in his favour to enable him or
his agent to obtain payment on surrender of stipulated document and comply with the
term and conditions of the L/c. If L/c 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 : An Advising Bank provides advice to the beneficiary and takes the
responsibility for sending the documents to the issuing bank and is normally located
in the country of the beneficiary.
Confirming Bank : Confirming bank adds its guarantee to the credit opened by
another bank, thereby undertaking the responsibility of payment/negotiation
acceptance under the credit, in additional to that of the issuing bank. Confirming bank
play an important role where the exporter is not satisfied with the undertaking of only
the issuing bank.
Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents
submitted to them by the beneficiary under the credit either advised through them or
restricted to them for negotiation. On negotiation of the documents they will claim the
reimbursement under the credit and makes the payment to the beneficiary provided
the documents submitted are in accordance with the terms and conditions of the letters
of credit. 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. It is normally the bank with which issuing bank has an
account from which payment has to be made.
Second Beneficiary : Second Beneficiary is the person who represent the first or
original Beneficiary of credit in his absence. In this case, the credits belonging to the
original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.
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Types of Letter of Credit
1. Revocable Letter of Credit L/c
A revocable letter of credit may be revoked or modified for any reason, at any time by the
issuing bank without notification. It is rarely used in international trade and not considered
satisfactory for the exporters but has an advantage over that of the importers and the issuing
bank.
2. Irrevocable Letter of CreditL/c
In this case it is not possible to revoked or amended a credit without the agreement of the
issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is
believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures
the beneficiary that if the required documents are presented and the terms and conditions are
complied with, payment will be made.
3. Confirmed Letter of Credit L/c
Confirmed Letter of Credit is a special type of L/c in which another bank apart from the
issuing bank has added its guarantee. Although, the cost of confirming by two banks makes
it costlier, this type of L/c is more beneficial for the beneficiary as it doubles the guarantee.
4. Sight Credit and Usance Credit L/c
Sight credit states that the payments would be made by the issuing bank at sight, on demand
or on presentation. In case of usance credit, draft are drawn on the issuing bank or the
correspondent bank at specified usance period. The credit will indicate whether the usance
draft 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 L/c
Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as
backtoback credit when a L/c is opened with security of another L/c.A backtoback credit which can also be referred as credit and countercredit is actually a
method of financing both sides of a transaction in which a middleman buys goods from one
customer and sells them to another.
The parties to a BacktoBack Letter of Credit are:
1. The buyer and his bank as the issuer of the original Letter of Credit.
2. The seller/manufacturer and his bank,
3. The manufacturer's subcontractor and his bank.
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The practical use of this Credit is seen when L/c is opened by the ultimate buyer in favour of
a particular beneficiary, who may not be the actual supplier/ manufacturer offering the main
credit with near identical terms in favour as security and will be able to obtain reimbursement
By presenting the documents received under back to back credit under the main L/c.
The need for such credits arise mainly when :
1. The ultimate buyer not ready for a transferable credit
2. The Beneficiary do not want to disclose the source of supply to the openers.
3. The manufacturer demands on payment against documents for goods but the
beneficiary of credit is short of the funds
6. Transferable Letter of Credit L/c
A transferable documentary credit is a type of credit under which the first beneficiary which
is usually a middleman may request the nominated bank to transfer credit in whole or in part
to the second beneficiary.
The L/c does state clearly mentions the margins of the first beneficiary and unless it is
specified the L/c cannot be treated as transferable. It can only be used when the company is
selling the product of a third party and the proper care has to be taken about the exit policy
for the money transactions that take place.
This type of L/c is used in the companies that act as a middle man during the transaction butdont have large limit. In the transferable L/c there is a right to substitute the invoice and the
whole value can be transferred to a second beneficiary.
The first beneficiary or middleman has rights to change the following terms and conditions of
the letter of credit:
1. Reduce the amount of the credit.
2. Reduce unit price if it is stated
3. Make shorter the expiry date of the letter of credit.
4. Make shorter the last date for presentation of documents.
5. Make shorter the period for shipment of goods.
6. Increase the amount of the cover or percentage for which insurance cover must be
effected.
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Standby Letter of Credit L/c
Initially used by the banks in the United States, the standby letter of credit is very much
similar in nature to a bank guarantee. The main objective of issuing such a credit is to secure
bank loans. Standby credits are usually issued by the applicants bank in the applicantscountry and advised to the beneficiary by a bank in the beneficiarys country.
Unlike a traditional letter of credit where the beneficiary obtains payment against documents
evidencing performance, the standby letter of credit allow a beneficiary to obtains payment
from a bank even when the applicant for the credit has failed to perform as per bond.
A standby letter of credit is subject to "Uniform Customs and Practice for Documentary
Credit" (UCP), International Chamber of Commerce Publication No 500, 1993 Revision, or
"International Standby Practices" (ISP), International Chamber of Commerce Publication No590, 1998.
Import Operations Under L/c
The Import Letter of Credit guarantees an exporter payment for goods or services, provided
the terms of the letter of credit have been met.
A bank issue an import letter of credit on the behalf of an importer or buyer under the
following Circumstances
When a importer is importing goods within its own country.
When a trader is buying good from his own country and sell it to the another country
for the purpose of merchandizing trade.
When an Indian exporter who is executing a contract outside his own country requires
importing goods from a third country to the country where he is executing the
contract.
Export Operations Under L/c
Export Letter of Credit is issued in for a trader for his native country for the purchase of
goods and services. Such letters of credit may be received for following purpose:
1. For physical export of goods and services from India to a Foreign Country.
2. For execution of projects outside India by Indian exporters by supply of goods and
services from Indian or partly from India and partly from outside India.
3. Towards deemed exports where there is no physical movements of goods from
outside India But the supplies are being made to a project financed in foreign
exchange by multilateral agencies, organization or project being executed in Indiawith the aid of external agencies.
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4. For sale of goods by Indian exporters with total procurement and supply from outside
India. In all the above cases there would be earning of Foreign Exchange or
conservation of Foreign Exchange.
Banks in India associated themselves with the export letters of credit in various capacities
such as advising bank, confirming bank, transferring bank and reimbursing bank.
In every cases the bank will be rendering services not only to the Issuing Bank as its agent
correspondent bank but also to the exporter in advising and financing his export activity.
1. Advising an Export L/c
The basic responsibility of an advising bank is to advise the credit received from its overseas
branch after checking the apparent genuineness of the credit recognized by the issuing bank.
It is also necessary for the advising bank to 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.The main features of advising export LCs are:
1. There are no credit risks as the bank receives a onetime commission for the
advising service.
There are no capital adequacy needs for the advising function.
2. Advising of Amendments to L/Cs
Amendment of LCs is done for various reasons and it is necessary to fallow all
the necessary the procedures outlined for advising. In the process of advisingthe amendments the Issuing bank serializes the amendment number and also
ensures that no previous amendment is missing from the list. Only on receipt
of satisfactory information/ clarification the amendment may be advised.
3. Confirmation of Export Letters of Credit
It constitutes a definite undertaking of the confirming bank, in addition to that
of the issuing bank, which undertakes the sight payment, deferred payment,
acceptance or negotiation.
Banks in India have the facility of covering the credit confirmation risks with
ECGC under their Transfer Guarantee scheme and include both the
commercial and political risk involved.
4. Discounting/Negotiation of Export LCs
When the exporter requires funds before due date then he can discount or
negotiate the LCs with the negotiating bank. Once the issuing bank nominates
the negotiating bank, it can take the credit risk on the issuing bank or
confirming bank.
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5. Reimbursement of Export LCs
Sometimes reimbursing bank, on the recommendation of issuing bank allows
the negotiating bank to collect the money from the reimbursing bank once the
goods have been shipped. It is quite similar to a cheque facility provided by a
bank. In return, the reimbursement bank earns a commission per transaction
and enjoys float income without getting involve in the checking the
transaction documents. reimbursement bank play an important role in payment
on the due date ( for usance LCs) or the days on which the negotiating bank
demands the same (for sight LCs).
Pre Shipment export finance
Pre Shipment Finance is issued by a financial institution when the seller want the payment of
the goods before shipment. The main objectives behind preshipment finance or pre export
finance is to enable exporter to: Procure raw materials.
Carry out manufacturing process.
Provide a secure warehouse for goods and raw materials.
Process and pack the goods.
Ship the goods to the buyers.
Meet other financial cost of the business.
Types of Pre Shipment Finance Packing Credit
Advance against Cheques/Draft etc. representing Advance Payments.
Requirment for Getting Packing Credit
This facility is provided to an exporter who satisfies the following criteria
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 Licence), the exportershould have the required license /quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of the following
evidences to the bank:
1. Formal application for release the packing credit with undertaking to the effect that
the exporter would be ship the goods within stipulated due date and submit the
relevant shipping documents to the banks within prescribed time limit.
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2. Firm order or irrevocable L/C or original cable / fax / telex message exchange
between the exporter and the buyer.
3. Licence issued by DGFT if the goods to be exported fall under the restricted or
canalized category. If the item falls under quota system, proper 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, description quantity and value of goods
(FOB or CIF), destination port and the last date of payment.
Bank guarantee:
A bank guarantee is a written contract given by a bank on the behalf of a customer. By
issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it
is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank
gets some commission for issuing the guarantee.
Anyone can apply for a bank guarantee, if his or her company has obligations towards a third
party for which funds need to be blocked in order to guarantee that his or her company fulfils
its obligations (for example carrying out certain works, payment of a debt, etc.).
In case of any changes or cancellation during the transaction process, a bank guarantee
remains valid until the customer dully releases the bank from its liability.
In the situations, where a customer fails to pay the money, the bank must pay the amount
within three working days.
Benefits of Bank Guarantees
For Governments
1. Increases the rate of private financing for key sectors such as infrastructure.
2. Provides access to capital markets as well as commercial banks.
3. Reduces cost of private financing to affordable levels.4. Facilitates privatizations and public private partnerships.
5. Reduces government risk exposure by passing commercial risk to the private
sector.
For Private Sector
1. Reduces risk of private transactions in emerging countries.
2. Mitigates risks that the private sector does not control.
3. Opens new markets.
4. Improves project sustainability.
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Legal Requirements
Bank guarantee is issued by the authorised dealers under their obligated authorities notified
vide FEMA 8/ 2000 dt 3 rd May 2000. Only in case of revocation of guarantee involving US $
5000 or more need to be reported to Reserve Bank of India (RBI).
Types of Bank Guarantees
1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or
indirect.
Direct Bank Guarantee It is issued by the applicant's bank (issuing bank) directly
to the guarantee's beneficiary without concerning a correspondent bank. This type
of guarantee is less expensive and is also subject to the law of the country in
which the guarantee is issued unless otherwise it is mentioned in the guarantee
documents.
Indirect Bank Guarantee With an indirect guarantee, a second bank is involved, which is
basically a representative of the issuing bank in the country to which beneficiary belongs.
This involvement of a second bank is done on the demand of the beneficiary. This type of
bank guarantee is more time consuming and expensive too.
2. Confirmed Guarantee
It is cross between direct and indirect types of bank guarantee. This type of bank
guarantee is issued directly by a bank after which it is send to a foreign bank for
confirmations. The foreign banks confirm the original documents and thereby
assume the responsibility.
3. Tender Bond
This is also called bid bonds and is normally issued in support of a tender in international
trade. It provides the beneficiary with a financial remedy, if the applicant fails to fulfill any of
the tender conditions.4. Performance Bonds
This is one of the most common types of bank guarantee which is used to secure the
completion of the contractual responsibilities of delivery of goods and act as security of
penalty payment by the Supplier in case of non delivery of goods.
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5. Advance Payment Guarantees
This mode of guarantee is used where the applicant calls for the provision of a sum of money
at an early stage of the contract and can recover the amount paid in advance, or a part thereof,
if the applicant fails to fulfil the agreement.
6. Payment Guarantees
This type of bank guarantee is used to secure the responsibilities to pay goods and services. If
the beneficiary has fulfilled his contractual obligations after delivering the goods or services
but the debtor fails to make the payment, then after written declaration the beneficiary can
easily obtain his money from the guaranteeing bank.
7. Loan Repayment Guarantees
This type of guarantee is given by a bank to the creditor to pay the amount of loan body and
interests in case of non fulfilment by the borrower.
8. B/L Letter of Indemnity
This is also called a letter of indemnity and is a type of guarantee from the bank making sure
that any kind of loss of goods will not be suffered by the carrier.
9. Rental Guarantee
This type of bank guarantee is given under a rental contract. Rental guarantee is either limited
to rental payments only or includes all payments due under the rental contract including cost
of repair on termination of the rental contract.
10. Credit Card Guarantee
Credit card guarantee is issued by the credit card companies to its customer as a guarantee
that the merchant will be paid on transactions regardless of whether the consumer pays their
credit.
Bank Guarantees vs. Letters of Credit
A bank guarantee is frequently confused with letter of credit (LC), which is similar in many
ways but not the same thing. The basic difference between the two is that of the partiesinvolved. In a bank guarantee, three parties are involved; the bank, the person to whom the
guarantee is given and the person on whose behalf the bank is giving guarantee. In case of a
letter of credit, there are normally four parties involved; issuing bank, advising bank, the
applicant (importer) and the beneficiary (exporter).
Also, as a bank guarantee only becomes active when the customer fails to pay the necessary
amount where as in case of letters of credit, the issuing bank does not wait for the buyer to
default, and for the seller to invoke the undertaking.
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Role of Foreign exchange in international trade
Liquidity
In terms of international trade, liquidity is the ease in which foreign currency is
converted into domestic currency. FX markets, such as the New York Mercantile
Exchange, match buyers and sellers to bring about speedy, orderly transactions.
Rates
Buyers and sellers set prices using the auction method in the FX market. Sellers try to
earn the highest "ask" price possible, and buyers try to purchase currency at the
lowest "bid." Buyers and sellers meet at the "spot" price, the current value and
exchange rate for a particular currency against others.
Reserves
International governments enter the FX market to build and manage foreign exchange
reserves. They build the reserves to make official payments and influence domestic
currency values.
International Trade
Businesses rely on FX markets to buy currency that is spent to obtain overseas goods.
Corporations will also look to FX markets to convert international earnings back into
the domestic currency.
Hedging
Traders use foreign exchange derivatives, which "derive" their valuations and costsfrom the spot market. Options and futures contracts effectively lock in exchange rates
for a set period, to hedge against the risks of currency fluctuations.
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DATA ANALYSIS AND INTERPRETATION
Objective of the Study
The primary objective of the study is to study the major factors responsible for
choosing a bank.
The Secondary objective is to assess which banking services are given importance the
most .
Research Methodology used
Descriptive research design was used to study the factors for choosing a Bank. The primary
data was collected based on stratified sampling method. We first found out a list of
companies from the internet and rang each and every company to know which companies are
functional and then went to them for survey.The secondary data was collected from the
articles, newspapers, books and internet. The factor analysis and chi-square were used to find
factors for choosing a Bank. The collected data have been analyzed with the help of
SPSS16.0 package. The scope of this study is to know which factors influence exporters and
importers to choose a bank. This study shows the present level of factors which influence and
indicates the area for improvement. Factor analysis and chi-square are done to find out the
factors which influence the most and on what services banks have to concentrate respectively.
The factors that have been taken are:
General Factors:
Speed
Cost
Reach
Customer friendly
Already having an account
All banking services
Trade finance factors: Importers choice of bank
Credit limit
Factoring and forfaiting
Forex factors:
Forex limits
Better forex offers
Empirical findings
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Factor analysis
The factors which we assumed are general factors, trade finance factors and forex factors.
Factor analysis has grouped all these 10 factors into three categorical factors which are export
related services factor, convenience factor and efficiency factor.
Correlation matrix
Interpretation : From the above correlation matrix we can find out that all factors are not
highly correlated with each other except forex offers which are correlated around 70% withbetter forex offers and factoring and forfaiting.
speed cost reach Customerfriendly
Alreadyhave a
account
Importerschoice
Creditlimit
Allbankingservices
Factoringand
forfaiting
Betterforexoffers
Forexlimits
speed 1 0.553 -0.05 0.167 -0.193 -0.223 0.111 0.015 0 0 -0.01
cost 0.553 1 0.04 0.208 0.05 -0.067 0.089 -0.196 0.111 0.111 0.109
reach -0.046 0.038 1 -0.332 0.467 0.353 -0.54 -0.304 -0.415 -0.415 -0.32
Customerfriendly
0.167 0.208 -0.33 1 -0.459 -0.107 0.434 0.298 0.208 0.208 0.055
Alreadyhave aaccount
-0.193 0.05 0.47 -0.459 1 0.081 -0.19 -0.207 -0.151 -0.151 -0.12
Importerschoice
-0.223 -0.07 0.35 -0.107 0.081 1 -0.4 -0.053 -0.336 -0.336 -0.19
Creditlimit
0.111 0.089 -0.54 0.434 -0.191 -0.396 1 0.026 0.802 0.802 0.722
Allbankingservices
0.015 -0.2 -0.3 0.298 -0.207 -0.053 0.026 1 -0.196 -0.196 -0.4
Factoringandforfaiting
0 0.111 -0.42 0.208 -0.151 -0.336 0.802 -0.196 1 1 0.792
Betterforexoffers
0 0.111 -0.42 0.208 -0.151 -0.336 0.802 -0.196 1 1 0.792
Forexlimits
-0.014 0.109 -0.32 0.055 -0.119 -0.185 0.722 -0.402 0.792 0.792 1
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Interpretation : From this total variance matrix table we can see that all the factors have
been reduced to three factors. In which first factor contribute about 35% of total variance,second factor contribute 20% and third factor 15%.Only these three factors are taken since
these three factors explain about 70% of total variance. The first factor has to be given more
importance since it contributes more to the total variance. What constitutes first factor will be
explained in rotated component matrix.From this study it is evident that the important factors which influence the exporters and
importers in choosing a bank are
Total Variance Explained
Component
Initial Eigen values
Extraction Sums of Squared
Loadings
Rotation Sums of Squared
Loadings
Total
% of
Variance
Cumulative
% Total
% of
Variance
Cumulative
% Total
% of
Variance
Cumulative
%
1 4.124 37.490 37.490 4.124 37.490 37.490 3.856 35.054 35.054
2 1.981 18.007 55.497 1.981 18.007 55.497 2.194 19.945 54.998
3 1.600 14.549 70.045 1.600 14.549 70.045 1.655 15.047 70.045
4 .969 8.812 78.857
5 .739 6.716 85.573
6 .533 4.850 90.423
7 .438 3.979 94.403
8 .314 2.858 97.261
9 .208 1.890 99.151
10 .093 .849 100.000
11 -
2.736E-
16
-2.487E-15 100.000
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1) Export related services factors: which include credit limit, factoring and forfaiting,
better forex offers, forex limits.
2) Convenience factor: which include reach, customer friendly, already having an
account, all banking services.
3) Efficiency: which include speed and cost of transactions.
The three factors explain the 70% of the total variance of the data. Therefore only these three
factors are considered.
From the rotated component matrix. The resultant table is as follows
Rotated Component Matrix
Component
1 2 3
Speed .857
Cost .877
Reach -.678
Customer friendly .689
Already have an account -.696
Importers choice
Credit limit .848
All banking services .723
Factoring and forfaiting .957
Better forex offers .957
Forex limits .902
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
From the rotated component matrix the first important factor seems to be the export related
services factor account for 35% of co-variance among variables, convenience account for
20% of co-variance and efficiency factor account for 15%.Export related services factor
include:
Credit limit
Factoring and forfaiting
Better forex offers
Forex limits
All these explain the factor on an average of 90% each.
The next important factor is the convenience factor which includes reach, customer friendly,
already having an account and all banking services.
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Interpretation: The above plot shows the graph between Eigen value and components. We
can see that the graph steeply decreases up to third component and from then it is becoming
stable. Meaning the each successive factor is accounting for smaller and smaller amounts of
the total variance.
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Chi-squareChi-square is a statistical test commonly used to compare observed data with data we would
expect to obtain according to a specific hypothesis. For example, if, according to Mendel's
laws, you expected 10 of 20 offspring from a cross to be male and the actual observed
number was 8 males, then you might want to know about the "goodness to fit" between the
observed and expected. Were the deviations (differences between observed and expected) the
result of chance, or were they due to other factors. How much deviation can occur before
you, the investigator, must conclude that something other than chance is at work, causing the
observed to differ from the expected. The chi-square test is always testing what scientists call
the null hypothesis, which states that there is no significant difference between the expected
and observed result.
Findings for another objective, i.e. banking services which are used the most are evident from
the data by using chi-square test. The resultant table is as follows:
Test Statistics
Documentary
collections
letter
of
credit
Type of
LC
Services
regarding
LC
Shipping
guarantees
Post
shipment
export
finance
Transaction
services
Advising,
negotiating
services
Chi-Square
.000a
4.800a
15.000b
13.333a
16.133a
4.800a
19.200a
8.533a
Df 1 1 2 1 1 1 1 1
Asymp.
Sig.
1.000 .028 .001 .000 .000 .028 .000 .003
Interpretation: This table shows that all the services are significant.
From the chi-square test we can find out the significance of the data obtained. The resultant
table of chi-square shows that all services have significance less than 0.05 which explainsthat all services are given importance. The documentary collection has an exception because
the values of documentary collection are almost constant therefore the significance value is
1i.e. the chi-square can not be applied for variables which are constant.
Chi-square shows that the variables are significant or is the best fit to the sample population,
because the significance values of all the variables are less than 0.05.
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Frequencies
Interpretation: The above graph shows that the survey has been done in the followingsectors
Sea food Pharma Misc
o Granite o Jewellery o Decorative items
Sea food sector has more sample size because it is the dominant sector in vizag, therefore themore the sample size, more accurate the results will be.
Then pharma companies are surveyed more since there exists pharma city in vizag which arealso large in number.
The miscellaneous companies include granite, jewellery and decorative items, which are lessin number.
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Exports
The graph shows the volume of exports of the companies that are being surveyed.
The companies which have exports :
< 5 crores are export house
5- 25 crores are 25-125 crores 125-625 crores
Particulars Yes NoAdvance payments 0% 100%Open account 0% 100%Documentary collections 50% 50%Letter of credit 80% 20%Services regarding LC 80% 20%Bills collection 100% 0%Bills discounting 100% 0%Shipping gaurantees 10% 90%Preshipment Export finance 100% 0%Postshipment export finance 30% 70%Transaction services 100% 0%Advising, negotiating services 80% 0%
Interpretation: The above frequency table shows that except the Advance payments, openaccount and post shipment finance services all other services are used the most and are givenequal importance. Advance payments and open account are very risky therefore naturallythey are avoided as much as possible.
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Frequencies of factors:
Interpretation: The above bar-graph shows that most of the respondents has opted forstrongly and agree only. Therefore this factor can be considered as a very important factor.
Interpretation: Like speed cost also got the same response. so this factor can also beconsidered as a very important factor .
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Interpretation: We can see from the bar graph of the responses that many people disagreed
or said not an issue regarding reach as a factor for choosing a bank. This shows that peopleare not interested in whether the bank in reach or not. The reason might be since thetechnology has been developed, now a days everything is going online , there is no worryregarding the reach of the bank.
Interpretation: Almost all respondents agree that customer friendly is one of the factors forchoosing a bank. Therefore this factor also need to be considered as an important factor.
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ParticularsStronglydisagree Disagree Neutral Agree
Stronglyagree
Already having an account 30% 70% 0% 0% 0%Importer's choice of bank 45% 65% 0% 0% 0%
Credit limit 0% 0% 0% 55% 45%All banking services 0% 0% 0% 85% 15%Factoring and forfaiting 0% 0% 0% 50% 50%
Better forex offers 0% 0% 0% 50% 50%
Forex limits 0% 0% 15% 45% 40%
Interpretation: From the above frequency table , it is evident that all agreeing exporterstrading services as factor for choosing a bank , except already having an account andimporters choice of bank.
Therefore banks should be more competitive in these factors to attract customers.
Crosstabs
Interpretation: The above bar graph shows the relation between volume of exports and
documentary collection service. It shows that companies small companies (< 5 crores and 5-
25 crores) and showed a little bit interest in documentary collections. The reason would be
documentary collection services would be comparatively cheaper and have some sought of
safety. Therefore who could not afford for costly services they go for cheaper services.
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Interpretation : The above bar graph shows the relation between volume of exports and letterof credit. It shows that low volume exporting companies does not prefer LC and otherspreferred as it is safe to use.
Interpretation: The above graph shows that most of the respondents use sight and usanceletter of credit. The other types are not used by any one because respondents are not aware of the other LC services available.
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Interpretation: Every respondent who use LC obviously uses the services regarding LC.
Interpretation: almost all the respondents said that they dont need shipping guarantees,because most of them are using services which are safer and also includes shippingguarantees. It is preferred by those who use documentary collections.
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Interpretation: every respondent responded positively for transaction because it is keyservice for trade. It is used for payments, foreign exchange transactions, etc..
Interpretation: many companies said yes for advising, negotiating bank services.
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Conclusion:From the analysis we can conclude that while choosing a bank, these exporters are giving
importance to export related services first(credit limit, factoring and forefaiting, better forex
offers, forex limits), because they want to work efficiently by reducing their costs take
service with better quality. Then the importance is given to general factors and then to
efficiency factor.
Coming to the services used the most, exporters are using all the export services offered by
the bank with exception of advance payments and post shipment finance. In vizag most of the
exporters are not using advance payments and documentary collections, it suggests that
exporters of vizag are risk averse since usage of advance payments and documentary
collections are risky comparatively.
Suggestions :As per the analysis made the suggestions that can be made are
The important factor seem to be the export related services factor then general factors
and then efficiency factor. Therefore it is advisable to concentrate more on export
related service factors.
Then coming to the services used, exporters are using all the export services offered
by the bank with exception of post shipment finance and shipment guarantees. As the
exporters of vizag seem to be risk averse it is better to concentrate on service which
are safe to use like LC, etc...
Most of the exporters in vizag are not aware of different types of LCs, so firstawareness of the different types of LCs have to be created and their uses have to beexplained to create a market.
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