banking_trade finance - ntak 2010

8/8/2019 Banking_Trade Finance - NTAK 2010

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Corporate Banking / Trade / Slide 1Prof. N.T.Arunkumar | IFMR 2010

TRADE FINANCE: Concepts


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Corporate Banking / Trade / Slide 2

TRADE

BUYER SELLERpayment for goods & services

supply of goods & services

The underlying basis of trade is the contract for sale

between buyer & seller


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RISKS IN INTERNATIONALTRADE

Buyer & Seller totally unknown to one anotherRisk of loss/damage in transport of goods

Import/export restrictions

Changes in Exchange Control regulations

Whose laws applicable ?

Whose courts have jurisdiction in case of disputes

Sovereign (Country) Risk


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WHAT THE SELLER WANTS

Contract Fulfillment Assurance that he will be paid in full within the agreed

time limit

Convenience

The convenience of receiving payment at his own bank

or through a bank in his own country


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WHAT THE SELLER WANTS

Prompt Payment

Prompt payment for the sale of his goods, so as to improve

the liquidity of his own business

Advice

The knowledge necessary to conduct complex trade

transactions


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WHAT THE BUYER WANTS

Contract Fulfillment

Assurance that he does not have to pay the seller until he

is certain that the seller has fulfilled his obligations

correctly

Convenience

The convenience of using an intervening third party in

whom both buyer & seller have confidence ----such as

a bank with its documentary expertise---- when

making payment


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WHAT THE BUYER WANTS

Credit

A managed cash flow, by the possibility of obtaining

bank finance

Expert Assistance

Expert assistance and facilities with often complex

transactions, particularly with the specific procedures tobe followed


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TIME FOR PAYMENT

IN ADVANCE

AT THE TIME OF SHIPMENT

AFTER SHIPMENT

SELLER BUYER

Payment in

advance mostpreferred

Payment after

shipment mostpreferred


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TIME FOR PAYMENT - SELLER

In Advance

He needs payment before shipment, as he cannot otherwisefinance production of the goods the buyer has ordered

At the time of Shipment

He wants assurance of payment as soon as goods are shipped He has to meet regulations stipulating payment at the time of

shipment rather than before or after it

After Shipment He is prepared to wait for payment for a certain time after

shipment, as he trusts the buyer and appreciates his position


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TIME FOR PAYMENT - BUYER In Advance

He trusts the seller, knowing that the contract will be carried out

as agreed, and is prepared to pay in advance

At the time of Shipment

He does not want to take the risk of paying before being certain

that the goods are shipped on time and they are as stipulated in hiscontract with the seller

He has to meet regulations stipulating payment at the time of

shipment rather than before or after it

After Shipment

He possibly wants to sell the goods before he pays the seller


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TRADE FINANCING METHODS

Documentary Credits

Bills Purchase/Negotiation/Discount

Guarantees


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WHAT IS A DOCUMENTARYCREDIT

Commitment of a bank to pay the seller of goods & services a certain amount provided he presents

stipulated documents evidencing shipment of goods

or the performance of services within a prescribedperiod of time.

It is a conditional undertaking of payment given bya bank.


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UNIFORM CUSTOMS & PRACTICEFOR DOCUMENTARY CREDITS

UCP codify the main international ground rules -code of practice for documentary operations

It includes

Detailed information on form and notification of credit

instruments

Liabilities & Responsibilities of Banks

Details of documents to be presented by the beneficiary

working definition of a documentary credit


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UNIFORM CUSTOMS & PRACTICE FORDOCUMENTARY CREDITS

It has no legislative forceBanks in most countries subscribe to these rules

Prepared by the International Chamber of

Commerce (ICC), it is drafted by representatives ofthose who have to use them (banks) and are referred

to in credits throughout the world

Revised periodically,currently applicable is UCP 500effective March 1994


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BASIC PREMISE

Credits by their nature, are separate transactions

from the sales or other contracts on which they may be

based and banks are in no way concerned with or

bound by such contracts even if any references to such

contracts is included in the credit - Article 3 of UCP

IN DOCUMENTARY CREDIT OPERATIONS THE

PARTIES CONCERNED ARE DEALING INDOCUMENTS & NOT IN GOODS


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FEATURES OF A CREDIT

Arrangements by banks for settling Internationalcommercial transactions

Conditional undertaking of payment by a bank

A form of security for the parties involved

Ensures payment provided terms & conditions of the

credit have been fulfilled

Both a credit instrument & a means of making and

securing payment


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FEATURES OF A CREDIT

Payment is based on documents only and not on

merchandise or services involved

Substitutes banks credit worthiness for credit

worthiness of the client

Represents a promise by a bank to pay up to a pre-

determined sum of money

States the terms & conditions under which beneficiarycan obtain these funds

Always contains expiration date


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ADVANTAGES OF USINGDOCUMENTARY CREDITS

Importer has documentary assurance

Exporter has payment assurance

Facilitates International trade by enabling an

importer (whose credit standing may be good but not

well known) to buy goods from a foreign exporter


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PRICING & COMMISSIONS

Fee will be charged for issuance & confirmation

The issuing/confirming bank could require the

opener to provide either a guarantee or cash

collateral


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PARTIES TO A LETTER OF CREDIT

Account Party Issuing Banks client who is the

Importer/Buyer applicant for the credit

Applicant

Beneficiary Party in whose favor the credit issued

Exporter/Seller

Issuing Bank The buyers bank which issues the

Opening Bank credit & gives the undertaking

Negotiating Bank Bank which negotiates (advances funds)

to the beneficiary against presentation

of documents


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PARTIES TO A LETTER OFCREDIT

Paying Bank Bank named as the bank which will effectpayment to the beneficiary

Advising Bank Bank which advises or sends the instrument to

the beneficiary

Confirming Bank Bank which adds its own irrevocable

undertaking to the credit


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BASIC FORMS OF CREDITS

Revocable

Can be amended or cancelled without notice to the beneficiary

Irrevocable

Constitutes a definite undertaking of the Issuing Bank

Cannot be amended or cancelled without the consent of allparties involved in the transaction

Irrevocable, Confirmed

Confirmation constitutes a definite undertaking of theconfirming bank in addition to that of issuing bank


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DOCUMENTARY REQUIREMENTS

Documents must conform strictly with the terms ofthe credit

Documents must be presented to paying/negotiating

bank on or before latest expiration/negotiation dateand within specified time after shipment

Invoices must always be issued by the beneficiary and

must show the name of the buyer as specified in thecredit


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STAGES IN A LETTER OF CREDITOPERATION

Application for credit

Issue of credit

Advise of credit

Presentation of documents

Settlement by payment

by negotiationby acceptance


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TYPICAL LETTER OF CREDITTRANSACTION

SELLER BUYER

Contract

Goods

Credit

Advice

Credit

Money

8 documents

Advising/Confirming

bank

documents documents

ISSUINGBANK

payment/reimbursement

1

23

4

5

6 10

Applicationfor credit

7

9

Payment


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Negotiation and Conclusion of the Contract

contractESLGAG

Electricity Supply Ltd.,

Osaka (ESL)Generator AG,

Zurich (GAG)

The Electricity Supply Ltd., Osaka (ESL)

Places the following order with Generator AG,

Zurich (GAG)

Goods: Complete generator system

Delivery date: May 19

Delivery terms: C + F Osaka

Transport: Overland to Rotterdam, by sea

from there to Osaka

Price Sfr. 378,000.-Mode of payment: Payable at sight against irrevocable

credit, opened by the Industrial Bank of

Asia Tokyo (IBA), and confirmed by

Union Bank of Switzerland,

Zurich (UBS).


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PROCEDURE 1 : ISSUING A CREDIT

SELLERBUYER

ADVISING /CONFIRMING

BANK

ISSUINGBANK

The buyer and seller conclude

a sales contract providing forpayment by documentary credit

The advising bank or confirmingbank informs the seller that thecredit has been issued

The buyer instructs his bank

- the "Issuing Bank" - toissue a credit in favour of theseller

The issuing bank asks another

bank, usually in the country ofthe seller, to advise or confirmthe credit

1

2

3

4


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Opening and Confirmation of the Credit

ESL

GAG

Applicant of the credit Beneficiary of the credit

IBAS

U B S

G

Credit

Opening BankCredit advising

and

Confirming BankESL requests IBA to open an irrevocable credit, to advise it through the intermediary of UBS

and to have it confirmed by them.


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PROCEDURE 2 : PRESENTATION

SELLER

ADVISING/

CONFIRMINGBANK

BUYER

ISSUING

BANK(9)

(8)

(5)

(6) (7)


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5. Seller dispatches goods on receiving credit andbeing satisfied on terms & conditions

6. Seller sends documents evidencing shipment to

the bank where credit is available7. Bank checks documents against credit for

conformity. If the document meets the

requirements, bank will pay, accept or negotiate,according to terms of credit


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8. The bank, if other than the issuing bank, sends thedocuments to the issuing bank

9. The issuing bank checks documents and if in

conformance to the credit either- effects payments in accordance to terms of

credit

- to the seller (if he sent documents direct)

- to the confirming bank


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Utilization of the Credit by presenting and

forwarding the Documents

ESL

GAG

IBAS

U B S

G

Following delivery of the goods, Generator AG, Zurich (GAG), has all the required documents at its

disposal and presents these to the confirming bank (UBS). After verification of the documents its

account is credited with the amount due. UBS forwards the documents and arranges for cover from

the opening bank (IBA). IBA, in turn, forwards the documents to the buyer (ESL) and debits its

account.

Debit Documents

Goods delivery

PaymentDocuments

Provision of cover

Documents


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PROCEDURE 3 : SETTLEMENT

SELLER BUYER


BANK

ISSUINGBANK

10 10

11


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PROCEDURE 3 : SETTLEMENT

10. When the documents are checked by issuing bankand found to be in conformance with the credit

they are released to buyer upon payment or

agreed terms.11. The buyer send transport documents to the carrier

who will deliver the goods


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PROCEDURE 3(a) : SETTLEMENT BYPAYMENT

SELLERBUYER


BANK

ISSUING

BANK

The seller sendsthe documents

direct to thebank where creditis available

After checking thatdocument meetrequirements, the

bank makes paymentThis bank, if other thanthe issuing bank, sendsdocuments to issuing

bank.Reimbursement isobtained in thepre-agreed manner


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PROCEDURE 3(b) : SETTLEMENT BYACCEPTANCE

SELLER

BUYER

ADVISING /

CONFIRMINGBANK

ISSUING

BANK

The seller sendsdocumentswith draft to thebank where credit

is available

After checking thatdocument meetsrequirements, thebank accepts the draft

and returns it to the seller

This bank, if other thanthe issuing bank,sendsdocuments to issuing bank

stating that it has acceptedthe draft and at maturityreimbursement will beobtained in the pre-agreedmanner


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PROCEDURE 3 (c) : SETTLEMENT BYNEGOTIATION

SELLER BUYER

ADVISING /

CONFIRMINGBANK

ISSUING

BANK

The seller sendsthe documentsdirectly with drafton the buyer to thebank where credit isavailable

After checking thatthe document meet

the requirements, thebank negotiates the draft

This bank, if other thanthe issuing bank, thensends the documents and

the draft to the issuing bank.Reimbursement is obtainedin the pre-agreed manner


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TRANSFERABLE CREDIT

SELLER (First Beneficiary)

Bank

Issuingbank

SecondBeneficiary

Buyer

Advising / Confirming bank

Can be transferred by the original beneficiary to one or

more other parties

1

2

5

34


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The Transfer

Opening of Original Credit and its Transfer

NCICCB

JCB SU B SG

AGContract Contract

BPB

(Applicant) (First Beneficiary) (Second Beneficiary)

Japan Commercial BankCorp., Osaka (JCB)

Credit opening bank

Credit confirmingand transferring bank

Banco Plata SABuenos Aires (BPB)

Bank of the second beneficiary

Confirmationadvice of originalcredit

Instructionto transfercredit

Notificationof the transferredcredit

Nippon Cotton Importers Ltd.,

Tokyo/Japan (NCI)

(Buyer)

Transit AG

Zurich (TAG)

(Middleman)

Cooperative Cotonela

Bueno Aires /

Argentina (CCB)

(Supplier / Producer)


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Utilization of the Credit after Delivery

NCICCB

JCB

S

U B S

G

AG

BPB

(Applicant) (First Beneficiary) (Second Beneficiary)

Japan Commercial BankCorp., Osaka (JCB)

Credit opening bank

Credit confirmingand transferring bank

Banco Plata SABuenos Aires (BPB)

Bank of the second beneficiary


Tokyo/Japan (NCI)

(Final Buyer)

Transit AG

Zurich (TAG)

(Middleman)


Bueno Aires /

Argentina (CCB)


DocumentsDebit

of finalbuyer

Documents Payment

Provisionof cover

Provisionof cover


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FEATURES OF TRANSFERABLECREDIT

Can be transferred only once

Transfer must be effected in accordance with the

terms of the original credit

Transfer is effected at the request of the first

beneficiary

A transferable credit will always be irrevocable


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BACK TO BACK CREDIT

SELLER

1st Advising/confirming bank

2ndIssuing bank

Buyer

Issue of a Second credit by the seller in favor of his Supplier

The seller as beneficiary of the first credit, offers it as 'security'

to the advising bank for the insurance of the second credit

1

2

5

3

4

1stIssuing bank

Supplier

2nd Advising/confirming bank

6

Goods


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Opening a Credit on a Back-to-back Basis

NCI CCB

JCB

S

U B SG

AGContract Contract

BPB

Applicant for

the original

credit

Credit opening bank Credit confirmingbank

Advisingbank


Tokyo/Japan (NCI)

(Final Buyer)

Transit AG

Zurich (TAG)

(Middleman)


Bueno Aires /

Argentina (CCB)


Beneficiary of

the original

credit

Applicant for the

back-to-back

credit

Beneficiary of

the back-to-back

credit

Credit openingbank


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RED CLAUSE CREDIT

Includes a special clause that authorizes the advising

or confirming bank to make advances to thebeneficiary before presentation of documents

Specifies the amount of advance that is authorized

Used as a method of providing seller with funds prior

to shipment

Puts onus of final payment on the buyer


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TYPES OF CREDITS ACCORDINGTO PAYMENT METHODS

Sight Credits

Acceptance Credits

Deferred Payment Credits

Credits with advance payment

Revolving Credits


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SIGHT CREDITS

The beneficiary receives the proceeds

of the credit upon presentation and

examination of the documents


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ACCEPTANCE CREDITS

The exporter draws a time draft payable on somefuture date

On presentation, the draft is accepted for payment

as per credit terms

The issuing / confirming bank guarantees

acceptance of the draft and its payment atmaturity


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DEFERRED PAYMENT CREDIT

The beneficiary presents the documents to the

drawee bank

The bank receives and undertakes to remitpayment at a future date based on the credit terms


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REVOLVING CREDIT

The amount of the credit is renewed without an

explicit amendment to the credit being needed

It can be revocable or irrevocable

it can revolve in relation to time or value

Credits that revolve in relation to time can becumulative or non cumulative

Credits that revolve in relation to value, have the

amount of credit re-instated upon utilization, withinthe overall validity period


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ASSIGNMENT OF PROCEEDS

Beneficiary can assign the whole or part of his claim

to the proceeds of the credit

The beneficiary of the credit is charged a fee for the

notification of assignment

Assignment under a credit differs from transferablecredits in that the assignee himself cannot make use

of the credit

On negotiation of correct documents, the assignedproceeds will be paid direct to the assignee


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NEGOTIATING CREDIT

Resumes anyone who negotiates that the

beneficiarys draft presented to the paying bank will

be honored

Negotiating bank becomes more than an agent of the

beneficiary

Negotiating bank becomes a legally recognized party

of the instrument


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STRAIGHT CREDIT

Engagements of opening bank extends only to the

named beneficiary

Banks/other intermediaries who negotiate drafts of

the beneficiary act as the agent of the beneficiaryCredit instrument conveys no legal undertaking to

protect negotiating parties.


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CREDIT APPLICATIONFull name & address of the beneficiary

Amount of credit

Type of credit

Mode of Payment

Brief description of goods, including details of

quantity, unit price..

Freight - to pay/ pre paid

Port of loading & destination


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CREDIT APPLICATION

Transshipment - allowed or not

Partial shipments - permitted or not

Latest date of shipment

Latest date of negotiation

Date & place of expiry of credit

Advice of credit - mail/telex/swift


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DOCUMENT TYPES

Transport Documents

documents indicating that goods have been loaded on

board, dispatched or taken in charge

Insurance Documents

Commercial Invoices

Other documents


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TRANSPORT DOCUMENTS

Marine Bill of lading

an original marine bill of lading represents title togoods

they are always made out in several originals (which

together constitute a set) on board clean documents must be provided

Post Receipts or certificates of posting

Transport documents issued by a named carrier orcarrier agent (air,rail,truck)


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INSURANCE DOCUMENTS

In the form stipulated in the credit

issued/signed by an insurance company, underwriter

or its agent

Must cover at least CIF/CIP value of goods plus 10 %Credit should stipulate exact type of insurance

required and the risks to be covered


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COMMERCIAL INVOICE

Describes the goods exactly as stated in the contract

and confirms that they have been delivered ascontracted

Other documents

Certificate of origin

Weight List

Packing List Certificates of analysis and survey

Consular Invoice


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INCOTERMS

Commercial terms widely used in International

Trade

Terms define costs and risks associated with

movement of goods between importer & exporter

INCOTERMS indicate

charges & expenses to be paid by seller

place of delivery of goods point in time when goods and transit risks are

tranferred


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INCOTERMS-BUYERS RISK &COST

Goods moving at buyers risk & cost

EXW Ex Works

FCR Free Carrier

FOR/FOT Free on Rail/Free on Track FOA Free on Airport

FAS Free Alongside Ship

FOB Free on Board


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INCOTERMS-BUYERS RISK &SELLERS COST

Buyers Risk & Sellers Cost

C&F Cost & Freight

CIF Cost,Insurance & Freight

FCP Freight Carriage Paid

CIP Freight Carriage Insurance Paid


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INCOTERMS-SELLERS RISK &COST

Sellers Risk and Cost

EXS Ex Ship

EXQ Ex Quay DAF Delivered at Frontier

DDP Delivered Duty Paid


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BANK GUARANTEE

An irrevocable obligation of a bank to pay a sum of

money in the event of non-performance of a contract

by a third party

The guarantee is a separate obligation independent ofthe principal debt or the contractual relationship

btween the creditor and the principal debtor


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TYPES OF GUARANTEES

Bid Bond

Performance Bond

Standby Credits

Advance Payment Guarantee

Payment Guarantee


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TENDER GUARANTEE

Given in support of a customers tender as assurance

of the intention of the customer to sign the contract ifhis tender is accepted

In the event of default, the guarantee provides within

the limits of the guarantee to make payment of astated sum of money to the beneficiary

A counter indemnity is invariably taken by the

issuing bank


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PERFORMANCE GUARANTEES

Given in support of a customers obligation to fulfill a

contractual commitment

Bank guarantees that the buyer/employer will be paid

for any claims he may have for non completion or

faulty completion by the supplier/contractor up to the

total amount guaranteed, if claims are made within

the validity and terms of the guarantee

STANDBY CREDIT


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STANDBY CREDIT

An undertaking of the issuing bank to pay in the

event of the account partys non performanceFunctional equivalent of a guarantee

Commonly issued by US banks who are not allowed

by law to issue guarantees

Documents required when drawing under a standby

credit - sight draft, beneficiarys written statement

that a default has occurred