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PRESTIGE INSTITUTE OF MANAGEMENT AND RESEARCH, INDORE
2, Education & Health Sector Scheme 54, Indore, India
Summer Training Report On
INTERNATIONAL TRADE TRANSACTIONS AND ASSOCIATED RISKS
At
INDUSIND BANK
(INDORE BRANCH)
SUBMITTED BY:
NAMRATA CHANDWANI
M.B.A (FT) SEM-III
UNDER THE GUIDANCE OF
Syed Tauseef Ahmed Dr. Sachin Mittal
(Deputy Vice President, Indusind) (Professor PIMR)
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DECLARATION
I hereby declare that the project work entitled INTERNATIONAL TRADETRANSACTIONS AND ASSOCIATED RISKS submittedto Prestige Institute Of Management And Research, Indore is a record of
an original work done by me under the guidance of Dr. SACHIN MITTAL,
Faculty Member, PIMR and this project work has not performed the basis for the
award of any Degree or diploma/ associate ship/fellowship and similar project if any.
NAMRATA CHANDWANI
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GUIDE CERTIFICATE
This is to certify that the project work done on INTERNATIONAL TRADE
TRANSACTIONS AND ASSOCIATED RISKS Submitted to Prestige
Institute Of Management & Research, is a bonafide work carried out by MS.
NAMRATA CHANDWANI under my supervision and guidance. This work has
not been submitted anywhere else for any other course.
The original work was carried out during 6 th June 2011 to 21st July 2011 in
IndusInd Bank Indore.
Date: DR. SACHIN MITTAL
Seal/Stamp of the Organization Faculty Mentor
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ACKNOWLEDGEMENT
I would like to express my gratitude to INDUSIND BANK, organization as a
whole which gave me the opportunity to undergo my Summer Internship Project
for the fulfillment of my academic career and also inculcating the sense of job
prospective development in the long term growth for the being an able
entrepreneur.
My sincere regards and thanks to, Mr. SYED TAUSEEF AHMED (Deputy
Vice-President) IndusInd bank MP & CG. Under whose esteemed protg and
mentorship I carried out the study. I owe my tutelage, commitment & outcome ofmy internship to him. He guided, assisted & provided me the necessary plethora of
knowledge for conducting the study.
I am indebted to my project guide & Dr. SACHIN MITTAL for his timely
Support and valuable suggestion and feedback. Without his wealth of knowledge,
and the reassurance that he would be there for the guidance and support, I would
not have been able to gather the courage to embark on this journey into the
unfamiliar world of Finance.
I would like to thank our Director Mrs. YOGESHWARI PATHAK for her
constant and dedicated service to brighten our careers.
I also extend my appreciation, thankfulness to employees of IndusInd bank during
the organization study, which helped in getting valuable information, ideas & in
action from the employees & executives working in their respective fields.
Namrata Chandwani
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EXECUTIVE SUMMARY
The project is all about International Trading. The trade cycle begins with the agreement
to trade. When partners agree to trade, merchandise is exchanged for payment. In the
international marketplace, the exporters goals are to be assured of payment and to free
capital invested in merchandise during shipping. For the importer, the guarantee of
delivery of merchandise and the ability to defer payment are of paramount concern.
The level of trust between importer and exporter is the base for a successful transaction.
This trust is enhanced by the Role Of A Bank as intermediary to the transaction and on
adherence to universally accepted standards of trade. As a responsible third party to
international trade, the bank expedites payment and handles the settlement process. The
bank fills a vital role that may result from lack of experience, geographic distance and
market unfamiliarity.
My project highlights the Role Of Bank as an intermediary in International Trading. It
explains all the operations that are performed by the Banks right from documentation to
payment & all the associated risks. The project also introduces the smaller aspects like
Bank Guarantees, Pre and Post shipment Financings, the regulatory bodies involved etc.
Both the exporters and importers are benefit from the involvement of a bank as anintermediary in international trade to provide professional counsel in this complex field
and facilitate the movement of documents and payments.
Majorly the project is focused on Payment Modes available for traders with Letter of
Credit payment mode covered in detail and the study of various Risks like Currency
Risks, Political Risks, Credit risks etc that are always Associated with International
Trade Transactions.
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CONTENTS
TOPIC PAGE NO.
1. Company Profile ..
Introduction
1
Board of Director
2
Rating...
2
Accolades.
2
Brand
3
Key Highlights.
4
Ranking of Bank..
5
Strengthening Distribution Infrastructure...
6
Organisation Structure
7
Financial Position
8
Balance Sheet....
9
Profit and Loss.
10
Recruitment and Selection.
11-12
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Future plans for IndusInd..
13
Marketing..
13-14
Area of Operation
Competition
Advertisement
SWOT..
15-16
2. Introduction to Bank..
Definition..
17
General Facilities by bank
18
Financial & other Facilities...
19
3. Introduction to Project
Trade.
22
Bank as Intermediately trade Transaction
23
Swift operation by bank25
Parties involved in trade and their role
27
Method of settlement.
28
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Letter of Credit (Types and Format)
31
4. Export Finance and Documents41-45
5. Export Pre-Shipment and Post Shipment Finance
Pre-shipment Finance46Post shipment Finance46Factoring and Forfeiting.
46Bank guarantees..47
6. Risks Associated with International Trade Transaction.
Export International trade transport risk.48-49Credit risk in Export Business.49-51
Country Political Risk in export..52-53Currency Risk in International trade.54
Conclusion...............................................
55
Suggestions...............................................56
Webliography...............................................57
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COMPANYS PROFILE
Profile
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, Honourable 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.
The bank is presently headed by Mr.Romesh Sobti- Managing Director, IndusInd Bank.
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.
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 centres.
In a pioneering initiative in 'Green Banking' project, the Bank opened its first solar-power ATM
in Maharashtra. The Bank received a series of accolades commencing with the prestigious
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'Technology Bank of the Year-2009' award in the private and foreign bank category from the
Indian Banks' Association (IBA).
BOARD OF DIRECTORS
Mr. R. Seshasayee, Chairman
Dr. T.T. Ram Mohan
Mr. Ajay Hinduja
Mr. S.C. Tripathi
Mr. Ashok Kini
Mrs. Kanchan Chitale (Additional Director)
Mr. Vijay Vaid (Additional Director)
Mr. R.S. Sharma (Additional Director)
Mr. Romesh Sobti, MD & CEO
Mr. Y.M. Kale (Alternate Director to Mr. Ajay Hinduja)
RATING:
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.
ACCOLADES :
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2011-2012
1. Panasonic Green Globe foundation Award 2012 in the Business Enterprise Services
(UNEP/TERI/KPMG).
2. NASSCOM IT User Award 2012 for Environmental Sustainability (Frost & Sullivan).
3. The CII Environmental Best Practices Award 2012 for the Most Innovative Project.
4. Most Improved Bank Performance of the Year at Financial Leadership Awards 2012
(Bloomberg UTV)
5. M.IT.R- 50 Marketing & IT Recognition Program amongst top 50 brands-(Paul Writer
& IBM ).
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 punchline Makes you feel
richer and since then, the bank has been consistent in communication through Television,
Radio, and Outdoor & print advertising.
IndusInd Bank understands 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 needs andbetter management of finances
Demystifies the banking process and makes it more accessible
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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
Further, as a banking partner, the bank also aims to help its customers discover how they can do
more things with their money.
KEY HIGHLIGHTS 2012
Steady performance in deteriorating macro economic environment
Net Interest Income grew 20% Y -o-Y & 8% Q-o-Q inspite of stressed Money Markets
Non-Interest Income to revenue remains healthy at 39%
Consistent growth in Core Fee Income 60% Y -o-Y & 5% Q-o-Q
Credit growth above industry 34% Y -o-Y & 8% Q-o-Q
Low exposure to stressed / sensitive sectors
Net NPA 0.27%; PCR 72.72%; Restructured Advances 0.26%
Credit cost falls to 40 bps
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RECENT RANKING OF INDUSIND BANK BY BUSINESS TODAY MAGAZINE
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STRENGTHENING DISTRIBUTION INFRASTRUCTURE
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
400 branches and 692 ATMs spread
across 270 geographic locations of the
country as on March 31, 2012.
AS AT END FY10
Branch Networks 180
ATMs 356
Marketing Outlets 410
The Bank also has 2 Representative offices, one each in London and Dubai.
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ORGANISATIONAL STRUTURE :
The Business has been organized into CLIENT BASED UNITS and PRODUCT
GROUPS that work across client groups with the objective to enhance focus and
customer orientation and service levels;
Also restructured geographical structure, regional offices and branch structure.
FINANCIAL POSITION
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Transactional Global Market
PRODUCT GROUP
Consumer finance Corporate & Investment Banking
Retail liabilities Commercial Banking
Banking Channel management Business Banking
Wealth Management & third party distributions Financial Institutions & public sector
Consumer banking Corp. & Commercial
CLIENT GROUP
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Q4FY12
Q4FY11
Y-o-Ygrowth
(%)
12monthsFY12
12monthsFY11
YoYgrowth
(%)
Net Profit
(Rs. crore)223.38 171.76 30 802.61 577.32 39
Operating Profit
(Rs. crore)379.09 298.03 27 1373.03 1081.67 27
Net Interest Income(Rs. crore)
464.40 388.08 20 1704.25 1376.49 24
Total Non InterestIncome (Rs. crore)
292.0561 _ 181.63 61 1011.78 713.66 42
Core Fee Income
(Rs. crore) 263.96 164.85 60 913.24 629.43 45
EPS (Rs.)
(not annualised) 4.78 3.69 30 17.20 13.16 31
Q-o-Q (%)
FINANCIAL PERFORMANCE HIGHLIGHTS
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Branch Network significantly increased to 400 as against 300 branches, the previousyear. The Banks ATMs increased to 692 from 594 ATMs, the previous year.
Announces a dividend of 22 % as against 20%, the previous year.
Net worth improves to Rs. 4522.37 crore
CASA improved to 27.30 % as against 27.15% in 2010-11.
Total Revenue improved to Rs. 2,716.03 crore as compared to Rs 2,090.15 crore, anincrease of 30%.
Net Profit was Rs. 802.61 crore as against Rs. 577.32 crore in the corresponding periodof the previous year, recording a jump of 39 %.
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RECRUITMENT AND SELECTION
STEPS IN RECRUITMENT OF A CANDIDATE-
Approvals
Prior approval shall be obtained from Business Head and Head HRbefore starting the hiring
process for any vacancies on account of:
a) Replacementsb) New Hires - where persons are required in addition to the existing approved
headcount to fill new positions
The approval of the Business Head shall be obtained on the Manpower Requisition Form(available on the intranet) before the formal process of New Hires is initiated for any newposition.
Manpower requisition form needs to highlight proper job description describing-
the purpose
role of the job
persons specifications (describing the kind of person - qualification, experience, skillsets, personality attributes etc.)
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APPROVAL FOR RECRUITMENT
PROCESSING OF REQUEST
CHOOSING A MODE OF SELECTION
INTERVIEW
OFFER TO SELECTED CANDIDATE
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Processing Of Approved Request
1. Any permanent position to be filled in must be budgeted & must have Head HR &
Business Head approval before hiring.2. After defining the job specifications and the skill & experience requirements(through a Manpower Requisition Form), it shall be decided whether the positionshould be internally sourced or through external recruitment.
3. In case of selection process involving internal candidates, Human Resource shall actas a coordinator, so that all issues related to transfer, release etc. between twodepartments are resolved satisfactorily.
4. In the event of a decision to go for an external source, Human Resource shall be thecoordinating point with external agencies. Human Resource shall also be responsiblefor establishing contracts related to fee structure & processes etc. with the externalsearch firms. This is to ensure uniform & consistent communication on all
recruitment matters.
Mode of Selection
Selection of manpower for new or replacement needs shall be through any of the following
modes:
A. Open Advertisements
B. Campus Selection
C. Selection through Manpower / Placement Agencies / Head Hunters
D. Internal Selections
Interviewing Process for New Recruits
Personal Interview
a) After screening the applications received, the short listed candidates should be called fora personal interview. Then the candidates would fill the interview declaration form andpresent it at the time of personal interview.
b) The candidate short listing is based on the collective view of the interview panel.c) The rejected candidates in the Personal Interview Process shall be communicated by a
regret letter immediately after the interview.d) The completed interview assessment sheets and other papers of every short listed
candidate should be fastened together and sent to the HR department clearly marking thename of the candidate, position to be offered and the location of postings.
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Offer Letter
HR will issue offers within the receipt of the interview papers based on the fitment criteria for
various positions as per the formats.
Future Plans Of IndusInd :
To expand branch network and ATM network.
To continue to optimize balance sheet and business mix to improve profitability.
To continue to create a more enhanced and deeper customer focus and leverage customer
relationships.
To widen and leverage delivery channels and achieve disciplined growth.
To improve operating efficiencies.
To continue to engage and retain employees.
To continue to improve brand equity.
MARKETING:
Areas Of Operation
IndusInd Bank being a part of Service Sectors works in the following areas of operation-
1. Consumer Banking & Finance
2. Credit cards
3. Corporate & Commercial Banking
4. Global Markets
5. Transactional Banking
6. Priority Sector Lending
7. Risk Management
8. Corporate & Global Markets Operations
9. Trade & Foreign Exchange
Competitors:
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The major competitors of IndusInd can be categorized as-
1. Foreign Banks which include HSBC, CitiBank, Standard Chatered Bank.
2. Private Banks which include Axis bank, ICICI, HDFC, Yes bank.
3. Nationalized Banks which include SBI & Group, Bank of Baroda.
Advertising and Sales Promotion:
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 punchline Makes you feel
richer and since then, the bank has been consistent in communication through Television,
Radio, and Outdoor & print advertising. IndusInd Bank unveils its new advertising campaign, a
series of three ads to communicate a set of innovative services; Cash-On-Mobile, Direct
Connect and Quick Redeem Service. The ads are directed by Imtiaz Ali, the well knowndirector of Jab We Met, Love Aaj kal and ROCKSTAR fame. The ad films feature some
popular Bollywood actors like Neetu Kapoor and Jimmy Shergill.
Along with a series of three ADS to communicate new services like ATM denomination
selection, 365 days banking and cheque images along with statements of accounts. The three
new Ads have been directed by Rohan Sippy, and Bollywood celebrity Ranvir Shorey will be
the main character in the Ad. Through these ad campaigns they are taking their responsiveness
theme to customers and reinforcing their commitment to give best-of-class services in the
industry.
ATM denomination selection and Cheque images along with statement of account are unique
features and they are the first bank in India to offer these. These new services are focused on
client needs and are an outcome of extensive customer research. All ads, in addition to the
humour, are giving the core message of IndusInd Banks commitment to provide a world-class
banking experience.
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Some of the famous TV commercials are -
Cash on mobile ATMs IndusInd bank open 365 days Direct connect service
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IndusInd check on cheque IndusInd choice money ATM IndusInd online payments
SWOT ANALYSIS OF THE ORGANISATION
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STRENGTHS :
Right strategy for right products.
Superior customer services vs. competitors.
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Great brand image.
Higher degree of customer satisfaction.
Lower response time with efficient and effective services.
Dedicated workforce aiming at making a long term career in the field
WEAKNESS :
Small capital base.
No foreign branches.
Proper global presence is not there.
Lack of funds and resources.
OPPORTUNITIES
Profit margins can be good.
Scope for extension Overseas.
New specialist applications.
Could seek better customer deals.
Fast-track career development opportunities on an industry-wide basis.
An applied research centre to create opportunities for developing techniques to provide
value-added services.
THREATS
Legislation could impact.
High risk is involved
Prevailing Competition in the industry.
Lack of infrastructure in rural areas could constrain investment.
High volume/low cost market is intensely competitive
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INTRODUCTION TO GENERAL BANKING
INTRODUCTION TO BANK
A bankis a financial institution licensed by a government. Its primary activities include
borrowing and lending money. Many other financial activities were allowed over time. For
example banks are important players in financial markets and offer financial services such as
investment funds.
The word 'bank' has been derived from the word 'Banco' which means a banch. Bank is the place
where one group of people can save their money for interest which may be generally less than
the deprecating value of money or to protect the deprecation of their money and for their money
security and other group of people take loan for various purpose mainly for business and
investment purpose out of the money deposited by the previous group of people (depositor)
paying interest which will be more than the giving interest to the depositor.
DEFINITIONS OF BANK
According to Oxford English Dictionary, Bank is, An establishment for custody of money
received from or on behalf of, its customers. Its essential duty is the payment of the orders
given on it by the customers, its profit mainly from the investment of money left unused by
them. .
Banking Regulation Act, 1949 (Sec. 5(c)), has defined the banking company as, Banking
Company means any company which transacts business of banking in India. According to
Section 5B, banking means the accepting of deposit of money from the public for the purpose
of leading or investment, which are repayable on demand or otherwise and are withdrawable by
cheque , draft, and order or otherwise.
Different economists, banking professionals and authorities explained their viewpoint regarding
bank or commercial bank. It has been rightly said by A.K. Basu that a general definition of a
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bank or banking is by no means easy, as the concepts of banking differ from age to age, and
country to country.
GENERAL FACILITIES PROVIDED BY BANK
The development of banking is evolutionary in nature. A Bank performs a multitude of
functions and services which cannot be put into a single definition. A bank may mean different
things to different people. For some it is a storehouse of money, for others an institution of
funding for Finance and yet for many others bank is a depository for their savings. Today in
English bank is largely understood as an institution that accepts money as a deposit to further
lend it out for profit.
General facilities provided by banks can be of 2 types:
Liabilities business deposits
Assets business
LIABILITIES BUSINESS DEPOSITS:
1. Current Account: Current Account is primarily meant for businessmen, firms,
companies, public enterprises etc. that have numerous daily banking transactions.
Current Accounts are cheque operated accounts meant neither for the purpose of earning
interest nor for the purpose of savings but only for convenience of business hence they
are non-interest bearing accounts. In a Current Account, a customer can deposit any
amount of money any number of times. He can also withdraw any amount as many times
as he wants, as long as he has funds to his credit.
2. Savings Bank Account: Savings accounts are accounts maintained by retail financial
institutions that pay interest but cannot be used directly as money in the narrow sense of
a medium of exchange (for example, by writing a check). These accounts let customers
set aside a portion of their liquid assets while earning a monetary return. For the bank,
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money in a savings account may not be callable immediately and therefore often does
not incur a reserve requirement freeing up cash from the bank's vault to be lent out with
interest.
3. Term Deposits: A term deposit is a money deposit at a banking institution that cannot
be withdrawn for a certain "term" or period of time (unless a penalty is paid). When the
term is over it can be withdrawn or it can be held for another term. Generally speaking,
the longer the term the better the yield on the money.
ASSETS BUSINESS:
It can be further classified as fund based and non-fund based facilities-
FUND BASED FACILITIES:
1. Overdraft:
Overdraft facility is given to the current account holders only whereby they can
withdraw more than their bank balance upon a certain limit for a specified period.
Interest is charged by the banks on the amount actually withdrawn. The objective behind
providing overdraft facility to the current account holders is to finance the businessmenfor a short period for their business activities. Overdraft facility is a very useful for
current accountholders who are businessmen, since it is the best method of raising
temporary finance at reasonable rate of interest.
2. Cash Credit:
It is an arrangement by which a borrower is allowed to borrow money up to a certain limit. It
is an arrangement for a long or medium term and the borrower need not draw the sanctionedamount at once. He can draw the loan amount as and when required. Cash credit is a running
account, to which deposits and withdrawals can be made frequently. Interest is charged only
for the amount withdrawn and not on the total amount of loan sanctioned. This arrangement
can be made by the bank against the pledge or hypothecation of goods. This type of loan
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provides flexibility because the sanctioned limit can be changed according to the needs of
the borrower. It is the most favorable form of loan.
3. Term Loans:
It easy facility whereby a lump sum amount advanced to the borrower, which is repayable
after an agreed period. Short-term, medium-term and long-term loans are granted by the
banks for personal and commercial purpose. They are generally sanctioned against a
security.
Interest is charged by the banks on the total amount of the loan whether used or not. Loans
that are granted for a period upto five years are called short-term loans, loans granted
between five to seven years are called medium term loans and loans granted for more than
seven years are called as long term loans.
4. Bill Discounting:
Banks usually grants loans to their customers by discounting bills of exchanges. The amount
of the bill after deducting the discount is credited to the account of the customer. The bank
receives the interest in advance at the time of discounting. The bank receives the interest in
advance at the time of discounting. The bank collects the full amount of bill on maturity
from the drawee of the bill. Sometimes, banks purchase the bills instead of discounting.
Thus, the bank grants loan to the borrower against the security of the bills. It is a clean
advance on which the bank has to rely on the credit-worthiness of the parties of the bill.
NON-FUND BASED FACILITIES:
1. Letter of Credit:
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The Basic objective of Letter of Credit is to facilitate orderly movement of trade. It is thereforenecessary that the evidence of movement of goods is present. Banks are not connected with thequality / quantity of the goods and are concerned only with the documents which shouldconform to the terms and conditions of Letter of Credit.
2. Bank Guarantees:
Bank Guarantee is a contract to perform the promise or discharge the liability of a third personin case of his default. Various types of guarantees offered are financial, performance, bidbond, tenders, customs, etc. Our guarantees are well accepted. Our overseas correspondent bankalliances also enable us to issue guarantees overseas for participation in global tenders, etc.
OTHER FACILITIES
Apart from the main facilities, the banks also provide financial services to the corporate
sector and business society. These are as follows:
1. Merchant Banking:
Merchant Banking is an organisation which underwrites securities for companies, advises in
various activities. Any person who is engaged in the business of issue management either by
making arrangements regarding selling, buying or subscribing to securities or acting as
manager, consultant, adviser or rendering corporate advisory services in relation to issue
management is known as a merchant banker. Merchant Banks are financial institutions
which provide specialized facilities including acceptance of bills of exchange, corporate
finance, portfolio management and other facilities.
Services Rendered by Merchant Bankers
Corporate Counseling
Project Counseling
Loan Syndication
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Issue Management
Portfolio Management
Advisory Services relating to mergers, acquisitions etc.
Working Capital Management.
2. Leasing:
Banks have started funding the fixed assets through leasing. It refers to the renting out of
immovable property by the bank to the businessmen on a specified rent for a specific period
on terms which may be mutually agreed upon. A written agreement is made in this respect.
The banks have started subsidiaries to transact equipment-leasing business with the
permission of RBI.
3. Mutual Fund:
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciations realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost. The flow chart below
describes broadly the working of a mutual fund:-
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Savings form an important part of the economy of any nation. With savings invested in various
options available to the people, the money acts as the driver for growth of the country. Indian
financial scene too presents multiple avenues to the investors. Though certainly not the best or
deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide
reasonable options for an ordinary man to invest his savings.
Investment goals vary from person to person. While somebody wants security, others might give
more weight age to returns alone. Somebody else might want to plan for his childs education
while somebody might be saving for the proverbial rainy day or even life after retirement. With
objectives defying any range, it is obvious that the products required will vary as well.
4. Credit Cards:
Credit Card is a small plastic card that allows its holder to buy goods and services on credit and
to pay at fixed intervals through the card issuing bank. It may also be use for the purpose of
obtaining cash from the branches of issuing bank or branches of certain other banks with which
arrangements have been made. Banks may a specific annual charge to their cardholders.
5. ATM:
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Automated Teller Machines also known as any time money is a computer-controlled device at
which the customer can make withdrawals or deposits, check the balance in his account or even
request an appointment with the loan officer all without involving a human operation. In order
to use the system, a customer is issued a plastic card which is quoted with customers name and
account number.
6. Debit Card:
A debit card is basically like an ATM card on the move or like bank a/c on the move. It enable
user to access his/her bank account for payment. When she/he makes any purchase using debit
card, then his/her bank account is instantaneously debited to the extent of the purchase amount.
INTRODUCTION TO THE PROJECT
TRADE
Trade refers to buying and selling of goods and services for money or money's worth. Itinvolves transfer or exchange of goods and services for money or money's worth. Themanufacturers or producer produces the goods, then moves on to the wholesaler, then to retailerand finally to the ultimate consumer.
TRADE CAN BE BROADLY CLASSIFIED UNDER THE FOLLOWING:
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1. Internal ORDOMESTICTRADE
INTERNALTRADEISALSOKNOWNASHOMETRADE. ITISCONDUCTEDWITHINTHEPOLITICAL
ANDGEOGRAPHICALBOUNDARIESOFACOUNTRY. ITCANBEATLOCALLEVEL, REGIONAL
LEVELORNATIONALLEVEL. HENCETRADECARRIEDONAMONGTRADERSOF DELHI ,MUMBAI
ETC. I
TSCALLED
HOME
TRADE
.
Internal trade can be further sub-divided into two groups, viz.,
Wholesale Trade: IT INVOLVES BUYING IN LARGE QUANTITIES FROM PRODUCERS OR
MANUFACTURERS AND SELLING IN LOTS TO RETAILERS FOR RESALE TO CONSUMERS. THE
WHOLESALER IS A LINK BETWEEN MANUFACTURER AND RETAILER. A WHOLESALER OCCUPIES
PROMINENTPOSITIONSINCEMANUFACTURERSASWELLASRETAILERSBOTHAREDEPENDENTON
HIM. WHOLESALERACTSASANINTERMEDIARYBETWEENPRODUCERSANDRETAILERS.
Retail Trade: IT INVOLVESBUYINGINSMALLERLOTSFROMTHEWHOLESALERSANDSELLING
IN VERY SMALL QUANTITIES TO THE CONSUMERS FOR PERSONAL USE. THE RETAILER IS THELASTLINK INTHECHAIN OFDISTRIBUTION. HEESTABLISHESALINKBETWEENWHOLESALERS
ANDCONSUMERS.
2. External Trade or Foreign Trade :
External trade also called as Foreign trade. It refers to buying and selling between two or more
countries. For instance, If Mr. X who is a trader from Mumbai, sells his goods to Mr. Y another
trader from New York then this is an example of foreign trade.
External trade can be further sub-divided into two groups, viz.,
Export Trade: The definition of Export is when you trade something out of the country. In
economics, an export is any good or commodity, transported from one country to another
country in a legitimate fashion, typically for use in trade.
In simple words, when a trader from home country sells his goods to a trader located in another
country, it is called export trade.
For e.g. a trader from India sells his goods to a trader located in China.
Import Trade: An import is any goods (e.g. a commodity) or service brought in from one
country to another country in a legitimate fashion, typically for use in trade.
In simple words, when a trader in home country obtains or purchase goods from a trader located
in another country, it is called import trade.
For e.g. a trader from India purchase goods from a trader located in China.
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International trade is a complex process because the amount of risk involved is higher is
case of International trade than in Domestic trade.
RISK: The differentiating factor - Domestic Trade Vs International Trade;
1. Buyer insolvency (purchaser cannot pay);
2. Non-acceptance (buyer rejects goods as different from the agreed upon
specifications);
3. Credit risk(allowing the buyer to take possession of goods prior to payment);
4. Regulatory risk(e.g., a change in rules that prevents the transaction);
5. Intervention (governmental action to prevent a transaction being completed);
6. Political risk(change in leadership interfering with transactions or prices);
7. War and other uncontrollable events; and
8. Unfavourable exchange rate movements (and, the potential benefit of favorable
movements) Hedging (Direct/indirect hedging through Banking Channels)
Therefore Banks are involved in the process to make the complex task easier for the buyer and
seller.
BANK AS AN INTERMEDIATETARY IN TRADE TRANSACTIONS
It is impossible for buyers and sellers to be in international trade without involving the banks for
all the services they provide such as advice on financial issues and the potential risks
involved. It is true that one critical hurdle is the lack of information on international trade
processes, documentation 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.
The Banks help the buyer and seller in a number of ways. It throws light on the following
information:
Overview of International Trade
1. Flow of goods from seller to buyer
2. Flow of Payment from buyer to seller
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3. In accordance with a contract of sale
Documentary requirements
1. Buyer - What documents does he needs?
2. Seller - With what documents will he be able to supply?
3. Country of export - what documents are required under the regulations of the exporting
country?
4. Country of import - what documents are required under the regulations of the
importing country?
The key role played by any bank in Trade Transactions is TRADE FINANCE.
Trade Finance can be defined as:
Trade financing is the provision of any form of financing that enables a trading activity to take place
and which may be made directly to the supplier, to facilitate procurement of items for immediate
sale and/or for storage for future activities, or it could be provided to the buyer, to enable him meet
contract obligations. The availability of trade finance, particularly in developing and least-
developed countries, plays crucial role in facilitating international trade.
Exporters with limited access to working capital often require financing to process or
manufacture productsbefore receiving payments.
Conversely, importers often need credit to buy raw materials, goods and equipment fromoverseas.
Other roles played by BANKS in TRADE
Provide Information to buyers and sellers (advisory role)
Initial International Trade Contract
Settlements for Trade Transactions
Provide Financing
Manage currency risks
Take market risks
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In the Basic agreement (International Trade Sale Contract) between the buyer and seller the bankprovides guidance for all the following terms:
1. Preliminary Quotation & Commitment (Invoicing / order etc)
2. The Merchandise (goods to be imported / exported)3. Packing (instructions regarding packing of imported / exported merchandise)4. Method of Settlement (Immediate or Credit / Advance / LC Collection???)5. Shipping Instructions (trans shipment partial shipment etc)6. Price and its components (INCOTERMS 2000)7. Delivery Mode ,Period, Place (Sea, Air, Road place of shipment and last date of shipment)8. Documents (Invoice, packing list, inspection report, certificate of origin, BL/AWB etc)
SWIFT OPERATIONS BY BANKS
It (Society for Worldwide Interbank Financial Telecommunications) is Cooperative Society underBelgium Law and owned and controlled by its members-share holders. It has a board of 25Independent directors appointed by the shareholders who are responsible for overseeing andgoverning the company.
The National Bank of Belgium, the central bank of the country in which SWIFT head quarters arelocated and which is under arrangement with central Banks of G-10 countries i.e. Belgium,Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, Unites States,Switzerland, Sweden, and the European Central Bank.
A new SWIFT member will pay a onetime entry fee and recurring service fees to SWIFT.
BENEFITS OF JOINING SWIFT;
1. Cost is much lower than telex message2. Use of standard formats for messages results in consistency.3. Improved accuracy.4. Timely delivery.5. Confidentiality and security.6. Reduced risk.
SWIFT OPERATIONS- SERIES
Series
Description Examples
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Series1 **
Deals in directcustomer relatedmessages.
Single customer transferi.e.MT103 (TT)
Series2 **
Deals in FinancialInstitution Transfers.
General Financial InstitutionsTransfer i.e. MT202 (Imports)
Series3 **
Deals in Buying andSelling of TwoCurrencies.
Forward Rate AgreementConfirmation i.e. MT340(Treasury)
Series4 **
Deals in Collections. Advice of payment i.e. MT400(Collection Payment)
Series5 ** Deals in sale /purchaseof Securities. Order to Buy i.e. MT500(Treasury)
Series6 **
Deals in Precious MetalTrade.
Precious metal TradeConfirmation i.e. MT600
Series7 **
Deals in DocumentaryCredit Operations.
Issue of Documentary Crediti.e. MT700
Series8 **
Deals in TravelersCheques.
T/C Settlement Advice i.e.MT802
Series9 **
Deals in MiscellaneousPurpose Messages
Miscellaneous MT-999
Various Parties Involved In International Trade Transactions & their Roles
Role of Various Parties
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Exporter
The seller ships the goods and then hands over the document related to the goods to their bankswith the instruction on how and when the buyer would pay.
Exporter's BankThe exporter's bank is known as the remitting bank, and they remit the bill for collection withproper 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.
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 remittingbank but any other bank can also be used on the request of exporter. The collecting bank act asthe remitting bank's agent and clearly follows the instructions on the remitting bank's coveringschedule. However the collecting bank does not guarantee payment of the bills except in veryunusual circumstance for undoubted customer, which is called availing. Importer's bank isknown 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.
Remit the proceeds of the bill according to the Remitting Bank's schedule instructions. If the billis 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.
Methods of Settlement
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The bank provides financial support to the traders by settlement of all the trade transactions.The transactions are settled in two steps:
1. By making payments on behalf of the customer to the opposite party2. By collecting payments from the customer
Making Payment:Payments are settled in Trade by either of the following methods
1. Clean Payments
In clean payment method, all shipping documents, including title documents are handleddirectly between the trading partners. The role of banks is limited to clearing amounts asrequired. Clean payment method offers a relatively cheap and uncomplicated method ofpayment for both importers and exporters.
There are basically two types of clean payments:
Advance Payment
In advance payment method the exporter is trusted to ship the goods after receiving paymentfrom 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 theimporter get the advantage over the delay use of company's cash resources and is also notresponsible for the risk associated with goods.
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2. Payment Collection of Bills in International Trade
The Payment Collection of Bills also called Uniform Rules for Collections is published byInternational Chamber of Commerce (ICC) under the document number 522 (URC522) and isfollowed 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 banksand gives the banks necessary instructions concerning the release of these documents to theImporter.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 collectionsof bill:
Documents Against Payment D/P
In this case documents are released to the importer only when the payment has beendone.
Documents Against Acceptance D/AIn 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 toeffect payment in favour of the exporter (beneficiary) up to a stated sum of money, within aprescribed time limit and against stipulated documents. It is published by the InternationalChamber of Commerce under the provision of Uniform Custom and Practices (UCP) brochurenumber 500.
One of the many advantages of a letter of credit is its almost universal acceptancethroughout the world. A letter of credit can afford important advantages to both the exporter
and the importer that other payment methods cannot offer. In addition to the security of
payment, which does not depend upon the importers financial condition, the exporter can
continue to control title to the merchandise until payment is actually made or the documents are
accepted for payment. The importer, in turn, gains the advantage of time in making payment,
doing so only when the documents providing shipment are presented.
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PAYMENT RISK LADDER
OPEN ACCOUNT
COLLECTION-DA
COLLECTION-DP
LETTER OF CREDIT
CONFIRMED DC
ADVANCE PAYMENT
The letter of credit is a payment method provides an increased level of security for both
importers and exporters. Hence its the most preferred mode of payment by the traders.
Details of Letter Of Credit are discussed further in the project.
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LEAST
LEASTMOST
MOST
EXPORTEREXPORTER IMPORTERIMPORTER
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LETTER OF CREDIT (L/C) DOCUMENTARY COLLECTION
Introduction
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 atthe buyer request. Buyer also provides the necessary instructions in preparing the document.
The International Chamber of Commerce (ICC) in the Uniform Custom and Practicefor Documentary Credit (UCPDC) defines L/C as: "An arrangement, however named ordescribed, whereby a bank (the Issuing bank) acting at the request and on the instructions ofa 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 ofexchange (drafts) drawn by the beneficiary.2. Authorized another bank to effect such payments or to accept and pay such bills of exchange(draft).
3. Authorized another bank to negotiate against stipulated documents provided that the terms arecomplied with.
A key principle underlying letter of credit (L/C) is that banks deal only in documents and not ingoods. The decision to pay under a letter of credit will be based entirely on whether thedocuments presented to the bank appear on their face to be in accordance with the terms andconditions 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 onthe basis of his instructions.
Issuing Bank (Opening Bank) :
The issuing bank is the one which create a letter of credit and takes the responsibility to makethe payments on receipt of the documents from the beneficiary or through their banker. Thepayments has to be made to the beneficiary within seven working days from the date of receiptof documents at their end, provided the documents are in accordance with the terms andconditions of the letter of credit.
Beneficiary :
Beneficiary is normally stands for a seller of the goods, who has to receive payment from theapplicant. A credit is issued in his favour to enable him or his agent to obtain payment onsurrender of stipulated document and comply with the term and conditions of the L/c.
Advising Bank: An Advising Bank provides advice to the beneficiary and takes theresponsibility for sending the documents to the issuing bank and is normally located in thecountry of the beneficiary.
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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, inadditional to that of the issuing bank. Confirming bank play an important role where theexporter 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 thebeneficiary under the credit either advised through them or restricted to them for negotiation. Onnegotiation of the documents they will claim the reimbursement under the credit and makes thepayment to the beneficiary provided the documents submitted are in accordance with the termsand conditions of the letters of credit.
Reimbursing Bank:
Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement ofnegotiation/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.
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11. DOCS
BENEFICIARY
ISSUING BANK
APPLICANT
ADVISING BANK
1.COMMERCIAL
2. LC APPLICAT
10. REIMBURSEMENT
8. DOCS
3. LC ISSUED
5. GOODS
DEBIT A/C
12. B/L EXCHANGED FOR
GOODS13.SUBMITS PROOF OF IMPORT
TO ISSUING BANK (BILL O
4. LC ADVICED 6. DOCS
SUBMITTED
7. NEGOTIATE THE
LC
CYCL
E
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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 bytheissuing bank without notification. It is rarely used in international trade andnot consideredsatisfactory for the exporters but has an advantage over that of the importers andthe issuingbank.There is no provision for confirming revocable credits as per terms of UCPDC,Hence theycannot be confirmed. It should be indicated in LC that the credit is revocable. if thereis no suchindication the credit will be deemed as irrevocable.
2. Irrevocable Letter of Credit L/c
In this case it is not possible to revoke or amended a credit without the agreement of the issuingbank, the confirming bank, and the beneficiary. Form an exporters point of view it is believedto 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 arecomplied 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 issuingbank 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 demandor on presentation. In case of usance credit, drafts are drawn on the issuing bank or the
correspondent bank at specified usance period. The credit will indicate whether the usance draftsare 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 backto back credit when a L/c is opened with security of another L/c. A back to back credit whichcan also be referred as credit and counter credit is actually a method of financing both sides of atransaction in which a middleman buys goods from one customer and sells them to another.
The practical use of this Credit is seen when L/c is opened by the ultimate buyer in favour of aparticular 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 bypresenting the documents received under back to back credit under the main L/c.
The need for such credit arises mainly when:1. The ultimate buyer not ready for a transferable credit2. The Beneficiary do not want to disclose the source of supply to the openers.
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3. The manufacturer demands on payment against documents for goods but the beneficiary ofcredit 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 thesecond 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 but dont 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.
7. Standby Letter of Credit L/c
Initially used by the banks in the United States, the standby letter of credit is very muchsimilar in nature to a bank guarantee. The main objective of issuing such a credit is to securebank loans. Standby credits are usually issued by the applicants bank in the applicants countryand advised to the beneficiary by a bank in the beneficiarys country. Unlike a traditional letterof credit where the beneficiary obtains payment against documents evidencing performance, thestandby letter of credit allow a beneficiary to obtains payment from a bank even when theapplicant for the credit has failed to perform as per bond.
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FORMAT OF A LC
BANK : INDUSIND BANK LTD. IMPORTERS CODE NO.: .
A.B.ROAD, INDORE - 452 001(M.P.) INDIA
PLEASE ESTABLISH WITH YOUR BRANCH /
CORRESPONDANCE IN THE BANK OF NEW YORK, FRANKFURT
A DOCUMENTARY CREDIT AS PER DETAILS BELOW:
20 SENDERS REFERENCE
31C DATE OF ISSUE
23 PREADVISED ON : PREADV /
40A TYPE OF L/C [X] IRREVOCABLE : [ ]RREVOCABLE &
TRANSFERABLE
31D DATE & PLACE / COUNTRY OF EXPIRY DATE (YY MM DD) PLACE /
COUNTRY
50 NAME & ADDRESS OF THE APPLICANT
59 NAME & ADDRESS OF THE BENEFICIARY
WITH TEL, TLX, FAX NOS.
32B CURRENCY CODE & AMOUNT (IN FIGURES
& WORDS) SPECIFY, FOB / C&F / CIFFO
39A PERCENTAGE CREDIT AMOUNT TOLERANCE
39C ADDITIONAL AMT. COVERED
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41D CREDIT AVAILABLE WITH
CREDIT AVAILABLE BY [ ] PAYMENT; [ X ] NEGOTIATION; [ ]
ACCEPTANCE;
42C USANCE OF THE DRAFTS
42a DRAFTS TO BE DRAWN ON
42P DEFERED PAYMENTS, IF ANY
43P PARTIAL SHIPMENT
43T TRANSSHIPMENT
COMBINED SHIPMENT
44A LOADING ON
44B FOR TRANSPORTATION TO
44C LATEST DATE OF SHIPMENT(YY/MM/DD)
44D INSURANCE
45E CONFIRMATION
45A DESCRIPTION OF GOODS : (BRIEF DESCRIPTION WITH TERMS OF PRICE )
46A DOCUMENTS REQUIRED
[ ] DRAFTS FOR 100% OF INVOICE VALUE
[ ] FULL SET OF ORIGINAL CLEAN ON BOARD CHARTER PARTY BILL OF LADING TO
THE ORDER OF INDUSIND BANK LTD, INDORE NOTIFY APPLICANT MARKED
FREIGHT PREPAID.
[ ] CERTIFICATE OF ORIGIN IN 1 ORIGINAL + 2 COPIES FROM CHAMBER OF
COMMERCE OR EQUIVALENT GOVERNMENT AUTHORITY.
[ ] SELLERS SIGNED AND STAMPED COMMERCIAL INVOICE IN 1 ORIGINAL + 4
COPIES SHOWING DETAILS OF CALCULATIONS.
[ ] DRAFT SURVEY REPORT ISSUED IN DUPLICATE.
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[ ] CERTIFICATE OF WEIGHT IN 1 ORIGINAL + 3 COPIES ISSUED.
[ ]
47A ADDITIONAL CONDITIONS
OTHER TERMS AND CONDITIONS
All documents to mention the LC No. and Date.
All Transport Documents / Invoice must mention Import License details.
71B SPECIFY, IF ANY CHARGES TO
BE BENEFICIARYS A/C
[ X ] ALL CHARGES: [ ] (SPECIFY)
48 PERIOD OF PRESENTATION
57A ADVISING THROUGH BANK
IN CONSIDERATION OF YOUR OPENING A LETTER OF CREDIT AS ABOVE, I/WE HEREBY UNDERTAKE TO ACCEPT
AND PAY IN DUE COURSE ALL DRAFTS DRAWN WITHIN THE TERMS THEREOF AND/OR TO TAKE UP AND PAY FO
ALL DOCUMENTS NEGOTIATED THERE UNDER ON PRESENTATION, AND IN DEFAULT OF MY/OUR SO DOING YO
MAY SELL THE GOODS BEFORE OR AFTER ARRIVAL AND I/WE UNDERTAKE TO REIMBURSE YOU FOR ANY
SHORTFALL THAT MAY OCCUR AND I/WE HERE BY FURTHER UNDER TAKE FORTHWITH ON DEMAND MADE BYYOU WRITING TO DEPOSIT WITH YOU SUCH SUM OR SECURITY OR FURTHER SUM OR SECURITY AS YOU MAY
FROM TIME TO TIME SPECIFY AS SECURITY FOR THE DUE FULFILLMENT OF OUR OBLIGATION HEREUNDER AN
ANY SECURITY SO DEPOSITED WITH YOU MAY FROM TIME TO TIME SPECIFY AS SECURITY FOR THE DUE
FULFILLMENT OF OUR OBLIGATION HEREUNDER AND ANY SECURITY SO DEPOSITED WITH
YOU MAY BE SOLD BY YOU ON YOUR GIVING REASONABLE NOTICE OF SALE TO US AND THE SAID SUM OF THE
PROCEEDS OF SALE THE SECURITY MAY BE APPROPRIATED BY YOU, IN OR TOWARDS SATISFACTION OF OUR
SAID OBLIGATION AND ANY LIABILITY OF OURS ARISING OUT OF THE NON FULFILLMENT THEREOF.
YOU ARE TO HAVE A LIEN ON ALL GOODS, DOCUMENTS AND POLICIES AND PROCEEDS THEREOF FOR ANY
OBLIGATIONS OF LIABILITIES PRESENT OR FUTURE INCURRED BY YOU UNDER ARISING OUT OF THIS CREDIT.
I/WE APPROVE OF THE NEGOTIATION OF DRAFT IS DRAWN UNDER THIS CREDIT BEING CONFINED TO YOURBRANCHES CORRESPONDENTS.THE RELATIVE SHIPPING DOCUMENTS HAVE TO BE SURRENDERED TO ME/USAGAINST PAYMENT/ ACCEPTANCE. IN AT ANY TIME AND FROM TIME TO TIME HEREAFTER AND AT OUR REQUEYOU ENHANCE THE AMOUNT OF THE LETTER OF CREDIT OR AMEND ANY OF THE TERMS THEREOF (INCLUDINGEXTENSION OF THE VALIDITY OF THE CREDIT FOR SHIPMENT AND/OR NEGOTIATION OF DOCUMENTS). THEN NWITH STANDING THE AMOUNT AND THE TERMS SPECIFIED IN THE APPLICATION, OUR GUARANTEE SHALLCOVER AND BE DEEMED TO COVER THE ENTIRE AMOUNT OF THE ENHANCED LETTER OF CREDIT ISSUED BY YAND ANY OTHER AMENDMENTS EFFECTED THERE TO AND OUR LIABILITY WILL BE FOR THE ENTIRE AMOUNT
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THE LETTER OF CREDIT ENHANCED AND/OR AMENDED AT OUR REQUEST. WE SHALL CONTINUE TO BE BOUNDALL THE OTHER TERMS AND CONDITIONS OF THE APPLICATION AND GUARANTEE NOTWITHSTANDING SUCHENHANCEMENT OR AMENDMENTS FROM TIME TO TIME AS YOU SHALL MAKE AT OUR REQUEST IN THE VALUEAND TERMS OF THE LETTER OF CREDIT.
I/WE HEREBY AGREE AND DECLARE THAT IN THE EVENT OF MY/OUR FAILING TO RETIRE THE BILLS DRAWNUNDER L/C ON DUE DATES IN CASE OF USANCE BILLS AND WITHIN 10 DAYS FROM THE DATE OF RECEIPT OF
DOCUMENTS BY YOU IN CASE OF SIGHT BILLS YOU SHALL BE AT LIBERTY TO CRYSTALISE THE FOREIGN
CURRENCY RUPEE LIABILITY THEREUNDER ON THE DUE DATE OR ON THE EXPIRY OF THE 10TH DAY AS THE
CASE MAY BE AND CONVERT THE SAME TO RUPEES AT THE PREVAILING BILL SELLING RATE OR AT THE
CONTRACT RATE WHICHEVER APPLICABLE.
I/WE UNDERTAKE TO REMOURSE TO YOU ON DEMAND THE RUPEE EQUIVALENT SO DETERMINED TOGETHER
WITH INTEREST THEREON AT NORMAL RATE FROM THE DATE OF NEGOTIATION. THE DATE OF
CRYSTALLISATION AND THEREAFTER AT PENAL RATE APPLICABLE THERETO.
YOU WOULD BOOK FORWARD CONTRACTS IF I/WE DECIDE TO COVER THE ELLUCTUATIONS IN THE EXCHANGE
RATES. I/WE UNDERTAKE TO BOOK SUCH FORWARD CONTRACTS WITH YOU IN AS MUCH AS THE BOOKING OF
FORWARD CONTRACTS FORMS PART OF THE ARRANGEMENT BY YOU UNDER THE L/C. IF I/WE BOOK FORWAR
CONTRACTS WITH OTHER BANKS UNDER THIS LETTER OF CREDIT. I/WE ARE UNABLE TO PAY TO YOU 1/4%
COMMISSION IN LIEU OF EXCHANGE IN ADDITION TO SWAP COST AND INTEREST FROM THE DATE OF
NEGOTIATION AT THE FOREIGN CENTRE TILL THE DATE OF CREDIT OF PROCEEDS IN YOUR NOSTRO ACCOUNT
IN CASE I/WE DO NOT BOOK THE FORWARD CONTRACT, I/WE UNDERTAKE TO BUY THE RELATIVE EXCHANGE I
CONNECTION WITH FOREIGN EXCHANGE RETIREMENT OF THE BILLS/DOCUMENTS ETC. I/WE ARE LIABLE TO P
TO YOU 1/4% COMMISSION IN LIEU OF EXCHANGE IN ADDITION TO SWAP COST AND INTEREST FROM THE DATE
OF NEGOTIATION AT THE FOREIGN CENTRE TILL THE DATE OF CREDIT PROCEEDS IN YOUR NOSTRO ACCOUNT
DATE :
PLACE : FOR .,
horised Signatory
REGULATORY REQUIREMENTS
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Opening of imports LCs in India involve compliance of the following main regulation:
UCPDC Guidelines
Uniform Customs and Practice for Documentary Credit (UCPDC) is a set of predefined rulesestablished by the International Chamber of Commerce (ICC) on Letters of Credit. The UCPDCis used by bankers and commercial parties in more than 200 countries including India tofacilitate trade and payment through LC.UCPDC was first published in 1933 and subsequently updating it throughout the years. In 1994,UCPDC 500 was released with only 7 chapters containing in all 49 articles .The latest revisionwas approved by the Banking Commission of the ICC at its meeting in Parison 25 October2006. This latest version, called the UCPDC600, formally commenced on 1 July2007. Itcontains a total of about 39 articles covering all the areas.
Serial No. Article Area Consisting
1. 1 to 3 General Application, Definition & Interpretation
2. 4 to 12 Obligations Credit vs. Contracts, Documents vs. Goods
3. 13 to 16Liabilities &Responsibilities
Reimbursement, ExaminationofDocuments, Complying, Presentation,Handling Discrepant Documents
4. 17 to 28 Documents
Bill of Lading, Charter Party Bill ofLading,
Air Documents, Road Rail etc. Documents,Courier, Postal etc. Receipt. On board,Shippers count, Clean Documents, Insurancedocuments
5. 29 to 33MiscellaneousProvisions
Extension of dates, Tolerance in Credits,Partial Shipment and Drawings. House ofPresentation
6. 34 to 37 Disclaimer Effectiveness of Document Transmission andTranslation Force Major Act of an InstructedParty
7. 37 to 39 Others Transferable Credits Assignment of Proceeds
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ISBP 2002
The widely acclaimed International Standard Banking Practice(ISBP) for the Examinationof Documents under Documentary Credits was selected in 2007 by the ICCs BankingCommission. First introduced in 2002, the ISBP contains a list of guidelines that an examinerneeds to check the documents presented under the Letter of Credit. Its main objective is to
reduce the number of documentary credits rejected by banks.
FEDAI Guidelines
Foreign Exchange Dealers Association of India (FEDAI) was established in 1958 under theSection 25 of the Companies Act (1956). It is an association of banks that deals in Indianforeign exchange and work in coordination with the Reserve Bank of India, other organizationslike FIMMDA, the Forex Association of India and various market participants. FEDAI hasissued rules for import LCs which is one of the important area of foreign currency exchanges. Ithas an advantage over that of the authorized dealers who are now allowed by the RBI to issuestand by letter of credits towards import of goods. As the issuance of standby of letter of Credit
including imports of goods is susceptible to some risk in the absence of evidence of shipment,therefore the importer should be advised that documentary credit under UCP 500/600 should bethe preferred route for importers of good.
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EXPORT FINANCE AND DOCUMENTATION
Introduction
International market involves various types of trade documents that need to be produced whilemaking transactions. Each trade document is differ from other and present the various aspectsof the trade like description, quality, number, transportation medium, indemnity, inspection andsoon. So, it becomes important for the importers and exporters to make sure that theirdocuments support the guidelines as per international trade transactions. A small mistake couldprove costly for any of the parties. For example, a trade document about the bill of lading is aproof that goods have been shipped on board, while Inspection Certificate certifies that thegoods have been inspected and meet quality standards. So, depending on these necessarydocuments, a seller can assure a buyer that he has fulfilled his responsibility whilst the buyer is
assured of his request being carried out by the seller.
The following is a list of documents often used in international trade:
Air Waybill
Bill of Lading
Certificate of Origin
Combined Transport Document
Draft (or Bill of Exchange)
Insurance Policy (or Certificate)
Packing List/Specification Inspection Certificate
Air Waybills
Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample consists of three originals and nine copies. The first original is for the carrier and issigned by an export agent; the second original, the consignee's copy, is signed by an exportagent; the third original is signed by the carrier and is handed to the export agent as a receipt forthe goods.
Air Waybills serves as:
Proof of receipt of the goods for shipment. An invoice for the freight. A certificate of insurance. A guide to airline staff for the handling, dispatch and delivery of the consignment.
The principal requirements for an air waybill are:
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The proper shipper and consignee must be mention.
The airport of departure and destination must be mention.
The goods description must be consistent with that shown on other documents.
Any weight, measure or shipping marks must agree with those shown onother documents.
It must be signed and dated by the actual carrier or by the named agent of a namedcarrier.
It must mention whether freight has been paid or will be paid at the destination point.
Bill of Lading (B/L)
Bill of Lading is a document given by the shipping agency for the goods shippedfor transportation form one destination to another and is signed by the representatives of thecarrying vessel. Bill of landing is issued in the set of two, three or more. The number in the setwill be indicated on each bill of lading and all must be accounted for. This is done due to thesafety reasons which ensure that the document never comes into the hands of an unauthorisedperson. Only one original is sufficient to take possession of goods at port of discharge so, a bankwhich finances a trade transaction will need to control the complete set. The bill of lading mustbe signed by the shipping company or its agent, and must show how many signed originals wereissued.
It will indicate whether cost of freight/ carriage has been paid or not:"Freight Prepaid": Paid by shipper"Freight collect": To be paid by the buyer at the port of dischargeThe bill of lading also formsthe contract of carriage.
To be acceptable to the buyer, the B/L should :
Carry an "On Board" notation to showing the actual date of shipment, (Sometimes
however, the "on board" wording is in small print at the bottom of the B/L, in whichcases there is no need for a dated "on board" notation to be shown separately with dateand signature.)
Be "clean" & have no notation by the shipping company to the effect that goods/
packaging are damaged.
The main parties involve in a bill of lading are:
Shipper: The person who send the goods.
Consignee: The person who take delivery of the goods.
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Notify Party: The person, usually the importer, to whom the shipping company or its
agent gives notice of arrival of the goods.
Carrier :The person or company who has concluded a contract with the shipper
for conveyance of goods
The bill of lading must meet all the requirements of the credit as well as complying withUCP500. These are as follows:
The correct shipper, consignee and notifying party must be shown.
The carrying vessel and ports of the loading and discharge must be stated.
The place of receipt and place of delivery must be stated, if different from port of
loading or port of discharge.
The goods description must be consistent with that shown on other documents.
Any weight or measures must agree with those shown on other documents. Shipping marks and numbers and /or container number must agree with those shown on
other documents.
It must state whether freight has been paid or is payable at destination.
It must be dated on or before the latest date for shipment specified in the credit.
It must state the actual name of the carrier or be signed as agent for a named carrier.
Certificate of Origin
The Certificate of Origin is required by the custom authority of the importing country for thepurpose of imposing import duty. It is usually issued by the Chamber of Commerce and
contains information like seal of the chamber, details of the good to be transported and so on.
The certificate must provide that the information required by the credit and be consistent withall other document, It would normally include:
The name of the company and address as exporter.
The name of the importer.
Package numbers, shipping marks and description of goods to agree with that on
other documents.
Any weight or measurements must agree with those shown on other documents.
It should be signed and stamped by the Chamber of Commerce.
Combined Transport Document
Combined Transport Document is also known as Multimodal Transport Document, and is used
when goods are transported using more than one mode of transportation. In the case
of multimodal transport document, the contract of carriage is meant for a combined transport
from the place of shipping to the place of delivery. It also evidence receipt of goods but it does
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not evidence on board shipment, if it complies with ICC 500, Article 26 (a). The liability of the
combined transport operator starts from the place of shipment and ends at the place of delivery
his documents need to be signed with appropriate number of originals in the full set and
proper evidence which indicates that transport charges have been paid or will be paid at
destination port. Multimodal transport document would normally show:
That the consignee and notify parties are as the credit.
The place goods are received, or taken in charges, and place of final destination.
Whether freight is prepaid or to be collected.
The date of dispatch or taking in charge, and the "On Board" notation, if any must be
dated and signed.
Total number of originals.
Signature of the carrier, multimodal transport operator or their agents.
Commercial Invoice
Commercial Invoice document is provided by the seller to the buyer. Also known as exportinvoice or import invoice, commercial invoice is finally used by the custom authorities of theimporter's country to evaluate the good for the purpose of taxation.
The invoice must:
Be issued by the beneficiary named in the credit (the seller).
Be address to the applicant of the credit (the buyer).
Be signed by the beneficiary (if required).
Include the description of the goods exactly as detailed in the credit.
Be issued in the stated number of originals (which must be marked "Original) and
copies. Include the price and unit prices if appropriate.
State the price amount payable which must not exceed that stated in the credit
Include the shipping terms.
Bill Of Exchange:
A Bill of Exchange is a special type of written document under which an exporter ask importer acertain amount of money in future and the importer also agrees to pay the importer that amountof money on or before the future date. This document has special importance in wholesale tradewhere large amount of money involved.
Following persons are involved in a bill of exchange: Drawer: The person who writes or prepares the bill.
Drawee : The person who pays the bill.
Payee: The person to whom the payment is to be made.
Holder of the Bill: The person who is in possession of the bill.
On the basis of the due date there are two types of bill of exchange:
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Bill of Exchange after Date: In this case the due date is counted from the date of drawing
and is also called bill after date.
Bill of Exchange after Sight : In this case the due date is counted from the date
of acceptance of the bill and is also called bill of exchange after sight.
Insurance Certificate
Also known as Insurance Policy, it certifies that goods transported have been insured under anopen policy and is not actionable with little details about the risk covered. It is necessary that thedate on which the insurance becomes effective is same or earlier than the date of issuance of thetransport documents. Also, if submitted under a LC, the insured amount must be in thesame currency as the credit and usually for the bill amount plus 10 per cent. The requirementsfor completion of an insurance policy are as follows:
The name of the party in the favour which the document has been issued.
The name of the vessel or flight details.
The place from where insurance is to commerce typically the sellers warehouse or the
port of loading and the place where insurance cases usually the buyer's warehouse or theport of destination.
Insurance value that specified in the credit.
Marks and numbers to agree with those on other documents.
The description of the goods, which must be consistent with that in the credit and on the
invoice.
The name and address of the claims settling agent together with the place where claims
are payable.
Countersigned where necessary. Date of issue to be no later than the date of transport documents unless cover is shown to
be effective prior to that date.
Packing List
Also known as packing specification, it contains details about the packing materials used in theshipping of goods. It also includes details like measurement and weight of goods.
The packing List must:
Have a description of the goods ("A") consistent with the other documents.
Have details of shipping marks ("B") and numbers consistent with other documents
Inspection Certificate
Certificate of Inspection is a document prepared on the request of seller when he wants the
consignment to be checked by a third party at the port of shipment before the goods are sealed
for final transportation.
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Therefore In this process seller submit a valid Inspection Certificate along with the other trade
documents like invoice, packing list, shipping bill, bill of lading etc to the bank for negotiation.
On demand, inspection can be done by various world renowned inspection agencies on nominal
charges.
EXPORT PRE SHIPMENT AND POST SHIPMENT FINANCE:
PRE SHIPMENT FINANCE is issued by a financial institution when the seller wants thepayment of the goods before shipment.
The main objective behind pre-shipment 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.
POST SHIPMENT FINANCE is a kind of loan provided by a financial institution to anexporter or seller against a shipment that has already been made. This type of export finance isgranted from the date of extending the credit after shipment of the goods to the realization dateof the exporter proceeds. Exporters dont wait for the importer to deposit the funds.
The features of post-shipment finance are:
Post-shipment finance is meant to finance export sales receivable after the date
of shipment of goods to the date of realization of exports proceeds.
Post-shipment finance is provided against evidence of shipment of goods or supplies
made to the importer or seller or any other designated agency.
Forfeiting and Factoring.
Forfeiting and factoring are services in international market given to an exporter or seller. Itsmain objective is to provide smooth cash flow to the sellers.
The basic difference between the forfeiting and factoring is that forfeiting is a long term
receivables (over 90 days up to 5 years) while factoring is a short term receivables (within 90
days) and is more related to receivables against commodity sales.
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Benefits to Banks
Forfeiting provides the banks following benefits:
Banks can offer a novel product range to clients, which enable the client to gain
100%finance, as against 80-85% in case of other discounting products.
Bank gain fee based income. Lower credit administration and credit follow up.
Export Bank Guarantees:
A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuingthis guarantee, a bank takes responsibility for payment of a sum of money in case, if it is notpaid by the customer on whose behalf the guarantee has been issued. In return, a bank gets somecommission for issuing the guarantee.Anyone can apply for a bank guarantee, if his or her company has obligations towards a thirdparty 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 remainsvalid 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 withinthree working days. This payment can also be refused by the bank, if the claim is found to beunlawful.
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.Bank Guarantees vs. Letters of Credit:
A bank guarantee is frequently confused with letter of credit (LC), which is similar in manyways but not the same thing.The basic difference between the two is that of the parties involved.
In a bank guarantee, three parties are involved; the bank, the person to whom theguarantee is given and the person on whose behalf the bank is giving guarantee.
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In case of a letter of credit, there are normally four parties involved; issuing bank,advising bank, the applicant (importer) and the beneficiary (exporter).
Another difference is
In case of a bank guarantee only becomes active when the customer fails to pay the
necessary amount 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.
RISKS ASSOCIATED WITH INTERNATIONAL TRADE
TRANSACTIONS
O