jindal report
TRANSCRIPT
A
TRAINING REPORT
titled
‘TRADE FINANCE’
for the training undergone at
Jindal Stainless Ltd.
Submitted to Submitted by Director, IMS Ashish Anand
4th SemesterRoll no 20
Univ regn no 07 –UD -1123
Institute of Management Studies
Kurukshetra University, Kurukshetra
ACKNOWLDGEMENT
A project report is never the sole product of a person whose name appears on the
cover. There is always the help, guidance and suggestions of many in preparation of
such a report. So, I have indebted to several people who have helped me in
completing my project “ASSESSMENT OF TRADE FINANCE”.
I wish to express my sincere thanks to Mr. D.B. Gupta, Executive, Finance &
Accounts Department, Jindal Stainless Limited, Hisar for his valuable guidance and
pain taking supervision during course of my present work. His keen interest, timely
and constant encouragement and generous cooperation gave me confidence and
strength to progress this report.
His valuable advice, constructive criticism and suggestion during course of my study
really helped me a lot. I also thank him for providing full facilities required in
submitting our report within a limited time span.
I also want to express my thanks to HRM Deptt. Of JSL, Hisar for their cooperation
as and when needed. I would be failing my duty if I don’t mention my seniors who
helped me at various moments, during my project.
Specially, I am thankful to my parents and God for their blessings and showing me
the right way at all moments
Preface
This department is intended for the experience gained by me during Winter Training
in Jindal Stainless limited, Hisar.
While making this project I became familiar with the financial terms that are usually
used in a company and the different functions that a Finance Manager has to
perform. I have learnt how to manage Trade Finance.
I have also gained confidence to interact with different persons working at reputed
positions during the summer training, in preparing the project report I have tried my
level best effort to make it reliable, compact and accurate organization.
Declaration
I, Ashish Anand hereby declare that I have completed the project entitled ‘Trade
Finance’ assigned to me by ‘Mr. Sunil Kumar’ (JINDAL STAINLESS Ltd) for the
Training to be submitted in the partial fulfillment of the MBA 5 Year Degree from
Kurukshetra University. Further, I declare that this is original Work done by me and
the information provided in the study is authentic to the best of my knowledge and
belief. My training period was from 26.12.08 to 02.02.09.
This study has not been submitted to any other Institution or university for the award
of any other degree or for any purpose.
Date 18.03.09
Ashish Anand
4th Semester
Class roll no.20
Shri Om Prakash Jindal more popularly known as O.P. Jindal was born on August 7, 1930 to a farmer Late Netram Jindal of village Nalwa of district Hisar in Haryana. Since his childhood the young Jindal had interested in technical work. He started his industrial career with a small bucket-manufacturing unit in Hisar. In 1964, he commissioned a Pipe Unit Jindal India Limited, followed by a large factory in 1969 under the name Jindal Strips Limited.
Sh. Jindal always had the conviction that India should be self-reliant in every sector of industry. He visited several foreign countries to elicit latest industrial technical development and know-how. He acquired a great deal of knowledge, which he aptly applied to
enhance production of his industrial establishments. At present, there are twenty factories under the flagship of the Jindal Organization, which are worth over US $ 10 Billion, under whose umbrella thousands of families directly or indirectly benefit themselves.
Sh. O.P. Jindal was the Chairman of the Jindal Organization. In November 2004, Sh. Jindal was conferred the prestigious "Life Time Achievement Award" for his outstanding contribution to the Indian Steel Industry by the Bengal Chamber of Commerce & Industry. According to the latest Forbes' List, Sh. O.P. Jindal has been ranked 13th amongst the richest Indians of the country and placed 548th amongst the richest persons of the world.
His life's mission was to help others particularly the common man in every possible way. The list of his philanthropic activities is rather long. He was the Chairman of N.C. Jindal Charitable Trust, under whose auspices a 300 Bed N.C. Jindal Institute of Medical Care functions in Hisar Haryana. A 10+2 Girls Residential School in the name of Vidya Devi Jindal School is also run at Hisar. The girls school spreads over 40 acres of land. Another 10+2 school by the name of N.C. Jindal Public School for 4000 students is being run in Delhi.
For his selfless social services and philanthropic contributions, he was unanimously nominated as the Chairman of the Maharaja Agarsen Medical Education & Scientific Research Society. He was also the custodian trustee of the Agroha Vikas Trust. Sh. Jindal was known for his unassuming generosity and donates crores of rupees annually not only to known but also to needy strangers. Numerous social and religious institution of India also received liberal donations from Sh. Jindal for noble causes.
The Group
Jindal Organization, set up in 1970 by the steel visionary Mr. O.P. Jindal, has grown
from an indigenous single-unit steel plant in Hisar, Haryana to the present multi-
billion, multi-national and multi-product steel conglomerate. The organization is still
expanding, integrating, amalgamating and growing.
The group places its commitment to sustainable development, of its people and the
communities in which it operates, at the heart of its strategy and aspires to be a
benchmark for players in the industry the world over.
The Jindal Organization today is a global player. Its relentless quest for excellence
has reaped rich benefits and it is today one of the world’s most admired and
respected groups within the steel fraternity.
Jindal Stainless
Jindal Stainless is in many ways very much like the material it produces. Like
stainless steel the company is versatile in its thought process, strong and unrelenting
in its operations, environment friendly in its manufacturing process, bright, shining
and beautiful in its community support activities.
The list of the properties of stainless steel is endless, just as our values are all
encompassing.
Jindal Stainless has always been committed to innovation and progression, research
and development. Innovations are admired beyond the geographical boundaries of
country. No wonder JSL is the strategic partners of global leaders by choice.
Today JSL is the largest integrated stainless steel producer in India.
Jindal Stainless, a $780 million plus ISO: 9002 & ISO: 14001 companies is the
flagship company of the Jindal Organization. The company today has come a long
way from a single factory establishment, started in 1970.
As the numero uno it has taken on the task of making stainless steel a part of
everybody's life by taking a 360 degrees approach from production of raw materials
to supply of architecture and lifestyle related products.
VISION
Late Shri OP Jindal, had a vision of a progressive state - a state where men and women worked shoulder to shoulder towards a happier tomorrow. Jindal Stainless constantly echoes those thoughts and takes its role as a responsible corporate citizen very seriously. Giving back to the community at large has been an objective from the very beginning.
Schools at various levels have been set up to educate the specifiers of the future. The Vidya Devi Jindal and The Jindal Modern School, at Hisar, is fully child oriented and ensures ‘holistic development’ of a student’s mental and physical potential.Adopting villages and thus contributing to the development of a region has also been
part of the overall Jindal plan. Improving of medical facilities is yet another field of endeavor.
NC JIM Care, at Hisar offers the entire range of diagnostic, treatment and surgical facilities. Immunization drives and free healthcare camps on different medical aspects are also conducted from time to time.
Vision – 2010
To be amongst the top 10 steel producers in the world.
To gain international recognition for cost leadership , product innovation and
customer satisfaction.
To be admired as a socially responsible Corporate and a sustained value
creator for all its stakeholders.
UNIT PROFILE
Jindal Stainless Ltd is the ISO 9001:2000, ISO 14001:1996 and OHSAS
18001:1999 certified Flagship Company of the $ 2.0 billion Jindal Organization. It is
the largest integrated manufacturer of international quality steel flat products in
India.
Hisar Plant
Jindal Stainless Limited (JSL) is a stainless steel products manufacturing company. It
has export markets in over 40 countries including United States, Europe, Middle-East
and South Asian countries. JSL has integrated operations from mining, melting,
casting, hot rolling to cold rolling. The product range includes stainless steel slabs
and blooms, hot rolled coils, plates, cold rolled coils / sheets and products in
precision. JSL has Ferro-chrome manufacturing facilities in Jaipur, Orissa. JSL is
setting up a Greenfield integrated stainless steel project in the state of Orissa with
capacity of 1.6 million tons per annum.
It manufactures a range of products for sale in the domestic market for customers in
segments, such as architecture, building construction, automobiles, white goods and
appliances, railways, power plants and other industrial applications. JSL also
produces stainless steel for specialty products, such as razor blades, precision strips
and coin blanks.
At Hisar, Jindal Stainless has India’s only composite stainless steel plants for the
manufacture of Stainless Steel Slabs, Blooms, Hot Rolled and Cold Rolled Coils,
60% of which are exported worldwide.
Precision Strips
The company produces stainless steel precision strips in various grades. These
strips are produced in narrow mills in the precision cold rolling unit.
Blade Steel
The company is the exclusive producer of stainless steel strips for making
razor and surgical blades in India.
Coin Banks
Besides supplying CR Strips to the Government of India, the plant at Hisar
houses a coin banking line for supply to the Indian Mint & Mints in the global
market.
Some of the products made of stainless steel which are necessary in daily life:-
Stainless Steel Cookware
Made of the finest stainless steel, the cookware set includes frying pan, covered pan,
many other cooking utensils.
Cookware:-
Cookware set
Boilers
Casseroles
Cookers
Grill Pans
Kitchen Accessories:-
Banana Holder
Bread Box
Cook Book Holder
Dish Drainer
Dish Rack
Napkin Holder
Sink Strainer
Spice Rack
Stainless Steel Electric Tea kettle
This electric tea kettle makes instant tea, coffee, hot chocolate and boils faster than a
microwave.
The kettle is made of unalloyed stainless steel, polished to a mirror finish. A great
appliance for homes and offices, this kettle provides powerful heat and safety.
Kitchen Hardware:-
Electric Tea Kettle
Kitchen Cabinet
Kitchen Chimney
Oven
Sink Welded
Utensils:-
Pans
Measuring Spoon
Canisters
Dessert Dishes
Serving Bowls
Covered Bowls
Stainless Steel Spoon
This crafted out with newest design that modern technology can produce. Made of
steel, they are anti-magnetic, and the seamless construction is resistant to bacteria
and germs.
Cutlery;-
Spoons
Meat Fork
Large Knife
Blunt End Spoon
Cutlery Starter Set
Boning Knife
Cheese Knife
Utility Knife set
Energy Conservation Achievements
Jindal Stainless Ltd (CR Division) has taken the various aspects of energy
conservation very seriously.
Many energy conservation projects have been implemented and many more ideas are
being considered for implementation.
The company is committed to achieve Energy Conservation by providing necessary
knowledge and exposure to the employees and in the process has arranged various
training programs.
JSL has regularly upgraded its technology and constantly striving to adopt practices
and process that preclude undesirable impact on energy conservation aspects.
Energy Policy
Energy efficient production and processing of steel and sustain continuous
reduction in energy consumption year after year.
Involvement of employees for energy conservation through awareness and
recognition.
Conserve and optimally utilize raw materials: petroleum fuels and by
products, steam, power, compressed air, water and other resources.
Establishing and maintain a energy management information system designed
to support managerial decision making.
Corporate Social Responsibility
Shri OP Jindal, had a vision of a progressive state - a state where men and women
worked shoulder to shoulder towards a happier tomorrow. Jindal Stainless constantly
echoes those thoughts and takes its role as a responsible corporate citizen very
seriously. Giving back to the community at large has been an objective from the very
beginning.
Schools at various levels have been set up to educate the specifiers of the future. The
Vidya Devi Jindal and The Jindal Modern School, at Hisar, is fully child oriented and
ensures ‘holistic development’ of a student’s mental and physical potential.
Adopting villages and thus contributing to the development of a region has also been
part of the overall Jindal plan. Improving of medical facilities is yet another field of
endeavor.
NC JIM Care, at Hisar offers the entire range of diagnostic, treatment and surgical
facilities. Immunization drives and free healthcare camps on different medical
aspects are also conducted from time to time
Eco- Friendliness
At Stainless Steel plants, the challenge faced is to make and process stainless steel
without adversely impacting the environment. Jindal Stainless has a formal
environmental protection program in place since inception. They recognize the
importance of protecting our environment, and that of children and commitment is
unwavering in this respect. Jindal Stainless Ltd. complies with the requirements of
the State Pollution Control Board.
Having received the ISO 14001 certification, the company has a full-fledged
environment department that manages the existing facilities for pollution control.
It has a sewage treatment plant for domestic affluent whose treated water is reused
for horticulture purposes as well as in industrial applications.
With greater efforts being made to achieve low long-term maintenance costs, less
environmental impact and greater concern with life cycle costs, the market for
stainless steel continues to improve.
Art d'inox
Art d'inox is the exciting new form of ultimate style. The name translates into 'the art
of stainless steel'. And that's precisely what it is. Works of art in stainless steel. Set
up with the objective of creating exclusive stainless steel lifestyle products, these are
synonymous with quality, beauty and functionality. The professionally qualified in-
house design team is dedicated to exploring the frontiers of design. The product
range is a celebration of both form and function. The range encompasses tableware,
serving ware, gifts, home accessories and office accessories.
ARC
Stainless steel is a material par excellence, which now seeks to permeate through Indian
Architecture. The Architectural Division launched by Jindal Stainless Ltd has taken the
initiative to promote Stainless steel products and technology solutions to cater to the
emerging market of Stainless Steel for Architecture, Building and Construction (ABC) in
India. The Architectural Division of Jindal Stainless is capable of providing a full range
of technical support services including design, engineering work, fabrication of quality
material and finishes, and job site supervision by trained personnel. The division has
completed many projects specially that of street furniture, cafeteria furniture, lighting and
signages apart from other architectural requirements.
Trade Finance-Background
As international trade increases, so does the importance of trade finance. The success
of a nation’s export program depends on the availability of trade finance, which
facilitates the transfer of commodities and manufactured goods between countries.
Trade finance, an important business for U.S. banks, generates more than $1 billion
in revenue annually. Banks can participate in trade financing by providing pre-export
financing, helping in the collection process, confirming or issuing letters of credit,
discounting drafts and acceptances, and offering fee-based services such as providing
credit and country information on buyers.
What dose Trade Finance mean?
The science that describes the management of money, banking, credit, investments
and assets for international trade transactions.
Trade finance refers to the various forms of financial support and financial
transactions used in trade. Trade finance uses a range of instruments to provide
finance to exporters and importers, including documentary credits such as letters of
credit.
Letter of credit is a document issued mostly by a financial institution used primarily
in trade finance, which usually provides an irrevocable payment undertaking (it can
also be revocable, confirmed, unconfirmed, transferable or others to a beneficiary
against complying documents as stated in the Letter of Credit)
Banks may assist by providing various forms of support. For example, the importer's
bank may provide a letter of credit to the exporter (or the exporter's bank) providing
for payment upon presentation of certain documents, such as a bill of lading. The
exporter's bank may make a loan (by advancing funds) to the exporter on the basis of
the export contract.
In many countries, trade finance is often supported by quasi-government entities
known as export credit agencies that work with commercial banks and other financial
institutions.
The absence of an adequate trade finance infrastructure is, in effect, equivalent to a
barrier to trade. Limited access to financing, high costs, and lack of insurance or
guarantees are likely to hinder the trade and export potential of an economy, and
particularly that of small and medium sized enterprises.
Need of Trade Finance
One of the most important challenges for traders involved in a transaction is to secure
financing so that the transaction may actually take place. The faster and easier the
process of financing an international transaction, the more trade will be facilitated.
Main factors influencing Trade Finance
•Government agencies
•Banks & other Financial Institutions
•International Agencies
Key Issues in Trade Finance
•The mechanics & systems for arranging receiving payment
•The Legislation and custom requirements export and import countries
•Foreign exchange policy and other risks associated with international trade
•The institutions -the operations of the system in operating the trade
finance instruments, and payments and settlements.
•Infrastructure and a host of ICT services
Trade finance tools and instruments
• To raise Capital
–Loan / Line of Credit
–Structured Financing
–Leasing
–Inventory Financing
• To Mitigate risks
–Factoring
–Export Credit Insurance
–Export Credit Guarantee
• Terms of Payment
–Advance Payment
–Open Account
–Collections (Document on Payment or Document on Acceptance)
–Letters of Credit
Trade Financing Instruments
The main types of trade financing instruments are as follows:
a) Documentary Credit
This is the most common form of the commercial letter of credit. The issuing bank
will make payment, either immediately or at a prescribed date, upon the presentation
of stipulated documents.
These documents will include shipping and insurance documents, and commercial
invoices. The documentary credit arrangement offers an internationally used method
of attaining a commercially acceptable undertaking by providing for payment to be
made against presentation of documentation representing the goods, making possible
the transfer of title to those goods.
A letter of credit is a precise document whereby the importer’s bank extends credit
to the importer and assumes responsibility in paying the exporter. A common
problem faced in emerging economies is that many banks have inadequate capital
and foreign exchange, making their ability to back the documentary credits
questionable.
Exporters may require guarantees from their own local banks as an additional source
of security, but this may generate significant additional costs as the banks may be
reluctant to assume the risks. Allowing internationally reputable banks to operate in
the country and offer documentary credit is one way to effectively solve this
problem.
b) Countertrade
As mentioned above, most emerging economies face the problem of limited foreign
exchange holdings. One way to overcome this constraint is to promote and encourage
countertrade. Today’s modern counter trade appears in so many forms that it is
difficult to devise a definition. It generally encompasses the idea of subjecting the
agreement to purchase goods or services to an undertaking by the supplier to take on
a compensating obligation.
The seller is required to accept goods or other instruments of trade in partial or
whole payment for its products. Some of the forms of counter trade include:
• Barter – This traditional type of countertrade involving the exchange of goods and
services against other goods and services of equivalent value, with no monetary
exchange between exporter and importer.
• Counter purchase – The exporter undertakes to buy goods from the importer or
from a company nominated by the importer, or agrees to arrange for the purchase by
a third party. The value of the counter purchased goods is an agreed percentage of the
prices of the goods originally exported.
• Buy-back – The exporter of heavy equipment agrees to accept products
manufactured by the importer of the equipment as payment.
c) Factoring
This involves the sale at a discount of accounts receivable or other debt assets on a
daily, weekly or monthly basis in exchange for immediate cash. The debt assets are
sold by the exporter at a discount to a factoring house, which will assume all
commercial and political risks of the account receivable. In the absence of private
sector players, governments can facilitate the establishment of a state-owned factor;
or a joint venture set-up with several banks and trading enterprises.
d) Pre-Shipping Financing
This is financing for the period prior to the shipment of goods, to support pre-export
activities like wages and overhead costs. It is especially needed when inputs for
production must be imported. It also
provides additional working capital for the exporter. Pre-shipment financing is
especially important to smaller enterprises because the international sales cycle is
usually longer than the domestic sales cycle.
Pre-shipment financing can take in the form of short term loans, overdrafts and cash
credits.
e) Post-Shipping Financing
Financing for the period following shipment. The ability to be competitive often
depends on the trader’s credit term offered to buyers. Post-shipment financing
ensures adequate liquidity until the purchaser receives the products and the exporter
receives payment. Post-shipment financing is usually short-term.
f) Buyer’s Credit
A financial arrangement whereby a financial institution in the exporting country
extends a loan directly or indirectly to a foreign buyer to finance the purchase of
goods and services from the exporting country. This arrangement enables the buyer
to make payments due to the supplier under the contract.
g) Supplier’s Credit
A financing arrangement under which an exporter extends credit to the buyer in the
importing country to finance the buyer’s purchases.
Risks Associated With Trade Financing
The risks associated with trade financing are: credit, foreign currency translation
,transaction, compliance, strategic, and reputation. These risks are discussed more
fully in the following paragraphs.
Credit Risk
Credit risk is the current and prospective risk to earnings or capital arising from an
obligor’s failure to meet the terms of any contract with the bank or otherwise to
perform as agreed.
Credit risk is found in all activities in where success depends on counterparty, issuer,
or borrower performance. It arises any time bank funds are extended, committed,
invested, or otherwise exposed through actual or implied contractual agreements,
whether reflected on or off the balance sheet.
In trade finance, many transactions are self-liquidating or supported by letters of
credit and guarantees, and the examiner must review each transaction individually to
properly identify and evaluate the sources of repayment. Although trade finance has
a low loss ratio historically, it is a very specialized area, and a bank that lacks the
appropriate expertise may experience losses because of improper structuring, poor
documentation, unfamiliarity with a country’s business practices, or improper
pricing. A bank should ensure that documents on shipments of goods are proper and
thorough. Any bank engaging in trade finance should thoroughly analyze the risks. In
issuing a letter of credit for a domestic importer, the bank must evaluate the
importer’s repayment capacity as it would that of any other type of borrower. In
confirming or accepting as collateral a foreign bank’s letter of credit, a U.S. bank
must evaluate the risk that the foreign importer/bank may not be able to in the
importing country.
The low default risk is due, in part, to the importance that countries assign to
maintaining access to trade credits. In a currency crisis, central banks may require all
foreign currency inflows to be turned over to the central bank.
The central bank would then prioritize foreign currency payments. Trade liabilities
would be more likely to be designated for repayment than most other types of credits.
For this reason, trade finance is viewed as having less transfer risk than other types of
debt.
Foreign Currency Translation Risk
Foreign currency translation risk is the current and prospective risk to earnings or
capital arising from the conversion of a bank’s financial statements from one
currency into another. It refers to the variability in accounting values for a bank’s
equity accounts that result from variations in exchange rates which are used in
translating carrying values and income streams in foreign currencies to U.S. dollars.
Market-making and position taking in foreign currencies should be captured under
price risk. In a trade transaction, foreign currency translation risk arises from the
exposure to fluctuations in exchange rates whenever payments involve foreign
currencies. The level of risk depends on the currency involved in the transaction,
whether the bank creates an open position, the size of any maturity gap, and
settlement uncertainties.
A bank financing an exporter’s operation by discounting foreign currency
denominated drafts or acceptances encounters foreign currency translation risk
because of the time lag between its discounting of the draft or acceptance and its
collection from the foreign importer or bank. The U.S. bank will be exposed to
foreign currency translation risk from the time it discounts the instrument and pays
the local exporter the dollar equivalent of the draft or acceptance until it collects from
the foreign counterpart in the foreign currency. If the foreign currency depreciates in
relation to the dollar during the time it takes the bank to pay the exporter and to
collect on the foreign instrument, the bank incurs a loss.
When the U.S. exporter is paid by the foreign importer with a dollar denominated
draft, exchange risk may arise from transfer problems. Transfer problems may occur
when the foreign importer is located in a country that is having difficulties
accumulating hard currency reserves. In those circumstances, the foreign importer
may have the local currency to repay its debt but be unable to purchase the dollars
because of central bank controls over the sale of hard currency.
The payment instructions to the foreign importer’s bank could allow payment to be
received from the foreign importer in local currency with the stipulation that, when
foreign exchange in U.S. dollars is allocated by the government authorities for the
transaction, it should be remitted to the exporter’s U.S. bank. Depending on the
scarcity of foreign exchange in the foreign importer’s nation, the wait may be longer
than anticipated, exposing the U.S. bank to exchange risk if it discounted the draft.
Transaction Risk
Transaction risk is the current and prospective risk to earnings or capital arising from
fraud, error, and the inability to deliver products or services, maintain a competitive
position, and manage information
Risk is inherent in efforts to gain strategic advantage, and in the failure to keep pace
with changes in the financial services marketplace.
Transaction risk is evident in each product and service offered. Transaction risk
encompasses: product development and delivery, transaction processing, systems
development, computing systems, complexity of products and services, and the
internal control environment.
Transaction risk is also referred to as operating or operational risk. This risk is
particularly high in trade transactions because of the high level of documentation
required in letter of credit operations. Many transactions evolve readily from letters
of credit to sight drafts or acceptances or to notes and advances, collateralized by
trust or warehouse receipts.
Repayment often depends on the eventual sale of goods and the accuracy of
documentation. Thus, the documents required to secure payment under the letter of
credit should be properly handled.
Compliance Risk
Compliance risk is the current and prospective risk to earnings or capital arising from
violations of, or nonconformance with, laws, rules, regulations, prescribed practices,
internal policies and procedures, or ethical standards.
Compliance risk also arises in situations where the laws or rules governing certain
bank products or activities of the bank’s clients may be ambiguous or untested.
Compliance risk exposes the institution to fines, civil money penalties, payment of
damages, and the voiding of contracts. Compliance risk can lead to a diminished
reputation, reduced franchise value, limited business opportunities, reduced
expansion potential, and an inability to enforce contracts.
Compliance risk can be overlooked because it often blends into transaction risk and
operational processing. In trade transactions, failure to comply with domestic and
international laws, such as the anti-boycott provisions of the
Export Administration Act or regulations enforced by the Department of the
Treasury, Office of Foreign Asset Control may result in fines and prevent the bank
from collecting on a transaction.
The bank must be aware of the laws of the country in which the counterpart to the
domestic customer is located. The bank must ensure that collection and penalty
procedures stipulated in the contract are enforceable in the foreign country.
For this reason many banks rely on foreign correspondent bank relationships in the
countries where they are active but lack branches.
Strategic Risk
Strategic risk is the current and prospective risk on earnings or capital arising from
adverse business decisions, improper implementation of decisions, or lack of
responsiveness to industry changes. This risk is a function of the compatibility of an
organization’s strategic goals, the business strategies developed to achieve those
goals, the resources deployed against these goals, and the quality of implementation.
The resources needed to carry out business strategies are both tangible and
intangible.
They include communication channels, operating systems, delivery networks, and
managerial capacities and capabilities. The organization’s internal characteristics
must be evaluated against the impact of economic, technological, competitive,
regulatory, and other environmental changes.
Strategic risk in trade financing arises when a bank does not know enough about the
region in which it is doing business or the financing product it is using. A bank
considering whether to finance trade must carefully develop its financing strategy.
Reputation Risk
Reputation risk is the current and prospective impact on earnings and capital arising
from negative public opinion. This affects the institution’s ability to establish new
relationships or services or to continue servicing existing relationships. This risk may
expose the institution to litigation, financial loss, or a decline in its customer base.
Reputation risk exposure is present throughout the organization and includes the
responsibility to exercise an abundance of caution in dealing with its customers and
community.
Trade financing is an area where reputation and market perception is particularly
important. Trade financing requires expedient processing of operations and
significant attention to details of documents.
A bank’s failure to meet these requirements may result in financial losses to the bank
and its community. To regain its foothold, the bank may have to lower prices on its
products and fund expensive advertising/public relations efforts.
Export Credit Insurance
Export Credit insurance involves insuring exporters against possible:
Commercial risk such as non-acceptance of goods by buyer, the failure of
buyer to pay debt, and the failure of foreign banks to honor documentary
credits.
Political risk arises from factors like war, riots and civil commotion, blockage
of foreign exchange transfers and currency devaluation.
The type of export credit insurance used varies from country to country and depends
on traders’ perceived needs. The most commonly used are as follows:
Short-term Export Credit Insurance – Covers periods not more than 180
days. Protection includes pre-shipment and post-shipment risks, the former
covering the period between the awarding of contract until shipment.
Protection can also be covered against commercial and political risks.
Medium and Long-term Export Credit Insurance – Issued for credits
extending longer periods, medium-term (up to three years) or longer.
Protection provided for financing exports of capital goods and services.
Investment Insurance – Insurance offered to exporters investing in foreign
countries.
Exchange Rate Insurance – Covers losses as a result of fluctuations in
exchange rates between exporters’ and importers’ national currencies over a
period of time.
The benefits of export credit insurance include:
Ability of exporters to offer buyers competitive payment terms.
Protection against risks and financial costs of non-payment.
Access to working capital.
Protection against losses from foreign exchange fluctuations.
Reduction of need for tangible security when borrowing from banks.
Export Credit Guarantees
An export credit guarantee is issued by a financial institution, or a government
agency, set up to promote exports. Such guarantee allows exporters to secure pre-
shipment financing or post-shipment financing from a banking institution more
easily. Even in situations where trade financing is commercially available, companies
without sufficient track records may not be looked upon favorably by banks.
Therefore, the provision of financial guarantees to the banking system for purveying
export credit is an important element in helping local companies goes into exporting.
The agency providing this service has to carefully assess the risk associated in
supporting the exporter as well as the buyer.
Issued by a financial institution, or a government agency.
Assist companies without sufficient track records to obtain credit
from banks.
Instruments to safeguard export-financing banks from losses that may occur
from providing funds to exporters.
The Role of Governments in Trade Financing
The role of government in trade financing is crucial in emerging economies. In the
presence of underdeveloped financial and money markets, traders have restricted
access to financing. Governments can either plays a direct role like direct provision
of trade finance or credit guarantees; or indirectly by facilitating the formation of
trade financing enterprises. Governments could also extend assistance in seeking
cheaper credit by offering or supporting the following:
• Central Bank refinancing schemes;
• Specialized financing institutes like Export-Import Banks or Factoring Houses;
• Export credit insurance agencies;
• Assistance from the Trade Promotion Organization; and
• Collaboration with Enterprise Development Corporations (EDC) or State Trading
Enterprises (STE).
Role in Facilitating and Promoting Trade
Traders need to secure financing so that the transaction may actually take place. The
faster and easier the process of financing an international transaction.
•Manage cash flow, risks and costs.
•Raise fund and capitals
•Access Credit Information
WORKING IN JINDAL STAINLESS STEEL LIMITED
Running a business globally involves dealing with diverse trade practices and
transacting in foreign currencies on a regular basis. The faster you react to
opportunities, the better it is for the business. This requirement is now days is
fulfilling by trade finance.
As trade finance is becoming important part of every business. Without which a
businessman can’t think to work. As it satisfy every need of business, whether it is
exchange of goods, dealing with foreign customers. As seeing the trends and basic
requirement of business,
Trade finance in Jindal Stainless steel limited, a million dollar entity, is act as its
heart without which it is incomplete and can’t live a progressive life.
Trade financing is an important tool for most business owners as it can provide you
with the funding you need to grow your business.
All important dealings related to imports as well as exports of steel without Trade
finance, JSL can’t imagine. Transportation of raw material and finished goods are
supported by trade finance activities. As from beginning to end all major activities
are fulfilled by Trade finance.
In large amount of stainless steel are imported and exported that requires a big
finance and quick competition to survive in market. From past many years, members
of finance department are involved in Trade finance activity that helps them to
mitigate risks that not only helps in procuring fund and also saves time.
Trade finance can meet all its needs - from plain vanilla lending to structured
transactions such as pre-export financings, lease financings, project-related
financings and the newly introduced hedged inventory products.
Trade Finance continues to be fertile ground for structured and non-structured deals
not least because of the continuing divergence in trading regulations between the
main markets of the world.
Trade finance can serve as an important part of business as it offers various aspects
of managing finances for the company. It helps generate, manage, and establish
various finance practices like working capital, factoring solutions, banking solutions,
loans, guarantees, discounting, etc. Trade finance companies help reduce marketing
cost and increase trade profitability.
They also help in increasing the sales of the company’s by promoting the products,
services or the website around the world. Trade finance companies help in
eliminating most of the commercial and political risk normally retained by the
company or any small or medium business owner.
What is the reason of adoption of Trade Finance system in JSL
Company need to secure financing so that the
•Manage cash flow, risks and costs.
•Raise fund and capitals
•Access Credit Information
The faster and easier the process of financing transaction may actually take place an
international transaction.
Risks Involved when act as Buyer-
• Non-delivery / delayed delivery of goods
• Short shipment/inferior goods
• Goods received before the documents
• Foreign exchange fluctuation
• Regulatory changes
As seller
• Non-payment/Delayed payment
• Exchange risk
• Foreign exchange fluctuation
• Regulatory changes
Work flow in JINDAL Stainless Steel through Trade finance System
Work flow is designed to assist meet cash flow shortages arising from a mismatch in
the timing of making payment for goods or raw materials for use in manufacture of
goods, and the receipt of payments from the on selling of these purchased or
manufactured goods.
First of all marketing department through contacts and surveys find out the demand
of their product i.e. Stainless steel and all related information given to PPC
department (plant and plan dept.), that this much is demanded by the seller and gets
order.
So after that to fulfill the required order by seller, it contact with plant dep’t. They
discuss about how much raw material is available or kept with them or how much
quantity is required to overcome the existing demand or order.
They call upon certain suppliers and specify the raw material required and asked
about their price. Suppliers provides their price quote that is a list of price mentioned
for different material .Mostly or most consumable raw material by JSL is nickel and
solid scrap in order to make stainless steel.
After analyzing their budget and market prices the company chose best possible and
lower price for raw material that is beneficent for them through bargaining
After finalizing the price and supplier, JSL makes a contract with them. Till upon the
whole process was performed by the JSL internally and themselves. But now
onwards the main activity i.e. Trade Finance begins that make their work and
dealings easier to perform.
Functions of Various banks which involved in trading of JSL
OPENING BANK OR ISSUING BANK -
1.The issuing bank is primarily responsible for payment under the credit to the
beneficiary.
2.Credit and any amendments thereto issued by the bank must be complete and clear.
In order to guard against confusion and misunderstanding, the opening bank should
discourage any attempt to include any excessive details in the credit or in any
amendments thereto.
3.The issuing bank should nominate the bank which is authorized to pay or accept
drafts or to negotiate, unless the credit allows negotiation by any bank. “By
negotiating any bank, or by allowing for negotiation by any bank, or by authorizing
or requesting a bank to add it confirmation, the issuing bank authorize such bank to
pay, accept drafts or negotiate, as the case may be, against document which appear
on their face to be in accordance with the terms and condition of the credit, and
undertakes to reimburse such bank”.
4.If the issuing bank fails to act in accordance with the above provision and or fails
to hold the document at the disposal of, to return them to the presenter, the issuing
bank shall be precluded from claiming that the documents are not in compliance with
the terms and condition of credit.
5.Upon receipt of document, the issuing bank must determine, on the basis of
document alone, whether or not they appear on their face not to be in accordance
with terms and conditions of the credit. If the documents appear on their face not to
be in compliance with the terms and conditions of the credit, the issuing bank may
refuse to take up the document.
6.The issuing bank shall have a reasonable time not exceeding seven banking days
following the day of receipt of the document to examine the document and to
determine whether to take up or to refuse document and to inform the party from
which it received the documents accordingly.
ADVISING BANK-
1.A credit may be advised to a beneficiary through another bank (the advising bank)
without engagement on the part of the advising bank, but that bank shall take
reasonable care to check the apparent authenticity of credit which it advises. If the
advising bank cannot establish such apparent authenticity, it must inform, without
delay, the bank from which the instructions appear to have been received that it has
been unable to establish the authenticity of the credit and if it collects nonetheless to
advise the credit it must inform the beneficiary that has not been able to establish the
authenticity of the credit.
2.If the bank elects not to advise the credit, it must inform the issuing bank without
delay. Thus the responsibility of the advising bank is to vouchsafe the authenticity if
the credit. It may negotiate document under the credit, if it so desires in which case it
becomes the negotiating bank. The beneficiary cannot compel the advising bank to
negotiate documents.
CONFIRMING BANK-
1.When a bank in the exporter’s country adds its confirmation to the credit, it gives
an additional undertaking to the beneficiary, in addition to that of the issuing bank, to
the negotiate documents under the credit. Therefore, the relationship of the
confirming bank with the beneficiary is similar to that of issuing bank. If the
documents tendered are in conformity with the letter of credit terms and within
expiry time of credit, it has to make payment against them.
2.As to the relation of the confirming bank with the issuing bank, the position is
same as that of the negotiation bank.
NEGOTIATING BANK-
1.Unless the negotiating bank is nominated in the credit and it accepts the nomination
or it is the confirming or paying bank, no bank can be compelled by the beneficiary
to negotiate documents under the credit. A bank, under an open credit, may accept on
its own to negotiate documents.
2.“Banks must examine all documents with reasonable care to ascertain that they
appear on their face to be accordance with the terms and condition of credit.
Compliance of the stipulated documents on their face with the terms and conditions
of credit, shall be determined by international standard banking practice as reflected
in these Articles. Documents which appear on their face to be inconsistent with one
another will be considered as not appearing on their face to be accordance with the
terms and conditions of the credit”.
3.Therefore the negotiating bank should accept document tendered only if they
conform to the terms and conditions of credit. In documentary credit all parties
concerned deal in document and not in goods. Therefore, he cannot ensure
correctness of the goods shipped but can only see that the documents on their face
appear to be required by the credits.
4.If the negotiating bank finds any discrepancies in the documents tendered, but still
negotiates, it may require the beneficiary to execute an indemnity in favour of the
bank. But such indemnity cannot be transferred to the issuing bank without the
consent of the beneficiary.
REIMBURSING BANK –
The issuing bank or opening bank may indicate in the credit the name of bank, from
whom the paying/negotiating bank can obtain reimbursement. The documents are
sent to the bank; the negotiating/paying bank simultaneously makes a claim with the
reimbursing bank for the negotiating/paying effected. Normally the reimbursing bank
would be the bank with whom the issuing bank maintains an account.
Letter of credit an important instrument used by JSL in trade finance
system
What is letter of credit?
Letters of credit (LC’s) are among the most secure instruments available to
international traders. An LC is a commitment by a bank on behalf of the buyer that
payment will be made to the exporter provided that the terms and conditions have
been met, as verified through the presentation of all required documents. The buyer
pays its bank to render this service. An LC is useful when reliable credit information
about a foreign buyer is difficult to obtain, but you are satisfied with the
creditworthiness of your buyer’s foreign bank. An LC also protects the buyer since
no payment obligation arises until the goods have been shipped or delivered as
promised.
• A bank’s written guarantee
• Made on behalf of a buyer
• To pay a seller
• A given sum of money
• Provided that documents presented
• Meet the terms specified
• And are presented within a specified time
• And at a specified place
Characteristics of a Letter of Credit
Applicability
Recommended for use in new or less-established trade relationships when you are
satisfied with the creditworthiness of the buyer’s bank.
Risk
Risk is evenly spread between seller and buyer provided all terms and conditions are
adhered to.
Pros
• Payment after shipment
• A variety of payment, financing and risk mitigation options
Cons
• Process is complex and labor intensive
• Relatively expensive in terms of transaction costs
Various types of Letter of Credits that are commonly used by JSL
1. Payment, acceptance and negotiation credits.
2. Revocable and irrevocable credits.
3. Confirmed and unconfirmed credits.
4. With recourse and without recourse credits.
5. Fixed and revolving credits.
6. Transferable credits.
7. Back-to-back credits.
8. Red Clause and Green Clause credits.
9. Standby credits.
Role of the Bank in JSL dealings with trade finance system
Bank’s business interests are:
• Providing finance
• Providing fee based services
• Risk mitigation
The Buyer’s bank can assist in:
• Providing payment assurance to seller on behalf of the buyer
• Providing finance in respect of the sale
• Effecting payment to the seller on behalf of the buyer
• Handling documents covering the sale
The seller’s bank can assist in:
• Assuring payment as a third party
• Providing finance :
• to arrange for goods
• to provide credit to buyer
• Handling documents for regulatory requirements
• Obtaining payment for seller
LC PROCESS IN JSL
Buyer ask his bank to issue an LC against the sale contract
↓
Advising bank issues LC to negotiating bank
↓
Advising bank notifies the seller about the LC
↓
Seller sends the goods through shipper and collects shipping Document
↓
Seller submits Shipping doc. to negotiating bank
↓
Negotiating bank gives shipping doc. to opening bank
↓
Bank collects the money from buyer and gives him shipping document
↓
Opening bank pays to negotiating bank
↓
Buyer gives the doc. to the shipper and Collects goods
↓
Finally, Negotiating bank gives payment to seller
Some of critical risk considerations to JSL from trade finance
How Would the Bank Mitigate Risks?
Risk
• Transport – related risks (damage, loss, theft)
• Credit risk or non-payment risk
• Quality of goods risk
• Exchange rate risk
• Legal risk
• Country risk / Political risk
• Fraud risk
• The risk of misunderstanding
Risk Mitigation
• Ensuring insurance coverage/ carrier’s liability
• Ensuring credit-worthiness of party: Financial standing, quality of goods
being sold
• Proper document scrutiny
• Forward cover
• Procedures verified by legal experts
• Taking cover
• Substantial credit and compliance scrutiny
• Well-drafted contract
Some very commonly used terms:-
Advising Bank
An 'advising bank' is a correspondent of a bank which issues a letter of credit, and,
on behalf of the issuing bank, the advising bank notifies the beneficiary of the terms
of the credit, without engagement on its part to pay or guarantee the credit.
Acceptance Letter Of Credit
A letter of credit which instead of agreeing to pay the beneficiary immediately upon
presentation of documents requires presentation of a time draft drawn by the
beneficiary upon the issuing bank or another bank. However, the beneficiary may, in
effect, obtain prompt payment by discounting the draft.
Beneficiary
1. In the case of a letter of credit, the individual or company who is entitled to draw
or demand payment under its terms.
2. In the case of insurance, the person entitled to take the proceeds.
3. The person for whose benefit a contract, or trust, or will is executed or enforced.
Bill of Lading
A document issued by a carrier which is evidence of receipt of the goods, and is a
contract of carriage. It describes the goods, the details of the intended voyage, and it
specifies the conditions of transportation. If issued in negotiable form, i.e. "to order",
it becomes documentary evidence of title to the goods.
Bibliography
Jindal Stainless Steel Limited. (n.d.). Retrieved Febuary 2009, from http://www.jindalstainless.com
Gupta, D. (2006-08). JSL Financial report. Hisar.