Balance of Trade and Balance of Payments: Definition, Explanation and Difference: Here, we would like to make a sharp distinction

between balance of international trade and balance of international payments as they are often confused by the readers. By balance of International trade we mean, statement that takes into account the total value of exports and imports of visible commodities of a country during a year. By visible commodities is meant the commodities which when exported or imported are recorded to the trade accounts at the ports. Balance of payments, on the other hand, is a statistical statement of income and expenditure both of the visible and invisible items of trade on international account during a calendar year. Invisible items are those items which are not shown in the trade accounts at the time of their imports. Main Components of a Balance of payments Account I. Current Account (A) Goods General merchandise, goods for processing, repairs on goods produced in ports by carries and non-monetary gold.

(B) Services

Transportation, travel, communications, construction, financial and computer services, royalties and license fees, other professional and business services.

(C) Income

Direct investment income, portfolio investment income, and compensation of employees

(D) Current Transfers

Government current transfers, workers' remittances and other current transfers.

II. Capital and Financial Account 1. Capital Account (A) Capital transfers Government and private transfers of fixed assets and forgiveness of liabilities.

(B) Non-produced and Non-financial assets

Land and subsoil assets, patents, copyrights, trademarks, franchises.

2. Financial Account (C) Direct Investment External investments with lasting interest in enterprises.

(D) Portfolio Investment

External investments in securities and financial derivatives.

(E Other investment

External investments other than reserves, direct and portfolio investments. For example, short- and long-terms loans, trade credits, currency holdings and deposits, other accounts receivable and payable.

(F) Reserve Assets

Monetary gold, foreign exchange assets and other claims.

Disequilibrium in the Balance of Payment Meaning , Causes Meaning of Disequilibrium in Balance of Payment Though the credit and debit are written balanced in the balance of payment account, it may not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium. Disequilibrium may take place either in the form of deficit or in the form of surplus. Disequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to foreigners. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange. This is called an 'unfavourable balance'. Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. Such a surplus disequilibrium is termed as 'favourable balance'. Causes of Disequilibrium in Balance of Payment 1. Population Growth Most countries experience an increase in the population and in some like India and China the population is not only large but increases at a faster rate. To meet their needs, imports become essential and the quantity of imports may increase as population increases.

2. Development Programmes Developing countries which have embarked upon planned development programmes require to import capital goods, some raw materials which are not available at home and highly skilled and specialized manpower. Since development is a continuous process, imports of these items continue for the long time landing these countries in a balance of payment deficit. 3. Demonstration Effect When the people in the less developed countries imitate the consumption pattern of the people in the developed countries, their import will increase. Their export may remain constant or decline causing disequilibrium in the balance of payments. 4. Natural Factors Natural calamities such as the failure of rains or the coming floods may easily cause disequilibrium in the balance of payments by adversely affecting agriculture and industrial production in the country. The exports may decline while the imports may go up causing a discrepancy in the country's balance of payments. 5. Cyclical Fluctuations Business fluctuations introduced by the operations of the trade cycles may also cause disequilibrium in the country's balance of payments. For example, if there occurs a business recession in foreign countries, it may easily cause a fall in the exports and exchange earning of the country concerned, resulting in a disequilibrium in the balance of payments. 6. Inflation

An increase in income and price level owing to rapid economic development in developing countries, will increase imports and reduce exports causing a deficit in balance of payments. 7. Poor Marketing Strategies The superior marketing of the developed countries have increased their surplus. The poor marketing facilities of the developing countries have pushed them into huge deficits. 8. Flight Of Capital Due to speculative reasons, countries may lose foreign exchange or gold stocks People in developing countries may also shift their capital to developed countries to safeguard against political uncertainties. These capital movements adversely affect the balance of payments position. 9. Globalisation Due to globalisation there has been more liberal and open atmosphere for international movement of goods, services and capital. Competition has beer increased due to the globalisation of international economic relations. The emerging new global economic order has brought in certain problems for some countries which have resulted in the balance of payments disequilibrium.

balance of payment position. However Deflation can be successful when the exchange rate remains fixed. 2. Exchange Depreciation Exchange depreciation means decline in the rate of exchange of domestic currency in terms of foreign currency. This device implies that a country has adopted a flexible exchange rate policy. Suppose the rate of exchange between Indian rupee and US dollar is $1 = Rs. 40. If India experiences an adverse balance of payments with regard to U.S.A, the Indian demand for US dollar will rise. The price of dollar in terms of rupee will rise. Hence, dollar will appreciate in external value and rupee will depreciate in external value. The new rate of exchange may be say $1 = Rs. 50. This means 25% exchange depreciation of the Indian currency. Exchange depreciation will stimulate exports and reduce imports because exports will become cheaper and imports costlier. Hence, a favourable balance of payments would emerge to pay off the deficit. Limitations of Exchange Depreciation :Exchange depreciation will be successful only if there is no retaliatory exchange depreciation by other countries. It is not suitable to a country desiring a fixed exchange rate system.

Monetary Measures for Correcting the BoP The monetary methods for correcting disequilibrium in the balance of payment are as follows :1. Deflation Deflation means falling prices. Deflation has been used as a measure to correct deficit disequilibrium. A country faces deficit when its imports exceeds exports. Deflation is brought through monetary measures like bank rate policy, open market operations, etc or through fiscal measures like higher taxation, reduction in public expenditure, etc. Deflation would make our items cheaper in foreign market resulting a rise in our exports. At the same time the demands for imports fall due to higher taxation and reduced income. This would built a favourable atmosphere in the

Exchange depreciation raises the prices of imports and reduces the prices of exports. So the terms of trade will become unfavourable for the country adopting it. It increases uncertainty & risks involved in foreign trade. It may result in hyper-inflation causing further deficit in balance of payments.

3. Devaluation Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of home currency against foreign currency. While depreciation is a spontaneous fall due to interactions of market forces, devaluation is official act enforced by the monetary authority. Generally the international monetary fund advocates the policy of devaluation as a corrective measure of disequilibrium for the

countries facing adverse balance of payment position. When India's balance of payment worsened in 1991, IMF suggested devaluation. Accordingly, the value of Indian currency has been reduced by 18 to 20% in terms of various currencies. The 1991 devaluation brought the desired effect. The very next year the import declined while exports picked up. When devaluation is effected, the value of home currency goes down against foreign currency, Let us suppose the exchange rate remains $1 = Rs. 10 before devaluation. Let us suppose, devaluation takes place which reduces the value of home currency and now the exchange rate becomes $1 = Rs. 20. After such a change our goods becomes cheap in foreign market. This is because, after devaluation, dollar is exchanged for more Indian currencies which push up the demand for exports. At the same time, imports become costlier as Indians have to pay more currencies to obtain one dollar. Thus demand for imports is reduced. Generally devaluation is resorted to where there is serious adverse balance of payment problem. Limitations of Devaluation :Devaluation is successful only when other country does not retaliate the same. If both the countries go for the same, the effect is nil. Devaluation is successful only when the demand for exports and imports is elastic. In case it is inelastic, it may turn the situation worse. Devaluation, though helps correcting disequilibrium, is considered to be a weakness for the country. Devaluation may bring inflation in the following conditions :Devaluation brings the imports down, When imports are reduced, the domestic supply of such goods must be increased to the same extent. If not, scarcity of such goods unleash inflationary trends. A growing country like India is capital thirsty. Due to non availability of capital goods in India, we have no option but to continue imports at higher costs. This will force the industries depending upon capital goods to push up their prices.

When demand for our export rises, more and more goods produced in a country would go for exports and thus creating shortage of such goods at the domestic level. This results in rising prices and inflation. Devaluation may not be effective if the deficit arises due to cyclical or structural changes. 4. Exchange Control It is an extreme step taken by the monetary authority to enjoy complete control over the exchange dealings. Under such a measure, the central bank directs all exporters to surrender their foreign exchange to the central authority. Thus it leads to concentration of exchange reserves in the hands of central authority. At the same time, the supply of foreign exchange is restricted only for essential goods. It can only help controlling situation from turning worse. In short it is only a temporary measure and not permanent remedy.

Non-Monetary Measures for Correcting the BoP A deficit country along with Monetary measures may adopt the following nonmonetary measures too which will either restrict imports or promote exports. 1. Tariffs Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the prices of imports would increase to the extent of tariff. The increased prices will reduced the demand for imported goods and at the same time induce domestic producers to produce more of import substitutes. Non-essential imports can be drastically reduced by imposing a very high rate of tariff. Drawbacks of Tariffs :Tariffs bring equilibrium by reducing the volume of trade. Tariffs obstruct the expansion of world trade and prosperity. Tariffs need not necessarily reduce imports. Hence the effects of tariff on the balance of payment position are uncertain. Tariffs seek to establish equilibrium without removing the root causes of disequilibrium.

A new or a higher tariff may aggravate the disequilibrium in the balance of payments of a country already having a surplus. Tariffs to be successful require an efficient & honest administration which unfortunately is difficult to have in most of the countries. Corruption among the administrative staff will render tariffs ineffective.

They are not long-run solution as they do not tackle the real cause for disequilibrium. Under the WTO quotas are discouraged. Implements of quotas is open invitation to corruption.

3. Export Promotion 2. Quotas Under the quota system, the government may fix and permit the maximum quantity or value of a commodity to be imported during a given period. By restricting imports through the quota system, the deficit is reduced and the balance of payments position is improved. Types of Quotas :the tariff or custom quota, the unilateral quota, the bilateral quota, the mixing quota, and import licensing. Merits of Quotas :Quotas are more effective than tariffs as they are certain. They are easy to implement. They are more effective even when demand is inelastic, as no imports are possible above the quotas. More flexible than tariffs as they are subject to administrative decision. Tariffs on the other hand are subject to legislative sanction. Demerits of Quotas :The government can adopt export promotion measures to correct disequilibrium in the balance of payments. This includes substitutes, tax concessions to exporters, marketing facilities, credit and incentives to exporters, etc. The government may also help to promote export through exhibition, trade fairs; conducting marketing research & by providing the required administrative and diplomatic help to tap the potential markets. 4. Import Substitution A country may resort to import substitution to reduce the volume of imports and make it self-reliant. Fiscal and monetary measures may be adopted to encourage industries producing import substitutes. Industries which produce import substitutes require special attention in the form of various concessions, which include tax concession, technical assistance, subsidies, providing scarce inputs, etc. Non-monetary methods are more effective than monetary methods and are normally applicable in correcting an adverse balance of payments. Drawbacks of Import Substitution :Such industries may lose the spirit of competitiveness. Domestic industries enjoying various incentives will develop vested interests and ask for such concessions all the time.

Deliberate promotion of import substitute industries go against the principle of comparative advantage.

State Trading Corporation FUNCTIONS & DUTIES STC is engaged in exports, imports and domestic trading activities in a large number of items. The Corporation exports a diverse range of items to countries all over the world. Its export basket includes wheat, rice, castor oil, castor seed, tea, coffee, jute goods, spices, sugar, other agro products, chemicals, drugs, pharmaceuticals, iron ore, light engineering goods, construction materials, consumer goods, sports goods, processed foods, marine products, textiles, garments, leatherware, steel raw materials etc. The Corporation is also the nodal agency for counter trade commitments against Government purchases. Major items of import by STC include gold, silver, edible oils, pulses, sugar, fertilizers, metals, minerals, hydro-carbons, petro products, FMCG Goods and IT products. The Corporation arranges imports of crucial raw materials as and when needed by the Indian consumer or industry. It also undertakes import of technical and security equipment on behalf of Forensic Science Laboratories, State Police and Intelligence Departments and Paramilitary Organisations against specific requests. The Corporation also undertakes domestic trading in a limited way. In addition to supply of tea and pulses to Defence, major items traded by STC in domestic market include raw jute, edible oils, oilseeds, maize/coarse grains, petrochemicals and hydrocarbons. Besides above, the Corporation is also asked by the Govt. from time to time to undertake on its behalf, the following types of activities :

- Import of essential items of mass consumption such as wheat, edible oils, sugar, pulses, etc. to meet domestic shortages - Handling counter trade commitments against bulk purchases made by various Govt. Departments. - Undertake domestic market intervention operations to check the prices of certain commodities such as rubber, tobacco, shellac, etc. from falling below a specified level and to ensure remunerative prices of the produce to the farmers. - Implementing bilateral trade arrangements entered into by the Govt. of India with the Governments of other countries. - Handling despatch of aid consignments/Govt. grants. - Handling consignments received as aid from various external agencies such as edible oils from USAID, CARE, etc. STC also plays a promotional role in enhancing the countrys foreign trade. The Corporation keeps diversifying into new areas of trade and exploring new markets with a view to sustain itself in the highly competitive global trading environment. MISSION To emerge as one of the largest global trading companies with international standards of excellence nurturing a blend of quality, business ethics and proactive enthusiasm to enhance stakeholders value. CORPORATE OBJECTIVES - To develop core competencies in selected areas of exports and exploit the market opportunities in these areas to the best advantage of the Corporation. - To continuously undertake horizontal and vertical diversifications thereby enabling sustained growth of business. - To make best use of financial strength of the Corporation in expanding its business. - To lay emphasis on quality of services to customers so as to develop long-term business relationship with buyers and suppliers in and outside the country. - To undertake market intervention operation as and when advised by the Government of India. - To create new infrastructure and make optimum utilisation of infrastructure available with the Corporation. - To strive to pay adequate returns to the stakeholders. - To fulfil Corporations social responsibility by following ethical business practices and reinforcing commitment to customers, employees, partners and communities. - To undertake on a continuous basis training / re-training of existing manpower and induct professionally qualified young talent so as to create a cadre of highly professional and motivated managers. - To ensure an efficient and streamlined system of operations, with minimum transaction costs. - To act as a facilitator to small and medium exporters and importers EXIM Bank

SET UP BY AN ACT OF PARLIAMENT IN SEPTEMBER 1981 WHOLLY OWNED BY GOVERNMENT OF INDIA COMMENCED OPERATIONS IN MARCH 1982 APEX FINANCIAL INSTITUTION

Objectives for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the countrys international trade

Functions/services

Term Finance (For Exporting Companies)

Project Finance Equipment Finance Import of Technology & Related Services Domestic Acquisitions of businesses/companies/brands Export Product Development/ Research & Development General Corporate Finance

Working Capital Finance (For Exporting Companies)

Funded

o o o o o

Working Capital Term Loans [< 2 years] Long Term Working Capital [upto 5 years] Export Bills Discounting Export Packing Credit Cash Flow financing

Non-Funded o Letter of Credit Limits o Guarantee Limits

Working Capital Finance (For Non- Exporting Companies)

Bulk Import of Raw Material

Term Finance (For Non- Exporting Companies)

Import of Equipment

Export Finance

Pre-shipment Credit Post Shipment Credit Buyers' Credit Suppliers' Credit [including deferred payment credit] Bills Discounting Export Receivables Financing Warehousing Finance Export Lines of Credit (Non-recourse finance)

Equity Participation (In Indian Exporting Companies)

To part finance project expenditure(Project, inter alia, includes new project/ expansion/ acquisition of business/company/ brands/research & development) Small and Medium Enterprises (SME) Finance The importance of SME sector is well-recognized world over owing to its significant contribution in achieving various socio-economic objectives, such as employment generation, contribution to national output and exports, fostering new entrepreneurship and to provide depth to the industrial base of the economy. India has a vibrant SME sector that plays an important role in sustaining economic growth, increasing trade, generating employment and creating new entrepreneurship in India. Indian SMEs require business advisory services to enhance their international competitiveness in a highly competitive globalising world. The SMEs find the services of reputed national and international consultants as not cost effective and often, not adequately focused. Recognising this knowledge gap, Exim Bank of India has been endeavouring to provide a suite of services to its SME clients. These include providing business leads, handholding during the process of winning an export contract and thus assisting the generation of export business on success fee basis, countries/ sector information dissemination, capacity building in niche areas such as quality, safety, export marketing, etc. and financial advisory services such as loan syndication, etc. AGRI FINANCE The globalization and post-WTO scenario offers considerable scope for exports of Indian agricultural products. Exim Bank has a dedicated Agri Business Group to cater to the financing needs of export oriented companies dealing in agricultural products. Financial assistance is provided by way of term loans, pre-shipment/post-shipment credit, overseas buyers' credit, bulk import finance, guarantees etc. Term loans with varying maturities are provided for setting up processing facilities, expansion, modernization, purchase of equipment, import of equipment/technology, financing overseas joint ventures and acquisitions etc. The Bank has strong linkages with other stakeholders in agri sector such as Ministry of Food Processing Industries, GoI, NABARD, APEDA, Small Farmers' Agri-Business Consortium (SFAC), National Horticultural Board etc. Apart from financing, the Bank also provides a range of advisory services to agri exporters. The Bank also publishes a number of Occasional Papers, Working Papers on export potential of various sub-sectors in agriculture and a bi-monthly publication in different languages on global scenario in agri-business and opportunities therein

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

signed by the shipping company or its agent, and must show how many signed originals were issued. 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 discharge The bill of lading also forms the contract of carriage. To be acceptable to the buyer, the B/L should :

Air Waybills Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample consists of of three originals and nine copies. The first original is for the carrier and is signed by a export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the 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 requirement for an air waybill are :

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 which cases there is no need for a dated "on board" notation to be shown separately with date and 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 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 on other documents. It must be signed and dated by the actual carrier or by the named agent of a named carrier. It must mention whether freight has been paid or will be paid at the destination point.

The person who send the goods.

Consignee o The person who take delivery of the goods. Notify Party o 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

Bill of Lading (B/L) Bill of Lading is a document given by the shipping agency for the goods shipped for transportation form one destination to another and is signed by the representatives of the carrying vessel. Bill of landing is issued in the set of two, three or more. The number in the set will be indicated on each bill of lading and all must be accounted for. This is done due to the safety reasons which ensure that the document never comes into the hands of an unauthorised person. Only one original is sufficient to take possession of goods at port of discharge so, a bank which finances a trade transaction will need to control the complete set. The bill of lading must be

The bill of lading must meet all the requirements of the credit as well as complying with UCP 500. 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.

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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.

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 Certificate of Origin The Certificate of Origin is required by the custom authority of the importing country for the purpose 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 with all other document, It would normally include : Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or import invoice, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation. The invoice must :

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.

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.

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 not evidence on board shipment, if it complies with ICC 500, Art. 26(a). The liability of the combined transport operator starts from the place of shipment and ends at the place of delivery. This 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 :

Bill of Exchange A Bill of Exchange is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where 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:

That the consignee and notify parties are as the credit. The place goods are received, or taken in charges, and place of final destination.

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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.

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. 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. There are 3 standard ways of payment methods in the export import trade international trade market: 1. 2. 3. Clean Payment Collection of Bills Letters of Credit L/c

Insurance Certificate Also known as Insurance Policy, it certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered. It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents. Also, if submitted under a LC, the insured amount must be in the same currency as the credit and usually for the bill amount plus 10 per cent. The requirements for completion of an insurance policy are as follow :

The name of the party in the favor which the documents 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 the port 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.

1. Clean Payments In clean payment method, all shipping documents, including title documents are handled directly between the trading partners. The role of banks is limited to clearing amounts as required. Clean payment method offers a relatively cheap and uncomplicated method of payment for both importers and exporters.

There are basically two type of clean payments: Advance Payment In advance payment method the exporter is trusted to ship the goods after receiving payment from the importer. Open Account In open account method the importer is trusted to pay the exporter after receipt of goods. The main drawback of open account method is that exporter assumes all the risks while the importer get the advantage over the

Packing List Also known as packing specification, it contain details about the packing materials used in the shipping of goods. It also include details like measurement and weight of goods. The packing List must :

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delay use of company's cash resources and is also not responsible for the risk associated with goods. 2. Payment Collection of Bills in International Trade The Payment Collection of Bills also called Uniform Rules for Collections is published by International Chamber of Commerce (ICC) under the document number 522 (URC522) and is followed by more than 90% of the world's banks. In this method of payment in international trade the exporter entrusts the handling of commercial and often financial documents to banks and gives the banks necessary instructions concerning the release of these documents to the Importer. It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system. There are two methods of collections of bill : Documents Against Payment D/P In this case documents are released to the importer only when the payment has been done. Documents Against Acceptance D/A In this case documents are released to the importer only against acceptance of a draft. 3. Letter of Credit L/c Letter of Credit also known as Documentary Credit is a written undertaking by the importers bank known as the issuing bank on behalf of its customer, the importer (applicant), promising to effect payment in favor of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. It is published by the International Chamber of Commerce under the provision of Uniform Custom and Practices (UCP) brochure number 500. Various types of L/Cs are :

Revocable & Irrevocable Letter of Credit (L/c) A Revocable Letter of Credit can be cancelled without the consent of the exporter. An Irrevocable Letter of Credit cannot be cancelled or amended without the consent of all parties including the exporter. Sight & Time Letter of Credit If payment is to be made at the time of presenting the document then it is referred as the Sight Letter of Credit. In this case banks are allowed to take the necessary time required to check the documents. If payment is to be made after the lapse of a particular time period as stated in the draft then it is referred as the Term Letter of Credit. Confirmed Letter of Credit (L/c) Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the issuing bank. By adding its commitment, the Confirming Bank takes the responsibility of claim under the letter of credit, assuming all terms and conditions of the letter of credit are met. Financing Techniques Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. The main objectives behind preshipment finance or pre export finance is to enable exporter to:

Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business.

Types of Pre Shipment Finance

Packing Credit Advance against Cheques/Draft etc. representing Advance Payments.

Preshipment finance is extended in the following forms :

Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)

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Requirment for Getting Packing Credit This facility is provided to an exporter who satisfies the following criteria

guideline principle is the concept of NeedBased Finance. Banks determine the percentage of margin, depending on factors such as:

A ten digit importerexporter code number allotted by DGFT. Exporter should not be in the caution list of RBI. If the goods to be exported are not under OGL (Open General Licence), the exporter should have the required license /quota permit to export the goods.

The nature of Order. The nature of the commodity. The capability of exporter to bring in the requisite contribution.

Different Stages of Pre Shipment Finance

Packing credit facility can be provided to an exporter on production of the following evidences to the bank: 1. Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time limit. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.

Appraisal and Sanction of Limits 1. Before making any an allowance for Credit facilities banks need to check the different aspects like product profile, political and economic details about country. Apart from these things, the bank also looks in to the status report of the prospective buyer, with whom the exporter proposes to do the business. To check all these information, banks can seek the help of institution like ECGC or International consulting agencies like Dun and Brad street etc. The Bank extended the packing credit facilities after ensuring the following" a. The exporter is a regular customer, a bona fide exporter and has a goods standing in the market. b. Whether the exporter has the necessary license and quota permit (as mentioned earlier) or not. c. Whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries(RCC) or not. Disbursement of Packing Credit Advance

2.

3.

The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.

Eligibility Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not have export orders in their own name. In this case some of the responsibilities of meeting the export requirements have been out sourced to them by the main exporter. In other cases where the export order is divided between two more than two exporters, pre shipment credit can be shared between them Quantum of Finance The Quantum of Finance is granted to an exporter against the LC or an expected order. The only 2. Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed. Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provide a special packing credit facility and is known as Running Account Packing. Before disbursing the bank specifically check for the following particulars in the submitted documents" a. b. c. d. Name of buyer Commodity to be exported Quantity Value (either CIF or FOB)

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e. f.

Last date of shipment / negotiation. Any other terms to be complied with

The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of goods, whichever is found to be lower. Normally insurance and freight charged are considered at a later stage, when the goods are ready to be shipped. In this case disbursals are made only in stages and if possible not in cash. The payments are made directly to the supplier by drafts/bankers/cheques. The bank decides the duration of packing credit depending upon the time required by the exporter for processing of goods. The maximum duration of packing credit period is 180 days, however bank may provide a further 90 days extension on its own discretion, without referring to RBI. Post shipment finance Basic Features The features of postshipment finance are:

invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of preshipment stage. Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm. Period of Finance Postshipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.

Financing For Various Types of Export Buyer's Credit Postshipment finance can be provided for three types of export :

Purpose of Finance Postshipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies. Basis of Finance Postshipment finances is provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency. Types of Finance Postshipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self liquidating. In that case it involves advance against undrawn balance, and is usually unsecured in nature. Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature.

Physical exports: Finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred. Deemed export: Finance is provided to the supplier of the goods which are supplied to the designated agencies. Capital goods and project exports: Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter.

Supplier's Credit Buyer's Credit is a special type of loan that a bank offers to the buyers for large scale purchasing under a contract. Once the bank approved loans to the buyer, the seller shoulders all or part of the interests incurred. Types of Post Shipment Finance The post shipment finance can be classified as : 1. 2. 3. Export Bills purchased/discounted. Export Bills negotiated Advance against export bills sent on collection basis.

Quantum of Finance As a quantum of finance, postshipment finance can be extended up to 100% of the

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4. 5. 6.

Advance against export on consignment basis Advance against undrawn balance on exports Advance against claims of Duty Drawback.

1. Export Bills Purchased/ Discounted.(DP & DA Bills) Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. 2. Export Bills Negotiated (Bill under L/C) The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks: 1. The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit. The bank also faces the documentary risk where the issuing bank refuses to honour its commitment. So, it is important for the for the negotiating bank, and the lending bank to properly check all the necessary documents before submission.

exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months. 5. Advance against Undrawn Balance It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within 6 months from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment. 6. Advance Against Claims of Duty Drawback Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the inhouse cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets. In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank. After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities. Factoring and forfeiting Forfeiting and factoring are services in international market given to an exporter or seller. Its main 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 shorttermed receivables (within 90

2.

3. Advance Against Export Bills Sent on Collection Basis Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill. The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance. 4. Advance Against Export on Consignments Basis Bank may choose to finance when the goods are exported on consignment basis at the risk of the

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days) and is more related to receivables against commodity sales. Definition of Forfeiting The terms forfeiting is originated from a old French word forfait, which means to surrender ones right on something to someone else. In international trade, forfeiting may be defined as the purchasing of an exporters receivables at a discount price by paying cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment from the importer. How forfeiting Works in International Trade The exporter and importer negotiate according to the proposed export sales contract. Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate. The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. Export takes place against documents guaranteed by the importers bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date. Documentary Requirements In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected in the following documents associated with an export transaction in the manner suggested below:

specific forfeiting transaction at a firm discount rate with in a specified time. 2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfaiter from the amount paid to the exporter against the availised promissory notes or bills of exchange.

Benefits to Exporter

100 per cent financing : Without recourse and not occupying exporter's credit line That is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt. Improved cash flow : Receivables become current cash in flow and its is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability. Reduced administration cost : By using forfeiting , the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly. Advance tax refund: Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing. Risk reduction : forfeiting business enables the exporter to transfer various risk resulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank. Increased trade opportunity : With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more competitive in the market.

Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately instead, these could be built into the FOB price, stated on the invoice. Shipping Bill and GR form : Details of the forfeiting costs are to be included along with the other details, such FOB price, commission insurance, normally included in the "Analysis of Export Value "on the shipping bill. The claim for duty drawback, if any is to be certified only with reference to the FOB value of the exports stated on the shipping bill.

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 8085% in case of other discounting products. Bank gain fee based income. Lower credit administration and credit follow up.

Definition of Factoring Forfeiting The forfeiting typically involves the following cost elements: 1. Commitment fee, payable by the exporter to the forfeiter for latters commitment to execute a Definition of factoring is very simple and can be defined as the conversion of credit sales into cash. Here, a financial institution which is usually a bank buys the accounts receivable of a company usually a client and then pays up to 80% of the amount

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immediately on agreement. The remaining amount is paid to the client when the customer pays the debt. Examples includes factoring against goods purchased, factoring against medical insurance, factoring for construction services etc. Characteristics of Factoring 1. The normal period of factoring is 90150 days and rarely exceeds more than 150 days. 2. It is costly. 3. Factoring is not possible in case of bad debts. 4. Credit rating is not mandatory. 5. It is a method of offbalance sheet financing. 6. Cost of factoring is always equal to finance cost plus operating cost. Different Types of Factoring 1. Disclosed 2. Undisclosed 1. Disclosed Factoring In disclosed factoring, clients customers are aware of the factoring agreement. Disclosed factoring is of two types: Recourse factoring: The client collects the money from the customer but in case customer dont pay the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of interest and is in very common use. Nonrecourse factoring: In nonrecourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization. 2. Undisclosed In undisclosed factoring, client's customers are not notified of the factoring arrangement. In this case, Client has to pay the amount to the factor irrespective of whether customer has paid or not.

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