Gp Presentation(Imtiyaz)

7/30/2019 Gp Presentation(Imtiyaz)

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A Grand Project on

Trade finance with respect tocommercial banks problem and

prospect

Prepaid by Guided by

Mansuri Imtiyaz (35) Prof Debaditya Mohante

MBA Semester 4

Submitted to

S K P I M C S


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DECLARATION

We/ I, hereby, declare that the Comprehensive Project report Project titled, A

Grand Project on Trade finance with respect to commercial banks problem

and prospect is original to the best of our/ knowledge and has not been

published elsewhere. This is for the purpose of partial fulfillment of Kadi Sarva

Vishwa Vidhyalaya University requirements for the award of the title of Master

of Business Administration, only.

Student Name Signature

Mansuri Imtiyaz (46)


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CERTIFICATE

This is to certify that Mr.Chaitalya Gadhavi of S. K. Patel Institute of Management and

Computer Studies, Gandhinagar have submitted their Grand Project Report on A GrandProject on Trade finance with respect to commercial banks problem and

prospect in the year of 2012-2013 in fulfillment of Kadi Sarva Vishwvidhlaya

requirements as a part of their course of MASTER OF BUSINESS

ADMINISTRATION PROGRAMME.

Dr. Bhavin pandya Prof.Debaditya Mohante Prof. Sandhya Harkavat

Director Faculty guide Coordinator


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PREFACE

Someone has rightly said that practical experience is for better and closer to the

real world then mere theoretical exposure. The practical experience helps the

students view the real world closely, which in turn widely influences their

perceptions and argument their understanding of the real situation.

Research work constitutes the backbone of any management education program.

A management student has to do research work quite frequently during his

entire span.

The research work entitles A Grand Project on Trade finance with respect

to commercial banks problem and prospect aims to analyze factor affecting

to the credit risk analysis.


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Acknowledgment

I express my sincere thanks to my project guide Prof.Debaditya Mohante for

guiding me right from the inception till the completion of the project. I sincerely

acknowledge them for extending their valuable guidance, support for literature,

critical reviews of project and above all the moral support they had provided to

me with all stages of this project.


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Executive Summery


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Table of Contain

Topic Page No


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CHAPTER 1

INTRODUCTION TO

BANKING INDUSTRY


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Introduction to Banking Industry

Banks play an active role in the economic development of a country. Their

ability to make a positive contribution in igniting the process of growth depends

on the effective banking system. These banks mostly deal with money collected

in the form of deposits along with their own funds in the form of share capital

and resources constituting around 5% of the total resources of the banks. So the

banks have the obligation of meeting the demand of the customers promptly,

interest for the amount and meeting the expenses to carry out its activities. Thisnecessitates the banks to maintain adequate liquidity and earn required profit

from their activities. Maintenance of liquidity and profitability are contradictory

in nature. (Therefore, the banks have to perform the difficult task of maintaining

equilibrium between liquidity and profitability). The maintenance of liquidity is

necessary to prove the fact that the bank is able to meet its commitments

without fail and is paying the day to day expenses. Thus, liquidity refers to the

ability of the concern to fulfill its obligation promptly. Whereas, profitability is

primarily the measure of the overall success of business and so, it is the abilityto earn profit. Profitability is the most powerful motivational factor in any

business. The larger the profit, the more efficient and profitable a business is

deemed to be. It is the engine that drives a business concern. It also enables a

concern to discharge its obligation to the various segments of the society.


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Meaning of bank

An establishment for the custody of money, which it pays out, on a

customers order.

According to Whitehead

A Bank is defined as an institution which collects surplus funds from the

public, safeguards them, and makes them available to the true owner when

required and also lends sums be their true owners to those who are in need offunds and can provide security.

Banking Company in India has been defined in the Banking Companies act

1949,

One which transacts the business of banking which means the accep ting, forthe purpose of lending or investment of the deposits of money from the public,

repayable on demand, or otherwise and withdraw able be cheque, draft, order or

otherwise.

The banking system is an integral subsystem of the financial system. It

represents an important channel of collecting small savings from the households

and lending it to the corporate sector.The Indian banking system has ReserveBank of India (RBI) as the apex body for all matters relating to the banking

system. It is the central Bank of India. It is also known as the Banker to All

Other Banks.


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History of Indian banking

Without a sound and effective banking system in India it cannot have a healthyeconomy. The banking system of India should not only be hassle free but it

should be able to meet new challenges posed by the technology and any other

external and internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no

longer confined to only metropolitans or cosmopolitans in India. In fact, Indian

banking system has reached even to the remote corners of the country. This is

one of the main reasons of India's growth process.

Not long ago, an account holder had to wait for hours at the bank counters for

getting a draft or for withdrawing his own money. Today, he has a choice. Gone

are days when the most efficient bank transferred money from one branch to

other in two days. Now it is simple as instant messaging or dials a pizza. Money

has become the order of the day.

The first bank in India, though conservative, was established in 1786. From

1786 till today, the journey of Indian Banking System can be segregated into

three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalizations of Indian Banks and up to 1991 prior to Indian banking

sector Reforms.

New phase of Indian Banking System with the advent of Indian Financial

& Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase

II and Phase III.


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Phase1

The General Bank of India was set up in the year 1786. Next came Bank ofHindustan and Bengal Bank. The East India Company established Bank of

Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as

independent units and called it Presidency Banks. These three banks were

amalgamated in 1920 and Imperial Bank of India was established which started

as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians,

Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.

Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,

Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of

India came in 1935.

During the first phase the growth was very slow and banks also experienced

periodic failures between 1913 and 1948. There were approximately 1100

banks, mostly small. To streamline the functioning and activities of commercial

banks, the Government of India came up with The Banking Companies Act,

1949 which was later changed to Banking Regulation Act 1949


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Phase 2

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive

banking facilities on a large scale especially in rural and semi-urban areas. Itformed State Bank of India to act as the principal agent of RBI and to handle

banking transactions of the Union and State Governments all over country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960

on 19th July, 1969, major process of nationalizations was carried out. It was the

effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major

commercial banks in the country were nationalized.

Second phase of nationalizations Indian Banking Sector Reform was carried out

in 1980 with seven more banks. This step brought 80% of the banking segment

in India under Government ownership.

The following are the steps taken by the Government of India to Regulate

Banking Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalizations of State Bank of India.

1959: Nationalizations of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: nationalizations of seven banks with deposits over 200 crore.

After the nationalizations of banks, the branches of the public sector bank India

rose to approximately 800% in deposits and advances took a huge jump by

11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith

and immense confidence about the sustainability of these institutions.


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Phase3

this phase has introduced many more products and facilities in the banking

sector in its reforms measure. In 1991, under the chairmanship of M

Narasimham, a committee was set up by his name which worked for the

liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are

being put to give a satisfactory service to customers. Phone banking and net

banking is introduced. The entire system became more convenient and swift.

Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered

from any crisis triggered by any external macroeconomics shock as other East

Asian Countries suffered. This is all due to a flexible exchange rate regime, theforeign reserves are high, the capital account is not yet fully convertible, and

banks and their customers have limited foreign exchange exposure.

Merchants in Calcutta established the Union Bank in 1839, but it failed in 1840

as a consequence of the economic crisis of 1848-49. The Allahabad Bank,established in 1865 and still functioning today, is the oldest Joint Stock bank in

India.(Joint Stock Bank: A company that issues stock and requires shareholders

to be held liable for the company's debt) It was not the first though. That honor

belongs to the Bank of Upper India, which was established in 1863, and which

survived until 1913, when it failed, with some of its assets and liabilities being

transferred to the Alliance Bank of Shimla.


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Foreign banks too started to app, particularly in Calcutta, in the 1860s. The

Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another

in Bombay in 1862; branches in Madras and Pondicherry, then a French colony,

followed. HSBC established itself in Bengal in 1869. Calcutta was the most

active trading port in India, mainly due to the trade of the British Empire, and so

became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,

established in 1881 in Faizabad. It failed in 1958. The next was the Punjab

National Bank, established in Lahore in 1895, which has survived to the present

and is now one of the largest banks in India.

The period between 1906 and 1911, saw the establishment of banks inspired by

the Swedish movement. The Swedish movement inspired local businessmen andpolitical figures to found banks of and for the Indian community. A number of

banks established then have survived to the present such as Bank of India,

Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central

Bank of India.
http://en.wikipedia.org/wiki/Pondicherryhttp://en.wikipedia.org/wiki/Pondicherry


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Reserve Bank of India

The Banking system is an integral sub-system of the financial system. It representsan important channel of collecting small savings from the households and lending

it to the corporate sector. The Indian banking system has The Reserve Bank of

India (RBI) as the apex body from all matters relating to the banking system. It is

the Central Bank of India and act as the banker to all other banks.

Functions of RBI

Currency issuing authority

Banker to the government.

Banker to other Bank.

Framing of monetary policy.

Exchange control. Custodian to foreign exchange and gold reserves.

Development activities

Research and development in the banking sector.


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Current scenario and vision of Banking

The financial system is the lifeline of the economy. The changes in the economyget mirrored in the performance of the financial system, more so of the banking

industry. The Committee, therefore felt, it would be desirable to look at the

direction of growth of the economy while drawing the emerging contours of the

financial system. The India Vision 2020"prepared by the Planning

Commission, Government of India, is an important document, which is likely to

guide the policy makers, in the years to come. The Committee has taken into

consideration the economic profile drawn in India Vision 2020 document while

attempting to visualize the future landscape of banking Industry.

India Vision 2020 envisages improving the ranking of India from the present

11th

to 4th

among 207 countries given in the World Development Report in

terms of the Gross Domestic Product (GDP). It also envisages moving the

country from a low-income nation to an upper middle-income country. To

achieve this objective, the India Vision aims to have an annual growth in the

GDP of 8.5 per cent to 9 per cent over the next 20years. Economic development

of this magnitude would see quadrupling of real per capita income. When

compared with the average growth in GDP of 4-6% in the recent past, this is an

ambitious target. This would call for considerable investments in the

infrastructure and meeting the funding requirements of a high magnitude would

be a challenge to the banking and financial system.


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India Vision 2020 sees a nation of 1.3 billion people who are better educated,

healthier, and more prosperous. Urban India would encompass40% of the

population as against 28 % now. With more urban conglomerations coming up,

only 40% of population would be engaged in agricultural sector as against

nearly two thirds of people depending on this sector for livelihood. Share of

agriculture in the GDP will come down to 6% (down from 28%). Services

sector would assume greater prominence in our economy. The shift in

demographic profile and composition of GDP are significant for strategy

planners in the banking sector.

Small and Medium Enterprises (SME) sector would emerge as a major

contributor to employment generation in the country. Small Scale sector had

received policy support from the Government in the past considering the

employment generation and favorable capital-output ratio. This segment had,

however, remained vulnerable in many ways. Globalization and opening up of

the economy to international competition has added to the woes of this sector

making bankers wary of supporting the sector. It is expected that the SME

sector will emerge as a vibrant sector, contributing significantly to the GDP

growth and exports.

Indias share in International trade has remained well below 1%. Being not an

export led economy (exports remaining below 15% of the GDP), we haveremained rather insulated from global economic shocks. This profile will

undergo a change, as we plan for 8-9% growth in GDP .Planning Commission

report visualizes a more globalised economy. Our international trade is

expected to constitute 35% of the GDP.


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In short, the Vision of India in 2020 is of a nation bustling with energy,

entrepreneurship and innovation. In other words, we hope to see market-driven,

productive and highly competitive economy. To realize the above objective, weneed a financial system, which is inherently strong, functionally diverse and

displays efficiency and flexibility. The banking system is, by far, the most

dominant segment of the financial sector, accounting for as it does, over 80% of

the funds flowing through the financial sector. It should, therefore, be our

Endeavour to develop a more resilient, competitive and dynamic financial

system with best practices that supports and contributes positively to the growth

of the economy.

The ability of the financial system in its present structure to make available

investible resources to the potential investors in the forms and tenors that will

be required by them in the coming years, that is, as equity, long term debt and

medium and short-term debt would be critical to the achievement of plan

objectives.


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Types of bank

There are various types of banks which operate in our country to meet the

financial requirements of different categories of people engaged in agriculture,business, profession, etc. On the basis of Functions, the banking institutions in

India may be divided into the following types:

2.1Central bankA central bank, reserve bank, ormonetary authority is a public institution

that manages the nation's currency, money supply, and interest rates. Central

banks also usually oversee the commercial banking system of their respective

countries. In contrast to a commercial bank, a central bank possesses amonopoly on increasing the nation's monetary base, and usually also prints the

national currency, which usually serves as the nation's legal tender. Examples

include the European Central Bank (ECB), the Federal Reserve of the United

States, and the People's Bank of China.

The primary function of a central bank is to manage the nation's money supply

(monetary policy), through active duties such as managing interest rates, setting

the reserve requirement, and acting as a lender of last resort to the banking

sectorduring times of bank insolvency orfinancial crisis. Central banks usually

also have supervisory powers, intended to prevent commercial banks and other

financial institutions from reckless or fraudulent behavior. Central banks in

most developed nations are institutionally designed to be independent from

political interference.

2.2 Commercial Banks

Commercial Banks are banking institutions that accept deposits and grantshort-term loans and Advances to their customers. In addition to giving short-

term loans, commercial banks also give Medium-term and long-term loan to

business enterprises. Now-a-days some of the commercial Banks are also

providing housing loan on a long-term basis to individuals. There are also many

other functions of commercial banks, which are discussed later in this lesson.
http://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Monetary_basehttp://en.wikipedia.org/wiki/Legal_tenderhttp://en.wikipedia.org/wiki/European_Central_Bankhttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Lender_of_last_resorthttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Financial_crisishttp://en.wikipedia.org/wiki/Financial_crisishttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Lender_of_last_resorthttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/European_Central_Bankhttp://en.wikipedia.org/wiki/Legal_tenderhttp://en.wikipedia.org/wiki/Monetary_basehttp://en.wikipedia.org/wiki/Commercial_bank


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Types of Commercial banks: Commercial banks are of three types i.e., Public

sector banks, Private sector banks and foreign banks.

Graph - 1

Reserve Bank of India

[Central Bank]

Scheduled Banks

Scheduled Co-operative

Banks

Scheduled

Commercial Banks

Public SectorBanks

Nationalized

Banks

SBI & its

Associates

Private Sector

Banks

Old PrivateSectorBanks

Foreign

Banks

Development

Banks

Scheduled Urban

Co-Operative

Banks

Scheduled State

Co-OperativeBanks

New Private

Sector Banks


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(i) Public Sector Banks: These are banks where majority stake is held by the

Government of India or Reserve Bank of India. Examples of public sector banks

are: State Bank of India,

(ii) Private Sectors Banks: In case of private sector banks majority of share

capital of the Bank is held by private individuals. These banks are registered as

companies with limited Liability. For example: The Jammu and Kashmir Bank

Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna

Bank Ltd., Bharat Overseas Bank Ltd.,Global Trust Bank, Vysya Bank, etc.

(iii) Foreign Banks: These banks are registered and have their headquarters in a

foreign country but operate their branches in our country. Some of the foreign

banks operating in our country are Hong Kong and Shanghai Banking

Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered

Bank, Grindlays Bank, etc. The number of foreign banks operating in our

country has increased since the financial sector reforms of 1991.

iv) Development Banks

Business often requires medium and long-term capital for purchase of

machinery and equipment,

Development Banks

Industrial Development Bank of India (IDBI)

Industrial Finance Corporation of India (IFCI)

Export - Import Bank of India (Exim Bank)

Industrial Reconstruction Bank of India (IRBI) now

(Industrial Investment Bank of India)

National Bank for Agriculture and Rural Development

(NABARD)

Small Industries Development Bank of India (SIDBI)

National Housing Bank (NHB)
http://www.idbi.com/http://www.idbi.com/http://www.ifciltd.com/http://www.ifciltd.com/http://www.eximbankindia.com/http://www.eximbankindia.com/http://www.nabard.org/http://www.nabard.org/http://www.nabard.org/http://www.nabard.org/http://www.nabard.org/http://www.sidbi.com/http://www.sidbi.com/http://www.sidbi.com/http://www.nabard.org/http://www.nabard.org/http://www.eximbankindia.com/http://www.ifciltd.com/http://www.idbi.com/


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2.3. Co-operative Banks

People who come together to jointly serve their common interest often form a

co-operative Society under the Co-operative Societies Act. When a co-operative

society engages itself in banking business it is called a Co-operative Bank. Thesociety has to obtain a license from the Reserve Bank of India before starting

banking business. Any co-operative bank as a society is to function under the

overall supervision of the Registrar, Co-operative Societies of the State. As

regards banking business, the society must follow the guidelines set and issued

by the Reserve Bank of India.

Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are

primary credit societies, central co-operative banks and state co-operative

banks. These banks are organized at three levels, village or town level, district

level and state level.

(i) Primary Credit Societies: These are formed at the village or town level with

borrower and non-borrower members residing in one locality. The operations of

each society are restricted to a small area so that the members know each other

and are able to watch over the activities of all members to prevent frauds.

(ii) Central Co-operative Banks: These banks operate at the district level

having some of the primary credit societies belonging to the same district as

their members. These banks provide loans to their members (i.e., primary credit

societies) and function as a link between the primary credit societies and state

co-operative banks.


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(iii) State Co-operative Banks: These are the apex (highest level) co-operative

banks in all The states of the country. They mobilize funds and help in its

proper channelization among Various sectors. The money reaches the individual

borrowers from the state co-operative Banks through the central co-operative

banks and the primary credit societies

2.4 Scheduled Banks

Scheduled Banks in India are those banks which have been included in theSecond Schedule of Reserve Bank of India (RBI) Act, 1934.[1] RBI in turn

includes only those banks in this schedule which satisfy the criteria laid down

vide section 42 (6) (a) of the Act.

2.5 Non-scheduled bank in India

"Non-scheduled bank in India" means a banking company as defined in clause

(c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not

a scheduled bank.
http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Scheduled_banks#cite_note-0http://en.wikipedia.org/wiki/Scheduled_banks#cite_note-0http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/India


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Chapter 2Introduction

Of the topic


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Introduction of Trade Finance

Trade Finance has been reviewing the global trade market since 1983. The remit

of what we cover is somewhat broad, and as the market evolves to meet the

requirements of financing global trade, so our content has changed.

It is comes into picture when exporter and importer want to trade with a low

cost of transaction and with no risk of their money. Exporters will usually

require financing to manufacture product conversely importers need line ofcredit to buy goods overseas and sell in domestic market.

A seller can require the purchaser to prepay for goods shipped, the purchaser

may wish to reduce risk by requiring the seller to document the goods that havebeen shipped. Banks may assist by providing various forms of support. For

example, the importer's bank may provide a letter of credit to the exporter (orthe 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.

Other forms of trade finance can include Documentary collection, trade creditinsurance, export factoring, and forfaiting. Some forms are specifically designed

to supplement traditional financing. 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.

Since secure trade finance depends on verifiable and secure tracking of physical

risks and events in the chain between exporter and importer, the advent of new

methodologies in the information systems world has allowed the development

of risk mitigation models which have developed into new advanced finance

models. This allows very low risk payment advances to exporters to be made,while preserving the importers normal payment credit terms and without

burdening the importers balance sheet.
http://en.wikipedia.org/wiki/Shippinghttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Letter_of_credithttp://en.wikipedia.org/wiki/Bill_of_ladinghttp://en.wikipedia.org/wiki/Documentary_collectionhttp://en.wikipedia.org/wiki/Trade_credit_insurancehttp://en.wikipedia.org/wiki/Trade_credit_insurancehttp://en.wikipedia.org/wiki/Factoring_(finance)http://en.wikipedia.org/wiki/Forfaitinghttp://en.wikipedia.org/wiki/Export_credit_agencyhttp://en.wikipedia.org/wiki/Export_credit_agencyhttp://en.wikipedia.org/wiki/Forfaitinghttp://en.wikipedia.org/wiki/Factoring_(finance)http://en.wikipedia.org/wiki/Trade_credit_insurancehttp://en.wikipedia.org/wiki/Trade_credit_insurancehttp://en.wikipedia.org/wiki/Documentary_collectionhttp://en.wikipedia.org/wiki/Bill_of_ladinghttp://en.wikipedia.org/wiki/Letter_of_credithttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Shipping


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RISKS ASSOCIATED WITH TRADE

FINANCING

Credit Risk

Foreign Currency Translation Risk

Transaction Risk

Reputation Risk

Strategic Risk

We have to discuss the risk associate with trade finance in detail.

Definition of 'Credit Risk'

The risk of loss of principal or loss of a financial reward stemming from a

borrower's failure to repay a loan or otherwise meet a contractual obligation.

Credit risk arises whenever a borrower is expecting to use future cash flows to

pay a current debt. Investors are compensated for assuming credit risk by wayof interest payments from the borrower or issuer of a debt obligation.Credit risk

is closely tied to the potential return of an investment, the most notable being

that the yields on bonds correlate strongly to their perceived credit risk.

Investopedia explains 'Credit Risk'

The higher the perceived credit risk, the higher the rate of interest that investorswill demand for lending their capital. Credit risks are calculated based on the

borrowers' overall ability to repay. This calculation includes the borrowers'

collateral assets, revenue-generating ability and taxing

Credit risks are a vital component of fixed-income investing, which is why

ratings agencies such as S&P, Moody's and Fitch evaluate the credit risks of

thousands of corporate issuers and municipalities on an ongoing basis


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Definition of 'Translation Risk'

The exchange rate risk associated with companies that deal in foreign currenciesor list foreign assets on their balance sheets. The greater the proportion of asset,

liability and equity classes denominated in a foreign currency, the greater the

translation risk.

Investopedia explains 'Translation Risk'

This poses a serious threat for companies conducting business in foreign

markets. Exchange rates usually change between quarterly financial statements,

causing significant variances between the reported figures. Companies attemptto minimize these transaction risks by purchasing currency swaps or hedging

through futures contracts.

Definition of 'Transaction Risk'

The exchange rate risk associated with the time delay between entering into a

contract and settling it. The greater the time differential between the entrance

and settlement of the contract, the greater the transaction risk, because there is

more time for the two exchange rates to fluctuate.

Investopedia explains 'Transaction Risk'

Transaction risk creates difficulties for individuals and corporations dealing in

different currencies, as exchange rates can fluctuate significantly over a short

period of time. This volatility is usually reduced, or hedged, by entering into

currency swaps and other similar securities.


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Banks are providing such trade financing

instruments like:

- Letter of credit- Pre shipment financing/post shipment - financing

- Buyers credit/suppliers credit

- loan for import/export

- Advance payment guarantee

-Foreign bill discounting

-payment guarantee

-performance guarantee

-Guarantee for release of retention money-Guarantee for raising borrowing overseas

We are discuss services in detail

Definition of 'Letter Of Credit'

A letter from a bank guaranteeing that a buyer's payment to a seller will be

received on time and for the correct amount. In the event that the buyer is

unable to make payment on the purchase, the bank will be required to cover thefull or remaining amount of the purchase

Investopedia explains 'Letter Of Credit'

Letters of credit are often used in international transactions to ensure that

payment will be received. Due to the nature of international dealings including

factors such as distance, differing laws in each country and difficulty in

knowing each party personally, the use of letters of credit has become a very

important aspect of international trade. The bank also acts on behalf of the

buyer (holder of letter of credit) by ensuring that the supplier will not be paid

until the bank receives a confirmation that the goods have been shipped


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Letter of Credit - Meaning and Different Types of

LC

International trade between an Exporter and Importer would entail multipletransactions in terms of documentation exchange, physical cargo movement

as well as settlement of payment which have to be clearly defined and setup

in order to ensure smooth business transaction.Over the years international

trade has established various methods and payment mechanisms that are

accepted globally by all financial institutions and other related parties.

Normally when the Customer is new to the Exporter, the businesstransactions are done either based on advance payment or Letter of Creditoption. LC is one of the safest mechanisms available for an Exporter to

ensure he gets his payment correctly and the importer is also assured of the

Exporters adherence to his requirement in terms of quality, quantity, shipping

instructions as well as documentation etc.

A letter of Credit is the Buyers Bankers promise to the Bank of the Seller /

Exporter that the bank will honor the Invoice presented by the Exporter ondue date and make payment, provided that the Seller/Exporter has compliedwith all the requirements and conditions set by the Importer in the said letter

of credit or the Buyers Purchase Order and produced documentary evidence

to prove compliance, along with the necessary shipment related

documentation.


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Confirmed Letter of Credit

A Letter of Credit is always sent by the Buyers bank to the Sellers Bank or

any bank that is becomes an advising bank. Normally the Sellers bank becomesan advising bank when a normal LC is received and it delivers or advises the

buyer regarding the receipt of LC with no responsibility towards it. In case of aConfirmed LC, the Sellers bank checks out the authentication of the LC from

the Buyers bank and confirms to stand responsible for negotiating, collecting

payment from the Buyers bank and making payment to the seller in line with

the terms and conditions stipulated in the LC. By adding confirmation to the

LC, the Sellers bank too becomes equally responsible to make payment for thetransaction under the LC.

Revocable and Irrevocable Letter of Credit

Normally the Letter of Credits issued is irrevocable, which means that no single

party can unilaterally make any changes to the LC, unless it is mutually

agreeable to both the parties involved. However an LC is said to be revocable if

the terms allow any one single party to be able to make changes to the LC

unilaterally.

Sight LC

When the LC is opened, stipulating the condition that, on presentation of thenegotiable set of shipping document by the seller as per the terms of the LC are

made, the buyers bank will make payment at sight meaning immediately to the

sellers bank subject to fulfillment of terms and conditions of the LC being

fulfilled, the LC is called Sight LC .

Future or Credit LC


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If the payment schedule under the said LC stipulates payment at certain future

dates after presentation of negotiable set of shipping documents by the Seller

and fulfilling the LC terms and conditions, such an LC is termed Future LC or

Credit LC. It is quite normal for sellers to extend credit of 30 days to 60 days

under LCs. However the shipping documents would have to be presented to thebank immediately so that they documents reach the buyer well ahead in timebefore the consignment reaches the foreign shores and the buyer is able to clear

the consignment and take delivery

DEFINITION:

Financial assistance extended to the exporter from the date of receipt of the

export order till the date of shipment is known as pre-shipment credit. Suchfinance is extended to an exporter for the purpose of procuring raw materials,processing, packing, transporting, warehousing of goods meant for exports.

IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE:

To purchase raw material, and other inputs to manufacture goods.

To assemble the goods in the case of merchant exporters.

To store the goods in suitable warehouses till the goods are shipped.

To pay for packing, marking and labelling of goods.

To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and

other capital goods to produce export goods.

To pay for consultancy services.

To pay for export documentation expenses.


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FORMS OR METHODS OF PRE-SHIPMENT FINANCE:

1. Cash Packing Credit Loan:

In this type of credit, the bank normally grants packing credit advantage initiallyon unsecured basis. Subsequently, the bank may ask for security.

2. Advance Against Hypothecation:

Packing credit is given to process the goods for export. The advance is given

against security and the security remains in the possession of the exporter. Theexporter.

DEFINITION:

Credit facility extended to an exporter from the date of shipment of goods tillthe realization of the export proceeds is called Post-shipment Credit.

IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE:

To pay to agents/distributors and others for their services.

To pay for publicity and advertising in the over seas markets.

To pay for port authorities, customs and shipping agents charges.

To pay towards export duty or tax, if any.

To pay towards ECGC premium.

To pay for freight and other shipping expenses.

To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service.

To pay towards such expenses regarding participation in exhibitions and

trade fairs in India and abroad.

To pay for representatives abroad in connection with their stay board.


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FORMS/METHODS OF POST SHIPMENT FINANCE

Export bills negotiated under L/C: The exporter can claim post-

shipment finance by drawing bills or drafts under L/C. The bank insists

on necessary documents as stated in the L/C. if all documents are inorder, the bank negotiates the bill and advance is granted to the exporter.

Purchase of export bills drawn under confirmed contracts: The banksmay sanction advance against purchase or discount of export bills drawn

under confirmed contracts. If the L/C is not available as security, the bankis totally dependent upon the credit worthiness of the exporter.

Advance against bills under collection: In this case, the advance isgranted against bills drawn under confirmed export order L/C and which

are sent for collection. They are not purchased or discounted by the bank.

However, this form is not as popular as compared to advance purchase ordiscounting of bills.

Advance against claims of Duty Drawback (DBK): DBK means refund

of customs duties paid on the import of raw materials, components, parts

and packing materials used in the export production. It also includes a

refund of central excise duties paid on indigenous materials. Banks offerpre-shipment as well as post-shipment advance against claims for DBK.

Advance against Undrawn Balance of Bills: There are cases where bills

are not drawn to the full invoice value of gods. Certain amount isundrawn balance which is due for payment after adjustments due to

difference in rates, weight, quality etc. banks offer advance against suchundrawn balances subject to a maximum of 5% of the value of export andan undertaking is obtained to surrender balance proceeds to the bank.


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Buyers Credit

Buyers Credit refers to loans for payment of imports into India arranged onbehalf of the importer through an overseas bank. The offshore branch credits the

nostro of the bank in India and the Indian bank uses the funds and makes the

payment to the exporter bank as an import bill payment on due date. Theimporter reflects the buyers credit as a loan on the balance sheet.

Benefits of Buyers Credit:

The benefits of buyers credit for the importer is as follows:

The exporter gets paid on due date; whereas importer gets extended date

for making an import payment as per the cash flows

The importer can deal with exporter on sight basis, negotiate a better

discount and use the buyers credit route to avail financing.

The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.)

depending on the choice of the customer.The importer can use thisfinancing for any form of trade viz. open account, collections, or LCs.

Suppliers Credit

Suppliers Credit relates to credit for imports into India extended by the

overseas suppliers or financial institutions outside India.

Usance Bills under Letter of Credit (LC) issued by Indian bank branches onbehalf of their importers are discounted by Indian bank overseas branches orForeign bank. Paying your suppliers at sight against Usance bills under letter of

credits.


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Why Required?

Suppliers would ask for sight payment where as you want credit on the

transaction.

At times, in capital goods, banks would insist on using term loan insteadof buyers credit. By this way you can avail cheap LIBOR rate funds andyour supplier would also not mind as he is getting funds at sight.

Benefits / Advantages

For Importer

Availability of cheaper funds for import of raw materials and capital

goods

Ease short-term fund pressure as able to get credit

Ability to negotiate better price with suppliers Able to meet the Suppliers requirement of payment at sight

For Supplier

Realize at-sight payment Avoid the risk of importers credit by making settlement with LC

Foreign Bill Discounting

This facility enables an organization to pledge its foreign receivables to a bank

in return for immediate cash facility. A bank will hold an organizations

receivables as collateral and provide the pledged amount with an agreed

markup. This fulfills an organizations immediate cash requirements. Due to

speculation on currency conversions, mark-up rates are usually higher onforeign bill discounting


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Chapter 3

Research

Methodology


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Research Methodology

OBJECTIVE:

-To study the Trade financing activity in banks.

-To study the customers satisfaction level in trade finance with particular bank.

-To study the customer preference and awareness level in selecting the trade

financing instruments.

DATA COLLECTION:

-Primary data: primary data has been collected from the banks customers

through questionnaires.

-Secondary data: Websites ,newspapers.

SAMPLE SIZE:

20 questionnaire of leading import export organization

LIMITATIONS:

Time constraint.

Data were not easily revealed by importers and exporters.


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DataAnalysis:

1. To check the customer preference in selecting the trade

financing instruments with the scale of the organization

TRADE FINANCEINSTRUMENT

SMALL SCALE MIDIUM SCALE LARGE SCALE

Letter of credit 07 08 05

BUYER'S CREDIT/SUPPLIER'SCREDIT

01 02 02

PRE SHIPMENT CREDIT/POSTSHIPMENT CREDIT

00 02 01

LOAN FOR IMPORT/EXPORT 00 00 01

FOREIGN BILLDISCOUNTING

03 05 04

ADVANCE PAYMENTGURANTEE

00 01 01

PERFORMANCE GUARANTEE 00 00 00

GUARANTEE FOR RELEASEOF RETENTION MONEY

00 00 00

GUARANTEE FOR RAISINGBORROWING OVERSEAS

00 00 00

OTHER GUARANTEES 00 00 00


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2. To check the awareness level of the customers in import export

services with reference to banks

1. What kind of business are you in to?

Interpretation

From above chart exporter have major role as compare to importer.

Exporters stake are 16% ,importers stake 1.5%, importer and exporter

are 3%

0

2

4

6

810

12

14

16

Exports Imports Import and

Export

No. Of organization


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2. What is the size of turnover in organization?

Interpretation

Medium scales turnover is higher than small scale and large scale .Small

scales stake is 7% ,medium scales stake is 8% and large scales stake is 5%

0

2

4

6

8

Small

Scale

Medium

Scale

Large

Scale

No of organization


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3) What financial intermediaries do you take the support for conducting

your business?

No. Intermediaries No. Of intermediaries

1. Banks 20

2. Agents/Agency Nill

3. NBFC Nill

4. Moneylender Nill

Interpretation

All the import export organization using only banking services .


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4. Which of the following services do you use?

Services No. Of services

L/C 20

Buyers /suppliers credit 5

Reshipment 4

Loan for import/export 4

Foreign bill discounting 1

Advance payment guarantee 12

Performance guarantee 0

Guarantee for release money 1

Guarantee for raising borrowing

overseas

0

Other guarantee 0

Interpretation

Customer are in import export organization mostly using 3 to 4 services like LC

,advance payment guaranty and post reshipment .


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5. Are you satisfied with the services you use?

Interpretation

Most customer are satisfied with the services they use for their business .

0

2

4

6

8

10

12

14

16

18

Yes No

No. Of organization


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6. If no, what are the problems that you are facing?

Interpretation

Most of customer facing the problem regarding in delay in obtaining funds .

0

0.5

1

1.5

2

No. Of organization

Lack of concentrated

services

Delay in obtaining

funds

Overrated charges


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7. Is organization keeping watch on forex market?

Interpretation

Most of the organisation always watching on the forex market.

0

5

10

15

20

Yes No

No. Of

organization


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8. Is organization comparing rates of different banks?

Interpretation

16 % organisation compare the rates of the different banks while making

transaction with them where other 5% organisation are not comparing the rates

.

0

2

4

6

8

10

12

14

16

Yes No

No. Of organization


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9. How do you hedge your transaction to avoid risk?

Interpretation

Forward is the best option to avoid the risk during the transaction so most of the

organization using the forward contract to avoid the transaction risks .

0

2

4

6

8

10

12

14

16

18

Forward contract o tions

No. Of

organization


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10. Do you really need other trade finance activities which are not available

right now?

Interpretation

Customer is not ready to use other services because they are satisfied with the

service they use for the transaction with bank.

0

5

10

15

20

Yes No

No. Of organization


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FINDINGS

It is found from organization that at times the banks with whom they

deal are also confused and have to consult their head offices due to

unawareness existing at branch level.

Organizations are satisfied with banks they are dealing with but still

need good services so that they can do business smoothly.

Several organizations have committed that foreign exchange aspects

of business is a neglect area by them, different reasons being lack of

awareness and knowledge, absence of professional employee.

Public sector banks are still believed that they are doing good

business in recession and they hope that boom take place


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Conclusion


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BIBLIOGRAPHY

Websites

www.sbi.com

www.rbi.org.in

www.bankofbaroda.com

www.forex.com
http://www.sbi.com/http://www.sbi.com/http://www.rbi.org.in/http://www.rbi.org.in/http://www.bankofbaroda.com/http://www.bankofbaroda.com/http://www.forex.com/http://www.forex.com/http://www.forex.com/http://www.bankofbaroda.com/http://www.rbi.org.in/http://www.sbi.com/


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Gp Presentation(Imtiyaz)

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