TRADE FINANCE IN INDIA 2018 - PWC

 
TRADE FINANCE IN INDIA 2018 - PWC
Trade
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finance
in India
2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                        Introduction to   Need for    Trade    Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
                         international     trade     finance   of international trade   receiving payments   Buyer’s      credit in foreign        and        Case
                             trade        finance    methods        transactions          internationally     credit      currency (PCFC)       factoring    studies   Contacts
                       Introduction to
                        international
                            trade

International trade
Introduction
•• International trade is the exchange of capital,
   goods and services across international borders or
   territories.
•• It allows both buyers and sellers to expand their
   markets for goods and services that otherwise may
   not be made available to them.
•• All countries have different assets or strengths
   in terms of land, labour, capital, technology and
   natural resources. Hence, most countries usually
   focus on those products and services in which
   they possess a comparative or absolute advantage
   through specialisation. However, such specialisation
   may result in excess production capacity for certain
   goods and services and also result in an opportunity
   cost in terms of inadequate production of other
   goods and services.
•• It reduces dependency on the domestic market by
   expanding customers’ demand in other countries.
•• It enhances economic growth and contributes
   significantly to the country’s gross domestic product.
•• International trade presupposes the existence of a
   sufficient level of geopolitical peace and stability to
   facilitate smooth trade between nations.

2   PwC                                                                                                                                               Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                      Introduction to               Trade    Timeline and structure       Making and                  Pre- and post-shipment   Forfaiting
                       international               finance   of international trade   receiving payments    Buyer’s      credit in foreign        and        Case
                           trade                   methods        transactions          internationally      credit      currency (PCFC)       factoring    studies   Contacts
                                        Need for
                                         trade
                                        finance

International trade

    The trade dilemma

     A
                             1. The exporter ships the goods.

           Importer              Importer’s preference                  Importer
                                                                                                           •• International trade must work around a
                                                                                                              fundamental dilemma.
                      2. The importer pays after goods are received.
                                                                                                           •• Imagine an importer and an exporter who would
                                                                                                              like to do business with one another.
                                                                                                           •• Due to the distance between the two, it is not
                                                                                                              possible to simultaneously hand over goods with
                                                                                                              one hand and accept payment with the other.
     B                                                                                                     •• The importer would prefer arrangement ‘A’,
                            1. The importer pays for the goods.                                               portrayed at the top of the adjacent figure, while
                                                                                                              the exporter’s preference, ‘B’, is shown at the
                                                                                                              bottom of the figure.
           Importer              Exporter’s preference                  Importer

                             2. The exporter ships the goods.

3   PwC                                                                                                                                              Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                        Introduction to                  Trade    Timeline and structure         Making and                 Pre- and post-shipment   Forfaiting
                         international                  finance   of international trade     receiving payments   Buyer’s      credit in foreign        and        Case
                             trade                      methods        transactions            internationally     credit      currency (PCFC)       factoring    studies   Contacts
                                           Need for
                                            trade
                                           finance

International trade

      Bank as an intermediary
     Introduction             for import/export
                    to international  trade
                                                                                                                      •• The fundamental dilemma of being
                                  1. The importer obtains the bank’s                                                     unwilling to trust a stranger in a foreign
                                     promise to pay on its behalf.                                                       land is solved by using a bank as an
                                                                                                                         intermediary. A simplified view of such a
             Importer                                                                                                    structure is presented alongside.
                                                                                                                      •• The importer obtains the bank’s promise to
                                                                                                                         pay on its behalf, knowing that the exporter
                     6. The importer                                   2. The bank promises the
                        pays the bank.
                                                                                                                         will trust the bank. The bank’s promise to
                                                                          exporter it will pay on
                                                                                                                         pay is called a letter of credit.
                                                                          behalf of the importer.
                                                                                                                      •• The exporter ships the merchandise
                                                 Bank                                                                    to the importer’s country. Title to the
          5. The bank ‘gives’                                                                                            merchandise is given to the bank on a
             merchandise to                                                                                              document called an order bill of lading.
             the importer.                                4. The bank pays                                               The exporter asks the bank to pay for the
                                                             the exporter.                                               goods, and the bank does so.
                                                                                                                      •• The bank, having paid for the goods, now
                                                                                                                         passes title to the importer, whom the bank
                                                                                  Exporter                               trusts. At that time or later, depending on
                                          3. The exporter ships ‘to                                                      their agreement, the importer reimburses
                                             the bank’, trusting the                                                     the bank.
                                             bank’s promise.

4   PwC                                                                                                                                                    Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                 Introduction to               Trade    Timeline and structure        Making and                 Pre- and post-shipment   Forfaiting
                  international               finance   of international trade    receiving payments   Buyer’s      credit in foreign        and        Case
                      trade                   methods        transactions           internationally     credit      currency (PCFC)       factoring    studies   Contacts
                                   Need for
                                    trade
                                   finance

International trade
    Benefits of the system
                                    •• Once the importer and exporter agree on terms, the seller usually prefers to maintain legal title to the goods until paid, or at
                                       least until assured of payment.
    Protection
                                    •• The buyer, however, will be reluctant to pay before receiving the goods, or at least before receiving title to them.
    against risk of                 •• Each wants assurance that the other party will complete its portion of the transaction.
    non-completion                  •• The letter of credit, sight draft and bill of lading are part of a system carefully constructed to determine who bears the
                                       financial loss if one of the parties defaults at any time.

                                    •• In international trade, foreign exchange risk arises from transaction exposure.
    Protection                      •• If the transaction requires payment in the exporter’s currency, the importer carries the foreign exchange risk. If the
    against foreign                    transaction calls for payment in the importer’s currency, the exporter has the foreign exchange risk.
    exchange risk                   •• Transaction exposure can be hedged; but in order to hedge, the exposed party must be certain that payment of a specified
                                       amount will be made on a particular date.

                                    •• Most international trade involves a time lag during which funds are tied up while the merchandise is in transit.
    Financing                       •• Once the risks of non-completion and exchange rate changes are disposed of, banks are willing to finance goods in transit.
    the trade                       •• A bank can finance goods in transit, as well as goods held for sale, based on the key documents, without exposing itself to
                                       questions about the quality of the merchandise or other physical aspects of the shipment.

5   PwC                                                                                                                                         Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                          Introduction to   Need for             Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
                           international     trade               of international trade   receiving payments   Buyer’s      credit in foreign        and        Case
                               trade        finance                   transactions          internationally     credit      currency (PCFC)       factoring    studies   Contacts
                                                        Trade
                                                       finance
                                                       methods

Overview of trade finance methods

                      Buyer’s                   Pre-shipment
                       credit                       credit

                                Trade finance
          Letter of                methods
           credit
                                                          Post-shipment
                                                              credit

                                   Forfaiting
                                      and
                                   factoring

6   PwC                                                                                                                                                 Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                         Introduction to   Need for    Trade                                Making and                  Pre- and post-shipment   Forfaiting
                          international     trade     finance                           receiving payments    Buyer’s      credit in foreign        and        Case
                              trade        finance    methods   Timeline and structure internationally         credit      currency (PCFC)       factoring    studies   Contacts
                                                                 of international trade
                                                                      transactions

                                                                            Time and events

                                    Export                                                 Documents                                                   Settlement
     Price quote                                                Goods are                                                Goods are
                                   contract                                                     are                                                       of the
          request                                                shipped                                                   received
                                     signed                                                  accepted                                                  transaction

           Negotiation                         Trade execution
                                                                      Documents are
                                                                        presented

                                                                                                             Financing period

            •• In order to understand the risks associated with international trade transactions, it is helpful to understand the sequence of events.
            •• The two primary risks associated with an international trade transaction are currency risk and risk of non-completion.
            •• The risk of default on the part of the importer is present as soon as the financing period begins.

7   PwC                                                                                                                                                Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                                 Introduction to   Need for      Trade                                  Making and                    Pre- and post-shipment      Forfaiting
                                  international     trade       finance                             receiving payments    Buyer’s        credit in foreign           and                                 Case
                                      trade        finance      methods     Timeline and structure internationally         credit        currency (PCFC)          factoring                             studies   Contacts
                                                                             of international trade
                                                                                  transactions

Understanding the trade finance needs of corporates
                                         Broad stages of the business value chain during the working capital cycle
                                                                                                                                                                                                        Increased open
                                                                                                                                                                                                             account
             Procurement of raw materials                           Conversion of raw materials                                                                                                           transactions
                                                                                                                          Sale of finished goods
                                                                       into finished goods

                                                                          Trade finance needs

                                                                                                                                                                       Global trends in trade finance
                                                                                                                                                                                                         Increased use
                                                                                                                                                                                                             in the
                                                                                                                                                                                                          Asia-Pacific
                                                                                                                                                                                                             region
Fund-based

                                                                      Pre-shipment                                        Bill
                          Buyer                  Cash                                             Cash                                              Cash
  facility

                                                                     credit in foreign                               discounting/
                      credit/supplier       credit/overdraft                                 credit/overdraft                                  credit/overdraft
                                                                        currency                                     factoring/for
                          credit                facility                                         facility                                          facility
                                                                         (PCFC)                                         faiting
                                                                                                                                                                                                          Increased
                                                                                                                                                                                                         proportion of
                                                                                                                                                                                                           US dollar
                                                                                                                                                                                                            funding
based facility

                     Bank guarantee/
 Non-fund

                      standby letters           Foreign /                   Bank                 Foreign /                 Bank                    Foreign/
                         of credit           inland letter of             guarantee/           inland letter             guarantee/              inland letter
                         (SBLCs)                  credit                    SBLC                 of credit                 SBLC                    of credit

                                                                                                                                                                                                            Intense
                                Insurance protection provided by the Export Credit Guarantee Corporation of India Limited                                                                                 competition
                                                                                                                                                                                                            among
                 Trade finance plays two pivotal roles—providing working capital tied to and in support of international trade transactions                                                                  banks
                                                      and providing means of reducing payment risk.

8    PwC                                                                                                                                                                           Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                 Introduction to   Need for    Trade    Timeline and structure                                  Pre- and post-shipment   Forfaiting
                  international     trade     finance   of international trade                        Buyer’s      credit in foreign        and        Case
                      trade        finance    methods        transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                                 receiving payments
                                                                                   internationally

Payment instruments in international trade
    Clean payments

                                    •• ‘Clean payments’ are characterised by trust. Either the exporter sends the goods and trusts the importer to pay once the
    What is a clean                    goods have been received, or the importer trusts the exporter to send the goods after payment is effected.
    payment?                        •• In the case of clean payment transactions, all shipping documents, including title documents, are handled directly by the
                                       trading parties. The role of banks is limited to clearing funds as required.

                                    •• There are two types of clean payments: Open account and payment in advance. The payment in advance and open account
    Basic facts and                    schematics vary only in the order in which events take place.
    mechanics                       •• Open account: The importer is trusted to pay the exporter after receipt of the goods. The exporter ships the goods and
    pertaining to clean                documents directly to the importer and waits for the importer to send payment.
                                    •• Payment in advance: An arrangement whereby the exporter is trusted to ship the goods after receiving payment from the
    payments                           importer. The importer sends payment directly to the exporter and waits for the exporter to send the goods and documents.

                                    Open account:                                                Payment in advance:
    Risk analysis under             •• Disadvantageous to the exporter since it                  •• Advantageous to the exporter since it takes no risks and receives
                                       assumes all the risks                                        the payment in advance
    clean payment
                                    •• Advantageous to the importer since it does                •• Disadvantageous to the importer since it assumes all the risks
    transactions                       not take any risks; delays the outflow of                    and incurs the opportunity cost of outflow of cash resources
                                       cash resources                                               before receiving the goods

9   PwC                                                                                                                                        Trade finance in India 2018
TRADE FINANCE IN INDIA 2018 - PWC
Trade finance in India 2018
                  Introduction to   Need for    Trade    Timeline and structure                                  Pre- and post-shipment   Forfaiting
                   international     trade     finance   of international trade                        Buyer’s      credit in foreign        and        Case
                       trade        finance    methods        transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                                  receiving payments
                                                                                    internationally

Payment instruments in international trade
 Clean payments

                                     •• A method of payment used in international trade whereby the exporter entrusts the handling of commercial and
 What is                                often financial documents to banks and gives the banks instructions concerning the release of these documents to the
                                        importer. The banks involved do not provide any guarantee of payment.
 documentary                         •• Collections are subject to the uniform rules for collections published by the International Chamber of Commerce (ICC)
 collection?                            under Uniform Customs and Practice for Documentary Credits (UCP) 600 and International Standby Practices
                                        (ISP) 98.

                                     •• Documentary collection may be carried out in two ways:
 Basic facts of                      •• Documents against payment: Documents are released to the importer only against payment. It is also known as a ‘sight
 documentary                            collection’ or ‘cash against documents’ (CAD).
 collection                          •• Documents against acceptance: Documents are released to the importer only against acceptance of a draft/bill of
                                        exchange. It is also known as ‘term collection’.

10 PwC                                                                                                                                          Trade finance in India 2018
Trade finance in India 2018
                     Introduction to   Need for    Trade       Timeline and structure                                  Pre- and post-shipment   Forfaiting
                      international     trade     finance      of international trade                        Buyer’s      credit in foreign        and        Case
                          trade        finance    methods           transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                                        receiving payments
                                                                                          internationally

Payment instruments in international trade
 Documentary collection

                               Flow of goods                      Flow of documents                                                                   Flow of payment
                               •• After the importer              •• After the goods are shipped, documents originating with the exporter (e.g.•• Payment is
                                  and the exporter                   commercial invoice) and the transport company (e.g. bill of lading) are      forwarded to the
                                  have established a                 delivered to a bank, called the remitting bank in the collection process.    remitting bank
 Mechanics                        contract and agree on                                                                                           for the exporter’s
                                                                  •• The role of the remitting bank is to send these documents accompanied
 pertaining to                    documentary collection             by a collection instruction giving complete and precise instructions to a    account. And
                                  as the method of                                                                                                the importer
 documentary                      payment, the exporter
                                                                     bank in the importer’s country, referred to as the collecting/presenting
                                                                                                                                                  can now present
                                                                     bank in the collection process.
 collection                       ships the goods. In                                                                                             the transport
                                  documentary collection,         •• The collecting/presenting bank acts in accordance with the instructions      document to the
                                  the importer is known              given in the collection instruction and releases the documents to the        carrier in exchange
                                  as the ‘drawee’ and the            importer against payment or acceptance, according to the remitting           for the goods.
                                  exporter, as the ‘drawer’.         bank’s collection instructions.

         Legend: Flow of goods,
         documents and payment               Exporter/drawer                  1                                                                 Remitting bank

                                                                                                                                    3                              2
               Flow of goods
                                                                                                                                            2
               Flow of documents                                              1

               Flow of payment                                                                                                                    Presenting/
                                             Importer/drawee                                                                    3               collecting bank

11 PwC                                                                                                                                                Trade finance in India 2018
Trade finance in India 2018
                 Introduction to   Need for    Trade     Timeline and structure                                  Pre- and post-shipment   Forfaiting
                  international     trade     finance    of international trade                        Buyer’s      credit in foreign        and        Case
                      trade        finance    methods         transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                                  receiving payments
                                                                                    internationally

Payment instruments in international trade
 Documentary collection

                          Documents against payment (D/P)                                   Documents against acceptance (D/A)
                          Advantages to exporter:                                           Advantages to exporter:
                          •• Documents are not released to the importer until               •• Less costly than a letter of credit
                             payment has been effected                                      •• May provide formal/legal means to collect unpaid obligation
                          •• Less costly than a letter of credit
                                                                                            Disadvantages to exporter:
                          Disadvantages to exporter:                                        •• Risk of non-acceptance of documents
 Risk analysis            •• Risk of refusal of payment                                     •• Commercial risk and country risk remain
 under                    •• Commercial risk and country risk remain                        •• Although bill of exchange/draft is accepted by the importer, there
 documentary              Advantages to importer:                                              is no guarantee of payment by the banks involved
 collection               •• Ability to examine documents before authorising                •• Legal enforcement of unpaid obligation is costly and time-
                             payment                                                           consuming
                          •• Unlike a letter of credit, a line of credit is not             Advantages to importer:
                             required, and fees are minimal                                 •• Will receive goods before having to make payment
                          Disadvantages to importer:                                        Disadvantages to importer:
                          •• In the case that transport documents carry title,              •• Dishonouring an accepted draft is a legal liability and may ruin
                             cannot access goods until payment has been made                   business reputation

12 PwC                                                                                                                                          Trade finance in India 2018
Trade finance in India 2018
                Introduction to    Need for    Trade    Timeline and structure                                  Pre- and post-shipment   Forfaiting
                 international      trade     finance   of international trade                        Buyer’s      credit in foreign        and        Case
                     trade         finance    methods        transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                                 receiving payments
                                                                                   internationally

Payment instruments in international trade
 Letters of credit
                         •• A letter of credit is a written undertaking by the importer’s bank (issuing bank) on behalf of its customer, the importer
                            (applicant), promising to effect payment in favour of the exporter (beneficiary) up to a stated sum of money, within a
                            prescribed time limit and against stipulated documents.

 What is a letter        •• A key principle underlying letters of credit is that banks deal only in documents and not in goods. The decision to pay
                            under a letter of credit will be based entirely on whether the documents presented to the bank appear, at face value, to be in
 of credit?                 accordance with the terms and conditions of the letter of credit. It would be prohibitive for banks to physically check whether
                            all merchandise has been shipped exactly as per each letter of credit.
                         •• The ICC publishes internationally agreed-upon rules, definitions and practices governing letters of credit, which are called
                            UCP and referred to as UCP 600.

                         •• Letters of credit are either revocable or irrevocable:
                            –     A revocable letter of credit can be revoked without the consent of the exporter, meaning that it may be cancelled or
                                  changed up to the time the documents are presented. Revocable letters of credit are very rarely used.
 Basic facts and
                            –     An irrevocable letter of credit cannot be cancelled or amended without the consent of all parties, including the
 mechanics                        exporter. Unless otherwise stipulated, all letters of credit are irrevocable.
 pertaining to           •• Letters of credit may be settled either by sight or by acceptance:
 letters of credit          –     If payment is to be made at the time that the documents are presented, this is referred to as a sight letter of credit.
                            –     If payment is to be made at a future fixed time from the presentation of documents, this is referred to as a term letter
                                  of credit.

13 PwC                                                                                                                                         Trade finance in India 2018
Trade finance in India 2018
                 Introduction to    Need for         Trade          Timeline and structure                                     Pre- and post-shipment     Forfaiting
                  international      trade          finance         of international trade                           Buyer’s      credit in foreign          and         Case
                      trade         finance         methods              transactions            Making and           credit      currency (PCFC)         factoring     studies    Contacts
                                                                                             receiving payments
                                                                                               internationally

Payment instruments in international trade
 Letters of credit
                  Issuance                                                          Flow of goods                              Flow of documents and payment
                  •• After the trading parties agree on a sale of                   •• Upon receipt of the letter of           •• After the goods are shipped, the exporter
                     goods where payment is made by a letter of                        credit, the exporter reviews               presents the documents specified in the letter of
                     credit, the importer requests that its bank                       the letter of credit to ensure             credit to the advising/confirming bank.
                     (the issuing bank) issue a letter of credit in                    that it corresponds to the              •• Once the documents are checked and found to
                     favour of the exporter (beneficiary).                             terms and conditions in                    comply with the letter of credit (i.e. without
                  •• The issuing bank then sends the letter of                         the purchase and sales                     discrepancies), the advising/confirming bank
                     credit to the advising bank. A request may                        agreement; that the                        forwards these documents to the issuing bank.
                     be included for the advising bank to add its                      documents stipulated in                 •• The drawing is negotiated, paid or accepted as
                     confirmation. The advising bank is usually                        the letter of credit can be                the case may be.
 Mechanics           located in the country where the exporter                         produced; and that the terms            •• In turn, the issuing bank examines the documents
 pertaining to       does business and may be the exporter’s                           and conditions of the letter of            to ensure they comply with the letter of credit. If
                     bank, although it does not have to be.                            credit can be fulfilled.
 documentary                                                                                                                      the documents are in order, the issuing bank will
                  •• Next, the advising/confirming bank                             •• Assuming the exporter is in                obtain payment from the importer for payment
 collection          verifies the letter of credit for authenticity                    agreement with the above, it               already made to the confirming bank.
                     and sends it to the exporter.                                     arranges for shipment of the            •• Documents are delivered to the importer to
                                                                                       goods.                                     allow it to take possession of the goods.
                      Exporter/              4                Advising/                       Exporter/beneficiary
                      beneficiary                          confirming bank                                                          Exporter/      2                            Advising/
                                          Advice/
                             1                                  Request to                                                           drawer                                  confirming bank
                                    confirmation of the                                                                                                                3
                                      letter of credit          advise and                                                               1                                              4
                       Contract                                 possibly                                                                                                       5
                                                           3
                      negotiation                               confirm the                                                                        6
                                    Importer applies                                                      Goods                 Importer/drawee                               Issuing bank
                                                                letter of credit                                                                                       7
                      Importer/     for letter of credit                                                                       Legend: Flow of goods documents and payment
                                                               Issuing bank
                      applicant              2                                                 Importer/applicant                 Flow of goods        Flow of documents      Flow of payment

14 PwC                                                                                                                                                           Trade finance in India 2018
Trade finance in India 2018
                  Introduction to   Need for    Trade    Timeline and structure                                  Pre- and post-shipment   Forfaiting
                   international     trade     finance   of international trade                        Buyer’s      credit in foreign        and        Case
                       trade        finance    methods        transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                                  receiving payments
                                                                                    internationally

Payment instruments in international trade
 Letters of credit
                       Importer                                                          Exporter
                       Advantages:                                                       Advantages:
                       •• The importer is assured that, for the exporter to              •• An undertaking from the issuing bank that the exporter will receive
                          be paid, all terms and conditions of the letter of                payment under the letter of credit provided that it meets all the terms
                          credit must be met.                                               and conditions of the letter.
 Risk analysis
                       •• Ability to negotiate more favourable trade                     •• Shifts credit risk from the importer to the issuing bank.
 for letters of           terms with the exporter when payment by letter                 •• Not obligated to ship against a letter of credit that is not issued as
 credit                   of credit is offered.                                             agreed.
                       Disadvantages:                                                    Disadvantages:
                       •• A letter of credit ensures correct documents but               •• Documents must be prepared in strict compliance with the
                          not necessarily correct goods.                                    requirements stipulated in the letter of credit.
                       •• Ties up the line of credit.                                    •• Non-compliance leaves the exporter exposed to risk of non-payment.

15 PwC                                                                                                                                          Trade finance in India 2018
Trade finance in India 2018
                         Introduction to   Need for     Trade    Timeline and structure                                      Pre- and post-shipment   Forfaiting
                          international     trade      finance   of international trade                            Buyer’s      credit in foreign        and        Case
                              trade        finance     methods        transactions            Making and            credit      currency (PCFC)       factoring    studies   Contacts
                                                                                          receiving payments
                                                                                            internationally

Payment methods in international trade
 Comparison of payment methods in international trade

Method                      Time of                      Goods available to               Risk to                      Risk to                            Least risk    Highest risk
                            payment                      buyer                            exporter                     importer                          to exporter    to importer
Prepayment                  Before shipment              After payment                    None                         Relies completely on
                                                                                                                       the exporter to ship the
                                                                                                                       goods as per the order
Letter of credit            When shipment is made        After payment                    Very little or none,         Assured shipment made,
                                                                                          depending on credit          but relies on the exporter
                                                                                          terms                        to ship goods described
                                                                                                                       in documents
Sight draft; documents      On presentation of draft     After payment                    If draft unpaid, must        Same as above
against payment             to buyer                                                      dispose of goods             (unless importer can
                                                                                                                       inspect goods before
                                                                                                                       payment)
Time draft; documents       On maturity of drafts        Before payment                   Relies on buyer to pay       Same as above
against acceptance                                                                        drafts
Consignment                 At the time of resale by     Before payment                   Allows importer to sell      None, improves cash
                            importer                                                      inventory before paying      flow of buyer
                                                                                          exporter
                                                                                                                                                        Highest risk      Least risk
Open account                After shipment               Before payment                   Relies completely on         None                             to exporter      to importer
                            (as agreed)                                                   buyer to pay as agreed

16 PwC                                                                                                                                                      Trade finance in India 2018
Trade finance in India 2018
              Introduction to    Need for    Trade     Timeline and structure                                  Pre- and post-shipment   Forfaiting
               international      trade     finance    of international trade                        Buyer’s      credit in foreign        and        Case
                   trade         finance    methods         transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                                receiving payments
                                                                                  internationally

Payment instruments in international trade
 Guarantees
                       •• A guarantee is issued by a bank on behalf of its customer, the exporter, as financial assurance to the importer to be collected in
                          the event that the exporter defaults on certain specified contractual obligations.
                       •• The bank that issues a guarantee will pay the named beneficiary the amount specified on presentation of a written demand as
                          outlined in the guarantee.
 What is a
                       •• While there are standard guarantee formats, they can be tailored to meet specific contractual needs.
 guarantee?            •• Often, standby letters of credit are used instead of guarantees. Standby letters of credit work in much the same way as
                          guarantees, offering financial assurance to the importer if the exporter defaults on agreed-upon contractual obligations.
                          However, there are at least two important ways in which standby letters of credit differ from guarantees:
                          –     Standby letters of credit are governed by the ICC’s UCP, while guarantees are subject to the laws of the country of the issuing bank.

                       The following guarantees are commonly requested in foreign contracts:
                       •• Bid guarantee: An importer will often ask foreign contract bidders to post a bid guarantee as evidence of serious intent to
                          supply the goods or services if selected. In the event that the selected supplier is unwilling or unable to carry out the contract,
                          the importer can collect the amount of the bid guarantee.
 Types of              •• Advance payment guarantee: An advance payment guarantee covers the amount of the down payment the exporter requests
 guarantees               from the importer and provides the importer with some security that, if the exporter does not deliver under the terms of the
                          contract, the amount of the down payment would be retrievable.
                       •• Performance guarantee: A performance guarantee permits the importer to draw on the guarantee if the exporter fails to
                          perform according to the terms of the contract. For example, in the event that the exporter is unable to complete the contract as
                          agreed halfway through a project, the importer is compensated with the amount of the performance guarantee.

17 PwC                                                                                                                                        Trade finance in India 2018
Trade finance in India 2018
                Introduction to   Need for    Trade    Timeline and structure                                      Pre- and post-shipment   Forfaiting
                 international     trade     finance   of international trade                        Buyer’s          credit in foreign        and        Case
                     trade        finance    methods        transactions            Making and        credit          currency (PCFC)       factoring    studies    Contacts
                                                                                receiving payments
                                                                                  internationally

Payment instruments in international trade
 Guarantees

                         •• During contract negotiations, the
                                                                                                               2       Applies for a guarantee
                            importer requests that the exporter                     Exporter/                                                                 Issuing
                            provide a guarantee securing an                         applicant                                                                   bank
                            aspect of the contract (e.g. bid,
                            advance payment). The exporter
                            (applicant) enlists its bank (issuing                                                                                         3
                            bank) to issue the guarantee in favour                  1
                            of the importer (beneficiary) for a                                                                                  The guarantee
                            specified amount and within a stated                                                                                 is sent to a
 Mechanics of               time frame.                                                                                                          corresponden
 guarantees              •• In the event of default by the
                                                                                    Contract
                                                                                   negotiation
                                                                                                                                                 t bank of the
                                                                                                                                                 issuing bank
                            exporter, the importer would demand                                                                                  for advice to
                            payment against the guarantee                                                                                        the importer.
                            through the advising bank.
                         •• A correspondent bank is a foreign
                            bank with which the issuing bank                                               Advice of the guarantee          4
                            has established a relationship where                   Importer/                                                               Advising
                                                                                   beneficiary                                                               bank
                            secure transactions may be processed.

18 PwC                                                                                                                                             Trade finance in India 2018
Trade finance in India 2018
               Introduction to   Need for    Trade    Timeline and structure                                  Pre- and post-shipment   Forfaiting
                international     trade     finance   of international trade                        Buyer’s      credit in foreign        and        Case
                    trade        finance    methods        transactions            Making and        credit      currency (PCFC)       factoring    studies   Contacts
                                                                               receiving payments
                                                                                 internationally

Payment instruments in international trade
 Guarantees/SBLCs
                        For issuing bank                                For applicant                                    For beneficiary
                        •• Compliance checks on the parties             •• As documents lack intrinsic value,            •• Evaluation of credit and cross-border
                           and understanding the underlying                additional documents may be                      risk on the issuing bank.
                           purpose of the standby.                         required to support a demand                  •• Understanding the risk of automatic
                        •• Obtaining satisfactory documentation            certification, e.g. copy of unpaid               reduction or automatic termination
 Potential risks/          and reimbursement agreement from                invoices or transport documents or               against documents which the applicant
 challenges to             the obligor. Evaluating credit risk.            certification issued by an independent           can present directly to the issuing bank.
                                                                           arbitrator or copy of court judgement.
 consider               •• Clear documentary conditions need to                                                          •• Understanding documents and/or
                           be mentioned to minimise the risk of         •• Effectiveness of standby is against              conditions that are required in order
                           conditions being misinterpreted by the          clearly defined conditions, e.g.                 to draw, and avoiding documents which
                           beneficiary and possible rejection by           effectiveness of advance payment                 are issued and/or signed by
                           the applicant in the event of a dispute         standby after receipt of the                     the applicant.
                           under the underlying contract.                  advance payment.

19 PwC                                                                                                                                       Trade finance in India 2018
Trade finance in India 2018
              Introduction to   Need for    Trade    Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
               international     trade     finance   of international trade   receiving payments                credit in foreign        and        Case
                   trade        finance    methods        transactions          internationally                 currency (PCFC)       factoring    studies   Contacts
                                                                                                   Buyer’s
                                                                                                    credit

Payment instruments in international trade
 Buyer’s credit
                       •• Buyer’s credit is short-term credit given to an importer (buyer) from overseas lenders such as banks and other financial
                          institutions for goods it is importing. Overseas banks usually lend credit to the importer (buyer) based on a letter of comfort
                          (a bank guarantee) issued by the importer’s bank. For availing this service, the importer’s bank or buyer’s credit consultant
 What is buyer’s          charges a fee called an arrangement fee.

 credit?               •• Buyer’s credit helps local importers gain access to cheaper foreign funds that may be closer to London Interbank Offer Rate
                          (LIBOR) rates, as against local sources of funding which are more costly.
                       •• It is regulated as per the RBI’s Master Circular on External Commercial Borrowing (ECB) and Trade Credit, 2014, which
                          specifies norms for amount, maturity and ceiling charges.

                       •• It is beneficial to both parties as the exporter gets paid on the respective due date, whereas the importer gets an extended
                          date for making an import payment as per the cash flows.
 Basic facts and       •• The importer can deal with the exporter on sight basis, negotiate a better discount and use the buyer’s credit route to
                          avail financing.
 mechanics             •• The funding can be in any currency, depending on the terms of trade and availability of LIBOR. The currency of imports can
 pertaining to            be different from the funding currency, which enables importers to take a favourable view of a particular currency.
 buyer’s credit        •• The importer can use this financing for any form of trade—namely, open account, collections or letters of credit.
                       •• Buyer’s credit involves cost such as interest (LIBOR plus bank spread), letter of credit issuing fees, hedging cost and
                          withholding tax.

20 PwC                                                                                                                                      Trade finance in India 2018
Trade finance in India 2018
                   Introduction to    Need for     Trade    Timeline and structure       Making and                     Pre- and post-shipment   Forfaiting
                    international      trade      finance   of international trade   receiving payments                    credit in foreign        and        Case
                        trade         finance     methods        transactions          internationally                     currency (PCFC)       factoring    studies    Contacts
                                                                                                          Buyer’s
                                                                                                           credit

 Buyer’s credit

                                        The mechanics of buyer’s credit are depicted below:

                                                              1
                                                                   An importer imports goods using
                                                                        either a letter of credit,
                                                                   collections or an open account.

          6
                On the due date, the importer either
              requests for the rollover of the buyer’s
                credit or recovers the funds from the                                                               2
               importer and retires the liability of the                                                                      An importer approaches the
              importer towards the bank against the                                                                          issuing bank or arranges for a
                        letter of undertaking.                                                                                    buyer’s credit quote.

          5                                                                                                         3
                   The issuing bank makes the
                                                                                                                          The issuing bank arranges for a an
                 payment to the exporter and thus
                                                                                                                         offer letter at the best possible rates
                 settles the liability of the importer
                                                                                                                                 from the funding bank.
                       towards the exporter.                  4
                                                                    The funding bank, on receipt of
                                                                    the letter of undertaking, credits
                                                                      the NOSTRO account of the
                                                                      issuing bank with the funds.

21 PwC                                                                                                                                                  Trade finance in India 2018
Trade finance in India 2018
               Introduction to   Need for    Trade    Timeline and structure       Making and                                      Forfaiting
                international     trade     finance   of international trade   receiving payments   Buyer’s     Pre- and post-        and        Case
                    trade        finance    methods        transactions          internationally     credit   shipment credit in   factoring    studies   Contacts
                                                                                                               foreign currency
                                                                                                                    (PCFC)

Payment instruments in international trade
 PCFC

                        •• ‘Pre-shipment’ means any loan or advance granted or any other
                           credit provided by a bank to an exporter for financing the purchase,
                           processing, manufacturing or packing of goods prior to shipment, on
  What is                  the basis of a letter of credit opened in his favour or in favour of some
  pre-shipment             other person, by an overseas buyer or a confirmed and irrevocable
                           order for the export of goods from India or any other evidence of an
  credit?                  order for export from India having been placed on the exporter or
                           some other person, unless the depositing of export orders or a letter of
                           credit with the bank has been waived.

                        •• The applicant needs to arrange a ‘fund-based line of credit’ from an
                           authorised dealer/bank.

  Basic facts and       •• To make the credit available to exporters at internationally
                           competitive rates, the cost of the loan is quoted in LIBOR plus bank
  mechanics                spread.
  pertaining to         •• A major cost/challenge for an Indian exporter will be rupee depreciation
                           against the currency in which the loan is drawn.
  pre-shipment
                        •• Interest is charged on credit up to 270 days at the rate decided by the
  credit                   bank within the ceiling rate arrived at on the basis of Benchmark Prime
                           Lending Rate (BPLR), relevant for the entire tenor of the export credit
                           under the respective category.

22 PwC                                                                                                                                   Trade finance in India 2018
Trade finance in India 2018
               Introduction to   Need for    Trade     Timeline and structure       Making and                                      Forfaiting
                international     trade     finance    of international trade   receiving payments   Buyer’s     Pre- and post-        and        Case
                    trade        finance    methods         transactions          internationally     credit   shipment credit in   factoring    studies   Contacts
                                                                                                                foreign currency
                                                                                                                     (PCFC)

 PCFC

                        •• ‘Post-shipment credit’ means any loan or advance granted or any
                           other credit provided by a bank to an exporter of goods/services from
                           India from the date of extending credit after the shipment of goods/
  What is                  rendering of services to the date of realisation of export proceeds as per
  post-shipment            the period of realisation prescribed by Foreign Exchange Department
                           (FED), and includes any loan or advance granted to an exporter, in
  credit?                  consideration of, or on the security of any duty drawback allowed by
                           the government from time to time. As per the current instructions of
                           FED, the period prescribed for realisation of export proceeds is 12
                           months from the date of shipment.

                        •• Post-shipment advance can mainly take the form of:
  Basic facts and           (i) Export bills purchased/discounted/negotiated
  mechanics                 (ii) Advances against bills for collection
  pertaining to             (iii) Advances against duty drawback receivable from the government
  buyer’s credit        •• This type of credit is available for a maximum period of 365 days,
                           depending upon the underlying bill and bank’s policy.

23 PwC                                                                                                                                    Trade finance in India 2018
Trade finance in India 2018
                         Introduction to   Need for    Trade     Timeline and structure        Making and                                        Forfaiting
                          international     trade     finance    of international trade    receiving payments   Buyer’s     Pre- and post-          and        Case
                              trade        finance    methods         transactions           internationally     credit   shipment credit in     factoring    studies   Contacts
                                                                                                                           foreign currency
                                                                                                                                (PCFC)

  RBI guideline for the pricing of PCFC

1 Pre-shipment credit (from the date of advance)
   (a) Up to 270 days
   (b) Against incentives receivable from the government covered by the Export
   Credit Guarantee Corporation of India (ECGC) guarantee up to 90 days
2. Post-shipment credit (from the date of advance)
    (a) On-demand bills for transit period (as specified by the Foreign Exchange
        Dealers’ Association of India [FEDAI])
    (b) Usance bills (for total period comprising usance period of export bills, transit
        period as specified by the FEDAI and grace period, wherever applicable)
		       (i) Up to 180 days
		       (ii) Up to 365 days for exporters under the Gold Card Scheme
    (c) Against incentives receivable from the government (covered by the ECGC
        guarantee) up to 90 days
    (d) Against undrawn balances (up to 90 days)
    (e) Against retention money (for supplies portion only) payable within one year
        from the date of shipment (up to 90 days)

Note:
1. Since these are ceiling rates, banks would be free to charge any rate below the ceiling rates.
2. Interest rates for the above-mentioned categories of export credit go beyond the tenors prescribed above and are deregulated. Banks are free to decide the rate of interest,
   keeping in view the BPLR and spread guidelines.

24 PwC                                                                                                                                                 Trade finance in India 2018
Trade finance in India 2018
               Introduction to   Need for    Trade    Timeline and structure       Making and                 Pre- and post-shipment
                international     trade     finance   of international trade   receiving payments   Buyer’s      credit in foreign                 Case
                    trade        finance    methods        transactions          internationally     credit      currency (PCFC)     Forfaiting   studies    Contacts
                                                                                                                                        and
                                                                                                                                     factoring

 Forfaiting and factoring
                                    •• In normal course of business, the exporter is unable to clock the collection and reinvest in producing additional
                                       goods even after shipment to the importer due to long credit periods or the aging of invoices. This negatively impacts
                                       the exporter’s cash flow.

  What is factoring                 •• Factoring and forfaiting are two similar routes to finance accounts receivables of an exporter. They differ on the basis of
                                       the type of underlying consideration and the credit period given to the importer. The bank/arranger buys the accounts
  and forfaiting?                      receivable for a margin.
                                    •• Factoring typically involves the purchase of an exporter’s accounts receivable with a short credit period and invoiced
                                       goods, whereas forfaiting is a term used for financing long-term credit periods ranging between six months and
                                       seven years for underlying securities being capital goods, commodities and high-value merchandise.

                                    •• To make the exporters more competitive, this facility is available in major convertible currencies charged as part of a
  Basic facts and                      bank’s commitment fees plus bank spread over and above the respective currency’s LIBOR.
  mechanics pertaining              •• Days of grace, added to the actual number of days until maturity for the purpose of covering the number of days normally
  to factoring and                     experienced in the transfer of payment, are applicable to the country of risk.
                                    •• Such transactions are normally done on a non-recourse basis with a marginal risk for the arranger/bank given that the
  forfaiting                           final payment is generally guaranteed by the letter of credit from the importer’s bank.

25 PwC                                                                                                                                      Trade finance in India 2018
Trade finance in India 2018
                        Introduction to   Need for    Trade    Timeline and structure        Making and                 Pre- and post-shipment
                         international     trade     finance   of international trade    receiving payments   Buyer’s      credit in foreign                   Case
                             trade        finance    methods        transactions           internationally     credit      currency (PCFC)     Forfaiting     studies    Contacts
                                                                                                                                                  and
                                                                                                                                               factoring

 Forfaiting and factoring

Differences                                     Factoring                                                Forfaiting
Extent of finance (invoice value)               75–80%                                                   100%
Credit worthiness                               Bank does the credit rating in case of                   The forfaiting bank relies on the creditability of the availing bank.
                                                non-recourse factoring transactions.
Sales administration                            Day-to-day administration of sales                       No services are provided.
Recourse                                        With or without recourse                                 Always without recourse

Sales                                           By turnover                                              By bills

Term                                            Short term                                               Medium term

Credit extension                           The bank provides credit protection after doing a credit check of the importer/receiving a letter of credit.

Invoice sale                               The exporter hands over invoices to the bank; the assignment is created at this stage.

Cash advances                              The bank credits the exporter’s bank account as per the terms agreed on before receiving payment from the importer.

                                           The bank collects payment from the exporter (if the arranging bank is not a collection agent) and follows up on
Receivable collection
                                           overdue invoices.

Remit collected funds                      The bank repays previous advances and remits the balance to the client (if the bank is a collection agent).

Financial reporting                        The bank provides transaction reports and statements to the client.

26 PwC                                                                                                                                                  Trade finance in India 2018
Trade finance in India 2018
                        Introduction to   Need for    Trade    Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
                         international     trade     finance   of international trade   receiving payments   Buyer’s      credit in foreign        and
                             trade        finance    methods        transactions          internationally     credit      currency (PCFC)       factoring              Contacts
                                                                                                                                                              Case
                                                                                                                                                             studies

1. Outsourcing of preparation                                                           2. Use of letters of credit in
   of documents by a large                                                                 commodity trading
   multinational to its bank
As with many companies, a large Asia-based subsidiary of a European electronics         The trading of commodities is a global business, with goods constantly being
manufacturer was facing staffing pressures. The subsidiary found that it did not        shipped from one side of the world to the other and to all points in between.
have the correct skill set among existing staff to prepare the full set of documents    Typically, UK-based commodity traders will act as middlemen, sourcing
needed to support letters of credit. With the company preparing about 2,000             goods from one country or region and selling them in another, adding value
sets of documents a year, the proportion of errors resulted in a large number of        by providing logistics and other services to facilitate the transaction. Sales
discrepancies in the documents which the company presented to the bank. As a            can often be to buyers in emerging, developing or economically challenging
result, the company saw an adverse impact on its days sales outstanding (DSO)           countries, where the risk of non-payment is a major concern for the seller. The
and decided to outsource this non-core activity to its bank.                            value of individual commodity shipments can be relatively high (often million
The bank had specialist teams responsible for originating and checking all              USD), and failure to collect the sale proceeds can have a serious effect on the
such documents, and today the bank prepares the full set of documents for               seller’s own financial condition.
the company. The solution was implemented in a short time frame and to the              One way to mitigate this risk is for the seller to insist that the buyer arranges
company’s satisfaction, using dedicated resources at the bank. Not only did             for its bank to issue a letter of credit in favour of the seller prior to the shipment
the bank improve efficiency by using its own expertise in the preparation of            of the goods. Payment under the letter of credit is conditional upon the seller
documents, it was also able to reduce the risk of discrepancies by simplifying          presenting the required documents through its bank. These typically include,
the company’s own internal processes.                                                   amongst others, bills of lading (or other title documents), invoice, certificate of
As a consequence, the company has effectively shortened its collection cycle,           origin, and certificate of weight/quality.
resulting in an improvement in the company’s DSO to three to four days.                 This arrangement provides a degree of comfort to both parties. The seller
Moreover, when establishing the outsourced arrangement, the bank’s trade                can arrange for goods to be shipped, with the knowledge that they will be
advisors also reviewed the company’s processes, leading to further operational          paid for provided that the appropriate documents are presented as required
savings and reduced staff costs.                                                        under the letter of credit; and the buyer can refuse payment if the documents
Thus, this move had both cost and revenue benefits. The company started by              presented do not conform to the requirements of the letter of credit. For
outsourcing trade documents prepared by at least one of its divisions to the            example, the certificate of quality indicates that the goods are not of the
bank. It is now considering opportunities to further expand this service.               correct specification.

27 PwC                                                                                                                                                Trade finance in India 2018
Trade finance in India 2018
                       Introduction to   Need for    Trade    Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
                        international     trade     finance   of international trade   receiving payments   Buyer’s      credit in foreign        and
                            trade        finance    methods        transactions          internationally     credit      currency (PCFC)       factoring              Contacts
                                                                                                                                                             Case
                                                                                                                                                            studies

2. Use of letters of credit in commodity trading
The trading of commodities is a global business, with goods constantly                 However, it should be remembered that the letter of credit is a bank-to-bank
being shipped from one side of the world to the other and to all points in             instrument, and while it does provide comfort in respect of the buyer’s ability
between. Typically, UK-based commodity traders will act as middlemen,                  to pay (albeit with the support of the bank), it does not protect the seller in the
sourcing goods from one country or region and selling them in another,                 event that the buyer’s bank is unable to make the required payment on the due
adding value by providing logistics and other services to facilitate the               date as a result of, for example, its own liquidity problems, or situations outside
transaction. Sales can often be to buyers in emerging, developing or                   its control, such as the imposition of foreign exchange controls. Also, buyers
economically challenging countries, where the risk of non-payment                      increasingly require extended credit terms, such that they pay for the goods at
is a major concern for the seller. The value of individual commodity                   some agreed future date (e.g. 60, 90 or 180 days from the date of shipment),
shipments can be relatively high (often million USD), and failure to                   which puts pressure on the seller’s cash flow and ability to do more business.
collect the sale proceeds can have a serious effect on the seller’s own                By adding its ‘confirmation’ to the letter of credit, the seller’s bank agrees that,
financial condition.                                                                   provided the correct documents are presented (the seller’s bank will check the
One way to mitigate this risk is for the seller to insist that the buyer               documents before sending them overseas), it will pay funds to the seller on the
arranges for its bank to issue a letter of credit in favour of the seller              due date in the event that the buyer’s bank is unable to do so, thereby effectively
prior to the shipment of the goods. Payment under the letter of credit is              removing the bank and country risk factors for the seller. If the letter of credit
conditional upon the seller presenting the required documents through                  allows for payment at an agreed future date, the seller’s bank may also agree
its bank. These typically include, amongst others, bills of lading (or                 to discount the proceeds—that is, advance funds to the seller (less an agreed
other title documents), invoice, certificate of origin, and certificate of             discount) ahead of the actual due date, thereby improving the seller’s cash flow.
weight/quality.
This arrangement provides a degree of comfort to both parties. The seller
can arrange for goods to be shipped, with the knowledge that they will
be paid for provided that the appropriate documents are presented as
required under the letter of credit; and the buyer can refuse payment
if the documents presented do not conform to the requirements of the
letter of credit. For example, the certificate of quality indicates that the
goods are not of the correct specification.

28 PwC                                                                                                                                               Trade finance in India 2018
Trade finance in India 2018
                        Introduction to   Need for    Trade     Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
                         international     trade     finance    of international trade   receiving payments   Buyer’s      credit in foreign        and
                             trade        finance    methods         transactions          internationally     credit      currency (PCFC)       factoring              Contacts
                                                                                                                                                               Case
                                                                                                                                                              studies

3. ‘Letters of credit are too expensive’
This was what an Asian buyer from an Irish exporting company stated when he              What benefit would the confirmed letter of credit have provided
convinced the exporter to make a sale on open account terms. The Asian buyer             to the exporter?
obtained 60 days credit, which was to be calculated from the date of the invoice.
                                                                                         •• A guarantee of payment on the due date from Allied Irish Banks
The value of the order was 1,00,000 USD and the goods were dispatched and
                                                                                            (provided the terms and conditions of the letter of credit were
invoiced by the Irish exporter on 15 April 2006. The payment from Asia was due
                                                                                            complied with).
on 14 June 2006. The payment eventually arrived on21 August 2006, over two
months late. The delay in payment cost the exporter 1,700 USD, as it resulted in         •• No risk of non-payment as a result of problems with the buyer or the
his account being overdrawn by this amount for 68 days at 9% per annum.                     Asian economy.
So, are letters of credit too expensive?                                                 •• A definitive date for the receipt of funds, particularly important for
                                                                                            devising proper currency hedging strategies.
The Irish exporter could have insisted on receiving a confirmed letter of credit
through Allied Irish Banks. The following costs would have applied at that time:         •• The opportunity to receive the payment in advance of the due date
                                                                                            through non-recourse discounting of the receivable.
Particulars                                            Amount
                                                                                         Conclusion
Confirmation fee                                       250 USD
                                                                                         Please note that this case has not accounted for the costs the Irish exporter
Acceptance commission (@ 1.5% pa for 60 days)          250 USD                           incurred in chasing the debt with the Asian buyer. In addition, if the exporter
                                                                                         had sold his foreign currency receivable on a forward basis to his bank for
Negotiation/payment fee                                150 USD
                                                                                         the original due date, they may have incurred a further cost in cancelling or
Out of pocket expenses (estimate)                      60 USD                            rearranging the forward contract.
Total letter of credit cost                            710 USD                           Letters of credit, although they appear to be expensive, do provide real and
                                                                                         tangible benefits to companies. In this case, the Irish exporter only lost 1,700
Interest cost as a result of late payment              1,700 USD
                                                                                         USD. Of course, if the Asian buyer had not paid at all, they would have lost
Benefit of using letter of credit                      990 USD                           the whole 1,00,000 USD.

The letter of credit seems expensive because the costs are very visible and linked
to each transaction. The benefits, on the other hand, are intangible.

29 PwC                                                                                                                                                 Trade finance in India 2018
Trade finance in India 2018
                        Introduction to   Need for    Trade    Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
                         international     trade     finance   of international trade   receiving payments   Buyer’s      credit in foreign        and
                             trade        finance    methods        transactions          internationally     credit      currency (PCFC)       factoring              Contacts
                                                                                                                                                              Case
                                                                                                                                                             studies

4. Securitisation of receivables
Large companies that generate a sufficient volume
of receivables may be able to raise finance through
securitisation. The following case study is an example
of how this technique can be used. It also shows how
the proceeds from a transaction can be used in a
variety of ways.
Case study
An international chemicals distribution group
wanted to open a 250 million EUR funding facility by
securitising trade receivables denominated in euros
and dollars. The receivables were originated by the
group’s operating subsidiaries in the US and a number
of European countries.
The group’s bank and two other banks arranged for
the establishment of a special purpose vehicle (SPV)
in Ireland. Using funds raised via the issue of A1/P1-
rated commercial paper (CP) into the asset-backed
commercial paper (ABCP) market, the SPV purchases
the receivables directly from the company (indirectly in
the case of Italy and the US). The structure is operated
without recourse to the company, which receives funds
at the cost of the CP issuance, plus a credit-related
margin on any drawn funds. This facility has freed
cash for the distribution company and allowed it to
refinance some acquisition financing.

30 PwC                                                                                                                                                Trade finance in India 2018
Trade finance in India 2018
                        Introduction to   Need for    Trade    Timeline and structure       Making and                 Pre- and post-shipment   Forfaiting
                         international     trade     finance   of international trade   receiving payments   Buyer’s      credit in foreign        and
                             trade        finance    methods        transactions          internationally     credit      currency (PCFC)       factoring              Contacts
                                                                                                                                                              Case
                                                                                                                                                             studies

5. Implementation of a cash and trade solution by the division of a major
   international retail company
The regional division of a major international retail company wanted                    From the company’s perspective, only one file is uploaded to the
to improve the efficiency of its cash management structure, improve its                 bank. The bank then manages the entire payables process, even for
working capital (via an extension to its days payable outstanding [DPO]) and            those suppliers participating in the SCF. This reduces the
strengthen its supply chain to reduce the risk of disruption.                           company’s workload and minimises the touchpoints between the bank
The solution involved the division centralising its treasury operations and             and corporates.
establishing a true end-to-end payables solution, including a supply chain finance      The bank’s cash management system generates a series of reports back
(SCF) programme. As part of this process, the company was able to automate a            to the company, giving the latter visibility on all the flows it requires.
number of its cash and trade processes, including its accounts payable function.        Once the system has executed the payment run on behalf of the
Central to the success of the SCF is the way the company has minimised its              company, all payments are automatically reconciled, whether or not the
involvement in the accounts payable process. The company uploads all of its             supplier is part of the SCF programme.
approved invoices (payables) automatically from its ERP system to its bank              As a result of implementing the SCF programme, the company
on a daily basis. Invoices relating to suppliers which participate in the SCF           strengthened its relationships with its strategic suppliers, who were
programme are filtered by the bank on receipt to its trade platform. Other              all able to participate. With the bank placing the credit risk on the
invoices are forwarded directly to the bank’s cash management system.                   company when financing its suppliers, the company was able to
Once the invoices from suppliers in the SCF appear on the bank’s trade                  reduce the risk of supplier default. At the same time, this supply chain
platform, suppliers have the option of selling them to the bank to accelerate           financing element allowed the division to mitigate the impact on
cash receipt. If the supplier chooses a discounted payment, the bank pays it            suppliers from extending DPO by up to 90 days (thereby improving its
on a next-day basis. The bank then collects payment from the company’s cash             working capital).
management account on the invoice due date. If the supplier does not discount           Finally, the automated solutions and the reduction in the number
the invoice, payment information is uploaded to the bank’s cash management              of bank relationships have given the regional treasury much greater
system. This then initiates payment from the company’s account to the supplier          visibility and control over the group’s regional operations.
on the invoice due date. Invoices relating to suppliers not participating in the
SCF programme are paid via the bank’s cash management system.

31 PwC                                                                                                                                                Trade finance in India 2018
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