What is Trade Finance TRADE FINANCE

TRADE

FINANCE

Business Objectives of the Players

Seller Buyer

Desired quantity and quality of the goods in time A managed cash flow, with bank finance An assuring third party Convenient payment channel Protection against regulatory errors

Timely payment Bank finance for buyers credit & goods arrangement An assuring third party Payment to be received at own location Protection against regulatory errors

Risks Involved in Trade Finance

Payment on Delivery

X
Seller

Buyer

Seller runs a risk of non-payment even when he has delivered the goods

Risks Involved in Trade Finance

1
Advance payment

Buyer

Seller

Buyer runs a risk of non-delivery of goods or poor quality of goods even when he has paid the money

Risks Involved for the Players

Buyer

Seller

Non-delivery / delayed delivery of goods Short shipment/inferior goods Goods received documents before the

Non-payment/Delayed payment Exchange risk Foreign exchange fluctuation Regulatory changes

Foreign exchange fluctuation Regulatory changes

Role of the Bank

Banks business interests are: Providing finance

Buyers Bank

Providing fee based services

Risk mitigation

The Buyers bank can assist in: Providing payment assurance to seller on behalf of the buyer Providing assurance for right quality of goods

Buyer

Providing finance in respect of the sale

Effecting payment to the seller on behalf of the buyer Handling documents covering the sale

Role of the Bank

Banks business interests are:

Sellers Bank

Providing finance Providing fee based services Risk mitigation

The sellers bank can assist in: Assuring payment as a third party Providing finance
Seller

to arrange for goods to provide credit to buyer

Handling documents for regulatory requirements Obtaining payment for seller

Trade Finance Products: Assurance

For the seller

Assuring payment as a third party

Banks products
Letter of Credit Bank Guarantee

For the buyer Providing payment assurance to seller on behalf of the buyer Providing assurance for

right quality of goods

Trade Finance Products: Payment

For the Seller

Obtaining payment for seller

For the buyer

Banks products
Bills for Collection Remittance

Effecting payment
to the seller on behalf of the buyer

Trade Finance Products: Finance

For the seller:

Providing finance to arrange for

Banks products:
Negotiation / Purchase of Bills (Post-shipment) Packing Credit(preshipment)* Term Loans*

For the buyer:

Providing finance in respect of the sale

goods
to provide credit to buyer

Flow of Goods

Buyers Bank

Sellers Bank

Seller Buyer

Shipper

Flow of Documents

Buyers Bank

Sellers Bank

Seller Buyer

Shipper
Documents can flow in 3 directions a) Seller - Buyer b) Seller - Buyers bank - Buyer c) Seller - Sellers Bank - Buyers Bank - Buyer

Flow of Payments

Buyers Bank

Sellers Bank

Seller Buyer

Shipper

Inland vs. Foreign

If the seller and buyer are from the same country it becomes an Inland product These products are simpler because of the absence of exchange/trade control requirements

Service Tree for Trade Finance

Bills

Seller

Buyer

Inland

Foreign

Inland

Foreign

Purchase/ Negotiation

Collection

Purchase/ Negotiation

Collection

Collection

LC

Collection

LC

LC

LC

Remittance Non LC Non LC

Risks Involved in Trade Finance

WAR!
Seller Buyer

If the players are in different countries, they face Country Risk.

Risks go up as the situation becomes more complex

Critical Risk Considerations

Transport-related risks (damage, loss, theft) Credit risk or non-payment risk

Quality of goods risk

Exchange rate risk Unforeseen events Legal risks Country risk/Political risk

Fraud risk
The risk of misunderstanding

How Would the Bank Mitigate Risks

Risk
Transport related risks (damage, loss, theft) Credit risk or non-payment risk Quality of goods risk Exchange rate risk Legal risk Country risk / Political risk

Risk Mitigation
Ensuring insurance coverage/ carriers liability Ensuring credit-worthiness of party: Financial standing, quality of goods being sold Proper document scrutiny Forward cover Procedures verified by legal experts Taking cover Substantial credit and compliance scrutiny Well-drafted contracts

Fraud risk
The risk of misunderstanding