Description
This is a presentation describes basic concepts of trade finance.
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 buyer’s 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
1
Seller runs a risk of non-payment even when he has delivered the goods
Risks Involved in Trade Finance
1
Advance payment
Buyer
X
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
Bank’s business interests are: • Providing finance
•
•
Buyer’s Bank
Providing fee based services
Risk mitigation
The Buyer’s 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
Bank’s business interests are:
• • •
Seller’s Bank
Providing finance Providing fee based services Risk mitigation
The seller’s 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
Bank’s 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
Bank’s 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
Bank’s 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
Buyer’s Bank
Seller’s Bank
Seller Buyer
Shipper
Flow of Documents
Buyer’s Bank
Seller’s Bank
Seller Buyer
Shipper
Documents can flow in 3 directions a) Seller - Buyer b) Seller - Buyer’s bank - Buyer c) Seller - Seller’s Bank - Buyer’s Bank - Buyer
Flow of Payments
Buyer’s Bank
Seller’s 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/ carrier’s liability Ensuring credit-worthiness of party: Financial standing, quality of goods being sold Proper document scrutiny Forward cover Procedures verified by legal experts Taking cover Substantial credit and compliance scrutiny Well-drafted contracts
• • • • • •
•
•
Fraud risk
The risk of misunderstanding
doc_366938034.ppt
This is a presentation describes basic concepts of trade finance.
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 buyer’s 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
1
Seller runs a risk of non-payment even when he has delivered the goods
Risks Involved in Trade Finance
1
Advance payment
Buyer
X
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
Bank’s business interests are: • Providing finance
•
•
Buyer’s Bank
Providing fee based services
Risk mitigation
The Buyer’s 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
Bank’s business interests are:
• • •
Seller’s Bank
Providing finance Providing fee based services Risk mitigation
The seller’s 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
Bank’s 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
Bank’s 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
Bank’s 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
Buyer’s Bank
Seller’s Bank
Seller Buyer
Shipper
Flow of Documents
Buyer’s Bank
Seller’s Bank
Seller Buyer
Shipper
Documents can flow in 3 directions a) Seller - Buyer b) Seller - Buyer’s bank - Buyer c) Seller - Seller’s Bank - Buyer’s Bank - Buyer
Flow of Payments
Buyer’s Bank
Seller’s 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/ carrier’s liability Ensuring credit-worthiness of party: Financial standing, quality of goods being sold Proper document scrutiny Forward cover Procedures verified by legal experts Taking cover Substantial credit and compliance scrutiny Well-drafted contracts
• • • • • •
•
•
Fraud risk
The risk of misunderstanding
doc_366938034.ppt