Unit 14 Finance and International Trade: Structure

International Business Management
Unit 14
Unit 14
Finance and International Trade
Structure:
14.1 Introduction
Objectives
14.2 Understanding Payment Mechanism in foreign trade
Payment terms in foreign trade
Letter of credit
14.3 Documentation in International Trade
Commercial invocie
Packing list
Bill of lading
Insurance certificate
14.4 Financing Techniques
Bankers acceptance
Factoring
Forfaiting
14.5 Export Promotion Schemes
14.6 Export and Import Finance
Short term credit
Long term credit
EXIM bank
14.7 Summary
14.8 Glossary
14.9 Terminal Questions
14.10 Answers
14.11 Caselet
14.1 Introduction
In the previous unit, we have studied about the importance of ethics in
international business. We also learned the various methods adopted for
formulating ethics and how the difference in culture affects the ethical
practices around the world.
Walk into any mall, you will come across Washington apples, cheap
Chinese toys and plastics, South Korean and Japanese television sets,
Brazilian coffee or South African wine. Today, Indian spices are popular all
Sikkim Manipal University
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over the world. All these are the results of increasing international trade.
International trade is a system, which deals with the exchange of goods and
services between nations. As global citizens, International Trade shapes our
lives and boosts the economy of the participating countries. There are
various financing techniques that play a major role in international trade and
finance.
This unit covers the benefits, payment systems and arrangements related to
international trade. We will discuss documentation required to make any
foreign trade transaction. We will also learn about various export promotion
schemes supported by the government and methods to avail finance as
exporters and importers within India.
Objectives:
After studying this unit, you should be able to:
describe the payment system facilitating the foreign trade.
analyse the documentation required to facilitate international trade.
explain various Government schemes to promote exports from India.
explain different kinds of finance options available for international trade.
14.2 Understanding Payment Mechanism in Foreign Trade

For successfully conducting international trade in todays competitive
international environment, it is essential for the exporters to offer attractive
sales terms and payments to importers so as to woo them for business. One
of the major concerns for en exporter is to choose the appropriate payment
method in order to minimise risks related to payments of trade transaction.
Payment should be done after understanding the economic scenario of
importers country, importer credit worthiness and to certain extent
accommodating the needs of the importer. Exporter can choose any mode
of payment depending on risk perception, size of deal, importer credit
worthiness and economic situation in importers country.
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Table 14.1: Factors to be considered for choosing payment terms

Require Letter
of Credit
Consider Documentary
Collection Against
Payment
Consider
Open
Account
Type of the
customer
Undetermined
Acceptable
Excellent
Relationship
New
Established
Established
Economic
stability
Unstable
Stable
Very stable
Type of order
Custom
Regular production
In stock
Transaction
Size
Large
Moderate
Small
Cash flow
Always
Never
Never
Factor
Source: John Michael Pierobon; How to Succeed In International Business
In case of domestic business, main factor driving salesmans decision

criteria for realisation of payments is based on the buyer's ability, willingness
and honesty to make payment coupled with exporter trust on buyer. Usually
sale in domestic market are on open account and in certain cases it can be
on cash in advance. Such methods also depend on buyers and sellers
power to negotiate and nature of competition such as:
Monopoly condition will favour to the seller.
Perfect competition will favour to the buyers.
However, in case of international trade, exporter has to take more
precautions as some methods of payment are unique and usually used in
case of international trade only. Key consideration while deciding upon a
payment term in foreign trade is elaborated as under.
A. Some of the major risks involved in realisation of payments in
international trade can be either at importer, importer bank and
importers country such as insolvency and default by importer,
insolvency of importer bank and exchange control restrictions,
inconvertibility issues with importers country.
B. Some of the risks involved in international trade in Liberalisation,
Privatisation and Globalisation era can be under control of exporter but
some cannot be. For example, credit risk which arises from a change in
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the credit worthiness of importer can be covered by ECGC. Exchange

Rate Fluctuation risk can be covered by hedging the currency invoiced
in forward contract market but risk such as Force Majeure which arises
from change in policy of a country, which in turn affects the trade
capability, and by a natural disaster cannot be anticipated in complex
international environments1. Other risks mainly arises due to a difference
in culture, law, or language are also beyond exporter control.
Exhibit 14.1: Choice of payments method: Decision Matrix
1.
2.
3.
4.
5.
6.
7.
8.
9.
Buyer-Seller relationship.
Competition.
Buyers credit standing.
Uniqueness of the product (Is it custom made?)
Cash flow considerations.
Country conditions (political, economic).
Transaction costs.
Risk tolerance/aversion.
Other.
Source: Craig F. Schaffer, Inside Trade Finance
C. International Trade Operations offers different types, quantum and

location of risks, thereby confusing the exporter with uncertainty over
realisation of payments and timing of payments between the exporter
and importer2.
D. For exporters, any international sale will be equivalent to gift until he has
not realised the payment from the importer. For importer any payment is
donation until he has received the cargo as sent by exporter.
E. Exporter will always be interested to receive the payments as soon as
he/she sends the goods to importer through shipment. Importer will be
willing to delay the payments as he/she will be interested to sell these
goods in markets and then make the payments to exporter.
General Insurance Companies, in LPG&M era covers even the Force Majeure
risks in international trade.
2
J. H. Rayners & Co., Ltd., and the Oilseeds Trading Company, Ltd. v.Hambros
Bank Limited 1942
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F. However, the selection criteria for mode of payment is based on mutual

negotiation of exporter and importer and in LPG&M era there are other
parties such as bank, credit insurer involved which helps in exporter in
financing and assuring about the payment.
G. Though safe mode of payment such as L/C is getting popular, this is not
usually used by small exporters and importers due to heavy transaction
costs. For example, L/C is used as mode of payment only in 14% trade
transactions due to heavy transactions costs3.
H. Exporter can alternatively divide the payment category into secure mode
and unsecure mode. The secure mode of payment for exporter is cash
in advance and letter of credit. Unsecure mode of payment are Open
Account, Documents against Acceptance and Documents against
Payments.
14.2.1 Payment terms in foreign trade
Since international trade deals with exchange of goods, there are various
ways in which the payment terms (finance) will be handled.
Bothe seller and trader should be careful about the method of payment as
they are at different locations and transactions happen without face-to-face
interaction. There are four methods of payment for the international
transactions. This includes the Cash-in-advance method, Letter of Credit,
Documentary collections and the Open Account. These are shown in figure
14.1.
Figure 14.1: Payment Risk Diagram
Information accessed at www.wikipedia.com
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As shown in figure 14.1, there is uncertainty during the time when payment
transactions happen between importer and exporter. The figure compares
and contrasts the most suitable methodology from the perspective of
importer and exporter. Apparently the most secure methodologies that work
for the exporter is not safe for the importer. For exporters, documentary
collection and open account are less secure and letter of credit and cash in
advance are more secure methods. In the same way, with respect to the
importer, the letter of credit and cash in advance are less secure and the
documentary collection and open account are more secure. These terms
are explained as follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By
this method, exporter receives the payment before the transfer of goods.
The options that are available with the cash-in-advance method include wire
transfers and credit cards. This is the least attractive method for many of the
buyers as it creates cash flow problems. The buyers are concerned about
the quality/quantity and delivery of the goods that are not sent if the
payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international
traders. This is the commitment made by the bank that the payment will be
made to the exporter if the terms and conditions are met. The terms and
conditions of the payment are explained in the required documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank
(remitter bank) sends the documents to the importer's bank (collecting
bank). The document contains information about the payment. The funds
are collected from the importer and paid to the exporter through the banks
involved in the collection, in exchange for the documents.
Open account
The open account transaction involves the shipping and delivery of goods in
advance. The payment is due usually from 30 to 90 days. This is
advantageous for the importer in cash flow and cost terms, but at the same
time it is very risky for the exporters. Buyers from abroad stress on open
accounts since the extension of credit from the seller to the buyer are more
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common in many countries. Exporters who avoid extending credit may face
loss in the sale because of competitors in the market.
14.2.2 Letter of credit
International Trade is affected by distance, laws, political instability and lack
of familiarity by the transacting parties. Letter of credit assumes significance
since it can be used to mitigate risk. It is a document that is issued by the
bank that guarantees payment to a beneficiary. It is written by the financial
institution in favour of the importer of goods to the seller. In the letter, the
bank promises that it will honour the drafts drawn on it if the seller confirms
to the specific conditions that are set forth in the letter of credit. The process
of letter of credit works as shown under:
Exhibit 14.2: Process of Execution for Payment under L/C Mode
Self Assessment Questions 1

1. The letter of credit is a letter that is benefial for both buyer and seller.
(True/False)
2. The ________ transaction involves the shipping and delivery of goods
in advance.
a) Open account.
b) Draft.
c) Cash-in-advance.
d) Letter of credit.
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14.3 Documentation in International Trade

Now, we will learn about documentation in international trade. A number of
international trade documents are required at various stage of international
trade transactions; process of trade begins with proforma Invoice and ends
with negotiations of documents with the banks for payments of export deals.
Documents are very important in international trade deals and fulfil the
commercial as well as regulatory requirements of international trade
transactions. Such documents may be aimed for various purposes such as
bill of lading carries the title of goods. It is a contract of affreightment, proof
of ownership and tells the origin and destination of goods. Hence sound
knowledge of the International Trade Documentation is essential for a
successful international marketer. Export imports documents are broadly
classified into two; namely commercial and regulatory documents. Various
commercial and regulatory documents that are used in India are tabled as
under:
COMMERCIAL DOCUMENTS
Auxiliary Commercial
Documents
Principal Commercial Documents
1. Shipping Instruction
1. Commercial Invoice
2. Pro-forma Invoice
2. Packing List
3. Shipping Order
4. intimation of Inspection
3. Certificate of Inspection/Quality
Control
5. Mates Receipt
4. Certificate of Insurance
6. Insurance Declaration
5. Bill of Lading/Combined
Transport Document
7. Application for Certificate of

Origin
8. Letter to the Bank for
Collection/Negotiation of
Documents
6. Certificate of Origin
7. Bill of Exchange
8. Shipment Advice
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REGULATORY DOCUMENTS
Main and important regulatory
documents
Allied regulatory
documents
1. Shipping Bill / Bill of Export

2. Application for Remission of Excise
(ARE I & II)
1. Export Application/Dock
Challan/Port Trust Copy
of Shipping Bill
3. Exchange Control Declaration

(SDF/GR/PP/SOFTEX/VOP) Forms
2. Receipt for Payment of

Port Charges
4. Bank Realisation Certificate
3. Vehicle Chit
5. Proof of Landing
4. Freight Payment
Certificate
5. Insurance Premium
Payment Certificate
Table 14.2: Commercial and regulatory documents
14.3.1 Commercial invoice

Commercial invoice is the document that is given to the seller from the
buyer. It is called as the import invoice or export invoice. It is mainly used by
the custom authorities of the importer country. Commercial invoice helps to
evaluate goods for the purpose of taxation.
The following are some criteria that are considered while issuing a
commercial invoice. The commercial invoice must be:
Issued by the seller in the credit, who is the beneficiary. It must include
the price amount that should not exceed the price stated in the credit.
Addressed to the applicant of the credit, which refers to the buyer. It
must include the details of the goods, included in the credit.
Signed by the beneficiary if it is required.
Issued in the specified number of originals and copies and must include
the price and unit prices, if it is required.
Clear about the shipping terms.
14.3.2 Packing List
Customs officials use packing list to check what is being exported or
imported while importer uses it to know without opening the carton/packing
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that goods are of specified nature as requested by importer in exporter

order. Cargo manifest or packing list provides all the information with
respect to all the items in the box, crate, pallet, and container including their
dimensions, type, and container weight so as to help the customs to known
that what is inside the carton or packet.
14.3.3 Bill of lading
The legal document that is issued by the shipping agency for the
merchandises that are shipped from one destination to the other is called
the bill of lading. The bill of lading is signed by the representatives of the
carrying vessel. It contains the details of type, quantity and destination of the
goods.
Several times, the bill of lading is issued as a set of two, three or more. The
number present on each bill of lading is to ensure security. Shipping
company or th agent has to sign the bill of lading. It should also show the
number of originals (signed).
The bill of lading indicates whether the cost of carriage is paid or not. This
will be of the following two types:
Freight prepaid - This is paid for the shipper.
Freight collect The buyer has to pay this amount at the port of
discharge.
To be acceptable by the buyer, the bill of lading should:
Carry the correct date of shipment on the board.
Have the notation of the shipping company if the goods are damaged.
The main people that are involved in the bill of lading are mentioned below:
Shipper He/she is person who sends the merchandises.
Consignee - He/she is person who delivers the merchandises.
Notify party - He/she is person who is informed by the shipping company
on the arrival of goods.
Carrier - This can be a person or company who is in contract with the
shipper for transport of the merchandises.
Bill of lading has to be in line with the specifications of the letter of credit.
Even a small spelling mistake may lead to rejection of documents.
The consignee, exact shipper, and the notifying party need to be known.
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Means of transportation and ports of loading and release need to be

mentioned.
The description/quality of the goods needs to be consistent with the
other as shown on the documents.
The measurements/quantity need to match with the measurements/
quantity that are on the other documents.
The shipping marks and numbers need to match with the numbers that
are shown on the other documents.
The bill of lading has to state whether the goods are paid or if it needs to
be paid during the release of goods.
The bill of lading has to state the last date for the shipment, that is
before the date specified in the credit.
The bill of lading has to state actual name of the carrier.
14.3.4 Insurance certificate

Also called as insurance policy, insurance certificate certifies that the goods
that are transported are insured through an open policy . It is mandatory that
the date of effectiveness of the insurance is either same or earlier than the
date of issuance of transport documents. If the document is submitted under
the letter of credit, the insured amount should be in the currency as
mentioned in the credit. This is usually the amount of the bill with an
additional 10 percent.
For insurance policy to be complete, following information is needed:
The name of the party in favour, which the document has been issued.
The place from where the insurance has to commerce should be
detailed. The insurance cases include the buyers warehouse and the
port of destination.
The details of the flight and the name of the vessel.
The marks and numbers need to match with the numbers that are
present on the other documents.
The value of insurance need to be specified in the credit.
The information related to the names and addresses of the claims
should be included in this document.
Consistency should be maintained in case of the the description of the
goods with that of the invoice credit.
Wherever it is necessary, the document is countersigned.
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The date of issue of the insurance certificate should not be later than the
date of isuuance of transport documents unless the cover that is shown
be effective before the date of transport documents.

3. The legal document, given by the shipping company for the
merchandises shipped from one place to another is called as
________.
4. The ______________ document is required when you are exporting
the goods to other countries.
5. Which of the following document certifies that the goods that are
transported are insured under an open policy?
a) Consular invoice
b) Insurance certificate
c) Commercial invoice
d) Bill of lading
Activity 1
Consider that you are a product manager in XYZ creations and your
company is exporting leathers and laces to the ST Company in Thailand
and importing shoes from the same company. Your management has
asked you to maintain the documents related to the international trade of
both the exports and imports. Name the documents that you would
maintain for the same.
Hint: Insurance certificate.
14.4 Financing Techniques

In the previous section, we have learnt about documentations that play an
important role during transactions in the international market. Now let us
learn about the financing techniques that enable us to know various ways of
transactions other than direct bank financing.
Planning plays an important role in the lifespan of investment so that
financing is available at every stage.
There are some well-known financing techniques that are explained in the
upcoming sections.
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14.4.1 Bankers acceptance

In financial terms, the bankers acceptance is the credit instrument that is
developed by the non financial firm and guaranteed by a bank for payment.
Usually, the acceptances are traded at discounts from face value in the
secondary market, depending on the credit quality of the guaranteeing bank.
The banker's acceptance has played an important role in financing foreign
trade for many years. A banker's acceptance, is a promised future payment,
or time draft, which is accepted and guaranteed by a bank and drawn on a
deposit at the bank. After accepting the draft, the bank gives an
unconditional promise to pay the holder of the draft a specified amount on a
specified day. So, the bank substitutes its own credit for that of a borrower
and in the process, creates an instrument that is freely traded.
14.4.2 Factoring
The term factoring means the financial transaction in which the factoring
organisation buys the exporters foreign accounts receivable at a discount.
In this, the factor assumes all the credit and political risks that are present
with the importer. From the perspective of the exporter, factoring is
advantageous as it serves to help the firm realise cash immediately.
Following are the three ways in which factoring differs from bank loan:
Factoring mainly focuses on the value of the receivables but not on the
worth of the organisation's credit.
Factoring is the purchase of the financial asset, which refers to the
receivable, but it is not a loan.
Whilst bank involves just two parties for a loan, factoring involves three
parties the seller, debtor and factor.
14.4.3 Forfaiting
In international trade, the term forfaiting refers to the purchase of an
exporters receivables, i.e. the amount importers owe the exporter. The
amount is paid in cash by the forfaiter selling of an exporter's receivables for
a specified transaction.
Forfaiting is the financing technique that is used for financing the sale of
capital goods. In Forfaiting, the buyer is known as the forfaiter who takes on
all the risks involved with the receivables the importer now is obliged to
pay the forfaiter. It involves the sale of notes signed by the importer in
favour of the exporter. In this technique, exporter gets the payment for the
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goods. Forfaiter does not have a recourse on the promissory notes and the
structure of the payment is extended for a period of three to seven years.
6. The _________________is the credit instrument that is developed by
the non financial firm.
7. The term factoring is the financial transaction in which the business sells
its accounts receivable at a discount. (True/False)
8. In which of the following technique the buyer is known as the forfaiter?
a) Bankers acceptance.
b) Factoring.
c) Forfaiting.
d) Commercial invoice.
14.5 Export Promotion Schemes

In the previous section, we have learnt about financing techniques. Now let
us understand the promotion schemes.
Government, in order to promote the exports from the country, offers some
export assistance and export promotion schemes so that exporters can
benefit from them. They can improve their key weaknesses and stand up to
compete in the international market by offering quality Indian products and
services. Such export-promotion measures can be divided into direct and
indirect assistance or programmes from the government agencies to enable
Indian exporters to standardise the products and services as appropriate for
the international quality and aesthetic appeal. Such measures may be
targeted on any of the combination of the following:
i. Market Access Initiatives (for studies, brochures etc.).
ii. Marketing Development Assistance for participation in trade fairs etc.
iii. Providing services to international market.
iv. Marketing in difficult markets like certain African, Latin American and
Commonwealth of Independent States (CIS) markets.
v. Marketing difficult products like those from rural areas.
vi. Special agricultural products and rural industrial products.
vii. High-technology products
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India being a developing economy, export promotion schemes are needed

to give a boost to our economy. The needs of the export promotion scheme
are explained below.
As the economy of the country is progressing with the increase in
population, there is a need for more number of imports. We need to have
surplus exports to pay our imports.
It is not wise to depend on external assistances for financing essential
imports, instead exportable surplus needs to be created.
In any country, there are some capital goods, machinery and raw
materials that cannot be produced for some time and it has to be
imported from other countries. In order to pay for such imports, the
country needs to have sufficient funds so that the country has to pay for
its exports.
The earning from the exports needs to be increased to generate
purchasing power in order to import the essential goods.
We need to explore the foreign markets in order to expand the
capacities of the existing units and find a market for new units.
To tap our export potentials completely, we need to focus on our
strengths like, price stability, low wages and the industrial bases to
increase its exports.
The deficits of payments in Indian economy can be resolved using funds
received through foreign assistance. We need to create the repaying
capacity with the help of exports.
Table 14.3 shows the three main categories that are associated with the
export promotion and assistance measures.
Table 14.3: Export promotion and assistance schemes in India
Export incentives and
benefits
a. Market focus scheme
Product focus scheme
b. Status holder scheme
c. VKGUY scheme
d. Services from India
scheme
e. Services export scheme
Duty neutralization
and remission
Capacity building and

infrastructural support
a. Advance
authorisation
scheme
b. Duty free import
authorisation
scheme
c. Duty drawback
scheme
a. Export promotion
capital goods scheme
b. EOU/STPI/BTP EHTP
scheme
c. Textiles and apparel
park scheme
d. Agri export zones
scheme
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f.
Special focus initiatives d. Imprest license for

in agriculture and village
deemed export
industry, handlooms,
handicrafts, gems and
jewellery, leather and
footwear, marine sector,
electronics and IT
hardware manufacturing
industries, sports goods
and toys, green
products and
technologies, incentives
for exports from the
North Eastern Region
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e. SEZ and FTWZ

scheme
f. ASIDE scheme
g. Market access
initiative scheme
h. Market development
assistance scheme
i. Board of trade
j. Town of export
excellence scheme
k. Brand promotion and
quality and test
houses scheme

9. The ________________________ helps in identification of the product
and market.
10. The imports of second hand goods that have the minimum residual life
of six years are allowed free of licensee. (True/False)
11. Which of the following scheme aims at import of goods for free of cost?
a) Export Promotion Capital Goods Scheme
b) Software Technology Parks
c) Electronic Hardware Technology Parks
d) Duty exemption scheme
14.6 Export and Import Finance

In the previous section, we have studied about the export promotion
schemes. In this section, we will learn about the export and import finance.
The export credit in India is studied with response to its two stages. The two
stages are the pre-shipment credit and the post-shipment credit. The preshipment credit is mainly used for production, processing and packaging.
The post-shipment credit is mainly required to finance the foreign buyers.
Depending on the period of loans, there are three types of creditsshort
term, medium term and long term credit.
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14.6.1 Short term credit

The short term credit is provided in the form of pre-shipment and postshipment finance. This can be provided by the commercial banks that are
authorised dealers in the foreign exchange. Short term credits are covered
by RBI and provide credits at lower rate of interest. In relation to this type of
credit, there are two schemes that are explained as follows:
The Pre-shipment Credit in Foreign Currency (PCFC) in which the
exporters can take the credit both in rupees as well as, the foreign
currency. We get the credit in Indian rupees at base rate+1% of interest
and the foreign exchange at London interbank offered rate (LIBOR)+1%
rate of interest. Concessional pre-shipment credit as per RBI rules can
be for 6 months.
The second scheme is the post-shipment credit that is available in
Indian rupees. This post-shipment credit rate of interest is available in
Indian currency which does not exceed 13% for a maximum of 180
days. Higher rate of interest are charged when post-shipment finance is
availed for more than 6 months.
14.6.2 Long term credit
Long term credit is provided by the EXIM bank and the commercial banks
that are refinanced by the IDBI.
The important aspect of export credit is the risk of transacting with the
overseas buyers. The risks with the foreign buyers occur due to the
insolvency of the buyers when there are fluctuations in exchange rates and
some government actions that cause delay in the payment to exporters.
These types of risks can be averted by the insured Export Credit and
Guarantee Corporation (ECGC). This corporation offers two types of
services that are given as below:
The export credit insurance, which consists of the policies that are
issued to the exporters to protect themselves against the losses that
occur from granting credit terms to the foreign buyers.
The direct guarantees are the guarantees to the banks that give
protection in respect of exporters.
14.6.3 EXIM bank
The EXIM bank is the export import bank that has been set up by the
Government of India. This is set up to perform many functions to finance,
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promote and develop the trade. This was established on Jan 1, 1982. This
has the power to borrow from the RBI as well as from abroad. This plays an
important role in the export financing. This bank provides the financial
assistance for promoting the Indian exports. This provides the financial
assistance through the direct financial assistance, abroad investment
finance, pre-shipment credit, buyers lines, export bills discounting and so
on. This also extends the help through the non funded facility for the
exporters in the form of guarantees. This aims at export of the manufactured
goods, export of technology, export of software. EXIM bank provides pre
shipment and post shipment credit in Indian rupees and foreign currency.
Finance is extended for short term i.e. upto 6 months and also for
medium/long term i.e. beyond 6 months for eligible products and projects.
Medium/long term export credit is extended by way of supplier's credits (i.e.
through the Indian exporter) with recourse to the exporter or buyer's credits
i.e. directly to the overseas buyer with no recourse to the Indian exporter.
Certain RBI guidelines apply for such medium/long term export credit.
The financing programmes of the EXIM bank are the most comprehensive
among the export credit agencies across the globe.
12. The ________________ credit is mainly used for production, processing
and packaging.
13. Name the credit that is provided by the EXIM bank and the commercial
banks that are again financed by the IDBI?
14. EXIM bank is a private owned body. (True/False)
Activity 2
Consider that you are a business head in the company and you have to
deal with the finance related to the imports and exports of the company.
Due to the transit period in the company, there is shortage of funds and
your management has planned to go for credit terms. Name the credits
that you would suggest for the same.
Hint: Short term credit.
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14.7 Summary
Let us summarise the points covered in this unit about finance and
international trade:
International trade refers to the exchange of products, services and

money at the national level. The international trade increases gross
domestic product by increasing the economic opportunities.
There are some risks with both the exporter and importer of the goods.
The letter of credit is a letter that is given to the seller. The letter of credit
helps in solving the risks that the importer and exporter may face in
terms of payment or delivery of goods.
Documentation plays an important role while making transactions at

international markets. The bill of lading is a document that is given by
the shipping agency for the goods that are shipped from one destination
to other.
Commercial invoice is the document that is given to the seller from the
buyer. The insurance certificate is the insurance policy which allows the
transport of goods under the open policy.
The consular invoice plays an important role while transporting the

goods to another country.
Different financing techniques play an important role in the lifespan of

the investment. We have seen the banker's acceptance, which is the
time at which the draft is drawn on a bank.
The factoring technique helps to realise the cash immediately. The

forfaiting technique is used for financing the sale of capital goods.
The export promotion schemes are the incentive programs developed to

attract more firms towards exporting. There is a need for the export
promotion schemes in the developing country like India.
There are many export promotion schemes and Export Promotion

Capital Goods (EPCG) is one of the export promotion schemes that aim
at import of capital goods at a reduced rate.
The three broad categories of credits include the short term, medium
term and long term credit.
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Unit 14
14.8 Glossary
Beneficiary: In insurance, the beneficiary is the person or organisation that
receives money from insurance company when the insured event occurs.
Commodity: The physical substances such as food, grains and metals are
interchangeable with other products of the same type.
Export promotion: Program that promotes the domestic producer for
exporting and importing goods.
Foreign Direct Investment (FDI): This is the amount of money that is
invested by foreign companies and other assets that helps the economies to
grow more efficiently and become competitive participants.
Gross Domestic Product (GDP): The final market value of all the goods
and services are produced in the country in one financial year.
Monopoly: Situation in which a single firm owns almost all the market of a
given type of product or service.
14.9 Terminal Questions

1.
2.
3.
4.
5.
Explain in brief about letter of credit.

Write a short note on insurance certificate.
Discuss factoring.
Elaborate the need for the export promotion scheme in the country.
Describe the functions of the EXIM bank.
14.10 Answers
1. True
2. a. Open account
3. Bill of lading
4. Consular invoice
5. b. Insurance certificate
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6. bankers acceptance
7. True
8. c. Forfaiting
9. export promotion scheme
10. False
11. d. Duty exemption scheme
12. Pre-shipment
13. Long term
14. False
Terminal Questions
1. The letter of credit is a letter that is given to the seller. In the letter, the
bank promises that it will honour the drafts drawn on it if the seller
confirms to the specific conditions that are set forth in the letter of
credit. For more information, refer subsection 14.2.2 of this unit.
2. Insurance certificate is known as an insurance policy which certifies that
the goods that are transported are insured under an open policy and
are not actionable with the risks that are covered. We have discussed
this in subsection 14.3.3 of this unit. You can refer the same for more
details.
3. Term factoring is the financial transaction in which the business sells its
accounts receivable at a discount. For more information on factoring,
refer subsection 14.4.2 of this unit.
4. As the country economy is progressing, there is a need for more
number of imports. We need to have much of the exports to pay our
imports. You can refer section 14.5 of this unit for more details.
5. EXIM bank plays an important role in export financing. This bank
provides the financial assistance for promoting the Indian exports. For
more information, refer subsection 14.6.3 of this unit.
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Unit 14
14.11 Caselet
In order to promote paperless, transperent and cost effective export
import operations; government of India with the help of UNCTAD has
implemented the ICEGATE platform which is a one-stop-window for
filing of export import documents so that the goods can be cleared for
export and import. ICEGATE is an e-commerce initiative for filing of all
export import documents so that the cargo can be cleared on real time
basis and informed decisions vis-a-vis composition and direction of
foreign trade can be taken. Thus, ICEGATE is an infrastructure project
that fulfils the customs department's electronic communication/electronic
data interchange and data communication requirements.
ICEGATE system facilitates the smooth functioning of Central Board of
Exicse and Customs through various facilities such as electronic filing of
Bill of Entry (import goods declaration) and Shipping Bills (export goods
declaration) and related electronic messages between customs and the
trading partners using communication facilities, i.e. e-mail. The ICEGATE
also ensures 24X7 helpdesk facilities on status of trade documents to
trading partners, i.e. exporters and importers. For safe and secure
transactions, it is mandatory that one should use only digital signatures
on Bill of Entry and other documents/messages to be handled on the
gateway.
At present, ICEGATE system at Indian customs is working through a
MPLS based Wide Area Network. It links all the buildings of the 582
departments of Indian customs all over the country. In addition to e-filing
of export import documents, ICEGATE also provides a host of other
services like e-payment, online registration for intellectual property
rights/SPS barriers/TBT barriers etc. One can check the status of trade
by using Document Tracking status platform at ICEGATE. Now, it is
possible to make online verification of export promotion schemes like
DCS/DEPB/DEEC/EPCG licences, Importer-Exporter code status.
ICEGATE is also linked up with other system like ACES (excise and
service tax), PAN (income tax) for availing input credit if any. Custom
House Agents can also use it on behalf of exporter/importer and can
access important information relating to export or import from other
websites and databases. Due to all these reasons, Indian exporters and
Page No. 314
Unit 14
importers are fast moving towards paperless trade by filing shipping

bill/bill of entry at ICEGATE.
Q. No. 1: What are the major benefits of customs clearance platform
called as ICEGATE?
Q. No. 2: How does ICEGATE system ensure cost effective operations of
customs?
Q. No. 3: What are the advantages of ICEGATE linkages with other
systems like ACES (excise and services tax), PAN (income tax) Quality
assurance agency and DGFT?
References:
B.L. Mathur (2001), Towards economic development, Discovery

publishing house.
Aswathappa (2008), International business, Tata McGraw-Hill.
E-Reference:
http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1077787643&
type=RESOURCES, retrieved on 3rd November, 2010.
http://www.infodriveindia.com/Exim/Guides/Exportinance/Ch_4_Trade_Documents.aspx, retrieved on 4th November, 2010
http://www.investopedia.com/articles/03/112503.asp, retrieved on 5th

November, 2010
http://ecedweb.unomaha.edu/ve/library/bfte.pdf, retrieved on 11th

November, 2010.
http://www.economywatch.com/international-trade/heckscher-ohlinmodel.html, retrieved on 15 Nov 2010
http://www.bangkoklogistics.com/international-business/Three-BarriersTo-International-Trade.html, retrieved on 18th November 2010
http://www.pierobon.org/export/outline.htm, retrieved on 20 April 2012
Page No. 315

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International Business Management

Finance and International Trade

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14.2 Understanding Payment Mechanism in Foreign Trade

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Table 14.1: Factors to be considered for choosing payment terms

Source: John Michael Pierobon; How to Succeed In International Business

In case of domestic business, main factor driving salesmans decision

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International Business Management

the credit worthiness of importer can be covered by ECGC. Exchange

Source: Craig F. Schaffer, Inside Trade Finance

C. International Trade Operations offers different types, quantum and

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F. However, the selection criteria for mode of payment is based on mutual

Figure 14.1: Payment Risk Diagram

Information accessed at www.wikipedia.com

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Self Assessment Questions 1

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14.3 Documentation in International Trade

Principal Commercial Documents

7. Application for Certificate of

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1. Shipping Bill / Bill of Export

3. Exchange Control Declaration

2. Receipt for Payment of

4. Bank Realisation Certificate

Table 14.2: Commercial and regulatory documents

14.3.1 Commercial invoice

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that goods are of specified nature as requested by importer in exporter

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Means of transportation and ports of loading and release need to be

14.3.4 Insurance certificate

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Self Assessment Questions 2

14.4 Financing Techniques

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14.4.1 Bankers acceptance

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14.5 Export Promotion Schemes

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India being a developing economy, export promotion schemes are needed

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