International Trade Finance

AMITY MBA 317

Meaning and definition of FOREIGN TRADE: Trade between two or more nations is called foreign trade or international trade. This involves the exchange of goods and services between the citizens of two nations. when the citizens of one nation exchange goods and services with the citizens of another nation, it is called foreign trade; for example, India's trade with USA, Japan, France and Pakistan. Foreign trade is also known as external trade. Foreign trade transactions are classified under three categories: Import Trade Export Trade Entrepot Trade. (When goods are imported for export to other countris, it is known as entreport trade ) Need for foreign Trade The aim of foreign trade is to increase production and to raise the standard of living of the people. Foreign trade helps citizens of one nation to consume and enjoy the possession of goods produced in some other nation. There is a need of foreign trade due to the following reasons:

I. Uneven Distribution of Natural Resources: II. Division of Labour and Specialization: III. Differences in Economic Growth Rate: IV. Theory of Comparative Cost: V. Equality of prices VI. Availability of multiple choices VII. Ensures quality and standard goods VIII. Raises standard of living of the people IX. Generate employment opportunities X. Facilitate economic development XI. Assitance during natural calamities

India Balance of Trade India reported a trade deficit equivalent to 18080 Million USD in September of 2012. Historically, from 1994 until 2012, India Balance of Trade averaged a deficit equivalent to 4001.78 Million USD reaching the best surplus at 491.28 Million USD in November of 2001 and the worst deficit at 19644.00 Million USD in October of 2011. India is leading exporter of gems and jewelry, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals. Main trading partners are European Union, The United States, China and UAE.

EXPORTER : The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer". In International Trade, "exports" refers to selling goods and services produced in the home country to other markets. In national accounts "exports" consist of transactions in goods and services (sales, barter, gifts or grants) from residents to non-residents. The exact definition of exports includes and excludes specific "borderline" cases. A general delimitation of exports in national accounts is given below: An export of a good occurs when there is a change of ownership from a resident to a non-resident; this does not necessarily imply that the good in question physically crosses the frontier. Export of services consist of all services rendered by residents to nonresidents. In national accounts any direct purchases by non-residents in the economic territory of a country are recorded as exports of services; therefore all expenditure by foreign tourists in the economic territory of a country is considered as part of the exports of services of that country.

'Deemed Exports' as defined in the Foreign Trade Policy means those transactions in which the goods supplied do not leave the country and the supplier in India receives the payment for the goods. It means the goods supplied need not go out of India to treat them as 'Deemed Export'. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. IMPORTER The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import where the overseas based seller is referred to as an "exporter". Thus an import is any good (e.g. a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale.Imported goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country.

MERCHANT A merchant is a businessperson who trades in commodities that were produced by others, in order to earn a profit. Merchants can be one of two types: A wholesale merchant operates in the chain between producer and retail merchant. Some wholesale merchants only organize the movement of goods rather than move the goods themselves. A retail merchant or retailer, sells commodities to consumers (including businesses). A shop owner is a retail merchant. TRADER A trader is person or entity, in finance, who buys and sells financial instruments such as stocks, bonds, commodities and derivatives, in the capacity of agent, hedger, arbitrageur, or speculator. Traders are either professionals (institutional) working in a financial institution or a corporation, or individual (retail). They buy and sell financial instruments traded in the stock markets, derivatives markets and commodity markets, comprising the stock exchanges, derivatives exchanges and the commodities exchanges.

 'Merchant Bank' A bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public. Their knowledge in international finances make merchant banks specialists in dealing with multinational corporations.

OVERSEAS REPRESENTATIVES: Company-specific counseling: offer companies counseling on export related questions and concerns by providing the services and expertise of Global Trade Specialists. Matchmaking: can assist their companies looking for foreign agent/distributors, foreign customers or joint venture partners. Trade Shows: International trade shows are an effective tool that can help companies enter new markets or expand sales in existing markets. they organize their companys participation in various trade events, including trade shows. Trade Missions: they help plan and execute their companys Trade Missions. Foreign Offices: Through the overseas representatives in Japan, China, Korea and Europe, OR are able to make available to companies international networks of foreign government officials, foreign companies and foreign trade associations. the foreign offices provide due diligence when researching potential agents and distributors in foreign markets, supply on the ground knowledge of global competition in foreign markets, and can offer expertise in business protocol in foreign cultures. Capacity-Building Events (Outreach): the OR which are foreign trade specialists conduct strategically targeted outreach and training events for new and established exporters. Market research: OR are able to offer thier companys targeted market research in foreign marketsdepending on the market and the industry

GLOBALIZATION Name for the process of increasing the connectivity and interdependence of the world's markets and businesses. This process has speeded up dramatically in the last two decades as technological advances make it easier for people to travel, communicate, and do business internationally. Two major recent driving forces are advances in telecommunications infrastructure and the rise of the internet. In general, as economies become more connected to other economies, they have increased opportunity but also increased competition. Thus, as globalization becomes a more and more common feature of world economics, powerful pro-globalization and anti-globalization lobbies have arisen. Its visible effects can also be seen in the sectors like: Education Health Sports Tourism Food segment with globalized brands like Mc Donalds.

ROLE OF BANKS IN FOREIGN TRADE AND FINANCE: Without commercial banks, the international finance and import-export industry would not exist. Commercial banks make possible the reliable transfer of funds and translation of business practices between different countries and different customs all over the world. The global nature of commercial banking also makes possible the distribution of valuable economic and business information among customers and the capital markets of all countries. Commercial banking also serves as a worldwide barometer of economic health and business trends. Foreign Branch Banking Some small commercial banks limit their reach to the local business community; but as business has gone global, so have commercial banks.for e.g large banks such as Citigroup, Bank of America and Chase are retail (consumer) banks that also maintain full commercial banking activities in the United States with branches in many countries. These larger banks may act as affiliates of smaller banks that do not have branch presences in other countries. Through foreign branch banking, U.S. based multinational companies can consolidate their financial business at a single bank that handles their trade finance, currency transactions, project loans, payroll, cash management investments and deposit accounts throughout the world. Commercial banks also arrange deals between their customers globally, including strategic partnerships and project fulfillment agreements. Trade Finance Commercial banks doing international business are also called merchant banks because they finance trade between companies and customers located in different countries. This is done by issuing LOCs that indicate the customer has deposited the full amount due on an order with a company located in a different country. The seller company can then feel assured of being paid if it ships goods to its offshore customer. The LOC may also be used by the company to guarantee a manufacturer's loan, allowing it to finance the manufacture of the goods to be delivered. Without LOCs, companies would face considerable expense in investigating their foreign customers to make sure they are legitimate and creditworthy, and complying with laws and regulations of the different countries in which they do business.

Foreign Exchange In order to facilitate international trade and development, commercial banks convert and trade foreign currencies. When a company is doing business in another country it may be paid in the currency of that country. While some of these revenues will be used to pay workers in that country and for administrative expense such as office rent, utilities and supplies, the company may need to purchase goods from a neighboring country in that country's currency, or convert cash to its native currency for return to the home office. Corporate Finance Companies always need to borrow money to cover purchases of raw materials, machinery parts, inventory and/or payroll. Banks with overseas branches or affiliates can simplify the process of corporate finance throughout a company's organization by consolidating the transaction procedures, reporting and record keeping. It is much easier for a company manager to do business in her own language with a banker located nearby who handles her global business finance needs than it would be for her to develop banking relationships in every country where she does business. Her international commercial bank can also provide referrals to professional service firms in other countries, as well as arrange introductions to other companies appropriate as customers or for strategic partnerships.

Miscellaneous Banking Services Corporate checking accounts, currency specific credit cards and lock boxes are also offered by commercial banking to help make foreign trade possible for a company. Lock boxes are particularly helpful for collecting payments from overseas customers and reporting receipts daily for cash management purposes. Currency-specific credit cards are also important in eliminating the cost of cross currency purchasing, which normally is done at expensive valuation levels.

LOGISTICS Logistics is the management of the flow of resources between the point of origin and the point of destination in order to meet some requirements, for example of customers or corporations. The resources managed in logistics can include physical items such as food, materials, equipment, liquids, and staff as well as abstract items such as information, particles, and energy. The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security. Minimizing use of resources and time are common goals Logistics is one of the main functions within a company. The main targets of logistics can be divided into performance related and cost related. A few examples are high due date reliability, short delivery times, low inventory level and high capacity utilization. When decisions are made, there is a trade off between targets.

 Inbound logistics is one of the primary processes and it concentrates on purchasing and arranging inbound movement of materials, parts and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses or retail stores. Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user. Logistics fields Given the services performed by logisticians, the main fields of logistics can be broken down as follows: Procurement Logistics Production Logistics Distribution Logistics After sales Logistics Disposal Logistics Reverse Logistics -The reverse logistics process includes the management and the sale of surplus as well as returned items of products.

 Procurement Logistics consists of activities such as market research, requirements planning, make or buy decisions, supplier management, ordering, and order controlling. The targets in procurement logistics might be contradictory - maximize the efficiency by concentrating on core competences, outsourcing while maintaining the autonomy of the company, and minimization of procurement costs while maximizing the security within the supply process. Production Logistics connects procurement to distribution logistics. The main function of production logistics is to use the available production capacities to produce the products needed in distribution logistics. Production logistics activities are related to organizational concepts, layout planning, production planning, and control. Distribution Logistics has, as main tasks, the delivery of the finished products to the customer. It consists of order processing, warehousing, and transportation. Distribution logistics is necessary because the time, place, and quantity of production differs with the time, place, and quantity of consumption. Disposal Logistics' main function is to reduce logistics cost(s), enhance service(s), related to the disposal of waste produced during the operation of a business. Reverse logistics stands for all operations related to the reuse of products and materials.The reverse logistics process includes the management and the sale of surplus as well as returned items of products.

Logistics is that part of the supply chain which plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer and legal requirements. A professional working in the field of logistics management is called a logistician. Logistics management is known by many names, including: Materials Management Channel Management Distribution (or Physical Distribution) Supply-Chain Management

LOGISTICS The American Council of Logistics Management defines logistics as the process of planning,implementing and controlling the efficient and effective flow, and storage of goods, services andrelated information from the point of origin to the point of consumption for the purpose of conforming to customer requirements. word logistics is derived from the Greek adjective logistikos meaning "skilled in calculating" Objective of Logistics Management: The primary objective of logistics management is to effectively and efficiently move the supplychain so as to extend the desired level of customer service at the least cost. Thus, logisticsmanagement starts with ascertaining customers needs till their fulfillment supplies. However,there are some definite objectives to be achieved through a proper logistics system. These can bedescribed as follows: 1. Improving customer service: An important objective of all marketing efforts, including the physical distribution activities, isto improve the customer service. An efficient management of physical distribution can help inimproving the level of customer service by developing an effective system of warehousing, quick and economic transportation, and maintaining optimum level of inventory.

2. Rapid Response: Rapid response is concerned with a firm's ability to satisfy customer service requirements in atimely manner. Information technology has increased the capability to postpone logisticaloperations to the latest possible time and then accomplish rapid delivery of required inventory. 3. Reduce total distribution costs: The cost of physical distribution consists of various elements such as transportation,warehousing and inventory maintenance, and any reduction in the cost of one element may resultin an increase in the cost of the other elements. Thus, the objective of the firm should be toreduce the total cost of distribution and not just the cost incurred on any one element. 4. Generating additional sales: A firm can attract additional customers by offering better services at lowest prices. For example, by decentralizing its warehousing operations or by using economic and efficient modes of transportation, a firm can achieve larger market share. Also by avoiding the out-of stock situation, the loss of loyal customers can be arrested. 5. Creating time and place utilities: The products are physically moved from the place of their origin to the place where they arerequired for consumption; the productshave to be made available at the time they are needed for consumption.

 6. Price stabilization: It can be achieved by regulating the flow of the products to the market through a judicious use of available transport facilities and compatible warehouse operations. By stocking the raw materialduring the period of excess supply and made available during the periods of short supply, the prices can be stabilized. 7. Quality improvement: The long-term objective of the logistical system is to seek continuous quality improvement. Totalquality management (TQM) has become a major commitment throughout all facets of industry.If a product becomes defective or if service promises are not kept, little, if any, value is added bythe logistics. Logistical costs, once expended, cannot be reversed. 8. Movement consolidation Consolidation one of the most significant logistical costs is transportation. Transportation cost isdirectly related to the type of product, size of shipment, and distance. Many Logistical systemsthat feature premium service depend on high-speed, small shipment transportation. Premiumtransportation is typically high-cost. To reduce transportation cost. It is desirable to achievemovement consolidation.

RELEVANCE OF LOGISTICS IN INTERNATIONAL MARKETING Marketing experts have recognized that for developing a position of sustainable competitiveadvantage, a major source is superior logistics performance. Thus, it can be argued that insteadof viewing distribution, marketing and manufacturing as largely separate activities within the business, they need to be unified, particularly at the strategic level. One might be tempted todescribe such an integrated approach to strategy and planning as Marketing Logistics. Businesscan only compete and survive either by winning a cost advantage or by providing superior valueand benefit to the customer. In recent years, numbers of companies have become aware that themarket place encompasses the world, not just the India .As a practical matter, marketingmanagers are finding that they need to do much work in terms of conceptualizing , designing ,and implementing logistics initiatives to market effective globally. Following are the reasons behind the extension of logistics activities at global level to do business internationally. Themagnitudes of global business are: Increase in the magnitude of global business. Business is relying on foreign countries to provide a source of raw materials and markets for finished goods. Fall of global trade barriers. Increase in Global competition.

 A freight forwarder, forwarder, or forwarding agent, is a person or company that organizes shipments for individuals or corporations to get large orders from the manufacturer or producer to market or final point of distribution. Forwarders will contract with a carrier[to facilitate the movement of goods. A forwarder is not typically a carrier but is an expert in supply chain management. In other words, a freight forwarder is a "travel agent," for the cargo industry, or a third-party (non-asset-based) logistics provider. A forwarder will contract with asset-based carriers to move cargo ranging from raw agricultural products to manufactured goods. Freight can be booked on a variety of carrier types, including ships, airplanes, trucks, and railroads. It's not unusual for a shipment to move along its route on multiple carrier types. International freight forwarders typically arrange cargo movement to an international destination. International freight forwarders have the expertise that allows them to prepare and process the documentation and perform related activities pertaining to international shipments. Some of the typical information reviewed by a freight forwarder is the commercial invoice, shipper's export declaration, bill of lading, and other documents required by the carrier or country of export, import, or transshipment. Much of this information is now processed in a paperless environment. A forwarder in some countries may sometimes deal only with domestic traffic and never handle international traffic.

 Freight companies are companies that specialize in the moving (or "forwarding") of freight, or cargo, from one place to another. These companies are divided into several variant sections. For example, international freight forwarders ship goods internationally from country to country, and domestic freight forwarders, ship goods within a single country. There are thousands of freight companies in business worldwide, many of which are members of certain organizations. Such organizations include the IATA (International Air Transport Association), TIA (Transportation Intermediaries Association) the BIFA (British International Freight Association), or the FTA (Freight Transport Association) and various or other regional organisations. An electric container freight train There are various methods of shipping goods; by air, road, sea, or rail. Some companies offer multi-modal solutions, this means that they offer more than one service, in many cases air and sea and in other cases air, sea, and road. The most common multi-modal way of shipping is referred to as inter-modal meaning truck pickup to rail to truck delivery. A shipping method is by evaluating three factors: time, cost, and product characteristics. While shipping by sea could take longer than shipping by air, the latter is generally more expensive

WHAT IS FREIGHT FORWARDING? WHAT DO FORWARDERS DO? Freight Forwarders can be thought of as travel agents for cargo shipped to overseas locations. Most employ highly skilled and knowledgeable staffs who search for the most economical means to ship your cargo. The myriad of documentation requirements and government formalities are the details commonly handled by the Freight Forwarder." ... International Trade Line of Balto. County Chamber of Commerce, January, 1992 issue Freight forwarding is all about the smooth flow of international trade. The freight forwarder is the party who ensures that internationally traded goods move from point of origin to point of destination to arrive: At the right place, at the right time, In good order and condition, At the most economic cost. To accomplish this, expertise is required in a number of different areas: Logistics, risk management, regulatory compliances etc.

For example, he will: - Arrange to receive export shipment for a client at any point of origin . - Arrange consolidations of less-than-container load lots. - Arrange forwarding to seaboard of the cargo loaded aboard ship. - Arrange for insurance coverage. - If necessary, arrange free domicile delivery abroad. ... Many forwarders offer the same service on air freight and are consolidators. What specific functions does a freight forwarder normally perform? 1. Preliminary advice to the exporter: Explaining exporter's responsibilities / obligations under Terms of Sale (Incoterms) requested. Assist in negotiating inland and ocean rates; provide ideas on optimal and most cost effective shipping alternatives. 2. Booking the freight / Shipping Operations: Provide custody and control of material in transit. Expediate production and delivery.

3. Documentation for shipping: Certify and notarize invoices. Normally prepare dock receipt, bill of lading; warehouse receipt, insurance certificate, AID documents, certificate of origin, special customs invoices, inspection certificate. May prepare or assist in preparing with exporter: commercial invoice, packing list, draft, transmittal letters, consular invoices, export license, drawback forms, shipper's export declaration. 4. Notifications made in connection with the shipment: Notification normally made to exporter/shipper, consignee, consignee's broker. Notification made for insurance, L/C, contract, payment, and advice purposes. While shipment is underway, forwarder may trace as necessary, assist in filing claim when necessary and correct errors learned after the fact. 5. Distribution of negotiable documents for collections: Forward documents to Bank, exporter's foreign sales representative, consignee or consignee's broker.

The Incoterms rules or International Commercial terms are a series of predefined commercial terms published by the International Chamber of Commerce (ICC) widely used in international commercial transactions. A series of three-letter trade terms related to common sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods. The Incoterms rules are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. First published in 1936, the Incoterms rules have been periodically updated, with the eighth versionIncoterms 2010 having been published on January 1, 2011. "Incoterms" is a registered trademark of the ICC.

Rules for Any Mode(s) of Transport The seven rules defined by Incoterms 2010 for any mode(s) of transportation are: EXW Ex Works (named place of delivery) The seller makes the goods available at its premises. The buyer is responsible for unloading. This term places the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included. EXW means that a seller has the goods ready for collection at his premises (works, factory, warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also bears the risks for bringing the goods to their final destination. The seller doesn't load the goods on collecting vehicles and doesn't clear them for export. If the seller does load the good, he does so at buyer's risk and cost. If parties wish seller to be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale. FCA Free Carrier (named place of delivery) The seller hands over the goods, cleared for export, into the disposal of the first carrier (named by the buyer) at the named place. The seller pays for carriage to the named point of delivery, and risk passes when the goods are handed over to the first carrier. CPT Carriage Paid To (named place of destination) The seller pays for carriage. Risk transfers to buyer upon handing goods over to the first carrier.

CIP Carriage and Insurance Paid to (named place of destination) The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.
DAT Delivered at Terminal (named terminal at port or place of destination) Seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.

DAP Delivered at Place (named place of destination) Seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.
DDP Delivered Duty Paid (named place of destination) Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The buyer is responsible for unloading. This term is often used in place of the non-Incoterm "Free In Store (FIS)". This term places the maximum obligations on the seller and minimum obligations on the buyer.

Rules for Sea and Inland Waterway Transport The four rules defined by Incoterms 2010 for international trade where transportation is entirely conducted by water are: FAS Free Alongside Ship (named port of shipment) The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export. Suitable only for maritime transport but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). This term is typically used for heavy-lift or bulk cargo. FOB Free on Board (named port of shipment) The seller must load the goods on board the vessel nominated by the buyer. Cost and risk are divided when the goods are actually on board of the vessel (this rule is new!). The seller must clear the goods for export. The term is applicable for maritime and inland waterway transport only but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). The buyer must instruct the seller the details of the vessel and the port where the goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder. This term has been greatly misused over the last three decades ever since Incoterms 1980 explained that FCA should be used for container shipments. CFR Cost and Freight (named port of destination) Seller must pay the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods are loaded on the vessel (this rule is new!). Maritime transport only and Insurance for the goods is NOT included. This term is formerly known as CNF (C&F). CIF Cost, Insurance and Freight (named port of destination) Exactly the same as CFR except that the seller must in addition procure and pay for the insurance. Maritime transport only.

Credit risk The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. The higher the perceived credit risk, the higher the rate of interest that investors will demand for lending their capital. Credit risks are calculated based on the borrowers' overall ability to repay. This calculation includes the borrowers' collateral assets, revenue-generating ability and taxing authority (such as for government and municipal bonds). Credit risks are a vital component of fixed-income investing, which is why ratings agencies such as S&P, Moody's and Fitch evaluate the credit risks of thousands of corporate issuers and municipalities on an ongoing basis.

 Meaning and definition of economic risk Generally speaking, economic risk can be described as the likelihood that an investment will be affected by macroeconomic conditions such as government regulation, exchange rates, or political stability, most commonly one in a foreign country. In other words, while financing a project, the risk that the output of the project will not produce adequate revenues for covering operating costs and repaying the debt obligations.

 Economic risk is one of the reasons for international investing carrying higher risk as compared to domestic investing. Bondholders and shareholders generally put up with the risk undertaken by international companies. Investors dealing in sale and purchase foreign government bonds are also exposed. Moreover, economic risk can also provide additional opportunities for investors. For example, foreign bonds allow investors to involve themselves circuitously in the foreign exchange markets as well as the interest rate environments of various countries. However, the foreign regulatory authorities can impose different requirements on the sizes, types, timing, credit quality, disclosures of bonds, and underwriting of bonds issued in their countries. Economic risk can be, however, reduced by opting for international mutual funds for they proffer instantaneous diversification, time and again investing in various countries, currencies, instruments, or international industries

What are the different types of risks in international trade? For buyers and sellers that are engaged in international trade, they may experience one or more of the following risks: Buyers Insolvency/Credit Risk Buyers Acceptance Risk Knowledge Inadequacy Sellers Performance Risk Documentation Risk Economic Risk Cultural Risk Legal Risk Foreign Exchange Risk Interest Rate Risk Political/Sovereign Risk Transit Risk Buyers Insolvency/Credit Risk Buyers insolvency or credit risk refers to the inability of the buyer to honour full payment for goods or services rendered on due date. This is a risk on seller associated with selling or supplying a product or service without collecting full payment or experienced late payment. Buyers Acceptance Risk Buyers acceptance risk refers to the buyers non-acceptance of goods delivered or services rendered. Unaccepted goods or services may create difficulty for the seller to dispose the goods to another buyer or encounter working capital problem.

Knowledge Inadequacy A buyer or seller who intends to expand his business into another product/service/industry/country may not have adequate knowledge on the risk of the new product/service, local market situation or goods fashion. The lack of knowledge increases the chances of business failure. Sellers Performance Risk A seller may fail to carry out his obligations in a sales contract due to one or more reasons, and such non-performance by the seller may have adverse consequential impacts on the buyers business. It could be expensive for the buyer to take legal actions against the seller in his country. Documentation Risk Documentation risk is the risk of non-conformance to specific documentation requirements under a sales contract or documentary credit. Failure in fulfilling documentation requirements may result in sellers inability or delay in obtaining payment for goods delivered or service rendered

Economic Risk Economic risk refers to unfavourable economic conditions in buyer or sellers country which may affect both parties in fulfilling their obligations. On the buyer side, economic risk may result in buyers insolvency or inability to accept the goods or services. On the other hand, the seller may experience difficulty in producing or shipping the goods per se. Cultural Risk Different countries have their unique language and culture. The inability to appreciate/accept cultural differences and/or language barrier may result in conflicts and non-completion of the sales contract. Legal Risk Legal risk is the potential for financial loss arising from uncertainty of legal proceeding or change in legislation, such as a foreign exchange control policy. A sales contract could be frustrated due to changes in laws and regulations. Foreign Exchange Risk A buyer or seller may deal with foreign currencies in their daily course of business. This implies that they are exposed to fluctuations in foreign exchange market which may result in paying more (by the buyer) or receiving less (from the buyer) in terms of the local currency. Interest Rate Risk Interest rate risk is the risk borne by an interest-bearing asset, such as a floating rate loan. An increase in interest rate will result in buyer or seller paying more interest for their floating rate loan.

Political/Sovereign Risk Political/sovereign risk refers to the complications that buyer or seller may expose due to unfavourable political decisions or political changes that may vary the expected outcome of an outstanding contract. Examples of political/sovereign risk are changes in fiscal/monetary policy, war, riots, terrorism, trade embargoes, etc. Transit Risk Transit risk is the risk of goods being damaged during shipment from the place of origin to the place of destination. Failure in addressing transit risk may result in heavy replacement cost or performance risk.

How to Mitigate Risks in International Trade For the Buyer Deal with seller with sound reputation or established track record. Request for performance guarantee to avoid non-performance risk. Agree on more secure methods of payment such as documentary credit or open account. Acknowledge and respect cultural differences with the seller. Buy and sell in same currency to minimise foreign exchange risk. Alternatively, the buyer can hedge against foreign exchange risk by entering a forward or option foreign exchange contract with a bank. If financing is needed, enter into a fixed interest rate loan or interest rate swap agreement to mitigate against interest rate risk. Ensure sufficient insurance coverage against transit risk. Always have a contingency plan against unfavourable events.

FOR THE SELLER Deal with buyer with sound reputation or established track records. Engage a reputable credit agency or credit insurer to minimise buyers insolvency or credit risk. Engage on more secured methods of payment such as documentary credit or advance payment. Avoid granting excessive credit period or limit to the buyer. Ensure that the sales contract or documentary credit does not contain ambiguous or erroneous terms and conditions that are subject to future disputes. Acquire sufficient knowledge in document preparation to mitigate against documentation risk. Acknowledge and respect cultural differences with the buyer. Buy and sell in same currency to minimise foreign exchange risk. Alternatively, the buyer can hedge against foreign exchange risk by entering a forward or option foreign exchange contract with a bank. If financing is needed, enter into a fixed interest rate loan or interest rate swap agreement to mitigate against interest rate risk. Ensure sufficient insurance coverage against transit risk. Engage a representative in the buyers country to deal with the goods or relevant parties in case of non-payment or non-acceptance by the buyer. Always have a contingency plan against unfavourable event.

Rating Agencies in India The Indian credit rating industry has evolved over a period of time. Indian credit rating industry mainly comprises of CRISIL, ICRA, CARE, ONICRA, FITCH & SMERA. CRISIL is the largest credit rating agency in India, with a market share of greater than 60%. It is a full service rating agency offering its services in manufacturing, service, financial and SME sectors. SMERA is the rating agency exclusively established for rating of SMEs.

Small and Medium Enterprises Rating Agency (SMERA) SMERA a joint initiative by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B) and several leading banks in the country. SMERA is the country's first Rating agency that focuses primarily on the Indian MSME segment. SMERA has completed 7000 ratings. CRISIL CRISIL is the largest credit rating agency in India. It was established in 1987. The worlds largest rating agency Standard & Poor's now holds majority stake in CRISIL. Till date it has rated more than 5178 SMEs across India and has issued more than 10,000 SME ratings.
CARE Ratings Incorporated in 1993, Credit Analysis and Research Limited (CARE) is a credit rating, research and advisory committee promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other financial and lending institutions. CARE has completed over 7,564 rating assignments since its inception in 1993.

ONICRA Credit Rating Agency ONICRA was established in 1993 by Mr. Sonu Mirchandani as a rating agency. It analyzes data and provides rating solutions for Individuals and Small and Medium Enterprises(SMEs). ONICRA has an extensive experience in operating a wide range of business processes in areas such as Finance, Accounting, Backend Management, Application Processing, Analytics, and Customer Relations. It has rated more than 2500 SMEs.

Fitch Ratings Fitch Ratings is a global rating agency committed to providing the world's credit markets with independent and prospective credit opinions, research, and data. Fitch Ratings is headquartered in New York and London and is part of the Fitch Group.

ICRA ICRA was established in 1991 by leading Indian financial institutions and commercial banks. International credit rating agency, Moodys, is the largest shareholder. ICRA has a dedicated team of professionals for the MSME sector and has developed a linear scale for MSME sector which makes the benchmarking with peers easier.

 Some of the leading credit rating agencies of the world are A. M. Best, Standard & Poor's, Baycorp Advantage, Pacific Credit Rating, Dominion Bond Rating Service, Egan-Jones Ratings Company, Fitch Ratings, Capital Intelligence Ltd and Moody's. Of these companies A. M. Best, Fitch Ratings, Moody's, Standards and Poor's and Egan-Jones Ratings Company are located in USA, Baycorp Advantage is in Australia, Dominion Bond Rating Service is in Canada, Pacific Credit Rating is in Peru and Capital Intelligence Ltd is in Cyprus. The ratings of the credit rating agencies are applied across a wide variety of fields. These ratings are used by the issuers of bonds and similar debt financing securities, investment banks as well as dealers acting as brokers. The government regulators also use the ratings of the credit rating agencies. These ratings are normally instrumental in transactions of structured finance

Why is credit rating necessary at all? Credit rating is an opinion expressed by an independent professional organisation, after making a detailed study of all relevant factors. Such an opinion will be of great assistance to investors in making investment decisions. It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors. Regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility criteria for some instruments. For example, the RBI has stipulated a minimum credit rating by an approved agency for issue of Commercial Paper. Credit ratings are also used for determination of risk weights for calculation of Capital Adequacy for Banks as per Basel II guidelines in India. In general, credit rating is expected to bridge information asymmetry in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit Rating is also a valuable input in establishing business relationships of various types. Does credit rating constitute an advice to the investors to buy? It does not. The reason is that some factors, which are of significance to an investor in arriving at an investment decision, are not taken into account by rating agencies. These include reasonableness of the issue price or the coupon rate, secondary market liquidity and prepayment risk. Further, different investors have different views regarding the level of risk to be taken and rating agencies can only express their views on the relative credit risk.

THE WORLD BANK

Type - International organization Legal status - Treaty Purpose/focus - Crediting Location - Washington, D.C., U.S. Membership - 188 countries (IBRD) 170 countries (IDA) President - Jim Yong Kim Main organ - Board of Directors Parent organization - World Bank Group Website - worldbank.org

THE WORLD BANK HEADQUARTERS IN WASHINGTON D.C.

History Lord Keynes (right) and Harry Dexter White, the "founding fathers" of both the World Bank and the IMF. The World Bank is one of five institutions created at the Bretton Woods Conference in 1944. The International Monetary Fund, a related institution, is another. Delegates from many countries attended the Bretton Woods Conference. The most powerful countries in attendance were the United States and United Kingdom, which dominated negotiations. Although both are based in Washington, D.C., the World Bank is traditionally headed by a citizen of the United States while the IMF is led by a European citizen.

The World Bank is an international financial institution that provides loans to developing countries for capital programs. The World Bank's official goal is the reduction of poverty. According to the World Bank's Articles of Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment. The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter incorporates these two in addition to three more:International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID).

Criteria Many achievements have brought the Millennium Development Goals (MDGs) targets for 2015 within reach in some cases. For the goals to be realized, six criteria must be met: stronger and more inclusive growth in Africa and fragile states, more effort in health and education, integration of the development and environment agendas, more and better aid, movement on trade negotiations, and stronger and more focused support from multilateral institutions like the World Bank. Eradicate Extreme Poverty and Hunger: From 1990 through 2004, the proportion of people living in extreme poverty fell from almost a third to less than a fifth. Although results vary widely within regions and countries, the trend indicates that the world as a whole can meet the goal of halving the percentage of people living in poverty. Africa's poverty, however, is expected to rise, and most of the 36 countries where 90% of the world's undernourished children live are in Africa. Less than a quarter of countries are on track for achieving the goal of halving under-nutrition. Achieve Universal Primary Education: The number of children in school in developing countries increased from 80% in 1991 to 88% in 2005. Still, about 72 million children of primary school age, 57% of them girls, were not being educated as of 2005. Promote Gender Equality: The tide is turning slowly for women in the labor market, yet far more women than men- worldwide more than 60% are contributing but unpaid family workers. The World Bank Group Gender Action Plan was created to advance women's economic empowerment and promote shared growth. Reduce Child Mortality: There is some what improvement in survival rates globally; accelerated improvements are needed most urgently in South Asia and Sub-Saharan Africa. An estimated 10 million-plus children under five died in 2005; most of their deaths were from preventable causes.

 Improve Maternal Health: Almost all of the half million women who die during pregnancy or childbirth every year live in Sub-Saharan Africa and Asia. There are numerous causes of maternal death that require a variety of health care interventions to be made widely accessible. Combat HIV/AIDS, Malaria, and Other Diseases: Annual numbers of new HIV infections and AIDS deaths have fallen, but the number of people living with HIV continues to grow. In the eight worst-hit southern African countries, prevalence is above 15 percent. Treatment has increased globally, but still meets only 30 percent of needs (with wide variations across countries). AIDS remains the leading cause of death in Sub-Saharan Africa (1.6 million deaths in 2007). There are 300 to 500 million cases of malaria each year, leading to more than 1 million deaths. Nearly all the cases and more than 95 percent of the deaths occur in Sub-Saharan Africa. Ensure Environmental Sustainability: Deforestation remains a critical problem, particularly in regions of biological diversity, which continues to decline. Greenhouse gas emissions are increasing faster than energy technology advancement. Develop a Global Partnership for Development: Donor countries have renewed their commitment. Donors have to fulfill their pledges to match the current rate of core program development. Emphasis is being placed on the Bank Group's collaboration with multilateral and local partners to quicken progress toward the MDGs' realization.

Objectives of World Bank The World Bank was established to promote long-term foreign investment loans on reasonable terms. The, purposes of the Bank, as set forth in the 'Articles of Agreement are as follows: (i) To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purpose including; (a) the restoration of economies destroyed or disrupted by war; (b) the reconversion of productive facilities to peaceful needs; and (c) the encouragement of the development of productive facilities and resources in less developing countries; (ii) To promote private investment by means of guarantee or participation in loans and other investments made by private investors. (iii) When private capital is not available on reasonable terms, to supplement private investment by providing on suitable conditions finance for productive purpose out of its own capital funds raised by it and its other resources. (iv) To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living, and conditions of labour in their territories.

(v) To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first. (vi) To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and in the immediate postwar years, to assist in bringing about a smooth transition from a wartime to peacetime economy.

The World Bank as lender The World Bank lends money to low and middle-income governments for two general uses: investment projects and policy reforms. Investment project lending typically supports public works such as water systems, roads and schools. The World Bank also lends money for economic, institutional or other policy reforms, often known as structural adjustment or development policy lending. These reforms can influence the amount and composition of public spending in your country and the design of your governments economic and social policies, affecting things like the cost of electricity and water, labor laws and investment regulations. World Bank lending can take the form of loans or grants, and the poorest countries often receive both. In recent years, the Bank has increased the proportion of its financing provided through grants. The Bank typically requires certain actions of borrowing countries in advance of loan/grant approval and/or in the course of a projects implementation - known as conditions or conditionality. Conditions can range from requiring a government to privatize its state-owned companies or adopt lower trade tariffs, to mandating new budget and procurement procedures. The Banks imposition of controversial conditions on borrowing governments has been heavily criticized over the years, as a violation of a countrys sovereignty and an undemocratic way to force reforms that can have substantial consequences on people and planet.

INTERNATIONAL MONETARY FUND - EVOLUTION During the Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply raising barriers to foreign trade, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to hold foreign exchange. These attempts proved to be self-defeating. World trade declined sharply , and employment and living standards plummeted in many countries. This breakdown in international monetary cooperation led the IMF's founders to plan an institution charged with overseeing the international monetary systemthe system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other. The new global entity would ensure exchange rate stability and encourage its member countries to eliminate exchange restrictions that hindered trade. The Bretton Woods agreement The IMF was conceived in July 1944, when representatives of 45 countries meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation, to be established after the Second World War. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression. The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF. The IMF's membership began to expand in the late 1950s and during the 1960s as many African countries became independent and applied for membership. But the Cold War limited the Fund's membership, with most countries in the Soviet sphere of influence not joining.

Par value system The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. This par value systemalso known as the Bretton Woods systemprevailed until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. With its near-global membership of 188 countries, the IMF is uniquely placed to help member governments take advantage of the opportunitiesand manage the challengesposed by globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties. The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. Key IMF activities The IMF supports its membership by providing policy advice to governments and central banks based on analysis of economic trends and cross-country experiences; research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; loans to help countries overcome economic difficulties; concessional loans to help fight poverty in developing countries; and technical assistance and training to help countries improve the management of their economies.

 provide a forum for cooperation on international monetary problems facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction; promote exchange rate stability and an open system of international payments; and lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems. To assist mainly low- and middle-income countries in effectively managing their economies, the IMF provides practical guidance and training on how to upgrade institutions, and design appropriate macroeconomic, financial, and structural policies MANAGEMENT The Board of Governors, the highest decision-making body of the IMF, consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the governor of the central bank. All powers of the IMF are vested in the Board of Governors. The Board of Governors may delegate to the Executive Board all except certain reserved powers. The Board of Governors normally meets once a year.

IMF AND WORLD BANK: The World Bank is an investment bank, intermediating between investors and recipients, borrowing from the one and lending to the other. Its owners are the governments of its 180 member nations with equity shares in the Bank, which were valued at about $176 billion in June 1995. The IBRD obtains most of the funds it lends to finance development by market borrowing through the issue of bonds (which carry an AAA rating because repayment is guaranteed by member governments) to individuals and private institutions in more than 100 countries. Its concessional loan associate, IDA, is largely financed by grants from donor nations. The Bank is a major borrower in the world's capital markets and the largest nonresident borrower in virtually all countries where its issues are sold. It also borrows money by selling bonds and notes directly to governments, their agencies, and central banks. The proceeds of these bond sales are lent in turn to developing countries at affordable rates of interest to help finance projects and policy reform programs that give promise of success. Despite Lord Keynes's profession of confusion, the IMF is not a bank and does not intermediate between investors and recipients. Nevertheless, it has at its disposal significant resources, presently valued at over $215 billion. These resources come from quota subscriptions, or membership fees, paid in by the IMF's 188member countries. Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength (richer countries pay more, poorer less). While the Bank borrows and lends, the IMF is more like a credit union whose members have access to a common pool of resources (the sum total of their individual contributions) to assist them in times of need. Although under special and highly restrictive circumstances the IMF borrows from official entities (but not from private markets), it relies principally on its quota subscriptions to finance its operations. The adequacy of these resources is reviewed every five years.

ASIAN DEVELOPMENT BANK Key Facts President: Haruhiko Kuroda Members: 67; 48 regional members; 19 nonregional members Offices: Headquarters in Manila, Philippines, with 27 resident missions and 3 representative offices in Tokyo, Frankfurt, and Washington, DC Founded: 1966 Budget: 2012 Budget Financing in 2011: $21.72 billion

The Asian Development Bank aims for an Asia and Pacific free from poverty. Approximately 1.7 billion people in the region are poor and unable to access essential goods, services, assets and opportunities to which every human is entitled. Since its founding in 1966, ADB has been driven by an inspiration and dedication to improving peoples lives in Asia and the Pacific. By targeting their investments wisely, in partnership with their developing member countries and other stakeholders, they want alleviate poverty and help create a world in which everyone can share in the benefits of sustained and inclusive growth. Whether it be through investment in infrastructure, health care services, financial and public administration systems, or helping nations prepare for the impact of climate change or better manage their natural resources, ADB is committed to helping developing member countries evolve into thriving, modern economies that are well integrated with each other and the world.

 The main devices for assistance are loans, grants, policy dialogue, technical assistance and equity investments. ADB is at the forefront of development thinking and practice, spreading information through regional forums, a growing online presence and the publication of specialized papers, serials and books. Economists, sociologists, engineers, gender experts and environmental scientists are amongst the hundreds of professions at the bank working together to reduce poverty, and ensure growth across the Asia and Pacific region is sustainable and inclusive.

Over the past 6 years, ADB, through the Asian Development Fund has: expanded the access of more than 19 million students to quality education by building or upgrading more than 60,000 classrooms and training 720,000 teachers; helped more than 252 million people gain better access to wider economic opportunities and social services by building or upgrading more than 56,000 (km) of roads; provided more than 2.1 million households with access to clean water by installing or rehabilitating about 14,000 km of water supply pipes; connected more than 1.8 million households to electricity by building or upgrading more than 35,000 km of power transmission and distribution lines; and reduced greenhouse gas emissions by 2 million tons of carbon dioxide equivalent per year by promoting more efficient and cleaner energy operations

Organization ADB Headquarters in Mandaluyong City, Philippines The highest policy-making body of the bank is the Board of Governors composed of one representative from each member state. The Board of Governors, in turn, elect among themselves the 12 members of the Board of Directors and their deputy. Eight of the 12 members come from regional (Asia-Pacific) members while the others come from non-regional members. The Board of Governors also elect the bank's President who is the chairperson of the Board of Directors and manages ADB. The president has a term of office lasting five years, and may be reelected. Traditionally, and because Japan is one of the largest shareholders of the bank, the President has always been Japanese. The current President is Haruhiko Kuroda, who succeeded Tadao Chino in 2005.

The main objectives of ADB, as laid down in its Charter, are "to foster economic growth and cooperation in the region of Asia and Far East, and to contribute to the acceleration of the process of economic development of the developing members in the region, collectively and individually." The Bank aims at achieving this broad objective through the following functions: (i) Mobilisation and promotion of investment of private and public capital for productive purposes. (ii) Utilisation of its resources for financing those development projects which contribute most to the harmonious economic growth of the region as a whole, with special emphasis on the needs of the smaller or less developed members. (iii) Coordination of plans and policies of the member countries with a view to achieving better utilisation of their resources, making them economically more complementary, and expanding their foreign trade. (iv) Provision of technical assistance to the member countries for the preparation, financing and execution of development projects. (v) Cooperation with the United Nations and its various organs and other international organisations with the objective of persuading them to make investments in this region. (vi) Undertaking of such other activities which may help to achieve its main objectives.

BILL DISCOUNTING Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his (borrower's) customer and pays him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collects the total amount. If the bill is delayed, the borrower or his customer pays the Bank a predetermined interest depending upon the terms of transaction.

Export Bill Discounting Export Bill Discounting or "without recourse" financing is a method of trade finance whereby the bnak purchases, on a without recourse basis, unconditional debt obligations arising from the supply of goods and/or services provided for under an Export Letter of Credit. In an Export Bill Discount transaction, the exporter agrees to surrender the rights to claim for payment of goods or services delivered to an importer under a Letter of Credit, in return for a cash payment from the bank. In exchange for the payment, the bank takes over the Issuing Bank's debt obligation and assumes the full risk of the payment by the Issuing Bank. The exporter is thereby freed from any financial risk in the transaction and is liable only for the quality and reliability of the goods and/or services provided. Benefits to the exporter include: Conversion of credit transaction into a cash transaction Financing on a without recourse basis Improved liquidity Cost is known beforehand, enabling the exporter to adjust pricing Benefits to the importer are: Flexibility to pay for goods on deferred credit terms Fixed-rate financing Access to foreign currency financing

NON RECOURSE In general: phrase meaning that credit risk, or risk of nonpayment, is assumed by the buyer, rather than the seller, of a promissory note or the holder of a negotiable instrument. In negotiable instruments law, the endorser of a check or draft cannot be held accountable for payment to subsequent holders in the event the Maker or Drawer fails to pay, if the endorsement contains the words "without recourse." Such an endorsement is a qualified endorsement under Article 3 of the Uniform Commercial Code.

MONEY LAUNDERING Money Laundering refers to the conversion or laundering of money, which is illegally obtained, so as to make it appear to originate from a legitimate source. Money laundering is being employed by criminals worldwide to conceal activity associated with drug/arms trafficking, terrorism, extortion, etc Money laundering is a threat to society, security and to the economic development of the nation. It threatens national governments and international relations between them through the corruption of officials and legal systems As a leader among the emerging economies in Asia with a strongly growing economy and demography, India is facing a range of money laundering activities. However, it is regulated in India under the provisions of the Foreign Exchange Management Act

How is money laundered? The processes are extensive. Generally speaking, money is laundered whenever a person or business deals in any way with another persons benefit from crime. That can occur in a countless number of diverse ways. Traditionally money laundering has been described as a process which takes place in three distinct stages. Placement, the stage at which criminally derived funds are introduced in the financial system. Layering, the substantive stage of the process in which the property is washed and its ownership and source is disguised. Integration, the final stage at which the laundered property is re-introduced into the legitimate economy. This three staged definition of money laundering is highly simplistic. The reality is that the so called stages often overlap and in some cases, for example in cases of financial crimes, there is no requirement for the proceeds of crime to be placed

Anti Money Laundering (AML) is a compliance requirement governed by the Prevention of Money Laundering Act (PMLA). This broadly requires banks to have suitable measures for customer due diligence, customer identification procedures, monitoring suspicious transactions and risk & audit. Sound investments in these measures lead to improved confidence amongst various stakeholders and greater business opportunities with international banks While governments play an important role in enforcing regulations and banking practices that can combat money laundering, international bodies such as FATF (the Financial Action Task Force on Money Laundering ), BASEL( The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974.It provides a forum for regular cooperation on banking supervisory matters) the World Bank, IMF and others have a strong role in defining and sharing best practices with the Central Banks of various countries. Technology has enabled sophisticated deterrents to be built by financial institutions for combating money laundering. However, besides technology, it is important to have strong underlying processes in every financial organization to prevent money laundering and also have a high level of early warning signals built through business rules and policies.

Implications for banks Banks, insurance companies and other financial sector institutions remain the primary gateway to the financial system of any country. Once illegal proceeds get into a depository institution, they can be moved instantly by wire or disguised through commingling with legitimate funds. With the advent of the Internet and remote banking, depository institutions face increased challenges identifying customers and their customers sources of funds. As the technology is evolving, cyber crimes such as identity theft, illegal access to e-mail and credit card fraud are coming together with money laundering and terrorist activities. Large amounts of money are now stored in digital form. Now one can transfer money through electronic and online gateways to multiple accounts. This convergence leads to a greater problem of tackling different issues all at once. A wide range of technology options are available to banks depending on the type of bank and the sophistication of its AML processes. With a supposedly weak state of infrastructure and technology, Public Sector Banks usually procure a ready-to-use AML software and, accordingly, their biggest challenge is to integrate the software with existing databases. Private banks with their considerably enhanced technology platforms prefer a customized in-house approach. Foreign banks understandably obtain their AML solution from their head office as part of the global implementation. For India, AML standards are defined by the RBI under the guidance of the Ministry of Finance as well as the Parliament. These guidelines, rules and regulations are monitored through the Financial Intelligence Unit or FIU IND. FATF is a global body that has so far released 40 + 8 recommendations that are subscribed to by most developed countries including India. Lastly, the PMLA Act of 2005 of the Indian Parliament forms the core framework for combating money laundering in India.

 Banks are required to submit reports related to their KYC(know your customers) activities and compliance to guidelines. Additionally, on a monthly basis Suspicious Transaction Reports (STRs) & Currency Transaction Report (CTRs) and their internal investigation results are to be submitted to the Financial Intelligence Unit (FIU) through the banks Compliance Head. India has implemented AML guidelines for the entire financial services industry including insurance, AMCs, broking industry and others and not just for banks.

India The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and the records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished. It is handled by the Indian Income Tax Department. The provisions of the Act are frequently reviewed and various amendments have been passed from time to time. The recent activity in money laundering in India is through political parties, corporate companies and the shares market. It is investigated by the Indian Income Tax Department. Bank accountants must record all the transactions whose amount will be more than Rs. 10 Lakhs. Bank accountants must maintain this records for 10 years. Banks will also make cash transaction reports (CTRs) and Suspicious transaction reports whose amounts are more than RS. 10 Lakhs within 7 days of doubt. This report will be submitted to enforcement directorate and income tax department.

 Remittances to India are money transfers from Indian workers employed outside the country to friends or relatives in India. India is the world's leading receiver of remittances, claiming more than 12% of the world's remittances in 2007. Remittances to India account for approximately 3% of the country's GDP. Since 1991, India has experienced sharp remittance growth. Money is sent to India either electronically (for example, by SWIFT) or by demand draft. In recent years many banks are offering money transfers and this has grown into a huge business. Around 40% of the international remittances flow to the three states of Kerala, Punjab and Goa which are among the top international remittance-dependent economies of the world. Research work on remittances to India is listed in the India Migration Bibliography.

Year
19901991 19951996 19992000 20002001 20012002 20022003 20032004 20042005 20052006 20062007 20072008

Remittances (US$ billion)

2.1 8.5 12.07 12.85 15.4 16.39 21.61 20.25 24.55 29.10 37.2

Percent GDP
0.7 3.22 2.72 2.84 3.29 3.39 3.69 3.03 3.08

20082009 20092010

51.6 55.06

The Reserve Bank of India had announced a Liberalised Remittance Scheme (the Scheme) in February 2004 as a step towards further simplification and liberalization of the foreign exchange facilities available to resident individuals. As per the Scheme, resident individuals may remit up to USD 200,000 per financial year for any permitted capital and current account transactions or a combination of both. The Scheme was operationalised vide A.P. (DIR Series) Circular No. 64 dated February 4, 2004. PART A : Q.1. What is the Liberalised Remittance Scheme of USD 200,000? Ans. Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 200,000 per financial year (April March) for any permissible current or capital account transaction or a combination of both. Q.2. Please provide an illustrative list of capital account transactions permitted under the scheme. Ans.. Under the Scheme, resident individuals can acquire and hold immovable property or shares or debt instruments or any other assets outside India, without prior approval of the Reserve Bank. Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the Scheme. Q. 3. What are the prohibited items under the Scheme? Ans. The remittance facility under the Scheme is not available for the following:

i) Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000; ii) Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty; iii) Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market; iv) Remittance for trading in foreign exchange abroad; v) Remittance by a resident individual for setting up a company abroad; vi) Remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan; vii) Remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as non co-operative countries and territories, from time to time; and viii) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.

 'Margin Call' You would receive a margin call from a broker if one or more of the securities you had bought (with borrowed money) decreased in value past a certain point. You would be forced either to deposit more money in the account or to sell off some of your assets.

Q. 17. Are there any restrictions on the frequency of the remittance? Ans. There is no restriction on the frequency. However, the total amount of foreign exchange purchased from or remitted through, all sources in India during a financial year should be within the cumulative limit of USD 200,000. Q.18. What are the requirements to be complied with by the remitter? Ans. The individual will have to designate a branch of an AD through which all the remittances under the Scheme will be made. The applicants should have maintained the bank account with the bank for a minimum period of one year prior to the remittance. If the applicant seeking to make the remittance is a new customer of the bank, Authorised Dealers should carry out due diligence on the opening, operation and maintenance of the account. Further, the AD should obtain bank statement for the previous year from the applicant to satisfy themselves regarding the source of funds. If such a bank statement is not available, copies of the latest Income Tax Assessment Order or Return filed by the applicant may be obtained. He has to furnish an application-cum-declaration in the specified format regarding the purpose of the remittance and declare that the funds belong to him and will not be used for the purposes prohibited or regulated under the Scheme. The remittances can be made in any freely convertible foreign currency equivalent to USD 200,000 in a financial year.

PRESHIPMENT FINANCE Pre-shipment is also referred as packing credit. It is working capital finance provided by commercial banks to the exporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods is called preshipment finance or packing credit.

IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE: To purchase raw material, and other inputs to manufacture goods. To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labelling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. To pay for consultancy services. To pay for export documentation expenses.

Foreign trade financing

Methods of Pre-Shipment Finance 1. Cash Packing Credit Loan In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security. 2. Advance Against Hypothecation Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank. 3. Advance Against Pledge The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter.

4. Advance Against Red L/C The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit. 5. Advance Against Back-To-Back L/C: The merchant exporter who is in possession of the original L/C may request his bankers to issue Back-To-Back L/C against the security of original L/C in favour of the sub-supplier. The sub-supplier thus gets the Back-To-Back L/C on the basis of which he can obtain packing credit. 6. Advance Against Exports Through Export Houses Manufacturer, who exports through export houses or other agencies can obtain packing credit, provided such manufacturer submits an undertaking from the export houses that they have not or will not avail of packing credit against the same transaction.

7. Advance Against Duty Draw Back (DBK) DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer preshipment as well as post-shipment advance against claims for DBK. 8. Special Pre-Shipment Finance Schemes: Exim-Banks scheme for grant for Foreign Currency PreShipment Credit (FCPC) to exporters. Packing credit for Deemed exports.

Disbursement of Packing Credit Advance Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed. Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provide a special packing credit facility and is known as Running Account Packing. Before disbursing the bank specifically check for the following particulars in the submitted documents Name of buyer Commodity to be exported Quantity Value (either CIF or FOB) FOB stand s for Free on Board. Free on board means the sellers responsibility is upto the loading port henceforth all freight, carriage and insurance costs to be borne by the buyer Cost, Insurance and Freight - CIF Mean? A trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier. Last date of shipment / negotiation. Any other terms to be complied with

 The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of goods, whichever is found to be lower. Normally insurance and freight charged are considered at a later stage, when the goods are ready to be shipped. In this case disbursals are made only in stages and if possible not in cash. The payments are made directly to the supplier by drafts/bankers/cheques. The bank decides the duration of packing credit depending upon the time required by the exporter for processing of goods. The maximum duration of packing credit period is 180 days, however bank may provide a further 90 days extension on its own discretion, without referring to RBI. Follow up of Packing Credit Advance Exporter needs to submit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides the rate of submission of this stocks. Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals.

POST SHIPMENT FINANCE Post shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. the finance provided after shipment of goods is called post-shipment finance. DEFINITION: Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit.

IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE: To pay to agents/distributors and others for their services. To pay for publicity and advertising in the over seas markets. To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium( ECGC Offers insurance protection to exporters against payment risks) To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service. To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. To pay for representatives abroad in connection with their stay board.

FORMS/METHODS OF POST SHIPMENT FINANCE 1. Export bills negotiated under L/C: The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter. 2. Purchase of export bills drawn under confirmed contracts: The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter. 3. Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills.

4.

Advance against claims of Duty Drawback (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as postshipment advance against claims for DBK. Advance against goods sent on Consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis. Advance against Undrawn Balance of Bills: There are cases where bills are not drawn to the full invoice value of gods. Certain amount is undrawn balance which is due for payment after adjustments due to difference in rates, weight, quality etc. banks offer advance against such undrawn balances subject to a maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank.

5.

6.

7.

Advance against Deemed Exports: Specified sales or supplies in India are considered as exports and termed as deemed exports. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is offered for a maximum of 30 days. Advance against Retention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/ services towards guarantee of performance or completion of project. Banks advance against retention money, which is payable within one year from date of shipment.

8.

9.

Advance against Deferred payments: In case of capital goods exports, the exporter receives the amount from the importer in installments spread over a period of time. The commercial bank together with EXIM bank do offer advances at concessional rate of interest for 180 days.

Consignment the act of consigning, which is placing any material in the hand of another, but retaining ownership until the goods are sold or person is transferred. This may be done for shipping, transfer of prisoners, to auction, or for sale in a store (i.e. a consignment shop). To consign means to send and therefore consignment means sending goods to another person. In case of consignment goods are sent to the agent for the purpose of sale. The ownership of these goods remains with the sender. The agent sells the goods on behalf of the sender, according to his instructions. The sender of goods is known as consignor and the agent is known as the consignee

FORFAITING In trade finance, forfaiting is a financial transaction involving the purchase of receivables from exporters by a forfaiter. The forfaiter takes on all the risks associated with the receivables but earns a margin. The forfaiting is a transaction involving the sale of one of the firm's transactions. Factoring is also a financial transaction involving the purchase of financial assets, but Factoring involves the sale of any portion of a firm's receivables.

Characteristics The characteristics of a forfaiting transaction are: Credit is extended to the exporter for a period ranging between 180 days to seven years. Minimum bill size is normally $250,000, although $500,000 is preferred. The payment is normally receivable in any major convertible currency. A letter of credit or a guarantee is made by a bank, usually in the importer's country. The contract can be for either goods or services. At its simplest, the receivables should be evidenced by a promissory note, a bill of exchange, a deferred-payment letter of credit, or a letter of guarantee. Pricing Three elements relate to the pricing of a forfaiting transaction: Discount rate, the interest element, usually quoted as a margin over LIBOR. Days of grace, added to the actual number of days until maturity for the purpose of covering the number of days normally experienced in the transfer of payment, applicable to the country of risk. Commitment fee, applied from the date the forfaiter is committed to undertake the financing, until the date of discounting. The benefits to the exporter from forfaiting include eliminating political, transfer, and commercial risks and improving cash flows. The benefit to the forfaiter is the extra margin on the loan to the exporter.

Forfaiting The forfaiting owes its origin to a French term a forfait which means to forfeit (or surrender) ones rights on something to some one else. Forfaiting is a mechanism of financing exports: a. by discounting export receivables b. evidenced by bills of exchanges or promissory notes c. without recourse to the seller (viz; exporter) d. carrying medium to long-term maturities e. on a fixed rate basis upto 100% of the contract value. In other words, it is trade finance extended by a forfaiter to an exporter seller for an export/sale transaction involving deferred payment terms over a long period at a firm rate of discount. Forfaiting is generally extended for export of capital goods, commodities and services where the importer insists on supplies on credit terms. Recourse to forfaiting usually takes place where the credit is for long date maturities and there is no prohibition for extending the facility where the credits are maturing in periods less than one year.

Parties to Forfaiting There are five parties in a transaction of forfaiting. These are i. Exporter ii. Importer iii. Exporters bank iv. Importers bank v. The forfaiter. Mechanism 1. The exporter and importer negotiate the proposed export sale contract. Then the exporter approaches the forfaiter to ascertain the terms of forfaiting. 2. The forfaiter collects details about the importer, supply and credit terms, documentation etc. 3. Forfaiter ascertains the country risk and credit risk involved.

4. The forfaiter quotes the discount rate. 5. The exporter then quotes a contract price to the overseas buyer by loading the discount rate, commitment fee etc. on the sale price of the goods to be exported. 6. The exporter and forfaiter sign a contract. 7. Export takes place against documents guaranteed by the importers bank. 8. The exporter discounts the bill with the forfaiter and the latter presents the same to the importer for payment on due date or even sell it in the secondary market.

Three Additional Major Advantages of Forfaiting Volume: Can work on a one-shot deal, without requiring an ongoing volume of business. Speed: Commitments can be issued within hours/days depending on details and country. Simplicity: Documentation is usually simple, concise, and straightforward. Forfaiting Industry Profile While the number of forfaiting transactions is growing worldwide, industry sources estimate that only 2 percent of world trade is financed through forfaiting and that U.S. forfaiting transactions account for only 3 percent of that volume. Forfaiting firms have opened around the world, but the Europeans maintain a hold on the market, including in North America. While these firms remain few in number in the United States, the innovative financing they provide should not be overlooked as a viable means of export finance f or U.S exporters.

 Forfaiting Industry Profile While the number of forfaiting transactions is growing worldwide, industry sources estimate that only 2 percent of world trade is financed through forfaiting and that U.S. forfaiting transactions account for only 3 percent of that volume. Forfaiting firms have opened around the world, but the Europeans maintain a hold on the market, including in North America. While these firms remain few in number in the United States, the innovative financing they provide should not be overlooked as a viable means of export finance f

forfaiting is a transaction-based operation involving exporters in which the firm sells one of its transactions,[3] while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables.

A forfeiting transaction has typically three cost elements: Commitment fee Discount fee Documentation fee

benefits which accrue to an exporter from forfeiting Converts a deferred payment export into a cash transaction, improving liquidity and cash flow Frees the exporter from cross-border political or commercial risks associated with export receivables Finance up to 100 percent of the export value is possible as compared to 80-85 percent financing available from conventional export credit program As forfeiting offers without recourse finance to an exporter, it does not impact the exporters borrowing limits. Thus, forfeiting represents an additional source of funding, contributing to improved liquidity and cash flow Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit Exporter is freed from credit administration and collection problems Forfaiting is transaction specific. Consequently, a long term banking relationship with the forfeiter is not necessary to arrange a forfeiting transaction Exporter saves on insurance costs as forfeiting obviates the need for export credit insurance

SWIFT Society for Worldwide Interbank Financial Telecommunication SWIFT is a member-owned cooperative through which the financial world conducts its business operations with speed, certainty and confidence. More than 10,000 financial institutions and corporations in 212 countries every day exchange millions of standardised financial messages. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity. SWIFT also markets software and services to financial institutions, much of it for use on the SWIFTNet Network, and ISO 9362 bank identifier codes (BICs) are popularly known as "SWIFT codes". Its role is two-fold.it provides the proprietary communications platform, products and services that allow its customers to connect and exchange financial information securely and reliably. it also acts as the catalyst that brings the financial community together to work collaboratively to shape market practice, define standards and consider solutions to issues of mutual interest. SWIFT enables its customers to automate and standardise financial transactions, thereby lowering costs, reducing operational risk and eliminating inefficiencies from their operations. By using SWIFT customers can also create new business opportunities and revenue streams. SWIFT has its headquarters in Belgium and has offices in the world's major financial centres and developing markets. SWIFT provides additional products and associated services through Arkelis N.V., a wholly owned subsidiary of SWIFT, the assets of which were acquired from SunGard in 2010. SWIFT does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis.

 SWIFT was founded in Brussels in 1973 under the leadership of its inaugural CEO Carl Reuterskild (1973-1983) and was supported by 239 banks in 15 countries. It started to establish common standards for financial transactions and a shared data processing system and worldwide communications network designed by Logica.Fundamental operating procedures, rules for liability, etc., were established in 1975 and the first message was sent in 1977. SWIFT's first United States Operating Centre was inaugurated by Governor John N. Dalton of Virginia in 1979 SWIFT does not facilitate funds transfer; rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features. SWIFT hosts an annual conference every year called SIBOS which is specifically aimed at the Financial Services industry. SWIFT is a cooperative society under Belgian law and it is owned by its member financial institutions. It has offices around the world.

SWIFT means several things in the financial world: 1. a secure network for transmitting messages between financial institutions; 2. a set of syntax standards for financial messages (for transmission over SWIFTNet or any other network) 3. a set of connection software and services, allowing financial institutions to transmit messages over SWIFT network.

The Regions SWIFT is organized into three regions the Americas, Asia Pacific, and EMEA (Europe, Middle East and Africa). Each regional head manages their region with significant autonomy. The regional teams include locally based marketing, sales and support experts, relationship managers and core functions such as Communications, HR, Training, Finance and Legal. This structure enables us to work closely with our customers and ensures that their particular needs are understood. The Americas Region The Asia Pacific Region The EMEA Region

Management The SWIFT Board of Directors delegates the day-to-day management of the Company to the Chief Executive Officer (CEO). The CEO chairs an Executive Committee formed by the CEO, the Chief Financial Officer (CFO), the Chief Information Officer (CIO), the Head of Marketing, and the Heads of the three Regions. Executive Committee Gottfried Leibbrandt, Chief Executive Officer Chris Church, Chief Executive Americas and Global Head of Securities Michael Fish, Chief Information Officer, Head of Information Technology and Operations Ian Johnston, Chief Executive, Asia Pacific Region Javier Prez-Tasso, Head of Marketing Alain Raes, Chief Executive, EMEA Francis Vanbever, Chief Financial Officer

Whether your business is payments, treasury, trade or securities; whether you work for a small local brokerage or a global multi-service bank; SWIFT enables you to automate and standardise your transactions end-to-end. its solutions can help lower your costs, mitigate your risk and increase your service levels customers Banks Banking market infrastrucures Broker/dealers Corporates Custodians Investment managers Securities market infrastructures

PAYMENT, SETTLEMENT AND CLEARING SYSTEMS IN FOREIGN CURRENCY Transferring money to an overseas beneficiary account requires details beyond the operational capabilities of most banks. To assist identification of destination banks and to communicate the transfer details, banks use external systems and/or arrangements. This is achieved in two standard ways, 1. through a bank-to-bank partnership agreement or 2. a globally accepted standard platform. In a partnership between two banks, transfers are processed according to a previously agreed arrangement. For example, Wells Fargo's ExpressSend service is based on its partnerships with banks in countries such as Mexico, India, China etc. to process transfers for its customers. Transfers through such systems tend to be quicker and cheaper. On the other hand, transfers between banks with no partnership agreement necessiates the use of a globally accepted platform. SWIFT, as is explained below, processes a majority of such wire transfers around the world. Local transfers (those which are initiated and concluded within a country) make use of regional systems such as ACH (US), INTERAC (Canada), CHAPS (UK) etc. to process communication of financial information.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) SWIFT is a member-owned cooperative of over 8300 banking institutions in more than 208 countries. It provides a platform to its member banks to communicate financial information securely using standardised messages. Each member bank is assigned a unique BIC (Bank Identifier Code). It is common for a bank to have more than one BIC, each representing a different operation. For example, a bank may have separate BICs for personal and corporate banking customers. ACH (Automated Clearing House) ACH is a batch-oriented electronic funds transfer system which provides for interbank clearing of electronic payments for member banks in the US. It is operated by the Federal Reserve and Electronic Payments Network. ACH facilitates Direct Deposit of payroll, Social Security benefit payments, tax refunds etc. CHIPS (Clearing House Interbank Payments System) CHIPS is a private clearing house for large-value transactions in the US, owned and operated by its members, which constitute banking and financial institutions with regulated US presence. Interac Interac is a not-for-profit organisation in Canada that operates the InterMember Network (IMN), a nation-wide payment network. Interac and its participating members operate Interac Email Money Transfer, where money is transfered securely through online banking.

CHAPS (Clearing House Automated Payment System) CHAPS provides a platform for bank-to-bank (and business-to-business) same-day payment processing (either sterling or euro) in UK. CHAPS is one of the largest RTGS systems in the world. BACS (Bankers' Automated Clearing Services) BACS is a not-for-profit, membership based, industry body that provides payment processing services to its members. BACS, which provides two principal electronic payment systems; Direct Debit and BACS Direct Credit, is owned and operated by a 15 member group of banks and building societies in UK. BPAY BPAY is a bill payment service in Australia that allows subscribers to conveniently receive and pay bills electronically. BPAY Pty Ltd is a wholly owned subsidiary of Cardlink Services Limited (CSL) which is owned by the four major banks and BankWest. IBAN (International Bank Account Number) IBAN is a standard format adopted by banks in the European Union, Israel and some other countries to uniquely identify bank accounts with an alphanumeric code of atleast 27 characters in Europe and 34 characters outside Europe. A notable exception is Germany where banks use 22 alphanumeric characters to identify bank accounts. All transfers originating from or destined for the European Union require an IBAN number. Since the code is verifiable at the originating bank IBAN-based transfers do not suffer delays/rejections resulting from incorrect or insufficient beneficiary account details. RTGS (Real Time Gross Settlement) RTGS is a system of inter-bank payment processing used by Central banks around the world to electronically settle payments between its constituent banks. In simple terms, a Central bank debits the electronic account of the payer bank and credits it to the payee bank's account. GIRO GIRO is a payment processing system where a payer instructs their bank to transfer funds to payee's bank account. Unlike cheque payments, GIRO instructions do not 'bounce' because banks do not process instructions unless there are sufficient funds in payers' account.

 CHAPS' A British company that facilitates the trading of European currency. CHAPS provides same-day fund transfers for the sterling and the euro. CHAPS transfers are used when money needs to be moved from one account to another. CHAPS transfers are fairly costly, with an average fee of 30 pounds per transfer. CHAPS eliminates float time that occurs with cheque writing and prohibits the sender from rescinding the payment. CHAPS was first established in London in 1984. It is currently used by 19 settlement banks (including the Bank of England) and over 400 submember institutions. In 2004, CHAPS averaged 130,000 transactions per day, moving 300 billion pounds sterling. New, lower cost transfers have recently become available from the CHAPS system.

 CHIPS' The primary clearing house in the U.S. for large banking transactions. CHIPS settles over 250,000 of trades per day, valued in excess of $1 trillion. CHIPS and the Fedwire funds service used by the Federal Reserve Bank combine to constitute the primary network in the U.S. for both domestic and foreign large transactions denominated in U.S. dollars. CHIPS differs from the Fedwire transaction service in several respects. First and foremost, it is cheaper than the Fedwire service, albeit not as fast, and the dollar amounts required to use this service are lower. It is also privately owned by member banks and has only 46 members (as of 2006), compared to the approximately 50,000 members that use the Fedwire service. Finally, CHIPS acts as a netting engine, where payments between parties are netted against each other instead of the full dollar value of both trades being sent.

 CHIPS: Clearing House Interbank Payments System. An interbank payment system related to international trade, CHIPS is used for the transfer of international trade dollars. CHIPS is used by both Fedwire and S.W.I.F.T. CHAPS: Clearing House Automated Payments System. Operated by the Bankers Clearing House of London, CHAPS is used for interbank messaging and wire transfer involving British Pounds. BOJNET: Electronic wire transfer system overseen by the Bank of Japan. FUNDS WIRING SERVICES: Although there are many wire transfer services, they must each use the basic services such as Fedwire, S.W.I.F.T, or BOJNET. Examples of wire money transfer services are Western Union, Moneygram, Eurigro, Sterling Draft Service, and the various payment services available on the Internet.

CHIPS The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value transactions in the United States, settling well over US$1 trillion a day in around 250,000 interbank payments. Together with the Fedwire Funds Service (which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value domestic and international USD payments (where it has a market share of around 96%). CHIPS transfers are governed by Article 4A of Uniform Commercial Code. CHIPS is owned by financial institutions. According to the Federal Financial Institutions Examination Council (FFIEC), an interagency office of the United States government, "any banking organization with a regulated U.S. presence may become an owner and participate in the network."CHIPS participants may be commercial banks, Edge Act corporations or investment companies. Until 1998, to be a CHIPS participant, a financial institution was required to maintain a branch or an agency in New York City. A non-participant wishing to make international payments using CHIPS was required to employ one of the CHIPS participants to act as its correspondent or agent. Banks typically prefer to make payments of higher value and of a less time-sensitive nature by CHIPS instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required).

 CHIPS differs from the Fedwire payment system in three key ways. First, it is privately owned, whereas the Fed is part of a regulatory body. Second, it has 47 member participants (with some merged banks constituting separate participants), compared with 9,289 banking institutions (as of March 19, 2009) eligible to make and receive funds via Fedwire. Third, it is a netting engine (and hence, not real-time). A netting engine consolidates all of the pending payments into fewer single transactions. For example, if Bank of America is to pay American Express US$1.2 million, and American Express is to pay Bank of America $800,000, the CHIPS system aggregates this to a single payment of $400,000 from Bank of America to American Express only 20% of the $2 million to be transferred actually changes hands. The Fedwire system would require two separate payments for the full amounts ($1.2 million to American Express and $800,000 to Bank of America). Only the largest banks dealing in U.S. dollars participate in CHIPS; about 70% of these are non-U.S. banks. Smaller banks have not found it cost effective to participate in CHIPS, but many have accounts at CHIPSparticipating banks to send and receive payments.

As of 2009, few member participants (with country of ownership) are: ABN AMRO Bank N.V. Netherlands American Express Bank Ltd. United States Banco Bilbao Vizcaya, S.A. Spain Banco de la Nacion Argentina Argentina Banco do Brasil S.A. Brazil Bangkok Bank Public Company Limited Thailand Bank Hapoalim B.M. Israel Bank Leumi USA United States Bank of America, N.A. United States Bank of China China Dresdner Bank AG Germany Habib Bank Limited Pakistan HSBC Bank USA United States Standard Chartered Bank England State Bank of India India State Street Bank and Trust Company United States

CHAPS The Clearing House Automated Payment System or CHAPS is a British company established in London in 1984, which offers same-day sterling fund transfers. CHAPS is a member of the trade organisation APACS, and the EU-area settlement system TARGET. A CHAPS transfer is initiated by the sender to move money to the recipient's account (at another banking institution) where the funds need to be available (cleared) the same working day. CHAPS is used by 19 settlement banks including the Bank of England and over 400 sub-member financial institutions. In its first year of operation, average daily transactions numbered 7,000 with an annual value of 5 billion pounds sterling. In 2004, twenty years later, average daily transactions numbered 130,000 with an annual value of 300 billion pounds sterling. In 2010 there were 32 million CHAPS transactions totalling over 61 trillion, down from 73 trillion in 2008. CHAPS used to offer euro fund transfers, but this service closed on 16 May 2008.The total value of these in 2007 was 57 trillion. As well as making transfers originated by banks themselves, CHAPS is frequently used by businesses for high-value payments to suppliers, and by solicitors and Licensed Conveyancers on behalf of individuals buying houses.

CHAPS transfers are relatively expensive, with banks typically charging as much as 35 for a transfer. The cost of fast transfers and the slow speed of free transfers (such as BACS) is sometimes a subject of controversy in the UK, although low value transactions are now available from its Faster Payments Service. Problems can arise from delays, e.g. when an exceptional workload at a bank results in the money being cleared too late in a working day to complete related transactions, or inadequate instructions, when a bank is not given sufficient information to know where to credit the money. As of 2012 the members of CHAPS are: Bank of America Merrill Lynch The Governor and Company of the Bank of England Bank of Scotland Plc Barclays Bank Plc Citibank N.A. CLS Bank International Clydesdale Bank Plc The Co-operative Bank Plc Danske Bank A/S (Northern Bank Ltd.) Deutsche Bank A.G. HSBC Bank Plc JPMorgan Chase & Co. Lloyds TSB Bank Plc National Westminster Bank Plc The Royal Bank of Scotland Plc Santander UK Plc Standard Chartered Bank Plc State Street Bank UBS A.G.

The 12 Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The 12 federal reserve banks together divide the nation into 12 Federal Reserve Districts, the 12 banking districts created by the Federal Reserve Act of 1913.[1] The twelve Federal Reserve Banks are jointly responsible for implementing the monetary policy set by the Federal Open Market Committee. Each federal reserve bank is also responsible for the regulation of the commercial banks within its own particular district. In the United Kingdom, a public limited company usually must include the words "public limited company" or the abbreviation "PLC" or "plc" at the end and as part of the legal company name. Welsh companies may instead choose to end their names with c.c.c.However, some public limited companies (mostly nationalised concerns) incorporated under special legislation are exempted from bearing any of the identifying suffixes

OTC Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without any supervision of an exchange. It is contrasted with exchange trading, which occurs via these facilities. An exchange has the benefit of facilitating liquidity, mitigates all credit risk concerning the default of one party in the transaction, provides transparency, and maintains the current market price. In an OTC trade, the price is not necessarily made a public information. OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such. Products traded on the exchange must be well standardised in respect of transparent trading. Non-standard products are traded in the OTC markets. For derivatives, OTC ones have less standard structure. As in OTC market contracts are bilateral (i.e. contract between only two parties), each party could have credit risk concerns with respect to the other party. OTC derivative market is significant in some asset classes: interest rate, foreign exchange, equities, and commodities.

 Importance of OTC derivatives in modern banking OTC derivatives are significant part of the world of global finance. The OTC derivatives markets are large and have grown exponentially over the last two decades. The expansion has been driven by interest rate products, foreign exchange instruments and credit default swaps. The notional outstanding of OTC derivatives markets rose throughout the period and totaled approximately US$601 trillion at December 31, 2010. In the past two decades, the major internationally active financial institutions have significantly increased the share of their earnings from derivatives activities. These institutions manage portfolios of derivatives involving tens of thousand of positions and aggregate global turnover over $1trillion. The OTC market is an informal network of bilateral counterparty relationships and dynamic, time-varying credit exposures whose size and distribution are tied to important asset markets. International financial institutions have increasingly nurtured the ability to profit from OTC derivatives activities and financial markets participants benefit from them. As a result, OTC derivatives activities play a central and predominantly a beneficial role in modern finance. The advantages of OTC derivatives over exchange-traded ones are mainly the lower fees and taxes, and greater freedom of negotiation and customization of a transaction, as it involves only a seller and a buyer and no standardization authority.

 OTC derivatives can lead to significant risks. Especially counterparty risk has gained particular emphasis due to the credit crisis in 2007. Counterparty risk is the risk that a counterparty in a derivatives transaction will default prior to expiration of the trade and will not make the current and future payments required by the contract.[There are many ways to limit counterparty risk. One of them focuses on controlling credit exposure with diversification, netting, collateralisation and hedging.[ The International Swaps and Derivatives Association suggested five main ways to address the credit risk arising from a derivatives transaction, as follows: avoiding the risk by not entering into transactions in the first place; being financially strong enough and having enough capital set aside to accept the risk of non-payment; making the risk as small as possible through the use of close-out netting having another entity reimburse losses, similar to the insurance, financial guarantee and credit derivatives markets obtaining the right of recourse to some asset of value that can be sold or the value of which can be applied in the event of default on the transaction.

A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone. Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records. Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes

Interest Rate Swaps, Credit Default Swaps, FX and Commodities. Our multiasset class clearing offerings are open-access, platform agnostic and substantially mitigate your counterparty credit risk.

FLOATING RATE INTEREST RATE A floating interest rate, also known as a variable rate or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. Such debt typically uses an index or other base rate for establishing the interest rate for each relevant period. One of the most common rates to use as the basis for applying interest rates is the London Inter-bank Offered Rate, or LIBOR (the rates at which large banks lend to each other). The rate for such debt will usually be referred to as a spread or margin over the base rate: for example, a five-year loan may be priced at six-month LIBOR + 2.50%. At the end of each six-month period, the rate for the following period will be based on LIBOR at that point (the reset date), plus the spread. The basis will be agreed between the borrower and lender, but 1, 3, 6 or 12 month money market rates are commonly used for commercial loans. Typically, floating rate loans will cost less than fixed rate loans, depending in part on the yield curve. In return for paying a lower loan rate, the borrower takes the interest rate risk: the risk that rates will go up in future. In cases where the yield curve is inverted, the cost of borrowing at floating rates may actually be higher; in most cases, however, lenders require higher rates for longer-term fixed-rate loans, because they are bearing the interest rate risk (risking that the rate will go up, and they will get lower interest income than they would otherwise have had). Certain types of floating rate loans, particularly mortgages, may have other special features such as interest rate caps, or limits on the maximum interest rate or maximum change in the interest rate that is allowable

 Floating rate loan In business and finance, a floating rate loan (or a variable or adjustable rate loan) refers to a loan with a floating interest rate. The total rate paid by the customer "floats" in relation to some base rate, to which a spread or margin is added (or more rarely, subtracted). The term of the loan may be substantially longer than the basis from which the floating rate loan is priced; for example, a 25-year mortgage may be priced off the 6-month prime lending rate. Floating rate loans are common in the banking industry and for large corporate customers. A floating rate mortgage is a mortgage with a floating rate, as opposed to a fixed rate loan. In many countries, floating rate loans and mortgages predominate. They may be referred to by different names, such as an adjustable rate mortgage in the United States. In some countries, there may be no special name for this type of loan or mortgage, as floating rate lending may be the norm. For example, in Canada substantially all mortgages are floating rate mortgages; borrowers may choose to "fix" the interest rate for any period between six months and ten years, although the actual term of the loan may be 25 years or more. Floating rate loans are sometimes referred to as bullet loans, although they are distinct concepts. In a bullet loan, a large payment (the "bullet" or "balloon") is payable at the end of the loan. A floating rate loan may or may not incorporate a bullet payment.

 Example A customer borrows $50,000 from a bank; the terms of the loan are (sixmonth) LIBOR + 3.5%. At the time of issuing the loan, the LIBOR rate is 2.5%. For the first six months, the borrower pays the bank 6% annual interest: in this simplified case $1,500 for six months. At the end of the first six months, the LIBOR rate has risen to 4%; the client will pay 7.5% (or $1,875) for the second half of the year. At the beginning of the second year, the LIBOR rate has now fallen to 1.5%, and the borrowing costs are $1,250 for the following six months. Interest rates option can hedge the floating rate loan.

FIXED INTEREST LOAN A fixed interest rate loan is a loan where the interest rate doesn't fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments. Variable rate loans, by contrast, are anchored to the prevailing discount rate. A fixed interest rate is based on the lender's assumptions about the average discount rate over the fixed rate period. For example, when the discount rate is historically low, fixed rates are normally higher than variable rates because interest rates are more likely to rise during the fixed rate period. Conversely, when interest rates are historically high, lenders normally offer a discount to borrowers to fix their interest rate over time, as rates are more likely to fall during the fixed rate period.

Choice between fixed and floating interest rates

Investor: If you are an informed investor and hold a view on the future interest rates which is different from the market, there is merit in opting one strategy over the other for making monetory gains. For example, if you feel that future interest rates are going to be higher thatn what are being projected by analysyts, there is a chance to make money by lending at floating rate and borrowing at fixed rate. The present value of the floating rate according to your views would be higher than that of fixed rate and you would thus end making money. On the other hand, if you feel that the interest rates are going to be lower than expected, there is merit in borrowing at floating rate and lending at fixed rate.
Personal loans: If you are borrowing for personal usage and are not aware of the market dynamics, it is safer to opt for fixed interest loans since you would be aware of the interest rate to be paid in coming years in advance and would be protected against sudden rise in the same. However, if you have a good appetite for risk and have a view that interest rates are likely to fall, then opting for a floating rate loan is not a bad strategy.

INTERNATIONAL CAPITAL MARKET: International capital market is that financial market or world financial center where shares, bonds, debentures, currencies, hedge funds, mutual funds and other long term securities are purchased and sold. International capital market is the group of different country's capital market. They associate with each other with Internet. They provide the place to international companies and investors to deal in shares and bonds of different countries. After invention of computer and Internet and revolution of financial market in 2010, almost all financial markets are converted in international capital markets. We can give the example of Hong Kong, Singapore and New York world trade centre. International capital market was started with dealing of foreign exchange. After globalization of financial sector, companies have to take certificate for dealing in international market. Suppose, Indian company wants to sell shares in France, for this, Indian company should take certificate named global depository receipt (GDR).

International capital market's daily turnover has crossed $ 5 trillion. International capital market is very helpful for reducing the risk of small company because in international market, you can buy different countries companies shares, debentures and mutual funds. Different countries have different business environment, so if any country is facing loss and due to financial crisis, your investment in that country may suffer losses but you can fulfill this loss from other country's investment. So, overall risk will be reduced by this technique.

FACTORING MECHANISM
The three parties directly involved are: the one who sells the receivable, the debtor (the account debtor, or customer of the seller), the factor. 1. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). 2. The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), often, in advance factoring, to obtain cash. 3. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables. Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and, in nonrecourse factoring, must bear the loss if the account debtor does not pay the invoice amount due solely to his or its financial inability to pay.

Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs. Sometimes the factor charges the seller (the factor's "client") both a discount fee, for the factor's assumption of credit risk and other services provided, as well as interest on the factor's advance, based on how long the advance, often treated as a loan (repaid by set-off against the factor's purchase obligation, when the account is collected), is outstanding.The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this in pricing, when determining the purchase price to be paid to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.

 Types of Factoring Generally speaking, there are three types of factoring arrangements: 1. Discount/Advance Factoring with Notification: Funds are advanced to the client before the due date of the receivables. The advance of funds frequently occurs soon after the receivables are generated. The advance may be as much as 90% of the face value of the invoices that are factored. The remaining 10% that is held back is a cushion against customer claims or allowances. Interest is charged by the factor in one of two ways. The interest is charged until the accounts receivables are collected or, until the average maturity date arrives. The notification requirement necessitates the client to place a stamp directing the customer to make payments to the factor.

 2. Maturity Factoring with Notification: Funds advanced to the client are determined by a calculation of the average due date of a months sales. Again, with notification the client will place a stamp on its invoices directing the customer to make payments to the factor. 3. Non-Notification Factoring: A factoring arrangement without notification leaves the client to keep its own bookkeeping and collection responsibilities. In addition, there is no notification provided to its customers.

 Non-recourse and Full Recourse Within this context of factoring, there is also factoring on a recourse and non-recourse basis. Receivables purchased on a non-recourse basis, it is the factor that assumes the risk and therefore the loss on those receivables, should the account debtor become unable to pay the receivables. A factoring arrangement on a full recourse basis, the factor retains the collection function of the receivables it has funded. But if the clients customer fails to pay the invoice during the agreed upon repayment period, the factor will return the receivable to the client and will expect a refund of the advanced funds.

'Nostro Account' A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions. The term is derived from the Latin word for "ours." Conversely, accounts that are held by the domestic bank in its home country for foreign banks are called vostro accounts, derived from the Latin word for "yours. For example, a U.S. bank may have nostro accounts with one or more Canadian banks. These accounts will be denominated in Canadian dollars, which enables efficient settlement of transactions that are Canadian dollar denominated. Nostro accounts also minimize the exposure of the U.S. bank to undue exchange rate risk

'Vostro Account' The account that a correspondent bank, usually located in the United States or United Kingdom, holds on behalf of a foreign bank. A vostro account is one in which the domestic bank (from the point of view of the currency in which the account is held) acts as custodian or manages the account of a foreign counterpart. Also known as a loro account. For instance, if a Spanish life insurance company approaches a U.S. bank to manage funds in an account for the Spanish life insurer's behalf, the account would be deemed a vostro account of the insurer. The term vostro is Latin for "yours," thus when translated literally, it means "your account."

Example : When X (Buyer) a trader in Base Country wants to purchase $5000 worth of goods by paying cash. Mr. X deposits the cash in his local bank in the country's currency for the corresponding amount ($5000) then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a NOSTRO account requesting the bank to make the payment to Y (Seller) in his local currency i.e. US Dollars. Thus facilitating the trade between X & Y. IF Y wanted to buy something from X then the foreign bank would complete the deal using their VOSTRO account in X's country.

 Wire Transfers between two banks is essentially not too complex. To understand the whole concept of wire transfer, you need to understand the different types of Wire Transfers: Domestic Inter-bank Transfers (within the country transfer from one bank to another) Domestic Intra-bank Transfers (within the country and transferring from one bank branch to another) International Inter-bank Transfers (probably the most common/famous bank transfer, whereby funds are transferred from one bank in one country to another bank in another country) International Intra-bank Transfers (transferring of money within the same bank, but in a different country)

Domestic Inter-Bank Funds Transfer This depends on how the setup is in each country. It can be done via RTGS (See Wiki on RTGS: http://en.wikipedia.org/wiki/Rea...) or via a local Automated Clearing House or even a localized Financial Network or Switch. Essentially, banks are members of a network (secure, closed network) that essentially allows banks to net off or send payments to each other and exchange beneficiary details. Some old-school (read: not technologically advance countries) still do this manually by exchanging physical cheques and then settling them. Whilst, most of the modern and even developing economies have some form of an exchange / network to connect to and settle. The United States, for example uses ACH for this purpose. Intra-Bank Funds Transfers (Domestic) For Intra-Bank Transfers the procedure is very simple. Most banks will simply instruct their core banking software to do an FT (Funds Transfer), which essentially means debit one account holder and credit the other account holder. Intra-Bank Funds Transfers (International) When the same Intra-Bank transfer is done internationally, banks in both the remitting country and the beneficiary country have to follow laws in their respective countries for reporting the same to the financial services authority / central banks on the money in-flow/out-flow (see more below on the different types of reporting).

Inter-Bank Funds Transfer (International) On the International transfers, for Inter-bank transfers, banks usually use the Society for Worldwide Interbank Financial Telecommunication network. Think of SWIFT as the common denominator (or network) to connect any two banks. Sometimes two banks may have a direct arrangement (for example, a transfer from Citibank NYC (US) to Deutsche Bank Karachi (PK) have a direct arrangement, and hence the transfer will be done via the SWIFT network, without the interaction or involvement of an intermediary bank, commonly referred to as a correspondent bank. In the event a direct relationship is not available, banks have arrangements with each other (via Nostro Accounts).

LATE PAYMENTS AND BAD DEBTS Late payments and bad debts have always, and will likely continue to be, a problem for firms of all sizes and in all sectors. However in recent times these issues have become a lot worse. With firms forced to accept tougher payment terms from both suppliers and customers, companies often tread a fine line when it comes to cash flow and balancing incomings with outgoings. It only takes late payment from one or two clients to cause huge problems. Similarly, bad debt often pushes companies to the brink of collapse and causes unnecessary financial hardship. With many businesses feeling helpless under this relentless pressure, the importance of strong financial backing from a lender who knows your business inside out is more crucial than ever. bank lending has traditionally been seen as the one stop shop for financial support, the importance of shopping around for other solutions which may be better suited to the needs of your company cannot be lessened

 Invoice finance is one such means. The beauty of this type of finance is that once an invoice is raised the firm has access to up to 95 per cent of its value helping alleviate much of the strain on cash flow caused by late payments. This is especially beneficial when it comes to waiting for payment from one or two large customers, where quite often any delay can cripple a company. With many invoice finance packages also offering bad debt protection, firms are afforded the ability to continue their day to day operations safe in the knowledge that, if and when bad debts rear their ugly head, they will be shielded from the nasty consequences. In todays climate a strong relationship with your financial provider is essential. The ability to work closely together in assessing the risks involved with different clients helps mitigate any potential trouble, hopefully allowing you to dodge the nasty problems bad debtors cause. A careful and considered approach to finance can ease the burden on cash flow caused by late payments and help protect your business from the damaging impact of bad debts.

One way that some exporters have overcome this headache is by outsourcing the responsibility for chasing customer invoices and signing up to an invoice finance package with a specialist international trade financier. In the case of FIRMS giving Financial Services international trade finance package, it is able to offer its clients a multilingual team who are used to dealing with international accounts departments in Europe, Eastern Europe, the Middle East and Asia to name but a few! They understand and are well versed with the legal, financial and cultural idiosyncrasies of individual countries often reducing the time taken to obtain money quite considerably. Customers are always dealt with in their own language and payments can be made into their local bank, something that can quicken the collection process. A finance facility with a specialist team in Financial Services firm helps smooth out the problem of fluctuating exchange rates by offering multicurrency facilities as well as foreign exchange and forward currency dealings for protection against exchange losses. This means that small and medium-sized businesses dont lose out if the Pound; Dollar or Euro suddenly loses value or gains ground unexpectedly

Keep your business wits about you Don't automatically offer credit Set individual credit limits Set time aside for invoicing and credit control

Travellers Cheques Travellers Cheques are a safe and easy way to protect your spending money whilst travelling and for making export payments. They are available in 6 major currencies and universally accepted. Should you have the misfortune of having your Travellers Cheques lost or stolen, they are replaceable within 24 hours,by the issuing bank virtually anywhere in the world. There is also no expiration date so you can always save unused Cheques for another trip.

Telegraphic Transfers A Telegraphic Transfer (TT) allows you to electronically send funds directly into your beneficiary's account in a specified currency. TTs are the preferred method to make large value international payments as they are processed quickly, cost-effectively and securely. To send a TT, you will need to contact your closest bank who will facilitate the payment for you. You will be required to provide the following information in order to process a TT with us: Your street address Beneficiary's name and street address Beneficiary's bank account details Foreign Currency Drafts Foreign Currency Bank Drafts, commonly called drafts or foreign currency cheques, are simply bank cheques made to a recipient who can deposit the cheque directly into their own account overseas. Drafts are an ideal payment method when you have small amounts to pay or you do not know the banking details of the person or beneficiary you need to send money to. If drafts are is ordered before 2pm, then it is expected to be available within 48 hours.

BUYERS CREDITS Buyer's credit is the credit availed by an importer (buyer) from overseas lenders, i.e. banks and financial institutions for payment of his imports on due date. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importers bank. Importer's bank or Buyers Credit Consultant or importer arranges buyer's credit from international branches of a domestic bank or international banks in foreign countries. For this service, importer's bank or buyer's credit consultant charges a fee called an arrangement fee. Buyer's credit helps local importers gain access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates. The duration of buyer's credit may vary from country to country, as per the local regulations. For example in India, buyer's credit can be availed for one year in case the import is for trade-able goods and for three years if the import is for capital goods. Every six months, the interest on buyer's credit may get reset

Benefits to importer The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing. The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer. The importer can use this financing for any form of trade viz. open account, collections, or LCs. The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency. Steps involved The customer will import the goods either under LC, collections or open account The customer requests the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing Arrange to request overseas bank branches to provide a buyer's credit offer letter in the name of the importer. Best rate of interest is quoted to the importer Overseas bank to fund Importer's bank Nostro account for the required amount Importer's bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment) Importer's bank will recover the required amount from the importer and remit the same to overseas bank on due date. It helps importer in working capital management

Cost involved Interest cost: is charged by overseas bank as a financing cost Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking Forward Booking Cost / Hedging cost Arrangement fee: Charged by person who is arranging buyer's credit for buyer. Risk premium: Depending on the risk perceived on the transaction. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges. WHT (Withholding tax): The customer may have to pay WHT on the interest amount remitted overseas to the local tax authorities depending on local tax regulations. In case of India, the WHT is not applicable where Indian banks arrange for buyer's credit through their offshore offices. Indian regulatory framework Banks can provide buyers credit up to USD 20 million per import transactions for a maximum maturity period of one year from date of shipment. In case of import of capital goods, banks can approve buyers credits up to USD 20 million per transaction with a maturity period of up to three years. No rollover beyond that period is permitted.

Suppliers credit A financing arrangement under which an exporter extends credit to a foreign importer to finance his purchase. Usually the importer pays a portion of the contract value in cash and issues a Promissory note or accepts a draft as evidence of his obligation to pay the balance over a period of time. The exporter thus accepts a deferred payment from the importer, and may be able to obtain cash payment by discounting or selling the draft or promissory notes created with his bank. This form of self-financing has many benefits for both the supplier and the customer. For the customer, the establishment of a line of credit means it is possible to order what is needed now and pay for it incrementally while earning a return from the use of the items ordered. For the supplier, extending the line of credit means that steady flows of revenue are created, assuming that all customers who are granted supplier credit make timely payments on their outstanding balances. The rate of interest is usually competitive keeping into consideration the rates he would have paid while borrowing from other sources.

Supplier Credit

Suppliers Credit Facility Suppliers' Credit relates to credit for imports into India extended by the overseas supplier. Under Supplier's credit, the importer opens a LC from a bank in India under usance terms and the supplier gets its LC or bills discounted from a financing bank through which LC advised. Indian importers are free to enjoy a credit period of 180 days on their imports from the date of shipment Eligibility : All Importers but L/C is to be advised through financing Bank

Process Flow

Indian importer approach to Finrex Financial Consultancy (FFC) before issuing letter of credit (LC) to avail Supplier credit financing. FFC arrange best competitive rate from different banks. And get give best possible cheapest rate to our customer. A sight Letter of credit is issued by the L/c issuing bank which needs to advised and confirmed by Financing bank. The Seller submits related documents as per LC at his bank after shipping the goods to the buyer. Suppliers Bank sends the documents to Financing Bank. The Financing bank the sends the documents to the L/c issuing bank for their acceptance to pay the seller after scrutiny of documents for discrepancies. Importer accepts documents on presentation by L/c issuing bank. Importers Bank provides acceptance to Financing Bank guaranteeing payment on due date. On receipt of the acceptance, the financing bank pays off the seller On the due date of the L/c claims reimbursement from the L/c issuing bank for the principal and interest.