Introduction to Financial Supply Chain

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International Trade:

1. Why international trade is important to India? ( small paragraph)

2. Components of Current account, our trade balance and Balance ofPayment position a small brief with statistics. ( small paragraph).

Chapter -1

International Trade role played by UCO Bank.

Banks have been providing financial services to corporates for a long time.

The key services that UCO Bank provide in order to facilitate the trade

business of corporates involved in international trade are

1. Payment and Clearing sevices

2. Financing Services and Forex/Risk management Services.

For international trade, the supply chain process generally proceeds as

under:

Step1 Overseas Buyer places a purchase

order on the Indian Seller ( Vice-

versa)

Step2 Seller procures raw material,

produces the finished products and

delivers for shipment.

Step3 Seller raises invoice on the buyer

Step4 The buyer accepts the invoice

Step-5 The buyer pays to seller as per

agreed terms.

A commercial bank like UCO Bank gets involved in each of these steps:

1. As the invoice price is quoted in foreign currency, the exporter needs

to cover his exchange risk arising out of the transaction (transaction

risk). Bank gets involved to book forward contract.

2. Bank provides credit facility to the exporter for pre-shipment.

3. Bank finances the post shipment.

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4&5: Bank involves in the payment and clearing services for settlement

of the value of goods sold.

In a similar way for the importer, bank books forward contract (step-1),

issues LC/ Provides import finance to facilitate trade.Introduction to Financial Supply Chain

The supply chain represents the processes involved in Trade-Which can be

categorized into two different parts: The physical and the financial Supply

chain. The physical supply chain comprises of processes involved in the

physical movement of goods e.g.: Inventory management, shipment tracking

etc. The financial supply chain includes the movement of funds resulting

from the physical supply chain.

Specialized trade departments in UCO Bank service the physical supply chain

with very highly specialized and specific products. The international trade

finance business of the bank starts with finance of the buyer and supplier.

The bank finance for trade is extended to both the buyers (Importers) and

suppliers (Exporters) in various circumstances and under various names:

some of which are described here

1. Pre-Shipment Credit (Packing Credit): Finance to Exporter ( Seller) to

procure raw material for production and packaging.

2. Post-shipment Credit (Foreign Bills purchased/ negotiated): Finance to

Exporter (Seller) after shipment of goods and before sales realization

is received by the seller.

3. Finance to Importer (buyer) for making payment to seller.

The financial standing and market reputation of the buyer and that of the

seller may be vastly different. This gives rise to risks which the buyer and

seller are exposed to. Banks step in to mitigate this risk through the

mechanism of: Letter of Credit (LC) also known as documentary credit and

has been one of the key innovations in trade finance.

Letter of Credit or Documentary Credit an introduction

Generally, the seller perceives a risk that if they have completed the

manufacturing and delivered the goods to thy buyer and the buyer does not

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pay them they run a payment risk. In such a case of non-payment by the

buyer, the seller may not be able to repossess the goods. The buyer on the

other hand runs a risk of making the payment and then finding that the

delivery has not been made at all or the quality of the delivery is not as per

their expectation.

So, UCO bank acts as an intermediary between the buyer and the seller to

mitigate the risks for both. The letter of credit is a guarantee issued to the

seller by the bank on behalf of its importer client guaranteeing payment to

the seller if he presents trade documents as specified in the letter of

credit. So the LC document, which is issued by the buyers bank, contains the

terms and conditions that the seller has to fulfill in order to receive the

payment. The bank can only examine the trade documents to verify if the

conditions have been fulfilled. Therefore, the bank specifies conditions forall the documents that it expects to receive from the seller in order to

verify that the seller has met their obligations.

When the buyers bank receives the documents it verifies the documents

against the specifications mentioned in the letter of credit. If the

documents are satisfactory it will make payment to the seller on due date.

The buyers bank will have to make the payment irrespective of whether or

not it receives payment from the buyer! Therefore the buyers bank takes a

credit risk when it issues an LC. This credit risk is evaluated when the

working capital credit facility is sanctioned by the bank.

In practice some more parties are involved in the process, the main one

being the sellers bank, which receives the documents from the seller and

forwards them to the buyers bank. This is required as the buyers bank will

not be in a position to know the authenticity of the seller directly especially

if they are in a different country.

The 10-Steps involved in LC

1 Buyer Requests UCO Bank to

issue LC

2 Buyers bank Issues LC and informs

sellers bank

3 Sellers bank Advises LC to the seller

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4 Seller Ships the goods

5 Seller Gives documents to his

bank with the LC for

negotiation, where upon

the sellers bank creditsthe importers account

by sanctioning an

advance.

6 Sellers bank Forwards the

documents to the

buyers bank

7 Buyer Gives acceptance to pay

later or pays

immediately8 Buyers bank Verifies documents

against the LC and

conveys

acceptance/payment to

sellers bank

9 Sellers bank Adjusts the credit

facility availed by the

importer

10 Buyer Collects documentsfrom the bank and then

takes the goods.

Banks as intermediaries gain as follows

Importers bank: Gains exchange income from opening LC, gains interest

income from importer, gains forex exchange income as the importer needs

to pay in foreign currency.

Exporters bank: Gains exchange income from LC advising fee, Gets interest

income from Negotiation of Export bill. Gains forex income as the foreign

currency received from exporter is converted to domestic currency (INR).

Trade documents:

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Under a letter of credit or documentary credit, the banks depend upon the

underlying trade documents to verify the performance of the seller before

making the required payment.

When a seller sells goods to a buyer:

The goods will generally be transported either by ship or airplane.

The sale of goods will be accompanied by some documentation such

as: Invoice, Packing list, Transport Document( Bill of lading/Airway

bill), Insurance, Quality Certificate and Certificate of Origin.

(She may refer the FEDAI book on documentary credits and give a small

brief on the significance of these documents).

Standardization and progress in Trade Services

International trade through LC requires a sound legal frame work to resolve

the disputes that arises. International Chamber of Commerce( ICC) was

founded in 1919 with this aim came out with Uniform Customs and Practices

for Documentary Credit ( UCPDC). This guiding document laid down in great

details:

Model conditions that could be used in establishing letter of credit.

The interpretation and guidelines for verifying the documents verses

the documentary conditions set out in the letter of credit.

Some model practices for handling the uncertainties around the

courier and receipt of documents.

Chapter-2: Govt. Agencies involved in International Trade.

1. How international trade is regulated?

(Role of DGFT, various licenses and its importance).

2. Role of Customs in the physical supply chain.

3. Role of RBI in the documentation chain. GR form / Bill of Entry etc

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Chapter-3

The Regulatory environment related to exports / imports. RBI

guidelines/FEMA.

Chapter -4: Corporate finance ( International sourcing)

1. Various avenues for corporate to raise working capital finance for

funding trade (pre/post shipment finance, buyers credit/suppliers

credit).

2. A small brief on international debt market ( ECB/ADR/GDR etc.)

3. Transaction risk , Translation risk for corporates

Chapter -5

Various Risks and its mitigation both from the corporate perspective and

banks perspective

A detailed study of how a typical corporate manages his exchange risk. How

he decides whether to borrow in foreign currency or domestic currency etc.

Derivatives used for risk mitigation.

2. Economic Risk :( A competitor sourcing goods from another country

benefits from exchange rate and therefore is able to sell at cheaper price)

3. Risk inherent in supply chain. (For instance many corporates who were

sourcing components from Japan faced supply constraints when the huge

earthquake had hit Japan).

4. How bank manages its Risks on exposures to corporate?

Chapter -6

A case study of a corporate can be included covering all the above aspects.

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Documents

Introduction to Financial Supply Chain