A

TRAINING REPORT

titled

‘TRADE FINANCE’

for the training undergone at

Jindal Stainless Ltd.

Submitted to Submitted by Director, IMS Ashish Anand

4th SemesterRoll no 20

Univ regn no 07 –UD -1123

Institute of Management Studies

Kurukshetra University, Kurukshetra

ACKNOWLDGEMENT

A project report is never the sole product of a person whose name appears on the

cover. There is always the help, guidance and suggestions of many in preparation of

such a report. So, I have indebted to several people who have helped me in

completing my project “ASSESSMENT OF TRADE FINANCE”.

I wish to express my sincere thanks to Mr. D.B. Gupta, Executive, Finance &

Accounts Department, Jindal Stainless Limited, Hisar for his valuable guidance and

pain taking supervision during course of my present work. His keen interest, timely

and constant encouragement and generous cooperation gave me confidence and

strength to progress this report.

His valuable advice, constructive criticism and suggestion during course of my study

really helped me a lot. I also thank him for providing full facilities required in

submitting our report within a limited time span.

I also want to express my thanks to HRM Deptt. Of JSL, Hisar for their cooperation

as and when needed. I would be failing my duty if I don’t mention my seniors who

helped me at various moments, during my project.

Specially, I am thankful to my parents and God for their blessings and showing me

the right way at all moments

Preface

This department is intended for the experience gained by me during Winter Training

in Jindal Stainless limited, Hisar.

While making this project I became familiar with the financial terms that are usually

used in a company and the different functions that a Finance Manager has to

perform. I have learnt how to manage Trade Finance.

I have also gained confidence to interact with different persons working at reputed

positions during the summer training, in preparing the project report I have tried my

level best effort to make it reliable, compact and accurate organization.

Declaration

I, Ashish Anand hereby declare that I have completed the project entitled ‘Trade

Finance’ assigned to me by ‘Mr. Sunil Kumar’ (JINDAL STAINLESS Ltd) for the

Training to be submitted in the partial fulfillment of the MBA 5 Year Degree from

Kurukshetra University. Further, I declare that this is original Work done by me and

the information provided in the study is authentic to the best of my knowledge and

belief. My training period was from 26.12.08 to 02.02.09.

This study has not been submitted to any other Institution or university for the award

of any other degree or for any purpose.

Date 18.03.09

Ashish Anand

4th Semester

Class roll no.20

Shri Om Prakash Jindal more popularly known as O.P. Jindal was born on August 7, 1930 to a farmer Late Netram Jindal of village Nalwa of district Hisar in Haryana. Since his childhood the young Jindal had interested in technical work. He started his industrial career with a small bucket-manufacturing unit in Hisar. In 1964, he commissioned a Pipe Unit Jindal India Limited, followed by a large factory in 1969 under the name Jindal Strips Limited.

Sh. Jindal always had the conviction that India should be self-reliant in every sector of industry. He visited several foreign countries to elicit latest industrial technical development and know-how. He acquired a great deal of knowledge, which he aptly applied to

enhance production of his industrial establishments. At present, there are twenty factories under the flagship of the Jindal Organization, which are worth over US $ 10 Billion, under whose umbrella thousands of families directly or indirectly benefit themselves.

Sh. O.P. Jindal was the Chairman of the Jindal Organization. In November 2004, Sh. Jindal was conferred the prestigious "Life Time Achievement Award" for his outstanding contribution to the Indian Steel Industry by the Bengal Chamber of Commerce & Industry. According to the latest Forbes' List, Sh. O.P. Jindal has been ranked 13th amongst the richest Indians of the country and placed 548th amongst the richest persons of the world.

His life's mission was to help others particularly the common man in every possible way. The list of his philanthropic activities is rather long. He was the Chairman of N.C. Jindal Charitable Trust, under whose auspices a 300 Bed N.C. Jindal Institute of Medical Care functions in Hisar Haryana. A 10+2 Girls Residential School in the name of Vidya Devi Jindal School is also run at Hisar. The girls school spreads over 40 acres of land. Another 10+2 school by the name of N.C. Jindal Public School for 4000 students is being run in Delhi.

For his selfless social services and philanthropic contributions, he was unanimously nominated as the Chairman of the Maharaja Agarsen Medical Education & Scientific Research Society. He was also the custodian trustee of the Agroha Vikas Trust. Sh. Jindal was known for his unassuming generosity and donates crores of rupees annually not only to known but also to needy strangers. Numerous social and religious institution of India also received liberal donations from Sh. Jindal for noble causes.

The Group

Jindal Organization, set up in 1970 by the steel visionary Mr. O.P. Jindal, has grown

from an indigenous single-unit steel plant in Hisar, Haryana to the present multi-

billion, multi-national and multi-product steel conglomerate. The organization is still

expanding, integrating, amalgamating and growing.

The group places its commitment to sustainable development, of its people and the

communities in which it operates, at the heart of its strategy and aspires to be a

benchmark for players in the industry the world over.

The Jindal Organization today is a global player. Its relentless quest for excellence

has reaped rich benefits and it is today one of the world’s most admired and

respected groups within the steel fraternity.

Jindal Stainless

Jindal Stainless is in many ways very much like the material it produces. Like

stainless steel the company is versatile in its thought process, strong and unrelenting

in its operations, environment friendly in its manufacturing process, bright, shining

and beautiful in its community support activities.

The list of the properties of stainless steel is endless, just as our values are all

encompassing.

Jindal Stainless has always been committed to innovation and progression, research

and development. Innovations are admired beyond the geographical boundaries of

country. No wonder JSL is the strategic partners of global leaders by choice.

Today JSL is the largest integrated stainless steel producer in India.

Jindal Stainless, a $780 million plus ISO: 9002 & ISO: 14001 companies is the

flagship company of the Jindal Organization. The company today has come a long

way from a single factory establishment, started in 1970.

As the numero uno it has taken on the task of making stainless steel a part of

everybody's life by taking a 360 degrees approach from production of raw materials

to supply of architecture and lifestyle related products.

VISION

Late Shri OP Jindal, had a vision of a progressive state - a state where men and women worked shoulder to shoulder towards a happier tomorrow. Jindal Stainless constantly echoes those thoughts and takes its role as a responsible corporate citizen very seriously. Giving back to the community at large has been an objective from the very beginning.

Schools at various levels have been set up to educate the specifiers of the future. The Vidya Devi Jindal and The Jindal Modern School, at Hisar, is fully child oriented and ensures ‘holistic development’ of a student’s mental and physical potential.Adopting villages and thus contributing to the development of a region has also been

part of the overall Jindal plan. Improving of medical facilities is yet another field of endeavor.

NC JIM Care, at Hisar offers the entire range of diagnostic, treatment and surgical facilities. Immunization drives and free healthcare camps on different medical aspects are also conducted from time to time.

Vision – 2010

To be amongst the top 10 steel producers in the world.

To gain international recognition for cost leadership , product innovation and

customer satisfaction.

To be admired as a socially responsible Corporate and a sustained value

creator for all its stakeholders.

UNIT PROFILE

Jindal Stainless Ltd is the ISO 9001:2000, ISO 14001:1996 and OHSAS

18001:1999 certified Flagship Company of the $ 2.0 billion Jindal Organization. It is

the largest integrated manufacturer of international quality steel flat products in

India.

Hisar Plant

Jindal Stainless Limited (JSL) is a stainless steel products manufacturing company. It

has export markets in over 40 countries including United States, Europe, Middle-East

and South Asian countries. JSL has integrated operations from mining, melting,

casting, hot rolling to cold rolling. The product range includes stainless steel slabs

and blooms, hot rolled coils, plates, cold rolled coils / sheets and products in

precision. JSL has Ferro-chrome manufacturing facilities in Jaipur, Orissa. JSL is

setting up a Greenfield integrated stainless steel project in the state of Orissa with

capacity of 1.6 million tons per annum.

It manufactures a range of products for sale in the domestic market for customers in

segments, such as architecture, building construction, automobiles, white goods and

appliances, railways, power plants and other industrial applications. JSL also

produces stainless steel for specialty products, such as razor blades, precision strips

and coin blanks.

At Hisar, Jindal Stainless has India’s only composite stainless steel plants for the

manufacture of Stainless Steel Slabs, Blooms, Hot Rolled and Cold Rolled Coils,

60% of which are exported worldwide.

Precision Strips

The company produces stainless steel precision strips in various grades. These

strips are produced in narrow mills in the precision cold rolling unit.

Blade Steel

The company is the exclusive producer of stainless steel strips for making

razor and surgical blades in India.

Coin Banks

Besides supplying CR Strips to the Government of India, the plant at Hisar

houses a coin banking line for supply to the Indian Mint & Mints in the global

market.

Some of the products made of stainless steel which are necessary in daily life:-

Stainless Steel Cookware

Made of the finest stainless steel, the cookware set includes frying pan, covered pan,

many other cooking utensils.

Cookware:-

Cookware set

Boilers

Casseroles

Cookers

Grill Pans

Kitchen Accessories:-

Banana Holder

Bread Box

Cook Book Holder

Dish Drainer

Dish Rack

Napkin Holder

Sink Strainer

Spice Rack

Stainless Steel Electric Tea kettle

This electric tea kettle makes instant tea, coffee, hot chocolate and boils faster than a

microwave.

The kettle is made of unalloyed stainless steel, polished to a mirror finish. A great

appliance for homes and offices, this kettle provides powerful heat and safety.

Kitchen Hardware:-

Electric Tea Kettle

Kitchen Cabinet

Kitchen Chimney

Oven

Sink Welded

Utensils:-

Pans

Measuring Spoon

Canisters

Dessert Dishes

Serving Bowls

Covered Bowls

Stainless Steel Spoon

This crafted out with newest design that modern technology can produce. Made of

steel, they are anti-magnetic, and the seamless construction is resistant to bacteria

and germs.

Cutlery;-

Spoons

Meat Fork

Large Knife

Blunt End Spoon

Cutlery Starter Set

Boning Knife

Cheese Knife

Utility Knife set

Energy Conservation Achievements

Jindal Stainless Ltd (CR Division) has taken the various aspects of energy

conservation very seriously.

Many energy conservation projects have been implemented and many more ideas are

being considered for implementation.

The company is committed to achieve Energy Conservation by providing necessary

knowledge and exposure to the employees and in the process has arranged various

training programs.

JSL has regularly upgraded its technology and constantly striving to adopt practices

and process that preclude undesirable impact on energy conservation aspects.

Energy Policy

Energy efficient production and processing of steel and sustain continuous

reduction in energy consumption year after year.

Involvement of employees for energy conservation through awareness and

recognition.

Conserve and optimally utilize raw materials: petroleum fuels and by

products, steam, power, compressed air, water and other resources.

Establishing and maintain a energy management information system designed

to support managerial decision making.

Corporate Social Responsibility

Shri OP Jindal, had a vision of a progressive state - a state where men and women

worked shoulder to shoulder towards a happier tomorrow. Jindal Stainless constantly

echoes those thoughts and takes its role as a responsible corporate citizen very

seriously. Giving back to the community at large has been an objective from the very

beginning.

Schools at various levels have been set up to educate the specifiers of the future. The

Vidya Devi Jindal and The Jindal Modern School, at Hisar, is fully child oriented and

ensures ‘holistic development’ of a student’s mental and physical potential.

Adopting villages and thus contributing to the development of a region has also been

part of the overall Jindal plan. Improving of medical facilities is yet another field of

endeavor.

NC JIM Care, at Hisar offers the entire range of diagnostic, treatment and surgical

facilities. Immunization drives and free healthcare camps on different medical

aspects are also conducted from time to time

Eco- Friendliness

At Stainless Steel plants, the challenge faced is to make and process stainless steel

without adversely impacting the environment. Jindal Stainless has a formal

environmental protection program in place since inception. They recognize the

importance of protecting our environment, and that of children and commitment is

unwavering in this respect. Jindal Stainless Ltd. complies with the requirements of

the State Pollution Control Board.

Having received the ISO 14001 certification, the company has a full-fledged

environment department that manages the existing facilities for pollution control.

It has a sewage treatment plant for domestic affluent whose treated water is reused

for horticulture purposes as well as in industrial applications.

With greater efforts being made to achieve low long-term maintenance costs, less

environmental impact and greater concern with life cycle costs, the market for

stainless steel continues to improve.

Art d'inox

Art d'inox is the exciting new form of ultimate style. The name translates into 'the art

of stainless steel'. And that's precisely what it is. Works of art in stainless steel. Set

up with the objective of creating exclusive stainless steel lifestyle products, these are

synonymous with quality, beauty and functionality. The professionally qualified in-

house design team is dedicated to exploring the frontiers of design. The product

range is a celebration of both form and function. The range encompasses tableware,

serving ware, gifts, home accessories and office accessories.

ARC

Stainless steel is a material par excellence, which now seeks to permeate through Indian

Architecture. The Architectural Division launched by Jindal Stainless Ltd has taken the

initiative to promote Stainless steel products and technology solutions to cater to the

emerging market of Stainless Steel for Architecture, Building and Construction (ABC) in

India. The Architectural Division of Jindal Stainless is capable of providing a full range

of technical support services including design, engineering work, fabrication of quality

material and finishes, and job site supervision by trained personnel. The division has

completed many projects specially that of street furniture, cafeteria furniture, lighting and

signages apart from other architectural requirements.

Trade Finance-Background

As international trade increases, so does the importance of trade finance. The success

of a nation’s export program depends on the availability of trade finance, which

facilitates the transfer of commodities and manufactured goods between countries.

Trade finance, an important business for U.S. banks, generates more than $1 billion

in revenue annually. Banks can participate in trade financing by providing pre-export

financing, helping in the collection process, confirming or issuing letters of credit,

discounting drafts and acceptances, and offering fee-based services such as providing

credit and country information on buyers.

What dose Trade Finance mean?

The science that describes the management of money, banking, credit, investments

and assets for international trade transactions.

Trade finance refers to the various forms of financial support and financial

transactions used in trade. Trade finance uses a range of instruments to provide

finance to exporters and importers, including documentary credits such as letters of

credit.

Letter of credit is a document issued mostly by a financial institution used primarily

in trade finance, which usually provides an irrevocable payment undertaking (it can

also be revocable, confirmed, unconfirmed, transferable or others to a beneficiary

against complying documents as stated in the Letter of Credit)

Banks may assist by providing various forms of support. For example, the importer's

bank may provide a letter of credit to the exporter (or the exporter's bank) providing

for payment upon presentation of certain documents, such as a bill of lading. The

exporter's bank may make a loan (by advancing funds) to the exporter on the basis of

the export contract.

In many countries, trade finance is often supported by quasi-government entities

known as export credit agencies that work with commercial banks and other financial

institutions.

The absence of an adequate trade finance infrastructure is, in effect, equivalent to a

barrier to trade. Limited access to financing, high costs, and lack of insurance or

guarantees are likely to hinder the trade and export potential of an economy, and

particularly that of small and medium sized enterprises.

Need of Trade Finance

One of the most important challenges for traders involved in a transaction is to secure

financing so that the transaction may actually take place. The faster and easier the

process of financing an international transaction, the more trade will be facilitated.

Main factors influencing Trade Finance

•Government agencies

•Banks & other Financial Institutions

•International Agencies

Key Issues in Trade Finance

•The mechanics & systems for arranging receiving payment

•The Legislation and custom requirements export and import countries

•Foreign exchange policy and other risks associated with international trade

•The institutions -the operations of the system in operating the trade

finance instruments, and payments and settlements.

•Infrastructure and a host of ICT services

Trade finance tools and instruments

• To raise Capital

–Loan / Line of Credit

–Structured Financing

–Leasing

–Inventory Financing

• To Mitigate risks

–Factoring

–Export Credit Insurance

–Export Credit Guarantee

• Terms of Payment

–Advance Payment

–Open Account

–Collections (Document on Payment or Document on Acceptance)

–Letters of Credit

Trade Financing Instruments

The main types of trade financing instruments are as follows:

a) Documentary Credit

This is the most common form of the commercial letter of credit. The issuing bank

will make payment, either immediately or at a prescribed date, upon the presentation

of stipulated documents.

These documents will include shipping and insurance documents, and commercial

invoices. The documentary credit arrangement offers an internationally used method

of attaining a commercially acceptable undertaking by providing for payment to be

made against presentation of documentation representing the goods, making possible

the transfer of title to those goods.

A letter of credit is a precise document whereby the importer’s bank extends credit

to the importer and assumes responsibility in paying the exporter. A common

problem faced in emerging economies is that many banks have inadequate capital

and foreign exchange, making their ability to back the documentary credits

questionable.

Exporters may require guarantees from their own local banks as an additional source

of security, but this may generate significant additional costs as the banks may be

reluctant to assume the risks. Allowing internationally reputable banks to operate in

the country and offer documentary credit is one way to effectively solve this

problem.

b) Countertrade

As mentioned above, most emerging economies face the problem of limited foreign

exchange holdings. One way to overcome this constraint is to promote and encourage

countertrade. Today’s modern counter trade appears in so many forms that it is

difficult to devise a definition. It generally encompasses the idea of subjecting the

agreement to purchase goods or services to an undertaking by the supplier to take on

a compensating obligation.

The seller is required to accept goods or other instruments of trade in partial or

whole payment for its products. Some of the forms of counter trade include:

• Barter – This traditional type of countertrade involving the exchange of goods and

services against other goods and services of equivalent value, with no monetary

exchange between exporter and importer.

• Counter purchase – The exporter undertakes to buy goods from the importer or

from a company nominated by the importer, or agrees to arrange for the purchase by

a third party. The value of the counter purchased goods is an agreed percentage of the

prices of the goods originally exported.

• Buy-back – The exporter of heavy equipment agrees to accept products

manufactured by the importer of the equipment as payment.

c) Factoring

This involves the sale at a discount of accounts receivable or other debt assets on a

daily, weekly or monthly basis in exchange for immediate cash. The debt assets are

sold by the exporter at a discount to a factoring house, which will assume all

commercial and political risks of the account receivable. In the absence of private

sector players, governments can facilitate the establishment of a state-owned factor;

or a joint venture set-up with several banks and trading enterprises.

d) Pre-Shipping Financing

This is financing for the period prior to the shipment of goods, to support pre-export

activities like wages and overhead costs. It is especially needed when inputs for

production must be imported. It also

provides additional working capital for the exporter. Pre-shipment financing is

especially important to smaller enterprises because the international sales cycle is

usually longer than the domestic sales cycle.

Pre-shipment financing can take in the form of short term loans, overdrafts and cash

credits.

e) Post-Shipping Financing

Financing for the period following shipment. The ability to be competitive often

depends on the trader’s credit term offered to buyers. Post-shipment financing

ensures adequate liquidity until the purchaser receives the products and the exporter

receives payment. Post-shipment financing is usually short-term.

f) Buyer’s Credit

A financial arrangement whereby a financial institution in the exporting country

extends a loan directly or indirectly to a foreign buyer to finance the purchase of

goods and services from the exporting country. This arrangement enables the buyer

to make payments due to the supplier under the contract.

g) Supplier’s Credit

A financing arrangement under which an exporter extends credit to the buyer in the

importing country to finance the buyer’s purchases.

Risks Associated With Trade Financing

The risks associated with trade financing are: credit, foreign currency translation

,transaction, compliance, strategic, and reputation. These risks are discussed more

fully in the following paragraphs.

Credit Risk

Credit risk is the current and prospective risk to earnings or capital arising from an

obligor’s failure to meet the terms of any contract with the bank or otherwise to

perform as agreed.

Credit risk is found in all activities in where success depends on counterparty, issuer,

or borrower performance. It arises any time bank funds are extended, committed,

invested, or otherwise exposed through actual or implied contractual agreements,

whether reflected on or off the balance sheet.

In trade finance, many transactions are self-liquidating or supported by letters of

credit and guarantees, and the examiner must review each transaction individually to

properly identify and evaluate the sources of repayment. Although trade finance has

a low loss ratio historically, it is a very specialized area, and a bank that lacks the

appropriate expertise may experience losses because of improper structuring, poor

documentation, unfamiliarity with a country’s business practices, or improper

pricing. A bank should ensure that documents on shipments of goods are proper and

thorough. Any bank engaging in trade finance should thoroughly analyze the risks. In

issuing a letter of credit for a domestic importer, the bank must evaluate the

importer’s repayment capacity as it would that of any other type of borrower. In

confirming or accepting as collateral a foreign bank’s letter of credit, a U.S. bank

must evaluate the risk that the foreign importer/bank may not be able to in the

importing country.

The low default risk is due, in part, to the importance that countries assign to

maintaining access to trade credits. In a currency crisis, central banks may require all

foreign currency inflows to be turned over to the central bank.

The central bank would then prioritize foreign currency payments. Trade liabilities

would be more likely to be designated for repayment than most other types of credits.

For this reason, trade finance is viewed as having less transfer risk than other types of

debt.

Foreign Currency Translation Risk

Foreign currency translation risk is the current and prospective risk to earnings or

capital arising from the conversion of a bank’s financial statements from one

currency into another. It refers to the variability in accounting values for a bank’s

equity accounts that result from variations in exchange rates which are used in

translating carrying values and income streams in foreign currencies to U.S. dollars.

Market-making and position taking in foreign currencies should be captured under

price risk. In a trade transaction, foreign currency translation risk arises from the

exposure to fluctuations in exchange rates whenever payments involve foreign

currencies. The level of risk depends on the currency involved in the transaction,

whether the bank creates an open position, the size of any maturity gap, and

settlement uncertainties.

A bank financing an exporter’s operation by discounting foreign currency

denominated drafts or acceptances encounters foreign currency translation risk

because of the time lag between its discounting of the draft or acceptance and its

collection from the foreign importer or bank. The U.S. bank will be exposed to

foreign currency translation risk from the time it discounts the instrument and pays

the local exporter the dollar equivalent of the draft or acceptance until it collects from

the foreign counterpart in the foreign currency. If the foreign currency depreciates in

relation to the dollar during the time it takes the bank to pay the exporter and to

collect on the foreign instrument, the bank incurs a loss.

When the U.S. exporter is paid by the foreign importer with a dollar denominated

draft, exchange risk may arise from transfer problems. Transfer problems may occur

when the foreign importer is located in a country that is having difficulties

accumulating hard currency reserves. In those circumstances, the foreign importer

may have the local currency to repay its debt but be unable to purchase the dollars

because of central bank controls over the sale of hard currency.

The payment instructions to the foreign importer’s bank could allow payment to be

received from the foreign importer in local currency with the stipulation that, when

foreign exchange in U.S. dollars is allocated by the government authorities for the

transaction, it should be remitted to the exporter’s U.S. bank. Depending on the

scarcity of foreign exchange in the foreign importer’s nation, the wait may be longer

than anticipated, exposing the U.S. bank to exchange risk if it discounted the draft.

Transaction Risk

Transaction risk is the current and prospective risk to earnings or capital arising from

fraud, error, and the inability to deliver products or services, maintain a competitive

position, and manage information

Risk is inherent in efforts to gain strategic advantage, and in the failure to keep pace

with changes in the financial services marketplace.

Transaction risk is evident in each product and service offered. Transaction risk

encompasses: product development and delivery, transaction processing, systems

development, computing systems, complexity of products and services, and the

internal control environment.

Transaction risk is also referred to as operating or operational risk. This risk is

particularly high in trade transactions because of the high level of documentation

required in letter of credit operations. Many transactions evolve readily from letters

of credit to sight drafts or acceptances or to notes and advances, collateralized by

trust or warehouse receipts.

Repayment often depends on the eventual sale of goods and the accuracy of

documentation. Thus, the documents required to secure payment under the letter of

credit should be properly handled.

Compliance Risk

Compliance risk is the current and prospective risk to earnings or capital arising from

violations of, or nonconformance with, laws, rules, regulations, prescribed practices,

internal policies and procedures, or ethical standards.

Compliance risk also arises in situations where the laws or rules governing certain

bank products or activities of the bank’s clients may be ambiguous or untested.

Compliance risk exposes the institution to fines, civil money penalties, payment of

damages, and the voiding of contracts. Compliance risk can lead to a diminished

reputation, reduced franchise value, limited business opportunities, reduced

expansion potential, and an inability to enforce contracts.

Compliance risk can be overlooked because it often blends into transaction risk and

operational processing. In trade transactions, failure to comply with domestic and

international laws, such as the anti-boycott provisions of the

Export Administration Act or regulations enforced by the Department of the

Treasury, Office of Foreign Asset Control may result in fines and prevent the bank

from collecting on a transaction.

The bank must be aware of the laws of the country in which the counterpart to the

domestic customer is located. The bank must ensure that collection and penalty

procedures stipulated in the contract are enforceable in the foreign country.

For this reason many banks rely on foreign correspondent bank relationships in the

countries where they are active but lack branches.

Strategic Risk

Strategic risk is the current and prospective risk on earnings or capital arising from

adverse business decisions, improper implementation of decisions, or lack of

responsiveness to industry changes. This risk is a function of the compatibility of an

organization’s strategic goals, the business strategies developed to achieve those

goals, the resources deployed against these goals, and the quality of implementation.

The resources needed to carry out business strategies are both tangible and

intangible.

They include communication channels, operating systems, delivery networks, and

managerial capacities and capabilities. The organization’s internal characteristics

must be evaluated against the impact of economic, technological, competitive,

regulatory, and other environmental changes.

Strategic risk in trade financing arises when a bank does not know enough about the

region in which it is doing business or the financing product it is using. A bank

considering whether to finance trade must carefully develop its financing strategy.

Reputation Risk

Reputation risk is the current and prospective impact on earnings and capital arising

from negative public opinion. This affects the institution’s ability to establish new

relationships or services or to continue servicing existing relationships. This risk may

expose the institution to litigation, financial loss, or a decline in its customer base.

Reputation risk exposure is present throughout the organization and includes the

responsibility to exercise an abundance of caution in dealing with its customers and

community.

Trade financing is an area where reputation and market perception is particularly

important. Trade financing requires expedient processing of operations and

significant attention to details of documents.

A bank’s failure to meet these requirements may result in financial losses to the bank

and its community. To regain its foothold, the bank may have to lower prices on its

products and fund expensive advertising/public relations efforts.

Export Credit Insurance

Export Credit insurance involves insuring exporters against possible:

Commercial risk such as non-acceptance of goods by buyer, the failure of

buyer to pay debt, and the failure of foreign banks to honor documentary

credits.

Political risk arises from factors like war, riots and civil commotion, blockage

of foreign exchange transfers and currency devaluation.

The type of export credit insurance used varies from country to country and depends

on traders’ perceived needs. The most commonly used are as follows:

Short-term Export Credit Insurance – Covers periods not more than 180

days. Protection includes pre-shipment and post-shipment risks, the former

covering the period between the awarding of contract until shipment.

Protection can also be covered against commercial and political risks.

Medium and Long-term Export Credit Insurance – Issued for credits

extending longer periods, medium-term (up to three years) or longer.

Protection provided for financing exports of capital goods and services.

Investment Insurance – Insurance offered to exporters investing in foreign

countries.

Exchange Rate Insurance – Covers losses as a result of fluctuations in

exchange rates between exporters’ and importers’ national currencies over a

period of time.

The benefits of export credit insurance include:

Ability of exporters to offer buyers competitive payment terms.

Protection against risks and financial costs of non-payment.

Access to working capital.

Protection against losses from foreign exchange fluctuations.

Reduction of need for tangible security when borrowing from banks.

Export Credit Guarantees

An export credit guarantee is issued by a financial institution, or a government

agency, set up to promote exports. Such guarantee allows exporters to secure pre-

shipment financing or post-shipment financing from a banking institution more

easily. Even in situations where trade financing is commercially available, companies

without sufficient track records may not be looked upon favorably by banks.

Therefore, the provision of financial guarantees to the banking system for purveying

export credit is an important element in helping local companies goes into exporting.

The agency providing this service has to carefully assess the risk associated in

supporting the exporter as well as the buyer.

Issued by a financial institution, or a government agency.

Assist companies without sufficient track records to obtain credit

from banks.

Instruments to safeguard export-financing banks from losses that may occur

from providing funds to exporters.

The Role of Governments in Trade Financing

The role of government in trade financing is crucial in emerging economies. In the

presence of underdeveloped financial and money markets, traders have restricted

access to financing. Governments can either plays a direct role like direct provision

of trade finance or credit guarantees; or indirectly by facilitating the formation of

trade financing enterprises. Governments could also extend assistance in seeking

cheaper credit by offering or supporting the following:

• Central Bank refinancing schemes;

• Specialized financing institutes like Export-Import Banks or Factoring Houses;

• Export credit insurance agencies;

• Assistance from the Trade Promotion Organization; and

• Collaboration with Enterprise Development Corporations (EDC) or State Trading

Enterprises (STE).

Role in Facilitating and Promoting Trade

Traders need to secure financing so that the transaction may actually take place. The

faster and easier the process of financing an international transaction.

•Manage cash flow, risks and costs.

•Raise fund and capitals

•Access Credit Information

WORKING IN JINDAL STAINLESS STEEL LIMITED

Running a business globally involves dealing with diverse trade practices and

transacting in foreign currencies on a regular basis. The faster you react to

opportunities, the better it is for the business. This requirement is now days is

fulfilling by trade finance.

As trade finance is becoming important part of every business. Without which a

businessman can’t think to work. As it satisfy every need of business, whether it is

exchange of goods, dealing with foreign customers. As seeing the trends and basic

requirement of business,

Trade finance in Jindal Stainless steel limited, a million dollar entity, is act as its

heart without which it is incomplete and can’t live a progressive life.

Trade financing is an important tool for most business owners as it can provide you

with the funding you need to grow your business.

All important dealings related to imports as well as exports of steel without Trade

finance, JSL can’t imagine. Transportation of raw material and finished goods are

supported by trade finance activities. As from beginning to end all major activities

are fulfilled by Trade finance.

In large amount of stainless steel are imported and exported that requires a big

finance and quick competition to survive in market. From past many years, members

of finance department are involved in Trade finance activity that helps them to

mitigate risks that not only helps in procuring fund and also saves time.

Trade finance can meet all its needs - from plain vanilla lending to structured

transactions such as pre-export financings, lease financings, project-related

financings and the newly introduced hedged inventory products.

Trade Finance continues to be fertile ground for structured and non-structured deals

not least because of the continuing divergence in trading regulations between the

main markets of the world.

Trade finance can serve as an important part of business as it offers various aspects

of managing finances for the company. It helps generate, manage, and establish

various finance practices like working capital, factoring solutions, banking solutions,

loans, guarantees, discounting, etc. Trade finance companies help reduce marketing

cost and increase trade profitability.

They also help in increasing the sales of the company’s by promoting the products,

services or the website around the world. Trade finance companies help in

eliminating most of the commercial and political risk normally retained by the

company or any small or medium business owner.

What is the reason of adoption of Trade Finance system in JSL

Company need to secure financing so that the

•Manage cash flow, risks and costs.

•Raise fund and capitals

•Access Credit Information

The faster and easier the process of financing transaction may actually take place an

international transaction.

Risks Involved when act as Buyer-

• Non-delivery / delayed delivery of goods

• Short shipment/inferior goods

• Goods received before the documents

• Foreign exchange fluctuation  

• Regulatory changes

As seller

• Non-payment/Delayed payment

• Exchange risk

• Foreign exchange fluctuation

• Regulatory changes

Work flow in JINDAL Stainless Steel through Trade finance System

Work flow is designed to assist meet cash flow shortages arising from a mismatch in

the timing of making payment for goods or raw materials for use in manufacture of

goods, and the receipt of payments from the on selling of these purchased or

manufactured goods.

First of all marketing department through contacts and surveys find out the demand

of their product i.e. Stainless steel and all related information given to PPC

department (plant and plan dept.), that this much is demanded by the seller and gets

order.

So after that to fulfill the required order by seller, it contact with plant dep’t. They

discuss about how much raw material is available or kept with them or how much

quantity is required to overcome the existing demand or order.

They call upon certain suppliers and specify the raw material required and asked

about their price. Suppliers provides their price quote that is a list of price mentioned

for different material .Mostly or most consumable raw material by JSL is nickel and

solid scrap in order to make stainless steel.

After analyzing their budget and market prices the company chose best possible and

lower price for raw material that is beneficent for them through bargaining

After finalizing the price and supplier, JSL makes a contract with them. Till upon the

whole process was performed by the JSL internally and themselves. But now

onwards the main activity i.e. Trade Finance begins that make their work and

dealings easier to perform.

Functions of Various banks which involved in trading of JSL

OPENING BANK OR ISSUING BANK -

1.The issuing bank is primarily responsible for payment under the credit to the

beneficiary.

2.Credit and any amendments thereto issued by the bank must be complete and clear.

In order to guard against confusion and misunderstanding, the opening bank should

discourage any attempt to include any excessive details in the credit or in any

amendments thereto.

3.The issuing bank should nominate the bank which is authorized to pay or accept

drafts or to negotiate, unless the credit allows negotiation by any bank. “By

negotiating any bank, or by allowing for negotiation by any bank, or by authorizing

or requesting a bank to add it confirmation, the issuing bank authorize such bank to

pay, accept drafts or negotiate, as the case may be, against document which appear

on their face to be in accordance with the terms and condition of the credit, and

undertakes to reimburse such bank”.

4.If the issuing bank fails to act in accordance with the above provision and or fails

to hold the document at the disposal of, to return them to the presenter, the issuing

bank shall be precluded from claiming that the documents are not in compliance with

the terms and condition of credit.

5.Upon receipt of document, the issuing bank must determine, on the basis of

document alone, whether or not they appear on their face not to be in accordance

with terms and conditions of the credit. If the documents appear on their face not to

be in compliance with the terms and conditions of the credit, the issuing bank may

refuse to take up the document.

6.The issuing bank shall have a reasonable time not exceeding seven banking days

following the day of receipt of the document to examine the document and to

determine whether to take up or to refuse document and to inform the party from

which it received the documents accordingly.

ADVISING BANK-

1.A credit may be advised to a beneficiary through another bank (the advising bank)

without engagement on the part of the advising bank, but that bank shall take

reasonable care to check the apparent authenticity of credit which it advises. If the

advising bank cannot establish such apparent authenticity, it must inform, without

delay, the bank from which the instructions appear to have been received that it has

been unable to establish the authenticity of the credit and if it collects nonetheless to

advise the credit it must inform the beneficiary that has not been able to establish the

authenticity of the credit.

2.If the bank elects not to advise the credit, it must inform the issuing bank without

delay. Thus the responsibility of the advising bank is to vouchsafe the authenticity if

the credit. It may negotiate document under the credit, if it so desires in which case it

becomes the negotiating bank. The beneficiary cannot compel the advising bank to

negotiate documents.

CONFIRMING BANK-

1.When a bank in the exporter’s country adds its confirmation to the credit, it gives

an additional undertaking to the beneficiary, in addition to that of the issuing bank, to

the negotiate documents under the credit. Therefore, the relationship of the

confirming bank with the beneficiary is similar to that of issuing bank. If the

documents tendered are in conformity with the letter of credit terms and within

expiry time of credit, it has to make payment against them.

2.As to the relation of the confirming bank with the issuing bank, the position is

same as that of the negotiation bank.

NEGOTIATING BANK-

1.Unless the negotiating bank is nominated in the credit and it accepts the nomination

or it is the confirming or paying bank, no bank can be compelled by the beneficiary

to negotiate documents under the credit. A bank, under an open credit, may accept on

its own to negotiate documents.

2.“Banks must examine all documents with reasonable care to ascertain that they

appear on their face to be accordance with the terms and condition of credit.

Compliance of the stipulated documents on their face with the terms and conditions

of credit, shall be determined by international standard banking practice as reflected

in these Articles. Documents which appear on their face to be inconsistent with one

another will be considered as not appearing on their face to be accordance with the

terms and conditions of the credit”.

3.Therefore the negotiating bank should accept document tendered only if they

conform to the terms and conditions of credit. In documentary credit all parties

concerned deal in document and not in goods. Therefore, he cannot ensure

correctness of the goods shipped but can only see that the documents on their face

appear to be required by the credits.

4.If the negotiating bank finds any discrepancies in the documents tendered, but still

negotiates, it may require the beneficiary to execute an indemnity in favour of the

bank. But such indemnity cannot be transferred to the issuing bank without the

consent of the beneficiary.

REIMBURSING BANK –

The issuing bank or opening bank may indicate in the credit the name of bank, from

whom the paying/negotiating bank can obtain reimbursement. The documents are

sent to the bank; the negotiating/paying bank simultaneously makes a claim with the

reimbursing bank for the negotiating/paying effected. Normally the reimbursing bank

would be the bank with whom the issuing bank maintains an account.

Letter of credit an important instrument used by JSL in trade finance

system

What is letter of credit?

Letters of credit (LC’s) are among the most secure instruments available to

international traders. An LC is a commitment by a bank on behalf of the buyer that

payment will be made to the exporter provided that the terms and conditions have

been met, as verified through the presentation of all required documents. The buyer

pays its bank to render this service. An LC is useful when reliable credit information

about a foreign buyer is difficult to obtain, but you are satisfied with the

creditworthiness of your buyer’s foreign bank. An LC also protects the buyer since

no payment obligation arises until the goods have been shipped or delivered as

promised.

• A bank’s written guarantee

• Made on behalf of a buyer

• To pay a seller

• A given sum of money

• Provided that documents presented

• Meet the terms specified

• And are presented within a specified time

• And at a specified place

Characteristics of a Letter of Credit

Applicability

Recommended for use in new or less-established trade relationships when you are

satisfied with the creditworthiness of the buyer’s bank.

Risk

Risk is evenly spread between seller and buyer provided all terms and conditions are

adhered to.

Pros

• Payment after shipment

• A variety of payment, financing and risk mitigation options

Cons

• Process is complex and labor intensive

• Relatively expensive in terms of transaction costs

Various types of Letter of Credits that are commonly used by JSL

1. Payment, acceptance and negotiation credits.

2. Revocable and irrevocable credits.

3. Confirmed and unconfirmed credits.

4. With recourse and without recourse credits.

5. Fixed and revolving credits.

6. Transferable credits.

7. Back-to-back credits.

8. Red Clause and Green Clause credits.

9. Standby credits.

Role of the Bank in JSL dealings with trade finance system

Bank’s business interests are:

• Providing finance

• Providing fee based services

• Risk mitigation

The Buyer’s bank can assist in:

• Providing payment assurance to seller on behalf of the buyer

• Providing finance in respect of the sale

• Effecting payment to the seller on behalf of the buyer

• Handling documents covering the sale

The seller’s bank can assist in:

• Assuring payment as a third party

• Providing finance :

• to arrange for goods

• to provide credit to buyer

• Handling documents for regulatory requirements

• Obtaining payment for seller

LC PROCESS IN JSL

Buyer ask his bank to issue an LC against the sale contract

↓

Advising bank issues LC to negotiating bank

↓

Advising bank notifies the seller about the LC

↓

Seller sends the goods through shipper and collects shipping Document

↓

Seller submits Shipping doc. to negotiating bank

↓

Negotiating bank gives shipping doc. to opening bank

↓

Bank collects the money from buyer and gives him shipping document

↓

Opening bank pays to negotiating bank

↓

Buyer gives the doc. to the shipper and Collects goods

↓

Finally, Negotiating bank gives payment to seller

Some of critical risk considerations to JSL from trade finance

How Would the Bank Mitigate Risks?

Risk

• Transport – related risks (damage, loss, theft)

• Credit risk or non-payment risk

• Quality of goods risk

• Exchange rate risk

• Legal risk

• Country risk / Political risk

• Fraud risk

• The risk of misunderstanding

Risk Mitigation

• Ensuring insurance coverage/ carrier’s liability

• Ensuring credit-worthiness of party: Financial standing, quality of goods

being sold

• Proper document scrutiny

• Forward cover

• Procedures verified by legal experts

• Taking cover

• Substantial credit and compliance scrutiny

• Well-drafted contract

Some very commonly used terms:-

Advising Bank

An 'advising bank' is a correspondent of a bank which issues a letter of credit, and,

on behalf of the issuing bank, the advising bank notifies the beneficiary of the terms

of the credit, without engagement on its part to pay or guarantee the credit.

Acceptance Letter Of Credit

A letter of credit which instead of agreeing to pay the beneficiary immediately upon

presentation of documents requires presentation of a time draft drawn by the

beneficiary upon the issuing bank or another bank. However, the beneficiary may, in

effect, obtain prompt payment by discounting the draft.

Beneficiary

1. In the case of a letter of credit, the individual or company who is entitled to draw

or demand payment under its terms.

2. In the case of insurance, the person entitled to take the proceeds.

3. The person for whose benefit a contract, or trust, or will is executed or enforced.

Bill of Lading

A document issued by a carrier which is evidence of receipt of the goods, and is a

contract of carriage. It describes the goods, the details of the intended voyage, and it

specifies the conditions of transportation. If issued in negotiable form, i.e. "to order",

it becomes documentary evidence of title to the goods.

Bibliography

Jindal Stainless Steel Limited. (n.d.). Retrieved Febuary 2009, from http://www.jindalstainless.com

Gupta, D. (2006-08). JSL Financial report. Hisar.