report on trade finance
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SUMMER TRAINING REPORT ON
TRADE FINANCE
Undertaken at
JINDAL STAINLESS LIMITED
Submitted in partial fulfillment of the requirements
for the award of the degree of
MASTER OF BUSINESS ADMINISTRATIONto
Guru Gobind Singh Indraprastha University, Delhi
Under the Guidance of Submitted by
Dr.Anil Rajoria Tej Pratap Singh
MBA-III Sem,2nd
Shift
04321303912
Session 201314
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DECLARATION
This is to certify that report entitled TRADE FINANCE which is submitted by me in partial
fulfillment of the requirement for the award of degree MBA to GGSIP University, Dwarka, Delhi
comprises only my original work and due acknowledgement has been made in the text to all other
material used.
Date: TEJ PRATAP SINGH
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PREFACE
This department is intended for the experience gained by me during summer Training
in Jindal Stainless Limited, Gurgaon.
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.
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ACKNOWLEDGEMENT
I express my sincere thanks to my project guide Mr. Sachin NandwaniFinance & Accounts
department, Jindal Stainless Limited, Gurgaon for guiding me right for the inception till the
successful completion of the project. I sincerely acknowledge him for extending their valuable
guidance and support for literature, critical review of the project and the report and the above all the
moral support he had provided for me with all the stage of this project.
I would also like to thank the supportive staff of finance department for their help & cooperation
throughout my project.
TEJ PRATAP SINGH
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CONTENTS
S No Topic Page No
1 Certificate
2 Summer Training Appraisal
3 Acknowledgement
4 Executive Summary
Chapter I: Introduction
Chapter II: Company Profile
Chapter III: Trade Finance
Chapter IV: Import
Chapter V: Working in JSL
Chapter VI: Summary & Conclusions
5 References/ Bibliography
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Executive Summary
Stainless Steel is crucial to the development of any modern economy and is considered to be
the backbone of human civilization. The level of per capita consumption of steel is treated as
an important index of the level of socioeconomic development and living standards of the
people in any country. It is a product of a large and technologically complex industry having
strong forward and backward linkages in terms of material flows and income generation. All
major industrial economies are characterized by the existence of a strong steel industry and
the growth of many of these economies has been largely shaped by the strength of their steel
industries in their initial stages of development.
Sector and has made rapid strides since then. The new Greenfield plants represent the latest in
technology. Output has increased, the industry has moved up i n the value chain and exports
have risen consequent to a greater integration with the global economy.
Trade involves purchase of merchandise from seller by a purchaser for his onward Selling
(with or without value addition to the goods) for a profit. Any trade transaction involves
movement of the documents representing settlement of the transaction. While the
merchandise passes through a range of Logistics player operating at different levels of supply
chain, bank have traditionally been playing a significant role in the movement of documents
and funds. Though this basic concept of trade and the role played by banks (as a lender or
otherwise) remains the same, the dimensions of trade and the role of players undergo a lot of
change depending on whether the entire trade transaction (sale/purchase) is carried on in the
country, or it is a cross Border transaction.
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Introduction
About OP Jindal
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 & ScientificResearch Society. He was also the custodian trustee of the Agroha Vikas Trust. Sh. Jindal
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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 worlds most admired and respected groups within the
steel fraternity.
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JINDAL STAINLESS LIMITED (JSL)
Jindal stainless a part of $15 billion USD, OP Jindal group is the largest integrated
manufacturer of stainless steel in India and is ranked as the 8 th largest in the world, with a
capacity of 1.8 million tons. The foundation of the stainless steel journey began in 1978 at
hisar, in Haryana. It has been gradually enhanced to 780,000 tons over the last four decades.
It has now grown from a single unit steel plant to the present multi-location and multi product
conglomerate.
A leader and a name synonymous with enterprise, excellence and success, the companys
ethos mirrors most characteristics similar to the metal it produces; akin to stainless steel
jindal stainless is innovative and versatile in its thought process; strong and unrelenting in itsoperations. JSL has crafted its success story by fully integrating its operations based on a
strategy of both, backward and forward integration, starting from mining, melting, casting,
hot rolling to cold rolling and further value additions.
This has been the driving philosophy of the company from its one unit present in the early
70s to its present multi-location presence across the globe. An ISO: 14001 compliant, JSL
product range includes: Ferro alloys, stainless steel slabs, blooms. Hot rolled coils, plated and
cold rolled coils/sheets, stainless steel strips for razor blade steel and coin blanks for mints in
India & EU.
Driven by its focus on sustained growth & value addition in its products and services, JSL
Stainless has led the way with continuous innovation. Its new focus is on providing feasible
solutions by developing new product series such as Krome16+ to counter the challenges of
escalating raw material costs.
VISION
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 sustained value creator for allits stakeholders
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GUIDING PRINCIPLES
They are based on the core values. They are standard for conduct of business and behaviour
of all our employees.
Value creation
Sustained value creation for all its stake holders; customers, employee, supplier, shareholder,
society and nation.
Transparency
Conduct all business dealings along transparent lines.
Personal conduct
Display high standards of personal and professional conduct.
Learning & development
Foster an environment of learning and excellence.
Creativity & innovation
Encourage creative experimentation and institutionalize continuous improvement in allaspects of business.
Environment, safety and health
Manage and protect the safety and health of our people, products, locations and environment.
Responsible corporate citizen
Enrich the quality of life of the communities we serve.
Confidentiality
Respect and ensure confidentiality of all business related information.
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CORE VALUES
Integrity
Respect for individual
Dynamic thinking
Creativity and innovation
Social responsibility
Our Group Companies
Pt Jindal Stainless, Indonesia
JSL Stainless Steel way Ltd
JSL Architecture Ltd
JSL Lifestyle Ltd
IBER Jindal S.L LTD
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AWARDS & HONOURS
Jindal Stainless, Jaipur receives coveted odisha state govts POLLUTION CONTROL
AWARD-2011 in industrial sector in odisha.
Jindal stainless limited, the flagship company of OP Jindal group was conferred the
confederation of Indian Industry (CII) National HR excellence award 2009 commendation for
strong commitment to human resource excellence at the HR conclave 2010 held on 23rdJuly
2010 at Hotel Lalit.
International quality summit award
Srishti good green governance award
10thannual greentech safety GOLD award-2011
JSL stainless-Jaipur awarded for best practices in safety in iron & steel sector- 2009
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SWOT ANALYSIS
Strength
Produces efficient and economical steel through backward and forward integration. Has the force of innovation, adaptation of new technologies and the collective skills
of workforce.
Has the enterprising spirit and the ability to discern the future trends. Having a product portfolio which helps in satisfying the need of steel
Weakness
it is largely dependent on import weak performance on the back of high raw material cost
Opportunity
Venture into new business by leveraging its core capabilities
Increase production capacity to meet global steel demand Diversify investments to distribute risk in business
Threats
Hike in the duty Project implementation and raw material security
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Corporate Social Responsibility
OPJEMS SCHOLARSHIP
The OPJEMS(O.P. Jindal engineering and management schoarship) was started in the year
2007 to commemorate shri OP jindal, the founding father of the jindal group.
Every year approx. 40 reputed management and engineering institutes are being invited in the
s scholarship process. The institutes include IIMs and IITs with other institutes of repute.
A total of 100 students(app) receive OPJEMS scholarship every year.
NC Jindal institute of medical sciences
JIMS is a 42 years old multi speciality charitable hospital. It was founded by late sh. OP
Jindal in 1968.
Initially it was started as a dispensary for providing primary level medical care. Today with a
capacity of 450 beds, we are providing health services to the community of hisar and
adjoining distrcicts of Haryana, Punjab and rajasthan.
Located in the heart of city with multiple green lawns in the area of 14.5 acres.
VIDYA DEVI JINDAL SCHOOL, HISAR
Late shri OP Jindal, former member of parliament, philanthropist, industrialist of Haryana
had a vision of progressive state where men and women would be equal to each other in their
equality lay.
The result of this vision was the birth of vidya devi jindal school, a girls residential school in
Haryana. The school became functional in july 1984 and was granted affiliation by CBSE insame year.
The motto of the school isvidya jyoti jeevan joti which means light of knowledge is the
light of life.
OP Jindal Modern School
Founded on the munificent ideals and ethics inscribed in the very soul of its foundingfather,
shri OP Jindal, OP jindal modern school, hisar is a senior secondary , co educational,English medium day school with a whopping strength ofover 3800 students. Affiliated tp the
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central board of secondary education, delhi vide affiliation no. 530256 the school is run by
OP Jindal charitable trust.
The school has been a fast growthrajectory since its inception in 1997 and has grown from
strength to strength within the span of 15years. A double storeyed building grew into a triple
storeyed building.
OPJMS is fortified with the muscled and state-of-the-art infrastructure that lays the
foundation for the fruitful learning experience of students. Spacious and well ventilated
rooms, cricket pitch, swimming etc.
STAINLESS STEEL INITIATIVES
Stainless gallery
Stainless steel is truly the metal of the century.
Here atthe stainless we travel many geographies from the art, design, and architecture to
provide a platform for creative minds for expressing their interpretation & experimentation
with this metal.
Launched in 2007 by Ms. Deepika jindal, the stainless gallery has showcased works of
eminent designers, architects, artists and sculptors through our previous exhibitions like
saptarishis and ekant to name a few.
It is spread over 5500sq.ft, technologically endowed, this state of the art gallery has its own
unique collection of stainless steel art.
MNIT JAIPUR
This course is aimed at sensitizing budding engineers about the usage and applications of
stainless steel. The course will how the unique properties of this material can be effective in
their respective feilds of work.
The objective of the course is to equip these bright minds, that will design and create the
future of our nation, with the knowledge of stainless steel and its applications in design and
engineering.
The course will touch upon almost all the aspects of stainless steels from metallurgy to it end
applications.
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The students will also learn to use the concepts of life cycle costing and cost benefit analysis
through real world case studies.
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 Indias only composite stainless steel plants for the manufactureof Stainless Steel Slabs, Blooms, Hot Rolled and Cold Rolled Coils, 60% of which are
exported worldwide.
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Product Line
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.
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Hot Rolled Coil
It is rolled on a hot strip mill from slabs. It can be found in the market in coil or sheet form and it
proceesed further.
Plates
They are prepared after annealing or pickling hot rolled nnealed picking coils.
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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 CookersGrill Pans
Kitchen Accessories:-
Banana Holder
Bread Box
Cook Book Holder
Dish Drainer
Dish Rack
Napkin Holder
Sink Strainer
Spice Rack
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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 KettleKitchen Cabinet
Kitchen Chimney
Oven
Sink Welded
Utensils:-
PansMeasuring SpoonCanistersDessert DishesServing BowlsCovered Bowls
Stainless Steel Spoon
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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;-
SpoonsMeat ForkLarge KnifeBlunt End SpoonCutlery Starter SetBoning KnifeCheese KnifeUtility Knife set
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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 beingconsidered 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 inenergy 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.
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Trade Finance-Background
As international trade increases, so does the importance of trade finance. The success of a
nations export program depends on the availability of trade finance, which facilitates the
transfer of commodities and manufactured goods between countries.
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 F inancemean?
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 creditis 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.
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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
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Trade Financing Instruments
The main types of trade financing instruments are as follows:
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 importers 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 toassume the risks. Allowing internationally reputable banks to operate in the country and offer
documentary credit is one way to effectively solve this problem.
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.
Todays modern counter trade appears in so many forms that it is difficult to devise adefinition. 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.
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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.
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 severalbanks and trading enterprises.
Pre-Shipping F inancing
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.
Post-Shipping Financing
Financing for the period following shipment. The ability to be competitive often depends on
the traders 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.
Buyers Credit
A financial arrangement whereby a financial institution in the outside importers 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.
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Suppliers Credit
A financing arrangement under which an exporter extends credit to the buyer in the importing
country to finance the buyers purchases.
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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 obligors
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
countrys 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 bankmust evaluate the importers repayment capacity as it would that of any other type of
borrower. In confirming or accepting as collateral a foreign banks 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.
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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 non-conformance 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 banks 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. 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.
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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 organizations 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 organizations 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 institutions 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.
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Import
Introduction
Import trade is regulated by the Directorate General of foreign trade (DGFT) under the
ministry of commerce and industry, department of commerce, government of India.
Authorised Dealer Category-I (AD Category-I) banks should ensure that the imports into
India are in conformity with the foreign trade policy force and foreign exchange management
rules.
AD Category I banks should follow normal banking procedures and adhere to the
provisions of uniform customs and practices.
It may also advise importers to ensure compliance with the provisions of Income Tax Act,
wherever applicable.
General guidelines
Rules and regulations from the foreign exchange angle to be followed by the AD Category-I
banks while undertaking import payment transactions on behalf of their clients are set out.
AD Category-I banks may particularly note to adhere to Know Your customer guidelines
issued by Reserve Bank.
Authorised dealer approves on the exchange control copy of import license under their stamp
and signature.
Under the present foreign exchange management rules, public sector undertakings
department are required to obtain the approval of the ministry of shipping for payment of
import on CIF basis. Public sector undertakings are required to obtain the approval of
chartering wing of ministry of shipping for payment of import on CIF basis.
In Foreign Exchange Management Act, any person acquiring foreign exchange is permitted
to use it either for the purpose mentioned in the declaration made by him to Ad category-I
Bank or for any other purpose for which acquisition of foreign exchange is permissible.
When foreign exchange has been utilised for import of goods, importer should furnish
evidences like Exchange control copy of the bill of entry, postal appraisal form etc.
Import of Currency
According to FEMA, no person shall bring any foreign currency in the country without the
general or special permission of reserve bank. A person can import currency according to
terms and conditions liable on it.
A person who is a resident of India, gone out of India on a temporary visit may bring into
India reserve bank notes up to an amount not exceeding Rs.7500 per person.
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A person may send into India without limit foreign exchange in any form other than currency
notes, bank notes.
Under the current FEMA regulations AD Category I banks are permitted to approve
suppliers and buyers credit for the import of platinum, silver for a period not exceeding 90
days from the date of shipment.
Advance Remittance for Imports
In case of advance remittance for imports, if the amount of advance remittance exceeds USD
200,000 then an unconditional or a guarantee from an international bank situated outside
India of repute is obtained.
If importer is not able to obtain the bank guarantee from the overseas supplier and AD
Category- I Bank is satisfied by track record of the importer then letter of credit may not be
required or insisted upon.
All payments towards advance remittance for imports shall be subject to the following
conditions.
The importer is a customer of the AD Category-I bank
The customer account is fully compliant with reserve bank KYC guidelines.
The AD Category banks should undertake the transactions based on their commercial
judgement.
It should follow submission of evidences for import into India
AD Category- I Bank is permitted to allow advance remittance without any limit and without
back guarantee by an importer for import of rough diamond into India.
In case of import of services if the amount exceeds USD 500,000 then a guarantee from
international bank outside India or guarantee from AD Category-I bank is obtained.
Airlines companies can make advance remittance without bank guarantee up to USD 50million.
Operational guidelines for Import
Where the goods are of short supplied, damaged and exchange control copy of import license
has already been utilised against the lost goods then the original endorsement of lost goods
may be cancelled by bank and fresh remittance is done.
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In case of postal imports, remittance against bills received for collection in respect of imports
by post parcel may be made by authorised dealers, and the goods imported are despatched by
the post parcel.
Authorised dealer may allow remittance of rent, royalty, license fee, and profit in connection
with import of cinematography films.
In case BPOs import equipment for setting up their international call centre then they are
required to make remittances towards the cost of imported equipment.
Receipt of Import Bills
Import bills and documents should be received from the banker of supplier. AD Category Ibanks should not make payment where import bills have been received directly from the
importer from overseas supplier.
AD Category I banks are permitted to allow remittance for imports up to USD 300,000
where the importer of rough diamonds has received the import bills from overseas supplier.
AD Category-I bank may receive bills directly from overseas supplier on the request on
importer.
Evidence of Import
AD Category bank may accept a certificate from CEO against of bill of entry that goods are
actually been imported into India if amount is less than USD 100,000.
In case non physical imports like software then a certificate from CA is obtained that the
software has been received by importer.
Internal inspectors carry out all the verification of evidences regarding import.
In case if importer doesnt furnish any evidence of import within the 3months then AD
CategoryI bank can issue registered letters to the importer.
Import of Gold
Gold may be imported by the banks where ownership remain with the supplier and import act
as an agent of supplier
Gold brought by NRI according to import and export policy is required to sell out to residents
in rupees.
Bank may import gold on the basis of condition that ownership of gold passes to the importer
but the prices of the gold are fixed later when the goods are sold to customers.
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About 15CA & CB
Form 15CA is a Form utilized during the process of remittance to a foreign entity and is
required to be presented as per rules laid down by the Income Tax Act of 1961. This form is
directly related to the process of making a payment to a Non Resident entity and deduction of
Tax Deductible at Source (TDS) on the payment made, at the rates in force at the time.
As per Sub Section (6) of Section 195 of the Income Tax Act of 1961, Form 15CA is
required to be presented to RBI before a remittance is made. It relates to the remittance of
payment that is made to a Non Resident individual or a foreign company.
Information included
The first section contains the Name and additional information of the Remitter. The
PAN Number and the TAN Number along with the Address of the Remitter is required to be
furnished. The Principal Place of Business is also required to be mentioned.
The second section contains details of the Recipient of the remittance. The Name, the
complete postal address, details of the Place of Business, the PAN Number, as well as the
name of the country to which the remittance has been made is required to be mentioned. The
Status of the entity, whether it is a Company, a firm or Others, is represented by the numerals
1, 2, and 3.
The third section refers to details of the Accountant. The Name of the Accountant, the name
of the firm or proprietorship concern the accountant is representing, the address, the
Registration Number and the Certificate details are mentioned here. The Certificate Number
and the Date of the Certificate are important mentions in this section.
GUIDELINES
15CA is required to be duly filled out, signed, and submitted to the Reserve Bank of India oran authorized dealer before the remittance mentioned is made.
The Form is also required to be furnished at the official website of the Tax Information
Network (www.tin-nsdl.com).
The details in the Form should be valid, especially in the case of the PAN. The details for the
Remitter, the Remittance, and the Recipient of the Remittance are required to be mentioned.
The Accountant handling the furnishing of the form and the accompanying TDS Certificate
should be fitting the definition laid down by Section 288 of the Income Tax Act of 1961.
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Finance Act, 2008 inserted a new sub section (6) to section 195 effective from April 1, 2008,
which requires the person responsible for making payment to a non-resident to furnish
information relating to such payments in formsto be prescribed. The Central Board of Direct
Taxes (CBDT) has now, bynotificationNo 30/2009 dated March 25, 2009, prescribed a
new rule 37BB in theIncome Tax Rules, 1962 (the rules) prescribing Form 15CA andForm 15CB to be filed in relation to remittances to non-residents under section 195(6) of the
Income Tax Act, 1961 (the Act).
This new rule is effective from July 1, 2009 and shall apply to all remittances being made
after July 1, 2009. The process that will have to be followed, before any remittance can be
made, is as under
Step 1: Obtain acertificatefrom a Chartered Accountantin FormNo 15CB
Step 2:Furnish the informationin FormNo15CA
Step 3:Electronically upload Form 15CA on the designated website
Step 4:TakePrint outof Form 15CA and file a signed copy
Step 5:Remit moneyto the Non Resident
Please note that all the above steps have to be undertaken before remittance of money to the
non-resident.
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Some of the Global Competitors of Jindal Stainless Limited
Arcelor mittal Acerinox TISCO POSCO Thyssenkrup stainless AK Steel NSSC YUSCO
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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 InsuranceCovers 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 InsuranceInsurance 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.
Access to working capital.
Protection against losses from foreign exchange fluctuations.
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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 Facil itating 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
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Buyers Credit
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.
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Steps Involved
The customer will import the goods either under LC, collections or open account
The customer requests the Buyer's Credit Arranger to arrange the credit before the due date of
the bill
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 tooverseas bank on due date.
It helps importer in working capital management.
Cost Involved
Interest cost: is charged by overseas bank as a financing cost
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 ofIndia, the WHT is not applicable where Indian banks arrange for buyer's credit through their
offshore offices.
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WORKING IN JINDAL STAINLESS 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 forthe 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
cant 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 financing is an important tool for most business owners as it can provide you with the
funding you need to grow your business.
In large amount of stainless steel are imported and exported that requires a big finance and
quick competition to survive in market.
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 companys 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.
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What is the reason of adoption of Trade Finance system in JSL
Company need to secure financing so that:
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
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Work flow in JINDAL Stainless Steel through Trade finance System
Marketing Department (Demand Analysis)
Production Department
Raw Material Department (Procurement dept.)
Purchase Order
LC Contract
Issuing Bank
Advising Bank
Supplier (Beneficiary)
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Functions of Various banks which involved in trading of JSL
OPENI NG 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 tonegotiate, 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.
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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 checkthe 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 exporters country adds its confirmation to the credit, it gives an
additional undertaking to the beneficiary, in addition to that of the issuing bank, to thenegotiate 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.
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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 consideredas 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.
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Letter of credit an important instrument used by JSL in trade finance system
What is letter of credit?
Letters of credit (LCs) 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 buyers foreign bank. An LC also protects the
buyer since no payment obligation arises until the goods have been shipped or delivered as
promised.
A banks 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
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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 buyers 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
Relatively expensive in terms of transaction costs
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Letter of Credit Fees
Letters of credit have certain advantages as an international payment method. If you have
enough knowledge and expertise on letters of credit field then you can use them wisely to get
paid where no other payment method works. No matter how many advantages letters of credit
have they have one big disadvantage. They are expensive. As a result you should understand
your costs before finalizing a letter of credit deal.
Who should pay bank charges in a letter of credit tr ansaction?
A bank instructing another bank to perform services is liable for any commissions, fees, costs
or expenses ("charges") incurred by that bank in connection with its instructions. If a credit
states that charges are for the account of the beneficiary and charges cannot be collected or
deducted from proceeds, the issuing bank remains liable for payment of charges."
In real life situations applicant pay only issuing bank's charges and remaining bank charges
will be paid by the beneficiary unless beneficiary is very strong against applicant.
TYPES OF BANK CHARGES
Opening Chargess
The fee charged by the L/c opening bank during the commitment period is referred to as
nuntil the last date of negotiation of documents under the L/c or the expiry of the L/c,
whichever is later.
Advising charge
The advising bank charges an advising fee to the beneficiary unless stated otherwise The fees
could vary depending on the country of the beneficiary. The advising bank charges may beeventually borne by the issuing bank or reimbursed from the applicant.
Retirement charge
This would be required at the time of retirement of LC. When the beneficiary handover all
the document related to the shipment through the advising bank then it is known as retirement
of documents.
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LC PROCESS IN JSL
Buyer ask his bank to issue an LC against the purchase contract
Issuing bank issues LC to advising 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/ advising 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 shipping company/ vessel carrier and Collects goods
Finally, Negotiating bank gives payment to seller
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CONCLUSION
In accordance to analysis and study conduct by me on trade finance i.e. how JSL trade with
other companies all over the world, I conclude that working in JSL is a great way to go
ahead. They have taken several steps towards it spirit of producing their kind of products.
They are also gaining the competitive advantage over their competitors by manufacturing
stainless steel in india and ranked 8 th largest in the world. It is the ISO 14001 certified
company and it also takes part in social responsibility like in education, hospitals etc.
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