factors for choosing a bank

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GITAM School of International Business Page 1


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Executive summary

In the modern customer centric competitive arena, satisfaction, quality and loyalty prove tobe key factors. The higher the (perceived) service quality, the more satisfied and loyal are thecustomers. In particular, financial institutions (i.e. banks) realized the strategic importance of customer value and seem to be continuously seeking innovative ways to enhance customerrelationships. In fact, as the offers of many financial services are very similar and slightlydifferentiable, loyal customers have a huge value, since they are likely to spend and buymore, spread positive word-of- mouth, resist competitors offers, wait for a product to becomeavailable and recommend the service provider to other potential customers.

This paper focuses on those factors t hat affect customers choice in corporate banking.Firstly, the paper tries to investigate about the factors which influence the exporters inchoosing a bank. Secondly, this paper also tries to investigate which banking services aregiven more importance by the exporters. Factor analysis to found out the factors whichinfluence exporters in choosing a bank, chi-square to find out the goodness of fit and cross

tabs to know the relationship between variables.

INTRODUCTIONNeed of the study

Growth of trade made banking boom:

Due to the growth of trade there is a tremendous demand for banking services to averse the

risk from the others. Therefore there is boom in banking services for trading like trade

finance related services and forex related factors.

Trend of exports

Indias exports have been witnessingrobust growth and displaying a tendency of moving to a

higher growth trajectory since. The sharp recovery witnessed was further consolidated with

exports registering a growth rate (in US dollar value and on customs basis) of 21.1 per cent

on top of a rise of 20.3 per cent in the preceding fiscal. Volume increase was the main

contributor to this strengthening of export performance. Net terms of trade, which had

increased on an average by 1.5 per cent per annum, have witnessed a continuous decline. This

deterioration in prices of exports relative to imports has been significant in the last two years

and seems to have been affected, inter alia, by the resurgence in international crude oil prices.

However, given the strong growth in exports in volume terms, the income terms of trade,

which measure the import purchasing power of exports, has consistently improved. In the

recent past, this capacity to import on the basis of exports increased by 10.0 per cent per year.

It reflects the growing competitiveness of Indian exports, with volumes increasing with

decline in relative unit prices.


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Objective of the Study

The primary objective of the study is to study the major factors responsible for

choosing a bank by exporters.

The Secondary objective is to assess which banking services are given importance the

most by exporters .

Research Methodology used

Descriptive research design was used to study the factors for choosing a Bank. The primary

data was collected based on stratified sampling method. The secondary data was collected

from the articles, newspapers, books and internet. The factor analysis and chi-square were

used to find factors for choosing a Bank. The collected data have been analyzed with the help

of SPSS16.0 package. The scope of this study is to know which factors influence exporters

and importers to choose a bank. This study shows the present level of factors which influence

and indicates the area for improvement. Factor analysis and chi-square are done to find out

the factors which influence the most and on what services banks have to concentrate

respectively.

The factors that have been taken are:

General Factors:

Speed

Cost

Reach Customer friendly

Already having an account

All banking services

Trade finance factors:

Importers choice of bank

Credit limit

Factoring and forfaitingForex factors:

Forex limits

Better forex offers

Limitations of the Research: Some respondents are not comfortable in revealing their information.

Stratified and judgmental sampling method is used of my own choice.

The selected exporters are surveyed and are the results are generalized to all the

exporters of vizag.


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Role of Banks in International Trade

It is hardly possible to be in foreign trade without involving banks for all the services they

provide such as advice on financial issues and the potential risks involved. Although one

critical hurdle for small and medium enterprises is the documentation, lack of information on

international trade processes and banking procedures necessary to carry on with business

abroad. For result oriented and cost effective international trade, you will very definitely need

access to accurate and timely information and a sound knowledge of banking. All the

payments of foreign trade are made by the banks; they have no alternatives without using

banks. So a foreigner has to know that which bank offering the best services for the foreign

trade from the others.

Payment of foreign trade

Letter of credit: if the exporter does not know the foreign importer or if he has no

confidence about the credit worthiness of the foreign importer, he requests the importer to

arrange for the letter of credit from a bank. A letter of credit is an advice issued for

undertaking given by a bank that bills drawn on the banker by the exporter, according to the

terms of letter of credit, will be honored. All importers usually request the bank to issue a

letter of credit in favor of the exporter.

Preparing invoice: The next task of the exporter is to prepare several copies of the invoice

to be sent to the importer through the bank. The invoice contains the prices to be paid,

quantity, and quality of goods etc. several copies of the invoice are sent to the importer both

directly and through bank along with other documents, namely, bill of lading, marine

insurance policy, consular invoice, certificate of origin etc.

Receiving payment : After the goods are dispatched, the exporter is to receive the amount of

the goods. For this, he draws bill of exchange in sets of three and sends all these bill to an

exchange bank having branch or agent at the importing country along with other documents,

namely, bill of lading, trade invoice, consular invoice, certificate of origin, insurance policyetc. This bill may again be D/A (document against acceptance) or D/P (document against

payment) bill. In case of D/A bill documents are handed over to the importer on his

acceptance of the bill. In that case the exporter must wait till maturity of the bill for securing

payment. For this, the banker demands from the exporter a letter of Hypothecation which

empowers the bank to sell the goods in case the importer dishonors the bill. In the case of

D/P bill the documents are given to the importer when the payment is made.


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In most financial systems banks play a major role being intermediaries between lenders and

depositors. If due to macroeconomic shocks or risky operation a bank starts failing,

contagion effect can happen.

Overcoming and prevention of the system banking crises can be achieved only through the

complex solution of the global instability problem. Nevertheless, often politicians and

economists see different solution of this problem, sometimes even diametrically opposite.

There are many Development. Attaches offered to modified IMF into International

gendarmes, authorized with resources and real authorities supporters of the further

Globalization for the purpose of increase in the role of International Institutions. This way,

the ex-president of the European Bank of Reconstruction and on the long term supervision

over economic in different countries, imposing certain sanctions on them for not fulfilling

the agreements setting Trusteeship over economies of troublesome countries.

COMPANY PROFILE

Indusind Bank Ltd.

Genesis

IndusInd Bank derives its name and inspiration from the Indus Valley civilisation -a culture

described by National Geographic as 'one of the greatest of the ancient world' combining a

spirit of innovation with sound business and trade practices.

Mr. Srichand P. Hinduja, a leading Non-Resident Indian businessman and head of the

Hinduja Group, conceived the vision of IndusInd Bank -the first of the new-generation

private banks in India -and through collective contributions from the NRI community towards

India's economic and social development, brought our Bank into being.

The Bank, formally inaugurated in April 1994 by Dr. Manmohan Singh, Honorable Prime

Minister of India who was then the countrys Finance Minister, started with a capital base of

Rs.1,000 million (USD 32 million at the prevailing exchange rate), of which Rs.600 million

was raised through private placement from Indian Residents while the balance Rs.400 million

(USD 13 million) was contributed by Non-Resident Indians.

A New Era

IndusInd Bank, which commenced its operations in 1994, caters to the needs of both

consumer and corporate customers. It has a robust technology platform supporting multi-

channel delivery capabilities. IndusInd Bank has 365 branches, and 674 ATMs spread across

254 geographic locations of the country as on December 31, 2011.The Bank also has 2Representative offices, one each in London and Dubai.


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The Bank believes in driving its business through technology. It has multi-lateral tie-ups with

other banks providing access to their ATMs for its customers. It enjoys clearing bank status

for both major stock exchanges - BSE and NSE - and three major commodity exchanges in

the country - MCX, NCDEX, and NMCE. It also offers DP facilities for stock and

commodity segments. The Bank has been bestowed with the mandate of being a Settlement

Banker for six tea auction centers.

Ratings:

ICRA AA for Lower Tier II subordinate debt program and ICRA AA- for Upper Tier II

bond program by ICRA. CRISIL A1+ for certificate of deposit program by CRISIL. CARE

AA for Lower Tier II subordinate debt program by CARE. Fitch AA- for Long Term Debt

Instruments and Fitch A1+ for Short Term Debt Instruments by Fitch Ratings.

Mission & Vision

Mission

We will consistently add value to all our stakeholders and emerge as the Best in class in the

chosen parameters amongst the comity of banks, by doubling our profits, clients and branches

within the next three years.

Vision

IndusInd Bank will be:

A relevant business and banking partner to its clients

Customer Responsive, striving at all times to collaborate with clients in providing

solutions for their Banking needs

A forerunner in the market place in terms of profitability, productivity and efficiency

Engaged with all our stakeholders and will deliver sustainable and compliant returns

Brand

IndusInd Bank has been aggressive in its brand building program since last year. As a part of

the brand building exercise, the bank has taken many initiatives which have helped the brand

connect up with the customers & enhance the visibility quotient. IndusInd Bank had launched

its first ever mass media campaign in May- June 2009 along with its punch line Makes you

feel richer and since then, the bank has been consistent in communication through

Television, Radio, and Outdoor & print advertising.


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IndusInd Bank u nderstands its customers money is not just money. It is the vehicle to realise

their dreams! Hence, the bank aims to ensure that the customers experience with the bank is

pleasant and enriching. That they get value for their money, enabling them to lead a richer,

fuller, content life... For this, the bank:

Offers a new level of banking better services, better understanding of unique needsand better management of finances

Demystifies the banking process and makes it more accessible

Apart from fulfilling traditional banking responsibilities, advises customers on how

and where to use their money to get the best out of it

Projects an image of being a young, energetic, modern bank with values of dynamism,

confidence and progression

Businesses IndusInd Bank operates in a diverse range of businesses, which include Corporate Banking,

Retail Banking, Treasury and Foreign Exchange, Investment Banking, Capital Markets, Non-

Resident Indian (NRI) / High Net worth Individual (HNI) Banking and Information

Technology (through a subsidiary). It also claims the distinction of being the first bank in

India that received ISO 9001:2000 certification for its Corporate Office and its entire network

of branches.

Products & Services

IndusInd Bank provides multi-channel facilities, which comprise of ATMs, Net Banking,

Mobile Banking, Phone Banking, Multi-city Banking and International Debit Cards. It is also

credited for being one of the first banks to become a part of RBIs Real Time Gross

Settlement (RTGS) system. Enlisting the help of KPMG, IndusInd Bank has adopted an

enterprise-wide risk management system, including global best practices in the area of Risk

Management. The other products and services offered by the bank include:

Personal Banking

Accounts

Deposits

Loans

Cards - Debit Card, Credit Card, Gold Debit Card, Indus Money

Indus Protect


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Wealth Management Services

Portfolio Management

Investments

Insurance

Corporate Banking

Fund Based Facilities

Non Fund Based Facilities

Value Added Facilities

Supply Chain Management

International Banking

Correspondent Banking

SWIFT

Rupee Drawing Arrangement R

Advisory Services A

Facilities to Exporters

Trade Finance

RFC Account for Residents R

Gold Banking

Remittance Services

Suvarna Mudra

Others

Investment Banking

Treasury

NRI Services

Online Banking

RTGS/ NEFT


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Branches & ATMs

Within a few years of its foundation, IndusInd Bank started climbing the ladder of success

and became one of the fastest-growing banks in the Indian banking sector. By 2006, it had

expanded its branch network, from 61 in 2004, to 137. Apart from setting up 150 ATM

centers of its own, the bank also concluded multilateral arrangements with other banks,taking the total number of authorized ATM outlets to 15,000. All the branches as well as

ATMs of IndusInd Bank are connected to its central database, via a satellite that operates on

the latest version of IBMs AS400-720 hardware & Midas Kapiti (now Misys) software.

Mile stones

2011 - 2012

Awarded as the Best Bank Mid-sized in Business world PwC Best Banks Survey2011

Awarded M.IT.R- 50 Marketing & IT Recognition Program amongst top 50 brands

organised by Paul Writer in association with IBM

Awarded the CII Environment Best Practice Award 2012 for the Most Innovative

Environmental Project

Awarded in the Business Enterprise Services category for running ATMs on solar

power Organised by Panasonic Green Globe Foundation

2010 - 2011

Winner of Best Use of technology in training and e-Learning Initiatives awarded by

IBA Banking Technology Awards 2010

2009 - 2010

Tier II Issue raised Rs. 4200 million in March 2010

Received the prestigious ISO 27001 certification for IT operations

2008 - 2009

Appointed as Clearing & Settlement Bank at 6 major Tea Auction centers (includes 2

which were added in 2010)

2007 - 2008

Extended microfinance to 300,000+ women by partnering leading MFIs like SKS

Microfinance

Became clearing/settlement bank for NSE currency futures exchange


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2006 - 2007

GDR - raised Rs 1,460 million, tied up with Chola mandalam MS for bancassurance

Signed an agreement with National Multi Commodity Exchange Ltd as clearing

banker

2005 - 2006

Tied-up with Religare Securities for offering 3-in-1 account covering banking,

depository & securities trading

Tied up with Aviva Life Insurance for bank assurance

2004 - 2005

Signed an agreement with NCDEX as clearing banker

Opened its second representative office in London.

2001 - 2002

Tie ups with exchange houses in Middle East and banks in the United States1994 - 2000

IPO - raised Rs 1,800 million, became clearing bank to First Commodities Clearing

Corporation of India

2000 Became clearing/settlement bank for BSE/NSE

Raised Rs 1,000 million through preferential issue of shares

Incorporated in 1994; Promoted by a group of Non Resident Indians. Started

operations with Rs 1000 Mn Capital

Further, as a banking partner, the bank also aims to help its customers discover how they can

do more things with their money.

In the recent advertising campaign, the Bank reinforces its focus on Innovative banking based

on the philosophy of Responsive Innovation. The bank is taking responsiveness themeto

customers and reinforces its commitment to give best-of-class services in the industry.


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Literature review

Thomas Foscht, Judith Schloffer, Cesar Maloles III, Swee L. Chia (2009) found the

differences among the three age groups contained in Generation Y in terms of their sources of

information, financial services used, likelihood of switching, and number of banks utilized. In

addition, determinants of satisfaction, loyalty, and behavioural intention are primarily

affected by satisfaction with employees and services rendered. There results indicated that as

young people reach certain milestones, their needs become more multifaceted. Consequently,

the determinants of satisfaction have also changed. A study conducted by Mamunur Rashid,

M. Kabir Hassan (2009) in Bangladesh in six full fledged Islamic banks found non-Islamic

factors such as Corporal efficiency, Core- Banking Services, Confidence, etc. were given

higher weights by majority of the respondents. The report recommends introducing complete

E-Banking solution, to increase advanced marketing efforts and to hire experienced human

resources for better Islamic Banking activities in Bangladesh.

Charles Blankson , Ogenyi Ejye Omar , Julian Ming-Sung Cheng (2009) identified four key

factors - convenience, competence, recommendation by parents, and free banking and/or no

bank charges - to be consistent across the two economies. The recommendation of the study

is that in the context of an open and liberalized market environment, retail bank marketing

strategies should be standardized irrespective of the national development stage. It concludes

that retail bank managers particularly in developing countries should learn to provide

consistent and good customer care.

Omar Masood, Jamel E. Chichti, Walid Mansour , Muzafar Iqbal (2009) research attempt is

made to assess the degree of customer awareness, satisfaction as well as selection criteria. A

sample of 200 respondents took part in this study. The responses where shows a certain

degree of satisfaction, there few respondents also have expressed their dissatisfaction with

some of the Islamic bank's services.

Dominic Celestine Fernandez (2008) conducted a survey and results indicated no attributeobtained was an outright determinant of bank selection choices. This was attributed to the

diverse needs of respondents as revealed by this survey. While some determinants such as

location was of prime importance when selecting a bank, other factors that emphasize of

better social interaction between banker and client, is gaining prominence partly due to the

influence of Asian culture. It also revealed the use of the consumer decision making model

when selecting bank choices.

Charles Blankson, Julian Ming-Sung Cheng, Nancy Spears (2007) study reveals three keydimensions, factors, strategies that are consistent across all three economies. The paper


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concludes that open and liberalized business climate appear to explain consumers' decisions.

This research is based on the college student cohort and thus the results do not represent the

public. This poses generalizability questions without further replications and validations. This

study did not examine whether there were consumers' switching behaviours involving banks.

A study conducted by Erdener Kaynak, Talha D. Harcar (2005) revealed banks were

evaluated more positively by customers in areas such as extra services offered by the bank,

image of the bank, and convenience of the bank.

James F. Devlin and Philip Gerrard (2004) presented an analysis of trends in the relative

importance of choice criteria in respect of selecting a retail bank. And pointed that the

influence of recommendations has increased significantly and is now the most important

choice criterion. Other factors which have also increased in importance are the offering of

incentives, having a wide product range and economic factors, such as interest rate paid and

fees and charges levied. Locational factors, such as choosing a bank close to home or work

place, have decreased significantly in importance in motivating choice. Certain criteria have

remained broadly constant through time, amongst them, and perhaps surprisingly, are

choosing on the basis of a bank's image and reputation and expectations about level of

service.

Ron Shevlin and Catherine Graeber (2001) explored the various factor the influence a

customer in choosing a particular bank. They pointed out that ATM (Automatic TellerMachine) being the primary reason for a customer choice for a bank and further branch visit

and referral from friends and relatives are most prevalent sources of influence in Texas, USA.

Findings of Mohammed Almossawi (2001) reveal that the chief factors determining college

students bank selection are: banks reputation,availability of parking space near the bank,

friendliness of bank personnel, and availability and location of automated teller machines

(ATM).

Findings of Huu Phuong Ta, Kar Yin Har (2000) indicated indicate that undergraduates place

high emphasis on the pricing and product dimensions of bank services. The results are of

interest to bank managers because they provide information on the importance of the

selection criteria as well as areas of strengths and weaknesses of banks.

Burc lengins (1998) findingsconcluded that respondents prefer the extended loyalty

programs, the continuous information flow from the bank, the off-site ATMs, the maximum


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five-minutes waiting time in the branches and a simple application for all the accounts the

bank offers.

Carolyn Kennington, Jeanne Hill, Anna Rakowska (1996) pointed that most important

variable influencing customer choice are reputation price and service.

Josee Bloemer, Kode Ruyter and Pascel Peeters (1998) investigated how image, perceivedservice quality and satisfaction determine loyalty in retail banking.

The key findings by Laroche, Rosenblatt, and Manning (1986) on diverse demographic

segments included importance of location convenience, speed of service, competence and

friendliness of bank employees.

Meidan (1976) revealed that about 90% of the respondents banked at the branch nearest to

their home place and place of work. Convenience, in terms of location, was also found to be

the single most important factor for selecting a bank.


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Theoretical framework

The study is based on general factors, trade finance factors and forex factors. So first of all it

is essential to know about the trade finance and forex.

Trade finance

What is trade finance?Trade Finance has been reviewing the global trade market since 1983. The remit of what we

cover is somewhat broad, and as the market evolves to meet the requirements of financing

global trade, so our content has changed.

What is trade finance?

There are various definitions to be found online as to what trade finance is, and the choice of

words used is interesting. It is described both as a science and as an imprecise term

covering a number of different activit ies. As is the nature of these things, both are accurate.

In one form it is quite a precise science managing the capital required for international trade

to flow. Yet within this science there are a wide range of tools at the financiers disposal, all

of which determine how cash, credit, investments and other assets can be utilised for trade.In

its simplest form, an exporter requires an importer to prepay for goods shipped. The importer

naturally wants to reduce risk by asking the exporter to document that the goods have been

shipped. The importers bank assists by providing 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 to the exporter on the basis of the export

contract.

Trade services and supply chain

Building on what I have termed traditional trade finance, there are a number of ways in

which banks can help corporate clients trade (both domestically and cross-border) for a

fee.A typical service offering from a bank will include:

Letters of credit (LC), import bills for collection, shipping guarantees, import financing,

performance bonds, export LC advising, LC safekeeping, LC confirmation, LC checking and

negotiation, pre-shipment export finance, export bills for collections, invoice financing, and

all the relevant document preparation.Despite this focus on the LC, over the years the term

trade finance has been shifting away from this sometimes cumbersome method of

conducting business. It is now estimated that over 80% of global trade is conducted on an

open account basis.


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Led by large corporates, this form of trade saves costs and time and so has been adopted by

smaller corporates as they become more comfortable with their buyer and supplier

relationships. Open account transactions can be described as buy now, pay later and are

more like regular payments for a continuing flow of goods rather than specific transactions.

This is much cheaper for corporates.

In response to this development, the organisation SWIFT launched the TSU (trade services

utility), a collaborative centralised data matching utility, which allows banks to build

products around its core functionality to improve the speed and flow of open account trade.

This is helping banks re-intermediate themselves into these trade flows.While volumes of

LCs have remained flat in recent years, their value actually increased and they remain an

essential part of emerging market trade and trade in countries where exchange controls are in

force. This increase in value is also a reflection of the commodity price boom of 2007/08 .

Factoring & Forfaiting Factoring, or invoice discounting, receivables factoring or debtor financing, is where a

company buys a debt or invoice from another company. In this purchase, accounts

receivable are discounted in order to allow the buyer to make a profit upon the settlement of

the debt. Essentially factoring transfers the ownership of accounts to another party that then

chases up the debt. Factoring therefore relieves the first part of a debt for less than the total

amount providing them with working capital to continue trading, while the buyer, or factor,

chases up the debt for the full amount and profits when it is paid.Forfaiting is the purchase of an exporter's receivables (the amount importers owe the

exporter) at a discount by paying cash. The purchaser of the receivables, or forfeiter, must

now be paid by the importer to settle the debt. As the receivables are usually guaranteed by

the importer's bank, the forfeiter frees the exporter from the risk of non-payment by the

importer. The receivables have then become a form of debt instrument that can be sold on

the secondary market as bills of exchange or promissory notes.

Structured Commodity Finance

Structured commodity finance (SCF) as covered by Trade Finance is split into three main

commodity groups: metals & mining, energy, and soft commodities (agricultural crops). It is

a financing technique utilised by commodity producers and trading companies conducting

business in the emerging markets. SCF provides liquidity management and risk mitigation

for the production, purchase and sale of commodities and materials. This is done by isolating

assets, which have relatively predictable cash flow attached to them through pricing

prediction, from the corporate borrower and using them to mitigate risk and secure credit

from a lender. A corporate therefore bor rows against a commoditys expected worth.


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If all proceeds to plan then the lender is reimbursed through the sale of the assets. If not then

the lender has recourse to some or all of the assets. Volatility in commodity prices can make

SCF a tricky business. Lenders charge interest any funds disbursed as well as fees for

arranging the transaction. SCF funding techniques include pre-export finance, countertrade,

barter, and inventory finance. These solutions can be applied across part or all of the

commodity trade value chain: from producer to distributor to processor, and the physical

traders who buy and deliver commodities.

Export & Agency Finance

This part of Trade Finances remit covers the roles of the export credit agencies, the

development banks, and the multilateral agencies. Their traditional role is complement

lending by commercial banks at interest by guaranteeing payment.

These agencies have once again become of vital importance to the trade finance market due

to the role that they play in facilitating trade, insuring transactions, promoting exports,

creating jobs, and increasingly through direct lending. All are important in the current global

downturn.

ECAs are private or governmental institutions that provide export finance, or credit

insurance and guarantees, or both. ECAs can have very different mandates which we will not

delve into here (please refer to Trade Finances annualWorld Official Agency Guide).The

development banks, sometimes referred to as DFIs (development finance institutions), and

the multilaterals similarly have different mandates depending on their ownership or regional

remit. Most will have a form of trade facilitation programme that promotes trade through the

provision of guarantees.

ECAs and multilaterals are becoming a crucial part of the financing of large infrastructure

projects around the world as credit from commercial banks remains scarce.

Make sure you stay abreast of the latest news and analysis across the spectrum of global

trade with Trade Finance the information source on the trade, supply chain, commodity

and export finance markets.


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DESCRIPTION OF FACTORS FOR CHOOSING A BANK BY EXPORTERS


General Factors:

Speed

Cost

Reach

Customer friendly



Trade finance factors:

Importers choice of bank

Credit limit

Factoring and forfaitingForex factors:

Forex limits

Better forex offers

Costs

Lower costs related to preparation, submission and approval of documents; lower

cost of clearance and transportation of goods.

The elements involved in the cost are described in annexture-2.

Speed

Because procedures and processes are rationalized and transparent, facilitation of

just intime delivery is done by almost all the banks.

Payments:

There are 3 standard ways of payment methods in the export import trade international trade

market:

1. Clean Payment

2. Collection of Bills

3. Letters of Credit L/c

Clean Payments

In clean payment method, all shipping documents, including title documents are handled

directly between the trading partners. The role of banks is limited to clearing amounts as

required. Clean payment method offers a relatively cheap and uncomplicated method of

payment for both importers and exporters.


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There are basically two type of clean payments:

Advance Payment

In advance payment method the exporter is trusted to ship the goods after receiving payment

from the importer.

Open Account

In open account method the importer is trusted to pay the exporter after receipt of goods.

The main drawback of open account method is that exporter assumes all the risks while the

importer get the advantage over the delay use of company's cash resources and is also not

responsible for the risk associated with goods.

2. Payment Collection of Bills in International Trade

The Payment Collection of Bills also called Uniform Rules for Collections is published by

International Chamber of Commerce (ICC) under the document number 522 (URC522) and

is followed by more than 90% of the world's banks.

In this method of payment in international trade the exporter entrusts the handling of

commercial and often financial documents to banks and gives the banks necessary

instructions concerning the release of these documents to the Importer. It is considered to be

one of the cost effective methods of evidencing a transaction for buyers, where documents

are manipulated via the banking system.

There are two methods of collections of bill :

Documents Against Payment D/P

In this case documents are released to the importer only when the payment has been done.

Documents Against Acceptance D/A

In this case documents are released to the importer only against acceptance of a draft.

3. Letter of Credit L/c

Letter of Credit also known as Documentary Credit is a written undertaking by the importersbank known as the issuing bank on behalf of its customer, the importer (applicant), promising

to effect payment in favour of the exporter (beneficiary) up to a stated sum of money, within

a prescribed time limit and against stipulated documents. It is published by the International

Chamber of Commerce under the provision of Uniform Custom and Practices (UCP)

brochure number 500.


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Various types of L/Cs are :

Revocable & Irrevocable Letter of Credit (L/c)

A Revocable Letter of Credit can be cancelled without the consent of the exporter. An

Irrevocable Letter of Credit cannot be cancelled or amended without the consent of all parties

including the exporter.

Sight & Time Letter of Credit

If payment is to be made at the time of presenting the document then it is referred as the Sight

Letter of Credit. In this case banks are allowed to take the necessary time required to check

the documents. If payment is to be made after the lapse of a particular time period as stated

in the draft then it is referred as the Term Letter of Credit.

Confirmed Letter of Credit (L/c)

Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its

commitment to that of the issuing bank. By adding its commitment, the Confirming Bank

takes the responsibility of claim under the letter of credit, assuming all terms and conditions

of the letter of credit are met.

Documentary collections

Payment Collection Against Bills also known documentary collection as is a payment

method used in international trade all over the world by the exporter for the handling of

documents to the buyer's bank and also gives the banks necessary instructions indicating

when and on what conditions these documents can be released to the importer.

It is different from the letters of credit, in the sense that the bank only acts as a medium for

the transfer of documents but does not make any payment guarantee. However, collection of

documents are subjected to the Uniform Rules for Collections published by the International

Chamber of Commerce (ICC).

Role of Various Parties

Exporter

The seller ships the goods and then hands over the document related to the goods to theirbanks with the instruction on how and when the buyer would pay.

Exporter's Bank

The exporter's bank is known as the remitting bank , and they remit the bill for collection

with proper instructions. The role of the remitting bank is to :

Check that the documents for consistency.

Send the documents to a bank in the buyer's country with instructions on collecting

payment. Pay the exporter when it receives payments from the collecting bank.


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Buyer/Importer

The buyer / importer is the drawee of the Bill.

The role of the importer is to :

Pay the bill as mention in the agreement (or promise to pay later).

Take the shipping documents (unless it is a clean bill) and clear the goods.

Importer's Bank

This is a bank in the importer's country : usually a branch or correspondent bank of the

remitting bank but any other bank can also be used on the request of exporter.

The collecting bank act as the remitting bank's agent and clearly follows the instructions on

the remitting bank's covering schedule. However the collecting bank does not guarantee

payment of the bills except in very unusual circumstance for undoubted customer , which is

called availing. Importer's bank is known as the collecting / presenting bank. The role of the

collecting banks is to : Act as the remitting bank's agent

Present the bill to the buyer for payment or acceptance.

Release the documents to the buyer when the exporter's instructions have been

followed.

If the bill is unpaid / unaccepted, the collecting bank :

May arrange storage and insurance for the goods as per remitting bank instructions on

the schedule.

Protests on behalf of the remitting bank (if the Remitting Bank's schedule states

Protest)

Requests further instruction from the remitting bank, if there is a problem that is not

covered by the instructions in the schedule.

Once payment is received from the importer, the collecting bank remits the proceeds

promptly to the remitting bank less its charges.

Documents Against Payments (D/P)This is sometimes also referred as Cash against Documents/Cash on Delivery. In effect D/P

means payable at sight (on demand). The collecting bank hands over the shipping documents

including the document of title (bill of lading) only when the importer has paid the bill. The

drawee is usually expected to pay within 3 working days of presentation. The attached

instructions to the shipping documents would show "Release Documents Against Payment"


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Risks :

Under D/P terms the exporter keeps control of the goods (through the banks) until the

importer pays. If the importer refuses to pay, the exporter can:

Protest the bill and take him to court (may be expensive and difficult to control from

another country).

Find another buyer or arrange a sale by an auction.

With the last two choices, the price obtained may be lower but probably still better than

shipping the goods back, sometimes, the exporter will have a contact or agent in the

importer's country that can help with any arrangements.

If the importers refuses to pay, the collecting bank can act on the exporter's instructions

shown in the Remitting Bank schedule. These instructions may include:

Removal of the goods from the port to a warehouse and insure them.

Contact the case of need who may negotiate with the importer. Protesting the bill through the bank's lawyer.

Documents Against Acceptance (D/A)

Under Documents Against Acceptance, the Exporter allows credit to Importer, the period of

credit is referred to as Usance, The importer/ drawee is required to accept the bill to make a

signed promise to pay the bill at a set date in the future. When he has signed the bill in

acceptance, he can take the documents and clear his goods.

The payment date is calculated from the term of the bill, which is usually a multiple of 30days and start either from sight or form the date of shipment, whichever is stated on the bill

of exchange. The attached instruction would show "Release Documents Against

Acceptance".

Risk

Under D/A terms the importer can inspect the documents and , if he is satisfied, accept the

bill for payment o the due date, take the documents and clear the goods; the exporter loses

control of them.

The exporter runs various risk. The importer might refuse to pay on the due date because :

He finds that the goods are not what he ordered.

He has not been able to sell the goods.

He is prepared to cheat the exporter (In cases the exporter can protest the bill and take

the importer to court but this can be expensive).

The importer might have gone bankrupt, in which case the exporter will probably

never get his money.


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Usance D/P Bills

A Usance D/P Bill is an agreement where the buyer accepts the bill payable at a specified

date in future but does not receive the documents until he has actually paid for them. The

reason is that airmailed documents may arrive much earlier than the goods shipped by sea.

The buyer is not responsible to pay the bill before its due date, but he may want to do so, if

the ship arrives before that date. This mode of payments is less usual, but offers more

settlement possibility.

These are still D/P terms so there is no extra risk to the exporter or his bank. As an alternative

the covering scheduled may simply allow acceptance or payments to be deferred awaiting

arrival of carrying vessel. There are different types of usance D/P bills, some of which do not

require acceptance specially those drawn payable at a fix period after date or drawn payable

at a fixed date. Bills requiring acceptance are those drawn at a fix period after sight, which is

necessary to establish the maturity date.

LETTER OF CREDIT

Letter of Credit L/c also known as Documentary Credit is a widely used term to make

payment secure in domestic and international trade. The document is issued by a financial

organization at the buyer request.The International Chamber of Commerce (ICC) in the

Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as:

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at

the request and on the instructions of a customer (the Applicant) or on its own behalf :

1. Is to make a payment to or to the order third party ( the beneficiary ) or is to accept

bills of exchange (drafts) drawn by the beneficiary.

2. Authorised another bank to effect such payments or to accept and pay such bills of

exchange (draft).

3. Authorised another bank to negotiate against stipulated documents provided that the

terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and notin goods. The decision to pay under a letter of credit will be based entirely on whether the

documents presented to the bank appear on their face to be in accordance with the terms and

conditions of the letter of credit.

Parties to Letters of Credit

Applicant (Opener) : Applicant which is also referred to as account party is normally

a buyer or customer of the goods, who has to make payment to beneficiary. LC is

initiated and issued at his request and on the basis of his instructions.


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Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of

credit and takes the responsibility to make the payments on receipt of the documents

from the beneficiary or through their banker. The payments has to be made to the

beneficiary within seven working days from the date of receipt of documents at their

end, provided the documents are in accordance with the terms and conditions of the

letter of credit. If the documents are discrepant one, the rejection thereof to be

communicated within seven working days from the date of of receipt of documents at

their end.

Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to

receive payment from the applicant. A credit is issued in his favour to enable him or

his agent to obtain payment on surrender of stipulated document and comply with the

term and conditions of the L/c. If L/c is a transferable one and he transfers the credit

to another party, then he is referred to as the first or original beneficiary.

Advising Bank : An Advising Bank provides advice to the beneficiary and takes the

responsibility for sending the documents to the issuing bank and is normally located

in the country of the beneficiary.

Confirming Bank : Confirming bank adds its guarantee to the credit opened by

another bank, thereby undertaking the responsibility of payment/negotiation

acceptance under the credit, in additional to that of the issuing bank. Confirming bank

play an important role where the exporter is not satisfied with the undertaking of only

the issuing bank.

Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents

submitted to them by the beneficiary under the credit either advised through them or

restricted to them for negotiation. On negotiation of the documents they will claim the

reimbursement under the credit and makes the payment to the beneficiary provided

the documents submitted are in accordance with the terms and conditions of the letters

of credit. Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the

reimbursement claim in settlement of negotiation/acceptance/payment lodged with it

by the negotiating bank. It is normally the bank with which issuing bank has an

account from which payment has to be made.

Second Beneficiary : Second Beneficiary is the person who represent the first or

original Beneficiary of credit in his absence. In this case, the credits belonging to the

original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.


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Types of Letter of Credit

1. Revocable Letter of Credit L/c

A revocable letter of credit may be revoked or modified for any reason, at any time by the

issuing bank without notification. It is rarely used in international trade and not considered

satisfactory for the exporters but has an advantage over that of the importers and the issuing

bank.

2. Irrevocable Letter of CreditL/c

In this case it is not possible to revoked or amended a credit without the agreement of the

issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is

believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures

the beneficiary that if the required documents are presented and the terms and conditions are

complied with, payment will be made.

3. Confirmed Letter of Credit L/c

Confirmed Letter of Credit is a special type of L/c in which another bank apart from the

issuing bank has added its guarantee. Although, the cost of confirming by two banks makes

it costlier, this type of L/c is more beneficial for the beneficiary as it doubles the guarantee.

4. Sight Credit and Usance Credit L/c

Sight credit states that the payments would be made by the issuing bank at sight, on demand

or on presentation. In case of usance credit, draft are drawn on the issuing bank or the

correspondent bank at specified usance period. The credit will indicate whether the usance

draft are to be drawn on the issuing bank or in the case of confirmed credit on the confirming

bank.

5. Back to Back Letter of Credit L/c

Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as

backtoback credit when a L/c is opened with security of another L/c.A backtoback credit which can also be referred as credit and countercredit is actually a

method of financing both sides of a transaction in which a middleman buys goods from one

customer and sells them to another.

The parties to a BacktoBack Letter of Credit are:

1. The buyer and his bank as the issuer of the original Letter of Credit.

2. The seller/manufacturer and his bank,

3. The manufacturer's subcontractor and his bank.


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The practical use of this Credit is seen when L/c is opened by the ultimate buyer in favour of

a particular beneficiary, who may not be the actual supplier/ manufacturer offering the main

credit with near identical terms in favour as security and will be able to obtain reimbursement

By presenting the documents received under back to back credit under the main L/c.

The need for such credits arise mainly when :

1. The ultimate buyer not ready for a transferable credit

2. The Beneficiary do not want to disclose the source of supply to the openers.

3. The manufacturer demands on payment against documents for goods but the

beneficiary of credit is short of the funds

6. Transferable Letter of Credit L/c

A transferable documentary credit is a type of credit under which the first beneficiary which

is usually a middleman may request the nominated bank to transfer credit in whole or in part

to the second beneficiary.

The L/c does state clearly mentions the margins of the first beneficiary and unless it is

specified the L/c cannot be treated as transferable. It can only be used when the company is

selling the product of a third party and the proper care has to be taken about the exit policy

for the money transactions that take place.

This type of L/c is used in the companies that act as a middle man during the transaction butdont have large limit. In the transferable L/c there is a right to substitute the invoice and the

whole value can be transferred to a second beneficiary.

The first beneficiary or middleman has rights to change the following terms and conditions of

the letter of credit:

1. Reduce the amount of the credit.

2. Reduce unit price if it is stated

3. Make shorter the expiry date of the letter of credit.

4. Make shorter the last date for presentation of documents.

5. Make shorter the period for shipment of goods.

6. Increase the amount of the cover or percentage for which insurance cover must be

effected.


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Standby Letter of Credit L/c

Initially used by the banks in the United States, the standby letter of credit is very much

similar in nature to a bank guarantee. The main objective of issuing such a credit is to secure

bank loans. Standby credits are usually issued by the applicants bank in the applicantscountry and advised to the beneficiary by a bank in the beneficiarys country.

Unlike a traditional letter of credit where the beneficiary obtains payment against documents

evidencing performance, the standby letter of credit allow a beneficiary to obtains payment

from a bank even when the applicant for the credit has failed to perform as per bond.

A standby letter of credit is subject to "Uniform Customs and Practice for Documentary

Credit" (UCP), International Chamber of Commerce Publication No 500, 1993 Revision, or

"International Standby Practices" (ISP), International Chamber of Commerce Publication No590, 1998.

Import Operations Under L/c

The Import Letter of Credit guarantees an exporter payment for goods or services, provided

the terms of the letter of credit have been met.

A bank issue an import letter of credit on the behalf of an importer or buyer under the

following Circumstances

When a importer is importing goods within its own country.

When a trader is buying good from his own country and sell it to the another country

for the purpose of merchandizing trade.

When an Indian exporter who is executing a contract outside his own country requires

importing goods from a third country to the country where he is executing the

contract.

Export Operations Under L/c

Export Letter of Credit is issued in for a trader for his native country for the purchase of

goods and services. Such letters of credit may be received for following purpose:

1. For physical export of goods and services from India to a Foreign Country.

2. For execution of projects outside India by Indian exporters by supply of goods and

services from Indian or partly from India and partly from outside India.

3. Towards deemed exports where there is no physical movements of goods from

outside India But the supplies are being made to a project financed in foreign

exchange by multilateral agencies, organization or project being executed in Indiawith the aid of external agencies.


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4. For sale of goods by Indian exporters with total procurement and supply from outside

India. In all the above cases there would be earning of Foreign Exchange or

conservation of Foreign Exchange.

Banks in India associated themselves with the export letters of credit in various capacities

such as advising bank, confirming bank, transferring bank and reimbursing bank.

In every cases the bank will be rendering services not only to the Issuing Bank as its agent

correspondent bank but also to the exporter in advising and financing his export activity.

1. Advising an Export L/c

The basic responsibility of an advising bank is to advise the credit received from its overseas

branch after checking the apparent genuineness of the credit recognized by the issuing bank.

It is also necessary for the advising bank to go through the letter of credit, try to understand

the underlying transaction, terms and conditions of the credit and advice the beneficiary in

the matter.The main features of advising export LCs are:

1. There are no credit risks as the bank receives a onetime commission for the

advising service.

There are no capital adequacy needs for the advising function.

2. Advising of Amendments to L/Cs

Amendment of LCs is done for various reasons and it is necessary to fallow all

the necessary the procedures outlined for advising. In the process of advisingthe amendments the Issuing bank serializes the amendment number and also

ensures that no previous amendment is missing from the list. Only on receipt

of satisfactory information/ clarification the amendment may be advised.

3. Confirmation of Export Letters of Credit

It constitutes a definite undertaking of the confirming bank, in addition to that

of the issuing bank, which undertakes the sight payment, deferred payment,

acceptance or negotiation.

Banks in India have the facility of covering the credit confirmation risks with

ECGC under their Transfer Guarantee scheme and include both the

commercial and political risk involved.

4. Discounting/Negotiation of Export LCs

When the exporter requires funds before due date then he can discount or

negotiate the LCs with the negotiating bank. Once the issuing bank nominates

the negotiating bank, it can take the credit risk on the issuing bank or

confirming bank.


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5. Reimbursement of Export LCs

Sometimes reimbursing bank, on the recommendation of issuing bank allows

the negotiating bank to collect the money from the reimbursing bank once the

goods have been shipped. It is quite similar to a cheque facility provided by a

bank. In return, the reimbursement bank earns a commission per transaction

and enjoys float income without getting involve in the checking the

transaction documents. reimbursement bank play an important role in payment

on the due date ( for usance LCs) or the days on which the negotiating bank

demands the same (for sight LCs).

Pre Shipment export finance

Pre Shipment Finance is issued by a financial institution when the seller want the payment of

the goods before shipment. The main objectives behind preshipment finance or pre export

finance is to enable exporter to: Procure raw materials.

Carry out manufacturing process.

Provide a secure warehouse for goods and raw materials.

Process and pack the goods.

Ship the goods to the buyers.

Meet other financial cost of the business.

Types of Pre Shipment Finance Packing Credit

Advance against Cheques/Draft etc. representing Advance Payments.

Requirment for Getting Packing Credit

This facility is provided to an exporter who satisfies the following criteria

A ten digit importer exporter code number allotted by DGFT.

Exporter should not be in the caution list of RBI.

If the goods to be exported are not under OGL (Open General Licence), the exportershould have the required license /quota permit to export the goods.

Packing credit facility can be provided to an exporter on production of the following

evidences to the bank:

1. Formal application for release the packing credit with undertaking to the effect that

the exporter would be ship the goods within stipulated due date and submit the

relevant shipping documents to the banks within prescribed time limit.


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2. Firm order or irrevocable L/C or original cable / fax / telex message exchange

between the exporter and the buyer.

3. Licence issued by DGFT if the goods to be exported fall under the restricted or

canalized category. If the item falls under quota system, proper quota allotment proof

needs to be submitted.

The confirmed order received from the overseas buyer should reveal the information about

the full name and address of the overseas buyer, description quantity and value of goods

(FOB or CIF), destination port and the last date of payment.

Bank guarantee:

A bank guarantee is a written contract given by a bank on the behalf of a customer. By

issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it

is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank

gets some commission for issuing the guarantee.

Anyone can apply for a bank guarantee, if his or her company has obligations towards a third

party for which funds need to be blocked in order to guarantee that his or her company fulfils

its obligations (for example carrying out certain works, payment of a debt, etc.).

In case of any changes or cancellation during the transaction process, a bank guarantee

remains valid until the customer dully releases the bank from its liability.

In the situations, where a customer fails to pay the money, the bank must pay the amount

within three working days.

Benefits of Bank Guarantees

For Governments

1. Increases the rate of private financing for key sectors such as infrastructure.

2. Provides access to capital markets as well as commercial banks.

3. Reduces cost of private financing to affordable levels.4. Facilitates privatizations and public private partnerships.

5. Reduces government risk exposure by passing commercial risk to the private

sector.

For Private Sector

1. Reduces risk of private transactions in emerging countries.

2. Mitigates risks that the private sector does not control.

3. Opens new markets.

4. Improves project sustainability.


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Legal Requirements

Bank guarantee is issued by the authorised dealers under their obligated authorities notified

vide FEMA 8/ 2000 dt 3 rd May 2000. Only in case of revocation of guarantee involving US $

5000 or more need to be reported to Reserve Bank of India (RBI).

Types of Bank Guarantees

1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or

indirect.

Direct Bank Guarantee It is issued by the applicant's bank (issuing bank) directly

to the guarantee's beneficiary without concerning a correspondent bank. This type

of guarantee is less expensive and is also subject to the law of the country in

which the guarantee is issued unless otherwise it is mentioned in the guarantee

documents.

Indirect Bank Guarantee With an indirect guarantee, a second bank is involved, which is

basically a representative of the issuing bank in the country to which beneficiary belongs.

This involvement of a second bank is done on the demand of the beneficiary. This type of

bank guarantee is more time consuming and expensive too.

2. Confirmed Guarantee

It is cross between direct and indirect types of bank guarantee. This type of bank

guarantee is issued directly by a bank after which it is send to a foreign bank for

confirmations. The foreign banks confirm the original documents and thereby

assume the responsibility.

3. Tender Bond

This is also called bid bonds and is normally issued in support of a tender in international

trade. It provides the beneficiary with a financial remedy, if the applicant fails to fulfill any of

the tender conditions.4. Performance Bonds

This is one of the most common types of bank guarantee which is used to secure the

completion of the contractual responsibilities of delivery of goods and act as security of

penalty payment by the Supplier in case of non delivery of goods.


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5. Advance Payment Guarantees

This mode of guarantee is used where the applicant calls for the provision of a sum of money

at an early stage of the contract and can recover the amount paid in advance, or a part thereof,

if the applicant fails to fulfil the agreement.

6. Payment Guarantees

This type of bank guarantee is used to secure the responsibilities to pay goods and services. If

the beneficiary has fulfilled his contractual obligations after delivering the goods or services

but the debtor fails to make the payment, then after written declaration the beneficiary can

easily obtain his money from the guaranteeing bank.

7. Loan Repayment Guarantees

This type of guarantee is given by a bank to the creditor to pay the amount of loan body and

interests in case of non fulfilment by the borrower.

8. B/L Letter of Indemnity

This is also called a letter of indemnity and is a type of guarantee from the bank making sure

that any kind of loss of goods will not be suffered by the carrier.

9. Rental Guarantee

This type of bank guarantee is given under a rental contract. Rental guarantee is either limited

to rental payments only or includes all payments due under the rental contract including cost

of repair on termination of the rental contract.

10. Credit Card Guarantee

Credit card guarantee is issued by the credit card companies to its customer as a guarantee

that the merchant will be paid on transactions regardless of whether the consumer pays their

credit.

Bank Guarantees vs. Letters of Credit

A bank guarantee is frequently confused with letter of credit (LC), which is similar in many

ways but not the same thing. The basic difference between the two is that of the partiesinvolved. In a bank guarantee, three parties are involved; the bank, the person to whom the

guarantee is given and the person on whose behalf the bank is giving guarantee. In case of a

letter of credit, there are normally four parties involved; issuing bank, advising bank, the

applicant (importer) and the beneficiary (exporter).

Also, as a bank guarantee only becomes active when the customer fails to pay the necessary

amount where as in case of letters of credit, the issuing bank does not wait for the buyer to

default, and for the seller to invoke the undertaking.


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Role of Foreign exchange in international trade

Liquidity

In terms of international trade, liquidity is the ease in which foreign currency is

converted into domestic currency. FX markets, such as the New York Mercantile

Exchange, match buyers and sellers to bring about speedy, orderly transactions.

Rates

Buyers and sellers set prices using the auction method in the FX market. Sellers try to

earn the highest "ask" price possible, and buyers try to purchase currency at the

lowest "bid." Buyers and sellers meet at the "spot" price, the current value and

exchange rate for a particular currency against others.

Reserves

International governments enter the FX market to build and manage foreign exchange

reserves. They build the reserves to make official payments and influence domestic

currency values.

International Trade

Businesses rely on FX markets to buy currency that is spent to obtain overseas goods.

Corporations will also look to FX markets to convert international earnings back into

the domestic currency.

Hedging

Traders use foreign exchange derivatives, which "derive" their valuations and costsfrom the spot market. Options and futures contracts effectively lock in exchange rates

for a set period, to hedge against the risks of currency fluctuations.


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DATA ANALYSIS AND INTERPRETATION

Objective of the Study

The primary objective of the study is to study the major factors responsible for

choosing a bank.

The Secondary objective is to assess which banking services are given importance the

most .

Research Methodology used

Descriptive research design was used to study the factors for choosing a Bank. The primary

data was collected based on stratified sampling method. We first found out a list of

companies from the internet and rang each and every company to know which companies are

functional and then went to them for survey.The secondary data was collected from the

articles, newspapers, books and internet. The factor analysis and chi-square were used to find

factors for choosing a Bank. The collected data have been analyzed with the help of

SPSS16.0 package. The scope of this study is to know which factors influence exporters and

importers to choose a bank. This study shows the present level of factors which influence and

indicates the area for improvement. Factor analysis and chi-square are done to find out the

factors which influence the most and on what services banks have to concentrate respectively.


General Factors:

Speed

Cost

Reach

Customer friendly



Trade finance factors: Importers choice of bank

Credit limit

Factoring and forfaiting

Forex factors:

Forex limits

Better forex offers

Empirical findings


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Factor analysis

The factors which we assumed are general factors, trade finance factors and forex factors.

Factor analysis has grouped all these 10 factors into three categorical factors which are export

related services factor, convenience factor and efficiency factor.

Correlation matrix

Interpretation : From the above correlation matrix we can find out that all factors are not

highly correlated with each other except forex offers which are correlated around 70% withbetter forex offers and factoring and forfaiting.

speed cost reach Customerfriendly

Alreadyhave a

account

Importerschoice

Creditlimit

Allbankingservices

Factoringand

forfaiting

Betterforexoffers

Forexlimits

speed 1 0.553 -0.05 0.167 -0.193 -0.223 0.111 0.015 0 0 -0.01

cost 0.553 1 0.04 0.208 0.05 -0.067 0.089 -0.196 0.111 0.111 0.109

reach -0.046 0.038 1 -0.332 0.467 0.353 -0.54 -0.304 -0.415 -0.415 -0.32

Customerfriendly

0.167 0.208 -0.33 1 -0.459 -0.107 0.434 0.298 0.208 0.208 0.055

Alreadyhave aaccount

-0.193 0.05 0.47 -0.459 1 0.081 -0.19 -0.207 -0.151 -0.151 -0.12

Importerschoice

-0.223 -0.07 0.35 -0.107 0.081 1 -0.4 -0.053 -0.336 -0.336 -0.19

Creditlimit

0.111 0.089 -0.54 0.434 -0.191 -0.396 1 0.026 0.802 0.802 0.722

Allbankingservices

0.015 -0.2 -0.3 0.298 -0.207 -0.053 0.026 1 -0.196 -0.196 -0.4

Factoringandforfaiting

0 0.111 -0.42 0.208 -0.151 -0.336 0.802 -0.196 1 1 0.792

Betterforexoffers

0 0.111 -0.42 0.208 -0.151 -0.336 0.802 -0.196 1 1 0.792

Forexlimits

-0.014 0.109 -0.32 0.055 -0.119 -0.185 0.722 -0.402 0.792 0.792 1


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Interpretation : From this total variance matrix table we can see that all the factors have

been reduced to three factors. In which first factor contribute about 35% of total variance,second factor contribute 20% and third factor 15%.Only these three factors are taken since

these three factors explain about 70% of total variance. The first factor has to be given more

importance since it contributes more to the total variance. What constitutes first factor will be

explained in rotated component matrix.From this study it is evident that the important factors which influence the exporters and

importers in choosing a bank are

Total Variance Explained

Component

Initial Eigen values

Extraction Sums of Squared

Loadings

Rotation Sums of Squared

Loadings

Total

% of

Variance

Cumulative

% Total

% of

Variance

Cumulative

% Total

% of

Variance

Cumulative

%

1 4.124 37.490 37.490 4.124 37.490 37.490 3.856 35.054 35.054

2 1.981 18.007 55.497 1.981 18.007 55.497 2.194 19.945 54.998

3 1.600 14.549 70.045 1.600 14.549 70.045 1.655 15.047 70.045

4 .969 8.812 78.857

5 .739 6.716 85.573

6 .533 4.850 90.423

7 .438 3.979 94.403

8 .314 2.858 97.261

9 .208 1.890 99.151

10 .093 .849 100.000

11 -

2.736E-

16

-2.487E-15 100.000


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1) Export related services factors: which include credit limit, factoring and forfaiting,

better forex offers, forex limits.

2) Convenience factor: which include reach, customer friendly, already having an

account, all banking services.

3) Efficiency: which include speed and cost of transactions.

The three factors explain the 70% of the total variance of the data. Therefore only these three

factors are considered.

From the rotated component matrix. The resultant table is as follows

Rotated Component Matrix

Component

1 2 3

Speed .857

Cost .877

Reach -.678

Customer friendly .689

Already have an account -.696

Importers choice

Credit limit .848

All banking services .723

Factoring and forfaiting .957

Better forex offers .957

Forex limits .902

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.

From the rotated component matrix the first important factor seems to be the export related

services factor account for 35% of co-variance among variables, convenience account for

20% of co-variance and efficiency factor account for 15%.Export related services factor

include:

Credit limit

Factoring and forfaiting

Better forex offers

Forex limits

All these explain the factor on an average of 90% each.

The next important factor is the convenience factor which includes reach, customer friendly,

already having an account and all banking services.


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Interpretation: The above plot shows the graph between Eigen value and components. We

can see that the graph steeply decreases up to third component and from then it is becoming

stable. Meaning the each successive factor is accounting for smaller and smaller amounts of

the total variance.


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Chi-squareChi-square is a statistical test commonly used to compare observed data with data we would

expect to obtain according to a specific hypothesis. For example, if, according to Mendel's

laws, you expected 10 of 20 offspring from a cross to be male and the actual observed

number was 8 males, then you might want to know about the "goodness to fit" between the

observed and expected. Were the deviations (differences between observed and expected) the

result of chance, or were they due to other factors. How much deviation can occur before

you, the investigator, must conclude that something other than chance is at work, causing the

observed to differ from the expected. The chi-square test is always testing what scientists call

the null hypothesis, which states that there is no significant difference between the expected

and observed result.

Findings for another objective, i.e. banking services which are used the most are evident from

the data by using chi-square test. The resultant table is as follows:

Test Statistics

Documentary

collections

letter

of

credit

Type of

LC

Services

regarding

LC

Shipping

guarantees

Post

shipment

export

finance

Transaction

services

Advising,

negotiating

services

Chi-Square

.000a

4.800a

15.000b

13.333a

16.133a

4.800a

19.200a

8.533a

Df 1 1 2 1 1 1 1 1

Asymp.

Sig.

1.000 .028 .001 .000 .000 .028 .000 .003

Interpretation: This table shows that all the services are significant.

From the chi-square test we can find out the significance of the data obtained. The resultant

table of chi-square shows that all services have significance less than 0.05 which explainsthat all services are given importance. The documentary collection has an exception because

the values of documentary collection are almost constant therefore the significance value is

1i.e. the chi-square can not be applied for variables which are constant.

Chi-square shows that the variables are significant or is the best fit to the sample population,

because the significance values of all the variables are less than 0.05.


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Frequencies

Interpretation: The above graph shows that the survey has been done in the followingsectors

Sea food Pharma Misc

o Granite o Jewellery o Decorative items

Sea food sector has more sample size because it is the dominant sector in vizag, therefore themore the sample size, more accurate the results will be.

Then pharma companies are surveyed more since there exists pharma city in vizag which arealso large in number.

The miscellaneous companies include granite, jewellery and decorative items, which are lessin number.


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Exports

The graph shows the volume of exports of the companies that are being surveyed.

The companies which have exports :

< 5 crores are export house

5- 25 crores are 25-125 crores 125-625 crores

Particulars Yes NoAdvance payments 0% 100%Open account 0% 100%Documentary collections 50% 50%Letter of credit 80% 20%Services regarding LC 80% 20%Bills collection 100% 0%Bills discounting 100% 0%Shipping gaurantees 10% 90%Preshipment Export finance 100% 0%Postshipment export finance 30% 70%Transaction services 100% 0%Advising, negotiating services 80% 0%

Interpretation: The above frequency table shows that except the Advance payments, openaccount and post shipment finance services all other services are used the most and are givenequal importance. Advance payments and open account are very risky therefore naturallythey are avoided as much as possible.


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Frequencies of factors:

Interpretation: The above bar-graph shows that most of the respondents has opted forstrongly and agree only. Therefore this factor can be considered as a very important factor.

Interpretation: Like speed cost also got the same response. so this factor can also beconsidered as a very important factor .


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Interpretation: We can see from the bar graph of the responses that many people disagreed

or said not an issue regarding reach as a factor for choosing a bank. This shows that peopleare not interested in whether the bank in reach or not. The reason might be since thetechnology has been developed, now a days everything is going online , there is no worryregarding the reach of the bank.

Interpretation: Almost all respondents agree that customer friendly is one of the factors forchoosing a bank. Therefore this factor also need to be considered as an important factor.


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ParticularsStronglydisagree Disagree Neutral Agree

Stronglyagree

Already having an account 30% 70% 0% 0% 0%Importer's choice of bank 45% 65% 0% 0% 0%

Credit limit 0% 0% 0% 55% 45%All banking services 0% 0% 0% 85% 15%Factoring and forfaiting 0% 0% 0% 50% 50%

Better forex offers 0% 0% 0% 50% 50%

Forex limits 0% 0% 15% 45% 40%

Interpretation: From the above frequency table , it is evident that all agreeing exporterstrading services as factor for choosing a bank , except already having an account andimporters choice of bank.

Therefore banks should be more competitive in these factors to attract customers.

Crosstabs

Interpretation: The above bar graph shows the relation between volume of exports and

documentary collection service. It shows that companies small companies (< 5 crores and 5-

25 crores) and showed a little bit interest in documentary collections. The reason would be

documentary collection services would be comparatively cheaper and have some sought of

safety. Therefore who could not afford for costly services they go for cheaper services.


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Interpretation : The above bar graph shows the relation between volume of exports and letterof credit. It shows that low volume exporting companies does not prefer LC and otherspreferred as it is safe to use.

Interpretation: The above graph shows that most of the respondents use sight and usanceletter of credit. The other types are not used by any one because respondents are not aware of the other LC services available.


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Interpretation: Every respondent who use LC obviously uses the services regarding LC.

Interpretation: almost all the respondents said that they dont need shipping guarantees,because most of them are using services which are safer and also includes shippingguarantees. It is preferred by those who use documentary collections.


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Interpretation: every respondent responded positively for transaction because it is keyservice for trade. It is used for payments, foreign exchange transactions, etc..

Interpretation: many companies said yes for advising, negotiating bank services.


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Conclusion:From the analysis we can conclude that while choosing a bank, these exporters are giving

importance to export related services first(credit limit, factoring and forefaiting, better forex

offers, forex limits), because they want to work efficiently by reducing their costs take

service with better quality. Then the importance is given to general factors and then to

efficiency factor.

Coming to the services used the most, exporters are using all the export services offered by

the bank with exception of advance payments and post shipment finance. In vizag most of the

exporters are not using advance payments and documentary collections, it suggests that

exporters of vizag are risk averse since usage of advance payments and documentary

collections are risky comparatively.

Suggestions :As per the analysis made the suggestions that can be made are

The important factor seem to be the export related services factor then general factors

and then efficiency factor. Therefore it is advisable to concentrate more on export

related service factors.

Then coming to the services used, exporters are using all the export services offered

by the bank with exception of post shipment finance and shipment guarantees. As the

exporters of vizag seem to be risk averse it is better to concentrate on service which

are safe to use like LC, etc...

Most of the exporters in vizag are not aware of different types of LCs, so firstawareness of the different types of LCs have to be created and their uses have to beexplained to create a market.


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