sip2010_ibs_angir gupta
TRANSCRIPT
A REPORT
ON
TRADE FINANCING: NAVIGATION
OF EMERGING AND DEVELOPED
ECONOMIES DURING GLOBAL
ECONOMIC CRISIS
By
Angir Gupta
Enrolment No – 09BSHYD0097
TATA Consultancy Services, Hyderabad
A REPORT
ON
TRADE FINANCING: NAVIGATION
OF EMERGING AND DEVELOPED
ECONOMIES DURING GLOBAL
ECONOMIC CRISIS
By
Angir Gupta
Enrolment No – 09BSHYD0097
TATA Consultancy Services, Hyderabad
A report submitted in partial fulfillment of the requirements of MBA
Program of IBS Hyderabad
Submitted to
Corporate Guide:
Mr. Tushar Bisht,
Assistant Systems Analyst, TBDA
Faculty Guide:
Prof. Manas Ranjan Pradhan,
IBS Hyderabad
Date of Submission: Friday, May 14, 2010
PROJECT COMPLETION CERTIFICATE
This is to certify that Mr. Angir Gupta, student of IBS Hyderabad, undergoing MBA program,
has successfully completed his Summer Internship Program with a project entitled “Trade
Financing: Navigation of Emerging and Developed economies during global Economic
crisis” at Tata Consultancy Services, Hyderabad (TCSH) for a period of 14 weeks from 16th
Feb 2010 till 21st May 2010. His performance on the project during this period was satisfactory.
Tushar Bisht,
Project Supervisor
Suryanarayana Kolachena,
Academic Relationship Manager
V. Rajanna,
Vice-President & Regional Head
Tata Consultancy services
Hyderabad
Tata Consultancy Services Ltd. 1 Software Units Layout Madhapur Hyderabad 500 081 Andhra Pradesh India
Tel +91 40 6667 2000 Fax +91 40 6667 2222 e-mail [email protected] website www.tcs.com Registered Office Bombay House Homi Mody Street Mumbai 400 001
IBS HYDERABAD
CERTIFICATE
This is to certify that the thesis titled “Trade Financing: Navigation of Emerging and
Developed economies during global Economic crisis” is a bonafide work done by Mr. ANGIR
GUPTA, Enrolment No. 09BSHYD0097, Batch 2009-11 in partial fulfilment of the
requirements for the award of the degree MBA and submitted to the IBS Hyderabad.
This work was not submitted earlier at any other University or Institute for the award of the
degree.
Faculty Guide:
Prof. Manas Ranjan Pradhan,
IBS Hyderabad
Project Coordinator:
Prof. Hilda Amalraj,
IBS Hyderabad
SIP 2010 – Trade Financing: Navigation of Emerging and Developed economies during global economic crisis
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I. Acknowledgements
I would like to take this opportunity to thank all those who helped me in the successful completion of my
Summer Internship Program (SIP).
My Summer Internship Program at Tata Consultancy Services has been a rewarding experience. The
project undertaken during the internship was regarding ―Trade Finance‖.
First of all, I would like to thank Dr. V.P Gulati, Vice President and Head, Tata Business Domain
Academy, Tata Consultancy Services, for giving me an opportunity to work in the company, TATA
Consultancy Services and for providing his valuable guidance and support throughout the course of the
internship program.
I am immensely thankful to Prof. Manas Ranjan Pradhan, my faculty guide, for being a guiding force
in leading me through this immense learning project.
I am most grateful to Mr. Tushar Bisht, my mentor and company guide. He has been a constant source
of inspiration at each and every step of my research work and had always extended his valuable inputs
and guidance regarding my project.
I would also like to thank all the other mentors at TCS with whom our team worked.
Finally I would like to thank my friends and fellow interns at TCS who provided valuable inputs
throughout my internship, which helped me in formulating a comprehensive report.
SIP 2010 – Trade Financing: Navigation of Emerging and Developed economies during global economic crisis
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II. Declaration
This is to certify that the thesis titled ―Trade Financing: Navigation of emerging and developed
economies during global economic crisis” is a bonafide work done by Mr. ANGIR GUPTA, Enrolment
No. 09BSHYD0097, in partial fulfillment of the requirements of MBA Program and submitted to IBS
Hyderabad.
I also declare that this project is a result of my own efforts and that has not been copied from anyone and I
have taken only citations from the literary resources which are mentioned in the Bibliography section.
This work was not submitted earlier at any other university or institute for the award of the degree.
Place: Hyderabad (ANGIR GUPTA)
Date: May 14, 2010
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III. Abstract
This report presents the work done at the TCS Business Domain Academy, Hyderabad in the Summer
Internship Program, 2010. The different tasks like Asset Review, Asset development and the Research
Project work were done in this period.
Summer Internship Program at TCS is divided into three phases and each phase lasted for 4 weeks,
namely:
Phase I: Asset Review – Three Certificate courses in Wholesale Banking: Products and services,
Wholesale Banking: Trade Finance, Governance systems.
Phase II: Asset Development – Certificate course in Trade finance Advanced
Phase III: Research Project - “Trade financing: Navigation of Emerging and Developing economies
during recent global economic crisis”
The project topic is “Trade financing: Navigation of Emerging and Developed economies during global
economic crisis”. Trade finance is the blood and soul of the international trade, since around 80 to 90% of
the world trade relies on some form of trade finance. The financing of the trade become more crucial
during the times of economic crisis. The blockage of the free flow of the credit from the banks to the
exporters/importers lead to total disruption of the trade process, thereby affecting the company’s/
country’s growth. If this situation persists for a long time, the economic crisis can lead to a financial
Contagion, deepening and prolonging the recession. During the recent crisis, some companies/economies
manage to navigate safely and able to increase its market presence, to emerge as a global player.
This paper (Research Project) aims to study the trade financing options in the developing/emerging and
the developed countries, and perform a comparative analysis. It also investigates how exporters/
corporate and the SMEs manage to get their trade financed during the recent global crisis, measures to
navigate out of this crisis. It discusses the scope and advantage of the usage of IT products in trade
finance, proposed an IT solution (TradFinc) to trade finance by the help of a CASE STUDY, and finally
made recommendations to the TCS about the improvement of its IT products/ solutions.
By doing this project, I have suggested measures to navigate out of the financial economic crisis,
proposed a sample IT solution in form of case study, brought improvement areas into limelight, so as to
improve the overall trade finance solutions, and gave recommendations to a similar solution by TCS.
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IV. Executive Summary
I, Angir Gupta, a student of IBS Hyderabad, did my Summer Internship training, for Tata Consultancy
Services (TCS), one of the leading IT Consultancy companies in the world. I worked in Tata Business
Domain Academy (TBDA), a department under TCS, which deals with training in domain assets, by
creating certification courses, and hosting of e-learning programs on the portal.
I worked for a project entitled “Financial technological Centre – Portal Development”. I have
performed different tasks of Asset Review, Asset Development and submitted a Research Work during
this period. For the Asset Review, I have reviewed the 3 Certification courses of Banking and Financial
services (BFS). Under the Asset Development phase, I have developed an entire certification course on
Trade Finance Advanced Level 3, including the Word documents, presentation files, Quizzes and
glossary.
I have submitted a Research work titled - “Trade financing: Navigation of Emerging and Developing
economies during recent global economic crisis”
Trade finance is the blood and soul of the international trade, and becomes more crucial during the times
of economic crisis. The blockage of the free flow of the credit from the banks to the exporters/importers
lead to total disruption of the trade process, thereby affecting the company’s/ country’s growth. Some
companies managed to navigate safely during the global recession of 2008.
I did a Comparative analysis to study the trade financing options in the developing/emerging as well as
developed countries. I investigated how exporters/ corporate and the SMEs manage to get their trade
financed during the recent global crisis. I have suggested some solid measures to navigate out of this
crisis. I covered the scope and advantage of the usage of IT products in trade finance.
Since TCS has different clients in this domain area, I proposed an IT solution (TradFinc), an integrated
end to end platform in form of a CASE STUDY. I also made recommendations to TCS trade finance
solution, TCS BαNCS Trade Finance regarding its improvement, to increase TCS clientage. An
analytical model can be developed in the future based upon the findings from my research work.
I can work on similar lines in future, and can publish Research papers and White papers on national/
international level.
I also got certified with Wholesale banking Certification course from TCS, with Grade B, during this
period.
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V. Table of Contents
I. Acknowledgements........................................................................................................................... i
II. Declaration ...................................................................................................................................... ii
III. Abstract ...................................................................................................................................... iii
IV. Executive Summary .................................................................................................................... iv
V. Table of Contents............................................................................................................................. v
VI. List of Figures............................................................................................................................. vi
VII. List of Tables .............................................................................................................................. vi
VIII. List of Abbreviations ................................................................................................................. vii
IX. Company Profile ...................................................................................................................... viii
1. Introduction ..................................................................................................................................... 1
1.1. Purpose of the report ................................................................................................................ 1
1.2. Scope of Report ....................................................................................................................... 1
1.3. Purpose of Project .................................................................................................................... 4
1.4. Scope of Project ....................................................................................................................... 5
1.5. Limitations of the Project ......................................................................................................... 5
1.6. Methodology ............................................................................................................................ 5
1.7. Learning................................................................................................................................... 5
1.8. Literature Survey ..................................................................................................................... 6
Main Text................................................................................................................................................ 7
2. Phase 1: Asset Review and Learning ................................................................................................ 9
3. Phase 2 - Asset Development ......................................................................................................... 15
4. Phase 3 - Research Project ............................................................................................................. 21
4.1 Study of Trade Finance .......................................................................................................... 25
4.2 Trade Finance for exporters/corporate and small and medium enterprises ............................... 39
4.3 Trends/Use of Instruments in developing and developed economies ....................................... 47
4.4 Navigation out of the crisis ..................................................................................................... 68
4.5 IT Products in Trade Finance.................................................................................................. 75
4.6 Case Study: TradFinc ............................................................................................................. 78
4.7 Recommendations for TCS Solution ....................................................................................... 84
5. Annexure ....................................................................................................................................... 86
6. Glossary [7]
..................................................................................................................................... 93
7. Bibliography .................................................................................................................................. 94
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VI. List of Figures
Figure 1: Phases of SIP at TBDA, TCS .................................................................................................... 7
Figure 2: Gantt chart for the SIP .............................................................................................................. 7
Figure 3: Asset Review Sub tasks ............................................................................................................ 9
Figure 4: Traditional to Supply Chain Finance and Open Account trade ................................................. 26
Figure 5: Risk Ladder ............................................................................................................................ 35
Figure 6: Change in value of trade finance by Customer Segment .......................................................... 39
Figure 7: Short Term Export Credit Insurance........................................................................................ 45
Figure 8: SWIFT year-on-year growth in trade finance messages ........................................................... 52
Figure 9: Growth in World merchandise exports trade by region (% change in Dollar values) ................ 54
Figure 10: Trends in growth of trade volume (% change) ....................................................................... 59
Figure 11: Sharp drop in Trade Finance (Change in the ratio of insured export credit to export) ............. 64
Figure 12: Countertrade used in the Asia-Pacific region ......................................................................... 72
Figure 13: IT service providers and their products.................................................................................. 75
Figure 14: Open Account Suite (Bolero) ................................................................................................ 76
Figure 15: Letter of credit/ Documentary credit Suite (Bolero) ............................................................... 76
Figure 16: TradFinc - End to End integration of Global Trade Services .................................................. 81
Figure 17: DAR Report sample .............................................................................................................. 90
Figure 18: Asset Review Tracker ........................................................................................................... 91
Figure 19: Asset Development Tracker .................................................................................................. 92
VII. List of Tables
Table 1: Deliverables to Domain Academy ............................................................................................ 11
Table 2: Restructuring of Courses .......................................................................................................... 12
Table 3: Development of Chapters ......................................................................................................... 13
Table 4: Development: Trade Finance Advanced ................................................................................... 15
Table 5: Advantages and Risks in Open Account for Buyer and Seller ................................................... 27
Table 6: Pros and Con of the Open Account........................................................................................... 28
Table 7: Pros and Con of the Letter of Credit ......................................................................................... 29
Table 8: Pros and Con of the Documentary collection ............................................................................ 29
Table 9: Pros and Con of the Export credit Insurance ............................................................................. 31
Table 10: Trade developments in a country with financial crisis ............................................................. 62
Table 11: Measures implemented during Recession ............................................................................... 65
Table 12: Trade Finance Facilitation Programs – Mid-2008 to Mid-2009 ............................................... 71
Table 13: Measures and their Scope in region ........................................................................................ 73
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VIII. List of Abbreviations
ADB Asian Development Bank
AFP Association for Financial Professionals
BAFT Bankers Association for Finance and Trade
BIS Bank of International Settlement
EBRD European Bank for Reconstruction and Development
GTA Global Trade Alert
ICC International Chamber of Commerce
IDB Inter-American Development Bank
IFC International Financial Corporation
IFSA International Financial Services Association
IT Information Technology
SIP Summer Internship Program
SMEs Small and Medium Enterprises
SWIFT Society for Worldwide Interbank Financial
Telecommunication
TBDA Tata Business Domain Academy
TCS Tata consultancy services
UCPDC Uniform Custom and Practice for Documentary Credit
WTO World Trade Organization
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IX. Company Profile 1
Tata Consultancy services (TCS) is one of the leading IT Consultancy companies in the world. TCS is
providing its expertise to many of the world’s largest companies in the areas of IT Services, Business
Solutions, Outsourcing and Consultancy. TCS provides a comprehensive range of services & solutions for
the clients to focus on their core businesses. Such engagements require extensive and updated knowledge
of client business domain.
TCS has the lineage of Tata Group, one of India’s largest industrial conglomerates and most respected
brands. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled services delivered through
its unique Global Network Delivery Model™, recognized as the benchmark of excellence in software
development. TCS has over 160,000 of the world's best trained IT consultants in 42 countries. Financial
Information: Revenue of over $6.3 billion (fiscal year ending 31 March, 2010). [1]
TCS is headquartered in Mumbai, and operates in more than 42countries and has more than 170 offices
across the world. Natarajan Chandrasekaran is the Chief Executive Officer (CEO) and Managing Director
of the company.TCS is the world’s first organization to achieve an enterprise-wide Maturity Level 5 on
CMMI® and P-CMM® based on SCAMPISM, the most rigorous assessment methodology.TCS helps
clients optimize business processes for maximum efficiency and galvanize their IT infrastructure to be
both resilient and robust. TCS offers variety of solutions like IT Services, IT infrastructure services,
Enterprise solutions, Consulting, Business process outsourcing, Business process outsourcing, etc.
TCS helps clients from various industries solve complex problems, mitigate risks, and become
operationally excellent. Above 40% of the revenue generated by the gamut of services provided by TCS
is contributed by the BFSI vertical (Banking, Financial Services and Insurance). More than 33% of the
total employees of TCS are working on the BFSI projects. Therefore in view of the role of BFSI and the
employees working on such projects, FTC (Financial technology centre) was formed.
To build such domain knowledge, TCS piloted Financial Technology Centre (FTC) in July 2005 focusing
on banking and financial services (BFS). The success of FTC prompted expansion into other industries in
mid-2007, including insurance, e-governance, telecom, Life sciences & Healthcare, Energy Resources &
Utilities, Retail, Manufacturing, Hi-tech, Travel Transportation & Hospitality etc.
FTC got re-christened as TCS Business Domain Academy (TBDA) during April 2009 and is now creating
assets for other industry verticals also through its Domain Competency Centre (DCC) arm.
1 The Corporate facts and other information about TCS is taken from www.tcs.com
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1. Introduction
1.1. Purpose of the report
The main purpose of Report is to give reader an overview regarding the work done in Summer Internship
Program.
1.2. Scope of Report Report covers the entire work done during Summer Internship Program in TCS.
It briefs about the progress of three phases of SIP in TCS in a systematic manner.
Below given is the phase wise work done during SIP.
PHASE I
Asset Review
Following tasks were assigned and completed in this phase:
To read and understand the basic concepts of 3 Certification Courses provided by Tata
Business Domain Academy.
To get the certification by giving the tests of individual modules and a final certification
test of 100 marks.
To review all 3 courses entirely and find the discrepancies and give recommendations if
any. A total number of 468 Review comments have been logged out of which 382
Review comments have been accepted.
To add some questions to existing question bank for chapters of the 3 Certification
Courses. A total number of 113 questions were added to the question bank.
The details are explained in main text.
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PHASE II
Asset Development: Trade finance Advanced
Following work was done during phase:
Development of following documents for each chapter was done:
1. Word document
2. Power point Presentation
3. Hot Potatoes File of Question bank with minimum 15 questions
4. Word document of Questions and Key
5. Glossary
Total 11 chapters have been developed. Chapters are clubbed together in a systematic fashion so as form
logical modules out of them. The logical clubbing is as follows
Overview of Foreign Trade– 1 Chapter
Domestic Trade finance Laws – 1 Chapter
International Trade theories and facilitation – 3 Chapters
Terms of trade and documentation – 2 Chapters
Risks involved in trade finance – 1 Chapter
Uniform customs and practice (UCP) 600 – 2 Chapters
Trade Finance: IT products- 1 Chapter
Total 11 chapters are further modularized. The details are explained in main text.
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PHASE III
Research Project: “Trade Finance: Navigation of Emerging and Developed economies during the
global economic crisis “.
Trade finance is the blood and soul of the international trade, since around 80 to 90% of the world trade
relies on some form of trade finance. During the global economic crisis, this financing becomes difficult
due to non availability of the credit. Since the countries/companies/small and medium enterprises relies
on this finance, blockage of it has disrupted the country’s trade and growth performance, and possibly
exacerbating the crisis.
This paper (Research Project) aims to study the trade financing options in the developing/emerging and
the developed countries, and perform a comparative analysis. It also investigates how exporters/ corporate
and the SMEs manage to get their trade financed during the recent global crisis, measures to navigate out
of this crisis. It discusses the scope and advantage of the usage of IT products in trade finance, proposed
an IT solution (TradFinc) to trade finance by the help of a CASE STUDY, and finally made
recommendations to the TCS about the improvement of its IT products/ solutions.
By doing this project, I have suggested measures to navigate out of the financial economic crisis,
proposed a sample IT solution in form of case study, brought improvement areas into limelight, so as to
improve the overall trade finance solutions, and gave recommendations to a similar solution by TCS.
The project is divided into the following parts or Stages.
1. Study of Trade Finance
a. Importance of Trade Finance
b. Trade Finance Instruments: Typology and significance
c. Risks involved in trade finance
d. Classification of Instruments by transaction volume
2. Trade finance for exporters/corporate and small and medium enterprises
a. Trends and patterns in trade finance during recent economic meltdown
b. How the companies, SMEs and the exporters/importers managed to get their trade
financed during the crisis period?
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3. Trends/Use of instruments in Developing and Developed economies
a. Trends/Use of instruments in developing and developed economies
b. Trade Finance during financial crisis
c. Trade Pattern (Exports/ Imports) during the economic crisis
d. Trade Credit during the recession
e. Impact of the recent economic crisis on Trade Credit
f. Measures taken by government and its Impact
4. Navigation out of the crisis
5. IT products in trade finance
6. Case Study
7. Recommendations for TCS Solution
1.3. Purpose of Project
Main Objective:
This paper (Research Project) aims to do the comparative analysis of the trade finance options in the
developing/emerging and the developed countries.
Ancillary Objectives:
How exporters/importers manage to get their trade finances during the recent global crisis,
Measures to navigate out of the crisis,
IT products used in the trade finance, and
Recommendations to TCS about the improvement of their products, to serve its clients better in
future.
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1.4. Scope of Project The entire study is based on my asset development topic: Trade Finance Advanced.
However it covers the recent global crisis time period with findings and recommendations making it a
complete project to look at Trade financing options at local/global perspective. Also IT products involved
in the trade finance are discussed and some recommendations have been given.
1.5. Limitations of the Project No matter how much work is done, there is still the scope of improvement in the research.
The project was selected keeping in mind two constraints- a) Time b) Scope
The project doesn’t deals with the primary data.
This Analysis is constraint to the time and resources such as access to some costly databases for the
countries and the company specific data. And hence the Research project is limited to data provided by
WTO Reports, different surveys done over global banks by international bodies like ICC, BAFT, and
AFP etc. Data has to be compiled from within these reports only.
1.6. Methodology The technique of secondary data collection is used for complete research process. It includes:
1. Surveys on Trade finance by ICC, BAFT, and AFP etc.
2. Online data collection from WTO reports
3. Research papers, white papers and journals
4. Online data collection for different IT service providers and products
1.7. Learning
The research work enhances my scope to work in the similar lines in future, and to present them
in the form of Research papers and White papers on national/ international level
An analytical model can be developed in future based upon the findings from the research work
Research methodology can be applied to the ―Management Research Project‖, which is an
integral part to fulfill the requirements of MBA, and performed in the last Semester.
Learned how to structure the research, analyze the broad issues and gradually focus on to the
main topic of the research.
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1.8. Literature Survey
Various survey reports, international trade body websites, research papers, white papers and journals are
read on the topic Trade finance.
Trade finance refers to the financing of import and export of goods and services in international trade.
Business across the globe is carried by import and export of goods and services as part of their
professional activities. These international trade transactions require facilitation of payment between
various concerned parties and complex structured financing is required through governments and various
financial institutions and banks. The main aim of trade finance is to promote international trade by
making available credit extensions or financing to meet the exporters’ and importers’ requirements. Trade
Finance acts as a boon for the small and undercapitalized businesses that have reached their credit limits.
The self-liquidating feature ensures that such business concerns get financing from the banks in form of
trade finance.
Trade finance becomes more crucial in times of economic crisis, where there is crunch of liquidity in the
market and there is higher growth rate of defaults and risks.
How technology can leverage Trade Finance:
Technology has changed the face of doing business in the past few years. Considering the ever growing
demand by the wholesale banks and financial institutions, IT solution vendors have prepared various IT
products to provide an integrated end to end solution covering all the minute aspects of trade. These
products apart from traditional pre shipment and post shipment financing issues also perform the
document and risk management.
The IT service providers can leverage by providing best solutions to their clients, by customizing the
different aspects as per the client’s requirements, eventually increasing their reach in the market, by
making them popular. Due to all the above reasons, I have taken up this study for my project.
This project analyzes the trade financing patterns both in emerging and developed economies during the
recent crisis, compares the trends with pre crisis and post crisis scenario.
The project aims to find out the trends in the trade financing activities, measures to come out of it, role of
IT products in the trade finance, and finally making recommendations. The findings and
recommendations can come handy for the companies and the TCS in particular if they incorporate them.
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Main Text
This section of report aims to describe in detail the works that have been done in Summer Internship
program.
The Summer Internship Program at TCS Business Domain Academy, Hyderabad is divided into 3 phases.
Figure 1: Phases of SIP at TBDA, TCS
As shown in the figure, an Intern has to undergo the above 3 phases, with certain deliverables to be
supplied to company. The First phase is of Asset Review, which includes the study of the asset, review
of asset, addition of questions in the quizzes. The second phase, i.e., Asset Development includes the
development of the new course, and the third phase of Research Project includes the research on the
allotted topic.
The three phases belong to the same Domain Area. i.e., Wholesale Banking. The Trade finance
also comes under the scope of Wholesale banking. The development and the Research project
work is performed simultaneously. The Gantt chart for the SIP is provided here.
Figure 2: Gantt chart for the SIP
Asset Review
Asset Development
Research Project
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PHASE 1
ASSET REVIEW
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2. Phase 1: Asset Review and Learning
TCS Business Domain academy (TBDA) deals with training in domain assets, by creating certification
courses, and hosting these e-learning programs on the portal. As per the quality cycle, there is an annual
review and up gradation of all the domain assets present in the portal. During SIP, intern is given domain
courses/assets (Certification course) for review.
In this first phase of the Summer Internship Program ,which is of 4 weeks, an intern has to do the
following tasks.
Figure 3: Asset Review Sub tasks
I have reviewed the following 3 courses in this phase of Asset Review:
1. Certificate in Wholesale Banking: Products and services – Level 1
2. Certificate in Wholesale Banking: Trade Finance – Level 2
3. Certificate in Governance Systems – Level 1
The above 2 courses of Wholesale banking: Products and services and Trade finance gives the overview
how wholesale banks in particular comes to the rescue of exporters/small and medium enterprises, when
exporters/importers trade their goods and services to the counterparties located in some other country.
Asset
• Study the Asset
•Review the Asset
Review
•Certification test
•Restructure of the course, if needed
•Draft of some chapters, if needed
Sub tasks
•Add questions in quizzes
•Modifications done after the Mentor review
•Deliverables to be submitted on time
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The 2nd
course i.e. Wholesale Banking: Trade Finance covers the basic concepts of Trade finance. It
covers the following topics:-
Different types of payment options available to the parties involved in the trade,
Different types of financing instruments with sub-types,
Documentation needed in trade,
Intricacies involved during the pre shipment and the post shipments,
Different types of risks and their mitigation,
Concepts of the working capital management, cash management, factoring/forfeiting and
securitization.
These 2 courses lay the basic foundation of my research work. They have helped me to obtain the
background knowledge of the trade financing activities.
The details of all the three courses have been provided in Annexure [8]
.
A. Study of the asset:
In this stage I studied allotted 3 courses, and got certified in the course of Wholesale Banking V 2.0,
with B grade. Certification in Wholesale banking V2.0 is the parent course for the allotted 2 courses
of wholesale banking.
B. Suggestions & recommendations:
Suggestions and recommendations have been made in 3 assets. Following deliverables were
submitted to the domain academy during this phase:
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Table 1: Deliverables to Domain Academy
Tasks Asset 1 - Wholesale
Banking: Products and
Services
Asset 2 - Wholesale
Banking: Trade
Finance
Asset 3 -
Governance
Systems
DOC PPT QUIZ DOC PPT QUIZ DOC PPT QUIZ
No. of
recommendations/
Suggestion
117 56 19 87 66 24 38 39 22
Total No. of
Review
Comments
192
177
99
Review
Comments
accepted
87 45 19 65 51 24 30 39 22
Total No. of
Review accepted
151 140 91
The table contains the total number of Reviews comments delivered, and the total number of review
comments accepted. These comments were written daily on an Asset Review tracker, PF3030A template
sheet, which is reviewed by the company mentor for closing. Also DAR (Daily activity Report) is filled
to record the daily activities of the Intern.
The review comments were filled in the PF3030A template, used by TBDA. The Sample Asset review
tracker (PF3030A template), and the DAR are provided in the Annexure. [10]
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C. Restructuring of the Courses
The courses of Certificate in Wholesale Banking: Products and Services and Certificate in Wholesale
Banking: Trade Finance have been restructured according to the academy standards and requirements.
Table 2: Restructuring of Courses
Tasks Asset 1 - Wholesale
Banking: Products and
Services
Asset 2 - Wholesale
Banking: Trade Finance
Asset 3 - Governance
Systems
Study
material
Redrafted
28
pages
30
slides
33
questions
28
pages
14
slides
15
questions
10
pages
16
slides
22
questions
Study
material
merged
18
pages
20
slides
30
questions
- - 10
questions
16
pages
20
slides
10
questions
Total No. of Pages Added in all the three courses = 28 + 28 + 10 = 66 pages
Total No. of Slides Added in all the three courses = 30 + 14 + 16 = 60 slides
Total No. of Questions Added in all the three courses = 33 + 15 + 22 = 70 questions
D. Development of some chapters
The 2 new chapters were developed to be included in the course. The total numbers of deliverables given
are:-
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Table 3: Development of Chapters
DOC file 28 pages
PPT file 25 slides
Quiz file: Products and services 22 questions
Quiz file: Trade Finance 21 questions
After the review of the above courses, the review comments have been checked by respective course
owners, after which final closure is performed.
E. Upload of the course on the Portal
After the course was reviewed in totality by passing through different stages, the courses were finally
uploaded on the TCS Business domain Academy Web Portal.
Learning from Asset Review Phase
The Exposure to different Banking and Financial Sector (BFS) courses which are applicable in the market
Got Certified in the course of the Wholesale banking from TCS, with Grade B
The first hand experience of delivering the work in stringent conditions
Gained knowledge about the concepts included in 3 certification courses of Wholesale Banking
It provided me a sound background to facilitate the research on the topic allotted to me.
Real corporate exposure, which will help my working in future
Valuable insights about the stringent quality processes used in an IT company
The Course outline and the description of the chapters of all the three courses have been provided in
Annexure. [11]
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PHASE 2
ASSET
DEVELOPMENT
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3. Phase 2 - Asset Development
This phase involves developing an e-learning certification course for TCS associates in 4 weeks. During
this stage the interns have to develop the course document containing
The Word documents for each chapter
Presentations for the chapter,
Quizzes (containing at least 15 questions) from each chapter
Glossary
The asset is developed as per the client’s requirements, and caters to various associates working in
various departments of TCS. This asset gets uploaded on the TBDA portal.
For asset development I have been allotted to develop the course on Certificate in Wholesale Banking:
Trade Finance Advanced – Level 3. The course outline contains 11 chapters which are completed in all
aspects.
Table 4: Development: Trade Finance Advanced
Certificate in Wholesale Banking: Trade Finance Advanced
Chapter Developed 11
Number of Pages Developed (Doc file) 151 Pages
Number of PPTs developed 158 Slides
Number of Quiz questions 166 Questions
TBDA Standards to be followed Different Font usage and font sizes, using corporate
templates for making the documents, Appropriate
headers and footers, ensuring each chapter conform
to the highest quality standards as put by Techcom in TCS.
In the Table shown above, the progress report of the development has been shown mentioning the Total
number of pages developed, total number of slides in the presentation and the total number of quiz
questions, keeping the TBDA standards in mind.
The development is on the same line with the Research topic. Hence the Development and the literature
review were done simultaneously. The Advance finance concepts of some chapters proved advantageous
to prepare the detailed outline of the project.
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The various chapters important topics developed in this phase are mentioned in the Annexure. Also main
topics have been mentioned to give the overview of the course.
The brief overview of each chapter is described below.
Chapter 1 –Meaning of Foreign Trade
In general terms, trade between two or more nations is called foreign trade or international trade. This
involves the exchange of goods and services between the two nations. In today’s era of globalization, no
country can remain in isolation. When the citizens/institutions/companies of one nation exchange goods
and services with the citizens of another nation, it is called foreign trade; for example, India's trade with
USA, UK, Australia, France and Pakistan. Foreign trade is also known as external trade. In this chapter,
the foreign trade, scope of foreign trade, importance of foreign trade, and terms of delivery of goods, risks
involved in foreign trade, balance of trade and balance of payments has been discussed.
This session provides a brief overview of all chapters in the certification course.
Chapter 2 – Trade Finance Laws
Trade finance is regulated by laws prevailing in both the importer and exporter countries. The laws
provide certain guidelines to the companies/institutions and vary from country to country. Trade finance
laws include the appropriate rules and customs for handling trade between countries or between
companies across borders that includes rules for transfer of goods, transfer of payment, settlement, dispute
resolution etc. In this chapter, it has been discussed that how these laws restrict the scope of the trade and
cover few important acts and the export-import policy of the country.
Chapter 3 – International Trade Theories
Various theories of international trade have been developed from time to time, to explain the diverse ideas
of exchange of goods and services across the global boundaries. Trade theory is supposed to provide the
insights into mechanisms of international trade and determinants of trade patterns. In this chapter different
theories of international trade and how these theories does affect the overall trade finance for a corporate
and institution has been discussed.
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Chapter 4 – Terms of trade and INCOTERMS
In the world of globalization, uniform terms and conditions need to be broadly and clearly specified in the
contract. The uniform practice helps in definition and recognition to avoid embarrassing re-negotiations
or loss of profits. Terms of trade are a critical component of international contract negotiations. These are
used to indicate responsibility and liability of both the seller and buyer in the movement of the goods and
are globally recognized and accepted. In this chapter, various terms of trade and the INCOTERMS in
detail, have been discussed.
Chapter 5 – Trade Documents
International or domestic trade involves various types of trade documents that need to be produced while
making transactions. They help to identify the import and export items in terms of description; quality,
value and ownership for both trade as well as control purposes. They also facilitate in the tracking of
cargo for the importers and exporters about their shipments are and provide them with the information
that when they will arrive at the final destination. In this chapter, various types of trade documents have
been discussed.
Chapter 6 – WTO and its impact
In an environment of increasing international trade, monitoring and public commitments to multilateral
free trade negotiations becomes necessary and is ensured by World trade organization (WTO), in order to
prevent the protectionism. WTO acts as a trade watchdog, and it provides a vehicle for committing in a
legally binding manner to trade and financial services. In this chapter, WTO functions and its impact on
the international trade in particular, has been discussed.
Chapter 7 – Trade Finance facilitators
In an environment of increasing international trade, trade credit is the lifeline of the business. Facilitation
of the trade is critical and it minimizes the transaction costs and complexity of international trade for
businesses. Trade facilitation is made ensured by facilitators like Export-Import Banks, Export credit
Guarantee Corporation etc. These bodies extend credit, and assist the exporters and importers from time
to time. In this chapter, different trade facilitators, their coordinate with the government, to assist the
international trade, has been discussed.
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Chapter 8 – Risks involved in Trade Finance
Success in international trade depends, largely, on the careful evaluation of risks and then attempting to
minimize or eliminate the risks to the greatest possible extent. Risks can be reduced, if not ruled out, by
covering the risks to the extent possible. In this chapter, different types of risks involved in trade finance,
their effect on the trade, has been discussed. Also the risk management and the risk transfer process have
been discussed.
Chapter 9 – UCP Overview
Exporter and importer reside in different nations. Each nation has its own laws. Contract in a country is
not only governed by the law of the land but also commercial practices of that country. In order to guard
against confusion and misunderstanding, opening and negotiation of letter of credit are governed by
―Uniform Customs & Practice for Documentary Credits‖ commonly known as UCP. In this chapter, the
importance of UCP, its help in the formulation of the letter of Credit, has been discussed.
Chapter 10 – UCP 600 Parts
Uniform customs & Practice for Documentary Credits (UCP 600) forms an important part in the
regulation of the letter of credit. It aids the wholesale banks, importers and exporters in letter of credit
transactions. In the previous chapter we have learnt about the salient features of UCP, structure of the
UCP and some of the important articles included in it. In this chapter, different parts included in the UCP,
how various documents are examined, different issues involved etc, have been discussed.
Chapter 11 –Trade Finance: IT Products
With the adoption of new technological tools and e-commerce, companies are now achieving new levels
of cost effectiveness and efficiency in their business. Manual processes are being replaced by paperless e-
trade services. Providing Speed, accuracy, access to various stakeholders these tools are changing the
landscape of how business is being done and how trade financial services can support these businesses.
Various trade finance products have been produced by different IT service providers. In this chapter,
various trade finance products offered and their help to the Trade finance, have been discussed.
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Asset Development Tracker
The asset development tracker is a template assisting the coordination between the Intern and the
Company guide. It is filled with the Intern who is developing the Asset. The Progress is constantly
tracked by the mentor, review comments are closed and the suggestions are provided. The Asset
development tracker sheet is shown in Annexure. [12]
In the Asset Development tracker, I have suggested for some changes to the Domain Academy, which are
as follows:
In the Course Outline, the proposed date and the Date of Completion columns have been added.
In the Chapters sheets, the No. of pages Box has been added to tell the no. of documents present
in each chapter DOC file.
Learning from Asset Development Phase
Collected the related data and developed the Course of the Level 3 completely, which will be
used by the Academy and its associates in future. This enhanced my scope to work in the similar
lines in future, and will publish Research papers and White papers on national/ international level
Detailed literature review will enhance the learning, ultimately helping me to work for my Project
work
Working in the structured methodology to create a deliverable, has helped me to attune my
working style to a more professional mode.
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PHASE - III
RESEARCH
PROJECT
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4. Phase 3 - Research Project
Title of the Project: “Trade Finance: Navigation of Emerging and Developed economies during the
global economic crisis “
This paper (Research Project) aims to study the trade financing options in the developing/emerging and
the developed countries, and perform a comparative analysis. It also investigates how exporters/
corporate and the SMEs manage to get their trade financed during the recent global crisis, measures to
navigate out of this crisis. It discusses the scope and advantage of the usage of IT products in trade
finance, proposed an IT solution (TradFinc) to trade finance by the help of a CASE STUDY, and finally
made recommendations to the TCS about the improvement of its IT products/ solutions.
By doing this project, I have suggested measures to navigate out of the financial economic crisis,
proposed a sample IT solution in form of case study, brought improvement areas into limelight, so as to
improve the overall trade finance solutions, and gave recommendations to a similar solution by TCS.
The project is divided into the following parts or Stages.
1. Study of Trade Finance
a. Importance of Trade Finance
b. Trade Finance Instruments: Typology and Significance
c. Risks involved in Trade finance
d. Classification of Instruments by transaction volume
2. Trade Finance for exporters/corporate and small and medium enterprises
a. Trends and patterns in trade finance during the recent economic meltdown
b. How the companies, SMEs and the exporters/importers managed to get their trade
financed during the crisis period?
3. Trends/Use of instruments in Developing and Developed economies
a. Trends/Use of instruments in developing and developed economies
b. Trade Finance during financial crisis
c. Trade Pattern (Exports/ Imports) during the economic crisis
d. Trade Credit during the recession
e. Impact of the recent economic crisis on Trade Credit
f. Measures taken by the government and its Impact
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4. Navigation out of the crisis
5. IT products in trade finance
6. Case Study
7. Recommendations for TCS Solution
Area of project: Banking & Finance (BFS)
Project Objectives: Major Objective
This paper (Research Project) aims to do the comparative analysis of the trade financing options
in the developing/emerging and the developed countries.
Ancillary Objectives:
To study how exporters/corporate manage to get their trade financed during the recent
global crisis,
To study the measures implemented to navigate out of this crisis,
To study the IT products used in the trade finance, and
To make Recommendations to TCS regarding the improvement in their products, to
serve the clientage
Project Scope The entire study is based on my asset development topic: Trade Finance Advanced
However it covers pre crisis, crisis and post crisis era with findings and recommendations making it a
complete project to look at Trade financing options at local/global perspective.
Also IT products involved in the trade finance are discussed and some recommendations have been
given.
Scope Statement
The research project would deliver a thesis on Trade financing patterns during the recent global
economic crisis.
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Proposed Solution
The research studies and analyzes the trade financing patterns in the emerging and the developing
economies during the recent economic crisis. The reasoning is provided to figure out the factors
behind it. The measures of the government and its impact on the trade are highlighted.
The measures were suggested to navigate out of the financial economic crisis, proposed a sample
IT solution in form of case study, brought improvement areas into limelight, so as to improve the
overall trade finance solutions, and gave recommendations to a similar solution by TCS.
Since TCS has different clients in this domain area, I proposed an IT solution (TradFinc), an
integrated end to end platform in form of a CASE STUDY.
Methodology The above steps were taken during the research:
In depth literature review of various surveys done specific to the trade finance, journals, Research
papers, White papers etc.
Secondary Research on the data sets gathered from the surveys and the literature review
Collection of the data sets of the trade credits, usage of the trade finance instruments in different
countries
Analysis of the data, trend analysis
Learning The research work enhances my scope to work in the similar lines in future, and to present them
in the form of Research papers and White papers on national/ international level
An analytical model can be developed in the future based upon the findings from the research
work
Research methodology can be applied to the ―Management Research Project‖, which is an
integral part to fulfill the requirements of MBA, and performed in the last Semester.
Got the structures and the proper manner of how to do a literature review
Learned how to structure the research, analyze the broad issues and gradually focus on to the
main topic of the research.
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PROJECT PART 1
Study of Trade Finance
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4.1 Study of Trade Finance
1. Importance of Trade Finance
Trade finance refers to the financing provided to exporters and importers, in terms of instruments
throughout the trade cycle. Importers do not want to pay cash in advance for imported goods and
services, since it risky for them to do so. Consequently exporters have to provide the credit and secure
financing until they receive payment. Moreover exporters themselves need to finance their own
production to support their export sales. In this scenario, Wholesale banks come to their rescue which
provides them with various types of confirmed letters of credit. They book acceptance and
discounting drafts. They offer fee-based services such as providing credit and country information on
buyers.
Trade transaction involves risks ranging from Credit risk to political risk, from currency risk to
operational and legal risks. Commercial risk is one where the buyer defaults in payment or in
acceptance of goods. Moreover, international trade transactions involve an exchange rate risk, which
firms operating in domestic countries or in single currency unions are protected from. Infrastructure
risk is one occurring when trading partners operate in very heterogeneous countries, with different
financial systems or different legal systems.
Various financing instruments have been designed to assist and facilitate the parties involved in
international trade as well as mitigate the risks associated to it. Among the methods and instruments
designed to effect a payment, the most commonly used ones are open account, collection of payment
against document and letter of credit. These transfer the commercial risk from the exporter to the
importer at different stages of the transaction.
Trade financing instruments offers a high degree of security to the trade transaction and its payment.
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2. Trade finance Instruments: Typology and Significance
Figure 4: Traditional to Supply Chain Finance and Open Account trade
Open accounts
Open account transactions is a form of instrument, where due to strong trading relationships, seller
ships the goods together with the necessary documents to the buyer before the payment is made and
without any form of guarantee. The seller also sends the buyer an invoice asking for payment within
the agreed credit terms, for example, 60 days from the invoice date. Here, buyer is given a liberty to
make the payment upon receipt of the goods with no backing other than the buyer's reputation.
The open account transactions are becoming popular in trade financing, since large corporations
demand trading from their smaller suppliers in form of open account, due to fierce competition
available in the market. Even middle-market companies are embracing open account transactions.
The banks' role in these kinds of transactions is minor or non-existent. Hence, banks' trade finance
revenues are likely to decline as open account transactions take hold.
Cash in Advance
Documentary Collections
Letters of Credits
Supply Chain
financing
Open Accounts
Traditional Risk Mitigation
and financing tools
New Risk Mitigation
and Financing tools
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Open account trade has brought savings and enhanced the efficiency throughout the entire supply
chain cycle, particularly for companies with a one-to-many relationship between themselves and their
overseas suppliers.
Open account form of trading is a win-win situation for both buyers and sellers. As buyers move their
overseas suppliers from L/Cs to open account, the electronic disbursement services are reducing buy-
side transaction processing and vendor management expenses. Open account trade enables the
financial supply chain to work more in sync with the physical supply chain. By providing greatly
improved visibility and transparency, it helps promotes liquidity for all stakeholders in the purchasing
cycle.
Open account trading has many merits of inducting competitiveness in the market, by enabling the
financial supply chain in sync with the physical supply chain. Also it improves visibility,
transparency and helps to generate the liquidity in the purchasing cycle.
Despite the current economic slowdown and the liquidity crunch, open account trading will remain
the dominant terms under which the continued growth in trade will take place in the future.
Table 5: Advantages and Risks in Open Account for Buyer and Seller
Advantage to Buyer Advantage to Seller
Control over the goods None
Pays when convenient
Risk to Buyer Risk to Seller
None No control over the goods or
payment
Buyer may refuse to pay
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Table 6: Pros and Con of the Open Account
PROS CON
Boosts competitiveness in the global market Significant exposure to the risk of non-payment
Helps establish and maintain a successful trade
relationship
Additional costs associated with risk mitigation
measures
Letter of credits/ Documentary Credits
Letter of Credit (L/Cs), otherwise called as Documentary credit is “an arrangement whereby a bank
acting at the request of the customer undertakes to pay a third party by a given date according to
agreed stipulations and against presentation of documents, the counter value of goods or services
dispatched/supplied, rendered or otherwise”(UCPDC). A key principle underlying letter of credits is
that banks deal only in documents and not in goods. High degree of involvement by banks in the
documentary credit process builds in trust into the transactions.
The introduction of Letter of credits (L/Cs) and their subsequent standardization over the years in the
UCP rules provided standard rules and act as a guard against confusion and misunderstanding
between parties from different countries, thus promoting global trade. The main advantages
associated with LCs include:
Once the underlying conditions in the contract are met, there is provision of guaranteed payment.
From the supplier point of view, a L/C transfers the credit risk from the buyer to a trusted third party,
typically the buyer's own bank, although the ability to receive funds is still contingent on the
L/C s is still a dominant tool in terms of volume of transactions in south-south trading, OECD
countries and Africa, and south/southeast Asia. In case of risk scenario, L/Cs is a superior instrument
to the Export credit insurance because of the provision of assurances within the L/C documentation.
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Confirmed Letter of Credit:
It is a L/C to which is confirmed by another bank (known by the seller). This increases the credibility
of the L/C. But it is costlier to the parties as the confirming bank will command a commission.
Table 7: Pros and Con of the Letter of Credit
PROS CON
Payment made after shipment Complex and labor-intensive process
A variety of payment, financing, and risk
mitigation options available
Relatively expensive method in terms of
transaction costs
Documentary Collections
A documentary collection (D/C) is a type of trading transaction whereby the exporter entrusts the
collection of a payment to the remitting bank (exporter’s bank), which sends documents to a
collecting bank (importer’s bank), along with instructions for payment. D/Cs involve using a draft
that requires the importer to pay the face amount either at sight (document against payment) or on a
specified date (document against acceptance).Here funds are received from the importer and then
shifted to the exporter through the banks involved in the collection in exchange for those documents.
Drafts are generally less expensive than LCs.
Table 8: Pros and Con of the Documentary collection
PROS CON
Bank assistance in obtaining payment Banks’ role is limited and they do not
guarantee payment
The process is simple, fast, and less costly
than LCs
Banks do not verify the accuracy of the
documents
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Documents against Payment: - (Cash against documents)
The collecting bank releases the documents of title only when the importer has paid the bill. The exporter
keeps the control of the goods till the importer pays. If the importer refuses to pay, the exporter can take
importer to the court or sell the goods to any other buyer.
Document against Acceptance
The exporter extends credit to the importer. The bank releases the document, once importer accepts the
draft and promises to make payment to the bank at set date in future.
Once the buyer has taken the documents, exporter loses the control on the goods. The exporter runs into
risk, if importer refuses to make payment thereafter. In that condition, exporter has only one choice, i.e.,
to protest the bill and take importer to court. But this option is expensive one, if the legal structure in
other country is complicated.
Advantages to Importer:
Will receive the goods before making the payment
Least risk to importer.
Disadvantages to exporter:
No guarantee of payment by the buyer.
Legal enforcement of unpaid obligations costly and time consuming
(2) Sight draft
and documents
(2) Sight draft and
documents
Exporter
(seller)
Importer
(buyer)
Collecting/
Presenting
Bank
Remit
ting
Bank
(6) Currency
(5) Currency
Currency
Goods
(1)
Sight Draft
and
Document
in trust
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Export credit insurance
Export Credit Insurance provided by the financial agencies insures exporters against political and
commercial risks. Export credit insurance seeks to create a favorable climate in which exporters
can get timely and liberal credit facilities from banks. For this purpose, export credit insurer
provides guarantees to banks to protect them from the risk of loss inherent in granting various
types of finance facilities to exporters.
There are four types of Export Credit Insurance:-
1. Short-term Export Credit Insurance – It is used for a shorter term, generally covers the
periods of 180days and less. It provides protection for pre-shipment and post-shipment
risks.
2. Medium and long-term credit insurance This type of insurance provides protection to
the companies for financing export of capital goods and services. It is generally issued for
medium and long-term credit protection, which is usually up to 3 years.
3. Investment insurance – It is the insurance for the investments made by exporters in
foreign countries.
4. Exchange rate insurance - Exchange rate insurance covers the losses due to the
fluctuations in exchange rates between the exporters’ and the importers’ currencies over a
period of time.
Table 9: Pros and Con of the Export credit Insurance
PROS
CON
Reduces the risk of non-payment by foreign
buyers
Cost of obtaining and maintaining an insurance
policy
Offer open account terms safely in the global
market
Risk sharing in the form of a deductible
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Some Findings from the typology and their answers:
Given below are some of the common questions and explanations that answer the increasing
popularity of the Open Accounts and the decline in the usage of the LCs. [2]
Q 1: Why are the probable reasons for the companies shifting to more open account trading? What
particular advantages, does the open account offers over the Traditional L/Cs?
A 1: Advantages of the Open account:-
Inexpensive and fast way of settling the transactions from the traditional documentary credits.
Companies have fewer and strategic trading partners, with which they have built long lasting
relationships. Hence they can exercise the Open account trading.
The advantage of open account over traditional L/C is that the credit lines will not be used to
underwrite transactions.
High bank charges in case of L/Cs bring supply chain hurdles, and hence the companies have
shifted to the open account trading.
Technology advancement and the related IT products have simplified the overall process of the
documentation. Also the trade link database can facilitate them
Q 2: Does shifting to open account trading from the L/C increases the trading administration?
A 2: Shifting to the open account trading reduces the administration, matching and reconciliation of the
documentation required for each trade.
In fact, a bank is the ideal central point of data collection for purchase orders, invoices and related
documentation and thus provides a one-stop shop for administration and settlement of the trade
transactions. Open account trading certainly reduces the paperwork.
Q 3: While processing the trade, some of the trading partners are less automated than the main exporter.
Does it pose problem. And if yes, what could be the solution?
A 3: Yes, there may be problems associated with the difference in automation. The possible solution can
be use of the various levels of technology integration-from paper to electronic data interchange. Since the
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partner may be closed to the paper work, imaging technology can be a viable solution to the misery. This
is where a leading global player can provide real added value/outsourcing to all types of operations of
small and medium players.
Q 4: Is the transition from the L/C s to open account will bring an end to the L/C?
A4: No. There will probably always be a need for L/Cs. For example, it may be advisable to use L/Cs for
the first few transactions with a new trading partner, and there are some volatile markets where the
security provided by L/Cs will always be required. Some of the disadvantages of the open account will
not allow the L/Cs to terminate.
In short, considerations of cost and inconvenience in case of Letter of credits have superseded aversion to
risk, associated with the open account trading. Therefore, Open account trading is more popular.
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3. Risks Involved in Trade Finance
When the companies/SMEs/exporters are doing business/ trade across international borders, they face
several types of risks as evident in strictly domestic transactions. Risks in international trade are the major
barriers for the growth to the same. These risks ranges from Credit risk to political risk, from currency
risk to operational and legal risks.
The various types of risks that an international trade faces are divided into the following categories:
1. Credit risk
2. Country Risk
3. Exchange risk
4. Legal risk
5. Product Risk
6. Operational Risk
7. Performance risk
Credit Risk
Credit risk (also known as commercial risk) is a customer-related risk that reflects the customer’s ability
to fulfill all obligations made to its counterparty in the contract.
Country Risk
Country risk is the possibility that the country in which the bank has business dealings may experience
internal instability that reduces the offshore lender’s ability to collect in a timely manner.
Exchange rate risk
There are foreign exchange fluctuations, wherein one currency may depreciate in terms of the other or
vice versa. This fluctuation makes the delivery amount higher, which leads to default by any party. The
risk associated by this phenomenon is known as the Exchange Rate risk.
Legal Risk
When a transaction is susceptible to the changing laws and regulations in the country of the exporter and
the importer, it is known as the Legal risk. Trade products that carry legal and regulatory risk include:
letters of credit, bankers’ acceptances, documentary collections, and bank-to bank reimbursements.
Product Risk
Product risk is the risk that the structure of a certain trade product or service is inadequate or faulty.
Letters of credit, bankers’ acceptances, documentary collections, and bank-to-bank reimbursements are
trade products that have this risk.
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Performance Risks
Performance risk is the possibility that an exporter may fail to perform under the contract established with
the importer.
Risks associated with different types of Instruments
Figure 5: Risk Ladder
From EXPORTER point of view:-
Open account is the riskiest option, with Cash in advance being the safest.
From IMPORTER point of view:-
Cash in advance is the most risky option, with Open account being the safest.
Apart from the risks associated in the open account trading, they have been superseded by the
considerations of cost and inconvenience in case of Letter of credits. Therefore, in the recent times, the
popularity of the Open account trading is increasing (which is visible by the Value figures of the trade
instruments).
Open Account
Documents against acceptance
Documents against payment
Confirmed letter of Credit
Cash in advance
High Risk
Exporter
Low Risk
Low Risk
Importer
High Risk
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4. Classification of Instruments by transaction volume
(ICC Global survey 2010)
In the global survey of ICC 2010 received from the responses from 161 leading wholesale banks in 75
countries, the major volume of Exports and Imports are done with the help of Letter of Credit
(Documentary and Standby).
In terms of Volume of trade transactions, most of the trading is done via Letter of credit (53%), which is
more secured form of transaction.
In terms of Trade value, Open Accounts is still the most favorable option constituting of 80-85% trade
transactions.
Export Transaction volumes (Usage %)
(Classification by Instrument)
Commercial Letter of Credit 45
Standby letter of credit 7
Bank Guarantees 11
Documentary Collections 20
Open Account 15
Others 2
Source: - ICC Global Survey, Rethinking Trade Finance 2010
Commercial Letter of Credit
45%
Standby letter of credit
7%Bank Guarantees
11%
Documentary Collections
20%
Open Account15%
Others2%
Export Transactions Volume
Import Transaction volumes (Usage %)
(Classification by Instrument)
Commercial Letter of Credit 43
Standby letter of credit 8
Bank Guarantees 17
Documentary Collections 16
Open Account 12
Others 4
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Source: - ICC Global Survey, Rethinking Trade Finance 2010
Bank guarantees number increased from 8% in 2007, to about 12% during the meltdown, since they
provide greater security in trade, as they are designed to restore confidence by protecting the parties
against performance breaches without the need for businesses to post onerous cash deposits to secure their
performance duties.
Open Account number has decreased drastically from about 25% to 8% in terms of volume from 2007 to
the crisis period.
Commercial Letter of Credit
43%
Standby letter of credit
8%
Bank Guarantees17%
Documentary Collections
16%
Open Account12%
Others4%
Import Transaction Volumes
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Project Part 2
Trade Finance: Customer
Base
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4.2 Trade Finance for exporters/corporate and
small and medium enterprises
1. Trends and patterns in trade finance during recent economic
meltdown
According to the Global Survey of ICC 2010, 40% of respondents indicated that the trade credit lines
for corporate decreased 40% in 2009, which it must be remembered is on top of a similar sized
decrease indicated in last year’s Survey. Some 28% of respondents noted no change between 2008
and 2009. At the same time, 42% of respondents indicated that the trade credit lines for financial
institutions declined in 2009, with 30% of respondents mentioning no change between 2008 and
2009.
Figure 6: Change in value of trade finance by Customer Segment
Compiled from the below cited sources.
Source: - ICC Global Survey, Rethinking Trade Finance 2010
IMF-BAFT Trade Finance Survey, 2009
ICC Global Survey, Rethinking Trade Finance 2009
The main reasons given by the banks for difficulties in securing credit lines were the following:
76% – More stringent credit criteria being applied;
41% – Selective exiting of customer relationships due to credit deterioration;
26% – Exiting markets;
25% – Capital allocation restrictions; and
21% – Reduced inter-bank lending.
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Up until October, 2008, banks were reporting an increase in the overall value of their trade finance
business with their corporate customer base. This is particularly true with the large corporate
segment, where there was a near double digit increase over the prior year.
Source: - IMF-BAFT Trade Finance Survey, 2009
As visible from the graph, 44% of the respondents are of the view that there is a net increase in the trade
finance availability for SMEs and 57% increment for the Corporate.
Only 25% are of the view that the trade finance was decreased for SMEs and 19% for the corporate.
Source: - IMF-BAFT Trade Finance Survey, 2009
19
25
57
44
24
31
Large Corporate
SMEs
Availability of Trade Finance (2007-08)
No change Increased Decreased
49
50
24
22
27
28
Large Corporate
SMEs
Availability of Trade Finance (2008-09)
No change Increased Decreased
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The pattern got reversed itself between October, 2008 and October, 2009 when each of the corporate
sectors evaluated reported a decline in value. The most noticeable change was within the large corporate
segment with a -22 point swing in value. Various factors were propagated and are mentioned above, due
to which there was a decrement in the availability of trade finance for both corporate and SMEs, as 50%
respondents supported the view for SMEs and 49% for large corporate.
As far as the availability of the trade finance in the early 2010 is concerned, from the initial trends got, the
Respondents from different banks were of the view that the situation somewhat improved, but still there
was a decrement in the trade finance availability for both the Exporters and the large corporate.
Source: - ICC Global Survey, Rethinking Trade Finance 2010
In short, considerations of cost and inconvenience in case of Letter of credits have superseded aversion to
risk, associated with the open account trading.
Large Corporate
Exporters
40
42
32
28
28
30
Availability of Trade Finance (2009-10)
No change Increased Decreased
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The Big Question to answer: -
2. “How the companies, SMEs and the exporters/ importers managed
to get their trade financed during the crisis period?”
During the recession, the liquidity shortage and the disproportionate aversion to risk, that had driven up
interest rates on loans and advances in many countries.
The documentary credit (L/Cs) is a traditional form of international export payment and transaction,
especially in trade between distant partners. Bank guarantees were implemented as they provide greater
security in trade, as they are designed to restore confidence by protecting the parties against performance
breaches. Open account trade covers the 80-85% of world trade value.
The Customers i.e. corporate, SMEs and the exporters/importers are now shifting towards the confirmed
letters of credit, even though they previously had dealt under unconfirmed L/Cs, documentary collections
or open account. Due to the risk level present in the instruments like open accounts, unconfirmed L/Cs
they have chosen a safer option of confirmed letter of credit. Also, the bank perception of risk is leading
to a tightening of liquidity in some instances, therefore causing greater difficulty in obtaining bank
confirmations. This situation prevailed till April 2010.
According to the ICC global survey figures, 73% respondents from different banks have confirmed the
increment in the Confirmed letter of Credit.
Confirmed Letter of credit
(2009-10)
Increased 73
Decreased 27
Source: - ICC Global Survey, Rethinking Trade Finance 2010
The number of defaults and claims were quite high in the period of 2009-10. 44% of the respondents
indicated that there was an increase in the number of defaults in 2009 (while 29% said there had been a
decrease in the number of defaults in 2009 and 27% saying there was no change).
Increased73%
Decreased27%
Confirmed Letter of credit (2009-10)
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As far as the Claims under guarantees and the standby letter of credit are concerned, 44% of respondents
have gone for an increase in 2009 (with 25% reporting there was a decrease and 31% indicating there was
no change).
Source: - ICC Global Survey, Rethinking Trade Finance 2010
The big corporations are trying to simplify the trade finance processes both within the documentation
stream and within the trade finance stream. From getting a quote to sending a purchase order—and
ensuring that the details move into a letter of credit (LC) or some other instrument, they are looking for
the technology solutions by the service providers.
Credit Insurance Support:-
The support from the credit insurers proved crucial and vital for the small and medium corporate to
continue to trade and sell goods internationally. The insurance cover provided by the Export credit
insurance companies become even more important during the times if
economic crisis.
Exporters have protected themselves by purchasing Export Credit Insurance
against non-payment for his trade receivables arising from either commercial
(i.e. risks excluding political risk) or non-commercial risks. Also, exporters
got choice of selecting the type of export credit insurance, and can protect themselves from risks
associated with the non-acceptance of goods by the buyer, default on the part of the buyer to pay the debt,
the failure of foreign banks to honor documentary credits, as well as political risks associated with war,
riots and civil commotion, foreign currency risk.
Suppose an exporter is unable to cope with the lack of cash flow, and has risks of extending credit for the
contract. The wholesale bank is also not willing to lend large amount without a guarantee. The bank
Increased
44%Decreas
ed29%
No change
27%
Defaults and Discrepancies (2009-10)
Increased 44%
Decreased
25%
No change
31%
Claims under Guarantees and Standby (2009-10)
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arranged for a loan with the importer for certain per cent amount of the total contract value (Step 1) in the
figure below, if the Export Credit Insurance and Guarantee Service (ECIGS, generally backed by the
Government) provides a guarantee (Step 2).
This guarantee ensures that the bank will receive the loan value in case the buyer does not repay the loan.
Once the loan and guarantee are in place, the importer pays the exporter some amount of the contract
value (Step 3). After delivery of the goods (Step 4), the exporter claims the remaining amount of the
contract value from the bank. The bank remits the remaining amount of the contract value to the exporter
after deducting the fee payable to ECIGS (step 6).
EXPORTER IMPORTER
WHOLESALE BANK
ECIGS
1. Bank Arrange
Loan with Importer
2. Guarantee Loan
3. Down Payment
4. Delivery of goods
5. Bank pays Loan
Amt to Exporter
6. Payment of
Insurance fees
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Short term credit during 2005-2009
The Figure 7 gives the amount of the short term export credit insurance in US Million $, for the period
2005 to 2009. The export insurance increased during the period of 2008 due to the increase in the political
and commercial risks prevailing in the market after the global crisis.
Figure 7: Short Term Export Credit Insurance
Source: - ICC Global Survey, Rethinking Trade Finance 2010
The extension of the short term credit was at its peak during the recent economic crisis. It moved up at the
same time when there was a shift from the Open accounts to traditional instruments (Letter of Credits).
Risks involved in the open account have prompted increase in the Export credit insurance.
The companies, corporate and the SMEs have approached to the doors of the IFC, ADB, IDB and EBRD
etc, which took measures and economic crisis responses. The measures have been elaborated in the
section of Navigation out of the crisis, in detail.
High level of due diligence, and institutional relationships inherent in the development banks trade
facilitation programs together with quality technical assistance and training in trade finance operations
provided to their issuing banks greatly reduced the operational risks involved in the delivery of trade
finance.
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Project Part 3
Trade Finance: Trends/Use of
Instruments in Economies
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4.3 Trends/Use of Instruments in developing and
developed economies 1. Trends/Use of Instruments in developing and developed economies
Global Perspective
The above table gives the Export and Import transaction volumes of the world post economic crisis, as
acquired by the figures published in Trade finance survey of 2010 of ICC.
Export Transaction volumes (Classification by Instrument)
Commercial Letter of Credit 45
Standby letter of credit 7
Bank Guarantees 11
Documentary Collections 20
Open Account 15
Others 2
Source: - ICC Global Survey, Rethinking Trade Finance 2010
The transaction volumes of the Open account have recovered from the dismal figures of about 5% to
about 12-13% post recession. The documentary credits (i.e. L/Cs) figures somewhat remains constant
after the crisis.
Regional Perspective
North America region containing the USA, Canada affected by the global recession the most, have
encountered a major dip in case of the Open account transactions.
% breakdown, by volume for Trade finance products by region (Exports)
North America Europe Asia
Letter of Credits 65 49 53
Open Account 4 14 16
Guarantees 4 16 7
Documentary Collections 26 19 22
Others 1 2 2
Source: - ICC Global Survey, Rethinking Trade Finance 2009
Import Transaction volumes (Classification by Instrument)
Commercial Letter of Credit 43
Standby letter of credit 8
Bank Guarantees 17
Documentary Collections 16
Open Account 12
Others 4
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Asian economies containing the developing countries of China and India, having a adequate domestic
demand and long lasting relationships between the buyer and seller, were least affected by the Economic
crisis.
Asia’s exports Export transaction volume of the Open account was 16% which was much higher than the
4% of North America.
% breakdown, by volume for trade finance products by region (Imports)
North America Europe Asia
Letter of Credits 71 45 54
Open Account 5 10 9
Guarantees 3 21 15
Documentary
Collections
20 19 16
Others 1 5 6
Source: - ICC Global Survey, Rethinking Trade Finance 2009
North America breakdown in terms of Imports is somewhat similar to the exports. The open account is
minimal in case of it. On the other hand, the transaction by the Letter of Credits and documentary
collection is enormous.
Asia’s and Europe’s Import transaction volume of the Open account is somewhat similar.
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China
Data Sets Findings:-
In the year 2009, China has overtaken Germany as the world’s leading merchandise exporter, accounting
for almost 10% of world exports, and is second to the United States on the import side. The US share in
world merchandise imports is 13% compared to China’s 8%. [5]
The emergence of China as the world’s manufacturer—often of lower cost goods—has resulted in high
volumes of goods moving through supply chains that originate, pass through, or terminate in China. The
frequency of deliveries to China and exports from China is also greater as organizations work to keep
inventories thin. The favorable government policies help in more Export oriented economy.
The organizations that conduct business with suppliers and/or buyers located in China are prefer to use
the open accounts in their trade activity, since it provides them with the safest mode of operation.
As per the AFP Trade Finance Survey (2007), the findings suggest that,
China Trade Transactions (2006-07)
(In %)
Open Account 57
Letter of credits 29
Source: - AFP Trade Finance Survey, 2007
Fifty-seven percent (57%) of transactions for those organizations that conduct business in China do so via
open accounts, compared to 29 percent of transactions that are conducted via letters of credit. [1]
This preference for open accounts is likely due to the fact that other trade finance methods, such as letters
of credit, are paperwork-intensive and more expensive than open accounts.
Explanations
The Chinese companies, especially the exporters are very price conscious. They are very keen to
make themselves competitive in the global market. When they have a chance to substitute Letter
of credit with the new and popular instruments like Open Account, they are ready to take some
amount of risk.
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Asia Pacific including India, south/southeast Asia
In terms of volume, usage of the documentary credits is increasing in Asia-Pacific region and they remain
a primary tool for south-south trading and for trading between OECD countries and India, Southeast Asia,
Africa, and the Middle East.
ASIA % breakdown, by volume for trade finance products
Type of Instrument Exports Imports
Letter of Credits 53 54
Open Account 16 9
Guarantees 7 15
Documentary Collections 22 16
Others 2 6
As evident from the above table, Documentary credits (L/Cs) is still the most favored option in Asia.
Reasons:-
Asia-Pacific region is assumed to be more economically sound to bear the turbulence during the crisis due
to its sound economic fundamentals, substantial reserves, improved regulatory frameworks and generally
robust corporate balance sheets and banking sectors.
The sound economic fundamentals tend to build the trust amongst the importers and exporters, wherein
they are more prone to tilt in the favor of using more and more Open accounts, when compared to
traditional documentary credits.
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United States of America
United States Of America
% breakdown, by volume for trade finance products (2008-09)
Instrument Exports Imports
Letter of Credits 65 71
Open Account 4 5
Guarantees 4 3
Documentary Collections 26 20
Others 1 1
Source: - IFSA, Latest trends in Global Trade Finance, 2009
Although the L/Cs is the dominant instrument in terms of transaction volume for both exports and
imports. But when the amount of value comes into play, Open account is one of the most favored options.
It occupies around 80-85% of the amount of the total trade of US with other countries.
Q. Why open account terms have become so readily available to US buyers?
Since U.S. being the biggest player in trade transactions from decades, both in terms of exports and
imports, the players have developed long lasting relationships, as a result of which the counterparty has
no problem in doing business in terms of Open Account. Also the market of U.S. is friendly enough to
attract more and more exporters. The stiff competition between the exporters compels them to use the
Open Account type of trade instruments.
The US economy has become largely an import economy and the largest consumer economy in the world
today. That kind of clout in the marketplace helps shift the credit needs away from the traditional letter of
credit and toward creative open account purchasing options, such as factoring-based solutions.
The volume of trade in the US helps them to build the long lasting relationships between the buyers and
sellers, which in turn tends to motivate them to use the more risky but at the same time fast and paperless
option of Trade account.
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SWIFT Volume
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) operates a worldwide
financial messaging network which exchanges the messages between banks and other financial
institutions.
SWIFT provides a centralized store-and-forward mechanism, coupled with the transaction management.
Suppose, if bank A wants to send a message to bank B with an authorization needed of an institution C, it
will format the message according to the set standards, and will send it to SWIFT in a secured manner.
SWIFT guarantees its secure and trustworthy delivery to B after the appropriate action by C.
SWIFT also offers Trade services utility, a service which is designed to allow the Banks to integrate
effectively with their corporate customers, and their Suppliers.
Data from the SWIFT show that messages sent between banks for letters of credit, guarantees and
documentary collections during the recession have drastically gone down, but have steadily increasing
since January 2009. Still it has a long way to go in recovering to pre-crisis level.
Figure 8: SWIFT year-on-year growth in trade finance messages
The dip displays the reduction in the exchange of information between the banks and the financial
institutions. This is due to the reason that the trade volumes and the transactions have suddenly dipped
during the economic crisis period. As a result, use of the trade financing instruments become unpopular,
and had led to the new issuance of the letter of credits.
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Regional Distribution of the Trade traffic of the Category 4 and 7:
SWIFT category 4 messages are flows for Documentary Collections - with the exception of three little-
used ―cash letter‖ messages. SWIFT category 7 messages are flows for commercial and standby letters of
credit, and guarantees.
Source: - ICC Global Survey, Rethinking Trade Finance 2010
The above figure depicts the difference between the Category 4 and 7 across regions of the world,
between the 4th quarters of 2007 to 2009.
Use of category 4 is low in Asia-Pacific, as compared to the use of L/Cs, whereas in the Europe Euro
zone, use of category 4 is much higher as a percentage of the whole. This is also true of North America.
The use of commercial and standby letters of credit, and guarantees as depicted by the Category 7 is most
popular in the Asia Pacific region, followed by countries in Europe using Euro as a currency. North
America is also not far in the list.
In both Category 4 and 7, there was a dip in the 4th quarter of 2008, stressing the aftermaths of the
economic crisis.
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2. Trade Finance during financial crisis
The deepening world recession had profound impact on world trade. The US$16 trillion global trade
of 2008 collapsed, reaching US $ 5.8 trillion in the first half of 2009 compared to US$8.2 trillion in
the corresponding period of 2008. As a result, growth of world output and trade volume of goods and
services fell to (-) 0.8 and (-) 12.3 per cent respectively in 2009 according to the International
Monetary Fund’s (IMF) World Economic Outlook (WEO) January 2010.
The World Trade organization (WTO) in March 2009 forecast a 9 per cent decline in global trade for
2009, the largest in over 60 years. The decline was more marked in the case of advanced economies.
Figure 9: Growth in World merchandise exports trade by region (% change in Dollar values)
Source: http://www.wto.org/english/news_e/pres10_e/pr598_e.htm
Trend Analysis
The above figure shows the decline in the World exports during the period of 2007-09, due to the
global economic crisis. The largest decline is in the case of Commonwealth of Independent states
(CIS), i.e. around (-42%). This is because of the fact, that the CIS is a major exporter of
Petroleum and energy goods, whose demand fall drastically during the economic crisis.
The least impact of the crisis can be seen on the Asian region, due to presence of the major
exporters like China and India. The sound principles of these countries, and their competitive
stand on goods (expertise) kept them immune from the DIP in the merchandise exports.
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3. Trade Pattern (Exports/ Imports) during the economic crisis
Exports trends of the Developed and developing Countries
Country Exports in Million $
2005 2006 2007 2008 2009
China 761953 968978 1220060 1430693 1201534
India 99616 121808 150159 194828 155249
United
Kingdom 384477 448653 439091 459666 350728
United
States 901082 1025967 1148199 1287442 1056895 Source: - WTO_Home > Resources > Statistics > Statistics database > Time series
Web link: http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E
[Accessed on 26 April, 2010]
China being the leading exporter, has the maximum export value in the year 2009, surpassing
Germany and is shown by Green box (12051534 million $). China being a developing
country has picked up fast from the year 2005 and shown a constant increment in the value.
Both the developed and the developing countries have experienced a sharp decline in the year
2008, due to economic crisis. The dip in case of China is minimal due to its sound economic
fundamentals, and domestic consumption.
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
2005 2006 2007 2008 2009
Exp
ort
s in
Mill
ion
$
Trends of Exports (2005-09)
China
India
United Kingdom
United States
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Country Imports in Million $
2005 2006 2007 2008 2009
China 659953 791461 956115 1132567 1005688
India 142870 178410 229371 321031 243636
United
Kingdom 513673 601424 622897 632975 479890
United
States 1732706 1918077 2020403 2169487 1603768
Source: - WTO_Home > Resources > Statistics > Statistics database > Time series
Web link: http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E
[Accessed on 26 April, 2010]
In terms of Import, US is the leading importer of goods and services. The values are shown in
the Green box. There was a sudden dip from 2169487 million $ to 1603768 million $.
The decline in the world trade volume is available in both the cases of Emerging and
developed/ advanced economies. From the trend analysis, the projection of the year 2010 and
2011 has been provided.
0
500000
1000000
1500000
2000000
2500000
2005 2006 2007 2008 2009
Imp
ort
s in
Mill
ion
$
Trends of Imports (2005-09)
China
India
United Kingdom
United States
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Trade financing Instruments usage pattern (In terms of Volume of Transactions)
Pre- Crisis Period:
Due to new trends in the trade finance and the long lasting relationships developed between the parties,
the growth of the Open Account instrument in terms of the volume has been increasing and had reached
to around 36% till the Oct 2008. Due to the competition between the exporters, they are ready to take
ample amount of risk to go for the Open account option.
Trade finance
Instrument
Before Crisis (Before
Oct 2008)
During Crisis (Oct
2008 – 2009 last)
After Crisis(2009 4th
Quarter – 2010
April)
Letter of Credits 47 53 53
Open Account 36 13 11
Guarantees 8 12 20
Documentary
Collections
3 22 15
Others 6 4 2
Source: - ICC Global Survey, Rethinking Trade Finance 2010; IMF-BAFT Trade Finance Survey, 2009; ICC
Global Survey, Rethinking Trade Finance 2009
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During Crisis:
Due to shortage of liquidity and the proportionate default and counter party risk, the users have
gone for more safe options available like Letter of Credits, Guarantees and the documentary
collections. Bank guarantees increased from 8% to 12%.
Customers are asking for confirmed letters of credit, documentary collections where they
previously dealt with unconfirmed L/Cs, and open account. However, bank perception of risk is
leading to a tightening of liquidity in some instances and therefore greater difficulty in obtaining
bank undertakings.
Due to increase in number of defaults and the risk associated, the trust between the parties has
received a dent.
Also the IMPORTANT trend coming here is the increase in the documentary collections.
Documentary collections provide greater security in trade, and are designed to restore confidence
by protecting the parties against performance breaches.
Post Crisis:
The use of the different instruments remained on the same platform they were during the crisis. It
takes time to build the confidence once again. The parties are still skeptical about their partners.
These are only the early trends of the trade finance after the crisis. The situation may improve
and there may be a functional shift in the instruments in the Surveys done later in the year.
From the IMF BAFT survey 2009, Interesting phenomenon that happened was that the Value of
transactions has decreased. This was due to couple of reasons:
A fall in the demand for trade activities
Less credit availability at the financial institution
Less credit availability at counterparty banks
A fall in the price of transactions
Some secondary factors were like:-
Shift towards the cash in advance transactions and the Open account transactions
The shift towards these instruments have instigated the lower pricing by the companies because
they can’t afford to raise the cost, otherwise their clients may shift towards their competitors.
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Figure 10: Trends in growth of trade volume (% change)
Source: - IMF: WEO, January 2010
The contraction in international trade is coupled with a sharp decline in the availability of trade finance.
This decline is explained by the contraction in demand: according to a BAFT (Banker’s Association for
Trade and Finance) and International Monetary Fund (IMF) joint survey (2009). The contraction in value
of trade finance has also been accompanied by a sharp increase in its price. Fear that the decline in trade
finance and the increase in its cost would accelerate the slowdown of world trade has triggered a number
of government initiatives in support of trade finance.
Several measures were implemented by the government to facilitate the trade in the time of global
economic crisis.
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Explanation (Reasons for these trends):-
A. Market failure
“According to some theorists, the Herd behavior of the private operators is the main reason for the
decline in the trade finance. This becomes more crucial in particular when credit risk and country
risk are being confounded (for example in cases of rumour of sovereign default)” [4]
.
Herd Behaviour: The international providers of trade finance during crises makes judgment often
gets deviated by the perceptions, wherein a departure of one player tends to trigger similar actions by
other players. There is a tendency of ―rush for the exit‖ and any lack of information about the
situation of corporate clients can aggravate the risk perceptions and make a prophecy self-fulfilling.
Blockage of free flow of Credit: There is a tendency of some players in the Trade financing,
which blocks the free flow of the credit in the time of liquidity crunch. Their monopolistic interest
blocks the refinancing medium of the wholesale banks which in turn the raises cost of trade finance.
Regulatory Mechanism: On the other hand the wholesale bankers complain the regulatory
mechanism of the Basel II norms and ask for relaxation in the norms. They argue since with the
stringent measures of the Basel II norms, they are bound to maintain Risk Capital in buffer, to use in
the difficult times. This in turn blocks the free supply of credit.
Market Tightening: Also there is a phenomenon of the market tightening, the Risk capital
requirements allocated for the instruments of trade finance tend to increase more than proportionally
to the amount of risk, and present in case of the counterparty is resident of a developing country.
Ratings: Both the Global Western banks and the regional developing banks have complained that
international rating agencies give attractive ratings to the developed countries banks when compared
against the developing countries' banks.
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Steps that can be taken:
Formation of transparent Global International credit rating agency, which gives unbiased
ratings to all the corporations, and will publish that information on the web portal, accessible
even from the remotest part of the world. This portal should be accessible on the major
technology platforms popular in the market.
Since the relaxation in the Basel II norms are very difficult, the wholesale banks should try to
find other ways to get access to credit at the minimal costs.
B. Mismatch between demand and Supply
Increase in spreads of L/Cs: After the financial meltdown, there has been reduced demand of the
goods and services; the overall increase in the Spreads of the requests of the LETTER OF CREDIT
suggests the mismatch between the supply and the demand.
There are many theorists which argued for number of reasons for the shortage of trade finance. On
one hand, the private sector argues that the implementation of the Basel II accord is the main culprit
behind the shortage of trade finance, the public sector on the other hand, maintains that trade finance
gaps are a result of market failure, due to unavoidable circumstances emerged after the crisis.
The mismatch between the demand and supply is the common phenomena during the time of
economic crisis. But the point of concern here is that how the spread of the letter of credit is on the
increasing trend. This is an important phenomenon to have deep thought.
The different propositions derived here are:
The upward trend can be due to some other prevalent reason.
The cost of the letter of credit issue is on the higher side, and not the actual number of the
issue of the letter of credit.
The reason for this can be found after the detailed analysis of the various options.
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4. Trade Credit during the recession
Table 10: Trade developments in a country with financial crisis
Issues that affect trade
finance during recession
Effect of the issues on the
volume of exports from the
economy
Effect of the issues on the
volume of imports by the
economy
Credit crunch in the economy,
liquidity scarcity, interest rates
up, confidence loss amongst
banks to extend the trade
finance
Exports down, as no
liquidity available
Imports down, as no
liquidity available
Decline in domestic demand
of finished goods
If export demand is
there, the volume will
go up
If export demand is not
there, volume will go
down
Down, no demand so
less imports.
Financial and economic
contagion
Down ----
Foreign exchange fluctuations Fluctuations affect the
competitive
differentiation in
global market.
Fluctuations affect the
competitive
differentiation in
global market.
In the above table, different issues like the credit crunch, financial and economic contagions,
foreign exchange fluctuations, etc have been discussed which can affect the volume of Exports
and imports.
In early 2009, a World Bank survey of 425 firms and 78 banks and other financial institutions in
14 developing countries confirmed that trade finance became more expensive and less available,
with the banks becoming more risk averse and selective in the supply of credit.[6]
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Analysis
There are different reasons for the overall decline in the Overall Trade Credit during the recession
period.
The 12% drop in the volume of world trade in 2009 was larger than most economists had
predicted. This contraction also exceeded the WTO’s earlier forecast of a 10% decline. Also, the
overall trade value transactions decreased.
Less credit availability at both the banks and the corporations is also another factor that further
weakens the trade activities.
Due to the economic crisis, there is increased risk present at the global level. Because if in this
case, the counterparty defaults, no one can come to the party’s rescue. This forces
Exporters/importers to either hold the trade and wait for the situation to improve
To strategize on the untapped markets to seize the opportunity
They may take calculated risk and invest in some other options
5. Impact of the recent economic crisis on trade credit
The global economic crisis impacts the trade credit. During the survey done by World Bank,
International Monetary Fund (IMF) and Bankers Association for Finance and Trade (BAFT), the
banks responded that lack of trade credit and other forms of finance, such as working capital and pre-
export financing, has majorly affected growth in world trade. At the same time, the costs of trade
credit instruments charged by the banks to the customers have gone up and is higher than what it was
in the pre-crisis period, raising the challenge of affordability of credit for exporters. Higher funding
costs and increased risk continue to put upward pressure on the price of trade credit.
In the Figure 11, The ―Change‖ refers to percentage change from same quarter of previous year.
There is a sharp drop in the trade finance in case of both EMERGING and DEVELOPED economies.
The emerging economies example includes India, China etc, and the examples of developed
economies are United States, France and Russia.
The decline in the trade finance has been highlighted by the Red ellipses in the Figure 11.
The most affected region in world during this period was Russia. Russia Trade pattern is highly
dependent on the exports of minerals, petroleum goods etc. Due to the increase in the prices, the trade
of Russia got affected.
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The Dip is represented in the figures by the Encircled Regions (Ellipses). India and China trade
pattern somewhat remain strong enough, and showed less impact, as compared to developed countries
like US, France and Russia.
Figure 11: Sharp drop in Trade Finance (Change in the ratio of insured export credit to export)
Source: Joint BIS-IMF-OECD-World Bank Statistics on External Debt and CEIC database [3]
Some findings from the chart:
There is a sharp drop in the Trade finance, making difficult for the exporters, especially
SMEs to finance their trade during the financial crisis.
Asia-Pacific region is economically sound to bear the turbulence during the crisis due to
its sound economic fundamentals, substantial reserves, improved regulatory frameworks
and generally robust corporate balance sheets and banking sectors. But due to the rise in
Risk aversion, the corporations in these countries found difficult to finance their trade.
This trend continued for the 2nd and 3rd quarters of 2009. But it has shown an opposite
trend in initial results of 4th Quarter.
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Suggestions
Establishment of a Regional trade finance database to facilitate the information exchange
between the banks, trade facilitators and the corporations.
The strengthening of the domestic credit rating agencies is critical to reduce the cost of trade
credit and insurance. This can be only done when the creditworthiness of the buyer or seller can
be assessed.
Information sharing and recording mechanisms of the companies is very essential.
In the long run, sound macroeconomic fundamentals can help in availability of more credit in
similar financial crisis.
6. Measures taken by government and its Impact:-
The table shows the different types of measures employed by governments during the recession.
There was a wide array of measures ranging from Bail outs, Tariffs, Export measures to Import bans
and public procurement.
Table 11: Measures implemented during Recession
Total Red/Implemented Measures Implemented
during Nov 2008- Nov 2009
Type No of
measures
Bail outs/ subsidies 137
Total defense measures 66
Tariffs/Import bans/Quotas 62
Non-Tariff barriers 28
Export Measures 21
Local content/Public procurement 20
Other 8
Source: - Global Trade Alert, Jan 2010
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Out of these, some of the measures restrict imports and others favor/ support the exports. The red
measures are those which are highly discriminatory in nature.
In the below figure, there is a sudden drastic dip in the Bilateral trade, in 4th quarter of 2008 due
to the government measures. The Encircled portion is the most drastic drift from the usual trend.
Source: IMF working calculations
The measures had the negative impact on the bilateral trade flows. The measures taken by the
governments restricts the exports in most of the cases, the bilateral trade between the previously
trading partners gets broken. Here the countries follow the Close door policy, where they restrict
the exports outside the physical border of the country and consume the goods and services within
the country itself.
Bilateral trade flow, i.e. the trade between two countries got disrupted during the recessionary
period. As compared to the period before crisis, there was a sudden dip in the trade flow. The
measures restricted the trade between most of the countries.
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Project part 4
Trade Finance: Navigation
out of the Crisis
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4.4 Navigation out of the crisis
Immediate measures were needed during the recessionary period, to prevent the situation from becoming
a Financial Contagion. The contagion is a disaster for the nation’s economies. The measures can be
categorized in both short term as well as long term. Governments and the bodies thought at that time that
it is better to implement the short term measures, because it was the need of the hour. The long term
measures can be implemented anytime later once situation becomes normal.
The Short term measures that can be implemented to navigate out of the crisis are mentioned below:
Actions and Measures:-
1. Inter-firm trade finance
Inter firm trade finance means the finance provided to importers from exporters to buy the goods
from overseas, and that provided to exporters, to help them produce the goods to export as well as to
allow them to finance their extensions of credit to importers. This is one of the most important
sources of short-term financing for firms around the world. It tends to be relatively more important
for firms located in emerging countries.
It is also important to create among the trading partners all the conditions to exploit the
advantages of inter-firm trade finance, like removing the obstacles that might create
inefficiencies. For example, structured financing schemes might be a valuable instrument to
secure export financing to firms located in low-income countries.
Inter-firm trade finance helps in overcoming of the informational problems associated with
other lending relationships.
2. Coordination for a trade-Led Recovery
Private Banks (which account for some 80% of the trade finance market by way of lending),
export credit agencies and regional development banks can pool their resources to the extent
this is practicable.
Cooperation among the various players is crucial in the difficult times of crisis, because of an
absence of a comprehensive, continuous data set on trade finance flows.
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3. Liquidity pool by IFC
A liquidity pool allows the co-financing operations with banks in developing countries that
would likely have a high leverage and multiplier effect on trade.
The bodies proposed to design a small and targeted liquidity fund run by international
financial institutions and useful for smaller segments of the market or new countries, in
particular for those most likely to be hit by the contraction of trade credit supply.
4. Use of products like Factoring:-
Factoring is a form of commercial finance whereby a Business sells its Accounts
Receivables (in the form of invoices) at a discount. In this process, there is an agent (or
factor) that buys all or some of a business’s outstanding invoices, sometimes called Debt
Outright, in advance, and repays the remaining amount, minus a commission plus interest on
the advance when the accounts are settled.
Factoring is especially useful for generating working capital when a business needs cash
immediately and is willing to pay a commission. This is only a Short term Solution.
5. Global Measures:-
International level: At the international platform, the bodies like IMF, WTO, ICC can
relax their norms for the time being and can wait for this difficult time to pass. This
action will in turn have a positive impact on the investors. They will be motivated to
increase their trade activities.
Regional level:
Regional development banks provide funding for building infrastructures and private
businesses in emerging markets countries. Even if a project does not meet the necessary
criteria for financing from the development bank, assistance is still available to help
companies locate direct investment financing from other sources.
The most important regional development banks are owned by the governments of many
donor countries, both from the industrialized world and from emerging markets, and
serve mainly as central banks for local development banks. They also offer direct
financing to private sector-businesses.
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The most important development banks are:
The Inter-American Development Bank (for Latin America)
The African Development Bank and Fund (for Africa)
The European Bank for Reconstruction and Development (for Eastern Europe
and the Commonwealth of Independent States)
The European Investment Bank (for the funding of worldwide interests of the
European Union)
The Asian Development Bank (for Asia and the Pacific)
National level/ Action by various governments
The government regulations can have a favorable impact on the exporters/
importers.
Relaxation in the rules and regulations can increase the overall trade volume
6. Relaxation in the BASEL-II norms
The relaxation in the Basel- II norms will allow more proportionate capital weightings for traditional
trade finance transactions, so that the transactions becomes more secured. In addition, the private
sector is to be fully represented in the drafting of the new capital adequacy regime through a trade
finance working group.
7. Regional clearing houses:
Advantages of the regional clearing house:
A clearing house decouples the risk involved in a trade for counterparty
No need to take the matter to the distant bodies, which are located far
Quick disposal of the trade activities
A Regional Clearing House stands between two traders, located in a country and its purpose is to
reduce the risk of one (or more) trading firm failing to honor its trade settlement obligations. The
transactions are cleared.
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8. Trade Finance Facilitation programs by International/ Regional bodies
Development institutions have taken actions to help ease access to trade finance, during this period.
For example, in response to the financial crisis, the International Finance Corporation (IFC) has,
doubled its Global Trade Finance Program to $3 billion to facilitate trade by providing guarantees
that cover the payment risk in trade transactions.
To deal with the liquidity constraint, the IFC introduced a Global Trade Liquidity Program, in
collaboration with official and private partners, to provide up to $50 billion of trade liquidity
support.
Table 12: Trade Finance Facilitation Programs – Mid-2008 to Mid-2009
Mid-2008
International
Financial
Institutions
No. of
Transactions
Trade Credit/
Guarantees
extended
(In Billion $)
Issuing
Banks
Countries
Involved
IFC 1900 2.1 100 50
EBRD 7000 6.7 109 21
IDB 303 0.58 31 14
ADB 828 0.34 38 9
Mid-2009
International
Financial
Institutions
No. of
Transactions
Trade Credit/
Guarantees
extended
(In Billion $)
Issuing
Banks
Countries
Involved
IFC 5720 4.4 146 74
EBRD 8100 6.8 115 19
IDB 694 0.86 51 20
ADB 1293 0.7 59 9 Source: - www.ifc.org; www.ebrd.com; www.iadb.org; www.adb.org
Regional development banks such as the Asian Development Bank (ADB), the European Bank for
Reconstruction and Development (EBRD), African Development Bank (AfDB), and the Inter-American
Development Bank (IDB) have also launched or expanded their trade finance programs to extend
guarantee facilities, with a focus on small transactions in low-income countries that have little access to
international markets and no or low international ratings.
The trade facilitation programs have been immensely increased during the times of crisis.
Number of transactions and the trade credit lines in $ billions, both are increased, in the year 2009
when compared with the period of 2008
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In the context of the current economic crisis, the international bodies like the Bankers association for
foreign trade, International chamber of commerce, Business Europe, as well as individual wholesale
banks have been instrumental in recommending at the G20 Summit platform in London, in the following
given areas:
9. Cash-less forms of trade such as Barter or Countertrade
Cash less forms of trade are useful in times of insufficient liquidity and diminished availability of
trade finance. Modern countertrade is facilitated by advanced web-based technologies.
Figure 12: Countertrade used in the Asia-Pacific region
10. Sharing of risk with public sector backed institutions: It was suggested to encourage co-
finance between the various providers of trade finance. The Public sector actors, such as export
credit agencies and regional development banks, can be mobilized to counter some of the
private sector risk.
11. General Measures
Information gap in trade finance can be filled in particular in terms of business
performance data evidencing the loss history of different trade finance risk categories.
Preventing ethical risk and crowding out Wholesale banks by setting clear time limits and
exit strategies for the intervention programs and also creation of special guideline
wherein they have to share the risk rather than underwriting it.
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Table 13: Measures and their Scope in region
Type of Measure Effective In
Trade facilitation bodies like IFC, ADB and
EBRD
Low Income Countries, Underdeveloped and
developing economies
Inter firm trade finance Big corporations and companies
Developed economies
Factoring Worldwide (All)
Liquidity Pool Developed economies (Have a say on a
global level to influence the International
bodies)
Public sector backed institutions Developing Economies (Socialist
economies) like China
Regional clearing Houses Developed countries – coupled with IT
solutions
Basel II norms Worldwide (All)
Cash less form of Trade (Barter/ Countertrade) Asia-Pacific region
General Measure_ Information gap in Trade
finance
Worldwide (All)
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Project Part 5
IT Products in Trade Finance
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4.5 IT Products in Trade Finance
The paper intensive processes of the trade financing instruments prompted the wholesale banks to develop
the technological platforms which include the features like centralized procurement and payment
mechanisms. This in turn reduced the transaction charges of banks and made the delivery process
speedier. The advent of new features in these products has attracted the Corporate/Small and medium
enterprises to use them to their advantage. It is a win-win situation for both the wholesale banks and the
customers i.e. exporters and importers.
IT products provide Banks and their customers with the automation of the open account and the letter of
credit, complementary to the emerging SWIFT bank trade services utility.
Also, there is a better collaboration between the exporter and the importer due to flexible and modular
application features.
These products becomes more important in times of the recession, wherein due to the liquidity crunch in
the market, parties find it difficult to get finance and also the cost of trade credit increases.
There are many types of technological solutions developed by various IT service providers. Some of them
are:-
Figure 13: IT service providers and their products
• Bolero Advise
• Bolero Trusted trade platform
• Bolero Application suitesBOLERO
• IMEX
• a//NETT
• IBSnetSurecomp
• Bank Trade
• Client Trade
• Open TradeCSI
• DTTNTrade Link
• Open TradeTRADEPAQ
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Considering the new demand in the trade finance space, banks and financial institutions look to IT
solution vendors to provide a suitable solution enabling them to evaluate and assume risk besides the
traditional intermediating pre and post-shipment financing products. Also if they can provide them with
the facilities like indemnity, compliance and the Order collaboration, then the solution becomes
integrated.
Some of the existing Open Account and the documentary credit (L/C) suites are providing the solutions
like:
Figure 14: Open Account Suite (Bolero)
In the open account, the bank don’t have much role to play and therefore provides simple functions of
order collaboration, documentation if any, reconciliation of the order, payment and finance management.
Figure 15: Letter of credit/ Documentary credit Suite (Bolero)
Source: http://www.bolero.net/index.html
In documentary credit suite, the company provides the advice and collaboration in Purchase order. Then it
performs the documentation, keep the record in a database, and perform the document compliance. Also
the pre and post export finance is provided. The payment is made by the help of SWIFT trade service
utility and the finance management is done.
The TCS provides a trade finance solution of the name TCS BANCS Trade finance.
Apart from these basic services, the service providers also can leverage on the exposure and the credit/
market risk management by providing its clients with the updated information about the companies.
Inventory finance is another area they can look into.
Order Collaboration
Document Management
Order Reconciliation
Payment Management
Finance Management
Order collaboration
Document Credit
collaboration
Document Credit
Advising
Document Management
Complaint checking
Payment management
Credit Management
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Project Part 6
Case Study
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4.6 Case Study: TradFinc
A case study has been given here, where a hypothetical IT service provider is taken, which is
providing Trade finance solutions. The name of the company is ACECOMPT and the solution name
is TradFinc.
In the solution, the conceptualization of an Integrated Model or product is thought of and an end to
end integrated framework of the entire trading cycle. This solution framework can be refined upon
and be implemented by any trade finance IT service provider, like TCS.
1. Background
ACECOMPT was founded in 2000 by its parent company, ACEM Global Tech. (APT), a leading
global IT solutions provider. ACECOMP employs more than 10000 people servicing the clients need.
The company’s TradFinc Suite includes the solutions for trade services like, Open Account Trade,
documentary credit trade, risk management and Factoring. These applications integrate with the
existing core banking, cash management, or other systems to quick-start a new operation. The global
TradFinc Portal extends e- Trade services, to the customers, allowing them and other service
providers to access the trade services front Office and back office over Internet, and to enquire about
any process in the supply chain.
The company provides end-to-end, integrated IT solutions, focuses on the client’s business, the
industry perspective, and the competition and challenges in the market. The technology domain
expertise helps us to provide superior financial services.
Finally, ACECOMP best-in-class TradFinc Solution Integration Services helps to integrate, deploy
unequal systems and migrates the custom applications.
2. CHALLENGE/ Business Requirements
The convergence of Trade solutions with cash management system to an integrated platform provides
total visibility of the value chain. The Trade Services Utility (TSU) and Open account act as enablers
for the supply chain management initiatives and Trade Finance needs to evolve to provide these
capabilities. ACECOMP works concurrently with the banks, who want to re-invent itself in the area
of trade processing, by becoming a trade facilitator and in the process, create for itself a niche market
space by transcending customary banking vistas.
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There was an immediate business requirement of the business vertical to provide an integrated, end-
to-end trade portal that is highly secure, scalable and user-friendly to shorten trade cycle times,
coupled with higher process efficiency and reduce the cost and time involved.
3. SOLUTION
TradFinc is a state-of-the-art global Trade finance back and front-end system, complete trade cycle
support. Its multi-tier architecture ensures maximum safety and scalability while giving the optimal
performance. In its architecture, every step of the trade finance business flow is automated; reducing
the need for data entry at all levels of the process.
TradFinc converges the trade-related data of the companies/corporate of the open accounts,
documentary credits (L/Cs), documentary collections, and shipping details, and allows its clients to
access the real time information anywhere and anytime. The unique feature of this integrated
platform is that it permits even the third parties such as Insurers to access the information online, with
access controlled and secured by the client.
TradFinc provides an end to end integration of the trade services, on a global level. The explanation
of the Figure 16, given on the next figure is as follows: -
Corporate/Exporter or any consumer accesses online the Global platform of the TradFinc web portal
the component library of the solution. In this library, all the information about the exporters and
importers who are registered to the bank or to the TradFinc solution is shown.
Also, in the Bank interface provided by the TradFinc, the bank has all the options ranging from the
documentation to the risk management and from reconciliation to Pre or Post shipment finance.
The bank provides services at various ends:-
1. Corporate End: -
Here the options of Application, Pricing of the service or instrument and document management
are provided.
2. Front office End: -
The origination and the negotiation of the trade financing option are done here. Also the services
like Guarantees, Pre shipment finance and Guarantees are provided.
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3. Back Office: -
The processing of the entire sequential flow is done here. The various types of
amendments, remittances and the payment options are defined over here.
4. Management: -
Here the cash management of the accounts of the customers is performed. The processes
of Reconciliation and discrepancy handling are done over here. Important part of the
entire workflow is that, the credit reporting and the Risk management of the clients is
done here and maintained in the Component library.
Suppose a Corporate applies for an issue of a Letter of Credit (L/C), he will use the platform of
TradFinc for the application. The various price quotes are provided. The bank will complete all
the formalities regarding the request. The bank is connected to the Trade services utility of the
SWIFT, wherein the real time transactions and the movement of the cash is noted. The back
office systems will ensure that the payment is to be received by the Authorized person.
The process of the Cash management and Risk management is already calculated by the software
given by the company. The transactions between the exporters and the importers are noted on a
real time basis.
Even the third parties to the transaction, such as Insurers and forfeiters are allowed to access the
information online, provided they are allowed by their respective client.
The party is reminded periodically, to make the payments before the due date. If any party defaults in
between, the affected party gets the Real time alert, whereby he/she can action with the help of the
Insurer.
There is complete automation of the trade life cycle via Straight through processing (STP), where the
process of a stock transaction is made automatically by computer from beginning to end without manual.
This in turn improves the operational efficiency of the process.
At times, the documents templates are customized according to the needs and aspirations of the
exporter/corporate.
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TradFinc Solution to Bank
SWIFT
Payment
System
SWIFT
Adaptor
Cash
Management
COMPONENT LIBRARY
Corporate
TSU
Connecter
Bank Interface
Risk
Management
Figure 16: TradFinc - End to End integration of Global Trade Services
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4. Advantages of TradFinc
TradFinc provides the following advantages to its customers:-
Reduction in the Operational risk, involved in the process, by improving and refining the
work processes.
Automation of the trade life cycle via Straight through processing (STP), where the process
of a stock transaction is made automatically by computer from beginning to end without
manual.
Provides a holistic view of the client’s and the bank’s risks
Improvement in productivity and throughput of the entire business
Complete audit trail and tracking
User customisable document templates
Enhances customer relationship management
This solution can anytime be converted to the MODEL, wherein new features can be used in the existing
or the new products of TCS.
The solution can be implemented along with some re-engineered trade financed products. Also the
solution can encompass wide Industry spectrum.
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Project part 7
Recommendations
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4.7 Recommendations for TCS Solution Based on the analysis and the findings obtained in the previous sections, I would like to give the
following suggestions to the TCS Trade finance solution called TCS BαNCS Trade Finance so as to
improve its utility across the world and more specifically in India. The recommendations have been
divided into three degrees- First (being very important), Second (being the next important ones), and
Third (being not that important) and they are as follows:
First Degree:
• Develop a solution that is integrated and simplified (i.e., all types of transactions involved in the
trade financing activities and the various types of risks involved are mitigated using a single platform
or a single solution). This makes the work of the user much easier and such a solution would attract
customers in large numbers.
• Develop a solution that is an end-to-end one. This is an immediate requirement by the
exporters/importers and banks. An end-to-end solution means all kinds of activities right from
advising the purchase order, pre export finance, indemnity, documentation, document compliance,
post export finance, reconciliation process and payment. This makes the solution more simple and
hence trading movements are traced in real –time and more efficiently.
• New technology platforms enable buyer, sellers, banks, and other supply chain members to gain
visibility of the flow of goods and related information.
Provide a suitable solution enabling them to evaluate and assume risk besides intermediating pre and
post-shipment financing products.
• Try to expertise in Trade Finance Product engineering: Develop new breakthrough products by
reengineering the prevailing products. These products will be according to the recent trends in the
market.
• The Trade ecosystem is made up of diverse systems operated by a wide spectrum of organizations,
including financial institutions. The complete auditing processes of the customers are tracked and are
closely monitored, as it consists of cross-border transactions that may be vehicles for money
laundering or other illegal activities. This requires organizations and individuals involved in
international trade to coordinate with different partners, service providers, national and international
regulatory authorities, and other entities across the Financial Supply Chain.
• Hence the TCS solution can formulate an IT component library which can extend trade finance
solutions and the existing systems through automation, interoperability, SOA and workflow-
enablement, thus providing true solution integration benefits like compliance and risk management.
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Second Degree:
• Best-in-class IT's Solution Integration Services can be developed to integrate, deploy disparate systems
or develop and migrate custom applications.
• Interfaces to multiple Back Office systems, Integration with existing Business Workflow processes, and
Integration to Document Management should also integrated into the system.
Third Degree:
• Cost factor should be worked out, as the decisions taken by the institutions while buying a solution
from a particular vendor might be affected due to this constraint.
• TCS could concentrate on giving proper training facilities along with the implementation that might
stand out as very good service offered by TCS. Also, it could concentrate on giving secondary training to
the employees of the users of these solutions to leverage its position from other service providers.
Taking these recommendations into account, TCS’ solution can definitely improve its solution and
increase its penetration levels in the markets worldwide and in India also.
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5. Annexure
Certificate Program in Wholesale banking: Products and Services
Course Content
Certificate in Wholesale Banking: Products and services
Module I
Chapter 1 Overview of Wholesale Banking
Chapter 2 Deposit and Payment Systems
Chapter 3 Wholesale Banking: Current account and deposits
Chapter 4 Wholesale Banking: Loans and Advances
Module II
Chapter 5 Wholesale Banking: Payment Cards
Chapter 6 Trade Finance
Chapter 7 Project Finance
Chapter 8 Syndicate Lending
Module III
Chapter 9 Off Balance Sheet Activities
Chapter 10 Loan Pricing
Chapter 11 Wholesale Banking Risks
Chapter 12 Wholesale Banking Technology
Chapter 13 Regulations
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Certificate Program in Wholesale banking: Trade Finance
Course Content
Certificate in Wholesale Banking: Trade Finance
Module I
Chapter 1 Introduction to Trade Finance
Chapter 2 The Trade Environment
Chapter 3 Payment Options
Chapter 4 Financial and Commercial Documents
Chapter 5 Letter of Credit and UCPDC
Chapter 6 Bank Guarantees
Module II
Chapter 7 Extension of Credit
Chapter 8 Export Finance
Chapter 9 Import Finance
Chapter 10 Leasing and Hire Purchase
Module III
Chapter 11 Cash Management
Chapter 12 Working Capital Finance
Chapter1 3 Bill discounting, Overdrafts and cash credit
Chapter 14 Factoring and Forfeiting
Chapter 15 Securitization
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Certificate Program in Governance Systems
Course Content
Certificate in Governance Systems
Chapter
Number
Chapter Name
Module I
Chapter 1 Introduction to E-governance
Chapter 2 Organizational and Activity structure of the Government
Chapter 3 Federal/Central level Government
Chapter 4 State/ Province level Government
Chapter 5 Local/District level Government
Module II
Chapter 6 Work or File flow in e-form
Chapter 7 Mutual Interaction between Business Entity and Government
Chapter 8 Mutual Interaction between Government and Citizen
Chapter 9 Mutual Interaction between Government and Government
Module III
Chapter 10 E-procurement architecture
Chapter 11 Government Bills Payment Architecture
Chapter12 Ideal e-central Government and Government Web Portal
Chapter 13 The future of e-Government and issues
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Certificate program in Wholesale banking: Trade Finance Advanced
Course content
Certificate in Wholesale Banking: Trade Finance Advanced – L3
Chapter No. Chapter Name Important Topics Covered
Chapter 01 Meaning of Foreign
Trade
Meaning of foreign trade, terms of delivery of goods,
Balance of payment, Balance of trade
Chapter 02 Trade Finance
Laws
FEMA, NIACT, Indian stamp act, EXIM Policy, RBI
guidelines, FEDAI guidelines
Chapter 03 International Trade
Theories
Theory of Mercantilism, Theory of absolute advantage,
Theory of comparative advantage, Heckscher-Ohlin model,
Imitation-Gap theory, International product life cycle theory
Chapter 04 Terms of trade and
INCOTERMS
Different terms of trade, terms of Import, Terms of payment,
INCOTERMS different sections
Chapter 05 Trade Documents Bill of exchange, Invoice, Bill of lading, Airway bill,
Insurance Policy, Insurance including Marine Insurance, etc
Chapter 06 WTO and its
impact
Functions, activities, WTO secretariat, organizational
structure, Need of the trade agreement, Dispute settlement
mechanism, and criticisms)
Chapter 07 Trade Finance
Facilitators
Role of EXIM Bank, ECGC, UNCTAD, UNCEFACT,
WCO etc. in trade facilitation
Chapter 08 Risks involved in
trade finance
Country, Currency, Credit, Counterparty, Exchange,
Performance, Product, Legal Risk etc
Chapter 09 UCP 600 overview Overview of UCP 600, Various articles included for trade
finance
Chapter 10 UCP 600 Parts UCP 600 different parts and their description
Chapter 11 Trade Finance: IT
Products
IT products of Bolero, Surecomp, Eximbills, Trade Link,
TRADEPAQ, CSI, comparison between different products
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Sample DAR Report
Figure 17: DAR Report sample
Daily activity report tracker is the Standard TBDA template to facilitate the Mentor to keep track of the
Intern. The Intern fills the DAR daily, and gives the complete information regarding the activities specific
to the project work in TCS.
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Sample PF3030A Review Tracker Template
Figure 18: Asset Review Tracker
Sample PF3030A is the standard review tracker template used by TCS in the stage of Asset Review. The
Intern while reviewing the course/asset, he fills the PF3030A, and highlights the
discrepancies/suggestions/ recommendations. As a result, the asset is passed from the process of review
twice and helps in the improvement of it.
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Asset Development Tracker
Figure 19: Asset Development Tracker
The asset development tracker is a template assisting the coordination between the Intern and the
Company guide. It is filled with the Intern who is developing the Asset. The Progress is constantly
tracked by the mentor, review comments are closed and the suggestions are provided.
In the Asset Development tracker, I have suggested for some changes to the Domain Academy, which are
as follows:
In the Course Outline, the proposed date and the Date of Completion columns have been added.
In the Chapters sheets, the No. of pages Box has been added to tell the no. of documents present
in the chapter DOC file.
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6. Glossary [7]
Document against Acceptance
A notation on a draft issue in an export transaction stating that the documents attached to the draft and
giving title to the shipped goods should be handed to the buyer (drawee) only upon his acceptance of the
draft.
Documentary Collection
A type of trading transaction whereby the exporter entrusts the collection of a payment to the remitting
bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with
instructions for payment.
Factoring
Factoring may be defined as ―A contract by which the factor is to provide at least two of the services,
(finance, the maintenance of accounts, the collection of receivables and protection against credit risks)
and the supplier is to assigned to the factor on a continuing basis by way of sale or security, receivables
arising from the sale of goods or supply of services‖.
Letter of Credit
LOC is ―an undertaking by importer’s bank stating that payment will be made to the exporter if the
required documents are presented to the bank within the validity of the L/C‖.
Open Account
Open account transactions is a form of instrument, where due to strong trading relationships, seller ships
the goods together with the necessary documents to the buyer before the payment is made and without
any form of guarantee.
SWIFT
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a body that operates a
worldwide financial messaging network, and exchanges the messages between banks and other financial
institutions.
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7. Bibliography
Surveys and Reports:-
1. BAFT, I. (2009). IMF-BAFT Trade Finance Survey. ICC BAFT.
2. ICC. (2009). Rethinking Trade Finance 2009:An ICC Global Survey. International Chamber of
Commerce.
3. ICC. (2010). Rethinking Trade Finance 2010 Global Survey. International Chamber of
Commerce.
4. ICC_ScotiaBank. (2007). AFP Trade Finance Survey 2007. Association for financial
professionals.
5. Ronci, M. (2004). Report on the Trade Finance. IMF.
6. Thomas. (2009). IMF Report on Trade Finance in Developing countries. IMF.
7. Trade to expand by 9.5% in 2010 after a dismal 2009, WTO reports. (2010, March 26). Retrieved
April 26, 2010, from www.wto.org: http://www.wto.org/english/news_e/pres10_e/pr598_e.htm
Research Papers and Journals:-
1. [1] 2007 AFP (Association of financial professionals) Trade Finance Survey, October 2007,
Scotia bank
2. [2] Michael Klaussner, ABN AMRO Research paper
3. [3] Wei Liu and Yann Duval, Trade finance in times of crisis and beyond,2008
4. [4] Marc Auboin, Boosting the availability of trade finance in the current crisis: Background
analysis for a substantial G20 package, WTO Secretariat
5. Malouche, M. (2009). Trade and trade finance developments in 14 developing countries post
September 2008 - a World Bank Survey. World Bank Policy Research Working Paper 5138.
6. Anna Maria C. Menichini, Inter-Firm Trade Finance in Times of Crisis
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Database:- 1. Link_ WTO statistics database. (2010). Retrieved April 2010, from www.stat.wto.org:
http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E
2. [5] http://www.wto.org/english/news_e/pres10_e/pr598_e.htm, dated 26 March, 2010
[Date Accessed: 10 April, 2010]
3. Source:- WTO_Home > Resources > Statistics > Statistics database > Time series
[Date Accessed: 23 April, 2010]
Guides:- 1. Trade Finance Guide – A quick reference for U.S. Exporters
2. Trade Finance Infrastructure Development Handbook for Economies in Transition
Books:- 1. India Budget, Chapter-7 International Trade
2. Practitioners’ book on Trade finance, Taxmann publications, IIBF, 2005.
Literature Review:-
1. MARCIO RONCI, Report on the trade Finance, 2004 IMF
2. THOMAS, 2009 IMF report on trade finance in developing countries
Glossary 1. [7]
www.intracen.org/tfs/docs/glossary/de.htm
[Date Accessed: 11 May, 2010]