2

International transactions in cash require two distinct purchases

Purchase of foreign currency Purchase of good/service with the FC

The term “Foreign Exchange” is used to denote: a foreign currency - ie. currency of another country the exchange of one currency into another.

As per FEMA 1999, Foreign exchange includes: Deposits, credits and balances payable in foreign

currency Drafts, travelers' cheques, letter of credit or bill of

exchange expressed or drawn in Indian currency but payable in foreign country.

Drafts, travelers' cheques, L/Cs, etc. drawn by banks, institutions or persons outside India but payable in Indian currency abroad.

3

This market exists to cater to the demand for foreign currency.

Currency is needed around the world for international trade and investments.

The largest financial market in the world, trading around $1.5 trillion each day.

Dynamic – high fluctuations in rates. round the clock market. No central location. Over the counter market. Trading between participants through

electronic communication networks (ECNs) and phone networks

Settlements affected through time zone factor.

4

5

6

Central Banks to manage their reserves and the value of their home

currency. Foreign Exchange dealers

for their retail clients hedging and investing their own assets and liabilities.

Investment Funds/Banks moving funds from one country to another and hedging

their investments in various countries. Forex brokers

middlemen between other participants and at times taking positions on their books.

Corporations moving funds between different counties and

currencies for investment or trade transaction. Individuals

ordinary or high net worth individuals for investment, trade, persona needs etc.

7

Spot Exchange Rate: represent the price that a buyer expects to pay for a

foreign currency in another currency. Settlement in case of spot rate is normally done

within one or two working days. Forward Exchange Rate:

rate that is quoted and traded today but for delivery and payment on a specific future date.

There are two methods of quoting exchange rates:

Direct Quotation: variable units of home currency equivalent to a fixed unit

of foreign currency are quoted. (US$ 1= Rs. 46.8143) Indirect Quotation:

variable units of foreign currency as equivalent to a fixed unit of home currency (US $ 2.1361= Rs..100)

After 1993 banks are quoting rates on direct basis only.

8

A contract between two parties (the Bank and the customer). to sell or buy one currency for another, at an agreed future date, at a rate of exchange which is fixed at the time the contract is entered into.

Foreign Currency Options gives the owner the right to buy or sell the indicated amount of

foreign currency at a specified price before a specific date. The buyer of option has the right but no obligation to enter into a contract with the seller. Therefore the buyer of a currency option has the right, to his advantage, to enter into the specified contract.

Flexible Forwards an alternative to forward exchange contracts and currency

options. The agreement to exchange a specified amount of one currency for another currency at a foreign exchange rate that is determined in accordance with the mechanisms set out in the agreement at an agreed time and an agreed date (the ‘expiry time’ on the ‘expiry date’).

Currency Swap also known as cross currency swap is a foreign exchange

agreement between two countries to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped.

9

Generally, the Forex rates quoted are spot rates. Forward rate = Spot rate + Premium (- discount) If the forward rate is higher than the spot rate,

the currency is at a premium and if lower, it is discount.

Bid and offered rates: In USD/INR 46.80/81 the bank is bidding for USD at Rs. 46.80

and offering to sell USD at Rs. 46.81

Cross rates: To obtain rates for a particular currency pair when they are

not available directly 1 US $ = Rs.Rs. 46.8125 = 3.7563 Saudi Riyal 1SAR = 46.8125/3.7563 = 12.4625

10

The bid rate always precedes the ask rate. E.g Rs./$ 46.45 / 46.50 The bid and ask rates are always separated

either by slash(/) or (-). The quote is always from the banker’s point of

view. Rs./$ 46.45 / 46.50The banker is ready to buy dollar at Rs. 46.45 and sell at Rs. 46.50. i.e. Banker’s buy rate= Customer’s sell rate.

The Bid is always lower than the ask. ask rate- Bid rate = spread Merchant quote is by bank to its retail

customers. Interbank quote is given by one bank to

another bank.

11

TT Selling Rate:  applied for all clean remittances outside India i.e.,

for selling foreign currency to its customer by the bank issue of bank drafts, mail/telegraphic transfers etc.

TT Buying Rate:  for purchase of foreign currency by banks where

cover is already obtained by banks in India. Foreign inward remittances made payable in IndiaBill Selling Rate:  for all foreign remittances outside India as

proceeds of import bills payable in India. Bills Rate: for purchase of sight export bills which will result

in foreign remittance to India after realisation. Banks also quote different rates for TC and Currency.

12

There has to be a genuine underlying exposure i.e. Forward contracts are permitted only for hedging and not for speculation.

A forward contract can be booked for the following: an inward / outward remittance for export /

import transactions respectively foreign currency loans / bonds - only after RBI

approval, where necessary, has been obtained The currency of hedge and tenor will be the

customers choice Maturity of the hedge should not exceed the

maturity of the underlying transaction

13

23-13

Importer

Importer

Exporter

Exporter

Importer Preference

Exporter Preference

1st: Exporter ships the goods

2nd: Importer pays after goods received

1st: Importer pays for goods

2nd: Exporter ships the goods after being paid

14

The fundamental dilemma of being unwilling to trust a stranger in a foreign land is solved by using a highly respected bank as an intermediary.

Following alternatives can be used:1. The exporter ships the goods and deliver the documents to

his Banker along with a Bill of exchange.The bank through its correspondent abroad arranges to deliver the documents of title against payment by the importer.

2. In the above case, if the instructions are to deliver the document against acceptance, an accepted bill of exchange will be available to the exporter through the bank, which can be enforced through court in case of non payment on due date.

3. The importer opens a Letter of Credit through his banker, which is confirmed by a Banker of exporter’s choice.

4. Exporter gets the Payment from the bank when the documents as mentioned in the Letter of Credit are produced to the Bank.

5. If the buyer demands open Account terms, International Factoring is the solution.

15

23-15

Importer

Exporter

Bank

16

A Letter of credit is an arrangement at the request and on instructions of a customer to make payment / authorise other bank to pay

or negotiate against stipulated documents, provided that the terms and conditions are

complied with. It is an undertaking

issued by the banker of the buyer in favour of the Seller to pay a certain sum of money against presentation of documents as called for and complying with the conditions laid down in the

LC.

17

EXPORTER

SALECONTRACTDEFINING

TERMS

IMPORTER

ISSUINGBANKADVISING

BANK

L/CAPPLICATION

ISSUE OF THE LETTER OF

CREDIT

ADVICE OFOPENING

LETTER OFCREDIT

18

Applicant (Opener / Importer) Issuing Bank Beneficiary (Exporter) Advising Bank Confirming Bank Negotiating Bank Reimbursing Bank

1919

Revocable LC: revocable before negotiation of documents. Irrevocable LC: can be revoked or amended with consent Confirmed Irrevocable LC: LC is confirmed by a Bank in

the exporter’s Country. Transferable LC: specifically made transferable. Red Clause LC: advance payments prior to shipment. Green Clause LC: advance payments after warehousing. Back-to-back LC: Opening LC based on an existing LC. Deferred Payment LC: Payment in installments over a

period. Standby LC: An undertaking to pay only in the event of

non performance by the opener. Revolving LC: to make the LC available for like amount

again and again. Payment made replenishes the LC amount.

Restricted LC: Negotiation of documents by a particular Bank

20

Pre-shipment credit for purchase, processing or packing of goods

meant for exports. Packing credit – in Rupees and in FC Clean Packing Credit

Post Shipment Credit Financial assistance extended after the

shipment of exports Factoring Forfaiting

21

The objectives is to enable the exporter to :

Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and

raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business.

22

Issued to exporter who has the export order in his own name.

Also granted to third party manufacturer/ supplier who do not have export orders in their own name.

A ten digit importer exporter code number allotted by DGFT.

Exporter should not be in the caution list of RBI. License issued by DGFT if the goods to be exported fall

under the restricted category. If the goods to be exported are not under OGL (Open

General Licence), the exporter should have the required license /quota permit to export

The exporter would ship the goods and submit the relevant shipping documents to the banks within prescribed time limit.

Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer.

23

granted against confirmed order/irrevocable LC

Export order/LC should be denominated in convertible currency

The rate of interest on PCFC is linked to LIBOR.

The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro etc.

Proceeds should be realisable in convertible currency

Exports in ACU currency also eligible.

24

Granted to credit worthy parties where advance payment is required to be made to the supplier.

Quantum determined based on the likely purchase pattern of the exporter with their suppliers.

Period of CPC is determined based on the facts of each case (but not later than the period of contract/LC).

A higher margin is stipulated CPC should be converted as PC or Bills.

25

Finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds

Export Bills purchased/discounted. Export Bills negotiated Advance against export bills sent for collection. Advance against export on consignment basis Advance against un-drawn balance on exports Advance against claims of Duty Drawback

26

Set up in 1957, for the promotion of exports To protect the exporters from any financial

loss. Primary goal of ECGC : To support & strengthen the export promotion

drive in India by providing a range of credit risk insurance covers to exporters against loss in export of goods and service also by offering guarantee covers to banks and financial institutions to enable exporters to obtain better facilities from them.

27

Provides credit risk covers to Exporters against non payment risks of the overseas buyers / buyer’s country in respect of the exports made.

Provides credit Insurance covers to banks against lending risks of exporters

Assessment of buyers for the purpose of underwriting

Preparation of country reports

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COMMERCIAL RISKS

Insolvency of buyer/LC opening bank Protracted Default of buyer Repudiation by buyer POLITICAL RISKS War/civil war/revolutions Import restrictions Exchange transfer delay/embargo Any other cause attributable to importing

country

29

UNIDROIT (Institut international pour l’unification du droit prive ) is International Institute for the Unification of Private Law.

UNIDROIT convention on International factoring 1988 defined factoring as:

The assignment by a supplier of receivables arising from contracts of sale of goods made between the supplier and its customers to a factor, in which the factor is to perform at least two of the following functions:

Finance for the supplier Maintenance of accounts of the receivables Collection of receivables Protection against default in payment

30

Factoring is a continuing arrangement between

a financial institution (THE FACTOR) and a business concern (THE CLIENT) selling goods

or services to trade customers (THE CUSTOMER)

whereby the FACTOR purchases the CLIENT’s Accounts Receivables / book debts either with or without recourse to the CLIENT and administers his Sales Ledger.

31

Credit protection provided by Factors Credit protection provided by Factors involves its undertaking to purchase involves its undertaking to purchase Book debts / receivables, without Book debts / receivables, without recourse, to the Client.recourse, to the Client.

Under this service, the Factor assumes Under this service, the Factor assumes the risk of default in payment by the risk of default in payment by Customers only in case of Customers‘ Customers only in case of Customers‘ financial inability to pay.financial inability to pay.

Under "Without Recourse" arrangement, Under "Without Recourse" arrangement, the Factor has to pay to its Clients on the the Factor has to pay to its Clients on the due date of the invoice. due date of the invoice.

32

Selling international accounts receivable to "Factors"

It is a flexible way of managing trade debts. The goods can be sold on open account terms Factor provides professional help with credit

control, debt collection and sales accounting. In India, Export Factoring is undertaken by

Export Factor through an import Factor abroad. The Factoring Company (called “Factor”)

undertake Export Factoring Activity.

INFORMATION

INDIANEXPORTERINDIANEXPORTER

OVERSEAS IMPORTEROVERSEAS IMPORTER

EXPORT FACTOREXPORT FACTOR

IMPORTFACTORIMPORTFACTOR

INFORMATION

REQUEST FOR CREDIT COVER

CREDIT COVER

LETTER OF INTRODUCTION

AGREEMENTS

CONFI

RMATI

ON

DOCUMENTS

INDIANEXPORTERINDIANEXPORTER

OVERSEAS IMPORTEROVERSEAS IMPORTER

EXPORT FACTOREXPORT FACTOR

IMPORTFACTORIMPORTFACTOR

INFORMATION ON EXPORT

100 % PAYMENT

CONTRACT CONTRACT

FOLLOW UP

PRE PAYMENT

PAYMENTS

E X P O R T D

O C U M

E N T S

FINAL PAYMENT

35

The exporter give details of his overseas customers to the Export Factor.

Factor refer the same to Correspondent (Import Factor) of that country.

The Import factor establishes lines of credit for each importer after verifying their credit standing.

The credit line will be for the specific amount and period as per the terms of sales.

The Factor fix factoring prepayment limit to the exporter who signs a factoring and credit protection agreement with the Export Factor.

36

The Exporter: assign the receivables to the import factor Submit the export documents to the Export

Factor. Export Factor:

send the export documents to the importer. makes pre-payment of 80 to 90 per cent of the

invoice value to the Exporter. On due date:

The import factor collects the invoice value and remit to the Export Factor.

Export Factor, in turn makes full payment to the exporter.

Exchange control forms are disposed off.

EXPORT FACTOR

1.1. Dispatch of documents Direct Dispatch of documents Direct to the Buyer abroad in all to the Buyer abroad in all cases.cases.

2.2. Individual follow up with the Individual follow up with the buyer in his country. buyer in his country.

3.3. 100 % Credit protection in 100 % Credit protection in buyer’s country. buyer’s country.

4.4. Trade disputes not protected. Trade disputes not protected.

5.5. Responsibility of collection of Responsibility of collection of receivables with the import receivables with the import factor in the buyers country. factor in the buyers country.

6.6. Automatic payment by the Automatic payment by the import factor after 90 days import factor after 90 days from due date.from due date.

7.7. Payment from Import Factor Payment from Import Factor fulfills the obligations of the fulfills the obligations of the exporter. exporter.

8.8. Payments from import factor Payments from import factor entitles disposal of GR forms.entitles disposal of GR forms.

BANKS

1. Despatch thro’ a bank abroad in most of the cases.

2. No such follow up

3. If ECGC cover is available, part

of the risk is covered - not 100 %.

4. Not covered by ECGC also.

5. Responsibility is with the exporter.

6. Claim to be submitted if ECGC cover is available.

7. Claims settled in rupees by ECGC are not export realisation in foreign exchange.

8. ECGC Payments do not entitle automatic closure of GR Form.

38

The Factor administers the Client's sales ledger The Factor administers the Client's sales ledger and renders debt collection service.and renders debt collection service.

The amount of each invoice is made over to the The amount of each invoice is made over to the Client at the end of the credit term or on an Client at the end of the credit term or on an agreed maturity date, less the Factor's charges. agreed maturity date, less the Factor's charges.

  Such factoring could be with or without recourse. Such factoring could be with or without recourse.

If it is without recourse, the Client will get the If it is without recourse, the Client will get the amount regardless of whether the invoice is paid amount regardless of whether the invoice is paid or not. or not. 

39

Export Credit Guarantee Corporation of India Ltd., (ECGC) has a product ‘Without Recourse Export Maturity Factoring’

Banks offer Bill discounting facility to exporters against maturity Factoring of ECGC.

Among others ECGC provides the following:-

100% credit guarantee protection against bad debts100% credit guarantee protection against bad debts Regular monitoring of outstanding credits, facilitating Regular monitoring of outstanding credits, facilitating

collection on due datecollection on due date Recovery at its own cost all recoverable bad debts.Recovery at its own cost all recoverable bad debts. In the event of non-realization, payment of factored In the event of non-realization, payment of factored

receivables in Rupees, on crystallization of dues by the receivables in Rupees, on crystallization of dues by the financing institution. financing institution.

40

“Forfait” (French) means “relinquish a right”. The exporter relinquishes his right on a

receivable which is due at a future date in exchange for cash at an agreed discount, passing all the risks to the forfaitor.

It is the discount of international trade receivables on without recourse basis.

Exporter is responsible only for the validity and execution of the order. Forfaitor handles the rest.

Normally forfaiting is fixed interest rate and medium/ long term (up to 10 years) financing .

Floating interest quotes are also available. Debt is evidenced by Bills of Exchange,

Promissory Note, Letter of Credit, or Letter of guarantee.

41

The importer requests credit terms. The exporter approaches a forfaiter to know

his willingness to provide this credit and the costs.

The forfaitor needs the following information: The country of the importer The importer's name The type of goods The value of the goods The expected shipment date The repayment terms sought by the importer Name of the importer’s banker ready to

guarantee his obligations

42

The forfaiter indicates the costs involved. No commitment at this stage. The exporter negotiates with the importer. The exporter asks the forfaiter for a

commitment to purchase the debt obligations (bills of exchange, promissory notes etc) created under the transaction.

The forfaiter issues a commitment which, when accepted by the exporter, is binding on both parties

43

The commitment of forfaiter contain the following: Details of the underlying commercial transaction. Nature of the debt instruments to be purchased. The discount (interest) rate and other charges. The documents required in order to be satisfied that

the debt being purchased is valid and enforceable The latest date that the exporter can deliver these

documents to the forfaiter The exporter signs the commercial contract

with the importer and delivers the goods.

44

The importer obtains a guarantee from his bank and provides the required documents for forfaiting

This exchange of documents is usually done by a bank, through a Letter of Credit.

The exporter delivers the documents to the forfaiter who pays for them as agreed in the commitment

The exporter has no further interest in the transaction.

The forfaiter collects the future payments due from the importer and runs all the risks of non-payment.

45

3 Delivery of goods2 Commercial Contract

5 hands over documents.

8. Presents documents for Payment.

Exporter

Forfaiter

Importer

Bank

46

means unconditional and irrevocable obligation to pay

In forfaiting, the importer’s bank avalise the debt instrument.

The instrument is a Promissory Note, Bill of Exchange or Deferred Payment LC or a Letter of Guarantee.

By endorsing the bill on the back, the bank commits itself unconditionally to pay should the drawee default.

An "avalised" bill substitutes the importers risk by the bank’s risk.

The bill is stamped with wording such as "Pour Aval" and signed by a representative of the bank

47

Forfaiting has been approved by RBI in 1992. Scheme available for transactions of >US $ 1-00

lakhs. The facility provided by international Forfaitor

through an AD, called (Facilitator). The facilitator:

gets the quotes from the Forfaitor handles the documents. Arranges contract with the Forfaitor. Gets Exporter’s endorsements on the avalised

instrument if any. Forwards the avalised instrument to the Forfaitor. Collects the payment form the Forfaitor. makes payment to the exporter dispose off the GR form.

48

Net amount received by the exporter should not be less than the amount realised if goods were exported on cash basis- the export amount is to be structured for this purpose.

Commitment charge not to exceed 1.5% of contract value.

Pass all charges to the importer to the extent possible. Forfaiting proceeds are to be received in India

immediately after shipment but in any case before 180 days.

Commitment charges need not be mentioned in Export Declaration Form, but discount charges to be entered in the Export Declaration form and the shipping bill.

AD provides customs certificate for Export declaration form purposes.

49

Converts credit sales to cash sales. Finance up-to 100 % of the contract value Predetermined costs. Free from risk – credit, political & transfer. Simple documentation. Saves cost of export insurance. Do not affect other limits with the Bank. Diversify business across the borders. Can export to even listed countries without risk. Speed – Commitments within hours or days

depending on details and country.

50

High value exports Capital goods Consumer durables Vehicles Consultancy and construction contracts. Project exports Bulk commodities

51

Briefly, the cost is made up of: A charge for the money to cover the the Forfaiter's

refinancing costs, calculated on the LIBOR (London Interbank Offer Rate) rate applicable to the average life of the transaction.

A charge for covering the political, commercial, and transfer risks attached to the avalor/guarantor·

Additional costs include a "days of grace" charge; and when necessary, a commitment fee. LIBOR.

Commitment charges from the date the forfaitor is committed to undertake the forfaiting till the date of discounting – may range from 0.5% to 1.5% pa

Documentation fee Facilitation fee for the Bank acting as facilitator.

Payment in installmentssingle payment

Forfaitor comes first.Comes after contract

Single transaction Continuous relationship

availableNo secondary market

bank guarantees etc. Supported by invoices only

Longer periodShort term

Mostly capital goodsConsumer goods etc

Mostly international Mostly domestic

ForfaitingFactoring

53

Construction equipments

Infrastructure Machineries

Truckss