TRADE FINANCE

PRESENTATION TO PT. MULTISTRADA ARAH SARANA

TRADE PRODUCT GROUPCORPORATE BANKING

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RISKS IN INTERNATIONAL TRADE

RISKS

Country RiskBuyer’s Risk

Force Major

Foreign Exchange Risk

Commercial Risk

Seller’s Risk

Risk Issues in International Trade

Reliable information concerning the company’s track record?

Insolvency of your trading partner?

Default or termination on your contract?

Volatile foreign currency?

Stable political climate? War? Revolution?

Positive economic environment?

Solid legal infrastructure?

Exotic countries – OFAC List?

Distance?

Credit worthiness of Buyer?

Disputes?

Restrictions imposed by governments?

Late arrival of the goods?

Damaged goods?

Goods not as per contract requirement?

Risk Mitigation

Risks Issues in International Trade

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CREDIT RISK ANALYSIS

Customer’s Perspective

Managing Liquidity – Cash Flow

Lower Cost of Financing

Lower Risks :• Counter Parties• Foreign Exchange• Countries – OFAC List

Best Service

Credit Risk Analysis in International Trade

Credit Risk Analysis in International Trade

Credit Risks

Lower Counter Party / Foreign Exchange / Country Risks

Higher Revenue / Higher Return

Lower Capital

• Bank’s Perspective

Relevant questions to the Customer about their Supplier► Who are the suppliers and how many suppliers are there?► What are the goods and amounts involved? ► What method of payment applies to the contract between the supplier and

our customer?► Does the supplier extend credit terms to our customer?► Who pays for freight and insurance?► If a supplier ships under DC, what is the time period between

establishment of DC and receipt of documents (goods) by the DC issuing bank (DC lead time)?

► What is the validity of the DC? ► Does the customer require a term DC?► Are a full set of negotiable title documents consigned to the Bank

available?► Is merchanting trade involved?

Credit Risk Analysis in International Trade

Relevant questions to the Customer about their Buyer► Who are the buyers and how many buyers are there?► What are the goods and amounts involved? ► What method of payment applies to the contract between the buyer

and our customer?► Does our customer extend credit terms to the buyer?► If our customer sells under documentary collection, where are the

buyers located and how soon can the documents be delivered to the buyer via the Collecting bank?

► We need to determine the document transit time (the interval between our purchase of an export collection bill and the customer’s receipt of funds under D/P or D/A.

► If our customer sells under DC, who are the issuing banks and does our customer require DC confirmation and/or discounting?

► Can we consider GBIL for DC issuing banks (DC confirmation and discounting)?

Credit Risk Analysis in International Trade

Credit Risk Analysis in International Trade

Provide financial support

Apply international codes of practice

Conduct delivery channel for payment

methods

Maintain control over the goods on behalf of the exporter

• 1

• 3

• 2• 4How Bank help in

dealing with the RISKS ?

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COMMERCIAL CONTRACT

Commercial Contract

What is Commercial Contract?A formal written agreement between a seller and buyer for the sale of goods, real property or services

Commercial Contract• Provisions of Commercial Contract

• Minimum Provision:• Name and address of Buyer and Seller• Description of goods• Shipping and delivery instruction and

documentation• Payment terms• Insurance coverage

• Additional Provisions:• Method of packaging and marking• Inspection and test by the Buyer• Warranties of the Seller• Banking guarantee• Remedies in case of default• Dispute settlement• Choice of Law• Insurance fee

Commercial ContractItems of Commercial Contract?· Description of Goods · Quantity· Price terms· Delivery time / Shipment date· Terms of payment· Validity time· Destination· Packing and Marking· Shipment terms : partial,

transhipment, vessel age· Shipping documents : Bill of Lading,

Airway Bill

· Inspection Clause· Force Majeure· After sales service

Commercial Contract

• Agreement • Obligatoir • Penalty

Principles of Commercial Contract

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PAYMENT METHOD IN INTERNATIONAL TRADE

Payment Methods

Clean Payment Documentary Collection

Documentary Credit

Payment Methods in

International Trade

Sight and Usance Revocable and Irrevocable Negotiable and Non

Negotiable Confirmed and Not Confirmed

Open Account Advance Payment

Clean Collection and CAD Sight Draft and Time Draft D/P and D/A

RISK LADDER

LEAST RISK TO IMPORTER

HIGHEST RISK TO

IMPORTER

HIGHEST RISK TO EXPORTER

Clean Payment - Open Account

Documentary Collections

Documents Against Acceptance

Documents Against Payment

Documentary Credit / Letter of Credit

Unconfirmed

Confirmed

Clean Payment – Advance Payment

Payment Methods

LEAST RISK TO EXPORTER

Clean Payment

• Based on trust between Buyer and Seller.

• The Exporter sends the goods and trusts the Importer to pay

once the goods have been received, or, • The Importer trusts the Exporter to send the goods after

payment is effected.• All shipping documents, including title documents, are

handled directly by the trading parties. • Role of banks is limited to clearing funds as required.

ADVANCE PAYMENTThe Importer sends payment directly to the Exporter and trusts for the Exporter to send the goods and documents.

Exporter

Importer

• 1• GOODS

• 2• PAYMEN

T

Clean Payment

Exporter

Importer

• 2• GOODS

• 1• PAYMEN

T

OPEN ACCOUNTThe Exporter ships the goods and the documents directly to the Importer and trusts for the Importer to send payment

ADVANCE PAYMENT

Buyer provide credit to Seller.

Most advantageous to Seller.

Protection is short for Buyer when order of goods cannot be realized by Seller while Buyer has already provide the fund for such purpose.

Usually carried out only for trade transaction with the following condition:

• Trade value is not of great amount.

• Buyer has really trust Seller.

• Such goods are really required and there is no other choice

Clean PaymentOPEN ACCOUNT

Seller gives credit to Buyer.

Disadvantage to Seller.

Protection is short for Seller when Buyer freely take goods after their arrival at the port of destination.

This payment method occurs because:

• Seller has been really sure that Buyer will realize payment at the time already set.

• Seller is sure that there is no blocking payment policy from government of Buyer’s country.

• Seller has sufficient liquidity to give credit to Buyer

Documentary Collection

An arrangement whereby the exporter shipped the goods to importer, and exporter sends the shipping documents and drafts to his bank for further send to importer’s bank to collect payment and/or acceptance from the importer on his behalf.

COLLECTION CYCLE

1.Sales Contract

• 2

Goods3

Invoice +

Transport Document

• 5

• 6

8

Acceptance

&

Payment

Acceptance

&

Payment

Invoice + Transport Document

Invoice +

Transport Document

Acceptance & Payment

4

7

Documentary Collection

COLLECTING / PRESENTING BANK

REMITTING BANK

EXPORTER / DRAWER IMPORTER / DRAWEE

Documentary Collection Types of Documentary Collection:

In term of documents submission :• Clean Collection only Draft as document collected.• Cash Against Document (CAD) the shipping document collected by

Buyer’s Bank will be released to Buyer only after payment.

In term of payment period (tenor) :• Sight Draft if payment is made at sight.• Time Draft if payment is made on a certain date, or in a period of several

days after a certain date.

In term of payment certainty :• Documents against Payment (D/P) submission of documents by Bank

to Buyer after payment is made.• Documents against Acceptance (D/A) submission of documents by

Bank to Buyer after acceptance.

BUYER

More profitable

• Lower transaction cost because purchase of goods is not accompanied by DC Issuing.

Documentary CollectionSELLER

More risk :

• Documentary Risk Buyer refuse to take goods since documents submitted to Bank are not complete.

• Commercial Risk Buyer refuse to take goods due to declines of selling price of the goods.

• Political Risk Buyer’s import license is suddenly revoked by local government.

• Transfer Risk Transfer restriction of Buyer’s country due to lack of foreign exchange

Documentary Credit (DC)

• Usually called as Letter of Credit (L/C)• A Bank’s written guarantee issued on behalf of the Buyer to pay the Seller a given sum of money provided that documents presented comply with terms and conditions of the Documentary Credit

Documentary Credit (DC)Principles Issued by Bank

8 Every DC issued by Bank at the request of Buyer (as DC Applicant) must bear burdens and risks arising from consequences of such DC opening.

Containing Payment Undertaking8 DC constituting a payment undertaking from Issuing Bank to Seller (as DC

Beneficiary) so that Seller is no longer necessary to worry about credibility of Buyer (as DC Applicant) because Issuing Bank has undertaken it.

Conditional Undertaking8 DC issued by Bank is a conditional undertaking means that payment will be

made as long as Seller (as DC Beneficiary) has presented documents that comply with terms and conditions stipulated in the DC.

Involved Certain Parties8 DC issued by Bank shows involved parties such as Buyer (as DC Applicant),

Issuing Bank, Paying Bank and Confirming (if any) and Seller (as DC Beneficiary).

Time Factor8 DC has also time factor such as expiry date, latest shipment date and latest

presentation.

Documentary Credit (DC)Conditional Payment Undertaking The use DC as payment is a agreed for payment implementation for

delivery of documents transferring proprietary rights to or supervision over any goods. In other words, the payment can only be made if documents delivered are really in accordance with DC terms and conditions. It should be realized by all parties concerned.

As consequences of the documentary undertaking of the DC, DC issuing bank can not refuse payment if goods are not according to documents.

Advantages of DC As instrument in goods purchase transaction especially import goods.

As financing basis of DC Issuing Bank to finance importer.

Constituting a safer method for the parties involved in trade transaction concerning uniformity in interpreting terms in its implementation.

DC CYCLE

1. CommercialContract

5

Goods shipped6ADocument

8

9

Payment (Sight)

or

Acceptance

(Usance)

Document

Document

Payment (Sight) or Acceptance (Usance)

6B

7A

Documentary Credit (DC)

ISSUING BANKADVISING BANK /NEGOTIATING BANK

EXPORTER / BENEFICIARY IMPORTER / APPLICANT

DC

Application

2

3Issue DC

4

Advise the DC

Payment (Sight)

or

Acceptance

(Usance)

7B

Documentary Credit (DC)Parties Involved in DC Buyer, called as Applicant or Account Party

8 Party who requesting its Bank to issue DC and to whom the Issuing Bank will finally charge its account.

Seller, called as Beneficiary8 Party who receiving payment undertaking from the Issuing Bank and to whom

the DC is designated / issued.

Issuing Bank8 Bank who carries out DC issuing at the request of Buyer containing payment

undertaking to Seller.

Advising Bank8 Bank who is requested by the Issuing Bank to advise / forward DC to Seller (as

DC Beneficiary).

Negotiating Bank8 Bank who is carrying out taking over or negotiation or purchase of documents

submitted by Seller (as DC Beneficiary) based on the DC.

Documentary Credit (DC)Parties Involved in DC Paying Bank

8 Bank who is designated by the Issuing Bank to make payment to Seller (as DC Beneficiary).

Accepting Bank8 Bank who is carrying out acceptance on Time Draft drawn based on the DC by

Seller (as DC Beneficiary).

Confirming Bank8 Bank who confirms or do secures the DC issued by another bank.

Documentary Credit (DC)General Types of DC

Based on Tenor of Payment► SIGHT DC a payment undertaking issued by Issuing Bank on compliance

presentation whether or not accompanied by Draft taken over from Beneficiary.► USANCE DC a payment undertaking issued by Issuing Bank for delivery of

documents together with Draft on a certain maturity date after there has been acceptance from Issuing Bank.

Based on Obligatoir Principle► REVOCABLE DC can be unilaterally amended / cancelled by Issuing Bank

without prior notice to Beneficiary.► IRREVOCABLE DC a definite undertaking from Issuing Bank for delivery of

documents according to the terms and conditions in the DC. • UCP DC 2007 Revision ICC Publication No. 600 (UCP 600) accepts only

Irrevocable Documentary Credit

Documentary Credit (DC)General Types of DC

Based on Terms of Payment► PAYMENT DC payment made by Issuing Bank designated in the DC. ► NEGOTIATION DC payment made by Issuing Bank, or Confirming Bank (if any),

for taking over of documents, both sight and usance tenor.► RESTRICTED DC payment or negotiation is only applicable at a designated bank

nominated in the DC.

Based on another Bank’s undertaking► CONFIRMED DC an additional payment undertaking to the DC made by Other

Bank by taking responsibility for and bound to the payment, acceptance and negotiation.

► UNCONFIRMED DC a payment undertaking from Issuing Bank only.

Documentary Credit (DC)Special Types of DC

Standby DC8 DC that provide payment undertaking against Beneficiary Attestation rather than

documentary evidence .8 Issued to guarantee performance of the transaction, goods and services, between

Applicant and Beneficiary. 8 Payment under Standby DC will be made when Applicant cannot perform the

transaction (default) and it is attested by Beneficiary when claim payment to Standby DC Issuing Bank.

8 Same purposes with Bank Guarantee issuing.

Documentary Credit (DC)International Commercial Terms (Incoterms)

Incoterms are the international rules for the interpretation of trade terms. It is a term of the contract of sale and represents contemporary commercial practice.

Incoterms tell the Seller and Buyer what to do with respect to :► carriage of the goods from the Seller to Buyer.► export and import clearance ► explains the division of costs and risks between Seller and Buyer.

Incoterms clearly defines the respective obligations of the Sellers and Buyers to give notice, provide documents, provide information including security-related information, procure insurance, and pack the good properly and clear them for export and import and carry out all formalities for the export and import of the goods.

SELLER BUYER

SELLER'S COSTS & RISKS

SELLER'S COSTS & RISKS

SELLER'S COSTS & RISKS

FOB

CFR

CIF

BUYER'S COSTS & RISKS

• BUYER'S COSTS & RISKS

BUYER'S COSTS & RISKS

• BUYER'S COSTS & RISKS

FREIGHT (SELLER)

BUYER'S RISKS

FREIGHT & INSURANCE (SELLER)

BUYER'S RISKS

ON BOARD

Documentary Credit (DC)

Most Frequent Incoterms applied for Documentary Credit

Documentary Credit (DC)

SKBDN (Surat Kredit Berdokumen Dalam Negeri)

Local LC issued by domestic banks to cover intra nation trade.

Subject to Bank Indonesia Regulation / Peraturan Bank

Indonesia (PBI) Nomor 5/6/PBI/2003.

The PBI is binding to all parties involved in Local LC / SKBDN

transaction.

Peraturan Bank Indonesia (PBI) No. 5/6/PBI/2003 for SKBDN

SKBDN hanya berlaku untuk transaksi perdagangan barang. Perpindahan barang dilakukan di dalam negeri atau perpindahan barang dari

dalam negeri ke luar negeri sepanjang SKBDN diterbitkan atas dasar master L/C dan non L/C untuk tujuan ekspor.

Bisa dibuka dalam valuta asing, sepanjang SKBDN terkait dengan perdagangan internasional.

SKBDN tidak dapat dijadikan master L/C untuk membuka L/C ke luar negeri. Bank Pembuka memiliki waktu minimal 7 (tujuh) hari kerja perbankan setelah

tanggal penerimaan dokumen untuk melakukan pemeriksaan dan menentukan pengambilalihan atau penolakan dokumen.

Bank Pembuka dapat menerima penyerahan dokumen yang melewati batas waktu berakhirnya SKBDN.

Prinsip Independensi. Prinsip Keterikatan pada dokumen

Documentary Credit (DC)

Thank You