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Analysis of trade finance AXIS BANK LIMITED

INDIAN BANKING INDUSTRY 3.1 INTRODUCTION The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks. These banks have over 67,000 branches spread across the country. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking.Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector also grew during the 1970s in protected environments and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eightfold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSBs) found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.

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Analysis of trade finance AXIS BANK LIMITED

After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

PRESENT SCENARIO: Banking industry is in a transition phase. The Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account for more than 78 per cent of total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.

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Analysis of trade finance AXIS BANK LIMITED

The structure of the Indian banking system can be assessed by the following pictorial representation

Fig. No. 3.1 Structure of banking system

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Analysis of trade finance AXIS BANK LIMITED

3.2 CHALLENGES FACING BANKING INDUSTRY IN INDIA The banking industry in India is undergoing a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank trying to graduate from completely regulated seller market to completed deregulated customers market.  Deregulation: This continuous deregulation has made the Banking market extremely competitive with greater autonomy, operational flexibility and decontrolled interest rate and liberalized norms for foreign exchange. The deregulation of the industry coupled with decontrol in interest rates has led to entry of a number of players in the banking industry. At the same time reduced corporate credit off take thanks to sluggish economy has resulted in large number of competitors batting for the same pie.  New rules: As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. Natural fall out of this has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.  Efficiency: This in turn has made it necessary to look for efficiencies in the business. Banks need to access low cost funds and simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread and have to give thrust on retail assets.  Diffused Customer loyalty: This will definitely impact Customer preferences, as they are bound to react to the value added offerings. Customers Page 4

Analysis of trade finance AXIS BANK LIMITED

have become demanding and the loyalties are diffused. There are multiple choices; the wallet share is reduced per bank with demand on flexibility and

Customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.  Misaligned mindset: These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly creeping in but the utilization is not maximized.  Competency Gap: Placing the right skill at the right place will determine success. The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. The focus of people will be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

 Strategic options with banks to cope with the challenges: Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives include:  Investing in state of the art technology as the back bone to ensure reliable service delivery  Leveraging the branch network and sales structure to mobilize low cost current and savings deposits  Making aggressive forays in the retail advances segment of home and personal loans  Implementing organization wide initiatives involving people, process and technology to reduce the fixed costs and cost per transaction

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Analysis of trade finance AXIS BANK LIMITED

 Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade services)  Innovating Products to capture customer ‘mind share’ to begin with and later the wallet share

FOREIGN EXCHANGE 1.1 INTRODUCTION Meaning Foreign exchange refers to foreign money, which includes near money instruments denominated in foreign currency such as notes, cheques, bills of exchange, bank balances and deposits in foreign currencies. 

Foreign exchange is the simultaneous exchange of one country’s currency for that of another. By foreign exchange it is meant here obtaining the earnings that are received out of export of project, goods and services that is earnings from the rest of the world by respective countries.

 It covers different means and methods by which the claims expressed in terms of one currency and specifically deals with the rate at which such conversion take place. This rate is known as exchange rate.  The foreign exchange market is the market in which currencies are bought & sold against each other. The Foreign Exchange Market can be defined as the market in which individuals; business firms and banks purchase and sell foreign currency. The term market, here, does not refer to a central meeting place but a communication system through which participants remain in continuous contact with one another. For example, the foreign exchange market for any currency such as US Dollar consists of all locations where US Dollar is purchased and sold for other national currencies. These locations include Sydney, Tokyo, Hong Kong and San Francisco besides other locations. It is the world’s largest market in which, rather than currencies, most of the transactions involve bank transfers via electronic funds transfer system. Trades are concluded within seconds. Page 6

Analysis of trade finance AXIS BANK LIMITED

With advancements in technology, deals are also done through electronic dealing systems in which purchases and sales are automatically triggered off by price moves. Reserve bank of India and FEDAI regulate the foreign currency transactions in India. Policy is determined by Reserve bank and day-to-day transactions are governed by the guidelines issued by FEDAI. Foreign Exchange is the process of conversion of one currency into another currency. For a country its currency becomes money and legal tender. For a foreign country it becomes the value as a commodity. Since the commodity has a value its relation with the other currency determines the exchange value of one currency with the other. For example, the US dollar in USA is the currency in USA but for India it is just like a commodity, which has a value which varies according to demand and supply. Most countries of the world have their own currencies The US has its dollar, France its franc, Brazil its cruziero; and India has its Rupee. Trade between the countries involves the exchange of different currencies. It is the largest market in the world. Transactions conducted in foreign exchange markets determine the rates at which currencies are exchanged for one another, which in turn determine the cost of purchasing foreign goods & financial assets. The most recent, bank of international settlement survey stated that over $900 billion were traded worldwide each day.

1.2 CHARACTERSTICS  An over-the-counter (OTC) market: Foreign exchange market has no physical presence. The Participants deal among themselves directly through telephones, telexes, restricted money changers computer terminals and other electronic means of communication and settle their transactions without the facilitation of an exchange or a clearinghouse.

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Analysis of trade finance AXIS BANK LIMITED

 A 24-hour market: Foreign exchange market spans all the time zones of the world and functions virtually round the clock.  No single location-no barriers: Foreign exchange market is global in character. Although the market does not exist at each and every centre in the world, its accessibility is from any part of the world. Thus, it is possible for

bank in Mumbai to buy or sell dollars or any other currency in the Tokyo forex market or any other market.  A highly volatile and liquid market: The main causes of fluctuation in exchange rates are demand and supply of a currency, i.e. the amount generally offered for sale or purchase at any given time. Exchange rates of actively traded currencies are said to fluctuate almost every four seconds.

1.3 NEED FOR FOREIGN EXCHANGE OPERATIONS One of the important components of the international financial system is the foreign exchange market. The various commercial and financial transactions between countries result in receipts and payments between them. Such receipts and payments involve exchange of one currency for another. Thus, rupee is a legal tender in India, but an exporter in UK will have no use for these rupees. He therefore, wishes to receive from the importer in India only in pound sterling. Then the importer will have to convert such rupees into pounds in that transaction. The foreign exchange from one country to another is the basis for demand for currencies in the exchange market. Such merchandise and invisible trade items constitute nearly 70–80 percent of the total transactions in the market. Conversion of currencies is also necessary for short-term capital flows or long– term investment in financial or physical assets of another country. It will thus be seen that the services of the exchange market are necessary not only for trade transactions but also for any financial receipts or payments as between countries. Any receipts and payment of

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Analysis of trade finance AXIS BANK LIMITED

foreign cash, coins, and claims in currencies or credit instruments involve foreign exchange transactions. In India exports and imports are increasing at a faster rate but the rate of growth of imports is more as compare to exports. This leads to negative Balance of Payment position. To compensate this trade deficit, government is allowing the inflow of money from abroad. This inflow is called Foreign Exchange Reserve.

1.4 SOURCES OF FOREIGN EXCHANGE The sources of foreign exchange reserves are as follows: 1. Foreign Direct Investment(FDI) 2. Foreign Institutional Investment(FII) 1. Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) contributes directly and indirectly in building national capabilities. FDI is considered the best complement to domestic investment to bridge the gap between the investment needs of the Country and its savings. FDI has long term and substantial developmental impact on the country’s economy. FDI helps transfer and upgrade technology; improves skills and managerial capabilities; provides competitive edge to country’s exports; improves efficiency and quality of services and goods; and helps create additional jobs. 2. Foriegn Institutional Investment (FII) The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market.

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Analysis of trade finance AXIS BANK LIMITED

Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets. Types of typical investors include banks, insurance companies, retirement.

TRADE FINANCE 2.1 INTRODUCTION Trade finance is related to international trade. Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other institution of the importer provides for paying for goods imported on behalf of the importer. Trade Finance is the specific topic within the financial services industry. It’s much different, for e.g., than the commercial lending, mortgage lending or insurance. A product is sold and shipped overseas; therefore it takes longer to get paid. Extra time and energy is required to make sure that buyers are reliable and creditworthy. In addition, foreign buyers-just like domestic buyers-prefer to delay payment until they receive and resell the goods. Due diligence and careful financial management can mean the difference between profits and loss on each transaction. For importers and exporters seeking to participate in global markets, efficient access to international markets along with local expertise is paramount .While a seller (the exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support.

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Analysis of trade finance AXIS BANK LIMITED

For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract. Other forms of trade finance can include Documentary collection, trade credit insurance, export factoring, forfeiting and others. In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions. Trade Finance provides alternatives solutions that balance risk and payment. 2.2 CATEGORIES IN TRADE FINANCE In this overview, there are two broad categories of Trade Finance:

1. Pre-Shipment Financing 2. Post-Shipment Financing

EXPORTER

SHIPPMENT

PRE-SHIPMENT

IMPORTER

POST-SHIPMENT

Fig. No. 2.1 Requirement of Pre-Shipment and Post-Shipment Finance

1. Pre-Shipment financing to produce or purchase the material and labor necessary to fulfill the sales order.Pre-Shipment finance is credit granted to the exporters by a

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Analysis of trade finance AXIS BANK LIMITED

financial institution. Pre-Shipment credit is part of working capital finance. The main objective behind Pre-Shipment finance is to enable exporters to:  Procure raw materials  Carry out manufacturing processes  Provides a secure warehouse for goods and raw material.  Process and pack the goods.  Ship the goods to the buyer.  Meet other financial costs of the business.

IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE  To purchase raw material, and other inputs to manufacture goods.  To assemble the goods in the case of merchant exporters.  To store the goods in suitable warehouses till the goods are shipped.  To pay for packing, marking and labeling of goods.  To pay for pre-shipment inspection charges.  To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods.  To pay for consultancy services.  To pay for export documentation expenses

2. Post-Shipment financing in order to generate immediate cash while offering payment terms to buyers. Post-Shipment finance is a loan, advance or any other credit provided by an institution to an exporter of goods from India. This finance is from the date of extending the credit after shipment of the goods to the realization date of the export proceeds. It is any form of credit provided by a bank to the exporter from the date of extending credit after shipment of goods to the date of receipt of export proceeds.

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Analysis of trade finance AXIS BANK LIMITED

IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE  To pay to agents/distributors and others for their services.  To pay for publicity and advertising in the overseas markets.  To pay for port authorities, customs and shipping agents charges.  To pay towards export duty or tax, if any.  To pay towards ECGC premium.  To pay for freight and other shipping expenses.  To pay towards marine insurance premium, under CIF contracts.  To meet expenses in respect of after sale service.  To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad.

2.3 KEY FACTORS/COMPONENTS IN TRADE Any trade transaction can be broadly broken into: 1. Movement of Goods. 2. Movement of Documents. 3. Movement of Funds. Traditionally, Banks have played role in the ‘Movement of Documents’ and ‘Movement of Funds’, while ‘Movement of Goods’ have been done through the whole range of logistics players operating at different levels of supply chain.

2.4 WHY DO COUNTRIES NEED INTERNATIONAL TRADE A country may need International Trade/business because of various reasons which are as follows:  To achieve higher profits.  To expanding the production capacities beyond the demand of domestic country.  Severe competition is faced by businesses in domestic country. Page 13

Analysis of trade finance AXIS BANK LIMITED

 Limited home market either in size or in purchasing power.  Availability of technology, managerial competencies, and raw material at cheaper rates.  To increase their market share.  To avoid tariffs and import quotas.  Due to liberalization and globalization.  To earn foreign exchange.

2.5 WHY CUSTOMERS NEED INTERNATIONAL TRADE

 Access to wider markets.  Diversity risk.  Larger potential sales market.  Access to new ideas & technology.  Wealth generation for country.  Incentives for Exports.  Improve prestige/global awareness.

CONCERNS FOR EXPORTERS  Marketing process is complicated.  Cost to organizations.  Ability to develop markets and sell in them.  Financial returns may be less certain.

CONCERNS FOR IMPORTERS

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Analysis of trade finance AXIS BANK LIMITED

 How to make the payments-may need credit terms.  Availability of knowledge. Is the importer trading with the best supplier?  Need of finance.  Quality of goods.  Cost of importing.  Shipment timing issue.

RISK ASSOCIATED WITH INTERNATIONAL TRADE  COUNTRY RISK – Tariffs, quotas, import/export registration.  POLITICAL RIK – Wars, strike, trade transactions.  FOREX RISK – Fluctuating rates affecting price & profit.  IMPORTER’S RISK – Non-payment of invoices, delayed payment, buyer’s insolvency. 

EXPORTER’S RISK – Failure to supply goods.

 TRANSIT RISK – Mode of transit.  INDUSTRY RISK – Demand of particular products, competitive production, pricing, fashionable/seasonable goods.

2.6 WHY A BANK /AXIS NEEDS AN INTERNATIONAL TRADE Page 15

Analysis of trade finance AXIS BANK LIMITED

 To increase profits via fees, commission, interest on products.  Develop products to facilitate trade.  Maximize potential services.

2.7 DOCUMENTS REQUIRED IN AN INTERNATIONAL TRADE Almost every party to international trade issues documents. These documents are very important in international trade because they serve evidence that some action has been carried out. Based on these documents, a seller can prove to the buyer that he has fulfilled his obligation whilst the buyer is assured of his request being carried out by the seller. In brief, the existence of these documents makes international transaction trade possible. The following is a list of documents often used: Air Waybill – This is a receipt of goods from Airline Company. Bill Of Lading – This is a receipt given by the shipping company to the shipper for goods accepted for carriage by sea. Certificate Of Origin – This is a declaration that goods originated in a particular country. Combined Transport Document – This lists the place, place of delivery and the different modes of transport involved. It is also known as Multimodal Transport Document, Inter-modal Transport Document or Combined Transport Bill of Lading. Commercial Invoice – This is a statement of goods shipped, and is also a statement of payment due. It describes the goods shipped and lists the price together with details as agreed between the buyer and seller. Draft (or bill of exchange) – This is a demand for payment issued by the exporter(drawer) to the importer(drawee)-NB in the case of documentary credits the drawee is usually the DC opening bank.

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Analysis of trade finance AXIS BANK LIMITED

Insurance Policy (or certificate) – The date on which the insurance becomes effective must be the same as or earlier than the date of issuance of the transport documents. Packing List/Specification – This lists contents of each crate, parcels etc. showing packing materials used and shipping marks placed on the outside. Inspection Certificate – In many cases the importer requests/requires the consignment to be inspected by a third party at the port of shipment/exporter’s factory or warehouse before the goods are sealed and transported.

FLOW IN CASE OF INTERNATIONAL TRANSACTION EXPORTER’S BANK

EXPORTER

EXPORT COUNTRY’S CUSTOM

IMPORTER’S BANK

IMPORTER

IMPORT COUNTRY’S CUSTOM

Where: Blue-Movement of Funds Brown-Movement of Documents Black-Movement of Goods Fig. No. 2.2 Procedure of International Trade Transaction

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Analysis of trade finance AXIS BANK LIMITED

REGULATORY ENVIRONMENT FOR INTERNATIONAL TRADE

Fig. No. 2.3 Regulators of International Trade

In INDIAN context, the major policy/regulatory framework in international trade are laid down by: 1. Directorate General Of foreign Trade (DGFT). 2. Reserve Bank of India (RBI). 3. International Chambers of Commerce (ICC). 4. Foreign Exchange Dealers Association of India (FEDAI).

DIRECTORATE GENERAL OF FOREIGN TRADE It operates under the ministry of commerce and it lays down policies and regulations relating to physical movement of goods into India. Any company undertaking imports or exports of goods/services requires getting itself registered with the DGFT.DGFT issues an IMPORTER EXPORTER CODE (IEC) to the company. IEC is a unique code that the company needs to provide to the bank and to the customs/ other regulatory Page 18

Analysis of trade finance AXIS BANK LIMITED

agencies.While making International Transactions. IEC code helps DGFT and other agencies in keeping a track of various International Transactions done by the company.

2.8 RESERVE BANK OF INDIA (RBI) RBI’s role in trade is concerned with: 1. EXCHANGE CONTROL: RBI oversees the payment and receipts by residents to nonresidents and vice versa. 2. CREDIT NORMS OF RBI: Any credit being extended to another party is controlled by RBI credit norms. As a result both domestic and international trade and currency transactions come within the scope of various RBI regulations. RBI regulations: RBI also closely monitors international transactions in order to ensure compliance with various forex regulations.

INTERNATIONAL CHAMBERS OF COMMERCE (ICC) ICC is an apex international body, which forms the guidelines for smooth functioning of trade and forex transactions across countries. ICC has laid out UNIFORM CUSTOM and PRACTICE FOR DOCUMENTARY CREDITS (UCPDC).A set of rules called UCP-500 has been created. Banks throughout the world use these rules.

FOREIGN EXCHANGE DEALER’S ASSOCIATION OF INDIA (FEDAI) FEDAI is an apex forum of banks authorizes to deal in forex issues and guidelines. Its main functions are:  Guidelines and rules for Forex Business. Page 19

Analysis of trade finance AXIS BANK LIMITED

 Trading of banks personnel in the areas of Foreign Exchange Business.  Accreditation of Forex Brokers.  Advising/assisting member banks in settling issues/ matters in their dealing.  Representing member banks on government/RBI/other bodies.  Announcement of daily and periodicals rates to member banks. Trading between countries is fraught with difficulties. In order to facilitate exporting, several international “set of rules” have been created. In the area of sending goods and responsibility for delivery and customs clearance, most countries recognize INCOTERMS 2000, published in 1936 and now in its 6th revision. The standardized INCOTERMS:  Define responsibilities for carriage, custom clearance and risk, including who pays for loading onto and transport, and the production of documents.  Define delivery. Such delivery may be a useful start point of any credit given to the customer.  Are internationally recognized, reducing cultural and language difficulties.

INCOTERMS are not:  Contract. They are simple set of definition and rules.  A means of transfer of property rights or a definition of transfer of property rights.  Provision for relief from unforeseen events. There are 13 different INCOTERMS and they have been grouped into 4 categories: 1. The E term (departure)  Ex-Works (Ex-Factory. Ex-Godown) 2. The F terms (Free, Main Carriage Unpaid)  FCA (Free Carrier-Named Point)  F.A.S (Free Alongside Slip)

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Analysis of trade finance AXIS BANK LIMITED

 F.O.B (Free On Board) 3. The C terms (Main Carriage Paid)  CFR (Cost & Freight)  C.I.F (Cost, Insurance, Freight)  CPT (Carriage Paid To)  CIP (Carriage, Insurance and Freight Paid) 4. The D terms (Delivery/Arrival)  D.A.F (Delivery At Frontier)  DES (Delivery Ex Ship)  DEQ (Delivery Ex Quay)  DDU (Delivery Duty Unpaid)  DDP (Delivery Duty Unpaid)

PROFILE OF AXIS BANK 4.1 INTRODUCTION Commercial banking services which includes merchant banking, direct finance infrastructure finance, venture capital fund, advisory, trusteeship, forex, treasury and other related financial services. As on 31-Mar-2009, the Group has 827 branches, extension counters and 3,595 automated teller machines (ATMs). Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I).Life Page 21

Analysis of trade finance AXIS BANK LIMITED

Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 359.76 crores with the public holding (other than promoters) at 57.79%.The Bank's Registered Office is Jamnagar and its Central Office is located at Mumbai. The Bank has a very wide network of more than 853 branches and Extension Counters (as on 30th June 2009). The Bank has a network of over 3723 ATMs (as on 30th June 2009) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

4.2 HISTORY 1993: The Bank was incorporated on 3rd December and Certificate of business on 14th December. The Bank transacts banking business of all description. UTI Bank Ltd. was promoted by Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation of India and its four subsidiaries. The bank was the first private sector bank to get a license under the new guidelines issued by the RBI. 1997: The Bank obtained license to act as Depository Participant with NSDL and applied for registration with SEBI to act as `Trustee to Debenture Holders’. Rupees 100 crores was contributed by UTI, the rest from LIC Rs 7.5 crores, GIC and its four subsidiaries Rs 1.5 crores each. 1998: The Bank has 28 branches in urban and semi urban areas as on 31st July. All the branches are fully computerized and networked through VSAT. ATM services are available in 27 branches. The Bank came out with a public issue of 1,50,00,000 No. of equity shares of Rs 10 each at a premium of Rs 11 per share aggregating to Rs 31.50 crores and Offer for sale of 2,00,00,000 No. of equity shares for cash at a price of Rs 21

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Analysis of trade finance AXIS BANK LIMITED

per share. Out of the public issue 2,20,000 shares were reserved for allotment on preferential basis to employees of UTI Bank. Balance of 3,47,80,000 shares were offered to the public. The company offers ATM cards, using which account-holders can withdraw money from any of the bank's ATMs across the country which is inter- connected by VSAT. UTI Bank has launched a new retail product with operational flexibility for its customers. UTI Bank will sign a co-brand agreement with the market, leader, Citibank NA for entering into the highly promising credit card business. UTI Bank promoted by India's pioneer mutual fund Unit Trust of India along with LIC, GIC and its four subsidiaries. 1999: UTI Bank and Citibank have launched an international cobranded Credit card. UTI Bank and Citibank have come together to launch an international co-branded credit card under the MasterCard umbrella. UTI Bank Ltd has inaugurated an off site ATM at Ashok Nagar here, taking the total number of its off site ATMs. 2000: The Bank has announced the launch of Tele-Depository Services for Its depository clients. UTI Bank has launch of `iConnect', its Internet banking Product. UTI Bank has signed a memorandum of understanding with equitymaster.com for e-broking activities of the site. Infinity.com financial Securities Ltd., an e-broking outfit is Typing up with UTI Bank for a banking interface. Geojit Securities Ltd, the first company to start online trading services, has signed a MoU with UTI Bank to enable investors to buy\sell demat stocks through the company's website. India bulls have signed a memorandum of understanding with UTI Bank. UTI Bank has entered into an agreement with Stock Holding Corporation of India for providing loans against shares to SCHCIL's customers and funding investors in public and rights issues. ICRA has upgraded the rating UTI Bank's Rs 500 crore certificate of deposit programmed to A1+. UTI Bank has tied up with L&T Trade.com for providing customized online trading solution for brokers.

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Analysis of trade finance AXIS BANK LIMITED

2001: UTI Bank launched a private placement of non-convertible debentures to rise up to Rs 75 crores. UTI Bank has opened two offsite ATMs and one extension counter with an ATM in Mangalore, taking its total number of ATMs across the country to 355. UTI Bank has recorded a 62 per cent rise in net profit for the quarter ended September 30, 2001, at Rs 30.95 crore. For the second quarter ended September 30, 2000, the net profit was Rs 19.08 crore. The total income of the bank during the quarter was up 53 per cent at Rs 366.25 crore. 2002: UTI Bank Ltd has informed BSE that Shri B R Barwale has resigned as a Director of the Bank w.e.f. January 02, 2002. A C Shah, formerchairman of Bank of Baroda, also retired from the bank’s board in the third quarter of last year. His place continues to be vacant. M Damodaran took over as the director of the board after taking in the reins of UTI. B S Pandit has also joined the bank’s board subsequent to the retirement of K G Vassal. UTI Bank Ltd has informed that Shri Paul Fletcher has been appointed as an Additional Director Nominee of CDC Financial Service (Mauritius) Ltd of the Bank.And Shri Donald Peck has been appointed as an Additional Director (nominee of South Asia Regional Fund) of the Bank. UTI Bank Ltd has informed that on laying down the office of Chairman of LIC on being appointed as Chairman of SEBI, Shri G N Bajpai, Nominee Director of LIC has resigned as a Director of the Bank.

2002: B Paranjpe & Abid Hussain cease to be the Directors of UTI Bank.UTI Bank Ltd has informed that in the meeting of the Board of Directors following decisions were taken: Mr Yash Mahajan, Vice Chairman and Managing Director of Punjab Tractors Ltd were appointed as an Additional Director with immediate effect. Mr N C Singhal former Vice Chairman and Managing Director of SCICI was appointed as an Additional Director with immediate effect. ABN Amro, UTI Bank in pact to share ATM. UTI Bank Ltd has

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Analysis of trade finance AXIS BANK LIMITED

informed BSE that a meeting of the Board of Directors of the Bank is scheduled to be held on October 24, 2002 to consider and take on record the unaudited half yearly/quarterly financial results of the Bank for the half year/Quarter ended September. 2002. UTI Bank Ltd has informed that Shri J M Trivedi has been appointed as an alternate director to Shri Donald Peck with effect from November 2, 2002. 2003: UTI Bank Ltd has informed BSE that at the meeting of the Board of Directors of the company held on January 16, 2003, Shri R N Bharadwaj, Managing Director of LIC has been appointed as an Additional Director of the Bank with immediate effect.- UTI Bank, the private sector bank has opened a branch at Nellore. The bank's Chairman and Managing Director, Dr P.J. Nayak, inaugurating the bank branch at GT Road on May 26. Speaking on the occasion, Dr Nayak said. This marks another step towards the extensive customer banking focus that we are providing across the country and reinforces our commitment to bring superior banking services, marked by convenience and closeness to customers. -UTI Bank Ltd. has informed the Exchange that at its meeting held on June 25, 2003 the BOD have decided the following: 1) To appoint Mr. A T Pannir Selvam, former CMD of Union Bank of India and Prof. Jayanth Varma of the Indian Institute of Management, Jamnagar as additional directors of the Bank with immediate effect. Further, Mr. Pannir Selvam will be the nominee director of the Administrator of the specified undertaking of the Unit Trust of India (UTI-I) and Mr. Jayanth Varma will be an Independent Director. 2) To issue Non-Convertible Unsecured Redeemable

Debentures up to Rs.100 crs, in one or more tranches as the Bank's Tier - II capital. -UTI has been authorized to launch 16 ATMs on the Western Railway Stations of Mumbai Division. -UTI filed suit against financial institutions IFCI Ltd in the debt recovery tribunal at Mumbai to recover Rs.85cr in dues. –UTI bank made an entry to the Food Credit Programme; it has made an entry into the 59 cluster which includes private sector, public sector, old private sector and co- operative banks. –Shri Ajeet Prasad, Nominee of

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Analysis of trade finance AXIS BANK LIMITED

UTI has resigned as the director of the bank. -Banks Chairman and MD Dr. P. J. Nayak inaugurated a new branch at Nellore.-UTI bank allots shares under Employee Stock Option Scheme to its employees. -Unveils pre-paid travel card 'Visa Electron Travel Currency Card' -Allotment of 58923 equity shares of Rs 10 each under ESOP. -UTI Bank ties up with UK govt fund for contract farm in -Shri B S Pandit, nominee of the Administrator of the Specified Undertaking of the Unit Trust of India (UTI-I) has resigned as a director from the Bank wef November 12, 2003. -UTI Bank unveils new ATM in Sikkim. 2004:Comes out with Rs. 500 mn Unsecured Redeemable Non- Convertible Debenture Issue, issue fully subscribed -UTI Bank Ltd has informed that Shri Ajeet Prasad, Nominee of the Administrator of the Specified Undertaking of the Unit Trust of India (UTI - I) has been appointed as an Additional Director of the Bank w. e. f. January 20, 2004.-UTI Bank opens new branch in Udupi-UTI Bank, Geojit in pact for trading platform in Qatar -UTI Bank ties up with Shriram Group Cos -Unveils premium payment facility through ATMs applicable to LIC UTI Bank customers –Metal junction (MJ)- the online trading and procurement joint venture of Tata Steel and Steel Authority of India (SAIL)- has roped in UTI Ban k to start off own equipment for Tata Steel. -DIEBOLD Systems Private Ltd, a wholly owned subsidiary of Diebold Incorporated, has secured a major contract for the supply of ATMs an services to UTI Bank -HSBC completes acquisition of 14.6% stake in UTI Bank for .6 m -UTI Bank installs ATM in Thiruvananthapuram.

AXIS Group’s Products & Services

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Analysis of trade finance AXIS BANK LIMITED

Bank

Mutual Fund

Institutional Equities

Axis Private Equity

Credit Cards

Car Finance

Investment Banking

Axis Realty Fund

Life Insurance

Securities

International Business

Wealth Management

Table 3.1 Products offered by Axis

WORKING CAPITAL CYCLE OF AXIS

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Analysis of trade finance AXIS BANK LIMITED

Fig. No3.2 Working Capital Cycle of Axis

OBJECTIVE OF THE STUDY

FINANCE IS THE LIFE AND BLOOD OF ANY BUSINESS. Success or failure of any export order mainly depends upon the finance available to execute the order. Page 28

Analysis of trade finance AXIS BANK LIMITED

Nowadays export finance is gaining great significance in the field of international finance.

Many Nationalized as well as Private Banks are taking measures to help the exporter by providing them pre-shipment and post- shipment finance at subsidized rate of interest. Some of the major financial institutions are EXIM Bank, RBI, and other financial institutions and banks. EXIM India is the major bank in the field of export and import of India. The objectives as this study can be as follows:

MAIN OBJECTIVE The foremost objective of this project is to understand the Trade Finance Techniques used at AXIS BANK.

SUB OBJECTIVE Further, this study also attempts to-

 

Understand the procedure involved in trade financing. Discuss the terms and conditions for sanctioning and disbursing of pre-shipment and packing credit.



Discuss the types of post-shipment credit facilities available at axis bank.

 

Understand the documentation required for letter of credit. Analyze the track records of the NRI deposits at the Bank. Page 29

Analysis of trade finance AXIS BANK LIMITED



To ascertain the FERM practices, and product usage, of Indian corporate

 

enterprises. To know the attitudes, perceptions and concerns of Indian firms towards FERM. To ascertain the organization structure, policymaking and control process adopted by the firms, which use derivatives, in managing foreign exchange exposure.

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Analysis of trade finance AXIS BANK LIMITED

RESEARCH METHODOLOGY A research design is the arrangement of condition for collection and analysis of data in a manner that to, combine relevance to research purpose with economy in procedure. Research Design is conceptual structure within which research is conducted. It constitutes the blue print of collection, measurement and analysis of data. Research Design is needed because it facilitates the smooth sailing of various research operations, thereby making research as efficient as possible yielding maximum information with minimum time, effort and money. Research Design stands for advance planning of methods to be used for collecting relevant data and techniques to be used in the analysis .The design helps researcher to organize his ideas whereby it will be possible for him to look for flaws and inadequacies. Following questions have to be asked in Research Design  What is the study about?  Why is the study being made?  What type of data is required?  Where can data be found?

DATA COLLECTION METHODS After the research problem, we have to identify and select which type of data is to research. At this stage; we have to organize a field survey to collect the data. One of the important tools for conducting study is the availability of necessary and useful data.

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Analysis of trade finance AXIS BANK LIMITED

SOURCES OF DATA Most of the information was collected through a secondary source i.e. through a data, which have been gathered for some other purpose. 1. Primary data: Feedbacks from seniors, peers are sources of primary data.

2. Secondary Data: Company’s profile, journals, intranet studies are important sources of secondary data.  Books on Treasury Management, Foreign Exchange, Derivatives etc.  Articles from Magazines like Business World, Fortune, Forbes etc.  Information collected from various sites on Internet.  Information collected from various manuals used only for internal circulation in bank.

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Analysis of trade finance AXIS BANK LIMITED

INTERNATIONAL TRADE TRANSACTIONS OR TRADE FINANCE AT AXIS

Fig. No. 7.1 Remittances and its Types These are 3 broad ways of effecting outward payment (imports) in international trade: 1. Clean Payments  Advance Payments  Open Account (Direct Imports) 2. Bills For Collection 3. Documentary Credit

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Analysis of trade finance AXIS BANK LIMITED

7.1 ADVANCE PAYMENTS AT AXIS Advance Payment is the arrangement where importer pays for the goods to be shipped in advance and Exporter is trusted to ship the goods after receiving payment from the importer. In other words the Importer sends payments directly to the Exporter and waits for the Exporter to send the goods and documents. Advance Payments are usually adopted where the parties do not have long term relationship.

PROCESS FLOW IN CASE OF ADVANCE PAYMENTS

EXPORTER’S BANK

EXPORTER

EXPORT COUNTRY’S CUSTOM

IMPORTER’S BANK

IMPORTER

IMPORT COUNTRY’S CUSTOM

Where Blue: Movement of Funds Brown: Movement of Documents Black: Movement of Goods Fig. No. 7.2 Procedure for collection of Advance Payments

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Analysis of trade finance AXIS BANK LIMITED

DOCUMENTS REQUIRED 1. REQUEST LETTER (by the importer giving instructions to bank for remitting its exporter or not). 2. FEMA Declaration (stating that importer fulfills all the t&d and can freely trade or not). 3. FORM A1 (for payment of imports relating to physical goods only). 4. PERFORMA INVOICE 5. NON NEGATIVE LIST

ADVANTAGES TO:  IMPORTER

– None

 EXPORTER– Funds received can be used for manufacturing.

- Not bound to ship the goods (can be fradulant). RISK TO:  IMPORTER

– Funds are committed. - Shipment is uncertain. - No control over goods.

 EXPORTER

- None

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Analysis of trade finance AXIS BANK LIMITED

7.2 DIRECT IMPORT OR OPEN ACCOUNT AT AXIS It is the arrangement where Exporter ships the goods and the documents directly to the importer and waits for the Importer to send the payment. This type of transaction symbolizes long term and regular relationship between the two parties. A mutual level of trust between the parties ensures that an open account system is carried on smoothly. It is one of the simplest modes of doing business as long as parties trust each other.

PROCESS FLOW IN CASE OF OPEN ACCOUNT

EXPORTER’S BANK

EXPORTER

EXPORT COUNTRY’S CUSTOM

IMPORTER’S BANK

IMPORTER

IMPORT COUNTRY’S CUSTOM

Where Blue: Movement of Funds Brown: Movement of Documents Black: Movement of Goods Fig. No. 7.3 Procedure for collection of Open Account

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Analysis of trade finance AXIS BANK LIMITED

DOCUMENTS REQUIRED 1. REQUEST LETTER (by the importer giving instructions to bank for remitting its exporter or not).

2. FEMA Declaration (stating that importer fulfills all the t&d and can freely trade or not). 3. FORM A1 (for payment of imports relating to physical goods only). 4. COMMERCIAL INVOICE 5. NON NEGATIVE LIST 6. BILL OF ENTRY

ADVANTAGES TO:  IMPORTER

– Control over the goods.

 EXPORTER

– None.

RISK TO:  IMPORTER

– None.

 EXPORTER

– No control over goods. -Uncertainty of receipt of payment.

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Analysis of trade finance AXIS BANK LIMITED

RISK ANALYSIS

HIGHEST RISK TO EXPORTER

LEAST RISK TO EXPORTER

OPEN ACCOUNT

ADVANCE PAYMENT

LEAST RISK TO IMPORTER

HIGHEST RISK TO IMPORTER

Fig. No. 7.4 Risk Analysis of Advance Payments and Open Account

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Analysis of trade finance AXIS BANK LIMITED

7.3 CLEAN OUTWARD REMITTANCES AT AXIS It is the arrangement where exporter and importer deal with exchange of other than physical goods for example payment regarding import of some technology or software or paying for some student fees, royalties, commissions, dividends etc. These transactions are characterized by trust; these are also known s remittances other than imports.

DOCUMENTS REQUIRED 1. REQUEST LETTER (by the importer giving instructions to bank for remitting its exporter or not).

2. FEMA Declaration (stating that importer fulfills all the t&d and can freely trade or not). 3. FORM A2 (for payment of imports relating to otherwise than physical goods). 4. COMMERCIAL INVOICE/any underlying instruction. 5. CA CERTIFICATE. 6. AGREEMENT IF NEEDED.

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Analysis of trade finance AXIS BANK LIMITED

7.4 BILLS FOR COLLECTION AT AXIS This is a method of payment used in international trade whereby the Exporter entrusts the handling of commercial and often financial documents to the banks and gives the banks instructions concerning the releases of these documents to the Importer. There are 2 types of documentary collection transactions: 1. Document Against Payment (D/P) 2. Document against acceptance (D/A) 1. DOCUMENT AGAINST PAYMENT (D/P) Documents are released to the Importer only against payment. This is sometimes referred as Cash against documents/Cash on delivery. In the effect D/P means payable at sight (on demand). The collecting bank hands over the shipping documents including the document of title (Bill of Lading) only when the Exporter has paid the bill. The drawee is usually expected to pay within 3 working days of presentation. The attached instructions to the shipping documents would show “released documents against payment”.

PROCESS FLOW IN CASE OF D/P

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Analysis of trade finance AXIS BANK LIMITED

COLLEECTING/ PRESENTING BANK

REMITTING BANK

IMPORTER

EXPORTER

EXPORT COUNTRY’S CUSTOM

.

IMPORT COUNTRY’S CUSTOM

Where Blue: Movement of Funds Brown: Movement of Documents Black: Movement of Goods Fig. No. 7.5 Procedure for collection of Payment under D/P

ADVANTAGES TO:  IMPORTER

– To examine documents before payment. - Fees are minimal

 EXPORTER

– Less costly than Letter of Credit -Documents are not released unless payment is effected.

RISK TO:  IMPORTER – In case documents are titled goods cannot be accessed.  EXPORTER

– Risk of refusal of payment. Page 41

Analysis of trade finance AXIS BANK LIMITED

Commercial and country risk.

2. DOCUMENT AGAINST ACCEPTANCE (D/A)

Under document against acceptance, the Exporter allows credit to the Importer: the period of credit is referred to As ‘usance’ The Importer/ drawee are required to ACCEPT the bill i.e. to make a signed promise to pay the bill a set date in the future. When he has signed the bill in acceptance, he can take thee documents and clear his goods. The payment date is calculated from the ‘term’ of the bill- the ‘term’ is usually a multiple of 30 days and starts either from sight or from the date of shipment, whichever is earlier on the bill of exchange. The attached instructions would show “Release documents against Acceptance’

PROCESS FLOW IN CASE OF D/A

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Analysis of trade finance AXIS BANK LIMITED

. REMITTING BANK

COLLEECTING/ PRESENTING BANK

IMPORTER

EXPORTER

EXPORT COUNTRY’S CUSTOM

IMPORT COUNTRY’S CUSTOM

Where Blue: Movement of Funds Brown: Movement of Documents Black: Movement of Goods Fig. No. 7.6 Procedure for collection of Payment under D/A

ADVANTAGES TO:  IMPORTER – Will receive goods before making payment.  EXPORTER – Less costly than Letter of Credit.

RISK TO:  IMPORTER

–

Dishonoring accepted draft which is a legal obligation, may ruin

business reputation.  EXPORTER

– Risk of non acceptance of documents. - Legal enforcement of unpaid obligation is costly and time consuming.

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Analysis of trade finance AXIS BANK LIMITED

RISK ANALYSIS HIGHEST RISK TO EXPORTER

OPEN ACCOUNT

LEAST RISK TO IMPORTER

DOCUMENTS AGAINST ACCEPTANCE (D/A)

DOCUMENTS AGAINST PAYMENT (D/P) LEAST RISK TO IMPORTER

ADVANCE PAYMENT

HIGHEST RISK TO EXPORTER

Fig. No. 7.7 Risk Analysis of D/A, D/P, Advance Payments and Open Account

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Analysis of trade finance AXIS BANK LIMITED

PROCEDURE FOLLOWED FOR TRADE TRANSACTIONS AT AXIS

EXPORTER

AXIS BANK

Branch issue credit advise to customer

Loan sanction amount credit to customer’s A/C

Request forward to CPC i.e. Bombay authority

CPC checks the documents and the limits

Fig. No. 7.8 Overall Procedure At Axis For Treating the Transactions For processing any of the transaction at axis following procedure was followed:  Firstly the documents are received (through client, courier, mail, scan or by fax) for the transactions to be processed.  Then minor scrutiny of the documents is to be done in order to ensure the correctness and completion of the documents.  Proper signature or stamp of the higher authority is needed to confirm the transaction.  The scan image of that transaction is to be maintained in order to have the record of the transactions done.  The original copy of the transaction is kept as a record and the transaction is processed by the scan image.

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Analysis of trade finance AXIS BANK LIMITED

 After, that the same transaction is to be forwarded to higher authority (i.e. in Bombay), who will do the full scrutiny of the transaction and processing and in case any discrepancy occurs the same is intimated to the branch, who in turn intimates the same to the Relationship Manager who originally generated the transaction for the company, and he in turn gets the discrepancy solved by the client.  In case document does not have any discrepancy the authority in Bombay takes the rate from treasury department (rate of foreign currency from the interbank market) and calculates the total amount (inclusive of the bank’s commission) to be paid by the client for the processing of the transaction.  While processing of the transaction, one fact must be kept in mind that, to complete the transaction, it must be forwarded to Bombay authority before 3.00 P.M., so that transaction can be done as soon as possible.

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Analysis of trade finance AXIS BANK LIMITED

7.5 DOCUMENTARY CREDIT (L.C) Documentary Credits, otherwise popularly known as “Letter Of Credit” (L.C.), is an instrument of settling trade payments. The International Chamber Of Commerce (ICC) in the Uniform Custom and Practices for Documentary Credit (UCPDC) defines it as: An arrangement, however named or described, where by a bank (the issuing bank) acting at the request and on the instructions of a customer (the applicant) or on its own behalf:  Is to make a payment to or to the order of a third party (the beneficiary) or is to accept bill of exchange (drafts) drawn by the beneficiary Or  Authorize another bank to effect such payments or to accept and pay such bills of exchange (drafts). Or  Authorize another bank to negotiate against stipulated documents provided that the terms are compiled with. LC is an arrangement where 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. A key principle in LC is that bank deals only in the documents and not in the goods. The decision to pay under LC will be entirely based on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the Letter Of Credit. High degree of involvement by the banks in the Documentary Credit process builds in trust into the transactions. Page 47

Analysis of trade finance AXIS BANK LIMITED

7.5.1 PARTIES TO LETTER OF CREDIT  APPLICANT – Applicant is normally the buyer of the goods, who has to make payment to beneficiary. LC is initiated and issued at his request and in the basis of his instruction.  ISSUING BANK – Issuing Bank is one which issues the credit i.e. it is the bank that creates a letter of credit and undertakes to make payment.  BENEFICIARY – Beneficiary is normally the seller of the goods, who has to receive payment from the applicant. A credit is issued in his favor to enable him or his agent to obtain payment on surrender of stipulated documents.  ADVISING BANK – Advises Bank advices the credit to the beneficiary, there by assuring the genuineness of the credit. It is normally situated in the country/place of Beneficiary. The advising bank may be correspondent bank of the issuing bank or could be specifically notified by the beneficiary.  CONFIRMING BANK – Confirming Bank adds its guarantee to the credit opened by another bank, there by undertaking the responsibility of payment/negotiation/acceptance under the credit, in addition to that of the issuing bank.  NEGOTIATING BANK – Negotiation is the process of giving value to the documents. The negotiating bank is one with whom the documents may be negotiated. The LC may either specify the negotiating bank (restricted negotiation) or the exporter may be free to negotiate through any bank (unrestricted negotiation).  REIMBURSING BANK – Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by negotiating bank. It is normally the bank with which Issuing Bank has an account, from which payment is too made. This role may also be played by the ‘issuing bank’ itself.

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Analysis of trade finance AXIS BANK LIMITED

LETTER OF CREDIT PROCESS REIMBURSING BANK

CONFIRMING BANK

ADVISING BANK

NEGOTIATING BANK

ISSUING BANK

EXPORTER

IMPORTER

EXPORT COUNTRY’S CUSTOM

IMPORT COUNTRY’S CUSTOM

Where Blue: Movement of Funds Brown: Movement of Documents

Page 49

Analysis of trade finance AXIS BANK LIMITED

Black: Movement of Goods Green: LC Issuance Fig. No. 7.9 Procedure for the Issue of L.C

DOCUMENTS REQUIRED  COMMERCIAL INVOICE  TRASNPORT DOCUMENT  INSURANCE DOCUMENT  INSPECTION CERIFICATE  CERTIFICATE OF ORIGIN

ADVANTAGES TO:  IMPORTER – Importer is assured that Exporter will get paid. -Ability to negotiate more favorable trade terms with exporter -Risk shifts from importer to issuing bank.  EXPORTER

– Payment is assured.

RISK TO:  IMPORTER – LC ensures correct documents not correct goods.  EXPORTER

– Non compliance to terms leaves exporter at risk.

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Analysis of trade finance AXIS BANK LIMITED

7.5.2 TYPES OF LETTER OF CREDIT 1. REVOCABLE L.C.  It can be revoked, cancelled or amended by issuing bank without any notice to other parties.  Least satisfactory from the point of view of Exporter.  Advantageous from the point of Importer.  If nothing mentioned, assume to be irrevocable.

2. IRREVOCABLE L.C.  It is an undertaking on the part of Issuing bank for not revoking or amending without the consent of other parties (particularly beneficiary).  More favorable for Exporter.

3. CONFIRMED & UNCONFIRMED L.C.  It is an L.C. to which another bank adds its confirmation.  More favorable to beneficiary, involves double guarantee.  Confirmation is desired from a bank which is known to Exporter, may be in his own country.  Risk becomes localized and can easily deal with a local bank.  Advising bank forwards the unconfirmed letter to seller but ensures the authenticity of the Issuing bank.

4. STAND BY LETTER OF CREIDT  An assurance to beneficiary that applicant shall perform his part.  It is kind of performance guarantee in case of default by importer.

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Analysis of trade finance AXIS BANK LIMITED

 This is issued mostly by banks in country’s where they are precluded from issuing guarantees.

5. REVOLVING L.C.  Revolving credit is used for regular shipments of the same commodity to the same importer.  It is re-instated for further regular shipments until the credit is fully drawn. 

Revolving letters of credit are useful to avoid the need for repetitious arrangements for opening or amending letters of credit

6. TRANSFERABLE L.C.  It can be transferred from original beneficiary in favor of second beneficiary or several others.  The word TRANSFERABLE has to be mentioned in L.C.  If not mentioned then it should not effect the beneficiary’s right to receive the payment.  It can only be transferred from first to only second beneficiary and not further (it can be the opener of L.C).

7. BACK TO BACK L.C.  It is also known as Countervailing Credit.  When a L.C is opened with the security of another L.C, it is BACK TO BACK L.C.  The original L.C which is offered as security for opening a back to back L.C is known as Overriding Credit.  Many banks are reluctant to issue this kind of credit which involves a lot of risk on part of banks.

8. SIGHT & USANCE L.C.  Under this payment would be made by the issuing bank at sight, on demand.

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Analysis of trade finance AXIS BANK LIMITED

 Under this payment would be made by the issuing bank after a certain period of time.

9. RED CLAUSE L.C.  This enables the confirming bank to make advances to exporter even before the presentation documents.  This clause is to be written in RED ink.  Inclusion of this credit is to be decided by exporter and importer beforehand.

10. GREEN CLAUSE L.C. If credit is given to the exporter to cover the period of storage of goods at the sea port.

11. NEGOTIABLE L.C.  In this credit shall be available by negotiation.  The bank which negotiates payment is negotiating bank.  This facility is available if only the sentence is mentioned in L.C “payment is allowed by negotiation”.  In this case exporter can get the payment even before the documents gets scrutinize.

12. WITH/WITHOUT RECOURSEL.C.  A L.C with recourse is when the negotiating bank can approach the beneficiary for the refund of payment.  Whereas under without recourse L.C negotiating bank cannot approach beneficiary for the refund.  A confirmed L.C is without recourse.  An unconfirmed L.C is with recourse.

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Analysis of trade finance AXIS BANK LIMITED

RISK ANALYSIS HIGHEST RISK TO EXPORTER

OPEN ACCOUNT

LEAST RISK TO IMPORTER

DOCUMENTS AGAINST ACCEPTANCE DOCUMENTS AGAINST PAYMENT UNCONFIRMED LC CONFIRMED LC LEAST RISK TO IMPORTER

ADVANCE PAYMENT

HIGHEST RISK TO EXPORTER

Fig. No. 7.10 Risk Analysis of Advance Payment, Open Account, D/A, D/P, Unconfirmed L.C., Confirmed L.C

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Analysis of trade finance AXIS BANK LIMITED

7.6 BANK GUARANTEE Guarantees are given by bank on behalf of its customers regarding specific performance/obligation by the customer to the other party. The guarantee ensures payment to the party the bank’s customer is doing business. Under a bank guarantee/surety bond agreement, the bank act as a guarantor of a claim or obligation in lieu of the debtor. The bank cannot be held liable n the event that the debtor. The banks obligation is limited to its pledge to pay a maximum specified amount on fulfillment of the terms of the commitment. A bank guarantee/surety bond may only be issued if the customer has been granted a line of credit. In certain cases, the bank may require adequate collateral. One may note that even though in both Letter Of Credit and Bank Guarantee ensures that the issuing bank guarantees payment, the difference lies in the fact that while LC is a ‘positive action’ instrument, BG is a non-performance instrument. Hence, payment is released under LC as and when all the terms of the underlying trade transaction are met. On the other hand, payment is released under BG if and when the terms of the underlying transaction are not compiled with.

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Analysis of trade finance AXIS BANK LIMITED

7.7 MAJOR FINANCIAL AND OTHER INSTITUTIONS For providing credit and finance and insuring export credit risk, there are 2 primary institutions i.e. EXIM Bank and ECGC. Although there are other commercial banks, nationalized institutions and private institutions such as IFCI, IDBI, engaged in providing finance to exporter. The major institutions are EXIM Bank, ECGC, and RBI.

1. EXIM BANK

Fig. No. 7.11 Evolving Vision of EXIM Bank Exim Bank Act-Completed 20 years of operations. 

Set up by an Act of Parliament in September 1981.



Commenced operations in March 1982. Page 56

Analysis of trade finance AXIS BANK LIMITED



Wholly owned by the Government of India.



Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting foreign trade in India.



Exim is the principal financial institution in the country for co-coordinating working of institutions engaged in financing exports and imports.

INTRODUCTION OF EXIM BANK The Export-Import bank of India is the apex institution for project finance, which provides direct finance and coordinates the working of the institution, which is engaged in financing export or import of goods and services. It has taken over the operations of international finance wing of the industrial development bank of India (IDBI). The EXIM bank of India came into existence on 1st January 1982, and started functioning from 1st march 1982. It has it’s headquarter in Mumbai and its branches and offices in important cities in India and abroad.

OFFICES Head office – Mumbai. A network of 13 offices in India and Overseas. Domestic Offices - Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune. Overseas Offices - Budapest, Johannesburg, Milan, Singapore, Washington DC.

PURPOSE The EXIM bank was established for the purpose of financing medium and long term loan to the exporters thereby promoting foreign trade of India.

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Analysis of trade finance AXIS BANK LIMITED

MAIN OBJECTIVES  To provide financial assistance (medium and long term) to exporters and importers.  To function as the principal financial institution for coordinating the working of institutions engaged in providing export finance.  To promote Foreign Trade of India.  To deal with all matters that may be considered to be incidental or conducive to the attainment of above objectives.

2. EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD. In order to provide export credit and insurance support to Indian exporters, the GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was transformed into export credit guarantee corporation limited (ECGC) in 1964. Since 1983, it is now know as ECGC of India Ltd. ECGC is a company wholly owned by the GOI. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing government, Banking, Insurance, Trade and Industry. The ECGC with its headquarters in Bombay and several regional offices is the only institution providing insurance cover to Indian exporters against the risk of non-realization of export payments due to occurrence of the commercial and political risks involved in exports on credit terms and by offering guarantees to commercial banks against losses that the bank may suffer in granting advances to exports, in connection with their export transactions.

OBJECTIVES OF ECGC:

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Analysis of trade finance AXIS BANK LIMITED

 To protect the exporters against credit risks, i.e. non-repayment by buyers  To protect the banks against losses due to non-repayment of loans by exporters

COVERS ISSUES BY ECGC: The covers issued by ECGC can be divided broadly into four groups: 1. STANDARD POLICIES – issued to exporters to protect then against payment risks involved in exports on short-term credit. 2. SPECIFIC POLICIES – designed to protect Indian firms against payment risk involved in (i) exports on deferred terms of payment (ii) service rendered to foreign parties, and (iii) construction works and turnkey projects undertaken abroad. 3. FINANCIAL GUARANTEES – issued to banks in India to protect them from risk of loss involved in their extending financial support to exporters at pre-shipment and post-shipment stages; and 4. SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks which add confirmation to letters of credit opened by foreign banks, Insurance cover for Buyer’s credit, etc.

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Analysis of trade finance AXIS BANK LIMITED

TRADE FINANCE Letters of credit (LC-Sigh/Usance) Whether you are an exporter or an importer, axis bank offers a gamut of services to meet your entire letter of credit requirement including opening, advising and confirming LCs. We also structure complex letters of credit, back to back LCs to suit specific transaction requirements. Bill Collection Service Axis Bank offers flexible and efficient handling of commercial and financial documents for imports and exports. We have in place an extensive network and correspondents banking arrangements to facilitate the same. Trust receipt loans This financial facility can bridge the gap between payment for imported goods nad receipt of funds through subsequent sales, thus liquidity. This ensure that our customers do ot miss any business opportunities’ due to inadequate cash flow. Invoice Financing For customers who wish to import their products on open account terms, we provide invoice financing facilities, such facilities are tailors to customer’s needs to carry out their imprt activities without using a documentary credit. Export LC Negotiation We can provide immediate payment to our customers on presentation of shipping documents under a LC transaction.

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Analysis of trade finance AXIS BANK LIMITED

CASE STUDY: TRADE FINANCE Supporting trade flows across emerging markets Our position at the crossroads of world trade has allowed Axis Bank to take full advantage of opportunities along trade flows for more than 150 years. Many of our long-standing client relationships are anchored by the trade business and trade clients often rely on us for other bank services such as cash management and foreign exchange. Trade is the lifeblood of emerging markets. With market uncertainties affecting trade last year, we took the lead to form partnerships with other organisations to boost the growth of trade flows. This included our agreement with the OPEC Fund for International Development (OFID) to expand our trade finance risk-sharing programme, which helps support an estimated incremental $4 billion of international trade flows each year. We also worked with InterAmerican Development Bank (IDB) in negotiating a new Latin American Trade Co-lending Partnership to facilitate trade finance between Latin America and markets in Asia, Africa and the Middle East. As part of our multi-award winning trade finance securitisation programme Sealane, the Bank successfully completed a second securitisation with Sealane II in August. Despite the challenging market environment, the transaction was oversubscribed and upsized to $3 billion from $2.5 billion. This programme created additional capacity for us to pursue further business with our clients. By remaining open for business and extending our strong balance sheet to finance our existing clients, we have strengthened our reputation as a reliable banking partner.

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Analysis of trade finance AXIS BANK LIMITED

Our ability to meet our clients’ needs with products and expertise supported by consistent global service standards has been integral to Axis Bank position as one of the world’s top trade finance banks.

LIMITATIONS OF THE STUDY

Every work has its own limitation. Limitations are extent to which the process should not exceed. Limitations of this project are:-

 The project was constrained by time limit of two months.  No personal interaction with the clients of the organization.  Getting feedback at appropriate time from the concerned senior or peer was very difficult

 Concerned seniors or peers were very busy in their schedule. So it took more time to get on to the information for the project.

 Non disclosure of company’s policy or its system or pattern of doing work was an obstacle in acquiring complete information.

 No accessibility to the storage of the information available on the intranet of the company.

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Analysis of trade finance AXIS BANK LIMITED

FINDINGS & RECOMMENDATIONS

 The preliminary scrutiny must be done by the relationship manager before forwarding the transaction to the bank through its client.  Instead of minor/light scrutiny by the bank, a full fledged scrutiny should be done at Axis, so there is no wastage of time when Bombay authority scrutinizes the documents and then it forwards the discrepancy and then solves it.

 There should be proper time limit to receive the transactions from clients, to reduce delay of the transactions.  Trade Finance is a very important branch to study & understand the overall gamut of the international finance market.  Availability of favorable Trade finance schemes directly impacts the local trade, encourages exporters, enlarges markets abroad, improves quality of domestic goods and overall helps the nation boost its exchange earnings.

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Analysis of trade finance AXIS BANK LIMITED

 The Government of any nation plays a very vital role in boosting export turnover. The credit policy of the Indian Government is also changed depending upon the needs of the exporters, global trade environment etc.

CONCLUSION According to Foreign Trade (Development and Regulation) Act, 1992 a business firm can enter into the business of export-import only if has been allotted Importer-Exporter Code Number (IEC) by the competent licensing authority. The chief licensing authority of India is the office of the Director General Foreign Trade (DGFT) under the ministry of Commerce, Government of India, with its headquarters located at Udyog Bhavan, New Delhi. A business should apply to the office of regional licensing authority i.e. the competent authority, having territorial jurisdiction over the firm for the allotment of the Importer-Exporter Code Number. Trade policy governs exports from and imports into a country. It is one of the various policy instruments used by a country to attain her goals of economic development. Before planning for export marketing strategy, it is essential that the entrepreneurs and export managers should be well aware of the legal environment in terms of the trade policy of their country besides understanding the rules and regulations of the importing country. Trade policy provides vital inputs for the formulation of business growth strategies. In India, the legal framework for the regulation of international trade is mainly provided by Foreign Trade (Development and Regulation) Act, 1992. The main objective of this act is to provide for the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India. This Act has replaced the earlier law namely, the Imports and Exports (Control) Act, 1947.

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Analysis of trade finance AXIS BANK LIMITED

The primary responsibility for the safety of banks in their foreign exchange operations rests with the managements of banks.It is the management’s responsibility to set appropriate limits to the risks taken by bank in its foreign exchange business and to ensure that there are proper internal control procedures covering this area of a bank’s activities.

A proactive role of governments in trade finance may alleviate the lack of trade finance in emerging GMS economies and contribute to trade expansion and facilitation. However, the best long-term solution in resolving the constraints in trade financing is to encourage the growth and development of a vibrant and competitive financial system, comprising mainly private sector players. This point is important as some of the governmentsupported trade financing schemes may increasingly be challenged by competing countries as unfair export subsidies under existing and future WTO rules. The role of the government and other parties involved in trade finance will need to evolve along with the country’s economy. Underlying the functions provided by the different players is the need for a clear and effective legal environment. The commercial legal system must be transparent. Laws of property, contract and arbitration must be clear. The commercial legal environment must be integrated with the financial infrastructure framework in order for it to be effective.

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Analysis of trade finance AXIS BANK LIMITED

BIBLIOGRAPHY  WEBSITES 

http://www.axis.com/AxisGroupSite/groupcos/investment_banking.htm

 

http://www.intracen.org/tfs/docs/overview.htm www.forex.com

 BOOKS 

INDIAN INSTITUTE OF BANKING & FINANCE, “Practitioner’s book on TRADE FINANCE”, Taxman Publications Pvt Ltd, June 2005.



P.K. Khurana “Export Management” (7th Edition) Galgotia Publishing Company, 2008.

 COMPANY SOURCES 

Mr. Alka Tyagi Manager (Operations Dept.) at Axis Bank Ltd.



Mrs. Jitendra Kumar Shukla (deputy manager)



Senior Manager (Operations Dept.) at Axis Bank Ltd

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Analysis of trade finance AXIS BANK LIMITED

 OTHERS 

Intranet of Axis Bank used as a secondary source of data.

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