Saturday 13 November 2010

EXPORT RISK MANAGEMENT.

Introduction
Export pricing is the most important factor in for promoting export and facing international trade competition. It is important for the exporter to keep the prices down keeping in mind all export benefits and expenses. However, there is no fixed formula for successful export pricing and is differ from exporter to exporter depending upon whether the exporter is a merchant exporter or a manufacturer exporter or exporting through a canalising agency.

Like any business transaction, risk is also associated with good to be exported in an overseas market. Export is risk in international trade is quite different from risks involve in domestic trade. So, it becomes important to all the risks related to export in international trade with an extra measure and with a proper risk management.

The various types of export risks involve in an international trade are as follow:
Credit Risk
Sometimes because of large distance, it becomes difficult for an exporter to verify the creditworthiness and reputation of an importer or buyer. Any false buyer can increase the risk of non-payment, late payment or even straightforward fraud. So, it is necessary for an exporter to determine the creditworthiness of the foreign buyer. An exporter can seek the help of commercial firms that can provide assistance in credit-checking of foreign companies.

Poor Quality Risk
Exported goods can be rejected by an importer on the basis of poor quality. So it is always recommended to properly check the goods to be exported. Sometimes buyer or importer raises the quality issue just to put pressure on an exporter in order to try and negotiate a lower price. So, it is better to allow an inspection procedure by an independent inspection company before shipment. Such an inspection protects both the importer and the exporter. Inspection is normally done at the request of importer and the costs for the inspection are borne by the importer or it may be negotiated that they be included in the contract price.
Alternatively, it may be a good idea to ship one or two samples of the goods being produced to the importer by an international courier company. The final product produced to the same standards is always difficult to reduce.

Transportation Risks
With the movement of goods from one continent to another, or even within the same continent, goods face many hazards. There is the risk of theft, damage and possibly the goods not even arriving at all.

Logistic Risk
The exporter must understand all aspects of international logistics, in particular the contract of carriage. This contract is drawn up between a shipper and a carrier (transport operator). For this an exporter may refer to Incoterms 2000, ICC publication.

Legal Risks
International laws and regulations change frequently. Therefore, it is important for an exporter to drafts a contract in conjunction with a legal firm, thereby ensuring that the exporter's interests are taken care of.

Political Risk
Political risk arises due to the changes in the government policies or instability in the government sector. So it is important for an exporter to be constantly aware of the policies of foreign governments so that they can change their marketing tactics accordingly and take the necessary steps to prevent loss of business and investment.

Unforeseen Risks
Unforeseen risk such as terrorist attack or a natural disaster like an earthquake may cause damage to exported products. It is therefore important that an exporter ensures a force majeure clause in the export contract.

Exchange Rate Risks
Exchange rate risk is occurs due to the uncertainty in the future value of a currency. Exchange risk can be avoided by adopting Hedging scheme.

Export Risk Management Plan
Risk management is a process of thinking analytically about all potential undesirable outcomes before they happen and setting up measures that will avoid them. There are six basic elements of the risk management process:
• Establishing the context
• Identifying the risks
• Assessing probability and possible consequences of risks
• Developing strategies to mitigate these risks
• Monitoring and reviewing the outcomes
• Communicating and consulting with the parties involved

A risk management plan helps an exporter to broaden the risk profile for foreign market. For a small export business, an exporter must keep his risk management analysis clear and simple.

Foreign Direct Investment

Foreign Direct Investment
is investment made by a foreign individual or company in productive capacity of another country. It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset

Types of FDI
There are two types of FDI:

Greenfield investment : It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries.
Mergers and Acquisition : It occurs when a transfer of existing assets from local firms takes place.

Forbidden Territories:
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc

Investment in India
Government of India recognizes the key role of Foreign Direct Investment (FDI) in economic development not only as an addition to domestic capital but also as an important source of technology and global best practices. The Government of India has put in place a liberal and transparent FDI policy.

FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI policy in India is reckoned to be among the most liberal in emerging economies. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI.

Monday 8 November 2010

DOCUMENTARY COLLECTIONS

Documentary collection is the collection by a bank of funds due from a buyer against the delivery of documents. The bank, acting as agent for the seller (exporter), presents documents to
the buyer (importer) through that party's bank and in exchange receives payment of the amount owed, or obtains acceptance of a time draft for payment at a future date.

The liability of the bank under a documentary collection is primarily restricted to following the seller's instructions in forwarding and releasing documents against payment or acceptance.

How is Documentary Collection different from an L/C or Open Account?
Unlike a letter of credit, the bank does not assume any liability to pay if the buyer does not want or is unable to pay. Compared to open account sales, the documentary collection offers more
security to the seller, but less than a letter of credit

When should a Documentary Collection be used?
Numerous criteria are applied by businesses when determining which payment instrument to offer as a term of sale. However, in general, a documentary collection would be appropriate
where:
1) The seller and the buyer know each other to be reliable.
2) There is no doubt about the buyer's willingness or ability to pay.
3) The political and economic conditions of the buyer's country are stable.
4) The importer's country does not have restrictive foreign exchange controls.

What are the advantages of a Documentary Collection?
1) Simple and inexpensive handling compared to letters of credit.
2) Often faster receipt of payment than open account terms.
3) Seller retains title to the goods until payment or acceptance is made.

What are the disadvantages of Documentary Collection?
If the buyer refuses or is unable to pay, the seller has three options, which could be expensive:
1) Find another buyer.
2) Pay for return transportation
3) Abandon the merchandise.

Who are the parties involved?
1) PRINCIPAL - exporter, seller, remitter, drawer of the draft.
2) REMITTING BANK - exporter's bank handling the collection
3) PRESENTING OR COLLECTING BANK - usually the buyer's bank.
4) DRAWEE - importer, buyer, payee.

What types of Documentary Collections are there?
1) Documents against Payment (D/P) also known as "Sight Draft" or "Cash against Documents” (CAD). The buyer must pay before the collecting bank releases the title documents.

2) Documents against Acceptance (D/A). The buyer accepts a time draft, promising to pay for the goods at a future date. After acceptance, the title documents are released to the buyer.

What are the steps in documentary collection?
1) The buyer (importer) and seller (exporter) agree on the terms of sale, shipping dates, etc., and that payment will be made on a documentary collection basis.
2) The exporter, through a freight forwarder, arranges for the delivery of goods to the port/airport of departure.
3) The forwarder delivers the goods to the point of departure and prepares the necessary documentation based on instructions received from the exporter.
4) Export documents and instructions are delivered to the exporter's bank by either the exporter or the freight forwarder.
5) Following the instructions of the exporter, the bank processes the documents and forwards them to the buyer's bank.
6) The buyer's bank, on receipt of documents, contacts the buyer and requests payment or acceptance of the trade draft.
7) After payment or acceptance of the draft, documents are released to the buyer, who utilizes them to pick up the merchandise.
8) The buyer's bank remits funds to the seller's bank or advises that the draft has been accepted.
9) On receipt of good funds, seller's bank credits the account of the exporter.

Saturday 6 November 2010

A little about Bank Guarantees ( BG )/ Standby Letter of Credit (SBLC)

Introduction
A Bank Guarantee (more properly called a Banker’s Guarantee) is a banking arrangement whereby a bank substitutes its creditworthiness for that of its customer.
Unlike an L/C which is intended to be paid, a BG is a contingent obligation. “Contingent” means “depending on the happening of an event, which may or may not occur” and 99% of the time it is not paid because the event does not happen.

The terms SBLC and BG are interchangeable, both do the same work and both serve the same purpose. The difference between a BG and a SBLC is legal, a BG is a simple obligation subject to civil law whereas a SBLC is issued subject to UCP 500 and ISP 98, both well-accepted banking protocols. Both SBLCs or BGs can be issued and sent by Swift, telex, courier, mail, messenger or
pigeon. The mode of transmission does not matter.

What Is A Bank Guarantee?
A bank guarantee is a written obligation, or guarantee, from an issuing bank promising to pay a set sum of money to a beneficiary who is doing business with a client of the bank’s, in the event that the bank’s client defaults on the payment contractually promised to the beneficiary

TYPES OF GUARANTEES

Tender/Bid Guarantee
In practice tender guarantees or bid bonds are often used by a party to safeguard its interest in the event that the party submitting the tender withdraws prior to entering into a legally binding contract. If a party that has submitted a tender later withdraws it from the buyer this could cost the buyer dearly in terms of time and costs in retendering.

Advance Payment Guarantee
If the seller has requested an advance payment, then the buyer can request a bank guarantee to cover the advance payment in the event that the seller fails to fulfill its obligations as stipulated in the contract. This is rarely needed in sugar trading, as payment is usually made by a letter of credit, under which payment is only made to the seller in the event that the conditions of the contract are fulfilled.

Performance Guarantee
A performance bond guarantee is a bank guarantee which is issued by the seller and given to the buyer. If the seller fails to meet the terms of the contract, then the buyer is entitled to claim payment on the bank guarantee, which is normally around ten percent of the total value stipulated on the contract. It is standard practice for the seller to issue the buyer a performance bond guarantee.

Payment Guarantee
A payment guarantee is simply an assurance provided by the buyer to the seller that payment will be made upon shipping of goods. This is the most common form of bank guarantee usage in the global sugar trading industry, and buyers can expect most sellers to request a bank guarantee for the purpose of securing payment in the case of the buyer defaulting on the contract.

Retention Guarantee
supports an obligation to account for retention money made by the beneficiary to the principal/applicant. Retention guarantee may increase in accordance with the successive releases of the retention money. It is advisable that the Retention Guarantees/Standby explicitly stipulates that it does not take effect until the retention money has been received by the principal/applicants account at the issuing bank.

Warranty Guarantee
support remedies and any defects, which become apparent after delivery of the goods or after provisional or substantial completion of the plant.

Loan Guarantee
A loan guarantee is a promise by a person or an entity to assume a debt obligation in the event of non payment by the borrower. The person or entity that guarantees the loan is referred to as the guarantor.