Contributions 3 Chapter 1 4 Introduction 4 1.1 Motivation 4 1.2 Objective 5 1.3 Methodology 5 Chapter 2 6 Payment Method and Financing Method 6 2.1 Payment terms and trade finance 6 2.1.1 Prepayments/ cash in advance 8 2.1.2 Letter of credit 9 2.1.3 Drafts / Bills of exchange 10 2.1.4 Consignments 13 2.1.5 Open accounts 14 2.2 Trade financing 15 Chapter 3 17 Data Representation on Payment Methods in Use 17 3.1 Payment Methods based on Destination 17 3.2 Payment Methods based on Industry 18 3.3 Payment Methods based on Revenue 20 Chapter 4 22 Data Representation on Financing Methods in Use 22 4.1 Financing Methods based on Destination 22 4.2 Financing Methods based on Industry 23 4.3 Financing Methods based on Revenue 23 Chapter 5 24 Data Representation of Primary Data 24 5.1 Selection of Industries 24 5.2 Major Payment Methods used by Firms 25 5.3 Major Financing Methods used by Firms 26 Chapter 6 27 (1)
Transcript
Contributions 3
Chapter 1 4
Introduction 4
1.1 Motivation 4
1.2 Objective 5
1.3 Methodology 5
Chapter 2 6
Payment Method and Financing Method 6
2.1 Payment terms and trade finance 62.1.1 Prepayments/ cash in advance 82.1.2 Letter of credit 92.1.3 Drafts / Bills of exchange 102.1.4 Consignments 132.1.5 Open accounts 14
2.2 Trade financing 15
Chapter 3 17
Data Representation on Payment Methods in Use 17
3.1 Payment Methods based on Destination 17
3.2 Payment Methods based on Industry 18
3.3 Payment Methods based on Revenue 20
Chapter 4 22
Data Representation on Financing Methods in Use 22
4.1 Financing Methods based on Destination 22
4.2 Financing Methods based on Industry 23
4.3 Financing Methods based on Revenue 23
Chapter 5 24
Data Representation of Primary Data 24
5.1 Selection of Industries 24
5.2 Major Payment Methods used by Firms 25
5.3 Major Financing Methods used by Firms 26
Chapter 6 27
Conclusion 27
6.1 Popular Payment Method 27
6.2 Popular Financing Method 28
6.3 Working Capital Management 28
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Annexure A 29
Questionnaire 29
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Contributions
KUNTAL GHOSH (20)
Planned the organisation of entire project. Collected the secondary data as the starting point of the project. Prepared the questionnaire for the exporters based on the questionnaire. Approached to exporters of “Global Change Research”, “Club International” and “BB Trexim” to understand the payment method and financing schemes used by them as per the given questionnaire. Remained instrumental for completion of the project.
RATNESH KUMAR (16)
Ratnesh had provided support for completing the report. He had also contributed by collecting data from “DHL India”.
MANI SHANKAR SAHA (23)
Provided data for the following companies – “Graphite India Limited” and “Siemens Limited”.
ROHIT NAHAR (19)
Provided data for “Indian Chemical Company”.
SATISH JAISWAL (21)
Provided data for “Kamrup Tea Company”.
SWAROOP GHOSH (22)
Provided data for “Gontermann Piepers India Ltd”.
RAKTIM MITRA (18)
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In this chapter the background of this study is explained. This is coupled with the relevant studies that we have performed in order to throw light on the practices known or used by the exporters originated from our soil.
1.1 Motivation
There are three legs of study for international business –
1. International Trade Logistics2. International Trade Documentation3. Financing in International Trade
International trade will also follow the nuances of theories of international trade. So study of these essential concepts would be a prior requirement. But when we talk about business and especially operating in land of overseas counterpart it is of utmost importance for an exporter to know all these operational backbone of international trade. Financing in international trade can be consider the most important leg.
There is a reason for believing in the fact that financing in international trade is the most important leg. Let us elaborate further with example. Barring some extraordinary organisations started operations by exporting there is a sequence of business process. First a company starts producing for the domestic market. It increases its capacity with the growing demand. It then increases its efficiency and in the process it becomes bigger in size. Now to keep its capacity fully utilised or to increase the revenue generated out of the country the organisations started exporting in the basic form. Further increase in efficiency can cause outward FDI but we are not concentrating on this at this moment. If an organisation follows this path of growth, it would increase its knowledge on endogenous factors of growth for the organisation and all exogenous factors learnt by the organisation would be specific to the home country only.
So for sending goods to overseas buyers bring a whole lot of challenges for the organisation. Now methods or documentations used in international trade logistics and documentation would be verified pretty early part of the exportation process. So, the organisation starts learning them offhand. But financing and particularly realisation of payment comes very late. An exporter can ship the good with an expectation that the payment will be made. Remember, no buyer can really feel confident of paying in advance for the new exporter. So arrangement of working capital has become an important concern for the exporters.
These facts have motivated us to explore the essential ingredients of exporters to save themselves from grotesquely behaving into the international business and make things right in right time!
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1Introduction
1.2 Objective
Objective of our study was –
1. To find out the financial products and services used by exporters2. To find out the financing methods used by exporters3. To find out the working capital management done by exporters
During the process we have evolved some of derived objectives as well –
1. To find out pattern of payment methods by different types of exporters2. To find out pattern of financing methods by different types of exporters
1.3 Methodology
To understand the usage of various payment method and financing method, we have divided the data into two parts – primary data collection and secondary data collection. First we have collected data from secondary source. Afterwards, descriptive analysis has been done on them. At this point of time it is giving a fair chance of preparing the questionnaire as mentioned in annexure A. Based on the questions interview was conducted mainly on the exporters.
With those input from secondary data sources, we have created a questionnaire to interview the exporters designated to each team member. We shall collate data and see the meaningful information or any pattern available or not.
During the course of studying the payment and export financing methods, we have actually try to also find out that how secondary data is following the primary data. Moreover, secondary data is from pan-India whereas primary data is collected from Kolkata only. However, there could be other exporting units of the concerned firms elsewhere in India as well. But the criteria of selection of firms would follow –
- export unit be present in Kolkata and major decision can be taken from Kolkata unit
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In this chapter we shall focus on understanding the payment method and financing method from the existing literature available to us.
22.1 Payment terms and trade finance
International trade is all about movement of goods and services/documents or funds. But there are two major risks are involved in it.
(1) Counter party risk
(2) Country risk
With the use of proper payment methods, the counter party risk can be easily mitigate.
In any international trade transaction, credit is provided by either
¤ the supplier (exporter),
¤ the buyer (importer),
¤ one or more financial institutions, or
¤ any combination of the above.
The form of credit whereby the supplier funds the entire trade cycle is known as supplier credit.
Payment methods have direct implication on working capital cycle. While choosing the appropriate payment terms, it would be highly recommended to go through closely the working capital cycle of the exporter. Generally the working capital looks like below in figure 2.1.1.
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2Payment Method and Financing Method
Figure 2.1 . 1 Working Capital Cycle
There are 5 types of payment terms used in the international trade. These payment terms can be used either alone or with the combination of more than one.
1) Prepayments
2) Letter of credit
3) Drafts / bill of exchange
4) Consignments
5) Open Account
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FG
Shipment
Purchase RM
WIP
Figure 2.1 . 2 Risk of Exporter
Let us go through each of the payment terms and understand the advantage/ disadvantage and risk exposure from the point of view importer and exporter.
2.1.1 Prepayments/ cash in advance
Prepayments payment method, the exporter can eliminate credit risk or the risk of non-payment since payment is received prior to the transfer of ownership of the goods. Goods will not be shipper until the buyer has paid the seller. There is flip side of this, because for buyer point of view it is less attractive payment methods as it will create the cash flow problems for the buyers. Also from exporter points of view it makes them less competitive.
Table 2.1 - 1 Characteristics of Cash-in-Advance
Applicability Recommended for use in high-risk trade relationships or export markets, and appropriate for small export transactions
Risk Exporter is exposed to virtually no risk as the burden of risk is placed almost completely on the importer
Merit Payment before shipment Eliminates risk of non-payment
Demerit May lose customers to competitors over payment terms No additional earnings through financing operations
Key Points
Full or significant partial payment is required, usually via credit card or bank or wire transfer or escrow service, before the ownership of the goods is transferred.
Cash-in-advance, especially a wire transfer, is the most secure and least risky method of international trading for exporters and, consequently, the least secure and an unattractive method for importers. However, both the credit risk and the competitive landscape must be considered.
Insisting on cash-in-advance could, ultimately, cause exporters to lose customers to competitors who are willing offer more favourable payment terms to foreign buyers.
Creditworthy foreign buyers, who prefer greater security and better cash utilization, may find cash-in-advance unacceptable and simply walk away from the deal.
When to Use Cash-in-Advance Terms
The importer is a new customer and/or has a less-established operating history.
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The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.
The political and commercial risks of the importer’s home country are very high.
The exporter’s product is unique, not available elsewhere, or in heavy demand.
The exporter operates an Internet-based business where the acceptance of credit card payments is a must to remain competitive.
2.1.2 Letter of credit
Letters of credit are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents. This is one of the most versatile and secure instruments available to international traders. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain or if the foreign buyer’s credit is unacceptable, but the exporter is satisfied with the creditworthiness of the importer’s bank. This method also protects the importer since the documents required to trigger payment provide evidence that goods have been shipped as agreed.
Time of payment : When shipment is made Goods available to buyers : After payment
Table 2.1 - 2 Characteristics of a Letter of Credit
Applicability Recommended for use in higher-risk situations or new or less-established trade relationships when the exporter is satisfied with the creditworthiness of the buyer’s bank
Risk Risk is spread between exporter and importer, provided that all terms and conditions as specified in the LC are adhered to
Pros Payment made after shipment A variety of payment, financing and risk mitigation
options available
Cons Labor intensive process Relatively expensive method in terms of transaction
costs
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Key Points
An LC, also referred to as a documentary credit, is a contractual agreement whereby the issuing bank (importer’s bank), acting on behalf of its customer (the importer or buyer), promises to make payment to the beneficiary or exporter against the receipt of “complying” stipulated documents. The issuing bank will typically use intermediary banks to facilitate the transaction and make payment to the exporter.
The LC is a separate contract from the sales contract on which it is based; therefore, the banks are not concerned with the quality of the underlying goods or whether each party fulfils the terms of the sales contract.
The bank’s obligation to pay is solely conditioned upon the seller’s compliance with the terms and conditions of the LC. In LC transactions, banks deal in documents only, not goods.
LCs can be arranged easily for one-time transactions between the exporter and importer or used for an ongoing series of transactions.
Unless the conditions of the LC state otherwise, it is always irrevocable, which means the document may not be changed or cancelled unless the importer, banks, and exporter agree.
2.1.3 Drafts / Bills of exchange
It is the unconditional promises draw by exporter/ buyer to pay the face amount of the drafts. Banks are the party from both exporter and importer ends.
It is having two types
(a) Sight drafts (documents against payment)
(b) Time drafts (documents against acceptance)
Table 2.1 - 3 Characteristics of Bills of exchange
Applicability Recommend for use in established trade relationships, in stable
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export markets and for transactions involving ocean shipments
Risk Riskier for the exporter, though D/C terms are more convenience and cheaper than an LC to the importer
Pros Bank assistance in obtaining payment The process is simple, fast, and less costly than LCs
Cons Banks’ role is limited and they do not guarantee payment Banks do not verify the accuracy of the documents
Key Points
D/Cs are less complicated and less expensive than LCs.
Under a D/C transaction, the importer is not obligated to pay for goods before shipment.
If structured properly, the exporter retains control over the goods until the importer either pays the draft amount at sight or accepts the draft to incur a legal obligation to pay at a specified later date.
Although the goods can be controlled under ocean shipments, they are more difficult to control under air and overland shipments, which allow the foreign buyer to receive the goods with or without payment unless the exporter employs agents in the importing country to take delivery until goods are paid for.
The exporter’s bank (remitting bank) and the importer’s bank (collecting bank) play an essential role in D/Cs.
Although the banks control the flow of documents, they neither verify the documents nor take any risks. They can, however, influence the mutually satisfactory settlement of a D/C transaction.
When to Use Bills of exchanges
With D/Cs, the exporter has little recourse against the importer in case of non-payment. Thus, D/Cs should be used only under the following conditions:
The exporter and importer have a well-established relationship.
The exporter is confident that the importing country is politically and economically stable.
An open account sale is considered too risky, and an LC is unacceptable to the importer.
Documents against Payment Collection
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With a D/P collection, the exporter ships the goods and then gives the documents to his bank, which will forward the documents to the importer’s collecting bank, along with instructions on how to collect the money from the importer. In this arrangement, the collecting bank releases the documents to the importer only on payment for the goods. Once payment is received, the collecting bank transmits the funds to the remitting bank for payment to the exporter.
Table 2.1 - 4 Characteristics of Documents against Payment Collection
Time of Payment After shipment, but before documents are released
Transfer of Goods After payment is made at sight
Exporter Risk If draft is unpaid, goods may need to be disposed of r may be delivered without payment if documents do not control possession
Risk to importer Relies on exporter to ship goods as described in documents
Documents against Acceptance Collection
With a D/A collection, the exporter extends credit to the importer by using a time draft. The documents are released to the importer to claim the goods upon his signed acceptance of the time draft. By accepting the draft, the importer becomes legally obligated to pay at a specific date. At maturity, the collecting bank contacts the importer for payment. Upon receipt of payment, the collecting bank transmits the funds to the remitting bank for payment to the exporter.
Table 2.1 - 5 Characteristics of Documents against Acceptance Collection
Time of Payment On maturity of draft at a specified future date
Transfer of Goods Before payment, but upon acceptance of draft
Exporter Risk Has no control over goods after acceptance and may not get paid at due date
Importer Risk Relies on exporter to ship goods as described in documents
2.1.4 Consignments
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The exporter retains actual title to the goods that are shipped to the importer. A consignment is the method of payment in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Payment to the exporter is required only for those items sold. One of the common uses of consignment in exporting is the sale of heavy machinery and equipment because the foreign distributor generally needs floor models and inventory for sale.
Table 2.1 - 6 Characteristics of Consignment
Applicability Recommended for use in competitive environments to enter new markets and increase sales in partnership with a reliable and trustworthy foreign distributor
Risk Significant risk to the exporter because payment is required only after the goods have been sold to the end customer
Pros Help enhance export competitiveness on the basis of greater availability and faster delivery of goods
Help reduce the direct costs of storing and managing inventory
Cons Exporter is not guaranteed payment Additional costs associated with risk mitigation measures
Key Points
Payment is sent to the exporter only after the goods have been sold by the foreign distributor.
Exporting on consignment can help exporters enter new markets and increase sales in competitive environments on the basis of better availability and faster delivery of goods.
Consignment can also help exporters reduce the direct costs of storing and managing inventory, thereby making it possible to keep selling prices in the local market competitive.
Partnership with a reputable and trustworthy foreign distributor or a third-party logistics provider is a must for success.
The importing country should be commercially and politically secure.
Appropriate insurance should be in place to mitigate the risk of non-payment as well as to cover consigned goods in transit or in possession of a foreign distributor.
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Export working capital financing can help exporters of consigned goods have access to financing and credit while waiting for payment from the foreign distributor.
2.1.5 Open accounts
The exporter ships the merchandise and expects the buyer to remit payment according to the agreed-upon terms. Obviously, this option is advantageous to the importer in terms of cash flow and cost, but it is consequently a risky option for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms. In addition, the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. However, though open account terms will definitely enhance export competitiveness, exporters should thoroughly examine the political, economic, and commercial risks as well as cultural influences to ensure that payment will be received in full and on time.
Table 2.1 - 7 Characteristics of an Open Account Transaction
Applicability Recommended for use (a) in low-risk trading relationships or markets and (b) in competitive markets to win customers with the use of one or more appropriate trade finance techniques
Risk Substantial risk to the exporter because the buyer could default on payment obligation after shipment of the goods
Pros Boost competitiveness in the global market Help establish and maintain a successful trade
relationship
Cons Significant exposure to the risk of non-payment Additional costs associated with risk mitigation measures
Key Points
The goods, along with all the necessary documents, are shipped directly to the importer who has agreed to pay the exporter’s invoice at a specified date, which is usually in 30, 60 or 90 days.
The exporter should be absolutely confident that the importer will accept shipment and pay at the agreed time and that the importing country is commercially and politically secure.
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Open account terms may help win customers in competitive markets and may be used with one or more of the appropriate trade finance techniques that mitigate the risk of non-payment.
2.2 Trade financing
Below are the popular trades financing method being used widely.
Accounts Receivable Financing Factoring (Cross-Border Factoring) Letters of Credit (L/C) Banker’s Acceptance (BA) Working Capital Financing Medium-Term Capital Goods Financing (Forfaiting) Countertrade
Account Receivable financing: It is used to take shot term credit against account receivables which was generated due to trade export. This type of credit is generally taken by exporter when they have immediate requirement of the funds. Bank issued the credit to the exporter after securing the account receivables which was generated from the trade export.
Factoring (Cross-Border Factoring): It is widely used instrument in the developed country. Basically in this exporter which has an arrangement with the factoring agency (called The Factor) would sell its receivables to them. The factor will finance to the exporter and collect the money from buyer.
Two types of terms and condition may have with the factor and buyer
1) Without Recourse : All collection responsibility to factor2) With Recourse : Exporter and buyer mutually bear the collection risk
Sometimes accounts receivable related reporting is also done by the factor.
Letter of credit: One of the popular trade financing method is letter of credit. Letter of credit is being issued by the importer bank (called issuing bank) on the instruction by the importer. In the letter of credit there are terms and condition present which exporter need to present as documentary proof. This terms and condition basically comes from the sale-purchase contract between exporter and the importer. The importer pays the issuing bank the amount of the L/C plus associated fees.
The required documents typically include a draft (sight or time), a commercial invoice, and a bill of lading (receipt for shipment).
Once the letter of credit is with the exporter then for financing the trade exporter may avail the export credit for funding the pre-shipment credit (packing credit) and the post shipment
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credit. As per master circular of RBI, bank can issue the loan to the exporter on the base rate to the maximum of 30 days.
Letter of credit is governed by the ICC rule UCP 600 and any dispute between exporter and importer is being handled by the online arbitration of the ICC.
Bankers’ Acceptance: When letter of credit is being issued in DA terms or time draft that is drawn on and accepted by a bank (the importer’s bank). The accepting bank is obliged to pay the holder of the draft at maturity.
If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA. The bank accepting the drafts charges an all-in-rate (interest rate) that consists of the discount rate plus the acceptance commission. In general, all-in-rates are lower than bank loan rates. They usually fall between the rates of short-term Treasury bills and commercial papers.
Working Capital Financing: Banks may provide short-term loans that finance the working capital cycle, from the purchase of inventory until the eventual conversion to cash.
Medium-Term Capital Goods Financing (Forfaiting): The importer issues a promissory note to the exporter to pay for its imported capital goods over a period that generally ranges from three to seven years. The exporter then sells the note, without recourse, to a bank (the forfaiting bank).
Countertrade: These are foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country. Common countertrade types include barter, compensation (product buy-back), and counter purchase. The primary participants are governments and MNCs. ESCROW account is one of the obligations to perform the counter trade.
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We shall discuss the pattern of payment methods used by Indian exporters within an industry, or regular method of payment usually preferred based on the destinations or sales volume. The report in this chapter had been made based on the secondary data that has been collected.
33.1 Payment Methods based on Destination
An exporting firm from India sends their goods to foreign soil for the countries or region like USA, Europe, South America, African nations, Bangladesh, South East Asian countries etc. We have grouped the nations in the following economic classifications of nations (shown in table 3.1-1).
Table 3.1 - 8 Type of Nation
Developed Nation 0Developing Nation 1Least Developed Nation
2
Following figure shows that the share of Indian export to such type of nations.
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3Data Representation on Payment Methods in Use
Developed Na-tion; 65%
Developing Na-tion; 19%
Least De-veloped Na-tion; 16%
Destination
Figure 3.1 . 3 Share of Export on Different Type of Nations
Following table is showing that the percentage of exporters using what type of payment methods while exporting their goods and services to the countries belonging to the economic group as mentioned in Table 3.1-9.
Table 3.1 - 10 Payment Methods for Different Nations
Prepayment Letter of Credit
Draft Consignment Open Account
Developed Nation 0% 39% 19% 0% 6%Developing Nation
0% 16% 0% 0% 5%
Least Developed Nation
6% 3% 3% 0% 3%
3.2 Payment Methods based on Industry
There are six major industries that we have collected data from. These are mentioned in the following table.
Table 3.2 - 11 Types of Industry Selected
Manufacturing 0Electrical 1Construction 2
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Financial services 3Non-financial services
4
Mine 5
The distribution of exporting firms among these sectors are as follows.
Manufactur-ing
61%Electrical3%
Construction10%
Financial services
10%
Non-financial services
6%
Mine10%
Export Share
Following table is showing the percentages of payment methods used by exporting firms falling in a particular industry or sector.
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Table 3.2 - 12 Distribution of Payment Methods According to Industry
We shall discuss the pattern of financing methods used by Indian exporters within an industry, or regular method of financing usually preferred based on the destinations or sales volume. The report in this chapter had been made based on the secondary data that has been collected.
44.1 Financing Methods based on Destination
There could be some confidence on the nation as a whole with which an Indian export company is dealing with. Following table is depicting the fact in percentage terms the number of exporting firms engaged in what kind of financing methods while working with the economic classification of the countries. Destination country would also be matter of interest for banks and other financial institutions funding that export.
Table 4.1 - 15 Distribution of Financing Methods based on Type of Nation
Account Receivable
Factoring LC BA Working Capital Finance
Developed Nation
3% 16% 32% 13% 0%
Developing Nation
0% 3% 13% 0% 3%
Least Developed Nation
10% 0% 0% 0% 7%
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4Data Representation on Financing Methods in Use
4.2 Financing Methods based on Industry
From the given set of secondary data we shall find out in the following table the percentage distribution of financing methods across different industries.
Table 4.2 - 16 Distribution of Financing Methods across Industries
Companies had already been classified according to table 3.3-1 in different revenue groups – low, medium and high. Refer to table 4.3-1 for distribution of financing methods across different groups of revenue group.
Table 4.3 - 17 Distribution of Financing Methods across Different Revenue Group
In this chapter we shall represent the data obtained from our survey we did with different exporters. We would classify the primary data according to industry and would see whether our primary survey is following the trend of secondary data.
55.1 Selection of Industries
Before collection of data we did not target any particular industry because we realised that collecting data based on industries would be time taking. Hence, as per the collected data we have put them into industries based on their product and operations.
Table 5.1 - 18 Companies and Industry in Primary Survey
Company Name Product Industry Importing Countries
BB Trexim Hand Gloves Manufacturing Europe, USAClub International Bags Manufacturing WorldwideDHL India Ltd. Courier service Non-financial services DomesticGlobal Change Research
Project appraisal Non-financial services Europe
Graphite India Limited
Synthetic Graphite and Carbon
Manufacturing, Mining USA, Latin-America, Europe, South-East Asia, South Asia
Indian Chemical Company
Industrial chemical Manufacturing Domestic
Kamrup Tea Company
Tea, Cashew nuts, coffee, bags, seeds etc.
Manufacturing of agricultural products
Mainly in Europe, South Asia
Siemens Ltd Multiple products Manufacturing WorldwideNote: Companies in italics have engagement in international trade as an importer
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5Data Representation of Primary Data
5.2 Major Payment Methods used by Firms
We shall represent the data of payment methods used by the firms in the survey in table 5.2-1. This information would be useful in identifying what are the methods actually being encouraged among exporters in India.
Table 5.2 - 19 Payment Methods of Surveyed Firms
Firm Size* Prepayment LC Drafts Open A/c OthersBB Trexim Medium 10% 80% 10% (DA
only)Nil Nil
Club International
Large 20% 60% 20% Nil Nil
DHL India Ltd.
Large 40% 20% Nil Nil 40%
Global Change Research
Small 80% Nil Nil 20%(Payment against invoice after 30 days)
Nil
Graphite India Limited
Large 6% 25% 43% 26% Nil
Indian Chemical Company
Medium 34% Nil Nil 66% Nil
Kamrup Tea Company
Medium Nil Nil 100% Nil Nil
Siemens Ltd.
Large 7% 26% 41% 26% Nil
*size: as per table 3.3-1
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5.3 Major Financing Methods used by Firms
We shall represent the data of financing methods used by the firms in the survey in table 5.3-1. This information would be useful in identifying what are the methods actually being encouraged among exporters in India.
Table 5.3 - 20 Financing Methods of Surveyed Firms
Firm Account Receivable
Factoring LC BA Working Capital Financing
Medium Term Capital Goods Financing
BB Trexim 40% 20% 40% Nil Nil NilClub International
Nil Nil 100% Nil Nil Nil
DHL India Ltd.
Nil Nil Nil Nil Nil Nil
Global Change Research
Nil Nil Nil Nil Nil Nil
Graphite India Limited
15% Nil 85% Nil Nil Nil
Indian Chemical Company
Nil Nil Nil Nil Nil Nil
Kamrup Tea Company
20% Nil 20% Nil 60% Nil
Siemens Ltd.
15% 15% 70% Nil Nil Nil
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From the data we have obtained we shall summarise the outcome of the study. The summary would be on the products and services being used by the exporters in India. In addition to that we shall also update the working capital management issues shared by the exporting firms those who were actually forthcoming while attending the interviews.
66.1 Popular Payment Method
From the data sources we have found that letter of credit is the most popular product being used both for payment method and for financing method. We have seen that majority of the firms working with the developed nations are working with LC as payment method. However, when it turns out to be least developed nation based on the bargaining power of the exporter, advanced payment is also a well-known practice.
During the interview, it has also been acknowledged by the exporters that they are not confident even with the letter of credits with the companies in least developed countries. Hence, the preferable choice would be advanced payment for the exporters. However, if letter of credit is insisted upon, the confirming bank is essentially chosen to be from some other countries like Singapore or even UK.
We have also learnt about the open LC. Open letter of credit means a letter of credit that can be financed on a simple draft without requiring documentary title. The interest of a beneficiary in an open letter of credit is not attachable as a debt or property since prior to the presentation of conforming documents, a confirming bank is neither indebted to the beneficiary nor holds any of its property1. For perishable item and iron ore the practice used in India is LC.
Documentary collection is also useful product. This reduces bank involvement and thus reduces bank costs. Hence, exporting firms had shown interests of using this product in case the importers are reliable but open account would be little risky for some reason.
Open account is useful payment method benefiting importers. Data collected on behalf of importers had also support this. Becoming reliable to the exporters is the key here. Through long term relationship open account arrangement is achievable and it has been shown by the Indian importers.
Since banks are providing packing credit the most useful form of export financing in India is invariably obtaining the packing credit especially using the letter of credit or loan against the accounts receivable. In such case, it has been reported by the exporters that credibility of the importing firms and countries are also important factors.
Factoring is known to the exporters but this is not so common because of the cost factor. The cost of factoring is almost 1.5 to 3% per month. For small organisations this would be too high. Hence, we can also see from the data in chapter 5 that factoring is used by the large firms. This cost can increase even further for non-payment in time. The cost of such fund would become further 1 to 2% more over and above the usual cost of this fund.
In the collected data from both the sources – primary and secondary Bankers’ acceptance is not seen to be popular in India. There is a possibility that since the market is not so much efficient in India, Indian banks are reluctant to securitise such usance bill.
6.3 Working Capital Management
The whole story of payment method and financing evolves from the working capital cycle. Now, obviously, efficient working capital management would result into better financial performance of the company; it also reduces the operation risks generated mainly due to cash crunch during operation.
The practices used by the Indian exporters (or importers) are as follows.
1. Advance payment. Perked in FD for interest income2. Payment time negotiated keeping in view of the exchange rate3. WCM through reserves and internal accruals4. Mostly through financing from banks by availing various types of Credit lines in
foreign currency or Rupee. Some of them are as follows: Cash Credit Export Packing Credit Rupee Packing Credit Buyer’s Credit Short term borrowings
5. Advances from customer for very reliable counterpart.
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QuestionnaireSome Information of Company
Name of the Company:
Year of incorporation:
Ownership type: Please tick (Private/Public)
Foreign Ownership: (in percentage terms)
Major Role: Please tick (Exporter/Importer)
Sales figures
Year1
Year2
Year3
Year4
Year5
Year6
Year7
Year8
Year9
Year10
Payment Methods
Method Percentage of total export (import)
Reasons
Prepayments (Advance payment)Letters of CreditDrafts (Bill of Exchange)
a. Sight draftb. Time draft
ConsignmentOpen accountAny Other method (Please describe here)
(29)
Annexure AQuestionnaire
Number of Importers (Overseas customers)
Number of Years:
Overall relationship with all customers (Please tick one)
1. Very reliable2. Reliable3. Cannot comment4. Not reliable5. Not at all reliable
Destination Countries
Working Capital Management
Describe in few words how do you manage working capital (please comment on below box)?
(30)
Trade Financing Methods
Method Percentage of total financing
Reasons
Account Receivable Financing[Bank loan against account receivable]Factoring[Account receivable is sold to third party and immediately receive the fund]Letters of Credit[Avail loans by producing letter of credit]Banker’s Acceptance[A time draft amount is discounted and paid to exporter]Working Capital Financing[Short term loan from Bank]Medium Term Capital Goods Financing[Importer issues promissory note to exporter to pay for its imported capital goods over a period of 3 to 7 years] Countertrade[Exchange of goods]
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