Trade finance training for MASA

TRADE FINANCE

PRESENTATION TO PT. MULTISTRADA ARAH SARANA

TRADE PRODUCT GROUP
CORPORATE BANKING

Click to edit Master title style

RISKS IN INTERNATIONAL TRADE

Risk Issues in International Trade
Force Major

Buyer’s Risk
Country Risk
Stable political climate? War? Late arrival of the goods?
Revolution? Damaged goods?
Positive economic environment? Goods not as per contract requirement?
Solid legal infrastructure?
Exotic countries – OFAC List?
RISKS
Seller’s Risk
Distance?
Foreign Exchange Risk
Credit worthiness of Buyer?
Volatile foreign currency?
Disputes?
Restrictions imposed by governments?
Commercial Risk
Reliable information concerning the company’s track record?
Insolvency of your trading partner?
Default or termination on your contract?

Risks Issues in International Trade

Risk
Mitigation


CREDIT RISK ANALYSIS

Credit Risk Analysis in International Trade
Customer’s Perspective

 Managing Liquidity – Cash Flow
 Lower Cost of Financing
 Lower Risks :
• Counter Parties
• Foreign Exchange
• Countries – OFAC List
 Best Service


•Bank’s Perspective  Credit Risks
 Lower Counter Party / Foreign
Exchange / Country Risks
 Higher Revenue / Higher Return
 Lower Capital

Relevant questions to the Customer about their Supplier
► Who are the suppliers and how many suppliers are there?
► What are the goods and amounts involved?
► What method of payment applies to the contract between the supplier and
our customer?
► Does the supplier extend credit terms to our customer?
► Who pays for freight and insurance?
► If a supplier ships under DC, what is the time period between
establishment of DC and receipt of documents (goods) by the DC issuing
bank (DC lead time)?
► What is the validity of the DC?
► Does the customer require a term DC?
► Are a full set of negotiable title documents consigned to the Bank
available?
► Is merchanting trade involved?

Relevant questions to the Customer about their Buyer
► Who are the buyers and how many buyers are there?
► What are the goods and amounts involved?
► What method of payment applies to the contract between the buyer
and our customer?
► Does our customer extend credit terms to the buyer?
► If our customer sells under documentary collection, where are the
buyers located and how soon can the documents be delivered to the
buyer via the Collecting bank?
► We need to determine the document transit time (the interval
between our purchase of an export collection bill and the customer’s
receipt of funds under D/P or D/A.
► If our customer sells under DC, who are the issuing banks and does
our customer require DC confirmation and/or discounting?
► Can we consider GBIL for DC issuing banks (DC confirmation and
discounting)?


Apply international codes of practice

•1

Maintain control over the
How Bank help in dealing goods on behalf of the
Conduct delivery channel for •4 with the RISKS ? •2
exporter
payment methods

•3

Provide financial support


COMMERCIAL CONTRACT

Commercial Contract

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

Commercial Contract
Provisions of Commercial Contract

Minimum Provision: Additional Provisions:
Name and address of Buyer and Seller Method of packaging and marking
Description of goods Inspection and test by the Buyer
Shipping and delivery instruction and Warranties of the Seller
documentation Banking guarantee
Payment terms Remedies in case of default
Insurance coverage Dispute settlement
Choice of Law
Insurance fee

Commercial Contract
Items of Commercial Contract?
Inspection Clause
Description of Goods
Force Majeure
Quantity
After sales service
Price terms
Delivery time / Shipment date
Terms of payment
Validity time
Destination
Packing and Marking
Shipment terms : partial,
transhipment, vessel age
Shipping documents : Bill of Lading,
Airway Bill

Commercial Contract

Principles of Commercial Contract

Agreement Obligatoir Penalty


PAYMENT METHOD IN INTERNATIONAL TRADE

Payment Methods

Payment Methods
Clean Payment Documentary Collection
in
 Open Account International Trade
 Clean Collection and CAD
 Advance Payment
 Sight Draft and Time Draft
 D/P and D/A
Documentary Credit

 Sight and Usance
 Revocable and Irrevocable
 Negotiable and Non
Negotiable
 Confirmed and Not Confirmed

Payment Methods
RISK LADDER
HIGHEST RISK LEAST RISK
TO EXPORTER TO IMPORTER
Clean Payment - Open Account
Documentary Collections
Documents Against Acceptance
Documents Against Payment
Documentary Credit / Letter of Credit
Unconfirmed
Confirmed
LEAST RISK Clean Payment – Advance Payment HIGHEST RISK
TO EXPORTER TO IMPORTER

Clean Payment

• Based on trust between Buyer and Seller.
• The Exporter sends the goods and trusts the Importer to pay
once the goods have been received, or,
• The Importer trusts the Exporter to send the goods after
payment is effected.
• All shipping documents, including title documents, are
handled directly by the trading parties.
• Role of banks is limited to clearing funds as required.

Clean Payment
OPEN ACCOUNT ADVANCE PAYMENT
The Exporter ships the goods and the The Importer sends payment directly to
documents directly to the Importer and trusts the Exporter and trusts for the Exporter to
for the Importer to send payment send the goods and documents.

Exporter Exporter

•GOODS •PAYMENT •GOODS •PAYMENT
•1 •2 •2 •1

Importer Importer

Clean Payment
OPEN ACCOUNT ADVANCE PAYMENT
 Seller gives credit to Buyer.  Buyer provide credit to Seller.
 Disadvantage to Seller.  Most advantageous to Seller.
 Protection is short for Seller when  Protection is short for Buyer when
Buyer freely take goods after their order of goods cannot be realized by
arrival at the port of destination. Seller while Buyer has already provide
the fund for such purpose.
 This payment method occurs because:
 Usually carried out only for trade
• Seller has been really sure that
transaction with the following
Buyer will realize payment at the
condition:
time already set.
• Trade value is not of great amount.
• Seller is sure that there is no
blocking payment policy from • Buyer has really trust Seller.
government of Buyer’s country.
• Such goods are really required and
• Seller has sufficient liquidity to give there is no other choice
credit to Buyer

Documentary Collection

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

EXPORTER / DRAWER
COLLECTION CYCLE
IMPORTER / DRAWEE
1.Sales Contract
•2
3 Goods •6
Acceptance Invoice +
& Invoice + Acceptance Transport
Payment Transport Document & Document
Payment
8
•5

4 Invoice + Transport Document

7
Acceptance & Payment
REMITTING BANK COLLECTING / PRESENTING BANK

Types of Documentary Collection:

 In term of documents submission :
• Clean Collection  only Draft as document collected.
• Cash Against Document (CAD)  the shipping document collected by
Buyer’s Bank will be released to Buyer only after payment.

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

 In term of payment certainty :
• Documents against Payment (D/P)  submission of documents by Bank to
Buyer after payment is made.
• Documents against Acceptance (D/A)  submission of documents by
Bank to Buyer after acceptance.

SELLER BUYER
 More risk :  More profitable

• Documentary Risk  Buyer refuse • Lower transaction cost because
to take goods since documents purchase of goods is not accompanied
submitted to Bank are not complete. by DC Issuing.

• Commercial Risk  Buyer refuse
to take goods due to declines of
selling price of the goods.
• Political Risk  Buyer’s import
license is suddenly revoked by local
government.
• Transfer Risk  Transfer restriction
of Buyer’s country due to lack of
foreign exchange

Documentary Credit (DC)

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

Principles
 Issued by Bank
 Every DC issued by Bank at the request of Buyer (as DC Applicant) must bear
burdens and risks arising from consequences of such DC opening.
 Containing Payment Undertaking
 DC constituting a payment undertaking from Issuing Bank to Seller (as DC
Beneficiary) so that Seller is no longer necessary to worry about credibility of
Buyer (as DC Applicant) because Issuing Bank has undertaken it.
 Conditional Undertaking
 DC issued by Bank is a conditional undertaking means that payment will be
made as long as Seller (as DC Beneficiary) has presented documents that
comply with terms and conditions stipulated in the DC.
 Involved Certain Parties
 DC issued by Bank shows involved parties such as Buyer (as DC Applicant),
Issuing Bank, Paying Bank and Confirming (if any) and Seller (as DC
Beneficiary).
 Time Factor
 DC has also time factor such as expiry date, latest shipment date and latest
presentation.

Conditional Payment Undertaking
 The use DC as payment is a agreed for payment implementation for delivery of
documents transferring proprietary rights to or supervision over any goods. In
other words, the payment can only be made if documents delivered are really in
accordance with DC terms and conditions. It should be realized by all parties
concerned.
 As consequences of the documentary undertaking of the DC, DC issuing bank can
not refuse payment if goods are not according to documents.

Advantages of DC
 As instrument in goods purchase transaction especially import goods.
 As financing basis of DC Issuing Bank to finance importer.
 Constituting a safer method for the parties involved in trade transaction
concerning uniformity in interpreting terms in its implementation.

EXPORTER / BENEFICIARY DC CYCLE IMPORTER / APPLICANT
1. CommercialContract
5
6A Goods shipped 9 2
Payment
Document Document
(Sight)
Payment
or (Sight) DC
Acceptance Advise the DC
or Application
(Usance) Acceptance
4 8
7B (Usance)
Issue DC
3
6B Document

ADVISING BANK / Payment (Sight) or Acceptance (Usance) 7A
ISSUING BANK
NEGOTIATING BANK

Parties Involved in DC
 Buyer, called as Applicant or Account Party
 Party who requesting its Bank to issue DC and to whom the Issuing Bank will
finally charge its account.
 Seller, called as Beneficiary
 Party who receiving payment undertaking from the Issuing Bank and to whom
the DC is designated / issued.
 Issuing Bank
 Bank who carries out DC issuing at the request of Buyer containing payment
undertaking to Seller.
 Advising Bank
 Bank who is requested by the Issuing Bank to advise / forward DC to Seller (as
DC Beneficiary).
 Negotiating Bank
 Bank who is carrying out taking over or negotiation or purchase of documents
submitted by Seller (as DC Beneficiary) based on the DC.

Parties Involved in DC
 Paying Bank
 Bank who is designated by the Issuing Bank to make payment to Seller (as DC
Beneficiary).
 Accepting Bank
 Bank who is carrying out acceptance on Time Draft drawn based on the DC by
Seller (as DC Beneficiary).
 Confirming Bank
 Bank who confirms or do secures the DC issued by another bank.

General Types of DC

 Based on Tenor of Payment
► SIGHT DC  a payment undertaking issued by Issuing Bank on compliance
presentation whether or not accompanied by Draft taken over from Beneficiary.
► USANCE DC  a payment undertaking issued by Issuing Bank for delivery of
documents together with Draft on a certain maturity date after there has been
acceptance from Issuing Bank.

 Based on Obligatoir Principle
► REVOCABLE DC  can be unilaterally amended / cancelled by Issuing Bank
without prior notice to Beneficiary.
► IRREVOCABLE DC  a definite undertaking from Issuing Bank for delivery of
documents according to the terms and conditions in the DC.
•  UCP DC 2007 Revision ICC Publication No. 600 (UCP 600) accepts only
Irrevocable Documentary Credit



General Types of DC

 Based on Terms of Payment
► PAYMENT DC  payment made by Issuing Bank designated in the DC.
► NEGOTIATION DC  payment made by Issuing Bank, or Confirming Bank (if any),
for taking over of documents, both sight and usance tenor.
► RESTRICTED DC  payment or negotiation is only applicable at a designated
bank nominated in the DC.

 Based on another Bank’s undertaking
► CONFIRMED DC  an additional payment undertaking to the DC made by Other
Bank by taking responsibility for and bound to the payment, acceptance and
negotiation.
► UNCONFIRMED DC  a payment undertaking from Issuing Bank only.

Special Types of DC

 Standby DC
 DC that provide payment undertaking against Beneficiary Attestation rather than
documentary evidence .
 Issued to guarantee performance of the transaction, goods and services, between
Applicant and Beneficiary.
 Payment under Standby DC will be made when Applicant cannot perform the
transaction (default) and it is attested by Beneficiary when claim payment to
Standby DC Issuing Bank.
 Same purposes with Bank Guarantee issuing.

International Commercial Terms (Incoterms)

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

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

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

Most Frequent Incoterms applied for Documentary Credit
SELLER BUYER

ON BOARD

FOB SELLER'S COSTS & RISKS BUYER'S COSTS & RISKS BUYER'S COSTS & RISKS

CFR SELLER'S COSTS & RISKS
FREIGHT (SELLER)

BUYER'S RISKS •BUYER'S COSTS & RISKS

CIF SELLER'S COSTS & RISKS FREIGHT & INSURANCE (SELLER)

BUYER'S RISKS •BUYER'S COSTS & RISKS


SKBDN (Surat Kredit Berdokumen Dalam Negeri)

 Local LC issued by domestic banks to cover intra nation trade.
 Subject to Bank Indonesia Regulation / Peraturan Bank
Indonesia (PBI) Nomor 5/6/PBI/2003.
 The PBI is binding to all parties involved in Local LC / SKBDN
transaction.

Peraturan Bank Indonesia (PBI) No. 5/6/PBI/2003 for SKBDN
 SKBDN hanya berlaku untuk transaksi perdagangan barang.
 Perpindahan barang dilakukan di dalam negeri atau perpindahan barang dari
dalam negeri ke luar negeri sepanjang SKBDN diterbitkan atas dasar master L/C
dan non L/C untuk tujuan ekspor.
 Bisa dibuka dalam valuta asing, sepanjang SKBDN terkait dengan perdagangan
internasional.
 SKBDN tidak dapat dijadikan master L/C untuk membuka L/C ke luar negeri.
 Bank Pembuka memiliki waktu minimal 7 (tujuh) hari kerja perbankan setelah
tanggal penerimaan dokumen untuk melakukan pemeriksaan dan menentukan
pengambilalihan atau penolakan dokumen.
 Bank Pembuka dapat menerima penyerahan dokumen yang melewati batas waktu
berakhirnya SKBDN.
 Prinsip Independensi.
 Prinsip Keterikatan pada dokumen

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