Foreign Exchange Business
International Trade Definition
Foreign Exchange Business firms engaged in foreign trade receive and make payment through foreign currency. In order to facilitate such transactions and also help exporters and importers, there are banking institutions which primarily engage in transactions involving foreign exchange, These are known as Foreign Exchange Dealing branch or Banks.
Foreign Exchange Significance
The main reason foreign exchange is so significant is because the modern world is so intertwined and globalized. More corporation than ever have extensive business operations in almost every country around the world. McDonald’s, for instance, derives some 65 percent of its revenue from outside the U.S. Given this dependence on foreign markets, man international corporations use the foreign exchange system to minimize risk in the event of adverse currency movements, and maximize revenue optimization when conditions appear advantageous.
Importance of International Trade
# Cross border exchange of goods and services.
# Exporter/Seller’s responsibility is just to make the shipment according
to the agreed upon terms and conditions
# Importer/Buyer’s task is to make the payment according to the
contract.
Role of Banks in international Trade
#Facilitating trade payment
# Extending trade finance
# Working as an intermediary between the buyer and the seller.
Forex Market
To facilitate foreign business there exists a Forex Market. The Foreign Exchange Market is the Financial market in which currencies are bought and sold that is a transaction is entered into where a given amount of currency is exchanged for another amount of currency. The need for the Foreign Exchange Market (commonly referred to as the Forex Market) developed to facilitate International trade where currencies were required to be settled from the country of both the importer and the exporter. It therefore plays an extremely impotent role in facilitating cross- border trade, financial transactions and investment.
Reasons for International Trade
1. Consumers generally come into the fray to foreign exchange when they
travel one place to another. They either go to bank for a foreign exchange bureau to exchange one currency into another currency
2. When there is some business which needs to operate from other countries too than this type of foreign exchange system comes into play.
3. Sometimes investors require currency exchange whenever they are doing any foreign investment or any real state investment. 4. All banks i.e. Commercial and Investment Banks trade currencies as a service for their commercial banking, deposit and lending customers base. Banks can earn profit in financing foreign exchange business through following:
Import Finance
# Loan Against Imported Merchandise (LIM)
# Loan Against Trust Receipt (L.TR)
# Loan Against Export Development Fund (EDF)
# Payment against Document (PAD)
Export Cash Credit
# Packing Credit.
# Export Finance
# Pre-shipment credit
# Foreign Bills Purchased (FBP)
LIM-Loan Against Imported Merchandise
This type of finance is offered to the importer to finance their needs for meeting the cost of customs and excise duty payable on the imported merchandise. The Lending bank mostly pledges the imported goods. The merchandise is released for the use of the importer (borrower) upon repayment of the bank’s finance and charges either fully or partially, on production of the Delivery Order issued by the banker in favor of the borrower.
Packing Credit
Packing credit is short-term advance granted by a bank to an exporter against valid export L/C/contract for the purpose of purchase of materials or finished goods or manufacturing, Processing, packing, transporting up to ware house/port of shipment etc. of exportable for export. This type of credit is sanctioned for the transitional period from dispatch of the goods till negotiation of the export documents.
Bill Discounted
Bank allows credit to the clients by discounting Usance bill (bill of exchange) which matured after a fixed tenor. It may be clean or documentary.
Bill Purchased
Bank allows credit to the clients by purchasing Demand bills (Bill of Exchange) Which the bank collects immediately. It may be clean or documentary. There are two types of bill purchase:
l) IBP (Inland Bill purchased)
2) FBP (Foreign Bill Purchased)
IBP (Inland Bill Purchased)
A draft for a sum of money to be paid in the same country. A bill of exchange that is both drawn and made payable in the same country.
FBP (Foreign Bill purchased)
A draft for a sum of money to be paid in another country. A bill of exchange that is drawn in one country and made payable in another used extensively in foreign trade.
Loan Against Trust Receipt (LTR)
This is a loan against a Trust Receipt provided to the client for meeting the cost of customs and excise duty. Under this system, the client will hold the goods of their sale proceeds in trust for the bank, until the loan allowed against the Trust Receipt is fully paid.
Payment Against Document (PAD)
Arrangement under which the LC issuing bank execute payment under its commitment to an exporter against the delivery of goods.
Loan Against Export Development Fund (EDF)
The EDF is intended to facilitate access to financing in foreign exchange for input procurements by manufacturer exporters. The EDF Loan is provided to the exporters who want to open BTB LC on sight basis.
Letter Of Credit (LC)
Under an Letter of Credit the exporter is assured regarding payment by the LC issuing bank. This is the most popular payment method in the international trade. Banks realize commissions, charges, interests, Postages etc. on the facilities mentioned above, which play a positive impact on profitability.
