Fixed Deposit

What you need to know about trade financing

Trade finance & services

Finance is an important element of any business responsible for bringing in the financial capital required for furthering business prospects. Finance is also a part of sourcing funds, managing funds and spending funds judiciously. Finance function often impinges on domestic as well as overseas business operations.

Trade finance is a vital subset of overall finance function dealing predominantly with trade operations. Trade finance is more relevant when it comes to international operations. Here, the businesses concerned need services in two countries where different trade norms could apply involving the sale of goods and services as also exchange of currencies in relation to payments. Trade finance assumes significance because it helps both parties in a cross-border transaction to transact with minimum fuss where the seller gets paid for the sale of goods or services to the buyer and the buyer gets the goods or services delivered as per terms and conditions of the sale. Trade finance helps to make the transaction smoother for both parties as also to reduce delays in consummating the transaction thus reducing trade risks for both parties.

Contours of trade finance services

Typically, trade finance services deal with commercial and international trade and monetary activities such as

  • Lending
  • Letters of credit
  • Factoring
  • Guarantees
  • Insurance
  • Bank-to-bank transactions known as correspondent banking
  • Deployment of latest technologies – blockchain

Providing finance to consummate a trade is an integral part of any trade finance activity. The financier helps the process of trade by filling the trade cycle funding gap. The function of trade finance is to act as a third-party to remove the payment risk and the supply risk, whilst providing the exporter with accelerated receivables and the importer with extended credit.

The financier seeks certain facilities from the buyer and seller that include

  • Security and control of the goods traded
  • Use of funds lent
  • Repayment of lent funds
  • Close supervision of the trade cycle

Thus, trade finance helps seller and buyer to mitigate their respective risks through extending credit to the importer and making faster payment to the exporter.

IDFC Bank Trade Finance Features

IDFC Bank is among the leading trade financiers in India with an excellent track record for financing all kinds of trade – large and small.

The various services under trade finance include

Cash management services

IDFC Bank’s Cash management services provide focus, efficiency and convenience with a host of features such as

  • Payables and receivables management, reconciliation, IDFC Bank Edge Debit card
  • The concentration of cash at a central place for easy monitoring and effective deployment of cash resources
  • Earning income from parked cash through sweep into fixed deposits
  • Effortless monitoring and operation of multiple accounts

Trade finance and services

Businesses involved in export and import can benefit from IDFC Bank’s trade finance services that offer a comprehensive suite of solutions that include

  • Bill negotiation – facility of better terms at competitive rates
  • Letter of Credit Advising – authenticity check and LC advice
  • LC confirmation – enables financing options through quick confirmation at optimal cost
  • Bill collection – enables faster receivable turnaround in any currency
  • Discounting/purchase of bill – financing through the purchase of bills without LC opening
  • Pre-shipment finance – flexibility of order-based running account
  • Bank Guarantee (BG)/Standby Letter of Credit (SBLC) for domestic and international transactions - Performance Guarantees, Financial Guarantees, Bid Bond Guarantees, Advance Payment Guarantees, Deferred Payment Guarantees and Shipping Guarantees/DO
  • Remittances – inward remittance alerts and disposal through instructions

Escrows

Escrows or a means of mitigating risks and complexities of commercial transactions and IDFC Bank’s escrow services provide several options comprising

  • Escrows – revenue-sharing, milestone, franchisor-franchisee, anchor-dealer and e-tendering escrows
  • Merger and acquisition transactions - Share-purchase transaction-linked, FDI-linked share-purchase, Open offer and indemnity obligations escrows
  • Lending and investment transactions - Project finance transactions, Lending-linked debt servicing, DSRA, default, External commercial
  • borrowing-linked, Lease rental discounting, Receivables purchase and invoice discounting and Bond/NCD servicing-linked escrows
  • Capital market transactions - Buyback offer and Delisting offer escrows
  • E-commerce and payment facilitation - Escrow account for prepaid instrument issuer and Nodal accounts for payment and marketplace aggregator

Integrated channels

IDFC Bank offers unified portal services that can connect anytime from anywhere through

  • IDFC Bank BXP - Business eXperience Platform – omnichannel experience, full audit control, advanced security features, front-end consolidation and back-end integration
  • Customized dashboard – optimized information extracts and dedicated transaction workflows, alerts and reports

Forex, derivatives and fixed income

Customized hedging solutions for currency risks is a facility from IDFC Bank that helps buyers and sellers through

  • Foreign exchange – forward contracts and foreign exchange options to mitigate risks
  • Interest rate derivates – interest rate swaps and forward rate agreement
  • Fixed income – treasury bills, government and corporate bonds, short-tenor commercial paper and long-term financial structures
  • Exchange traded currency derivatives - Currency Futures-USD/INR, EUR/INR, GBP/INR and JPY/INR. Currency Options - USD/INR

Project finance

IDFC Bank offers a number of financial instruments through which it lends to businesses to provide trade finance to consummate a trade. Some of them include

  • Financial instruments - corporate loans, project loans, subordinated debt, loans against shares, mezzanine finance and equity
  • Customer engagement
  • Domain knowledge

Treasury and capital markets

IDFC Bank offers treasury and capital markets services that are customer-centric which include

  • Risk mitigation - protection from currency and interest fluctuations
  • Raising funds - short tenor commercial papers to long-term financing structures

Trade financing is often short-term lasting for the period that the trade gets consummated. It allows both parties to concentrate on their core competencies leaving the trade financing task to intermediaries such as IDFC Bank. It also protects against risks inherent in any international trade – political instability, currency fluctuations, non-payment issues or lack of creditworthiness.

IDFC Bank is at the forefront of using technology to offer services to its clients. It is looking at digitization of trade finance through robo-advisors, smart contracts, block chain, remittance apps, cryptocurrency, RegTech and InsurTech. These would help improve transparency, mitigate risks, lower fees, eliminate paperwork and lower transaction costs. Accessing trade finance from IDFC Bank is quite easy and quick through its user-friendly online platforms backed by robust back-office structure.