2013 - ICC India

6ICC BANKING COMMISSION | 2013 GLOBAL RISKS TRADE FINANCE | INTRODUCTION1.2.3. Loans for ExportAs explained above, the import L/C and export confirmed L/C reducethe risk of non-payment to the exporter. However, the exporter may stillface the problem that the payment will take a reasonably long time to bemade given the terms of the transaction and, while awaiting payment forthis exported goods or service, the exporter may need to pay staff or buyfurther materials etc.This is where a loan for export can play a beneficial role. Given that theexporter has a L/C, it can use this as collateral for a loan from a bank inorder to accelerate payment i.e. it can use a loan for export 6 . Under thisarrangement, the L/C component reduces the risk of non-payment, whilstthe loan provides funds more rapidly, thereby reducing liquidity risks for theexporter and allowing it to undertake more trade.A variety of techniques and structures exist which have the effect ofloans extended to the exporter. For example, as a common means ofproviding working capital financing where L/Cs are being used, an L/Cstructure can be set up as per an import L/C but with a ‘negotiable’ clause.Figure 5 shows how such a negotiable L/C works.FIGURE 5Transaction process flow for a negotiable L/C1EXPORTER5L/CIMPORTER2 931NEGOTIATINGBANK45ISSUING BANK1. L/C structure set up as per import L/C• L/C needs to have a “negotiable” clause(i.e. an assurance from the issuing bank that it willreimburse anyone under the terms and conditionsof the L/C who “negotiates” against conformingdocuments)• Hence, negotiating bank usually not named in theL/C2. Exporter presents documents to the negotiating bankas per the terms and conditions of the L/C3. Negotiating bank checks the documentation and, ifcompliant, advances cash to the exporterThe “negotiation” is effectively the purchase ofdocuments from the exporter at a discount4. Negotiating bank presents the documents to theissuing bank5. Issuing bank checks the documents and, if compliant,arranges payment to the negotiating bank