trade finance for sme exports to Bangladesh

TRADE FINANCE FOR SME EXPORTS TO BANGLADESH

SHAFIA AHMAD (09BS0002138)

TRADE FINANCE FOR SME EXPORTS TO

BANGLADESH

Name : Shafia Ahmad Enrollment No. : 09BS0002138 Mobile No. : 9836661371 E-mail ID : [email protected]



A REPORT ON


SUBMITTED TO:

FACULTY GUIDE COMPANY GUIDE PROF S.N.MOOKHERJEE PRADIP BHATTACHARYA ICFAI BUSINESS SCHOOL REGIONAL HEAD KOLKATA (GLOBAMARKETGROUP) INDUSIND BANK SUBMITTED BY: SHAFIA AHMAD

ENROLLMENT NO-09BS0002138

INDUSIND BANK



SUMMER INTERNSHIP REPORT

An Interim report submitted in partial fulfillment of the requirements of MBA Program of ICFAI Business School, Kolkata.

Submitted by: SHAFIA AHMAD

(09BS0002138)

Submitted to:

FACULTY GUIDE COMPANY GUIDE

PROF S.N.MOOKHERJEE PRADIP BHATTACHARYA ICFAI BUSINESS SCHOOL REGIONAL HEAD

KOLKATA (GLOBAL MARKET GROUP)

INDUSIND BANK



AUTHORIZATION

This report, “TRADE FINANCE FOR SME EXPORTS TO BANGLADESH” is authorized by

Mr. Pradip Bhattacharya – the Company Guide and Prof.S.N. Mookherjee – the Faculty

Guide with the partial fulfillment of the requirement of Summer Internship Program

of the MBA Program of ICFAI Business School.



ACKNOWLEDGEMENTS

It is well established fact that behind every achievement lays an unfathomable sea of

gratitude to those who have extended their support and without whom the project would

never have come into existence, without their help the present work would never have

assumed its form. So with immense gratitude, I acknowledge all those whose guidance and

encouragement served as a “beacon light” and crowned my efforts with success.

I wish to express my gratitude to IndusInd Bank’s management for giving me an

opportunity to be a part of their esteemed organization and enhance my knowledge by

granting permission to pursue my Summer Internship Program under their kind guidance.

I must thank my Company Guide Mr. Pradip Bhattacharya-Regional Head(Global Market

Group), IndusInd Bank, for not only giving me the opportunity to work on an enriching area

like this but also guiding me through the complexities of the project. I am especially

thankful to my Faculty Guide Prof. S.N. Mookherjee, who gave me the necessary

confidence and support to go ahead with this project and also for his helping hand when

doubts bogged me down.

I am grateful to Mr. Subir Kumar Kundu, Head Forex, for his invaluable guidance and

cooperation during the course of the program. He provided me with his guidance and

support whenever needed that has been instrumental in completion of this project.

Shafia Ahmad

(09BS0002138)



TABLE OF CONTENTS

SERIAL NUMBER TOPIC PAGE NUMBER

A. AUTHORIZATION 4

B. ACKNOWLEDGEMENT 5

1. ABSTRACT 8

2. INTRODUCTION 9

2.1. COMPANY PROFILE 9

2.2. OPERATING RESULTS 12

2.3. INTRODUCTION TO INTERNATIONAL TRADE FINANCE AND SME

16

2.4 OBJECTIVE 18

2.5 METHODOLOGY 18

2.6 LIMITATIONS 19

3. TRADE FINANCE 20

3.1. TRADE FINANCING INSTRUMENTS

21

3.2. EXPORT CREDIT INSURANCE

22

3.3. EXPORT CREDIT GUARANTEES

23

3.4. LETTER OF CREDIT 23

3.5. RISKS ASSOCIATED WITH TRADE FINANCING

29

4. INDO-BANGLADESH TRADE RELATION

34

4.1. BILATERAL TRADE AND EXCHANGE RATES

36

4.2. INDO-BANGLADESH TRADE POLICIES

38

5. DEFINATION OF SMESs IN INDIA

40



5.1. WHY FOCUS ON SMEs 41

5.2. CONSTRAINTS OF SMEs IN INDIA

43

5.3. SWOT ANALYSIS 45

5.4. INDIAN SMEs-STRATEGIC THRUST FOR THE FUTURE

46

6. FINDINGS 49

7. CONCLUSION 72

8. RECOMMENDATIONS 73

9. ATTACHMENTS 75

10. REFERENCES 79



1. ABSTRACT

Trade finance can serve as an important part of business as it offers various aspects of

managing finances for the company. It helps generate, manage, and establish various

finance practices like working capital, factoring solutions, banking solutions, loans,

guarantees, discounting, etc. Trade finance companies help reduce marketing cost and

increase your trade profitability. They also help in increasing the sales by promoting the

products, services or the website around the world. Trade finance companies help in

eliminating most of the commercial and political risk normally retained by the company or

any small or medium business owner. As businesses continue to source overseas suppliers

and open up new markets for their products, the impact on cash flow cannot be

underestimated. Companies are now looking beyond traditional bank financing such as an

overdraft to more creative methods that allow funding to be provided off the back of

existing trade cycles. Businesses can then release capital which can be used to offer

customer discounts or extend credit terms resulting in a competitive advantage for their

company.

Trade finance can serve as an important part of business as it offers various aspects of

managing finances for the company. It helps generate, manage, and establish various

finance practices like working capital, factoring solutions, banking solutions, loans,

guarantees, discounting, etc. Trade finance companies help reduce marketing cost and

increase your trade profitability. They also help in increasing the sales by promoting the

products, services or the website around the world. Trade finance companies help in

eliminating most of the commercial and political risk normally retained by the company or

any small or medium business owner.

The financing of small and medium-size enterprises (SMEs) has been a subject of great

interest both to policy-makers and researchers because of the significance of SMEs in

private sectors around the world.



2.INTRODUCTION

2.1.COMPANY PROFILE

BRIEF HISTORY ABOUT INDUSIND BANK

IndusInd Bank derives its name and inspiration from the Indus Valley civilisation - a

culture described by National Geographic as 'one of the greatest of the ancient world'

combining a spirit of innovation with sound business and trade practices. Mr. Srichand P.

Hinduja, a leading Non-Resident Indian businessman and head of the Hinduja Group,

conceived the vision of IndusInd Bank. The Bank, formally inaugurated in April 1994 by Dr.

Manmohan Singh, Honourable Prime Minister of India who was then the country’s Finance

Minister, started with a capital base of Rs.1,000 million (USD 32 million at the prevailing

exchange rate), of which Rs.600 million was raised through private placement from Indian

Residents while the balance Rs.400 million (USD 13 million) was contributed by Non-

Resident Indians.

IndusInd Bank is one of the new generation private-sector banks in India, which

commenced its operations in 1994. The Bank caters to the needs of both Consumer &

Corporate Clients and has a robust technology platform supporting multi – channel

delivery capabilities. The Bank enjoys a patronage of 2 million customers and has a

network of 209 branches and 427 ATMs spread over 168 geographical locations in 28

states and union territories across the country. The Bank also has a Representative Office

in Dubai and London. The Bank’s total business (deposits plus advances) as on December

31, 2009 crossed Rs. 43,000 crore. The Bank is driven by state-of-the-art technology since

its inception. It has imulti-lateral tie-ups with other banks providing access to more than

21000 ATMs for its customers. It enjoys clearing bank status for both major stock

exchanges - BSE and NSE - and three major commodity exchanges in the country – MCX,

NCDEX, and NMCE. The various services provided by the bank are Personal Banking,

Wealth Management, Corporate Banking, International Banking, Investment Banking,

Treasury, Capital/Commodities, ASBA and NRI Services. It also offers DP facilities for stock

and commodity segments. Various facilities provided to exporters are Export Finance in

Rupees, Foreign Currency Denominated Loans for Working Capital/Capital Goods/Services



Requirements, Forward booking Facilities to Exporters , Exchange Earners Foreign Currency

(EEFC) Accounts, Diamond Dollar Account Scheme (DDA). The Bank has been bestowed

with the mandate of being a Settlement Banker for tea auctions at Kolkata, Siliguri,

Coonoor, Coimbatore and Guwahati.

During the quarter, in a pioneering initiative in ‘Green Banking’ the Bank became the first

bank in Maharashtra to open a solar-power ATM. Subjects like sustainable development,

social responsibility and climate change are fast becoming part of the corporate vocabulary

and IndusInd is at the forefront of this change in the Indian banking sector. IndusInd Bank

offers special schemes to provide timely credit to Importers/Exporters at competitive

interest and exchange rates in Indian rupees well as foreign currency. The main categories

of granting trade finance are as under:

Importers to avail buyers’/ suppliers’ credit upto 6 months in foreign currency to finalise

import.

Suppliers’ credit is part of the contract between the importer in India and the supplier abroad.

Buyers’ credit is arranged by banks at the instance of the importer.

Exporter to avail pre-shipment credit and post-shipment credit in Indian rupee or foreign

currency.

Exchange Earners to keep certain percentage of receipts in Foreign Currency

Account.(EEFC)

Indian companies to avail foreign currency loans from banks in India out of banks foreign

currency resources in the form of FCNR(B) deposit.

Indian companies to avail foreign currency loan for exports at pre and post shipment stage

from the credit lines, made available by correspondent bank abroad at the rate fixed by

Reserve bank of India. Bank will advise Importer/Exporter to make the choice between

rupee and foreign currency finance (or deposit) depending on what is likely to be cost

effective. The economies of these facilities depends on the Rupee and foreign currency

interest rates, ruling forward premium, exchange rates movements, etc. Some of the

important aspects of economies are as under:



Credit on Imports:

a. Credit is limited to 6 months from the date of shipment or any longer period approved by

RBI.

b. Interest should not exceed prime or equivalent rate for currency of credit.

c. Economics is based on:

i. Rupee and forex interest rates

ii. The exchange rate movement or

iii. Cost of Hedging in the forward market

iv. Difference in commission charged by banks abroad.

v. Deduction/Charging of TDS, including withholding Tax

Export Credit

There are three alternatives available to exporters under export credit for availing bank

finance:

a. Pre-shipment credit in Rupees followed by post-shipment credit in rupees

b. Pre-shipment in rupees followed by discount and re-discount of export bills in foreign

currency.

c. Pre-shipment credit in foreign currency followed by re-discount of export bills at the

post-shipment stage(EBRD).

Export post-shipment credit is available to exporters against the export documents

submitted to bank and method of finance will be either purchase/discount or negotiation of

bills or granting rupee advance against export credit receivable.The Bank has been

awarded the highest P1+ rating for its Fixed Deposits and Certificates of Deposit by CRISIL.

Recently, CRISIL has reaffirmed its P1+ rating of IndusInd Bank’s fixed deposits and

certificates of deposit program. The rating continues to reflect the Bank’s established

presence in the Commercial Vehicle (CV) financing business and the significant



improvement in its asset quality. The rating also features in the Bank’s modest resource

and earnings profile, and average capitalisation levels.

2.2.OPERATING RESULTS(2008-2009)

Total business crossed Rs. 37,800 crores

Net Profit up by 98%. to Rs. 148.34 crores

Net Interest Income up by 53% to Rs. 459.03 crores

Fee and Other Income up by 53% to Rs. 456.24 crores

Net NPA at 1.14 % as compared to 2.27% as on March 31, 2008.

Net worth moved to Rs. 1429 crores

Earning per share (Basic) increased to Rs 4.28 from Rs 2.35

Capital Adequacy Ratio stood at 12.33 % as against the minimum regulatory norm

of 9%.

Highest A1+ rating for its Certificates of Deposit by ICRA and the highest P1+ rating

for its Fixed Deposits and Certificates of Deposit by CRISIL.

Dividend declared 12% up from 6%.

Bagged The Economic Times Acer Intel Smart Workplace Award, in the Financial

Services category.

Mandated as Settlement Banker for Tea auctions at Kolkata, Siliguri, Coonoor and

Guwati.

Loans to grow at 30% CAGR over FY09-12E; SME to be sweet spot- Benefiting

from the small base, recovering economy and strong growth in corporate loan book,

IndusInd bank has registered above industry loan growth during past 4 quarters

(~20‐30%). As a strategy, going forward, bank intends to broad‐base its corporate

customer profile and will be focusing on high yielding SME loans to drive‐in robust

credit growth. Being a small bank, it makes sense for the bank to focus on SMEs

offering its high end technology products & services at better pricing and create a

niche for itself. We expect bank to register 30% CAGR in loans over FY09‐12E,

primarily driven by strong growth in corporate loans (primarily SME) and vehicle

loans. Bank has strong presence in consumer finance segment; however, off‐late

share of corporate loans too has increased in bank’s loan portfolio, indicating



increased activity on corporate side, which should further boost banks fee income.

Being a small bank, SME remains the key focus segment for the bank to generate fee

income, where it can offer its high end technology products and create a niche for

itself.

Loans to grow at 30% CAGR over FY09-12E



COMPOSITION OF LOAN BOOK OF INDUSIND BANK

CONTIBUTION OF INDUSIND BANK(KOL) IN SME EXPORTS TO BANGLADESH

EXPORTS TO BANGLADESH(KOLKATA) %COMPOSTION

LEATHER GOODS 40%

AUTOPARTS 30%

PHARMACEUTICALS MACHINERY 18%

FOODS 12%



MAJOR SME CLIENT OF INDUSIND BANK(KOL)

MAJOR SME CLIENTS OF INDUSIND BANK (KOL) %COMPOSITION

RA INTERNATIONAL 30%

FALCON TYRES 18%

WONDER COMMODITIES 15%

DOKANIA EXIM 11%

NSA EXPORT 9%

ARUN ENTERPRISES 8%

VIBGOYR GOLD 4%

ORIENTAL TRADERS 3%

ARITRA TRADING 2%



2.3. INTODUCTION TO INTERNATIONAL TRADE FINANCE AND SMALL AND MEDIUM

ENTERPRISES

Global trade is the exchange of raw materials, goods and services across the geographical

borders of countries across the globe. Foreign trade got its first impetus from the industrial

revolution in the late eighteenth and early nineteenth century. Rapid development in

transportation facilities resulted in a surge in international trade in the twentieth century.

Today, international trade has taken the form of outsourcing and multinational companies

(companies that have a presence in several countries). Trade among nations induces

countries to specialize in particular products or in particular varieties of some products.

http://www.economywatch.com/international-trade/

http://www.economywatch.com/international-trade/



This results in a more efficient allocation and utilization of world resources. As the

producers benefit from specialization and economies of scale and the customers get a

wider range of products to choose from, the economic activities increases, thus giving a

push to the economic growth of the world.

In today’s global economy, many small and medium-sized companies are looking to banks,

and commercial lending organizations to satisfy the financial needs of a growing business.

International Trade Finance can offer Letters of Credit and coordinate with the nation’s top

factors to meet your company’s Purchase Order Financing and Accounts Receivable

Factoring needs.

The absence of an adequate trade finance infrastructure is, in effect, equivalent to a barrier

to trade. Limited access to financing, high costs, and lack of insurance or guarantees are

likely to hinder the trade and export potential of an economy, and particularly that of small

and medium sized enterprises.

SMALL AND MEDIUM ENTERPRISES

SMEs have been playing a pivotal role in country’s overall economic growth, and have

achieved steady progress over the last couple of years. From the perspective of industrial

development in India, and hence the growth of the overall economy, SMEs have to play a

prominent role, given that their labour intensiveness generates employment. The SME

segment also plays a major role in developing countries such as India in an effort to

alleviate poverty and propel sustainable growth. They also lead to an equitable distribution

of income due to the nature of business. Moreover, SMEs in countries such as India help in

efficient allocation of resources by implementing labour intensive production processes,

given the abundant supply of labour in these countries, wherein capital is scarce.

SMEs in India: The Current Scenario

Small & Medium industries definition laid down by Govt. in terms of

investment in Plant & Machinery :

SSI : upto INR 1 mn (USD 22,000 )

MSI : above INR 1mn and up to INR 10 mn (USD 220,000)



13 million plus SME units.

Employment generation in SSI : 42 Million people.

Share in Industrial Value Added: 39%

Total No. of items Produced: Over 8000, No. of Reserved items: 675

Production : USD 100 bn, Exports : USD 27 bn (FY2007)

SSIs account for 45% of industrial production, 40% of exports, around 17% share

in GDP

Ownership pattern : 78% proprietorships, 16% partnerships, 6% corporates &

others

96% industrial units, 3% service enterprises, 1% ancillary units

2.4. OBJECTIVE OF THE PROJECT

The first and the foremost objective was to find out as to how to enhance trade

volumes of Indian SME’s with Bangladesh to benefits the economy of both the

countries.

Swot Analysis of Indian SME.

To what extent does the total exports of Indian SMEs contributes to Indian GDP.

To study current trade policies and improvements that can be made to ease the

trade relations.

Comparative Data on Overall Industrial Growth Rate, Employment, number of

Enterprises, Fixed Investment, Production of Micro, Small and Medium Enterprises

2.5. METHODOLOGY Interacting with bank officials and other staffs of the Foreign Exchange department in the bank to gain the knowledge of import and export finance and risk management and to learn the procedures taken by the bank Secondary Research based on:

1. Business Magazines

2. Internet Sources

3. Finance books.

4. Master Circular-Export, Import and Remittance



The project is divided into three phases:-

1st PHASE: Understanding the concept of Trade Finance. Studying the concept of SME’S

and understanding the trade relation between India and Bangladesh.

2nd PHASE: Collection of the various data required for the project and analyzing them to

identify as to how the SME’s of India can increase their trade with Bangladesh.

3rd PHASE: Tabulation of the collected data and on the basis of that doing a detailed

analysis of the findings. On the basis of the detailed analysis giving the recommendations.

2.6.LIMITATIONS It is a known fact to all that nothing and nobody in this world is perfect! However hard one

may try, but certain limitations – directly or indirectly are bound to crop up. Certain

aspects which have put limitations on this project are listed below.

The foremost limitation is the Time-Constraint. The time frame for the completion

of this project is 14 weeks which is undoubtedly a little less. As a result, full

utilization of ideas and creativity will remain limited.

Only secondary data is used for the research.



3.TRADE FINANCE

“Trade Finance is the science that describes the management of money, banking,

credit, investments and assets for international trade transactions”

Trade finance is a specific topic within the financial services industry. It is much

different, for example than commercial lending, mortgage lending or insurance. It is

concerned with international trade. A product is sold and shipped overseas; therefore, it

takes longer to get paid. Extra time and energy is required to make sure that buyers are

reliable and creditworthy. In addition, foreign buyers- just like domestic buyers- prefer to

delay payment until they receive and resell the goods. Due diligence and careful financial

management can mean the difference between profit and loss on each transaction.Trade

Finance enables credit worthy businesses to fund purchases from suppliers (particularly

wholesalers, distributors and manufacturers.)Trade finance provides alternative solutions

that balance risk and payment

Trade Finance refers to the institutions, laws, regulations and other systems related

to the following three activities:

1. Provision of capital to firms that are engaging in international trade transactions,

2. Provision of support services to manage the risk involved in these transactions, and

3. Provision of international payment mechanisms.

Companies involved with trade finance include importers and exporters, financiers,

insurers and other service providers. The Main Players are:

• Government agencies

• Banks & other Financial Institutions

• International Agencies

There are many types of financial tools and packages designed to facilitate the financing of trade transactions. They are:



3.1.TRADE FINANCING INSTRUMENTS

a) Documentary Credit

This is the most common form of the commercial letter of credit. The issuing bank will

make the payment, either immediately or at a prescribed date, on the presentation of

stipulated documents. These documents include shipping and insurance documents, and

commercial invoices. The documentary credit arrangement offers an internationally used

method of attaining a commercially acceptable undertaking by providing for payment to

be made against presentation of documentation representing the goods, and making

possible the transfer of title to those goods. A letter of credit is a precise document

whereby the importer’s bank extends credit to the importer and takes responsibility in

paying the exporter.

b) Countertrade

Most emerging economies in today’s time face the problem of limited foreign exchange

holdings. One way to overcome this constraint is to promote and encourage countertrade.

Today’s modern countertrade appears in so many forms that it is difficult to devise a

definition. It generally encompasses the idea of subjecting the agreement to purchase

goods or services to an undertaking by the supplier to take on a compensating obligation.

The seller is required to accept goods or other instruments of trade in partial or whole

payment for its products.

Some of the forms of counter trade include:

(i) Barter exchange: In case of barter agreements, there are exchanges of goods for

goods. For example: there can be exchange of cotton for wheat. This transaction is not a

sale but it is a barter transaction. In a sale there is an exchange of goods for price and

the price is paid in money. In case of exchange of money for money it is a transaction of

exchange and not a sale.

(ii)Counter purchase – The exporter undertakes to buy goods from the importer or

from a company nominated by the importer, or agrees to arrange for the purchase by a

third party. The value of the counter purchased goods is an agreed percentage of the prices

of the goods originally exported.

c) Pre-Shipping Financing



It is for the period prior to the shipment of goods, to support pre-export activities like

wages and overhead costs. It is especially needed when the inputs for production must be

imported. It provides additional working capital for the exporter. Pre-shipment financing is

especially vital to smaller enterprises because the international sales cycle is usually longer

than the domestic sales cycle. Pre-shipment financing can take the form of short term loans,

overdrafts and cash credits.

d) Post-Shipping Financing

This is financing for the period following shipment. The ability to be competitive often

depends on the trader’s credit term offered to buyers. Post-shipment financing ensures

adequate liquidity until the purchaser receives the products and the exporter receives

payment. Post-shipment financing is usually for a short term.

e ) Buyer’s Credit

A financial arrangement whereby a financial institution in the exporting country extends a

loan directly or indirectly to a foreign buyer to finance the purchase of goods and services

from the exporting country. This arrangement enables the buyer to make payments due to

the supplier under the contract.

f) Supplier’s Credit

A financing arrangement under which an exporter extends credit to the buyer in the

importing country to finance the buyer’s purchases.

3.2.EXPORT CREDIT INSURANCE

In addition to financing issues, traders are also subject to various other risks, which can be

either commercial or political. Commercial risk arises from factors like the non-acceptance

of goods by buyer, the failure of buyer to pay debt, and the failure of foreign banks to

honour documentary credits. Political risk arises from factors like war, riots and civil

commotion, blockage of foreign exchange transfers and currency devaluation. Export credit

insurance involves insuring exporters against such risks. It is commonly used in Europe,

and its vitality is increasing in the United States as well as in developing markets. The

types of export credit insurance used vary from country to country and depends on traders’

perceived needs. The most commonly used ones are as follows:

Short-term Export Credit Insurance – Covers periods not more than 180 days.



Protection includes pre-shipment and post-shipment risks, the former covering the

period between the awarding of contract until shipment. Protection can also be

covered against commercial and political risks.

Medium and Long-term Export Credit Insurance – Issued for credits extending

longer periods, medium-term (up to three years) or longer.

Investment Insurance – Insurance offered to exporters investing in foreign

countries.

Exchange Rate Insurance – Covers losses as a result of fluctuations in exchange rates

between exporters’ and importers’ national currencies over a period of time.

The benefits of export credit insurance include:

Ability of exporters to offer buyers competitive payment terms.

Protection against risks and financial costs of non-payment.

Access to working capital.

Protection against losses from foreign exchange fluctuations.

Reduction of need for tangible security when borrowing from banks.

Export credit insurance mitigates the financial impact of the risk. There are specialized

financial institutions available that offer insurance cover, with premiums dependent on the

risk of the export markets and export products.

3.3.EXPORT CREDIT GUARANTEES

Export credit guarantees are instruments to safeguard export-financing banks from losses

that may occur from providing funds to exporters. While export credit insurance protects

exporters, guarantees protect banks offering the loans. They do not involve the actual

provision of funds, but the exporters’ access to financing is facilitated. An export credit

guarantee is issued by a financial institution, or a government agency, set up to promote

exports. Such guarantee allows exporters to secure pre-shipment financing or post-

shipment financing from a banking institution more easily. Even in situations where trade

financing is commercially available, companies without sufficient track records may not be

looked upon favourably by banks. Therefore, the provision of financial guarantees to the

banking system for purveying export credit is an important element in helping local

companies go into exporting. The agency providing this service has to carefully assess the

risk associated in supporting the exporter as well as the buyer.

3.4. LETTER OF CREDIT

A letter of credit (LC) is a document issued by a bank to carry out a buyer’s or importer’s

specific instructions regarding a trade transaction. The LC specifies the nature of the trade



transaction to be conducted, including the dates and destination for shipping merchandise,

the necessary documents to be sent by the seller, the method of payment, dates by which

the transaction should be completed, and the condition the seller must satisfy to receive

payment. These detailed instructions follow a standard format described in the Uniform

Customs and Practices for Documentary Credits, International Chamber of Commerce (ICC)

Publication Number 500, known as UCP500.

The Uniform Commercial Code and the Uniform Customs and Practices for Documentary

Credits published by the United States Council of the International Chamber of Commerce

set forth the covenants governing the Issuance and negotiation of letters of credit.

All letters of credit must be issued:

• In favor of a specific beneficiary,

• For a specific amount of money,

• In a form clearly stating how payment to the beneficiary is to be made and under what

conditions, and

• With a specific expiration date.

The major parties of LC transactions are the buyer (Applicant) and seller (Beneficiary) and

their respective banks acting on their behalf. The issuing bank issues the LC and acts on

behalf of the buyer. The advising bank acts as an financial agent on behalf of the beneficiary

verifying the documents, authorizing the payment to the seller and submitting the

documents to the issuing bank. The relationship between the buyer and the seller and their

respective banks under an LC provides the buyer and the seller with additional protection

against commercial and international risks. For the buyer using an LC substitutes the

creditworthiness of the issuing bank for his own. For the seller this substitution reduces

the risk of non payment as the issuing bank commits to pay the seller if the documents so

provided is correct. The buyer has no right to inspect the merchandise under an LC. The

role of the bank involved is solely to review the documents required by the LC. They do not

concern themselves with the quality or the nature of the merchandise. For the buyer , once

the LC has been successfully performed, the payment obligation must be honored. Letter of

credit should be well-defined, written clearly, and understood by both the parties prior to

engaging in the transaction to avoid the risk at a later stage.

The 4 major parties of an LC are the buyer, the issuing bank, the advising bank, and the

beneficiary. Their roles in the transactions are :

The buyer commonly called the account party submits an application requesting an

LC with specific instructions on how to proceed with the LC.



The beneficiary is also the seller who, by accepting the LC sent to him\her, must

agree to its terms and conditions. The terms of an LC usually require shipping goods

or services and submitting the necessary commercial and financial documents to the

banks involved with the LC. Once all the obligations have been fulfilled, the

beneficiary receives payment for his or her merchandise as stated in the LC.

The issuing bank issues the LC. By doing so the issuing bank substitutes its credit

risk for that of the buyer. Once issued, the bank makes itself responsible for the

payment outlined in the LC.

The advising bank receives the LC, verifies its authenticity, and delivers , it to the

beneficiary. It is common for the advising bank to be a correspondent bank of the

issuing bank.

CHARACTERISTICS OF LETTER OF CREDIT: Applicability: Recommended for use in new or less-established trade relationships when

you are satisfied with the creditworthiness of the buyer‟s bank.

Risk: Risk is evenly spread between seller and buyer provided all terms and conditions are

adhered to.

Pros: Payment after shipment. A variety of payment, financing and risk mitigation options

Cons: Process is complex and labor intensive Relatively expensive in terms of transaction

costs.

VARIOUS TYPES OF LETTER OF CREDIT

IRREVOCABLE

An irrevocable LC cannot be revoked or cancelled unilaterally by any party once it

has been issued, unless all the parties involved agree to the revocation or the

cancellation in writing. This is a vital aspect of an LC as it protects the seller, and it is

recommended that all LC’s be irrevocable.

REVOCABLE

The opposite is a revocable LC. This type of LC can be cancelled by the issuing bank

at any time without the permission of the other parties. Consequently, a revocable

LC is seldom used in international trade transactions. To be revocable an LC must

state that it is revocable.



STRAIGHT

A straight LC requires the beneficiary to present documents and to request payment

at the counter of a specific bank. No other bank may be used to negotiate

documents.

SIGHT

A sight LC requires the banks to provide payment to the beneficiary immediately

after determining compliance of the necessary commercial documents. They only

acceptable delay to a sight credit is if a reimbursing bank is employed for payment.

USANCE

A usance LC is one that calls for a payment at a future date rather than at sight.

Under this type of LC, usance(time) drafts will be presented with the required

documents. If the documents comply with the LC terms , the draft is “honoured the

drawee bank by accepting it for payment at the specified future date. Because the

accepted draft is a negotiable instrument, it has an additional advantage to the

beneficiary. The beneficiary may elect to receive funds prior to the draft maturity

date by requesting the drawee\accepting bank to pay the draft amount on a

discounted basis.

NEGOTIABLE

A negotiable LC allows the beneficiary to employ any bank as its intermediary to

examine documents and request payment, even if this bank is not the advising bank.

This bank can on its sole discretion pay the beneficiary provided that the beneficiary

fulfills the terms of the credit and all commercial documents are in order.

TRANSFERABLE

A transferable LC allows the beneficiary the right to transfer the proceeds of an LC

to another person or persons or beneficiaries. This additional beneficiary becomes a

party to the term and conditions of the credit. The credit may be transferred as a

whole or in parts to different persons and may involve a complete transfer or only a

partial transfer. An LC can be transferred only once. It may not be retransferred.

Most LCs today are in payment for goods shipped or services performed. Payment is



normally made against documents consisting of commercial invoices, packing lists,

certificates of origin, and shipping documents for the goods shipped.

DIAGRAMATIC REPRESENTATION OF:

MECHANISM OF OPERATING OF LETTER OF CREDIT

A) OPENING OF THE LC

SALES CONTRACT

FORWARDS LC TO APPLIES TO

OPENING LC

AND FORWARDS TO

INDUSIND BANK

INDIA

(ADVISING BANK)

EXPORTER,INDIA

(BENEFICIARY)

IMPORTER,BANGLADESH

(APPLICANT)

AGRANI BANK,

BANGLADESH

(OPENING BANK)

OPENING OF LETTER

OF CREDIT



B) UTILIZATION OF LC

SHIPS GOODS

MONEY

MONEY

DOCUMENTS

DOCUMENTS

MONEY

DOCUMENTS

EXPORTER,INDIA

(BENEFICIARY)

IMPORTER,BANGLADESH

(APPLICANT)

INDUSIND BANK

INDIA

(ADVISING BANK)

AGRANI BANK,

BANGLADESH

(OPENING BANK)

UTILISATION OF LETTER OF

CREDIT



3.5.RISKS ASSOCIATED WITH TRADE FINANCING

From a supervisory perspective, risk is the potential that events, expected or unanticipated,

may have an adverse impact on the bank’s capital or earnings.

There are nine categories of risk for bank supervision purposes. These risks are: credit,

interest rate, liquidity, price, foreign currency translation, transaction, compliance, strategic,

and reputation..

The risks associated with trade financing are: credit, foreign currency translation,

transaction, compliance, strategic, and reputation.

CREDIT FOREIGN CURRENCY TRANSACTION COMPLIANCE STRATEGIC REPUTATION

TRANSLATION

These risks are discussed below:

Credit Risk

Credit risk is the current and prospective risk to earnings or capital arising from an

obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as

agreed. Credit risk is found in all activities in where success depends on counterparty,

issuer, or borrower performance. It arises any time bank funds are extended, committed,

invested, or otherwise exposed through actual or implied contractual agreements, whether

reflected on or off the balance sheet.

RISKS ASSOCIATED WITH TRADE FINANCING



In trade finance, many transactions are self-liquidating or supported by letters of credit

and guarantees, and the examiner must review each transaction individually to properly

identify and evaluate the sources of repayment.

Although trade finance has a low loss ratio historically, it is a very specialized area, and a

bank that lacks the appropriate expertise may experience losses because of improper

structuring, poor documentation, unfamiliarity with a country’s business practices, or

improper pricing. A bank should ensure that documents on shipments of goods are proper

and thorough. Any bank engaging in trade finance should thoroughly analyze the risks. In

issuing a letter of credit for a domestic importer, the bank must evaluate the importer’s

repayment capacity as it would that of any other type of borrower. In confirming or

accepting as collateral a foreign bank’s letter of credit, a U.S. bank must evaluate the risk

that the foreign importer/bank may not be able to raise the dollars required to repay the

transaction because of capital controls in the importing country.

Foreign Currency Translation Risk

Foreign currency translation risk is the current and prospective risk to earnings or capital

arising from the conversion of a bank’s financial statements from one currency into

another. It refers to the variability in accounting values for a bank’s equity accounts that

result from variations in exchange rates which are used in translating carrying values and

income streams in foreign currencies to U.S. dollars. Market-making and position taking in

foreign currencies should be captured under price risk. In a trade transaction, foreign

currency translation risk arises from the exposure to fluctuations in exchange rates

whenever payments involve foreign currencies. The level of risk depends on the currency

involved in the transaction, whether the bank creates an open position, the size of any

maturity gap, and settlement uncertainties.

A bank financing an exporter’s operation by discounting foreign-currency denominated

drafts or acceptances encounters foreign currency translation risk because of the time lag

between its discounting of the draft or acceptance and its collection from the foreign

importer or bank. The U.S. bank will be exposed to foreign currency translation risk from

the time it discounts the instrument and pays the local exporter the dollar equivalent of the

draft or acceptance until it collects from the foreign counterpart in the foreign currency. If

the foreign currency depreciates in relation to the dollar during the time it takes the bank

to pay the exporter and to collect on the foreign instrument, the bank incurs a loss.

When the U.S. exporter is paid by the foreign importer with a dollar denominated draft,

exchange risk may arise from transfer problems. Transfer problems may occur when the

foreign importer is located in a country that is having difficulties accumulating hard

currency reserves. In those circumstances, the foreign importer may have the local



currency to repay its debt but be unable to purchase the dollars because of central bank

controls over the sale of hard currency. The payment instructions to the foreign importer’s

bank could allow payment to be received from the foreign importer in local currency with

the stipulation that, when foreign exchange in U.S. dollars is allocated by the government

authorities for the transaction, it should be remitted to the exporter’s U.S. bank. Depending

on the scarcity of foreign exchange in the foreign importer’s nation, the wait may be longer

than anticipated, exposing the U.S. bank to exchange risk if it discounted the draft.

Transaction Risk

Transaction risk is the current and prospective risk to earnings or capital arising from

fraud, error, and the inability to deliver products or services, maintain a competitive

position, and manage information. Risk is inherent in efforts to gain strategic advantage,

and in the failure to keep pace with changes in the financial services marketplace.

Transaction risk is evident in each product and service offered. Transaction risk

encompasses: product development and delivery, transaction processing, systems

development, computing systems, complexity of products and services, and the internal

control environment.

Transaction risk is also referred to as operating or operational risk. This risk is particularly

high in trade transactions because of the high level of documentation required in letter of

credit operations. Many transactions evolve readily from letters of credit to sight drafts or

acceptances or to notes and advances, collateralized by trust or warehouse receipts.

Repayment often depends on the eventual sale of goods and the accuracy of

documentation. Thus, the documents required to secure payment under the letter of credit

should be properly handled.

Compliance Risk

Compliance risk is the current and prospective risk to earnings or capital arising from

violations of, or nonconformance with, laws, rules, regulations, prescribed practices,

internal policies and procedures, or ethical standards.

Compliance risk also arises in situations where the laws or rules governing certain bank

products or activities of the bank’s clients may be ambiguous or untested. Compliance risk

exposes the institution to fines, civil money penalties, payment of damages, and the voiding

of contracts. Compliance risk can lead to a diminished reputation, reduced franchise value,

limited business opportunities, reduced expansion potential, and an inability to enforce

contracts.

Compliance risk can be overlooked because it often blends into transaction risk and

operational processing. In trade transactions, failure to comply with domestic and



international laws, such as the anti-boycott provisions of the Export Administration Act or

regulations enforced by the Department of the Treasury, Office of Foreign Asset Control

may result in fines and prevent the bank from collecting on a transaction.

The bank must be aware of the laws of the country in which the counterpart to the

domestic customer is located. The bank must ensure that collection and penalty procedures

stipulated in the contract are enforceable in the foreign country. For this reason many

banks rely on foreign correspondent bank relationships in the countries where they are

active but lack branches.

Strategic Risk

Strategic risk is the current and prospective risk on earnings or capital arising from

adverse business decisions, improper implementation of decisions, or lack of

responsiveness to industry changes. This risk is a function of the compatibility of an

organization’s strategic goals, the business strategies developed to achieve those goals, the

resources deployed against these goals, and the quality of implementation. The resources

needed to carry out business strategies are both tangible and intangible. They include

communication channels, operating systems, delivery networks, and managerial capacities

and capabilities. The organization’s internal characteristics must be evaluated against the

impact of economic, technological, competitive, regulatory, and other environmental

changes.

Strategic risk in trade financing arises when a bank does not know enough about the region

in which it is doing business or the financing product it is using. A bank considering

whether to finance trade must carefully develop its financing strategy.

Reputation Risk

Reputation risk is the current and prospective impact on earnings and capital arising from

negative public opinion. This affects the institution’s ability to establish new relationships

or services or to continue servicing existing relationships. This risk may expose the

institution to litigation, financial loss, or a decline in its customer base. Reputation risk

exposure is present throughout the organization and includes the responsibility to exercise

an abundance of caution in dealing with its customers and community.

Trade financing is an area where reputation and market perception is particularly

important. Trade financing requires expedient processing of operations and significant

attention to details of documents. A bank’s failure to meet these requirements may result in

financial losses to the bank and its customers, and may diminish its business opportunities

in the trade financing community. To regain its foothold, the bank may have to lower prices

on its products and fund expensive advertising/public relations efforts.



Risk Management

In reviewing risk, examiners should determine that a bank has adequate safeguards in

place to identify, measure, monitor, and control risks inherent in the trade finance area.

Such safeguards include policies, procedures, internal controls, and management

information systems governing trade finance activities. The importance of strong internal

controls in this area cannot be overemphasized. There is a growing incidence of counterfeit

letters of credit, totaling millions of dollars. Often, these counterfeit instruments are not

identified in a timely manner. A significant amount of funds can be released before the

schemes are detected. Bankers should closely monitor every detail of a letter of credit

transaction.

Examiners should also assess the capabilities of the trade finance staff and the adequacy of

their training. A bank’s trade finance policy should identify the target market, prospective

customers, and desirable countries, and it should set country limits and minimum

standards for documentation. The bank’s trade credit administration system should be

documented in a complete and concise manner and should include, when appropriate,

narrative descriptions, flowcharts, copies of forms, and other pertinent information.

Adequate documentation is the principal means available to reduce or eliminate risks

inherent in international trade. Therefore, operating policies and procedures should

address the documentation requirements for each transaction, and internal controls should

be established to ensure adequate reviews. A well-organized and efficient backroom

operation is essential because of the amount of documentation involved.

There is always the risk that a shipment will be damaged or destroyed, the wrong goods

will be shipped, or the quality of goods (especially if the goods are agricultural) will be

lower than stipulated. Insurance coverage is crucial to protect the buyer, the seller, and the

issuing bank from loss. Banks should not issue commercial letters of credit without

satisfactory insurance coverage.



4.INDO-BANGLADESH TRADE RELATION

The two Governments i.e. India and Bangladesh recognized the need and requirement of

each other in the context of their developing economies undertake to explore all

possibilities, including economic and technical cooperation, for promotion, facilitation,

expansion and diversification of trade between the two countries on the basis of equality

and mutual benefit.

Relationship with India is important for Bangladesh in its greater interest. This is because

India is Bangladesh's close-door neighbour and has high 'geo-political' importance in the

sub-continent. There have been various attempts to promote greater trade between India

and Bangladesh under the provision of SAPTA (South Asian Preferential Trading

Agreement) and SAFTA (South Asian Free Trade Area).

The trading relationship between India and Bangladesh is currently of special interest in

both countries for a number of reasons. Firstly, there are urgent and longstanding

concerns in Bangladesh arising from the perennial, large bilateral trade deficit with India,

and from the large volumes of informal imports from India across the land border which

avoid Bangladesh import duties. These concerns have been particularly acute on the

Bangladesh side in the context of discussions between the two governments of the

possibility of a bilateral free trade agreement along the lines of the India-Sri Lanka FTA.

Secondly, even though (because of the disparity in the size of the two economies) India’s

trading relationship with Bangladesh is much less significant for it than it is for Bangladesh,

closer economic integration with Bangladesh is nevertheless seen as a very important way

of reducing the economic and political isolation of the seven Indian eastern and north

eastern states from the rest of the country. Finally, both countries have long shared

common objectives for closer economic integration within the South Asia region, and these

have recently been re-emphasised by signing on to SAFTA, which is to come into force in

January 2006. Under SAFTA, the preferential tariffs agreed in the various rounds of SAPTA-

- so far largely ineffective in generating much intra-regional trade-- will continue, but a

number of ambitious new objectives have been enunciated. These include the eventual

elimination of tariffs and non-tariff barriers on trade between the members, the

harmonisation of Customs procedures and documentation, the facilitation of banking

relationships, and cooperation and improvements in the infrastructure for regional trade

and cross-border investments.

Under four rounds of negotiations, India had offered concessions on 2,927 products (at 6-

digit HS Classification), of which 2,450 products were offered exclusively to least developed

countries (LDCs) including Bangladesh. Later, India offered 100 per cent tariff concessions

on 16 product groups consisting of 40 tariff lines to Bangladesh during the trade review



talks in April 2002, held in Dhaka. Duty-free access was announced for items under another

39 tariff lines during the trade review talks held in March 2003.

INDIA’S MERCHANDISE TRADE WITH BANGLADESH

Indicator Units Expression Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

Exports Rs.crore Ival 201356 209018 255137 293367 375340 456418 571779 655864

Imports Rs.crore Ival 228307 245200 297206 359108 501065 660409 838048 1005159

Trade Balance Rs.crore Ival -26951 -36182 -42069 -65741

-125725

-203991

-266269 -349295

Total external

debt Rs.crore Ival 472625 482328 498804 491078 581802 616144 746918 892912

Market borrowings Rs.crore Ival 141464 140018 130593 116164 137509 142166 211906 290668

Export credit Rs.crore Ival 27625 26110 23750 20553 21976 24175 31237 41413

Commercial borrowings Rs.crore Ival 113839 113908 106843 95611 115533 117991 180669 249255



INDIA’S TOP EXPORT COMMODITY GROUPS TO BANGLADESH IN 2004-05

HS-HARMONIZED CODE

4.1.BILATERAL TRADE AND EXCHANGE RATES

In 2004 India’s officially recorded exports to Bangladesh were about $1.7 billion but its

imports from Bangladesh were just $78 million. Indian exports to Bangladesh grew very

rapidly during the 1990s, and have continued to grow since 2000. By contrast Bangladesh

exports to India-almost zero in the early 90s-have stagnated at very low levels at well

below $100 million annually. In inflation adjusted US dollars they are presently about the

same as they were 20 years ago during the 1980s. Since 1996/97 Indian exports to

Bangladesh (in nominal US dollars) have been growing at 9.1% annually, just slightly above

the general rate of growth of its total merchandise exports (8.4%), but India’s imports from

Bangladesh over the same period have grown on average at only 3% annually, compared to

average growth of its total imports of 9.2%. Consequently Bangladesh’s bilateral trade

deficit with India has been increasing rapidly, on average at about 9.5 % annually. For

India, trade with Bangladesh is a very small part of its total trade-just over one percent

since the mid-1990s, and currently about 3 percent of its total exports and a miniscule



share (0.01%) of its total imports. For Bangladesh, however, India has now become the

largest single source of its imports.

Prospects for bilateral trade to rise are greater when one country has a clear comparative

advantage in products that figure prominently in the import structure of another country.

India has a ‘revealed comparative advantage’ in many goods which is why Indian imports

to Bangladesh have been growing over the years. Bangladesh, on the other hand, has

relatively limited scope for enhancing its exports because it lacks a similar `revealed

comparative advantage’

RECORDED INDIA-BANGLADESH TRADE 1990/01-2003/04

$USMILLION



4.2.INDO-BANGLADESH TRADE POLICIES

India’s Trade Polices include:

Non-tariff barriers.

Removing tariff from intermediate and capital goods.

Specific duties protecting the textile and garment industries.

India’s SAPTA(South Asian Prefrential Trade Agreement) preference for

Bangladesh

Export policies.

Bangladesh’s Trade Policies include:

Non tariff barriers.

Custom clearance at Land Border Custom Posts.

Para-tariffs.

“End-User” tariff concessions.

Bangladesh Tariff Preference for India.



INDIA’S EXPORT OF PRINCIPAL COMMODITIES

P: Provisional. R: Revised Note : 1. Figures in brackets represent percentage to total exports. 2. Leather & manufactures include finished leather, leather goods, leather garments, footwear of leather & its components and saddlery & harness. 3. Engineering goods comprise ferro alloys, aluminium other than products, non-ferrous metal, manufactures of metals, machine tools, machinery and equipments, transport equipments, residual engineering items, iron and steel bar/rod etc., primary and semi-finished iron and steel, electronic goods, computer software and project goods. 4. Textiles and Textile Products includes: (a) cotton yarn, fabrics, made-ups etc., (b) natural silk yarn, fabrics made-ups etc., (c) manmade yarn, fabrics, made-ups etc., (d) manmade staple fibre, (e) woolen yarn, fabrics, made-ups etc., (f) readymade garments, (g) jute and jute manufactures, (h) coir & coir manufactures and (i) carpets



5.DEFINITION OF SMEs IN INDIA

With the advent of planned economy from 1951 and the subsequent industrial policy

followed by Government of India, both planners and Government earmarked a special role

for small-scale industries and medium scale industries in the Indian economy. Due

protection was accorded to both sectors, and particularly for small scale industries from

1951 to 1991, till the nation adopted a policy of liberalization and globalization. There is no

universal definition of small and medium enterprises. In some countries, there are certain

objective standards, which classify the units as micro, small or medium enterprises

depending on the number of employees. In some other countries, annual turnover of the

company determines the size of an enterprise. The concept of size is also a relative

phenomenon with reference to the local economies, since a large company in a small

country could possibly be considered as a small company in a larger country.

The Micro, Small and Medium Enterprises Development Act, 2006 has come into force on

2nd Oct 2006. Under the Act, the SMEs category in India comprises:

(A) Micro Enterprises

(B) Small Enterprises

(C) Medium Enterprises

The criteria fixed for identification are tabulated below for easy reference:

Internationally, SME is categorized with no subtypes. The Ganguly Committee has

recommended that on India, THREE TYPES OF SMEs recognized.

1. Tiny Type : Annual turnover upto Rs.2 crores.

2. Small Type : Annual turnover of more than Rs.2 crores but upto Rs.10 crores.

3. Medium Type : Annual turnover of more than Rs.10 crores but upto Rs.50 crores.

Classification Investment in Plant and Machinery (For Manufacturing Enterprises)

Investment in Equipments (For Service sector Enterprises)

Micro Enterprises Investment in Plant and Machinery ceiling upto Rs.25 Lacs

Investment in Equipments ceiling upto Rs. 10 Lacs

Small Enterprises Investment in Plant and Machinery above Rs. 25 Lacs but upto ceiling of Rs.500 Lacs

Investment in Equipment above Rs. 10 Lacs but upto ceiling of Rs. 200 Lacs

Medium Enterprises Investment in Plant and Machinery above Rs.500 Lacs but upto ceiling of Rs.1000 Lacs

Investment in Equipment above Rs.200 Lacs but upto ceiling of Rs. 500 Lacs



5.1. WHY FOCUS ON SMEs

SMEs always represented the model of socio-economic policies of Government of India

which emphasized judicious use of foreign exchange for import of capital goods and inputs;

labour intensive mode of production; employment generation; non-concentration of

diffusion of economic power in the hands of few (as in the case of big houses); discouraging

monopolistic practices of production and marketing; and finally effective contribution to

foreign exchange earning of the nation with low import-intensive operations. It was also

coupled with the policy of de-concentration of industrial activities in few geographical

centers. SMEs developed in a manner, which made it possible for them to achieve the

following objectives:

• High contribution to domestic production

• Significant export earnings

• Low investment requirements

• Operational flexibility

• Location wise mobility

• Low intensive imports

• Capacities to develop appropriate indigenous technology

• Import substitution

• Contribution towards defense production

• Technology oriented industries

• Competitiveness in domestic and export markets



SMEs have been established in almost all-major sectors in the Indian industry such

as:

PRODUCTS OF SME % composition

Food Processing 22%

Chemicals & Pharmaceuticals 12%

Basic metal Industry 10%

Metal products 8%

Electrical and Machinery Parts 6%

Rubber and Plastic Products 6%

Others 36%



5.2.CONSTRAINTS OF SMEs IN INDIA The constraints those come across by the SMEs in India to be export competitive include product reservations, regulatory hassles– both at the entry and exit stages, insufficient finance at affordable terms, inflexible labor markets and infrastructure related problems - like high power tariff, and insufficient export infrastructure. These are briefly elaborated below: a) Lack of entrepreneurial, managerial and marketing skills

b) Bureaucracy and red tape

c) Lack of accessibility to information and knowledge

d) Difficulties accessing financial resources/Lack of capital

e) Lack of accessibility to investment (technology equipment and know-how)

f) Non-conformity of standardization, lack of quality awareness and lack of mutual

recognition schemes

g) Product and service range and usage differences

h) Language barriers and cultural differences

i) Risks in selling abroad

j) Competition of indigenous SMEs in foreign markets

k) Inadequate behaviors of multinational companies against domestic SMEs/Lack of

government supply-supporting programs

l) Complexity of trade documentation including packaging and labeling

m) Lack of government incentives for internationalization of SMEs

n) Inadequate intellectual property protection

The following are the issues of SME financing:

• They are unable to capture market opportunities, which require large production

facilities and thus could not achieve economies of scale, homogenous standards and regular

supply.

• They are experiencing difficulties in purchase of inputs such as raw materials, machinery

and equipments, finance, consulting services, new technology, highly skilled labor etc.

• Small size hinders the internalization of functions such as market research, market

intelligence, supply chain, technology innovation, training, and division of labor that

impedes productivity.

• Emphasis to preserve narrow profit margins makes the SMEs myopic about the

innovative improvements to their product and processes and to capture new markets.



• They are unable to compete with big players in terms of product quality, range of

products, marketing abilities and cost.

• And most importantly, absence of a wide range of Financing and other services those are

available to raise money and sustain the business.

• Absence of Infrastructure, quality labor, Business acumen and limited options /

opportunities to widen the business.

• Poor IT and Knowledge infrastructure.



5.3.SWOT ANALYSIS-SMEs IN INDIA

STRENGTH

CONTRIBUTION TO NATIONAL

INCOME

GROWTH

REGIONAL DEVELOPMENT

TECHNOLOGICAL INNOVATION

EXPORT MARKET EXPANSION

GENERATING EMPLOYMENT

WEAKNESS

LACK OF FUNDS

LACK OF MARKETING SKILL

LACK OF INFORMATION

LACK OF MANAGEMENT SKILLS

LACK OF ACCESS TO TECNOLOGICAL

INFORMATION AND CONSULTANCY

SERVICES

NON-AVAILABILITY OF TECHNICALLY

TRAINED HUMAN RESORCES

POOR ADAPTIBILITY TO

CHANGING TRADE TRENDS

OPPORTUNITY

WTO REGIME

ENHANCED CREDIT SUPPORT

GROWING DOMESTIC AND

INTERNATIONAL MARKETS

MARKETING ASSISTANCE AND

GROWING

EXPORT PROMOTION SUPPORT

COMPREHENSIVE SUPPORT FOR

CLUSTER DEVELPOMENT

SUPPORT FOR TECHNOLOGICAL

UPGRADATION

BILATERAL AND MULTILATERAL

TRADE

AGREEMENTS

THREAT

DUMPING FROM DEVELOPED COUNTRIES

DISTRUST BETWEEN SMEs AND FINANCIAL INSTITUTIONS

POOR INCENTIVE STRUTURES FOR ENTREPRENEURS

VIRTUAL ABSENCE OF ENTERPRISE EDUCATION

NO TARIFF BARRIERS FROM DEVELOPED COUNTRIES

SLOW IMPROVEMENT IN QUALITY TO MEET THE INTERNATIONAL STRANDARDS



5.4.INDIAN SMEs - STRATEGIC THRUSTS FOR THE FUTURE

Drawing from the experiences of countries that have successfully promoted the export competitiveness of SMEs, the following section lays down the strategy for Indian SMEs to achieve their export potential and make them increasingly export oriented. Promoting the export competitiveness of SMEs needs the active involvement of various stakeholders – government, the private sector and the international community. This section has addressed policy recommendations for them.

ROLE OF GOVERNMENT

Creating a business-friendly environment: The points for the creation and further

development of a business-friendly environment enabling SMEs to start exporting, or to

help consolidate the activities of SMEs that are already exporting are outlined below:

a) Combating of corruption and redtapism that hinder the growth and export potential of

SMEs.

b) Creation or reform of administrative and legal institutions in order to guarantee SMEs a

stable legal framework in which to operate, and to facilitate an antimonopolistic and

competitive business environment.

c) Delivery of an appropriate public infrastructure, especially in transportation, power,

telecommunications and other infrastructure needed to enable domestic and external trade

(e.g. testing and certification laboratories).

Measures to improve SMEs’ access to finance:

This may include,

a) Providing credits directly from state owned banks to SMEs;

b) Liquidity incentives to commercial banks that provide loans to SMEs (lowering of

reserve requirements, access to discount lines, etc.);

c) Interest rate subsidies;

d) Guarantee programs; and so on and so forth.

Measures to encourage TNCs to create linkages with SMEs:

Provided the local suppliers’ capacities are sufficient to meet the needs of foreign investors

efficiently, these measures include:

a) Prescriptive measures like high tariffs on imports or local content requirements,

Incentives: benefits such as tax exemptions, the possibility to treat costs related to linkages



formation as tax-deductible expenses and granting foreign investors a special status that

entitles them to various types of fiscal or financial incentives.

b) Contractual arrangements with foreign investors, such as privatization transactions and

license concessions.

SME trade promotion through public-private partnerships: Governments may

approach domestic and foreign large corporations to design specific institutions or tools to

provide exporting or promising SMEs with specific services. Such partnerships can take

various forms, including:

a) Training facilities,

b) Technology upgrading centers,

c) Research and testing labs,

d) Scientific hubs,

e) Investment funds,

f) Incubators, etc.

ROLE OF PRIVATE SECTOR

A wide range of measures could also be considered at the B2B level to boost the export

capacities of SMEs in India. Key factors and possible measures include:

TNCs: In manufacturing, TNCs and their foreign affiliates can do more to drive or guide the

competitiveness upgrading of selected local SMEs suppliers and subcontractors.

Clusters: SMEs should be encouraged to work in a cluster environment ensuring

complementarities, common activities, collective goods and institutional stability. This

strategy requires sector specific actions, aimed at increasing the competitiveness of the

cluster, promoting networks and cooperation amongst firms.

National governments, local authorities, TNCs and SMEs associations should be involved in

efforts to identify the optimal division of labor among individual SMEs, large firms and

central/local governments in developing countries so as to enable duplication of the

successes of the best exporting SME clusters and industrial districts

Financial and non-financial business development services (BDS): Smooth access to

financial and non-financial services can play a role in supporting some SMEs aiming at

exporting or to consolidate regular foreign orders.



Combination of financial and non-financial support services: The rigid separation

between financial and technical service providers should be reduced to improve proximity

to the real multi-level needs of SME exporters. The combination and teamwork of financial

and technical services should be much more systematically explored both by banks and by

BDS providers to match SME export needs.

ROLE OF INTERNATIONAL SOCIETY

TNCs’ business linkages for exporting SMEs should be part of the UN agenda: TNCs

and other large firms could play a more driving role in enhancing local SME development,

and SME export competitiveness in particular, through various forms of FDI and business

linkages.

National policy versus international commitments: An important issue is the choice

between incentives and subsidies for exporting SMEs, their compatibility and legality with

existing international agreements needs further exploration.

SMEs’ access to finance: The international community should play a more active role in

facilitating SMEs’ access to finance. This can be achieved in the following ways:

a) Enhancing SME export credit and long-term finance: Facilitating SME access not only to

short-term export credit but also to long-term loans for the expansion of SME export

capacity. The issue of credit collateral and guarantees should be revised. Foreign buyers,

TNCs and other business linkage makers should be invited as facilitators or guarantors.

b) Coordination between financial and non-financial support institutions: Agreements with

selected financial institutions to enable SMEs to quickly access medium- to long term

finance at preferential interest rates; and export development and investment funds (EDIF)

designed to improve the export competitiveness of SMEs at low comparative interest rates.



6.FINDINGS

COMPARATIVE DATA ON GROWTH RATES OF MSE SECTOR

The MSE sector has maintained a higher rate of growth vis-à-vis the overall

industrial sector as would be clear from the comparative data on growth rates of

production.

**: IIP-INDEX OF INDUSTRIAL PRODUCTION

*: PROJECTED



As per the latest 4th Census the projected corresponding figure for the year 2008-09

was 285 lakh enterprises generating employment for about 659 lakh persons. The

following chart depicts the number of enterprises, employment and the magnitude

of fixed investment in MSMEsector.

NUMBERS OF ENTERPRISES IN MSME SECTOR

YEAR NO. OF ENTERPRISES(IN LACS)

2004-2005 118.59

2005-2006 123.42

2006-2007 261.01

2007-2008* 272.79

2008-2009* 285.16 *PROJECTED DATA



SIZE OF THE REGISTERED MSE SECTOR

DETAILS OF WORKING ENTERPRISES MICRO SMALL MEDIUM TOTAL NUMBER OF MANUFACTURING ENTERPRISES 974609 57666 2828 1035103

NUMBER OF SERVICE ENTERPRISES 501072 15915 402 517389

TOTAL NUMBER MSMEs 1475681 73581 3230 15524292

%AGE DISTRIBUTION OF TOTAL UNITS 95.05 4.74 0.21 100 %AGE SHARE OF MANUFACTURING UNITS 94.16 5.57 0.27 66.67

%AGE SHARE OF SERVICE UNITS 96.85 3.08 0.008 33.33



EMPLOYMENT IN MSME SECTOR

YEAR EMPLOYMENT (NO. IN LAKHS)

2004-2005 282.57

2005-2006 294.91

2006-2007 594.61

2007-2008* 626.34

2008-2009* 659.35 *PROJECTED DATA



CONTRIBUTION OF MSMEs IN THE GROSS DOMESTIC PRODUCT (GDP)

*PROJECTED DATA



FIXED INVESTMENT IN MSME SECTOR

YEAR FIXED INVESTMENT(VALUE IN RS. CRORES)

2004-05 178699

2005-06 188113

2006-07 500758

2007-08* 558190

2008-09* 621753 *PROJE CTED DATA



PRODUCTION IN TERMS OF GROSS OUTPUT IN MSME SECTOR

YEAR PRODUCTION IN CURRENT PRICES(IN CRORES)

2004-05 429796

2005-06 497842

2006-07 709398

2007-08* 790759

2008-09* 880805 *PROJECTED DATA



FOREIGN INVESTMENTS INFLOWS

Year A. Direct investment

B. Portfolio investment Total (A+B)

Rs. crore

US $ million

Rs. crore

US $ million

Rs. crore

US $ million

1990-91 174 97 11 6 185 103

1991-92 316 129 10 4 326 133

1992-93 965 315 748 244 1713 559

1993-94 1838 586 11188 3567 13026 4153

1994-95 4126 1314 12007 3824 16133 5138

1995-96 7172 2144 9192 2748 16364 4892

1996-97 10015 2821 11758 3312 21773 6133

1997-98 13220 3557 6794 1828 20014 5385

1998-99 10358 2462 -257 -61 10101 2401

1999-00 9338 2155 13112 3026 22450 5181

2000-01 18406 4029 12609 2760 31015 6789

2001-02 29235 6130 9639 2021 38874 8151

2002-03 24367 5035 4738 979 29105 6014

2003-04 19860 4322 52279 11377 72139 15699

2004-05 27188 6051 41854 9315 69042 15366

2005-06 39674 8961 55307 12492 94981 21453

2006-07 103367 22826 31713 7003 135080 29829

2007-08 138276 34362 109741 27271 248017 61633 Note : 1 Data for 2007-08 and 2008-09 are provisional.

2. Data from 1995-96 onwards include acquisition of shares of Indian companies by non-

residents under Section 6 of FEMA, 1999. Data on such acquisitions are included as part of

FDI since January 1996.

3. Data on FDI have been revised since 2000-01 with expanded coverage to approach

international best practices. Data from 2000-01onwards are not comparable with FDI data

for earlier years.

4. Negative (-) sign indicates outflow.

5. Direct Investment data for 2006-07 include swap of shares of 3.1 billion.



YEAR EXPORTS TO BANGLADESH(CRORES)

1998-99 990859

1999-00 1043497

2000-01 989351

2001-02 1141530

2002-03 1348151

2003-04 1469298

2004-05 2107519

2005-06 1934143

2006-07 1975885

2007-08 1999187



EXPORTS TO BANGLADESH IN CRORES

THROUGH THE ABOVE DATA I TRIED TO STUDY THE EFFECT OF FII ON INDIAN

EXPORTS TO BANGLADESH.THE RESULT OF WHICH WAS THAT THE FII

INVESTMENTS HAS NO SIGNIFICANT EFFECT ON THE INDIAN EXPORTS TO

BANGLADESH



DATA ON WHOLE PRICE INDEX (WPI) AND INDIAN EXPORTS TO BANGLADESH(1999-

2009)

YEARS WPI INDIA IND EXPORTS

Dec-99 146.1 26523.96

Jan-00 145.9 20837.76

Feb-00 146.4 24669.51

MRC00 149.5 29688.46

Apr-00 151.7 27033.18

May-00 151.8 29301.59

Jun-00 152.7 24069.11

Jul-00 153.1 21193.13

Aug-00 153.4 15604.58

Sep-00 154.7 17896.48

Oct-00 157.9 21580.57

Nov-00 158.2 55563.23

Dec-00 158.2 61545.6

1-Jan 158.6 47926.4

1-Feb 158.6 35705.1

MRC01 159.1 41398.62

1-Apr 159.9 29684.78

1-May 160.3 41115.94

1-Jun 160.8 40598.53

1-Jul 161.2 50893.51

1-Aug 161.7 40864.88

1-Sep 161.7 44350.93

1-Oct 162.5 36639.63

1-Nov 162.3 38934.23

1-Dec 161.8 24143.33

2-Jan 161 24848.39

2-Feb 160.8 27248.18

MRC02 161.9 37202.52



2-Apr 162.3 39041.34

2-May 162.8 22644.84

2-Jun 164.7 40517.23

2-Jul 165.7 37364.14

2-Aug 167.1 28376.68

2-Sep 167.4 32249.12

2-Oct 167.5 34406.28

2-Nov 167.8 41614.22

2-Dec 167.2 35516.95

3-Jan 167.8 34397.29

3-Feb 169.4 31226.06

MRC03 171.6 69813.49

3-Apr 173.1 66347.77

3-May 173.4 40722.05

3-Jun 173.6 32224.18

3-Jul 173.4 62521.6

3-Aug 173.7 51484.86

3-Sep 175.6 59390.31

3-Oct 176.1 54904.57

3-Nov 176.9 61301.85

3-Dec 176.8 66364.23

4-Jan 178.6 66567.99

4-Feb 179.8 59004.69

MRC04 179.8 88229.53

4-Apr 180.9 53136.07

4-May 182.1 45796.57

4-Jun 185.2 47147.42

4-Jul 186.6 56800.81

4-Aug 188.4 52833.27

4-Sep 189.4 52373.85

4-Oct 188.9 52991.51

4-Nov 190.2 70749.23

4-Dec 188.8 62050.95



5-Jan 188.6 72413.73

5-Feb 188.8 68593.11

MRC05 189.4 82473.28

5-Apr 191.6 65095.58

5-May 192.2 60126.31

5-Jun 193.2 53825.47

5-Jul 194.6 58593.4

5-Aug 195.3 43682.84

5-Sep 197.2 57273.81

5-Oct 197.8 57312.28

5-Nov 198.2 52176.98

5-Dec 197.2 78032.89

6-Jan 196.3 72811.74

6-Feb 196.4 68980.53

MRC06 196.8 68344.19

6-Apr 199 67815.33

6-May 201.3 60510.83

6-Jun 203.1 60312.67

6-Jul 204 57048.3

6-Aug 205.3 61050.57

6-Sep 207.8 57747.15

6-Oct 208.7 53527.9

6-Nov 209.1 65934.16

6-Dec 208.4 56646.63

7-Jan 208.8 52469.7

7-Feb 208.9 61322.58

MRC07 209.8 77200.39

7-Apr 211.5 76913.87

7-May 212.3 66951.45

7-Jun 212.3 52020.39

7-Jul 213.6 59575.37

7-Aug 213.8 79631.24

7-Sep 215.1 84401.61



7-Oct 215.2 75297.98

7-Nov 215.9 74953.74

7-Dec 216.4 89313.02

8-Jan 218.1 109911.4

8-Feb 219.9 118105.2

MRC08 225.5 141666.9

8-Apr 228.5 95647

8-May 231.1 100824.1

8-Jun 237.4 115044.5

8-Jul 240 106037.9

8-Aug 241.2 93639.93

8-Sep 241.5 93225.13

8-Oct 239 80947.27

8-Nov 234.2 87345.8

8-Dec 229.7 91443.74

9-Jan 228.9 55721.27

9-Feb 227.6 70903.65

MRC09 228.2 89174.06

9-Apr 231.5 89876.09

9-May 234.3 80987.09

9-Jun 235 74238.4

9-Jul 238.7 109056.1

9-Aug 240.8 85565.2

9-Sep 242.6 86012.88

9-Oct 242.5 95559.83

9-Nov 247.2 100608.5

9-Dec 248.3 99660.09

.



WHOLE PRICE INDEX (1999-2009)

INDIAN EXPORTS TO BANGLADESH (1999-2009)

FROM THE GRAPHS WE CAN SEE THAT WPI PLAYS AN IMPORTANT ROLE IN BOOSTING

INDIAN EXPORTS TO BANGLADESH.



DATA ON INDEX OF INDUSTRIAL PRODUCTION AND INDIAN EXPORTS TO BANGLADESH

YEARS IIP DATA INDIAN EXPORTS TO

BANGLADESH

Dec-99 166.1 26523.96

Jan-00 163.2 20837.76

Feb-00 161.6 24669.51

Mar-00 174.5 29688.46

Apr-00 156.5 27033.18

May-00 160 29301.59

Jun-00 154.9 24069.11

Jul-00 156.5 21193.13

Aug-00 157.7 15604.58

Sep-00 158.7 17896.48

Oct-00 157.4 21580.57

Nov-00 163.3 55563.23

Dec-00 172.1 61545.6

Jan-01 170.2 47926.4

Feb-01 166.4 35705.1

Mar-01 178.6 41398.62

Apr-01 160.4 29684.78

May-01 162.5 41115.94

Jun-01 159 40598.53

Jul-01 160.4 50893.51

Aug-01 162.2 40864.88

Sep-01 161.7 44350.93

Oct-01 162.2 36639.63

Nov-01 167 38934.23

Dec-01 177.1 24143.33

Jan-02 176.9 24848.39

Feb-02 170.3 27248.18

Mar-02 184.2 37202.52

Apr-02 167 39041.34

May-02 169.2 22644.84

Jun-02 166.2 40517.23

Jul-02 171.8 37364.14

Aug-02 172.2 28376.68

Sep-02 171.8 32249.12



Oct-02 173.6 34406.28

Nov-02 173.9 41614.22

Dec-02 188 35516.95

Jan-03 188.8 34397.29

Feb-03 182.2 31226.06

Mar-03 195 69813.49

Apr-03 174 66347.77

May-03 180 40722.05

Jun-03 177.3 32224.18

Jul-03 183.1 62521.6

Aug-03 182.1 51484.86

Sep-03 184.7 59390.31

Oct-03 184.4 54904.57

Nov-03 188.2 61301.85

Dec-03 202 66364.23

Jan-04 203.9 66567.99

Feb-04 197.3 59004.69

Mar-04 210.7 88229.53

Apr-04 189.5 53136.07

May-04 192.3 45796.57

Jun-04 190.3 47147.42

Jul-04 198.7 56800.81

Aug-04 197.8 52833.27

Sep-04 202.8 52373.85

Oct-04 204 52991.51

Nov-04 202.7 70749.23

Dec-04 220 62050.95

Jan-05 219.2 72413.73

Feb-05 208.9 68593.11

Mar-05 231.4 82473.28

Apr-05 204.9 65095.58

May-05 213 60126.31

Jun-05 213.6 53825.47

Jul-05 208.1 58593.4

Aug-05 212.9 43682.84

Sep-05 217.4 57273.81

Oct-05 223.9 57312.28

Nov-05 214.8 52176.98

Dec-05 232.5 78032.89



Jan-06 237.9 72811.74

Feb-06 227.3 68980.53

Mar-06 251.9 68344.19

Apr-06 225.2 67815.33

May-06 237.9 60510.83

Jun-06 234.4 60312.67

Jul-06 235.5 57048.3

Aug-06 234.8 61050.57

Sep-06 243.5 57747.15

Oct-06 234 53527.9

Nov-06 248.8 65934.16

Dec-06 263.7 56646.63

Jan-07 265.5 52469.7

Feb-07 252.2 61322.58

Mar-07 289.1 77200.39

Apr-07 250.7 76913.87

May-07 263.1 66951.45

Jun-07 255.3 52020.39

Jul-07 255 59575.37

Aug-07 260.3 79631.24

Sep-07 260.5 84401.61

Oct-07 262.6 75297.98

Nov-07 261 74953.74

Dec-07 284.7 89313.02

Jan-08 281.9 109911.4

Feb-08 276.2 118105.2

Mar-08 304.9 141666.9

Apr-08 266.3 95647

May-08 274.6 100824.1

Jun-08 269.2 115044.5

Jul-08 271.3 106037.9

Aug-08 264.7 93639.93

Sep-08 276.2 93225.13

Oct-08 262.9 80947.27

Nov-08 267.6 87345.8

Dec-08 284 91443.74

Jan-09 284.8 55721.27

Feb-09 276.8 70903.65

Mar-09 305.9 89174.06



Apr-09 269.3 89876.09

May-09 280.3 80987.09

Jun-09 291.6 74238.4

Jul-09 290.8 109056.1

Aug-09 292.8 85565.2

Sep-09 302 86012.88

Oct-09 289.7 95559.83

Nov-09 299.8 100608.5

Dec-09 334 99660.09 INDEX OF INDUSTRIAL PRODUCTION DATA (1999-2009)

INDIAN EXPORTS TO BANGLADESH (1999-2009)

FROM THE ABOVE GRAPHS WE CAN ANALYSE THAT INDEX OF INDUSTRIAL

PRODUCTION IS PLAYING A PIVOTAL ROLE IN BOOSTING INDIAN EXPORTS.



Note : 1) 2007-08 data are Provisional.

2) Since 2001-02, production figures are at 2001-02 prices.

3) The estimates of employment for the period 2002-03 to 2005-06 have been revised. The

Third All-India Census surveyed the units registered upto 2000-01, while its reference

period was 2001-02. Adjustments have been made in the estimates using the number of

units registered with State/UTs Government after 31.3.2001.

NEW INITIATIVES TO PROMOTE SMEs

In the recent years, Indian authorities have taken several steps to address factors that constrain SME financing and developments, and the World Bank has provided support through an SME Financing and Development Project. The Government of India and the Small Industries Development Bank of India (SIDBI), which is the apex bank for SMEs in India) requested the World Bank to support efforts to remove constraints to SME access to finance (including term financing), and to foster SME development. A Bank project involving funding of US$120 million for SME financing and development was subsequently developed. The Project was approved on November 30, 2004, and became effective on April 4, 2005 and is currently scheduled to close on June 30, 2009. The objective of the Project was to improve SME access to finance and business development services, thereby fostering SME growth, competitiveness and employment. The Small and Medium Enterprises Financing and Development Project has been designed to improve access to finance for SMEs. The lending from the original project covered 927 SMEs spread across 10 Indian states.

A US$ 400 million additional financing loan to the SIDBI was signed on 5 June, 2009 by representatives from the Government of India, SIDBI and the World Bank.

The Securities and Exchange Board of India (SEBI), issued norms on separate stock exchanges for SMEs during November, 2009 so as to give them more options to raise capital. At present, around 90% of the 2.61 crore MSMEs depend on either banks or informal sources to finance their business. Setting up of a separate stock exchange for SMEs is not so simple. Two requirements are to be fulfilled. One is to reduce the cost of compliance and the second is to safeguard the investors from any undue risk. The SEBI has laid the groundwork to allow SMEs to list on SME Exchanges. SMEs have always complained of difficulty in accessing to both debt and equity capital. It is perceived that registration of companies from the SME sector is essential so as to raise capital from the stock exchange.

SMERA is India’s premier credit rating agency in the micro, small, & medium enterprise segment. It focuses primarily on the Indian SME segment. The primary objective is to provide ratings that are comprehensive, transparent and reliable. It



takes into account the financial condition and several qualitative factors that have bearing on credit worthiness of the SME.

The credit guaranty fund and credit linked capital subsidy scheme has been built in order to support the SMEs. Credit rating helps in cost efficiency and innovation to be undertaken by SMEs, and helps the bank to go for less riskier lending venture, provided the credit rating is done in a scientific way. The Exim Bank of India in India has also provided financial solutions to the SMEs.

Outlook for SMEs

SMEs’ contribution to national GDP is projected to go up to by a minimum of 5% and

touch 22% share of India’s GDP by 2012, since over 55% of SMEs are aggressively

upgrading themselves technologically to reduce their input costs and increase

production and exports.

The World Bank has approved 400 million dollar additional financing loan to the

Small Industries Development Bank of India (SIDBI), which is aimed at improving

access to finance for Small and Medium Enterprises (SMEs).

SMEs continue to be the thrust area for Government policies.

The growing economy and the tremendous market potential of the country augurs

well for the sustained growth of SMEs in the country.

Panacea for employment and decentralised industrial development.

With the enactment of MSME Act, the sector is all set to emerge as the most

significant player in national economy.

SIDBI as the apex institution will continue to play its key role in facilitating timely

and adequate credit besides meeting the developmental needs of the sector.

The MSME Development Act 2006, came into being with effect from 2nd October,

2006, subsequent to which, both the Central and State Governments took effective

measures towards implementation of the Act. In order to increase the competitive

edge of the MSMEs vis-à-vis the multinational corporations (MNCs), the

Government of India announced the National Manufacturing Competitiveness

Programme (NMCP) during the budget speech 2005-06. One of the objectives of

NMCP is to ensure healthy growth of the MSME sector. Under the National



Manufacturing Competitiveness Programme (NMCP), five components have been

made operational, which include quality management systems and quality

technology tools, building awareness on intellectual property rights, support for

entrepreneurial and managerial development through incubators, setting up of new

mini tool rooms and marketing assistance/ support to MSEs.

An important component of the NMCP is “Building Awareness on Intellectual

Property Rights (IPRs)” for the MSMEs. The objective here is to create and enhance

awareness about Intellectual Property Rights (IPRs) among the MSME units so as to

enable them to take appropriate measures for protecting their ideas and business

strategies and also avoiding infringement of the intellectual property belonging to

others. This has been deemed important since India is a signatory of the Trade

related Intellectual Property Rights (TRIPs) under the World Trade Organisation

(WTO) pact. However, it would have been better had the government taken steps

towards open research, collaborative knowledge creation as well as innovation and

adopted the idea of ‘scientific commons’. IPR protection and standards are required

but it should not be based on: (i) frivolous patents; (ii) monopolistic practices; (iii)

beating the system by incrementally modifying patents and getting extensions on

the IPR, etc.



7.CONCLUSION

My Project dealt with Trade Finance for SME Exports to Bangladesh as a part of

International Trade Finance at IndusInd Bank. There are many types of financial tools and

packages designed to facilitate the financing of trade transactions. Exporting is considered

to be one way of stimulating growth of SMEs, gradually improving the quality standards of

SME products, and capturing more global shares. Boosting the contribution of Small and

Medium Enterprises in total exports of India is vital to India’s future Economic growth.

According to the Union Ministry, MSMEs, with addition of Medium enterprises in their fold

are now a sector that contributes up to 40% to the gross industrial manufacturing value

added to the economy, 35% to India’s exports directly and around 8% to India’s GDP.

Numbering more than 13 Mn units and employing around 33 Mn. people, as per the

Ministry and no matter which other data set is used, the sector is proved to be the second

largest employer after agriculture.

My experience as an Intern at IndusInd Bank plays a very important role in the learning

aspect of my MBA course which has helped me gain practical exposure and knowledge.



8.RECOMMENDATIONS SMEs which constitute more than 80 per cent of the total number of industrial enterprises

and form the backbone of industrial development in India now are not export competitive

and contribute only about 34 per cent of exports. Boosting the contribution of small and

medium enterprises in total exports of India is vital to India’s future economic growth,

which can be promoted in the following manner:

a) Independent SMEs specializing in specific niches and highly profiled productions; SMEs

that link up with TNCs or large domestic exporting firms; and SMEs that are part of clusters

and networks in order to reinforce their external competitiveness be encouraged.

b) Special emphasis should be put on linkages between TNCs and SMEs as a way to enhance

the export competitiveness of SMEs. Linking up with TNCs is increasingly perceived as a

way for SMEs to solve their traditional problem of access to certain critical resources, the

most important of which are finance, technology and managerial skills, as well as to new

markets.

c) Policy intervention for SMEs could be particularly export-effective when it is based on

the Triple C (Customer oriented, Collective and Cumulative) However, it is also essential to

create and sustain a business environment that reinforces the international

competitiveness of the export sector as a whole. This can be achieved by active

collaboration between governments, the private sector and international agencies with a

view to reaping the significant potential benefits of exports through SMEs.

d) Exclusive Stock Exchange for SMEs- A stock exchange purely dedicated for SMEs seems

to be the next big thing. A SME‐focused stock exchange is likely to boost the confidence of

SMEs planning to tap the capital market to raise low cost capital. Currently only companies

with a minimum paid up capital of Rs 100 million and a market capital of Rs 250 million are

eligible to list on NSE while those with a post issue capital of Rs 30 million and a minimum

market cap of Rs 50 million are eligible to list on the BSE. Thus SMEs which in spite of

having a good track record of growth but do not meet this criteria are kept away from the

listed category.

Some examples of SME dedicated stock exchanges include AltX, Africa’s first alternative

exchange for SMEs, a partnership between the Johannesburg Stock Exchange Ltd and the

Department of Trade and Industry and AIM, a sub market of the London Stock Exchange

that allows smaller companies to float shares with a more flexible regulatory system as

compared to the main market. The creation of an SME stock exchange will also help in

bridging the gap between private equity players, venture capitalists and the SMEs.



e) Providing Foreign currency export finance and much of that is extended to SME

exporters who benefit from the lower cost and natural hedging that it provides. The

relative lower cost of foreign currency funding helps SMEs become more competitive

against exports from other countries. Assisting SME exporters in multiple ways including

leveraging our relationship with large global retailers to extend finance to their Indian

vendors who are typically SMEs. This helps the SME vendor meet their increasing working

capital requirements since the reality is that more and more of the large buyers are

extending their payment terms. Setting customized solutions, for example, we set up a

special process where suppliers to one of the large buyers in the apparel segment, can now

get payments against export documents in four days compared to 10-15 days. This process

helps the SME client reduce their working capital borrowings, and consequently costs.



9.ATTACHMENTS

BANK CERTIFICATE OF EXPORT AND REALISATION

FORM NO. 1 To ______________________________________(Name and address of Licensing Authority) We _____________________________________ (Name and address of the Exporters) hereby declare that we have forwarded a documentary export Bill to _____________________________ (Name and address of the bank i.e., Branch and City) for collection/negotiation/purchase as per particulars given hereunder.

Invoice Export promotion copy of Shipping

Bill duly authenticated by

the Customs

Description of goods as given in the customs authenticated Shipping Bill

Bill of Lading /PP Receipt/ Airways Bill

Destination of goods

Country name

Bill amount CIF/C&F/FOB

(In foreign exchange

No. Date No. Date

No. Date

[1] [2] [3] [4] [5] [6] [7] [8] [9]

Freight amount as per Bill of

lading/ Freight memo

Insurance amount as

per insurance Company's

bill/ Receipt

Commission/ Discount

paid/ payable

Whether the export is in

freely convertible currency or

in Indian Rupees

FOB value/

FOB value actually realised in free

Foreign Exchange/Rupees

Date of realisation of export proceeds

GRI/PP/ SDF form

No.

No. date & category of applicable

licence

[10] [11] [12] [13] [14] [15] [16] [17]

We further declare that the aforesaid particulars are correct. (Copies of invoices relevant to these exports and Customs attested EP. Copy of relevant Shipping Bill is attached for verification by the bank). Signature of the exporter

: ....................

Name in block letters : .................... Place: : .................... Designation : .................... Full official address : .................... Official Seal/stamp

Full Residential address : ....................



TRADE AGREEMENT BETWEEN INDIA AND BANGLADESH

The Government of the Republic of India and the Government of the People’s

Republic of Bangladesh,

Being conscious of the urge of their two peoples to enlarge areas of mutual co-

operation;

Desirous of expanding trade and strengthening economic relations between the two

countries on the basis of equality and mutual benefit;

Have agreed as follows:

Article I

The two Governments recognizing the need and requirement of each other in the context of

their developing economies undertake to explore all possibilities, including economic and

technical cooperation, for promotion, facilitation, expansion and diversification of trade

between the two countries on the basis of equality and mutual benefit.

Article II

The two Governments agree to take appropriate measures in accordance with the evolving

international trading system for mutual benefit of developing countries and least developed

countries in so far as such measures are consistent with their individual, present and future

development, financial and trade facilitation.

Article III

The two Governments agree that expansion of their mutual trade exchanges would make an

important contribution towards their development. To this end, they agree to take

appropriate and special measures during periodic reviews taking into account the

asymmetries between the two countries with a view to augmenting and diversifying their

mutual trade specially in respect of specific products as may be agreed upon.

Article IV

All payments and charges in connection with trade between the two countries shall

continue to be effected in freely convertible currencies in accordance with the foreign

exchange regulations in force in each country from time to time.

Article V



Imports and exports of commodities and goods produced or manufactured in India or

Bangladesh, as the case may be, shall be permitted in accordance with the import, export

and foreign exchange laws, regulations and procedures in force in either country from time

to time taking into account asymmetries between the two countries.

Article VI

Each Government shall accord to the commerce of the country of the other Government,

treatment no less than that accorded to the commerce of any third country.

Article VII

The provisions of Article VI shall not prevent the grant or continuance of:-

a) Privileges which are or may be granted by either of the two Governments in order to

facilitate frontier trade by separate agreement(s);

b) Advantages and privileges which are or may be granted by either of the respective

neighbouring countries;

c) Advantages resulting from any customs union, a free trade area or similar arrangements

which either of the two Governments has concluded or may conclude in the future.

d) Advantages or preferences accorded under any scheme for expansion of trade and

economic cooperation among developing countries, which is open for participation by all

developing countries, and to which either of the two Governments is or may become a

party.

Article VIII

The two Governments agree to make mutually beneficial arrangements for the use of their

waterways, roadways and railways for commerce between the two countries for passage of

goods between two places in one country through the territory of the other.

Article IX

Each Government will grant merchant vessels of the other country while entering, putting

off and lying at its ports the most-favoured-nation treatment accorded by their respective

laws, rules and regulations to the vessels under the flag of any third country.

Both the Governments agree on the basis of shipper’s preference, to utilize to the maximum

extent possible, the vessels owned/chartered by shipping organizations of the two

countries concerned for shipping cargoes imported or exported under this Agreement at

competitive freight rates.



Article X

The two Governments agree to cooperate effectively with each other to prevent

infringement and circumvention of the laws, rules and regulations of either country in

regard to matters relating to foreign exchange and foreign trade.

Article XI

The two Governments agree to accord, subject to their respective laws and regulations,

reasonable facilities for the holding of trade fairs and exhibitions and visits of business and

trade delegations sponsored by the Government concerned.

Article XII

In order to facilitate the implementation of this Agreement, the two Governments shall

consult each other at least once in a year or earlier as and when necessary, and shall review

the working of the Agreement with special attention to the asymmetries between the two

countries.

Article XIII

This amended Agreement shall come into force on the 1st

April, 2006. It shall remain in

force for a period of three years. It may be extended by a further period of three years by

mutual consent subject to such modifications as may be agreed upon.



10.REFERENCES

‘Big Change in Small Scale’, Business India, January 2-15, 1995.

Bank Financing for SMEs around the World Drivers, Obstacles, Business

Models and Lending Practices. (The World Bank development Research

Group Finance and Private sector Team November 2008).

K.D.RAJU, “Small and Medium Enterprises: Past, Present and Future in

India”.

www.rbi.org

www.ciionline.org

www.indusind.com

S.K. Bakshi, Bank Finance for “Small and Medium Enterprises”

www.occ.gov/handbook/tradfin.pdf

http://trade.gov/media/publications/abstract/trade_finance_guide2008d

esc.html

Alan C. Shapiro, “Multinational Financial Management”.

http://www.imf.org/external/pubs/ft/scr/2010/cr1055.pdf

http://www.msmementor.in/About_SIDBI.asp

http://www.iba.org.in/sme.asp

http://www.infodriveindia.com/Export-Import/Trade-Statistics.aspx

http://www.infodriveindia.com/Export-Import/Trade-Statistics/Trading-

Partners.aspx

http://msme.gov.in/MSME_AR_ENG_2009_10.pdf

http://rbi.org.in/scripts/AnnualPublications.aspx?hea

d=Handbook%20of%20Statistics%20on%20Indian%20Economy

http://rbi.org.in/scripts/statistics.aspx

http://www.smera.in/home.aspx

http://www.rbi.org/

http://www.ciionline.org/

http://www.indusind.com/

http://www.occ.gov/handbook/tradfin.pdf

http://trade.gov/media/publications/abstract/trade_finance_guide2008desc.html

http://trade.gov/media/publications/abstract/trade_finance_guide2008desc.html

http://www.imf.org/external/pubs/ft/scr/2010/cr1055.pdf

http://www.msmementor.in/About_SIDBI.asp

http://www.iba.org.in/sme.asp

http://www.infodriveindia.com/Export-Import/Trade-Statistics.aspx

http://www.infodriveindia.com/Export-Import/Trade-Statistics/Trading-Partners.aspx

http://www.infodriveindia.com/Export-Import/Trade-Statistics/Trading-Partners.aspx

http://msme.gov.in/MSME_AR_ENG_2009_10.pdf

http://rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy

http://rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy

http://rbi.org.in/scripts/statistics.aspx

trade finance for sme exports to Bangladesh

Documents

Transcript of trade finance for sme exports to Bangladesh