Arasan - Trade Finance Consultant

The Impact of COVID-19 on Trade Finance The COVID-19 pandemic has had a significant impact on the global economy, and trade finance has not been immune to its effects. The pandemic has disrupted supply chains, reduced demand for goods and services, and caused financial volatility, all of which have affected trade finance. One of the most significant impacts of the pandemic on trade finance has been a reduction in trade volumes. With many countries implementing lockdowns and travel restrictions, cross-border trade has slowed down significantly. This has led to a decrease in the demand for trade finance products such as letters of credit and trade finance loans. Another impact of the pandemic on trade finance has been a tightening of credit conditions. Many banks have become more risk-averse in their lending practices, as the economic uncertainty caused by the pandemic has made it more difficult to assess the creditworthiness of borrowers. This has made it harder for small and medium-siz

Documentary Letter of Credit (DLC) is a financial instrument used in international trade to facilitate the payment between the importer and exporter. A DLC is a written commitment issued by a bank on behalf of the importer (buyer) to pay the exporter (seller) a specified amount of money within a predetermined period, subject to the presentation of specific documents that comply with the terms and conditions of the DLC. In this article, we will discuss the significance of DLC in import and export businesses. Why Use a Documentary Letter of Credit in International Trade? In international trade, the seller wants to ensure that they will receive payment for the goods they have shipped, and the buyer wants to ensure that the goods they receive are in the agreed-upon condition. A DLC provides a secure payment method that guarantees that both parties will fulfill their obligations. The DLC serves as an assurance to the seller that they will receive payment for the goods and to the buyer that

  It is possible for non-rated banks to provide letters of credit (LCs) to applicants, but it can be more challenging than for rated banks. A bank's credit rating reflects its financial strength and ability to meet its financial obligations. Banks with higher credit ratings are generally viewed as more reliable and trustworthy by counterparties in trade transactions. Non-rated banks, on the other hand, have not been evaluated by credit rating agencies and may be viewed as riskier by counterparties. Therefore, non-rated banks may face more scrutiny from counterparties and may need to provide additional assurances of their ability to fulfill their obligations under the LC. This could include providing collateral, obtaining insurance or guarantees from third-party insurers, or working with a rated bank as a confirming bank to provide additional security to the beneficiary. Overall, while non-rated banks can provide LCs to applicants, they may face more challenges and may need to take

Performance guarantees are an important aspect of many business contracts. They provide a level of assurance to the parties involved that certain outcomes will be achieved. In this blog, we'll explore advanced performance guarantees, what they are, and why they are becoming increasingly popular. What are Advanced Performance Guarantees? Advanced performance guarantees are a type of contractual agreement that goes beyond the typical performance guarantees found in many contracts. These guarantees are designed to provide a higher level of assurance to the parties involved by using more sophisticated methods to measure performance. Traditional performance guarantees typically focus on a few key metrics that are easy to measure, such as delivery times, quality standards, or uptime percentages. Advanced performance guarantees, on the other hand, may incorporate more complex measures such as customer satisfaction, employee engagement, or environmental impact. Why are Advanced Performance

  Trade finance instruments are important in international trade because they facilitate transactions between buyers and sellers across borders, while mitigating risks associated with international trade. Some reasons why trade finance instruments are crucial in international trade include: Mitigating payment risks: Trade finance instruments, such as letters of credit and bank guarantees, provide assurance to both buyers and sellers that payment will be made once the agreed-upon conditions are met. This reduces the risk of non-payment or delayed payment, which is a common challenge in cross-border transactions. Facilitating access to credit: Many businesses, particularly small and medium-sized enterprises (SMEs), may not have the necessary credit history or collateral to secure financing for international trade. Trade finance instruments, such as export credit insurance and factoring, can help these businesses access financing by providing lenders with additional security. Lowering tra

The standard bank procedure for a Letter of Credit (LC) typically involves the following steps: Request for LC: The importer requests their bank to issue an LC in favor of the exporter, stating the terms and conditions of the LC. Issuance of LC: The importer's bank issues the LC to the exporter's bank, which then forwards it to the exporter. The LC will state the terms and conditions of the transaction, such as the amount, documents required for payment, and the deadline for presentation. Shipment of Goods: The exporter ships the goods to the importer, and then prepares the required documents for presentation to the bank. Presentation of Documents: The exporter presents the required documents to their bank, which then checks them for compliance with the terms and conditions of the LC. Payment: If the documents are in compliance with the terms and conditions of the LC, the exporter's bank sends the documents to the importer's bank for payment. The importer's bank che

  Trade finance instruments are used by businesses to facilitate international trade by reducing the risks as  importing and exporting goods. The most active regions for trade finance instruments are typically those with high levels of international trade and commercial activity. Here are some of the most active regions for trade finance instruments: Asia: Asia is a major hub for international trade, particularly in countries such as China, Japan, and South Korea. Hong Kong and Singapore are also major centers for trade finance, with a significant number of banks and financial institutions offering trade finance services. Europe is home to a large number of major banks and financial institutions that provide trade finance services. Countries such as Germany, the United Kingdom, and the Netherlands are particularly active in trade finance. North America: The United States and Canada are also active in trade finance, with many banks and financial institutions providing trade finance ser

  A Bank Guarantee (BG) is a financial instrument issued by a bank on behalf of a customer, which guarantees payment to a beneficiary if the customer fails to fulfill their contractual obligations. A Bank Guarantee is a popular tool used in a variety of business transactions, including trade finance. In the context of trade finance, a Bank Guarantee can be used to secure payment for goods or services. For example, if a buyer and seller are located in different countries and the seller requires payment before shipping the goods, the buyer can request a Bank Guarantee from their bank to provide assurance to the seller that payment will be made. The seller's bank can then confirm the validity of the Bank Guarantee and release the goods for shipment. There are several types of Bank Guarantees that can be used in trade finance, including performance guarantees, bid bonds, advance payment guarantees, and warranty guarantees. Each type of Bank Guarantee serves a specific purpose and provi

No Upfront Payment is Myth. It is highly unlikely that a bank will issue a Letter of Credit (LC) without requiring some form of upfront payment or collateral from the applicant. Banks typically require some form of security or collateral from the LC applicant to mitigate the risk of non-payment. This may include a cash deposit, a performance bond, or other forms of collateral. The specific requirements may vary depending on the bank, the nature of the transaction, and the creditworthiness of the applicant. In some cases, a bank may issue an LC without requiring an upfront payment if the applicant has an established credit history with the bank and a strong reputation for paying their obligations. However, this is relatively rare, and the bank will still require some form of security or collateral to minimize their risk. It is important to note that there are many scams and fraudulent schemes that involve fake or non-existent LCs, and that it is important to conduct thorough due diligen