A REPORT ON INTERNATIONAL TRADE FINANCE (PROCEDURE, DOCUMENTATION, FOREX AND RISK)
- With Reference to KOTAK MAHINDRA BANK

The project report is submitted to the Department of International Business in partial fulfillment of course curriculum for the degree of
MASTER OF BUSINESS ADMINISTRATION (INTERNATIONAL BUSINESS)

Submitted by
DURGA ANAND SANIPILLI
REG NO: 1105616 Under the guidance of DR.MOHAN K PILLAI, & MR. M RAVI CHANDRA HOD, Department of international business, Associate vice president and BM Pondicherry University. Kotak Mahindra bank Hyderabad.

DEPARTMENT OF INTERNATIONAL BUSINESS
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY, PUDUCHERRY – 605014

DEPARTMENT OF INTERNATIONAL BUSINESS
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
PUDUCHERRY – 605014
2010 - 2011

CERTIFICATE

This is to certify that this project report titled “A STUDY ON INTERNATIONAL TRADE FINANCE (PROCEDURE, DOCUMENTATION, FOREX AND RISK ANALYSIS).” is based on the individual study and original work done by Mr. DURGA ANAND SANIPILLI of Master of Business Administration (International Business) from the Department of International Business, School of Management, Pondicherry University during the period of study in the academic year 2009 – 2010.

Dr. MOHAN K. PILLAI Head Of The Department, Department of International Business, School Of Management, Pondicherry University

DECLARATION

I hereby declare that this project report titled “A STUDY ON INTERNNATIONAL TRADE FINANCE (PROCEDURE, DOCUMENTATION,FOREX AND RISK ANALYSIS).” submitted to the School of Management, Pondicherry University is based on the original work done entirely by and is completely based on my own observations and research. It hasn’t previously been formed basis for award of any other Degree, Diploma, fellowship or any other similar title.

The facts presented in this study are true to the best of my knowledge and understanding.

Place: PUDUCHERRY
Date:

DURGA ANAND SANIPILLI MBA (IB) 1st Year, Department of International Business, Pondicherry University.

ACKNOWLEDGEMENTS

It is my first duty to convey my sincere gratitude to Dr. MOHAN K PILLAI, Professor and Head Department of International Business, and my faculty adviser, Pondicherry University, for his constant encouragement and for providing the necessary assistance to complete my project successfully and meaningfully. Mr. RAVI CHANDRA MANDARAPU, Associate Vice President and Branch Manager ,Kotak Mahindra Bank-Hyderabad and RAM MOHAN MOKKUPATI, Chief Manager(Trade Finance) for providing all support and information to complete this project, With the blessings of my Mother and Father Smt. VARALAKSHMI and Sri. VEERABHADRA RAO for giving their great support in completing this Project. I extend my hearty thanks to all other faculty members of Department of International Business, Pondicherry University DR SRIDHARAN, DR BHUSHAN D SUDHAKAR, DR Y SRINIVASULU, DR BANUMATHI, DR RAJEESH, DR P G ARUL, and Dr. THIYAGARAJAN for their support and valuable suggestions in one or the other occasions to complete this project and report. It is my duty to convey my sincere thanks to , Mr. RAVI CHANDRA MANDARAPU, Associate Vice President and Branch Manager ,Kotak Mahindra Bank, giving their full support in for assisting me in selecting the topic and every step in my project. My thanks to Mr.RAM MOHAN (PROCEDURE), RAMREDDY (WORKING CAPITAL), JAGADISH (DOCUMENTATION) and RAINA RELE (RISK ANALYSIS) of KOTAK MAHINDRA BANK for their courtesy towards me. I thank my friends and classmates for their support and everyone who have helped directly and indirectly to finish this project.

DURGA ANAND SANIPILLI

CONTENTS SL No. | INDEX | Pg no: | I | Certificate | 2 | II | Declaration | 3 | III | Acknowledgement | 4 | IV | Contents | 5 | VI | List of Tables | 7 | VII | List of Figures | 8 | CHAPTER 1 | INTRODUCTION | | 1.1 | Procedure and advance payment | 12 | 1.2 | Advance payment and Documentation | 13-19 | 1.3 | Letter of credit | 20-22 | 1.4 | Open account | 22 | 1.5 | Guarantees | 22-24 | 1.6 | Forex management | 25-27 | 1.7 | Risk analysis | 27- | CHAPTER 2 | COMPANY PROFILE | | 2.1 | Kotak history | 38 | 2.2 | Mile stones of Kotak | 39 | 2.3 | Awards | 39 | 2.4 | Recognition | 40 | CHAPTER 3 | RESEARCH METHODOLOGY | | 3.1 | Methodology | 42 | 3.2 | Objectives of the study | 42 | 3.3 | Limitations of the study | 43 | 3.4 | Collection of data | 43 | 3.5 | Sampling design | 44 | 3.6 | Statistical Tools | 44 | 3.7 | Review of literature | | CHAPTER 4 | DATA ANALYSIS AND INTERPRETATION | | 4.1 | Abstract | 47 | 4.2 | Introduction | 47 | 4.3 | Interpretation | 61 | CHAPTER 5 | CONCLUSION | | 5.1 | Findings | 66 | 5.2 | Suggestions | | 5.3 | Conclusion | | LIST OF TABLES S.NO | TITLE | | 4.5.1 | No. of banks doing international trade transactions | | 4.5.2 | Most of the customers operate which type of payment mostly | | 4.5.3 | In export which mode of payment you receive from importer | | 4.5.4 | In export which mode of payment normally customers opt to mitigate risk: | | 4.5.5 | Type of analysis banks used to access the customer | | 4.5.6 | Which risk customers face in international trade normally | | 4.5.7 | Risk which is difficult to mitigate in international trade effect both bank and customer | | 4.5.8 | Ranking to the risk which customer faces | | 4.5.9 | In forex management which risk mitigation mostly customer follow | | 4.5.10 | In forex management which type of contract you suggest to your customer | | 4.5.11 | Problem faced in documentation | | 4.5.12 | Is your customer involved in hedging practice | | 4.5.13 | Which hedging practice they opt normally | | LIST OF FIGURES

S.NO | TITLE | 1.1 | Procedure | 1.27 | Back-to-back loan structure | 1.29 | Letter of credit structure | 4.5.1 | No, of banks doing international trade transactions | 4.5.2 | Most of the customers operate which type of payment mostly | 4.5.3 | In export which mode of payment you receive from importer | 4.5.4 | In export which mode of payment normally customers opt to mitigate risk: | 4.5.5 | Type of analysis banks used to access the customer | 4.5.6 | Which risk customers face in international trade normally | 4.5.7 | Risk which is difficult to mitigate in international trade effect both bank and customer | 4.5.8 | Ranking to the risk which customer faces | 4.5.9 | In forex management which risk mitigation mostly customer follow | 4.5.10 | In forex management which type of contract you suggest to your customer | 4.5.11 | Problem faced in documentation | 4.5.12 | Is your customer involved in hedging practice | 4.5.13 | Which hedging practice they opt normally |

CHAPTER-I
INTRODUCTION

KOTAK MAHINDRA BANK-TRADE FINANCE

INTRODUCTION: The science that describes the management of money, banking, credit, investments and assets for international trade transactions. An exporter requires an importer to prepay for goods shipped. The importer naturally wants to reduce risk by asking the exporter to document that the goods have been shipped. The importer’s bank assists by providing a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan to the exporter on the basis of the export contract.

NORMALLY FOLLOWING STEPS INVOLVED IN TRADE FINANCE: * PROCEDURE * DOCUMENTATION * LETTER OF CREDIT * FOREX MANAGEMENT * RISK ANALYSIS

* PROCEDURE: In procedure how the bank involves in international business and how settlement of money takes place in international trade.

Payment Buyers Sellers Bank Bank

Dr. to Cr. to Buyer a/c Seller a/c

Buyer Seller Movement of Goods

SETTLEMENT MECHANISMS: * ADVANCE PAYMENT * DOCUMENTARY COLLECTION * LATTER OF CREDIT * OPEN ACCOUNT * GUARANTEES

ADVANCE PAYMENT: * She/he gets payment in advance prior to shipping goods to buyer. * Worst case scenario for the buyer.

DOCUMENTATION: * Facilitated by banks. * Simple and easy for the bank as there is no exposure involved. * Governed by the Uniform Rules for Collections, ICC Publication No.522, 1995. * Steps involved * Seller enters into a contract with the buyer * Seller prepares documents relating to the sale * Terms of payment are generally D/a (Documents against acceptance) or D/p (Documents against payment) * Seller ships the goods and presents documents to his bank (remitting bank) * Sellers bank sends the documents to the buyers bank (collecting bank)

* Buyers bank releases documents against acceptance / payment * Against payment means that the buyer pays for the value of the document and takes the document from his bank * Using the document that he has paid for, he proceeds to take delivery of goods * The buyers bank sends buyers money to the sellers bank * Sellers bank credits the seller * Against acceptance means that the buyer accepts to pay on a pre-agreed due date (by signing on the bill of exchange) and takes the documents * With the documents, he takes possession of goods * On due date (which is pre-agreed between buyer and seller), the buyer authorizes his bank to make the payment to the sellers bank * Buyers bank effects such payment to the sellers bank * Sellers bank in turns credits the sellers account.

DOCUMENTATION: IN INTERNATIONAL TRADE DOCUMENTS HELP IN SETTLEMENT IN FOLLOWING WAYS: * DOCUMENTARY COLLECTION * DOCUMENTARY ACCEPTANCE * DOCUMENTARY COLLECTION: In international settlement buyer will take documents from collecting bank by paying money. * DOCUMENTARY ACCEPTANCE: In this buyer will accept to pay on pre-agreed due date.(this is bills of exchange) * TYPES OF DOCUMENTS: * FINANCIAL DOCUMENTS: HELP IN SETTLEMET OF CASH. * TRANSPORT DOCUMENTS: DOCUMENTS RELATED TO TRANSPORT * COMMERCIAL DOCUMENTS: DOCUMENTS RELATED TO CUSTOMER STRENGTH * REGULATORY DOCUMENTS: DOCUMENTS RELATED TO GOVT RULES AND REGULATIONS. * INSURANCE DOCUMENTS: DOCUMENTS RELATED TO ECI ETC

* FINANCIAL DOCUMENTS: Documents which transfer between two parties i.e. for paying / receiving money. * PURPOSE: * Issued by Beneficiary * Addressed to issuing bank / nominated bank * Is a demand of money made by seller to buyer * Provides for payment terms (at sight, usance ) TYPES: * Bills of exchange * Drafts * Promissory notes * COMMERCIAL DOCUMENTS: Needed by the buyer and seller as a part of their normal trade transaction. * PURPOSE: * Seller should be able to give merchandise details * Seller should be able to specify payment terms * Document shows delivery terms * Clear description, quantity of goods, value

TYPES: * Commercial invoice: Seller’s bill of merchandise. * Performance invoice: A form of a quotation by the seller to the buyer on quality of products. * Purchase order: Buyer’s request for purchase of specified goods. * Certificate of analysis: Indicates the inner composition, quality and intricate nature of the goods broadly described in the invoice. * Weight certificate: Certifying weight of goods. * Inspection certificate: Document certifying inspection of the goods (prior to shipment) issued by agency specified by importer. * Packing list: Shows the nature and number of goods etc. put in each packet / container.

* TRANSPORT DOCUMENTS: Relates to the movement of goods. * PURPOSE: * Important document as it is a title to goods document representing movement of goods by water (ocean or sea)/air. * Receipt of goods given by carrier or his agent * Contract of carriage of goods. TYPES: * Bills of lading. * Airway bills. * Road, rail (or) inland waterway transport. * Courier and post receipts.

* INSURANCE DOCUMENTS: Relating to insurance of goods being sold. This mainly useful in insurance of goods in transit. * Policy * Cover note * Certificate

* REGULATORY DOCUMENTS: Required as per the law of the land i.e. rules and regulations of govt in the country. * Certificate of origin: Shows the country of origin of the goods. * Export/import license: Certification by export licensing authority allowing the export of goods.

* A1 form: Every payment made abroad for imports should be supported by Form A1 along with relevant invoices. * A2 form: All the payments made out of the country for purpose other than imports above USD 500 should be supported by A2 Form. * Gr form/softex form: GR Form is a declaration by exporter ensuring that money earned through exports is coming into the country. * Edi form/sdf: Electronic GR Form. * Bill of entry: Proof of goods imported in India to ensure that if forex is remitted, the goods have come to India in lieu of that.

LETTER OF CREDIT:
A letter of credit is:- * An undertaking by a bank (opening / issuing bank) * Made to the seller (beneficiary) * On behalf of the buyer (applicant) * To pay a certain amount * If documents are presented * conforming to terms of the Loc

LETTER OF CREDIT: It is a document given by receiving bank to issuing bank. * The exporter and the importer enter into an export contract which provides for payment by means of a Letter of Credit. * The importer approaches his bank to open the Letter of Credit in favors of the exporter * The importer’s bank sends the Letter of Credit to the exporter through one of its corresponding banks in the exporters’ country, known as advising bank. * Advising bank authenticates the letter of credit and sends it to the exporter. LETTER OF PAYMENT: This is of two features: * Single: In this payment will be happened within one week i.e. 7days * Usay: In this payment will be happened within 30, 60, 90 days.

* TYPES OF LETTER OF CREDIT: * BASIC TYPES OF LC: * REVOCABLE: Letters of credit can be revocable. This means that they can be cancelled or amended at any time by the issuing bank without notice to the beneficiary. * IRREVOCABLE: An irrevocable letter of credit cannot be cancelled without the consent of the beneficiary. * UNCONFIRMED: An unconfirmed letter of credit carries the obligation of the issuing bank to honor all drawings, provided that the terms and conditions of the letter of credit have been complied with. * CONFIRMED: A confirmed letter of credit also carries the obligation of another bank which is normally located in the beneficiary’s country, thereby giving the beneficiary the comfort of dealing with a bank known to him. * SPECIAL TYPES OF LC: * RED CLAUSE LETTER OF CREDIT: A red clause letter of credit incorporates a clause, traditionally written in red, which authorizes the bank acting as the negotiating or paying bank to pay the beneficiary in advance of shipment. * TRANSFORABLE LETTER OF CREDIT: A transferable letter of credit allows the beneficiary to act as a middleman and transfer his rights under a letter of credit to another party or parties who may be suppliers of the goods. Depending on whether the letter of credit permits partial shipments, fractional amounts may be transferred to more than one beneficiary.

* BACK TO BACK LETTER OF CREDIT: Although not recorded on a letter of credit, “back-to-back” is a term used in transactions involving two irrevocable letters of credit. Such transactions originate when a seller receives a letter of covering goods which must be obtained from a third party who in turn requires a letter of credit. The “second” issuing bank looks to the first issuing bank for reimbursement after paying under the second letter of credit. * DEFERRED PAYMENT LETTER OF CREDIT: Under a deferred payment letter of credit, the applicant does not pay until a future date determined in accordance with the terms of the letter of credit. * STAND BY LETTER OF CREDIT: Standby letters of credit may apply in general to transactions which are based on the concept of default by to draw under the letter of credit. Standby letters of credit may be used as a substitute for performance guarantees, or issued to guarantee loans granted by one firm to another, thereby securing payment to the creditor in the event the other party fails to repay its obligation on the due date. The applicant in performance of a contract or obligation. In the event of default, the beneficiary is permitted to draw under the letter of credit. Standby letters of credit may be used as a substitute for performance guarantees, or issued to guarantee loans granted by one firm to another.

OPEN ACCOUNT: * Seller first ships the goods * Buyer receives the goods and only then pays for them * Best case scenario for the buyer * Worst case scenario for the seller GUARANTEES: * A guarantee is also a contingent liability * Generally issued by a bank * It is an irrevocable promise (defined in monetary terms) to carry out someone else’s obligation in the event of default provided terms and conditions of the guarantee are met with. * A guarantee is issued on behalf of a customer (applicant or the principal) by an issuing bank * The person in whose favors the guarantee has been issued is the beneficiary * A guarantee is always issued subject to the bank conditions and rules * Time (expiry date / claim period expiry date of the guarantee) * Amount * Broadly, a guarantee is classified as Performance and Non-Performance (Financial Guarantees)

TYPES OF GUARANTEES * Performance Guarantees * Are related to the performance or non-performance of an event * Are substantially less riskier in issuing as far as the issuing bank is concerned * Financial Guarantees * Is related to the non-payment of a certain amount of money * Are of a higher risk grade as far as the issuing bank is concerned * Bid guarantees * This is mainly used in contracts securities * Given by bank to govt on behalf of customer to ensure on the quality of performance of work of customer * In this beneficiary is foreign country.

FOREIGN EXCHANGE MANAGEMENT: We know that bank deals with only documents and currency but not with the goods. Foreign exchange management is very important to every bank because every bank will not foreign reserves to assist its customers. In international trade there will be following type3 of contracts will take place: * SPOT CONTRACT * FORWARD CONTRACT * FORWARD WINDOW CONTRACT * OPTION CONTRACT * SPOT CONTRACT: The bank agrees to a conversion rate with exporter (u.s) to precede a sale and pay in dollars (normally) in exchange. Conversely, bank may agree with importer (india) to provide foreign currency to pay an overseas vendor and receive u.s dollars in exchange. Delivery of currency and u.s dollars occurs two days after conversion rate is agreed. This gives time to all parties to settle commitments. * FORWARD CONTRACT: The bank agrees to a conversion rate with a U.S. exporter to take foreign currency proceeds of a sale at a future date, say June 30, and deliver U.S. dollars in exchange on same day. If the exporter does not have the currency on June 30, there still is an obligation to deliver it to the bank. In practice the bank will buy the foreign currency in the market and settle the profit, or loss, with the exporter. This is why prudent banks take margins when agreeing on exchange contracts with their customers. * FORWARD WINDOW CONTRACT: The bank agrees to a conversion rate with a U.S. exporter to take foreign currency proceeds of a sale on any day within a range of future dates, and deliver U.S. dollars in exchange on the same day. Usually the range is 30 days, and the exporter chooses the day within the range that is most suitable for the exchange. This is a more flexible arrangement than the forward exchange contract, and more Popular, unsurprisingly. If the exporter does not have the currency by the end of the window period, the risk is the same as that described earlier and the exporter should be prepared to suffer the consequences, or reap the benefits. * FOREIGN EXCHANGE OPTION CONTRACT: The bank agrees on a conversion rate with a U.S. exporter to take foreign currency proceeds of a sale at a future date, say June 30, and deliver U.S. dollars in exchange on same day. The exporter has the right to walk away from the arrangement if it does not suit the exporter’s interest at the time of delivery.

RISK ANALYSIS: Risk means probability of loss. Risk is common in any business. In international trade risk will occur in following ways. In international trade risk can be escaped only through proper procedure, documentation etc. TYPES OF RISK: * TRANSPORT RISK * COMMERCIAL RISK/BUSINESS RISK * POLITICAL/COUNTRY RISK * CURRENCY RISK * FINANCIAL RISK * INDUSTRY RISK * MANAGEMENT RISK

In this commercial risk/business risk, currency risk, financial risk (buyer risk) and industry risk are most crucial risks which company normally faces.

* TRANSPORT RISK: From a general risk perspective it is not only the product but also the physical movement of the goods from the seller to the buyer that has to be evaluated, based on aspects such as the nature of the product, size of delivery, the buyer and their country, and the actual transportation route. Most goods in international trade, apart from smaller and non-expensive deliveries, are covered by cargo insurance, providing cover against physical loss or damage whilst in transit, either by land, sea or air, or by a combination of these modes of transport. * Every commercial insurance company is providing transport risk insurance and EXIM bank also provides this insurance facility. * This transport risk can be avoided through insurance like export credit insurance and goods insurance. EXPORT CREDIT INSURANCE: Export credit insurance (ECI) protects an exporter of products and services against the risk of non-payment by a foreign buyer. In other words, ECI significantly reduces the payment risks associated with doing international business by giving the exporter conditional assurance that payment will be made if the foreign buyer is unable to pay. Simply put, exporters can protect their foreign receivables against a variety of risks that could result in non-payment by foreign buyers. ECI generally covers commercial risks, such as insolvency of the buyer, bankruptcy, or protracted defaults (slow payment), and certain political risks such as war, terrorism, riots, and revolution. ECI also covers currency inconvertibility, expropriation, and changes in import or export regulations. Coverage: Short-term ECI, which provides 90 to 95 percent coverage against commercial and political risks that result in buyer payment defaults, typically covers (a) consumer goods, materials, and services up to 180 days, and (b) small capital goods, consumer durables, and bulk commodities up to 360 days. Medium-term ECI, which provides 85 percent coverage of the net contract value, usually covers large capital equipment up to five years. ECI, which is often incorporated into the selling price, should be a proactive purchase exporters already have coverage before a customer becomes a problem. Types of export credit insurance: * 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. Protection provided for financing exports of capital goods and services. * Exchange Rate Insurance – Covers losses as a result of fluctuations in exchange rates between exporters and importers national currencies over a period of time. * RISK NOT COVERED BY EXPORT CREDIT INSURANCE: * capital risk – the amount of capital not covered by the insurance, which the seller has to retain at their own risk; * Interest risk – the corresponding uninsured parts of any credit given to the buyer, calculated on estimated interest payments during the credit period, multiplied by the average interest rate; * settlement risk – The interest due for the period before payment is made under the insurance

* FINANCIAL RISK: In this financial risk the seller has to look at the company (or) personal financial status. In this bank will analyze the company balance sheet I.e. balance sheet approach. Normally financial risk will not effect the contract because the company will analyze the financial sound i.e. financial position of the buyer will be analyze in this. In this they will analyze the following aspects: ASPECTS IN FINANCIAL RISK * Net worth * Debt * Stock holding * Creditors * Current ratio * P&L account(sales, net profit, interest) * COMMERCIAL RISK/BUSINESS RISK: Commercial risk, also called purchaser risk, is often defined as the risk of the buyer going into bankruptcy or being in any other way incapable of full filling the contractual obligations. Aspects which we see in commercial/business risk as follows: * INSOLVENCY * DEFAULT OF A PROMISSORY NOTE * PROTRACTED DEFAULT * BASED ON CUSTOMER * HOW OLD BUSINESS * DEBT

As we know that commercial risk deals with personal obligations we have to calculate the working capital of the organization. Normally working capital will be calculated by using simple formula current assets/current liabilities. As the deal is very high we have to consider more aspects in calculation of working capital. In working capital the following will be consider and both banker and company do analysis of the aspects as their own requirements.

* EQUITY IN BUSINESS * RESERVES AND SURPLUS * MARGINS AND SHARE HOLDERS * NET WORTH OF COMPANY * WORKING CAPITAL CYCLE * BUSINESS MODEL * INDUSTRIAL RISK * COMPETITORS * FOREX RISK

* INDUSTRY RISK: This risk can’t be controlled by company or bank. This risk is sudden risk and which is not in the hands of company or bank. Normally industrial risk can be assessed by over all market condition and international market and international countries economic position and economic growth rate of their respective industry. This risk can be assessing by looking over following aspects:

* Govt regulation on industry * Sales in industry * Competition in business * Comparison with other players in market * Patents * E.g.: In pharmacy industry companies have patents on drugs.

* CURRENCY RISK: Now a day’s currency risk mitigation is become very important because companies deal with different currencies. Every company has its own risk mitigation measures and techniques. From last few years many companies are following two major types of risk mitigation techniques: The two modern techniques which companies follow to mitigate of the currency risk (forex management). * Back-to-back loan * Letter of credit

* BACK-TO-BACK LOAN: This is one of the modern techniques that companies follow to mitigate the forex risk. In this companies will hedge the hard currency (foreign currency) with local bank and takes the loan of local currency. In this companies will receive the interest from bank for hard currency (foreign currency). The back-to-back loan technique can be explained with the help of following diagram as follow:

BACK-TO-BACK LOAN TECHNIQUE Deposit bank 3 1 2

Foreign lender Companies Local bank 4 5

Borrower/client

1. Hard currency (foreign currency) 2. Hard currency deposit 3. Pledge with local bank 4. Loan of local currency 5. Local currency settlement

* LETTER OF CREDIT STRUCTURE: This is another modern risk mitigation technique in foreign currency exchange. In this company enters hard currency loan with foreign currency lender and deposits the hard currency proceeds of this loan in an account maintained at a bank as collateral to secure the issuance by such bank of letter of credit to local bank. To achieve full benefit of this structure, the bank issuing the letter of credit not locally located. The local bank agrees to extend the loan currency loan to company.

LETTER OF CREDIT STRUCTURE: Issuing bank Local bank 1 2 4

Foreign Lender Company

5 Borrower/lender

1. Hard currency loan 2. Hard currency deposit 3. Hard currency denominated letter of credit. 4. Local currency loan 5. Local currency settlement

CHAPTER-II

COMPANY PROFILE

The Kotak Mahindra group is a financial organization established in 1985 in India. It was previously known as the Kotak Mahindra Finance Limited, a non-banking financial company. The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak & Company. The customer base of this group is more than 14 lakh. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited.
It bought stressed assets from a number of banks, at full loan value of Rs 1,000 crore in 2005. In January 2011, the bank reported a 32% rise in net profit to Rs188 crore for the quarter ended December 2010 against Rs. 142 crore the corresponding quarter last year. Kotak Mahindra bank also reached the top 100 most trusted brands of India in The Brand Trust Report published by Trust Research Advisory in 2011.
In February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry on banking business by the Reserve Bank of India (RBI). Kotak Mahindra Finance Ltd. is the first company in the Indian banking history to convert to a bank. Today it has more than 20,000 employees and Rs.10, 000 crore in revenue.
The bank is headed by K.M. Gherda as Chairman and Uday Kotak as Executive Vice Chairman & Managing Director. Shankar Acharya is the chairman of board of Directors in the company.
The Bank has its registered office at Nariman Bhavan, Nariman Point, Mumbai.

MILESTONES OF KOTAK MAHINDRA GROUP FROM ITS ORIGIN: Year | Milestone | 1986: | Kotak Mahindra Finance Limited starts the activity of Bill Discounting | 1987: | Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market | 1990: | The Auto Finance division is started | 1991: | The Investment Banking Division is started. Takes over FICOM, one of India's largest financial retail marketing networks | 1992: | Enters the Funds Syndication sector | 1995: | Brokerage and Distribution businesses incorporated into a separate company - Securities. Investment Banking division incorporated into a separate company - Kotak Mahindra Capital Company | 1996: | The Auto Finance Business is hived off into a separate company -Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited). Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra Limited, for financing Ford vehicles. The launch of Matrix Information Services Limited marks the Group's entry into information distribution. | 1998: | Enters the mutual fund market with the launch of Kotak Mahindra Asset Management Company. | 2000: | Kotak Mahindra ties up with Old Mutual plc. For the Life Insurance business. | 2000: | Kotak Securities launches its on-line broking site (now www.kotaksecurities.com). Commencement of private equity activity through setting up of Kotak Mahindra Venture Capital Fund. | 2001: | Matrix sold to Friday Corporation and | | Launches Insurance Services | 2003: | Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indian company to do so. | 2004: | Launches India Growth Fund, a private equity fund. Launches a real estate fund. Kotak group realigns joint venture. | | | 2005: | Ford Credit; Buys Kotak Mahindra Prime (formerly known as Kotak Mahindra Primus Limited) and sells Ford credit Mahindra. | 2006: | Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company and Securities |

CHPTER-III RESEARCH METHODOLOGY

3.1 METHODOLOGY:

Research Methodology may be defined as a way to systematically solve the research problem. Research means search for knowledge. Research Comprises, defining and redefining problems formulating hypothesis or suggested solutions. Collecting, organizing, and evaluating data making deductions, and reaching conclusions and at least carefully testing the conclusions to determine whether they fit the formulating hypothesis.

3.2 OBJECTIVES OF THE STUDY:

Primary objectives:
1. TO KNOW ANY RELATION BETWEEN KOTAK MAHINDRA BANK AND OTHER BANKS.

Secondary objectives:

1. TO KNOW THE PAYMENT MOSTLY FOLLOWED BY BANKS.

2. TO KNOW THE RISK MITIGATION STEPS TAKEN BY BANK?

3. TO KNOW THE CONTRACT MOSTLY FOLLOWED IN INTERNATIONAL TRADE.

4. TO KNOW THE BANKS HEDGING PRACTICES

3.3 LIMITATIONS OF THE STUDY:

* The study is confined to HYDERABAD REGION ONLY.

* My research is limited to only commercial banks

* RESPONSE delay was the main constrain.

* In banks response is collected from trade finance department

* Poor responses from certain respondents while collecting the questionnaire.

* As we know that information about trade finance is confidential.

Primary data:

Primary data was those data which are collected for the first time and they are original in character. They are collected by the researcher himself to study a particular problem. The method used in this study is personal interview method.

Secondary data:

This data is which is collected from the available sources that are original and external sources. This includes company journals and trade magazines etc.

Sampling size: Totally 10Questionnaires were selected for data collection for research. This is collected from commercial banks in Hyderabad because of cost and time constraints.

3.5 SAMPLING DESIGN: Then the field survey is undertaken, as a researcher I was not able to survey the whole banks because of time, cost and banks will not give information because of confidential information constraints. So I have selected few respondents to carry out the survey. Representation of total banks in order to get exact results.

Exploratory Research:

To gain familiarity with the phenomenon or to achieve new insights into it (studies with this object in view are termed as exploratory research studies).

Descriptive Research:

To portray accurately the characteristics of a particular individual, situation or a group (studies with this object in view are known as descriptive research studies)

3.6 STATISTICAL TOOLS:

This study has been analyzed using percentage analysis method and chi-square test.

Percentage Analysis: Percentage analysis refers to a special kind of ratio. Percentages are used in comparing two or more series of data. Percentage relates the data figures with the based figure studied.

Percentage is calculated as:

d / n x 100
Where d is the number of respondents, where ‘n’ is the base for the sample group. * Correlation
Correlation is a statistical measurement of the relationship between two variables. Possible correlations range from +1 to –1. A zero correlation indicates that there is no relationship between the variables. A correlation of –1 indicates a perfect negative correlation, meaning that as one variable goes up, the other goes down. A correlation of +1 indicates a perfect positive correlation, meaning that both variables move in the same direction together.
Correlation is a measure of the relation between two or more variables. The measurement scales used should be at least interval scales, but other correlation coefficients are available to handle other types of data. Correlation coefficients can range from -1.00 to +1.00. The value of -1.00 represents a perfect negative correlation while a value of +1.00 represents a perfect positive correlation. A value of 0.00 represents a lack of correlation. * REVIEW OF LITERETURE

Chapter-iv
DATA ANALYSIS
& INTERPRETATION

ABSTRACT:

The present survey is about knowing that how many banks are doing international trade transactions, customers operate which type of payment mostly and in export which type of payment mostly receive from importer. And the risk which normally customers faced in different situations and comparison between Kotak and other banks. And also concentrated on forex risk mitigation techniques and types of contracts customers operate. In my survey I also touched modern techniques of forex management techniques and techniques of contracts.

INTRODUCTION:

The survey is carried out on different banks in Hyderabad and iam taking sample of 10 banks which only 8 banks are doing international transactions and two banks are not doing international trade transactions.

Banks doing international trade: 1. Kotak Mahindra bank 2. Royal bank of Scotland 3. Tamilnad mercantile bank 4. Yes bank 5. Indusind bank 6. Danalakshmi bank 7. Barclays bank 8. Citi bank

Banks not doing international trade are 1. Catholic Syrian bank 2. South Indian bank

DATA ANALYSIS & INTERPRETATION
DATA GIVES THE INFORMATION OF BANKS IN INTERNATIONAL TRADE:

RESPONSE | NO.OF RESPONDENT | SHARE (%) | YES | 8 | 80 | NO | 2 | 20 | TOTAL | 10 | 100 |

BY THIS WE CAN COME TO A DECISION THAT MOST OF THECOMMERCIAL BANK IS INVOLVED IN INTERNATIONAL TRADE TRANSACTIONS.

INTERPRETATION:

1. TOTAL 80% OF BANKS DOING TRANSACTIONS IN INTERNATIONAL TRADE.
2.20% OF BANKS NOT INVOLVED IN I.T BECAUSE OF LESS SERVISES FROM HYDERABAD AND LESS CUSTOMERS

Most of the customers operate which type of payment mostly.

RESPONSE | NO.OF RESPONDENT | SHARE (%) | advance payment | 5 | 62.5 | Letter of credit | 3 | 37.5 | Documentation | 00 | 00 | Open account | 00 | 00 | TOTAL | 8 | 100 |

INTERPRETATION:

1. MOST OF THE CUSTOMERS OPT ADVANCE PAYMENT IN PAYMENT. 2. SECOND PLACE TO LETTER OF CREDIT 3. THEY ARE NOT USING DOCUMENTATION AND OPEN ACCOUNT PAYMENTS.

In export which mode of payment you receive from importer

RESPONSE | NO.OF RESPONDENT | SHARE (%) | advance payment | 2 | 25 | Letter of credit | 3 | 37.5 | Documentation | 3 | 37.5 | Open account | 00 | 00 | TOTAL | 8 | 100 |

INTERPRETATION:
1. IN PAYMENT RECEIVE THEY NORMALLY GET LETTER OF CREDIT AND DOCUMENTATION. 2. ADVANCE PAYMENT IS ALSO RECEIVING.

In export which mode of payment normally customers opt to mitigate risk: RESPONSE | NO.OF RESPONDENT | SHARE (%) | advance payment | 1 | 12.5 | Letter of credit | 3 | 37.5 | Documentation | 2 | 25 | Open account | 2 | 25 | TOTAL | 8 | 100 |

INTERPRETATION:
1. IN EXPORT THEY OPT MAINLY LETTER OF CREDIT FROM IMPORTER.2. SECOND PLACE TO DOCUMENTAION AND OPEN ACCOUNT
3. LEAST ONE THEY OPT ADVANCE PAYMENT

Type of analysis banks used to access the customer:

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Fundamental analysis | 0 | 0 | Technical analysis | 0 | 0 | Working capital | 2 | 40 | All the above | 6 | 60 | TOTAL | 8 | 100 |

INTERPRETATION:
1. BY THIS WE CAME TO KNOW THAT BANKS USUALLY ANALZE THE COMPANY USING THESE THREE TECHNIQUES i.e. WORKING CAPITAL,FUNDAMENTAL AND TECHNICAL BUT MAINLY FUNDAMENDAL AND WORKING CAPITAL.

Which risk customers face in international trade normally?

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Financial risk | 6 | 75 | Commercial risk | 1 | 12.5 | Transport risk | 1 | 12.5 | Forex risk | 00 | 00 | TOTAL | 8 | 100 |

INTERPRETATION: 1. BY THIS WE CAN CAME TO A CONCLUSION THAT MOST OF THE CUSTOMERS FACE FINANCIAL RISK. 2. AFTER FINANCIAL RISK MOST OF THE CUSTOMERS FACE TRANPORT AND COMMERCIAL RISK. 3. IN THIS NO CUSTOMER IS FACING FOREX RISK.

Risk which is difficult to mitigate in international trade effect both bank and customer: RESPONSE | NO.OF RESPONDENT | SHARE (%) | Financial risk | 3 | 37.5 | Commercial risk | 1 | 12.5 | Transport risk | 00 | 00 | Forex risk | 4 | 50 | TOTAL | 8 | 100 |

INTERPRETATION: 1. IN INTERNATIONAL TRADE RISK WHICH IS DIFFICULT TO MITIGATE IS FOREX RISK. 2. NEXT TO FOREX RISK FINANCIAL RISK AND COMMERCIAL RISK IS DANGEROUS. 3TRANSPORT RISK CAN BE FULLY AVOIDED WITH THE HELP OF EXPORT CREDIT INSURANCE.

Give ranking to the risk which customer faces:

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Buyers credit risk | 3 | 37.5 | Forex | 3 | 37.5 | Legal | 1 | 12.5 | Transport | 1 | 12.5 | TOTAL | 8 | 100 |

INTERPRETATION: 1. NORMALLY CUSTOMERS FACE BUYERS AND FOREX RISK FROM IMPORTER. 2. LEGAL AND TRANPORT RISK HAVE EQUAL SHARE OF RISK FROM IMPORTER.

In forex management which risk mitigation mostly customer follow:

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Back to back loan | 00 | 00 | Letter of credit structure | 8 | 100 | None of the above | 00 | 00 | Total | 8 | 100 |

INTERPRETATION: 1. IN THIS EVERY BANK CUSTOMER IS USING LETTER OF CREDIT STRUCTURE BECAUSE MOST OF THE BANKS IS NOT PROVIDING BACK TO BACK LOAN FACILITY TO THE CUSTOMERS. 2. BACK TO BACK LOAN IS VERY POPULAR IN FOREIGN COUNTRIES.

In forex management which type of contract you suggest to your customer:

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Spot | 1 | 12.5 | Forward | 7 | 87.5 | Forward window | 00 | 00 | option | 00 | 00 | TOTAL | 8 | 100 |

INTERPRETATION:

1. 87.5% OF BANKS IS SUGGESTING FORWARD CONTRACTS TO THEIR CUSTOMERS. 2. 12.5% OF BANKS IS SUGGESTING SPOT RATE 3. NO BANK IS SUGGESTING OPTION AND FORWARD WINDOW CONTRACT. Problem faced in documentation:

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Incomplete | 2 | 25 | Fake documents | 1 | 12.5 | Exporter agreement clauses | 3 | 37.5 | Miss communication | 1 | 12.5 | TOTAL | 8 | 100 |

INTERPRETATION: 1. 37.5% OF BANKS IS FACING CLAUSES PROBLEM IN DOCUMENTATION. 2.25% OF BANKS FACE INCOMPLETE DOCUMENTS PROBLEM. 3. 12.5% OF BANKS FACING FAKE DOCUMENTS 4.12.5% OF BANKS FACES MISCOMMUNICATION PROBLEM

Is your customer involved in hedging practices?

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Yes | 3 | 37.5 | N0 | 5 | 67.5 | Exporter agreement | 8 | 100 |

INTERPRETATION: 1. 67.5% CUSTOMERS OF BANKS NO ARE NOT INVOLVED IN HEDGING PRACTICES. 2.37.5% CUSTOMERS OF ARE INVOLVED IN HEDGING PRACTICES. 3. THIS DIFFERENCE IS BECAUSE OF LACK OF KNOWLEDGE

Which hedging practice they opt normally:

RESPONSE | NO.OF RESPONDENT | SHARE (%) | Forward | 6 | 75 | Future | 2 | 25 | Options | 0 | 0 | Swaps | 0 | 0 | TOTAL | 8 | 100 |

INTERPRETATION: 1. IN THIS 75% OF CUSTOMERS USING FORWARD TYPE OF CONTRACTS ONLY. 2. 25% OF CUSTOMERS USING FUTURES CONTRACTS MOSTLY. 3. NO CUSTOMER IS USING SWAPS AND OPTIONS TECHNIQUES.

TEST OF HYPOTHESIS: (NULL HYPOTHESIS IS RELATION BETWEEN BANKS) X | KOTAK | YES | BARCLAYS | INDUS | DLB | TMB | CITI | RBS | PYMT | 1 | 1 | 2 | 1 | 2 | 1 | 3 | 2 | PYMTR | 4 | 3 | 2 | 2 | 3 | 1 | 3 | 2 | ANLS | 4 | 4 | 4 | 4 | 3 | 3 | 4 | 4 | RISK | 4 | 1 | 3 | 1 | 2 | 1 | 2 | 1 | B&C | 4 | 4 | 4 | 1 | 2 | 1 | 1 | 2 | RISKM | 2 | 1 | 2 | 2 | 2 | 4 | 4 | 2 | BRISK | 1 | 2 | 3 | 3 | 4 | 1 | 4 | 1 | FOREX | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | CONTCT | 4 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | HEDGNG | 0 | 1 | 1 | 0 | 0 | 0 | 1 | 1 | KOTAK MAHINDRA VS YES BANK: K-Y | 0 | 1 | 0 | 3 | 0 | | 1 | -1 | 0 | 2 | -1 | KOTAK MAHINDRA VS YES BANK: (6∑(X-Y))2
1-
| N(N2-N) 1-102/990=1-0.1030 =.8969 T= .89698*1.9315=5.7363 Table value at n-2 =8 degree of freedom@0.025=2.306 i.e. cv > tv Hypothesis is accepted KOTAK MAHINDRA VS BARCLAYS BANK: K-B | -1 | 2 | 0 | 1 | 0 | | 0 | -2 | 0 | 2 | -1 | (6∑(X-Y))2
1-
| N(N2-N) 1-0.0909=0.9090

T=0.9090 8/1-(.9090)=6.1689

Table value at (n-2) i.e. 10-2= 8 Degree of freedom@.025=2.306 cv>tv hence hypothesis is accepted KOTAK MAHINDRA VS INUSIND BANK: K-I | 0 | 2 | 0 | 3 | 3 | | 0 | 2 | 0 | 2 | 1 | 1-6*31/990=1-0.1878 =0.8122 8/1-(.8122)=3.93783 Table value at (n-2) i.e. 10-2= 8 Degree of freedom@.025=2.306 Cv>tv hence hypothesis is accepted KOTAK MAHINDRA VS DHANALAXMI BANK: K-D | 1 | 1 | 1 | 2 | 2 | | 0 | 3 | 0 | 2 | 0 | 1-6*24/990 =0.8545 T=0.8545 8/1-(0.8545) =4.6530 Table value at (n-2) i.e. 10-2= 8 Degree of freedom@.025=2.306 Cv>tv hence hypothesis is accepted

KOTAK MAHINDRA VS TAMILNAD MERCANTILE BANK: K-T | 0 | 3 | 1 | 3 | 3 | | 2 | 0 | 0 | 2 | 0 | 1-6*36/990 =0.7818 0.7818 8/1-(0.7818) =8/0.3887 =3.54677 Table value at (n-2) i.e. 10-2= 8 Degree of freedom@.025=2.306 Cv>tv hence hypothesis is accepted

KOTAK MAHINDRA VS CITI BANK: K-C | 2 | 1 | 0 | 2 | 3 | | 2 | 3 | 0 | 2 | 1 | 1--6*36/990 =0.7818 0.7818 8/1-(0.7818) =8/0.3887 =3.54677 Table value at (n-2) i.e. 10-2= 8 Degree of freedom@.025=2.306 Cv>tv hence hypothesis is accepted KOTAK MAHINDRA VS ROBAL BANK OF SCOTLAND: (6∑(X-Y))2
1-
| N(N2-N) 1-6*23/990=0.8606 T=-8606 8/1-(-8606) =4.7801 Table value at (n-2) i.e. 10-2= 8 Degree of freedom@.025=2.306 Cv>tv hence hypothesis is accepted.

CHAPTER-V CONCLUSION

FACTS/FINDINGS:
1. There is no correlation between Kotak Mahindra bank and other banks.
2. Only barclays bank, yes bank and citi bank are involved in hedging practices.
3. Kotak Mahindra bank and other banks are not involved in hedging practices. 4. Only Kotak Mahindra bank only receiving advance payment from importer in international trade.
5. In risk mitigation Kotak Mahindra bank n doing better because many other banks are also doing letter of credit as risk mitigation process.
6. Kotak Mahindra bank is the only bank facing forex risk mainly from importer where other banks feel commercial/credit risk.
7. Kotak Mahindra bank and all other banks doing the same letter of credit structure to avoid forex risk.
8. There is similarity between citi bank and tamilnad mercantile bank.

RECOMMENDATIONS 1. In my study I came to know that Kotak Mahindra bank is doing letter of credit structure but they can opt back to back loan structure.
2. Kotak Mahindra can extend the services of hedging to their customers.
3. Kotak Mahindra bank is doing fundamental and working capital techniques to access the customer, but many other banks are doing technical analysis too. Kotak can concentrate on technical analysis too.
4. Kotak Mahindra bank can provide information and knowledge to customers about derivatives, swaps etc.

CONCLUSION:
In my project I had taken a sample of 10 where 8 banks are doing international trade transactions. Kotak Mahindra bank is doing well in international trade. In my study I came to know that there is no correlation between Kotak Mahindra bank and other banks.

REFERENCES:

* Marketing Research (second edition) by G.C.Beri

* Risk appraisal, m.k mukherjee risk appraisal.

* “Research Methodology,” by R. Panneerselvam (2007)

* WWW.KOTAK.COM

Questionnaire
Dear Sir/ Madam, I am Mr. DURGA ANAND SANIPILLI, Pursuing my M.B.A International Business in Pondicherry University. I am doing my Project on “TRADE FINANCE (PROCEDURE, DOCUMENTATION, FOREX AND RISK ANALYSIS)” in KOTAK MAHINDRA BANK as part of my academic curriculum I am kindly requesting you to provide necessary information to complete my project. I assure you the information provided by you only used for academic purpose, would be kept confidential.

(Please tick a mark ( ) which ever suitable to your answer or give ranking)

NAME OF BANK: |

1. You have international trade transactions? a. yes b. no If yes, Most of your customers operate which type of payment mostly? (Scale of 1 to 4)
A .advance payment
b. letter of credit
c. documentation
d. open account

2. In export which mode of payment you receive from importer? Give ranking (Scale of 1 to 4) a. Advance payment b. letter of credit c. documents collection d. open account

3. Which type of analysis banks use to access the customer? Give ranking (Scale of 1 to 3) a. fundamental analysis b. technical analysis c. working capital
d. ALL THE ABOVE a. a b. b c. a&c d. d

4. Which risk normally customers face in international trade? (Scale of 1 to 4) a. Financial risk b. commercial risk c. transport risk d. forex risk

5. Give ranking to the risk which is difficult to mitigate in international trade effect both bank and customer? (Scale of 1 to 4) a. Financial risk b. commercial risk c. transport risk d. forex risk

6. Normally companies opt which mode of payment give ranking based on their risk mitigation? (Scale of 1 to 4)

a. Advance payment b. letter of credit c. documents collection d. open account

7. Give ranking to risk which normally face from importer: (scale of 1 to 12)
a. Buyer’s Insolvency/Credit Risk
b. Buyer’s Acceptance Risk
c. Knowledge Inadequacy
d. Seller’s Performance Risk
e. Documentation Risk
f. Economic Risk
g. Cultural Risk
h. Legal Risk
i. Foreign Exchange Risk
j. Interest Rate Risk
k. Political/Sovereign Risk
l. Transit Risk

8. In forex management which risk mitigation mostly your customer follows? a. Back-to-back loan b. letter of credit structure c. none of the above

9. In foreign exchange management which type of contract you suggest your customer? Give ranking (Scale of 1 to 4) a. spot b. forward c. forward window contract d. option contract

10. In documentation what is the problem normally you face? | |

11. In letter of credit what is the problem you faced from issuing bank? | |

12. Is your customers involved in hedging practices?
a. yes b. no
If yes, in which tool you suggest them to opt? Give ranking: (Scale of 1 to 4)
a. forward
b. future
c. options d. swaps

GIVE SUGGESTIONS TO AVOID RISK IN INTERNATIONAL TRADE: | | | THANK YOU FOR YOUR COOPERATION SIR.