Seminar on minimizing Business Risks
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Mr. K Unnikrishnan, Jt. Director, FIEO-Bangalore (extreme left) addressing the gathering. With him, from left, are Mr. V Subbaiah, Vice President (Marketing), The West Coast Paper Mills Ltd., Bangalore; Mr. Vaibhav Gupta, Head SME, HSBC, and Mr. Nicholas D’Souza, Vice President, Trade Services HSBC. |
Many countries in Africa, South America, East Europe and Asia offer enormous export opportunities and under ‘Focus Market’ scheme the government is providing special incentives to exporters doing business with these countries. Yet, Indian exports to these countries are moving at snail’s pace. Lack of sufficient market information aside, Indian exporters are wary of the risks involved in doing business with such countries.
Vice President (International Marketing) of West Coast Paper Mills, Mr. V. Subbaiah admits that there are genuine concerns in exporting to emerging markets despite the impulse generated by lower expectations of the customers there in terms of product quality or service. Speaking at a seminar organized by FIEO Karnataka Chapter on ‘Doing Risk Free Business with Risky Countries’ on 25th May at Bangalore, Mr. Subbaiah says that the risks, which can be legal, financial, political, social, or environmental, are the result of inconsistent investment environment coupled with rapid economic growth which is taking place in these countries. He, however, believes that with proper precaution and planning such risks can be mitigated.
Mr. Vaibhav, Head, SEM, HSBC also believes that careful preparation to avoid problems in the first place is the best way out. He feels that the concept of business ethics is still fairly new in several of these countries and so he advises the exporters to exercise due diligence in knowing about the legal and financial background of the importers in these countries before entering into formal relationship with them.
His colleague Mr. Nicholas D’souza who is the Vice-President (Trade Services) says among all the risks involved, bank risk is a major risk which an exporter can avoid by getting a letter of credit Confirmed. A Confirmed L/C guarantees payment commitment by the Confirming Bank in addition to the Issuing Bank.
According to Mr. D’souza, export factoring without recourse is another tool to reduce payment risks as the factor discounts upto 85% of the receivables which secures the exporters against any eventuality and also helps them maintain their cash flow.
Payments in International Trade transactions take several forms. One of the most preferred arrangements is the letter of credit which is considered equally safe for exporters as well as importers. Trade sources, however, suggest that very frequently letters of credit are dishonoured by the banks on one pretext or the other. A survey by Midland Bank has found that around 50% of the documents presented under letters of credit are found termed ‘discrepant’ and rejected by the banks.
A major reason for the high incidence of rejection of documents under letters of credit is that different banks adopt different standards for determining the conformity of these documents. The International Chamber of Commerce has codified these standards to be followed by the banks but the standards need more clarity. The trade hopes the cases of rejection to come down with the new UCP 600 scheduled to come into force from 1st July 2007. A major amendment incorporated in UCP 600 determining the maximum time limit of five days for examination of documents by the banks instead of the earlier clause of ‘a reasonable time’ is expected to bring much relief for the exporters.
