Trading With India.
Introduction.
India remains one on the UK’s main trading partners, being around the 18th largest export market in 2006 and the 2nd largest [after China] in the developing world. In monetary terms, the UK exported over £3.9bn in 2005. Imports also remain a very important area, with the main import areas covering textiles, chemicals, jewellery, and leather goods. In total, bilateral trade in 2004 totalled some £6bn. From India’s perspective, the UK is the main European export market, with only the US and China receiving more goods from India.
On the export side, there has been a significant reduction in import tariffs, which India levies. From a high of 350% in 1991, they had fallen to 25% by 2004, with a further fall to 20% in 2005. In addition, most quantative restrictions were removed in 2001. UKTI maintains a list of priority sectors/products, where it feels there is strong demand from Indian importers – refer to their website for more details and an up to date list. There are also regular UKTI/Chamber led trade missions to various areas of India, which are well worth attending if you are looking at India as a potential new market.
Much has been written on international trade, both general and country specific, and good starting places are the UKTI and Chamber of Commerce [national or local] websites, as is the new UK International Trade Single Window, which, for the first time, looks at imports and exports. This can be found on the main HMRC website – www.hmrc.gov.uk and then search for ITSW. However, these sites tend to concentrate on the logistical aspect of finding new contracts and the paperwork required to ensure smooth passage of goods. There is much less information available on the financial side and how trade finance can be used to assist with imports from and exports to India.
Banking – the basics.
India’s banking infrastructure has come on in leaps and bounds in the past few years. However, there are still some areas where businesses need to be wary. Overall, the system is still very bureaucratic, especially when compared to the UK. There is an increasing amount of electronic banking and remote access in the major centres and from the newer banks, but many of the traditional banks and more rural areas are firmly stuck in a bygone age where pieces of paper remain sacrosanct. Also, there is no countrywide clearing system for banking; instead there are numerous local clearing centres, focused on the main trading cities, such as Mumbai, Delhi, Chennai, etc. Moving funds from 1 centre to another can be slow and tortuous, often involving the physical transfer of a paper payment order. For this reason, if you decide to operate a local account in India, location is as important as is being able to access your bank details remotely.
For importers, it remains fairly easy to send funds to India, although bear in mind that delays can occur if your seller’s bank account is not held either in a main centre or is not with one of the larger banks, who are accustomed to international trade. Perhaps one of the most frustrating issues is the fact that the same payment, made exactly the same way each month, for example, will take, say, 5 days one month, 10 days the next, then 6, etc., etc. It’s important to stay on good terms with your supplier so that they can also put pressure on their bank, in India, to trace the funds, since it’s not unknown for some banks to sit on the money until asked to pay on!!
There also still remains some exchange control on the export of money – another factor to take into account. If you are exporting to India and need to be paid by having funds transferred out of India – be it back to the UK or elsewhere, you will almost certainly need to open a Non Resident Account [‘NRI’] with a bank in India as a conduit to repatriate your payments.
Lastly, on the basics, currency. The local currency is the Indian Rupee [INR]. However, overseas trade [imports and exports] is more usually expressed in US Dollars, even for the UK, although Sterling is widely seen. You need to consider which currency will be the most beneficial to you both in terms of business opportunities and also whether you need to take steps to mitigate against adverse exchange rate fluctuations.
Trade Finance Options.
This can only be generalistic, since each contract may have its own specific needs and solution.
Looking firstly at exports to India. It is quite common for potential exporters to have to tender for contracts, so you need to understand this process, the costs and implications. Regardless of whether or not this applies to you, the main issue is how will you secure payment? Letters of Credit are often used, since this gives you better assurance of payment. Remember that you must comply strictly with all terms of the Letter of Credit regarding the documentation to secure payment. It is often usual for Indian importers to expect credit terms – often up to 180 days, so be prepared to negotiate [which is something that Indians expect]. Be aware of cultural issues and ensure that the person who agrees actually has the authority within the business – many are still controlled within one family and the family head is all important. Some form of deferred payment is usually seen to allow the necessary time for exchange control to be granted.
It is possible to use Bills of Exchange to obtain payment [known as ‘Collections’], but these do not guarantee payment and are more frequently seen once both parties become more comfortable with each other. Both Letters of Credit and Collections are processed through the banking system in both the UK and India. Ensure that you factor in the cost of these services. Open account is possible, but not often seen, whilst advance payment is even rarer. Sometimes, you can secure a percentage ‘up front’, with the balance following, even using the likes of Letters of Credit. You also need to ensure that there are no restrictions on your goods being allowed entry into India, and that you complete the correct paperwork.
For imports from India, your main concern is to ensure that there are no UK import restrictions. However, it is quite common for an Indian supplier to ask you for a Letter of Credit – remember that it is always the buyer who initiates a Letter of Credit. This may be because he doesn’t know you and wants to secure payment but, equally, it may be that he needs it to be able to use the Letter of Credit with his own bank to secure funding to fulfil your order. For this reason, an Indian exporter may ask for a percentage up front – it may be worth considering, if you are comfortable with him in his ability to supply the goods/services concerned, since the cost may be less than a Letter of Credit, which can be significant, unless you can pass on these costs to the Indian side. Bills of Exchange are often seen, since these are a legal acknowledgement of debt by the buyer, over and above any contract that may be agreed between the parties.
Summary
As with any business, it is vital that you understand the market and culture of the Country with whom you intend to trade. India is no different. The usual requirements regarding the status of your counterparty must also be carried out – the further away, geographically, the more important this is, both at the outset and at regular intervals, unless you have a reliable local office. [For exporters], if you do not have, consider credit insurance, they will not insure sales if they are not happy with the standing of the buyer. Make sure that you have a valid business model for engaging in trade with India, together with a strategic and operational plan. Finally, where needed, ensure that you are engaging experts to help you with those areas where, for whatever reason, you may currently lack sufficient internal expertise.
Trading overseas can be a minefield – it can equally be one of the most rewarding moves – in all senses – that your business ever makes. Which one do you want?
Good Luck!
Ray Stannard MSI, ACIB
International Trade Financial Solutions.
‘Minimising Commercial Risk When Trading Abroad’
E-mail: info@inttradefinsolns.co.uk
Tel/Fax +44 (0)1708 370838
Note: The comments contained herein are those of the author and should not be construed in any way as a recommendation to adopt any specific course of action. They are given in good faith and for information purposes only. In all cases, we strongly urge you to make your own independent investigations and cannot accept any form of liability from reliance on this content.
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