Trade Finance Services: An Operational Efficiency Model
By Aditya Watal, Principal HCL and Rafiq Dossani, Senior Research Scholar Asia-Pacific Research Center Stanford University
IMPORTANCE OF TRADE FINANCE
Every commercial business organization in the world is involved in some kind of Trade, i.e., the buying and selling of products and services. The popular term that is used to describe the financing of these transactions is working capital finance or cash credit.
A major element of the relationship between a bank and any corporation involved in Trade is the element of Trade Finance. For any large global bank to be successful it is critical for them to offer Transaction Banking services. Also, Trade Finance forms a significant part of the interest and fee income earnings within Transaction Banking.
The term Merchant Banking is often confused with Trade Finance. Historically, Merchant Banking was the method of financing long term and complex loans by underwriting. Today, Merchant Banking is the element where banks finance, by way of equity, any nonbanking transaction. However, Trade Finance is the method by which the Banks finance nonbanking businesses through the issuance of a short-term loan facility which is backed by the underlying trade documents.
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