TR banking refers to banking activities related to Trust Receipts (TR), a financing method commonly used in international trade. It provides a way for importers to finance their purchases.
Understanding Trust Receipts
A trust receipt is essentially a document under which a bank (the entruster) releases merchandise to a buyer (the trustee) for resale, but the bank retains ownership of the goods. The trustee then sells the goods and holds the proceeds in trust for the bank.
Key Aspects of TR Banking
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Financing Importers: TR banking primarily facilitates import financing.
- Example: A business imports goods using a letter of credit and requires financing to pay the supplier. A Trust Receipt allows the business to take possession of the goods for sale, with the proceeds used to repay the bank.
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Revolving Facility: Banks often grant a revolving trust receipt facility to customers after assessing their creditworthiness.
- This means the customer can repeatedly use the TR facility up to a certain limit, as long as they meet the bank's requirements.
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Fixed Tenor: The trust receipt limit has a fixed tenor or duration. This is the period within which the importer must sell the goods and repay the bank.
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Used with Import Letter of Credit: TR facilities are frequently used in conjunction with import letters of credit (LCs). The LC guarantees payment to the supplier, while the TR provides the importer with short-term financing to manage inventory and sales.
How it Works: A Simplified Example
- Importer applies for a Trust Receipt: The importer applies to the bank for a TR facility.
- Bank assesses creditworthiness: The bank evaluates the importer's financial standing.
- Goods released to Importer (Trustee): The bank releases the imported goods to the importer under a trust receipt.
- Importer sells the goods: The importer sells the goods.
- Proceeds held in trust: The importer holds the sales proceeds in trust for the bank.
- Repayment to Bank: The importer repays the bank from the sales proceeds within the agreed tenor.
Benefits of TR Banking
- Access to Finance: Importers gain access to financing they might not otherwise obtain.
- Inventory Management: Allows importers to take possession of goods and sell them before needing to fully pay for them.
- Facilitates Trade: Promotes international trade by simplifying the financing process for importers.
