Description
issues in export credit, how is export credit governed, life cycle of export order. Export credit is composed of pre-shipment credit, post shipment credit. It also explains the economics of export credit and various products of banks related to export credit.
EXPORT CREDIT
OTHER SECTORS PRIORITY
EXPORT CREDIT W/S TRADE
INDUSTRY
Rs in crores Source : RBI Annual Report
OTHER SECTORS
OTHER SECTORS :
SECTOR a) b) c) d) e) f) g) h) Housing Consumer Durables Non-Banking Financial Companies Loans to Individuals against Shares Real Estate Loans Other Non-Priority Sector Personal Loans Advances against Fixed Deposits Tourism and Tourism related Hotels Mar-03 36,587 7,219 14,127 2,001 5,894 27,905 22,708 2,428 Mar-04 51,981 8,274 16,802 2,020 5,577 35,165 26,346 3,269 Mar-05 75,173 8,655 18,610 2,390 10,612 58,812 29,310 3,455
EXPORT CREDIT – A PERSPECTIVE
Growth in export credit : 14 % as against growth in exports of 22 % Export Credit as % of net credit : 6.60 % v/s 7.35 % in previous year Outstanding Export Credit = 9 weeks’ exports Outstanding Housing & Personal Credits compare well with export credit
Fine Industries Ltd ( FIL ), an SME segment corporate, has estimated following overheads for the export order it has received from Honda Motors for $ 100,000.against a sight L/C for supply of 1000 units of an auto-part. Shipment in one lot is to be made before end Oct, 07 Numbers are per unit 1. 2. 3. 4. 5. 6. Raw material components etc labor, electricity Packing exp. Freight Finance charges : : : : : : Rs 2,000.Rs 300.Rs 800.Rs 200.Rs 400.Rs 100.-
Total
Profit expectations
:
:
Rs 3,800.Rs. 300.-
FIL does not foresee any capacity constraints and is confident of manufacturing the required quantity of 1000 units within the stipulated period. FIL has received this order over and above its production & sales estimates for the year 07/08. It would, therefore, need additional credit facilities for prompt execution of the order. Please discuss various issues involved from the point of view of the financing banker.
EXPORT CREDIT
RBI implements export credit scheme through the network of commercial banks The objective is to provide timely, adequate credit at concessive interest rates which are internationally competitive Obviously, the scheme comes with a discipline insofar as utilization, period and repayment is concerned
LIFE CYCLE OF EXPORT ORDER
Pre-shipment
Post-shipment
Receipt of Order
Shipment
Maturity
EXPORT PACKING CREDIT SCHEMES : EXPORT CREDIT
PRE-SHIPMENT
POST-SHIPMENT
CREDIT IN RUPEES
CREDIT IN FGN.CUR. ( USD,GBP,EURO,JPY )
CREDIT IN RUPEES
CREDIT IN FGN.CUR.
NEGOTIATION & COLLECTION
PLR - 2.50 % LIBOR + 1.00% PLR - 2.50 % up to 90 days No concessive rate beyond 91 days
DISCOUNTING
LIBOR + 1.00% UP TO 180 DAYS
PRE-SHIPMENT CREDIT
FIL would need finance at the pre-shipment stage for inputs such as
? ?
?
?
Raw material Utilities such as electricity, water Labor Shipping charges and insurance
FIL’s bank extends such a credit on
? ? ?
?
Priority basis At concessive rate of interest For a period not exceeding 180 days at pre and post-shipment stage Either in rupees or in dollars
POST SHIPMENT CREDIT
FIL gives an export bill to the bank
? ?
?
The bill represents money due at a future date since it is payable abroad The bank gives rupees to FIL today This would involve giving a credit to FIL
Negotiation and purchase/discounting of an export bill
? ?
Negotiation is normally under a L/C and forms finance to the bank opening L/c Purchase / discount is normally outside L/C
RUPEE CREDIT @ 10.00 % p.a.
FIL goes to its bank for a rupee packing credit today I.e. 11th July, 07 The order is for $ 100,000.- which works out to approximately Rs 40,50,000.- at today’s SPOT rate Bank will normally keep a margin of say 10 % , However, let us assume that no margin is insisted by the bank. No exchange rate is fixed today FIL goes ahead with manufacturing, packing & shipping FIL submits the documents to its bank on 30th Oct, 07. The bank will negotiate the documents at the then prevailing SPOT rate which let us assume rules at 41.00 The loan of Rs 40,50,000.- would have an accrued interest of Rs 1,23,164.The net credit that FIL would get is Rs 41,00,000 from which it will repay the loan of Rs 40,50,000.- It will have to pay interest short-fall of Rs 73,164.The interest cost would thus be Rs 73,164.- for 111 days on a principal of Rs 40,50,000.- which is approximately 5.95 % p.a. Interest cost is less than the applicable rate because FIL got a benefit of an appreciating USD. ( approx. 50 paise in 111 days or 4.05 % p.a. ) What would happen if the rate on 30th Oct is 40.00 ? ( 14.05 % p.a. )
USD CREDIT ( PCFC) @6.35% p.a.
FIL goes to its bank for a packing credit in $ today I.e. 11th July, 07 The order is for $ 100,000.- Bank will normally keep a margin of say 10 % , However, let us assume that no margin is insisted by the bank and a loan of $ 100,000.- is disbursed to FIL.. FIL would have to sell these $ at SPOT rate today since it needs rupees to meet the expenses. The rate is 40.50 FIL goes ahead with manufacturing, packing & shipping FIL submits the documents to its bank on 30th Oct, 07. The bank will negotiate the documents and liquidate the loan of $ 100,000.The loan of $ 100,000.- would have an accrued interest of $ 1957.90 FIL would have to buy these $ at SPOT rate that will prevail on 30th Oct,07 say 41.00 The interest cost would thus be Rs 80,275.- for 111 days on a principal of Rs 40,50,000.- which works out to 6.52 % p.a. What would happen if the rate on 30th Oct is 40.00 ? ( 6.36 % p.a. )
RUPEE CREDIT @ 10.00 % p.a. with FWD cover
FIL goes to its bank for a rupee packing credit today I.e. 11th July, 07 The order is for $ 100,000.- which works out to approximately Rs 40,50,000.- at today’s SPOT rate Bank will normally keep a margin of say 10 % , However, let us assume that no margin is insisted by the bank. Apprehensive that the rupee may strengthen against the dollar, FIL takes a forward cover for $ 100,000.- for delivery 30th Oct, 07 at a rate of Rs 40.75 per $ FIL goes ahead with manufacturing, packing & shipping FIL submits the documents to its bank on 30th Oct, 07. The bank will negotiate the documents at the contract rate of 40.75 regardless of what rate will prevail on that day The loan of Rs 40,50,000.- would have an accrued interest of Rs 1,23,164.The net credit that FIL would get is Rs 40,75,000 from which it will repay the loan of Rs 40,50,000.- It will have to pay interest short-fall of Rs 98,164.The interest cost would thus be Rs 98,164.- for 111 days on a principal of Rs 40,50,000.- which is approximately 7.97 % p.a. This cost will remain unchanged whatever be the spot rate prevailing on 30th Oct, 07
DECIDING THE “RIGHT” CREDIT
On the face of it, a PCFC appears to be cheaper. There is no direct comparison between a rupee credit and PCFC because the outcome of the first type of credit is uncertain. An appropriate comparison would be between a rupee credit with a forward contract and PCFC. In other words if the rupee credit rate minus the forward premium is less than the PCFC rate, then the exporter should go for a rupee credit Otherwise, he is better off taking a PCFC The cost of rupee credit, the forward premium and the rate of PCFC are all moving and hence a credit decision must be taken based on the prevailing levels
ECONOMICS OF EXPORT CREDIT
The final cost of export credit is a function of the USD/INR exchange rate In rupee credit this rate is fixed on shipment while in a USD credit it is fixed on the day the loan is taken The trade-off then is between a lower interest rate and a possible exchange rate gain Let us consider an example
ECONOMICS
Comparison between comparables
? ?
PCFC and Rupee credit with fwd contract (L + 100 bp ) v/s (PLR – 2.50 – FWD premium )
Rupee credit without forward contract is an uncertain alternative and hence not comparable Exporters prefer a credit that is the cheapest in a given situation Conservative exporters prefer PCFC or a rupee credit with forward contract
Gold Card Scheme for Exporters
Objectives of the Scheme :
Promotion of export by extending various facilities to exporters having good track record, on better terms.
Eligibility Criteria
1. All exporters including those in small and medium sectors and conforming to the borrower gradation category of CB1 and CB2
2 Exporter clients, with good track record for minimum 3 years 3 Accounts classified as `standard' during the last 3 financial years 4. Exporter clients earning profits continuously for the last 3 years, having positive tangible networth and positive net working capital as at the end of the last financial year.
Gold Card Scheme for Exporters
Special Concessions/ benefits for Card Holders:
1. Preference for sanction of Packing Credit in Foreign Currency
[PCFC]. 2. Preference for granting loans under FCNR funds etc. over non-export borrowers AND granting term loans in foreign currency in deserving cases out of FCNR, RFC Funds etc. 3. Proposals to be submitted in the simplified Application Form 4. The time-frame for disposal of application received for sanction of credit under the Scheme shall be as under: For disposal of fresh applications : 21 working days Renewal of limits : 14 working days Sanction of ad hoc limits : 7 working days
Service Charges : 20% concession in fees/charges 5. Rate of Interest : Concession by 25 bps on Export Credit
Source : www.corpbank.com
CORP BANK’S PRODUCTS
CORP BANK’S PRODUCTS
CORP BANK’S PRODUCTS
ICICI Banks’ products & services
Export Services
? ? ? ? ? ?
?
?
Export Packing Credit Export Bill Negotiation Export Bill Purchase & Discounting Rupee Advance against Export Bills Export Bill Collection Services Bank Guarantees Export LC Advising Export LC Confirmation
ICICI Banks’ products & services
Import Services
? ? ? ? ? ?
Import Letters of Credit Import Collection Bill Services Direct Import Bills Advance Payment towards Imports Arranging for Buyer’s & Supplier’s Credit Bank Guarantees
ICICI Banks’ products & services
Advisory Services Exchange Rates Customized Solutions and New Product Development Export Document Tracking Arrange for Export Credit Insurance Trade Regulation & Policy Update Trade Facilitation Country Scan
EXPORT CREDIT LIMIT
FCL is a regular exporter Projected T/O for 2007/08 is Rs. 25 cr Average process cycle at pre-shipment stage is 6 weeks Packing, shipment & document submission takes about 2 weeks Exports are against sight L/Cs Profit margin is about 10 % There is no seasonality or bunching of shipments What could be an appropriate export credit limit for FCL ?
Sources of funds for PCFC
FCNR(B) Balances EEFC A/C balances RFC & other escrow A/C balances Borrowing in F.C. in the inter-bank market Borrowing from international banks, LoCs etc.
SBI’s rates for FCNR(B) deposits
PROFITABILITY ISSUES
Spread is lower since applicable interest rate is a concessive rate Commissions could be on per bill basis rather than on value of bill. RBI rate ceilings are on all-inclusive basis leaving not much room for levy of any additional fee This being a specialized business with exchange control compliances, the administrative cost would be comparatively higher On the other hand, this is a short term, self-liquidating finance. The quality of collateral would also be better since the exporter is committed under FEMA and ECGC credit guarantee would also be available
PROFITABILITY ISSUES
?
Gross Profits
?
Execution costs are not known
?
Rupee Credit
? ? ?
Return @ 10.00 % p.a. Cost of funds @ 4.88 % p.a. Gross profit of Rs. 5,50,000.- for a 90 day credit of $ 1 mio ( in equivalent rupees )
?
PCFC
?
?
Gross Margin of 100 bps
?
?
Commission would be identical for both
Gross profit of Rs. 1,12,500.- ( $ 2,500.- ) for a 90 day credit of $ 1 mio
Assuming cost of funds at LIBOR
doc_316043682.pptx
issues in export credit, how is export credit governed, life cycle of export order. Export credit is composed of pre-shipment credit, post shipment credit. It also explains the economics of export credit and various products of banks related to export credit.
EXPORT CREDIT
OTHER SECTORS PRIORITY
EXPORT CREDIT W/S TRADE
INDUSTRY
Rs in crores Source : RBI Annual Report
OTHER SECTORS
OTHER SECTORS :
SECTOR a) b) c) d) e) f) g) h) Housing Consumer Durables Non-Banking Financial Companies Loans to Individuals against Shares Real Estate Loans Other Non-Priority Sector Personal Loans Advances against Fixed Deposits Tourism and Tourism related Hotels Mar-03 36,587 7,219 14,127 2,001 5,894 27,905 22,708 2,428 Mar-04 51,981 8,274 16,802 2,020 5,577 35,165 26,346 3,269 Mar-05 75,173 8,655 18,610 2,390 10,612 58,812 29,310 3,455
EXPORT CREDIT – A PERSPECTIVE
Growth in export credit : 14 % as against growth in exports of 22 % Export Credit as % of net credit : 6.60 % v/s 7.35 % in previous year Outstanding Export Credit = 9 weeks’ exports Outstanding Housing & Personal Credits compare well with export credit
Fine Industries Ltd ( FIL ), an SME segment corporate, has estimated following overheads for the export order it has received from Honda Motors for $ 100,000.against a sight L/C for supply of 1000 units of an auto-part. Shipment in one lot is to be made before end Oct, 07 Numbers are per unit 1. 2. 3. 4. 5. 6. Raw material components etc labor, electricity Packing exp. Freight Finance charges : : : : : : Rs 2,000.Rs 300.Rs 800.Rs 200.Rs 400.Rs 100.-
Total
Profit expectations
:
:
Rs 3,800.Rs. 300.-
FIL does not foresee any capacity constraints and is confident of manufacturing the required quantity of 1000 units within the stipulated period. FIL has received this order over and above its production & sales estimates for the year 07/08. It would, therefore, need additional credit facilities for prompt execution of the order. Please discuss various issues involved from the point of view of the financing banker.
EXPORT CREDIT
RBI implements export credit scheme through the network of commercial banks The objective is to provide timely, adequate credit at concessive interest rates which are internationally competitive Obviously, the scheme comes with a discipline insofar as utilization, period and repayment is concerned
LIFE CYCLE OF EXPORT ORDER
Pre-shipment
Post-shipment
Receipt of Order
Shipment
Maturity
EXPORT PACKING CREDIT SCHEMES : EXPORT CREDIT
PRE-SHIPMENT
POST-SHIPMENT
CREDIT IN RUPEES
CREDIT IN FGN.CUR. ( USD,GBP,EURO,JPY )
CREDIT IN RUPEES
CREDIT IN FGN.CUR.
NEGOTIATION & COLLECTION
PLR - 2.50 % LIBOR + 1.00% PLR - 2.50 % up to 90 days No concessive rate beyond 91 days
DISCOUNTING
LIBOR + 1.00% UP TO 180 DAYS
PRE-SHIPMENT CREDIT
FIL would need finance at the pre-shipment stage for inputs such as
? ?
?
?
Raw material Utilities such as electricity, water Labor Shipping charges and insurance
FIL’s bank extends such a credit on
? ? ?
?
Priority basis At concessive rate of interest For a period not exceeding 180 days at pre and post-shipment stage Either in rupees or in dollars
POST SHIPMENT CREDIT
FIL gives an export bill to the bank
? ?
?
The bill represents money due at a future date since it is payable abroad The bank gives rupees to FIL today This would involve giving a credit to FIL
Negotiation and purchase/discounting of an export bill
? ?
Negotiation is normally under a L/C and forms finance to the bank opening L/c Purchase / discount is normally outside L/C
RUPEE CREDIT @ 10.00 % p.a.
FIL goes to its bank for a rupee packing credit today I.e. 11th July, 07 The order is for $ 100,000.- which works out to approximately Rs 40,50,000.- at today’s SPOT rate Bank will normally keep a margin of say 10 % , However, let us assume that no margin is insisted by the bank. No exchange rate is fixed today FIL goes ahead with manufacturing, packing & shipping FIL submits the documents to its bank on 30th Oct, 07. The bank will negotiate the documents at the then prevailing SPOT rate which let us assume rules at 41.00 The loan of Rs 40,50,000.- would have an accrued interest of Rs 1,23,164.The net credit that FIL would get is Rs 41,00,000 from which it will repay the loan of Rs 40,50,000.- It will have to pay interest short-fall of Rs 73,164.The interest cost would thus be Rs 73,164.- for 111 days on a principal of Rs 40,50,000.- which is approximately 5.95 % p.a. Interest cost is less than the applicable rate because FIL got a benefit of an appreciating USD. ( approx. 50 paise in 111 days or 4.05 % p.a. ) What would happen if the rate on 30th Oct is 40.00 ? ( 14.05 % p.a. )
USD CREDIT ( PCFC) @6.35% p.a.
FIL goes to its bank for a packing credit in $ today I.e. 11th July, 07 The order is for $ 100,000.- Bank will normally keep a margin of say 10 % , However, let us assume that no margin is insisted by the bank and a loan of $ 100,000.- is disbursed to FIL.. FIL would have to sell these $ at SPOT rate today since it needs rupees to meet the expenses. The rate is 40.50 FIL goes ahead with manufacturing, packing & shipping FIL submits the documents to its bank on 30th Oct, 07. The bank will negotiate the documents and liquidate the loan of $ 100,000.The loan of $ 100,000.- would have an accrued interest of $ 1957.90 FIL would have to buy these $ at SPOT rate that will prevail on 30th Oct,07 say 41.00 The interest cost would thus be Rs 80,275.- for 111 days on a principal of Rs 40,50,000.- which works out to 6.52 % p.a. What would happen if the rate on 30th Oct is 40.00 ? ( 6.36 % p.a. )
RUPEE CREDIT @ 10.00 % p.a. with FWD cover
FIL goes to its bank for a rupee packing credit today I.e. 11th July, 07 The order is for $ 100,000.- which works out to approximately Rs 40,50,000.- at today’s SPOT rate Bank will normally keep a margin of say 10 % , However, let us assume that no margin is insisted by the bank. Apprehensive that the rupee may strengthen against the dollar, FIL takes a forward cover for $ 100,000.- for delivery 30th Oct, 07 at a rate of Rs 40.75 per $ FIL goes ahead with manufacturing, packing & shipping FIL submits the documents to its bank on 30th Oct, 07. The bank will negotiate the documents at the contract rate of 40.75 regardless of what rate will prevail on that day The loan of Rs 40,50,000.- would have an accrued interest of Rs 1,23,164.The net credit that FIL would get is Rs 40,75,000 from which it will repay the loan of Rs 40,50,000.- It will have to pay interest short-fall of Rs 98,164.The interest cost would thus be Rs 98,164.- for 111 days on a principal of Rs 40,50,000.- which is approximately 7.97 % p.a. This cost will remain unchanged whatever be the spot rate prevailing on 30th Oct, 07
DECIDING THE “RIGHT” CREDIT
On the face of it, a PCFC appears to be cheaper. There is no direct comparison between a rupee credit and PCFC because the outcome of the first type of credit is uncertain. An appropriate comparison would be between a rupee credit with a forward contract and PCFC. In other words if the rupee credit rate minus the forward premium is less than the PCFC rate, then the exporter should go for a rupee credit Otherwise, he is better off taking a PCFC The cost of rupee credit, the forward premium and the rate of PCFC are all moving and hence a credit decision must be taken based on the prevailing levels
ECONOMICS OF EXPORT CREDIT
The final cost of export credit is a function of the USD/INR exchange rate In rupee credit this rate is fixed on shipment while in a USD credit it is fixed on the day the loan is taken The trade-off then is between a lower interest rate and a possible exchange rate gain Let us consider an example
ECONOMICS
Comparison between comparables
? ?
PCFC and Rupee credit with fwd contract (L + 100 bp ) v/s (PLR – 2.50 – FWD premium )
Rupee credit without forward contract is an uncertain alternative and hence not comparable Exporters prefer a credit that is the cheapest in a given situation Conservative exporters prefer PCFC or a rupee credit with forward contract
Gold Card Scheme for Exporters
Objectives of the Scheme :
Promotion of export by extending various facilities to exporters having good track record, on better terms.
Eligibility Criteria
1. All exporters including those in small and medium sectors and conforming to the borrower gradation category of CB1 and CB2
2 Exporter clients, with good track record for minimum 3 years 3 Accounts classified as `standard' during the last 3 financial years 4. Exporter clients earning profits continuously for the last 3 years, having positive tangible networth and positive net working capital as at the end of the last financial year.
Gold Card Scheme for Exporters
Special Concessions/ benefits for Card Holders:
1. Preference for sanction of Packing Credit in Foreign Currency
[PCFC]. 2. Preference for granting loans under FCNR funds etc. over non-export borrowers AND granting term loans in foreign currency in deserving cases out of FCNR, RFC Funds etc. 3. Proposals to be submitted in the simplified Application Form 4. The time-frame for disposal of application received for sanction of credit under the Scheme shall be as under: For disposal of fresh applications : 21 working days Renewal of limits : 14 working days Sanction of ad hoc limits : 7 working days
Service Charges : 20% concession in fees/charges 5. Rate of Interest : Concession by 25 bps on Export Credit
Source : www.corpbank.com
CORP BANK’S PRODUCTS
CORP BANK’S PRODUCTS
CORP BANK’S PRODUCTS
ICICI Banks’ products & services
Export Services
? ? ? ? ? ?
?
?
Export Packing Credit Export Bill Negotiation Export Bill Purchase & Discounting Rupee Advance against Export Bills Export Bill Collection Services Bank Guarantees Export LC Advising Export LC Confirmation
ICICI Banks’ products & services
Import Services
? ? ? ? ? ?
Import Letters of Credit Import Collection Bill Services Direct Import Bills Advance Payment towards Imports Arranging for Buyer’s & Supplier’s Credit Bank Guarantees
ICICI Banks’ products & services
Advisory Services Exchange Rates Customized Solutions and New Product Development Export Document Tracking Arrange for Export Credit Insurance Trade Regulation & Policy Update Trade Facilitation Country Scan
EXPORT CREDIT LIMIT
FCL is a regular exporter Projected T/O for 2007/08 is Rs. 25 cr Average process cycle at pre-shipment stage is 6 weeks Packing, shipment & document submission takes about 2 weeks Exports are against sight L/Cs Profit margin is about 10 % There is no seasonality or bunching of shipments What could be an appropriate export credit limit for FCL ?
Sources of funds for PCFC
FCNR(B) Balances EEFC A/C balances RFC & other escrow A/C balances Borrowing in F.C. in the inter-bank market Borrowing from international banks, LoCs etc.
SBI’s rates for FCNR(B) deposits
PROFITABILITY ISSUES
Spread is lower since applicable interest rate is a concessive rate Commissions could be on per bill basis rather than on value of bill. RBI rate ceilings are on all-inclusive basis leaving not much room for levy of any additional fee This being a specialized business with exchange control compliances, the administrative cost would be comparatively higher On the other hand, this is a short term, self-liquidating finance. The quality of collateral would also be better since the exporter is committed under FEMA and ECGC credit guarantee would also be available
PROFITABILITY ISSUES
?
Gross Profits
?
Execution costs are not known
?
Rupee Credit
? ? ?
Return @ 10.00 % p.a. Cost of funds @ 4.88 % p.a. Gross profit of Rs. 5,50,000.- for a 90 day credit of $ 1 mio ( in equivalent rupees )
?
PCFC
?
?
Gross Margin of 100 bps
?
?
Commission would be identical for both
Gross profit of Rs. 1,12,500.- ( $ 2,500.- ) for a 90 day credit of $ 1 mio
Assuming cost of funds at LIBOR
doc_316043682.pptx