EXPORT FINANCE
TABLE OF CONTENTS
Chapter. no 1 2 Export Finance 2.1 Introduction 2.2 Concept 2.3 Objectives 2.4 Appraisal 3 Types of Export finance 3.1 Pre-Shipment 3.2 Post-Shipment 4 Letter of Credit – One of the most common method of payment in export finance 5 Some important Concept in Export Finance 5.1 Forfeiting 5.2 Factoring 5.3 Supplier?s Credit for Deferred Payment exports 6 Major Financial and other Institutions 6.1 Export Import Bank of India (EXIM Bank) 6.2 Export Credit Guarantee Control (ECGC) 6.3 Reserve Bank of India (RBI) 7 8 Market Development Assistance (MDA) High Court Ruling: Export Losses are not entitled to Tax Concessions 9 10 Conclusion Bibliography 60 – 61 62 57 – 58 59 29 – 56 22 – 28 17 - 21 05 – 16 Particulars Page No. 01 02 - 04
EXECUTIVE SUMMARY
Export in simple words means selling goods abroad. International market being a very wide market, huge quantity of goods can be sold in the form of exports. Export refers to outflow of goods and services and inflow of foreign exchange. Exports play a crucial role in the economy of the country. In order to maintain healthy balance of trade and foreign exchange reserve it is necessary to have a sustained and high rate of growth of exports. Success or failure of any export order mainly depends upon the finance available to execute the order. Nowadays export finance is gaining great significance in the field of international finance. Many Nationalized as well as Private Banks are taking measures to help the exporter by providing them pre-shipment and post- shipment finance at subsidized rate of interest. Some of the major financial institutions are EXIM Bank, RBI, and other financial institutions and banks. EXIM India is the major bank in the field of export and import of India.
CHAPTER 1 - EXPORT FINANCE
1.1.CONCEPT OF EXPORT FINANCE: Short term, medium term or long term finance depending upon the types of goods to be exported may require by the exporter. 1) Short Term Finance: - Working Capital (purchase of raw material, payment of wages and salaries, expenses like payment of rent, advertising etc.) 2) Term finance :- Medium and Long term financial (purchase of fixed assets) Finance and credit are available not only to help export production but also to sell to overseas customers on credit. 1.2.ADVANTAGES OF EXPORT FINANCE.
Export financing is a key competitive factor for exporters and may increase their opportunities of signing a contract. There are several advantages for both importers and exporters in having the Bank handle and finance the transaction.
A)Advantages for exporter ? ? ? ? ?
Gains competitive edge by offering financing to prospective buyers Receives cash payment upon shipment or commissioning Does not tie up assets Avoids credit, currency and interest-rate risks in the settlement period Does not need to use administrative resources to collect the debt
B)Advantages for importer ? Can use long-term financing to match expected revenues with expenditures, making cash flow more efficient Obtain financing that is less expensive than local financing which may be subject to restrictions
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Obtain additional savings on financing as exporters can use private insurance programmes which can make financing available at competitive rates Can obtain fixed-rate financing and be certain of the size of future payments
1.3 OBIECTIVES OF EXPORT FINANCE The Objective of export finance is to both encourage exports and boost the profitability of the domestic firms involved in exporting. The importance of this sort of financing is difficult to exaggerate, since so much hard currency is earned through exports. Entire economies, such as the Korea or Chinese, are based around exports. Export financing has helped turn third world countries into international economic powerhouses. It also helps : ? ? To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer. To cover natural risks like an earthquake, floods etc
CHAPTER 2 - TYPES OF EXPORT FINANCE
The export finance is being classified into two types viz. ? Pre-shipment finance. ? Post-shipment finance.
2.1.PRE-SHIPMENT FINANCE
2.1.1. MEANING: 'Pre-shipment' means any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.
2.1.2. IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE: ? To purchase raw material, and other inputs to manufacture goods. ? To assemble the goods in the case of merchant exporters. ? To store the goods in suitable warehouses till the goods are shipped. ? To pay for packing, marking and labeling of goods. ? To pay for pre-shipment inspection charges. ? To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. ? To pay for consultancy services. ? To pay for export documentation expenses.
2.1.3. FORMS OR METHODS OF PRE-SHIPMENT FINANCE:
1. Advance Against Red L/C: The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit.
2. Advance Against Duty Draw Back (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as postshipment advance against claims for DBK.
3. Advance Against Hypothecation: Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank.
4. Advance Against Pledge: The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter.
5. Advance Against Back-To-Back L/C: The merchant exporter who is in possession of the original L/C may request his bankers to issue Back-To-Back L/C against the security of original L/C in favour of the sub-supplier. The sub-supplier thus gets the Back-To-Bank L/C on the basis of which he can obtain packing credit.
6. Special Pre-Shipment Finance Schemes: ? ? Exim-Bank?s scheme for grant for Foreign Currency Pre-Shipment Credit (FCPC) to exporters. Packing credit for Deemed exports.
7. Advance Against Exports Through Export Houses: Manufacturer, who exports through export houses or other agencies can obtain packing credit, provided such manufacturer submits an undertaking from the export houses that they have not or will not avail of packing credit against the same transaction.
8. Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security.
2.1.4. SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE
Pre-shipment finance is extended in the following forms : ? ? Packing Credit in Indian Rupee Pre-shipment Credit in Foreign Currency (PCFC)
A) PACKING CREDIT I. SANCTION OF PACKING CREDIT ADVANCES: There are certain factors, which should be considered while sanctioning the packing credit advances viz. i. Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower. ii. Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. iii. Quantum of finance. B) PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC)
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The PCFC is available to exporting companies as well as commercial banks for lending
to the former. It is an additional window to rupee packing credit scheme & available to cover both the
domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance. ? To avail him of pre-shipment credit in rupees & then the post shipment credit either in
rupees or in foreign currency denominated credit or discounting /rediscounting of export bills. ? To avail of pre-shipment credit in foreign currency & discounting/rediscounting of the
export bills in foreign currency.
2.1.5 PERIOD OF CREDIT
(i) The PCFC will be available as in the case of rupee credit initially for a maximum period of 180 days; any extension of the credit will be subject to the same terms and conditions as applicable for extension of rupee packing credit and it will also have additional interest cost of 2 percent above the rate for the initial period of 180 days prevailing at the time of extension. (ii) Further extension will be subject to the terms and conditions fixed by the bank concerned and if no export takes place within 360 days, the PCFC will be adjusted at T.T. selling rate for the currency concerned. In such cases, banks can arrange to remit foreign exchange to repay the loan or line of credit raised abroad and interest without prior permission of RBI. (iii) For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll over basis of the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR rate for extended period plus permitted margin (1.0 percent over LIBOR/EURO LIBOR/EURIBOR).
2.1.6 DISBURSEMENT OF PCFC
(i) In case, full amount of PCFC or part thereof is utilised to finance domestic input, banks may apply appropriate spot rate for the transaction. (ii) As regards the minimum lots of transactions, it is left to the operational convenience of banks to stipulate the minimum lots taking into account the availability of their own resources.However, while fixing the minimum lot, banks may take into account the needs of their small customers also. (iii) Banks should take steps to streamline their procedures so that no separate sanction is needed for PCFC once the packing credit limit has been authorised and the disbursement is not delayed at the branches.
2.1.7. LIQUIDATION OF PCFC ACCOUNT
(I) GENERAL (a) The facility of PCFC will be self-liquidating in nature. Accordingly, the PCFC should be liquidated out of proceeds of export documents on their submission for
discounting/rediscounting under the EBR. (b) The export bills will have to be discounted or covered by grant of foreign currency loans (DP bills) to liquidate the outstanding PCFC. The question of sending export bills for collection does not arise. (c) The PCFC should not be liquidated with foreign exchange acquired from other sources. (d) PCFC cannot be treated as a loan to be repaid in order to avail of post-shipment credit separately.
(II) Packing credit in excess of F.O.B. value In certain cases, (viz. agro based products like HPS Groundnut, defatted & deoiled cakes, tobacco, pepper, cardamom, cashew nuts, etc.) where packing credit required is in excess of FOB value, PCFC would be available only for exportable portion of the produce.
(III) Substitution of order/commodity Repayment/liquidation of PCFC could be with export documents relating to any other order covering the same or any other commodity exported by the exporter. While allowing substitution of contract in this way, banks should ensure that it is
commercially necessary and unavoidable. Banks should also satisfy about the valid reasons as to why PCFC extended for shipment of a particular commodity cannot be liquidated in the normal method. As far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any.
2.1.8. CANCELLATION/NON-EXECUTION OF EXPORT ORDER
(I) In case of cancellation of the export order for which the PCFC was availed of by the exporter from the bank, or if the exporter is unable to execute the export order for any reason, it will be in order for the exporter to repay the loan together with accrued interest thereon, by purchasing foreign exchange (principal + interest) from domestic market through the bank. In such cases, interest will be payable on the rupee equivalent of principal amount at the rate applicable to 'Export Credit Not Otherwise Specified' (ECNOS) at pre-shipment stage plus a penal rate of interest to be decided by the bank from the date of advance after adjustment of interest of PCFC already recovered. Banks are free to decide the rate of interest for ECNOS at pre-shipment stage, subject to PLR and spread guidelines.
(II) It will also be in order for the banks to remit the amount to the overseas bank, provided the PCFC was made available to exporter from the line of credit obtained from that bank.
(III) Banks may extend PCFC to such exporters subsequently, after ensuring that the earlier cancellation of PCFC was due to genuine reasons.
2.2. POST-SHIPMENT FINANCE
2.2.1. MEANING: Post shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. Whereas the finance provided after shipment of goods is called post-shipment finance.
2.2.2. IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE: ? To pay to agents/distributors and others for their services. ? To pay for publicity and advertising in the overseas markets. ? To pay for port authorities, customs and shipping agents charges. ? To pay towards export duty or tax, if any. ? To pay towards ECGC premium. ? To pay for freight and other shipping expenses. ? To pay towards marine insurance premium, under CIF contracts. ? To meet expenses in respect of after sale service. ? To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. ? To pay for representatives abroad in connection with their stay board.
2.2.3. FORMS/METHODS OF POST SHIPMENT FINANCE
1. Export bills negotiated under L/C: The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter.
2. Purchase of export bills drawn under confirmed contracts: The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter.
3. Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills.
4. Advance against claims of Duty Drawback (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as postshipment advance against claims for DBK.
5. Advance against goods sent on Consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis.
6. Advance against Undrawn Balance of Bills: There are cases where bills are not drawn to the full invoice value of gods. Certain amount is undrawn balance which is due for payment after adjustments due to difference in rates, weight, quality etc. banks offer advance against such undrawn balances subject to a maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank.
7. Advance against Deemed Exports: Specified sales or supplies in India are considered as exports and termed as “deemed exports”. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is offered for a maximum of 30 days.
8. Advance against Retention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/ services towards guarantee of performance or completion of project. Banks advance against retention money, which is payable within one year from date of shipment.
9. Advance against Deferred payments: In case of capital goods exports, the exporter receives the amount from the importer in installments spread over a period of time. The commercial bank together with EXIM bank do offer advances at concessional rate of interest for 180 days.
2.2.4. SOME SCHEMES UNDER OPERATION IN POST-SHIPMENT FINANCE
1. DEFERRED CREDIT
Meaning: Consumer goods are normally sold on short term credit, normally for a period upto 180 days. However, there are cases, especially, in the case of export of capital goods and technological services; the credit period may extend beyond 180 days. Such exports were longer credit terms (beyond 180 days) is allowed by the exporter is called as “deferred credit” or “deferred payment terms”.
How the payment is received? The payment of goods sold on “deferred payment terms” is received partly by way of advance or down payment, and the balance being payable in installments spread over a period of time.
Period of financial credit support: Financial institutions extend credit for goods sold on “deferred payment terms” (subject to approval from RBI, if required). The credit extended for financing such deferred payment exports is known as Medium Term and Long Term Credit. The medium credit facilities are
provided by the commercial banks together with EXIM Bank for a period upto 5 years. The long term credit is offered normally between 5 yrs to 12 yrs, and it is provided by EXIM Bank.
Amount of credit support: Any loan upto Rs.10crore for financing export of capital goods on deferred payment terms is sanctioned by the commercial bank which can refinance itself from Exim bank. In case of contracts above Rs.10 Lakhs but not more than Rs50crore, the EXIM Bank has the authority to decide whether export finance could be provided. Contracts above Rs.50crore need the clearance from the working group on Export Finance.
2. REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) SCHEME:
The exporter has the option of availing of export credit at the post-shipment stage either in rupee or in foreign currency under the rediscounting of export bills abroad (EBRD) scheme at LIBOR linked interest rates.
This facility will be an additional window available to exporter along
with the exiting
rupee financing schemes to an exporter at post shipment stage. This facility will be available in all convertible currencies. This scheme will cover export bills upto 180 days from the date of shipment (inclusive of normal transit period and grace period) .
The scheme envisages ADs rediscounting the export bills in overseas markets by making arrangements with an overseas agency/ bank by way of a line of credit or banker?s acceptance facility or any other similar facility at rates linked to London Inter Bank Offered Rate (LIBOR) for six months.
Prior permission of RBI will not be required for arranging the rediscounting facility abroad so long as the spread for rediscounting facility abroad does not exceed one percent over the six months LIBOR in the case of rediscounting „with recourse? basis & 1.5% in the case of „without recourse? facility. Spread, should In all other cases, the RBI?s permission will be needed. be exclusive of any withholding tax.
3. FINANCE FOR RUPEE EXPENDITURE FOR PROJECT EXPORT CONTRACTS (FREPEC) This program seeks to Finance Rupee Expenditure for Project Export Contracts, incurred by Indian companies. 1. Purpose of this Credit. To enable Indian project exporters to meet Rupee expenditure incurred/required to be incurred for execution of overseas project export contracts such as for acquisition/purchase/acquisition of materials and equipment, acquisition of personnel, payments to be made in India to staff, sub-contractors, consultants and to meet project related overheads in Indian Rupees. 2. Eligibility for Assistance under FREPEC Program. Indian project exporters who are to execute project export contracts overseas secure on cash payment terms or those funded by multilateral agencies will be eligible. The purpose of the new lending program is to give boost to project export efforts of companies with good track record and sound financials. 3. Quantum of credit extended under this program. Up to 100% of the peak deficit as reflected in the Rupee cash flow statement prepared for the project. Exim Bank will not normally take up cases involving credit requirement below Rs. 50 lakhs. Although, no maximum amount of credit is being proposed, while approving overall credit limit, credit-worthiness of the exporter-borrower would be taken into account. Where feasible, credit may be extended in participation with sponsoring commercial banks. 4. Disbursements under this Program. Disbursements will made in Rupees through a bank account of the borrowercompany against documentary evidence of expenditure incurred accompanied by a certificate of Chartered Accountants.
CHAPTER 3 – METHODS OF FINANCING EXPORTS
3.1 FORFEITING Forfeiting is a mechanism of financing exports.
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By discounting export receivables Evidenced by bills of exchange or promissory notes Without recourse to the seller (viz. exporter) Carrying medium to long term maturities On a fixed rate basis (discount) Up to 100 percent of the contract value.
The word `forfeit' is derived from the French word `a forfeit' which means the surrender of rights. Simply put, Forfeiting is the non-recourse discounting of export receivables. In a forfeiting transaction, the exporter surrenders, without recourse to him, his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfeiter. As a result, an exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker. 3.1.1. CONCEPT OF FORFEITING
1. What exports are eligible for forfeiting? All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfeiting. 2. How does forfeiting work? Receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes, can be forfeited. Bills of exchange or promissory notes, backed by co-acceptance from a bank (which would generally be the buyer's bank), are endorsed by the exporter, without recourse, in
favour of the forfeiting agency in exchange for discounted cash proceeds. The co-accepting bank must be acceptable to the forfeiting agency. 3. Is there a prescribed format for the bills of exchange or promissory notes? Yes. The bills of exchange or promissory notes should be in the prescribed format. 4. What role will Exim Bank play in forfeiting transactions? The role of Exim Bank will be that of a facilitator between the Indian exporter and the overseas forfeiting agency. 5. How will Exim Bank facilitate a forfeiting transaction? ? On a request from an exporter, for an export transaction which is eligible to be forfeited, Exim Bank will obtain indicative and firm forfeiting quotes - discount rate, commitment and other fees - from overseas agencies. ? Exim Bank will receive availed bills of exchange or promissory notes, as the case may be, and send them to the forfeiter for discounting and will arrange for the discounted proceeds to be remitted to the Indian exporter. ? Exim Bank will issue appropriate certificates to enable Indian exporters to remit commitment fees and other charges. 6. What does forfeiting cost include? A forfeiting transaction has typically three cost elements: ? ? ? Commitment fee Discount fee Documentation fee
7. What benefits accrue to an exporter from forfeiting? ? Converts a deferred payment export into a cash transaction, improving liquidity and cash flow. ? Frees the exporter from cross-border political or commercial risks associated with export receivables.
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Finance up to 100 percent of the export value is possible as compared to 80-85 percent financing available from conventional export credit program.
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As forfeiting offers without recourse finance to an exporter, it does not impact the exporter's borrowing limits. Thus, forfeiting represents an additional source of funding, contributing to improved liquidity and cash flow.
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Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit. Exporter is freed from credit administration and collection problems
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Forfeiting is transaction specific. Consequently, a long term banking relationship with the forfeiter is not necessary to arrange a forfeiting transaction
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Exporter saves on insurance costs as forfeiting obviates the need for export credit insurance
3.2. FACTORING Factoring may be defined as “A contract by which the factor is to provide at least two of the services, (finance, the maintenance of accounts, the collection of receivables and protection against credit risks) and the supplier is to assigned to the factor on a continuing basis by way of sale or security, receivables arising from the sale of goods or supply of services”. Factoring offers smaller companies the instant cash advantage that was once available only to large companies with high sales volumes. With Factoring, there's no need for credit or collection departments, and no need to spend your profits on maintaining accounts receivables. In simple words...Factoring turns your receivable into cash today, instead of waiting to be paid at a future date.
3.2.1. International export Factoring Scheme:
RBI has approved the above scheme evolved by SBI Factors and Commercial Services Pvt. Ltd Mumbai for providing “International Export Factoring Services” on “with recourse” basis. The salient features of the scheme are as follows: ? An exporter should submit to SBI Factors & Commercial Services Pvt.Ltd i.e. the Export Factor(EF) a list of Buyers(customers) indicating their names & street addresses and his credit line needs . ? The Import Factor (IF) located in the importer?s country selected by EF, will rate the buyer?s list and the results will be reported to the exporter through EF. The exporter will apply for a credit limit in respect of overseas importer. IF will grant credit line based on the assessment of credit-worthiness of the overseas importer. ? The exporter will thereafter enter into an export factoring agreement with EF. All export receivable will be assigned to the EF, who in turn will assign them to IF. ? The exporter will ship merchandise to approved foreign buyers. Each
invoice is made
payable to a specific factor in the buyer?s (importer) country. Copies of invoices & shipping documents should be sent to IF through EF. EF will make prepayment against approved export receivables. ? EF will report the transaction in relevant ENC statement detailing full particulars, such as Exporter?s Code Number, GR Form Number, Custom Number, Currency, Invoice value etc. ? On receipt of payments from buyers on the due date of invoice, IF will remit funds to EF who will convert foreign currency remittances into rupees and will transfer proceeds to the exporter after deducting the amount of prepayments, if made. Simultaneously, EF will report the transaction in the relative „R? returns enclosing duplicate copy of the respective GR form to the exporter
duly certified. The payment received will be the net payment after deduction of a service fee, which ranges from 0.5 % to 2% of the value of the invoices. ? If an approved buyer (importer) is unable to pay the proceeds of exports, IF will pay the receivables to EF, 100 days after the due date. The transactions of this nature will be
reported by EF in the half yearly statements which are to be submitted to RBI, indicating therein the reasons for delay /nonpayment.
CHAPTER 4-TRADE DOCUMENTS REQUIRED DURING EXPORT FINANCE.
International market involves various types of trade documents that need to be produced while making transactions. Each trade document is differ from other and present the various aspects of the trade like description, quality, number, transportation medium, indemnity, inspection and so on. So, it becomes important for the importers and exporters to make sure that their documents support the guidelines as per international trade transactions. A small mistake could prove costly for any of the parties.For example, a trade document about the bill of lading is a proof that goods have been shipped on board, while Inspection Certificate, certifies that the goods have been inspected and meet quality standards. So, depending on these necessary documents, a seller can assure a buyer that he has fulfilled his responsibility whilst the buyer is assured of his request being carried out by the seller.
The following is a list of documents often used in international trade:
1. 2. 3. 4. 5. 6. 7. 8.
Air Waybill Bill of Lading Certificate of Origin Combined Transport Document Draft (or Bill of Exchange) Insurance Policy (or Certificate) Packing List/Specification Inspection Certificate
A. Air Waybills Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample consists of three originals and nine copies. The first original is for the carrier and is signed by a export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the goods.
Air Waybills serves as: • Proof of receipt of the goods for shipment. • An invoice for the freight. • A certificate of insurance. • A guide to airline staff for the handling, dispatch and delivery of the consignment. The principal requirement for an air waybill are :
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The proper shipper and consignee must be mention. The airport of departure and destination must be mention. The goods description must be consistent with that shown on other documents. Any weight, measure or shipping marks must agree with those shown on other documents.
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It must be signed and dated by the actual carrier or by the named agent of a named carrier.
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It must mention whether freight has been paid or will be paid at the destination point.
B. Bill of Lading (B/L) Bill of Lading is a document given by the shipping agency for the goods shipped for transportation form one destination to another and is signed by the representatives of the carrying vessel. Bill of landing is issued in the set of two, three or more. The number in the set will be indicated on each bill of lading and all must be accounted for. This is done due to the safety reasons which ensure that the document never comes into the hands of an unauthorized person. Only one original is sufficient to take possession of goods at port of discharge so, a bank which finances a trade transaction will need to control the complete set. The bill of lading must be signed by the shipping company or its agent, and must show how many signed originals were issued. It will indicate whether cost of freight/ carriage has been paid or not:
1."Freight prepaid": Paid by shipper. 2."Freight collect: To be paid by the buyer at the port of discharge. The bill of lading also forms the contract of carriage. To be acceptable to the buyer, the B/L should:
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Carry an "On Board" notation to showing the actual date of shipment, (Sometimes however, the "on board" wording is in small print at the bottom of the B/L, in which cases there is no need for a dated "on board" notation to be shown separately with date and signature.)
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Be "clean" having no notation by the shipping company to the effect that goods/ packaging are damaged.
The main parties involve in a bill of lading are:
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Shipper: The person who send the goods. Consignee: The person who take delivery of the goods. Notify Party: The person, usually the importer, to whom the shipping company or its agent gives notice of arrival of the goods.
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Carrier: The person or company who has concluded a contract with the shipper for conveyance of goods
The bill of lading must meet all the requirements of the credit as well as complying with UCP 500. These are as follows:
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The correct shipper, consignee and notifying party must be shown. The carrying vessel and ports of the loading and discharge must be stated. The place of receipt and place of delivery must be stated, if different from port of loading or port of discharge.
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The goods description must be consistent with that shown on other documents. Any weight or measures must agree with those shown on other documents. Shipping marks and numbers and /or container number must agree with those shown on other documents.
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It must state whether freight has been paid or is payable at destination. It must be dated on or before the latest date for shipment specified in the credit. It must state the actual name of the carrier or be signed as agent for a named carrier.
C. Certificate of Origin The Certificate of Origin is required by the custom authority of the importing country for the purpose of imposing import duty. It is usually issued by the Chamber of Commerce and contains information like seal of the chamber, details of the good to be transported and so on. The certificate must provide that the information required by the credit and be consistent with all other document, It would normally include :
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The name of the company and address as exporter. The name of the importer. Package numbers, shipping marks and description of goods to agree with that on other documents.
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Any weight or measurements must agree with those shown on other documents. It should be signed and stamped by the Chamber of Commerce.
D. Combined Transport Document Combined Transport Document is also known as Multimodal Transport Document, and is used when goods are transported using more than one mode of transportation. In the case of multimodal transport document, the contract of carriage is meant for a combined transport from the place of shipping to the place of delivery. It also evidence receipt of goods but it does not evidence on board shipment, if it complies with ICC 500, Art. 26(a). The liability of the combined transport operator starts from the place of shipment and ends at the place of delivery. This documents need to be signed with appropriate number of originals in the full set and proper evidence which indicates that transport charges have been paid or will be paid at destination port. Multimodal transport document would normally show :
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That the consignee and notify parties are as the credit. The place goods are received, or taken in charges, and place of final destination.
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Whether freight is prepaid or to be collected. The date of dispatch or taking in charge, and the "On Board" notation, if any must be dated and signed.
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Total number of originals. Signature of the carrier, multimodal transport operator or their agents.
E. Commercial Invoice Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or import invoice, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation.The invoice must :
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Be issued by the beneficiary named in the credit (the seller). Be address to the applicant of the credit (the buyer). Be signed by the beneficiary (if required). Include the description of the goods exactly as detailed in the credit. Be issued in the stated number of originals (which must be marked "Original) and copies. Include the price and unit prices if appropriate. State the price amount payable which must not exceed that stated in the credit include the shipping terms.
F. Bill of Exchange A Bill of Exchange is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where large amount of money involved. Following persons are involved in a bill of exchange: 1. Drawer: The person who writes or prepares the bill. 2. Drawee: The person who pays the bill.
3. Payee: The person to whom the payment is to be made. 4. Holder of the Bill: The person who is in possession of the bill. On the basis of the due date there are two types of bill of exchange:
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Bill of Exchange after Date: In this case the due date is counted from the date of drawing and is also called bill after date.
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Bill of Exchange after Sight: In this case the due date is counted from the date of acceptance of the bill and is also called bill of exchange after sight.
G. Insurance Certificate Also known as Insurance Policy, it certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered. It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents. Also, if submitted under a LC, the insured amount must be in the same currency as the credit and usually for the bill amount plus 10 per cent. The requirements for completion of an insurance policy are as follow:
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The name of the party in the favor which the document has been issued. The name of the vessel or flight details. The place from where insurance is to commerce typically the sellers warehouse or the port of loading and the place where insurance cases usually the buyer's warehouse or the port of destination.
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Insurance value that specified in the credit. Marks and numbers to agree with those on other documents. The description of the goods, which must be consistent with that in the credit and on the invoice.
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The name and address of the claims settling agent together with the place where claims are payable.
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Countersigned where necessary.
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Date of issue to be no later than the date of transport documents unless cover is shown to be effective prior to that date.
H. Packing List Also known as packing specification, it contains details about the packing materials used in the shipping of goods. It also includes details like measurement and weight of goods. The packing list must:
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Have a description of the goods ("A") consistent with the other documents. Have details of shipping marks ("B") and numbers consistent with other documents
I. Inspection Certificate Certificate of Inspection is a document prepared on the request of seller when he wants the consignment to be checked by a third party at the port of shipment before the goods are sealed for final transportation. In this process seller submit a valid Inspection Certificate along with the other trade documents like invoice, packing list, shipping bill, bill of lading etc to the bank for negotiation. On demand, inspection can be done by various world renowned inspection agencies on nominal charges.
CHAPTER 5 - LETTER OF CREDIT
5.1. INTRODUCTION:
This is one of the most popular and more secured of method of payment in recent times as compared to other methods of payment. A L/C refers to the documents representing the goods and not the goods themselves. Banks are not in the business of examining the goods on behalf of the customers. Typical documents, which are required includes commercial invoice, transport document such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in documents and not goods.
5.2. DEFINITION: A Letter of Credit can be defined as “an undertaking by importer’s bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C”.
5.3. PARTIES INVOLVED IN LETTER OF CREDIT: ? ? ?
Applicant:
The buyer or importer of goods Importer?s bank, who issues the L/C
Issuing bank:
Beneficiary:
The party to whom the L/C is addressed. The Seller or supplier of goods.
Advising bank:
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Issuing bank?s branch or correspondent bank in the exporter?s country to whom the L/C is send for Onward transmission to the beneficiary.
Confirming bank:
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The bank in beneficiary?s country, which Guarantees the credit on the request of the issuing Bank.
Negotiating bank:
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The bank to which the beneficiary presents his Documents for payment under L/C.
Reimbursing Bank:
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Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. It is normally the bank with which issuing bank has an account from which payment has to be made.
Second Beneficiary:
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Second Beneficiary is the person who represents the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original
beneficiary is transferable. The rights of the transferee are subject to terms of transfer.
5.4. Types of Letter of Credit 1. Revocable Letter of Credit L/c 2. Irrevocable Letter of Credit L/c 3. Confirmed Letter of Credit L/c 4. Sight Credit and Usance Credit L/c 5. Back to Back Letter of Credit L/c 6. Transferable Letter of Credit L/c 5.5. Export Operations Under L/c Export Letter of Credit is issued in for a trader for his native country for the purchase of goods and services. Such letters of credit may be received for following purpose: 1. For physical export of goods and services from India to a Foreign Country. 2. For execution of projects outside India by Indian exporters by supply of goods and services from Indian or partly from India and partly from outside India. 3. Towards deemed exports where there is no physical movements of goods from outside India But the supplies are being made to a project financed in foreign exchange by multilateral agencies, organization or project being executed in India with the aid of external agencies. Banks in India associated themselves with the export letters of credit in various capacities such as advising bank, confirming bank, transferring bank and reimbursing bank. In every cases the bank will be rendering services not only to the Issuing Bank as its agent correspondent bank but also to the exporter in advising and financing his export activity. 1. Advising an Export L/c The basic responsibility of an advising bank is to advise the credit received from its overseas branch after checking the apparent genuineness of the credit recognized by the issuing bank. It is also necessary for the advising bank to go through the letter of credit, try to understand the underlying transaction, terms and conditions of the credit and advice the beneficiary in the matter.The main features of advising export LCs are
1. There are no credit risks as the bank receives a onetime commission for the advising service. 2. There are no capital adequacy needs for the advising function. 2. Advising of Amendments to L/Cs Amendment of LCs is done for various reasons and it is necessary to fallow all the necessary the procedures outlined for advising. In the process of advising the amendments the Issuing bank serializes the amendment number and also ensures that no previous amendment is missing from the list. Only on receipt of satisfactory information/ clarification the amendment may be advised. 3. Confirmation of Export Letters of Credit It constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank, which undertakes the sight payment, deferred payment, acceptance or negotiation. Banks in India have the facility of covering the credit confirmation risks with ECGC under their “Transfer Guarantee” scheme and include both the commercial and political risk involved. 4. Discounting/Negotiation of Export LCs When the exporter requires funds before due date then he can discount or negotiate the LCs with the negotiating bank. Once the issuing bank nominates the negotiating bank, it can take the credit risk on the issuing bank or confirming bank. However, in such a situation, the negotiating bank bears the risk associated with the document that sometimes arises when the issuing bank discover discrepancies in the documents and refuses to honor its commitment on the due date. 5. Reimbursement of Export LCs Sometimes reimbursing bank, on the recommendation of issuing bank allows the negotiating bank to collect the money from the reimbursing bank once the goods have been shipped. It is quite similar to a cheque facility provided by a bank.
In return, the reimbursement bank earns a commission per transaction and enjoys float income without getting involve in the checking the transaction documents. Reimbursement bank play an important role in payment on the due date (for usance LCs) or the days on which the negotiating bank demands the same (for sight LCs)
CHAPTER 6 - BANK GUARANTEE
6.1. INTRODUCTION A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.
Any one can apply for a bank guarantee, if his or her company has obligations towards a third party for which funds need to be blocked in order to guarantee that his or her company fulfill its obligations (for example carrying out certain works, payment of a debt, etc.).
In case of any changes or cancellation during the transaction process, a bank guarantee remains valid until the customer dully releases the bank from its liability.
In the situations, where a customer fails to pay the money, the bank must pay the amount within three working days. This payment can also be refused by the bank, if the claim is found to be unlawful. 6.2. BENEFITS OF BANK GUARANTEES
a) For Governments 1. Increases the rate of private financing for key sectors such as infrastructure. 2. Provides access to capital markets as well as commercial banks. 3. Reduces cost of private financing to affordable levels. 4. Facilitates privatizations and public private partnerships. 5. Reduces government risk exposure by passing commercial risk to the private sector.
b) For Private Sector 1. Reduces risk of private transactions in emerging countries. 2. Mitigates risks that the private sector does not control. 3. Opens new markets. 4. Improves project sustainability. 6.3. Types of Bank Guarantees
1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or indirect.
Direct Bank Guarantee It is issued by the applicant's bank (issuing bank) directly to the guarantee's beneficiary without concerning a correspondent bank. This type of guarantee is less expensive and is also subject to the law of the country in which the guarantee is issued unless otherwise it is mentioned in the guarantee documents.
Indirect Bank Guarantee With an indirect guarantee, a second bank is involved, which is basically a representative of the issuing bank in the country to which beneficiary belongs. This involvement of a second bank is done on the demand of the beneficiary. This type of bank guarantee is more time consuming and expensive too. 2. Confirmed Guarantee It is cross between direct and indirect types of bank guarantee. This type of bank guarantee is issued directly by a bank after which it is send to a foreign bank for confirmations. The foreign banks confirm the original documents and thereby assume the responsibility. 3. Tender Bond This is also called bid bonds and is normally issued in support of a tender in international trade. It provides the beneficiary with a financial remedy, if the applicant fails to fulfill any of the tender conditions.
4. Performance Bonds This is one of the most common types of bank guarantee which is used to secure the completion of the contractual responsibilities of delivery of goods and act as security of penalty payment by the Supplier in case of nondelivery of goods.
5. Advance Payment Guarantees This mode of guarantee is used where the applicant calls for the provision of a sum of money at an early stage of the contract and can recover the amount paid in advance, or a part thereof, if the applicant fails to fulfill the agreement.
6. Payment Guarantees This type of bank guarantee is used to secure the responsibilities to pay goods and services. If the beneficiary has fulfilled his contractual obligations after delivering the goods or services but the debtor fails to make the payment, then after written declaration the beneficiary can easily obtain his money from the guaranteeing bank.
7. Loan Repayment Guarantees This type of guarantee is given by a bank to the creditor to pay the amount of loan body and interests in case of no fulfillment by the borrower.
8. B/L Letter of Indemnity This is also called a letter of indemnity and is a type of guarantee from the bank making sure that any kind of loss of goods will not be suffered by the carrier.
9. Rental Guarantee This type of bank guarantee is given under a rental contract. Rental guarantee is either limited to rental payments only or includes all payments due under the rental contract including cost of repair on termination of the rental contract.
10. Credit Card Guarantee Credit card guarantee is issued by the credit card companies to its customer as a guarantee that the merchant will be paid on transactions regardless of whether the consumer pays their credit. 6.4. How to Apply for Bank Guarantee Procedure for Bank Guarantees is very simple and is not governed by any particular legal regulations. However, to obtained the bank guarantee one need to have a current account in the bank. Guarantees can be issued by a bank through its authorized dealers as per notifications mentioned in the FEMA 8/2000 date 3rd May 2000. Only in case of revocation of guarantee involving US $ 5000/ or more to be reported to Reserve Bank of India along with the details of the claim received. 6.5. Bank Guarantees vs. Letters of Credit
A bank guarantee is frequently confused with letter of credit (LC), which is similar in many ways but not the same thing. The basic difference between the two is that of the parties involved. In a bank guarantee, three parties are involved; the bank, the person to whom the guarantee is given and the person on whose behalf the bank is giving guarantee. In case of a letter of credit, there are normally four parties involved; issuing bank, advising bank, the applicant (importer) and the beneficiary (exporter).
Also, as a bank guarantee only becomes active when the customer fails to pay the necessary amount where as in case of letters of credit, the issuing bank does not wait for the buyer to default, and for the seller to invoke the undertaking.
CHAPTER 7 - TRANSPORT RISK 7.1. INTRODUCTION
It is quite important to evaluate the transportation risk in international trade for better financial stability of export business. About 80% of the world major transportation of goods is carried out by sea, which also gives rise to a number of risk factors associated with transportation of goods. The major risk factors related to shipping are cargo, vessels, people and financing. So it becomes necessary for the government to address all of these risks with broad based security policy responses, since simply responding to threats in isolation to one another can be both ineffective and costly.
While handling transportation in international trade following precaution should be taken into consideration.
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In case of transportation by ship, and the product should be appropriate for containerization. It is worth promoting standard order values equivalent to quantities loaded into standard size containers.
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Work must be carried out in compliance with the international code concerning the transport of dangerous goods.
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For better communication purpose people involve in the handling of goods should be equipped with phone, fax, email, internet and radio.
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About the instructions given to the transport company on freight forwarder. Necessary information about the cargo insurance. Each time goods are handled; there risk of damage. Plan for this when packing for export, and deciding on choice of transport and route.
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The expected sailing dates for marine transport should be built into the production programme, especially where payments is to be made by Letter of Credit when documents will needs to be presented within a specified time frame.
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Choice of transport has Balance Sheet implications. The exporter is likely to received payments for goods supplied while they are in transit.
7.2. TRANSPORT INSURANCE Export and import in international trade, requires transportation of goods over a long distance. No matter whichever transport has been used in international trade, necessary insurance is must for ever good. Cargo insurance also known as marine cargo insurance is a type of insurance against physical damage or loss of goods during transportation. Cargo insurance is effective in all the three cases whether the goods have been transported via sea, land or air. Insurance policy is not applicable if the goods have been found to be packaged or transported by any wrong means or methods. So, it is advisable to use a broker for placing cargo risks. 7.3. SCOPE OF COVERAGE The following can be covered for the risk of loss or damage:
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Cargo import, export cross voyage dispatched by sea, river, road, rail post, personal courier, and including associated storage risks.
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Good in transit (inland). Freight service liability. Associated stock. However there is still a number of general exclusion such loss by delay, war risk, improper
packaging and insolvency of carrier. Converse for some of these may be negotiated with the insurance company. The Institute War Clauses may also be added.
Regular exporters may negotiate open cover. It is an umbrella marine insurance policy that is activated when eligible shipments are made. Individual insurance certificates are issued after the shipment is made. Some letters of Credit Will require an individual insurance policy to be issued for the shipment, While others accept an insurance certificate.
7.4. SELLER'S BUYER'S CONTINGENT INTEREST INSURANCE An exporter selling on, for example FOB (INCOTERMS 2000) delivery terms would according to the contract and to INCOTERMS, have not responsibility for insurance once the goods have passed the ship's rail. However, for peace of mind, he may wish to purchase extra cover, which will cover him for loss or will make up cover where the other policy is too restrictive. This is known as Seller's Interest Insurance .Similarly, cover is available to importers/buyers. Seller's Interest and Buyer's Interest covers usually extended cover to apply if the title in the goods reverts to the insured party until the goods are recovered resold or returned. 7.5. Loss of Profits/ Consequential Loss Insurance Importers buying goods for a particular event may be interested in consequential loss cover in case the goods are late (for a reason that id insured) and (expensive) replacements have to be found to replace them. In such cases, the insurer will pay a claim and receive may proceeds from the eventual sale of the delayed goods.
CHAPTER 8 - CONTRACT RISK AND CREDIT RISK 8.1.INTRODUCTION Contract risk and credit risk are the part of international trade finance and are quite different from each other.A contract risk is related to the Latin law of "Caveat Emptor", which means "Buyer Beware" and refers directly to the goods being purchase under contract, whether it's a car, house land or whatever. On the other hand a credit risk may be defined as the risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss. Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade financing, foreign exchange, swaps, bonds, equities, and interbank transactions. 8.2.CREDIT INSURANCE Credit Insurance is special type of loan which pays back a fraction or whole of the amount to the borrower in case of death, disability, or unemployment. It protects open account sales against nonpayment resulting from a customer's legal insolvency or default. It is usually required by manufacturers and wholesalers selling products on credit terms to domestic and/or foreign customers. Benefits of Credit Insurance: 1. Expand sales to existing customers without increased risk. 2 Offer more competitive credit terms to new customers in new markets. 3. Help protect against potential restatement of earnings. 4. Optimize bank financing by insuring trade receivables. 5. Supplement credit risk management. 8.3.PAYMENT RISK This type of risk arises when a customer charges in an organization or if he does not pay for operational reasons. Payment risk can only be recovered by a well written contract. Recovery cannot be made for payment risk using credit insurance.
8.4.BAD DEBT PROTECTION A bad debt can effect profitability. So, it is always good to keep options ready for bad debt like Confirmation of LC, debt purchase (factoring without recourse of forfeiting) or credit insurance. 8.5. CONFIRMATION OF LC In an international trade, the confirmation of letter of credit is issued to an exporter or seller. This confirmation letter assures payment to an exporter or seller, even if the issuing bank defaults on its payment once the beneficiary meets his terms and conditions. 8.6.FACTORING AND FORFAITING Where debt purchase is without recourse, the bank will already have advanced the funds in the debt purchase transaction. The bank takes the risk of nonpayment. 8.7.CREDIT LIMIT Companies with credit insurance need to have proper credit limits according to the terms and conditions. This includes fulfilling the administrative requirement, including notification of overdoes and also terms set out in the credit limit decision. Payment of the claim can only be done after a fix period, which is about 6 months for slow pay insurance. In case of economic and political events are six or more than six months, depending on the exporter markets. Credit insurance covers the risk of nonpayment of trade debts. Each policy is different, some covering only insolvency risk on goods delivered, and others covering a wide range of risk such as:
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Local sales, export sales, or both. Protracted default. Political risk, including contract frustration, war transfer. Pre-delivery risks. Cover for sales from stock. Non honoring of letters of credits. Bond unfair calling risks.
Like all other insurance, credit insurance covers the risk of fortuitous loss. Key features of credit insurance are:
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The company is expected to assess that its client exists and is credit worthy. This might be by using a credit limit service provided by the insurer. A Credit limit Will to pay attention to the company's credit management procedures, and require that agreed procedures manuals be followed at all times.
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While the credit insurer underwrites the risk of nonpayment and contract frustration the nature of the risk is affected by how it is managed. The credit insurer is likely to pay attention to the company's credit managements procedures, and require that agreed procedures manuals be followed at all times.
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The credit insurer will expect the sales contract to be written effectively and invoices to be clear.
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The company will be required to report any overdue or other problems in a timely fashion.
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The credit insurer may have other exposure on the same buyers or in the same markets. A company will therefore benefits if other policyholder report that a particular potential customer is in financial difficulties.
8.8. BENEFITS OF CREDIT COVER
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Protection for the debtor asset or the balance sheet. Possible access to information on credit rating of foreign buyer. Access to trade finance Protection of profit margin Advice on customers and levels of credit. Disciplined credit management. Assistance and /or advice when debts are overdue or there is a risk of loss. Provides confidence to suppliers, lenders and investors. Good corporate governance
CHAPTER 9 - CURRENCY RISK
9.1. INTRODUCTION Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency against another. This is a permanent risk that will remain as long as currencies remain the medium of exchange for commercial transactions. Market fluctuations of relative currency values will continue to attract the attention of the exporter, the manufacturer, the investor, the banker, the speculator, and the policy maker alike.
While doing business in foreign currency, a contract is signed and the company quotes a price for the goods using a reasonable exchange rate. However, economic events may upset even the best laid plans. Therefore, the company would ideally wish to have a strategy for dealing with exchange rate risk.
9.2. CURRENCY HEDGING Currency hedging is technique used to avoid the risks associated with the changing value of currency while doing transactions in international trade. It is possible to take steps to hedge foreign currency risk. This may be done through one of the following options:
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Billing foreign deals in Indian Rupees: This insulates the Indian exporter from currency fluctuations. However, this may not be acceptable to the foreign buyer. Most of international trade transactions take place in one of the major foreign currencies USD, Euro, Pounds Sterling, and Yen.
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Forward contract. You agree to sell a fixed amount of foreign exchange (to convert this into your currency) at a future date, allowing for the risk that the buyer?s payments are late.
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Options: You buy the right to have currency at an agreed rate within an agreed period. For example, if you expect to receive $35,000 in 3 months, time you could buy an option to convert $35,000 into your currency in 3 months. Options can be more expensive than a forward contract, but you don't need to compulsorily use your option.
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Foreign currency bank account and foreign currency borrowing : These may be suitable where you have cost in the foreign currency or in a currency whose exchange rate is related to that currency.
9.3. FOREX RATES VS. INTEREST RATES Forex rates or exchange rate is the price of a country's currency in terms of another country's currency. It specifies how much one currency is worth in terms of the other. For example a forex rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD 1. Choice of currency and its interest rate is a major concern in the international trade. Investors are easily attracted by the higher interest rates which in turns also effects the economy of a nation and its currency value. For an example, if interest rate on INR were substantially higher than the interest rate on USD, more USD would be converted into INR and pumped into the Indian economic system. This would result in appreciation of the INR, resulting in lower conversion rates of USD against INR, at the time of reconversion into USD. 9.4. Calculating the Forward Rates A forward rate is calculated by calculating the interest rate difference between the two currencies involved in the transactions. For example, if a client is buying a 30 days US dollar then, the difference between the spot rate and the forward rate will be calculated as follow: The US dollars are purchased on the spot market at an appropriate rate, what causes the forward contract rate to be higher or lower is the difference in the interest rates between India and the US. The interest rate earned on US dollars is less than the interest rate earned on Indian Rupee (INR). Therefore, when the forward rates are calculated the cost of this interest rate differential is added to the transaction through increasing the rate. USD 100,000 X 1.5200 = INR 152,000 INR 152,000 X 1% divided by 12 months = INR 126.67 INR 152,000 + INR 126.67 = INR 152,126.67 INR 152,126.67/USD 100,000 = 1.5213
CHAPTER 10 - COUNTRY RISK
10.1. INTRODUCTION Country risk includes a wide range of risks, associated with lending or depositing funds, or doing other financial transaction in a particular country. It includes economic risk, political risk, currency blockage, expropriation, and inadequate access to hard currencies. Country risk can adversely affect operating profits as well as the value of assets. With more investors investing internationally, both directly and indirectly, the political, and therefore economic, stability and viability of a country's economy need to be considered. 10.2. MEASURING COUNTRY RISK Given below are the lists of some agencies that provide services in evaluating the country risk.
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Bank of America World Information Services Business Environment Risk Intelligence (BERI) S.A. Control Risks Information Services (CRIS) Economist Intelligence Unit (EIU) Euro money Institutional Investor Standard and Poor's Rating Group Political Risk Services: International Country Risk Guide (ICRG) Political Risk Services: CoplinO'Leary Rating System Moody's Investor Services
10.3. POLITICAL RISK The risk of loss due to political reasons arises in a particular country due to changes in the country's political structure or policies, such as tax laws, tariffs, expropriation of assets, or restriction in repatriation of profits. Political risk is distinct from other commercial risks, and tends to be difficult to evaluate. Some examples of political risks are:
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Contract frustration by another country, government resulting in your inability to perform the contract, following which the buyer may not make payment and or / on demand bonds may be called. License cancellation or non renewal or imposition of an embargo. Sanctions imposed against a particular country or company. Imposition of exchange controls causing payments to be blocked. General moratorium decreed by an overseas government preventing payment Shortage of foreign exchange/transfer delay. War involving either importing or exporting country. Forced abandonment
The following are also considered as political risks in relation to exporting :
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Confiscation of assets by a foreign government. Unfair calling of bonds.
Insurance companies provide political risk covers. These may be purchased:
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On their own, covering only political risk on the sale to a particular country. For a portfolio of political risks. For the political risks in relation to the sale to another company in your group (where there is a common shareholding and therefore insolvency cover is not available). As part of a credit insurance policy.
10.4. PREDELIVERY RISKS A company can suffer financial loss, if export contract is cancelled due to commercial or political reasons, even before the goods and services are dispatched or delivered. In such a situation, the exposure to loss will depends on:
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The nature of the contract. If the company can salvage any products and resell them quickly, with a small amount of re working Any stage payments If servicing staff have left the country. The extent of the commitments to suppliers. The horizon of pre delivery risk The customer and country risks
10.5. PRE DELIVERY COVER Credit insurance can be extended to cover pre-delivery risk, in particular, the risk of customer insolvency pre-delivery or political frustration pre-delivery. Sometimes pre-delivery cover can be extended included the frustration of a contract caused by nonpayment of a pre delivery milestone, and or nonpayment of a termination account, and or bond call. Pre-delivery risks are often complicated and the wording of the cover is worth careful examination. It is to be noted that in the event that it was clearly unwise to dispatch goods, credit risk (payment risk) cover would not automatically apply if the company nonetheless went ahead and dispatched head them.
CHAPTER 11 - FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) FOR EXPORT IMPORT FOREIGN EXCHANGE.
11.1. INTRODUCTION Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organisation (WTO). Foreign Exchange Management Act was earlier known as FERA (Foreign Exchange Regulation Act), which has been found to be unsuccessful with the proliberalisation policies of the Government of India. FEMA is applicable in all over India and even branches, offices and agencies located outside India, if it belongs to a person who is a resident of India. 11.2. SOME HIGHLIGHTS OF FEMA
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It prohibits foreign exchange dealing undertaken other than an authorized person; It also makes it clear that if any person residing in India received any Forex payment (without there being a corresponding inward remittance from abroad) the concerned person shall be deemed to have received they payment from a nonauthorised person.
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There are 7 types of current account transactions, which are totally prohibited, and therefore no transaction can be undertaken relating to them. These include transaction relating to lotteries, football pools, banned magazines and a few others.
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FEMA and the related rules give full freedom to Resident of India (ROI) to hold or own or transfer any foreign security or immovable property situated outside India.
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Similar freedom is also given to a resident who inherits such security or immovable property from an ROI.
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An ROI is permitted to hold shares, securities and properties acquired by him while he was a Resident or inherited such properties from a Resident.
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The exchange drawn can also be used for purpose other than for which it is drawn provided drawl of exchange is otherwise permitted for such purpose.
11.3. FEDAI GUIDELINES FOR FOREIGN EXCHANGE Established in 1958, FEDAI (Foreign Exchange Dealers' Association of India) is a group of banks that deals in foreign exchange in India as a self regulatory body under the Section 25 of the Indian Company Act (1956). The role and responsibilities of FEDAI are as follows:
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Formulations of FEDAI guidelines and FEDAI rules for Forex business. Training of bank personnel in the areas of Foreign Exchange Business. Accreditation of Forex Brokers. Advising/Assisting member banks in settling issues/matters in their dealings. Represent member banks on Government/Reserve Bank of India and other bodies. Rules of FEDAI also include announcement of daily and periodical rates to its member banks.
FEDAI guidelines play an important role in the functioning of the markets and work in close coordination with Reserve Bank of India (RBI), other organizations like Fixed Income Money Market and Derivatives Association (FIMMDA), the Forex Association of India and various other market participants
CHAPTER 12 - MAJOR FINANCIAL AND OTHER INSTITUTIONS
12.1. EXIM BANK ? ? ? ? ? Set up by an Act of Parliament in September 1981. Commenced operations in March 1982. Wholly owned by the Government of India. Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting foreign trade in India. Exim is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports.
12.1.1. INTRODUCTION
The Export-Import bank of India is the apex institution for project finance, which provides direct finance and coordinates the working of the institution, which is engaged in financing export or import of goods and services. It has taken over the operations of international finance wing of the industrial development bank of India (IDBI). The EXIM bank of India came into existence on 1st January 1982, and started functioning from 1st march 1982. It has it?s headquarter in Mumbai and its branches and offices in important cities in India and abroad.The EXIM bank was established for the purpose of financing medium and long term loan to the exporters thereby promoting foreign trade of India.
12.1.2. MAIN OBJECTIVES ? ? To provide financial assistance (medium and long term) to exporters and importers. To function as the principal financial institution for coordinating the working of institutions engaged in providing export finance. ? ? To promote Foreign Trade of India. To deal with all matters that may be considered to be incidental or conducive to the attainment of above objectives.
12.1.3. FUNCTIONS
The assistance provided by EXIM Bank to the exporters can be grouped under two heads: A. Fund Based Assistance. B. Non-Fund based Assistance.
ASSISTANCE OFFERED BY EXIM BANK
FUND BASED ASSISTANCE
NON-FUND BASED ASSISTANCE
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INDIAN PARTIES. INDIAN BANKS. OVERSEAS BUYERS. OVERSEAS BANKS.
? FINANCIAL GUARANTEES. ? ADVISORY AND OTHER SERVICES.
1. FUND BASED ASSISTANCE: ? ? ? ?
Assistance to Indian Exporters: Assistance to Indian Commercial Banks: Assistance to Overseas Buyers: Assistance to Overseas Banks:
2. NON-FUND BASED ASSISTANCE ? ?
Guarantees and Bonds: Advisory and Other Services: (a) It advises Indian companies, in Executing Contracts Abroad, and on sources of overseas financing. (b) It advises Indian exporters on global exchange control practices. (c) The EXIM Bank offers Financial and Advisory Services to Indian construction projects abroad.
12.1.4. EXPORT FINANCING PROGRAMMES PROVIDED BY EXIM BANK
EXIM INDIA offers a range of financing programs that match the menu of Exim Banks of the industrialized countries. However, the Bank is atypical in the universe of Exim Banks in that it has over the years evolved, so as to anticipate and meet the special needs of a developing country. The Bank provides competitive finance at various stages of the export cycle covering: The Bank is involved in promotion of two-way technology transfer through the outward flow of investment in Indian joint ventures overseas and foreign direct investment flow into India. EXIM INDIA is also a Partner Institution with European Union and operates European Community Investment Partners' Program (ECIP) for facilitating promotion of joint ventures in India through technical and financial collaboration with medium sized firms of the European Union. The Export- Import Bank of India (Exim Bank) provides financial assistance to promote Indian exports through direct financial assistance, overseas investment finance, term finance for export production and export development, pre-shipping credit, buyer's credit, lines of credit, relending facility, export bills rediscounting, refinance to commercial banks. They are listed as below: 1. LOANS TO INDIAN ENTITIES ? Deferred payment exports: Term finance is provided to Indian exporters of eligible goods and services, which enables them to offer deferred credit to overseas buyers. Deferred credit can also cover Indian consultancy, technology and other services. Commercial banks participate in this program directly or under risk syndication arrangements. ? Pre-shipment credit: finance is available from Exim Bank for companies executing export contracts involving cycle time exceeding six months. The facility also enables provision of rupee mobilization expenses for construction/turnkey project exporters. ? Term loans for export production: Exim Bank provides term loans/deferred payment guarantees to 100% export-oriented units, units in free trade zones and computer software exporters. In collaboration with International Finance Corporation. Washington, Exim Bank provides loans to enable small and medium enterprises upgrade export production capability.
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Overseas Investment finance: Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture.
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Finance for export marketing: This program, which is a component of a World Bank loan, helps exporters implement their export market development plans.
2. LOANS TO COMMERCIAL BANKS IN INDIA
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Export Bills Rediscounting: Commercial Banks in India who are authorized to deal in foreign exchange can rediscount their short term export bills with Exim Banks, for an unexpired usance period of not more than 90 days.
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Refinance of Export Credit: Authorized dealers in foreign exchange can obtain from Exim Bank 100% refinance of deferred payment loans extended for export of eligible Indian goods.
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Guaranteeing of Obligations: Exim Bank participates with commercial banks in India in the issue of guarantees required by Indian companies for the export contracts and for execution of overseas construction and turnkey projects.
3. LOANS TO OVERSEAS ENTITIES ? Overseas Buyer's Credit: Credit is directly offered to foreign entities for import of eligible goods and related services, on deferred payment. ? Lines of Credit: Besides foreign governments, finance is available to foreign financial institutions and government agencies to on-lend in the respective country for import of goods and services from India. ? Relending Facility to Banks Overseas: Relending facility is extended to banks overseas to enable them to provide term finance to their client?s worldwide for imports from India.
12.2. RESERVE BANK OF INDIA
INTRODUCTION: The RBI with its head quarters in Mumbai and several regional offices is the central banks of our country to authorize extend and regulate export credit and transaction including foreign exchange affairs. RBI does not directly provide export finance to the exporters, but it adopts policies and initiates measures to encourage commercial banks and other financial institutions to provide liberal export finance. The Two Departments of RBI are: ? Industrial and credit department and ? Exchange control department These Departments administers various policies related to export finance/credit and foreign exchange.
12.2.1.SCHEMES OFFERED BY RBI TO ENCOURAGE COMMERCIAL BANKS TO PROVIDE EXPORT CREDIT TO THE EXPORTERS: ? EXPORT BILLS CREDIT SCHEME, 1963: Under this scheme, RBI used to grant advance to scheduled banks against export bills maturing within 180 days. Now this scheme is not in operation. ? PRE-SHIPMENT CREDIT SCHEME, 1969: Under this scheme, RBI provides re-finance facilities to scheduled banks that provide pre-shipment loans to bonafide customers. ? EXPORT CREDIT INTEREST SUBSIDIES SCHEME, 1968: Under this scheme, RBI provides interest subsidies of minimum 1.5 % p.a. to banks, which provide export finance to exporters, provided that the banks charge interest to exporter within the ceiling prescribed by RBI. The subsidies are given both against packing credit and post-shipment. ? DUTY DRAW BACK CREDIT SCHEME, 1976: Under this scheme, the exporters can avail an interest free advances from the bank up to 90 days against shipping bill provisionally certified by the customs authority towards a refund of customs duty. The advances made by commercial banks under
this scheme are eligible for re-finance, free of interest from RBI for maximum period of 90 days form the date of advance.
12.2.2.OTHER APPROVES EXPORTERS WITH RBI
OR SANCTIONS
OF APPLICATION
MADE
BY THE
? Extension of time limit for realization of export proceeds. ? Deduction in invoice price of exports goods. ? Fixation of commission to overseas consignee or agents. ? Provision of blanket permit where a lump sum exchange is released for a number of purposes. ? Remittance abroad in respect of advertising, legal expenses etc. ? Any other matters relating to foreign trade that require clearance from the exchange Control department of RBI. ? Clearance in respect of joint venture abroad.
CHAPTER 13- CONCLUSION
? Export Finance is a very important branch to study & understand the overall gamut of the international finance market. ? Availability of favorable Export finance schemes directly impacts the local trade, encourages exporters, enlarges markets abroad, improves quality of domestic goods and overall helps the nation boost its exchange earnings. ? ECGC and EXIM Bank take a lot of efforts for Export promotion. The strategies of these 2 agencies in India should be flexible & their finance schemes should be constantly synchronized with the changing scene of world trade. This alone can help Indian exporters to stand competition in world markets effectively and more gain-fully. ? Finally, a very essential question needs to be answered by the International Trade gurus with reference to “Relevance of EXIM Policy in the current times”. Exim policies had emerged when the state decided to limit imports and encourage exports in order to maintain currency reserves. However, such ideas backfired: consumers were hurt and producers turned lazy.
BIBLIOGRAPHY
Books Referred: ? Export –What Where & How ? Export Marketing ? Export Management
by Paras Ram
by Michael Vaz
by T. A .S. Balagopal
Newspapers and Magazines Ref erred: ? Business India ? Economic Times
Internet Websites: ? ? ?
www.google.com
www.economictimes.com
www.rediff.com
doc_940899276.docx
TABLE OF CONTENTS
Chapter. no 1 2 Export Finance 2.1 Introduction 2.2 Concept 2.3 Objectives 2.4 Appraisal 3 Types of Export finance 3.1 Pre-Shipment 3.2 Post-Shipment 4 Letter of Credit – One of the most common method of payment in export finance 5 Some important Concept in Export Finance 5.1 Forfeiting 5.2 Factoring 5.3 Supplier?s Credit for Deferred Payment exports 6 Major Financial and other Institutions 6.1 Export Import Bank of India (EXIM Bank) 6.2 Export Credit Guarantee Control (ECGC) 6.3 Reserve Bank of India (RBI) 7 8 Market Development Assistance (MDA) High Court Ruling: Export Losses are not entitled to Tax Concessions 9 10 Conclusion Bibliography 60 – 61 62 57 – 58 59 29 – 56 22 – 28 17 - 21 05 – 16 Particulars Page No. 01 02 - 04
EXECUTIVE SUMMARY
Export in simple words means selling goods abroad. International market being a very wide market, huge quantity of goods can be sold in the form of exports. Export refers to outflow of goods and services and inflow of foreign exchange. Exports play a crucial role in the economy of the country. In order to maintain healthy balance of trade and foreign exchange reserve it is necessary to have a sustained and high rate of growth of exports. Success or failure of any export order mainly depends upon the finance available to execute the order. Nowadays export finance is gaining great significance in the field of international finance. Many Nationalized as well as Private Banks are taking measures to help the exporter by providing them pre-shipment and post- shipment finance at subsidized rate of interest. Some of the major financial institutions are EXIM Bank, RBI, and other financial institutions and banks. EXIM India is the major bank in the field of export and import of India.
CHAPTER 1 - EXPORT FINANCE
1.1.CONCEPT OF EXPORT FINANCE: Short term, medium term or long term finance depending upon the types of goods to be exported may require by the exporter. 1) Short Term Finance: - Working Capital (purchase of raw material, payment of wages and salaries, expenses like payment of rent, advertising etc.) 2) Term finance :- Medium and Long term financial (purchase of fixed assets) Finance and credit are available not only to help export production but also to sell to overseas customers on credit. 1.2.ADVANTAGES OF EXPORT FINANCE.
Export financing is a key competitive factor for exporters and may increase their opportunities of signing a contract. There are several advantages for both importers and exporters in having the Bank handle and finance the transaction.
A)Advantages for exporter ? ? ? ? ?
Gains competitive edge by offering financing to prospective buyers Receives cash payment upon shipment or commissioning Does not tie up assets Avoids credit, currency and interest-rate risks in the settlement period Does not need to use administrative resources to collect the debt
B)Advantages for importer ? Can use long-term financing to match expected revenues with expenditures, making cash flow more efficient Obtain financing that is less expensive than local financing which may be subject to restrictions
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Obtain additional savings on financing as exporters can use private insurance programmes which can make financing available at competitive rates Can obtain fixed-rate financing and be certain of the size of future payments
1.3 OBIECTIVES OF EXPORT FINANCE The Objective of export finance is to both encourage exports and boost the profitability of the domestic firms involved in exporting. The importance of this sort of financing is difficult to exaggerate, since so much hard currency is earned through exports. Entire economies, such as the Korea or Chinese, are based around exports. Export financing has helped turn third world countries into international economic powerhouses. It also helps : ? ? To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer. To cover natural risks like an earthquake, floods etc
CHAPTER 2 - TYPES OF EXPORT FINANCE
The export finance is being classified into two types viz. ? Pre-shipment finance. ? Post-shipment finance.
2.1.PRE-SHIPMENT FINANCE
2.1.1. MEANING: 'Pre-shipment' means any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.
2.1.2. IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE: ? To purchase raw material, and other inputs to manufacture goods. ? To assemble the goods in the case of merchant exporters. ? To store the goods in suitable warehouses till the goods are shipped. ? To pay for packing, marking and labeling of goods. ? To pay for pre-shipment inspection charges. ? To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. ? To pay for consultancy services. ? To pay for export documentation expenses.
2.1.3. FORMS OR METHODS OF PRE-SHIPMENT FINANCE:
1. Advance Against Red L/C: The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit.
2. Advance Against Duty Draw Back (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as postshipment advance against claims for DBK.
3. Advance Against Hypothecation: Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank.
4. Advance Against Pledge: The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter.
5. Advance Against Back-To-Back L/C: The merchant exporter who is in possession of the original L/C may request his bankers to issue Back-To-Back L/C against the security of original L/C in favour of the sub-supplier. The sub-supplier thus gets the Back-To-Bank L/C on the basis of which he can obtain packing credit.
6. Special Pre-Shipment Finance Schemes: ? ? Exim-Bank?s scheme for grant for Foreign Currency Pre-Shipment Credit (FCPC) to exporters. Packing credit for Deemed exports.
7. Advance Against Exports Through Export Houses: Manufacturer, who exports through export houses or other agencies can obtain packing credit, provided such manufacturer submits an undertaking from the export houses that they have not or will not avail of packing credit against the same transaction.
8. Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security.
2.1.4. SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE
Pre-shipment finance is extended in the following forms : ? ? Packing Credit in Indian Rupee Pre-shipment Credit in Foreign Currency (PCFC)
A) PACKING CREDIT I. SANCTION OF PACKING CREDIT ADVANCES: There are certain factors, which should be considered while sanctioning the packing credit advances viz. i. Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower. ii. Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. iii. Quantum of finance. B) PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC)
? ?
The PCFC is available to exporting companies as well as commercial banks for lending
to the former. It is an additional window to rupee packing credit scheme & available to cover both the
domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance. ? To avail him of pre-shipment credit in rupees & then the post shipment credit either in
rupees or in foreign currency denominated credit or discounting /rediscounting of export bills. ? To avail of pre-shipment credit in foreign currency & discounting/rediscounting of the
export bills in foreign currency.
2.1.5 PERIOD OF CREDIT
(i) The PCFC will be available as in the case of rupee credit initially for a maximum period of 180 days; any extension of the credit will be subject to the same terms and conditions as applicable for extension of rupee packing credit and it will also have additional interest cost of 2 percent above the rate for the initial period of 180 days prevailing at the time of extension. (ii) Further extension will be subject to the terms and conditions fixed by the bank concerned and if no export takes place within 360 days, the PCFC will be adjusted at T.T. selling rate for the currency concerned. In such cases, banks can arrange to remit foreign exchange to repay the loan or line of credit raised abroad and interest without prior permission of RBI. (iii) For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll over basis of the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR rate for extended period plus permitted margin (1.0 percent over LIBOR/EURO LIBOR/EURIBOR).
2.1.6 DISBURSEMENT OF PCFC
(i) In case, full amount of PCFC or part thereof is utilised to finance domestic input, banks may apply appropriate spot rate for the transaction. (ii) As regards the minimum lots of transactions, it is left to the operational convenience of banks to stipulate the minimum lots taking into account the availability of their own resources.However, while fixing the minimum lot, banks may take into account the needs of their small customers also. (iii) Banks should take steps to streamline their procedures so that no separate sanction is needed for PCFC once the packing credit limit has been authorised and the disbursement is not delayed at the branches.
2.1.7. LIQUIDATION OF PCFC ACCOUNT
(I) GENERAL (a) The facility of PCFC will be self-liquidating in nature. Accordingly, the PCFC should be liquidated out of proceeds of export documents on their submission for
discounting/rediscounting under the EBR. (b) The export bills will have to be discounted or covered by grant of foreign currency loans (DP bills) to liquidate the outstanding PCFC. The question of sending export bills for collection does not arise. (c) The PCFC should not be liquidated with foreign exchange acquired from other sources. (d) PCFC cannot be treated as a loan to be repaid in order to avail of post-shipment credit separately.
(II) Packing credit in excess of F.O.B. value In certain cases, (viz. agro based products like HPS Groundnut, defatted & deoiled cakes, tobacco, pepper, cardamom, cashew nuts, etc.) where packing credit required is in excess of FOB value, PCFC would be available only for exportable portion of the produce.
(III) Substitution of order/commodity Repayment/liquidation of PCFC could be with export documents relating to any other order covering the same or any other commodity exported by the exporter. While allowing substitution of contract in this way, banks should ensure that it is
commercially necessary and unavoidable. Banks should also satisfy about the valid reasons as to why PCFC extended for shipment of a particular commodity cannot be liquidated in the normal method. As far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any.
2.1.8. CANCELLATION/NON-EXECUTION OF EXPORT ORDER
(I) In case of cancellation of the export order for which the PCFC was availed of by the exporter from the bank, or if the exporter is unable to execute the export order for any reason, it will be in order for the exporter to repay the loan together with accrued interest thereon, by purchasing foreign exchange (principal + interest) from domestic market through the bank. In such cases, interest will be payable on the rupee equivalent of principal amount at the rate applicable to 'Export Credit Not Otherwise Specified' (ECNOS) at pre-shipment stage plus a penal rate of interest to be decided by the bank from the date of advance after adjustment of interest of PCFC already recovered. Banks are free to decide the rate of interest for ECNOS at pre-shipment stage, subject to PLR and spread guidelines.
(II) It will also be in order for the banks to remit the amount to the overseas bank, provided the PCFC was made available to exporter from the line of credit obtained from that bank.
(III) Banks may extend PCFC to such exporters subsequently, after ensuring that the earlier cancellation of PCFC was due to genuine reasons.
2.2. POST-SHIPMENT FINANCE
2.2.1. MEANING: Post shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. Whereas the finance provided after shipment of goods is called post-shipment finance.
2.2.2. IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE: ? To pay to agents/distributors and others for their services. ? To pay for publicity and advertising in the overseas markets. ? To pay for port authorities, customs and shipping agents charges. ? To pay towards export duty or tax, if any. ? To pay towards ECGC premium. ? To pay for freight and other shipping expenses. ? To pay towards marine insurance premium, under CIF contracts. ? To meet expenses in respect of after sale service. ? To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. ? To pay for representatives abroad in connection with their stay board.
2.2.3. FORMS/METHODS OF POST SHIPMENT FINANCE
1. Export bills negotiated under L/C: The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter.
2. Purchase of export bills drawn under confirmed contracts: The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter.
3. Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills.
4. Advance against claims of Duty Drawback (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as postshipment advance against claims for DBK.
5. Advance against goods sent on Consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis.
6. Advance against Undrawn Balance of Bills: There are cases where bills are not drawn to the full invoice value of gods. Certain amount is undrawn balance which is due for payment after adjustments due to difference in rates, weight, quality etc. banks offer advance against such undrawn balances subject to a maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank.
7. Advance against Deemed Exports: Specified sales or supplies in India are considered as exports and termed as “deemed exports”. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is offered for a maximum of 30 days.
8. Advance against Retention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/ services towards guarantee of performance or completion of project. Banks advance against retention money, which is payable within one year from date of shipment.
9. Advance against Deferred payments: In case of capital goods exports, the exporter receives the amount from the importer in installments spread over a period of time. The commercial bank together with EXIM bank do offer advances at concessional rate of interest for 180 days.
2.2.4. SOME SCHEMES UNDER OPERATION IN POST-SHIPMENT FINANCE
1. DEFERRED CREDIT
Meaning: Consumer goods are normally sold on short term credit, normally for a period upto 180 days. However, there are cases, especially, in the case of export of capital goods and technological services; the credit period may extend beyond 180 days. Such exports were longer credit terms (beyond 180 days) is allowed by the exporter is called as “deferred credit” or “deferred payment terms”.
How the payment is received? The payment of goods sold on “deferred payment terms” is received partly by way of advance or down payment, and the balance being payable in installments spread over a period of time.
Period of financial credit support: Financial institutions extend credit for goods sold on “deferred payment terms” (subject to approval from RBI, if required). The credit extended for financing such deferred payment exports is known as Medium Term and Long Term Credit. The medium credit facilities are
provided by the commercial banks together with EXIM Bank for a period upto 5 years. The long term credit is offered normally between 5 yrs to 12 yrs, and it is provided by EXIM Bank.
Amount of credit support: Any loan upto Rs.10crore for financing export of capital goods on deferred payment terms is sanctioned by the commercial bank which can refinance itself from Exim bank. In case of contracts above Rs.10 Lakhs but not more than Rs50crore, the EXIM Bank has the authority to decide whether export finance could be provided. Contracts above Rs.50crore need the clearance from the working group on Export Finance.
2. REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) SCHEME:
The exporter has the option of availing of export credit at the post-shipment stage either in rupee or in foreign currency under the rediscounting of export bills abroad (EBRD) scheme at LIBOR linked interest rates.
This facility will be an additional window available to exporter along
with the exiting
rupee financing schemes to an exporter at post shipment stage. This facility will be available in all convertible currencies. This scheme will cover export bills upto 180 days from the date of shipment (inclusive of normal transit period and grace period) .
The scheme envisages ADs rediscounting the export bills in overseas markets by making arrangements with an overseas agency/ bank by way of a line of credit or banker?s acceptance facility or any other similar facility at rates linked to London Inter Bank Offered Rate (LIBOR) for six months.
Prior permission of RBI will not be required for arranging the rediscounting facility abroad so long as the spread for rediscounting facility abroad does not exceed one percent over the six months LIBOR in the case of rediscounting „with recourse? basis & 1.5% in the case of „without recourse? facility. Spread, should In all other cases, the RBI?s permission will be needed. be exclusive of any withholding tax.
3. FINANCE FOR RUPEE EXPENDITURE FOR PROJECT EXPORT CONTRACTS (FREPEC) This program seeks to Finance Rupee Expenditure for Project Export Contracts, incurred by Indian companies. 1. Purpose of this Credit. To enable Indian project exporters to meet Rupee expenditure incurred/required to be incurred for execution of overseas project export contracts such as for acquisition/purchase/acquisition of materials and equipment, acquisition of personnel, payments to be made in India to staff, sub-contractors, consultants and to meet project related overheads in Indian Rupees. 2. Eligibility for Assistance under FREPEC Program. Indian project exporters who are to execute project export contracts overseas secure on cash payment terms or those funded by multilateral agencies will be eligible. The purpose of the new lending program is to give boost to project export efforts of companies with good track record and sound financials. 3. Quantum of credit extended under this program. Up to 100% of the peak deficit as reflected in the Rupee cash flow statement prepared for the project. Exim Bank will not normally take up cases involving credit requirement below Rs. 50 lakhs. Although, no maximum amount of credit is being proposed, while approving overall credit limit, credit-worthiness of the exporter-borrower would be taken into account. Where feasible, credit may be extended in participation with sponsoring commercial banks. 4. Disbursements under this Program. Disbursements will made in Rupees through a bank account of the borrowercompany against documentary evidence of expenditure incurred accompanied by a certificate of Chartered Accountants.
CHAPTER 3 – METHODS OF FINANCING EXPORTS
3.1 FORFEITING Forfeiting is a mechanism of financing exports.
? ? ? ? ? ?
By discounting export receivables Evidenced by bills of exchange or promissory notes Without recourse to the seller (viz. exporter) Carrying medium to long term maturities On a fixed rate basis (discount) Up to 100 percent of the contract value.
The word `forfeit' is derived from the French word `a forfeit' which means the surrender of rights. Simply put, Forfeiting is the non-recourse discounting of export receivables. In a forfeiting transaction, the exporter surrenders, without recourse to him, his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfeiter. As a result, an exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker. 3.1.1. CONCEPT OF FORFEITING
1. What exports are eligible for forfeiting? All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfeiting. 2. How does forfeiting work? Receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes, can be forfeited. Bills of exchange or promissory notes, backed by co-acceptance from a bank (which would generally be the buyer's bank), are endorsed by the exporter, without recourse, in
favour of the forfeiting agency in exchange for discounted cash proceeds. The co-accepting bank must be acceptable to the forfeiting agency. 3. Is there a prescribed format for the bills of exchange or promissory notes? Yes. The bills of exchange or promissory notes should be in the prescribed format. 4. What role will Exim Bank play in forfeiting transactions? The role of Exim Bank will be that of a facilitator between the Indian exporter and the overseas forfeiting agency. 5. How will Exim Bank facilitate a forfeiting transaction? ? On a request from an exporter, for an export transaction which is eligible to be forfeited, Exim Bank will obtain indicative and firm forfeiting quotes - discount rate, commitment and other fees - from overseas agencies. ? Exim Bank will receive availed bills of exchange or promissory notes, as the case may be, and send them to the forfeiter for discounting and will arrange for the discounted proceeds to be remitted to the Indian exporter. ? Exim Bank will issue appropriate certificates to enable Indian exporters to remit commitment fees and other charges. 6. What does forfeiting cost include? A forfeiting transaction has typically three cost elements: ? ? ? Commitment fee Discount fee Documentation fee
7. What benefits accrue to an exporter from forfeiting? ? Converts a deferred payment export into a cash transaction, improving liquidity and cash flow. ? Frees the exporter from cross-border political or commercial risks associated with export receivables.
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Finance up to 100 percent of the export value is possible as compared to 80-85 percent financing available from conventional export credit program.
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As forfeiting offers without recourse finance to an exporter, it does not impact the exporter's borrowing limits. Thus, forfeiting represents an additional source of funding, contributing to improved liquidity and cash flow.
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Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit. Exporter is freed from credit administration and collection problems
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Forfeiting is transaction specific. Consequently, a long term banking relationship with the forfeiter is not necessary to arrange a forfeiting transaction
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Exporter saves on insurance costs as forfeiting obviates the need for export credit insurance
3.2. FACTORING Factoring may be defined as “A contract by which the factor is to provide at least two of the services, (finance, the maintenance of accounts, the collection of receivables and protection against credit risks) and the supplier is to assigned to the factor on a continuing basis by way of sale or security, receivables arising from the sale of goods or supply of services”. Factoring offers smaller companies the instant cash advantage that was once available only to large companies with high sales volumes. With Factoring, there's no need for credit or collection departments, and no need to spend your profits on maintaining accounts receivables. In simple words...Factoring turns your receivable into cash today, instead of waiting to be paid at a future date.
3.2.1. International export Factoring Scheme:
RBI has approved the above scheme evolved by SBI Factors and Commercial Services Pvt. Ltd Mumbai for providing “International Export Factoring Services” on “with recourse” basis. The salient features of the scheme are as follows: ? An exporter should submit to SBI Factors & Commercial Services Pvt.Ltd i.e. the Export Factor(EF) a list of Buyers(customers) indicating their names & street addresses and his credit line needs . ? The Import Factor (IF) located in the importer?s country selected by EF, will rate the buyer?s list and the results will be reported to the exporter through EF. The exporter will apply for a credit limit in respect of overseas importer. IF will grant credit line based on the assessment of credit-worthiness of the overseas importer. ? The exporter will thereafter enter into an export factoring agreement with EF. All export receivable will be assigned to the EF, who in turn will assign them to IF. ? The exporter will ship merchandise to approved foreign buyers. Each
invoice is made
payable to a specific factor in the buyer?s (importer) country. Copies of invoices & shipping documents should be sent to IF through EF. EF will make prepayment against approved export receivables. ? EF will report the transaction in relevant ENC statement detailing full particulars, such as Exporter?s Code Number, GR Form Number, Custom Number, Currency, Invoice value etc. ? On receipt of payments from buyers on the due date of invoice, IF will remit funds to EF who will convert foreign currency remittances into rupees and will transfer proceeds to the exporter after deducting the amount of prepayments, if made. Simultaneously, EF will report the transaction in the relative „R? returns enclosing duplicate copy of the respective GR form to the exporter
duly certified. The payment received will be the net payment after deduction of a service fee, which ranges from 0.5 % to 2% of the value of the invoices. ? If an approved buyer (importer) is unable to pay the proceeds of exports, IF will pay the receivables to EF, 100 days after the due date. The transactions of this nature will be
reported by EF in the half yearly statements which are to be submitted to RBI, indicating therein the reasons for delay /nonpayment.
CHAPTER 4-TRADE DOCUMENTS REQUIRED DURING EXPORT FINANCE.
International market involves various types of trade documents that need to be produced while making transactions. Each trade document is differ from other and present the various aspects of the trade like description, quality, number, transportation medium, indemnity, inspection and so on. So, it becomes important for the importers and exporters to make sure that their documents support the guidelines as per international trade transactions. A small mistake could prove costly for any of the parties.For example, a trade document about the bill of lading is a proof that goods have been shipped on board, while Inspection Certificate, certifies that the goods have been inspected and meet quality standards. So, depending on these necessary documents, a seller can assure a buyer that he has fulfilled his responsibility whilst the buyer is assured of his request being carried out by the seller.
The following is a list of documents often used in international trade:
1. 2. 3. 4. 5. 6. 7. 8.
Air Waybill Bill of Lading Certificate of Origin Combined Transport Document Draft (or Bill of Exchange) Insurance Policy (or Certificate) Packing List/Specification Inspection Certificate
A. Air Waybills Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample consists of three originals and nine copies. The first original is for the carrier and is signed by a export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the goods.
Air Waybills serves as: • Proof of receipt of the goods for shipment. • An invoice for the freight. • A certificate of insurance. • A guide to airline staff for the handling, dispatch and delivery of the consignment. The principal requirement for an air waybill are :
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The proper shipper and consignee must be mention. The airport of departure and destination must be mention. The goods description must be consistent with that shown on other documents. Any weight, measure or shipping marks must agree with those shown on other documents.
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It must be signed and dated by the actual carrier or by the named agent of a named carrier.
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It must mention whether freight has been paid or will be paid at the destination point.
B. Bill of Lading (B/L) Bill of Lading is a document given by the shipping agency for the goods shipped for transportation form one destination to another and is signed by the representatives of the carrying vessel. Bill of landing is issued in the set of two, three or more. The number in the set will be indicated on each bill of lading and all must be accounted for. This is done due to the safety reasons which ensure that the document never comes into the hands of an unauthorized person. Only one original is sufficient to take possession of goods at port of discharge so, a bank which finances a trade transaction will need to control the complete set. The bill of lading must be signed by the shipping company or its agent, and must show how many signed originals were issued. It will indicate whether cost of freight/ carriage has been paid or not:
1."Freight prepaid": Paid by shipper. 2."Freight collect: To be paid by the buyer at the port of discharge. The bill of lading also forms the contract of carriage. To be acceptable to the buyer, the B/L should:
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Carry an "On Board" notation to showing the actual date of shipment, (Sometimes however, the "on board" wording is in small print at the bottom of the B/L, in which cases there is no need for a dated "on board" notation to be shown separately with date and signature.)
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Be "clean" having no notation by the shipping company to the effect that goods/ packaging are damaged.
The main parties involve in a bill of lading are:
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Shipper: The person who send the goods. Consignee: The person who take delivery of the goods. Notify Party: The person, usually the importer, to whom the shipping company or its agent gives notice of arrival of the goods.
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Carrier: The person or company who has concluded a contract with the shipper for conveyance of goods
The bill of lading must meet all the requirements of the credit as well as complying with UCP 500. These are as follows:
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The correct shipper, consignee and notifying party must be shown. The carrying vessel and ports of the loading and discharge must be stated. The place of receipt and place of delivery must be stated, if different from port of loading or port of discharge.
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The goods description must be consistent with that shown on other documents. Any weight or measures must agree with those shown on other documents. Shipping marks and numbers and /or container number must agree with those shown on other documents.
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It must state whether freight has been paid or is payable at destination. It must be dated on or before the latest date for shipment specified in the credit. It must state the actual name of the carrier or be signed as agent for a named carrier.
C. Certificate of Origin The Certificate of Origin is required by the custom authority of the importing country for the purpose of imposing import duty. It is usually issued by the Chamber of Commerce and contains information like seal of the chamber, details of the good to be transported and so on. The certificate must provide that the information required by the credit and be consistent with all other document, It would normally include :
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The name of the company and address as exporter. The name of the importer. Package numbers, shipping marks and description of goods to agree with that on other documents.
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Any weight or measurements must agree with those shown on other documents. It should be signed and stamped by the Chamber of Commerce.
D. Combined Transport Document Combined Transport Document is also known as Multimodal Transport Document, and is used when goods are transported using more than one mode of transportation. In the case of multimodal transport document, the contract of carriage is meant for a combined transport from the place of shipping to the place of delivery. It also evidence receipt of goods but it does not evidence on board shipment, if it complies with ICC 500, Art. 26(a). The liability of the combined transport operator starts from the place of shipment and ends at the place of delivery. This documents need to be signed with appropriate number of originals in the full set and proper evidence which indicates that transport charges have been paid or will be paid at destination port. Multimodal transport document would normally show :
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That the consignee and notify parties are as the credit. The place goods are received, or taken in charges, and place of final destination.
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Whether freight is prepaid or to be collected. The date of dispatch or taking in charge, and the "On Board" notation, if any must be dated and signed.
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Total number of originals. Signature of the carrier, multimodal transport operator or their agents.
E. Commercial Invoice Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or import invoice, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation.The invoice must :
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Be issued by the beneficiary named in the credit (the seller). Be address to the applicant of the credit (the buyer). Be signed by the beneficiary (if required). Include the description of the goods exactly as detailed in the credit. Be issued in the stated number of originals (which must be marked "Original) and copies. Include the price and unit prices if appropriate. State the price amount payable which must not exceed that stated in the credit include the shipping terms.
F. Bill of Exchange A Bill of Exchange is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where large amount of money involved. Following persons are involved in a bill of exchange: 1. Drawer: The person who writes or prepares the bill. 2. Drawee: The person who pays the bill.
3. Payee: The person to whom the payment is to be made. 4. Holder of the Bill: The person who is in possession of the bill. On the basis of the due date there are two types of bill of exchange:
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Bill of Exchange after Date: In this case the due date is counted from the date of drawing and is also called bill after date.
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Bill of Exchange after Sight: In this case the due date is counted from the date of acceptance of the bill and is also called bill of exchange after sight.
G. Insurance Certificate Also known as Insurance Policy, it certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered. It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents. Also, if submitted under a LC, the insured amount must be in the same currency as the credit and usually for the bill amount plus 10 per cent. The requirements for completion of an insurance policy are as follow:
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The name of the party in the favor which the document has been issued. The name of the vessel or flight details. The place from where insurance is to commerce typically the sellers warehouse or the port of loading and the place where insurance cases usually the buyer's warehouse or the port of destination.
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Insurance value that specified in the credit. Marks and numbers to agree with those on other documents. The description of the goods, which must be consistent with that in the credit and on the invoice.
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The name and address of the claims settling agent together with the place where claims are payable.
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Countersigned where necessary.
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Date of issue to be no later than the date of transport documents unless cover is shown to be effective prior to that date.
H. Packing List Also known as packing specification, it contains details about the packing materials used in the shipping of goods. It also includes details like measurement and weight of goods. The packing list must:
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Have a description of the goods ("A") consistent with the other documents. Have details of shipping marks ("B") and numbers consistent with other documents
I. Inspection Certificate Certificate of Inspection is a document prepared on the request of seller when he wants the consignment to be checked by a third party at the port of shipment before the goods are sealed for final transportation. In this process seller submit a valid Inspection Certificate along with the other trade documents like invoice, packing list, shipping bill, bill of lading etc to the bank for negotiation. On demand, inspection can be done by various world renowned inspection agencies on nominal charges.
CHAPTER 5 - LETTER OF CREDIT
5.1. INTRODUCTION:
This is one of the most popular and more secured of method of payment in recent times as compared to other methods of payment. A L/C refers to the documents representing the goods and not the goods themselves. Banks are not in the business of examining the goods on behalf of the customers. Typical documents, which are required includes commercial invoice, transport document such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in documents and not goods.
5.2. DEFINITION: A Letter of Credit can be defined as “an undertaking by importer’s bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C”.
5.3. PARTIES INVOLVED IN LETTER OF CREDIT: ? ? ?
Applicant:
The buyer or importer of goods Importer?s bank, who issues the L/C
Issuing bank:
Beneficiary:
The party to whom the L/C is addressed. The Seller or supplier of goods.
Advising bank:
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Issuing bank?s branch or correspondent bank in the exporter?s country to whom the L/C is send for Onward transmission to the beneficiary.
Confirming bank:
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The bank in beneficiary?s country, which Guarantees the credit on the request of the issuing Bank.
Negotiating bank:
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The bank to which the beneficiary presents his Documents for payment under L/C.
Reimbursing Bank:
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Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. It is normally the bank with which issuing bank has an account from which payment has to be made.
Second Beneficiary:
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Second Beneficiary is the person who represents the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original
beneficiary is transferable. The rights of the transferee are subject to terms of transfer.
5.4. Types of Letter of Credit 1. Revocable Letter of Credit L/c 2. Irrevocable Letter of Credit L/c 3. Confirmed Letter of Credit L/c 4. Sight Credit and Usance Credit L/c 5. Back to Back Letter of Credit L/c 6. Transferable Letter of Credit L/c 5.5. Export Operations Under L/c Export Letter of Credit is issued in for a trader for his native country for the purchase of goods and services. Such letters of credit may be received for following purpose: 1. For physical export of goods and services from India to a Foreign Country. 2. For execution of projects outside India by Indian exporters by supply of goods and services from Indian or partly from India and partly from outside India. 3. Towards deemed exports where there is no physical movements of goods from outside India But the supplies are being made to a project financed in foreign exchange by multilateral agencies, organization or project being executed in India with the aid of external agencies. Banks in India associated themselves with the export letters of credit in various capacities such as advising bank, confirming bank, transferring bank and reimbursing bank. In every cases the bank will be rendering services not only to the Issuing Bank as its agent correspondent bank but also to the exporter in advising and financing his export activity. 1. Advising an Export L/c The basic responsibility of an advising bank is to advise the credit received from its overseas branch after checking the apparent genuineness of the credit recognized by the issuing bank. It is also necessary for the advising bank to go through the letter of credit, try to understand the underlying transaction, terms and conditions of the credit and advice the beneficiary in the matter.The main features of advising export LCs are
1. There are no credit risks as the bank receives a onetime commission for the advising service. 2. There are no capital adequacy needs for the advising function. 2. Advising of Amendments to L/Cs Amendment of LCs is done for various reasons and it is necessary to fallow all the necessary the procedures outlined for advising. In the process of advising the amendments the Issuing bank serializes the amendment number and also ensures that no previous amendment is missing from the list. Only on receipt of satisfactory information/ clarification the amendment may be advised. 3. Confirmation of Export Letters of Credit It constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank, which undertakes the sight payment, deferred payment, acceptance or negotiation. Banks in India have the facility of covering the credit confirmation risks with ECGC under their “Transfer Guarantee” scheme and include both the commercial and political risk involved. 4. Discounting/Negotiation of Export LCs When the exporter requires funds before due date then he can discount or negotiate the LCs with the negotiating bank. Once the issuing bank nominates the negotiating bank, it can take the credit risk on the issuing bank or confirming bank. However, in such a situation, the negotiating bank bears the risk associated with the document that sometimes arises when the issuing bank discover discrepancies in the documents and refuses to honor its commitment on the due date. 5. Reimbursement of Export LCs Sometimes reimbursing bank, on the recommendation of issuing bank allows the negotiating bank to collect the money from the reimbursing bank once the goods have been shipped. It is quite similar to a cheque facility provided by a bank.
In return, the reimbursement bank earns a commission per transaction and enjoys float income without getting involve in the checking the transaction documents. Reimbursement bank play an important role in payment on the due date (for usance LCs) or the days on which the negotiating bank demands the same (for sight LCs)
CHAPTER 6 - BANK GUARANTEE
6.1. INTRODUCTION A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.
Any one can apply for a bank guarantee, if his or her company has obligations towards a third party for which funds need to be blocked in order to guarantee that his or her company fulfill its obligations (for example carrying out certain works, payment of a debt, etc.).
In case of any changes or cancellation during the transaction process, a bank guarantee remains valid until the customer dully releases the bank from its liability.
In the situations, where a customer fails to pay the money, the bank must pay the amount within three working days. This payment can also be refused by the bank, if the claim is found to be unlawful. 6.2. BENEFITS OF BANK GUARANTEES
a) For Governments 1. Increases the rate of private financing for key sectors such as infrastructure. 2. Provides access to capital markets as well as commercial banks. 3. Reduces cost of private financing to affordable levels. 4. Facilitates privatizations and public private partnerships. 5. Reduces government risk exposure by passing commercial risk to the private sector.
b) For Private Sector 1. Reduces risk of private transactions in emerging countries. 2. Mitigates risks that the private sector does not control. 3. Opens new markets. 4. Improves project sustainability. 6.3. Types of Bank Guarantees
1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or indirect.
Direct Bank Guarantee It is issued by the applicant's bank (issuing bank) directly to the guarantee's beneficiary without concerning a correspondent bank. This type of guarantee is less expensive and is also subject to the law of the country in which the guarantee is issued unless otherwise it is mentioned in the guarantee documents.
Indirect Bank Guarantee With an indirect guarantee, a second bank is involved, which is basically a representative of the issuing bank in the country to which beneficiary belongs. This involvement of a second bank is done on the demand of the beneficiary. This type of bank guarantee is more time consuming and expensive too. 2. Confirmed Guarantee It is cross between direct and indirect types of bank guarantee. This type of bank guarantee is issued directly by a bank after which it is send to a foreign bank for confirmations. The foreign banks confirm the original documents and thereby assume the responsibility. 3. Tender Bond This is also called bid bonds and is normally issued in support of a tender in international trade. It provides the beneficiary with a financial remedy, if the applicant fails to fulfill any of the tender conditions.
4. Performance Bonds This is one of the most common types of bank guarantee which is used to secure the completion of the contractual responsibilities of delivery of goods and act as security of penalty payment by the Supplier in case of nondelivery of goods.
5. Advance Payment Guarantees This mode of guarantee is used where the applicant calls for the provision of a sum of money at an early stage of the contract and can recover the amount paid in advance, or a part thereof, if the applicant fails to fulfill the agreement.
6. Payment Guarantees This type of bank guarantee is used to secure the responsibilities to pay goods and services. If the beneficiary has fulfilled his contractual obligations after delivering the goods or services but the debtor fails to make the payment, then after written declaration the beneficiary can easily obtain his money from the guaranteeing bank.
7. Loan Repayment Guarantees This type of guarantee is given by a bank to the creditor to pay the amount of loan body and interests in case of no fulfillment by the borrower.
8. B/L Letter of Indemnity This is also called a letter of indemnity and is a type of guarantee from the bank making sure that any kind of loss of goods will not be suffered by the carrier.
9. Rental Guarantee This type of bank guarantee is given under a rental contract. Rental guarantee is either limited to rental payments only or includes all payments due under the rental contract including cost of repair on termination of the rental contract.
10. Credit Card Guarantee Credit card guarantee is issued by the credit card companies to its customer as a guarantee that the merchant will be paid on transactions regardless of whether the consumer pays their credit. 6.4. How to Apply for Bank Guarantee Procedure for Bank Guarantees is very simple and is not governed by any particular legal regulations. However, to obtained the bank guarantee one need to have a current account in the bank. Guarantees can be issued by a bank through its authorized dealers as per notifications mentioned in the FEMA 8/2000 date 3rd May 2000. Only in case of revocation of guarantee involving US $ 5000/ or more to be reported to Reserve Bank of India along with the details of the claim received. 6.5. Bank Guarantees vs. Letters of Credit
A bank guarantee is frequently confused with letter of credit (LC), which is similar in many ways but not the same thing. The basic difference between the two is that of the parties involved. In a bank guarantee, three parties are involved; the bank, the person to whom the guarantee is given and the person on whose behalf the bank is giving guarantee. In case of a letter of credit, there are normally four parties involved; issuing bank, advising bank, the applicant (importer) and the beneficiary (exporter).
Also, as a bank guarantee only becomes active when the customer fails to pay the necessary amount where as in case of letters of credit, the issuing bank does not wait for the buyer to default, and for the seller to invoke the undertaking.
CHAPTER 7 - TRANSPORT RISK 7.1. INTRODUCTION
It is quite important to evaluate the transportation risk in international trade for better financial stability of export business. About 80% of the world major transportation of goods is carried out by sea, which also gives rise to a number of risk factors associated with transportation of goods. The major risk factors related to shipping are cargo, vessels, people and financing. So it becomes necessary for the government to address all of these risks with broad based security policy responses, since simply responding to threats in isolation to one another can be both ineffective and costly.
While handling transportation in international trade following precaution should be taken into consideration.
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In case of transportation by ship, and the product should be appropriate for containerization. It is worth promoting standard order values equivalent to quantities loaded into standard size containers.
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Work must be carried out in compliance with the international code concerning the transport of dangerous goods.
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For better communication purpose people involve in the handling of goods should be equipped with phone, fax, email, internet and radio.
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About the instructions given to the transport company on freight forwarder. Necessary information about the cargo insurance. Each time goods are handled; there risk of damage. Plan for this when packing for export, and deciding on choice of transport and route.
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The expected sailing dates for marine transport should be built into the production programme, especially where payments is to be made by Letter of Credit when documents will needs to be presented within a specified time frame.
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Choice of transport has Balance Sheet implications. The exporter is likely to received payments for goods supplied while they are in transit.
7.2. TRANSPORT INSURANCE Export and import in international trade, requires transportation of goods over a long distance. No matter whichever transport has been used in international trade, necessary insurance is must for ever good. Cargo insurance also known as marine cargo insurance is a type of insurance against physical damage or loss of goods during transportation. Cargo insurance is effective in all the three cases whether the goods have been transported via sea, land or air. Insurance policy is not applicable if the goods have been found to be packaged or transported by any wrong means or methods. So, it is advisable to use a broker for placing cargo risks. 7.3. SCOPE OF COVERAGE The following can be covered for the risk of loss or damage:
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Cargo import, export cross voyage dispatched by sea, river, road, rail post, personal courier, and including associated storage risks.
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Good in transit (inland). Freight service liability. Associated stock. However there is still a number of general exclusion such loss by delay, war risk, improper
packaging and insolvency of carrier. Converse for some of these may be negotiated with the insurance company. The Institute War Clauses may also be added.
Regular exporters may negotiate open cover. It is an umbrella marine insurance policy that is activated when eligible shipments are made. Individual insurance certificates are issued after the shipment is made. Some letters of Credit Will require an individual insurance policy to be issued for the shipment, While others accept an insurance certificate.
7.4. SELLER'S BUYER'S CONTINGENT INTEREST INSURANCE An exporter selling on, for example FOB (INCOTERMS 2000) delivery terms would according to the contract and to INCOTERMS, have not responsibility for insurance once the goods have passed the ship's rail. However, for peace of mind, he may wish to purchase extra cover, which will cover him for loss or will make up cover where the other policy is too restrictive. This is known as Seller's Interest Insurance .Similarly, cover is available to importers/buyers. Seller's Interest and Buyer's Interest covers usually extended cover to apply if the title in the goods reverts to the insured party until the goods are recovered resold or returned. 7.5. Loss of Profits/ Consequential Loss Insurance Importers buying goods for a particular event may be interested in consequential loss cover in case the goods are late (for a reason that id insured) and (expensive) replacements have to be found to replace them. In such cases, the insurer will pay a claim and receive may proceeds from the eventual sale of the delayed goods.
CHAPTER 8 - CONTRACT RISK AND CREDIT RISK 8.1.INTRODUCTION Contract risk and credit risk are the part of international trade finance and are quite different from each other.A contract risk is related to the Latin law of "Caveat Emptor", which means "Buyer Beware" and refers directly to the goods being purchase under contract, whether it's a car, house land or whatever. On the other hand a credit risk may be defined as the risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss. Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade financing, foreign exchange, swaps, bonds, equities, and interbank transactions. 8.2.CREDIT INSURANCE Credit Insurance is special type of loan which pays back a fraction or whole of the amount to the borrower in case of death, disability, or unemployment. It protects open account sales against nonpayment resulting from a customer's legal insolvency or default. It is usually required by manufacturers and wholesalers selling products on credit terms to domestic and/or foreign customers. Benefits of Credit Insurance: 1. Expand sales to existing customers without increased risk. 2 Offer more competitive credit terms to new customers in new markets. 3. Help protect against potential restatement of earnings. 4. Optimize bank financing by insuring trade receivables. 5. Supplement credit risk management. 8.3.PAYMENT RISK This type of risk arises when a customer charges in an organization or if he does not pay for operational reasons. Payment risk can only be recovered by a well written contract. Recovery cannot be made for payment risk using credit insurance.
8.4.BAD DEBT PROTECTION A bad debt can effect profitability. So, it is always good to keep options ready for bad debt like Confirmation of LC, debt purchase (factoring without recourse of forfeiting) or credit insurance. 8.5. CONFIRMATION OF LC In an international trade, the confirmation of letter of credit is issued to an exporter or seller. This confirmation letter assures payment to an exporter or seller, even if the issuing bank defaults on its payment once the beneficiary meets his terms and conditions. 8.6.FACTORING AND FORFAITING Where debt purchase is without recourse, the bank will already have advanced the funds in the debt purchase transaction. The bank takes the risk of nonpayment. 8.7.CREDIT LIMIT Companies with credit insurance need to have proper credit limits according to the terms and conditions. This includes fulfilling the administrative requirement, including notification of overdoes and also terms set out in the credit limit decision. Payment of the claim can only be done after a fix period, which is about 6 months for slow pay insurance. In case of economic and political events are six or more than six months, depending on the exporter markets. Credit insurance covers the risk of nonpayment of trade debts. Each policy is different, some covering only insolvency risk on goods delivered, and others covering a wide range of risk such as:
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Local sales, export sales, or both. Protracted default. Political risk, including contract frustration, war transfer. Pre-delivery risks. Cover for sales from stock. Non honoring of letters of credits. Bond unfair calling risks.
Like all other insurance, credit insurance covers the risk of fortuitous loss. Key features of credit insurance are:
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The company is expected to assess that its client exists and is credit worthy. This might be by using a credit limit service provided by the insurer. A Credit limit Will to pay attention to the company's credit management procedures, and require that agreed procedures manuals be followed at all times.
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While the credit insurer underwrites the risk of nonpayment and contract frustration the nature of the risk is affected by how it is managed. The credit insurer is likely to pay attention to the company's credit managements procedures, and require that agreed procedures manuals be followed at all times.
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The credit insurer will expect the sales contract to be written effectively and invoices to be clear.
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The company will be required to report any overdue or other problems in a timely fashion.
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The credit insurer may have other exposure on the same buyers or in the same markets. A company will therefore benefits if other policyholder report that a particular potential customer is in financial difficulties.
8.8. BENEFITS OF CREDIT COVER
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Protection for the debtor asset or the balance sheet. Possible access to information on credit rating of foreign buyer. Access to trade finance Protection of profit margin Advice on customers and levels of credit. Disciplined credit management. Assistance and /or advice when debts are overdue or there is a risk of loss. Provides confidence to suppliers, lenders and investors. Good corporate governance
CHAPTER 9 - CURRENCY RISK
9.1. INTRODUCTION Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency against another. This is a permanent risk that will remain as long as currencies remain the medium of exchange for commercial transactions. Market fluctuations of relative currency values will continue to attract the attention of the exporter, the manufacturer, the investor, the banker, the speculator, and the policy maker alike.
While doing business in foreign currency, a contract is signed and the company quotes a price for the goods using a reasonable exchange rate. However, economic events may upset even the best laid plans. Therefore, the company would ideally wish to have a strategy for dealing with exchange rate risk.
9.2. CURRENCY HEDGING Currency hedging is technique used to avoid the risks associated with the changing value of currency while doing transactions in international trade. It is possible to take steps to hedge foreign currency risk. This may be done through one of the following options:
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Billing foreign deals in Indian Rupees: This insulates the Indian exporter from currency fluctuations. However, this may not be acceptable to the foreign buyer. Most of international trade transactions take place in one of the major foreign currencies USD, Euro, Pounds Sterling, and Yen.
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Forward contract. You agree to sell a fixed amount of foreign exchange (to convert this into your currency) at a future date, allowing for the risk that the buyer?s payments are late.
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Options: You buy the right to have currency at an agreed rate within an agreed period. For example, if you expect to receive $35,000 in 3 months, time you could buy an option to convert $35,000 into your currency in 3 months. Options can be more expensive than a forward contract, but you don't need to compulsorily use your option.
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Foreign currency bank account and foreign currency borrowing : These may be suitable where you have cost in the foreign currency or in a currency whose exchange rate is related to that currency.
9.3. FOREX RATES VS. INTEREST RATES Forex rates or exchange rate is the price of a country's currency in terms of another country's currency. It specifies how much one currency is worth in terms of the other. For example a forex rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD 1. Choice of currency and its interest rate is a major concern in the international trade. Investors are easily attracted by the higher interest rates which in turns also effects the economy of a nation and its currency value. For an example, if interest rate on INR were substantially higher than the interest rate on USD, more USD would be converted into INR and pumped into the Indian economic system. This would result in appreciation of the INR, resulting in lower conversion rates of USD against INR, at the time of reconversion into USD. 9.4. Calculating the Forward Rates A forward rate is calculated by calculating the interest rate difference between the two currencies involved in the transactions. For example, if a client is buying a 30 days US dollar then, the difference between the spot rate and the forward rate will be calculated as follow: The US dollars are purchased on the spot market at an appropriate rate, what causes the forward contract rate to be higher or lower is the difference in the interest rates between India and the US. The interest rate earned on US dollars is less than the interest rate earned on Indian Rupee (INR). Therefore, when the forward rates are calculated the cost of this interest rate differential is added to the transaction through increasing the rate. USD 100,000 X 1.5200 = INR 152,000 INR 152,000 X 1% divided by 12 months = INR 126.67 INR 152,000 + INR 126.67 = INR 152,126.67 INR 152,126.67/USD 100,000 = 1.5213
CHAPTER 10 - COUNTRY RISK
10.1. INTRODUCTION Country risk includes a wide range of risks, associated with lending or depositing funds, or doing other financial transaction in a particular country. It includes economic risk, political risk, currency blockage, expropriation, and inadequate access to hard currencies. Country risk can adversely affect operating profits as well as the value of assets. With more investors investing internationally, both directly and indirectly, the political, and therefore economic, stability and viability of a country's economy need to be considered. 10.2. MEASURING COUNTRY RISK Given below are the lists of some agencies that provide services in evaluating the country risk.
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Bank of America World Information Services Business Environment Risk Intelligence (BERI) S.A. Control Risks Information Services (CRIS) Economist Intelligence Unit (EIU) Euro money Institutional Investor Standard and Poor's Rating Group Political Risk Services: International Country Risk Guide (ICRG) Political Risk Services: CoplinO'Leary Rating System Moody's Investor Services
10.3. POLITICAL RISK The risk of loss due to political reasons arises in a particular country due to changes in the country's political structure or policies, such as tax laws, tariffs, expropriation of assets, or restriction in repatriation of profits. Political risk is distinct from other commercial risks, and tends to be difficult to evaluate. Some examples of political risks are:
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Contract frustration by another country, government resulting in your inability to perform the contract, following which the buyer may not make payment and or / on demand bonds may be called. License cancellation or non renewal or imposition of an embargo. Sanctions imposed against a particular country or company. Imposition of exchange controls causing payments to be blocked. General moratorium decreed by an overseas government preventing payment Shortage of foreign exchange/transfer delay. War involving either importing or exporting country. Forced abandonment
The following are also considered as political risks in relation to exporting :
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Confiscation of assets by a foreign government. Unfair calling of bonds.
Insurance companies provide political risk covers. These may be purchased:
? ? ? ?
On their own, covering only political risk on the sale to a particular country. For a portfolio of political risks. For the political risks in relation to the sale to another company in your group (where there is a common shareholding and therefore insolvency cover is not available). As part of a credit insurance policy.
10.4. PREDELIVERY RISKS A company can suffer financial loss, if export contract is cancelled due to commercial or political reasons, even before the goods and services are dispatched or delivered. In such a situation, the exposure to loss will depends on:
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The nature of the contract. If the company can salvage any products and resell them quickly, with a small amount of re working Any stage payments If servicing staff have left the country. The extent of the commitments to suppliers. The horizon of pre delivery risk The customer and country risks
10.5. PRE DELIVERY COVER Credit insurance can be extended to cover pre-delivery risk, in particular, the risk of customer insolvency pre-delivery or political frustration pre-delivery. Sometimes pre-delivery cover can be extended included the frustration of a contract caused by nonpayment of a pre delivery milestone, and or nonpayment of a termination account, and or bond call. Pre-delivery risks are often complicated and the wording of the cover is worth careful examination. It is to be noted that in the event that it was clearly unwise to dispatch goods, credit risk (payment risk) cover would not automatically apply if the company nonetheless went ahead and dispatched head them.
CHAPTER 11 - FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) FOR EXPORT IMPORT FOREIGN EXCHANGE.
11.1. INTRODUCTION Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organisation (WTO). Foreign Exchange Management Act was earlier known as FERA (Foreign Exchange Regulation Act), which has been found to be unsuccessful with the proliberalisation policies of the Government of India. FEMA is applicable in all over India and even branches, offices and agencies located outside India, if it belongs to a person who is a resident of India. 11.2. SOME HIGHLIGHTS OF FEMA
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It prohibits foreign exchange dealing undertaken other than an authorized person; It also makes it clear that if any person residing in India received any Forex payment (without there being a corresponding inward remittance from abroad) the concerned person shall be deemed to have received they payment from a nonauthorised person.
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There are 7 types of current account transactions, which are totally prohibited, and therefore no transaction can be undertaken relating to them. These include transaction relating to lotteries, football pools, banned magazines and a few others.
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FEMA and the related rules give full freedom to Resident of India (ROI) to hold or own or transfer any foreign security or immovable property situated outside India.
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Similar freedom is also given to a resident who inherits such security or immovable property from an ROI.
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An ROI is permitted to hold shares, securities and properties acquired by him while he was a Resident or inherited such properties from a Resident.
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The exchange drawn can also be used for purpose other than for which it is drawn provided drawl of exchange is otherwise permitted for such purpose.
11.3. FEDAI GUIDELINES FOR FOREIGN EXCHANGE Established in 1958, FEDAI (Foreign Exchange Dealers' Association of India) is a group of banks that deals in foreign exchange in India as a self regulatory body under the Section 25 of the Indian Company Act (1956). The role and responsibilities of FEDAI are as follows:
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Formulations of FEDAI guidelines and FEDAI rules for Forex business. Training of bank personnel in the areas of Foreign Exchange Business. Accreditation of Forex Brokers. Advising/Assisting member banks in settling issues/matters in their dealings. Represent member banks on Government/Reserve Bank of India and other bodies. Rules of FEDAI also include announcement of daily and periodical rates to its member banks.
FEDAI guidelines play an important role in the functioning of the markets and work in close coordination with Reserve Bank of India (RBI), other organizations like Fixed Income Money Market and Derivatives Association (FIMMDA), the Forex Association of India and various other market participants
CHAPTER 12 - MAJOR FINANCIAL AND OTHER INSTITUTIONS
12.1. EXIM BANK ? ? ? ? ? Set up by an Act of Parliament in September 1981. Commenced operations in March 1982. Wholly owned by the Government of India. Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting foreign trade in India. Exim is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports.
12.1.1. INTRODUCTION
The Export-Import bank of India is the apex institution for project finance, which provides direct finance and coordinates the working of the institution, which is engaged in financing export or import of goods and services. It has taken over the operations of international finance wing of the industrial development bank of India (IDBI). The EXIM bank of India came into existence on 1st January 1982, and started functioning from 1st march 1982. It has it?s headquarter in Mumbai and its branches and offices in important cities in India and abroad.The EXIM bank was established for the purpose of financing medium and long term loan to the exporters thereby promoting foreign trade of India.
12.1.2. MAIN OBJECTIVES ? ? To provide financial assistance (medium and long term) to exporters and importers. To function as the principal financial institution for coordinating the working of institutions engaged in providing export finance. ? ? To promote Foreign Trade of India. To deal with all matters that may be considered to be incidental or conducive to the attainment of above objectives.
12.1.3. FUNCTIONS
The assistance provided by EXIM Bank to the exporters can be grouped under two heads: A. Fund Based Assistance. B. Non-Fund based Assistance.
ASSISTANCE OFFERED BY EXIM BANK
FUND BASED ASSISTANCE
NON-FUND BASED ASSISTANCE
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INDIAN PARTIES. INDIAN BANKS. OVERSEAS BUYERS. OVERSEAS BANKS.
? FINANCIAL GUARANTEES. ? ADVISORY AND OTHER SERVICES.
1. FUND BASED ASSISTANCE: ? ? ? ?
Assistance to Indian Exporters: Assistance to Indian Commercial Banks: Assistance to Overseas Buyers: Assistance to Overseas Banks:
2. NON-FUND BASED ASSISTANCE ? ?
Guarantees and Bonds: Advisory and Other Services: (a) It advises Indian companies, in Executing Contracts Abroad, and on sources of overseas financing. (b) It advises Indian exporters on global exchange control practices. (c) The EXIM Bank offers Financial and Advisory Services to Indian construction projects abroad.
12.1.4. EXPORT FINANCING PROGRAMMES PROVIDED BY EXIM BANK
EXIM INDIA offers a range of financing programs that match the menu of Exim Banks of the industrialized countries. However, the Bank is atypical in the universe of Exim Banks in that it has over the years evolved, so as to anticipate and meet the special needs of a developing country. The Bank provides competitive finance at various stages of the export cycle covering: The Bank is involved in promotion of two-way technology transfer through the outward flow of investment in Indian joint ventures overseas and foreign direct investment flow into India. EXIM INDIA is also a Partner Institution with European Union and operates European Community Investment Partners' Program (ECIP) for facilitating promotion of joint ventures in India through technical and financial collaboration with medium sized firms of the European Union. The Export- Import Bank of India (Exim Bank) provides financial assistance to promote Indian exports through direct financial assistance, overseas investment finance, term finance for export production and export development, pre-shipping credit, buyer's credit, lines of credit, relending facility, export bills rediscounting, refinance to commercial banks. They are listed as below: 1. LOANS TO INDIAN ENTITIES ? Deferred payment exports: Term finance is provided to Indian exporters of eligible goods and services, which enables them to offer deferred credit to overseas buyers. Deferred credit can also cover Indian consultancy, technology and other services. Commercial banks participate in this program directly or under risk syndication arrangements. ? Pre-shipment credit: finance is available from Exim Bank for companies executing export contracts involving cycle time exceeding six months. The facility also enables provision of rupee mobilization expenses for construction/turnkey project exporters. ? Term loans for export production: Exim Bank provides term loans/deferred payment guarantees to 100% export-oriented units, units in free trade zones and computer software exporters. In collaboration with International Finance Corporation. Washington, Exim Bank provides loans to enable small and medium enterprises upgrade export production capability.
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Overseas Investment finance: Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture.
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Finance for export marketing: This program, which is a component of a World Bank loan, helps exporters implement their export market development plans.
2. LOANS TO COMMERCIAL BANKS IN INDIA
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Export Bills Rediscounting: Commercial Banks in India who are authorized to deal in foreign exchange can rediscount their short term export bills with Exim Banks, for an unexpired usance period of not more than 90 days.
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Refinance of Export Credit: Authorized dealers in foreign exchange can obtain from Exim Bank 100% refinance of deferred payment loans extended for export of eligible Indian goods.
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Guaranteeing of Obligations: Exim Bank participates with commercial banks in India in the issue of guarantees required by Indian companies for the export contracts and for execution of overseas construction and turnkey projects.
3. LOANS TO OVERSEAS ENTITIES ? Overseas Buyer's Credit: Credit is directly offered to foreign entities for import of eligible goods and related services, on deferred payment. ? Lines of Credit: Besides foreign governments, finance is available to foreign financial institutions and government agencies to on-lend in the respective country for import of goods and services from India. ? Relending Facility to Banks Overseas: Relending facility is extended to banks overseas to enable them to provide term finance to their client?s worldwide for imports from India.
12.2. RESERVE BANK OF INDIA
INTRODUCTION: The RBI with its head quarters in Mumbai and several regional offices is the central banks of our country to authorize extend and regulate export credit and transaction including foreign exchange affairs. RBI does not directly provide export finance to the exporters, but it adopts policies and initiates measures to encourage commercial banks and other financial institutions to provide liberal export finance. The Two Departments of RBI are: ? Industrial and credit department and ? Exchange control department These Departments administers various policies related to export finance/credit and foreign exchange.
12.2.1.SCHEMES OFFERED BY RBI TO ENCOURAGE COMMERCIAL BANKS TO PROVIDE EXPORT CREDIT TO THE EXPORTERS: ? EXPORT BILLS CREDIT SCHEME, 1963: Under this scheme, RBI used to grant advance to scheduled banks against export bills maturing within 180 days. Now this scheme is not in operation. ? PRE-SHIPMENT CREDIT SCHEME, 1969: Under this scheme, RBI provides re-finance facilities to scheduled banks that provide pre-shipment loans to bonafide customers. ? EXPORT CREDIT INTEREST SUBSIDIES SCHEME, 1968: Under this scheme, RBI provides interest subsidies of minimum 1.5 % p.a. to banks, which provide export finance to exporters, provided that the banks charge interest to exporter within the ceiling prescribed by RBI. The subsidies are given both against packing credit and post-shipment. ? DUTY DRAW BACK CREDIT SCHEME, 1976: Under this scheme, the exporters can avail an interest free advances from the bank up to 90 days against shipping bill provisionally certified by the customs authority towards a refund of customs duty. The advances made by commercial banks under
this scheme are eligible for re-finance, free of interest from RBI for maximum period of 90 days form the date of advance.
12.2.2.OTHER APPROVES EXPORTERS WITH RBI
OR SANCTIONS
OF APPLICATION
MADE
BY THE
? Extension of time limit for realization of export proceeds. ? Deduction in invoice price of exports goods. ? Fixation of commission to overseas consignee or agents. ? Provision of blanket permit where a lump sum exchange is released for a number of purposes. ? Remittance abroad in respect of advertising, legal expenses etc. ? Any other matters relating to foreign trade that require clearance from the exchange Control department of RBI. ? Clearance in respect of joint venture abroad.
CHAPTER 13- CONCLUSION
? Export Finance is a very important branch to study & understand the overall gamut of the international finance market. ? Availability of favorable Export finance schemes directly impacts the local trade, encourages exporters, enlarges markets abroad, improves quality of domestic goods and overall helps the nation boost its exchange earnings. ? ECGC and EXIM Bank take a lot of efforts for Export promotion. The strategies of these 2 agencies in India should be flexible & their finance schemes should be constantly synchronized with the changing scene of world trade. This alone can help Indian exporters to stand competition in world markets effectively and more gain-fully. ? Finally, a very essential question needs to be answered by the International Trade gurus with reference to “Relevance of EXIM Policy in the current times”. Exim policies had emerged when the state decided to limit imports and encourage exports in order to maintain currency reserves. However, such ideas backfired: consumers were hurt and producers turned lazy.
BIBLIOGRAPHY
Books Referred: ? Export –What Where & How ? Export Marketing ? Export Management
by Paras Ram
by Michael Vaz
by T. A .S. Balagopal
Newspapers and Magazines Ref erred: ? Business India ? Economic Times
Internet Websites: ? ? ?
www.google.com
www.economictimes.com
www.rediff.com
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