Description
It explains the trade finance in detail.International trade is the mainstay of present commercial environment. International trade is a major source of economic revenue for any nation that is considered a world power. The total value of international trade is estimated at USD 12 trillion. Without international trade, nations would be limited to the goods and services produced within their own borders.The report covers import finance and export finance in detail.
TRADE FINANCE
INDEX
1 Introduction 3 2Import Finance Letter Of Credit 4 Advance Payment 6 Open Account Trading Bills of Collection Buyers Credit 11 8 9
3 Export Finance Pre Shipment Credit 11 Post Shipment Credit LC Advising Bank Guarantees Factoring 17 12 14 15
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Forfeiting 19
4 Incoterms
20
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Introduction:
International trade is the mainstay of present commercial environment. International trade is a major source of economic revenue for any nation that is considered a world power. The total value of international trade is estimated at USD 12 trillion. Without international trade, nations would be limited to the goods and services produced within their own borders.
When goods need to be moved from one country to another, the following main considerations apply:
• • •
The physical movement of goods from one country to another Documents covering the transport of such goods. The goods must be insured against any damage they may suffer during transit. Bankers undertaking for transfer of money from buyer to the seller Regulations within countries e.g. Licensing, Exchange Control. Legal requirements within countries
• • •
The main objective of trade services is to facilitate a transaction or series of transactions. The exporter may require finance in order to produce the goods that have been ordered or in order to pay the costs of transporting them. Also since an exporter usually wants to get paid as quickly as possible and an importer will want to pay as late as possible – preferably after they have sold the goods on, trade finance is often required to bridge these two disparate objectives
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Import Finance:
1)Letter of credit:
A Letter of Credit is an arrangement under which the bank that issues the Credit undertakes to the beneficiary of the Credit (the exporter) that, provided the exporter presents the documents stipulated in the Credit and complies with all the terms and conditions of the Credit, the payment or any other obligation of the bank to the exporter will be fulfilled. By using a Letter of Credit, compared with other methods of Payment, both the exporter and the buyer gain the additional independent assurance of the bank that issues the Credit (the Issuing Bank).
Parties to the Letter of credit
Applicant- Applicant is the buyer of goods who approaches the issuing bank to open an LC in favor of the beneficiary and hence known as the Applicant. Beneficiary- Beneficiary is the seller of goods. The LC is opened in the seller’s favor and hence he is known as the Beneficiary. Issuing Bank- Issuing Bank is the buyer’s bank which issues the LC on the request of the buyer. Advising Bank- Advising Bank is generally the Seller’s Bank. The issuing bank sends the LC to this bank for further forwarding it to the beneficiary. Negotiating Bank- The bank that adds value to the under LC documents by scrutinizing documents and forwarding the same to the LC issuing bank Reimbursing Bank- The bank with which the issuing bank has an account and provides reimbursement to the exporters bank when furnished with an appropriate reimbursement claim
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Process Flow:
Advantages:
•
•
Both, the exporter and his buyer have independent assurance that goods and money will be exchanged according to the terms of the sales contract. Assured payment to the customer’s suppliers. Importer’s access to market widens. Buyer pays only against LC compliant documents. Bank’s expertise in scrutinizing documents
• •
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Disadvantages:
• • The exporter is still at some risk of non-payment. If the exporter is unable to meet the terms and conditions of the Credit, there is no guarantee of payment, even if the goods have already been shipped. • If the Issuing Bank finds discrepancies not previously found by either the exporter or the Paying Bank, there is no guarantee of payment.
2) Advance payment :
This trade payment method is prevalent for transactions where the seller has a much higher bargaining power than the buyer. Such payment method may also be employed where the buyer may not have the ability to open letters of credit through their bank/s.
The exporter may request advance payment because (for example) he is unwilling to send unpaid goods to the buyer’s country because of some risk over payment. The buyer may agree to pay in advance because he wants to induce the exporter into an established relationship. If advance payment is agreed, the buyer sends the payment before the exporter consigns the goods for delivery. The exporter sends off any documents that the buyer will need (e.g. original bills of lading, export licenses) after he hands the goods to the carrier or carrier’s agent.
Process Flow:
• The importer sends money first to the exporter. • The exporter checks that the money has been received.
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• The exporter sends the goods to the customer.
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Advantages:
• • Assured payment to the customer’s suppliers. Cheaper than LCs as the bank is used only for funds transfers.
Disadvantages:
• All against the buyer. He has parted with his money and has no assurance of receiving goods.
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3)Open account trading:
In an open account trading scenario, the buyer has a much greater leverage than the seller. Under open account trade, the entire risk in the transaction is borne by the seller since the payment is made by the buyer only after the latter has taken possession of the goods. Open account trading requires payment at agreed intervals after the goods have been dispatched to the buyer. It requires a more formal arrangement than is needed for advance payment because a longer and more permanent relationship between exporter and buyer is envisaged. The exporter dispatches goods to the buyer and at the same time sends an invoice for those goods, for payment at an agreed date or after an agreed period.
Process Flow:
• The exporter sends goods first to buyer (e.g. on Day 1). • The customer sends money afterwards (e.g. on Day 30).
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Advantages:
• • • Payment only after receipt of goods. The buyer has control over payment Cheaper payment mechanism as the bank is used only for funds transfers.
Disadvantages:
• • • All against the exporter. If the customer does not pay or if he does pay but his country blocks remittance of funds to exporter: The exporter has neither the goods nor the money, and The exporter may not get his goods back.
4) Bills of collection:
Trade between counterparties on collection basis is carried out where there is an inherent comfort level between the buyer and the seller but each party desires to safeguard itself to some extent. However, the buyer is at relatively lower risk than the seller. He can inspect the documents before paying for them Collections do not give the exporter the security of advance payment or the relative peace of mind that comes from open account transactions with longterm customers in established relationships. They require both exporter and buyer to exercise great care in agreeing the detail of the sales contract. The transaction is initiated by the exporter, who dispatches the goods to the buyer’s country. At the same time, he entrusts the related documents (which may include negotiable bills of lading) to his bank, for collection of sale
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proceeds and the delivery of documents to the buyer according to the terms of the sales contract.
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Process Flow:
Advantages:
• • • • Documents are not released to the importer until payment/acceptance has been received Less costly than a Letter of Credit May provide formal/legal means to collect unpaid obligation In case of DA, goods are received before having to make the payment
Disadvantages:
• • • Risk of refusal of payment for the exporter Commercial and Country risk are not hedged for the exporter Dishonoring of an accepted draft is a legal liability and may ruin business reputation
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5)Buyers credit:
Buyer's credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the letter of Credit (a Bank Guarantee) issued by the Importers (Buyer's) Bank. In fact the Importers Bank brokers between the Importer and the Overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee. Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates.
Export Finance:
1)
Pre-shipment Finance:
Pre-shipment credit is working capital finance granted to an exporter in anticipation of his exporting the goods. The main criteria in extending preshipment finance is to enable the eligible exporters to procure raw materials/process /manufacture/warehouse/ship the goods meant for export. Pre-shipment credit, also known as Packing credit is a loan or advance granted or any other credit provided by an institution to an exporter for financing purchase of raw materials etc., processing and packing of the goods, on the basis of letters of credit (LCs) opened in his favor by an importer of goods outside India, or an 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 exporters, unless lodgment of export order or letters of credit with the institution has been waived by RBI
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Eligibility
Packing credit can be granted to an exporter, who has export order or LC in his own name who will actually export the goods. However, as an exception to his rule, packing credit can be granted to supporting manufacturers or suppliers of goods, who do not have export orders or LCs in their own name and are exporting though merchant exporters or export house, subject to observance of requirement, stipulated by RBI in this regard. In cases where manufacturing and export of goods is divided between two parties, pre -shipment credit could be shared between them within the overall time limit prescribed, and amount permissible.
Period of Finance
Pre-shipment finance, being working capital finance, is basically a short-term finance. RBI has allowed banks to grant pre-shipment advances to all types of export commodities, for a maximum period of 180 days, at concessive rates. This period can be extended by 90 days.
2)Post shipment Finance
Post shipment finance is defined as “any loan or advance granted or any other credit provided by an institution to an exporter of goods from India from the date of extending the credit after shipment of the goods to the date of realization of export proceeds and includes any loan or advance granted to an exporter, in receivables from Government of India.
Purpose of Finance:
Post-shipment finance, being basically an export sales finance, is meant for financing export sales receivables after the date of shipment of goods to the date of realization of export proceeds. In case of deemed exports it is extended to finance the receivables against supplies made to designate
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agencies from the date of such supplies till the date of payment thereof for maximum period of 30 days
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Process for post shipment finance:
Post shipment finance can be secured or unsecured. Post-shipment finance can be extended upto 100% of invoice value of goods. However, where the domestic value of goods exceeds the value of export order/invoice value, finance for the price difference can also be extended if such price difference is covered by receivables from government, and such finance is not already extended at the pre -shipment stage.
Period of finance:
Post-shipment finance, though it is working capital finance, can be a shortterm finance or a long-term finance depending upon payment terms offered by India Exporters to overseas buyers. In the case of cash exports, maximum period allowed for realization of export proceeds is 6 months from the date of shipment.
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3) LC Advising:
The exporters are advised of any letter of credit in their favor received by the bank from various issuing banks worldwide. The bank establishes the authenticity of the LC received and accordingly informs the beneficiary about the same. Mere advising of LC is risk free on part of the bank and there is no obligation for the advising bank.
Benefits:
• • The bank authenticates the genuineness of the LC The seller is notified immediately through e-mail/alerts
Process Flow:
•
•
•
Contract of Sale between the buyer and the seller. The buyer opens a LC through their bankers which in turn is sent across to the seller’s bank. The bank notifies the seller of the LC and sends a copy to them.
4)
Bank Guarantees
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Bank guarantees are extensively used in trade to secure performances or other obligations. They provide the beneficiary with access to guaranteed amount should there be a breach of contract or performance. It is an undertaking given by the bank (Guarantor) on behalf of an applicant to a beneficiary to pay a certain sum of money up to a date subject to the applicant’s default.
Guarantees can be of two types:
Financial Guarantee-The underlying contract between the applicant and beneficiary calls for payment of a certain sum by the applicant. The bank guarantees to pay the specific sum on default of the applicant Non-Financial Guarantee- The underlying contract here calls for a performance on part of the applicant and the bank agrees to pay on default of the applicant
Process:
• • • • Underlying contract between the Applicant and the Beneficiary. Applicant approaches the bank for issuance of a guarantee in the beneficiary’s favour. Bank issues the guarantee favouring the beneficiary on behalf of the applicant. Payment is made in case the applicant makes a default under the contract.
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Benefits:
• • • The applicant’s customer is assured of performance under the contract. Not as complicated as a LC. Payment is done only in case of default.
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5)Factoring Services
Factoring is a “continuing arrangement between a financial institution (other ‘Factor’) and a business concern (the ‘client’) selling goods or services to trade customers (the ‘customers’) whereby the Factor purchases the client’s book debts (account receivables) either with or without recourse to the client and in relation thereto controls the credit extended to the customers and administer the sales ledger.” The purchase of book debts or receivables is central to the functioning of factoring.
The Factor provides the following services:
• • • •
Administration of the seller’s sales ledger Provision of pre -payment against the debts purchased Collection of the debts purchased Covering the credit risk involved.
Besides the above four basic services, Factors would also provide certain advisory services by virtue of their experience in credit and financial dealings and access to extensive credit information.
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Process Flow:
Types of Factoring Service:
• •
Recourse and Non-recourse Factoring Advance and Maturity Factoring (Advance upto 90% paid against invoice where as in maturity factoring payment is made against guarantee or collection of receivables)
• •
Full Factoring: (Advance + Nonrecourse) Disclosed and Undisclosed Factoring (Name of the factor is disclosed in the invoice by the supplier/client asking the customer to make payment to the factor)
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6)
Forfeiting:
Forfeiting is a form of financing of (export) receivables pertaining to international trade. It denotes the purchase of trade bills/promissory notes by a bank/financial institution without recourse to the seller. The purchase is in the form of discounting the documents covering the entire risk of nonpayment in collection. All risks and collection problems are fully the responsibility of the purchaser (Forfeiter) who pays cash to seller after discounting the bills/notes
Process Flow:
• •
•
•
Exporter sells and delivers goods to importer Importer draws a series of promissory notes in favor of the exporter for payment including interest charge. Exporter enters into forfeiting agreement (without recourse) with bank and receives payment which is face value-discount from bank in exchange of notes/bills provided by importer. Forfeiter may hold these notes/bills till maturity or securitize it and sell in secondary market
Comparative Analysis :
BILLS FACTORING DISCOUNTING 1. Extent of Finance 2. Recourse Upto 75 – 80% Upto 80% FORFAITING Upto 100%
With Recourse With or Without Without Recourse* Recourse Done Not Done
3. Sales Not Done Administratio n 4. Term Short Term
Short Term
Medium Term
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INCOTERMS:
Trade terms set out the rights and obligations of the parties to a sales contract with respect to the delivery of goods. They define whether the customer (buyer) or the exporter (seller) will be responsible for arranging the transport and insurance necessary for the delivery of goods, and up to what point, and other related matters. The most commonly used terms, accepted by international practice since 1936, are published by the International Chamber of Commerce (ICC) as “Incoterms”. The current edition is “Incoterms 2000”. Incoterms are not law and have no direct force of law, but by incorporating them in sales contracts exporters and buyers do give them legal effect. Thus, if an Incoterm is shown in a pro forma invoice or sales contract, it is absolutely necessary that the exporter understands the term clearly, and also that his customer shares his understanding from the outset. Such shared understanding of the full implications for both cost and risk should prevent later disputes and resultant delays in receiving funds for goods exported. Group E – Departure
1. EXW – Ex Works (named place) • The seller makes the goods available at his premises. • the buyer is responsible for all charges • This term may be the easiest to administer, however may not be in the seller's best interests. • There is no control over the final destination of the goods. • It may be possible for the seller to negotiate better freight rates than the buyer. • A vehicle arriving to take delivery of the seller's goods under EXW may not be suitable for the carriage.
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Group F – Main carriage unpaid 2. FCA – Free Carrier (named place) • The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. • This term is suitable for all modes of transport, including carriage by air, rail, road, and containerized / multi-modal transport. 3. FAS – Free Alongside Ship (named loading port) • The seller must place the goods alongside the ship at the named port. • The seller must clear the goods for export; this changed in the 2000 version of the Incoterms. Suitable for maritime transport only.
4. FOB – Free On Board (named loading port)
• • •
The seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at ship's rail. The seller must clear the goods for export. Maritime transport only.
Group C – Main carriage paid
5. CFR – Cost and Freight (named destination port) • seller must pay the costs and freight to bring the goods to the port of destination • Risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport only. 6. CIF – Cost, Insurance and Freight (named destination port) • Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. • Maritime transport only. 7. CPT – Carriage Paid To (named place of destination)
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• •
The general/containerized/multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.
8. CIP – Carriage and Insurance Paid to (named place of destination) • The containerized transport/multimodal equivalent of CIF. • Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.
Group D – Arrival 9. DAF – Delivered At Frontier (named place) • It can be used when the goods are transported by rail and road. • The seller pays for transportation to the named place of delivery at the frontier. • The buyer arranges for customs clearance and pays for transportation from the frontier to his factory. • The passing of risk occurs at the frontier.
10. •
• •
•
DES – Delivered Ex Ship (named port) Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the named port of destination and the goods made available for unloading to the buyer. The seller pays the same freight and insurance costs as he would under a CIF arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc… are for the Buyer. A commonly used term in shipping bulk commodities, such as coal, grain, dry chemicals and where the seller either owns or has chartered their own vessel.
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11. •
DEQ – Delivered Ex Quay (named port) It means the same as DES, but the passing of risk does not occur until the goods have been unloaded at the port of destination. DDU – Delivered Duty Unpaid (named destination place) It means that the seller delivers the goods to the buyer to the named place of destination in the contract of sale. The goods are not cleared for import or unloaded from any form of transport at the place of destination. The buyer is responsible for the costs and risks for the unloading, duty and any subsequent delivery beyond the place of destination. If the buyer wishes the seller to bear cost and risks associated with the import clearance, duty, unloading and subsequent delivery beyond the place of destination, then this all needs to be explicitly agreed upon in the contract of sale. DDP – Delivered Duty Paid (named destination place) It means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile"
12. • • • •
13. • •
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doc_375484559.doc
It explains the trade finance in detail.International trade is the mainstay of present commercial environment. International trade is a major source of economic revenue for any nation that is considered a world power. The total value of international trade is estimated at USD 12 trillion. Without international trade, nations would be limited to the goods and services produced within their own borders.The report covers import finance and export finance in detail.
TRADE FINANCE
INDEX
1 Introduction 3 2Import Finance Letter Of Credit 4 Advance Payment 6 Open Account Trading Bills of Collection Buyers Credit 11 8 9
3 Export Finance Pre Shipment Credit 11 Post Shipment Credit LC Advising Bank Guarantees Factoring 17 12 14 15
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Forfeiting 19
4 Incoterms
20
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Introduction:
International trade is the mainstay of present commercial environment. International trade is a major source of economic revenue for any nation that is considered a world power. The total value of international trade is estimated at USD 12 trillion. Without international trade, nations would be limited to the goods and services produced within their own borders.
When goods need to be moved from one country to another, the following main considerations apply:
• • •
The physical movement of goods from one country to another Documents covering the transport of such goods. The goods must be insured against any damage they may suffer during transit. Bankers undertaking for transfer of money from buyer to the seller Regulations within countries e.g. Licensing, Exchange Control. Legal requirements within countries
• • •
The main objective of trade services is to facilitate a transaction or series of transactions. The exporter may require finance in order to produce the goods that have been ordered or in order to pay the costs of transporting them. Also since an exporter usually wants to get paid as quickly as possible and an importer will want to pay as late as possible – preferably after they have sold the goods on, trade finance is often required to bridge these two disparate objectives
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Import Finance:
1)Letter of credit:
A Letter of Credit is an arrangement under which the bank that issues the Credit undertakes to the beneficiary of the Credit (the exporter) that, provided the exporter presents the documents stipulated in the Credit and complies with all the terms and conditions of the Credit, the payment or any other obligation of the bank to the exporter will be fulfilled. By using a Letter of Credit, compared with other methods of Payment, both the exporter and the buyer gain the additional independent assurance of the bank that issues the Credit (the Issuing Bank).
Parties to the Letter of credit
Applicant- Applicant is the buyer of goods who approaches the issuing bank to open an LC in favor of the beneficiary and hence known as the Applicant. Beneficiary- Beneficiary is the seller of goods. The LC is opened in the seller’s favor and hence he is known as the Beneficiary. Issuing Bank- Issuing Bank is the buyer’s bank which issues the LC on the request of the buyer. Advising Bank- Advising Bank is generally the Seller’s Bank. The issuing bank sends the LC to this bank for further forwarding it to the beneficiary. Negotiating Bank- The bank that adds value to the under LC documents by scrutinizing documents and forwarding the same to the LC issuing bank Reimbursing Bank- The bank with which the issuing bank has an account and provides reimbursement to the exporters bank when furnished with an appropriate reimbursement claim
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Process Flow:
Advantages:
•
•
Both, the exporter and his buyer have independent assurance that goods and money will be exchanged according to the terms of the sales contract. Assured payment to the customer’s suppliers. Importer’s access to market widens. Buyer pays only against LC compliant documents. Bank’s expertise in scrutinizing documents
• •
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Disadvantages:
• • The exporter is still at some risk of non-payment. If the exporter is unable to meet the terms and conditions of the Credit, there is no guarantee of payment, even if the goods have already been shipped. • If the Issuing Bank finds discrepancies not previously found by either the exporter or the Paying Bank, there is no guarantee of payment.
2) Advance payment :
This trade payment method is prevalent for transactions where the seller has a much higher bargaining power than the buyer. Such payment method may also be employed where the buyer may not have the ability to open letters of credit through their bank/s.
The exporter may request advance payment because (for example) he is unwilling to send unpaid goods to the buyer’s country because of some risk over payment. The buyer may agree to pay in advance because he wants to induce the exporter into an established relationship. If advance payment is agreed, the buyer sends the payment before the exporter consigns the goods for delivery. The exporter sends off any documents that the buyer will need (e.g. original bills of lading, export licenses) after he hands the goods to the carrier or carrier’s agent.
Process Flow:
• The importer sends money first to the exporter. • The exporter checks that the money has been received.
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• The exporter sends the goods to the customer.
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Advantages:
• • Assured payment to the customer’s suppliers. Cheaper than LCs as the bank is used only for funds transfers.
Disadvantages:
• All against the buyer. He has parted with his money and has no assurance of receiving goods.
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3)Open account trading:
In an open account trading scenario, the buyer has a much greater leverage than the seller. Under open account trade, the entire risk in the transaction is borne by the seller since the payment is made by the buyer only after the latter has taken possession of the goods. Open account trading requires payment at agreed intervals after the goods have been dispatched to the buyer. It requires a more formal arrangement than is needed for advance payment because a longer and more permanent relationship between exporter and buyer is envisaged. The exporter dispatches goods to the buyer and at the same time sends an invoice for those goods, for payment at an agreed date or after an agreed period.
Process Flow:
• The exporter sends goods first to buyer (e.g. on Day 1). • The customer sends money afterwards (e.g. on Day 30).
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Advantages:
• • • Payment only after receipt of goods. The buyer has control over payment Cheaper payment mechanism as the bank is used only for funds transfers.
Disadvantages:
• • • All against the exporter. If the customer does not pay or if he does pay but his country blocks remittance of funds to exporter: The exporter has neither the goods nor the money, and The exporter may not get his goods back.
4) Bills of collection:
Trade between counterparties on collection basis is carried out where there is an inherent comfort level between the buyer and the seller but each party desires to safeguard itself to some extent. However, the buyer is at relatively lower risk than the seller. He can inspect the documents before paying for them Collections do not give the exporter the security of advance payment or the relative peace of mind that comes from open account transactions with longterm customers in established relationships. They require both exporter and buyer to exercise great care in agreeing the detail of the sales contract. The transaction is initiated by the exporter, who dispatches the goods to the buyer’s country. At the same time, he entrusts the related documents (which may include negotiable bills of lading) to his bank, for collection of sale
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proceeds and the delivery of documents to the buyer according to the terms of the sales contract.
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Process Flow:
Advantages:
• • • • Documents are not released to the importer until payment/acceptance has been received Less costly than a Letter of Credit May provide formal/legal means to collect unpaid obligation In case of DA, goods are received before having to make the payment
Disadvantages:
• • • Risk of refusal of payment for the exporter Commercial and Country risk are not hedged for the exporter Dishonoring of an accepted draft is a legal liability and may ruin business reputation
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5)Buyers credit:
Buyer's credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the letter of Credit (a Bank Guarantee) issued by the Importers (Buyer's) Bank. In fact the Importers Bank brokers between the Importer and the Overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee. Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates.
Export Finance:
1)
Pre-shipment Finance:
Pre-shipment credit is working capital finance granted to an exporter in anticipation of his exporting the goods. The main criteria in extending preshipment finance is to enable the eligible exporters to procure raw materials/process /manufacture/warehouse/ship the goods meant for export. Pre-shipment credit, also known as Packing credit is a loan or advance granted or any other credit provided by an institution to an exporter for financing purchase of raw materials etc., processing and packing of the goods, on the basis of letters of credit (LCs) opened in his favor by an importer of goods outside India, or an 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 exporters, unless lodgment of export order or letters of credit with the institution has been waived by RBI
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Eligibility
Packing credit can be granted to an exporter, who has export order or LC in his own name who will actually export the goods. However, as an exception to his rule, packing credit can be granted to supporting manufacturers or suppliers of goods, who do not have export orders or LCs in their own name and are exporting though merchant exporters or export house, subject to observance of requirement, stipulated by RBI in this regard. In cases where manufacturing and export of goods is divided between two parties, pre -shipment credit could be shared between them within the overall time limit prescribed, and amount permissible.
Period of Finance
Pre-shipment finance, being working capital finance, is basically a short-term finance. RBI has allowed banks to grant pre-shipment advances to all types of export commodities, for a maximum period of 180 days, at concessive rates. This period can be extended by 90 days.
2)Post shipment Finance
Post shipment finance is defined as “any loan or advance granted or any other credit provided by an institution to an exporter of goods from India from the date of extending the credit after shipment of the goods to the date of realization of export proceeds and includes any loan or advance granted to an exporter, in receivables from Government of India.
Purpose of Finance:
Post-shipment finance, being basically an export sales finance, is meant for financing export sales receivables after the date of shipment of goods to the date of realization of export proceeds. In case of deemed exports it is extended to finance the receivables against supplies made to designate
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agencies from the date of such supplies till the date of payment thereof for maximum period of 30 days
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Process for post shipment finance:
Post shipment finance can be secured or unsecured. Post-shipment finance can be extended upto 100% of invoice value of goods. However, where the domestic value of goods exceeds the value of export order/invoice value, finance for the price difference can also be extended if such price difference is covered by receivables from government, and such finance is not already extended at the pre -shipment stage.
Period of finance:
Post-shipment finance, though it is working capital finance, can be a shortterm finance or a long-term finance depending upon payment terms offered by India Exporters to overseas buyers. In the case of cash exports, maximum period allowed for realization of export proceeds is 6 months from the date of shipment.
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3) LC Advising:
The exporters are advised of any letter of credit in their favor received by the bank from various issuing banks worldwide. The bank establishes the authenticity of the LC received and accordingly informs the beneficiary about the same. Mere advising of LC is risk free on part of the bank and there is no obligation for the advising bank.
Benefits:
• • The bank authenticates the genuineness of the LC The seller is notified immediately through e-mail/alerts
Process Flow:
•
•
•
Contract of Sale between the buyer and the seller. The buyer opens a LC through their bankers which in turn is sent across to the seller’s bank. The bank notifies the seller of the LC and sends a copy to them.
4)
Bank Guarantees
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Bank guarantees are extensively used in trade to secure performances or other obligations. They provide the beneficiary with access to guaranteed amount should there be a breach of contract or performance. It is an undertaking given by the bank (Guarantor) on behalf of an applicant to a beneficiary to pay a certain sum of money up to a date subject to the applicant’s default.
Guarantees can be of two types:
Financial Guarantee-The underlying contract between the applicant and beneficiary calls for payment of a certain sum by the applicant. The bank guarantees to pay the specific sum on default of the applicant Non-Financial Guarantee- The underlying contract here calls for a performance on part of the applicant and the bank agrees to pay on default of the applicant
Process:
• • • • Underlying contract between the Applicant and the Beneficiary. Applicant approaches the bank for issuance of a guarantee in the beneficiary’s favour. Bank issues the guarantee favouring the beneficiary on behalf of the applicant. Payment is made in case the applicant makes a default under the contract.
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Benefits:
• • • The applicant’s customer is assured of performance under the contract. Not as complicated as a LC. Payment is done only in case of default.
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5)Factoring Services
Factoring is a “continuing arrangement between a financial institution (other ‘Factor’) and a business concern (the ‘client’) selling goods or services to trade customers (the ‘customers’) whereby the Factor purchases the client’s book debts (account receivables) either with or without recourse to the client and in relation thereto controls the credit extended to the customers and administer the sales ledger.” The purchase of book debts or receivables is central to the functioning of factoring.
The Factor provides the following services:
• • • •
Administration of the seller’s sales ledger Provision of pre -payment against the debts purchased Collection of the debts purchased Covering the credit risk involved.
Besides the above four basic services, Factors would also provide certain advisory services by virtue of their experience in credit and financial dealings and access to extensive credit information.
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Process Flow:
Types of Factoring Service:
• •
Recourse and Non-recourse Factoring Advance and Maturity Factoring (Advance upto 90% paid against invoice where as in maturity factoring payment is made against guarantee or collection of receivables)
• •
Full Factoring: (Advance + Nonrecourse) Disclosed and Undisclosed Factoring (Name of the factor is disclosed in the invoice by the supplier/client asking the customer to make payment to the factor)
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6)
Forfeiting:
Forfeiting is a form of financing of (export) receivables pertaining to international trade. It denotes the purchase of trade bills/promissory notes by a bank/financial institution without recourse to the seller. The purchase is in the form of discounting the documents covering the entire risk of nonpayment in collection. All risks and collection problems are fully the responsibility of the purchaser (Forfeiter) who pays cash to seller after discounting the bills/notes
Process Flow:
• •
•
•
Exporter sells and delivers goods to importer Importer draws a series of promissory notes in favor of the exporter for payment including interest charge. Exporter enters into forfeiting agreement (without recourse) with bank and receives payment which is face value-discount from bank in exchange of notes/bills provided by importer. Forfeiter may hold these notes/bills till maturity or securitize it and sell in secondary market
Comparative Analysis :
BILLS FACTORING DISCOUNTING 1. Extent of Finance 2. Recourse Upto 75 – 80% Upto 80% FORFAITING Upto 100%
With Recourse With or Without Without Recourse* Recourse Done Not Done
3. Sales Not Done Administratio n 4. Term Short Term
Short Term
Medium Term
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INCOTERMS:
Trade terms set out the rights and obligations of the parties to a sales contract with respect to the delivery of goods. They define whether the customer (buyer) or the exporter (seller) will be responsible for arranging the transport and insurance necessary for the delivery of goods, and up to what point, and other related matters. The most commonly used terms, accepted by international practice since 1936, are published by the International Chamber of Commerce (ICC) as “Incoterms”. The current edition is “Incoterms 2000”. Incoterms are not law and have no direct force of law, but by incorporating them in sales contracts exporters and buyers do give them legal effect. Thus, if an Incoterm is shown in a pro forma invoice or sales contract, it is absolutely necessary that the exporter understands the term clearly, and also that his customer shares his understanding from the outset. Such shared understanding of the full implications for both cost and risk should prevent later disputes and resultant delays in receiving funds for goods exported. Group E – Departure
1. EXW – Ex Works (named place) • The seller makes the goods available at his premises. • the buyer is responsible for all charges • This term may be the easiest to administer, however may not be in the seller's best interests. • There is no control over the final destination of the goods. • It may be possible for the seller to negotiate better freight rates than the buyer. • A vehicle arriving to take delivery of the seller's goods under EXW may not be suitable for the carriage.
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Group F – Main carriage unpaid 2. FCA – Free Carrier (named place) • The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. • This term is suitable for all modes of transport, including carriage by air, rail, road, and containerized / multi-modal transport. 3. FAS – Free Alongside Ship (named loading port) • The seller must place the goods alongside the ship at the named port. • The seller must clear the goods for export; this changed in the 2000 version of the Incoterms. Suitable for maritime transport only.
4. FOB – Free On Board (named loading port)
• • •
The seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at ship's rail. The seller must clear the goods for export. Maritime transport only.
Group C – Main carriage paid
5. CFR – Cost and Freight (named destination port) • seller must pay the costs and freight to bring the goods to the port of destination • Risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport only. 6. CIF – Cost, Insurance and Freight (named destination port) • Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. • Maritime transport only. 7. CPT – Carriage Paid To (named place of destination)
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• •
The general/containerized/multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.
8. CIP – Carriage and Insurance Paid to (named place of destination) • The containerized transport/multimodal equivalent of CIF. • Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.
Group D – Arrival 9. DAF – Delivered At Frontier (named place) • It can be used when the goods are transported by rail and road. • The seller pays for transportation to the named place of delivery at the frontier. • The buyer arranges for customs clearance and pays for transportation from the frontier to his factory. • The passing of risk occurs at the frontier.
10. •
• •
•
DES – Delivered Ex Ship (named port) Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the named port of destination and the goods made available for unloading to the buyer. The seller pays the same freight and insurance costs as he would under a CIF arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc… are for the Buyer. A commonly used term in shipping bulk commodities, such as coal, grain, dry chemicals and where the seller either owns or has chartered their own vessel.
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11. •
DEQ – Delivered Ex Quay (named port) It means the same as DES, but the passing of risk does not occur until the goods have been unloaded at the port of destination. DDU – Delivered Duty Unpaid (named destination place) It means that the seller delivers the goods to the buyer to the named place of destination in the contract of sale. The goods are not cleared for import or unloaded from any form of transport at the place of destination. The buyer is responsible for the costs and risks for the unloading, duty and any subsequent delivery beyond the place of destination. If the buyer wishes the seller to bear cost and risks associated with the import clearance, duty, unloading and subsequent delivery beyond the place of destination, then this all needs to be explicitly agreed upon in the contract of sale. DDP – Delivered Duty Paid (named destination place) It means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile"
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doc_375484559.doc