Export Financing Project 071203

PROJECT REPORT ON

EXPORT FINANCING & DOCUMENTATIONS Submitted by :

School of Management Studies Indira Gandhi National Open University Maidan Garhi, New Delhi – 110068.

ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude and respect for my guide Mr. Arun Kumar Jain for her constant interest, valuable encouragement and timely guidance during completion of this project work. I am also thankful to all my professors of Indira Gandhi National Open University for their timely co-operation and helpful guidance. I Would like to take this opportunity to specially thank Prof. Anurag Singh, Faculty Delhi University & Dr. G.K.Varshney, Shyam Lal College, Delhi University for their valuable guidance and timely help and support for making this research study possible. Last but not the least, I deeply express appreciation to all my friends who directly or indirectly co-operated and helped me during completion of my project.

CERTIFICATE OF ORIGINALITY

This is to certify that, K.Krishnan, student of MBA ( Finance) from Indira Gandhi National Open University, has satisfactorily completed his project work on “EXPORT FINANCING & DOCUMENTATION” during academic year 2003-04. The project work was done under my supervision and the views and methodology adopted are original to the best of our knowledge and belief.

(STUDENT) GUIDE)

K.KRISHNAN, IGNOU

(PROJECT

CONCLUSION DRAWN FROM THE QUESTIONAIRE The Basis of Analysis is on a Simple Questionnaire which covers 25 simple points which are necessary for every indian exporters before coming to business of exports and for existing exporters.

After analyzing and examining questionnaire method, filled by various exporters , we analyze that simple points which are necessary for exports are not correctly filled by exporters. The points which are not taken care by exporters are :-

1. Rate of Interest 2. Packing Credit 3. Pre-Shipment Export Credit In Foreign Currency 4. Service Charges Levied on Packing Credit 5. Packing Credit Advances Against Personal Car, House Etc. 6. Extension of Packing Credit Facility to Sub-Supplier. 7. Extension of ECGC Guarantee to Packing Advances.

8. Export Advances Against Fixed Assets 9. Export Advances Against Claims of Duty Drawback.

10.Export Advances for Purchase of Fixed Assets. 11.Export Advances Against Goods Sent on Consignment Basis. 12.Conversion of Credit Export Sale to Cash Sale. 13.Awareness of New Export Financing option. 14.Export Finance for Market Development, Product Adaption, Training & R & D Support Etc. 15.Role of Exim Bank.

As we see that out of 25 points, only 10 points are correctly approached by exporters i:e 40% are correctly approached, remaining 60% points are incorrectly approached.

This clearly indicates, that exporters are not aware of export finance. That is the basis I finally took this “Export

Financing Documentation” as my project as I am already in this field for more than 5 years.

K.KRISHNAN, IGNOU

REVIEW OF THE QUESTIONAIRE 1. Rate of Interest From this table, we analyse that the rate of interest prevailing in the bank were not known by the exporters. Out of 13 only 9 exporters clearly mentioned Interest @ 11-12% p.a. ( For detail please refer page

)

2. Packing Credit From this table we analyse that every exporter except one are having knowledge of packing credit advances. ( For detail please refer page

3.

)

Pre-shipment export credit in foreign currency (PCFC)

After seeing questionnaire method analsis,we came to final conclusion that only few exporters ( 3 out of 13) were having knowledge about PCFC scheme. This is the scheme announced by RBI in Nov 1993, in addition to normal packing credit

schemes. In the project I simply explained all the options available for availing export finance under PCFC scheme and the formalities in terms of documents which are required to be completed by the Indian exporters for availing export finance under PCFC scheme.

4. SERVICE CHARGES LEVIED ON PACKING CREDIT As mentioned in PCFC scheme only 3 out of 13 exporters clearly mentioned that no service charged levied on packing credit other than premium payable to ECGC scheme.

5. PACKING CREDIT ADVANCES AGAINST PERSONAL CAR, HOUSE ETC. 9 out of 13 exporters clearly says no P/C advances against personal car, house etc. ( For detail please refer page

)

6. EXTENSION OF PACKING CREDIT FACILITY TO SUBSUPPLIER. Every exporter except 2 , were knowledge about the extension of packing credit facility to sub-supplier. This is the facility extended to sub-suppliers of raw materials, components etc. to the exporter goods. In the project I have explained what are the detailed guidelines to be fulfilled for getting packing K.KRISHNAN, IGNOU

credit facility to sub-supplier. ( For detail please refer page )

7. EXTENSION

OF

ECGC

GUARANTEE

TO

PACKING

ADVANCES. Only 2 out of 13 exporters were not having knowledge about extension about ECGC Guarantee to packing advances. It is very important to each and every exporters to obtain this information from the bank, as cost of additional premium for individual guarantee may sometimes be quite heavy depending upon the turnover in the account.

8. EXPORT ADVANCES AGAINST FIXED ASSETS Out of 13, 7 Exporters mentioned about that no export advances will be received against fixed assets and this is true also. As we know that many advances will be received from the bank against fixed assets and this will predict and encourages some exporters to get export advances against fixed assets.

9. EXPORT

ADVANCES

AGAINST

CLAIMS

OF

DUTY

DRAWBACK. Only 1 exporter wrongly tells that we cannot claim export

advances against claims of duty drawback.

10.EXPORT

ADVANCES

FOR

PURCHASE

OF

FIXED

ASSETS. As already mentioned in above point no. 8, that no export advances will be received against fixed assets or purchase of fixed assets.

11. EXPORT ADVANCES AGAINST GOODS SENT ON CONSIGNMENT BASIS. Out of 13, 2 exporters saying that no export advances will be received against goods sent on consignment basis.

12. CONVERSION OF CREDIT EXPORT SALE TO CASH SALE. This is called Forfaiting finance ( A new mechanism of financing exports). From seeing the questionnaire method analysis, we find that no exporters were having knowledge about forfating finance expect one exporter i:e M/s S.D.International. This is new financing

option

for

Indian

Exporters,

under

which

an

exporters in India can convert their credit sale into cash sale subject to quotes being available. Various formalities to be K.KRISHNAN, IGNOU

fulfilled for getting this facility. ( For full details, explained in a simplified manner, refer Page

).

13. AWARENESS OF NEW EXPORT FINANCING OPTION. Aleady explained in Point no. 12. or Refer page

14. EXPORT FINANCE FOR MARKET DEVELOPMENT, PRODUCT ADAPTION,TRAINING & R & D SUPPORT ETC. Exporters are not having knowledge about getting export finance for market development , product adaption, training and R & D support, by seeing questionnaire method analysis.

Most exporters try to finance their exports through commercial banks. To promote their exports some also take advantage of the Government’s Marketing Development Assistance Scheme through Ministry of Commerce. Yet, there are many exporters who are ignorant of various funding schemes of other organizations which could help them to finance their exports. In the project, an effort has been made to identify such schemes and highlight their specific requirements for the benefit of the exporting community. This is explained in the topic “ Non-conventional Avenues for Export Financing”. ( Page

)

15. ROLE OF EXIM BANK. Out of 13, only 8 exporters clearly mentioned about the role of the EXIM Bank. The 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-shipment credit, buyers credit, lines of credit, relending facility, export bills rediscounting, refinance to commercial banks, finance for computer software exports, finance for export marketing and bulk import finance to commercial banks. This also extends non-funded

facility

to

Indian

exporters

in

the

form

of

guarantees. Full details of financing programmes of EXIM Bank explained in Page

K.KRISHNAN, IGNOU

in the project.

CHAPTER SCHEME T h e p ro jec t h el p s th e ex p o rt ers to kn o w abo u t v ari o us m eth o d s

and

gu i d el i n es

to

be

ad o p ted

fo r

av ai li n g

ex p o rt fi n a nc e wh i c h wi l l h el p th em to m an ag e th e ri s ks a ss oc i a t ed wi th ex p o rti n g.

 Export Financing- Introduction  Features of Export Financing  Methods of Export Financing – Pre-shipment finance Post-shipment finance  Forfaiting Finance – A new financing option for Indian Exporters.  Non-conventional Financing

avenues

for

Export

 Role of Exim Bank & other banks

K.KRISHNAN, IGNOU

Export Financing Introduction F i n a n c i a l a s s i s t a n c e i s e x t e n d e d b y t h e b an k s t o t h e e x p o r t e r s a t p r e - s h i p m e n t a n d p o s t- s h i p m e n t s t a g e s . F i n a n c i a l a s s i s t a n c e e x t e n d e d t o t h e e x p o r te r p r i o r t o s h i p m e n t o f g o o d s f r o m I n d i a f a l l s w i t h i n t h e s co p e o f pre-shipment shipment

finance

of

the

while

goods

falls

that

extended

under

after

p o s t- s h i p m e n t

finance. While the pre-shipment finance is provided f o r w o r k i n g c a p i t a l f o r t h e p u r c h a s e o f raw m a t e r i a l , processing, etc.

packaging,

t ran s p o r t a t i o n ,

war e h o u s i n g

o f t h e g o o d s m e an t f o r e x p o r t , p o s t- s h i p m e n t

f i n a n c e i s g e n e ra l l y p r o v i d e d i n o r d e r t o b r i d g e t h e gap

between

shipment

realisation of proceeds.

of

goods

and

and

the

Salient

Features

of

Export Financing 1. Export Finance is to constitute 12% of Net Bank Credit as per RBI guidelines. 2. Interest is charged at concessional rates of interest and for this purpose RBI provides refinance at Bank Rate.

K.KRISHNAN, IGNOU

3. Credit Guarantee coverage by Export Credit Guarantee Corporation. 4. Purpose oriented and need based finance. 5. Consists of two elements-pre-shipment & postshipment finance. 6. Linkage between pre-shipment and post-shipment stages and desirability of treating the two as single package is crucial.

7. Liberal approach in regard to margin requirements subject to sanction by appropriate authority in the bank. 8. No margin requirement against export receivable. 9. Export credit over and above MPBF. 10.Exemption for application of loan delivery system.

11. Letter of credit to an exporter may be provided for a period of 3 yrs based on projections subject to periodic review once in a period of 12 months.

K.KRISHNAN, IGNOU

Methods of Export Financing PRE-SHIPMENT CREDIT Pre-shipment Credit in Indian Rupees The purpose of the advance includes purchase of raw materials

or

the

manufacturing

purchase

of

processing,

finished

goods,

packing,

their

transporting,

warehousing, etc., for export. Once the goods are ready for

exporting

some

credit/pre-shipment

banks

finance

convert into

the

what

packing

are

called

shipping loans. Shipping loans also form another type of packing

credit.

Packing

credit

may

be

taken

as

equivalent to 'cash credit' in domestic business except

that

cash

credit

facility

continuous/running

facility

is

sanctioned

whereas

as

packing

a

credit

advance is disbursed for a special purpose to enable the exporter to meet a specific export obligation. Every preshipment

advance

is,

therefore,

considered

as

a

separate loan account different from a domestic advance or inter se. The

credit

limits

for

pre-shipment

advance

are

considered simultaneously along with other facilities and it is generally made a sub-limit within the overall cash credit limit sanctioned to the borrower. However, for those borrowers who are exclusively engaged in exports, separate packing credit limits are sanctioned by the banks. The procedure and techniques adopted by the bank

are

the

same

as

in

case

of

other

advances.

However, the assessment of working capital requirement may be based upon the export orders in hand with the exporter besides his capacity to meet that commitment. A very flexible approach in this regard is adopted by the banks and adequate finance is available for every viable export proposal. The purpose of the above discussion is to

emphasis

the

need

to

apply

for

total

credit

requirements at one time with all the relevant details made available to the bank in the beginning itself so that suitable limits are sanctioned avoiding any request for ad boc facilities at a later date. The general terms K.KRISHNAN, IGNOU

and conditions of granting packing credit advances by banks are given below. 1. export form India is allowed either against an export L/C or against an export order. The bank may also sanction packing credit which may be disbursed either against an L/C or against an order. Correct position in this regard must be explained to the bank to avoid any difficulty later. It may be noted that if the limit by the bank is sanctioned against LC, disbursement against an order may not be allowed by the bank. Even in case of reports under L/C, the exporter may receive the L/C at a very late stage and may be required

to

procure/manufacture

the

goods

much

before the L/C is received. In this situation also some difficulty may be faced in getting the packing credit released

from

the

bank.

It

would,

therefore,

be

necessary to discuss all these matters with the bank at the time of sanctioning of limits. 2. All pre-shipment advances are to be liquidated from the proceeds of export bills. Application of sanctioning of suitable post-shipment facilities should, therefore, be

simultaneously

entitled

for

duty

against

claims

of

made.

Exporter

drawback such

obtained at that time.

etc.

may

and

incentives

also

credit

shall

be

limits

also

be

3. No

other

service

charges

are

leviable

on

these

advances other than premium payable to ECGC on their guarantees. 4. Sub-suppliers are also eligible for the packing credit advances for which they should lodge to the banks letter

from

the

Export

House/Merchant

a

Exporter

incorporating details of the goods to be supplied and confirming that they (export house etc.) have not availed of any packing credit advances for which they should lodge to the bank a letter from house etc.) have nor availed of any packing credit from any other bank/source against the same contract/L/C. 5. Packing credit is normally given and adjusted L/C/ contract wise. However, the finance is now permitted to be given on running account basis. For details see under para "Submission of Export Order/L/C". 6. In case of cancellation of export order, facility of substitution of contracts is also available. 7. The

finance

is

also

available

for

undertaking

preliminary arrangements in respect of consultancy services. 8. The finance is also available for export of goods of exhibition and sales, imports under advance import licences.

K.KRISHNAN, IGNOU

9. Except a certain cases, pre-shipment finance granted tot he exporter does not exceed FOB value of the goods

or

domestic

market

value

of

the

goods

whichever is less. Pre-shipment Credit in Foreign (PCFC) With a view to providing pre-shipment credit to Indian exporters

at

internationally

competitive

rates

of

interest, Reserve bank of India announced a new scheme of providing Pre-shipment Credit in Foreign Currency (PCFC) by the banks in India in November 1993. The PCFC scheme will be in addition to normal packing

credit

schemes

in

Indian

rupees

presently

available to Indian exporters. The exporter will now have

the

following

two

options

for

availing

export

finance. a) To avail packing credit in rupees and then avail post shipment

credit

in

rupees

or

under

PCFC

or

by

discounting/rediscounting of export bills abroad. b) To

avail

packing

credit

in

foreign

currency

discounting / rediscounting of export bills

and

in foreign

currency abroad., in India rupees or under PCFC. The broad aspects of PCFC scheme are given below: i)

Packing credit under foreign currency is available to cover both the domestic and imported inputs of

goods to be exported from India. ii)

PCFC can be availed in any convertible foreign currency.

iii)

Banks

will

grant

PCFC

out

of

foreign

currency

resources available with them under EEFC account, FCNR accounts and RFC accounts and may also negotiate required lines of credit from their foreign branches/correspondents. iv)

PCFC will be available for an initial period of 180 days as incase of rupee credit: The extension in period of PCFC for further 90 days may be granted at an interest rate which will be higher by 2% of the

normal

rate

as

in

case

of

rupee

credit.

Extension of PC upto 360 days and rate of interest on such extension will be as per discretion of the bank. v)

The running A/c facility will be permitted under PCFC on the same lines as in case of packing credit in rupees. However, packing credit advance already permitted in rupees will not be converted to PCFC.

vi)

PCFC will be available only for cash exports and will not cover "Deferred Payment Exports'.

vii)

The lending rate to exporter will be linked to 6 months LIBOR (London Inter Bank Offer Rate) rate

K.KRISHNAN, IGNOU

and the a) Indian banks having branches aborad] - 20% over, LIBOR and foreign banks in India. b) Indian banks not having branches - 2 1 / 2 % over LIBOR abroad. The above rates are excluding withholding tax. The banks are, however, free to quote better rates

depending

upon

the

availability

of

foreign

exchange resources available with them and/or the terms of line of credit arranged by these banks with their foreign branches/correspondents. viiiWithholding tax as per applicable rates will be payable

rates

will

be

exporter

in

addition

to

interest as above. ix In case full amount of PCFC or part thereof is utilised

to

finance

domestic

inputs,

the

foreign

currency amount will be converted to Indian rupees at appropriate exchange rates. x PCFC will be available within 'MPBF'/credit limits sanctioned in favour of exporter. xi ECGC

cover

will

be

available

in

rupees

only,

whereas PCFC is in foreign currency. xii PCFC will be self-liquidating in nature. PCFC should be liquidated by submission of export documents

for

discounting/rediscounting.

allowed

to

be

liquidated

PCFC

with

will

foreign

not

be

exchange

acquired from other sources. PCFC can be extended for exports to ACU 1 Countries w.e.f.1.1.1996. PFC can also be extended for deemed exports. Sharing of Export Credit under PCFC Scheme PCFC can now be availed by the manufacturer on the basis of disclaimer from the export order holder in the same way as permitted under rupee credit scheme. PCFC granted

to

transferring

the

manufacturer

foreign

currency

will

from

be the

adjustd export

by

order

holder. PCFC

for

supplies

from

one

EOU/EPZ

Unit

to

another EOU/EPZ Unit Supplier made to EOUs/EPZ units are treated as Deemed Exports and Reserve Bank has permitted granting PCFC both in the supplier EOU/EPZ unit and the receiver EOU/EPZ unit. PCFC for supplier EOU/EPZ unit will be for supply of raw material components for goods which will be further processed and finally exported by receiver EOU/EPZ unit. The PCFC extended in a supplier EOU/EPZ unit will have to be liquidated by receipt of foreign exchange from the receiver EOU/EPZ unit, for which a

K.KRISHNAN, IGNOU

supplier EOU/EPZ unit purpose, the receiver EOU/EPZ unit

can

avail

of

PCFC.

The

stipulation

regarding

liquidation of PCFC by payment in foreign exchange will be

met

in

such

cases

not

by

notation

of

exporter

documents but by transfer of foreign exchange from the bankers of the receiver EOU/EPZ unit to the banker of supplier EOU/EPZ unit. PCFC ranted to receiver EOU/EPZ unit will be liquidated by discounting of export bills as per general procedure in this regard. Furthermore such transaction will be treated as exports for the supplier unit and import for the receiving unit. Importer Exporter Code Number No commercial export from India is permitted on behalf of a person/firm/company who has not been allotted an Importer Exporter Code Number. A few firms may be completing

exports

through

registered

Export/Trading

Houses and are eligible to avail packing credit limits from the banks. Such firms may not be required to obtain the code number. Application for Packing Credit Application for Packman Credit should be accomplished by the following documents: i)

Confirmed export order/contract or L/C, etc. in

original.(Where it is not available, an undertaking to the effect that the same will be produced to the bank within a reasonable time for verification

and

endorsement. This undertaking is required where the

exporter

wants

to

avail

himself

of

packing

credit advance against preliminary information of contract where by at the later stage the contract or L/C, as the case may be, will be received by him. ii)

An undertaking that the advance will be utilised for the specific purpose of procuring / manufacturing / shipping etc. of the goods meant for export only as stated in the relative confirmed export order or the L/C.

iii)

Where

the

packing supply

exporter/application

credit the

is

a

for

and

wants

sub-supplier

goods

to

Trading/Super

Star

exporter,

undertaking

an

asking

the to

Export/Trading/Star.

Trading

House from

or

merchant

the

merchant

exporter or Export/Trading/Star Trading/super Star Trading House stating that they have not will not avail themselves of packing credit facility against the same transaction for the same purpose till the original packing credit is liquidated. iv)

Copies of Income Tax/Wealth Tax Assessment Order for

the

past

K.KRISHNAN, IGNOU

2/3

years

in

the

case

of

sole

proprietary and partnership firm. v)

Copy of RBI's (Exporter's) Code Number (CNX).

vi)

Copy

of

a

valid

RCMC

Membership

Certificate)

and/or

Export/Trading

the

(Registration-cum-

help

by

Star

the

exporter

Trading

House

Certificate. vii)

Appropriate policy/guarantee of the ECGC.

viii) Any other document required by the bank. A

packing

credit

limit

(PCL)

is

sanctioned

by

the

appropriate authority in the bank. It is fixed either as an annual overall limit or as ad hoc specific limit. Usually,

the

trade/manufacturer/export

who

seeks

a

packing credit limit also required foreign bills purchase limit negotiation/purchase/discount of bills, drawn under leter of credit and/or without letter of credit. All such limits together are generally reviewed by the appropriate authority in the bank and separate limits are purpose wise and security wise for the packing credit loan and foreign bills purchased within the total limit. These limits are reviewed at the end of the period for which

they

are

sanctioned

and

they

are

renewed/revised/canceled depending on the merits of each case.

Submission of Export Order/L/C The exporter has to produce a confirmed export order or L/C

as

per

the

terms

of

sanction

at

the

time

of

disbursement of packing credit. In the absence of an export

order/L/C,

communication

form

the the

bank

accept

overseas

some

buyer

other

provided

it

contains minimum details giving the name of the buyer, the value

of the order, quantity and particulars of the

goods to be exported, date of shipment and terms of payment. Even in such cases final sales contract/L/C will be required to be submitted to the bank at a later stage. Sometimes an export order is received by an export hose/trading hose or an merchant exporter who may pass on this order to sub-supplier who is not directly exporting.

Such

sub-supplier

may

also

avail

packing

credit facility from the bank. The packing credit in such cases can be granted after getting a letter from the exporter ord3er

house/trading and

also

house

giving

confirming

that

details he

of

the

(export

house/trading house) has not availed any packing credit against that order. The repayment of such advance should be from the proceeds of bills drawn under inland L/C

(back to back

L/C) opened by the export house/merchant exporter in favour of the sub-supplier. Where such an L/C is not

K.KRISHNAN, IGNOU

opened,

the

sub-supplier

house/merchant

exporter

would

may be

draw

export

necessary

to

the

effect that the goods have actually been exported. Extension

of

Pre-shipment

Credit

-

'Running

Account' facility The requirement of prior lodgment of letters of credit or firm orders had been waived by Reserve Bank of India respect of exports of certain commodities where banks were

authorised

to

grant

running

account

facility.

Reserve baks has now with effect from 14 t h March, 1992 waived this requirement for all commodities

and banks

have been permitted to grant pre-shjipment advances for exports of any commodity without insisting on prior lodgment of letter of credit/firm export orders. Granting of such facility may be subject to the following general conditions. i)

The facility will be allowed to only those exporters whose trace record has been good. New exporters may

not

for

obvious

reasons

be

allowed

this

facility. ii)

The exporters to whom this facility is allowed will be required to produce letters of credit/firm export orders within a reasonable period of time. In case of export of commodities covered under "Selective Credit Control', letters of credit/firm orders should

be produced within a period of one month from the date of advance. iii)

The banks shall mark off individual export bills, as and

when

purchase

they /

are

received

collection,

for

against

negotiation the

/

earliest

outstanding pre-shipment credit on 'First In First Out' (FIFO) basis. iv)

In respect of export of any commodity where the amount

of

pre-shipment

credit

is

in

excess

of

export value, excess amount should be adjusted either in cash or by sale of non-exportable by product, as soon as the extraction/segregation of by product is completed, within a period of 30 days from the date of advance. v)

The facility will not be allowed for inventory build up and only need based limits will be allowed.

vi)

The benefit of confessional rate of interest will be permitted up to 180/270 days in respect of

each

pre-shipment credit. vii)

If any exporter is found abusing the facility or does not comply with the above terms and conditions, the facility of running account will be withdrawn.

Pre-shipment Advance

K.KRISHNAN, IGNOU

It can also be given on production of sufficient evidence i.e. cable and telex/fax, the L/C or firm export order received

by

the

exporter

and

lodged

with

the

bank

within a reasonable time (as agreed upon by the bank) of

the

grant

of

cable/telex/fax particular

such

messages

of

goods,

advance. should

value

Moreover,

reveal of

quantity

order,

date

the and of

shipment/delivery period, terms of payment and name of buyer. It can also be given under the 'Red Clause' letter of credit

i.e.

at

the

instance

and

responsibility

of

the

foreign bank establishing L/C. In a Red Clause L/C, the packing credit advance is made against

a

simple

receipt

and

is

unsecured

whereas

packing credit in normal course (i.e. not against Red Clause) is made against the deposit of L/C and execution of letter of pledge/hypothecation/trust receipt and other loan documents. Exporter who do not receive the export order in their name

such

as

suppliers

to

merchant

exporter

and

Export/Trading Houses are also eligible provided: i)

The produce a letter from the concerned merchant exporter/Export Trading House that a portion of the 'Order' has been allotted to them, detailing the goods to be supplied.

ii)

The merchant exporter or Export Trading House neither has availed nor wish to seek packing credit in respect of the apportioned order, from any other bank/source,

iii)

The letter from the merchant exporter or Export Trading

House

is

countersigned

by

the

bank

advising the letter of credit. Sub-contractors

or

sub-suppliers

supplying

goods

for

exports under a consortia arrangement are also eligible for packing credit. Where

the

goods

are

to

be

manufactured

by

the

manufacturer and processed/packed etc. Export Trading House/Merchant-Exporter before making the shipment finance can be availed by both the parties i.e. the supplier as well as Export/Trading House or Merchant Exporter for the required period, subject to the condition that the total period of well as Export/Trading house or Merchant Exporter for the required period, subject to the condition that the total period of facility availed by both does

not

exceed

the

maximum

period

permitted

for

confessional finance. The pre-shipment credit is required to be liquidated from the proceeds of the relative export bills when purchased, negotiated or discounted. However, the RBI has relaxed this

condition.

K.KRISHNAN, IGNOU

For

instance,

if

for

any

reason

an

exporter negotiated or discounted. However, the RBI has relaxed this condition. For instance, if for any reason an exporter

who

has

availed

of

pre-shipment

credit,

is

confronted with the cancellation of the export order and, hence,

unable

top

adjust

the

credit

against

relative

export bill proceeds, the wiping off such outstanding through export bills drawn on the importers, either in the same country, or in any other country is permitted, provided the relative bills are in respect of the very goods for which credit was originally granted. Period of Advance The packing credit advance is granted up to the last date

of

shipment

as

per

the

underlying

sale

contract/export L/C to a maximum of 180 days. If the export order cannot be executed by that time, a further extension of 90 days may be permitted. Such extension would be considered by ranks only if they are satisfied that

reasons

for

extension

are

due

circumstances

beyond the control of the exporter. Banks may also consider to extend pre-shipment credit for

a longer period ab into up to a maximum of 270

days in respect of export of any commodity if the banks are

satisfied

about

the

need

for

longer

duration

of

credit, depending upon seasonality of commodity, its manufacturing cycle, time normally taken for shipment,

etc. the exporter must clearly out a case for availing packing credit for longer period and obtain necessary sanction from their banks. Exporters are, however, under an obligation to complete the export within a reasonable time which has now been fixed as 180 days after completion of initial period of 180 days i.e. the export must be completed within 360 days of granting o packing credit as otherwise it will loose the benefit of confessional rate of interest.

Rates of Interest Pre-shipment advances are granted to the exporters

at

the following concessional rate of interest: Pre-shipment advance up to initial 180 PLR – 2.5% days Pre-shipment

advance

for

a

further PLR - +0.5%

period of 90 days Pre-shipment advance beyond 270 days Banks are free to determine up to 360 days the rates Pre-shipment

advance

against PLR – 2.5%

incentives receivable from Government covered by ECGC guarantees (up to 90 days) The other important points as regards rates of interest K.KRISHNAN, IGNOU

on packing credit advances are given below:  If the export is the

date

of

not completed within 360 days from original

advance,

no

benefit

of

concessional rate of interest will be available from the 1 s t day of advance itself i.e. interest at the normal rate shall be payable from the day one the export is completed. The difference of interest less charged by the bank will be recovered.  If the export does not materialise at all and packing credit advance is to be adjusted from local funds, the entire advance will not be considered as an export credit from the date of original advance itself and interest

at

charged

by

the the

commercial rank

from

lending the

rate

date

may

of

be

original

advance.  No other service charges are payable by the exporters except guarantee fee on packing credit guarantee of ECGC obtained by the bank. Quantum of Advance The advance granted to exporter is restricted to the FOB

value

of

goods

or

domestic

value

of

goods

whichever is less except in the following cases: 1) For a few items, particularly engineering goods which are backed by export incentives of Government of

India the domestic value of goods exceeds FOB value. Advance up to the domestic value may be permitted in such case provided these are covered under ‘Export a

production

Finance

Guarantee’

of

ECGC.

The

packing credit allowed to these cases will be adjusted partly by export proceeds and the remaining amount from the claims of export incentives payable to the exporter. 2) For exports of HPS ground-nuts and de-oiled and defeated cakes, packing credit can be granted up to the cost of raw

material required even through the

value of advance exceeds the value of export order. The

advance

in

excess

of

export

order

must

be

adjusted either in cash or by selling residual ground nuts or by products oil product oil as soon as possible but within 15 days in case of HPS ground-nuts and 30 days in case of de-oiled and defatted cakes. The balance amount in the packing credit account will be adjusted by proceeds of export bills drawn under the export order in a usual manner. This provision has been brought in because raw material requirement to such exports is very high in comparison to the value of export order. Security of Packing Credit Advance The goods meant for export form the primary security

K.KRISHNAN, IGNOU

for the bank granting packing credit advance. The form of charge may, however, change on different stages depending

upon

the

nature

of

reports.

The

packing

credit may initially be clean at the time of disbursement; may be covered by hypothecation charge over the raw materials,

semi-finished

and

finished

goods

later;

hypothecation charge be converted to pledge of finished goods meant for exports or may even be covered by document of title to goods (LR/RR) if the goods are sent for shipment to a port city. This aspect of security must be discussed in details in the initial stages itself so that operation in the account are convenient. Margin The concept of margin in case packing credit is actually linked with the value of order/L/C and/or with value of security and different banks have their own standard in this regard. The most accepted

concept of margin in

these accounts is as under: 1) Margin on export order/L/C: This margin is applied on the value of export order/letter of credit at the time of initial disbursement when the packing credit may not be backed by security of goods. Usually a high margin is stipulated in such cases. 2) Margin on security: This is usual margin as applicable to other advances backed by security of goods such as

cash credit accounts etc.

K.KRISHNAN, IGNOU

ECGC Guarantee Most of the banks cover their packing credit advances under

‘Packing

Guarantee

Credit

Corporation

Guarantee” (ECGC).

of

ECGC

Credit

issues

and

packing

credit guarantees on each exporter individually and also has the system of issuing a guarantee in favour of the bank on whole turnover basis. Premium on the guarantee is generally recovered from the

exporter.

The

rates

of

premium

on

individual

guarantees are higher in comparison to rates on ‘Whole Turnover Packing Credit Guarantee’ issued to banks. It is necessary to obtain this information from the bank as cost of additional premium for individual guarantee may sometimes be quite heavy depending upon the turnover in

the

account.

Guarantees

issued

by

ECGC

are

in

addition to various policies issued by ECGC in favour of exporters to cover the risk of non-payment or other political risk involved in export trade. Full details of these policies are given in Chapter on Export Credit Insurance. Exim Bank’s Scheme for grant of Foreign Currency Pre-shipment Credit to Exporters (CFPC Scheme Export Import Bank of India (Exim Bank) has floated a scheme for Indian exporters to enable them to avail of

pre-shipment credit in foreign currencies to finance cost of imported inputs for manufacture of export products. The scheme is operated through authorized dealers who are granted refinance by Exim Bank in foreign currency out

of

credit

lines

arranged

by

Exim

Bank.

Salient

features of the scheme are given hereunder: i)

Exim Bank will arrange short-term lines of credit in foreign currencies from foreign lending agencies.

ii)

Exim Bank

will allocate bank-wise limits in foreign

currencies out of funds so raised for lending by those banks to Indian exporters. iii)

The

following

categories

of

exporters

will

be

eligible to obtain finance under the scheme: a) Export

House/Trading

Houses

with

annual

minimum

export

turnover exceeding Rs. 10 crores. b) Manufacturing orientation

of

units 25%

with of

production

or

export

turnover of Rs. 50 crores should be made either directly or through Trading Houses. c) Exporters should have satisfactory track record. iv)

Pre-shipment credit will be made available in any of the major international currencies in which Exim Bank raises funds.

K.KRISHNAN, IGNOU

v)

The

packing

should

be

sanctioned

credit

within by

granted

the

banks

under

permissible under

the

the

scheme

bank

finance

existing

credit

policy norms laid down by Reserve Bank. vi)

The credit risk arising in the transaction will be borne by banks through whom foreign currency funds will be disbursed

vii)

The outstanding under the facility should always be covered by firm orders/letters of credit or export receivables.

viii) Financing banks should obtain credit reports and satisfy themselves about the means and standing of the overseas buyers. ix)

the foreign currency loans to be extended by banks to their exporters should be covered with ECGC.

The total interest spread will be restricted to 2% over the interest rate at which the funds are raised by the Exim Bank. This two per cent will be shared by Exim Bank and the bank as under: Share of Exim Bank

0.5%

Share of Bank

1.5%

Any

commitment

fee

and/or

management

applicable will also be payable by the exporter.

fee,

if

The repayment of pre-shipment credit will be made out of sale proceeds off export shipments in respect of which the facility was availed by the exporters. The export will be subject to normal exchange/trade control regulations. As against the rupee interest rate of 3%, the credit under the scheme is going to be cheaper. The exact rate of interest will, however, depend on the foreign currency in which credit is availed. For instance approximate rate in US $ should be around 7 per cent. However, exchange rate for such transactions will be fixed at the time of taking advance and benefit of any appreciation in the value of foreign currency vis-a-vius Indian rupee will not be available. Relaxation’s granted in the area of Export Packing Credit Reserve Bank has announced a few relaxations in operational aspects of export packing credit as under: i)

The stipulation of repayment a few relaxations in operational

aspects

of

export

packing

credit

as

under: Substitution of commodity of export may also

be

granted

by

the

bank.

In

other

works

packing credit availed by an exporter can now be liquidated

by

export

documents

relating

to

any

export done by that exporter. ii)

The existing packing credit may also be marked off

K.KRISHNAN, IGNOU

with export proceeds of documents against which no packing credit has been drawn by the exporter. iii)

The relaxation’s as above are available both under packing

credit

availed

in

rupees

or

in

foreign

currency. iv)

The relaxation as above is, however, not extended to transactions of sister/associate/group concerns.

Extension of Packing Credit Facility to Sub-Supplier As per existing guidelines the packing credit is allowed to be shared between an Export Order Holder including trading house and a manufacturer of goods exported. This facility is now extended to sub-suppliers of raw materials, components etc. to the exported goods. The detailed guidelines in this regard are as under: i)

The packing credit facility for the sub-supplier will be available only on the basis of an export order or letter of credit L/C in the name of

Export Order

Holder. No running A/c facility will be permitted to sub-supplier. ii)

The

Export

Order

Holder

may

open

inland

L/C

through his banker in favour of his supplier/s on the basis of the export order or L/C received by him.

On the basis of such inland L/C the bank can

grant packing credit to sub-supplier. Such packing

credit will be liquidated from the proceeds of the bills drawn under L/C. The L/C opening grant packing credit to the Export

bank will

Order Holder at

this stage. iii)

Export Order Holder for

the

various

can open any number of L/Cs

components

required

within

the

overall value limit of the order L/C. iv)

The scheme will cover only the

rupee packing

credit. The finance given to both the sub-supplier and Export Order Holder will be eligible for export packing

credit

interest rate

at

interest

rates

as

per

RBI’s

directive for the specified period as

announced from time to time. v)

The charges for opening inland L/Cs will be as per FEDAI

(Foreign

Exchange

Dealers

Association

of

India) rules. vi)

The Export Order Holder will be responsible for exporting the goods as per export order or L/C and any delay with penal

provisions

process will subject him to the as

applicable

once

the

sub-

supplier makes available the goods as inland L/C terms to the Export Order Holder, his obligation of performance under the scheme will be treated as complex and penal provisions will not be applicable to him for any delay by Export Order Holder. K.KRISHNAN, IGNOU

vii)

The

scheme

will

cover

only

the

first

stage

of

production cycle. In other words a manufacturer exporter will

be

allowed to

open

inland

L/C

in

favour of this immediate suppliers of raw material/ components etc. that are required for manufacture of

exported

extended

to

goods. cover

The

scheme

suppliers

of

will

raw

not

material

be /

components etc. to such immediate suppliers. In case Export Order Holder is only a trading house, the facility will be available

commencing from the

manufacturer to whom the order has been passed on by the trading house. viii) EOUs/

EPZ

units

supplying

goods

to

another

EOU/EPZ unit for export purposes are also eligible for rupeepre-shipment export credit

under this

Scheme. However, the supplier EOU/EPZ unit will not be eligible for any post-shipment facility either in rupees or under PSCFC scheme as the scheme does not cover sales of goods on credit terms. ix)

The scheme does not envisage any change in the total quantum of advance or period of advance. Accordingly, the credit extended under the system will be treated as export credit from the date of advance

to

the

sub-supplier

to

the

date

of

liquidation by Export Order Holder under the inland export-L/C system and upto the date of liquidation

of packing credit by shipment of goods by Export Order Holder. x)

The

position

regarding

interest-

tax

on

export

packing credit granted to sub-supplier is not clear and interest-tax may be payable for the time being. Credit against proceeds of Cheques, Drafts, etc. received

directly

towards

advance

payment

for

Exports Banks can grant export credit at concessive interest rate in such cases subject to the following conditions being fulfillment. i)

Accommodation is granted for the transit period stipulated by FEDAI for collection of the instrument or till the

of realization of proceeds thereof which

ever is earlier. ii)

The

bank

gets

satisfactory

evidence

that

the

instrument represents advance remittance against an export order. iii)

The Bank’s past experience with the borrowers and the latters track record are good

iv)

The trade practices suggest the possibility of such instrument etc., being received towards advance payments are the exporters are able to satisfy the

K.KRISHNAN, IGNOU

Bank with reason for receiving payment directly. v)

Exchange Control Department of Reserve Bank has agreed to treat the direct inward remittance as an approach method of realization of export proceeds.

vi)

It is ensured by the Bank in due course that the goods have been shipped.

Packing

Credit

for

Imports

against

entitlements

under advance licence Concessive

packing

credit

can

be

granted

to

manufacture –exporters for financing of such imports against

advance

licence

etc.

as

are

meant

for

manufacture of goods to be exported by them even if they are not in a position, at the time availing of credit, to produce letter of credit or firm order for export of the manufactured items. This will be subject to the following conditions: i)

The bank has satisfied itself by referring to the conditions stipulated in the import licence that the imported material will be utilised for the items to be exported abroad.

ii)

Letter of credit/firm order is produced with in a reasonable time

which should not exceed 60 days

from the date of advance failing which commercial rate of interest will be charged ab initio.

Extension

of

Packing

Credit

etc.

for

Deemed

Exports Banks can grant export credit at concessional rates both for pre-shipment (supply) in respect of deemed exports. All categories of supply of goods regarded as deemed export under paragraph 0.2 o EXIM Policy eligible to avail the concessional finance.

K.KRISHNAN, IGNOU

997-2002 are

POST-SHIPMENT CREDIT Post-shipment finance means any advance granted to an exporter after shipment of goods. At the post-shipment stage. a) advances against shipping documents; b) advances against duty drawback. The need for post-shipment finance arises because exporters who sell goods abroad have to wait for a long time before payment is received from overseas buyers. The period of waiting will depend upon th terms of payment. Based on different types of terms of payment different methods of financing are being devised. Most of the provisions of Exchange Control Manual are by and large applicable to all these methods of post-shipment finance except few special provisions applicable to the individual methods of finance. Negotiations of Export Documents Drawn under Foreign L/Cs This has been thoroughly discussed in Chapter on ‘Negotiations under Documentary Credits’.

Purchase of Export Bills drawn under Confirmed Contracts Purchase or discount facilities in respect of export bills drawn

under

granted

confirmed

to

customers

Purchase/Discounting Since

in

case

documents offered

export

of

drawn

under

L/C

who

limits

purchase under by

are

are

enjoying

sanctioned of

of

by

generally

order

Bill

the

Bank.

of

export

discounting

export

way

order

the

substitution

security

of

credit-

worthiness of the buyer i.e. the importer as well as that of the exporter or beneficiary. The documents

drawn on

DP basis are parted with through foreign correspondent only when payment is received while in case of DA bills documents (including that of title to the goods) are passed on the overseas importer against the acceptance of the draft to make payment on maturity. DA bills are thus unsecured. The bank financing against export bills is open to the risk of non-payment on maturity. DA bills are thus unsecured. The bank financing against export bills is open to the risk of non-payment. Banks, in order to enhance security generally, opt for ECGC policies and guarantees

which

K.KRISHNAN, IGNOU

are

issued

in

favour

of

the

exporter/banks to protect their interest on percentage basis in case of non-payment or delayed payment which is not on account of mischief, mistake or negligence on the part of exporter. Within the total limit of policy issued to the customer, drawee-wise limits are generally fixed for individual customer. At the time of purchasing the bill bank has to ascertain that this drawee limit is not exceeded so as to make the bank ineligible for claim in case of non-payment. Advances against Export Bills Sent on Collect ion It may sometimes be possible to avail advance against export

bills

sent

on

collection.

In

such

cases

the

exporter bills will be sent by the bank on collection basis and will not be purchased/discounted. Advance such bills will be granted by way of a ‘separate loan’ usually termed as ‘post-shipment loan’. This facility is, in fact other

form

sanctioned conditions

of by as

post-shipment the

bank

advance

on

applicable

the to

and

same the

will

be

terms

and

facility

of

Negotiation/Purchase/Discount of export bills. A margin of 10 to 25% is, however, stipulated in such cases. The rates of interest etc., chargeable on this facility are also governed

by

the

bank

negotiation/purchase/discount.

by

way

of

Advances against Claims of Duty Drawback Duty drawback is permitted against export of different categories of goods under the ’Customer and Central Excise Duty Drawback Rules, 1995. ‘Drawback in relation to goods manufactured in India and exported means a rebate of duties chargeable under Central Excises and Salt Act, 1944 on certain specified goods. The Duty Drawback Scheme is administered by Directorate of Duty Drawback in the ministry of Finance. The claims of duty drawback are settled by Customs House at the rates determined and notified by the Directorate. As per the present procedure, no separate claim of duty drawback is to be filed by the exporter. A copy of the shipping bill presented by the exporter at the time of making shipment of goods serves the purpose of claim of duty

drawback

as

well.

This

claim

is

provisionally

accepted by the customs at the time of shipment and the shipping bill is duly verified the claim is settled by customs office later. As a further incentive to exporters Customs Houses at Delhi,

Mumbai,

Calcutta,

Chennai,

Chandigarah,

Hyderabad have evolve a simplified procedure under which claims of duty drawback are settled immediately after shipment and no funds of exporter are blocked. However, where settlement is not possible under the

K.KRISHNAN, IGNOU

simplified against

procedure claims

of

exporters duty

any

drawback

obtain as

advances

provisionally

certified by customs. The New Delhi Customs has gone a step

further

by

introducing

EDI

system

of

Indian

Customs and now w.e.f. 1.11.1996 drawback claims are settled under computerized system. Advance against Goods sent on Consignment Basis When the goods are exported on consignment basis at the risk of the exporter for sale and eventual remittance of sales proceeds to him by the agent/consignee, bank may finance against such transaction subject to the customer enjoying specific limit to that effect. However, the bank should ensure that while forwarding shipping documents

to

its

overseas

branch/correspondent

to

instruct the latter to deliver the documents only against Trust Receipt/Undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. Advance against Undrawn balance In certain lines of export it is the trade practice that bills are not to be drawn for the full invoice value of the goods but to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality

etc., to be ascertained after approval and inspection of the

goods.

Banks

do

finance

against

the

undrawn

balance if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export subject to a maximum of 10% of the value of

export

and

an

undertaking

is

obtained

from

the

exporter that he will, within 6 months from the date of shipment of the goods surrender balance proceeds of the shipment.

Against

Reserve

Bank

balance

can

of be

the India

specific the

enhanced

prior

approval

percentage

by

the

of

exporter

from

undrawn and

the

finance can be made available accordingly at higher rate. Since the actual amount to be realized out of the undrawn balance may be less than the undrawn balance it is necessary t keep margin on such advance. Advance against retention money In certain lines of export it is the trade practice that bills are not to be drawn for the full invoice value of the goods but to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc., to be ascertained after approval and inspection of the

goods.,

banks

do

finance

against

the

undrawn

balance if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export subject to a maximum of 10% of the value of

export

and

K.KRISHNAN, IGNOU

an

undertaking

is

obtained

from

the

exporter that he will, within 6 months from the date of shipment of the goods surrender balance proceeds of the shipment.

Against

Reserve

bank

balance

can

of be

the

specific

India

the

enhanced

by

prior

approval

percentage the

of

exporter

from

undrawn and

the

finance can be made available accordingly at high rate. Since

the

actual

amount

to

be

realized

out

of

the

undrawn balance may be less than the undrawn balance it is necessary to keep margin on such advance. Advance against Retention money Banks also grant advances against retention money, which

is

payable

within

one

year

from

the

date

of

shipment at confessional rate of interest i.e., 13% upto 90 days. If such advances extend beyond one year, they are treated as deferred payment advances which are also eligible for concessive rate of interest. Treatment for Overdue foreign currency Bills Many a time bills remain outstanding for long after the transit period or the due date, for some reason or the other. If the bill is not paid within 30 days after its due date and the relative credit advice not received by the concerned bank within this period, the foreign currency amount of the bil is to be converted into rupees at the prevailing. T.T. selling rate and the liability will be held in

rupees

in

the

books

of

the

negotiating

bank.

Thereafter, the bill with be treated as on collection basis. As and when the credit advice is finally received, the foreign currency amount of the bill will be purchased afresh by the bank at the prevailing T.T. buying rate. The difference between the rupees amount arrived at on the 30 t h day after due ar on the bais of T.T. selling rate and the rupees amount arrived at one the date of final payment at the T.T. buying rate will be debited/credited to the exporter. Barring exceptional cases, the exporter is bound to suffer a loss on account of the inherent difference between the T.T. selling T.T. buying rates on any currency. Again, interest would be recovered on the overdue export bill after the due date upto the date of realization.

K.KRISHNAN, IGNOU

Forfaiting finance ( A new financing option for Indian Exporter) Definit ion Forfaiting 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)

•

On a fixed rate basis (discount)

•

Upto 100 per cent of the contract value.

The word ‘forfait’ is derived from the French word ‘a forfait’ which means the surrender of rights. Simply

speaking,

discounting

of

forfaiting

export

is

receivables.

the In

non-recourse a

forfaiting

transaction the exporter surrenders, without recourse to

him, his rights to claim payment on goods delivered to an importer, in return for immediate cash payment from a forfaiter. 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. Eligibility All

goods

exported

on

credit

terms

are

eligible

for

contract

for

exchange

or

forfaiting, subject to quotes being available. How forfaiting works? Receivables export

of

under goods,

a

deferred

evidenced

payment

by

bills

of

promissory notes, can be forfaited. Bills of exchange or promissory notes, backed by coacceptance from a bank (which would generally be the buyer ’s bank), are endorsed by the exporter, without recourse, in favour of the forfaiting agency in exchange for

discounted

cash

proceeds.

The

banker ’s

co-

acceptance is known as availisation. The co-accepting bank must be acceptable to the forfaiting agency. Prescribed formats The bills of exchange or promissory notes should be in the prescribed format.

K.KRISHNAN, IGNOU

Role of Exim bank The

role

of

Exim

bank

will

be

that

of

a

facilitator

between the Indian exporter and the overseas forfaiting agency. On a request from an exporter, for an export transaction which is eligible to be forfaited, exim bank will obtain indicative and firm forfaiting quotes-discount rate,

commitment

and

other

fees-from

overseas

agencies. Exim bank will receive availised bills of exchange or promissory notes,m as the case may be, and send them to the forfaiter for discounting and will arrange for the discounted

proceeds

to

be

remitted

to

the

Indian

expoter. Exim Bank will issue appropriate certificates to enable Indian exporter. Exim Bank will issue appropriate certificates to enable Indian exporters to remit commitment fees and other charges. Exim bank has been authorized by the Reserve Bank of India vide AD (GP Series) Circular No. 3 dated February 13, 1992, to facilitate export financing through forfaiting. Forfaiting costs A

forfaiting

transaction

elements: •

Commitment free,

has

typically

three

cost

•

Discount fee,

•

Documentation fee.

Commitment fee A commitment fee is payable by the exporter to the forfaiter

for

the

latter’s

commitment

to

execute

a

specific forfaiting transaction at a firm discount rate within a specified time (normally not more than one year). The commitment fee generally ranges between 0.5 per cent and 1.5 per cent per annum of the utilized amount to be forfaited and is charged for the period forfait contract, whichever is earlier. The commitment fee is payable regardless of whether or not the export contract is ultimately executed. Discount fee Discount fee is the interest cost payable by the exporter for the entire period of credit involved and is deducted by the forfaiter from the amount paid to the exporter against

the

avalised

promissory

notes

or

bills

of

exchange. The discount fee is based on the relevant market

interest

rates

as

reflected

by

the

prevailing

London Inter-Bank Offered Rate (LIBOR) for the credit period and currency involved, plus a premium for the risks assumed by the forfaiter. The discount rate is applied to the aggregate principal and interest due on the debt instrument on its maturity to arrive at the payout to the exporter. The discount rate is established at the time of executing a forfait contract between the

K.KRISHNAN, IGNOU

exporter and the forfaiting agency.

Documentation Fee Generally,

no

documentation

straightforward

forfait

fee

is

transactions.

incurred

in

However,

if

extensive documentation and legal work is necessary a documentation fee may be charged. Other Costs Exum Bank will charge a service fee for facilitating the forfaiting

transaction

rupees, there may forfaiter,

such

as

which

will

be

payable

in

India

be additional costs levied by a handling

charges,

penalty

etc.

However, these costs are transaction-specific and will be specified and will be specified, where applicable. Transferability of cost As per Reserve Bank of India's AD (GP Series) Circular No.

3dated

February

documentation

fee

and

13, any

1992, other

discount

costs

levied

fee, by

a

forfaiter must be transferred toi the overseas buyer. Commitment

fee

should

also

be

passed

on

to

the

overseas b over to the extent possible. The exporter should finalise the export contract in a manner

which

ensures

that

the

amount

received

in

foreign

exchange

by

the

exporter

after

payment

of

forfaiting discount and other fees is equivalent to the price which he would obtain of gods were sold on cash payment terms. Computation of Duty Drawback Duty drawback will be computed only on FOB cost of goods i.e invoice value less freight, insurance, if any, and forfait discount and other related fees. The Forfaiting Benefits  Concerts

a

deferred

payment

export

into

a

cash

export into a cash transaction, improving liquidity and cash flow.  Frees

the

exporter

from

cross-border

political

or

commercial risks associated with export receivables.  Finance upto 100 per cent of the export value is possible as compared to 80-85 per cent financing available

from

conventional

export

credit

programmes.  As forfaiting offers without recourse finance

to an

exporter, it does not impact the exporter's borrowing limits. Thus forfaiting represents an additional source of funding, contributing to improved liquidity and cash flow.

K.KRISHNAN, IGNOU

 Provides fixed and

exchange

rate finance; hedges against interest risks

arising

from

deferred

export

credit.  Exporter

is

freed

from

credit

administration

and

collection problems.  Forfaiting is transaction specific. Consequently, long term banking relationship with the forfaiter is not necessary to arrange a forfaiting transaction.  Exporter

saves

on

insurance

costs

as

forfaiting

obviates the need for export credit insurance.  Simplicity of documentation enables rapid conclusions of the forfaiting arrangement. Other Important Factors Currency in which contract must be executed to vbe eligible for forfaiting: the export contract can be execute din any of the major convertible currencies e.g. US Dollar, Deutsche Mark, Pound Sterling, Japanese Yen. Minimum

value:

The

contract

eligible

for

minimum forfaiting

value and

of

an

export

acceptable

to

a

forfaiting agency will generally be the equivalent of $ 500,000. Eligibility:

Eligibility

of

an

export

transaction

for

forfaiting can be determined when the forfaiting agency

is approached for

a forfait quote. The availability of a

forfaiting quote for a particular country will depend on the

forfaiting

export

agency's

receivables

agency

will

perception

from

indicate

the

that

of

country.

maximum

risk

quality

The

of

forfaiting

amount

and

the

period of discount while giving quote for forfaiting. In

case

exporters

wisdh

to

forfait

their

export

receivables, Exim Bank can be contracted with these details:  Name and address of foreign buyer  Country to which exports are to be made  Name of the guarantor bank (i.e. aval), if known to the exporter  Nature of goods Operating mechanism 1. Indian exporter initiates negotiations with prospective overseas buyer with regard to order quantity, price, currency

of

payment,

delivery

period

and

credit

terms. 2. Exporter

approaches

Exim

bank

to

obtain

an

indicative foraiting quote from the forfaiting agency. For this purpose, the exporter is required to provide the following informationK.KRISHNAN, IGNOU

 Name and address of foreign buyer  Country to which exports are to be made  Name of the guarantor bank (i.e. aval), if known to the exporter  Nature of goods  Order quantity  Amount of order base price, interest rate  Delivery period and repayment schedule  Name of the authorised dealer who will handle the export transaction for the exporter in India. 3. Exim

Bank

obtain

indicative

quotes

of

discount,

commitment fees and documentation fees, if any, and communicates these to the exporter. 4. Exporter finalises the terms of the contract with the buyer. The final export offer must be structured in a manner which ensures that the amount received in foreign exchange by the exporter after payment of forfaiting discount and other fees is equivalent to the price which he would obtain if goods were sold on cash payment terms. 5. If the terms are acceptable ot the overseas buyer, the Indian exporter informs Exim Bank accordingly and

requests the Bank to obtain a firm quote form the forfaiting agency. 6. Exim Bank obtains a firm quote form the forfaiting agency and conveys this information to the exporter and

his

authorized

dealer,

with

a

request

to

the

exporter to confirm acceptance of the forfaiting terms within a specified time limit. 7. Indian

exporter

confirms

acceptance

of

forfaiting

terms of Exim Bank. The exporter will enter into a commercial contract with the overseas buyer and also execute

a

forfaiting

contract

with

the

forfaiting

agency through Exim Bank. 8. On execution of the forfaiting contract. Exim Bank issues:  A

certificate

to

the

exporter

with

a

copy

to

the

authorised dealer, regarding the commitment fee to be paid by the exporter to the forfaiting agency. This certificate

will

commitment accordance

fees with

enable to the

to the

exporter forfaiting

schedule

to

remit

agency,

indicated

in

in the

forfaiting contract in terms of the Reserve Bank of India

guidelines

governing

forfaiting

contracts,

commitment fees will be regarded as being analogous to

bank charges, and will not be required to be

mentioned in the GR form or shipping bill prepared by K.KRISHNAN, IGNOU

the

exporter,

subject

to

the

commitment

fee

not

exceeding 1.5 per cent of the contract value.  A certificate to the exporter detailing the discount payable to the forfaiting agency, to enable the Indian Customs

authorities

to

verify

deductions

towards

discounts declared by the exporter on the GR form and shipping bill. 9. The

Indian

schedule

exporter

agreed

ships

with

the

the

goods

overseas

as

per

buyer.

the The

forfaiting transaction will be reflected in the following three

documents

associated

with

an

export

transaction, in the manner suggested below: Invoice Forfaiting discount, commiment fees, etc. need not be shown separately; instead, these could be built into the FOB price, stated on the invoice. Shipping Bill and GR form Details of the forfaiting costs will be included along with the

other

details,

such

as

FOB

price,

commission

insurance, normally included in the "Analysis of Export Value" on the Shipping Bill. The claim for duty drawback, if any, will be certified only with reference to the FOB value of the exports states on the shipping bill.

In

case

of

exports

covered

under

the

scheme

of

forfaiting, the following procedure should be followed for filling up the various columns relating to the FOB value in the Shipping Billl and the GR form. i)

the column "Total f.o.b. value in words" will reflect the total invoice value inclusive of the forfaiting discount.

ii)

Under the column "Analysis of export value," the actual

f.o.b.

discount

value,

should

be

exclusive

of

the

indicated

against

forfaiting the

sub-

column "FOB value". The forfaiting discount will however, have to be shown separately under the sub-heading

"Other Deductions", on he basis of

Exim Bank's certificate which is to be submitted by exporters to the Customs authorities. iii)

The

column

"Full

export

value

or

where

not

ascertainable the value which exporter expects to receive on the sale of goods" should indicate the total

invoice

value

inclusive

of

the

forfaiting

discount. iv)

Under the column "Assessable Value under section 14" the actual f.o.b. value, net of the forfaiting discount will have to be shown.

v)

On the reverse of the Shipping Bill, the figures to

K.KRISHNAN, IGNOU

be indicated against the column "Value on which Drawback Claim" should be the f.o.b. value after deduction of the formatting discount. vi)

These instructions have been communicated to All Collectors

of

Customs

by

Ministry

of

Finance,

Department of Revenue in terms of Notification F.No. 605/26/91-DBK dates march 1,1993. 10.The export contract will provide for the overseas buyer to furnish avalised bills promissory notes. 11.If the contract for bills of exchange, the exporter will draw a series of bills of exchange and send them along with shipping documents to his banker for presentation

to

importer

for

acceptance

through

latter's banker. Importer's banker will hand and over shipping documents to importer against acceptance of bills of exchange by the importer and signature of avail. Avalised and accepted bills of exchange with the

words

"Without

Recourse"

and

forward

them

through his banker to Exim Bank, which in turn will send to the forfaiting agency. 12.If promissory notes are provided for in the export contract, then the exporter will require the importer to prepare a series of avalised promissory notes, as agreed.

On shipment, the exporter's bank sends the shipping documents to the importer's bank for transmission to the overseas buyer. Importer's banker will hand over shipping

documents

to

importer

against

avalised

promissory notes issued by the importer. Avalised

and

accepted

promissory

notes

will

be

forwarded to the exporter through his banker. The Indian exporter endorses the avalised promissory notes with the worlds "Without Recourse" and forwards them through his bank to Exim Bank, which in turn will send them to the forfaiting agency. 13.The forfaiting agency effects the payment of the discounted value, in accordance with Exim Bank's instructions, after verifying the aval's signature, and other particulars. Normally, Exim Bank will direct

the forfaiter to credit

the payment to the nostro account of the exporter's bank in the country where the forfaiter is based. The bank receiving the discounted proceeds will arrange to remit the funds to India. The exporter will be issued a Certificate of Foreign Inward Remittance. The GR form will also be released. 14.An export contract which provides for more than one shipment can also be forfaited under a single

K.KRISHNAN, IGNOU

forfaiting contract. However, where the export is effected

in

more

than

one

shipment,

availsed

promissory notes/bills of exchange in respect of each shipment could be forfaited, subject to the minimum

value

requirements

laid

down

by

the

forfaiter. 15.On maturity of the bills of exchange/promissory notes,

the

forfaiting

agency

presents

the

instruments to the aval for payment. 1. Customs

Public

Notice

on

Forfaiting

discount

and

commitment fees - Certificate of net realisable value of exports by Customs The Export Import Bank of India (Exim Bank), in consultation with the Reserve Bank of India, have decided to introduce the Scheme of Forfaiting as an instrument of financing exports. The scheme is being introduced initially of a period of three years. 2. Forfaiting, financing,

which

is

involves

an

instrument

purchase

of

of

invoices,

export bills

of

exchange, promissory notes etc. by certain forfaiting Agencies abroad at a discount from the exporters in different Countries of the world without recourse to such

exporters.

essentially

to

The help

objecive out

of

exporters

the

scheme

overcome

is he

problems of delay in the repatriation of the export

sale

proceeds.

forfaits

his

Under

right

to

the futue

scheme, payment

the in

exporter

return

for

immediate cash. In other worlds int converts credit shale into a scahs transaction the considration being discount that the exporters/his bank will have to bear. Forfaiting is without further recourse to the exporters i.e. of forfaiting bank/financial institution is unable to realise the amount frojm the purchasers of the goods, they cannot come back to the exporters for recovery of the amount. In such a transaction, the

Forfaiting

Agencies

normally

charge

forfaiting

discount (which varies from country to country and from transaction to transaction) and a committeemen fee which is payable till such period as the discount is

allowed.

The

Indian

exporters

opting

for

the

Scheme will have to charge their foreign buyers with these two elements of costs over and above the contractual base price agreed upon. All transactions under the forfaiting scheme will be through the Exim Bank of India which will act as intermediary. 3. As clarified by the Exim Bank, the commitment fees would be payable at a specified rate on the contract value for the period commencing from the date of acceptance of the offer, till the date of disbursals of the amount by the Forfaiting Agency (which will take place after shipment and presentation of documents).

K.KRISHNAN, IGNOU

Accordingly, it would not be possible to quantity this fee at the time of shipment. The commitment fees will be analogous to the bank charges. Since bank charges are now being allowed to be included in the F.O.B. value declared by the exporters it has been decided that this fee should also be included for arriving a the value under section 14 of the customs act. In all cases where the commitment fees do not exceed 1.5% of the contract value, the Reserve Bank of India

have permitted remittance of such fees in

terms of their AD (GP Series) Cicular No. 3 dated 13.2.1992. Prior approval of the RBI would, however, be

required

in

cases

where

the

commitemnt

fee

exceed 1.5% of the contract value. 4. Regarding the forfaiting discount, which is payable by the exporters to the overseas Forfaiting Agency, it has been decided that the Exim Bank issue

a

certificate,

shipment-wise,

of India will showing

the

forfaiting discount payable and this certificate will be submitted by the exporter along with Bills

of

scrutiny

of

the

Assessing

the Shipping Officer

in

the

Customs House. The forfaiting discount should be deducted from the total invoice value, for arriving at the assessable value under section 4 of the Customs Act. The assessable value, after deduction of the forfaiting discount will comprise of the F.O.B. price

and the commitment fees. 5. In case of exports under the Scheme of Forfaiting, the following procedure should be followed for filling up the various columns relating the FOB value in the Shipping Bill and the G.R. Form: i)

the column "Total F.O.B. value in the Shipping Bill and the G.R. Form:

ii)

under the column 'Analysis of export value', the actual

F.O.B.

value,

exclusive

of

the

forfaiting

discount should be indicate against the sub-column 'FOB Value'. The forfaiting discount will, however, have

to

be

shown

separately

under

the

sub-

heading "Other Deductions", on the basis of Exim Bank

certificate

submitted

by

the

individual

exporter. iii)

The

column

"full

export

value

or

where

not

ascertainable the value which exporter to receive on the sale of goods" should indicate the total invoice value, inclusive of the forfaiting discount. iv)

Under the column 'Assessable Value under Section 14' the actual F.O.B. value, net oof the forfaiting discount will have to be shown.

v)

On the reverse of the S/Bill the figures to be indicated against the column. Value

K.KRISHNAN, IGNOU

on which

Drawback Claim' should be the F.O.B. Value after deduction of the forfaiting discount. The drawback amount and other export incentives will have to be calculated with reference to the value shown after the requisite deductions and should match with the figures shown as FOB value as indicated in (ii) above. vi)

The entries in the GR from with regard to the break-up of the value should be verified by the Customs authorities on the basis of the EXIM Bank certificate before acceptance.

The certificate to be

issued by the EXIM Bank should be endorsed by the Customs Officials with the shipping bill number and

date and after completion of the Customs

formalities should be forwarded to the Reserve bank of India with the GR form.

Non-Conventional Avenues for Export financing Most

exporters

try

to

finance

their

exports

through

commercial banks. To promote their exports some also take

advantage

of

the

Government’s

Marketing

Development Assistance Scheme through the Ministry of Commerce. ignorant

Yet, of

there

are

various

many

funding

exporters schemes

who of

are

other

organizations which could help them to finance their exports. In the following paragraphs, an efforts has been made to identify such schemes and highlight their specific requirements for the benefit of the exporting community. Exim Bank The

financing

schemes

of

Exim-Bank

have

been

discussed later in this Chapter. Industrial

Credit

India Ltd. (ICICI) K.KRISHNAN, IGNOU

and

Investment

Corporation

of

All the financial institutions (namely IDBI, IFCI and ICICI) give priority to financing projects involving export possibilities.

However,

ICICI

has

separate

fund

for

financial assistance to Industrial Export Projects. Under this

scheme,

ICICI

provides

assistance

under

two

schemes (i) Productivity Fund (for market development); and (ii) Term Loans. Productivity Fund Financial assistance is available by way of a grant for upgrading export marketing (through market research, product

adaptation, training etc.) and for improvement

in productivity (through introduction of process/product technology)

which

would

increase

export

competitiveness. Eligible Companies Private/Joint

Sector

productivity

scheme

exportability

of

companies

its

with

a

products.

having view

comprehensive to

Priority

is

enhancing given

to

companies manufacturing products with identified export prospects, engineering,

preferably

in

electronics,

the

thrust

chemicals,

industries

like

pharmaceuticals,

textiles, apparel, leather, food processing and packaging and computer software.

Eligible Activities Product ivity Improvement Act ivities i)

for cost reduction and quality improvement, choice of process/product technology options, R&D effort towards production quality / improvement with

and

efficiency/ volume

establishing

measurable

productivity

achievements.

cells

Given

to

Productivity consultants and technicians. ii)

For identifying products suitable for ancillaries or selecting appropriate ancillary for modernizing, etc. Available to Ancillary Development Consultants.

iii)

For development and implementation of training programs, including trainers and training materials required

to

improve

productivity.

Available

to

supervisor training. iv)

Design

and

product

and/or

expenditure

adaptation incurred

(for

in

constancy

response

to

identified export market opportunities). v)

Visits

to

plants

in

competing

countries/plants

operated with collaborators assistance, with a view to adopting their production practices. vi)

Workships/Seminars with institutions or potential collaborators

K.KRISHNAN, IGNOU

for

productivity

and

technology

improvement. vii)

For upgrading product/process technology

through

induction of technical know-how. Export Market Development Activities i)

Desk Research to focus on promising markets.

ii)

Overseas Market Research for evaluating product specifications

identifying

market

segments,

distribution channels, buyer profiles etc. iii)

Overseas travel for appointing agents/distributors, direct selling and for keeping abreast with product developments.

iv)

Product inspectively /certification services.

v)

Training of export marketing personnel.

vi)

Travel to India by potential buyers.

vii)

Sampling,

Advertising

etc.

required

for

product

launch an international markets. Quantum of Assistance Grants upto 50% of the cost of the productivity scheme, subject to a maximum of US$ 4,00,000.

Term Loans for Export Oriented Industrial Projects ICICI also provides term loans to enable the industry to increase

its

quality

and

cost

competitiveness

in

the

international market. Eligible Companies Private/Joint sector companies manufacturing products having

long

advantage.

term

The

export

companies

potential should

and

have

economic

a

strategic

export plan striving to reach international price/quality standards,

incorporating

expanded

exports

as

an

important element of corporate strategy and marketing and

technological

arrangements

which

are

consistent

with significant export expansion. Priority is given to companies manufacturing products in the thrust areas (explained earlier) and those proposing ancillary

development

and

productivity

improvement

plans. Eligible Activities Cost of plant, equipment jigs, fixtures, tools, drawings, know-how

etc.

for

technology

upgradation,

modernization, balancing, expansion and new projects.

K.KRISHNAN, IGNOU

Terms of Loan Repayment

:

schedule

Repayment in 5 to 10 years with grace

period

of

1

to

3

years-

depending on the expected cash generations. Exchange Risk

:

None, as even the foreign currency loan (if any) is denominated in Indian Rupees on disbursement

Conversion

:

ICICI does not retain the option of converting the loan to equity.

Option Agricultural

Commercial

and

Enterprise

(ACE)

project ACE is funded by USAID, ICICI is the implementing agency for the project. Objectives The main objectives of the project are: -

To increase private investment in the agro-business sector.

-

To improve linkages between horticulture producers, processors and traders.

-

To increase flow of fresh and processed horticulture products to targeted domestic and export markets.

-

To increase rural incomes.

Eligible Organizations Private State

commercial of

venture and

Maharashtra

will

be

co-operatives eligible

to

in

the

receive

assistance under ACE. Type of ACE activities Thee groups of activities have been identified: -

Loans to private sector

-

Technical assistance

-

Trade and investment tours

Loans to Private Sector Agro-Business All types of agro-business entrepreneurs in Maharashtra will be eligible for ACE assistance. Technical Assistance Chemonics International, which has its headquarters in Washington, D.C. and field offices in Miami, Budapest and Warsaw, will be providing Technical Assistance (TA) to

private

firms

in

designing

and/or

implementing

innovative projects related to post-farm agriculture development.

K.KRISHNAN, IGNOU

Trade and Investment Tours ACE

will

organise

and

finance

about

15

Trade

and

Investment (TI)m tours for entrepreneurs to visit firm in USA/India for building commercial linkages. The request for TI should meet the objective of the ACE programme and preferably result in an ACE project. Main Terms of Assistance

LOANS TO PRIVATE SECTOR

Promoters

Atleast 255 of the project cost.

contribution ACE Assistance

Upto 50% of the project cost subject to a maximum of US $ 7,50,000 or its reupee equivalent, and balance 25% through loans/equity from other financial institutions/banks.

Repayment period

Upto seven years including suitable moratorium

Technical Assistance Promoter’s contribution atleast 25% of the TA cost and the balance as grant from ACE funds. The maharastra Chamber of Commerce and Industries (MCCI), Pune would be assisting ICICI for promotion of

the ACE project. Project proposals submitted by the entrepreneurs will be evaluated by ICICI for approval. ICICI has formed an ACE Group in its technology division for implementing the ACE project.

For further information please contact: Mr. Arjan Advani, General Manager The Industrial Credit and Investment Corpn. Of India Ltd. Scindia House, 5 t h Floor, N.M. Marg, Ballard Estate, Bombay – 400 038. Tel No. 2618251 Telex No.011-84458 ICIC IN Gram: CREDCORP Bombay Fax: 022-2625444

Department of Scientific and Industrial Research (D.S.I.R.) The DSIR operates a scheme called Transfer and Trading in Technology (TATT) under which it can grant assistance for technology exports. Apart from financial assistance, the prospective technology/service exporters can also identify possible export opportunities by studying the K.KRISHNAN, IGNOU

technology

profiles

of

various

developing

countries,

which have been prepared with the support of DSIR to identify the technology needs of those countries. Scheme of Transfer and Trading in Technology (TATT) Under this scheme, the DSIR provides support by way of grant, to finance exports. The quantum of grant and eligibility

is

determined

case-to-case,

but

grant

can

extend to 100% of the eligible expense. Eligible Activities i)

Preparation of reports/films regarding capabilities and experience of Indian industrial units and other concerned organisations in export of technologies and services.

ii)

Preparation of technology profiles having export potential.

iii)

Training programmes for potential foreign clients.

iv)

Preparation market

and

dissemination

promotion

materials

of

publicity

like

and

technology

catalogues, brochures, video films, audio-visuals etc. v)

Participation in technology trade

fairs, exhibitions

etc. (including participation fee, cost of display etc.).

vi)

Setting

up

projecting abroad

demonstration

Indian

(in

plants/plot

technology,

such

cases,

either

the

in

grant

is

plants India

or

usually

restricted to about 205 of the cost of the pilot plant). vii)

Documentation example

expense

brochures,

materials,

etc.)

for

delegations

pamphlets,

provided

the

(for

advertisement delegation

also

includes technology exports. Procedure As explained earlier, a grant under the TATT scheme is sanctioned on a case-to-case basis. The details of the proposal may be sent to DSIR, Technology

Transfer

Division, Technology Bhawan, New Mehrauli Road, New Delhi-110 016.

Role of Exim Bank Finance EXIM BANK FINANCE The export-import Bank of India (Exim Bank) provides financial assistance to promote Indian exports through direct financial assistance, overseas investment finance, K.KRISHNAN, IGNOU

term

finance

for

export

production

and

export

development, pre-shipment credit, buyers credit, lines of credit,

relending

facility,

export

bills

rediscounting,

refinance to commercial banks, finance for computer software exports, finance for export marketing and bulk import finance

to commercial banks. Th Exim Bank also

extends non-funded facility to Indian exporters in the form of guarantees. The diversified lending progrmme of the Exim i.e.

Bank

from

the

now covers various stages of exports, development

of

export

markets

to

expansion of production capacity for exports, production for exports and post shipment financing. The Exim Banks focus

is

on

export

of

manufactured

goods,

project

exports, exports of technology services and export of computer software.

FINANCING PROGRAMMES Loans to Indian Companies Deferred payment exports: Terms finance is provided to Indian exporters of eligible goods and services which enables buyers.

them

to

Deferred

offer

deferred

credit

can

credit also

to cover

overseas Indian

consultancy, technology and other services, Commercial banks participate in this programme directly or under risk syndication arrangements.

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. Facilities

for

deemed

exports:

Deemed

exports

are

eligible for funded and non-funded facilities from Exim Bank. Finance for export marketing: This programme, which is a component of a World Bank loan, helps exporters implement their export market development plans. Loans

to

Foreign

Government,

Companies

And

Financial

Institutions Overseas Buyers 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 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

K.KRISHNAN, IGNOU

term finance to their clients world-wide

for imports

from India. Loans to Commercial Banks in India Export Bills Rediscounting: Commercial banks in India who are authorised to deal in foreign exchange can rediscount their short term export

bills with Exim Bank,

for an unexpired usance period of not more than 90 days. Refinance of export credit: Authorised dealers in foreign exchange can obtain from Exim Bank 100% refinance of deferred payment loans extended for export of eligible Indian goods. Guaranteeing of Obligations Exim Bank participates with commercial banks in India in the issue of guarantees required by Indian companies for

export

contracts

and

for

execution

of

overseas

construction and turnkey projects. ORGANISATION Exim Bank is fully owned by the Government of Indian and is managed by a Board of Directors with repatriation from Government, financial institutions, banks, business community.

The

operations

are

grouped

into

Finance, Trade Finance, Overseas Investment

Project finance

supported by Planning and Co-ordination Groups. FINANCE FOR EXPORT ORIENTED UNITS Introduction Exim Bank seeks to create and enhance export capability of Indian Companies. Under the Lending Programme for Export Oriented Units, the Bank addresses the term finance requirements of export oriented units. Eligibility Company with a minimum export orientation (present or targetted) of 10%

of net sales or export sales of Rs. 5

crores, per year, whichever is lower. Focus Units set up/proposed to be set up in Export Processing Zones or under the 100% Export Oriented Units Scheme. Also,

expansion

/

modernization/

upgradation/

diversification programmes of existing export oriented units, importing capital goods under Export Promotion Capital Goods Scheme. What is on offer Terms loans in Indian Rupees or in foreign currency. Deferred Payment Guarantee for imports and guarantee in favour of Government of India for imports under Export Promotion Capital Goods Scheme. K.KRISHNAN, IGNOU

Rate of Internet On rupee terms loans-liked to Bank’s minimum lending rate;

on

interest

foreign rates.

currency Guarantee

loans-all

floating

commission

in

or

fixed

line

with

industry practice. Service Fee 1% of loan amount payable up front. Repayment Over a period upto ten years, determined on the basis of projected cash flows with suitable moratorium. Security Appropriate

charge

on

fixed

assets

of

the

company/project plus any other security acceptable to Exim Bank. Appraisal focus Track record of the company/promoters financial of the company/project,

competitive

strength

of

the

product/industry, both in domestic as well as in export markets,

appropriateness

of

the

technology,

export

marketing arrangements, Exim Bank’s industry/company exposure.

How to apply Applications may be made to any of the Bank’s offices in India,

Prior

to

receiving

an

application,

the

Bank

welcomes preliminary discussions with the promoters to determine scope identify

Exim

for Exim Bank’s term finance and also Bank’s

export

services

that

could

supplement the finance. General Indian

promoters

requiring

additional

information

or

clarifications are welcome to contract any of Exim Bank’s offices in India. FINANCE EXPORT OF COMPUTER SOFTWARE With further projects,

liberalisation in the export import policy,

going

in

for

development

and

export

of

software can now approach the Export Import Bank Of India (Exim Bank) for indirect financing

of their term

loan requirements. The broad parameters of the scheme are as follows: •

A

rupee

scheduled

term

loan

should

commercial

bank

be

sanctioned to

the

by

a

software

developing and exporting units (this loan will be fully refinanced by the exim Bank. The commercial bank will have a 2% interest spread).

K.KRISHNAN, IGNOU

•

The proposed unit should be located in an export processing zone.

•

The term loan sought, should be for acquisition of project related fixed assets, including imported and indigenous computer systems.

•

Units/projects

undertaking

export

obligation

under

Government of India’s Software Export Policy (1986) are also eligible. The scheme is also extended to existing units with minimum export orietnation at 255 of the annual sales. •

New

units/projects

orientation

backed

with by

minimum firm

25%

export

export market

arrangements are also eligible. •

The project cost should not exceed Rs. 5 crore.

•

The debt-equity ratio for the project should not be more than 2:1.

•

The promoters contribution should not be less than 17.5%

•

There should be no default in respect of any term loan availed of earlier.

•

The maximum period of financing will be 10 years. Including 3 years moratorium.

Any existing unit or an entrepreneur setting up a new unit and fulfilling the above mentioned parameters can approach

a scheduled commercial bank

for obtaining a

term loan for the said project. It may be mentioned here that irrespective of the fact that the cost of equity and debt is almost the same for an 100% EOU (as there is zero tax liability for such units) the advantage of term loan financing is that the interest rate can be capitalised during the construction period and built into the project cost. PRE-SHIPMENT EXPORT CREDIT IN FOREIGN CURRENCY Export-Import

Bank

of

India

(Exim

Bank)

has

introduced, for the first time ever in India, Pre-shipment Export

Credit

in

Foreign

Currency.

Such

credit

will

finance the foreign exchange costs of imported inputs for

export

production

such

as

raw

materials,

components, consumables. The finance will be repayable in foreign currency from the proceeds of the relative exports. any

Hence, the Indian exporter is unlikely to bear

foreign

currency.

Fluctuation

risks.

Such

transactions will also be self-liquidating in nature. Foreign Currency Pre-shipment Credit (FCPC) envisages Exim Bank raising short-term foreign currency funds on a revolving basis from one of more syndicate of overseas lenders. Exim Bank will K.KRISHNAN, IGNOU

fund commercial banks in India

who opt to avail of FCPC exporter

customers

for

for on-lending to eligible import

of

eligible

items.

Commercial banks in India will, in turn, allocate

FCPC

limits

their

to

their

assessment

customers

of

import

on

the

basis

requirement

of

for

export

production. The advances granted under FCPC to the exporters

will

be

fully

liquidated

from

the

export

proceeds of the relative export bill. The maximum period of an advance under FCPC will not generally exceed 180 days. CO N SULTAN C Y AN D TE C HN O LO G Y SE R VI C E S FI AN C NE PRO GR AMME

Introduction Indian Exporters, executing overseas contracts involving consultancy and technology services, can avail of Exim Bank’s

financing programme, to offer deferred payment

terms to their clients, thereby enlarging the market for Indian consultancy exports. Who can use the facility? Indian exporters, having corporate status or otherwise, who

have

secured

wherein deferred

a contract

for

export of services

payment terms need to be offered to

the client, can utilise the facility. Nature of Credit The credit may be extended to the Indian Exporter

either by Exim

Bank in participation with commercial

banks or directly by commercial banks, who could seek refinance

from Exim Bank. The Indian Exporter would,

in turn, offer deferred payment terms to the client. Scope Technology and Cnsultancy services including a) Providing

personnel

(including

skilled

or

unskilled

workmen and persons for rendering technical or other services). b) Transfer of technologic, know how expertise of other skills; c) Furnishing

any

information,

blue

prints,

plans

or

advice. d) Operation,

maintenance

and

supervision

of

manufacturing plants, buildings and structures. e) Management contracts for commercial concerns; f ) Any

other

activity

considered

acceptable

by

Exim

Bank. Amount of Credit Exporter

is

normally

expected

to

obtain

an

advance/down payment of 25% of contract value and remaining portion would be covered by credit under the

K.KRISHNAN, IGNOU

programme. The value of the contract should not be less than Rs. 20 lakhs, if deferred payment terms are to be offered. Currency of credit Normally India rupees, Loans in other currencies can also be considered, if required. Repayment Credit is repayable, by the India Exporter, in half yearly installments, over period not exceeding 5 years, with a suitable grace period. Interest should be payable even during the grace period. Security Guarantee

of

foreign

government

or

a

guarantee/irrevocable letter of credit of an acceptable bank would need to be obtained. Indian Exporter would also be required to obtain ECGC insurance cover and assign the same in favour of Banks. Documentation The Exporter

would enter into an agreement with Exim

Bank/participating bank(s) and would be required to execute documents as may be prescribed by Exim Bank. Procedures

 In case deferred credit terms are to be offered the Indian Exporter makes an application as per format (available on request from Exim Bank) and submits it to his banker, at bid submission stage.  The bank forwards the application, with its documents to all the members of the Working Group, i.e. Exim Bank,

Reserve

Bank

of

India

(Exchange

Control

Department)and Export Credit Guarantee Corporation of India Ltd. (ECGC).  Bid clearance for proposals on cash payment terms upto bid value of Rs. 5 crores and Rs. 10 crores is delegated to the Authorized Dealers and Exim bank, respectively,

while

bid

clearance

for

proposals

exceeding Rs. 10 crores in value are considered by the Working Group. All proposals on deferred payment terms irrespective of bid value are considered by the Working Group.  Exim Bank calls for additional information/clarification and convenes a Working Group meeting to discuss the as applicable, for post award clearance.  Disbursements would be made under the terms of letter of credit opened by the overseas client under

any

agreement

between

client

and

or

Indian

exporter or against invoices accepted by the overseas client. K.KRISHNAN, IGNOU

Glossary of Terms Term EXIM

Definition Export Import

PCFC

Pre-shipment export Credit in Foreign Currency

ECGC

Export Credit Gurantee Corporation

P/C

Packing Credit

L/C

Letter of Credit

FOB LIBOR

Freight on Board London Inter Bank offer Rate

EOU

Export Oriented Unit

EPZ

Export Processing Zone

IEC

Importer Exporter Code

PLR

Prime Lending Rate

PCL

Packing Credit Limit

CFPC ACE

Foreign Currency Pre-shipment Credit Agricultural Commercial and Enterprise

BIBLIOGRAPHY •

Exporters manual and documentation ‘A Nabhi Publication’.

•

Export financing and documentation ‘A.K. Tandan’

•

www.exportersindia.com

•

www.eximbank.com

•

Business India

•

Industry Trade Association Manual Rajasthan

•

Magazines

K.KRISHNAN, IGNOU