Sources Available For Export

For more Notes, Presentations, Project Reports visit a2zmba.blogspot.com hrmba.blogspot.com mbafin.blogspot.com CHAPTER 1 - INTRODUCTION OF EXPORTS Export in simple words means selling goods abroad. International market being a very wide market, huge quantity of goods can be sold in the form of exports. Export refers to outflow of goods and services and inflow of foreign exchange. Export occupies a very prominent place in the list of priorities of the economic set up of developing countries because they contribute largely to foreign exchange pool. Exports play a crucial role in the economy of the country. In order to maintain healthy balance of trade and foreign exchange reserve. It is necessary to have a sustained and high rate of growth of exports. Exports are a vehicle of growth and development. They help not only in procuring the latest machinery, equipment and technology but also the goods and services, which are not available indigenously. Exports leads to national self-reliance and reduces dependence on external assistance which howsoever liberal, may not be available without strings. Though India’s export compared to other countries is very small, but one of the most important aspects of our export is the strong linkages it is forging with the world economy which is a great boon for a developing nation like India.

CHAPTER 2 - EXPORT FINANCE 2.1 - INTRODUCTION Credit and finance is the life and blood of any business whether domestic or international. It is more important in the case of export transactions due to the prevalence of novel non-price competitive techniques encountered by exporters in various nations to enlarge their share of world markets. The selling techniques are no longer confined to mere quality; price or delivery schedules of the products but are extended to payment terms offered by exporters. Liberal payment terms usually score over the competitors not only of capital equipment but also of consumer goods. The payment terms however depend upon the availability of finance to exporters in relation to its quantum, cost and the period at pre-shipment and post-shipment stage. Production and manufacturing for substantial supplies for exports take time, in case finance is not available to exporter for production. They will not be in a position to book large export order if they don’t have sufficient financial funds. Even merchandise exporters require finance for obtaining products from their suppliers. This project is an attempt to throw light on the various sources of export finance available to exporters, the schemes implemented by ECGC and EXIM for export promotion and the recent

developments in the form of tie-EXIM tie-ups, credit policy announced by RBI in Oct 2001 and TRIMS.

2.2 - CONCEPT OF EXPORT FINANCE: The exporter may require short term, medium term or long term finance depending upon the types of goods to be exported and the terms of statement offered to overseas buyer. The short-term finance is required to meet “working capital” needs. The working capital is used to meet regular and recurring needs of a business firm. The regular and recurring needs of a business firm refer to purchase of raw material, payment of wages and salaries, expenses like payment of rent, advertising etc. The exporter may also require “term finance”. The term finance or term loans, which is required for medium and long term financial needs such as purchase of fixed assets and long term working capital. Export finance is short-term working capital finance allowed to an exporter. Finance and credit are available not only to help export production but also to sell to overseas customers on credit. 2.3 - OBIECTIVES OF EXPORT FINANCE •

To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer.

•

To cover natural risks like an earthquake, floods etc.

An exporter may avail financial assistance from any bank, which considers the ensuing factors:

a) Availability of the funds at the required time to the exporter. b) Affordability of the cost of funds.

2.4 - APPRAISAL Appraisal means an approval of an export credit proposal of an exporter. While appraising an export credit proposal as a commercial banker, obligation to the following institutions or regulations needs to be adhered to. Obligations to the RBI under the Exchange Control Regulations are:  Appraise to be the bank’s customer.  Appraise should have the Exim code number allotted by the Director General of Foreign Trade.  Party’s name should not appear under the caution list of the RBI. Obligations to the Trade Control Authority under the EXIM policy are:  Appraise should have IEC number allotted by the DGFT.  Goods must be freely exportable i.e. not falling under the negative list. If it falls under the negative list, then a valid license should be there which allows the goods to be exported.  Country with whom the Appraise wants to trade should not be under trade barrier. Obligations to ECGC are:  Verification that Appraise is not under the Specific Approval list (SAL).  Sanction of Packing Credit Advances.

GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE: When a commercial bank deals in export finance it is bound by the ensuing guidelines: a) Exchange control regulations. b) Trade control regulations. c) Reserve Bank’s directives issued through IECD. d) Export Credit Guarantee Corporation guidelines. e) Guidelines of Foreign Exchange Dealers Association of India.

CHAPTER 3 - TYPES OF EXPORT FINANCE The export finance is being classified into two types viz. ♦ Pre-shipment finance. ♦ Post-shipment finance.

3.1 - PRE-SHIPMENT FINANCE MEANING: Pre-shipment is also referred as “packing credit”. It is working capital finance provided by commercial banks to the exporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods is called pre-shipment finance or packing credit. DEFINITION: Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as pre-shipment credit. Such finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of goods meant for exports. IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE: ♦ To purchase raw material, and other inputs to manufacture goods. ♦ To assemble the goods in the case of merchant exporters. ♦ To store the goods in suitable warehouses till the goods are shipped. ♦ To pay for packing, marking and labelling of goods. ♦ To pay for pre-shipment inspection charges. ♦ To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. ♦ To pay for consultancy services. ♦ To pay for export documentation expenses.

FORMS OR METHODS OF PRE-SHIPMENT FINANCE: 1. Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on

unsecured basis. Subsequently, the bank may ask for security.

2. Advance Against Hypothecation: Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank.

3. Advance Against Pledge: The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter.

4. Advance Against Red L/C: The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit.

5. Advance Against Back-To-Back L/C: The merchant exporter who is in possession of the original L/C may request his bankers to issue Back-To-Back L/C against the security of original L/C in favour of the sub-supplier. The sub-supplier thus gets the Back-To-Bank L/C on the basis of which he can obtain packing credit.

6. Advance Against Exports Through Export Houses: Manufacturer, who exports through export houses or other agencies can obtain packing credit, provided such manufacturer submits an undertaking from the export houses that they have not or will not avail of packing credit against the same transaction.

7. Advance Against Duty Draw Back (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as postshipment advance against claims for DBK.

8. Special Pre-Shipment Finance Schemes: 

Exim-Bank’s scheme for grant for Foreign Currency Pre-Shipment Credit (FCPC) to exporters.



Packing credit for Deemed exports.

SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE 1. PACKING CREDIT SANCTION OF PACKING CREDIT ADVANCES: There are certain factors, which should be considered while sanctioning the packing credit advances viz. i. Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower. ii. Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. iii. Quantum of finance. iv. Standing of credit opening bank if the exports are covered under letters of credit. v. Regulations, political and financial conditions of the buyer’s country. DISBURSEMENT OF PACKING CREDIT: After proper sanctioning of credit limits, the disbursing branch should ensure: To inform ECGC the details of limit sanctioned in the prescribed format within 30 days from the date of sanction. a) To complete proper documentation and compliance of the terms of sanction i.e. creation of mortgage etc. b) There should be an export order or a letter of credit produced by the exporter on the basis of which disbursements are normally allowed. In both the cases following particulars are to be verified: i. Name of the Buyer. ii. Commodity to be exported. iii. Quantity. iv. Value. v. Date of Shipment / Negotiation. vi. Any other terms to be complied with.

2. FOREIGN CURRENCY PRE-SHIPMENT CREDIT (FCPC) •

The FCPC is available to exporting companies as well as commercial banks for lending to the former.

•

It is an additional window to rupee packing credit scheme & available to cover both the domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance.

•

To avail him of pre-shipment credit in rupees & then the post shipment credit either in rupees or in foreign currency denominated credit or discounting /rediscounting of export bills.

•

To avail of pre-shipment credit in foreign currency & discounting/rediscounting of the export bills in foreign currency.

•

FCPC will also be available both to the supplier EOU/EPZ unit and the receiver EOU/EPZ unit.

Pre-shipment credit in foreign currency shall also be available on exports to ACU (Asian Clearing Union) countries with effect from 1.1.1996. Eligibility: PCFC is extended only on the basis of confirmed /firms export orders or confirmed L/C’s. The “Running account facility will not be available under the scheme. However, the facility of the liquidation of packing credit under the first in first out method will be allowed. Order or L/C : Banks should not insist on submission of export order or L/C for every disbursement

of pre-shipment credit , from exporters with consistently good track record.

Instead, a system of periodical submission of a statement of L/C’s or export orders in hand, should be introduced. Sharing of FCPC: Banks may extend FCPC to the manufacturer also on the basis of the disclaimer from the export order.

2.2 - POST-SHIPMENT FINANCE MEANING: Post shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. Whereas the finance provided after shipment of goods is called post-shipment finance. DEFENITION: Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit. IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE: ♦ To pay to agents/distributors and others for their services. ♦ To pay for publicity and advertising in the over seas markets. ♦ To pay for port authorities, customs and shipping agents charges. ♦ To pay towards export duty or tax, if any. ♦ To pay towards ECGC premium. ♦ To pay for freight and other shipping expenses. ♦ To pay towards marine insurance premium, under CIF contracts. ♦ To meet expenses in respect of after sale service. ♦ To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. ♦ To pay for representatives abroad in connection with their stay board.

FORMS/METHODS OF POST SHIPMENT FINANCE 1. Export bills negotiated under L/C: The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter.

2. Purchase of export bills drawn under confirmed contracts: The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter. 3. Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills. 4. Advance against claims of Duty Drawback (DBK): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as post-shipment advance against claims for DBK.

5. Advance against goods sent on Consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis. 6. Advance against Undrawn Balance of Bills: There are cases where bills are not drawn to the full invoice value of gods. Certain amount is undrawn balance which is due for payment after adjustments due to difference in rates, weight, quality etc. banks offer advance against such undrawn balances subject to a maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank. 7. Advance against Deemed Exports: Specified sales or supplies in India are considered as exports and termed as “deemed exports”. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is offered for a maximum of 30 days. 8. Advance against Retention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/ services towards guarantee of performance or completion of project. Banks advance against retention money, which is payable within one year from date of shipment. 9. Advance against Deferred payments: In case of capital goods exports, the exporter receives the amount from the importer in installments spread over a period of time. The commercial bank together with EXIM bank do offer advances at concessional rate of interest for 180 days.

SOME SCHEMES UNDER OPERATION IN PRE-SHIPMENT FINANCE 1. DEFERRED CREDIT Meaning:

Consumer goods are normally sold on short term credit, normally for a period upto 180 days. However, there are cases, especially, in the case of export of capital goods and technological services; the credit period may extend beyond 180 days. Such exports were longer credit terms (beyond 180 days) is allowed by the exporter is called as “deferred credit” or “deferred payment terms”. How the payment is received? The payment of goods sold on “deferred payment terms” is received partly by way of advance or down payment, and the balance being payable in installments spread over a period of time. Period of financial credit support: Financial institutions extend credit for goods sold on “deferred payment terms” (subject to approval from RBI, if required). The credit extended for financing such deferred payment exports is known as Medium Term and Long Term Credit. The medium credit facilities are provided by the commercial banks together with EXIM Bank for a period upto 5 years. The long term credit is offered normally between 5 yrs to 12 yrs, and it is provided by EXIM Bank. Amount of credit support: Any loan upto Rs.10crore for financing export of capital goods on deferred payment terms is sanctioned by the commercial bank which can refinance itself from Exim bank. In case of contracts above Rs.10 Lakhs but not more than Rs50crore, the EXIM Bank has the authority to decide whether export finance could be provided. Contracts above Rs.50crore need the clearance from the working group on Export Finance.

2. REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) SCHEME: The exporter has the option of availing of export credit at the post-shipment stage either in rupee or in foreign currency under the rediscounting of export bills abroad LIBOR linked interest rates.

(EBRD) scheme

at

This facility will be an additional window available to exporter along with the exiting rupee financing schemes to an exporter at post shipment stage. This facility will be available in all convertible currencies. This scheme will cover export bills upto 180 days from the date of shipment (inclusive of normal transit period and grace period) . The scheme envisages ADs rediscounting the export bills in overseas markets by making arrangements acceptance

with an overseas agency/ bank facility

or any other similar

by way of a line of credit

facility at rates

or banker’s

linked to London Inter Bank

Offered Rate (LIBOR) for six months. Prior permission of RBI will not be required

for arranging

the rediscounting facility

abroad so long as the spread for rediscounting facility abroad does not exceed one percent over the six months LIBOR in the case of rediscounting ‘with recourse’ basis & 1.5% in the case of ‘without recourse’ facility. Spread, should

be exclusive of any withholding tax.

In all other cases, the RBI’s permission will be needed.

3. FINANCE FOR RUPEE EXPENDITURE FOR PROJECT EXPORT CONTRACTS (FREPEC) 1.

What is FREPEC Program?

This program seeks to Finance Rupee Expenditure for Project Export Contracts, incurred by Indian companies. 2.

What is the purpose of this Credit? To enable Indian project exporters to meet Rupee expenditure incurred/required to be incurred

for

execution

of

overseas

project

export

contracts

such

as

for

acquisition/purchase/acquisition of materials and equipment, acquisition of personnel, payments to be made in India to staff, sub-contractors, consultants and to meet project related overheads in Indian Rupees. 3.

Who are eligible for Assistance under FREPEC Program?

Indian project exporters who are to execute project export contracts overseas secure on cash payment terms or those funded by multilateral agencies will be eligible. The purpose of the new lending program is to give boost to project export efforts of companies with good track record and sound financials. 4.

What is the quantum of credit extended under this program?

Up to 100% of the peak deficit as reflected in the Rupee cash flow statement prepared for the project. Exim Bank will not normally take up cases involving credit requirement below Rs. 50 lakhs. Although, no maximum amount of credit is being proposed, while approving overall credit limit, credit-worthiness of the exporter-borrower would be taken into account. Where feasible, credit may be extended in participation with sponsoring commercial banks.

5.

How are Disbursements made under this Program?

Disbursements will made in Rupees through a bank account of the borrower-company against documentary evidence of expenditure incurred accompanied by a certificate of Chartered Accountants. 6.

How is a FREPEC Loan to be extinguished?

Repayment of credit would normally be out of project receipts. Period of repayment would depend upon the project cash flow statements, but will not exceed 4 (four) years from the effective date of project export contract. The liability of the borrower to repay the credit and pay interest and other monies will be absolute and will not be dependent upon actual realization of project bills. 7.

What is the security stipulated for FREPEC loan?

Hypothecation of project receivables and project movables. Optional: where available •

Personal Guarantees of Directors of the Company.

•

Available collateral security.

CHAPTER - LETTER OF CREDIT

INTRODUCTION:

The cycle of a business transaction can be said to be complete prima facie when the buyer has received the product he desires to buy and the seller gets his payment in due consideration of the product supplied.

While the seller is keen to receive the payment for his supplies, the buyer is equally keen that he gets what he wants by the paying for the same. Tough there are many merit and demerits in each of the different mode of payments we have discussed earlier, in relation either to the buyer or to the seller, we shall now deal in detail about the mode of payment under the Documentary Credit. Generally, though exporters are complacent once they get the letter of Credit on hand feeling that their payment is secured, let me say it is as much a dubious instrument as is a safe instrument. If one does not understand the implications of the terms and condition of a letter of credit, the provisions under UCP 500, how co-operative are the exporter’s bank and how good are the L/C opening bank and the reimbursement bank, he is sure to land in trouble at once stage or another. There are ample cases of frauds under the Letter of Credit. More and more ingenious methods are adopted to circumvent the provisions of UPC 500 by fair or foul means. Hence, even the safety and security under the Letters of Credit may prove to be no better than a mirage for a man in the desert. Hence, sufficient care is to be taken by the exporter to ensure that instrument is received in order and the conditions of the L/C can be well complied with, and there are no clauses of ambiguity.

This is one of the most popular and more secured of method of payment in recent times as compared to other methods of payment. A L/C refers to the documents representing the goods and not the goods themselves. Banks are not in the business of examining the goods on behalf of the customers. Typical documents, which are required includes commercial invoice, transport document such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in documents and not goods.

DEFINITION:

A Letter of Credit can be defined as “an undertaking by importer’s bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C”.

PARTIES INVOLVED IN LETTER OF CREDIT:

Applicant: Issuing bank: Beneficiary:

The buyer or importer of goods Importer’s bank, who issues the L/C The party to whom the L/C is addressed. The Seller or supplier of goods.

Advising bank:

Issuing bank’s branch or correspondent bank in The exporter’s country to whom the L/C is send for Onward transmission to the beneficiary.

Confirming bank:

The bank in beneficiary’s country, which Guarantees the credit on the request of the issuing Bank.

Negotiating bank:

The bank to whom the beneficiary presents his Documents for payment under L/C

A Letter of Credit contains these elements: •

A payment undertaking given by the bank (issuing bank) on behalf of the buyer (applicant)

•

To pay a seller (beneficiary) a given amount of money

on presentation of specified

documents representing the supply of goods within specific time limits •

These documents conforming to terms and conditions set out in the letter of credit

•

Documents to be presented at a specified place.

In simple words, the Issuing Bank's role is twofold: •

To guarantee to the seller that if complete documents are presented, the bank will pay the seller the amount due. This offers security to the seller – the bank says in effect "We will pay you if you present documents (XYZ)"

•

To examine the documents and only pay if these comply with the terms and conditions set out in the letter of credit. This protects the buyer's interests - the bank says "We will only pay your supplier on your behalf if they present documents (XYZ) that you have asked for"

ADVANTAGES OF LETTER OF CREDIT

ADVANTAGES TO THE EXPORTER: •

No blocking of funds.

•

Clearance of import regulations.

•

Free from liability.

•

Pre- shipment finance.

•

Non-refusal by importer.

•

Reduction in bad-debts.

ADVANTAGES TO THE IMPORTER: •

Better terms of trade.

•

Assurance of shipment of goods.

•

Overdraft facility.

•

No blocking of funds.

•

Delivery on time.

•

Better relations.

DISADVANTAGES OF LETTER OF CREDIT: •

Lacks flexibility.

•

Complex method

•

Expensive for importer

•

Problem of revocable L/C

What is a Documentary Credit? To say in simple language, this is an Undertaking by a Bank associated with the buyer to make the payment for the supply of goods by a seller subject to compliance of various requirements that may be specified in the document of undertaking by the Bank. This document is known as Documentary Credit. A Documentary Credit is also called a Letter of Credit (L/C).

CONTENTS OF A LETTER OF CREDIT A letter of credit is an important instrument in realizing the payment against exports. So, needless to mention that the letter of credit when established by the importer must contain all necessary details which should take care of the interest of Importer as well as Exporter. Let us see shat a letter of credit should contain in the interest of the exporter. This is only an illustrative list. •

name and address of the bank establishing the letter of credit

•

letter of credit number and date

•

The letter of credit is irrevocable

•

Date of expiry and place of expiry

•

Value of the credit

•

Product details to be shipped

•

Port of loading and discharge

•

Mode of transport

•

Final date of shipment

•

Details of goods to be exported like description of the product, quantity, unit rate, terms of shipment like CIF, FOB etc.

•

Type of packing

•

Documents to be submitted to the bank upon shipment

•

Tolerance level for both quantity and value

•

If L/C is restricted for negotiation

•

Reimbursement clause

PROCEDURE INVOLVED IN THE LETTER OF CREDIT The following are the step in the process of opening a letter of credit: •

Exporter’s Request: The exporter requests the importer to issue LC in his favor. LC is the most secured form of payment in foreign trade.

•

Importer’s Request to his Bank: The importer requests his bank to open a L/C. He May either pay the amount of credit in his current account with the bank.

•

Issue of LC: The issuing bank issues the L/C and forwards it to its correspondent bank with also request to inform the beneficiary that the L/C has been opened. The issuing bank may also request the advising bank to add its confirmation to the L/C, if so required by the beneficiary.

•

Receipt of LC: the exporter takes in his possession the L/C. He should see it that the L/C is confirmed.

•

Shipment of Goods: Then exporter supplies the goods and presents the full set of documents along with the draft to the negotiating bank.

•

Scrutiny of Documents: The negotiating bank then scrutinizes the documents and if they are in order makes the payment to the exporter.

•

Negotiation: The exporter’s bank negotiates the document against the letter of credit and forwards the export documents to the L/C opening bank or as per their instructions.

•

Realization of payment: The issuing bank will reimburse the amount (which is paid to the exporter) to the negotiating bank.

•

Document to Importer: the issuing in turn presents the documents to the importer and debits his account for the corresponding amount.

In order to have uniformity and to avoid disputes, the ICC Paris has evolved uniform customs and practices of documentary credit (UCPDC), in short known as UCP 500 effective from 1-196. These are rules have been adopted by more than 150 countries. They provide the comprehensive and practical working aid to banker, lawyer, importers, exporters, Exporters, transporters, executives involved in international trade. Note: as soon as an L/C is received ensure that the same is authenticated. Meaning that the genuineness of the L/C is certified by the Advising Bank by an endorsement with the marking ‘AUTHENTICATED’ OR ELSE THE L/C IS OF NO USE. Different Type of Documentary Credits. There are various types of Documentary Credit opened by a bank in favour of it’s customer

depending upon the requirement. Let us talk about few types of Documentary Credit which are in common use. •

Revocable / Irrevocable Documentary Credit :A Revocable Documentary Credit can be revoked (cancelled) by the buyer at his own discretion and this does not require the consent of the seller. The risk factor here is that the L/C may be cancelled even after the shipment is done and before the beneficiary present the documents to the bank for claiming the reimbursement. Hence, a revocable L/C is as goods as no L/C. obviously, no seller will entertain a revocable L/C. Contrary to this, an Irrevocable Documentary Credit once established and advised to the beneficiary, cannot be revoked or cancelled unilaterally by the buyer without the consent of the beneficiary (Seller).A Seller must always ask for an Irrevocable Letter of Credit.

•

Restricted/ Unrestricted Documentary Credit: A Documentary Credit stipulates the name of the bank who is authorized to negotiate the document for claming the reimbursement. In this case the beneficiary is obliged to negotiate the documents only through the specified bank i.e. Negotiation of document is restricted to that particular bank. On the contrary if no specific bank is nominated for negotiation, it may say ‘Negotiation by any bank’ which means the beneficiary is free no negotiate the document through the bank of his choice. This is beneficial because he can negotiate the documents through his own bank where he is having an account. Since the bank is not alien to him, he will not face any practical/procedural difficulty in negotiating the document. It is suggested to have an unrestricted L/C or L/C which may be restricted to the bank of the beneficiary’s choice.

•

Confirmed/Unconfirmed Documentary Credit: Confirmed Documentary Credit is one in which the beneficiary has the option to have the L/C confirmed by a bank in the beneficiary country i.e. the bank who confirms the L/C takes the responsibility of making the final payment to the beneficiary upon negotiation of the document in strict compliance with the terms and conditions of the Letter of Credit. By this process the final payment will be made in the beneficiary’s country by the bank which confirms the L/C immediately upon negotiation of the documents. The beneficiary do not stand the risk of

waiting for the document to reach the opening bank who will have the final say so to the compliance under the L/C before making the payment. Further, the payment is also made immediately after negotiation and without recourse to the beneficiary i.e. the payment once made by the confirmed bank cannot be revoked. Moreover, if the importing country’s regulation changes and the money is not allowed to be repatriated, this will eliminate the risk. On the contrary, in an unconfirmed L/C, the negotiating bank only accepts the documents and pays for the same with recourse i.e. if as and when the documents reach the opening bank, and the opening find some discrepancy in the documents it may refuse to make the payment or seek clarification for the applicant before reimbursement. The beneficiary is fully at the mercy of the opening bank for payment. It is suggested to ask for a Confirmed L/C. •

With Resource and Without (Sans) Resource Letter of Credit: The revocable or irrevocable LC can further be classified as with resource and without resource LC. o With resource LC: In this type the exporter is held liable to the paying/ negotiating bank, if the draft drawn against LC is not honored by the importer/issuing bank. The negotiating bank can make the exporter to pay the amount along with the interest, which it has already paid to the beneficiary. o Without (Sans) Resource LC: In the case of sans (without) resource letter of credit, the negotiating bank has no recourse to the exporter, but only to the issuing bank or to the confirming bank. Normally, the negotiating bank makes advance payment to the exporter in resource of letter of credit either by discounting bills against letter of credit or by purchasing the bills of exchange. In such an instance, if the issuing bank fails to make payment or dishonor the letter of credit, then the negotiating bank cannot get the money back from the exporter or hold him liable to pay the amount. However, in the case of with resource letter of credit, the negotiating bank can ask the exporter to pay back the money along with certain other expenses. For the exporter, sans Resource letter of credit is more safe as compared to With Resource letter of credit.

•

Transferable/Non-transferable Documentary Credit: In a transferable L/C, the beneficiary can transfer the L/C opened in his name in favor of a third party who may effect the shipment and negotiate the documents and claim payment under the said L/C.

•

Revolving Documentary Credit: Where an exporter is having a regular shipment for a particular customer and the value of each shipment may also be of more or less equal value,

and

then

one

can

call

for

a

Revolving

Documentary

Credit.

The salient feature of this L/C is that the buyer opens an L/C which can take care of shipments, say, may be for a period of one year on a monthly basis. For e.g. an exporter enters into a contract for supply of 5000 pairs of Trousers valued approx.US.$.75,000/- to be shipped every month. The buyer can open an L/C for a value of US.$.75000/- with validity for 12 months stipulating shipment every month for a value of US$. 75000/-and by adding a clause to make 12 shipment of like value the L/C stands replenished for the full value of the L/C after each shipment is made the documents are negotiated for which payment are also made immediately for the value of the shipment. The main benefit in this L/C is that the buyer, the bank and the exporter are saved from the routine of opening one L/C every month, the anxiety of non-receipt of the L/C on time, the amendments that may be warranted every time, the bank charges for opening number of L/Cs etc.,. A revolving Documentary Credit may have cumulative effect i.e. if a particular shipment is not made, then the value is added to the value for future utilization. In an automatic Revolving Credit, the bank is liable for the total amount covering the entire shipment and where it is non-automatic its responsibility is restricted to the value of one shipment. In automatic Revolving Credit the value of the credit is automatically replenished by an amendment. Where there are continuous shipments like the one stated above one can call for a Revolving Letter of Credit. •

Assignable Documentary Credit: In this type of L/C the benefit is shared between the first beneficiary and the parties whose names are assigned on the L/C. The assignee is not a party to the letter of credit but he only derives the benefit as per the L/C. this is more beneficial to the assignee because he receives his part of the money once the documents

are negotiated by the first beneficiary in whose name the L/C is opened. Calls for an L/C as necessary. •

Stand by Letter of Credit: This is aimed at providing a security to a seller in case the buyer fails to perform his part. Thus this L/C is used in case of non-performance while the other types of L/Cs are generally for some performance. Such credits are paying on first presentation and the only document required therein is a simple declaration of nonperformance along with the statement of claim. This type of L/C is mainly common in U.S.A. A standby Documentary Credit is generally common on open account trading where the seller may expect some security for getting his payment. This is not permitted in India.

•

Red Clause LC: The red clause LC is the usual irrevocable LC with further authorities the negotiating bank to make advance to the beneficiary for the purpose of processing the export goods. Thus, the red LC enables the exporter to obtain packing credit facility for the purpose of processing the goods. It is called a red-cause LC because it is generally printed/ typed in red ink.

•

Green Clause LC: The Green LC in addition to permitting packing credit advance also provides for the storing facilities at the port of shipment. Green LCs is extensively used in Australian wool creditors.

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Back-to-Back LC: Back-to Back LC is a domestic letter of credit. It is a ancillary credit created by a bank based on a confirmed export LC received by the direct exporters. The direct exporter keep the original LC (received from issuing bank) with the negotiating or some other bank in India, as a security, and obtains another LC in favour of domestic supplier. Through this route the domestic supplier gains direct access to a pre-shipment loan based on the receipt of domestic or back-to-back LC.

•

Documentary LC: Most of the L\C is documentary L\C. Payment is being made by the bank against delivery of the full set of documents as laid down by the terms of credit. The important documents required to be submitted by the exporter under documentary LC includes the following:

o Bill of Lading /Airway Bill or any other transport document o Commercial Invoice o Insurance Policy o Shipping Bill o Certificate of Origin o Combined Invoice and Certificate of Value and Origin o GSP/CWP certificate o Packing List o Certificate of Quality Inspection o Bill of Exchange o Any other document if required. A letter of credit may call for some or most of the above documents and may also call for some other documents specific to the shipment. •

Traveler’s LC: Traveler’s LC is issued to the person who intends to make a journey abroad. The correspondent/ agent of the bank honors all the cheques drawn on this credit by its holder up to the amount mentioned in LC. Traveler’s LC has more advantages as compared to traveler’s cheques. In case of cheque, the holder can withdraw up to the amount of the cheque. Again, he has to carry a number of cheque. In case of traveler’s LC, the holder can draw any amount up to the limit mentioned in the LC, and he need to carry only one paper of LC.

Types of Payments under a Documentary Credit. Payment under a documentary credit can be of the following types: •

Payment at Sight: In this mode, the payment is made by the L/C opening bank or its nominated bank or by a confirming bank on presentation of the documents in full conformity with the L/C. The L/C may or may not call for draft at sight for the full value of the documents.

•

Deferred Payment Scheme: In this case the payment is to be made at a future date as stipulated in the L/C. Here, generally NO draft is required as the due date of payment is defined in the L/C. In case of a confirmed L/C, the final payment is made by the confirmed bank on due date and by the issuing bank or its nominated bank if the L/C is not confirmed.

•

Acceptance Credit : This type of credit requires a usance draft to be drawn on a nominated or accepting bank. The payment is made by the nominated/accepting bank on the due date as per instructions of the negotiating bank. In case of a confirmed L/C the payment on due date is made by the negotiating bank (confirming bank).

•

Negotiation Credit: Here the payment is made by the negotiating bank upon negotiation of the documents if it prepares to take the risk and will recourse to the beneficiary. If the credit is confirmed, then the negotiation bank is obliged to make the payment upon submission of a clean document by the beneficiary.

Expect in the case of confirmed L/C there is always a time lag between the date of negotiation of the document and the date of receipt of the payment. This is a grey area. If the bank acts swiftly and without prejudice, one gets payment within a week’s time. If the payment is delayed beyond this time, though an exporter has every right to ask for compensation, in actual practice, no justice is done to the exporter for the delayed payment. Very rarely, on persistent approach by the exporter/their banker, does a defaulting bank comes forward to compensate for the delayed payment. Generally the exporter has to forego lot of money in correspondence through the negotiating bank because every communication of the bank is charged to the exporter. It is no surprise many exporter suffer this loss silently.

Feature of a Documentary Credit A documentary credit is a document in writing issue by the bank on behalf of its customer (The Buyer). Documentary Credit must stipulate the Type of Credit as detailed above and inter alia will also stipulate the Following details :

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the name of the Bank issuing the Documentary Credit.(The L/C Opening Bank)

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the name and address of the buyer on whose behalf the credit is Issued.(The Applicant)

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the name and address of a bank in the country of the seller the credit through Whom the L/C is to be advised to the seller.

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The name and address of the Seller (Beneficiary)

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The Maximum Value the opening bank undertakes to pay to the Beneficiary.

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The date of issue of the credit.

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The Expiry Date of the L/C

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The Validity Date for shipment.

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The Details of the product to be shipped.(Description)

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Details of document required for claiming the payment from the Opening bank.

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The name and address of the bank authorized to negotiate the documents.

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The Reimbursement Clause.

As soon as an L/C is received ensure that the L/C is authenticated. If the L/C received in mail the signatures are got to be verified by the advising bank. In case of telex/swift the bank should endorse on the document authenticated and then only the L/C is a valid document. While the above details are the minimum that a Documentary Credit may have in actual practice there can be other stipulations mutually agreeable to the buyer, seller and the opening bank as also the negotiating bank. The guidelines for the interpretation and usage of Letter of Credit are governed by the UCP 500 (Uniform Customs Practice for Documentary Credit) published by the International Chamber of Commerce (ICC). The UPC 500 covers all the procedural aspects relating to the transactions under a Letter of Credit. Hence one is suggested to be familiar with all the 49 Articles as detailed in the UCP 500 of 1994. While all the elements and events that one may encounter in each and every organization can not be explained, the UCP 500 has attempted to take care most of the queries that one may encounter normally.

The ICC Uniform Customs and Practice was first published in 1993. Taking into the consideration of the various developments in the transactions under the Documentary Credit the ICC has been reviewing these rules and updating the same. As time changes and the international transactions faces new aspects, attempts will be made to get the UCP 500 revised.

Scrutiny of letter of credit Mere receipt of letter of credit is no guarantee of payment. There are many ifs and buts before the documents are submitted to the bank against the letter of credit for realization of proceeds from the opening bank. As soon as the letter of credit is received a through scrutiny is to be undertaken to ensure that •

First and foremost that the credit is properly authenticated by the advising bank.

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The letter of credit has been opened in accordance with the terms of the contract.

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The name and address of the beneficiary has been spelt properly.

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The details of product description, quality, and value are in order.

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The validity of shipment and expiry are correct.

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The documents that are required can be submitted.

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There is sufficient % of tolerance of quantity and value.

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The unit price and the terms of contract are correct.

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The terms and conditions stipulated can be complied with.

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That the credit is available for negotiation without restriction.

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In case of exports requires the credit to be confirmed by the local, then necessary clause is incorporated by the opening bank on the credit.

•

Last but not the least; the credit has a reimbursing clause enabling the negotiation bank to get reimbursement of the money paid to the exporter against the documents.

There are only few suggestions. The requirement may differ for different exporter and the

scrutiny has be done relative to the requirement. AMENDMENTS TO THE CREDIT On scrutiny of the letter of credit, if the exporter finds that some change are required to be made in the credit, he should immediately request the buyer to make necessary change in the letter of credit and the opening bank issued necessary amendment in this respect. Any oral and written agreement by the importer about change in the credit directly to the exporter should not be accepted as it is not valid under the credit. Any change must be advised by the importer through the opening bank only as a sort of amendment to the original credit. DOCUMENTARY CREDIT IN GENERAL Of all the various type of payments, the most safest as far as the exporter is concerned is to get an advance payment in full for the value of shipment to be effected. Obviously, this puts the buyer totally at the mercy of the seller and unless the buyer feels unavoidable he will not be prepared to make advance payment. Hence, of the rest of the modes of payment, the best is calling for a Documentary Credit for any shipment. Now let us see how we can take care of the interest of the exporter while an L/C is established. It is suggested that the exporter gives the full details as to the various requirements to the buyer for incorporation in the L/C. this will avoid the necessary of asking for amendments and will save both time and money. Bear in mind every amendment costs you badly. Care

are should

be taken to ensure that there are NO spelling mistakes, omission and commission of “, or”, or such small things. A discrepancy is a discrepancy and there is nothing like minor discrepancy or major discrepancy as far as the bank is concerned. A bank strictly deals in documents and the documents are expected to be cent percent in line with details give in the Documentary Credit. Ensure that the Validity for shipment and for negotiation of documents can be complied with. If not possible, call for amendment extending the validity as required. Unless the L/C specifies the tolerance for the quantity and value, the exporter should follow the quantity and value as stipulated in the L/C. There is provision for a tolerance of the quantity up to 5 percent more or less than stipulated in the L/C even if the L/C does not specify tolerance

exclusively and unless tolerance is prohibited 0 specifically. However, the value of documents, on no account, could exceed the limits of the L/C. Check the description of the product properly, the rates if specified, and quantity of each of the items. Ask for amendment where you cannot copy with the terms. Make sure that all the documents as called for by the Credit can be submitted without any exception. The last but not the least is the Reimbursement clause (Getting the funds for the shipment made). An L/C without this clause is no L/C. if there is no provision as to from where the exporter is going to get paid for, the whole exercise of the L/C is futile. The opening bank may specify the reimbursement clauses as follows: •

The negotiating bank to send the documents to the opening bank who will, upon receipt of the documents, arrange for reimbursement as claimed by the negotiation bank.

•

The negotiating bank can claim reimbursement directly from a nominated bank (say ABC Bank, New York) either upon negotiation of documents or after a period of ¾ days of negotiation subject to the documents being submitted by the beneficiary is strictly in conformity with terms and condition of the letter of credit.

These are some of the aspects one should take care to ensure that the L/C established in his favor is in order and that he can comply with all the provision thereof. However, one is advised to make a checklist and take a note of each and every condition of the L/C for compliance at the right time. Where an L/C stipulates that the Negotiation is restricted to a specific bank which is not the Advising Bank or Where the L/C is not restricted, and the seller desires to negotiate the document which is not the advising bank, then we have a separate Negotiating Bank. Where the opening bank prefers to advise the L/C through its own branch in the beneficiary country or through another bank of its choice, then the L/C may be advised to the beneficiary directly by this bank or if it instructed to advise the L/C through the buyer’s nominated bank then it does so. Here, we have two advising bank.

As far as possible, one should restrict the involvement of the number of the banks to the minimum. More the number of the banks, more the time in the transmission of the L/C, in addition to multiplicity of bank charges.

SPECIAL NOTE Though one may strongly feel that a Letter of Credit is the safest mode of payment, one will face innumerous practical difficulties in so far as compliance with the terms and conditions of the L/C. since several documents are involved, there are every possible of discrepancy in the documents either between different documents or between the document or between the document and the L/C. the Negotiating bank soft pedal some of the discrepancies which they feel may not be pointed out by the opening bank as discrepancy to favour its customer. In the like manner the opening bank, to safeguard the interest of the buyer, would like to ensure that the document submitted against a Letter of Credit are strictly in full conformity of the L/C. For mastery of the operation under the Letter of Credit one is advised to completely study the various articles of the UCP 500 so that one can be clear in his mind as to the various provisions available under the Documentary Credit which will stand good while negotiating the documents with the bank. While the articles of UCP 500 come safeguard the interest of both the buyer and the seller, there are certain elements which may be outside the definition of the UPC 500. Also there is certain flexibility provisions in the UPC 500 which one might like to exploit to his favour. So, in spite of the L/C being the safest method to ensure the payment, unless both the buyer and the seller follow the business ethics there is every chance that one gets cheated by the other. As a prudent exporter one should be very careful in selecting his customer apart from taking other safety measures. If the customer is too good, and you have been dealing with them for a long time, one may relax and term the L/C as the best method to receive payment. If the customer turns out to be unscrupulous then he can play havoc. This is applicable to both the seller and the buyer. There are books on fraudulent us of the Documentary Credits. Sometimes it may be the buyer who is at the receiving end and some time it may be the other way.

A study of such book as above may help one to take adequate care. But, the brain is always working in multi directions. It will be no surprise if one comes across newer and newer dubious methods being adopted by the contracting parties. TOTAL OPERATION UNDER THE LETTER OF CREDIT. The Unconfirmed L/C. •

The Buyer makes an application to his bank to open an L/C.

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Opening bank establishes the L/C.

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Opening bank advises the L/C through his associate or through the bank. Nominated by the beneficiary.

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The Bank in the beneficiary country which receives the L/C sends the Original L/C to the customer either directly or through the bank Specified in the L/C.

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The buyer complies with the L/C requirements and submits the relevant documents. To the bank for claiming reimbursement.

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The negotiating bank negotiates and sends the documents to the opening bank or as Directed. Meantime pays the beneficiary.

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Advises the opening bank or the reimbursement bank the details of his Accounts and the nominated bank where the proceeds are to be credited.

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Once the credit is received, the nominated bank advises the negotiating bank of the credit. Thus the negotiating bank gets the credit for the L/C documents.

The Confirmed L/C. All the steps from 1to6 as far as the beneficiary are concerned since the payment is made to the beneficiary without recourse. However, the negotiating bank may have to follow the subsequent steps since he has to receive his money from the opening bank.

Sample Document: Letter of Credit (Documentary Credit)

THE MOON BANK INTERNATIONAL OPERATIONS 5 MOONLIGHT BLVD., EXPORT-CITY AND POSTAL CODE EXPORT-COUNTRY

OUR ADVICE NO.

ISSUING BANK REF. NO. & DATE

MB-5432

SBRE-777

January 26, 2005

To, UVW Exports 88 Prosperity Street East, Suite 707 Export-City and Postal Code Dear Sirs: We have been requested by The Sun Bank, Sunlight City, Import-Country to advise that they have opened with us their irrevocable documentary credit number SB-87654 For account of DEF Imports, 7 Sunshine Street, Sunlight City, Import-Country in your favor for the amount of not exceeding Twenty Five Thousand U.S. Dollars (US$25,000.00) available by your draft(s) drawn on us at sight for full invoice value Accompanied by the following documents: 1. Signed commercial invoice in five (5) copies indicating the buyer's Purchase Order No. DEF-101 dated January 10, 2005

2. Packing list in five (5) copies. 3. . Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable copies, issued to order of The Sun Bank, Sunlight City, Import-Country, notify the above accountee, marked "freight Prepaid", dated latest March 19, 2005, and showing documentary credit number. 4. Insurance policy in duplicate for 110% CIF value covering Institute Cargo Clauses (A), Institute War and Strike Clauses, evidencing that claims are payable in ImportCountry.

Covering:

100 Sets 'ABC' Brand Pneumatic Tools, 1/2" drive,

complete with hose and quick couplings, CIF Sunny Port Shipment from: Partial shipment Tran-shipment

Moonbeam Port, Export-Country to Sunny Port, Import-Country Prohibited Permitted

Special conditions: 1. All documents indicating the Import License No. IP/123456 dated January 18, 2005. 2. All charges outside the Import-Country are on beneficiary's account Documents must be presented for payment within 15 days after the date of shipment. Draft(s) drawn under this credit must be marked Drawn under documentary credit No. SB-87654 of The Sun Bank, Sunlight City, Import-Country, dated January 26, 2005

CHAPTER 5 - SOME IMPORTANT CONCEPTS IN EXPORT FINANCE

5.3 - Supplier's Credit for deferred payment exports

Definition of Deferred Payment Exports:

In terms of Regulation 9 of the Foreign Exchange Management Act 1999, the amount representing the full export value of goods exported must be realized and repadriated to India within 6 months of date of export. Exports where more than 10% of the value is realized beyond the prescribed period, i.e. 6 months from date of shipment, are treated as Deferred Payment Exports 1. What is an offer? ⇒ Exim Bank offers Supplier's Credit in Rupees or in Foreign Currency at post-shipment stage to finance export of eligible goods and services on deferred payment terms. ⇒ Supplier's Credit is available both for supply contracts as well as project exports; the latter includes construction, turnkey or consultancy contracts undertaken overseas. 2. Who can seek finance? ⇒ Exporters can seek Supplier's Credit in Rupees/ Foreign Currency from Exim Bank in respect of export contracts on deferred payment terms irrespective of value of export contracts. 3. What are the general terms of Supplier's Credit?

⇒ Extent of Supplier's Credit: 100% of post-shipment credit extended by exporter to overseas buyer. ⇒ Currency of Credit: Supplier's Credit from Exim Bank is available in Indian Rupees or in Foreign Currency.

⇒ Rate of Interest: The rate of interest for Supplier's Credit in Rupees is a fixed rate and is available on request. Supplier's Credit in Foreign Currency is offered by Exim Bank on a floating rate basis at a margin over LIBOR dependent upon cost of funds. ⇒ Security: Adequate security by way of acceptable letter of credit and/or guarantee from a bank in the country of import or any third country is necessary, as per RBI guidelines. ⇒ Period of Credit and Repayment: Period of credit is determined for each proposal having regard to the value of contract, nature of goods covered, security, competition. Repayment period for Supplier's Credit facility is fixed coinciding with the repayment of post-shipment credit extended by Indian exporter to overseas buyer. However, the Indian exporter will repay the credit to Exim Bank as per agreed repayment schedule, irrespective of whether or not the overseas buyer has paid the Indian exporter. ⇒ Overseas Buyer's Credit: Credit is offered directly to overseas buyer for a specific project/ contract.

Import Trade Procedures & Documentation

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Liberalisation of Imports.

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Categories of Importers.

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Special Schemes for Importers.

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Import Procedure : 1. Pre-import Procedure. 2. Legal Dimensions of Import Procedure. 3. Retirement of Import Documents. 4. Customs Clearance.

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Classification of Goods for Import Policy & Assessment of Duty.

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Bill of Entry.

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A Note on Forward Contract.

Liberalisation of Imports Consequent upon a comfortable balance of payments position of the country, increasing nec~ssity of imports for export production and globalisation of Indian economy, the Government of India has liberali~ed the import regime from time to time. At present, practically, all controls on imports have been lifted. Under the new EXIM Policy 2002-07 announced on March 31 , 2002, the Government has initiated a comprehensive' package intended to make international trade a vital .part of development strategy. It has substantially eliminated licensing, quantitative restrictions and. -other regulatory and discretionary controls both on exports and imports.

All goods may be imported freely in India without any restriction except to the extent such imports are regulated by the provisions of.the EXIM Policy 2002-07 or any other law for the time being in force. Moreover, the customs duties on imports have been considerably reduced and rationalised during the last few years. The procedure for imports has been considerably simplified and the bureaucratic controls have been reduced to the bare minimum. Besides, availability of foreign exchange for imports has also been eased. Regulations regarding personal imports such as consumer goods, baggage etc., have been substantially liberalised.

Categories of Importers Importer means a, person who imports or intends to import and holds an ImporterExporter.Code (lEC) Number. They can be divided into two categories : Actual User

(a) Actual user (Industrial) :- Actual users (industrial) means person who utilises the imported goods for manufacturing in his own industrial unit or manufacturing, for his own use in another unit including, a jobbing unit . (b) Actual user (Non-industrlal) :- Actual user (non industrial) means a person who utilises the imported goods for his own use in 

any commercial establishment carrying on business, trade or

profession or 

any. laboratory, scientific research and development institution

university or other educational institution OF hospital; or . 

any service industry.

Non-actual user Non-actual users include: •

Importers for Stock and Sale.

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Personal Impqrts.

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Imports' of Gifts~ etc.

Special Schemes for Importers

As per the latest EXIM Policy 2002-07, import of goods is permissible under the following special schemes, designed for encouraging exports : (a) Export Promotion Capital Goods Scheme (EPCG) :- EPCG scheme was introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporter to import machinery and other capital goods for export production at concessional or no customs duties at all. This facility is subject to export obligation i.e, the exporter is required to guarantee exports certain minimum value, which is in multiple of the value of capital goods imported. (b) Duty Free Replenishment Certificate (DFRC}:- DFRC is issued to a merchant exporter or manufacturer exporter for the duty free import of inputs such as raw materials components, intermediates, consumables, spare parts , including packing materials to be used for export: production. Such certificate is subject to the fulfilment. of time bound export obligation and is issued in respect of products covered. under the standard Input,Output Norms (Sions)

(C) Duty Eritltleme.t Passbook Scheme (DEPB}:- under the DEPB scheme an .

exporter may apply for credit as a specified percentage of FOB value of exports , made in freely convertible currency: The credit shall be available Against such export products and at such rates as may be specified by the Director General of foreign Trade (DGF) by way of public notice issued in this behalf, for import of raw materials, intermediates, components, parts, packaging materials, etc.

(D) Advance Licence :- An advance licence is issued for duty free import of components which are physically incorporated in the products manufactured for export. In addition, fuel, oil, energy, catalysts, etc.which are consumed in the course of production process may also be allowed.

Duty free import of mandatory spares up to 10% of the C.I.F. value of the licence which are required to be exported or supplied with the resultant product may also be allowed. Advance Licence can be issued for :¬ •

Physical Exports.

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Intermediate Supplies

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Deemed exports.

Pre-Import Procedure (a) Selecting the Commodity :- An importer should select the commodity for import after considering various commercial factors as well as legal considerations including the regulations contained in the EXIM Policy. Imports may be made freely except to the extent they are regulated by the provisions of the EXIM Policy. Prohibited goods cannot

be imported at all. Import of restricted items is permitted through licensing only while canalised items can be canalised through specified State Trading Enterprises (STEs).

(b) Selecting the Overseas Supplier :- Imports can be made from any country of the world except Iraq. However, there shall be no ban on the import of items form Iraq in case where the prior approval of the concerned sanction committee of the UN Security Council has been obtained. The information regarding overseas suppliers can be obtained from various trade directories, consulate generals, international trade fairs and exhibitions and chamber of commerce.

(c) Capability and Creditworthiness of Overseas Supplier :- Successful completion of an import transaction mainly depends upon the capability of the overseas supplier to fulfil his contract. Therefore, it is advisable to verify the creditworthiness of the overseas supplier and his capacity to fulfil the contract through confidential reports about him.from the banks and Indian embassies abroad. It is. advisable to finalise contract through fndenting agents of overseas suppliers situated in India.

(d) Role of Overseas Suppliers' Agents in India :- Some reputed overseas suppliers have their indenting agents stationed in India. These agents procure orders from the Indian parties and arrange for the supply of goods from their principal abroad. It is advisable to import through such agents as they can be readily contacted in case there is any dispute regarding quality or quantity of goods imported, receipt of payment, documentation formalities, etc.

e) Inquiry, Offer and Counter-offer :- It is advisable that before finalising the terms of import order, one should call for the samples or catalogue and other relevant literature and the specifications of t,he items to be imported. Import of

samples of goods is exempted from import duties under 'Geneva' Convention of 7th November 1952. After satisfying himself with the samples and the creditworthiness of the overseas supplier, the iinporter should proceed to finalise the terms, of the contract to be entered into. Legal Dimensions of Import Procedure

(a) Finalisation of the Terms of Contract :- The. import contract should be carefully and comprehensively drafted incorporating therein precise terms as well as all relevant conditions of the trade deal. There should not be any ambiguity regarding the exact specifications of the goods and terms of the purchase including import price, mode of payment, type of packaging, port of shipment, delivery schedule, licence and permits, discount commission, insurance, arbitration, etc.

(b) Mode of Pricing and INCO TERMS :- While finalising terms cof import contract, the importer should, inter-alia, be fully conversant with the mode of pricing and the manner of payment for the imports. As regards mode of pricing, the overseas supplier should quote the terms prevailing in international trade. International Chamber of Commerce (ICC) , paris given detailed definition of a few standard terms popularly known as “ INCOTERMS'. These terms have almost universal acceptance. (c) Mode of Settlement of Payment :- There are mainly three modes settling international transactions depending upon the creditworthiness of the importer or exporter, demand for the commodity in the international market, exchange control regulations prevailing in the importer or countries and other relevant factors •

Advance Payment.

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Payment or Acceptance against Document Collections.

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Payment under Letter of Credit.

(d) Obtaining IEC Number :- In India, it is obligatory for every importer and exporter to register themselves with the Director General of Foreign trade (DGFT) and obtain Import-Export Code (IEC) Number. The application form for obtaining IEC number should be accompanied by a fee of Rs.1000 and two copies of passport size photographs of the applicant duly attested by the banker of the applicant and other, relevant documents. (e) Obtaining Import Licence :- If the item to be imported falls in the prohibited list, then such item cannot be imported at all. How, if it falls in restricted list then the necessary clearance must be obtained from appropriate licensing authority. Similarly, if it is subject to the canalisation through State Trading Enterprises (STEs), then the necessary formalities are to be completed pertaining to the same. (f) Obtaining Foreign EXchange :- In India, all foreign exchange transactions are regulated by the Exchange Control Department of the Reserve bank of India (RBI). Therefore, every importer is required to make to the Reserve Bank of India (RBI) for getting. sanction for making overseas.

Payments. The Exchange Control Department scrutinises the application and if satisfied, sanctions necessary foreign exchange for the import transaction. (g) Arranging Finance for Import :- It is advisable that the financial planning for imports should be done in advance in order to avoid huge demurrages on the imported goods lying uncleared for want of payment. Banks normally do not extend any fund based assistance to importers. However, they enable industrial units and others to have access to imported inputs and machinery by establishing letters of credit in favour of the overseas suppliers.

(h) Obtaining Import L/C Umit:- Import L/C limits are sanctioned by the banks on submission of complete loan proposal as in the case of other types of credit facilities. This requires advance financial planning so as to retire import bills under L/C on time. Any delay in retirement of bills not only strains the relations of the importer with his bank but also results in additional costs by by of extra commission, penal interest, demurrage charges, etc. (i) Despatching Letter of Credit :- If the term of payment agreed between the importer and the overseas supplier is a letter of credit then the importer should obtain the letter of credit from his bank and forward it to the overseas supplier well within the time agreed for the same. The importer must see to it that the letter of credit has been prepared in the strict conformity of the import contract entered between them.

Retirement of Import Documents (a) Loading of Goods and Receipt of Shipment Advice :- On loading of goods the oyerseas supplier despatches the shipment advice to the importer informing him about the shipment of goods. The shipment advice contains" invoice number, bill of lading, airways bill number and date, name of the vessel with date, the port of export, description of goods and quantity and the date of sailing of the vessel.

(b) Retirement of Import Documents :- After shipping the goods, the overseas supplier prepares the necessary documents as per the terms of contract and letter of credit and hands them over to his bank for their onward negotiation" to

importer in the manner as specified in the L/C.The set normally contains bill of exchange," commercial invoice, bill of lading, packing list, certificate of origin, marine insurance policy, etc.

For the retirement of documents, the importer is require~ to submit the following documents to his bank :¬ (a) A letter authorising his bank to debit the equivalent Indian rupees to the value of documents including bank charges. . (b) Exchange control copy of the Import Licence, if applicable. . (c) FormAl duly completed for the remittance in foreign exc (c) Acceptance of the Bill of Exchange :- Bill of Exchange accompanied by the above documents is known as the Documentary Bill of Exchange.IT is of two types :¬ •

Documents against Payment (Sight Drafts) :- In case of sigh draft,

the drawer instructs the bank to hand over the relevant documents the importer only against payment. •

Documents against Acceptance (Usance Draft) :- In case of usance

draft, the drawer instructs the bank to hand over the relevant documents to the importer against his 'acceptance' of the bill of exchange. (d) Scrutiny of Documents Received under L/c :- After receipt of import documents from the exporter's bank, the importer's bank will scrutinise the documents as to their correctness as per the terms and conditions of L/C and hands over them to the importer after payment. The importer should also scrutinise the documents and ensure that there are no discrepancies.

(e) Appointment of C & F Agent :- In India, the procedure for clearance imported goods is very lengthy, time consuming and involves lots of legal formalities. Therefore, it is advisable to hire the services of C&F agents who are well versed with such formalities. The C&F Agent prepares bill of entry containing details of goods to be cleared from the customs ,in case the C&F agent does not have relevant information about the goodsto be cleared, he prepares a bill of sight in order to enable himself to physically check the goods imported and prepare bill of entry on that basis.

Customs Clearance Procedure for Imported Goods Under the Ministry of Finance (Department of Revenue), there are two independent Boards of Revenue :-

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(a) Central Board of Direct Taxes (for Income Tax, Wealth Tax etc.) (b) Central Board of Excise and Customs.

The Customs administration vests with the Central Board for excise and Customs, which shapes the policy and decides the functions of the formalities in the country, in terms of the provisions of the Customs act 1962

All goods imported in India have to pass through the customs clearanceafter they cross the Indian border. The goods so imported are examined appraised assessed, evaluated and then allowed to be taken out of customs charge for use by the importer. The procedure for customs clearance in general for goods imported as follows :¬ (a) Import Manifest :- As per the section 30 of the Customs Act 1962,the

persons in charge of a conveyance carrying imported goods should hand over, within 24 hours of the arrivafof the conveyance, an import manifest to the customs. The, import manifest is a complete, list of all items the conveyance carries on board, including those to be transhipped and those to be carried to the subsequent ports of call. '

(b) Entry in the Import Department of Customs House :- On receipt of information regarding the arrival of the goods, the importers or their 'agents have to make an entry by filing a Bill of Entry, in a prescribed form in the Import Department of Customs House. The. date of presentation of Bill of Entry is an important date as the rate of duty applicable to the imported goods will be the rate, which is in force on tl1e date of apresentation.

(c) Presentation of Bill of Entry for Appraisal :- After the Bill of Entry is noted in the import department, the same should be presented to the Appraising Counters along with the following necessary documents :¬ •

Import licence, if necessary.

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Exporter's Invoice.

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A copy of Letter of Credit.

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Original Bill of Lading and its non-negotiable copy.

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Two copies of Packing List.

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Weight specifications.

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Manufacturer's test certificate.

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Certificate of Origin.

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Delivery order issued by Shipping company or its agent.

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Freight and insurance amount certificate if the import is on FOB terms

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A declaration from importer that he has not paid any commission to

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agents in India.:

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CUstoms declaration

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Catalogue/drawing, etc for machinery imported.

In addition to the above, the following documents are also required to be submitted wherever necessary :If the spare parts are imported - exporters invoice showing unit price and extended tptal of each item; If the, secondhand machinery is imported - Chartered Engineer's Certificate; If the steel is imported - Manufacturer's Analysis Certificate; If Chemicals' and alIled products are imported - Literature showing chemical consumption If the textiles items are imported - Textile Commissioners endorsement or certificate. If the above documents furnished by the importer are found to be adequate for acceptance of the declared value and determination of classification and acceptance of ITC Licence, the bill of Entry is completed by the Appraiser. It is then countersigned by the, Assistant Collector and sent to the Licence Section with an order to the Dock Staff for examination of good clearance.

(d) Clearance of Goods :- After payment of duty (the original copy of bill of Entry is retained in the Customs House) the importer should obtain the duplicate copy of Bill of Entry on which order for examination of the goods

is given by Customs and get the goods examined. If the description of goods is found to be correct, on the basis of declared and accepted paarticulars , clearance of goods is allowed by the appraiser.

(e) Warehousing the Goods :- The imported goods can be warehoused at the port of shipment without the payment of duty by presenting a "Bill of entry for Warehousing" to the Bonds Department along with a bond for twice the amount of duty payable. Initially the facility is granted for 3 months, which may be extended upto a period one year. The warehoused goods cleared in one or more installments. For clearance of goods from the warehouse the importer is required to present what is known as 'Ex-bond Bill of entry.

(f) Import Follow-up :- Once an importer is allowed to remit foreign exchange out of the country he has an obligation to import the permitted goods of equivalent value in the country. If no goods or goods for lesser values are imported, it would lead to leakage of foreign exchange.

Bill of Entry

The bill of entry is a document, prepared by the importer or his clearing agent in the prescribed form under Bill of Entry Regulations, 1971, on the strength of which clearance of imported goods can be made.

When goods are imported in a particular country, the importer has to pay necessary import duty. For this purpose, necessary information about the goods imported must be given to the customs authorities in a prescribed form called bill of entry form. Bill of entry is a document, which states that the goods of the stated values and description in the specified quantity have entered into the country from abroad. The bill of entry is drawn in triplicate. The customs authorities may ask the importer to supply other documents invoice broker's note and insurance policy, etc., in order to verify the correctness of the information supplied in the bill of entry form.

Types of Bill of Entry For the purpose of giving information in the bill of entry form,goods are classified into three categories namely : (a) Bill of Entry for Goods Imported for Home Consumption {white coloured} :- This kind of bill of entry is used for clearing imported goods paying customs duty at the port. (b) Bill of Entry for Bonded Goods (Yellow coloured) :- This kind bill of entry is used when no duty is paid on imported goods and therefore are transferred to customs recognised bonded warehouses.

(c) Bill of Entry for Ex-bond Clearance for Home Consumption {green coloured} :- This kind of bill of entry is used where the importer intends to clear the dutiable goods, either in part or full, from a bonded warehouse by paying necessary duty.

Contents of Bill. of Entry The main contents of the Bill of Entry are : (a) Name and address of the importer. (b) Name and address of the exporter. (c) Import licence number of the importer. (d) Name of the port/dock where goods are to be cleared.' (e) Description of goods. (f) Value of goods. (g) Rate and amount of import duty payable. (h) Other relevant documents. However, no bill of entry is required in the following cases : (a) Passengers' baggage; (b) Favour parcels; (c) Mail bags and Post parcels;

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(d) Boxes, kennels of cages containing live animals or birds; (e) Post parcels, ship stores in small quantities for personal use. (f)Un-serviceable stores, such as, dunnage wood, empty bottles, drums, etc.,of reasonable value (below Rs. 50); (g) Cargo by sailing vessels from Customs Ports when landed at open bunders only.

FORWARD CONTRACT International contracts are either concluded in Indian rupees or in foreign currency. If

the contract is concluded in terms of Indian rupees, all relevant documents are prepared in Indian rupees and hence no conversion is involved. However, if the contract is concluded in some internationally accepted currency then the importers have to pay Indian rupees equivalent to the amount of foreign currency. Where the international contract has been concluded in foreign currency, an importer is always at risk due to adverse fluctuations in the exchange rates in the international market. Such risks can be avoided by the following methods :¬ (a) Invoicing the Goods in Indian Rupees :- The first remedy to adverse movements in exchange rates is invoicing goods in Indian rupees. However, foreign seller may not agree to invoicing goods in Indian rupees. (b) Entering into a Forward Exchange Contract :- This i~ the most commonly practised alternative for insuring the risks arising out of adverse movements in exchange rates. Under this adjustment, the importer enters into contract with its bank to purchase from the bank, foreign exchange at a future date or period and- the bank agrees to sell the firm the foreign exchange on that date or during the agreed period at certain predetermined rate agreed upon at the time of entering into contract. Thus,. the importer knows in advance the exchange rate that he is going to pay on delivery of import documents.

TERMS OF SHIPMENTS – INCOTERMS The INCOTERMS (International Commercial Terms) is a universally recognized set of definition of international trade terms, such as FOB, CFR & CIF, developed by the International Chamber of Commerce(ICC) in Paris, France. It defines the trade contract responsibilities and liabilities between buyer and seller. It is invaluable and a cost-saving tool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction. Once they have agreed on a commercial terms like FOB, they can sell and buy at FOB without discussing who will be responsible for the freight, cargo insurance and other costs and risks. The INCOTERMS was first published in 1936 --- INCOTERMS 1936 --- and it is revised periodically to keep with changes in the international trade needs. The complete definition of each term is available from the current publication --- INCOTERMS 2000. Under INCOTERMS 2000, the international commercial terms are grouped into E, F, C and D, designated by the first letter of the term, relating to the final letter of the term. E.g. EXW—exworks comes under grouped ‘E’. The purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree. The scope of Incoterms is limited to matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods. Incoterms deal with the number of identified obligations imposed on the parties and the distribution of risk

between the parties. In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms that would hold the seller responsible for the import customs clearance and/or payment of import customs duties and taxes and/or other costs and risks at the buyer’s end, for example the trade terms DEO (Delivery Ex Quay) and DDP (Delivered Duty Paid) Quite often, the charges and expenses at the buyer’s end may cost more to the seller than anticipated. To overcome losses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines. Similarly, it would be best for importers not to deal in EXW (Ex Works) which would hold the buyer responsible for the export customs clearance, payment of export customs charges and taxes, and other costs and risks at the seller’s end MORE CLARIFICATION ON INCOTERMS EXW {+the named place} Ex Works: Ex means from. Works means factory, mill or warehouse, which are the seller’s premises. EXW applies to goods available only at the seller’s premises. Buyer is responsible for loading the goods on truck or container at the sellers premises and for the subsequent costs and risks. In practice, it is not uncommon that the seller loads sthe goods on truck or container at the sellers pre4mises without charging loading fee. N the quotation, indicate the named place (sellers premises) after the acronym EXW for example EXW Kobe and EXW San Antonio. The term EXW is commonly used between the manufacturer (seller) and export-trader(buyer), and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers may use the term Ex Factory, which means the same as Ex Works. FCA {+the named point of departure} Free Carrier: The delivery of goods on truck, rail car or container at the specified point(depot) of departure, which is usually the sellers premises, or a named railroad station or a named cargo

terminal or into the custody of the carrier, at sellers expense. The point(depot) at origin may or may not be a customs clearance centre. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the air shipment, technically speaking, goods placed in the custody of an air carrier are considered as delivery on board the plane. In practice, many importers and exporters still use the term FOB in the air shipment. The term FCA is also used in the RO/RO (roll on/roll off) services In the export quotation, indicate the point of departure (loading) after the acronym FCA, for example FCA Hong Kong and FCA Seattle. Some manufacturers may use the former terms FOT (Free on Trucks) and FOR (Free on Rail) in selling to export-traders. FAS {+the named port of origin} Free Alongside Ship: Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller’s expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks In the export quotation, indicate the port of origin(loading)after the acronym FAS, for example FAS New York and FAS Bremen. The FAS term is popular in the break-bulk shipments and with the importing countries using their own vessels. FOB {+the named port of origin) Free on Board: The delivery of goods on the board the vessel at the named port of origin (Loading) at seller’s expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the export quotation, indicate the port of origin (loading) after the acronym FOB, for example FOB Vancouver and FOB Shanghai. Under the rules of the INCOTERMS 1990, the term FOB is used for ocean freight only. However, in practice, many importers and exporters still use the term FOB in the air freight. In North America, the term FOB has other applications. Many buyers and sellers in Canada and the USA dealing on the open account and consignment basis are accustomed to using the shipping terms FOB Origin and FOB destination.

FOB Origin means the buyer is responsible for the freight and other costs and risks. FOB Destination means the seller is responsible for the freight and other costs and risks until the goods are delivered to the buyer’s premises which may include the import custom clearance and payment of import customs duties and taxes at the buyer’s country, depending on the agreement between the buyer and seller. In international trade, avoid using the shipping terms FOB Origin and FOB Destination, which are not part of the INCOTERMS (International Commercial Terms). CFR {+the named port of destination} Cost and Freight: The delivery of goods to the named port of destination (discharge) at the sellers expenses. Buyer is responsible for the cargo insurance and other costs and risks. The term CFR was formerly written as C&F. Many importers and exporters worldwide still use the term C&F. In the export quotation, indicate the port of destination (discharge) after the acronym CFR, for example CFR Karachi and CFR Alexandria. Under the rules of the INCOTERMS 1990, the term Cost and Freight is used for ocean freight only. However, in practice, the term Cost and Freight (C&F) is still commonly used in the air freight. CIF {+named port of destination} Cost, Insurance and Freight: The cargo insurance and delivery of goods to the named port of destination (discharge) at the seller’s expense. Buyer is responsible for the import customs clearance and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym CIF, for example CIF Pusan and CIF Singapore. Under the rules of the INCOTERMS 1990, the term CIFI is used for ocean freight only. However, in practice, many importers and exporters still use the term CIF in the air freight.

CPT {+the named place of destination} Carriage Paid To: The delivery of goods to the named port of destination (discharge) at the sellers expenses. Buyer assumes the cargo insurance, import custom clearance, payment of custom duties and taxes, and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym CPT, for example CPT Los Angeles and CPT Osaka. CIP {+ the named place of destination) Carriage and Insurance Paid To: The delivery of goods and the cargo insurance to the named place of destination (discharge) at seller’s expense. Buyer assumes the importer customs clearance, payment of customs duties and texes, and other costs and risks. In the export quotation, indicate the place of destination (discharge) after the acronym CIP, for example CIP Paris and CIP Athens. DAF {+ the names point at frontier} Delivered At Frontier: The delivery of goods to the specified point at the frontier at sellers expense. Buyer is responsible for the import custom clearance, payment of custom duties and taxes, and other costs and risks. In the export quotation, indicate the point at frontier (discharge) after the acronym DAF, for example DAF Buffalo and DAF Welland. DES {+named port of destination} Delivered Ex Ship: The delivery of goods on board the vessel at the named port of destination (discharge) at sellers expense. Buyer assumes the unloading free, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and risks. In the export quotation, indicate the Port of destination (discharge) after the acronym DES, for example DES Helsinki and DES Stockholm.

DEQ {+ the named port of destination Delivered Ex Quay: The delivery of goods to the Quay (the port) at the destination at buyers expense. Seller is responsible for the importer customs clearance, payment of customs duties and taxes, at the buyers end. Buyer assumes the cargo insurance and other costs and risks. In the export quotation, indicate the Port of destination (discharge) after the acronym DEQ, for example DEQ Libreville and DEQ Maputo. DDU {+ the named point of destination} Delivered Duty Unpaid: The delivery of goods and the cargo insurance to the final point at destination, which is often the project site or buyers premises at sellers expense. Buyer assumes the import customs clearance, payment of customs duties and taxes. The seller may opt not to insure the goods at his/her own risks. In the export quotation, indicate the point of destination (discharge) after the acronym DDU for example DDU La Paz and DDU N’djamena. DDP {+ the named point of destination) Delivered Duty Paid: The seller is responsible for most of the expenses which include the cargo insurance, import custom clearance, and payment of custom duties, and taxes at the buyers end, and the delivery of goods to the final point of destination, which is often the project site or buyers premise. The seller may opt not to insure the goods at his/her own risk. In the export quotation, indicate the point of destination (discharge) after the acronym DDP, for example DDP Bujumbura and DDP Mbabane.

“E”-term,”F”-term, “C”-term &”D”-term: Incoterms 2000, like its immediate predecessor, groups the term in four categories denoted by the first letter in the three-letter abbreviation. •

Under the “E”-TERM (EXW), the seller only makes the goods available to the buyer at the seller’s own premises. It is the only one of that category.

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Under the “F”-TERM (FCA, FAS, &FOB), the seller is called upon to deliver the goods to a carrier appointed by the buyer.

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Under the “C”-TERM (CFR, CIF, CPT, & CIP), the seller has to contract for carriage, but without assuming the risk of loss or damage to the goods or additional cost due to events occurring after shipment or discharge.

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Under the “D”-TERM (DAF, DEQ, DES, DDU & DDP), the seller has to bear all costs and risks needed to bring the goods to the place of destination.

All terms list the seller’s and buyer’s obligations. The respective obligations of both parties have been grouped under up to 10 headings where each heading on the seller’s side “mirrors” the equivalent position of the buyer. Examples are Delivery, Transfer of risks, and Division of costs. This layout helps the user to compare the parties respective obligations under each Incoterms.

CHAPTER 6 - MAJOR FINANCIAL AND OTHER INSTITUTIONS For providing credit and finance and insuring export credit risk, there are 2 primary

institutions i.e. EXIM Bank and ECGC. Although there are other commercial banks, nationalized institutions and private institutions such as IFCI, IDBI, engaged in providing finance to exporter. The major institutions are EXIM Bank, ECGC, and RBI.

6.1 - EXIM BANK Exim Bank Act-Completed 20 years of operations. •

Set up by an Act of Parliament in September 1981.

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Commenced operations in March 1982.

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Wholly owned by the Government of India.

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Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting foreign trade in India.

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Exim is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports.

INTRODUCTION The Export-Import bank of India is the apex institution for project finance, which provides direct finance and coordinates the working of the institution, which is engaged in financing export or import of goods and services. It has taken over the operations of international finance wing of the industrial development bank of India (IDBI). The EXIM bank of India came into existence on 1st January 1982, and started functioning from 1st march 1982. It has it’s headquarter in Mumbai and its branches and offices in important cities in India and abroad. Offices Head office – Mumbai. A network of 13 offices in India and Overseas. Domestic Offices - Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune. Overseas Offices - Budapest, Johannesburg, Milan, Singapore, Washington DC.

PURPOSE The EXIM bank was established for the purpose of financing medium and long term loan to the exporters thereby promoting foreign trade of India. MAIN OBJECTIVES To provide financial assistance (medium and long term) to exporters and importers. To function as the principal financial institution for coordinating the working of institutions engaged in providing export finance. To promote Foreign Trade of India. To deal with all matters that may be considered to be incidental or conducive to the attainment of above objectives. FUNCTIONS The assistance provided by EXIM Bank to the exporters can be grouped under two heads: Fund Based Assistance. Non-Fund based Assistance. The various assistance provided by EXIM Bank can be charted as follows:

ASSISTANCE OFFERED BY EXIM BANK

FUND BASED ASSISTANCE INDIAN PARTIES. INDIAN BANKS. OVERSEAS BUYERS. OVERSEAS BANKS.

NON-FUND BASED ASSISTANCE FINANCIAL GUARANTEES. ADVISORY AND OTHER SERVICES.

A. FUND BASED ASSISTANCE: •

Assistance to Indian Exporters: (a) It provides financial assistance to “Deferred credit exports”. (b) It offers credit facilities to “Deemed Exports”. (c) It finances “Indian Joint Ventures in Foreign countries”. (d) Finances units in“EPZ/ SEZ and 100% EOU’s”. (e) It provides Pre-shipment finance to exporters for procuring raw materials and other inputs. (f) It finances export/import of machinery and equipment on lease basis. (g) It provides Computer Software exporters foreign exchange loan subject to RBI clearance. (h) It provides finance facility against deferred credit to exporters of consultancy, technology and other services. (i) It provides finance to Indian exporters to undertake various export marketing activities in India and abroad through Export Marketing Fund (EMF). (j) It also operates Export Development Fund (EDF) to finance techno-economic survey/research or any other study for the development of Indian Exports.

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Assistance to Indian Commercial Banks: (a) It provides Refinance Facilities so as to Indian exporters who extend term credit to importers. (b) It offers Export Bills Rediscounting Facility to commercial banks in India who have earlier discounted bills of exporters.

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Assistance to Overseas Buyers: (a) It offers “Overseas Buyer’s Credit” facility to foreign importers for import of Indian capital goods and related services with repayment spread over a period of years.

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Assistance to Overseas Banks: (a) Long term finance is also provided under “Lines of Credit” to finance financial institutions abroad, who in turn, extend finance to importers of their country to buy Indian Capital goods. (b) It provides Relending Facility to overseas Banks to make available term finance to their clients for import of Indian goods.

2. NON-FUND BASED ASSISTANCE •

Guarantees and Bonds:

EXIM Bank provides non-fund base assistance in the form of guarantees in the nature of Bid Bonds, Performance Guarantee etc. These guarantees are provided together with Commercial Banks. •

Advisory and Other Services: (a) It advises Indian companies, in Executing Contracts Abroad, and on sources of overseas financing. (b) It advises Indian exporters on global exchange control practices. (c) The EXIM Bank offers Financial and Advisory Services to Indian construction projects abroad. (d) It advises small-scale manufacturers on export markets and product areas. (e) It provides Euro Financing sources and Global Credit sources to Indian exporters. (f) It assists the exporters under Forfeiting scheme.

FREQUENTLY ASKED QUESTIONS (FAQ’s) IN EXIM BANK 1. What is Export-Import Bank of India? What are its objectives?  The Export-Import Bank of India (Exim Bank) is a public sector financial institution created by an Act of Parliament, the Export-import Bank of India Act, 1981. The business of Exim Bank is to finance Indian exports that lead to continuity of foreign exchange for India. The Bank's primary objective is to develop commercially viable relationships with a target set of externally oriented companies by offering them a comprehensive range of products and services, aimed at enhancing their internationalization efforts. 2. What is the place of Exim Bank in the institutional structure for financing developmental needs?  There are apex institutions in the country, which deal with major economic activities, viz. industry, agriculture and foreign trade. The Industrial Development Bank of India extends term industrial loans; the National Bank for Agricultural loans; and the Exim Bank extends term loans for foreign trade. All these institutions are wholesale banks. They, therefore work closely with commercial banks and other state level financial institutions that operate the retail banking system in the country. 3. What are the types of services provided by Exim Bank?  Exim Bank provides a range of analytical information and export related services. The Bank's fee based services help identify new business propositions, source trade and investment related information, create and enhance presence through joint network of institutional

linkages across the globe, and assists externally oriented companies in their quest for excellence and globalization. Services include search for overseas partners, identification of technology suppliers, negotiating alliances, and development of joint ventures in India and abroad. The Bank also supports Indian project exporters and consultants to participate in projects funded by multilateral funding agencies.

4. How does Exim Bank support Indian consultants to secure assignments overseas?  Exim Bank encourages Indian consultants to gain and enhance their international exposure by assisting them in securing assignments overseas.  Assignments are awarded under programme sponsored by International Finance Corporation (IFC) in Washington to promote private sector development in select countries and regions. Arrangements set in place cover: •

Africa Project Development Facility

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African Management Services Company

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Africa Enterprise Fund

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South-east Europe Enterprise Development Facility

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Mekong Project Development Facility

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Business Advisory and Technical Assistance Services (BATAS)

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Other Technical Assistance & Trust Funds

Exim Bank assists these agencies in the recruitment of Indian consultants and meets the professional fees of the consultant selected by IFC. Consultancy assignments undertaken comprise pre-feasibility studies, project and investment related services, management information systems, operations and maintenance support mainly for SMEs in a variety of sectors like agriculture, agro-industry, consumer goods, light engineering, telecom.

5. What are the various types of financial facilities provided by Exim Bank to Indian Companies for export of turnkey/ construction projects, export of services and export of capital/ engineering goods & consumer durables?  Exim Bank provides financial assistance to Indian Companies by way of a variety of lending Programmes, viz. Non-Funded •

Bid Bond

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Advance Payment Guarantee

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Performance Guarantee

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Guarantee for release of Retention Money

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Guarantee for raising Borrowings Overseas

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Other guarantees

Funded •

Pre-shipment Rupee Credit

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Post-shipment Rupee Credit

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Foreign Currency Loan

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Overseas Buyer's Credit

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Lines of Credit

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Loan under FREPEC programme

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Refinance of Export Loans

6. What are the various types of financial facilities provided by Exim Bank to Indian Companies for export capability creation?  Exim Bank provides financial assistance to Indian Companies for export capability creation by way of a variety of lending programmes, viz., •

Lending Programme for Export Oriented Units

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Production Equipment Finance Programme

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Import Finance

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Export Marketing Finance Programme

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Lending Programme for Software Training Institutes

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Programme for Financing Research & Development

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Programme for Export Facilitation: Port Development

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Export Vendor Development Lending Programme

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Foreign Currency Pre-Shipment Credit

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Working Capital Term Loan Programme for Export Oriented units

7. What type of financial assistance is extended by Exim Bank in setting up joint ventures?  Assistance is extended to Indian Promoter Companies by way of programmes that address to different requirements of the promoter company in setting up of the joint venture. •

Overseas Investment Finance Programme for setting up joint ventures and wholly owned subsidiaries abroad.

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Asian Countries Investment Partners (ACIP) Programme for creation of a joint venture in India with East Asian countries, through four facilities that address different stages of a project cycle.

EXPORT FINANCING PROGRAMMES PROVIDED BY EXIM BANK EXIM INDIA offers a range of financing programs that match the menu of Exim Banks of the industrialized countries. However, the Bank is atypical in the universe of Exim Banks in that it has over the years evolved, so as to anticipate and meet the special needs of a developing country. The Bank provides competitive finance at various stages of the export cycle covering: EXIM INDIA operates a wide range of financing and promotional programs. The Bank finances exports of Indian machinery, manufactured goods, and consultancy and technology services on deferred payment terms. EXIM INDIA also seeks to co finance projects with global and regional development agencies to assist Indian exporters in their efforts to participate in such overseas projects.

The Bank is involved in promotion of two-way technology transfer through the outward flow of investment in Indian joint ventures overseas and foreign direct investment flow into India. EXIM INDIA is also a Partner Institution with European Union and operates European Community Investment Partners' Program (ECIP) for facilitating promotion of joint ventures in India through technical and financial collaboration with medium sized firms of the European Union. The Export- Import Bank of India (Exim Bank) provides financial assistance to promote Indian exports through direct financial assistance, overseas investment finance, term finance for export production and export development, pre-shipping credit, buyer's credit, lines of credit, relending facility, export bills rediscounting, refinance to commercial banks.

Loans to Indian Entities

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Deferred payment exports: Term finance is provided to Indian exporters of eligible goods and services, which enables them to offer deferred credit to overseas buyers. Deferred credit can also cover Indian consultancy, technology and other services. Commercial banks participate in this program directly or under risk syndication arrangements.

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Pre-shipment credit: finance is available form Exim Bank for companies executing export contracts involving cycle time exceeding six months. The facility also enables provision of rupee mobilization expenses for construction/turnkey project exporters.

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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 deeded exports; Deemed exports are eligible for funded and non- funded facilities from Exim Bank.

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Overseas Investment finance: Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture.

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Finance for export marketing: This program, which is a component of a World Bank loan, helps exporters implement their export market development plans.

Loans to Commercial Banks in India •

Export Bills Rediscounting: Commercial Banks in India who are authorized to deal in foreign exchange can rediscount their short term export bills with Exim Banks, for an unexpired usance period of not more than 90 days.

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Refinance of Export Credit: Authorized dealers in foreign exchange can obtain from Exim Bank 100% refinance of deferred payment loans extended for export of eligible Indian goods.

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Guaranteeing of Obligations: Exim Bank participates with commercial banks in India in the issue of guarantees required by Indian companies for the export contracts and for execution of overseas construction and turnkey projects.

Loans to Overseas Entities •

Overseas Buyer's Credit: Credit is directly offered to foreign entities for import of eligible goods and related services, on deferred payment.

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Lines of Credit: Besides foreign governments, finance is available to foreign financial institutions and government agencies to on-lend in the respective country for import of goods and services from India.

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Relending Facility to Banks Overseas: Relending facility is extended to banks overseas to enable them to provide term finance to their client’s worldwide for imports from India.

A RANGE OF EXPORT SERVICES PROVIDED BY EXIM BANK

EXIM INDIA provides a range of analytical information and export related services necessary for globalization of Indian companies. EXIM INDIA through its wide network of alliances with financial institutions, trade promotion agencies, information providers across the globe assists externally oriented Indian companies in their quest for excellence and globalization. Services include search for overseas partners, identification of technology suppliers, negotiating alliances, and development of joint ventures in India and abroad.

A. ADVISORY SERVICES

I. MULTILATERAL AGENCIES FUNDED PROJECTS OVERSEAS (MFPO) Services  Information and support services to Indian companies to help improve their prospects for securing business in multilateral agencies funded projects.  Dissemination of business opportunities in funded projects

 Providing detailed information on projects of interest  Information on Procurement Guidelines, Policies, Practices of  Multilateral Agencies  Assistance for Registration with Multilateral Agencies  Advising Indian companies on preparation of Expression of Interest, Capability Profile.  Bid Intervention II. PROMOTING INDIAN CONSULTANCY TIE-UP WITH:  International Finance Corporation, Washington D.C. 

Africa Project Development Facility



Africa Enterprise Fund



Technical Assistance & Trust Funds



Mekong Project Development Facility

 Eastern & Southern African Trade & Development Bank (PTA Bank)  African Management Services Company (AMSCO), Netherlands

EXAMPLES



Gems & Jewellery Study - Zambia



Financial Training Mission - Kenya



Cement Project - Cameroon



Software - Madagascar



Wool Knitting - Vietnam



Textile - Nigeria



Refrigeration - Ghana



Financial Training - Poland

III. EXIM BANK AS A CONSULTANT  Feasibility study for establishment of an export credit and guarantee facility for Gulf Cooperation Council countries.  Regional cooperation in export finance and export credit guarantees for ESCAP.  Study on promotion of international competitiveness and exports of manufactured goods for ESCAP.  Setting up the AFRICAN-EXIM Bank.  Designing of Export Financing Programmes - Turkey  Setting up an Exim Bank in Malaysia  Design of Export Marketing Seminars for SMEs in Vietnam  Export Development Project : Ukraine  Enterprise Support Fund : Armenia  Establishing an Export Credit Guarantee Company in Zimbabwe  Advisory services to Industrial Development Corporation of South Africa for international finance products

B. KNOWLEDGE BUILDING I. EXIMIUS CENTRE FOR LEARNING, BANGALORE

 Set up, in October 1994, to organize seminars and workshops in areas such as international trade & investment, export marketing, quality, packaging, business opportunities in multilateral agencies funded projects, sector and country specific programmes  Guest faculty from network partners such as IFC, World Bank, EBRD, UNIDO.  Number of Programmes Conducted: 53

II. RESEARCH STUDIES  Research Studies on products, sectors, countries, macro economic issues relevant to international trade and investment  Number of research studies published as Occasional Papers: 85 INFORMATION  Exporters/Importers  Industry/Market Reports  Trade Regulations & Laws  Country Reports  International Quality Standards  Partner Identification  Product Display Examples of Information Services •

Hungarian Pharmaceutical Sector

•

Importers of Sanitary ware, Castings in North America

•

Importers of Agro-chemicals in Eastern Europe

•

Study for ear buds market in Hungary

•

Study of the Indian Wine market for a Hungarian Company

•

Partner identification for an Italian Sanitary ware manufacturer

•

Study of the Indian Crane Industry for a Finnish company

•

Regulatory Framework for setting up a Pharma Project in China

•

Market report for Computer Monitors in India for a Singaporean firm

•

Study on Bicycle market in Eastern Europe for Indian Cycle exporter

•

Market Potential for Denim in South East Asia

6.2 - EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD. In order to provide export credit and insurance support to Indian exporters, the GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was transformed into export credit guarantee corporation limited (ECGC) in 1964. Since 1983, it is now know as ECGC of India Ltd. ECGC is a company wholly owned by the GOI. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing government, Banking, Insurance, Trade and Industry. The ECGC with its headquarters in Bombay and several regional offices is the only institution providing insurance cover to Indian exporters against the risk of non-realization of export payments due to occurrence of the commercial and political risks involved in exports on credit terms and by offering guarantees to commercial banks against losses that the bank may suffer in granting advances to exports, in connection with their export transactions. OBJECTIVES OF ECGC: 

To protect the exporters against credit risks, i.e. non-repayment by buyers



To protect the banks against losses due to non-repayment of loans by exporters COVERS ISSUED BY ECGC: The covers issued by ECGC can be divided broadly into four groups:

1.

STANDARD POLICIES – issued to exporters to protect then against payment risks

involved in exports on short-term credit. 2.

SPECIFIC POLICIES – designed to protect Indian firms against payment risk involved in

(i) exports on deferred terms of payment (ii) service rendered to foreign parties, and (iii) construction works and turnkey projects undertaken abroad. 3.

FINANCIAL GUARANTEES – issued to banks in India to protect them from risk of loss

involved in their extending financial support to exporters at pre-shipment and post-shipment stages; and 4.

SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks which add

confirmation to letters of credit opened by foreign banks, Insurance cover for Buyer’s credit, etc. (A) STANDARD POLICIES: ECGC has designed 4 types of standard policies to provide cover for shipments made on short term credit: 1.

Shipments (comprehensive risks) Policy – to cover both political and commercial risks

from the date of shipment 2.

Shipments (political risks) Policy – to cover only political risks from the date of

shipment 3.

Contracts (comprehensive risks) Policy – to cover both commercial and political risk

from the date of contract 4.

Contracts (Political risks) Policy – to cover only political risks from the date of contract RISKS COVERED UNDER THE STANDARD POLICIES:

1.

Commercial Risks



Insolvency of the buyer



Buyer’s protracted default to pay for goods accepted by him



Buyer’s failure to accept goods subject to certain conditions

2.

Political risks



Imposition of restrictions on remittances by the government in the buyer’s country or

any government action which may block or delay payment to exporter.



War, revolution or civil disturbances in the buyer’s country. Cancellation of a valid

import license or new import licensing restrictions in the buyer’s country after the date of shipment or contract, as applicable. 

Cancellation of export license or imposition of new export licensing restrictions in

India after the date of contract (under contract policy). 

Payment of additional handling, transport or insurance charges occasioned by

interruption or diversion of voyage that cannot be recovered from the buyer. 

Any other cause of loss occurring outside India, not normally insured by commercial

insurers and beyond the control of the exporter and / or buyer. RISKS NOT COVERED UNDER STANDARD POLICIES: The losses due to the following risks are not covered: 1.

Commercial disputes including quality disputes raised by the buyer, unless the exporter

obtains a decree from a competent court of law in the buyer’s country in his favour, unless the exporter obtains a decree from a competent court of law in the buyers’ country in his favour 2.

Causes inherent in the nature of the goods.

3.

Buyer’s failure to obtain import or exchange authorization from authorities in his county

4.

Insolvency or default of any agent of the exporter or of the collecting bank.

5.

loss or damage to goods which can be covered by commerci8al insurers

6.

Exchange fluctuation

7.

Discrepancy in documents.

(B). SPECIFIC POLICIES

The standard policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of exporter’s shipment of raw materials, consumable durable for which credit period does not normally exceed 180 days.

Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad are not of a repetitive nature. Such transactions are, therefore, insured by ECGC on a case-tocase basis under specific policies. Specific policies are issued in respect of Supply Contracts (on deferred payment terms), Services Abroad and Construction Work Abroad. 1) Specific policy for Supply Contracts: Specific policy for Supply contracts is issued in case of export of Capital goods sold on deferred credit. It can be of any of the four forms: •

Specific Shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the Post-shipment stage.

•

Specific Shipments (Political Risks) Policy to cover only political risks after shipment stage.

•

Specific Contracts (Comprehensive Risks) Policy to cover political and commercial risks after contract date.

•

Specific Contracts (Political Risks) Policy to cover only political risks after contract date.

2) Service policy: Indian firms provide a wide range of services like technical or professional services, hiring or leasing to foreign parties (private or government). Where Indian firms render such services they would be exposed to payment risks similar to those involved in export of goods. Such risks are covered by ECGC under this policy. If the service contract is with overseas government, then Specific Services (political risks) Policy can be obtained and if the services contract is with overseas private parties then specific services (comprehensive risks) policy can be obtained, especially those contracts not supported by bank guarantees. Normally, cover is issued on case-to-case basis. The policy covers 90%of the loss suffered.

3) Construction Works Policy: This policy covers civil construction jobs as well as turnkey projects involving supplies and services. This policy covers construction contracts both with private and foreign government. This policy covers 85% of loss suffered on account of contracts with government agencies and 75% of loss suffered on account of construction contracts with private parties. (C). FINANCIAL GUARANTEES Exporters require adequate financial support from banks to carry out their export contracts. ECGC backs the lending programmes of banks by issuing financial guarantees. The guarantees protect the banks from losses on account of their lending to exporters. Six guarantees have been evolved for this purpose:(i). Packing Credit Guarantee (ii). Export Production Finance Guarantee (iii). Export Finance Guarantee (iv). Post Shipment Export Credit Guarantee (v). Export Performance Guarantee (vi). Export Finance (Overseas Lending) Guarantee. These guarantees give protection to banks against losses due to non-payment by exporters on account of their insolvency or default. The ECGC charges a premium for its services that may vary from 5 paise to 7.5 paise per month for Rs. 100/-. The premium charged depends upon the type of guarantee and it is subject to change, if ECGC so desires. (i) Packing Credit Guarantee: Any loan given to exporter for the manufacture, processing, purchasing or packing of goods meant for export against a firm order of L/C qualifies for this guarantee. Pre-shipment advances given by banks to firms who enters contracts for export of services or for construction works abroad to meet preliminary expenses are also eligible for cover under this guarantee. ECGC pays two thirds of the loss. (ii) Export Production Finance Guarantee: this is guarantee enables banks to provide finance at preshipment stage to the full extent of the of the domestic cost of production and subject to certain guidelines.

The guarantee under this scheme covers some specified products such a textiles, woolen carpets, readymade garments, etc and the loss covered is two third. (iii) Export Finance Guarantee: this guarantee over post-shipment advances granted by banks to exporters against export incentives receivable such as DBK. In case, the exporter Does not repay the loan, then the banks suffer loss? The loss insured is up to three fourths or 75%. (iv) Post-Shipment Export Credit Guarantee: post shipment finance given to exporters by the banks purchase or discounting of export bills qualifies for this guarantee. Before extending such guarantee, the ECGC makes sure that the exporter has obtained Shipment or Contract Risk Policy. The loss covered under this guarantee is 75%. (v) Export Performance Guarantee: exporters are often called upon to execute bid bonds supported by a bank guarantee and it the contract is secured by the exporter than he has to furnish a bank guarantee to foreign parties to ensure due performance or against advance payment or in lieu of or retention money. An export proposition may be frustrated if the exporter’s bank is unwilling to issue the guarantee. This guarantee protects the bank against 75% of the losses that it may suffer on account of guarantee given by it on behalf of exporters. (vi) Export Finance (Overseas Lending) Guarantee: if a bank financing overseas projects provides a foreign currency loan to the contractor, it can protect itself from risk of non-payment by the con tractor by obtaining this guarantee. The loss covered under this policy is to extent of three fourths (75%). (D) SPECIAL SCHEMES A part from providing policies (Standards and Specific) and guarantees, ECGC provides special schemes. These schemes are provided o the banks and to the exporters. The schemes are: I. Transfer Guarantee: the transfer guarantee is provided to safeguard banks in India against losses arising out of risk of confirmation of L/C. the risks can be either political or commercial or both. Loss due to political risks is covered up to 90 % and that due to commercial risks up to 75%. II. Insurance Cover for Buyer’s Credit and Lines of Credit: Financial Institutions in India have started direct lending to buyers or financial institutions in developing countries for

importing machinery and equipment from India. This sort of financing facilitates immediate payment to exporters and frees them from the problem of credit management. ECGC has evolved this scheme to protect financial institutions in India which extent export credit to overseas buyers or institutions. III. Overseas Investment Insurance: with the increasing exports of capital goods and turnkey projects from India, the involvement of exporters in capital anticipation in overseas projects has assumed importance. ECGC has evolved this scheme to provide protection for such investment. Normally the insurance cover is for 15 years. 6.3 - RESERVE BANK OF INDIA INTRODUCTION: The RBI with its head quarters in Mumbai and several regional offices is the central banks of our country to authorize extend and regulate export credit and transaction including foreign exchange affairs. RBI does not directly provide export finance to the exporters, but it adopts policies and initiates measures to encourage commercial banks and other financial institutions to provide liberal export finance. The Two Departments of RBI are:  Industrial and credit department and  Exchange control department These Departments administers various policies related to export finance/credit and foreign exchange. SCHEMES OFFERED BY RBI TO ENCOURAGE COMMERCIAL BANKS TO PROVIDE EXPORT CREDIT TO THE EXPORTERS:  EXPORT BILLS CREDIT SCHEME, 1963: Under this scheme, RBI used to grant advance to scheduled banks against export bills maturing within 180 days. Now this scheme is not in operation.  PRE-SHIPMENT CREDIT SCHEME, 1969: Under this scheme, RBI provides re-finance facilities to scheduled banks that provide pre-shipment loans to bonafide customers.  EXPORT CREDIT INTEREST SUBSIDIES SCHEME, 1968: Under this scheme, RBI provides interest subsidies of minimum 1.5 % p.a. to banks, which provide export finance to

exporters, provided that the banks charge interest to exporter within the ceiling prescribed by RBI. The subsidies are given both against packing credit and post-shipment.  DUTY DRAW BACK CREDIT SCHEME, 1976: Under this scheme, the exporters can avail an interest free advances from the bank up to 90 days against shipping bill provisionally certified by the customs authority towards a refund of customs duty. The advances made by commercial banks under this scheme are eligible for re-finance, free of interest from RBI for maximum period of 90 days form the date of advance. Other approves or sanctions of application made by the exporters with RBI  Extension of time limit for realization of export proceeds.  Deduction in invoice price of exports goods.  Fixation of commission to overseas consignee or agents.  Provision of blanket permit where a lump sum exchange is released for a number of purposes.  Remittance abroad in respect of advertising, legal expenses etc.  Any other matters relating to foreign trade that require clearance form the exchange Control department of RBI.  Clearance in respect of joint venture abroad.

GUIDELINES ISSUED BY RBI under section 47 of THE FEMA, 1999. Issued by RBI under Sec. 47 of Foreign Exchange Management Act, 1999. Types of Exports covered: •

Export of Goods on Deferred Payment Terms (e.g. Export of machinery, equipment, manufactured products)

•

Turnkey Projects (e.g. Setting up of Sugar Plant, Cement Plant)

•

Construction Projects (e.g. Construction of Roads, Dams, Bridges)

•

Consultancy & Technical Services (e.g. Operation & Maintenance Contracts) collectively referred to as 'PROJECT & SERVICES EXPORTS'.

TURNKEY, CONSTRUCTION & SUPPLY BIDS / CONTRACTS •

Upto Rs. 50 crores: Scheduled Commercial Banks.

•

Upto Rs. 200 crores: Exim Bank.

•

Above Rs. 200 crores: Working Group.

SERVICES BIDS / CONTRACTS

On Cash Terms

•

Upto Rs. 5 crores: Scheduled Commercial Banks.

•

Upto Rs. 10 crores: Exim Bank.

•

Above Rs. 10 crores: Working Group.

On Deferred Payment Terms •

For any amount: Working Group.

How to apply for loan? The proposal is to be submitted in the prescribed application form (Ref: Memorandum PEM) along with implementation schedule, currency-wise cash flows and write-up with regard to site and infra-structural condition, and sub-contracting arrangements envisaged. In case of a nonGovernment buyer, status report on the client/prime contractor would first need to be obtained. The completed applications are to be submitted to the sponsoring bank, for consideration, within fifteen days of entering into contract.

It would also be necessary to consult ECGC in advance in cases where corporation's insurance cover and/or counter guarantees are required. The applications are forwarded by the sponsoring banks with their comments, to the following agencies which constitute the Working Group: •

Exim Bank, Mumbai.

•

Reserve Bank of India,

•

Exchange Control Department,

•

Mumbai.

•

Export Credit Guarantee

•

Corporation of India Limited, Mumbai.

•

Ministry of Finance,

•

Department of Economic Affairs,

•

Banking Division, New Delhi.

•

Ministry of Finance,

•

Department of Economic Affairs (FT),

•

New Delhi.

•

Ministry of Commerce, New Delhi.

•

Other participating banks

•

Export Capability Creation Programmes:  Lending Programme for Export Oriented Units  Production Equipment Finance Programme

 Technology Up gradation Fund Scheme for Textile and Jute Industries  Overseas Investment Finance Programme  Equity Investment in Indian Ventures Abroad  Asian Countries Investment Partners Programme  Export Marketing Finance Programme  Export Product Development Programme  Export Vendor Development Programme •

Programme for Export Facilitation:  Port Development  Software Training Institutes

•

Foreign Currency Pre-shipment Credit

•

Working Capital Term Loan Programme for Export Oriented Units

•

Bulk Import Finance

•

Finance for Research & Development for Export Oriented Units

•

Long Term Working Capital

•

Import Finance

Post-Award Clearance of Export Contracts •

Exporter submits application in prescribed from along with copies of contract through his commercial bank for Post Award Clearance.

•

Exporter can directly approach Exim Bank for proposals of value limits upto Rs.200 crores.

•

On receipt of application and contract copies from the commercial bank, EXIM Bank approves the proposal if the same falls within its delegated powers or convenes Working Group meeting.

•

In approved cases, Exim Bank/Working Group accords clearance to the final terms and conditions of the contract including various fund based and non-fund based facilities and requisite exchange control approvals.

•

On the basis of package post award clearance granted by Exim Bank/Working Group, final approvals for fund based and non-fund based facilities and requisite exchange control approvals are issued by the concerned institutions and export's banks.

Criteria for Consideration for Clearance of Export Proposals •

Exporter's financial position, track record.

•

Status of overseas client - Government/ Private.

•

Break-up of contract value - Indian / Third Country / Local.

•

Risk Assessment of Buyer's Country.

•

Estimates of Cost and Profitability.

•

Currency of Payment - Convertible Currency / Local Currency

•

Security - Letter of Credit, Bank Guarantee, Government Guarantee, Externalization undertaking of Central Bank.

•

Foreign Exchange Outgo.

•

Facilities required by the exporter.

•

Salient Parameters of Appraisal for Clearance of Export Proposals

•

Payment Terms : Advance Payment, Progress / Down Payment, Deferred Payment, Retention Money

•

Availability of ECGC Cover, where necessary

•

Important Contractual Clauses :

•

Preshipment Inspection

•

Arbitration

•

Force Majeure

•

Status of Exporter : Prime Contractor/Sub-contractor/ Consortium Member

•

Penalty / Liquidated Damages for delay in Contract Execution

•

Price Escalation

•

Source of Funding : Multilateral / Local

•

Foreign Exchange Outgo

•

Facilities required by the exporter

CHAPTER 9 - CONCLUSION

Learning’s/Suggestions through this project: ♦ Export Finance is a very important branch to study & understand the overall gamut of the international finance market. ♦ Learning of the proper documentation during imports and exports is very essential while doing trade.

♦ Also the exporter and importer by studying the entire process of export and import finance can get exposure to risks, and therby he can hedge himself or the same by booking a forward contract. ♦ Availability of favorable Export finance schemes directly impacts the local trade, encourages exporters, enlarges markets abroad, improves quality of domestic goods and overall helps the nation boost its exchange earnings. ♦ The Government of any nation plays a very vital role in boosting export turnover. The credit policy of the Indian Government is also changed depending upon the needs of the exporters, global trade environment etc. ♦ ECGC and EXIM Bank take a lot of efforts for Export promotion. The strategies of these 2 agencies in India should be flexible & their finance schemes should be constantly synchronized with the changing scene of world trade. This alone can help Indian exporters to stand competition in world markets effectively and more gain-fully.

For more Notes, Presentations, Project Reports visit a2zmba.blogspot.com hrmba.blogspot.com mbafin.blogspot.com

BIBLIOGRAPHY Books Referred: Export –What Where & How

 Export Marketing 

Export Management

Newspapers and Magazines Ref erred:  

Business India

Economic Times

by Paras Ram

by Michael Vaz by T. A .S. Balagopal