EXPORT FINANCE

*Prof. Harkirat SinghProfessor & Consultant, IIFT

New Delhi

PRESHIPMENT FINANCE

Finance is the life and blood of domestic and international trade. Export is the main source of foreign exchange earnings for a country. Foreign exchange is required to purchase capital goods, raw materials, technology and energy etc. from international markets for economic development. Commercial banks in India encourage exports by providing finance in Rupees and in Foreign Currencies to eligible exporters. In return to provide finance to exporters, Banks get incentives like refinance at concessional interest rate and credit insurance coverage from Export Credit and Guarantee Corporation of India.

Selling overseas requires different financial strategy compared with selling in the domestic market. Delivery takes longer period. Payment arrangements are more complex and exporter is investing his money for longer periods. Foreign buyers are also demanding longer credits with best quality, low prices and timely delivery of goods. These factors reduce cash flows, creating financial problems for exporters. Exporters have to seek financial assistance from the bank to overcome fund requirements and to become successful in export business.

Each export order has a trade cycle. Trade cycle can be financed in many ways. Method or Vehicle of finance depends upon financial strength of exporter and importer, degree of mutual trust, currency of invoice and availability of financial resources. Financially strong exporter may be able to finance the entire export business transaction out of its own funds or from banks and thus not demand payment from the importer until latter sold the goods and received payment. Alternatively, strong importer may be willing to give advance payment to exporter to procure or manufacture the goods.

Export transaction may be financed by Exporter, Importer or Commercial Bank as follows:

FINANCING BY EXPORTER

Depending upon the financial resources, there are many methods through which exporter can finance export transaction, depending upon the trust and past dealings of the foreign buyer.

SHIPMENT ON AN OPEN BOOK ACCOUNT

Such an arrangement is extremely beneficial to foreign buyer. It permits the importer to receive the goods and even sell them. From sales proceeds, makes payment to exporter. This arrangement provides credit to importer and to make payment after realizing sales proceeds. Such method normally does not involve the use of bill of exchange evidencing

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the debt obligation between exporter and importer. Open account transaction permit great flexibility, involves less cost and offer a tool to meet local competition.

But exporter runs the risk of non-payment. Absence of negotiable instrument in the transaction makes recovery difficult by legal action. This method is used where exporter and importer have long established relationship, markets are well developed with no exchange control regulations. Suitable for exports to foreign branches and subsidiaries. CREDIT SALES

It is similar to open book account sales, incorporating a definite maturity period. Foreign buyer agrees to pay either on regular basis or after a specified period varying from say 60 days to over five years.

CONSIGNMENT SALES

Under consignment sales, exporter ships the goods to branch office or to agent, for sales while in transit or upon arrival at fixed price or best obtainable price. No payment is due to the exporter until goods are sold by importer. Goods remain in legal possession of the exporter until sale is made. Exporter ties up funds from date of manufacture of the goods till date of sale realization.

COLLECTION OF BILL OF EXCHANGE SYSTEM

B/E is essentially a request for payment by the Exporter (Drawer) to the Importer (Drawee). Exporter draws B/E on Importer at the time of shipment and becomes a legally accepted obligation for payment of debt. This method of financing is used when exporter is satisfied with credit standing of the importer and the track record of payments. In case of new importer, the use of L/C is suggested. Drafts or B/E will be Documents against acceptance or payment. B/E will be drawn depending upon the funds availability with exporter and dealings with buyer.

FINANCING BY IMPORTER

Importer finance the export transaction when goods are especially designed and made to order basis or to get very favorable low price. Following methods of financing by importer are common:

PAYMENT WITH ORDER

Exporter ask for advance payment from Importer especially when financial standing of the buyer is doubtful. Importer not only finance the export transaction but assumes the financial risk of non delivery of goods by exporter including foreign exchange risk. PARTIAL ADVANCE PAYMENT

Exporter will insist some percentage of sale amount as advance payment when supplying specialized goods. Such goods cannot be sold to alternative buyer in importer’s country in case of dispute. Exporter will demand advance payment at least to protect against loss

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due to expenses incurred on transportation, insurance, finance and other such items incidental to shipment of goods.

PAYMENT ON DOCUMENTS

When the contract as in L/C transaction, stipulates payment on presentation of documents by exporter, the importer must provide funds to its bank, so to, make payment to exporter. Importer thus raises the funds, converts them into currency of the country of exporter and carries the financial burden while the goods are in transit. Here exporter and importer share the financial burden of the export transaction.

EXPORT FINANCE FROM COMMERCIAL BANKS

Exporters are eligible to obtain finance from commercial bank at concessional interest rates to complete the export transaction.

ELIGIBILITY TO GET CHEAP FINANCE FROM BANKS

Banks provides export finance at concessional interest, on priority basis, to eligible exporter having following qualifications:

Exporter should have obtained Importer and Exporter Code Number issued by Director General Foreign Trade.

Having evidence of exports. Means exporter must obtain Letter of Credit or Confirmed Order, status exporters having good track record of international business are exempted.

Exporter must be a customer of a commercial bank. It means exporter must opens properly introduced bank account with a bank.

Commodity or service to be exported must be permitted to export by current Import and Export Policy.

Exporter should have obtained policy from Export Credit and Guarantee Corporation of India.

Exporter should not be caution listed by Reserve Bank of India, ECGC or any such agency.

COMPLETE EXPORT TRANSACTION

Technically a complete export transaction has following three dates. If any one of these dates is missing then export transaction will become incomplete.

PRESHIPMENT STAGE POSTSHIPMENT STAGE

Date of Receipt of Date of Shipment Date of Export Export Order Sales Realisation

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1. Date of receipt of export order from the foreign buyer in the form of confirmed order or letter of credit.

2. Date of shipment. Date on which goods loaded on the ship, airplane or any other mean of transportation.

3. Date of realization of the sale proceeds of exported goods or services.

Let us understand the Preshipment and Postshipment stages of the export transaction. This will help us to understand the basic financial requirements for exports and to approach the Bank for correct financial assistance.

PRESHIPMENT STAGE

The time period between the date of receipt of export order from the foreign buyer and date of shipment is designated as PRESHIPMENT STAGE.

ACTIVITIES OF EXPORTER IN PRESHIPMENT STAGE

Business activities at Preshipment stage depend upon category of the Exporter. Manufacturer exporter has to procure raw material, prepare semi finished goods, produce finished goods, packing of the finished goods, transporting the goods to airport or port and warehousing the goods etc. In case of merchant exporter to procure goods, packing of the goods, transporting the goods to port or airport and warehousing etc. It means all the business activities pertaining to arrange the goods before the date of shipment take place in this stage.

PROFESSIONAL HINTS

The basic nature of business activities in Preshipment Stage is Working Capital for the exporter. Banks appraise, calculate the financial requirements and supervise the export credit giver at this stage based on guidelines for handling working capital for the exporters. Working capital requirements means finance required by the Exporter to meet day to day business requirements.

PRESHIPMENT FINANCE

Preshipment Finance is given by Banks to Exporter to meet their business requirements. This working capital finance is provided in Rupees and in Foreign Currencies as per the requirements of the Exporter. Banks provides preshipment Finance under following schemes:

Packing Credit Advance or Shipping Loan. Advances against Export Incentives. Opening of letter of Credit and Import Finance required for items used for

manufacture of goods to be exported. Packing Credit Advance in Foreign Currencies.

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These schemes are covered one by one, to understand the practical implications. It will also help to select the most appropriate financial scheme of the Bank to generate maximum profits from export business.

PACKING CREDIT ADVANCE OR SHIPING LOAN

Salient features of packing credit or Shipping Loan given by the Bank to eligible Exporters are as under:

1.DEFINITION:

Preshipment/Packing credit means any loan or advance granted by bank to an exporter for financing the purchase, processing, manufacturing, packing, transporting and warehousing of the goods prior to shipment on the basis of letter of credit opened in his favour or in favour of same other person or confirmed order or other evidence depicting that an order for export from India have been placed on the exporter or some other person. Unless Lodgment of export order or letter of credit with bank has been waived for status exporters having good track record.

2.PURPOSE OF THE LOAN

The main purpose of this advance depends on the business activity of the Exporter. Finance is given to purchase raw materials, processing, meet labour expenses, packing of finished goods, transporting to port or airport and warehousing of the goods for exports. In case of merchant exporter finance is given for purchase of finished goods, packing and transporting the goods to ports and airports. Exporters involved in selling of services are given financial assistance to meet labour costs, training and visiting expenses and other expenses required to complete the service package.

Some Banks convert the packing Credit Advance into Shipping Loan when goods are ready to export and delivered to transport company or with warehousing agency. Shipping Loan is just extension of the packing Credit Advance. In such case exporter may get higher amount of advance due to financing of transporting and warehousing charges and Bank will get security of finished goods in the forms of documents, title to the goods.

3. EVIDENCE OF EXPORTS

Packing Credit is granted to new exporters against lodgment of irrevocable letter of credit issued by reputed international bank or confirmed order placed by overseas buyer. In case of letter of credit, it should preferably be received by packing credit giving bank. Or letter of credit should be advised through a reputed bank in India. These arrangements must be sorted out at the time of confirming the order with foreign buyer.

If the foreign buyer is new and is placing order without opening letter of credit then, it is advisable to procure credit limit on foreign buyer from ECGC to protect against risk of non-payment of claim, subsequently.

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Some times exporters may conclude contracts by exchanging messages through Fax/Telex/Cable with conditions that regular order or letter credits may follow subsequently. Bank may provide packing credit advance in such cases provided these messages/ communications contains the following minimum information:

Name of the overseas buyer. Particulars of goods to be exported. Value of goods to be exported. Value of order with unit price and quantity. Dates of shipment of the goods. Terms of payment

Please note that the bank on the basis of these messages has granted loan facility but letter of credit or confirmed order has to be submitted . Bank retains all the export orders and L/C against which, packing credit has been granted and marked/ endorsed to avoid double financing by any other bank.

4. QUANTUM OF PACKING CREDIT ADVANCE

Packing credit advance granted to exporters should not exceed the FOB value of the goods or domestic market value of the goods which ever is lower (refer Annexure I) except in the following cases:

In case of certain items like engineering goods where cost of production is more than FOB value of the goods. But these items are eligible for export incentives. Advances up to the domestic value is given by the bank to the exporter provided ECGC gives Export Production Finance Guarantee. This Guarantee Bank has to obtain from the ECGC. Bank adjusts packing credit, in such cases from export sale realizations and remaining amount from the payment of incentives.Banks have special schemes for items where raw material requirements are more so that particular size or grade may be selected to exports.

5. MARGIN FOR PACKING CREDIT ADVANCE

There are no fix bank guidelines for keeping margin in case of export finance. Margin means exporters’ contribution to meet cost of the goods or services procured for the exports. Bank may determine the percentage of margin depending on the basic nature of the goods. In case of perishable goods Banks keep higher margins. Other deciding factors such as capacity of the exporter to arrange for the contribution and past track records along with credit worthiness of foreign buyer. If these factors are good bank may agree to keep lower margins. The margins varies from 10% to 25%.

6. CONCESSIONAL INTEREST RATES AND PERIODS

PERIOD OF ADVANCE Packing credit advance in preshipment stage is a short-term bank finance for 180 days at concessional rate of interest to meet working capital requirements. Reserve Bank of India decides the rate of interest and periods of finance for export sectors.

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Changes from time to time are made to meet market requirements. Period of packing credit is decided based on the actual manufacturing cycle or period required to arrange goods and services for exports. The maximum period of packing credit advance is 180 days at concessional rate of interest. If export order cannot be completed due to some reasons, a further extension for a period of 90 days is given. Banks permit such extensions if they are satisfied that the reason for extension is due to reasons beyond the control of the exporter.

- If exports do not complete within 360 days from the date of advance then interest at the normal rate will be charged from day one till date of export.

- If exports do not take place at all and packing credit advance will be adjusted from Rupees funds as exporter will not be able to produce documents. Then interest rate at commercial lending rate plus penalty will be charged from the date of original advance.

Banks are charging interest on quarterly basis by debiting the amount to loan account. Please note ECGC does not cover the interest amount for claim.

Exporter should pay attention towards calculation of the interest rate by Banks. It has been observed that sometimes banks charge more interest due to wrong calculations/ misunderstanding of interest rate guidelines (refer Annex II).

INTEREST RATE

A ceiling rate has been provided for Rupee Credit linked to Prime Lending Rates (PLRs) of individual banks available to bank’s domestic borrowers. Banks have freedom to decide the actual interest rates to be charged within the specified ceiling. Further, the ceiling interest rate for different time buckets under following categories of export credit should be on the basis of PLR relevant for the entire tenor of Export Credit. PLR rates depending upon credit policy of the bank and varies from bank to bank.

At present the interest rate structure for Rupee Export Credit applicable as under:

PERIOD OF CREDIT INTEREST RATE

Upto 270 days Bank Base Rate related Beyond 271 days upto 360 days Bank Base rate related

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PROFESSIONAL HINTS

i. RBI may change interest rates for exports from time to time. The revision in interest rate is applicable to fresh advances as also to the existing export advances, for the remaining period of credit.

ii. Banks should charge concessional interest on preshipment Credit Upto 180 days From beyond 180 days upto 360 days.

At the interest rates to be decided by the bank within the ceiling rate arrived on the basis of PLR relevant for entire tenor of the export credit.

iii. If preshipment advances are not liquidated from proceeds of bills purchased, discounted, etc. on submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest ab initio.

iv. In cases where bank is not extending packing credit beyond the original period of sanction & export takes place after the expiry of sanctioned period but within a period of 360 days from period the date of advance exporter would be eligible for concessional credit only upto sanctioned period. For the balance period, interest rate prescribed for Export Credit not Otherwise Specified (ECNOS) at preshipment state will apply. But Bank has to provide the reasons for non-extension of the credit period to the exporter.

v. In cases where exports do not take place within 360 days from the date of Preshipment advance, such credits will be termed as “Export Credit Not Otherwise Specified” (ECNOS) and banks may charge such interest rates from the very first day of the advances.

vi. If exports do not materialise at all, banks should charge domestic lending rate plus penal interest on such packing credit advances.

7. REPAYMENT OF PACKING ADVANCE

Packing credit advance is self-adjusting in nature and must be repaid from the proceeds of export bills negotiated, purchased or discounted. If this loan will be adjusted by any other manner, then Bank will not charge concessional interest rate. When packing credit is granted, on running account basis then it must be ensured that first credit received of the export sale realization should be used to liquidate first debit in the account.

SPECIAL CASES FOR PACKING CREDIT ADVANCES

1. PACKING CREDIT IN EXCESS OF EXPORT VALUE

(a) Where by-product can be exported

Where the exporter is unable to tender export bills of equivalent value for liquidating the packing credit due to the shortfall on account of wastage involved in the processing of agro products like raw cashew nuts, etc., banks may allow exporters, inter alia, to extinguish the excess packing credit by export bills drawn in respect of by-product like cashew shell oil, etc.

(b) Where partial domestic sale is involved

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However, in respect of export of agro-based products like tobacco, pepper, cardamom, cashew nuts, etc., the exporter has necessarily to purchase a somewhat larger quantity of the raw agricultural produce and grade it into exportable and non-exportable varieties and only the former is exported. The non-exportable balance is necessarily sold domestically. For the packing credit covering such non-exportable portion, banks are required to charge commercial rate of interest applicable to the domestic advance from the date of advance of packing credit and that portion of the packing credit would not be eligible for any refinance from RBI.

(c) Export of deoiled/defatted cakes

Banks are permitted to grant packing credit advance to exporters of HPS ground nut and deoiled/defatted cakes to the extent of the value of raw materials required even though the value thereof exceeds the value of the export order. The advance in excess of the export order is required to be adjusted either in cash or by sale of residual by-product oil within a period not exceeding 30 days from the date of advance to be eligible for concessional rate of interest.

2. OPERATIONAL RELAXATIONS

Banks have, however, operational flexibility to extend the following relaxations to their exporter clients who have a good track record:

(a) Repayment/liquidation of packing credit with proceeds of export documents will continue; however, this could be with export documents relating to any other order covering the same or any other commodity exported by the exporter. While allowing substitution of contract in this way, banks should ensure that it is commercially necessary and unavoidable. Banks should also satisfy about the valid reasons as to why packing credit extended for shipment of a particular commodity cannot be liquidated in the normal method. As far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any.

(b) The existing packing credit may also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter. However, it is possible that the exporter might avail of EPC with one bank and submit the documents to another bank. In view of this possibility, banks may extend such facility after ensuring that the exporter has not availed of packing credit from another bank against the documents submitted.

(c) These relaxations should not be extended to transactions of sister/associate/group concerns.

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3. RUNNING ACCOUNT FACILITY

As stated above, pre-shipment credit to exporters is normally provided on lodgement of L/Cs or firm export orders. It is observed that the availability of raw materials is seasonal in some cases. In some other cases, the time taken for manufacture and shipment of goods is more than the delivery schedule as per export contracts. In many cases, the exporters have to procure raw material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of letters of credit/firm export orders from the overseas buyers. Having regard to difficulties being faced by the exporters in availing of adequate pre-shipment credit in such cases, banks have been authorised to extend Pre-shipment Credit 'Running Account' facility in respect of any commodity, without insisting on prior lodgement of letters of credit/firm export orders, depending on the bank's judgement regarding the need to extend such a facility and subject to the following conditions:

(a) Banks may extend the 'Running Account' facility only to those exporters whose track record has been good as also Export Oriented Units (EOUs)/Units in Free Trade Zones/ Export Processing Zones (EPZs) and Special Economic Zones (SEZs).

(b) In all cases where Pre-shipment Credit 'Running Account' facility has been extended, letters of credit/firm orders should be produced within a reasonable period of time to be decided by the banks.

(c) Banks should mark off individual export bills, as and when they are received for negotiation/collection, against the earliest outstanding pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to add that, while marking off the pre-shipment credit in the manner indicated above, banks should ensure that concessive credit available in respect of individual pre-shipment credit does not go beyond the period of sanction or 360 days from the date of advance, whichever is earlier.

(d) Packing credit can also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter.(i) If it is noticed that the exporter is found to be abusing the facility, the facility

should be withdrawn forthwith.(ii) Running account facility should not be granted to sub-suppliers.

4.PACKING CREDIT FACILITY TO SUB SUPPLIER

Packing credit advance is allowed to be shared between merchant exporter or export house and sub supplier manufacturer. Such sub supplier will not export the goods directly but supply the goods to order holder who will export the goods. Sub suppliers are also eligible for packing credit advance at concessional interest rates. This advance is given to sub supplier for purchase of the raw material, components, and for finished goods etc. So that goods can be supplied to organization, which will ultimately, export the goods to foreign buyer.The guidelines for providing packing credit advance to the sub supplier are as under:

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Bank provides packing credit facility to sub supplier on the basis of the Letter of Credit or Confirmed Order in the name of export house or the merchant exporter.

No running account facility is permitted to sub supplier. Export order holder organization may open inland letter of credit in favour of sub

supplier to get packing credit. Such packing credit will be adjusted from the proceeds of the bills drawn under this inland letter of credit. In case inland letter of credit is not opened, sub supplier may draw a bill on the exporter. Packing credit advance will be adjusted from the purchase of this bill.

If bill of lading or airway bill is not submitted by sub-supplier to the bank along with documents then a certificate from export house or order holder should be obtained stating that goods will be or have been exported.

Bank will grant packing credit advance after getting a letter from the export order holder, giving details of the export order and an undertaking that packing credit will not be availed by them against that order giver to the sub-supplier.

Thereafter, if export holder need finance for further addition to the goods their bank will provide packing credit to them at concessional interest rates.

Export order holder can open any number of inland L/Cs within over all amount of the export order from foreign buyer.

This scheme will cover packing credit in Indian Rupee only. Under this scheme manufacturer exporter will be allowed to open inland L/C in

favour of supplier of raw materials, components etc that are required for manufacture of goods for exports. In case export house order holder is a trader exporter then packing credit at concessional interest rate is extended to sub supplier who will manufacture the goods and supply to them for exports.

This scheme will not be extended to the third parties, supplying raw material etc. to the supplier.

Exporter Oriented Units or units in Export Processing Zones supplying goods to another EOU/EPZ for export purposes are also eligible for preshipment finance in Rupees. Supplier units EOU/EPZ will not be eligible for any post shipment facility as this loan scheme does not cover sales of goods on credit terms.

The credit extended under this scheme will be treated as export advance starting with date of releasing funds to sub-supplier till the date of liquidation of packing credit by shipment of goods by export order holder.

5.EXPORTS ROUTED THROUGH STC/MMTC/OTHER EXPORT HOUSES, AGENCIES, ETC.

Banks may grant export packing credit to manufacturer suppliers who do not have export orders/letters of credit in their own name, and goods are exported through the State Trading Corporation/Minerals and Metal Trading Corporation or other export houses, agencies, etc.

Exporters to note following guidelines for banks under this scheme

a) Banks should obtain from the export house a letter setting out the details of the export order and the portion thereof to be executed by the supplier and also certifying that the export house has not obtained and will not ask for packing credit in respect of such portion of the order as is to be executed by the supplier.

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b) Banks should, after mutual consultations and taking into account the export requirements of the two parties, apportion between the two i.e. the Export House and the Supplier, the period of packing credit for which the concessionary rate of interest is to be charged. The concessionary rates of interest on the pre-shipment credit will be available upto the stipulated periods in respect of the export house/agency and the supplier put together.

c) The export house should open inland L/Cs in favor of the supplier giving relevant particulars of the export L/Cs or orders and the outstandings in the packing credit account should be extinguished by negotiation of bills under such inland L/Cs. If it is inconvenient for the export house to open such inland L/Cs in favour of the supplier, the latter should draw bills on the export house in respect of the goods supplied for export and adjust packing credit advances from the proceeds of such bills. In case the bills drawn under such arrangement are not accompanied by bills of lading or other export documents, the bank should obtain through the supplier a certificate from the export house at the end of every quarter that the goods supplied under this arrangement have in fact been exported. The certificate should give particulars of the relative bills such as date, amount and the name of the bank through which the bills have been negotiated.

d) Banks should obtain an undertaking from the supplier that the advance payment, if any, received from the export house against the export order would be credited to the packing credit account.

6. RUPEE PRE-SHIPMENT CREDIT TO CONSTRUCTION CONTRACTORS

(i) The packing credit advances to the construction contractors to meet their initial working capital requirements for execution of contracts abroad may be made on the basis of a firm contract secured from abroad, in a separate account, on an undertaking obtained from them that the finance is required by them for incurring preliminary expenses in connection with the execution of the contract e.g., for transporting the necessary technical staff and purchase of consumable articles for the purpose of executing the contract abroad, etc..

(ii) The advances should be adjusted within 180 days of the date of advance by negotiation of bills relating to the contract or by remittances received from abroad in respect of the contract executed abroad. To the extent the outstandings in the account are not adjusted in the stipulated manner, banks may charge normal rate of interest on such advance.

(iii) The exporters undertaking project export contracts including export of services may comply with the guidelines/instructions issued by Reserve Bank of India.

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7. EXPORT OF CONSULTANCY SERVICES

(i) Some of the Indian consultancy firms have taken up export of consultancy services in connection with the setting up of industrial and other projects in foreign countries. Where such consultancy services form part of turnkey projects or joint ventures set up abroad, banks are considering suitable credit facilities at the pre-shipment and post-shipment stages. The exporters may need financial assistance from banks even in cases where consultancy services alone are exported, particularly, if no advance payments are received.

(ii) Banks may consider granting suitable pre-shipment credit facilities against consultancy agreements to consultancy firms for meeting the expenses of the technical and other staff employed for the project and purchase of any materials required for the purpose as well as for export of computer software, both standard and custom built software programs, subject to the usual conditions of packing credit scheme.

(iii) While deciding the pre-shipment facilities, advance payments received against the contract must be taken into account.

(iv) Banks may consider issuing suitable guarantees to exporters of consultancy services of high value with large advance payment, taking into account the competence of the firm to undertake the assignment in question and other related aspects.

8. PRE-SHIPMENT CREDIT TO FLORICULTURE, GRAPES AND OTHER AGRO-BASED PRODUCTS

(i) In the case of floriculture, pre-shipment credit is allowed to be extended by banks for purchase of cut-flowers, etc. and all post-harvest expenses incurred for making shipment.

(ii) However, with a view to promoting exports of floriculture, grapes and other agro-based products, banks are allowed to extend concessional credit for working capital purposes in respect of export-related activities of all agro-based products including purchase of fertilisers, pesticides and other inputs for growing of flowers, grapes, etc., provided banks are in a position to clearly identify such activities as export-related and satisfy themselves of the export potential thereof, and the activities are not covered by direct/indirect finance schemes of NABARD or any other agency, subject to the normal terms & conditions relating to packing credit such as period, quantum, liquidation, etc.

(iii) Export credit should not be extended for investments, such as, import of foreign technology, equipment, land development, etc. or any other item which cannot be regarded as working capital. 9. EXPORT CREDIT AGAINST PROCEEDS OF CHEQUES, DRAFTS, ETC. REPRESENTING ADVANCE PAYMENT FOR EXPORTS

(i) Where exporters receive direct remittances from abroad by means of cheques, drafts, etc. in payment for exports, banks may grant export credit at concessional interest rate to exporters of good track record till the realisation of proceeds of the cheque, draft etc.

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received from abroad, after satisfying themselves that it is against an export order, is as per trade practices in respect of the goods in question and is an approved method of realisation of export proceeds.

(ii) If, pending compliance with the above conditions, an exporter has been granted accommodation at normal commercial interest rate, banks may give effect to concessive export credit rate retrospectively once the aforesaid conditions have been complied with and refund the difference to the exporter.

HOW TO MAINTIAN PACKING CREDIT ACCOUNT

In case of new exporter or export against one time letter of creditor confirmed order bank maintain separate account of each preshipment advance account. Bank keeps these export advance account separately from domestic business accounts. In case of established exporters having good track record, banks permit them to have a running packing credit advance account on pattern of local hypothecation or pledge account basis. Running account facility means that first debit in the account can be adjusted by first credit pertaining to the export sales proceeds.

DISBURSAL OF PACKING CREDIT AMOUNTS

Packing Credit advances are given for specific purposes, so Bank disburse the loan amount as per exporter requirements. Bank will ensure the end use of the funds given to the exporters requirements. Banks will insist to make payment of the raw material suppliers by drafts/ cheques in their name. These payments by drafts are of course made on the approval of the exporters. Exporters gives instructions in writing for payments.

Where direct payment are not possible as in case of labour charges and other such small payments. Bank will credit such funds requirements to the current account of the exporters. Exporters can make payments through this account by cheques.

MONITORING PACKING CREDIT BY BANKS

The main objective of obtaining packing credit advance is to export the goods as per export contract to the foreign buyer on time. Exporter should make a plan in writing and diaries the important dates of acquiring raw materials, completion of finished goods, booking of shipment space, shipment, and preparation of complete set of documents etc. Monitor these dates with strict discipline.

Where delays are due to reasons beyond the control of the exporter then corrective measure like extension of L/C shipment dates and approval of the buyer and request to bank for extension period be made in time. In nutshell exporter need effective planning to meet the target dates. Delay may leads to rebate or discount demands from buyer affecting profitability of the exporters.

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PACKING CREDIT FACILITIES FOR GOODS FOR EXIBITION AND SALE

Exporters may participates or exhibit their goods in international exhibitions abroad. Exporters may sell such goods directly or through sponsors of the international exhibitions. Banks will provide export finance at concessional interest rates at pre and post shipment stages. Bank will charge concessional interest rate only when the goods are sold and foreign exchanged is earned. Normally, in such cases banks provide domestic finance to manufacture goods for exhibition. Then after the sale is completed and foreign payment is received then benefit of concessional export finance is given for eligible period by way of rebate. Exporter should make a request letter to avail such type of financial assistance from their banks.

PACKING CREDIT FOR IMPORTS MEANT FOR EXPORT PRODUCTION

Some times exporters need imported items to manufacture goods for exports. Packing credit advance at low rate of interest is given by the banks to exporters to import inputs against advance licenses or under Import and Export Policy with or without import license.

Banks are providing funded and not funded credit facilities against such imports along with payment of import duty at preshipment stage. Non funded credit facility includes issue of import L/C. Exporter may avail credit facility for imports of items required even exporter has not obtained L/C or confirmed order. Exporter has to satisfy the bank that imported raw material is required for export of goods. Further L/C or confirmed is to be submitted to Bank within reasonable time.

PACKING CREDIT FACILITIES TO DEEMED EXPORT

Deemed exports involve supply made to IBRD/IDA/ADB or any other multilateral fund aided projects and programmes. Further order secured through global tender which are paid for in free foreign exchange are eligible for concessional rate of interest for financial facility at preshipment and post ship stages. Packing credit facility can be granted to exporters of deemed exports on lines similar to physical exports.

PRESHIPMENT FINANCE IN FOREIGN CURRENCIES

International trade has become very competitive with reducing profit margins. Banks now provide to eligible exporters the pre shipment finance in foreign currencies at international competitive interest rates. Some Banks have put condition to a minimum amount for packing credit to foreign currency. To overcome these conditions for smaller amount export transaction and to reduce cost of finance, exporters are availing packing credit advance in Rupees and post shipment advance in foreign currency. Foreign currency facility at post shipment stage in this case will reduce the overall cost of the finance. Further advance will be adjusted from the foreign currency proceeds of the export bill.

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PCFC SCHEME

Banks use their own foreign funds or arrange line of credits from foreign or local banks. PCFC scheme has been introduced with a view to make export credit available to exporters at internationally competitive rates. PCFC is given to exporters for acquiring imported and domestic inputs at LIBOR/EUROLIBOR/EURIBOR related interest rates. Only designated branches of a bank provide PCFC facility to eligible exporters.

The scheme is an additional window for providing pre shipment credit to exporters at internationally competitive low interest rates. Scheme is applicable to cash exports only and PCFC is not available on deferred payment scheme.

The exporter will have the following options to avail of PCFC:

a) To avail of preshipment credit in Rupee and then the postshipment credit either in Rupee or discounting/rediscounting of export bills in foreign currency under External Bill Rediscounting scheme of the bank.

b) To avail of preshipment credit in foreign currency and discount/rediscount of the export bills in foreign currency under EBR scheme of the bank.

c) Choice of preshipment credit currency depends upon the choice of exporter. The facility will be extended in one of the convertible currencies viz US Dollar, Pound Sterling, Japanese Yen, Euro etc. Exporters are eligible to avail PCFC in different convertible currency than currency of the export order/invoice. The exchange risk in the transaction will be borne by the exporter.

d) Benefits of low interest rate will accrue to the exporter only after the realisation of export bills or when resultant export bills are rediscounted without recourse loans.

e) In case the exporters have arranged for suppliers credit for procuring imported inputs, the PCFC facility may extended by the banks for the purpose of financing domestic inputs required for exports.

SPREAD

The spread means cushion for Preshipment credit in foreign currency will be related to international references rates such as LIBOR/EURIBOR for 6 months period. The lending rate by the bank to the eligible exporter should not exceed 0.75% over LIBOR/EURIBOR excluding withholding tax.

LIBOR/EURIBOR rates are normally available for standard period of 1,2,3,6 & 12 months. Exporters must insist the bank to quote interest rates on the basis of standard periods of PCFC is required for periods less than 6 months. Exporter to note that while bank quoting interest rates for non-standard period, bank should ensure that the interest rate quoted is below the next upper standard period rate.

Exporter has to pay interest in foreign currency on PCFC at quarterly intervals against purchase of foreign currency from the bank or out of balances in EEFC account or out of discounted value of the export bills if PCFC is liquidated within the quarter.

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ANNEXURE ICALCULATION OF QUANTUM OF PRESHIPMENT ADVANCE

ACTIVITYAn exporter received an order of USD100,000 equivalent to Rs. 48,00,000 for supply of cotton shirts to USA. The contract is on CIF basis and international insurance and freight is 1% and 10% respectively. It was calculated that the cost of various inputs required to complete the order is as under:

Raw material cloth for shirts Rs 27,00,000Cost of threads, buttons, bookrum etc. Rs 3,00,000Stitching and other labour charges Rs 5,00,000 Packing of finished material RS 2,00,000Transport charges Rs 1,00,000

How much packing credit advance will be given by the bank against this L/C of equivalent to Rs48,00,000?

SOLUTION

Bank will calculate the FOB value of the order by deducting the amount of freight and insurance which are 10% and 1% of the amount of order respectively.

FOB METHOD

CIF value of the order is Rs 48,00,000Freight of the order is Rs 48,0000Insurance amount is Rs 48,000FOB value of the order R 42,72,000Margin 20% kept by Bank Rs 8,54,400Permissible packing credit Rs 34,17,600

Let us now see how the bank will calculate the packing credit advance based on the cost of production basis. Bank will give finance either based on the above discussed method or this method, whichever is less.

COST OF PRODUCTION METHOD

Cost of cloth, buttons and other items, stitching cost, packing cost and transportation expenses as mentioned in the activity Rs 38,00,000Bank margin 20% Rs 7,00,000Permissible Packing Credit Advance Rs 31,00,000 Since Permissible Packing Credit Advance of Rs 31,00,000 is lower than calculation of FOB method, the bank will give packing Credit Advance of Rs 31,00,000 only.

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EXPORT FINANCE

Prof. Harkirat SinghConsultant, IIFT

POSTSHIPMENT FINANCE

In export business goods and services are sold to foreign buyers. Exporter has to wait for some time, depending on the credit terms offered to the buyer to get the export sale proceeds. To meet financial requirements during the period of date of shipment and actual receipt of sale proceeds, banks provide postshipment credits at concessional rates of interest.

Bank will purchase or negotiate in case of L/C and adjust first packing credit if given. Balance of this bill finance will be given to the exporter for use in the business. Banks have classified postshipment finance as follows:

Negotiation of export bills under Letter of Credit FOBL/C (foreign outward bills under letter of credit).

Purchase/Discount of export bills under confirmed order FOBP (foreign outward bills purchased). Please note bank purchases sight bill and discounts usance bills.

Advance against export bills sent on collection basis but subsequently advance is provided to exporter FABC (advance against foreign bill sent on collection).

Advance against bills sent on consignment basis. Advance against Export Incentives. Advance against retention money by foreign buyer relating to the exports. Advance against approved deemed export.

For exporter, it is very essential to understand following features, rules and regulation of the banks, relating to the post shipment finance:

DEFINITION

Post-shipment credit means any loan or advance granted by the bank to an eligible exporter from the date of shipment of the goods to the date of realization of export sales proceeds. The purpose of finance is to provide liquidity to the exporter to over come the credit facility given to the foreign buyer.

ELIGIBILITY FOR POSTSHIPMENT FINANCE

Banks give post-shipment finance to exporters after the shipment of the goods to the foreign buyer. In case of deemed export, finance is granted to the supplier providing goods to designated agencies. Bank finance given to exporter or supplier is termed as SUPPLIER CREDIT. In case of big project and capital goods export, finance is granted in the name of the foreign buyer who is an importer in this transaction. But banks give loan amount to Indian exporter. Such finance is referred as BUYER’S CREDIT. This type of credit is normally granted by EXIM Bank with approval of Reserve Bank of India.

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Bank provides this finance automatically to exporters availing pre-shipment advance from them. Exporter not availing pre-shipment advance may avail post-shipment advance from the bank. Post-shipment advance is always extended against evidence of shipment of goods. Complete set of documents required by the bank must be submitted within 21 days from the date of shipment. Any delay over this stipulated period must be explained to the bank for their satisfaction.

PURPOSE AND QUANTUM OF POSTSHIPMENT FINANCE

Post-shipment finance is basically an export sale finance given by banks in the form of bill purchased or discounted. The main purpose is to finance export sales claims of the exporter, after the date of shipment of the goods upto date of realization of sales proceeds. Exporter gets cash flow relating to Sales. Bank will adjust packing credit first and then release balance funds for other business requirements.

Banks may advance upto 100% of the invoice value of ordered goods. Normally the banks charge no margin at post-shipment stage. Post-shipment finance is more than and addition to the pre-shipment advances. In cases of advance against bills sent on collection basis banks keep some margin. Margin depends upon the past track record of the exporter, nature of goods and credit worthiness of the foreign buyer.

PERIOD OF ADVANCE

Post-shipment finance is short terms finance for exporters depending on the payment terms offered by the exporter to buyer. Banks provide postshipment finance at concessional interest rate upto normal transit periods as prescribed by FEDAI(Foreign Exchange Dealers Association of India) in case of sight export bills. Further, in cases of usance export bills upto notional due date. Notional due date of each bill is calculated by the bank as mentioned here i.e. Usance period of the bill + Normal transit period prescribed by FEDAI + Grace period (if applicable). Rate of interest on export finance are controlled by RBI and changed frequently.

Post-shipment credit can be granted for a maximum period of 180 days from the date of shipment inclusive of Normal Transit period of FEDAI and grace period, if any. Normal Transit period means the average period normally involved from the date of negotiation/purchase till the receipt of export bills proceeds in Nostro A/C of the bank. NTP are prescribed by FEDAI and it has nothing to do with time taken for arrival of goods at overseas destination.

OVERDUE EXPORT BILL

Export bill will become overdue in following cases:(a) In case of a demand bill, if not paid before the expiry of the Normal Transit Period.(b) In case of a usance bill, if not paid on due date.

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INTEREST RATE FOR POST-SHIPMENT ADVANCE

1. On demand bills for Transit period Bank Base Rate Related effective from date of advance 2. Usance Bills for total period comprising of usance period, transit period and grace period as follows 1 – 180 days Bank Base Rate Related

3.(a) Against incentives receivable from Bank Base Rate Related Govt. covered by ECGC guarantee upto 90 days

(b) Against undrawn balances upto 90 days. Do (c) Against retention money payable within Do one year from date of shipment upto 90 days

4. Deferred Credita. Deferred Credit for the period As per Bank policy

180 days

- Exporters to note that these are the guidelines to charge highest interest rates, Banks are free to charge any rate below the ceiling rates

- The revision in interest is made from time to time. These revisions will be applicable to fresh export advances as also to the existing advances for the remaining period of credit.

- In the case of advances against demand bills, if the bills are realized before the expiring of NTP by credit in Nostro A/C of the bank then interest at concessional rate shall be changed from the date of advance till value date, date of credit in bank’s nostro a/c.

- In case of usance export bills interest at concessional rate may be charged only upto the notional/actual due date or the date on which export proceeds get credited to bank’s nostro a/c which ever is earlier, irrespective of the date of credit in current account of the exporter.

- In case bank has charged interest for entire NTP in case of demand bills or upto notional/ Actual due date in the case of usance bill has been collected by the bank at the time of negotiation/purchase/discount, the excess interest collected for the period from the date of realization to the last date of NTP/notional due date/actual due date should be refunded to exporter.

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OVERDUE EXPORT BILL

The ceiling interest rates for export finance will apply upto the due dates of the bills.For periods beyond the due date i.e for over due period, the rate fixed for Export Credit not otherwise specified (ECNOS) at post-shipment stage will apply and no penal interest should be changed additionally.

INTEREST ON POST-SHIPMENT ADVANCE ADJUSTED FROM RUPEE FUNDS

Banks adopt following procedure in charging interest rates on post-shipment advances adjusted out of Rupee funds either from exporters own resource or from ECGC claims.

(a) In case of exports to certain countries, exporters are unable to realize export proceeds in foreign currency due to restrictions in buyer’s country as a result of balance of payment problems even though buyer has made the payment locally. ECGC has made payment under transfer delay then bank will charge interest rates as applicable to ECNOS-post-shipment even if the postshipment advance may be outstanding beyond six months from date of shipment. Such interest rate is applicable to the full amount of advance irrespective of the fact that ECGC admit claims to lower percentages.

(b) In all other cases adjustment out of rupee resources, bank will charge commercial lending rates or the rate for ECNOS-postshipment whichever is higher for the entire duration of the postshipment advance.

(c) Subsequently if export proceeds are realized in an approved manners, the bank may refund to the exporter the excess amount representing difference between the quantum of interest already changed and interest that is chargeable.

CHANGE OF TENOR OF EXPORT BILL

- Banks have been permitted on request of the exporter to allow change of tenor of the bill in respect of the bills drown on the original buyer or the alternative buyer, provides the revised due date of payment does not fall beyond six months from the date of shipment. Further change of tenor take place before the original due date of the export bill.- Banks will charge concessional interest rate for the extended notional due date subject to maximum of six months.

Please note interest rates for export finance are changed by RBI very frequently and must be checked with the bank before negotiating for order with the overseas buyer.

PROFESSIONAL HINTSWhat is normal transit period, direct and indirect bill, notional due date of export bills? Calculate notional due for USD sight bill payable in NEW YORK and another bill with usance period of 60 days in USD payable in Tokyo Japan.

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Exporter should be very clear about these terms to check, whether the bank is charging interest correctly.

Normal transit periods are fixed by FEDAI for export bills only and varies with the country depending on their geographical locations. Transit period means the prescribed period within which export bill payable in a country should be realized.

As per RBI guidelines all export bills should be drawn in foreign currency. If the currency of the bill is the same as the legal currency of that country then bill is called direct export bill. For example bill drawn in GBP and payable in U.K is a direct bill. Further if the currency of the bill is different than the currency of the country where it will be paid then bill be called Indirect Bill. For example export bill drawn in USD and payable in London U.K. is an Indirect bill. Why direct and indirect export bills? FEDAI has fixed different transit periods for direct and indirect bills. Longer transit periods for indirect bills than direct bills have been fixed. So that an exporter in case of indirect bill may avail loan facility from bank for longer period at concessional rate of interest.

To calculate Notional Due Date of a usance export bill following factors are added:

- Notional Transit Period prescribed by FEDAI.- Usance period of the bill.- Grace period if applicable.

Notional due date of 60 days usance bill in USD also payable in Japan may be calculated as under:Normal transit period for indirect bill 25 daysUsance period of the bill 60 daysGrace period applicable in Japan nilNormal due date period 85 daysSo in this case bank will charge concessional export interest rate for 85 days.

ADJUSTMENT OF POSTSHIPMENT ADVANCE

Exporter should know that postshipment advance granted by banks should be adjusted by realization of the sale proceeds of the export bill or by claims paid under incentive schemes. If adjustment of the advance is done by this way then exporter will get the benefit of low interest rates. In case exporter approach bank to adjust postshipment advance by Rupees fund. Then transaction will not be considered as an export sale and normal interest rate will be charged from the date of advance.In case interest has been charged at domestic commercial rate and subsequently export bill has been paid and proceeds are realized through banking approved channels. The bank will refund the difference between higher interest rate and concessional export rate.

PROFESSIONAL HINTS

Exporter to note that post-shipment repayment date is the date on which nostro account of the bank is credited which is called value date of realization of export proceeds. In case bank is charging for longer period not taking into account of this value date, matter may be sorted out with bank. This normally happens in bank branches situated away from main cities. Reason of charging for longer period may be sought.

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POSTSHIPMENT FINANCE FOR COMPUTER SOFTWARE

Export of computer software involves sale of non-physical and physical items to overseas buyer. Software prepared on magnetic tapes and on papers in the form of formats is the examples of physical form of the software. Direct transmit ion of software through dedicated communication lines or through satellite link like videos/TV software come under non-physical software exports.

Computer software exporter should declare the details of the export on prescribed forms of SOFEX should be completed and submitted to the concerned officials of Department of Electronics, Govt. of India for the purpose of valuation.

TERMS OF PAYMENTS

Exporters interested in software exports must understand terms of payments to avoid costly mistakes. Following points should be noted carefully:

For long duration contracts involving series of transmissions, the exporter makes the arrangements to bill the buyer periodically to ensure early realization. At least once in a month or as per the contract executed with foreign buyer. Last invoice or bill should be raised not later than 15 days from the date of completion of the contract. It would be in order for exporter to submit a combined SOFEX form for all the invoices raised on a particular buyer including advance remittances in a month.

Exporter should submit SOFEX form to official of Govt. Software Technology Park of India for valuation certificate not later than 30 days from the date of bill or invoice.

Full value of non physical software declared on SOFEX or as certified by the concerned official whichever is higher should be repatriated to India on due date as per the contract or within 180 days from the date of invoice whichever is earlier.

NEGOTIATION OR PURCHASE OF BILLS UNDER LETTER OF CREDIT

Letter of credit is internationally recognized and accepted method of payment in international trade transactions. Letter of credit protects the business interest of the exporter and importer. In case of new foreign buyer with low creditworthiness letter of credit provides safety for payment.It is advisable to show the original letter of credit to the banker and seek opinion regarding various terms and conditions of the credit. There should not be any clause violating the exchange and trade regulations. Exporter should get the objectionable items amended before taking action on the manufacturing of the goods.

PROFESSIONAL HINTS

Please note that amendments in letter of credit is costly and time-consuming exercise. Each and every word of the terms and conditions must be thoroughly checked and compiled with.

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All the care should be taken to prepare the documents strictly in terms of letter of credit. It has been observed that payments under letter of credit were refused on very flimsy grounds, even on minor spelling mistakes specially when prices of the goods in buyer’s country are falling.Exporter should note that payment under letter of credit would be received when each and every clause and conditions are compiled with by submitting the requisite documents. It is essential that exporter tenders documents to the negotiating bank in total conformity of the terms and conditions of letter of credit. Doctrine of strict compliance of L/c should be followed.

PROFESSIONAL HINTS

Discrepancies however negligible even due to spelling mistakes will provide excuse to buyer to reject the documents and payment. Documents with discrepancies will only be paid by the consent of the buyer. Exporter should ask for amendment, if any condition or term mentioned in L/c can not be compiled. Exporter will assume great payment risk by not preparing document as per terms of letter of credit. Further documents prepared should be consistent with each other. Exporter may note following points also to avoid costly mistakes:

Original letter of credit along with any amendments thereto should be submitted to the negotiating bank.

Documents should be submitted to the negotiating branch of the bank within validity of the letter of credit with complete compliance.

If documents have discrepancies and credit expires before all discrepancies are rectified then exporter cannot claim that documents were submitted within expiry date.

Some times letter of credit is restricted to different bank for negotiation. In this case complete documents without discrepancies should be submitted well in time to your bank sufficiently before expiry date so to enable them to forward the documents to negotiation bank in time.

Exporter should take the help of some expert professional to subject the documents for detailed check up initially and then develop its own expertise.

Documents should be submitted in numbers as per L/c. Apart from documents required to be presented as per L/c there are certain documents like SDF/PP/SOFEX and customs certified copy of invoice as required by the negotiating bank.

EXPORT DOCUMENTS WITH DISCREPANCIES

Exporter should note that discrepant documents submitted for negotiation will cause risk and delays in getting the export sale realization. If discrepancies in export documents are beyond correction and amendment in L/c is not obtained from buyer’s bank, then the security of payment offered by L/c become useless.

No bank will negotiate the discrepant documents and give funds to exporters. Exporter has to restore to costly time consuming exercise to approach buyer to accept documents

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with discrepancies and arrange payment. The bank will negotiate documents after taking the indemnity from the exporter. In case buyer refuse to take the documents and make payment, then exporter has to refund the amount to the bank. Exporter will also loose control on the goods and may have to give heavy rebate or discount to the buyer or find out alternative buyer.

Exporter should note that discrepancies in export documents increase the cost of transaction by arranging indemnity, interest loss on account of delays, arranging authorization of negotiation.

PROFESSIONAL HINTS

The credit offered by L/c is lost when discrepant documents are sent to L/c opening bank for making payments. Exporter now depends on the mercy of the buyer. Exporter may find the attitude of the buyer very different specially if demand of the goods in foreign market declines.

L/C should be scrutinized properly. Documents without any discrepancy be tendered to negotiating bank. Any condition of L/C, not able to fulfil must be amended from issuing bank with the help of buyer.

PURCHASE OR DISCOUNT OF EXPORT BILLS-FOBP

Exports also take place against confirmed orders specially when past experience with foreign buyer is satisfactory. Sight export bills are purchased and usance bills are discounted by bank.

Export bills are drawn on Documents against Payment basis or Documents against Acceptance basis. In case of D/P documents will be delivered to the buyer by the foreign bank against payment. D/A documents will be delivered by the foreign bank on acceptance of the bill by the buyer. In either case buyer will get documents containing Bill of lading or airway bill and get the goods released. Exporter to note that in case of D/A bill documents are given to buyer against acceptance of the bill under his signatures and date. D/A bills are unsecured and buyer gets delivery of goods and may or may not make payment on due date. To avoid the risk of non-payment bank will insist on the ECGC policy and credit limit on foreign buyer.

PROFESSTIONAL HINTS

Selection of foreign buyer is essential to get export payments. Exporter should be satisfied with creditworthiness of the buyer and may obtain credit report from credit agencies like Dun and Bradstreet and Standard and Poor. Their services are available in India on nominal charges.

Bank provide FOBP facility to exporter having sanctioned limits with them. Exporter should apply for this limit well in advance while applying the packing credit limits for export business. It is advisable to apply higher postshipment credit limits than preshipment credit limits. In case bank is satisfied then export documents will purchased.

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First of all bank will adjust the packing credit and balance will be released for business use in current account of the exporter. On due date of the bill on receipt of sale proceeds in nostro account, the bank will adjust FOBP given to exporter.

ADVANCE AGAINST EXPORT BILL SENT ON COLLECTION BASIS

In certain cases bank do not purchase documents and send documents on collection basis to foreign bank. No advance is given to the exporter at this stage. Subsequently, on the request of the exporter bank decides to purchase the export documents sent on collection basis. Bank will give fund under FABC postshipment advance. Bank will also adjust packing credit given to the exporter. Normally bank do not release 100% amount of the purchased bill and may keep margin of 10% to 25%. The balance amount is credited to current account for business use of the exporter. FABC is adjusted on receipt of the sale proceeds of the bill on value date. Value date means the date on which banks nostro a/c is credited with export sale proceeds.

PROFESSIONAL HINTS

From the past experience it is observed that exporter will request the bank to send export documents on collection basis, when Rupees is under weakening trend in the markets. Subsequently, when exchange rate is favorable to him then request the bank to purchase the documents under FABC. Some times bank in case of new exporters will insist to purchase these documents under D/A basis on the receipt of the acceptance of the bill.

POSTSHIPMENT CREDIT IN FOREIGN CURRENCIES

INTRODUCTION

Like preshipment advances, exporters are also eligible for postshipment advances in foreign currencies under discounting/rediscounting of export bills scheme. This facility will be an additional window available to exporters along with existing postshipment finance in Rupees. Exporter may avail one of these methods of finance. This scheme provides an opportunity to exporters to avail postshipment finance at international competitive interest rates.

EXPORTER’S CHOICE

Exporters have the option to avail of preshipment credit, postshipment credit either in Rupee or in foreign currency. However if the preshipment credit has been availed in foreign currency, the postshipment credit has to be in foreign currency to liquidate preshipment credit.

SCHEME

The salient feature of the scheme is as under: Postshipment will be in foreign currency and interest will also be charged in foreign

currency. This loan will be adjusted from the foreign currency proceeds of the export bill.

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This scheme mainly covers bill with usance period upto 180 days from date of shipment. For longer periods RBI approval will be obtained by the bank.

Loan can be availed in any convertible currency but most of the banks provide the loan in USD.

INTEREST RATE

1. On Demand bills for Normal Not exceeding 2%Transit period as per FEDAI LIBOR/EURIBOR

Guidelines

2. Usance bills upto 6 months from Not exceeding 2%date of shipment including Usance LIBOR/EURIBORPeriod, NTP and Grace Period

The proceeds of the foreign currency may be utilized by exporter to adjust PCFC in foreign currency at preshipment stage or Rupee value can be used to adjust packing credit advance in Rupees.

As per FEDAI guidelines overdue export bill will be crystallized after 30 days from due date. Rate interest will be charged 2% above LIBOR from due date to date of crystallization. Foreign currency amount will be converted into Rupees at bank’s TT selling rate.

ECGC will provide policy in Rupees.

SUMMARY OF EXPORT FINANCE

Export transactions alongwith financial activities required to complete is as under:

TRANSACTION FINANCIAL ACTIVITY

Export order from Foreign Buyer. Exchange risk starts. Booking of forward Purchase Contract from bank to hedge risk. Arrangement of ECGC policy.

Manufacturing or procurement Packing credit advance from of goods for exports. Bank in Rupees or Foreign currency

Shipment of goods. Preparation Availment of Postshipmentof documents for Negotiation/ finance. Adjusting packingpurchase or collection. credit advance from post- shipment advance.

Realisation of export Bill. Adjustment of postshipment advance of the bank with sale realization of the bill to obtain export incentives.

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It is clear from the flow chart that post-shipment advance granted to the exporter by way of FOB/C or FOBP will be first utilized to adjust the outstanding pre-shipment advance or packing credit if availed. It is clear that post shipment advance is the extension of preshipment advance to ensure the end use of bank export credit.

Custom houses at Delhi, Mumbai, Chennai and Calcutta have introduced EDI system setting the duty drawback claims under computerized system immediately

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EXPORT FINANCE THROUGH FORFAITING

INTRODUCTION

Forfaiting is the discounting of export receivable on a without recourse basis. The word is derived from French term “a forfait” which means relinquishing a right. Here it refers to the exporter relinquishing his sight to a receivable due at a future date in exchange for immediate cash payment at an agreed discount rate. Minimum Bill size to be preferred is equivalent to US$ 2,50,000 and US$ 5,00,000 is more acceptable for forfaiting.

PROCESS OF FORFAITING

Forfaiting is a source of international trade finance covering short to medium terms, involving bank guaranteed overseas trade bills or promissory notes. Bill of exchange accepted by the buyer or promissory note from the buyer duly guaranteed or avalanched by the bank is used in this transaction. Forfaiting is a simple form of trade financing involving purchase of bank guaranteed of B/E or promissory note on a totally without recourse basis. It involves the Aval or irrevocable and unconditional guarantee of foreign buyer’s local bank unless buyer is of high financial standing. Forfaiting now covers sales of capital goods, small projects, commodities, service contracts etc. Under this system, finance is provided form 90 days to 10 years at fixed and floating interest rates.In typical forfaiting transaction, the exporter supplier receives 10-20% of sales price in advance payment as a down payment shortly after signing the supply contract. At the time of delivery of goods, supplier receives bill of exchange or promissory notes, covering the remaining 80-90% of the amount due from foreign buyer. A series of Bill of Exchange or promissory notes containing the interest rate clause will be issued to cover repayment during the credit period. For example for two years credit period four B/E maturing 6,12,18 &24 months will be issued after the delivery of the machinery. Exporter will sell series of B/E or PN to a forfaiting bank on a without recourse basis. The forfaiting bank will deduct interest in the form of a discount at a fixed rate for the entire period of credit involved.The discount rate can be fixed at the time of delivery of BE/PN to purchase or up to 12-18 months in advance. This will enable the exporter to add the discounted cost into the sale price. Bank forfaiting may hold the BE/PN until maturity or may sell them again to other forfaiting agent on non-recourse basis. Ultimate holder in due course present them for payment at maturity to the avalanched bank at which they are domiciled.

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BRIEF MECHANISM OF FORFAITING

Under this arrangements, the forfaiter a bank or finance house agrees to buy at a fixed rate of discount, bill of exchange. Discount rate is kept fix for certain period of time. This facility enables the exporter to negotiate the final terms of the contract with the overseas buyer on the basis of known financial costs and credit period. The buyer is required to accept the bill of exchange and arrange the guarantee by his banker also.Bill should be unconditional and not depend upon the performance of the exporter since the forfaiter has no right of recourse against the exporter. 5. Delivery of Bill of Exchange

EXPORTER FORFAITER

6. PAYMENT

2. DELIVERY OF GOODS 7. PRESENTATION OF BILL ON MATURITY 1.COMMERCIAL 4. AVALISED BILL BY BANK CONTRACT 8. PAYMENT OF BILL 3. BILL ACCEPTED BY IMPORTER

9. Presentation of bill on maturity AVALISER BANKIMPORTER 10. Payment of bill on maturity by GUARANTEE BANK Importer

Figure: Movement of payment and the bill in forfaiting transaction

ADVANTAGES OF FORFAITING Forfaiting offers following benefits to exporters:

- Ensuring cash flows and minimizing risk of payment.

- Exporter has the opportunity to convert credit export sales into cash which will improve profitability.

- Exporter gets 100% finance at fixed interest rate avoiding currency and interest rate change risks. - Forfaiting is without recourse to exporter removing credit risk.

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- Forfaiting does not require ECGC covers and save insurance costs. political and transfer risks are also removed.

- Exporters credit limits with bank are free for the use and not blocked.

- Exporter can venture in risky export markets as the forfaiter is willing to take on the country risks.

PROCEDURE FOR FORFAITING FACILITY

- Approach a bank say State Bank of India and submit an application toavail forfaiting facility. Bank will obtain quotes from agencies abroad byproviding the details of the export bills, term of payment, country of the buyer, foreign buyer etc.

- Exporter will get the quote and cost of forfaiting may be adjusted in the price during negotiation with foreign buyer.

- Once the exporter enters advance stage of negotiation approach the bank again for a Firm Quote which will be arranged from forfaiting agency.

- Acceptance of firm quote by the bank become binding on the exporter and agreement with foreign buyer and foreign forfaiting agency have to be executed.

- After shipping of goods, the foreign buyer’s bank would deliver the shipping documents against delivery of Bill of Exchange. Foreign buyers bank would then availse (unconditional and irrevocable obligations to pay) the debt instrument and deliver it back to State Bank of India.

- SBI will pass it to exporter for endorsement with without recourse clause.

- SBI will send the B/Ex to forfaiting agency and seek payment in Nostro A/c to be passed on to the exporter.

- Exporter should try to pass on commitment charges etc to foreign buyer.

- Exporter must draw bill of exchange and to ensure to give acceptable avalised bill to forfaiter for payment. Forfaitor must approve the availising bank.

- Discount rate and other charges are high because forfaitor assumes all the risks relating to the payment.

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EXPORT FINANCE BY FACTORING

INTRODUCTION

Factoring companies purchase short term export debt with a fee and provide cash to exporter with added benefit of collecting sale proceeds from buyer on due dates. As far finance is concerned, factoring of export debt makes immediate funds available for business use. Exporter gets Rupee equivalent of foreign currency export bill on the day when factor takes over the debt. Thus removing the exchange risk involved in the export transaction for the exporter. Risk is shifted to the factor. Exporter gets cash payment immediately and can negotiate for discounts from the supplier of inputs by making cash payments to them as cash payments attract discount in the local markets.Factoring takes care of the collection of export debts from foreign buyer, thus providing opportunity to exporter, to devote more time and efforts for manufacturing and marketing etc. Factoring companies assume the financial risk; as such they are selective of the credit worthiness of buyer and its country. Factoring is becoming popular with export companies specially for short term credit facility.

SERVICES PROVIDED BY FACTORING COMPANY

Factoring companies are finance companies and some of which owned by banks, provide range of services including:

Giving the exporter 100% credit insurance better than L/C by taking over the invoice of approved debtor by collecting the payments.

Factoring company giving credit insurance to set limit for each overseas buyer, allowing the exporter to supply goods upto this limit and submitting invoices to the factor.

Provide short-term finance by advancing cash immediately up to 85% of the invoice value. Balance will be paid on collection of the bill or 90 days after due date whichever is earlier.

Generally factoring companies do not purchase debt exceeding more than for 180 days.

Factoring is most appropriate for exporters selling on open account basis to high rating buyers.

Cover against buyer’s insolvency and foreign Exchange Risk.

COST OF FACTORING

The cost of factoring depends on type of services used by the exporter. Usually the service fee vary between 1% to 3% of the turnover. In case exporter want to avail cash advances then interest rate 1 to 2% above than bank overdraft, is also taken from the exporter. When credit insurance is taken from factor then finance is given to exporter on non-recourse basis.

Factoring companies have overseas branches or corresponding relationship though which arrangements can be made for collection of the payments. Factoring companies have close links with banks through which bills and other instruments may be presented for payment and obtain status reports on the buyers.

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IMPORT FACTORING

IMPORT FACTORING is where an exporter uses a factoring company in the country of import. If an Indian exporter has several buyers in U.K may use good British factoring company to collect debt especially on collection basis sold on open account sale arrangement. In such case exporter will send documents to factor through his banker the copies of invoices to factoring company. Advantage is that U.K factoring company knows the U.K buyer better in all respects.

ADVANTAGES OF FACTORING

The advantage to the exporter of using factoring service are that it expands sales in overseas markets by offering prospective customers, the same terms and conditions as given by local competitors i.e. offer open A/C terms, granting local credit terms as per local market requirements. Factoring improves cash flows to exporters and saves lot of administration expenses.

CUSTOMER SERVICE FOR EXPORTER

RBI GUIDELINES

RBI has issued guidelines to banks to ensure that exporters credit requirements and other demands are met in full and promptly at competitive rates. Some of the guidelines are as under:

- Banks should open Export Council Offices to guide exporters. Timely and adequate credit and other essential customer services/guidance in regard to procedural formalities and export opportunities to their export clients.

- In case of delays in crediting the export proceeds the compensation stipulated by FEDAI without waiting for a demand from the exporter. To release the post-shipment credit limits, banks should increase the efficiency in passing on the credits of export bills to exporters.

- Banks should not take more than 45 days from the receipt of export loan application with required information/documents. In case of renewal of limits and sanction of ad hoc credit facility the time taken, banks should not exceed 30 days and 15 days respectively. No additional interest is to be charged in respect of ad hoc export finance limits. Bank should develop fast track clearance of export credit proposals.

- All rejections of export finance proposals should be brought to the notice of the Chief Executive of the bank explaining the reasons of rejections.

- Bank should simply the application form and reduce data requirements. Bank should adopt suitable and appropriate method like Projected Balance Sheet Method, Turnover Method and Cash Budget Method to assess financial requirements suitable to exporters.

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- In case of established exporters having satisfactory track record, bank should sanction the credit limits for 3 years with in-build flexibility to step up/step down the limits within over loan facility.

- Banks should permit interchangeability of pre-shipment and post-shipment credit limits. Assessment of export credit limits should be need based and not linked to the availability of collectiral security.

- Submission of original sale contract or order countersigned by buyer need not be insisted upon at the handling of export documents since the goods have already been cleared and valued by custom authorities.

- Banks should not insist on submission of L/C/order in respect of exporters with good track record and put in place the system of obtaining periodical statements of outstanding L/C/orders on hand. This clause should be incorporated in sanction letter issued to exporter and appropriately brought to the notice of ECGC.

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