Leob session5&6 export finance_mfm3

• Need for such type of finance?

• The institutions which provides the credit,– EXIM BANK– COMMERCIAL BANK– ECGC

Need for such type of finance?

• In regard to the export business, funds are required:

– at the time of establishment of business (long term funds)

– and for carrying the business (short term funds)

EXIM BANK / COMMERCIAL BANK / ECGC

• EX-IM bank of India is exclusively meant for promotion of exports from India and provide long term funds to export units.

• Commercial banks provide short term loan to the exporters.

• Schemes of Export Credit and Guarantee Corporation of India (ECGC) facilitate the grant of short term loans to the exporters through various credit risk insurance policies.

• The commercial banks provide funds to the exporter both before sending shipment (at pre-shipment stage) and after sending the shipment (at the post-shipment stage)

NATURE OF EXPORT FINANCE

• RBI ensures a free flow of financial assistance to the export sector at a concessional rate of interest against export order.

• The commercial banks provide the loan.

• The commercial banks are provided the re-finance facility by the RBI and the EX-IM bank against the loan extended by them to the exporters.

GENERAL GUIDELINES TO THE BANKS FOR EXPORT FINANCING

• The application for export finance are to be disposed off immediately in the benefit of the exporters.

• The banks should consider the export activity in totality and grant adequate amount of credit .

• While assessing the credit proposals from exporters, the bank should keep in mind their past performance and the future potential of their business activity.

• In case of new exporters, their experience of conducting domestic business and other factors must be taken care of.

•The banks should ensure that the funds lent by them are used for the implementation for the export order in time. so, they should keep a close eye on the end use of the funds lent by them.

•RBI has allowed several relaxations of the credit norms relating to the exports. they are

a) while computing overall working capital gap/max. permissible bank finance (MPBF), banks can exclude export receivables out of such computation process.

b) Banks should decide on their own the amount of holding of individual items of inventory and receivables the exporter should hold in relation to the amount of bank finance sanctioned to the exporter. the bank should consider the production/processing cycle of the industry in question at the time of taking this decision.

MAXIMUM PERMISSIBLE BANK FINANCE

• MPBF represents the max. amount of credit the bank would sanction to a business firm to meet its working capital needs.

• Working capital is defined as the difference b/n the amount of current assets and the current liabilities.

• Pre-shipment finance

• Post-shipment finance

• Provides working capital finance to an exporter

• Basic purpose is to enable the eligible exporters to procure raw materials, supplies, process or manufacture, warehouse or ship the goods meant for exports

• Packing credit

• Advance against incentives receivables from govt. covered by ECGC guarantee

• Advance against cheque /drafts received as advance payment

• Facility can be shared with supporting manufacturer or the sub-supplier.

• It refers to the credit granted by a bank to enable an exporter to pack the goods meant for exports.

• It includes the loan or advance or credit granted by a bank to an exporter for financing the purchase of raw materials, supplies, etc. required for processing or manufacture of the goods as well as for the packing materials for exports to foreign country.

Person eligible for packing credit:

• Export company/firm having an export order or a letter of credit in its favour for the export of goods in its name

• A business firm/ company which does not have L/C in its own name and is exporting through merchant exporters or export houses, subject to compliance of norms laid by RBI

Sharing of packing credit with manufacturers:

• A merchant exporter or an export house is allowed to share the facility of packing credit at the concessional rate of interest with its supporting manufacturer of the goods. the bank allows sharing this facility subject to terms and conditions.

• Similarly exporters can share the packing credit with the sub-supplier of raw materials, components, etc. required for the manufacture of export product.

Steps• Application• Documentation formalities• ECGC formalities• Scrutiny of packing credit application• Determination of eligible loan amount• Disbursal of loan amount

SUMMING UP:

The exporters can avail of the facility of packing credit at concessional rates of interest so as to be competitive in the international market. They can share this facility with their supporting manufacturer or the sub-supplier. Hence mobilisation of adequate amount of funds enables an exporter to obtain the supplies from the supplier needed for the manufacture of the product for export.

Period of finance:

• Pre-shipment finance is granted for a short period of time as it is essentially a working capital finance.

• Max. period is 270 days.– Initially the amount of packing credit is granted for a

max. 180 days subject to time involved in production cycle.

– In case the circumstances of the export firm are beyond its control then the bank may extend the period of credit by a max of 90 days.

PERIOD OF CREDIT RATE OF INTEREST

Up to 180 days not exceeding PLR minus 2.5 %age points.

180-270 days not exceeding PLR plus 2.5 %age points.

270-360 days fixed by the bank.

POST SHIPMENT FINANCE

• Exporter should:– arrange the set of docs as stipulated in the

L/C– submit the docs. along with the Standardized

Letter to bank for collection/negotiation of docs.

– This letter to the bank provides comprehensive coverage of the various points

• This form of finance is available after the shipment of goods.

• This facility is extended to the exporters in whose name the goods were shipped OR an exporter in whose name export documents are transferred.

• It can be short term finance or a long term finance depending upon the nature of export.

• It is essentially a working capital finance granted on the strength of accounts receivables.

• This facility is extended only against the shipping documents which evidence that the goods have been shipped

• Credit is extended to finance export receivables for the period commencing from the date of submission of docs. to the bank to the date of realisation of export proceeds.

• The post shipment credit is essentially a form of fund based financing

• The concessional rate of interest is charged upto a maximum period of 6 months from the date of shipment of goods

Types of Post Shipment Finance

• The post shipment finance can be classified as :– Export Bills purchased/discounted.– Export Bills negotiated– Advance against export bills sent on collection

basis.– Advance against export on consignment basis– Advance against undrawn balance on exports– Advance against claims of Duty Drawback.

Crystallization of Overdue Export Bills

• Exporter foreign exchange is converted into Rupee liability, if the export bill purchase / negotiated /discounted is not realize on due date.

General Discrepancies• Late Shipment• Claused Bill of Lading• Draft for the amount exceeding the value of credit• Differences in the description of goods in different documents• Inconsistency in the documents as regards marks and

numbers• Bill of Exchange drawn on wrong party or not drawn as per

tenor stated in the credit• Bill of Lading not marked “Shipped on board”• Goods under-insured• Transshipment/Partial shipment made when prohibited under

the L/C and so on

Exchange Control Regulations

Exchange Control Regulations

Why is it important to understand

the exchange control regulations

and facilities?

Export transaction inflow of forex

If inputs are Imported outflow of forex

Participations in trade fair

Sales tours (INR/$)

Subscription for trade magazines (INR/$)

Advertisements in foreign media??

Payment of agency commission, etc.??

Outflow/ Inflow??

FOREIGN EXCHANGE MANAGEMENT ACT(FEMA)

FEMA & Exchange Control Regulations

Framed by the Exchange Control Authority of

India (RBI)…..according to provisions of FEMA,

1999

Introduction

• Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organisation (WTO). Foreign Exchange Management Act was earlier known as FERA (Foreign Exchange Regulation Act), which has been found to be unsuccessful with the proliberalisation policies of the Government of India.

• FEMA is applicable in all over India and even branches, offices and agencies located outside India, if it belongs to a person who is a resident of India.

Some Highlights of FEMA

• It prohibits foreign exchange dealing undertaken other than an authorised person;

• It also makes it clear that if any person residing in India, received any Forex payment (without there being a corresponding inward remittance from abroad) the concerned person shall be deemed to have received they payment from a nonauthorised person.

• There are 7 types of current account transactions, which are totally prohibited, and therefore no transaction can be undertaken relating to them. These include transaction relating to lotteries, football pools, banned magazines and a few others.

• FEMA and the related rules give full freedom to Resident of India (ROI) to hold or own or transfer any foreign security or immovable property situated outside India.

• Similar freedom is also given to a resident who inherits such security or immovable property from an ROI.

• An ROI is permitted to hold shares, securities and properties acquired by him while he was a Resident or inherited such properties from a Resident.

• The exchange drawn can also be used for purpose other than for which it is drawn provided drawl of exchange is otherwise permitted for such purpose.

• Certain prescribed limits have been substantially enhanced. For instance, residence now going abroad for business purpose or for participating in conferences seminars will not need the RBI's permission to avail foreign exchange up to US$. 25,000 per trip irrespective of the period of stay, basic travel quota has been increased from the existing US$ 3,000 to US$ 5,000 per calendar year.

Various exchange control Rules & Regulations

1. Foreign Exchange Management (Current Account

Transactions) Rules, 2000

2. Foreign Exchange Management (EXIM of Goods

and Services) Regulations, 2000

3. Foreign Exchange Management (Manner of

Receipt and Payment) Regulations, 2000

EXEMPTIONS from Exchange Control Declaration

Following transactions are exempt from ECD:

1.Export of samples of goods and publicity material

supplied free of payment

2.Export of goods with a declaration that value <

INR 25,000

3.Export of goods by way of GIFT with a declaration

that value < INR 5,00,000


4. Goods imported free of cost on re-export

basis

5. Goods worth < $1,000 in value/transaction

exported to Myanmar


6. Re-export of the following goods as permitted by

development commissioner

(a) imported goods found defective

(b) goods imported from suppliers,

collaborators on loan basis

(c) surplus goods imported from foreign

suppliers.


7. Replacement goods exported free of

charge as permitted by the EXIM Policy

Every shipment has to be cleared by

I.central excise authority

&

II.customs authority

Central Excise Clearance Procedures

There are 2 categories in case of central

excise clearance

i.Procedure for excise clearance in the case

of exempted units

ii.Procedure for excise clearance in the case

of units other than exempted units

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Claiming Rebate

After shipping the goods, exporter can file

claim of rebate before the specified rebate

authority

Exporter has to clearly indicate the option on

ARE.1 along with address of rebate authority

(Maritime Collector of Central Excise OR

Jurisdictional Asst. Collector of Central Excise)

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Claiming Rebate

Docs to be filed for claiming rebate:

i.Application in the prescribed form

ii.ARE.1(original) + ARE.1 (duplicate-*sealed)

iii.Duly attested copy of Bill of Lading

iv.Duly attested copy of Shipping Bill

v.Disclaimer certificate (if claimant is other

than the exporter)

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Rebate sanctioning authority verifies and

compares 1original(from exporter) AND 2duplicate (from customs officer) AND 3triplicate

(from Superintendent of Central Excise)

If ALL is O.K., rebate is sanctioned

Claiming Rebate~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Time limit for disposal

Rebate sanctioning authority shall point out all

deficiency within 15 days of filing of claim

Exporter must rectify the deficiencies within

next 15 days

claim of rebate of duty is generally disposed of

within 15 days

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

“Once the goods are ready for transportation

to the importer, it is in the interest of the

exporter to secure the shipment against all

possible risks”

RISK

……..possibility of loss in business

RISK

Credit risk – importer may not pay for the goods

Risk of physical damage - there may be damage to the goods

due to various factors during transportation from port of loading to the port of discharge

Product liability – the exporter may be required to pay for

compensation to the consumer due to the faulty product

Exchange rate fluctuation risk – the possibility of loss

due to exchange rate fluctuation

Political risk – loss due to various political factors resulting in delay in the

transfer of funds or non-remittance by the buyer’s bank

Risk Management

Risk management refers to

identification of the risks associated with

an export transaction &

planning for the measures to secure

against those risks with the objective of

minimising the cost of export transaction

Risk Management

Risk management involves

Identification of the risk

Quantification of the risk

Prevention or reduction of the risk

Developing one’s own risk policy

Transferring the risk to the third party

Export Risk Identification

Risk = possibility of loss in biz. & can be

attributed to those factors whose

occurrence or non-occurrence can be

anticipated and the probabilities can be

assigned

Different from UNCERTAINTY

Risk ManagementSome factors which cause risk in biz.

1.poor planning for funds

2.lack of market knowledge

3.misunderstanding foreign buyers

4.overestimation of one’s own capacity

5.default by the foreign buyers

6.Faulty nature of the product

7.Damage during transportation

8.Political development in the importer’s country

9.Fluctuation in the rate of exchange

Credit Risk Insurance and ECGC

In India,

credit risk insurance cover is provided by

ECGC (fully owned company of the GOI)

main functions of ECGC

1.covers the risk of non-payment due to

commercial and political risks arising in

respect of exports on credit terms

Credit Risk Insurance and ECGC

2. It issues guarantees to bank underwriting a

major part of losses that may arise in

respect of advance or other support they

extend to exporters in connection with their

export business.

Credit Risk Insurance Policies

ECGC offers the following policies

I. Standard Policies

II. Specific Shipment Policies

III. Specific Policies

Cargo Insurance (Marine) Insurance

Cargo can be damaged during transit from

port of loading to port of discharge

Insurance cover against such risks arising due

to physical damage to the goods is known as

cargo/marine insurance.

AIR CARGO, SHIPMARINE

Need for cargo (marine) insurance


Legal requirement

Each of the intermediaries involved in

transportation of goods have limited liability

As per law, intermediaries have no liability

for losses caused by uncontrollable factors and

for losses caused in spite of reasonable care



Legal requirement

In case of sea shipment maximum liability -

£100.00/package

In case of air shipment maximum liability –

US $ 20.00/package



Commercial requirement

It’s not just loss of goods; it is loss of profits

too.

If goods are damaged buyer won’t accept

goods/Bill of Exchange in case of D/P or D/A



Parties to the Contract of Insurance

1.Insurance company (underwriters)

2.The insured (buyer of insurance or

beneficiary)


Principles governing the contract of insurance

1. Principle of utmost good faith insured

must fully disclose material details to

insurer

2. Principle of insurable interest no person

can enter into a valid contract of insurance

unless he has insurable interest in the

object/life insured


Principles governing the contract of insurance

3. Principle of indemnity: cargo owners are

allowed a reasonable anticipated profit.

Therefore Policy provides commercial

indemnity I/O pure indemnity

4. Causa Proxima: implies that insurer

becomes liable to pay for loss if the insured

peril is the proximate cause of loss


WHO INSURES?

CIF/CFR shipper/exporter

FOB buyer. In this case exporter should

obtain Seller’s Contingency Insurance to cover

possible loss before goods are on board

Features of Marine Insurance Policy

1. Freely assignable (transferable) as goods

pass through various hands before delivery

2. Assignment is done by endorsement and

delivery

3. Insurable interest of the claimant must exist

at the time of loss of cargo

4. Value of policy is the sum agreed between

the insured and insurer. (110% of CIF value)

Features of Marine Insurance Policy

5. It’s a contract of commercial indemnity &

NOT pure indemnity

6. Duration includes 1period of transit +

2time of discharge + 3time of arrival

Air shipment Generally 30 days after

arrival

Sea shipment Generally 60 days after

arrival

Kinds of losses

1. Total loss

2. Partial loss

A. Actual Total Loss

B. Constructive Total Loss

c. General Average

d. Particular

Average

Kinds of lossesa. Actual Total Loss

i.Cargo is physically destroyed,

ii.Cargo is not the same anymore (cement

concrete)

iii.Cargo is irretrievably lost (ship sinks)

b. Constructive Total Loss

Cargo is damaged to such an extent that

cost of salvaging > value of goods

c. General Average

An extraordinary sacrifice or expenditure

intentionally and reasonably made or

incurred for the common safety

Kinds of losses

G.A. arises when the Captain of the ship decides to:

i. throw away some cargo to lighten the ship caught in

rough weather

ii. make payment to nearby agency to tow the ship

away from danger

iii. pour water on the cargo to extinguish the fire, etc.

*loss/expenditure is borne by each cargo owner

proportionately

Kinds of losses

d. Particular average

Arises when partial loss or damage is

caused accidently by a peril insured. It is

the loss of particular cargo owner.

Kinds of losses

Scope depends on the risks (perils)

covered in the insurance policy

1.Maritime perils

2.Extraneous perils

3.War perils

4.Strike perils

Scope of cargo insurance policy

“losses due to acts of God or man-made events”

Acts of God earthquake, volcanic eruption,

lightening, entry of seawater into vessel, washing

overboard of cargo, rain water damage

Manmade events fire, explosion, smoke,

water used to extinguish fire, piracy, deliberate

damage, vandalism, sabotage, arson, etc.

Maritime perils

“perils that arise on account of faults in loading,

keeping, carrying and unloading of the cargo”

Rough handling, breakage, leakage, pilferage,

non-delivery, improper stowage, wave impacts,

pressure caused by vibration on the road-rail

track

Extraneous perils

“losses due to war”

Civil war, revolution, rebellion, etc. and

capture, seizure, arrest or detainment of the

carrier during war, civil war, revolution etc.

War perils

“Damage or loss to cargo caused by strikes, lock-

outs, labour disturbances, riots, civil commotion

and by any terrorist acting from a political

motive”

Strike perils

Leob session5&6 export finance_mfm3

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