ROLE OF BANKS IN FOREIGN TRADE

(CORRESPONDENT RELATIONSHIP)
Under correspondent relationship one bank operates
as an agent of another in places wherever possible.
The following services are provided by banks to
settle international transactions:
a) Collection of cheques, drafts, bills, etc.
b) Issue of demand drafts, mail transfers, travelers
cheques etc.
c) Arrangements for reimbursement on letters of
credit.
d) Advising, confirming, amending letters of credit.
e) Sale and purchase of foreign currencies.
f) Issue and confirming guarantees.
g) Granting and guaranteeing loans & overdrafts.
h) Furnishing of credit information.

TYPES OF BANKS
1. Issuing Bank – This bank is primarily responsible
for the payment under the credit to the beneficiary,
i.e., exporter.
2. Advising Bank – A credit may be advised to the
beneficiary through another bank about the
authenticity of credit. However, the bank is not
responsible for making the payment.
3. Confirming Bank – The bank is located in the
exporter’s country but it carries the responsibility of
making payment under the credit like an issuing
bank.
4. Reimbursing Bank – The issuing bank may
indicate in the letter of credit the name of a bank
from whom the paying/negotiating bank can obtain
reimbursement.

PRE-SHIPMENT CREDIT OR
PACKING CREDIT

1. DEFINITION – The loan or advance is granted to

an exporter for financing the purchase of material,
processing, manufacturing or packing of goods, etc.
meant for export. It is a kind of working capital.
2. ELIGIBILITY – The exporter gets credit on the
strength of:
i) Letter of credit
ii) Confirmed export order
iii) Documentary proof of communication related to
the confirmation of the export order ( Fax, Telex,
Cable, etc.)
3. TYPE OF ACCOUNT – The exporter has to
maintain a separate loan account for each export
order. Running account facility may also be granted
by a bank to exporter with a good track record as
EOU, EPZ, SEZ, industrial unit.
4. PERIOD OF LOAN – Loan is normally granted
for a period not exceeding 180 days. However, it
could be extended up to 270 days at a concessional
rate of interest.
5. RATE OF INTEREST:
i) Up to 180 days Not exceeding PLR minus
2.5 per cent
ii) Over 180 days and PLR plus 0.5 percent
up to 270 days
ii) Beyond 270 days Bank has discretionary
up to 360 days power to charge any
interest.
6. QUANTUM OF FINANCE – The amount of loan
should not exceed (i) The FOB price, or (ii) Domestic
Cost of production (whichever is less).
Advance exceeding FOB value but up to domestic
cost of production may be considered in the
following cases:
a) The commodity is eligible for duty draw-back.
b) Export of HPS groundnuts and de-oiled cakes.
c) Agro-based products.
d) Wastage involved in the processing of agro-
products.
7. MARGIN REQUIREMENTS – Normally the
banks insist on the margin money from the borrower
while granting a loan. This is the minimum
contribution that a borrower has to make for availing
the loan facility. However, there are no fixed norms
prescribed by banks for the margin money.
APPRAISAL OF LOAN BY THE BANK
(Precautions taken for processing loan application)
a) The applicant should have IECN.
b) Exported goods are not banned for export.
c) Exporter’s name does not figure in the caution
list of the RBI.
d) Application supported by letter of credit/
confirmed export order.
e) The goods exported should not be under economic
or political stress.
DOCUMENTATION FORMALITIES
a) Export credit agreement.
b) Hypothecation/ Pledge agreement.
c) Corporate guarantees from directors/ partners.
d) Insurance policy to cover stocks.
e) Necessary undertaking for the payment of
insurance premium.
f) Formalities related with the registration charges,
wherever necessary.
g) Other documents as specified by the bank.
ECGC FORMALITIES
Bank should get the requisite guarantee from Export
Credit and Guarantee Corporation(ECGC) or Whole
Turnover Packing Credit Guarantee(WTPCG).
CERTAIN SPECIFIC CASES
1. Sharing of Packing Credit with Manufacturers.
A merchant exporter or an Export House is allowed
to share the packing credit facility with its supporting
manufacturer of the good.
2. Sharing of Packing Credit with Sub- suppliers.
Packing credit may be offered to the sub-suppliers of
raw materials, components, etc. of exported goods on
the basis of intent letter of credit opened in favour of
the suppliers by the exporter.
The scheme covers only rupee packing credit. The
advance granted to the sub-supplier will be a part of
the total packing credit granted to an exporter.
3. Packing Credit for Deemed Exports.
Deemed exporters are those firms which offer
supplies to EOU, EPZ, SEZ industrial units or the
projects funded by the international institutions.
Deemed exporters can also avail packing credit
facility.
4. Packing Credit for Consultancy Services.
5. Packing Credit for Construction Contractors.
6. Packing Credit for the Exports of IT Services
and Software.
7. Packing Credit for floriculture and other Agro-
based products.
8. Packing Credit for Processors/Exporters in
Agri-export Zones.
9. Advance Payment to Exporters
In case an exporter receives payment by means of
cheques, drafts (direct remittance), he may be granted
advance at concessional rate of interest. Exporters
with good track record are also eligible for advance
payment.

PACKING CREDIT IN FOREIGN CURRENCY

Exporters may get packing credit in foreign currency
(convertible currency) at a concessional rate not
exceeding 6.75% up to 160 days LIBOR(London
Inter-bank Offer Rate) and for credit over 160 days
at 2.75% over LIBOR.
The bank may use the balance available in EEFC
Account, FNCR (B) Account of the exporter for
granting(PCFC). It is self-liquidating in nature and
will be adjusted by discounting the related export bill
designated in foreign currency. It reduces the risk of
fluctuations in the exchange rates.
PCFC may be availed in rupees towards local
payments for materials, labour, etc.
Forward Cover for PCFC
No exchange risk is involved if the PCFC is availed
in the same foreign currency as the invoices.
PCFC is advantageous as compared to the rupee
packing credit due to interest differential and
avoidance of conversion cost.
Advance Against Duty-Drawback