Some Information on Export

Financing

Presented By

Prepared by: Kamalesh Mukherjee, Director, FINTEQ

1
 Export
p Financing-
g Sources
Sources:
Commercial banks which are members of the Foreign Exchange
Dealer’s Association provide finance at a concessional rate of
interest and are refinanced by the Reserve Bank/ Export Import
Bank of India.
India In case they do not wish to avail refinance
refinance, they
are entitled for an interest rate subsidy.
Export Import Bank of India, in certain cases, participates with
commercial bank in extending medium term loans to exporters.

Other Related Institutions:

Reserve Bank of India, being the central bank of country, lays down
the policy frame work and provides guidelines. The RBI functions
as refinancing
fi i iinstitution
tit ti for
f short
h t andd medium
di tterm lloans
respectively, provided by commercial banks.
Export
p Credit & Guarantee Corporation
p (ECGC)
( ) also pplays
y an
important role through various policies and guarantees providing
cover for commercial and political risks involved in export trade.
 Export Financing- Forms

Forms of Export Credit

• Pre-shipment credit
• Post Shipment credit
Post-Shipment
• Factoring
• Forfaiting
 A. Pre-shipment Credit
Pre Shipment Finance is provided by financial institutions when the
Exporter wants the payment of the goods before shipment.
The objectives off pre shipment finance
f is to enable the exporter to:
„ Procure raw materials.
„ Carry out manufacturing process.
„ Provide a secure warehouse for f goods and raw materials.
„ Process and pack the goods.
„ Ship the goods to the buyers.
„ M t other
Meet th financial
fi i l costt off the
th business.
b i

„ Types
… Packing Credit
… Advance against Cheques /Draft etc. representing Advance
Payments.

„ Forms :
… Packing Credit in Indian Rupee
… Packing Credit in Foreign Currency (PCFC)
 A. Pre-shipment Credit- Eligibility
„ Eligibility
… Issued to exporter who has the export order in his own name. As
an exception,
i iit can also
l b be grantedd to third
hi d party manufacturer/
f /
supplier who do not have export orders in their own name.
… A ten digit importer exporter code number allotted by DGFT.
… E
Exporter
t should
h ld nott bbe iin th
the caution
ti lilistt off RBI
RBI. License
Li issued
i d by
b
DGFT if the goods to be exported fall under the restricted
category.
… If the goods to be exported are not under OGL (Open General
Licence), the exporter should have the required license /quota
permit to export
… Formal application for releasing the packing credit to the effect
that the exporter would ship the goods and submit the relevant
shipping documents to the banks within prescribed time limit.
… Firm order or irrevocable L/C or original
g cable / fax / telex
message exchange between the exporter and the buyer.
… The confirmed order received from the overseas buyer should
reveal the information about the full name and address of the
overseas buyer,
b d
description
i ti quantity
tit and d valuel off goodsd (FOB or
CIF), destination port and the last date of payment.
 A. Pre-shipment Credit- Stages
ƒ Appraisal and Sanction of Limits: Banks Check Exporter
profile, Product profile, political and economic details about country, and the
exporters license/ permit
ƒ Disbursement of Packing Credit Advance: normally
allowed when all the documents are properly executed. The quantum of
finance depend on the FOB value of contract /LC or the domestic values of
goods,
d whichever
hi h is
i found
f d to
t be
b lower.
l Normally
N ll insurance
i and
d freight
f i ht
charged are also considered.
ƒ Follow up of Packing Credit Advance: Exporter needs to
submit stock statement giving all the necessary information about the
stocks. It is then used by the banks as a guarantee for securing the packing
credit in advance.
ƒ Liquidation of Packing Credit Advance: Packing Credit
Advance needs
Ad d tto b
be liquidated
li id t d outt off the
th exportt proceeds
d off the
th relevant
l t
shipment, thereby converting pre-shipment credit into post-shipment credit.
In case the export does not take place then the entire advance can also be
recovered at a certain interest rate.
ƒ O d Packing:
Overdue P ki Bank considers packing credit as an overdue, if
the borrower fails to liquidate the packing credit on the due date. And, if the
condition persists then the bank takes the necessary step to recover its dues
as per normal recovery procedure.
 A. Pre-shipment Credit in Foreign Currency
9 Authorized dealers are only permitted
9 The rate of interest on PCFC is linked to LIBOR
LIBOR.
9 The exporter has freedom to avail PCFC in convertible
currencies like USD, Pound, Sterling, Euro, Yen etc.
However, the risk associated with the cross currency
transaction is that of the exporter.
9 Sources of funds for the banks for extending PCFC facility
include the Foreign Currency balances available with the
Bank in Exchange,g Earner Foreign g Currencyy Account
(EEFC), Resident Foreign Currency Accounts RFC(D)
and Foreign Currency (Non Resident) Accounts.
 A. Pre-shipment Credit –Other issues
„ Packing Credit Facilities to Deemed Exports
Deemed exports made to multilateral funds aided projects and
programs, under
d orders
d securedd through
h h global
l b l tenders
d ffor which
hi h
payments will be made in free foreign exchange, are eligible for
concessional rate of interest both at pre and post supply stages.

„ Packing Credit facilities for Consulting Services

Do not involve physical movement of goods out of Indian Customs
t it
territory. Pre-shipment
P hi t finance
fi can be
b provided
id d to
t allow
ll the
th exporter
t
to mobilize resources like technical personnel and training them.

„ Advance against Cheque/Drafts

C / f received as advance
payment
Where exporters
p receive direct p payments
y from abroad by y means of
cheques/drafts etc. the bank may grant export credit at concessional
rate to the exporters, till the time of realization of the proceeds of the
cheques or draft etc. The Banks however, must satisfy themselves
that the proceeds are against an export orderorder.
 B. Post-shipment
ost s p e t CCredit
ed t
„ Purpose : meant to finance export sales receivable after the date of
shipment of goods to the date of realization of exports proceeds. In
cases of deemed exports
exports, it is extended to finance receivable against
supplies made to designated agencies.

„ Basis : p
provided against
g evidence of shipment
p of g
goods/supplies
pp

„ Nature: Can be secured or unsecured. Since the finance is extended

g
against evidence of export
p shipment
p and bank obtains the documents of
title of goods, the finance is normally self liquidating. In case it involves
advance against un-drawn balance, it is usually unsecured in nature.

„ Quantum : Can
C b be extended
t d d up tto 100% off th
the iinvoice
i value
l

„ Period : Can be short terms or long term, depending on the payment

terms offered by the exporter to the importer.
importer Six months in case of cash
exports.

„ Type of Exports covered: Physical exports

exports, Deemed export (
provided to the supplier of the goods which are supplied to the
designated agencies) and for Capital goods and project exports.
 B Post
B. Post-shipment
shipment Credit-
Credit Types

1. Export Bills purchased/discounted.

2. Export Bills negotiated
3. Advance against export bills sent on collection
basis.
4. Advance against export on consignment basis
5. Advance against un-drawn balance on exports
6. Advance against claims of Duty Drawback.
 Post-shipment
ost s p e t CCredit-types
ed t types
1. Export Bills Purchased/ Discounted : (DP & DA bills)
Exportt bills
E bill (Non
(N L/C Bills)
Bill ) is
i used
d iin tterms off sale
l contract/
t t/ order
d
may be discounted or purchased by the banks. It is used in
indisputable export transactions and the proper limit has to be
sanctioned to the exporter .

2
2. Export Bills Negotiated (Bill under L/C):
Because of the security available in this method, banks often
become ready to extend the finance against bills under LC.
However, this arises two major risk factors for the banks:
9 The risk of nonperformance by the exporter, In which case, the
issuing
g banks do not honor the letter of credit.
9 Documentary risk where the issuing bank refuses to honor its
commitment. So, it is important for the for the negotiating and the
lending bank to properly check all documents before submission
submission.
 Post-shipment
ost s p e t CCredit-Types
ed t ypes
3. Advance Against Export Bills Sent on Collection Basis
Bills can only be sent on collection basis if the bills drawn under LC
have some discrepancies. Banks may allow advance against these
collection bills to an exporter with concessional rates depending
upon the transit period in case of DP Bills and transit period plus
usance period in case of usance bill. Transit period is from the date
of acceptance of the export documents for collection by the bank.

4. Advance Against Export on Consignments Basis

Bank may finance goods exported on consignment basis at the risk
of the exporter. In this case bank instructs the overseas bank to
deliver the document only against trust receipt /undertaking to
deliver the sale proceeds by specified date which should be within
the prescribed date.
 Post-shipment Credit-Types

5. Advance against
g Undrawn Balance
It is a very common practice in export to leave small part undrawn
for payment after adjustment due to difference in rates, weight,
quality etc. Banks do finance against the undrawn balance, subject
t a maximum
to i off 10 percentt off the
th exportt value
l against
i t an
undertaking from the exporter

6 Ad
6. Advance A Against
i t Cl
Claims
i off Duty
D t Drawback
D b k
This credit is given only if the in house cost of production is higher in
relation to export price due to the existing duty structure. Banks
grant advances at lower rate of interest for a period of 90 days and
only if other types of export finance are extended to the exporter by
the same bank. After the shipment the exporters lodge their claims
to the relevant ggovernment authorities. The bank is authorized to
receive the claim amount directly from the concerned government
authorities.
 Forfaiting
‰ Forfaiting refers to non-recourse discounting of export
p
receivables. The exporter surrenders,, without recourse to him,,
his rights to claim for payment on goods delivered to an
importer.
‰ Forfaiter pays exporter in cash and undertakes the risk
associated
i t d with
ith the
th export.t
‰ EXIM bank plays intermediary role between exporter and the
overseas forfaiting agency. The exporter approaches EXIM
bank for forfaiting transaction.
transaction The bank receives bills from the
exporter and sends them to the forfaiter for discounting.
‰ The bank arranges for the discounted proceeds to be remitted
to the Indian exporter. The bank issues appropriate certificates
to enable exporters to remit commitment fees and charges.
‰ RBI has allowed Authorised dealers to undertake forfaiting of
medium term export p receivables.
‰ Involves two cost elements: Commitment fee, payable by the
exporter to the forfeiter and Discount fee payable by the
exporter for the entire period of credit involved and deducted
b the
by th forfaiter
f f it from
f the
th amountt paid
id to
t the
th exporter
t against
i t the
th
availed bills of exchange.
 Forfaiting- Benefits
Forfaiting
„ Benefits to Exporter
… 100 per cent financing : Without recourse and not occupying
exporter's
t ' credit
dit line
li
… Improved cash flow : Receivables become current cash in flow
… Reduced administration cost : By using forfeiting the exporter will
reduce the relevant management costs costs.
… Advance tax refund: the exporter can make the verification of
export and get tax refund in advance just after financing.
… Risk reduction : enables the exporter
p to transfer various risk
resulted from deferred payments, such as interest rate risk,
currency risk, credit risk, and political risk to the forfeiting bank.
… Increased trade opportunity : With forfeiting, the exporter is able to
grant credit to his buyers freely
freely, and thus
thus, be more competitive in
the market.

„ Benefits to Banks
… Banks can offer a novel product range to clients, which enable the
client to gain 100% finance, as against 80-85% in case of other
discounting
… Bank
B k gain i ffee b
based
d income.
i
… Lower credit administration and credit follow up.
 Factoring
It is an attractive way of providing export finance to exporters. In this system, factor bears
the complete credit risk
risk. A factor is a special type of agent who
who, depending upon the type
of agreement, offers a variety of services.
¾ These services include coverage of credit risk, collection of export proceeds, maintenance
of accounts receivables and advance of funds.
¾ Purchase of receivables of its clients without recourse is the most important service of the
factor. A big advantage to the exporter is that it is without recourse financing. This means
that the risk of non-payment by the importer is to be borne entirely by the factor.
¾ In India, International Export Factoring services on with recourse basis have been
approved by the RBI. It provides a new dimension to management of export receivables.
SBI Factors and Commercial Services Pvt. Ltd., Bombay have been permitted to provide
International Export Factoring.
¾ In this system, the exporter enters into an export factoring agreement with exporter’s
factor. The exporters ship goods to approved foreign buyers. Each invoice is made payable
to a specific factor in the importer’s country. Copies of invoices and shipping documents
are sent to the Importer’s factor. Exporter’s factor will make prepayment to the export
against approved export receivables.
¾ On receipt of payments from the importer on due date of invoice, importer’s factor remits
th fund
the f d tot the
th exporter’s
t ’ factor.
f t The
Th exporter’s
t ’ factor
f t pays to t the
th exporter
t after
ft deducting
d d ti
the amount of prepayments.
 Factoring
ƒ A factor is a special type of agent who depending upon the type of agreement
offers a variety
ariet of ser
services.
ices These ser
services
ices incl
include
de co
coverage
erage of credit risk
risk,
collection of export proceeds, maintenance of accounts receivables and
advance of funds.
ƒ The exporter enters into an export factoring g agreement
g with exporter’s factor.
The exporters ship goods to approved foreign buyers. Each invoice is made
payable to a specific factor in the importer’s country. Copies of invoices and
shipping documents are sent to the Importer’s factor. Exporter’s factor will
make pprepayment
p y to the exporter
p against
g approved
pp export
p receivables .
ƒ On receipt of payments from the importer on due date of invoice, importer’s
factor remits the fund to the exporter’s factor. The exporter’s factor pays to the
exporter after deducting the amount of prepayments.
ƒ Factoring may be disclosed or undisclosed
ƒ Disclosed factoring is of two types:
… Recourse factoring: The client collects the money from the customer but in case
customer don’t pay the amount on maturity then the client is responsible to pay the
amount to the factor. It is offered at a low rate of interest and is in very common use.

… Nonrecourse factoring: In non recourse factoring, factor undertakes to collect the

debts from the customer. Balance amount is paid to client at the end of the credit
period or when the customer pays the factor whichever comes first
first. The advantage of
nonrecourse factoring is that continuous factoring
Duty Drawback Scheme
In case of Central Excise, Manufacturers
can availil Cenvat
C t credit
dit off ddutyt paidid on
inputs and utilise the same for payment of
d t on other
duty th goods
d sold ld iin IIndia,
di or th they
can obtain refund. Schemes like
manufacture
f t under
d bond
b d are also l
available for customs. Manufacturers or
processors who are unable to avail any of
these schemes can avail duty drawback.
Duty Drawback Scheme (Cont.)

Drawback
D b k means th the rebate
b t off d
duty
t chargeable
h bl on any iimported
t d materials
t i l or excisable
i bl
materials used in manufacture of processing of goods which are manufactured in India
and exported. Duty drawback is equal to
• a) cus
customs
o s du
duty
y pa
paid
doon imported
po ed inputs
pu s S
SAD p
plus
us
• b) excise duty paid on indigenous inputs.

Duty paid on packing material is also eligible. However, if inputs are obtained without
payment
p y of customs/excise duty,
y, no drawback will be paid.
p

If customs/excise duty is paid on part of inputs or rebate/refund is obtained, only that part
on which duty is paid and on which rebate/refund is not obtained will be eligible for
d
drawback.
b k NNo d
drawback
b k iis available
il bl on other
th ttaxes lik
like sales
l ttax and
d octroi.
t i
Duty Drawback Scheme (Cont.)

Drawback is allowable if any manufacture,

manufacture process or any operation is
carried out in India. Thus, drawback is available not only on
manufacture, but also on processing and job work, where goods may
not change
g its identityy and no manufacture has taken pplacyy
considering average quantity and value of each class of inputs

The rate is fixed under rule 3 of Drawback Rules by considering

average quantity and value of each class of inputs or manufactured in
India. Average amount of duties paid is considered. These rates are
fixed for broad categories
g of p
products. The rates include drawback on
packing materials.
Duty Drawback Scheme (Cont.)

The AIR (All Industry Rate) is usually fixed as % of FOB price of export
products. However, in respect of many export products, duty drawback cap
(ceiling) has been prescribed.

The table gives allocation of the drawback allowed under tow heads namely –
Customs and Central Excise. The customs portion covers basic customs duty,
surcharge and SAD. Excise portion covers basic and special excise duty and
CVD. Duty drawback of customs portion can be paid even if exporter has
availed Cenvat credit,
credit as Cenvat credit is only of excise duty and CVD –
MF(DR) circular No. 83/2000-Cus dated 16-10-2000
Duty Drawback Scheme (Cont.)

IIndividual
di id l exporter
t iis nott required
i d tto produce
d any evidence
id iin respectt off actual
t l
duties paid by him on inputs

It is possible to fix All Industry Rate only for some standard products. It cannot
be fixed for special type of products
products. In such cases
cases, brand rate is fixed under
rule 6. The manufacturer has to be submit application with all details to
Commissioner, Central Excise. Such application must be made within 60
daysy of export.
p
Duty Drawback Scheme (Cont.)

All Industry rate is fixed on average basis

basis. Thus
Thus, a particular manufacturer
may find that the actual duty paid on inputs is higher than All Industry Rates
fixed for his product . In such case, he can apply under rule 7 of Drawback
Rules for fixation of Special
p Brand Rate, within 30 days
y from export.
p

‘Value’ for the p

purposes
p of section 76(1)(b)
( )( ) will be value at the time of export
p
and not the original value of import of the goods. If the imported goods are
used before re-export, the drawback will be allowed at a reduced percentage.