EXPORT FINANCE

Objective
The objective of this project is to study details of EXPORT FINANCE business. The objective was to understand the PRE-SHIPMENT & POST-SHIPMENT procedure various regulations required and documentation needed for the procedure, the analysis and collected data as primary source helped me to understand the scenario of EXPORT BUSSINESS carried by commercial banks in India. The objective was also to understand various services provided by commercial banks to enhance TRADE FINANCE, since export finance is very important to study and understand the overall gamut of international finance market, which can be useful to me in mere future. The project thus provided me the knowledge of EXPORT-IMPORT business. Since the business is of great importance to Indian economy.

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EXECUTIVE SUMMARY:
FINANCE IS THE LIFE AND BLOOD OF ANY BUSINESS. Success or failure of any export order mainly depends upon the finance available to execute the order. Nowadays export finance is gaining great significance in the field of international finance. Many Nationalized as well as Private Banks are taking measures to help the exporter by providing them pre-shipment and post- shipment finance at subsidized rate of interest. Some of the major financial institutions are EXIM Bank, RBI, and other financial institutions and banks. EXIM India is the major bank in the field of export and import of India. It has introduced various schemes like forfeiting, FREPEC Scheme, etc. Even Government is taking measures to help the exporters to execute their export orders without any hassles. Government has introduced schemes like Duty Entitlement Pass Book Scheme, Duty free Materials, setting up of Export Promotion Zones and Export Oriented Units, and other scheme promoting export and import in India. Initially the Indian exporter had to face many hurdles for executing an export order, but over the period these hurdles have been removed by the government to smoothen the procedure of export and import in India.

CHAPTER 1 - INTRODUCTION OF EXPORTS

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

CHAPTER 2 - EXPORT FINANCE

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_____________________________________________________________________________ _ 2.1 INTRODUCTION Credit and finance is the life and blood of any business whether domestic or international. It is more important in the case of export transactions due to the prevalence of novel non-price competitive techniques encountered by exporters in various nations to enlarge their share of world markets. The selling techniques are no longer confined to mere quality; price or delivery schedules of the products but are extended to payment terms offered by exporters. Liberal payment terms usually score over the competitors not only of capital equipment but also of consumer goods. The payment terms however depend upon the availability of finance to exporters in relation to its quantum, cost and the period at pre-shipment and post-shipment stage. Production and manufacturing for substantial supplies for exports take time, in case finance is not available to exporter for production. They will not be in a position to book large export order if they dont have sufficient financial funds. Even merchandise exporters require finance for obtaining products from their suppliers. This project is an attempt to throw light on the various sources of export finance available to exporters, the schemes implemented by ECGC and EXIM for export promotion and the recent developments in the form of tie-EXIM tie-ups, credit policy announced by RBI in Oct 2001 and TRIMS.

2.2 CONCEPT OF EXPORT FINANCE:

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

2.3 OBIECTIVES OF EXPORT FINANCE

To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer. To cover natural risks like an earthquake, floods etc.

An exporter may avail financial assistance from any bank, which considers the ensuing factors: a) Availability of the funds at the required time to the exporter. b) Affordability of the cost of funds.

2.4 APPRAISAL

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Appraisal means an approval of an export credit proposal of an exporter. While appraising an export credit proposal as a commercial banker, obligation to the following institutions or regulations needs to be adhered to. Obligations to the RBI under the Exchange Control Regulations are: Appraise to be the banks customer. Appraise should have the Exim code number allotted by the Director General of Foreign Trade. Partys name should not appear under the caution list of the RBI. Obligations to the Trade Control Authority under the EXIM policy are: Appraise should have IEC number allotted by the DGFT. Goods must be freely exportable i.e. not falling under the negative list. If it falls under the negative list, then a valid license should be there which allows the goods to be exported. Country with whom the Appraise wants to trade should not be under trade barrier. Obligations to ECGC are: Verification that Appraise is not under the Specific Approval list (SAL). Sanction of Packing Credit Advances. GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE: When a commercial bank deals in export finance it is bound by the ensuing guidelines: a) Exchange control regulations. b) Trade control regulations. c) Reserve Banks directives issued through IECD. d) Export Credit Guarantee Corporation guidelines.
e)

Guidelines of Foreign Exchange Dealers Association of India.

CHAPTER 3 -TYPES OF EXPORT FINANCE

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The export finance is being classified into two types viz. Pre-shipment finance. Post-shipment finance.

3.1 PRE-SHIPMENT FINANCE

MEANING: Packing credit is also known as Pre-shipment Credit. Financial assistance provided by the commercial banks to exporters before the shipment of goods is called pre-shipment finance. Preshipment finance is given for working capital for purchase of raw material, processing, packaging, transportation, ware-housing etc. of goods meant for export. Pre-shipment finance is presently given to Indian exporters at a concessional rate of 10% for a period of 180 days. Preshipment credit for a further period of 180 days to270 days is given at 12%.

DEFINITION: Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as pre-shipment credit. Such finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of goods meant for exports.

Packing Credit Finance Categories:

Packing credit falls in following categories.

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Rupee Pre-shipment credit or Packing Credit Packing credit on deemed exports Rupee export packing credit to manufacturer-supplier for export routed through export houses. Rupee packing credit to sub-suppliers
Rupee pre-shipment credit to specific sectors/segments.

Eligibility:
The packing credit is given on the strength of letter of credit opened in favor of exporters or in favor of some other person by foreign buyer or against a confirmed and revocable export order received by company. The applicant should, however, hold an importer-exporter code number from the licensing authority concerned.

Company can avail any loan or advance on the basis of:

Letter of Credit opened in your favor or in favor of some other person, by an overseas buyer; a) A confirmed and irrevocable order for the export of goods from India; b) Any other evidence of an order or export from India having been placed on the exporter or some other person, unless lodgments of export order or Letter of Credit with the bank has been waived. Packing Credit is granted for a period depending upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the relative goods. Packing credit is released in one lump sum or in stages, as per the requirement for executing the orders/LC. The pre-shipment / packing credit granted has to be

liquidated out of the proceeds of the bill dawn for the exported commodities, once the bill is purchased/discounted etc., thereby converting pre-shipment credit into postshipment credit. KPTL has to keep margin of 10% for packing credit. Rate of interest on Packing credit is not exceeding 7%irrespective of BPLR.

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It is granted to the clients for making advance payment to the suppliers for acquiring goods to be exported. Thus, it is clean in nature and usually extended to the parties, who are rated as first class, for a very short duration. However, bank should assess the procurement period and once the goods are acquired and are in the custody of the companys client. IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE: To purchase raw material, and other inputs to manufacture goods. To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labeling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. To pay for consultancy services. To pay for export documentation expenses. FORMS OR METHODS OF PRE-SHIPMENT FINANCE:
1.

Cash Packing Credit Loan:

In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security.

2.

Advance Against Hypothecation:

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

3.

Advance Against Pledge:

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

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Advance Against Red L/C:

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

5.

Advance Against Back-To-Back L/C:

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

6.

Advance Against Exports Through Export Houses:

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

7.

Advance Against Duty Draw Back (DBK):

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

SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE 1. PACKING CREDIT SANCTION OF PACKING CREDIT ADVANCES:
There are certain factors, which should be considered while sanctioning the packing credit advances viz.

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Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower.

ii. Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. iii.Quantum of finance. iv.Standing of credit opening bank if the exports are covered under letters of credit. v. Regulations, political and financial conditions of the buyers country. DISBURSEMENT OF PACKING CREDIT After proper sanctioning of credit limits, the disbursing branch should ensure: To inform ECGC the details of limit sanctioned in the prescribed format within 30 days from the date of sanction. a) To complete proper documentation and compliance of the terms of sanction i.e. creation of mortgage etc. b) There should be an export order or a letter of credit produced by the exporter on the basis of which disbursements are normally allowed. In both the cases following particulars are to be verified: i. Name of the Buyer. ii. Commodity to be exported. iii.Quantity. iv.Value. v. Date of Shipment / Negotiation. vi.Any other terms to be complied with.

2. FOREIGN CURRENCY PRE-SHIPMENT CREDIT (FCPC) The packing credit or pre-shipment credit that was spoken earlier was disbursement of rupee funds, that is, advancing money in rupee to the exporter for the purpose of procuring, processing or manufacturing the goods for exports. Under this scheme the pre-shipment credit is disbursed in foreign convertible currency at interest rates linked with LIBOR (London Inter-Bank Offered

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Rate). This credit is again self-liquidating in nature and is adjusted by the discounting or purchase or negotiation of the export bills. The banks change Earners Foreign Currency (EEFC), resident foreign currency accounts, foreign currency non-resident account bank scheme accounts and foreign currency available in escrow account. For all practical purposes this resembles the packing credit advance disbursed in rupees, except that the interest charged is based on LIBOR and the disbursement is made in foreign convertible currency. The advantage of this scheme is lower rate of interest and covering of foreign exchange risk where goods are imported for the purposes of export. For instance, if export order is for US$ 20,000 and the import component is say 60percent, assuming that the exporter avails PCFC of US$ 12,000, the liability would be adjusted against the submission of the export documents. Under the PCFC of US$ 12,000no exchange conversion is involved. The exporter saves the difference between buying and selling exchange rates. If PCFC is availed by the exporter against an export order, the bills drawn under the said export order will be discontinued at LIBPR plus the loading factor of the bank. Indian exporters can avail both pre and post shipment finance in foreign currency. Interest rates under the scheme are linked to LIBOR and the rates charged by Indian Banks over LIBOR for such credits would not exceed 1.5%. Export credit in foreign currency is available in US Dollar, Euro, Pound Sterling and Japanese Yen. Export credit is available without exchange risk and at internationally competitive rates. Banks extend credit on "need basis" of exporters and collateral security is not insisted. Banks also provide lines of credit for longer periods say three years, to exporters with satisfactory track records without insisting on the submission of export order/Letter of Credit.

Packing Credit Foreign Currency (PCFC) Interest charged at LIBOR + 1.5% (Max.) A 90 days Dollar Packing Credit can be availed at 3m LIBOR + 1.5%. 6.10% + 1.50% = 7.60%. PCFC drawls in cross currencies are allowed, subject to the exporter bearing the risk incurrence fluctuations. However, cross currency drawls are restricted to the US Dollar. For instance, for an

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export order in a non-designated currency like the Swiss Franc, PCFC will be given only in USD. The FCPC is available to exporting companies as well as commercial banks for lending to the former. It is an additional window to rupee packing credit scheme & available to cover both the domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance. To avail him of pre-shipment credit in rupees & then the post shipment credit either in rupees or in foreign currency denominated credit or discounting /rediscounting of export bills. To avail of pre-shipment credit in foreign currency & discounting/rediscounting of the export bills in foreign currency. FCPC will also be available both to the supplier EOU/EPZ unit and the receiver EOU/EPZ unit. Pre-shipment credit in foreign currency shall also be available on exports to ACU (Asian Clearing Union) countries with effect from 1.1.1996.

Eligibility: PCFC is extended only on the basis of confirmed /firms export orders or confirmed L/Cs. The Running account facility will not be available under the scheme. However, the facility of the liquidation of packing credit under the first in first out method will be allowed. Order or L/C : Banks should not insist on submission of export order or L/C for every disbursement of pre-shipment credit , from exporters with consistently good track record. Instead, a system of periodical submission of a statement of L/Cs or export orders in hand, should be introduced.

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Sharing of FCPC: Banks may extend FCPC to the manufacturer also on the basis of the disclaimer from the export order.

3.2 POST-SHIPMENT FINANCE

MEANING: Post shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. Whereas the finance provided after shipment of goods is called post-shipment finance. DEFENITION:

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Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit.

Basic Features
The features of post-shipment finance are:

Purpose of Finance
Post-shipment finance is 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, it is extended to finance receivable against supplies made to designated agencies.

Basis of Finance
Post-shipment finances is provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency.

Types of Finance
Post-shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self-liquidating. In that case it involves advance against undrawn balance, and is usually unsecured in nature. Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature.

Quantum of Finance
As a quantum of finance, post-shipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of pre-shipment stage. Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm.

Period of Finance
Post-shipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive

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rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.

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. 1. Export Bills Purchased/ Discounted.(DP & DA Bills) Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility.

2. Export Bills Negotiated (Bill under L/C) The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn 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:

The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit. The bank also faces the documentary risk where the issuing bank refuses to honour its commitment. So, it is important for the negotiating bank, and the lending bank to properly check all the necessary documents before submission.

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. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the

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strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill. The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance.

4. Advance against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, 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 even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months.

5. Advance against 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, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within 6 months from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment.

6. Advance against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the in-house cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets. In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank.

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After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities. IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE: To pay to agents/distributors and others for their services.

To pay for publicity and advertising in the overseas markets.

To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service.

To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad.

To pay for representatives abroad in connection with their stay board. FORMS/METHODS OF POST SHIPMENT FINANCE
1.

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

2.

Purchase of export bills drawn under confirmed contracts: The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter.

3.

Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills.

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

5.

Advance against goods sent on Consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis.

6.

Advance against Undrawn Balance of Bills: There are cases where bills are not drawn to the full invoice value of gods. Certain amount is undrawn balance which is due for payment after adjustments due to difference in rates, weight, quality etc. banks offer advance against such undrawn balances subject to a maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank.

7.

Advance against Deemed Exports: Specified sales or supplies in India are considered as exports and termed as deemed exports. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is offered for a maximum of 30 days.

8.

Advance against Retention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/ services towards guarantee of performance or completion of project. Banks advance against retention money, which is payable within one year from date of shipment.

9.

Advance against Deferred payments: In case of capital goods exports, the exporter receives the amount from the importer in installments spread over a period of time. The commercial bank together with EXIM bank do offer advances at concessional rate of interest for 180 days.

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

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Meaning: Consumer goods are normally sold on short term credit, normally for a period upto 180 days. However, there are cases, especially, in the case of export of capital goods and technological services; the credit period may extend beyond 180 days. Such exports were longer credit terms (beyond 180 days) is allowed by the exporter is called as deferred credit or deferred payment terms. How the payment is received? The payment of goods sold on deferred payment terms is received partly by way of advance or down payment, and the balance being payable in installments spread over a period of time.

Period of financial credit support: Financial institutions extend credit for goods sold on deferred payment terms (subject to approval from RBI, if required). The credit extended for financing such deferred payment exports is known as Medium Term and Long Term Credit. The medium credit facilities are provided by the commercial banks together with EXIM Bank for a period up to 5 years. The long term credit is offered normally between 5 yrs. to 12 yrs., and it is provided by EXIM Bank. Amount of credit support: Any loan up to Rs.10crore for financing export of capital goods on deferred payment terms is sanctioned by the commercial bank which can refinance itself from Exim bank. In case of contracts above Rs.10 Lakhs but not more than Rs50crore, the EXIM Bank has the authority to decide whether export finance could be provided. Contracts above Rs.50crore need the clearance from the working group on Export Finance. 1. REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) SCHEME: The exporter has the option of availing of export credit at the post-shipment stage either in rupee or in foreign currency under the rediscounting of export bills abroad LIBOR linked interest rates. (EBRD) scheme at

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This facility will be an additional window available to exporter along with the exiting rupee financing schemes to an exporter at post shipment stage. This facility will be available in all convertible currencies. This scheme will cover export bills upto 180 days from the date of shipment (inclusive of normal transit period and grace period) . The scheme envisages ADs rediscounting the export bills in overseas markets by making arrangements acceptance with an overseas agency/ bank facility or any other similar by way of a line of credit or bankers facility at rates linked to London Inter-Bank the rediscounting facility

Offered Rate (LIBOR) for six months. Prior permission of RBI will not be required for arranging abroad so long as the spread for rediscounting facility abroad does not exceed one percent over the six months LIBOR in the case of rediscounting with recourse basis & 1.5% in the case of without recourse facility. Spread, should In all other cases, the RBIs permission will be needed. be exclusive of any withholding tax.

CHAPTER 4 -LETTER OF CREDIT

INTRODUCTION: A letter of credit, often abbreviated as an LOC or LC, and also referred to as a documentary credit, is a document issued by a financial institution or any bank which essentially acts as an irrevocable guarantee of payment to a beneficiary. This means, that once the beneficiary has presented to the issuing or negotiating bank documents complying with the LC terms, the bank is obliged to pay irrespective of any instructions of the applicant to the contrary. In other words, the obligation to pay is shifted from the applicant to the LC issuing bank. The LC can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. Letters of credit are used nowadays almost exclusively in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. The parties to a letter of credit are usually a beneficiary who is to receive the money (seller), the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Since nowadays almost all letters of credit are irrevocable, (i.e. cannot be amended or

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cancelled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any), the applicant is not a party to the letter of credit.

DEFINITION: A Letter of Credit can be defined as an undertaking by importers bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C.

Flow in letter of credit transaction:

The procedure as to how the letter of credit is processed can be explained elaborately as below:

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1. A commercial negotiation or purchase order is binding the importer and the exporter.
2. Upon such a request from the exporter, the importer may request the opening of documentary

credit to its issuing bank in favor of the exporter, hence becoming the beneficiary of the credit. 3. The issuing bank advises the documentary credit to the bank of the exporter. 4. The bank of the exporter subsequently notifies (and it is called advising bank) or confirms (and it becomes the confirming bank) the letter of credit. 5. The next step is up to exporter who will have to ship the goods ordered. The documents of transport required for the completion of the transaction will be remitted to the exporter typically by the shipping company.

6. The exporter presents the whole set of documents required in the terms of the Letter of Credit to its bank. This bank will perform some document checking to ensure their compliance with the terms of the documentary credit. In case the bank had originally confirmed the credit or if a discount is granted to the exporter, the payment will be done to the exporter. 7. The bank of the exporter is sending the documents to the issuing bank that performs the payment or acceptance after a thorough checking of the documents. 8. The issuing bank transfers the documents to the importer and proceeds with the debit of its account for the principal amount. 9. The importer receives the goods, especially thanks to the document of title (bill of lading).

Price of LC
The issuer pays the LC fee to the bank, and may in turn charge this on to the beneficiary. From the bank's point of view, the LC they have issued can be called upon at any time(subject to the relevant terms and conditions), and the bank then looks to reclaim this from the issuer. There is the chance that the issuer goes insolvent, for example, and thus the bank is unable to claim back the money it has already paid out. This credit risk to the issuer thus makes up a large portion of the cost of issuing LCs.

Forms of LC
The various types of letters of credit which are commonly used in the commercial market are:

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Revocable Credit This can be amended or cancelled at any time by the importer without the consent of the exporter. This option is not often used, as there is little protection for the exporter. By default all credits are irrevocable, unless otherwise stated.

Irrevocable Credit Once issued this can only be changed or cancelled with the consent of all the parties. The seller must merely comply with the terms and conditions of the credit in order to receive payment.

Confirmed Credit In some instances, exporters may request a credit to be confirmed by another bank, (usually a bank in their own country). If a bank adds its confirmation to acredit, it means that it is obliged to pay if the terms and conditions of the credit are complied with. This obligation to pay exists even if the issuing bank or country defaults.

Payment Credit This is available for payment at the tellers of the paying bank, as nominated in thecredit. The seller can, therefore, present documents to the paying bank and doesnot have to wait for the documents to be forwarded to the issuing bank forchecking and subsequent payment.

Negotiation Credit This is always payable at the counters of the issuing bank. Buyers can use negotiation credits to delay payment until the documents have been received and checked by the issuing bank. Deferred Payment Credit Similar to payment credits, except that they are payable at a future date. Acceptance Credit The accepting bank guarantees payment to the holder of the bill of exchange on maturity date regardless of whether the credit is confirmed or not. This option comes with an acceptance fee which can be substantial.

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Back-to-Back Credit The original letter of credit is used as security to open another credit in favor of the exporter's own supplier. The bank confirming the original credit may not necessarily be the issuing bank of the second credit. Transferable Credit This is normally used when the exporter is not supplying the goods and wishes to transfer all or part of the responsibilities under the credit to the supplier(s).

Red Clause Credit This enables the exporter to obtain advance payment before shipment. This is provided against the exporter's certificate confirming its undertaking to ship the goods and to present the documents in compliance with the terms and conditions of the documentary credit. Green Clause Credit Similar to a Red Clause Credit, but in addition to pre-shipment finance the exporter also receives storage facilities at the port of shipment at the expense of the buyer. Packing Credit This offers pre-shipment finance to the seller against warehouse receipts, forwarding agent's receipts or similar documents that prove the goods are no longer in the seller's possession. Standby Credit Similar to a normal letter of credit, this method differs in that it is a default instrument, whereas a normal credit is a payment instrument. A standby credit isonly called upon in the event of failure to perform. Its function is, therefore, that of a guarantee. Revolving Credit This allows for the credit to be automatically reinstated under certain circumstances. It is normally used where shipments of the same goods are made to the same importer.

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Parties to Letter of Credit:There may be three to four parties to a Letter of Credit.

1. Applicant / Importer:

Importer is the opener* on whose behalf or account Letter of Credit issued by the bank. 2. Applicant Bank : The bank that issues or opens the Letter of Credit on behalf of the customer / importer is Applicant Bank. 3. Exporter: Exporter is the Beneficiary of the Letter of Credit who is entitled to receive the payment of his bills according to the terms of Letter of Credit. 4. Intermediary bank / Confirming bank : Intermediary bank is the bank usually a branch or the corresponding of the opening bank in the exporting country through which the credit without any obligation on its parts, it is called the Advising or Notifying bank. If the beneficiary bank adds its own undertaking to the credit while advising it to the beneficiary, it becomes the confirming bank. 5. Paying / Negotiating bank: The bank which negotiates the beneficiarys bills under the credit and pays for it is known as Paying Negotiating bank.

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In the international market, the company is executing more & more projects. Projects worth USD 150 Million are under execution apart from the bids submitted and jobs under view in the international market. The turnkey international jobs are having three components which are supply of towers, supply of bought-outs and local construction work. The bought-outs are supplied internationally qualified supplier only and these suppliers dont agree to supply without L/C, which has resulted into higher requirements of L/Cs. In the current year company is expected to buy bought out of approx. Rs.150crores for which the L/Cs will be opened on DA 90/180 days basis. The availability of raw materials like steel, aluminums and line materials in time has become very difficult and since there is gap between supply and demand so even certain domestic suppliers insists for letter of credit or cash payment terms against delivery of goods. Of course, in oversea market, the suppliers are ready to extend credit upto 360days under L/C or company can arrange cheaper finance up to 360 days on its financial strength from overseas branches of Indian banks.

Advantages of the L/C:

Provides a sort of an assurance to the exporter. The exporter does not have to bother about the exchange control regulations of the importers country, since the banks of the importers country, since the banks of the importers country open them and these institutions are in the know of the exchange control regulations of that country.

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Eases the financial position of the exporter since he can get pre-shipment as well as postshipment credit. If importer takes care of certain safeguards, the quantity and the quality of the goods are assured.

Discrepancies:
Discrepancies are the mistakes committed either by negotiation or from common errors. But due to this negotiation importer has to suffer a lot, and also at a same time exporter has to pay fine for that so one should take precautions for that. Some common Discrepancies are as under: Credit expired. Classed Bill of Lading. Presented after permitted time from the date of issue of shipping documents Credit amount exceeds. Short shipment. Description of goods on invoice differs from that of credit. Goods shipped on decks. Bill of Lading, Insurance documents, bill of exchange not endorsed correctly. Absence of signature, where required on the paper. Bill of exchange drawn on wrong party.

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CHAPTER 5 -External commercial borrowing (ECB)

External Commercial borrowing (ECB) refers to commercial loans availed by companies from non-resident lenders in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds). A company is allowed to raise ECB from internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. However, offers from unrecognized sources are not entertained. External Commercial Borrowings (ECBs) include bank loans, suppliers and buyers credits, fixed and floating rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial Institutions such as International Finance Corporation. In India, External Commercial Borrowings are being permitted by the Government for providing an additional source of funds to Indian corporate and PSUs for financing expansion of existing capacity and as well as for fresh investment, to augment the resources available domestically. ECBs can be used for any purpose (rupee-related expenditure as well as imports) except for investment in stock market and speculation in real estate.

What it includes
Commercial bank loans, buyers credit, suppliers credit, securitized instruments such as floating rate notes, fixed rate bonds etc., credit from official export credit agencies, commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB, AFIC, CDC etc. and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds. The government has been streamlining and liberalizing the ECB procedures in order to enable the Indian corporate to have greater access in the financial markets. The RBI has been

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empowered to regulate the ECBs. ECB provide additional sources of funds for the corporate and allows them to supplement the domestic available resources and take advantage of the lower interest rates prevailing in the international financial markets.

Purpose
ECBs are being permitted by the government as an additional source of financing for expanding the existing capacity as well as for fresh investments. The policy of the government also seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc. Another priority being addressed is the need of capital for Small and Medium scale enterprises.

Modes of raising ECBs

ECB constitutes the foreign currency loans raised by residents from recognized lender. The ambit of ECB is wide. It recognizes simple form of credit as suppliers credit as well as sophisticated financial products as securitization instruments. Basically ECB suggests any kind of funding other than Equity (considered foreign direct investment) be it Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature, satisfying the norms of the ECB regulations. The different borrowings and loans that come under the ECB roof are: 1. Commercial Bank Loans: These loans constitute the term loans taken by companies from banks outside India 2. Buyers Credit: Buyers credit is the credit availed by the importers of goods/services from overseas lenders such as Banks and Financial Institutions for payment of their Imports on the due date. This lending is usually based on the letter of Credit (a Bank Guarantee) issued by the importers bank, i.e., the importers bank acts as a broker between the Importer and the Overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee. 3. Suppliers Credit
4. Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate Bonds (FRBs) ,

Syndicated Loans etc. 5. Credit from official export credit agencies

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6. Commercial borrowings from the private sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC,
7. Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit

rating from internationally recognized credit rating agency 8. Lines of Credit from foreign banks and financial institutions

9. Financial Leases 10. Import Loans 11. Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds 12. External assistance, NRI deposits, short-term credit and Rupee debt 13. Foreign Currency Convertible Bonds 14. Non-convertible or optionally convertible or partially convertible debentures

What is not included under ECBs?

1. Investment made towards core capital of an organization viz. 2. Investment in equity shares 3. Convertible preference shares 4. Convertible debentures 5. Instruments which are fully and mandatorily convertible into equity within a specified time are to be reckoned as part of equity under the FDI Policy 6. Equity capital 7. Retained earnings of FDI companies 8. Other direct capital (inter-corporate debt transactions between related entities)

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Advantages of ECBs
1. Benefits to the borrower

Foreign currency funds: Companies need funds in foreign currencies for many purposes such as, paying to suppliers in other countries etc that may not be available in India. Cheaper Funds: The cost of funds borrowed from external sources at times works out to be cheaper as compared to the cost of Rupee funds. Diversification of investors base: Another advantage is the addition of more investors thus diversifying the investor base Satisfying Large requirements: The international market is a better option in case of large requirements, as the availability of the funds is huge when compared to domestic market. Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders, international capital markets etc.

1. Benefits to the economy

As can be seen from the policies formed to regulate the ECB, these borrowings have some apparent benefits for the economy. The government through these policies is trying to nourish 2 sectors: Infrastructure SME The policies do not require any approval for investment under a limit in these 2 sectors. Thus it is easy to acquire foreign loans for such enterprises. Apart from that, the low cost of funds in the global market provides the small and medium enterprises funds at low costs thus bringing in more money in these sectors.

1. Benefits to the investor

ECB is for specific period, which can be as short as three years Fixed Return, usually the rates of interest are fixed The interest and the borrowed amount are repatriable

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No owners risk as in case of Equity Investment

CHAPTER 6 -SOME IMPORTANT CONCEPTS IN EXPORT FINANCE 6.1 FORFEITING

Forfeiting is a mechanism of financing exports.
By discounting export receivables Evidenced by bills of exchange or promissory notes Without recourse to the seller (viz. exporter) Carrying medium to long term maturities On a fixed rate basis (discount) Up to 100 percent of the contract value.

Introduction
Forfeiting and factoring are services in international market given to an exporter or seller. Its main objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is short termed receivables (within 90 days) and is more related to receivables against commodity sales.

Definition of Forfeiting
The terms forfeiting is originated from a old French word forfeit, which means to surrender ones right on something to someone else. In international trade, forfeiting may be defined as the purchasing of an exporters receivables at a discount price by paying cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment from the importer.

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How forfeiting Works in International Trade

The exporter and importer negotiate according to the proposed export sales contract. Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate. The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. Export takes place against documents guaranteed by the importers bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date.

Documentary Requirements
In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected in the following documents associated with an export transaction in the manner suggested below:

Invoice: Forfeiting discount, commitment fees, etc. needs not be shown separately instead, these could be built into the FOB price, stated on the invoice. Shipping bill and GR form: Details of the forfeiting costs are to be included along with the other details, such FOB price, commission insurance, normally included in the "Analysis of Export Value "on the shipping bill. The claim for duty drawback, if any is to be certified only with reference to the FOB value of the exports stated on the shipping bill.

Forfeiting
The forfeiting typically involves the following cost elements: 1. Commitment fee, payable by the exporter to the forfeiter for latters commitment to execute a specific forfeiting transaction at a firm discount rate within a specified time. 2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfeiter from the amount paid to the exporter against the availed promissory notes or bills of exchange.

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Benefits to Exporter

100 per cent financing: Without recourse and not occupying exporter's credit line That is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt.

Improved cash flow: Receivables become current cash inflow and it is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability.

Reduced administration cost: By using forfeiting, the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly. Advance tax refund: Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing. Risk reduction: forfeiting business enables the exporter 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 export is able to grant credit to his buyers freely, and thus, be more competitive in the market.

Benefits to Banks Forfeiting provides the banks following benefits: Banks can offer a novel product range to clients, which enable the client to gain 100% finance, as against 8085% in case of other discounting products. Bank gain fee based income. Lower credit administration and credit follow up.

CONCEPT OF FORFEITING

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1. What exports are eligible for forfeiting? All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfeiting. 2. How does forfeiting work? Receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes, can be forfeited. Bills of exchange or promissory notes, backed by co-acceptance from a bank (which would generally be the buyer's bank), are endorsed by the exporter, without recourse, in favor of the forfeiting agency in exchange for discounted cash proceeds. The coaccepting bank must be acceptable to the forfeiting agency. 3. Is there a prescribed format for the bills of exchange or promissory notes? Yes. The bills of exchange or promissory notes should be in the prescribed format. 4. What role will Exim Bank play in forfeiting transactions? The role of Exim Bank will be that of a facilitator between the Indian exporter and the overseas forfeiting agency. 5. How will Exim Bank facilitate a forfeiting transaction? On a request from an exporter, for an export transaction which is eligible to be forfaited, Exim Bank will obtain indicative and firm forfeiting quotes - discount rate, commitment and other fees - from overseas agencies. Exim Bank will receive availed bills of exchange or promissory notes, as the case may be, and send them to the forfeiter for discounting and will arrange for the discounted proceeds to be remitted to the Indian exporter. 6. What does forfeiting cost include? A forfeiting transaction has typically three cost elements: Commitment fee Discount fee Documentation fee

1. What benefits accrue to an exporter from forfeiting?

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Converts a deferred payment export into a cash transaction, improving liquidity and cash flow Frees the exporter from cross-border political or commercial risks associated with export receivables Finance up to 100 percent of the export value is possible as compared to 80-85 percent financing available from conventional export credit program As forfeiting offers without recourse finance to an exporter, it does not impact the exporter's borrowing limits. Thus, forfeiting represents an additional source of funding, contributing to improved liquidity and cash flow Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit Exporter is freed from credit administration and collection problems Forfaiting is transaction specific. Consequently, a long term banking relationship with the forfeiter is not necessary to arrange a forfeiting transaction Exporter saves on insurance costs as forfeiting obviates the need for export credit insurance

6.2 Factoring
Factoring may be defined as A contract by which the factor is to provide at least two of the services, (finance, the maintenance of accounts, the collection of receivables and protection

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against credit risks) and the supplier is to assigned to the factor on a continuing basis by way of sale or security, receivables arising from the sale of goods or supply of services. Factoring offers smaller companies the instant cash advantage that was once available only to large companies with high sales volumes. With Factoring, theres no need for credit or collection departments, and no need to spend your profits on maintaining accounts receivables. In simple word Factoring turns your receivable into cash today, instead of waiting to be paid at a future date.

International export Factoring Scheme:

RBI has approved the above scheme evolved by SBI Factors and Commercial Services Pvt. Ltd Mumbai for providing International Export Factoring Services on with recourse basis. The salient features of the scheme are as follows:

An exporter should submit to SBI Factors & Commercial Services Pvt. Ltd i.e. the Export Factor(EF) a list of Buyers(customers) indicating their names & street addresses and his credit line needs .

The Import Factor (IF) located in the importers country selected by EF, will rate the buyers list and the results will be reported to the exporter through EF. The exporter will apply for a credit limit in respect of overseas importer. IF will grant credit line based on the assessment of credit-worthiness of the overseas importer.

The exporter will thereafter enter into an export factoring agreement with EF. All export receivable will be assigned to the EF, who in turn will assign them to IF. The exporter will ship merchandise to approved foreign buyers. Each invoice is made payable to a specific factor in the buyers (importer) country. Copies of invoices & shipping documents should be sent to IF through EF. EF will make prepayment to the exporter against approved export receivables.

EF will report the transaction in relevant ENC statement detailing full particulars, such as Exporters Code Number, GR Form Number, Custom Number, Currency, Invoice value etc.

On receipt of payments from buyers on the due date of invoice, IF will remit funds to EF who will convert foreign currency remittances into rupees and will transfer proceeds to the exporter after deducting the amount of prepayments, if made. Simultaneously, EF will report the transaction in the relative R returns enclosing duplicate copy of the respective GR form duly certified. The payment received will be the net payment after deduction of a service fee, which ranges from 0.5 % to 2% of the value of the invoices.

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If an approved buyer (importer) is unable to pay the proceeds of exports, IF will pay the receivables to EF, 100 days after the due date. The transactions of this nature will be reported by EF in the half yearly statements which are to be submitted to RBI, indicating therein the reasons for delay /non payment

Advantage/ use of factoring

The advantages of export factoring are not really connected to financing element, but to the complete package of a factors services. In view of the availability of concessional export finance by banks, financing by factors will only be attractive if offered at concessive rates. For this, factors will require financing from banks at concessional rates on which subsidy will have to be provided to the banks. Besides the Export Credit (Interest Subsidy) scheme, 1968 will have to be modified suitably. This issue needs examination by the RBI in detail. If pre-shipment credit is granted by banks and post-shipment credit by factors, it will have to be ensured that the proceeds of the post shipment credit granted by the factors liquidate the preshipment credit granted by banks. Introduction of export factoring in India would certainly provide an additional window of facility to the exporters. Further, the position of realization of export proceeds of shipments made by the Indian exporters is sufficiently encouraging for interested organizations to offer factoring services to exporters from India. In case factoring is to be introduced, the question arises whether an exporter would be absolved of his responsibility of realization of export proceeds once the factor pays to the exporter the value of the bill / invoice factored by it. In this regard, in terms of section 18 (8) of FERA, 1973, both the exporters and export factors would be liable for repatriation of export proceeds. This provision has to be modified suitably by the RBI, indicating that when factoring is done on with recourse basis only, the exporter will be liable for realization of expert proceeds. When export factoring is on without recourse basis, the responsibility will rest with the factor alone. However, in the latter case, if export proceeds are not repatriated, the RBI may not caution- list export factor and / or report the matter to the Enforcement Directorate, as is done in the case of exporters who fail to ensure repatriation of proceeds. Factors will need uniform rules to operate in the international market. It is suggested that India may ratify and accept the UNIDROIT Convention on International Factoring. Similarly, it would beneficial for export factors to join one of the international chains of factors.

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The group is in favor of extending the factoring services to exporters in India, notwithstanding the fact that they are currently being extended credit at concessional rates by banks and ECGC provides the cover for the risk involved. Among the various organization which have been dealing with exporters, banks and ECGC appear to be more eminently suitable for handling export factoring. Besides bank (s) factors, ECGC or an organization sponsored by it, may be permitted to undertake export factoring. Any such organization, however, will have to seek approval of the RBI to undertake business of export / import factoring. For ensuring that the exporters continue to receive finance and credit protection without any additional cost and, at the same time, avail of other services provided by factors, there could be suitable linkages between the concerned agencies. In one such model, ECGC would provide all services expected from an export factor except the financing service, which would be provided by bank(s), while under the other model the banks sponsored factor would provide all the series, including credit protection the finance being provided by the bank (s). An element of competition is absolutely necessary for ensuring satisfactory services to the exporters and they should have the opportunity to make their own choice and decision regarding the factor whose services they will avail of. In view of its experience the data bank it has built up and relationship with agencies/affiliations abroad, ECGC could start factoring business within a short period, while banks will take a fairly long time before they commence export factoring. This position gives ECGC an edge over banks. . Besides, being familiar with ECGC and its services, exporters too, would feel confident of approaching ECGC. It therefore need not apprehend any threat or challenging from banks, which would be later entrants. With the expected growth in international trade, exporters, particularly the smaller ones, are likely to find services of export factoring attractive. As such, steps should be taken for the introduction of export factoring services concurrently with the extension of such services for domestic credit sales.

CHAPTER 7 PAYMENT METHODS FOR IMPORT

Introduction
There is no predefined definition of personal import. In general a personal import is a direct purchase of foreign goods from overseas mail order companies, retailers, manufacturers or by an individual for the purpose of personal use.

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The most common terms of purchase are as follows: Consignment Purchase Cash-in-Advance (Pre-Payment) Down Payment Open Account Documentary Collections Letters of Credit

Consignment Purchase
Consignment purchase terms can be the most beneficial method of payment for the importer. In this method of purchase, importer makes the payment only once the goods or imported items are sold to the end user. In case of no selling, the same item is returned to the foreign supplier. Consignment purchase is considered the most risky and time taking method of payment for the exporter.

Cash-in-Advance (Pre-Payment)
Cash in Advance is a pre-payment method in which, an importer the payment for the items to be imported in advance prior to the shipment of goods. The importer must trust that the supplier will ship the product on time and that the goods will be as advertised. Cash-in-Advance method of payment creates a lot of risk factors for the importers. However, this method of payment is inexpensive as it involves direct importer-exporter contact without commercial bank involvement.

International trade, Cash in Advance methods of payment is usually done when The Importer has not been long established. The Importer's credit status is doubtful or unsatisfactory. The country or political risks are very high in the importers country. The product is in heavy demand and the seller does not have to accommodate an Importer's financing request in order to sell the merchandise.

Down Payment
In the method of down payment, an importer pays a fraction of the total amount of the items to be imported in advance. The down payment methods have both advantages and disadvantages.

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The advantage is that it induces the exporter or seller to begin performance without the importer or buyer paying the full agreed price in advance and the disadvantage is that there is a possibility the Seller or exporter may never deliver the goods even though it has the Buyer's down payment.

Open Account
In case of an open account, an importer takes the delivery of good and ensures the supplier to make the payment at some specific date in the future. Importer is also not required to issue any negotiable instrument evidencing his legal commitment to pay at the appointed time. This type of payment methods are mostly seen where when the importer/buyer has a strong credit history and is well-known to the seller. Open Account method of payment offers no protection in case of non-payment to the seller. There are many merits and demerits of open account terms. Under an open account payment method, title to the goods usually passes from the seller to the buyer prior to payment and subjects the seller to risk of default by the Buyer. Furthermore, there may be a time delay in payment, depending on how quickly documents are exchanged between Seller and Buyer. While this payment term involves the fewest restrictions and the lowest cost for the Buyer, it also presents the Seller with the highest degree of payment risk and is employed only between a Buyer and a Seller who have a long-term relationship involving a great level of mutual trust.

Documentary Collections
Documentary Collection is an important bank payment method under, which the sale transaction is settled by the bank through an exchange of documents. In this process the seller's instructs his bank to forwards documents related to the export of goods to the buyer's bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer. The buyer may obtain possession of goods and clear them through customs, if the buyer has the shipping documents such as original bill of lading, certificate of origin, etc. However, the documents are only given to the buyer after payment has been made ("Documents against Payment") or payment undertaking has been given - the buyer has accepted a bill of exchange issued by the seller and payable at a certain date in the future (maturity date) ("Documents

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against Acceptance"). Documentary Collections make easy import-export operations within low cost. But it does not provide same level of protection as the letter of credit as it does not involve any kind of bank guarantee like letter of credit.

Letter of Credit
A letter of credit is the most well-known method of payment in international trade. Under an import letter of credit, importers bank guarantees to the supplier that the bank will pay mentioned amount in the agreement, once supplier or exporter meet the terms and conditions of the letter of credit. In this method of payment, plays an intermediary role to help complete the trade transaction. The bank deals only in documents and does not inspect the goods themselves. Letters of Credit are issued subject to the Uniforms Customs & Practice for Documentary Credits (UCPDC) (UCP). This set of rules is produced by the International Chamber of Commerce and Industries (CII). Documents Against Acceptance: Instructions given by an exporter to a bank that the documents attached to the draft for collection are deliverable to the drawee only against his or her acceptance of the draft.

INTERVIEW BY MRS. KHAMKAR USHA LAXMAN MANAGER, FOREX OPERATIONS. 1. What are the industries preferred for financing exports and imports?

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There is no specified area preferred for exports. Since exports are major source of forex earning for the country, exports are encouraged irrespective of the areas. The decision for restriction/ban of particular commodity is vested with the ministry of commerce based on a number of factors such as domestic consumption etc. Imports were a restricted area in the initial years of our development. Imports were regulated through a licensing scheme. With the onset of liberalization, imports have been the first area to be deregulated. Major import components have now been bought under the purview of Open General License and import of capital goods is being encouraged to promote economic development. As in the case of exports, the decision for restriction/ban of particular commodity for imports is vested with the Ministry of Commerce based on number of factors such as protection to domestic industries etc. 2. What is the rate of interest charged? Exports are financed under concessional rate of interest in line with the guidelines issued by Reserve Bank of India. There is no element of interest in imports unless backed by buyers credit, foreign currency loan etc. Interest in such case depends on credit policy of the respective banks. And for BOB the rate of interest is 10.75% as base rate and it varies accordingly with the customers needs.

3. How is the variation on rate of interest decided? On what basis? Additional concessions are granted depending on the track record of the customers, financial Capabilities etc.
4. How the credit worthiness of the customer is decided?

Credit worthiness of the customers is determined on the basis of the detailed financial analysis of their financial statements, personal means of the partners/directors, capability of the companies to meet contingencies etc. 5. What are the problems and setback faced by commercial banks in financing export and import?

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Basically, banks do not encounter major problems in financing export and import trade since the Government policies ordinarily gives thrust to the trade. However, banks at times face problems in analyzing country risk, compliance to trade regulations of the overseas countries, trade barriers, local laws, etc. 6. What are the future prospects in this area? Export trade has registered tremendous growth since independence. Government policies continue to promote exports narrowing the trade deficit. With the onset of liberalization and fiscal reforms, exports have become more competitive and the share of manufacturing sector has been steadily increasing. The prospects are excellent for Indian exporters both in short term and long term prospective. Imports to a large extent have been deregulated. Liberalization of import of capital goods has greatly contributed to the capital formation and the ensuring economic development. With the recent thrust on infrastructure particularly relating to road, ports and power, the prospect of imports is even brighter.

7. How many correspondents or countries does BOB operate?

The overseas presence of the Bank is further supported by a large number of correspondent Banks (more than 500) which gives Bank of Baroda access to every corner of the Globe. Bank of Baroda, being Indias International bank is very active in Export promotion. With the operating network of our own branches/offices in 25 countries and worldwide correspondent relationships, our clients enjoy comforts in transacting international business. Bank of Baroda offers an excellent service with competitive charges to other Banks for providing the Correspondent Banking Services. 8. What are the services provided in correspondent banking? Through correspondent banking arrangements, efforts are initiated to increase the customer-base. The services provided are mainly:

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Collection of bills both Documentary and Clean. Advising / confirming of L/Cs opened by Indian Banks. Discounting of Bills drawn under L/Cs as well as outside L/Cs. Maintenance of foreign currency accounts (Nostro in US$, Euro, GBP at New York, Brussels and London respectively) for settlement of transactions (Link). Making foreign currency payments/ remittance on behalf of customers of Indian Banks.

1. Are there any benefit given for already existing exporters and importers? Benefits are provided to existing clients with a view to encourage their volume of operations and profitability. Gold cards are issued to major exporters having a good investment rating. Gold cards provides additional benefits such as concession in interest rate, built-in-ad-hoc limits for 3 years at a stretch etc. similarly, for importers additional limits are provided for need based requirements, concession on fee based charges, minimizing operational risks through soliciting credit reports from abroad through Dun & Bradstreet etc.

Recommendation & conclusion

Export finance is short term working capital finance allowed to an exporter. Finance and credit are available not only to help export production but also to sell to overseas customer on credit. Exports are major source of forex earning for the country, exports are encouraged irrespective of the areas. Exports are financed under concessional rate of interest in line with the guidelines issued by Reserve Bank of India. There is no element of interest in imports unless backed by buyers credit, foreign currency loan etc. Interest in such case depends on credit policy of the respective banks. Imports to a large extent have been deregulated. Liberalization of import of capital goods has greatly contributed to the capital formation and the ensuring economic development. With the onset of liberalization and fiscal reforms, exports have become more competitive and the share of manufacturing sector has been steadily increasing.

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Banks face problems in analyzing country risk, compliance to trade regulations of the overseas countries, trade barriers, local laws, etc. Success or failure of any export order mainly depends upon the finance available to execute the order. Availability of favorable export finance schemes directly impacts the local trade, encourages exporters, enlarges market abroad, improves quality of domestic goods and overall helps the nation boost its foreign exchange earnings.

Bibliography
http://www.eximguru.com. http://www.ncti-india.com. http://www.caclubindia.com. http://www.tradeport.org. www.rbi.org.in. www.exportfinance.gov. International trade & pre-export finance. International Macro Economics and Finance. Export/import procedures and documentation. Building an import/export business. http://www.swedbank.com.