Export Finance

Role of ECGC Primary goal is to support and strengthen the export promotion drive - provides a range of credit risk insurance covers to exporters against loss in export of goods and services as also by offering guarantee covers to banks and FIs

Export Finance
Refinance Different types of Export Deferred Payment Export, Project Exports, Deemed Exports. Different types of exporters Trade Controls Exchange Control

Export Finance
Pre-shipment Finance packing credit,advance against duty drawback / incentives, cheque purchase Features of P/C Who can avail P/C ? Basic eligibility criteria Export Order country of import, last date of shipment

Export Finance
Maximum period of finance Maximum amount of finance Type of account Repayment PCFC

Export Finance
Post-Shipment credit After shipment and submission of documents to bank Against evidence of shipment of goods From date of shipment till date of realisation By way of purchase/discounting/negotiation of export bills - self liquidating in nature

Export Finance
Post Shipment quantum Different types of Post-shipment finance (1) Export Bills negotiated/purchased/discounted (2) Export Bills sent on collection (3) Export on consignment basis

Export Finance Post Shipment

Buyers Credit a financial arrangement whereby a financial institution in the exporting country extends a loan to a foreign buyer to finance purchase of goods and services from the exporting country Suppliers Credit a financing arrangement where exporter extends credit to the buyer in the importing country to finance the buyers purchase

Forfaiting

 Forfaiting is used for international trade transactions. Forfaiting is the purchase, on a non-recourse basis, of a series of notes, usually bills of exchange or other promissory notes, which are freely negotiable and transferable, and which arise from the provision of goods or services. Forfaiting provides a flexible, creative alternative to traditional international trade financing methods, and is particularly useful for transactions with buyers in developing nations.

 The forfaiter deducts interest at an agreed rate for the full credit period covered by notes. The debt instruments are drawn by the exporter (seller) and accepted by the importer (buyer), and will bear an aval, or unconditional guarantee.

The guarantee will normally be issued by the importers bank.

FORFAITING OPERATING PROCEDURE

7 3
EXPORTERS BANK / NEGOTIATING BANK

LC ISSUED
NOTICE OF ASSIGNMENT

IMPORTERS BANK/ LC ISSUING BANK

1
APPLICATION FOR LC

EXPORT DOCS/ ASSIGNMENT OF PROCEEDS

6
ASSIGNMENT OF PROCEEDS

REPAYMENT AT MATURITY

EXPORTER
INLAND MOVEMENT OF GOODS

5
CONFIRMATION OF ASSIGNMENT

TRANSFER OF FUNDS

4
NOTICE OF ASSIGNMENT

FORFAITING BANK

IMPORTER

2
INLAND MOVEMENT OF GOODS

EXPORT COUNTRY CUSTOMS / REGULATORY CLEARANCE

IMPORT COUNTRY CUSTOMS/ REGULATORY CLEARANCE

What documents are required by the Forfaiter from the exporter?

Usually required are: a) Copy of supply contract, or of its payment terms b) Copy of signed commercial invoice c) Copy of shipping documents including certificates of receipt, railway bill, airway will, bill of lading or equivalent documents d) Letter of assignment and notification to the guarantor e) Letter of guarantee, or aval The aval is the Forfaiters' preferred form of security of payment of a bill or note. For an aval to be acceptable, the avalizing bank must be internationally recognized and credit worthy.

What are the commonly used debt instruments?

Letter of credit Promissory notes, Bills of exchange (or drafts)

Forfaiting as a Risk Mitigation and Sales Tool

Since there is a direct relationship between sales & financing many companies use Forfaiting as a means to grant credit terms to their foreign buyers. In a forfaiting transaction , the exporter sells his trade receivable, usually evidenced by a negotiable instrument, such as a Bill of Exchange, or a Promissory Note, to a financier, for cash, and without recourse. Forfaiting technique starts at the beginning of the selling cycle, before a sale is concluded, and at the beginning of the negotiation process. It is critical that the forfaiter be involved in the preliminary process, before any pricing discussions are held between the exporter and buyer.

What information does a Forfaiter need?

The Forfaiter needs to know :
who the buyer is and his nationality; what goods are being sold; detail of the value and currency of the contract; the date and duration of the contract, the credit period and number and timing of payments (including any interest rate already agreed with the buyer). what evidence of debt will be used (either promissory notes, bills of exchange, letters of credit), and the identity of the guarantor of payment (or avalor).

Forfaiting eliminates:

COUNTRY / POLITICAL RISK CURRENCY / TRANSFER RISK FINANCIAL / COMMERCIAL RISK

 Export-Import Bank of India (Exim Bank) and AD Banks have been permitted to undertake forfaiting, for financing of export receivables. Remittance of commitment fee / service charges, etc., payable by the exporter as approved by the Exim Bank/ AD Banks concerned may be done through an AD Bank. Such remittances may be made in advance in one lump sum or at monthly intervals as approved by the authority concerned.

How does Forfaiting work in practice?

In a typical Forfait transaction, the sequence is as follows: 1) The exporter approaches a Forfaiter who confirms that he is willing to quote on a prospective deal, covering the export in x months' time bearing the aval of XYZ Bank. 2) If the transaction is worth $1M, the Forfaiter will calculate the amount of the bills/notes, so that after discounting the exporter will receive $1M, and will quote a discount rate of 'n' per cent. 3) The Forfaiter will also charge for 'x' days grace and a fee for committing himself to the deal, worth 'y per cent per annum computed only on the actual number of days between commitment and discounting. 4) The Forfaiter will stipulate an expiry date for his commitment (that is, when the paper should be in his hands). This period will allow the exporter to ship his goods and get his bills/notes avalized and to present them for discounting.

5)

The exporter gets immediate cash on presentation of relevant documents, and the importer is then liable for the cost of the contract and receives credit for 'z years at 'n' per cent interest. Many exporters prefer to work with Forfait brokers who, because they deal with a large number of Forfait houses, can assure the exporter of competitive rates on a timely and cost effective basis. Brokers typically charge a nominal 1% fee to arrange the commitment. This is a onetime fee on the principal amount and frequently is added to the selling price by the exporter. The broker frequently consults with the exporter to structure the transaction to fit the Forfait market.

6)

7)

8)

Countertrade

 Countertrade is exchanging goods or services that are paid for, in whole or part, with other goods or services. Agreement by one nation to buy a product from another subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation

There are five main variants of countertrade:

Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment. Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country. Counter purchase : Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country. Buyback occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract. Offset : Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the future.

Counter-Trade Arrangement
Counter trade proposals involving adjustment of value of goods imported into India against value of goods exported from India in terms of an arrangement voluntarily entered into between the Indian party and the overseas party through an Escrow Account opened in India in U.S. dollar is considered by the Reserve Bank. (i) All imports and exports under the arrangement should be at international prices in conformity with the Foreign Trade Policy and Foreign Exchange Management Act, 1999 and the Rules and Regulations made there under. (ii) Application for permission for opening an Escrow Account may be made by the overseas exporter/organisation through his AD Banks to the concerned Regional Office of the Reserve Bank.

(iii) No interest will be payable on balances standing to the credit of the Escrow Account but the funds temporarily rendered surplus may be held in a short-term deposit up to a total period of three months in a year (i.e., in a block of 12 months) and the banks may pay interest at the applicable rate. (iv) No fund based/or non-fund based facilities would be permitted against the balances in the Escrow Account.

 In 2000, India and Iraq agreed on an "oil for wheat and rice" barter deal, subject to UN approval under Article 50 of the UN Gulf War sanctions, that would facilitate 300,000 barrels of oil delivered daily to India at a price of $6.85 a barrel while Iraq oil sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million tonnes of Iraqi crude under the oil-for-food program.