EXPORT FINANCE

Financing of foreign trade more complicated due to the separation of buyer and seller by long distances, differences in currencies, regulations and varied needs. Various agencies like EXIM Bank, commercial banks, SIDBI, ECGC are providing useful services to facilitate foreign trade.

Methods of export finance

Pre-shipment finance Post- shipment finance Credit lines Factoring Forfaiting

PRE SHIPMENT FINANCE

Also known as Packing credit It refers to the credit required by the exporter before the shipment of the goods.

Eligibility
1. Exporter should be allotted a 10 digit Importer exporter code (I E Code) by DGFT 2. Exporter should not be in the caution list of RBI. 3. Exporter should have a firm export order in hand or a L/c be opened in his favour 4. Also avalable to EOUs and EPZ without orders also. 5. If the export goods are not in the OGL(open general license) , then special license is obtained by exporter

Purpose
1. Manufacturing, processing,purchasing or packing goods meant for exports 2. Exporting consultancy services 3. Import of goods under advance license

Amount of packing credit

90% of the FOB value of goods or 75% of the CIF value. Maximum upto the domestic value of the goods

Period of credit
Generally for a max period of 180 days or the date of shipment , whichever is earlier. Further extension upto 90 days for unforeseen circumstances

Interest rates
Interest is based on PLR. Currently at 4.5% (below PLR)upto 180 days PLR+0.5% after 90 days Interest subvention scheme
Govt provides financial support upto 2% For textiles, handicrafts, carpets, leathers, gems and jewellary, marine and small and medium exporters. Deadline has been extended from 30/9/2009 upto 31/3/2010

Security
By pledge By hypothecation Against incentives receivable Against red clause L/c Against back to back L/c

Guarantee
Appropriate policy of ECGC required

PCFC
Pre shipment credit in foreign currency Finance in foreign currency at LIBOR based interest rates for max 180 days.(LIBOR + 3.5%) Advantageous when material needs to be imported Provides cover from exchange risk.

Post shipment finance

Finance granted after the shipment of goods Applicable when a credit period is granted to buyers To meet the working capital needs.

Eligibility
Available to exporters who have already shipped the goods.

Tenure and Interest rates

Generally upto 90 days or the due date of bill payable by the importer, whichever is earlier. Can be extended upto another 90 days ( total max 180 days) Interest rates :
Upto 90 days : PLR 2.5% Beyond 90 days : PLR + 0.5%

Forms of Finance
1. Purchase of export bills 2. Advance against acceptance of documents under L/c 3. Advance against bills under collection 4. Advance against export incentives 5. Advance against retention money 6. Advance against deemed exports

Guarantee
Appropriate policy of ECGC requires Repayment is to be done out of the export receipts.

Post shipment credit in Foreign currency

Exporters who have availed PCFC have to necessarily avail post shipment credit in f.c. Interest rate cannot be more than 0.75% above LIBOR Three avenues of finance
1. Use of on-shore foreign currency funds 2. Banks raising foreign currency abroad 3. Exporters using overseas lines of credit or factoringforfaiting services.

LINES OF CREDIT
Exim Bank extends Lines of Credit (LOCs) to overseas financial institutions, regional development banks, sovereign governments and other entities overseas, to enable buyers in those countries, to import goods and services from India on deferred credit terms. The Indian exporters can obtain payment of eligible value from Exim Bank, without recourse to them, against negotiation of shipping documents. LOC is a financing mechanism that provides a safe mode of non-recourse financing option to Indian exporters, especially to SMEs, and serves as an effective market entry tool.

Procedure

1.

Exim Bank signs agreement with Borrower and announces when effective.
Exporter checks procedures and Service fee with Exim Bank and negotiates contract with Importer. Importer consults borrower and signs contract with exporter. Borrower approves contract. Exim Bank approves contract and advises borrower and also exporter and commercial bank. Exporter ships goods. Commercial bank negotiates shipping documents and pays exporter. Exim Bankreimburses Commercial bank on receipt of claim by debit to borrower. Borrower repays Exim Bank on due date.

2. 3. 4. 5. 6. 7. 8. 9.

 EligibleGoods Capital goods, plant and machinery, industrial manufactures, consumer durables and any other items eligible for being exported under the 'Exim Policy' of the Government of India.

General Exporters are advised to check with Exim Bank before finalizing the contracts with the buyers, details of service fee and other charges, if any, payable by the exporters on the contracts to be covered under the relative LOC.

Factoring
factoring means an arrangement between a factor and his
client which includes at least two of the following services to be provided by the factor; i) finance, (ii) maintenance of accounts, (iii) collection of debts and (iv) protection against credit risk Factoring is the purchase of export receivables (with or without recourse) on an ongoing basis Management, collection and administration of export receivables is taken over by the factor Finance upto 90% of the export receivables Available from EXIM bank, Can factors, HSBC factors etc.

Mechanism of factoring
Buyer Buyer negotiates terms of purchasing the material with the seller Buyer receives delivery of goods with invoice and instructions by the seller to make payment to factor on due date Buyer makes payment to factor in time or gets extension of time or in the case of default is subject to legal process at the hands of the factor

Mechanism of factoring
Seller Sells goods to the buyer as per MoU/agreement Delvers copies of invoice, delivery challan, MoU, instructions to make payment to factor given to buyer Seller receives 80 percent or more payment in advance from factor on selling the receivables Seller receives balance payment from factor after deduction of factos service charges etc.

Cost of factoring
Service fee (for administrating the sales ledger as well as protection against bad debts as a percentage of invoice value or number of invoices) Discount charges (advance provided by factor and is interest which is PLR plus or minus)

Two-Factor System of Factoring :

1. 2. 3. 4.

There are usually four parties to a cross-border factoring transactions Exporter (client) Importer (customer Export Factor Import Factor Two factor system results in two separate but interlinked agreements Between exporter and export factor

 Usually export and import factors belong to a formal chain of factors with well-defined rules governing the conduct of business. Import factor provides a link between export factor and the importer and serves to solve the international barriers like language problem, legal formalities and so on. He also underwrites customer trade credit risks, collects receivables and transfers funds to the export factor in the currency of the invoice Functions of factors are divided between export factor and import factor

Types of Factoring Services

Recourse and Non-recourse Factoring Advance and Maturity Factoring Advance paid against invoice where as in maturity factoring payment is made against guarantee or collection of receivables Full Factoring Disclosed and Undisclosed Factoring Name of the factor is disclosed in the invoice by the supplier/client asking the customer to make payment to the factor

Forfaiting
It denotes the purchase of trade bills/promissory notes by a bank/financial institution without recourse to the seller. The purchase is in the form of discounting the documents covering the entire risk of nonpayment in collection. All risks and collection problems are fully the responsibility of the purchaser (Forfaiter) who pays cash to seller after discounting the bills/notes.

Forfaiting Steps
Exporter enters into a fortaiting arrangement with a forfaiter which is usually a reputed bank including exporters bank Exporter sells the availed notes/bills to the bank (forfaiter) at a discount without recourse. The agreement provides for the basic terms of the arrangement such as cost of forfaiting, margin to cover risk, commitment charges, days of grace, fee to compensate the forfaiter for loss of interest due to transfer and payment delays, period of forfaiting contract, installment of repayment, usually bi-annual instalment, rate of interest and so on. The rate of interest or discount charged by the forfaiter depends upon the terms of the note/bill, the currency in which it is determined, credit rating of the avalling bank, country risk of the importer etc

Forfaiting Steps
Payment to forfaiter to the exporter of the face value of the bill/note less discount Forfaiter may hold these notes/bills till maturity for payment by the importers bank. Alternatively, he can securitize them and sell the short-term paper in the secondary market as high-yielding unsecured paper

Difference
Factoring 1. Upto 80% finance 2. Financing almost all receivables 3. Upto 180 days 4. Advisory and administration services also 5. does not guard against exchange rate fluctuations Forfaiting 1. 100% finance 2. Finances single transaction 3. For longer tenures 4. Only financing service 5. forfaiter charges a premium for such risk