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Class room lecture on Export Import Financing, Letter of Credit, Factoring and Forfaiting as part of Financial Services course to MBA Finance students by Prof Chowdari Prasad of Alliance Business School, Bangalore
Class room lecture on Export Import Financing, Letter of Credit, Factoring and Forfaiting as part of Financial Services course to MBA Finance students by Prof Chowdari Prasad of Alliance Business School, Bangalore

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Published by: Prof Chowdari Prasad on Apr 24, 2009
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Financial Services

EXPORT IMPORT FINANCE – BILLS, LCs and FORFAITING

Bodies monitoring Fn Exch
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Exchange Control – R B I Trade Control – Min. of Com GOI Min of Foreign Trade – Enforcement Directorate, N Delhi F E D A I – Mumbai 13 Export Promotion Councils – all State Head Quarters in India Export Promotion Board, GOI FIEO New Delhi
Financial Services 2

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A. FUND BASED
x

1. Facilities to Exporters

Pre-shipment Credit (Packing Credit facility) x Post-Shipment Credit
Negotiation / Purchase / Discount of Export bills 3 Post-shipment loans / Advances against B Cs 3 Advances against claims of duty drawback
3
s

B. NON-FUND BASED
Advising / Confirmation of export LCs x Export Guarantees x Forward Exchange Contracts x Back to Back Letter of Credit issue
x
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Financing Exporters
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a) Pre-Shipment Finance
Packing Credit x Advance against receivables/ Export incentives from Government of India
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b) Post-Shipment Finance
Negotiation of Export Bills x Advances against Bills under collection x Others ...
x

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Financial Services

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a. Pre-Shipment Finance
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A Working Capital facility

Purchase of raw material etc Covers all costs prior to shipment

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Two essential features
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Export Order and/or Confirmed Irrevocable Letter of Credit x To Liquidate the advance out of proceeds of export bills negotiated
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b. Post Shipment Finance
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Negotiation or Discounting of Exp Bills Scrutinize the Export Documents
x

Permissible Currencies ? x Permissible method of Payment ? x All L/C terms have been complied with ? x Customs certified GR / PP form obtained ? x Validity of documents per EC Regulations ?

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Letter of Credit

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Letter of Credit
A letter (firm, absolute and autonomous undertaking) issued by the importer’s bank in favour of the exporter undertaking that the bills drawn by the exporter up to a particular amount will be duly honored by the opening bank, provided the terms and conditions of the credit are strictly complied with by the exporter.

In simple, L C is a
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Written assurance of an issuing bank … Given to the seller / exporter / beneficiary On instructions from the importer (applicant) To effect payment …. Up to a stated sum of money Provided the seller presents all specified documents evidencing shipment of goods or performance of services agreed upon Within the prescribed period of time.
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U C P D C - 500
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Uniform Customs and Practices for Documentary Credits, 1993 Revision – Publication No. 500 In force from January 01, 1994 49 Articles covering all aspects International Chamber of Commerce (ICC), Paris Sets in all terms and conditions Scope for arbitration by ICC
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S W I F T, Brussels
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Society for Worldwide Inter-bank Financial Telecommunications Created under Belgian law In operation since May 1977 Comprises computer network system for all member banks Speed, Security and Efficiency

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s

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Buyer / Importer s Seller / Exporter / / Opener / Beneficiary Applicant s Advising / Confirming / Notifying Bk Buyer’s Bank/ Issuing Bank/ Opening Bank/ s Paying /Negotiating Establishing Bank Bank s Exporter’s Bank

Parties to an L C

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Types of Letters of Credit
1. 2. 3. 4. 5. 6. 7. 8. 9.

Irrevocable Letter of Credit Revocable Letter of Credit Confirmed Credit Deferred Payment Credit Acceptance Credit Revolving Letter of Credit Transferable Credit Back to Back Credit and Red Clause Credit
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Contents in a Letter of Credit
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Terms - Date, Price, Ports, Qly, Qty,… Draft / Bill of Exchange (in Duplicate/Triplicate) Commercial Invoice - FOB, CIF, C & F, etc Bill of Lading - Complete set ( No.of Copies) Certificate of Origin Marine Insurance Policy - 110 % CIF Value Consular Invoice Fumigation Certificate Weight Certificate
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Documents under LC
s

1. Bill of Exchange or Draft
Date : Demand or Usance x LC Amount x Value - FOB or CIF x Drawee arrangements x in sets of 2 or 3
x

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2.Invoice & Packing List
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Description of Goods Quantity, Rate Amount Ports of shipment and destination Freight prepaid or payable at destination
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3. Insurance
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Mode of shipment Port of Shipment and Destination Transshipment permitted ? Cover Note, Certificate allowed ? Type of Risks covered Amount - FOB or CIF + 10 %

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4. Bill of Lading
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A receipt from Shippers or their Agents A Document of Title to Goods (UCPDC) Received for Shipment or On Board ? In sets of 2 or 3 ? Negotiable and non-Negotiable copies Types of B/L - Clean, Chartered Party, On Board, etc..

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Some Discrepancies in Export Documents
1.L C already expired 2.Late Shipment of Goods 3.Late presentation of Documents 4.Bill amount in excess of L C amount 5.Shipments made to different Port 6.Partial Shipment/ Transshipment done 7.B L or AWB not signed properly or not stamped properly or not authenticated...
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8. Insufficient or incomplete set of BL 9. Defective BL - eg Received for Shipment 10. “On Board” - not authenticated in BL 11.Variations in Packages/Weights/specifics 12.Inconsistency among the different docs. 13.Inadequate or defective Insurance cover 14.Defective Bills of Exchange 15.Non-submission of any other documents
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Discrepancies ….

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Advances against Incentives from Govt..
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Duty Drawback : Export Incentives in the form of refund of Excise / Customs Duty Advances for these @ lower rates of interest

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Some factors to consider
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Flexible attitude to margins,security Exporters capacity to execute Order Quantum of Finance -commensurate ? Standing of the LC Opening Bank ? Status Report on overseas Buyer ? Country Risk in the importer’s country ?
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Some factors ... to comply with Ex Control Exporters
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Registration - IE Code No. from DGFT ? Possession of Exp L I C or Quota/EPC ? Availability of ECGC Cover/Guarantee ? Spread of Risk-large number of buyers? Risk - covered by Forward Contract ? Any restrictions in importer’s country ?

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RBI relaxations to exports
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AD s to extend PSC for >180 days up to <270 days without prior clearance “Running Account Facility” can be given Given at concessional rate of interest, each packing credit to be kept separate Amount of advance can be FOB Value or Domestic Market Value - lower of the two Clean Packing Advances can be given selectively - Hypothecation / Pledge
Financial Services 24

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2. Financing Importers
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Term Loan for machinery
x

Under LC or DPG

s

Working Capital for day-to-day needs
Under LC or Purchase Contract x Raw Material - imported or indigenous x Others - spares or components etc
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s

Retirement of Import Bills
Strictly under terms of LC
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Scrutiny of all documents viz., BE, BL, Invoice, Packing List, Insurance, Certificate of Origin, Consular Invoice, etc

s s

Release Payment by debit to TL / CC Formalities connected to goods release
C & F Agents x Customs formalities
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Charge on Assets as usual
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Factoring
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A continuing arrangement between Factor and a “client” (seller of goods/services”) It is purchasing the client’s a/cs receivables - with or without recourse, Maintenance of Sales Ledger Collection of Receivables from Customer Follow up and Sending of Statements, Adv Services etc

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Forfaiting or Forfeiting ?
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Yet another form of long-term factoring; Right to future payment of cash forfeited through receiving discounted cash flows; Expected to be in 21st Century banking…

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What is Forfaiting ?
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“Forfait” is derived from French word “a forfait” which means forfeiting or surrender of rights It is a mechanism of financing exports
by discounting export receivables x evidenced by Bills of Exchange or PN x without recourse to the seller (viz exporter) x carrying medium to long term maturities x on a fixed rate basis (discount) x upto 100 per cent of the contract value
x

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Financial Services

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Six Parties in Forfaiting
„ „ „ „ „ „

Exporter (India) Importer (Abroad) Exporter’s Bank (India) Importer’s/Avalising Bank (Abroad) EXIM Bank (India ) Forfaiter (Abroad)

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1. 2. 3. 4. 5. 6. 7. 8.

Coml contract : Exporter & Foreign Buyer Commitment to Forfait B Exch / Pro Notes Delivery of Goods by Exporter to Buyer Delivery of B Ex / PN to Bank to EXIM Bk Endorsement of BE / PN without recourse Cash Payment/ thro’ a Nostro Account Presentation of BE / PN to Buyer on maty Payment of Debt Instrument on maturity

Forfaiting : 8 Steps

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Financial Services

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FACTORING Vs FORFAITING
S.NO
1. 2.

FORFAITING
100% FINANCE PURE FINANCING ARRANGEMENT APPLICABLE FOR DEFERRED TRANSACTIONS

FACTORING
RESTRICTED TO 80% PACKAGE OF SERVICES

3.

SHORT TERM FINANCING ARRANGEMENT

FACTORING – CLOSER FOLLOW UP OF RECEIVABLES
04/24/09 Financial Services 32

FACTORING Vs FORFAITING
S.NO
4.

FORFAITING

FACTORING

ONLY INTERNATIONAL FOR BOTH DOMESTIC AND TRADE INTERNATIONAL TRANSACTIONS BASED ON FINANCIAL STANDING OF THE “AVALLING BANK” BASED ON EXPORTER’S AND IMPORTER’S STANDING

5.

6.

ALWAYS WITHOUT RECOURSE

MAY BE WITH OR WITHOUT RECOURSE

FACTORING – FOLLOWS UP EACH INVOICE
04/24/09 Financial Services 33

Forfaiting vs. Export Factoring
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Forfaiting discounts 100% value of Bill Avalising Bank provides unconditional and irrevocable guarantee for Forfaiting Forfaiting is a pure financing arrangement Forfaiting covers Notes and Bills for Long Term & Deferred Payments : 3-7 years Forfaiter charges for and covers Exchange Rate fluctuations risk

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Financial Services

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Forfaiting means...
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Forfaiting is the discounting of trade receivables, without recourse to the Exporter It is a highly flexible technique that allows an Exporter to grant attractive credit terms to foreign Buyers, without tying up cash flow or assuming the risks of possible late payment or default. Simultaneously, the Exporter is fully protected against interest and/or currency rates moving unfavourably during the credit period Forfaiting is a highly effective sales tool, which simultaneously improves cash-flow and eliminates risk.

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London Forfaiting ....
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Applications and tenors Typical applications and tenors Commodities (oil, coal, rice, grain, etc.) Financed from 90 days to 18 months Services (engineering, design, maintenance, etc.) Financed from 180 days to 3 years. Technology (software, computers, communications, etc.) Financed from 180 days to 5 years. Capital equipment (machine tools, generators, tractors, etc.) Financed from 2 to 7 years Turn Key Plants (power generation, asphalt production, etc.) Financed from 3 years to 7 years Construction/Project (hospitals, airports, factories, etc) Financed from 3 years to 7 years.
Financial Services 36

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What is discountable?
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Generally, to discount a receivable without recourse, there should be a document evidencing the debt owed by the Buyer to the Exporter. This debt can be evidenced by a wide range of documentation such as: · Promissory Notes · Bills of Exchange · Letters of Credit / Standby Letters of Credit · Payment guarantees
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What is discountable?.....
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Open Book Receivables, subject to certain conditions In most instances, the debt will need to bear the unconditional, irrevocable and freely transferable guarantee or the Aval of an acceptable bank in the Buyer's country. In some cases however, London Forfaiting can consider top tier corporate or government debt without additional bank security.
Financial Services 38

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Role of Ex-Im Bank of India
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EXIM Bank (estd 1982) is authorised by RBI A facilitator between Indian Exporters and the overseas Forfaiting Agency EXIM Bank obtains quotes from Forfaiter EXIM Bank issues necessary Certificates
Financial Services 39

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EXIM Bank and Forfaiting
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Arranged the first Transaction in 1993-94 Credit Periods range from 90 days to 7 yrs Goods covered - textiles, plant & m/c etc Countries - Brazil, Germany, Ghana, Guyana, Indonesia, Iran, Paraguay, Saudi Arabia, South Africa and Turkey

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Financial Services

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Charges in Forfaiting
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Commitment Fee (to Forfaiter) Discounting Fee (to Forfaiter) Documentation Fee (EXIM Bank) Intermediary Service Fee, if any.
Financial Services 41

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Converts a Deferred Payment export into a cash transaction, improves liquidity Frees Exporter from cross-border political or commercial risks associated Finances upto 100 percent of export value It is a “Without Recourse” finance Hedges against Interest and Exchange Risks

Benefits to Exporters

04/24/09

Financial Services

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-Benefits to the importer
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The Importer can match repayments to projected revenues, allowing for grace periods. The Importer can obtain 100% financing, and avoid paying out cash in advance. The Importer can pay interest on a fixed rate basis for the life of the credit, which will make budgeting simpler and safer. The Importer can access medium to long term financing which may be prohibitively expensive or completely unavailable locally. The Importer may be able to take advantage of export subsidy schemes which are often available from the Exporter's government.
Financial Services 43

04/24/09

Other Important Features
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Normally receivables of 1-7 years covered Export Contract should be in any major currency US Dollars, Pound Sterling, Japanese Yen, Euro etc Minimum value is of US $ 500,000 Forfaiting Quotes depend on the country risk perceived by the Agency

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Some major/active Forfaiters
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Banque Indosuez Aval Amsterdam Rotterdam Bank Chase Investment Bank PIc Barclays Bank PIc Citicorp Investment Bank PIc Midland Bank Aval, Hungarian International Bank Banque Indosuez Sogem Aval Standard Bank, London Forfaiting Asia, Morgan Greenfell Trade France, ING Cap
Financial Services 45

04/24/09

List of some Forfaiters
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Standard Bank, London Hong Kong Bank Indo Aval ABN AMRO Bank Meghraj Financial Services Triumph International Finance India Ltd., Natwest Bank and West LB + EXIM Bk + IFC : GTF, India

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Financial Services

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Global Trade Finance Pvt Ltd
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Co-founded by West Lb Bank (Germany)- 40%, International Finance Corp – 25% and EXIM Bank of India – 35% share-holding EXIM MD is Chairman of GTF To carry out Factoring and Forfaiting in India Capital Base of Rs. 45 crore – from 2001 In 2002-03, factoring t/o of Rs. 500 crore Total Income Rs. 13.8 cr and Profit – Rs 1.3 cr
Financial Services 47

04/24/09

Suggested websites
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www.forfaiting.com www.forfaiting.co.uk www.meridianfinance.com www.mezraforfaiting.com www.londonforfaiting.com www.eximbankindia.com www.ecgcindia.com www.afia-forfaiting.org www.indianexportregister.com

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Financial Services

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Ref : Mezra / London Forfaiting Guide to Forfaiting by Lutschg : 2 Parts Forfaiting for Exporters by Andy Ripley : Amazon.com Forfaiting (1986) by Ian Guild EXIM Bank of India Booklet Indian Institute of Bankers, Mumbai Booklet NIBM, Vinimaya ICFAI – Chartered Financial Analyst
04/24/09 Financial Services 49

Books on Forfaiting

Thanks
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