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Financing to Overseas Importers

Dr. A.K. Sengupta


Former Dean, Indian Institute of Foreign Trade
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Financing to Overseas Importers

•Generally, commercial banks extend exports credit, often at


concessional rates, to finance export transactions to the
exporters as a part of their export promotion measures.
•In addition, credit is also available to overseas buyers so as to
facilitate import of goods from India, mainly under two forms:
Buyer’s Credit
•It is a credit, extended by a bank in exporter’s country to an
overseas buyer, enabling the buyer to pay for machinery and
equipment that she/he may be importing for a specific project.

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Line of Credit
• A credit extended by a bank in exporting country (for
example, India) to an overseas bank, institution, or government
for the purpose of facilitating import of a variety of listed goods
from the exporting country (India) into the overseas country.
•A number of importers in the foreign country may be importing
the goods under one line of credit.
•Commercial banks carry out the task of export financing under
the guidelines of the central bank (for example, Reserve Bank
of India).
•The export financing regulations are modified from time to
time.
•Most countries have an apex bank coordinating the country’s
efforts of financing international trade.

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•For instance, the Export-Import Bank of India is the principal
financial institution coordinating the working of institutions
engaged in export import finance in India.
Credit Risk Insurance
•Easy and hassle-free access to export finance significantly
enhances firms’ abilities to compete in international markets.
•Prior to agreeing to finance a firm’s export transactions, banks
need to be assured of the ability of the borrowers to repay the
loan.
•Generally, banks insist on pleading adequate collateral before
sanctioning export finance.

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•The major commercial risks in international trade transactions
are as follows:
Non-payment by the importer after expiry of credit term
Non-acceptance of goods by the importer despite of its
compliance with the export contract
Insolvency of the purchaser

•Credit risk insurance provides protection to exporters who sell


their goods on credit terms.
•It covers both political and commercial risks.

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•Credit insurance also facilitates exporters in getting export
finances from commercial banks.
•The benefits provided by credit insurance to the exporters are
Exporters can offer competitive payment terms to their
buyers.
It protects the exporters against the risk and financial
costs of non-payment
It provides exporters a freer access to working capital
The insurance cover reduces exporters’ need for tangible
security while negotiating credit with their banks.
Credit insurance provides exporters a second check on
their buyers.
Exporters get access to and benefit from the credit
insurer’s knowledge of potential payment risks in overseas
markets and their commercial intelligence, including
changes in their import regulations. 6
•Insurance policies and guarantees extended by export credit
agencies such as ECGC can be used as collateral for trade
financing.
•Once the perceived risk of default are reduced, banks are
often willing to grant favourable terms of credit to the
exporters.
•Most countries have central-level export credit agencies
(ECAs) to cover credit risks offering a number of schemes to
suit varied needs of the exporters for export credit and
guarantee.
•Examples include Export Credit and Guarantee Corporation
(ECGC) in India, Export Credit Guarantee Department (ECGD)
in the UK, Export Risk Insurance Agency (ERIA) in
Switzerland, and Export Finance and Insurance Corporation
(EFIC) in Australia

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Export Credit Guarantee Corporation
•Export Credit Guarantee Corporation (ECGC) of India,
established in 1957 by the Government of India is the principal
organization for promoting exports by covering the risks of
exporting on credit.
•It functions under the administrative control of the Ministry of
Commerce
•ECGC is the world’s fifth largest credit insurer in terms of
coverage of national exports
•The ECGC mainly:

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Provides a range of credit risk insurance covers to
exporters against loss in export of goods and services
Offers guarantees to banks and financial institutions to
enable exporters obtain better facilities from them
Provides overseas investment insurance to Indian
companies investing in joint ventures abroad in the form of
equity or loan

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