CHAPTER 1 - INTRODUCTION OF EXPORTS

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
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:
The exporter may require short term, medium term or long term finance depending upon the types of goods to be
exported andthe terms of statement offeredto overseas buyer.
The short-termfinance 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 andsalaries, 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 termfinancial needs such as purchase of fixedassets andlong termworking capital.
Export finance is short-termworking capital finance allowed to an exporter. Finance and credit are available not only
to helpexport 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 fromany bank, which considers the ensuing factors:
a) Availability of the funds at the requiredtime to the exporter.
b) Affordability of the cost of funds.
2.4 - APPRAISAL
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 followinginstitutions or regulations needs to be adheredto.
Obligations to the RBI under the Exchange Control Regulations are:
Appraise to be the banks customer.
Appraise should have the Eximcode number allottedby 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 allottedby the DGFT.
Goods must be freely exportable i.e. not falling under the negative list. If it falls under the negative list, then a
validlicense shouldbe there which allows the goods to be exported.
Country withwhomthe Appraise wants to trade shouldnot be under trade barrier.
Obligations to ECGC are:
Verification that Appraise is not under the Specific Approval list (SAL).
Sanction of PackingCredit 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 ForeignExchange Dealers Association of India.
CHAPTE R 3 -TYPE S OF E XPORT FINANCE
The export finance is being classifiedinto two types viz.
Pre-shipment finance.
Post-shipment finance.
3.1 -PRE-S HIPME NT FINANCE
ME ANING:
Pre-shipment is also referred as packing credit. It is working capital finance provided by commercial banks to the
exporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods is
called pre-shipment finance or packing credit.
DE FINITION:
Financial assistance extended to the exporter fromthe 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.
IMPORTANCE OF FINANCE AT PRE-S HIPMENT S TAGE:
To purchase rawmaterial, andother 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 andlabelling 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 ME THODS OF PRE-S HIPME NT 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.
4. 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 favour 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 E xport 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 post-shipment advance against claims
for DBK.
8. S pecial Pre-S hipment Finance S chemes:
Exim-Banks scheme for grant for Foreign Currency Pre-S hipment Credit (FCPC) to exporters.
Packing credit for Deemed exports.
S OME S CHE ME S IN PRE-S HIPMENT S TAGE OF FINANCE
1. PACKING CRE DIT
SANCTION OF PACKING CREDIT ADVANCES:
There are certain factors, which shouldbe consideredwhile sanctioningthe packing credit advances viz.
i. Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the
proposal andintegrity of the borrower.
ii. Satisfaction about the capacity of the execution of the orders within the stipulated time andthe management of
the export business.
iii. Quantumof finance.
iv. Standing of credit opening bank if the exports are covered under letters of credit.
v. Regulations, political andfinancial conditions of the buyers country.
DISBURSEMENT OF PACKING CREDIT:
After proper sanctioning of credit limits, the disbursing branch shouldensure:
To informECGC the details of limit sanctionedin the prescribedformat within 30 days fromthe date of sanction.
a) To complete proper documentation andcompliance 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 compliedwith.
2. FOREIGN CURRENCY PRE-SHIPMENT CREDIT (FCPC)
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.
Sharing of FCPC: Banks may extend FCPC to the manufacturer also on the basis of the disclaimer from the
export order.
2.2 -POST-S HIPME NT FINANCE
ME ANING:
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 fromoverseas buyer thereof. Whereas
the finance provided after shipment of goods is called post-shipment finance.
DE FE NITION:
Credit facility extended to an exporter fromthe date of shipment of goods till the realization of the export proceeds is
calledPost-shipment Credit.
IMPORTANCE OF FINANCE AT POST-SHIPME NT S TAGE :
To pay to agents/distributors andothers for their services.
To pay for publicity andadvertising inthe over seas markets.
To pay for port authorities, customs andshipping agents charges.
To pay towards export duty or tax, if any.
To pay towards ECGC premium.
To pay for freight andother shipping expenses.
To pay towards marine insurance premium, under CIF contracts.
To meet expenses inrespect of after sale service.
To pay towards such expenses regarding participationin exhibitions andtrade fairs inIndia andabroad.
To pay for representatives abroadin connectionwith their stay board.
FORMS/ME THODS OF POS T S HIPMENT FINANCE
1. E xport 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 andwhich are sent for collection. They are not purchased or discounted by the bank.
However, this formis not as popular as comparedto advance purchase or discounting of bills.
4. 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 maximumof 5% of
the value of export andan undertaking is obtainedto surrender balance proceeds to the bank.
7. Advance against Deemed E xports: 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 andsupplies made in India to
IBRD/IDA/ADB aidedprojects. Credit is offeredfor a maximumof 30days.
8. Advance against Retention Money: In respect of certain export capital goods andproject exports, the importer
retains a part of cost goods/services towards guarantee of performance or completion of project. Banks advance
against retentionmoney, which is payable within one year fromdate 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 180days.
S OME S CHE ME S UNDE R OPERATION IN PRE -SHIPME NT FINANCE
1. DE FE RRE D CRE DIT
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,
andthe balance being payable in installments spread over a periodof 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
TermCredit. The mediumcredit facilities are provided by the commercial banks together with EXIMBank for a period
upto 5years. The longtermcredit is offerednormally between 5 yrs to 12yrs, andit is provided by EXIMBank.
Amount of credit support:
Any loan upto 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 needthe clearance fromthe working grouponExport Finance.
2. 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 (EBRD) scheme at LIBOR linked interest
rates.
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 with an overseas agency/ bank by way of a line of credit or bankers acceptance
facility or any other similar facility at rates linked to London Inter Bank Offered Rate (LIBOR) for
six months.
Prior permission of RBI will not be required for arranging the rediscounting facility 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 be exclusive of any withholding tax. In all other cases, the RBIs permission
will be needed.
3. FINANCE FOR RUPEE EXPENDITURE FOR PROJECT EXPORT CONTRACTS (FREPEC)
1. What is FREPEC Program?
This program seeks to Finance Rupee Expenditure for Project Export Contracts, incurred by Indian
companies.
2. What is the purpose of this Credit?
To enable Indian project exporters to meet Rupee expenditure incurred/required to be incurred
for execution of overseas project export contracts such as for acquisition/purchase/acquisition of
materials and equipment, acquisition of personnel, payments to be made in India to staff,
sub-contractors, consultants and to meet project related overheads in Indian Rupees.
3. Who are eligible for Assistance under FREPEC Program?
Indian project exporters who are to execute project export contracts overseas secure on cash
payment terms or those funded by multilateral agencies will be eligible. The purpose of the new
lending program is to give boost to project export efforts of companies with good track record
and sound financials.
4. What is the quantum of credit extended under this program?
Up to 100% of the peak deficit as reflected in the Rupee cash flow statement prepared for the
project. Exim Bank will not normally take up cases involving credit requirement below Rs. 50 lakhs.
Although, no maximum amount of credit is being proposed, while approving overall credit limit,
credit-worthiness of the exporter-borrower would be taken into account. Where feasible, credit
may be extended in participation with sponsoring commercial banks.
5. How are Disbursements made under this Program?
Disbursements will made in Rupees through a bank account of the borrower-company against
documentary evidence of expenditure incurred accompanied by a certificate of Chartered
Accountants.
6. How is a FREPEC Loan to be extinguished?
Repayment of credit would normally be out of project receipts. Period of repayment would depend
upon the project cash flow statements, but will not exceed 4 (four) years from the effective date of
project export contract. The liability of the borrower to repay the credit and pay interest and other
monies will be absolute and will not be dependent upon actual realization of project bills.
7. What is the security stipulated for FREPEC loan?
Hypothecation of project receivables andproject movables.
Optional: where available
Personal Guarantees of Directors of the Company.
Available collateral security.
CHAPTER - LETTER OF CREDIT
INTRODUCTION:
The cycle of a business transaction can be said to be complete prima facie when the buyer has received the product
he desires to buy andthe seller gets his payment in due consideration of the product supplied.
While the seller is keen to receive the payment for his supplies, the buyer is equally keen that he gets what he wants
by the payingfor the same.
Tough there are many merit and demerits in each of the different mode of payments we have discussed earlier, in
relation either to the buyer or to the seller, we shall now deal in detail about the mode of payment under the
Documentary Credit.
Generally, though exporters are complacent once they get the letter of Credit on hand feeling that their payment is
secured, let me say it is as much a dubious instrument as is a safe instrument.
If one does not understand the implications of the terms and condition of a letter of credit, the provisions under UCP
500, how co-operative are the exporters bank and howgood are the L/C opening bank and the reimbursement bank,
he is sure to landin trouble at once stage or another.
There are ample cases of frauds under the Letter of Credit. More and more ingenious methods are adopted to
circumvent the provisions of UPC 500 by fair or foul means. Hence, even the safety and security under the Letters of
Credit may prove to be no better than a mirage for a man inthe desert.
Hence, sufficient care is to be taken by the exporter to ensure that instrument is received in order and the conditions
of the L/C can be well compliedwith, andthere are no clauses of ambiguity.
This is one of the most popular and more secured of method of payment in recent times as compared to
other methods of payment. A L/C refers to the documents representing the goods and not the goods
themselves. Banks are not in the business of examining the goods on behalf of the customers. Typical
documents, which are required includes commercial invoice, transport document such as Bill of lading or
Airway bill, an insurance documents etc. L/C deals in documents and not goods.
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.
PARTIES INVOLVED IN LETTER OF CREDIT:
Applicant: The buyer or importer of goods
Issuing bank: Importers bank, who issues the L/C
Beneficiary: The party to whom the L/C is addressed. The
Seller or supplier of goods.
Advising bank: Issuing banks branch or correspondent bank in
The exporters country to whom the L/C is send for
Onward transmission to the beneficiary.
Confirming bank: The bank in beneficiarys country, which
Guarantees the credit on the request of the issuing
Bank.
Negotiating bank: The bank to whom the beneficiary presents his
Documents for payment under L/C
A Letter of Credit contains these elements:
A payment undertaking given by the bank(issuing bank) on behalf of the buyer (applicant)
To pay a seller (beneficiary) a given amount of moneyon presentation of specified documents representing
the supply of goods within specific time limits
These documents conformingto terms and conditions set out in the letter of credit
Documents to be presentedat a specifiedplace.
In simple words, the Issuing Bank's role is twofold:
To guarantee to the seller that if complete documents are presented, the bank will pay the seller the amount
due. This offers security to the seller the bank says in effect "We will pay you if you present documents
(XYZ)"
To examine the documents andonly pay if these comply with the terms andconditions set out in the letter of
credit. This protects the buyer's interests -the bank says "We will only pay your supplier on your behalf if
they present documents (XYZ) that you have askedfor"
ADVANTAGES OF LETTER OF CREDIT
ADVANTAGES TO THE EXPORTER:
No blocking of funds.
Clearance of import regulations.
Free from liability.
Pre- shipment finance.
Non-refusal by importer.
Reduction in bad-debts.
ADVANTAGES TO THE IMPORTER:
Better terms of trade.
Assurance of shipment of goods.
Overdraft facility.
No blocking of funds.
Delivery on time.
Better relations.
DISADVANTAGES OF LETTER OF CREDIT:
Lacks flexibility.
Complex method
Expensive for importer
Problem of revocable L/C
What i s a Documentary Credi t?
To say in simple language, this is an Undertaking by a Bank associated with the buyer to make the payment for the
supply of goods by a seller subject to compliance of various requirements that may be specified in the document of
undertaking by the Bank. This document is known as Documentary Credit. A Documentary Credit is also called a
Letter of Credit (L/C).
CONTENTS OF A LETTER OF CREDIT
A letter of credit is an important instrument in realizing the payment against exports. So, needless to mention that the
letter of credit when established by the importer must contain all necessary details which should take care of the
interest of Importer as well as Exporter. Let us see shat a letter of credit should contain in the interest of the exporter.
This is only an illustrative list.
name and address of the bank establishingthe letter of credit
letter of credit number and date
The letter of credit is irrevocable
Date of expiry andplace of expiry
Value of the credit
Product details to be shipped
Port of loading and discharge
Mode of transport
Final date of shipment
Details of goods to be exportedlike description of the product, quantity, unit rate, terms of shipment like CIF,
FOB etc.
Type of packing
Documents to be submittedto the bank upon shipment
Tolerance level for both quantity andvalue
If L/C is restrictedfor negotiation
Reimbursement clause
PROCEDURE INVOLVED IN THE LETTER OF CREDIT
The following are the stepin the process of opening a letter of credit:
Exporters Request: The exporter requests the importer to issue LC in his favor. LC is the most securedform
of payment in foreign trade.
Importers Request to his Bank: The importer requests his bank to open a L/C. He May either pay the
amount of credit in his current account with the bank.
Issue of LC: The issuing bank issues the L/C and forwards it to its correspondent bank with also request to
informthe beneficiary that the L/C has been opened. The issuing bank may also request the advising bank
to addits confirmation to the L/C, if so requiredby the beneficiary.
Receipt of LC: the exporter takes in his possessionthe L/C. He shouldsee it that the L/C is confirmed.
Shipment of Goods: Then exporter supplies the goods and presents the full set of documents along with the
draft to the negotiating bank.
Scrutiny of Documents: The negotiating bank then scrutinizes the documents and if they are in order makes
the payment tothe exporter.
Negotiation: The exporters bank negotiates the document against the letter of credit andforwards the export
documents to the L/C opening bank or as per their instructions.
Realization of payment: The issuing bank will reimburse the amount (which is paid to the exporter) to the
negotiating bank.
Document to Importer: the issuing in turn presents the documents to the importer and debits his account for
the corresponding amount.
In order to have uniformity and to avoid disputes, the ICC Paris has evolved uniform customs and practices of
documentary credit (UCPDC), in short known as UCP 500 effective from1-1-96. These are rules have been adopted
by more than 150 countries. They provide the comprehensive and practical working aid to banker, lawyer, importers,
exporters, Exporters, transporters, executives involvedin international trade.
Note: as soon as an L/C is received ensure that the same is authenticated. Meaning that the genuineness of the L/C
is certified by the Advising Bank by an endorsement with the marking AUTHENTICATED OR ELSE THE L/C IS OF
NO USE.
Different Type of Documentary Credi ts.
There are various types of Documentary Credit opened by a bank in favour of its customer depending upon the
requirement. Let us talk about fewtypes of Documentary Credit which are in common use.
Revocable /Irrevocable Documentary Credit :A Revocable Documentary Credit can be revoked (cancelled)
by the buyer at his own discretion and this does not require the consent of the seller. The risk factor here is
that the L/C may be cancelled even after the shipment is done and before the beneficiary present the
documents to the bank for claiming the reimbursement. Hence, a revocable L/C is as goods as no L/C.
obviously, no seller will entertain a revocable L/C. Contrary to this, an Irrevocable Documentary Credit once
established and advised to the beneficiary, cannot be revoked or cancelled unilaterally by the buyer without
the consent of the beneficiary (Seller).A Seller must always ask for an Irrevocable Letter of Credit.
Restricted/Unrestricted Documentary Credit: A Documentary Credit stipulates the name of the bank who is
authorized to negotiate the document for claming the reimbursement. In this case the beneficiary is obliged
to negotiate the documents only through the specified bank i.e. Negotiation of document is restricted to that
particular bank. On the contrary if no specific bank is nominated for negotiation, it may say Negotiation by
any bank which means the beneficiary is free no negotiate the document through the bank of his choice.
This is beneficial because he can negotiate the documents through his own bank where he is having an
account. Since the bank is not alien to him, he will not face any practical/procedural difficulty in negotiating
the document. It is suggested to have an unrestricted L/C or L/C which may be restricted to the bank of the
beneficiarys choice.
Confirmed/UnconfirmedDocumentary Credit: Confirmed Documentary Credit is one in which the beneficiary
has the option to have the L/C confirmed by a bank in the beneficiary country i.e. the bank who confirms the
L/C takes the responsibility of making the final payment to the beneficiary upon negotiation of the document
in strict compliance with the terms and conditions of the Letter of Credit. By this process the final payment
will be made inthe beneficiarys country by the bankwhich confirms the L/C immediately upon negotiation of
the documents. The beneficiary do not stand the risk of waiting for the document to reach the opening bank
who will have the final say so to the compliance under the L/C before making the payment. Further, the
payment is also made immediately after negotiation and without recourse to the beneficiary i.e. the payment
once made by the confirmed bank cannot be revoked. Moreover, if the importing countrys regulation
changes and the money is not allowed to be repatriated, this will eliminate the risk. On the contrary, in an
unconfirmed L/C, the negotiating bank only accepts the documents and pays for the same with recourse i.e.
if as and when the documents reach the opening bank, and the opening find some discrepancy in the
documents it may refuse to make the payment or seek clarification for the applicant before reimbursement.
The beneficiary is fully at the mercy of the opening bank for payment. It is suggested to ask for a Confirmed
L/C.
With Resource and Without (Sans) Resource Letter of Credit: The revocable or irrevocable LC can further
be classifiedas with resource andwithout resource LC.
o With resource LC: In this type the exporter is heldliable to the paying/negotiating bank, if the
draft drawn against LC is not honored by the importer/issuing bank. The negotiating bank can
make the exporter to pay the amount along with the interest, which it has already paid to the
beneficiary.
o Without (Sans) Resource LC: In the case of sans (without) resource letter of credit, the
negotiating bank has no recourse to the exporter, but only to the issuing bank or to the
confirming bank.
Normally, the negotiating bank makes advance payment to the exporter in resource of letter of credit either by
discounting bills against letter of credit or by purchasing the bills of exchange. In such an instance, if the
issuing bank fails to make payment or dishonor the letter of credit, then the negotiating bank cannot get the
money back fromthe exporter or hold him liable to pay the amount. However, in the case of with resource
letter of credit, the negotiating bank can ask the exporter to pay back the money along with certain other
expenses. For the exporter, sans Resource letter of credit is more safe as compared to With Resource letter
of credit.
Transferable/Non-transferable Documentary Credit: In a transferable L/C, the beneficiary can transfer the
L/C opened in his name in favor of a third party who may effect the shipment and negotiate the documents
andclaimpayment under the said L/C.
Revolving Documentary Credit: Where an exporter is having a regular shipment for a particular customer
and the value of each shipment may also be of more or less equal value, and then one can call for a
Revolving Documentary Credit. The salient feature of this L/C is that
the buyer opens an L/C which can take care of shipments, say, may be for a period of one year on a
monthly basis.
For e.g. an exporter enters into a contract for supply of 5000 pairs of Trousers valued approx.US.$.75,000/-
to be shipped every month. The buyer can open an L/C for a value of US.$.75000/-with validity for 12
months stipulating shipment every month for a value of US$. 75000/-and by adding a clause to make 12
shipment of like value the L/C stands replenished for the full value of the L/C after each shipment is made
the documents are negotiated for which payment are also made immediately for the value of the shipment.
The main benefit in this L/C is that the buyer, the bank and the exporter are saved from the routine of
opening one L/C every month, the anxiety of non-receipt of the L/C on time, the amendments that may be
warranted every time, the bank charges for opening number of L/Cs etc.,. A revolving Documentary Credit
may have cumulative effect i.e. if a particular shipment is not made, then the value is added to the value for
future utilization. In an automatic Revolving Credit, the bank is liable for the total amount covering the entire
shipment and where it is non-automatic its responsibility is restricted to the value of one shipment. In
automatic Revolving Credit the value of the credit is automatically replenishedby an amendment.
Where there are continuous shipments like the one stated above one can call for a Revolving Letter of
Credit.
Assignable Documentary Credit: In this type of L/C the benefit is shared between the first beneficiary and
the parties whose names are assigned on the L/C. The assignee is not a party to the letter of credit but he
only derives the benefit as per the L/C. this is more beneficial to the assignee because he receives his part
of the money once the documents are negotiated by the first beneficiary in whose name the L/C is opened.
Calls for an L/C as necessary.
Stand by Letter of Credit: This is aimed at providing a security to a seller in case the buyer fails to perform
his part. Thus this L/C is used in case of non-performance while the other types of L/Cs are generally for
some performance. Such credits are paying on first presentation andthe only document requiredthereinis a
simple declaration of non-performance along with the statement of claim. This type of L/C is mainly common
inU.S.A.
A standby Documentary Credit is generally common on open account trading where the seller may expect
some security for getting his payment. This is not permittedin India.
Red Clause LC: The red clause LC is the usual irrevocable LC with further authorities the negotiating bank
to make advance to the beneficiary for the purpose of processing the export goods. Thus, the red LC
enables the exporter to obtain packing credit facility for the purpose of processing the goods. It is called a
red-cause LC because it is generally printed/typedin redink.
Green Clause LC: The Green LC in addition to permitting packing credit advance also provides for the
storing facilities at the port of shipment. Green LCs is extensively usedin Australian wool creditors.
Back-to-Back LC: Back-to Back LC is a domestic letter of credit. It is a ancillary credit created by a bank
based on a confirmed export LC received by the direct exporters. The direct exporter keep the original LC
(received from issuing bank) with the negotiating or some other bank in India, as a security, and obtains
another LC in favour of domestic supplier. Through this route the domestic supplier gains direct access to a
pre-shipment loan based on the receipt of domestic or back-to-back LC.
Documentary LC: Most of the L\C is documentary L\C. Payment is being made by the bank against delivery
of the full set of documents as laid down by the terms of credit. The important documents required to be
submittedby the exporter under documentary LC includes the following:
o Bill of Lading /Airway Bill or any other transport document
o Commercial Invoice
o Insurance Policy
o Shipping Bill
o Certificate of Origin
o CombinedInvoice andCertificate of Value andOrigin
o GSP/CWP certificate
o Packing List
o Certificate of Quality Inspection
o Bill of Exchange
o Any other document if required.
A letter of credit may call for some or most of the above documents and may also call for some other documents
specific to the shipment.
Travelers LC: Travelers LC is issued to the person who intends to make a journey abroad. The
correspondent/agent of the bank honors all the cheques drawn on this credit by its holder up to the amount
mentionedin LC. Travelers LC has more advantages as comparedto travelers cheques. In case of cheque,
the holder can withdrawupto the amount of the cheque. Again, he has to carry a number of cheque. In case
of travelers LC, the holder can draw any amount up to the limit mentioned in the LC, and he need to carry
only one paper of LC.
Types of Payments under a Documentary Credit.
Payment under a documentary credit can be of the following types:
Payment at Sight: In this mode, the payment is made by the L/C opening bank or its nominated bank or by a
confirming bank on presentation of the documents in full conformity with the L/C. The L/C may or may not
call for draft at sight for the full value of the documents.
Deferred Payment Scheme: In this case the payment is to be made at a future date as stipulated in the L/C.
Here, generally NO draft is required as the due date of payment is defined in the L/C. In case of a confirmed
L/C, the final payment is made by the confirmed bank on due date and by the issuing bank or its nominated
bank if the L/C is not confirmed.
Acceptance Credit : This type of credit requires a usance draft to be drawn on a nominated or accepting
bank. The payment is made by the nominated/accepting bank on the due date as per instructions of the
negotiating bank. In case of a confirmed L/C the payment on due date is made by the negotiating bank
(confirming bank).
Negotiation Credit: Here the payment is made by the negotiating bank upon negotiation of the documents if
it prepares to take the risk andwill recourse to the beneficiary. If the credit is confirmed, then the negotiation
bank is obligedto make the payment upon submission of a clean document by the beneficiary.
Expect in the case of confirmed L/C there is always a time lag between the date of negotiation of the document and
the date of receipt of the payment. This is a grey area. If the bank acts swiftly and without prejudice, one gets
payment within a weeks time. If the payment is delayed beyond this time, though an exporter has every right to ask
for compensation, in actual practice, no justice is done to the exporter for the delayed payment. Very rarely, on
persistent approach by the exporter/their banker, does a defaulting bank comes forward to compensate for the
delayed payment. Generally the exporter has to forego lot of money in correspondence through the negotiating bank
because every communication of the bank is charged to the exporter. It is no surprise many exporter suffer this loss
silently.
Feature of a Documentary Credit
A documentary credit is a document in writing issue by the bank on behalf of its customer (The Buyer). Documentary
Credit must stipulate the Type of Credit as detailedabove andi nter al ia will also stipulate the
Following details :
the name of the Bank issuing the Documentary Credit.(The L/C Opening Bank)
the name andaddress of the buyer on whose behalf the credit is Issued.(The Applicant)
the name and address of a bank in the country of the seller the credit through Whom the L/C is to be
advisedto the seller.
The name and address of the Seller (Beneficiary)
The MaximumValue the opening bank undertakes to pay to the Beneficiary.
The date of issue of the credit.
The Expiry Date of the L/C
The Validity Date for shipment.
The Details of the product to be shipped.(Description)
Details of document requiredfor claiming the payment fromthe Opening bank.
The name and address of the bank authorizedto negotiate the documents.
The Reimbursement Clause.
As soon as an L/C is received ensure that the L/C is authenticated. If the L/C received in mail the signatures are got
to be verified by the advising bank. In case of telex/swift the bank shouldendorse on the document authenticated and
then only the L/C is a valid document.
While the above details are the minimumthat a Documentary Credit may have in actual practice there can be other
stipulations mutually agreeable to the buyer, seller andthe opening bank as alsothe negotiating bank.
The guidelines for the interpretation and usage of Letter of Credit are governed by the UCP 500 (Uniform Customs
Practice for Documentary Credit) published by the International Chamber of Commerce (ICC). The UPC 500 covers
all the procedural aspects relating to the transactions under a Letter of Credit. Hence one is suggested to be familiar
with all the 49Articles as detailedinthe UCP 500of 1994.
While all the elements and events that one may encounter in each and every organization can not be explained, the
UCP 500has attemptedto take care most of the queries that one may encounter normally.
The ICC Uniform Customs and Practice was first published in 1993. Taking into the consideration of the various
developments in the transactions under the Documentary Credit the ICC has been reviewing these rules and
updating the same. As time changes and the international transactions faces new aspects, attempts will be made to
get the UCP 500revised.
Scrutiny of letter of credit
Mere receipt of letter of credit is no guarantee of payment. There are many ifs and buts before the documents are
submitted to the bank against the letter of credit for realization of proceeds from the opening bank. As soon as the
letter of credit is received a through scrutiny is to be undertaken to ensure that
First andforemost that the credit is properly authenticated by the advising bank.
The letter of credit has been openedin accordance with the terms of the contract.
The name and address of the beneficiary has been spelt properly.
The details of product description, quality, and value are in order.
The validity of shipment and expiry are correct.
The documents that are requiredcan be submitted.
There is sufficient % of tolerance of quantity andvalue.
The unit price andthe terms of contract are correct.
The terms andconditions stipulated can be compliedwith.
That the credit is available for negotiation without restriction.
In case of exports requires the credit to be confirmed by the local, then necessary clause is incorporated by
the opening bank on the credit.
Last but not the least; the credit has a reimbursing clause enabling the negotiation bank to get
reimbursement of the money paidto the exporter against the documents.
There are only few suggestions. The requirement may differ for different exporter and the scrutiny has be done
relative to the requirement.
AMENDMENTS TO THE CREDIT
On scrutiny of the letter of credit, if the exporter finds that some change are required to be made in the credit, he
should immediately request the buyer to make necessary change in the letter of credit and the opening bank issued
necessary amendment in this respect. Any oral and written agreement by the importer about change in the credit
directly to the exporter should not be accepted as it is not valid under the credit. Any change must be advised by the
importer throughthe opening bank only as a sort of amendment to the original credit.
DOCUMENTARY CREDIT IN GENERAL
Of all the various type of payments, the most safest as far as the exporter is concernedis to get an advance payment
in full for the value of shipment to be effected. Obviously, this puts the buyer totally at the mercy of the seller and
unless the buyer feels unavoidable he will not be prepared to make advance payment. Hence, of the rest of the
modes of payment, the best is calling for a Documentary Credit for any shipment. Now let us see how we can take
care of the interest of the exporter while an L/C is established.
It is suggested that the exporter gives the full details as to the various requirements to the buyer for incorporation in
the L/C. this will avoid the necessary of asking for amendments and will save both time and money. Bear in mind
every amendment costs you badly. Care are should be taken to ensure that there are NO spelling mistakes,
omission and commission of , or, or such small things. A discrepancy is a discrepancy and there is nothing like
minor discrepancy or major discrepancy as far as the bank is concerned. A bank strictly deals in documents and the
documents are expected to be cent percent in line with details give in the Documentary Credit. Ensure that the
Validity for shipment and for negotiation of documents can be complied with. If not possible, call for amendment
extending the validity as required.
Unless the L/C specifies the tolerance for the quantity and value, the exporter shouldfollowthe quantity and value as
stipulated in the L/C. There is provision for a tolerance of the quantity up to 5 percent more or less than stipulated in
the L/C even if the L/C does not specify tolerance exclusively and unless tolerance is prohibited 0 specifically.
However, the value of documents, on no account, couldexceedthe limits of the L/C.
Check the description of the product properly, the rates if specified, and quantity of each of the items. Ask for
amendment where you cannot copy with the terms. Make sure that all the documents as called for by the Credit can
be submittedwithout any exception.
The last but not the least is the Reimbursement clause (Getting the funds for the shipment made). An L/C without this
clause is no L/C. if there is no provision as to fromwhere the exporter is going to get paid for, the whole exercise of
the L/C is futile. The opening bankmay specify the reimbursement clauses as follows:
The negotiating bank to send the documents to the opening bank who will, upon receipt of the documents,
arrange for reimbursement as claimedby the negotiation bank.
The negotiating bank can claim reimbursement directly from a nominated bank (say ABC Bank, New York)
either upon negotiation of documents or after a period of days of negotiation subject to the documents
being submitted by the beneficiary is strictly in conformity with terms andcondition of the letter of credit.
These are some of the aspects one should take care to ensure that the L/C established in his favor is in order and
that he can comply with all the provision thereof. However, one is advised to make a checklist and take a note of
each andevery condition of the L/C for compliance at the right time.
Where an L/C stipulates that the Negotiation is restricted to a specific bank which is not the Advising Bank or Where
the L/C is not restricted, and the seller desires to negotiate the document which is not the advising bank, then we
have a separate NegotiatingBank.
Where the opening bank prefers to advise the L/C through its own branch in the beneficiary country or through
another bank of its choice, then the L/C may be advised to the beneficiary directly by this bank or if it instructed to
advise the L/C through the buyers nominated bank then it does so. Here, we have two advising bank.
As far as possible, one should restrict the involvement of the number of the banks to the minimum. More the number
of the banks, more the time inthe transmission of the L/C, in addition tomultiplicity of bank charges.
SPECIAL NOTE
Though one may strongly feel that a Letter of Credit is the safest mode of payment, one will face innumerous
practical difficulties in so far as compliance with the terms and conditions of the L/C. since several documents are
involved, there are every possible of discrepancy in the documents either between different documents or between
the document or between the document and the L/C. the Negotiating bank soft pedal some of the discrepancies
which they feel may not be pointed out by the opening bank as discrepancy to favour its customer. In the like manner
the opening bank, to safeguard the interest of the buyer, would like to ensure that the document submitted against a
Letter of Credit are strictly in full conformity of the L/C.
For mastery of the operation under the Letter of Credit one is advised to completely study the various articles of the
UCP 500 so that one can be clear in his mind as to the various provisions available under the Documentary Credit
which will stand good while negotiating the documents with the bank. While the articles of UCP 500 come safeguard
the interest of both the buyer and the seller, there are certain elements which may be outside the definition of the
UPC 500. Also there is certain flexibility provisions inthe UPC 500which one might like to exploit to his favour.
So, in spite of the L/C being the safest method to ensure the payment, unless both the buyer andthe seller follow the
business ethics there is every chance that one gets cheated by the other. As a prudent exporter one should be very
careful in selecting his customer apart fromtaking other safety measures.
If the customer is too good, and you have been dealing with themfor a long time, one may relaxand termthe L/C as
the best method to receive payment. If the customer turns out to be unscrupulous then he can play havoc. This is
applicable to both the seller andthe buyer. There are books on fraudulent us of the Documentary Credits. Sometimes
it may be the buyer whois at the receiving endandsome time it may be the other way.
A study of such book as above may help one to take adequate care. But, the brain is always working in multi
directions. It will be no surprise if one comes across newer and newer dubious methods being adopted by the
contracting parties.
TOTAL OPERATION UNDER THE LETTER OF CREDIT.
The Unconfirmed L/C.
The Buyer makes an application to his bank to open an L/C.
Opening bank establishes the L/C.
Opening bank advises the L/C through his associate or through the bank. Nominatedby the beneficiary.
The Bank in the beneficiary country which receives the L/C sends the Original L/C to the customer either
directly or throughthe bankSpecifiedin the L/C.
The buyer complies with the L/C requirements and submits the relevant documents. To the bank for claiming
reimbursement.
The negotiating bank negotiates and sends the documents to the opening bank or as Directed. Meantime
pays the beneficiary.
Advises the opening bank or the reimbursement bank the details of his Accounts and the nominated bank
where the proceeds are to be credited.
Once the credit is received, the nominated bank advises the negotiating bank of the credit. Thus the
negotiating bank gets the credit for the L/C documents.
The Confirmed L/C.
All the steps from1to6 as far as the beneficiary are concerned since the payment is made to the beneficiary without
recourse. However, the negotiating bank may have to followthe subsequent steps since he has to receive his money
fromthe opening bank.
Sample Document: Letter of Credit (Documentary Credit)
THE MOON BANK
INTE RNATIONAL OPE RATIONS
5 MOONLIGHT BLVD.,
EXPORT-CITY AND POS TAL CODE
E XPORT-COUNTRY
OUR ADVICE NO.
MB-5432
IS S UING BANK REF. NO. & DATE
SBRE-777 J anuary 26, 2005
To,
UVW Exports
88Prosperity Street East, Suite 707
Export-City andPostal Code
Dear Sirs:
We have been requested by The SunBank, Sunlight City, Import-Country to advise that they have openedwith
us their irrevocable documentary credit number SB-87654
For account of DEF Imports, 7Sunshine Street, Sunlight City, Import-Country in your favor for the amount of not
exceeding Twenty Five ThousandU.S. Dollars (US$25,000.00) available by your draft(s) drawn on us at sight
for full invoice value
Accompanied by the following documents:
1. Signed commercial invoice in five (5) copies indicating the buyer's
Purchase Order No. DEF-101 dated January 10, 2005
2. Packing list in five (5) copies.
3. . Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable copies, issued to
order of The Sun Bank, Sunlight City, Import-Country, notify the above accountee, marked
"freight Prepaid", dated latest March 19, 2005, and showing documentary credit number.
4. Insurance policy in duplicate for 110% CIF value covering Institute Cargo Clauses (A), Institute
War and Strike Clauses, evidencing that claims are payable in Import-Country.
Covering: 100 Sets 'ABC' Brand Pneumatic Tools, 1/2" drive,
complete with hose and quick couplings, CIF Sunny Port
Shipment from: MoonbeamPort, Export-Country toSunny Port, Import-Country
Partial shipment Prohibited
Tran-shipment Permitted
Special conditions:
1. All documents indicating the Import License No. IP/123456datedJ anuary 18, 2005.
2. All charges outside the Import-Country are on beneficiary's account
Documents must be presentedfor payment within 15days after the date of shipment.
Draft(s) drawn under this credit must be marked
Drawn under documentary credit No. SB-87654of The SunBank,
Sunlight City, Import-Country, datedJ anuary 26, 2005
CHAPTE R 5 -S OME IMPORTANT CONCE PTS IN E XPORT FINANCE
5.3 -S upplier's Credit for deferred payment exports
Definition of Deferred Payment Exports:
In terms of Regulation 9of the Foreign Exchange Management Act 1999, the amount representingthe full export
value of goods exportedmust be realized andrepadriatedto India within 6months of date of export.
Exports where more than 10% of the value is realized beyond the prescribed period, i.e. 6 months from date of
shipment, are treatedas DeferredPayment Exports
1. What is an offer?
Exim Bank offers Supplier's Credit in Rupees or in Foreign Currency at post-shipment stage to
finance export of eligible goods and services on deferred payment terms.
Supplier's Credit is available both for supply contracts as well as project exports; the latter
includes construction, turnkey or consultancy contracts undertaken overseas.
2. Who can seek finance?
Exporters can seek Supplier's Credit in Rupees/ Foreign Currency from Exim Bank in respect of
export contracts on deferred payment terms irrespective of value of export contracts.
3. What are the general terms of Supplier's Credit?
E xtent of S upplier's Credit:
100% of post-shipment credit extendedby exporter to overseas buyer.
Currency of Credit:
Supplier's Credit fromEximBank is available in IndianRupees or in Foreign Currency.
Rate of Interest:
The rate of interest for Supplier's Credit in Rupees is a fixedrate andis available on request. Supplier's
Credit in ForeignCurrency is offeredby EximBank on a floating rate basis at a margin over LIBOR
dependent upon cost of funds.
S ecurity: Adequate security by way of acceptable letter of credit and/or guarantee from a bank in the
country of import or any thirdcountry is necessary, as per RBI guidelines.
Period of Credit and Repayment: Period of credit is determined for each proposal having regard
to the value of contract, nature of goods covered, security, competition. Repayment period for
Supplier's Credit facility is fixed coinciding with the repayment of post-shipment credit extended
by Indian exporter to overseas buyer. However, the Indian exporter will repay the credit to Exim
Bank as per agreed repayment schedule, irrespective of whether or not the overseas buyer has
paid the Indian exporter.
Overseas Buyer's Credit: Credit is offered directly to overseas buyer for a specific project/
contract.
Import Trade Procedures & Documentation
Liberalisation of Imports.
Categories of Importers.
Special Schemes for Importers.
Import Procedure :
1. Pre-import Procedure.
2. Legal Dimensions of Import Procedure.
3. Retirement of Import Documents.
4. Customs Clearance.
Classification of Goods for Import Policy & Assessment of Duty.
Bill of Entry.
A Note on Forward Contract.
Liberalisation of Imports
Consequent upon a comfortable balance of payments position of the country,
increasing nec~ssity of imports for export production and globalisation of Indian economy, the
Government of India has liberali~ed the import regime from time to time. At present, practically, all
controls on imports have been lifted. Under the new EXIM Policy 2002-07 announced on March 31 , 2002,
the Government has initiated a comprehensive' package intended to make international trade a vital .part
of development strategy. It has substantially eliminated licensing, quantitative restrictions and. -other
regulatory and discretionary controls both on exports and imports.
All goods may be imported freely in India without any restriction except to the extent such imports are
regulated by the provisions of.the EXIM Policy 2002-07 or any other law for the time being in force.
Moreover, the customs duties on imports
have been considerably reduced and rationalised during the last few years. The
procedure for imports has been considerably simplified and the bureaucratic controls have been reduced
to the bare minimum. Besides, availability of foreign exchange for imports has also been eased.
Regulations regarding personal imports such as consumer goods, baggage etc., have been substantially
liberalised.
Categories of Importers
Importer means a, person who imports or intends to import and holds an Importer-Exporter.Code (lEC)
Number. They can be divided into two categories :
Actual User
(a) Actual user (Industrial) :- Actual users (industrial) means person who utilises the imported
goods for manufacturing in his own industrial unit or manufacturing, for his own use in
another unit including, a jobbing unit .
(b) Actual user (Non-industrlal) :- Actual user (non industrial) means a person who utilises the
imported goods for his own use in
any commercial establishment carrying on business, trade or profession or
any. laboratory, scientific research and development institution university or
other educational institution OF hospital; or .
any service industry.
Non-actual user
Non-actual users include:
Importers for Stock and Sale.
Personal Impqrts.
Imports' of Gifts~ etc.
Special Schemes for Importers
As per the latest EXIM Policy 2002-07, import of goods is permissible under the following special
schemes, designed for encouraging exports :
(a) Export Promotion Capital Goods Scheme (EPCG) :- EPCG scheme was
introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporter to import
machinery and other capital goods for export production at concessional or no customs duties
at all. This facility is subject to export obligation i.e, the exporter is required to guarantee
exports certain minimum value, which is in multiple of the value of capital goods imported.
(b) Duty Free Replenishment Certificate (DFRC}:- DFRC is issued to a
merchant exporter or manufacturer exporter for the duty free import of inputs such as raw materials components,
intermediates, consumables, spare parts ,
including packing materials to be used for export: production. Such certificate
is subject to the fulfilment. of time bound export obligation and is issued in
respect of products covered. under the standard Input,Output Norms (Sions)
(C) Duty Eritltleme.t Passbook Scheme (DEPB}:- under the DEPB scheme an
. exporter may apply for credit as a specified percentage of FOB value of exports ,
made in freely convertible currency: The credit shall be available Against such
export products and at such rates as may be specified by the Director General
of foreign Trade (DGF) by way of public notice issued in this behalf, for import
of raw materials, intermediates, components, parts, packaging materials, etc.
(D) Advance Licence :- An advance licence is issued for duty free import of
components which are physically incorporated in the products
manufactured for export. In addition, fuel, oil, energy, catalysts, etc.which are consumed in the
course of production process may also be allowed.
Duty free import of mandatory spares up to 10% of the C.I.F. value of the licence which are required to be
exported or supplied with the resultant product may also be allowed. Advance Licence can be issued for :

Physical Exports.
Intermediate Supplies
Deemed exports.
Pre-Import Procedure
(a) Selecting the Commodity :- An importer should select the commodity for import after considering
various commercial factors as well as legal considerations including the regulations contained in the EXIM
Policy. Imports may be made freely except to the extent they are regulated by the provisions of the EXIM
Policy. Prohibited goods cannot be imported at all. Import of restricted items is permitted through
licensing only while canalised items can be canalised through specified State Trading Enterprises (STEs).
(b) Selecting the Overseas Supplier :- Imports can be made from any country of the world except Iraq.
However, there shall be no ban on the import of items form Iraq in case where the prior approval of the
concerned sanction committee of the UN Security Council has been obtained. The information regarding
overseas suppliers can be obtained from various trade directories,
consulate generals, international trade fairs and exhibitions and chamber of commerce.
(c) Capability and Creditworthiness of Overseas Supplier :- Successful completion of an import
transaction mainly depends upon the capability of the overseas supplier to fulfil his contract. Therefore, it
is advisable to verify the creditworthiness of the overseas supplier and his capacity to fulfil the contract
through confidential reports about him.from the banks and Indian embassies abroad. It is. advisable to
finalise contract through fndenting agents of overseas suppliers situated in India.
(d) Role of Overseas Suppliers' Agents in India :- Some reputed overseas suppliers have their indenting
agents stationed in India. These agents procure orders from the Indian parties and arrange for the supply
of goods from their principal abroad. It is advisable to import through such agents as they can be readily
contacted in case there is any dispute regarding quality or quantity of goods imported, receipt of
payment, documentation formalities, etc.
e) Inquiry, Offer and Counter-offer :- It is advisable that before finalising the terms of import order, one
should call for the samples or catalogue and
other relevant literature and the specifications of t,he items to be imported. Import of samples of goods is
exempted from import duties under 'Geneva' Convention of 7th November 1952. After satisfying himself
with the samples and the creditworthiness of the overseas supplier, the iinporter should proceed to
finalise the terms, of the contract to be entered into.
Legal Dimensions of Import Procedure
(a) Finalisation of the Terms of Contract :- The. import contract should be carefully and comprehensively
drafted incorporating therein precise terms as well as all relevant conditions of the trade deal. There
should not be any ambiguity regarding the exact specifications of the goods and terms of the purchase
including import price, mode of payment, type of packaging, port of shipment, delivery schedule, licence
and permits, discount commission, insurance, arbitration, etc.
(b) Mode of Pricing and INCO TERMS :- While finalising terms cof import contract, the importer should,
inter-alia, be fully conversant with the mode of pricing and the manner of payment for the imports. As
regards mode of pricing, the overseas supplier should quote the terms prevailing in international trade.
International Chamber of Commerce (ICC) , paris given detailed definition of a few standard terms
popularly known as INCOTERMS'. These terms have almost universal acceptance.
(c) Mode of Settlement of Payment :- There are mainly three modes settling international transactions
depending upon the creditworthiness of the importer or exporter, demand for the commodity in the
international market, exchange control regulations prevailing in the importer or countries and other
relevant factors
Advance Payment.
Payment or Acceptance against Document Collections.
Payment under Letter of Credit.
(d) Obtaining IEC Number :- In India, it is obligatory for every importer and exporter to register themselves
with the Director General of Foreign trade (DGFT) and obtain Import-Export Code (IEC) Number. The
application form
for obtaining IEC number should be accompanied by a fee of Rs.1000 and
two copies of passport size photographs of the applicant duly attested by the banker of the applicant and
other, relevant documents.
(e) Obtaining Import Licence :- If the item to be imported falls in the prohibited list, then such item cannot
be imported at all. How, if it falls in restricted list then the necessary clearance must be obtained from
appropriate licensing authority. Similarly, if it is subject to the canalisation through State Trading
Enterprises (STEs), then the necessary formalities are to be completed pertaining to the same.
(f) Obtaining Foreign EXchange :- In India, all foreign exchange transactions are regulated by the
Exchange Control Department of the Reserve bank of India (RBI). Therefore, every importer is required to
make to the Reserve Bank of India (RBI) for getting. sanction for making overseas.
Payments. The Exchange Control Department scrutinises the application and if satisfied, sanctions
necessary foreign exchange for the import transaction.
(g) Arranging Finance for Import :- It is advisable that the financial planning for imports should be done in
advance in order to avoid huge demurrages on the imported goods lying uncleared for want of payment.
Banks normally do not extend any fund based assistance to importers. However, they enable industrial
units and others to have access to imported inputs and machinery by establishing letters of credit in
favour of the overseas suppliers.
(h) Obtaining Import L/C Umit:- Import L/C limits are sanctioned by the banks on submission of complete
loan proposal as in the case of other types of credit facilities. This requires advance financial planning so
as to retire import bills under L/C on time. Any delay in retirement of bills not only strains the relations of
the importer with his bank but also results in additional costs by by of extra commission, penal interest,
demurrage charges, etc.
(i) Despatching Letter of Credit :- If the term of payment agreed between the importer and the overseas
supplier is a letter of credit then the importer
should obtain the letter of credit from his bank and forward it to the overseas supplier well within the time
agreed for the same. The importer must see to it that the letter of credit has been prepared in the strict
conformity of the import contract entered between them.
Retirement of Import Documents
(a) Loading of Goods and Receipt of Shipment Advice :- On loading of goods the oyerseas supplier
despatches the shipment advice to the importer
informing him about the shipment of goods. The shipment advice contains" invoice number, bill of lading,
airways bill number and date, name of the vessel with date, the port of export, description of goods and
quantity and the date of sailing of the vessel.
(b) Retirement of Import Documents :- After shipping the goods, the overseas
supplier prepares the necessary documents as per the terms of contract
and letter of credit and hands them over to his bank for their onward negotiation" to importer in the
manner as specified in the L/C.The set normally contains bill of exchange," commercial invoice, bill of
lading, packing list, certificate of origin, marine insurance policy, etc.
For the retirement of documents, the importer is require~ to submit the following documents to his bank :

(a) A letter authorising his bank to debit the equivalent Indian rupees to the
value of documents including bank charges. .
(b) Exchange control copy of the Import Licence, if applicable. .
(c) FormAl duly completed for the remittance in foreign exc
(c) Acceptance of the Bill of Exchange :- Bill of Exchange accompanied by the above documents is known
as the Documentary Bill of Exchange.IT is of
two types :
Documents against Payment (Sight Drafts) :- In case of sigh draft,
the drawer instructs the bank to hand over the relevant documents the importer only against payment.
Documents against Acceptance (Usance Draft) :- In case of usance
draft, the drawer instructs the bank to hand over the relevant documents to the importer against his
'acceptance' of the bill of exchange.
(d) Scrutiny of Documents Received under L/c :- After receipt of import
documents from the exporter's bank, the importer's bank will scrutinise the documents as to their
correctness as per the terms and conditions of L/C and hands over them to the importer after payment.
The importer should also scrutinise the documents and ensure that there are no discrepancies.
(e) Appointment of C & F Agent :- In India, the procedure for clearance imported goods is very lengthy,
time consuming and involves lots of legal formalities. Therefore, it is advisable to hire the services of C&F
agents who are well versed with such formalities. The C&F Agent prepares bill of entry containing details
of goods to be cleared from the customs ,in case the C&F agent does not have relevant information about
the goodsto be cleared, he prepares a bill of sight in order to enable himself to physically check the
goods imported and prepare bill of entry on that basis.
Customs Clearance Procedure for Imported Goods
Under the Ministry of Finance (Department of Revenue), there are two
independent Boards of Revenue :- . '
(a) Central Board of Direct Taxes (for Income Tax, Wealth Tax etc.)
(b) Central Board of Excise and Customs.
The Customs administration vests with the Central Board for excise and Customs, which shapes the policy
and decides the functions of the formalities in the country, in terms of the provisions of the Customs act
1962
All goods imported in India have to pass through the customs clearanceafter they cross the Indian border.
The goods so imported are examined appraised assessed, evaluated and then allowed to be taken out of
customs charge for use by the importer.
The procedure for customs clearance in general for goods imported as follows :
(a) Import Manifest :- As per the section 30 of the Customs Act 1962,the
persons in charge of a conveyance carrying imported goods should hand
over, within 24 hours of the arrivafof the conveyance, an import manifest to the customs. The, import
manifest is a complete, list of all items the conveyance carries on board, including those to be transhipped
and those to be carried to the subsequent ports of call. '
(b) Entry in the Import Department of Customs House :- On receipt of information regarding the arrival of
the goods, the importers or their 'agents have to make an entry by filing a Bill of Entry, in a prescribed
form in the Import Department of Customs House. The. date of presentation of Bill of Entry is an
important date as the rate of duty applicable to the imported goods will be the rate, which is in force on
tl1e date of apresentation.
(c) Presentation of Bill of Entry for Appraisal :- After the Bill of Entry is noted in the import department, the
same should be presented to the Appraising Counters along with the following necessary documents :
Import licence, if necessary.
Exporter's Invoice.
A copy of Letter of Credit.
Original Bill of Lading and its non-negotiable copy.
Two copies of Packing List.
Weight specifications.
Manufacturer's test certificate.
Certificate of Origin.
Delivery order issued by Shipping company or its agent.
Freight and insurance amount certificate if the import is on FOB terms
A declaration from importer that he has not paid any commission to
agents in India.:
CUstoms declaration
Catalogue/drawing, etc for machinery imported.
In addition to the above, the following documents are also required to be submitted wherever necessary :-
If the spare parts are imported - exporters invoice showing unit price
and extended tptal of each item;
If the, secondhand machinery is imported - Chartered Engineer's Certificate;
If the steel is imported - Manufacturer's Analysis Certificate;
If Chemicals' and alIled products are imported - Literature showing chemical consumption
If the textiles items are imported - Textile Commissioners endorsement or certificate.
If the above documents furnished by the importer are found to be adequate for acceptance of the declared
value and determination of classification and acceptance of ITC Licence, the bill of Entry is completed by
the Appraiser. It
is then countersigned by the, Assistant Collector and sent to the Licence
Section with an order to the Dock Staff for examination of good clearance.
(d) Clearance of Goods :- After payment of duty (the original copy of bill of
Entry is retained in the Customs House) the importer should obtain the
duplicate copy of Bill of Entry on which order for examination of the goods
is given by Customs and get the goods examined. If the description of goods
is found to be correct, on the basis of declared and accepted paarticulars ,
clearance of goods is allowed by the appraiser.
(e) Warehousing the Goods :- The imported goods can be warehoused at the port of shipment without the
payment of duty by presenting a "Bill of entry for Warehousing" to the Bonds Department along with a
bond for twice the
amount of duty payable. Initially the facility is granted for 3 months, which
may be extended upto a period one year. The warehoused goods cleared in one or more installments. For
clearance of goods from the warehouse the importer is required to present what is known as 'Ex-bond Bill
of entry.
(f) Import Follow-up :- Once an importer is allowed to remit foreign exchange out of the country he has an
obligation to import the permitted goods of equivalent value in the country. If no goods or goods for
lesser values are imported, it would lead to leakage of foreign exchange.
Bill of Entry
The bill of entry is a document, prepared by the importer or his clearing agent in the prescribed form
under Bill of Entry Regulations, 1971, on the strength of which clearance of imported goods can be made.
When goods are imported in a particular country, the importer has to pay necessary import duty. For this
purpose, necessary information about the goods imported must be given to the customs authorities in a
prescribed form called bill of entry form. Bill of entry is a document, which states that the goods of the
stated values and description in the specified quantity have entered into the country from abroad. The bill
of entry is drawn in triplicate. The customs authorities may ask the importer to supply other documents
invoice broker's note and insurance policy, etc., in order to verify the correctness of the information
supplied in the bill of entry form.
Types of Bill of Entry
For the purpose of giving information in the bill of entry form,goods are classified into three categories
namely :
(a) Bill of Entry for Goods Imported for Home Consumption {white coloured} :- This kind of bill of entry is
used for clearing imported goods paying customs duty at the port.
(b) Bill of Entry for Bonded Goods (Yellow coloured) :- This kind bill of entry is used when no duty is paid
on imported goods and therefore are transferred to customs recognised bonded warehouses.
(c) Bill of Entry for Ex-bond Clearance for Home Consumption {green coloured} :- This kind of bill of entry
is used where the importer intends to clear the dutiable goods, either in part or full, from a bonded
warehouse by paying necessary duty.
Contents of Bill. of Entry
The main contents of the Bill of Entry are :
(a) Name and address of the importer.
(b) Name and address of the exporter.
(c) Import licence number of the importer.
(d) Name of the port/dock where goods are to be cleared.'
(e) Description of goods.
(f) Value of goods.
(g) Rate and amount of import duty payable.
(h) Other relevant documents.
However, no bill of entry is required in the following cases :
(a) Passengers' baggage;
(b) Favour parcels;
(c) Mail bags and Post parcels; .
(d) Boxes, kennels of cages containing live animals or birds;
(e) Post parcels, ship stores in small quantities for personal use.
(f)Un-serviceable stores, such as, dunnage wood, empty bottles, drums, etc.,of reasonable value (below
Rs. 50);
(g) Cargo by sailing vessels from Customs Ports when landed at open bunders only.
FORWARD CONTRACT
International contracts are either concluded in Indian rupees or in foreign currency. If the contract is
concluded in terms of Indian rupees, all relevant documents are prepared in Indian rupees and hence no
conversion is involved. However, if the contract is concluded in some internationally accepted currency
then the importers have to pay Indian rupees equivalent to the amount of foreign currency.
Where the international contract has been concluded in foreign currency, an importer is always at risk due
to adverse fluctuations in the exchange rates in the international market. Such risks can be avoided by the
following methods :
(a) Invoicing the Goods in Indian Rupees :- The first remedy to adverse
movements in exchange rates is invoicing goods in Indian rupees. However, foreign seller may not agree
to invoicing goods in Indian rupees.
(b) Entering into a Forward Exchange Contract :- This i~ the most commonly practised alternative for
insuring the risks arising out of adverse movements in exchange rates. Under this adjustment, the
importer enters into contract with its bank to purchase from the bank, foreign exchange at a future date
or period and- the bank agrees to sell the firm the foreign exchange on that date or during the agreed
period at certain predetermined rate agreed upon at the time of entering into contract. Thus,. the importer
knows in advance the exchange rate that he is going to pay on delivery of import documents.
TERMS OF SHIPMENTS INCOTERMS
The INCOTERMS (International Commercial Terms) is a universally recognized set of definition of international trade
terms, such as FOB, CFR & CIF, developed by the International Chamber of Commerce(ICC) in Paris, France. It
defines the trade contract responsibilities and liabilities between buyer and seller. It is invaluable and a cost-saving
tool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction.
Once they have agreed on a commercial terms like FOB, they can sell andbuy at FOB without discussing whowill be
responsible for the freight, cargo insurance and other costs andrisks.
The INCOTERMS was first published in 1936 ---INCOTERMS 1936 ---and it is revised periodically to keep with
changes in the international trade needs. The complete definition of each term is available from the current
publication ---INCOTERMS 2000. Under INCOTERMS 2000, the international commercial terms are grouped into E,
F, C andD, designatedby the first letter of the term, relating tothe final letter of the term. E.g. EXWexworks comes
under groupedE.
The purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly used
trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can
be avoided or at least reduced to a considerable degree. The scope of Incoterms is limited to matters relating to the
rights and obligations of the parties to the contract of sale with respect to the delivery of goods. Incoterms deal with
the number of identified obligations imposed on the parties andthe distribution of risk between the parties.
In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms that
would hold the seller responsible for the import customs clearance and/or payment of import customs duties and
taxes and/or other costs and risks at the buyers end, for example the trade terms DEO (Delivery ExQuay) andDDP
(DeliveredDuty Paid)
Quite often, the charges and expenses at the buyers end may cost more to the seller than anticipated. To overcome
losses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines.
Similarly, it wouldbe best for importers not to deal inEXW (ExWorks) which wouldholdthe buyer responsible for the
export customs clearance, payment of export customs charges and taxes, and other costs and risks at the sellers
end
MORE CLARIFICATION ON INCOTERMS
E XW {+the named place}
E xWorks: Exmeans from. Works means factory, mill or warehouse, which are the sellers premises. EXW applies to
goods available only at the sellers premises. Buyer is responsible for loading the goods on truck or container at the
sellers premises and for the subsequent costs and risks. In practice, it is not uncommon that the seller loads sthe
goods on truck or container at the sellers pre4mises without charging loading fee. N the quotation, indicate the
namedplace (sellers premises) after the acronymEXW for example EXW Kobe andEXW SanAntonio.
The termEXW is commonly used between the manufacturer (seller) and export-trader(buyer), and the export-trader
resells on other trade terms to the foreign buyers. Some manufacturers may use the termEx Factory, which means
the same as ExWorks.
FCA {+the named point of departure}
Free Carrier: The delivery of goods on truck, rail car or container at the specified point(depot) of departure, which is
usually the sellers premises, or a named railroad station or a named cargo terminal or into the custody of the carrier,
at sellers expense. The point(depot) at origin may or may not be a customs clearance centre. Buyer is responsible for
the main carriage/freight, cargoinsurance and other costs andrisks.
In the air shipment, technically speaking, goods placed in the custody of an air carrier are considered as delivery on
board the plane. In practice, many importers and exporters still use the termFOB in the air shipment. The termFCA
is also usedin the RO/RO (roll on/roll off) services
In the export quotation, indicate the point of departure (loading) after the acronymFCA, for example FCA Hong Kong
and FCA Seattle. Some manufacturers may use the former terms FOT (Free on Trucks) and FOR (Free on Rail) in
selling to export-traders.
FAS {+the named port of origin}
Free Alongside S hip: Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within
reach of its loading equipment so that they can be loaded aboard the ship, at sellers expense. Buyer is responsible
for the loading fee, main carriage/freight, cargo insurance, and other costs and risks In the export quotation, indicate
the port of origin(loading)after the acronym FAS, for example FAS New York and FAS Bremen. The FAS term is
popular in the break-bulk shipments andwiththe importing countries using their own vessels.
FOB {+the named port of origin)
Free on Board: The delivery of goods on the board the vessel at the named port of origin (Loading) at sellers
expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the export
quotation, indicate the port of origin (loading) after the acronym FOB, for example FOB Vancouver and FOB
Shanghai.
Under the rules of the INCOTERMS 1990, the term FOB is used for ocean freight only. However, in practice, many
importers and exporters still use the term FOB in the air freight. In North America, the term FOB has other
applications. Many buyers and sellers in Canada and the USA dealing on the open account and consignment basis
are accustomedto using the shipping terms FOB Origin andFOB destination.
FOB Origin means the buyer is responsible for the freight and other costs and risks. FOB Destination means the
seller is responsible for the freight and other costs and risks until the goods are delivered to the buyers premises
which may include the import custom clearance and payment of import customs duties and taxes at the buyers
country, depending on the agreement between the buyer and seller. In international trade, avoid using the shipping
terms FOB Origin and FOB Destination, which are not part of the INCOTERMS (International Commercial Terms).
CFR {+the named port of destination}
Cost and Freight: The delivery of goods to the named port of destination (discharge) at the sellers expenses. Buyer
is responsible for the cargo insurance and other costs and risks. The termCFR was formerly written as C&F. Many
importers andexporters worldwide still use the termC&F.
In the export quotation, indicate the port of destination (discharge) after the acronymCFR, for example CFR Karachi
and CFR Alexandria. Under the rules of the INCOTERMS 1990, the termCost and Freight is used for ocean freight
only. However, in practice, the termCost andFreight (C&F) is still commonly usedin the air freight.
CIF {+named port of destination}
Cost, Insurance and Freight: The cargo insurance and delivery of goods to the named port of destination
(discharge) at the sellers expense. Buyer is responsible for the import customs clearance and other costs andrisks.
In the export quotation, indicate the port of destination (discharge) after the acronymCIF, for example CIF Pusan and
CIF Singapore. Under the rules of the INCOTERMS 1990, the termCIFI is used for ocean freight only. However, in
practice, many importers andexporters still use the termCIF inthe air freight.
CPT {+the named place of destination}
Carriage Paid To: The delivery of goods to the named port of destination (discharge) at the sellers expenses. Buyer
assumes the cargo insurance, import custom clearance, payment of custom duties and taxes, and other costs and
risks. In the export quotation, indicate the port of destination (discharge) after the acronym CPT, for example CPT
Los Angeles andCPT Osaka.
CIP {+the named place of destination)
Carriage and Insurance Paid To: The delivery of goods and the cargo insurance to the named place of destination
(discharge) at sellers expense. Buyer assumes the importer customs clearance, payment of customs duties and
texes, and other costs andrisks.
In the export quotation, indicate the place of destination (discharge) after the acronym CIP, for example CIP Paris
andCIP Athens.
DAF {+the names point at frontier}
Delivered At Frontier: The delivery of goods to the specified point at the frontier at sellers expense. Buyer is
responsible for the import customclearance, payment of customduties andtaxes, and other costs andrisks.
In the export quotation, indicate the point at frontier (discharge) after the acronymDAF, for example DAF Buffalo and
DAF Welland.
DE S {+named port of destination}
Delivered Ex S hip: The delivery of goods on boardthe vessel at the named port of destination (discharge) at sellers
expense. Buyer assumes the unloading free, import customs clearance, payment of customs duties and taxes, cargo
insurance, and other costs andrisks.
In the export quotation, indicate the Port of destination (discharge) after the acronymDES, for example DES Helsinki
andDES Stockholm.
DE Q {+the named port of destination
Delivered Ex Quay: The delivery of goods to the Quay (the port) at the destination at buyers expense. Seller is
responsible for the importer customs clearance, payment of customs duties and taxes, at the buyers end. Buyer
assumes the cargo insurance and other costs and risks. In the export quotation, indicate the Port of destination
(discharge) after the acronymDEQ, for example DEQ Libreville andDEQ Maputo.
DDU {+the named point of destination}
Delivered Duty Unpaid: The delivery of goods and the cargo insurance to the final point at destination, which is
often the project site or buyers premises at sellers expense. Buyer assumes the import customs clearance, payment
of customs duties andtaxes. The seller may opt not to insure the goods at his/her own risks.
In the export quotation, indicate the point of destination (discharge) after the acronymDDU for example DDU La Paz
andDDU Ndjamena.
DDP {+the named point of destination)
Delivered Duty Paid: The seller is responsible for most of the expenses which include the cargo insurance, import
customclearance, and payment of customduties, and taxes at the buyers end, and the delivery of goods to the final
point of destination, which is often the project site or buyers premise. The seller may opt not to insure the goods at
his/her own risk. In the export quotation, indicate the point of destination (discharge) after the acronym DDP, for
example DDP Bujumbura andDDP Mbabane.
E-term,F-term, C-term &D-term: Incoterms 2000, like its immediate predecessor, groups the term in four
categories denoted by the first letter in the three-letter abbreviation.
Under the E-TE RM (EXW), the seller only makes the goods available to the buyer at the sellers own
premises. It is the only one of that category.
Under the F-TE RM (FCA, FAS, &FOB), the seller is calleduponto deliver the goods to a carrier appointed
by the buyer.
Under the C-TERM (CFR, CIF, CPT, & CIP), the seller has to contract for carriage, but without assuming
the risk of loss or damage to the goods or additional cost due to events occurring after shipment or
discharge.
Under the D-TE RM (DAF, DEQ, DES, DDU & DDP), the seller has to bear all costs and risks needed to
bring the goods to the place of destination.
All terms list the sellers and buyers obligations. The respective obligations of both parties have been grouped under
up to 10 headings where each heading on the sellers side mirrors the equivalent position of the buyer. Examples
are Delivery, Transfer of risks, and Division of costs. This layout helps the user to compare the parties respective
obligations under each Incoterms.
CHAPTER 6 - MAJOR FINANCIAL AND OTHER INSTITUTIONS
For providing credit and finance and insuring export credit risk, there are 2 primary institutions i.e.
EXIM Bank and ECGC.
Although there are other commercial banks, nationalized institutions and private institutions such as
IFCI, IDBI, engaged in providing finance to exporter. The major institutions are EXIM Bank, ECGC, and
RBI.
6.1 - EXIM BANK
Exim Bank Act-Completed 20 years of operations.
Set upby an Act of Parliament inSeptember 1981.
Commencedoperations in March 1982.
Wholly ownedby the Government of India.
Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting
foreign trade in India.
Exim is the principal financial institution in the country for co-ordinating working of institutions
engaged in financing exports and imports.
INTRODUCTION
The Export-Import bank of India is the apex institution for project finance, which provides direct finance
and coordinates the working of the institution, which is engaged in financing export or import of goods
and services. It has taken over the operations of international finance wing of the industrial development
bank of India (IDBI). The EXIM bank of India came into existence on 1
st
January 1982, and started
functioning from 1
st
march 1982. It has its headquarter in Mumbai and its branches and offices in
important cities in India and abroad.
Offices
Head office Mumbai.
A network of 13 offices in India and Overseas.
Domestic Offices -Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, NewDelhi, Pune.
Overseas Offices -Budapest, J ohannesburg, Milan, Singapore, Washington DC.
PURPOSE
The EXIM bank was established for the purpose of financing medium and long term loan to the exporters
thereby promoting foreign trade of India.
MAIN OBJECTIVES
To provide financial assistance (medium and long term) to exporters and importers.
To function as the principal financial institution for coordinating the working of institutions engaged
in providing export finance.
To promote Foreign Trade of India.
To deal with all matters that may be considered to be incidental or conducive to the attainment of
above objectives.
FUNCTIONS
The assistance provided by EXIM Bank to the exporters can be grouped under two heads:
A. Fund Based Assistance.
B. Non-Fund based Assistance.
The various assistance provided by EXIM Bank can be charted as follows:
A. FUND BAS E D ASS ISTANCE:
Assistance to Indian Exporters:
(a) It provides financial assistance to Deferred credit exports.
(b) It offers credit facilities to Deemed Exports.
(c) It finances Indi an Joi nt Ventures i n Forei gn countries.
INDIAN PARTIES.
INDIAN BANKS.
OVERSEAS BUYERS.
OVERSEAS BANKS.
FINANCIAL
GUARANTEES.
ADVISORY AND
OTHER SERVICES.
ASSISTANCE OFFERED BY EXIM BANK
FUND BASED
ASSISTANCE
NON-FUND BASED
ASSISTANCE
(d) Finances units inEPZ/ SEZ and 100% EOUs.
(e) It provides Pre-shipment finance to exporters for procuringrawmaterials andother inputs.
(f) It finances export/import of machinery andequipment on lease basis.
(g) It provides Computer Software exporters foreign exchange loan subject toRBI clearance.
(h) It provides finance facility against deferredcredit to exporters of consultancy, technology andother
services.
(i) It provides finance toIndian exporters to undertake various export marketing activities in India and
abroadthroughExport Marketing Fund(EMF).
(j) It also operates Export Development Fund(EDF) to finance techno-economic survey/research or
any other study for the development of Indian Exports.
Assistance to Indian Commercial Banks:
(a) It provides Refinance Facilities so as to Indian exporters who extendtermcredit to importers.
(b) It offers Export Bills Rediscounting Facility to commercial banks in India who have earlier
discountedbills of exporters.
Assistance to Overseas Buyers:
(a) It offers Overseas Buyers Credit facility to foreignimporters for import of Indian capital goods and
relatedservices with repayment spreadover a periodof years.
Assistance to Overseas Banks:
(a) Long termfinance is also providedunder Lines of Credit to finance financial institutions abroad,
who in turn, extendfinance to importers of their country to buy IndianCapital goods.
(b) It provides Relending Facility to overseas Banks tomake available termfinance totheir clients for
import of Indian goods.
2. NON-FUND BAS E D AS S IS TANCE
Guarantees and Bonds:
EXIMBank provides non-fundbase assistance inthe formof guarantees in the nature of BidBonds, Performance
Guarantee etc. These guarantees are providedtogether with Commercial Banks.
Advisory and Other S ervices:
(a) It advises Indian companies, in Executing Contracts Abroad, and on sources of overseas
financing.
(b) It advises Indian exporters on global exchange control practices.
(c) The EXIMBank offers Financial andAdvisory Servi ces to Indian construction proj ects abroad.
(d) It advises small -scal e manufacturers on export markets andproduct areas.
(e) It provides Euro Fi nancing sources andGlobal Credit sources to Indian exporters.
(f) It assists the exporters under Forfeiting scheme.
FREQUENTLY ASKED QUESTIONS (FAQs) IN EXIM BANK
1. What is E xport-Import Bank of India? What are its objectives?
The Export-Import Bank of India (Exim Bank) is a public sector financial institution created by an Act of
Parliament, the Export-import Bank of India Act, 1981. The business of Exim Bank is to finance Indian exports
that lead to continuity of foreign exchange for India. The Bank's primary objective is to develop commercially
viable relationships with a target set of externally orientedcompanies by offering thema comprehensive range of
products andservices, aimed at enhancing their internationalization efforts.
2. What is the place of Exim Bank in the institutional structure for financing developmental needs?
There are apexinstitutions in the country, which deal with major economic activities, viz. industry, agriculture and
foreign trade. The Industrial Development Bank of India extends term industrial loans; the National Bank for
Agricultural loans; and the Exim Bank extends term loans for foreign trade. All these institutions are wholesale
banks. They, therefore work closely with commercial banks andother state level financial institutions that operate
the retail banking systemin the country.
3. What are the types of services provided by E ximBank?
EximBank provides a range of analytical information and export related services. The Bank's fee based services
help identify new business propositions, source trade and investment related information, create and enhance
presence through joint network of institutional linkages across the globe, and assists externally oriented
companies in their quest for excellence and globalization. Services include search for overseas partners,
identification of technology suppliers, negotiating alliances, and development of joint ventures in India and
abroad. The Bank also supports Indian project exporters and consultants to participate in projects funded by
multilateral funding agencies.
4. How does E ximBank support Indian consultants to secure assignments overseas?
EximBank encourages Indian consultants to gain and enhance their international exposure by assisting themin
securing assignments overseas.
Assignments are awarded under programme sponsored by International Finance Corporation (IFC) in
Washington to promote private sector development in select countries and regions. Arrangements set in place
cover:
Africa Project Development Facility
African Management Services Company
Africa Enterprise Fund
South-east Europe Enterprise Development Facility
MekongProject Development Facility
Business Advisory andTechnical Assistance Services (BATAS)
Other Technical Assistance & Trust Funds
Exim Bank assists these agencies in the recruitment of Indian consultants and meets the professional fees of the
consultant selectedby IFC.
Consultancy assignments undertaken comprise pre-feasibility studies, project and investment related services,
management information systems, operations and maintenance support mainly for SMEs in a variety of sectors like
agriculture, agro-industry, consumer goods, light engineering, telecom.
5. What are the various types of financial facilities provided by E ximBank to Indian Companies for export of
turnkey/ construction projects, export of services and export of capital/ engineering goods & consumer
durables?
EximBank provides financial assistance to IndianCompanies by way of a variety of lending Programmes, viz.
Non-Funded
BidBond
Advance Payment Guarantee
Performance Guarantee
Guarantee for release of Retention Money
Guarantee for raisingBorrowings Overseas
Other guarantees
Funded
Pre-shipment Rupee Credit
Post-shipment Rupee Credit
ForeignCurrency Loan
Overseas Buyer's Credit
Lines of Credit
Loan under FREPEC programme
Refinance of Export Loans
6. What are the various types of financial facilities provided by Exim Bank to Indian Companies for export
capability creation?
Exim Bank provides financial assistance to Indian Companies for export capability creation by way of a
variety of lending programmes, viz.,
LendingProgramme for Export OrientedUnits
ProductionEquipment Finance Programme
Import Finance
Export Marketing Finance Programme
LendingProgramme for Software Training Institutes
Programme for FinancingResearch& Development
Programme for Export Facilitation: Port Development
Export Vendor Development Lending Programme
ForeignCurrency Pre-Shipment Credit
Working Capital TermLoanProgramme for Export Oriented units
7. What type of financial assistance is extended by EximBank in setting up joint ventures?
Assistance is extended to Indian Promoter Companies by way of programmes that address to different
requirements of the promoter company in setting up of the joint venture.
Overseas Investment Finance Programme for setting up joint ventures and wholly owned subsidiaries
abroad.
Asian Countries Investment Partners (ACIP) Programme for creation of a joint venture in India with East
Asian countries, through four facilities that address different stages of a project cycle.
EXPORT FINANCING PROGRAMMES PROVIDED BY EXIM BANK
EXIM INDIA offers a range of financing programs that match the menu of Exim Banks of the industrialized
countries. However, the Bank is atypical in the universe of Exim Banks in that it has over the years evolved,
so as to anticipate and meet the special needs of a developing country. The Bank provides competitive
finance at various stages of the export cycle covering:
EXIM INDIA operates a wide range of financing and promotional programs. The Bank finances exports of
Indian machinery, manufactured goods, and consultancy and technology services on deferred payment
terms. EXIM INDIA also seeks to co finance projects with global and regional development agencies to
assist Indian exporters in their efforts to participate in such overseas projects.
The Bank is involved in promotion of two-way technology transfer through the outward flow of investment
in Indian joint ventures overseas and foreign direct investment flow into India. EXIM INDIA is also a Partner
Institution with European Union and operates European Community Investment Partners' Program (ECIP)
for facilitating promotion of joint ventures in India through technical and financial collaboration with
medium sized firms of the European Union.
The Export- Import Bank of India (Exim Bank) provides financial assistance to promote Indian exports
through direct financial assistance, overseas investment finance, term finance for export production and
export development, pre-shipping credit, buyer's credit, lines of credit, relending facility, export bills
rediscounting, refinance to commercial banks.
Loans to Indian Entities
Deferred payment exports: Term finance is provided to Indian exporters of eligible goods and
services, which enables them to offer deferred credit to overseas buyers. Deferred credit can also
cover Indian consultancy, technology and other services. Commercial banks participate in this
program directly or under risk syndication arrangements.
Pre-shipment credit: finance is available form Exim Bank for companies executing export contracts
involving cycle time exceeding six months. The facility also enables provision of rupee mobilization
expenses for construction/turnkey project exporters.
Term loans for export production: Exim Bank provides term loans/deferred payment guarantees to
100% export-oriented units, units in free trade zones and computer software exporters. In
collaboration with International Finance Corporation. Washington, Exim Bank provides loans to enable
small and medium enterprises upgrade export production capability. Facilities for deeded exports;
Deemed exports are eligible for funded and non- funded facilities from Exim Bank.
Overseas Investment finance: Indian companies establishing joint ventures overseas are provided
finance towards their equity contribution in the joint venture.
Finance for export marketing: This program, which is a component of a World Bank loan, helps
exporters implement their export market development plans.
Loans to Commercial Banks in India
Export Bills Rediscounting: Commercial Banks in India who are authorized to deal in foreign
exchange can rediscount their short term export bills with Exim Banks, for an unexpired usance
period of not more than 90 days.
Refinance of Export Credit: Authorized dealers in foreign exchange can obtain from Exim Bank 100%
refinance of deferred payment loans extended for export of eligible Indian goods.
Guaranteeing of Obligations:
Exim Bank participates with commercial banks in India in the issue of guarantees required by Indian
companies for the export contracts and for execution of overseas construction and turnkey projects.
Loans to Overseas Entities
Overseas Buyer's Credit: Credit is directly offered to foreign entities for import of eligible goods and
related services, on deferred payment.
Lines of Credit: Besides foreign governments, finance is available to foreign financial institutions and
government agencies to on-lend in the respective country for import of goods and services from India.
Relending Facility to Banks Overseas: Relending facility is extended to banks overseas to enable
them to provide term finance to their clients worldwide for imports from India.
A RANGE OF E XPORT S E RVICE S PROVIDE D BY E XIM BANK
EXIM INDIA provides a range of analytical information and export related services necessary for
globalization of Indian companies. EXIM INDIA through its wide network of alliances with financial
institutions, trade promotion agencies, information providers across the globe assists externally oriented
Indian companies in their quest for excellence and globalization. Services include search for overseas
partners, identification of technology suppliers, negotiating alliances, and development of joint ventures
in India and abroad.
A. ADVIS ORY SE RVICE S
I. MULTILATE RAL AGE NCIE S FUNDE D PROJ ECTS OVE RS E AS (MFPO)
S ervices
Information andsupport services to Indian companies to helpimprove their prospects for securing business
inmultilateral agencies fundedprojects.
Dissemination of business opportunities in fundedprojects
Providing detailedinformation on projects of interest
Information on Procurement Guidelines, Policies, Practices of
Multilateral Agencies
Assistance for RegistrationwithMultilateral Agencies
Advising Indian companies on preparation of Expression of Interest, Capability Profile.
BidIntervention
II. PROMOTING INDIAN CONS ULTANCY
TIE -UP WITH:
International Finance Corporation, WashingtonD.C.
Africa Project Development Facility
Africa Enterprise Fund
Technical Assistance & Trust Funds
MekongProject Development Facility
Eastern& SouthernAfrican Trade & Development Bank (PTA Bank)
African Management Services Company (AMSCO), Netherlands
E XAMPLE S
Gems & J ewellery Study -Zambia
Financial Training Mission -Kenya
Cement Project -Cameroon
Software -Madagascar
Wool Knitting -Vietnam
Textile -Nigeria
Refrigeration -Ghana
Financial Training -Poland
III. E XIM BANK AS A CONS ULTANT
Feasibility study for establishment of an export credit andguarantee facility for Gulf CooperationCouncil
countries.
Regional cooperation in export finance and export credit guarantees for ESCAP.
Study on promotion of international competitiveness and exports of manufacturedgoods for ESCAP.
Setting upthe AFRICAN-EXIMBank.
Designing of Export FinancingProgrammes -Turkey
Setting up an EximBank inMalaysia
Design of Export MarketingSeminars for SMEs inVietnam
Export Development Project : Ukraine
Enterprise Support Fund: Armenia
Establishing anExport Credit Guarantee Company in Zimbabwe
Advisory services to Industrial Development Corporation of South Africa for international finance products
B. KNOWLE DGE BUILDING
I. E XIMIUS CE NTRE FOR LE ARNING, BANGALORE
Set up, in October 1994, to organize seminars andworkshops in areas such as international trade
& investment, export marketing, quality, packaging, business opportunities in multilateral agencies
fundedprojects, sector andcountry specific programmes
Guest faculty fromnetwork partners such as IFC, WorldBank, EBRD, UNIDO.
Number of Programmes Conducted: 53
II. RE S E ARCH S TUDIE S
ResearchStudies on products, sectors, countries, macro economic issues relevant to international trade and
investment
Number of research studies publishedas Occasional Papers: 85
C. INFORMATION
Exporters/Importers
Industry/Market Reports
Trade Regulations & Laws
Country Reports
International Quality Standards
Partner Identification
Product Display
E xamples of Information Services
Hungarian Pharmaceutical Sector
Importers of Sanitary ware, Castings inNorthAmerica
Importers of Agro-chemicals inEasternEurope
Study for ear buds market inHungary
Study of the Indian Wine market for a Hungarian Company
Partner identification for anItalian Sanitary ware manufacturer
Study of the Indian Crane Industry for a Finnish company
Regulatory Framework for setting upa Pharma Project inChina
Market report for Computer Monitors inIndia for a Singaporean firm
Study onBicycle market in EasternEurope for Indian Cycle exporter
Market Potential for DeniminSouth East Asia
6.2 -E XPORT CRE DIT GUARANTE E CORPORATION OF INDIA LTD.
In order to provide export credit and insurance support to Indian exporters, the GOI set up the Export Risks
Insurance Corporation (ERIC) in J uly, 1957. It was transformed into export credit guarantee corporation limited (ECGC)
in 1964. Since 1983, it is nowknow as ECGC of India Ltd.
ECGC is a company wholly owned by the GOI. It functions under the administrative control of the Ministry of
Commerce and is managed by a Board of Directors representing government, Banking, Insurance, Trade and Industry.
The ECGC with its headquarters in Bombay and several regional offices is the only institution providing insurance cover
to Indian exporters against the risk of non-realization of export payments due to occurrence of the commercial and
political risks involved in exports on credit terms and by offering guarantees to commercial banks against losses that the
bank may suffer in granting advances to exports, in connectionwith their export transactions.
OBJ ECTIVE S OF E CGC:
To protect the exporters against credit risks, i.e. non-repayment by buyers
To protect the banks against losses due to non-repayment of loans by exporters
COVE RS IS S UE D BY E CGC:
The covers issued by E CGC can be divided broadly into four groups:
1. S TANDARD POLICIE S issued to exporters to protect then against payment risks involved in exports on
short-termcredit.
2. S PE CIFIC POLICIE S designed to protect Indian firms against payment risk involved in (i) exports on
deferred terms of payment (ii) service rendered to foreign parties, and (iii) construction works and turnkey
projects undertaken abroad.
3. FINANCIAL GUARANTE E S issued to banks in India to protect them from risk of loss involved in their
extending financial support to exporters at pre-shipment andpost-shipment stages; and
4. S PE CIAL S CHE MES such as Transfer Guarantee meant to protect banks which add confirmation to letters of
credit openedby foreign banks, Insurance cover for Buyers credit, etc.
(A) STANDARD POLICIE S :
ECGC has designed 4types of standardpolicies to provide cover for shipments made on short termcredit:
1. Shipments (comprehensive risks) Policy to cover both political and commercial risks from the date of
shipment
2. Shipments (political risks) Policy to cover only political risks fromthe date of shipment
3. Contracts (comprehensive risks) Policy to cover both commercial and political risk from the date of
contract
4. Contracts (Political risks) Policy to cover only political risks fromthe date of contract
RISKS COVE RE D UNDE R THE STANDARD POLICIE S :
1. Commercial Risks
Insolvency of the buyer
Buyers protracteddefault to pay for goods acceptedby him
Buyers failure to accept goods subject to certain conditions
2. Political risks
Imposition of restrictions on remittances by the government in the buyers country or any government
actionwhich may block or delay payment to exporter.
War, revolution or civil disturbances in the buyers country. Cancellation of a valid import license or
new import licensing restrictions in the buyers country after the date of shipment or contract, as
applicable.
Cancellation of export license or imposition of newexport licensing restrictions in India after the date of
contract (under contract policy).
Payment of additional handling, transport or insurance charges occasioned by interruption or diversion
of voyage that cannot be recoveredfromthe buyer.
Any other cause of loss occurring outside India, not normally insured by commercial insurers and
beyondthe control of the exporter and/or buyer.
RISKS NOT COVERE D UNDE R S TANDARD POLICIES :
The losses due to the following risks are not covered:
1. Commercial disputes including quality disputes raisedby the buyer, unless the exporter obtains a decree froma
competent court of law in the buyers country in his favour, unless the exporter obtains a decree from a
competent court of lawin the buyers country in his favour
2. Causes inherent in the nature of the goods.
3. Buyers failure to obtain import or exchange authorization fromauthorities in his county
4. Insolvency or default of any agent of the exporter or of the collecting bank.
5. loss or damage to goods which can be covered by commerci8al insurers
6. Exchange fluctuation
7. Discrepancy in documents.
(B). SPECIFIC POLICIES
The standard policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of
exporters shipment of raw materials, consumable durable for which credit period does not normally exceed 180
days.
Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad are
not of a repetitive nature. Such transactions are, therefore, insured by ECGC on a case-to-case basis under specific
policies.
Specific policies are issued in respect of Supply Contracts (on deferred payment terms), Services Abroad and
Construction Work Abroad.
1) Specific policy for Supply Contracts:
Specific policy for Supply contracts is issued in case of export of Capital goods sold on deferred credit. It can be of
any of the four forms:
Specific Shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the
Post-shipment stage.
Specific Shipments (Political Risks) Policy to cover only political risks after shipment stage.
Specific Contracts (Comprehensive Risks) Policy to cover political and commercial risks after
contract date.
Specific Contracts (Political Risks) Policy to cover only political risks after contract date.
2) Service policy:
Indian firms provide a wide range of services like technical or professional services, hiring or leasing to foreign
parties (private or government). Where Indian firms render such services they would be exposed to payment risks
similar to those involved in export of goods. Such risks are covered by ECGC under this policy.
If the service contract is with overseas government, then Specific Services (political risks) Policy can be obtained
and if the services contract is with overseas private parties then specific services (comprehensive risks) policy can
be obtained, especially those contracts not supported by bank guarantees.
Normally, cover is issued on case-to-case basis. The policy covers 90%of the loss suffered.
3) Construction Works Policy:
This policy covers civil construction jobs as well as turnkey projects involving supplies and services. This policy
covers construction contracts both with private and foreign government.
This policy covers 85% of loss suffered on account of contracts with government agencies and 75% of loss suffered
on account of construction contracts with private parties.
(C). FINANCIAL GUARANTEES
Exporters require adequate financial support from banks to carry out their export contracts. ECGC backs the
lending programmes of banks by issuing financial guarantees. The guarantees protect the banks from losses on
account of their lending to exporters. Six guarantees have been evolved for this purpose:-
(i). Packing Credit Guarantee
(ii). Export Production Finance Guarantee
(iii). Export Finance Guarantee
(iv). Post Shipment Export Credit Guarantee
(v). Export Performance Guarantee
(vi). Export Finance (Overseas Lending) Guarantee.
These guarantees give protection to banks against losses due to non-payment by exporters on account of their
insolvency or default. The ECGC charges a premium for its services that may vary from 5 paise to 7.5 paise per
month for Rs. 100/-. The premium charged depends upon the type of guarantee and it is subject to change, if
ECGC so desires.
(i) Packing Credit Guarantee: Any loan given to exporter for the manufacture, processing, purchasing or packing
of goods meant for export against a firm order of L/C qualifies for this guarantee.
Pre-shipment advances given by banks to firms who enters contracts for export of services or for construction
works abroad to meet preliminary expenses are also eligible for cover under this guarantee. ECGC pays two thirds
of the loss.
(ii) Export Production Finance Guarantee: this is guarantee enables banks to provide finance at pre-shipment
stage to the full extent of the of the domestic cost of production and subject to certain guidelines.
The guarantee under this scheme covers some specified products such a textiles, woolen carpets, ready-made
garments, etc and the loss covered is two third.
(iii) Export Finance Guarantee: this guarantee over post-shipment advances granted by banks to exporters
against export incentives receivable such as DBK. In case, the exporter
Does not repay the loan, then the banks suffer loss? The loss insured is up to three fourths or 75%.
(iv) Post-Shipment Export Credit Guarantee: post shipment finance given to exporters by the banks purchase or
discounting of export bills qualifies for this guarantee. Before extending such guarantee, the ECGC makes sure
that the exporter has obtained Shipment or Contract Risk Policy. The loss covered under this guarantee is 75%.
(v) Export Performance Guarantee: exporters are often called upon to execute bid bonds supported by a bank
guarantee and it the contract is secured by the exporter than he has to furnish a bank guarantee to foreign parties
to ensure due performance or against advance payment or in lieu of or retention money. An export proposition
may be frustrated if the exporters bank is unwilling to issue the guarantee.
This guarantee protects the bank against 75% of the losses that it may suffer on account of guarantee given by it
on behalf of exporters.
(vi) Export Finance (Overseas Lending) Guarantee: if a bank financing overseas projects provides a foreign
currency loan to the contractor, it can protect itself from risk of non-payment by the con tractor by obtaining this
guarantee. The loss covered under this policy is to extent of three fourths (75%).
(D) SPECIAL SCHEMES
A part from providing policies (Standards and Specific) and guarantees, ECGC provides special schemes. These
schemes are provided o the banks and to the exporters. The schemes are:
I. Transfer Guarantee: the transfer guarantee is provided to safeguard banks in India against losses arising out
of risk of confirmation of L/C. the risks can be either political or commercial or both. Loss due to political risks
is covered up to 90 % and that due to commercial risks up to 75%.
II. Insurance Cover for Buyers Credit and Lines of Credit: Financial Institutions in India have started direct
lending to buyers or financial institutions in developing countries for importing machinery and equipment
from India. This sort of financing facilitates immediate payment to exporters and frees them from the problem
of credit management.
ECGC has evolved this scheme to protect financial institutions in India which extent export credit to overseas
buyers or institutions.
III. Overseas Investment Insurance: with the increasing exports of capital goods and turnkey projects from India,
the involvement of exporters in capital anticipation in overseas projects has assumed importance. ECGC has evolved
this scheme to provide protection for such investment. Normally the insurance cover is for 15 years.
6.3 - RESERVE BANK OF INDIA
INTRODUCTION:
The RBI with its head quarters in Mumbai and several regional offices is the central banks of our country to authorize
extend and regulate export credit and transaction including foreign exchange affairs. RBI does not directly provide
export finance to the exporters, but it adopts policies and initiates measures to encourage commercial banks and
other financial institutions to provide liberal export finance.
The Two Departments of RBI are:
Industrial and credit department and
Exchange control department
These Departments administers various policies related to export finance/credit and foreign exchange.
SCHEMES OFFERED BY RBI TO ENCOURAGE COMMERCIAL BANKS TO PROVIDE EXPORT CREDIT TO THE EXPORTERS:
EXPORT BILLS CREDIT SCHEME, 1963: Under this scheme, RBI used to grant advance to scheduled banks
against export bills maturing within 180 days. Now this scheme is not in operation.
PRE-SHIPMENT CREDIT SCHEME, 1969: Under this scheme, RBI provides re-finance facilities to scheduled
banks that provide pre-shipment loans to bonafide customers.
EXPORT CREDIT INTEREST SUBSIDIES SCHEME, 1968: Under this scheme, RBI provides interest subsidies of
minimum 1.5 % p.a. to banks, which provide export finance to exporters, provided that the banks charge
interest to exporter within the ceiling prescribed by RBI. The subsidies are given both against packing credit
and post-shipment.
DUTY DRAW BACK CREDIT SCHEME, 1976: Under this scheme, the exporters can avail an interest free
advances from the bank up to 90 days against shipping bill provisionally certified by the customs authority
towards a refund of customs duty. The advances made by commercial banks under this scheme are eligible for
re-finance, free of interest from RBI for maximum period of 90 days form the date of advance.
Other approves or sanctions of application made by the exporters with RBI
Extension of time limit for realization of export proceeds.
Deduction in invoice price of exports goods.
Fixation of commission to overseas consignee or agents.
Provision of blanket permit where a lump sum exchange is released for a number of purposes.
Remittance abroad in respect of advertising, legal expenses etc.
Any other matters relating to foreign trade that require clearance form the exchange Control department
of RBI.
Clearance in respect of joint venture abroad.
GUIDELINES ISSUED BY RBI under section 47 of THE FEMA, 1999.
Issuedby RBI under Sec. 47of Foreign Exchange Management Act, 1999.
Types of E xports covered:
Export of Goods on DeferredPayment Terms (e.g. Export of machinery, equipment, manufactured products)
Turnkey Projects (e.g. Setting upof Sugar Plant, Cement Plant)
ConstructionProjects (e.g. Construction of Roads, Dams, Bridges)
Consultancy & Technical Services (e.g. Operation& Maintenance Contracts) collectively referredto as
'PROJ ECT & SERVICES EXPORTS'.
TURNKEY, CONSTRUCTION & SUPPLY BIDS / CONTRACTS
Upto Rs. 50 crores: ScheduledCommercial Banks.
Upto Rs. 200 crores: EximBank.
Above Rs. 200 crores: WorkingGroup.
SERVICES BIDS / CONTRACTS
On Cash Terms
Upto Rs. 5 crores: ScheduledCommercial Banks.
Upto Rs. 10 crores: EximBank.
Above Rs. 10 crores: WorkingGroup.
On Deferred Payment Terms
For any amount: Working Group.
How to apply for loan?
The proposal is to be submittedin the prescribed application form(Ref: MemorandumPEM) along with
implementation schedule, currency-wise cash flows andwrite-upwith regardto site andinfra-structural condition, and
sub-contracting arrangements envisaged. In case of a non-Government buyer, status report on the client/prime
contractor wouldfirst needto be obtained.
The completedapplications are to be submittedto the sponsoring bank, for consideration, within fifteen days of
entering into contract.
It wouldalso be necessary to consult ECGC in advance in cases where corporation's insurance cover and/or
counter guarantees are required. The applications are forwardedby the sponsoring banks with their comments, to the
following agencies which constitute the WorkingGroup:
EximBank, Mumbai.
Reserve Bank of India,
Exchange Control Department,
Mumbai.
Export Credit Guarantee
Corporation of India Limited, Mumbai.
Ministry of Finance,
Department of Economic Affairs,
BankingDivision, NewDelhi.
Ministry of Finance,
Department of Economic Affairs (FT),
NewDelhi.
Ministry of Commerce, NewDelhi.
Other participating banks
Export Capability CreationProgrammes:
LendingProgramme for Export OrientedUnits
ProductionEquipment Finance Programme
Technology Upgradation FundScheme for Textile andJ ute Industries
Overseas Investment Finance Programme
Equity Investment in IndianVentures Abroad
Asian Countries Investment Partners Programme
Export Marketing Finance Programme
Export Product Development Programme
Export Vendor Development Programme
Programme for Export Facilitation:
Port Development
Software Training Institutes
ForeignCurrency Pre-shipment Credit
Working Capital TermLoanProgramme for Export OrientedUnits
Bulk Import Finance
Finance for Research& Development for Export OrientedUnits
Long TermWorkingCapital
Import Finance
Post-Award Clearance of Export Contracts
Exporter submits application in prescribed from along with copies of contract through his commercial bank for
Post AwardClearance.
Exporter can directly approachEximBankfor proposals of value limits uptoRs.200crores.
On receipt of application andcontract copies fromthe commercial bank, EXIMBank approves the proposal if the
same falls withinits delegatedpowers or convenes WorkingGroupmeeting.
In approvedcases, EximBank/WorkingGroupaccords clearance to the final terms andconditions of the contract
including various fundbasedandnon-fundbasedfacilities andrequisite exchange control approvals.
On the basis of package post award clearance granted by Exim Bank/Working Group, final approvals for fund
based and non-fund based facilities and requisite exchange control approvals are issued by the concerned
institutions andexport's banks.
Criteria for Consideration for Clearance of Export Proposals
Exporter's financial position, track record.
Status of overseas client -Government/Private.
Break-upof contract value -Indian /ThirdCountry /Local.
Risk Assessment of Buyer's Country.
Estimates of Cost andProfitability.
Currency of Payment -Convertible Currency /Local Currency
Security -Letter of Credit, BankGuarantee, Government Guarantee, Externalization undertaking of Central Bank.
ForeignExchange Outgo.
Facilities required by the exporter.
Salient Parameters of Appraisal for Clearance of Export Proposals
Payment Terms : Advance Payment, Progress /DownPayment, DeferredPayment, Retention Money
Availability of ECGC Cover, where necessary
Important Contractual Clauses :
Preshipment Inspection
Arbitration
Force Majeure
Status of Exporter : Prime Contractor/Sub-contractor/ConsortiumMember
Penalty /LiquidatedDamages for delay inContract Execution
Price Escalation
Source of Funding : Multilateral /Local
ForeignExchange Outgo
Facilities required by the exporter
CHAPTE R 9 -CONCLUSION
Learnings/Suggestions through this project:
Export Finance is a very important branch to study & understand the overall gamut of the international finance
market.
Learning of the proper documentation duringimports andexports is very essential while doing trade.
Also the exporter and importer by studying the entire process of export and import finance can get exposure to
risks, andtherby he can hedge himself or the same by booking a forward contract.
Availability of favorable Export finance schemes directly impacts the local trade, encourages exporters, enlarges
markets abroad, improves quality of domestic goods andoverall helps the nation boost its exchange earnings.
The Government of any nation plays a very vital role in boosting export turnover. The credit policy of the Indian
Government is also changeddepending upon the needs of the exporters, global trade environment etc.
ECGC and EXIM Bank take a lot of efforts for Export promotion. The strategies of these 2 agencies in India
should be flexible & their finance schemes should be constantly synchronized with the changing scene of world
trade. This alone can helpIndian exporters to standcompetition inworldmarkets effectively andmore gain-fully.