This action might not be possible to undo. Are you sure you want to continue?
Report Submitted in the partial fulfillment of Post Graduate Diploma in Management
Under the supervision of Professor Dipti Mukerji
Submitted by Deepak Sharma Roll No. 15 Batch 2008-10
Submitted to G. L. Bajaj Institute of Management and Research Plot No. 2, Knowledge Park III, Greater Noida – 201306 Websites: www.glbimr.org
This is to certify that Deepak Sharma 2nd year PGDM student Batch (2008-10) has done dissertation on “Processing export finance in a chemical export unit” under my supervision towards partial fulfillment of PGDM. I wish all the best for his future endeavor.
(Professor Dipti Mukerji) Date: Faculty, GLBIMR Greater Noida
This dissertation project bears the imprint of several persons. I have a deep sense of gratitude & honor towards them. These are just not the formalities but from my deep heart, I am thankful to all of them. First of all I would like to thank G.L.Bajaj Institute Of Management & Research, which has given me chance to do dissertation project on “Processing export finance in a chemical export unit”. I am very grateful to Mr. Deepak Mathur (Assistant Manager, OCCL) who has provided me to essential information in the preparation of this project in his esteem organization and given me proper guidance through out the project. My sincere thanks to Professor Dipti Mukerji (faculty, GLBIMR) with whom vast knowledge about the topic, I could complete my dissertation. She shared her experience which has helped me to approach adequate information and data. My regards to Mr. Hari Sharan (Executive, OCCL) for guiding me and clarifying the doubts in the project, where required. I also like to thank all our faculties who have taught me and have shared their experience with me which has helped me in doing my dissertation project.
Deepak Sharma Roll no- GM 015 PGDM, GLBIMR
I, Deepak Sharma, a student of G.L.Bajaj Institute of Management & Research, hereby declare that the entire project entitled PROCESSING EXPORT FINANCE IN A CHEMICAL EXPORT UNIT schedule & format were drawn & executed under the able guidance & supervision of Professor Dipti Mukerji, is the record of authentic work carried out by me during the academic year 2008-2010 and has not been submitted to any other university or Institute towards the award of any degree.
This dissertation project related to export finance and methods of payments used in international business. In the field of export, any company (exporter) wants security of payment from the importer’s side. On the other hand the importer wants the delivery of consignment on the due date. To fulfill the requirement of both parties various methods has been introduced by International Chamber of Commerce, which are accepted globally. It also focuses at some areas where an exporter needs the credit by financial institutions like banks, Export Credit Guarantee Corporation (ECGC) which Provides a range of credit risk insurance covers to exporters against loss in export of goods and services, Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them, Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan. There are many other institutions like Export and Import Bank of India also known as EXIM Bank helps the exporters in advisory and support services. EXIM Bank offers a diverse range of information, which enables exporters to evaluate international risks, exploit export opportunities and improve competitiveness Export finance is a vast topic of research and not all the areas can be covered through a single project, so I have basically focused on the chemical export unit, which is 100% export oriented unit because I was able to get some useful information regarding the project. To understand the procedure in export finance, this project would be quite helpful. What is the need of the finance in export?, how many types of export finance are there?, why the company needs the finance for export and ?. This study tells us about the procedure by which an export deal done and how the strategies are made to complete an export deal successfully. Therefore, I have studied all the documents, which are being used that Oriental Carbon and Chemicals Ltd., I also studied the incoterms, which are essential for the international business, which are globally accepted international commercial terms for international business transactions.
TABLE OF CONTENTS
1. Introduction Objectives of the study…………………………………………………………….1
2. Research Methodology………………………………………………………….....4 3. Company Profile 3.1 Introduction …………….……………………………………………........6 3.2 Product grades and composition...................................................................7 3.3 Market Strategy of company…………………………………………..….12 3.4 Sales network of company.…………………………………..…................12 4. Concept of Export Finance 4.1 Objectives of export finance………………………………………………18
4.2 Pre-shipment finance………………………………………………….......19
4.3 Some Schemes under Pre-Shipment Stage of Finance……………............20
4.4 Post-shipment finance……………………………………………………..23
4.5 Some schemes under operation in post-shipment finance ………………..25
5. Methods of payment in international business 5.1 Open account…………………………………………………………….....29 5.2 Payment Collection of Bills in International Trade……………………….29 5.3 Letter of Credit (L/C)………………………………………………………32 5.4 Consignment sales……………………………………………………….....34 5.5 Cash in advance…………………………………………………………....34
6. Findings & Suggestions……………………………………………………………35 7. Conclusion……………………………………………………………....................38 Bibliography..................................................................................................................39
OBJECTIVES OF THE STUDY
1) To study the export finance procedure in the perspective of an export unit. 2) To study the circumstances under which the bank finances the Chemical Export Unit. 3) To study the risks involved in granting credit to a foreign buyer.
CHAPTER 1 INTRODUCTION
In the light of growing need & importance of exports for our country it is of utmost importance that everyone should have an insight in the field of exports. In the course of last two decades, the export scenario in India has undergone a tremendous change. The liberalization initiated by the government, the keen competition in the market place & the rapid increase in the export of services have all combined to change the picture completely. This project will be covering various aspects of export finance. Areas covered in this project are related to “export finance, types of export finance, role of finance in export various, financial institutions providing finance for export, Processing export finance in a chemical export unit ” etc. I hope that this project would provide some essential information that will be useful to in future.
FINANCE IS THE LIFE AND BLOOD OF ANY BUSINESS. Success or failure of any export order mainly depends upon the finance available to execute the order. Nowadays export finance is gaining great significance in the field of international finance. Many Nationalized as well as Private Banks are taking measures to help the exporter by providing them pre-shipment and post- shipment finance at subsidized rate of interest. Some of the major financial institutions are EXIM Bank, RBI, and other financial institutions and banks. EXIM Bank is India’s major bank in the field of export and import of India. It has introduced various schemes like forfeiting, FREPEC Scheme, etc. Even Government is taking measures to help the exporters to execute their export orders without any hassles. Government has introduced schemes like Duty Entitlement Pass Book Scheme, Duty free Materials, setting up of Export Promotion Zones and Export Oriented Units, and other scheme promoting export and import in India. Initially the Indian exporter had to face many hurdles for executing an export order, but over the period these hurdles have been removed by the government to smoothen the procedure of export and import in India.
MEANING AND DEFINATIONS OF EXPORT 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 India’s 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. EXPORT FINANCE 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 don’t have sufficient financial funds. Even merchandise exporters require finance for obtaining products from their suppliers.
CHAPTER 2 RESEARCH METHODOLOGY
While preparing a project report, it is very essential to know what exactly we are going to do, how to do, in such a way so that the purpose of our report would be solved and what should be the procedure, we are going to adopt. In dealing with practical issue instead of theoretical problem are very much different. So it is very important to collect appropriate data in such a manner so that it helps us in preparing accurate report and taking correct decision. There are several ways of collecting data while doing the project report or any survey. (1) Primary sources (2) Secondary sources
(1) Primary sources For the primary data I took an appointment from the assistant manager of Oriental Carbon and Chemicals Ltd. and requested him to provide related information for the dissertation. He guided me well about all the procedure of export finance, types of export finance, explain the circumstances in which an export firm needs the export finance and what are the sources available for that. The company did not disclose the crucial data and information related to their clients; however I have used their procedure of dealings with clients in various places in the project as the references. Secondary data: I have collected the secondary data from the various Government institutions site like EXIM Bank, ECGC and RBI. There are no. of books related to export finance and international business available in the library and taken the data from company’s website and various financial and exports documents of the company. The methodology adopted in the procedure followed in order to give the projects its shape is:
Understanding of working process in an export company. Studying the Documents used in the export finance.
Collecting information from export deal files, documents, folders maintained by the company Seeking information from the executives of various departments such as finance, international marketing divisions. Studying the client’s files regarding export deals and understands various kinds of terms and conditions used in export finance. Studying the various types of credit facilities given to the export companies from leading financial institutions. Finally compiling the data in a proper format and making a study of option available.
4.1 Introduction The Oriental Carbon and Chemicals Ltd. was established in 1978 as Dharuhera Chemicals Ltd. (DCL). In 1983 Oriental Carbon Ltd. a group of manufacturing Carbon Black, was merged with DCL to form Oriental Carbon and Chemicals Limited (OCCL). In 1994, OCCL setup a unit of manufacturing insoluble sulfur, which later emerged as a flagship product of the company. The company has installed capacity to produce 10000 MT of Insoluble Sulphur and 41250 MT of Sulphuric Acid. During my project, I also came to know about the distribution channel of the OCCL, which has covered multiple nations in across the world. The countries where the company has the distributors are: USA, Brazil, Turkey, Egypt, Germany, Austria, Eastern Europe, Spain, Italy, Iran, Kenya, South Africa, South Korea, Australia, New Zealand, Malaysia, Indonesia, Pakistan etc. Oriental Carbon and Chemicals Ltd. is equally aware of the needs of its clients and exports the excellent quality products as per the requirements of their clients. This company has steadily progressed over the years from strength to strength. Manufacture of Tyres and different types of Rubber articles like Belts, Hoses and other goods wherein long compound storage, prevention of premature vulcanization, superior adhesion and green tack and use of various reinforcements are pre-requisites for manufacturing superior quality products. High Quality Product Attributes DIAMOND SULF demonstrates all the features one would expect from the finest quality Insoluble Sulfur.
Polymeric sulfur that is insoluble in elastomers, DIAMOND SULF is completely nonblooming: an ideal vulcanizing agent for unsaturated elastomers. It is particularly suitable for use in compounds where sulfur loading levels are required above the sulfur solubility rating of particular elastomers.
DIAMOND SULF offers a single point solution to multiple processing problems, viz,
It prevents bin scorching
• • • • • •
Eliminates sulfur bloom Ensures uniform dispersion Prevents sulfur migration Facilitates optimum curing every time Preserves building-tack Improves bonding between rubber to rubber as also with dissimilar reinforcement material.
Currently DIAMOND SULF is being consumed mostly by the automotive tyre sector in the production of carcass, tread, cushion, beading as well as non-retreading compounds that need long storage periods. However it is also being increasingly used in the manufacture of conveyer and transmission belts, hoses and other rubber products that require green tack and adhesion, extended compound storage and prevention of premature vulcanization. 4.2 Product grades and composition DIAMOND SULF is available in various Grades to cater to different customer requirements: 1) Regular Diamond Sulf Grades 2) High Stability Diamond Sulf Grades 3) Special Diamond Sulf Grades 4.2.1 Regular Insoluble Sulfur TYPICAL PHYSICO CHEMICAL DETAILS OF REGULAR DIAMOND SULF DIAMOND SULF oil treated grades are insoluble in elastomers, they are completely non-blooming and are ideal vulcanizing agent for unsaturated elastomers. They are particularly suitable for use in compounds where sulfur loading levels are required above the sulfur solubility rating of particular elastomers. QUALITY PARAMETERS DS - OT - 10 DS - OT - 20 Material Safety Data Sheet Physical Appearance DS - OT - 10 DS - OT - 20 Fine Yellow Fine Yellow Powder Powder 90±1 90 80±1 90 DS - OT - 33 Test Method DS - OT - 33 Fine Yellow Powder 67±1 90 ASTM D 4578-89 ASTM D
Elemental Sulphur % Insoluble Sulphur (Min)% (On Total S) Oil Content %
4573-95 Acidity(as H2SO4) (Max)% 0.05 0.05 0.05 ASTM D 4569-89 ASTM D 4574-94 ASTM D 4571-94 ASTM D 4572-89 0.2 2.0 0.2 2.0
Ash Content (Max)%
Heat Loss (Max) %
Fineness Retention on (Wet Screen) 100 Mesh (Max)% 0.2 200 Mesh (Max)% 2.0
Packing: Goods are packed in 20/25 kg paper / HDPE Bags which are stretch wrapped by polyfilm and palletized in wooden/steel/plastic pallets. The pallets are stuffed inside the factory in 20'/40' containers and dispatched through world Class Shipping Lines. Packing in 500 Kg big bags is also available. 4.2.2 High Stable Insoluble Sulfur TYPICAL PHYSICO CHEMICAL DETAILS OF HIGH STABLE DIAMOND SULF Insoluble Sulfur possessing higher level of thermal stability provides optimum resistance to reversion to the soluble form of sulfur even at elevated temperatures. Such a product would facilitate enhanced bloom protection. High stable DIAMOND SULF ensures more consistent vulcanizing properties and allows storage at relatively higher ambient temperature. QUALITYPARAMETERS DS - OT - 10 DS - OT - 20 DS - OT - 33 Test Method (HS) (HS) (HS) Material Safety Data Sheet DS - OT - 10 DS - OT - 20 DS - OT - 33 HS HS HS Physical Appearance Fine Yellow Fine Yellow Fine Yellow Powder Powder Powder
Elemental Sulphur % Insoluble Sulphur (Min)% (On Total S) Oil Content %
67±1 90 ASTM D 457889 ASTM D 457395 ASTM D 456989 ASTM D 457494 ASTM D 457194 ASTM D 457289
Acidity(as H2SO4)(Max)% 0.05
Ash Content (Max)%
Heat Loss (Max) %
Fineness Retention on (Wet Screen) 100 100Mesh (Max)% 0.2 200 Mesh (Max)% 2.0 Thermal Stability Heating at 105°C for 15 min.(In Liquid Paraffin ) (Min) % 80
0.2 2.0 80
0.2 2.0 80
Packing: Goods are packed in 20/25 kg paper / HDPE Bags which are stretch wrapped by polyfilm and palletized in wooden/steel/plastic pallets. The pallets are stuffed inside the factory in 20'/40' containers and dispatched through world Class Shipping Lines. PRE DISPERSED DS-75 is a newly designed 'Pre dispersed Insoluble Sulphur' for applications in both natural and synthetic rubber based compounding. It enhances the dispersion of IS in rubber matrices up to the highest level to achieve more consistent vulcanized properties in final product. The product is eco-friendly and is supposed to have acceptance in rubber industry. QUALITYPARAMETERS Pre dispersed DS-75
Physical Appearance Total Sulphur % Insoluble Sulphur (Min)% (On Total S) Binder (including process aid) Physical Form
Bright Yellow 75 (±2.0)% 72 (±2.0)%
25 (±2.0)% Available both in slab & pastilles (tablets) forms
MASTER BATCHES of Insoluble Sulphur with polymers in different ratio are also available. 4.2.3 Special Grade Insoluble Sulfur TYPICAL PHYSICO CHEMICAL DETAILS OF SPECIAL GRADE DIAMOND SULF
DS 90 is uncoated Insoluble Sulfur grade, which is available to specific requirements of users. DS OT 25 AS is an oil coated Insoluble Sulfur grade having specific blend of precipitated silica of compatible fineness. The resultant product has good thermal stability and exhibits better disposability. Presence of precipitated silica improves flow characteristics of insoluble sulfur as it inhibits caking effect of oil and also helps in bonding of rubber compound to coated steel cord used for radial tyre and belting DS OT 20(HD) is a special grade of DIAMOND SULF exhibiting higher levels of dispersion. during the mixing process this grade disperses more easily leading to reduction in incorporation time under identical conditions. This grade contains requisite quantity of suitable polymeric binder which facilitates better dispersion resulting in homogeneous vulcanization and physical properties DS - 90 DS - OT - 25 (AS) DS - OT - 25 AS DS - OT - 20 Test Method (HD) DS - OT - 20 HD Fine Yellow Powder 80±1.5
Material Safety Data Sheet DS - 90
Fine Yellow Fine Yellow Powder Powder 99.5±0.5 67±1
Elemental Sulphur %
Insoluble Sulphur (Min)% (On Total S) Oil hinder %
ASTM D 4578-89 ASTM D 4573-95 ASTM D 4569-89 ASTM D 4574-94 ASTM D 4571-94 ASTM D 4572-89
Acidity(as H2SO4)(Max)% 0.05
Ash Content (Max)%
Heat Loss (Max) %
Fineness Retention on (Wet Screen) 100 Mesh (Max)% 0.2 200 Mesh (Max)% 2.0 Thermal Stability Heating at 105°C for 15 min. (In Liquid Paraffin ) (Min) % -
0.2 2.0 75
0.2 2.0 75
Packing: Goods are packed in 20/25 kg paper / HDPE Bags which are stretch wrapped by polyfilm and palletized in wooden/steel/plastic pallets. The pallets are stuffed inside the factory in 20'/40' containers and dispatched through world Class Shipping Lines. Packing in 500 Kg big bags is also available. 4.3 Marketing strategies Oriental Carbon & Chemicals Limited offers Insoluble Sulfur manufactured in its modern plant. Wide ranges of grades of Insoluble Sulfur are available in company’s product category including high stability and other special grades. Custom made grades are also available to suit specific needs of tyre companies.
The company has separate marketing division which has a General Manager for international marketing. The main objective of this department is to search new markets for the company and maintain the existing clients by changing its production strategies time to time. The company provides on demand presentation and seminars for the possible foreign clients. 4.4 Distribution channel of OCCL to sale its products in international business The company has presence in the various countries to improve its products and looking for new markets. Oriental Carbon and Chemicals Ltd. is equally aware of the needs of its clients and exports the excellent quality products as per the requirements of their clients. This company has steadily progressed over the years from strength to strength. Sales Network (Worldwide): USA Name of the Company: M/s Continental Carbon Company Contact Person: Mr. Steve J. Renegar Mailing Address: 333 Cypress Run, Suit 100 Houston, Texas 77094 Tele Number: 00281-647-3837 Fax Number: 00281-647-3845 Email Address: firstname.lastname@example.org Brazil Name of the Company: M/s White Rubber Representacoes S/C Ltda. Contact Person: Mr. Julian L. White Mailing Address: RUA QUITANDUBA, 241, Sao Paulo SP 05516-030, Brazil Tele Number: 0055-11-3722-0299 Fax Number: 0055-11-3722-1638 Email Address: email@example.com Turkey
Name of the Company: M/s Aziz Insel Contact Person: Mr. Aziz Insel Mailing Address: Inonu Cad. Camplipark Sok.No:8 K: 1 81080 Sahrayicedid- Istanbul, Turkey Tele Number: 0090-216-411-1282 Fax Number: 0090-219-386-9119 Email Address: firstname.lastname@example.org Egypt Name of the Company: M/s Letraco Contact Person: Mr. Roger Kayal Mailing Address: 26 Sheriff Street, Apt. 780- Cairo-C.C.R-178882, Egypt. Tele Number: 00202-3957268 Fax Number: 00202-3938687 Email Address: email@example.com Germany Name of the Company: M/s Distri Warehouse Bremen GmbH & Co. KG Contact Person: Mr. Eduard Dubbers-Albrecht, Ms. Bettina Gutjahr Mailing Address: Distri Warehouse Bremen GmbH & Co.KG Tillmannstrasse 5, 28239 Bremen Germany or Distri Warehouse Bremen GmbH & Co. KG P.O. Box 21 03 23, 28223 Bremen, Germany. Tele Number: 0049-421-649 11 0 Fax Number: 49-421-649 11 98 Email Address: firstname.lastname@example.org; email@example.com; firstname.lastname@example.org Austria/ Germany Name of the Company: M/s OKA – Tec GmbH Contact Person: Dr. Artur Stilter
Mailing Address: Im Technologiepark, Herbert-Wehner-Strabe 2 59174 Kamen, Germany Tele Number: +49-2307-2888-44 Fax Number: +49-2307-2888-45 Email Address: email@example.com Eastern Europe Name of the Company: M/s DBH Osthandelsgesellschaftt mbH Contact Person: Mr. Kai Kunath Mailing Address: Storkower Strasse 139B, D-10407 Berlin, Germany Tele/Fax Number : 0049 30 428411-30/32 Spain Name of the Company: M/s World Elastomers Trade Contact Person: Mr. Xavier Blanch Mailing Address: S.L. Calle Els Cirers, 808811, Canyelles, Barcelona, Spain Tele Number: +34 (93) 818 8826 Fax Number: +34 (93) 897 3500 Email Address: firstname.lastname@example.org Italy Name of the Company: M/s R. D. C. SRL Contact Person: Mr. Giorgio Marzari (Sales Manager) Mailing Address: VIA MONTE NOVOSO 16-20010, Bareggio, Milano, Italy. Tele Number: 0039 0290360785 Fax Number: 0039 0290360782 Iran Name of the Company: M/s Sabahi Enterprises Co., Ltd. Contact Person : Ms. S. Attar
Mailing Address : No. 148 Khoramshahr Ave, Tehran 15337, Iran Tele Number : 0098 21 8740680(5 lines) Fax Number : 0098 21 8744284 Email Address : email@example.com Kenya Name of the Company: Panafrican Business Enterprises Ltd. Contact Person : Dr. Kariba J.C. Munio (Managing Director) Mailing Address : Suite No. 5 Village Plaza Ngara Road, Off Murang' A Road P O Box 49591, Nairobi- 00100 Kenya. Tele Number: 254-20-3750354 / 3748256 Fax Number: 254-20-3750355 Email Address: firstname.lastname@example.org South Africa Name of the Company: M/s Chempro (A division of Prochem (Pty) Ltd) Contact Person: Mr. G. Holtzhausen Mailing Address: Private Bag 14786, Wadeville, 1422 South Africa Tele Number: 00:27 11 842-363498 Fax Number: 00 27 11 824-2820 Email Address: email@example.com South Korea Name of the Company: M/s Intermax Corporation Contact Person: Mr. Daniel Lee (President) Mr. D.Y.Hwang (General Manager) Mailing Address : 1112, Woolim Lion's Valley 2, Gasan-Dong 680, Geumcheon-Gu, Seoul,
Korea. Tele Number: 0082-2-2027-2388 Fax Number: 0082-2-2027-2389, 2623 Email Address: firstname.lastname@example.org Australia/ New Zealand Name of the Company: M/s Rebain Internatioal (Aust) Pty Ltd Contact Person: Mr. Andrew D. Lowe Mailing Address: P.O. Box – 251, Port Melbourne, Melbourne Victoria 3207, Australia Tele Number : +61-3-96466379 Fax Number : +61-3-96466759 Email Address : email@example.com Malaysia/ Indonesia Name of the Company : M/s Bikawa Enterprise Sdn Bhd Contact Person : Mr. Goh Ing King Mailing Address : Co. No. 365082-P, No. 29-2, Jalan 10/125D, Desa Petaling 57100 Kuala Lumpur, Malaysia Tele Number : +60-3-90591998 Fax Number : +60-3-90595998 Email Address : firstname.lastname@example.org Pakistan Name of the Company: M/s M. A. J. International Contact Person: Mr. Mansoor Hakimuddin Mailing Address: 13 F Block -6 P.E.C.H.S., Karachi-75400 Tele Number: 0092-21-453-6897 / 6898 Fax Number: 0092-21-453-6896 / 2398 Email Address: email@example.com
CHAPTER 4 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 and the terms of statement offered to overseas buyer. The short-term finance 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 and salaries, 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 term financial needs such as purchase of fixed assets and long term working capital. Export finance is short-term working capital finance allowed to an exporter. Finance and credit are available not only to help export production but also to sell to overseas customers on credit. 2.1 Objectives 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.
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.
The export finance is being classified into two types viz. • • Pre-shipment finance. Post-shipment finance.
2.2 Pre-Shipment Finance 2.2.1 Meaning: 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. 2.2.2 Definition: Financial assistance extended to the exporter from the 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. 2.2.3 Importance of finance at pre-shipment stage: • • •
To purchase raw material, and other 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 and labeling 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.
• • • •
2.2.4 Forms or methods of pre-shipment finance: 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.
(1) 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 favor of the bank. (2) 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. (3) 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. (4) 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 subsupplier thus gets the Back-To-Bank L/C on the basis of which he can obtain packing credit. (5) Advance against exports through export 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. (6) 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. 2.3 SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE 2.3.1 Packing Credit Sanction of packing credit advances: There are certain factors, which should be considered while sanctioning the packing credit advances viz. • • • • The exporter should hold I E code allotted by DGFT. PCL is given only on the basis of confirmed /firms export orders or confirmed L/C’s There is no overdue export finance outstanding either in the pre-shipment credits or in the post-shipments credits either with their earlier banker or with own branches. If exporter is banking with more than 1 banker, detail of overdue position of export finance should be called for.
• • • • •
Overdue outstanding on export bills on collection basis should be called for unit as a whole. Outstanding under import bills even on collection basis to be called for. How the export orders are being procured. If export order are being procured through local agents whether any such agreement exists between the local agents and the overseas buyer. Amount written off, if any, with reason, to be ascertained and furnished. Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower.
• • • •
Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. The Quantum of Finance is granted to an exporter against the LC or an expected order Standing of credit opening bank if the exports are covered under letters of credit. Regulations, political and financial conditions of the buyer’s country.
Disbursement of packing credit: After proper sanctioning of credit limits, the disbursing branch should ensure: To inform ECGC the details of limit sanctioned in the prescribed format within 30 days from the date of sanction. a) To complete proper documentation and compliance 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 complied with.
2.3.2 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/C’s. 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 be introduced. Sharing of FCPC: Banks may extend FCPC to the manufacturer on the basis of the disclaimer from export order also. of pre-shipment credit , from exporters with consistently good track record. Instead, a system of periodical submission of a statement of L/C’s or export orders in hand, should
2.4 Post-Shipment Finance 2.4.1 Meaning:
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 from overseas buyer thereof. Whereas the finance provided after shipment of goods is called postshipment finance. 2.4.2 Definition: Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit. 2.4.3 Importance of finance at post-shipment stage: • • • • • • • • • • To pay to agents/distributors and others for their services. To pay for publicity and advertising in the over seas markets. To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service. To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. To pay for representatives abroad in connection with their stay board.
2.4.4 Forms/Methods of Post Shipment Finance (1) Export 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. 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. (2) Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills. (3) 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. (4) Advance against goods sent on Consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis. (5) 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 maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank. (6) Advance against Deemed Exports: 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 and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is offered for a maximum of 30 days. (7) Advance against Retention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/ services towards guarantee of performance or completion of project. Banks advance against retention money, which is payable within one year from date of shipment. (8) 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 180 days.
2.5 SOME SCHEMES UNDER OPERATION IN POST-SHIPMENT FINANCE 2.5.1 Deferred Credit Meaning: Consumer goods are normally sold on short term credit, normally for a period up to 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, and the balance being payable in installments spread over a period of 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 Term Credit. The medium credit facilities are provided by the commercial banks together with EXIM Bank for a period up to 5 years. The long term credit is offered normally between 5 yrs to 12 yrs, and it is provided by EXIM Bank. Amount of credit support: Any loan up to 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 need the clearance from the working group on Export Finance. 2.5.2 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 London
Inter Bank Offered Rate (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 up to 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 banker’s acceptance facility or any other similar facility at rates linked to 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 RBI’s permission will be needed. 2.5.3 Finance for Rupee Expenditure for Project Export Contracts (FREPEC) What is FREPEC Program? This program seeks to Finance Rupee Expenditure for Project Export Contracts, incurred by Indian companies. 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, subcontractors, consultants and to meet project related overheads in Indian Rupees. 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. 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. 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. 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. What is the security stipulated for FREPEC loan? •
Hypothecation of project receivables and project movables. Optional: where available Personal Guarantees of Directors of the Company. Available collateral security.
CHAPTER 5 METHOD OF PAYMENT IN INTERNATIONAL BUSINESS
The buyer and the seller are at the heart of every business. Both parties have one thing in common: to profit from the transaction and to expose themselves to the least risk possible. Payment methods in international trade are similar to those in domestic business. In international trade, the means of payment are known as “terms of payment.” There are five commonly used methods of payment, each of which offers different levels of risk and stability for buyers and sellers.
5.1 Open account Open account provides the least risk for the buyer and the greatest risk for the seller. The buyer agrees to pay for the goods within a designated time after the shipment, usually in 30, 60 or 90 days. In open account method the importer is trusted to pay the exporter after receipt of goods. The main drawback of open account method is that exporter assumes all the risks while the
importer get the advantage over the delay use of company's cash resources and is also not responsible for the risk associated with goods. 5.2 Payment Collection of Bills in International Trade The Payment Collection of Bills also called “Uniform Rules for Collections” is published by International Chamber of Commerce (ICC) under the document number 522 (URC522) and is followed by more than 90% of the world's banks. In this method of payment in international trade the exporter entrusts the handling of commercial and often financial documents to banks and gives the banks necessary instructions concerning the release of these documents to the Importer. It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system. 5.2.1 The Collection Order The collection order is the key document prepared by the seller specifying the terms and conditions of a documentary collection. It must be prepared with great care and precision as the banks are only permitted to act upon the instructions given in the order and not on instructions from past transactions or verbal understandings. These are notes for key provisions of the document: • • •
• • • •
The payment period as agreed with the buyer. The name and address of the buyer. The buyer’s bank Instructions, if any, about what to do with the accepted bill of exchange. Notation concerning payment of charges for the documentary collection. Notation/instructions for the lodging of a protest in the event of non acceptance or non payment. Instructions for notification of agent or representative in the buyer’s country. Performa of collection order
There are two methods of collections of bill: (i) Documents against payment (D/P) In D/P terms, the collecting bank releases the documents to the buyer only upon full and immediate cash payment. The buyer must pay the presenting /collecting bank the full payment in freely
available funds in order to take possession of the documents. This type of collection offers the greatest security to the seller. The process of D/P is as follows here:
Documents against Payment/Bill of Exchange flow diagram
(ii) Document against Acceptance (D/A) In D/A terms, the collecting bank is permitted to release the documents to the buyer against acceptance (signing) of a bill of exchange or signing of a time draft at the bank promising to pay at a later date (30,60,90 days). The completed draft is held by the collecting bank and presented to the buyer for payment at maturity, after which the collecting bank sends the funds to the remitting bank, which in turn sends them to the principal/seller. The seller should be aware that he gives up title to the shipment in exchange for the signed bill of exchange that now represents his only security in the transaction. Here is the process of D/A.
5.3 Letter of Credit (L/C) Letter of Credit also known as Documentary Credit is a written undertaking by the importers bank known as the issuing bank on behalf of its customer, the importer (applicant), promising to effect payment in favor of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. It is published by the International Chamber of Commerce under the provision of Uniform Custom and Practices (UCP) brochure number 500.
Letter of Credit Flow diagram
Various types of L/Cs are: (i)Revocable & Irrevocable L/Cs A Revocable Letter of Credit can be cancelled without the consent of the exporter. An Irrevocable Letter of Credit cannot be cancelled or amended without the consent of all parties including the exporter. (ii) Sight & Time L/Cs If payment is to be made at the time of presenting the document then it is referred as the Sight Letter of Credit. In this case banks are allowed to take the necessary time required to check the documents. If payment is to be made after the lapse of a particular time period as stated in the draft then it is referred as the Term Letter of Credit. (iii) Confirmed Letter of Credit L/Cs Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the issuing bank. By adding its commitment, the Confirming Bank takes the responsibility of claim under the letter of credit, assuming all terms and conditions of the letter of credit are met.
5.4 Consignment sales International consignment sales follow the same basic procedures as in the United States. The goods are shipped to a foreign distributor who sells them on behalf of the exporter. The exporter retains title to the goods until they are sold, at which point payment is sent to the exporter. The exporter has the greatest risk and least control over the goods with this method. Additionally, receiving payment may take quite a while. It is wise to consider risk insurance with international consignment sales. The contract should clarify who is responsible for property risk insurance that will cover the merchandise until it is sold and payment is received. In addition, it may be necessary to conduct a credit check on the foreign distributor. The oriental carbon and chemicals ltd use the following method: 1. cash in advance under letter of credit 2. document against payment 5.5 Cash in advance Provides greatest security for the seller and greatest risk for the buyer. The buyer simply prepays the seller prior to shipment of the goods either through Telegraphic Transfer (TT) or through a cheque or a demand draft this is normally done after acceptance of the order by the exporter. This term of payment requires that the buyer to have a high level of confidence in the seller to deliver the goods as ordered. Added costs (for handling of the documentary credit) to buyer. For the buyer, however, advance payment tends to create cash flow problems, as well as increase risks. Furthermore, cash in advance is not as common in most of the world as it is in the United States. Buyers are often concerned that the goods may not be sent if payment is made in advance. Exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who offer more flexible payment terms.
CHAPTER 5 FINDINGS AND SUGGESTATIONS
(1) Export Finance is a very important branch to study & understand the overall gamut of the international finance market.
(2) OCCL deals in the export transactions and deals with the clients through: • • • Letter of Credit Bill of Exchange Cash against documents
In which the more risks involve in the cash against documents COD where the exporter have to send the documents first than only the payments are made by the importer. This facility is given to the regular clients of the company. The Letter of Credit is the safest mode of payment in international business. It is used for the security of payment. basically used in the country where risk of payment is involved like in African continent countries like Somalia or where the chances of political instability happens like Kenya Pakistan, Afghanistan etc. Bill of Exchange is used by the company when the company has trust on the party or the credit of the client is good in the market. In case of OCCL the company provides the facility of Bill of Exchange to it regular clients. The overall %age of realization of bills at OCCL is quite impressive because they prefer dealing in Letter of Credit as a mode of payment. (3) Learning of the proper documentation during imports and exports 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. The Oriental Carbon and Chemicals Ltd. uses its factory invoice to get the benefit from the excise department of the government of India. It is done through the local authority of that place where the plant is located. (4) Availability of favorable Export finance schemes directly impacts the local trade, encourages exporters, enlarges markets abroad, improves quality of domestic goods and overall helps the nation boost its exchange earnings. The OCCL fulfills its requirement of finance through State Bank of India (overseas branch) whether it is a packing credit loan (PCL) or the term loan. (5) The Government of any nation plays a very vital role in boosting export turnover. The credit policy of the Indian Government is also changed depending upon the needs of the exporters, global trade environment etc. (6) 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 help Indian exporters to stand competition in world markets effectively and more gain-fully.
(7) Chemical Allied Products Export Promotion Council known as CAPEXIL, a non-profit making organization, was setup in March 1958 by the Ministry of Commerce, Government of India to promote export of Chemical and Allied Products from India. And since then has been the voice of Indian business community. Headquartered at Kolkata, and regional offices at New Delhi, Mumbai, Kolkata and Chennai, CAPEXIL has more than 3500 members across the country. One of the fascinating aspects of CAPEXIL is the overwhelming variety of products it deals with. CAPEXIL offers a full range of services to Indian exporters and foreign importers. Acting as an interface between the government and the members regarding trade and policy related matters-it provides its members an indispensable information gateway and helping hand. From preparation of authentic market reports to analysis of Indian export trend across country, product or other parameters - it serves the exporters as an awesome resource of global trade data. The main service categories include: • • • • • • • Market Development Assistance Trade Leads Enquiries Exporter Helpdesk Export Returns Filing Visa Recommendation Market Development Assistance
CAPEXIL offers a full range of services to Indian exporters and foreign importers: •
• • • • • •
Indispensable information gateway and helping hand for exporters An interface between the government and the members regarding trade and policy related matters Dissemination of trade enquiries Participation in national/international workshops, organizing seminars/buyer-seller meets Analysis of Indian export trend across country, product or other parameters Awesome resource of global trade data Disbursement of grants through various Preparation of authentic market reports
CHAPTER 6 CONCLUSION
This project covers various aspects related to export finance. the need of export finance depends upon the period at pre-shipment and post-shipment stage. The export company may need the short term, medium term or long term finance depending upon the types of goods which are to be exported. The requirement of finance to any exporter can be classified in two parts.
An exporter requires the short-term finance to meet its need of working capital. The working capital is used to meet regular and day to day operations in the company needs of a business firm. It can be anything like purchasing of raw material, payment of wages and salaries to employees, 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 term financial needs such as purchase of fixed assets and long term working capital. Export finance is short-term working capital finance allowed to an exporter which can be extended up to the post shipment finance. Finance and credit are available not only to help export production but also to sell to overseas customers on credit. For that the ECGC is there to provide the finance to the exporters. For example an export order was sent by OCCL to Indonesia via sea transportation. OCCL prepared the sales plan, arranged the delivery on time and delivered it by the Hyundai Marine Merchant Co. Ltd, which was one of the fastest shipping lines in the business. The shipping line delivered the consignment to the importer and the payment was done through the bank. The mode of payment was Bill of Exchange which was written in the favor of OCCL after the date of one month from the date of Bill of Lading. The bank of OCCL was State Bank of India.
Websites: 1) www.occlindia.com 2) www.dgft.org 3) www.eximindiamart.com 4) www.ecgc.in 5) www.eximbankindia.com 6) www.rbi.org.in
7) www.capexil.com Books: 1) Export Import Management – Aseem Kumar 2) Export Marketing - Michael Vaz 3) Export Management - T. A .S. Balagopal
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.