PROJECT GUIDE : PROF.S.B. KASTURE PROJECT PREPARED BY: SACHIN PARAB NMIMS MFM –III B ROLL NO.113
S.No 1 2 3 4 5 6 Table of Contents Introduction Concept of Export Finance Types – Pre-shipment & Post Shipment finance Letter of Credit Export credit in foreign currency Role of EXIM Bank in export promotion a) Features/Objectives/Operations b) Lending Programs c) Financing Programs d) FREPEC e) EXIM business profile f) Export Services g) Forfaiting Role of ECGC in export promotion a) Introduction/features b) Products of ECGC FAQ –EXIM bank Recent developments-EXIM Bank Exchange Control on Exports Trade Related Investment Measures (TRIMs) Factoring Monetary & Credit Policy High Court Ruling Learnings from the Project Bibliography Page No. 02 03 04/05 10 11 12 13 15 18 20 22 23 28 32 33 40 43-46 47 49 50 52 53 54 55
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Credit and finance is the life blood of any business whether domestic or international . It is more important in the case of export transactions due to the prevalance 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. 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 .
Concept OF EXPORT FINANCE:Export finance is a short term working capital finance allowed to an exporter. Finance and credit are available to help not only export production but also to sell overseas customers on credit . Need for 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 from any bank which consider the ensuing factors:a) Availability of the funds at the required time to the exporter. b) Affordability of the cost of funds. GUIDELINES FOR EXPORT FINANCE 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 Bank’s directives issued through IECD. d) Export Credit Guarantee Corporation guidelines. e) Guidelines of Foreign Exchange Dealers Association of India. We now have a look at the different types of export finance. Basically the point separating the two types of finances is related to whether the financial assistance is granted to an exporter prior to or after the shipment of the goods. Thus, as indicated above the two types of export finances are as follows:i. Pre-shipment finance Post-shipment finance Definition of Pre-shipment finance: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.
Definition of Post-shipment finance:Credit facility extended to an exporter from the date of shipment of goods till the realisation of the export proceeds is called post-shipment credit. Pre-shipment finance is available in the form of packing credit and advances against receivables from the Government like duty drawback, etc. Post-shipment finance is available in the form of ; i. Export bills purchased / negotiated / discounted. ii. Advances against bills sent on collection basis. iii. Advances against exports on consignments basis. iv. Advances against undrawn balances. v. Advances against duty drawback. We now discuss in detail about pre-shipment finance. Pre-shipment finance which is generally called packing credit is essentially a working capital advance made available for the specific purpose of procuring or processing or manufacturing of goods meant for export. Two essential features of packing credit advances are:a) There should be an export order or a letter of credit. b) The advances to be liquidated from the relative export proceeds.
APPRAISAL While appraising an export credit proposal as a commercial banker, obligation to the following institutions or regulations needs to be adhered to. To RBI under the Exchange Control Regulations:Obligations are:Appraisee to be the bank’s customer. Appraisee should have the exim code number alloted by the Director General Of Foreign Trade. Party’s name should not appear under the caution list of the RBI. To the Trade Control Authority under the EXIM policy:Obligations are:Appraisee should have IEC number alloted by the DGFT. Goods must be freely exportable i.e. not falling under the negative list. If it falls under the negative list, then a valid license should be there allowing the export.
Country with whom the appraisee wants to trade should not be under trade barrier. To ECGC:Obligations are:Verification that appraisee is not under the Specific Approval list (SAL). SANCTION OF PACKING CREDIT ADVANCES There are certain factors to be considered while sanctioning the 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 and integrity of the borrower. ii. Satisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. iii. Quantum of finance. iv. Standing of credit opening bank if the exports are covered under letters of credit. v. 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. QUANTUM OF FINANCE On the basis of the above particulars, the quantum of finance will be fixed. Normally, the quantum will be fixed on the FOB value of the contract or the LC or the domestic value of the goods which ever is less after deducting the profit margin. If the contract or the LC is on CIF basis, the FOB value will be arrived at by deducting 13 to 14% from the CIF value if the despatch is through sea and
around 25% if the despatch is by air. After arriving at the FOB value the usual margin i.e. profit margin stipulated in the terms of sanction to be deducted. PERIOD OF FINANCE This is decided on the basis of the production cycle or upto the date of shipment mentioned in the order / LC whichever is earlier. But in no case it should exceed 180 days. For reasons beyond the control of exporter, if the shipment could not be made within 180 daysfrom the date of advance, a further extension of 90 days can be granted by the banks themselves without referring to Reserve Bank. Extension of any packing credit beyond 360 days requires ECGC’s approval. In order to have proper control over the granting and settlement of pre-shipment credit allowed to exporters at concessive rates of interest, it is necessary for the banks to maintain separate accounts in respect of each packing credit advanced to the exporter. Packing credit advance should also be followed up properly at all stages like submission of stock statements and inspection of stocks at regular intervals, adequate insurance cover for the stocks etc. Packing credit advance will always be liquidated with the export proceeds of the relevant shipment. At this stage the pre-shipment liability of the party is converted into post-shipment liability. Post-shipment finance is essentially an advance against receivables which will be in the form of shipping documents. Some of the major exchange control regulations concerning export finance at the post-shipment stage are as follows:i. Exporter should have the code number and each shipment should accompany the prescribed declaration form in which the value of export will be declared and duly certified by the customs authority. ii. Shipping documents along with relative GR form must be submitted to an AD within 21 days from the date of shipment. iii. The payment should be received in an approved manner within the prescribed time limit. i.e. within six months from the date of shipment. Different types of post-shipment advances i. ii. iii. iv. v. vi. Export bills purchased / discounted Export bills negotiated Advances against bills sent on collection basis. Advances against exports on consignment basis. Advances against undrawn balances. Advances against duty drawback.
Export bills purchased / discounted:Proper limit should be sanctioned to the exporter for purchase of export bills facility. Since the export is not covered under LC, risk of non-payment may arise. Export bills negotiated:-(bills drawn under LC) When export documents are presented to the bank for negotiation, they should be scrutinized carefully with the terms and conditions of the LC. The operation of letter of credit is governed by Uniform Customs & Practices for Documentary Credits (1993 revision) of the International Chamber of Commerce, Brochure no. 500.
Advances against bills sent on collection basis:At times, the exporter might have fully utilized his bills and in certain cases the bills drawn under the LC may have some discrepancies. In such cases the bills will be sent on collection basis. In some cases, the exporter himself may request for sending the bills on collection basis anticipating the strengthening of the foreign currency. Banks may allow advance against these collection bills to an exporter. Concessive rate of interest can be charged for this advance upto the transit period in the case of DP Bill and the transit period + usance period + grace period (if any) in case of usance bills.
Advance against goods sent on consignment basis:Goods are exported on consignment basis at the risk of the exporter for sale abroad. Eventual remittance of sale proceeds will be made by agent / consignee.
Advances against undrawn balances:In certain line of export trade, it is the practice of the exporter to leave a part of the amount as undrawn balance. Adjustment will be made by the buyer for
difference in weight, quality etc. ascertained after arrival and inspection or analysis of the goods. Advances against receivables from Government such as Duty Drawback:Where the domestic cost of production of certain goods is higher in relation to international price, the exporter may get support from the Government so that he may compete effectively in the overseas market. Export incentives are provided under the Export Promotion Scheme by the Government of India and other agencies. This can only be in the form of refund of excise and customs duty known as Duty Drawback Period of finance Post –shipment advance against demand bills will be for a period upto normal transit period. In case of unasked bills the advance will be for the transit period + usance period + grace period if any, but in any case not exceeding 180 days from the date of shipment. Quantum of finance In case of post-shipment advances, normally no margin is maintained for bills drawn under LC’s. Only in case of export bills purchased against contracts / firm orders, depending upon the additional security available, some banks prescribe certain amount of margin.
Letter of Credit
A letter of credit is a banking mechanism which allows importers to offer secure terms to exporters. All letters of credit contain 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 money • • • on presentation of specified documents representing the supply of goods within specific time limits these documents conforming to terms and conditions set out in the letter of credit documents to be presented at a specified place.
Put simply, the issuing bank's role is twofold: to guarantee to the seller that if compliant 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, and only pay if these comply with the terms and conditions 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 asked for" Note that the letter of credit refers to documents representing the goods - not the goods themselves! Banks are not in the business of examining goods on behalf of their customers. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill, an insurance document; but there are many others. Letters of credit deal in documents, not goods. •
Export Credit In Foreign Currency :
Both Pre-shipment & post shipment credits are available in foreign currencies under 2 schemes : 1. Foreign currency pre-shipment credit (FCPC) Scheme : 2. Rediscounting of Export Bills Abroad (EBR) Scheme : 1. 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 himself of export finance. To avail himself of preshipment 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 preshipment credit in foreign currency & discounting /rediscounting of the export bills in foreign currency. FCPC will also be available both to the supplier receiver EOU/EPZ unit . EOU/EPZ unit and the
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 /firm 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 LCs or export orders in hand , should be introduced. Sharing of FCPC : Banks may extend FCPC to on the basis of the disclaimer from the export order the manufacturer also
Rediscounting of Export Bills Abroad (EBR) 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 nromal 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 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 RBI’s permission will be needed .
Role of EXIM Bank in Exports Promotion
Exim Bank Act • • • Set up by an Act of Parliament in September 1981 Commenced operations in March 1982 Wholly owned by 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-coordinating working of institutions engaged in financing exports and imports Introduction Exim Bank extends lines of credit to overseas governments/agencies nominated by them or financial institutions overseas to enable buyers in those countries to import capital/engineering goods, industrial manufactures and related services from India on deferred payment terms. This facility enables importers in those countries to import from India on deferred credit terms as per the terms and conditions already negotiated between Exim Bank and the overseas agency. The Indian exporters can obtain payment of eligible value from Exim Bank against negotiation of shipping documents, without recourse to them.
Features The lines of credit are denominated in convertible foreign currencies or Indian Rupees and extended to sovereign governments/agencies nominated by them or financial institutions. Such governments/agencies/institutions are the borrowers and Exim Bank the lender. Terms and conditions of different lines of credit are varying and details in respect of each line of credit can be obtained from Exim Bank. It would need to be ascertained from time to time that the lines of credit have come into effect and uncommitted balance is still available for utilization. Indian exporters also need to ascertain the quantum of service fees payable to Exim Bank on account of prorate export credit insurance premium and / or interest rate differential cost that they can then paid up in their prices to their importers OBJECTIVES Export-Import Bank of India (EXIM INDIA), an apex financial institution, was set up in 1982 to finance, facilitate and promote India's international trade. The Bank is the principal financial institution in the country for co-coordinating the working of institutions engaged in financing exports and imports. The mission of the Bank is to develop commercially viable relationships with externally oriented companies by offering a comprehensive range of products and services aimed at helping Indian companies to globalize. OPERATIONS - How it works :
The buyer arranges to obtain allocation of funds under the credit line from the borrower. The exporter then enters into contract with the buyer, for the eligible items covered under the line of credit. The contracts would need to conform to the basic terms and conditions of the respective credit lines. (Particulars of effective lines of credit are available separately).
The delivery period stipulated in the contracts should be such that credit can be drawn from Exim Bank within the terminal disbursement date
stipulated under the respective line of credit agreements. Also, all contracts should provide for pre-shipment inspection by the buyer or agent nominated by buyer.
The buyer arranges to comply with procedural formalities as applicable in his country and then submits the contract to the borrower for approval. The borrower in turn forwards copies of the contract to Exim Bank for approval.
Exim Bank advises approval of the contract to the borrower, with copy to exporter, indicating approval number, eligible contract value, last date for disbursement, and other conditions subject to which approval is granted.
The Buyer, on advice from the borrower, establishes an irrevocable sight letter of credit(L/C). A single L/C is to be opened, covering the full eligible value of the contract including, freight and/or insurance as laid down in the contract.
The letter of credit is advised through a bank in India designated by Exim Bank.
Exporter ships the goods covered under the contract and presents documents for negotiation to the designated bank. The Bank forwards negotiated documents to the buyer.
On receipt of clean non-negotiable set of shipment documents along with the relative invoices, inspection certificate and a certificate that documents negotiated are as per terms of L/C and without reserve from the negotiating bank and after having satisfied itself, that all formalities have been complied with in conformity with the terms of the Credit Agreement, Exim Bank reimburses the eligible value of shipment in equivalent rupees at spot exchange rate to the negotiating bank for payment to the exporter.
Exim Bank debits the borrower's account and arranges to collect interest and principal receivable on due dates as per the terms of the line of credit agreement between Exim Bank and the borrower.
EXPORT -IMPORT BANK OF INDIA (EXIM) A Range of Export Services In addition to finance, 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 Network of Institutional Linkages EXIM INDIA is a wholesale bank. The Bank works closely with commercial banks in India, who through a network of around 60,000 branches operate the retail export credit system in the country. Besides extensive linkages with commercial banks by virtue of its refinancing / rediscounting activities and risk participating arrangements, EXIM INDIA has a working relationship with the sole export credit insurance agency in India, i.e., the Export Credit Guarantee Corporation of India Ltd. A Variety of Lending Programs 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, 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. Export Financing - Finance from Exim Bank Exim Bank is fully owned by the Government of India and is managed by the Board of Directors with repatriation from Government, financial institutions, banks and business community. 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. The Exim Bank also extends non-founded facility to Indian exporters in the form of guarantees. The diversified lending program of the Exim Bank now covers various stages of exports, i.e., from the development of export makers to expansion of production capacity for exports, production capacity for exports, production for exports and post- shipment financing. The Exim Bank's focus is on export of manufactured goods, project exports, exports of technology services and exports of computers software.
FINANCING PROGRAMMES :
Loans to Indian Companies
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.
Preshipment 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 Foreign Governments, Companies and financial Institutions : 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 world-wide for imports from India.
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.
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, sub-contractors, 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 bank(s).
How are disbursements made under this program? Disbursements will made in Rupees through a bank account of the borrowercompany 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? a. Hypothecation of project receivables and project movables. b. optional: where available
Personal Guarantees of Directors of the Company. Available collateral security.
Refinance of Export Credit
Authorized Dealers in foreign exchange can obtain from Exim Bank, hundred percent refinance of deferred payment loans extended for export of eligible Indian goods.
Exim Bank - Business Profile
THE OPERATIONS ARE GROUPED AS BELOW : EXPORT CREDITS
Bank provides exports of Indian machinery, manufactured goods, consultancy and technology services on deferred payment terms
Lines of credit/buyer's credits are extended to overseas entities i.e. governments, central banks, commercial banks, development finance institutions, regional development banks for financing export of goods and services from India
1. Project Finance 2. Trade Finance
EXPORT CAPABILITY CREATION
Export Product Development Export Marketing Finance
Export Oriented Units 1. Project Finance 2. Working Capital 3. Production Equipment Finance
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European Community Investment Partners (ECIP) Asian Country Investment Partners (ACIP) Overseas Investment Finance Export Facilitation Programs 1. Software Training Institutes 2. Minor Ports Development
EXPORT SERVICES In addition to finance, Bank provides a range of information and advisory services to Indian companies to supplement their efforts aimed at globalization of Indian business. What are the types of services provided by Exim Bank? Exim Bank 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 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.
What are the various types of financial facilities provided by Exim Bank to Indian Companies for export of turnkey/ construction projects, export of services and export of capital/ engineering goods & consumer durables ? Exim Bank provides financial assistance to Indian Companies by way of a variety of lending programs, viz.,
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Bid Bond Advance Payment Guarantee Performance Guarantee Guarantee for release of Retention Money Guarantee for raising Borrowings Overseas Other guarantees
Non-Fund Based Facilities Exam Bank issues following guarantees directly or in participation with other banks, for project export contract.
Bid Bond is generally issued for a period of six months.
Advance Payment Guarantee:
Exporters are expected to secure a mobilization advance of 10-20% of the contract value which is normally released against bank guarantee and is
generally recovered on a pro-rata basis from the progress payments during project execution.
Performance guarantee for 5-10% of contract is issued, valid upto completion of maintenance period normally one year after completion of contract period and/or grant of Final Acceptance Certificate (FAC) by the overseas employer. Format of guarantee is expected to be furnished by exporter, at least four weeks before actual issue, to facilitate discussions and formal approval.
Guarantee for Release of Retention Money:
This enables the exporter to obtain the release of retention money (normally 10% of contract value) before obtaining Final Acceptance Certificate (FAC) from client.
Guarantee for Raising Borrowings Overseas:
Bridge finance may be needed at the earlier phases of the contracts to supplement the mobilization advance. Bridge finance upto 25% of the contract value may be raised in foreign currency from an overseas bank against this guarantee issued by a bank in India. Request for overseas borrowings must be supported by currency-wise cash flows, also indicating the outstanding letters of credit and L/C drawl schedule.
e.g. in lieu of customs duty or security deposit for expatriate labor. Guarantee commission is charged at rates stipulated by the Foreign Exchange Dealers Association of India (FEDAI) or as stipulated by guarantee issuing bank. Margin requirement for issue of guarantee is generally waived by banks for Export Performance Guarantee. However, appropriate securities are availed of.
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Pre-shipment Rupee Credit Post-shipment Rupee Credit Foreign Currency Loan Overseas Buyer's Credit Lines of Credit Loan under FREPEC program Refinance of Export Loans
Pre-Shipment Rupee Credit
Pre-shipment Rupee Credit is extended to finance temporary funding requirement of export contracts. This facility enables provision of rupee mobilization expenses for construction/ turnkey projects. Exporters could also avail of pre-shipment credit in foreign currencies to finance cost of imported inputs for manufacture of export products to be supplied under the projects. Commercial banks also extend this facility for definite periods. Supplier's Credit for deferred payment exports What is on offer? Exim Bank offers Supplier's Credit in Rupees or in Foreign Currency at postshipment 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.
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. What are the general terms of Supplier's Credit?
Extent of Supplier's Credit 100% of post-shipment credit extended by exporter to overseas buyer.
Currency of Credit Supplier's Credit from Exim Bank is available in Indian Rupees or in Foreign Currency.
Rate of Interest The rate of interest for Supplier's Credit in Rupees is a fixed rate and is available on request. Supplier's Credit in Foreign Currency is offered by Exim Bank on a floating rate basis at a margin over LIBOR dependent upon cost of funds.
Security Adequate security by way of acceptable letter of credit and/or guarantee from a bank in the country of import or any third country 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.
EXIM BANK Recent Headlines:
Shri T. C. Venkat Subramanian, Managing Director, Exim Bank of India, handed over a cheque for Rs. 38 crores to Union Finance Minister, Shri Yashwant Sinha, representing the dividend paid by the Bank to the Government for the year ended March 31, 2001. The dividend payout amounts to 24.6 % of the Bank's net profit for the year 2000-01. The profit before tax of the Bank for the year April 2000 to March 2001 amounted to Rs. 205 crores. The Bank has maintained one of the highest employee productivity in India. Its profit before tax per employee for the year 2000-01 was Rs. 135 lacs.
Forfaiting - An Export Finance Option by EXIM Forfaiting is a mechanism of financing exports.
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by discounting export receivables evidenced by bills of exchange or promissory notes without recourse to the seller (viz. exporter) carrying medium to long term maturities on a fixed rate basis (discount)
upto 100 percent of the contract value.
The word `forfait' is derived from the French word `a forfait' which means the surrender of rights. Simply put, forfaiting is the non-recourse discounting of export receivables. In a forfaiting transaction, the exporter surrenders, without recourse to him, his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfaiter. As a result, an exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker. What exports are eligible for forfaiting? All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfaiting. How does forfaiting work? Receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes, can be forfaited. Bills of exchange or promissory notes, backed by co-acceptance from a bank (which would generally be the buyer's bank), are endorsed by the exporter, without recourse, in favour of the forfaiting agency in exchange for discounted cash proceeds. The banker's co-acceptance is known as avalisation. The coaccepting bank must be acceptable to the forfaiting agency. Is there a prescribed format for the bills of exchange or promissory notes? Yes. The bills of exchange or promissory notes should be in the prescribed format. What role will Exim Bank play in forfaiting transactions? The role of Exim Bank will be that of a facilitator between the Indian exporter and the overseas forfaiting agency.
How will Exim Bank facilitate a forfaiting transaction? On a request from an exporter, for an export transaction which is eligible to be forfaited, Exim Bank will obtain indicative and firm forfaiting quotes - discount rate, commitment and other fees - from overseas agencies. Exim Bank will receive availed bills of exchange or promissory notes, as the case may be, and send them to the forfaiter for discounting and will arrange for the discounted proceeds to be remitted to the Indian exporter. Exim Bank will issue appropriate certificates to enable Indian exporters to remit commitment fees and other charges. What does forfaiting cost include? A forfaiting transaction has typically three cost elements;
• • •
Commitment fee Discount fee Documentation fee
What benefits accrue to an exporter from forfaiting?
Converts a deferred payment export into a cash transaction, improving liquidity and cash flow
Frees the exporter from cross-border political or commercial risks associated with export receivables
Finance up to 100 percent of the export value is possible as compared to 80-85 percent financing available from conventional export credit program
As forfaiting offers without recourse finance to an exporter, it does not impact the exporter's borrowing limits. Thus, forfaiting
represents an additional source of funding, contributing to improved liquidity and cash flow
Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit
Exporter is freed from credit administration and collection problems Forfaiting is transaction specific. Consequently, a long term banking relationship with the forfaiter is not necessary to arrange a forfaiting transaction
Exporter saves on insurance costs as forfaiting obviates the need for export credit insurance
Simplicity of documentation enables rapid conclusion of the forfaiting arrangement.
ECGC (Export Credit Guarantee Corporation of India Limited )
Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit. Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community. ECGC, the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.340 crores, which is expected to be enhanced to Rs.500 crores by the year 2002.
What does ECGC do?
provides a range of credit risk insurance covers to exporters against loss in export of goods and services, and also
offers guarantees to banks and financial institutions to enable exporters obtain better facilities from them.
Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in form of equity or loan.
How does ECGC help exporters? ECGC provides
insurance protection to exporters against payment risks
• • • • •
guidance in export related activities provides information on credit-worthiness of overseas buyers provides information on about 180 countries with its own credit ratings makes it easy to obtain export finance from banks/financial institutions assists exporters in recovering bad debts
When should an exporter approach ECGC? The point at which cover normally begins is the date of dispatch i.e. shipment Proposal for a Standard Policy may be made at any time. For specific policies ECGC should be approached well before shipments begin, preferably before concluding a contract.
PRODUCTS : The covers issued by ECGC can be divided broadly into four groups: 1) Standard Policy 2) Specific Policies 3) Financial Guarantees 4) Special Schemes
STANDARD POLICY Shipments (Comprehensive Risks) Policy, which is commonly known as the Standard Policy, is the one ideally suited to cover risks in respect of goods exported on short term credit; i.e. credit not exceeding 180 days. The policy covers both commercial and political risks from the date of shipment.
Risks covered under the policy : Under the Shipments (Comprehensive Risks) Policy, the Corporation covers, from the date of shipment, the following risks: 1) Commercial Risks
Insolvency of the buyer Failure of the buyer to make the payment within a specified period, normally 4 months from the due date
Buyer's failure to accept the goods, subject to certain conditions
2) Political Risks
Imposition of restrictions by the Government of the buyer's country or any Government action which may block the delay of transfer of payment made by the buyer.
War, civil war, revolution or civil disturbances in the buyer's country
New import restrictions or cancellation of a valid import license Interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer.
Any other cause of loss occurring outside India, not normally insured by general insurers and beyond the control of both the exporter and the buyer.
Risks not covered The policy does not cover losses due to the following risks:
Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyer's country in his favor.
Causes inherent in the nature of the goods Buyer's failure to obtain necessary import or exchange authorization from authorities in his country.
• • • •
Insolvency or default of any agent of the exporter or of the collecting bank. Loss or damage to goods which can be covered by general insurers Exchange rate fluctuation Failure of the exporter to fulfill the terms of export contract or negligence on his part.
Shipments Covered The shipments (Comprehensive Risks) Policy is meant to cover all the shipments that may be made by an exporter on credit terms during a period of 24 months ahead. In other words, an exporter is required to offer for insurance each and
every shipment that may be made by him in the next 24 months on DP, DA or Open Delivery terms to buyers other than his own associates. The Policy cannot be issued for selected shipments. selected buyers or selected markets. Exclusions Where an exporter is dealing with several distinct items, ECGC may agree to exclude all shipments of certain agreed items, provided that what is offered for insurance consists of all items of an allied nature and offers the Corporation a reasonable portion of the exporter's total business with a fair spread of risks. Maximum Liability As the policy is intended to cover all the shipments that may be made by an exporter in a period of 24 months ahead, the Corporation will fix its Maximum Liability under each policy. The Maximum Liability is the limit up to which ECGC would accept liability for shipments made during the policy period for both commercial and political risks. It will be advisable to estimate the maximum outstanding payments due from overseas buyers at any one time during the policy period and to obtain the policy with maximum liability for such a value. The maximum Liability fixed under the Policy can be enhanced subsequently, if necessary. Credit Limits Commercial risks are covered subject to a Credit Limit approved by the Corporation on each buyer to whom shipments are made on credit terms. The exporter has therefore to apply for a suitable Credit Limit on each buyer. On the basis of its own judgment of the creditworthiness of the buyer, as ascertained from credit reports obtained from banks and specialized agencies abroad, the Corporation will approve a Credit Limit which is the limit up to which it will pay claim on account of losses arising from commercial risks. The Credit limit is a revolving limit and once approved it will hold good for all shipments to the buyer as long as there is no gap of more than 12 months between the two shipments.
Credit limit is a limit on the Corporation's exposure on the buyer for commercial risks and not a limit on the value of shipment that may be made to him. Premium has, therefore, to be paid on the full value of each shipment even where the value of the shipment or the total value of bills outstanding for payment is in excess of the credit limit. As the Credit Limit is indicative of the safe limit of credit that can be extended to the buyer, it will be advisable for exporters to see that the total value of bills outstanding with the buyer at any one time is not out of proportion to the Credit Limit. In cases where the Credit Limit that the Corporation is prepared to grant is far lower than the value of outstanding, exporters should discuss the problem with the Corporation. Credit Limits need not be obtained if a shipment is made on D.P or C.A.D terms and if the value of shipment does not exceed Rs. 10 lacs. Political as well as commercial risks will stand automatically covered for such shipments, the only qualification being the claims will not be paid on more than four buyers during the Policy period under this provision. Premium Rates Depending on the combination of the payment term and the country group, the premium may range from 0.07% to 3.5%. ECGC's premium rates are one of the lowest among credit insurers in the world. When does a claim become payable? A claim could arise when the exporter suffers loss arising from any of the insured risks and will be paid to the exporter immediately upon the loss being ascertained by the Corporation. In case of insolvency of an overseas buyer, losses will be ascertained one month after the exporter's claim is admitted to rank against the insolvent's estate or after four months from the due date, whichever is earlier. In case of default by the buyer and in all other cases, loss will be ascertained four months from the due date. Expenses incurred by the exporter
on account of additional handling, transport or insurance charges because of interruption or diversion of voyage out side India could also form part of the insured loss. The Corporation normally pays 90% of the loss, whether it arises due to the commercial risks or political risks. A lower percentage of cover may be offered in certain cases. Sharing recovery with ECGC All amounts recovered, net of recovery expenses, should be shared with ECGC in the ratio in which the loss was originally shared. Receipt of a claim from ECGC does not relieve an exporter from obligations to the Exchange Control Authority for recovering the amount from the overseas buyer. Small Exporter's Policy ECGC issues a Small Exporter's Policy to exporters whose anticipated export turnover for the next twelve months does not exceed Rs. 50 lakhs. For further information about the scheme, feel free to contact ECGC. Specific Policies Specific Policies are designed to protect Indian firms against payment risks involved in a) exports on deferred terms of payment b) services rendered to foreign parties and c) construction works and turnkey projects undertaken abroad. These policies are issued separately for each specific contract, and cover risks normally from the date of contract.
Financial Guarantees Financial Guarantees are issued to banks in India to protect them from risks of loss involved in their extending financial support at pre-shipment and post-
shipment stages. These also cover a host of non-fund based facilities that are extended to exporters. Special Schemes Transfer Guarantee meant to protect banks which add confirmation to Letters of Credit opened by foreign banks, Insurance cover for Buyers Credit and Lines of Credit, and Exchange Fluctuation Risk Insurance. Overseas Investment Insurance ECGC has evolved a scheme to provide protection for Indian investments abroad. Any investments made by way of equity capital or untied loan for the purpose of setting up or expansion of overseas projects will be eligible for cover under investment insurance. The investments may be either in cash or in the form of export of Indian capital goods and services. The cover will be available for the original investment together with annual dividends or interest receivable. The risks of war, expropriation and restriction on remittances are covered under the schemes. As the investor would be having a hand in the management of the joint venture, no cover for commercial risks would be provided under the scheme. For investment in any country to qualify for investment insurance, there should preferably be a bilateral agreement protecting investment of one country in the other. ECGC may consider providing cover in the absence of any such agreement provided it is satisfied that the general laws of the country afford adequate protection to the investments. The period of insurance cover would not normally exceed 15 years. In case of projects involving long construction periods, cover may be extended for a period of 15 years from the date of completion of the project subject to a maximum of 20 years from the date of commencement of the investment.
Amounts insured shall be reduced progressively in the last five years of the insurance period.
1. What is Export-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 oriented companies by offering them a comprehensive range of products and services, aimed at enhancing their internationalisation efforts. 2. What is the place of Exim Bank in the institutional structure for financing developmental needs? There are apex institutions 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 and other state level financial institutions that operate the retail banking system in the country. 3. What are the types of services provided by Exim Bank? Exim Bank 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 globalisation. 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 Exim Bank support Indian consultants to secure assignments overseas? Exim Bank encourages Indian consultants to gain and enhance their international exposure by assisting them in 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 • Mekong Project Development Facility • Business Advisory and Technical 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 selected by 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 Exim Bank to Indian Companies for export of turnkey/ construction projects, export of services and export of capital/ engineering goods & consumer durables ? Exim Bank provides financial assistance to Indian Companies by way of a variety of lending programmes, viz., Non-Funded • Bid Bond • Advance Payment Guarantee • Performance Guarantee • Guarantee for release of Retention Money • Guarantee for raising Borrowings Overseas • Other guarantees Funded • Pre-shipment Rupee Credit • Post-shipment Rupee Credit • Foreign Currency Loan • Overseas Buyer's Credit • Lines of Credit • Loan under FREPEC programme • Refinance of Export Loans 6. How is Forfaiting useful as an export financing option ? What role does Exim Bank play in a Forfaiting transaction ? Forfaiting is a mechanism of financing exports by discounting export receivables evidenced by bills of exchange/ promissory notes without recourse to the exporter. Exim Bank plays the role of an intermediary for facilitating the forfaiting transaction between the Indian exporter and the overseas forfaiting agency. 7. 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., • Lending Programme for Export Oriented Units • Production Equipment Finance Programme • Import Finance • Export Marketing Finance Programme • Lending Programme for Software Training Institutes • Programme for Financing Research & Development • Programme for Export Facilitation: Port Development
• • •
Export Vendor Development Lending Programme Foreign Currency Pre-Shipment Credit Working Capital Term Loan Programme for Export Oriented units
8. What type of financial assistance is extended by Exim Bank 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.
Exim Bank Goes The Electronic Way : Exim Bank has introduced an option to investors in its bonds to hold the same in dematerialised form. The Bank has established connectivity with the National Securities Depository Limited and Central Depository Services (India) Limited through its new Transfer Agent, viz, NVs Datamatics Financial Software and Services Limited, with effect from November 1, 2001. As on October 31, 2001 there were 9 series of Exiin Bank bonds guaranteed by Government of India (SLR Bonds) amounting to Rs. 526.45 crores and 8 series of Exim Bank bonds (non-SLR Bonds) amounting to Rs. 1,800.00 crores. As a part of risk management strategies and in an effort to average out the cost of funds, the Bank has started tapping the debt market in tranches, in the current year. So far, in the current year the Bank has raised Rs.250 crores of 5-year non-SLR Bonds at bench-mark pricing levels ranging from 8.80% p.a. to 8.95% p.a. (payable annually). Apart from Bonds, the Bank also issues Commercial Papers for period upto 1 year, Certificate of Deposits for period from 1 to 3 years and Term Deposits for period from 1 to 5 years. All the above instruments across the maturity spectrum have been assigned the highest credit rating by CRISIL and ICRA.
EXIM BANK STUDY HIGHLIGHTS BUSINESS PRACTICES OF
SUCCESSFUL INDIAN EXPORTERS
Exim Bank has come out with a new study, titled "Business Practices of Successful Indian Exporters." The book was released by the Union Commerce Secretary, Mr. Prabir Sengupta, at a function jointly organised by Exiin Bank and the Federation of Indian Export Organisations (FIEO), in New Delhi on September 14, 2001. While a favourable trading environment may condition a firm's entry into the export trade, long-term success, to a large extent, is determined by the efforts of the individual firms. This is evident from the fact that even within sectors which have a high share of the export basket, not all firms are successful exporters. This latest study from Exim Bank, therefore, attempts to trace out the generic success factors/ business practices that characterise successful exporters across export sectors, The study focuses on six sectors: three traditional (apparel, spices and marine products) and three nontraditional (pharmaceuticals, agro-chemicals and autocomponents). For each of these sectors, the study offers an overview of the world trade environment and the Indian export scenario, which serve as a backdrop for understanding the industry level issues. The study is based on a sample of 138 firms from 21 locations across the country, ensuring adequate coverage and response. Detailed information was obtained and in-depth interviews carried out in order to gain insights into the business practices followed by the successful exporting firms in different sectors. The study is based on a cluster analysis, which involves clubbing firms with similar business practices into one cluster, and isolating the characteristics and imperatives for such clusters in each sector. The set of business practices thus obtained was then compared across the six sectors, to yield a set of common or ,generic' success factors that would apply across sectors. The study, thereafter, highlights the need for transfer of these business practices between firms, and identifies potential avenues for intervention by policy makers and other agencies, for facilitating such a transfer. Some of the recommended measures include awareness programmes, establishing an export-information repository, and mechanisms for inter-industry learnings. According to the study, twelve success factors/ business practices appear to be generic, although varying in criticality and emphasis, across sectors. These are: global market intelligence, strong global networking, direct relationship with buyers, clear product-market strategy for exports, strong R & D skills, access to technology, competitive raw material sourcing skills, world class manufacturing and quality standards, timely execution of orders, moving up the global value chain, clear export thrust, and entrepreneurial zeal.
The study firmly establishes that the days when firms could turn to the government for support, subsidy or protection for their business are well and truly over. Exporters now need to evolve their own strategies to meet the challenges of a dynamic business environment, not only in India, but also at the global level. Export success therefore, hinges more on firm dynamics than on government policies and regulations.
Exim Bank, UTI Bank Sign Business Tie-Up
Export-Import Bank of India (Exim Bank) and UTI Bank Ltd., have announced a tie-up for co-financing exports and export oriented companies, as also for providing value added services to support the internationalisation efforts of small and medium-sized externally oriented companies. The two Banks signed a Memorandum of Understanding (MOU) to signal this joint initiative, on Monday, December 10, 2001, in Mumbai. Mr. T. C. Venkat Subramanian, Managing Director of Exim Bank and Mr. P. J. Nayak, Chairman & Managing Director of UTI Bank Ltd. signed the MOU. Under the MOU, the institutions have agreed to: • Jointly provide export credits and loans to exporter customers, consistent with their respective operational policies and procedures. • Offer available information and advisory services to assist corporate clients seeking to create and enhance their international presence through exports, technology and investment tie-ups. • Co-operate in promotional activities, including exchange of information relating to business and investment opportunities, organising seminars/ workshops and exchange of faculty. • Exim Bank, with its overseas offices and institutional linkages with multilateral institutions, export credit agencies, foreign banks, and trade and investment promotion agencies in more than 28 countries, has in place a global network for promotion of India's international trade and investment. Exim Bank's range of financing programmes cover import of technology, strategic export marketing, equipment finance, project finance and overseas investment finance, including equity investments in Indian ventures overseas. Exim Bank's joint venture company, Global Trade Finance Pvt. Ltd., offers export factoring / forfaiting services. UTI Bank has a network of 116 branches and extension counters, which offer both working capital and term loans to its exporter customers. The Bank also has a strong network of 411 ATMs across 47 cities and towns in the country. Branches offer a full range of services in corporate, retail and international banking, treasury management, and merchant and investment banking. For the half year ended 30th September, 2001, the total income of UTI Bank increased by 67% yoy to Rs. 733.53 crores. The net profit of the bank was Rs. 56.32 crores, up from Rs. 35.17 crores for the first half of the previous year, representing a 60% rise . Given the synergy of operations between the two institutions, this alliance will further the consolidation of a one-stop, single banking window for exporters of goods and services.
Exchange Control Relating to Exports:
Export Import Code Number : every person/firm/company engaged in export import business should obtain an Export Import Code number issued by the DGFT . The exporter should invariably quote the code number in all declarations/forms which are explained below:
2. Export Declaration forms: As per Section 7 (1) (3) of FEMA , any export of goods from India should be declared in the prescribed forms to the effect that full value of exports will be realized within the prescribed period in the prescribed manner. The prescribed forms which are used for the purposes are given below: • • • GR Form PP Form Softex Form : : : Exports made otherwise than by post. Exports made by post parcel. Exports of software in non-physical form.
• SDF Form : On account of introduction of electronic data inter change system at certain customs offices where shipping bills are processed electronically.
Prescribed Time : The maximum time prescribed by RBI for realization of export proceeds is six months from date of shipment . If the bills are not realized within this time stipulated , the exporter should apply to RBI for extension of time in a form called ETX form . All overdue bills which are not realized within the due date will be reported to RBI in a half yearly statement. Prescribed Method : The payment for export proceeds should be received through the medium of Authorized Dealers (ADs) . In exceptional cases where the track record of the exporter is good , ADs will accept the amount received by exporters direct by cheque , DD etc. The currency of the receipt of payment should be appropriate to the final place of destination of the shipment as declared in the GR form irrespective of the country residence of the buyer.
5. Submission of export documents : The exporter has to declare the value of the goods of export to the customs in GR form and submit the form in duplicate to them. After certication , the original will be retained by the customs for onward transmission to RBI & the duplicate will be handed to the exporter . As per exchange control regulations , the duplicate copy of GR form along with the shipping documents should be submitted to the Authorized Dealers (ADs) within 21 days of shipment. If the exporter receives
advance payment for exports for the full value , the ADs will release the GR form accordingly. Remittances • connected with exports :
Remittance of Agency Commission : Agency commission can be remitted by the ADs upto a maximum of 12.5% of invoice value provided it is declared & approved by customs in exchange control forms. Reduction in Invoice Value : After the export bill has been negotiated or sent for collection , if the invoice is to be reduced , ADs can approve the same if the reduction does not exceed 10% of the invoice value. Claim Against Exports : Can also be upto 10% of invoice value which will be cleared by Authorized Dealers .
Agreement on Trade-Related Investment Measures (TRIMs)
This Agreement, negotiated during the Uruguay Round of WTO, applies only to measures that affect trade in goods. Recognizing that certain investment measures can have trade-restrictive and distorting effects, it states that no Member shall apply a measure that is prohibited by the provisions of GATT Article III (national treatment) or Article XI (quantitative restrictions). Examples of inconsistent measures, as spelled out in the Annex's Illustrative List, include local content or trade balancing requirements. The Agreement contains transitional arrangements allowing Members to maintain notified TRIMs for a limited time following the entry into force of the WTO (two years in the case of developed country Members, five years for developing country Members, and seven years for least-developed country Members). The Agreement also establishes a Committee on TRIMs to monitor the operation and implementation of these commitments.
Summary of the TRIMs Agreement
The agreement recognizes that certain investment measures restrict and distort trade. It provides that no contracting party shall apply any TRIM inconsistent with Articles III (national treatment) and XI (prohibition of quantitative restrictions) of the GATT. To this end, an illustrative list of TRIMs agreed to be inconsistent with these articles is appended to the agreement. The list includes measures which require particular levels of local procurement by an enterprise ("local content requirements") or which restrict the volume or value of imports such an enterprise can purchase or use to an amount related to the level of products it exports ("trade balancing requirements"). The agreement requires mandatory notification of all non-conforming TRIMs and their elimination within two years for developed countries, within five years for developing countries and within seven years for least-developed countries. It establishes a Committee on TRIMs which will, among other things, monitor the implementation of these commitments. The agreement also provides for consideration, at a later date, of whether it should be complemented with provisions on investment and competition policy more broadly.
Factoring may be defined as a contract by which the factor is to provide at least two of the services (finance , the maintenance of accounts , the collection of receivables and protection against credit risks) and the supplier is to assign to the factor on a continuing basis by way of sale or security , receivables arising from the sale of goods or supply of services . Factoring offers smaller companies the instant cash advantage that was once available only to large companies with high sales volumes. With factoring, there's no need for credit or collection departments, and no need to spend your profits on maintaining accounts receivables. Simply put...factoring turns your receivable into cash today, instead of waiting to be paid at a future date. International export Factoring Scheme : RBI has approved the above scheme evolved by SBI Factors and Commercial Services Pvt. Ltd Mumbai for providing “International Export Factoring Services “ on “with recourse” basis. The salient features of the scheme are as follows: a) An exporter should submit to SBI Factors & Commercial Services Pvt.Ltd i.e the Export Factor (EF) a list of buyers (customers) indicating their names & street addresses and his credit line needs . b) The Import Factor (IF) located in the importers country selected by EF , will rate the buyer’s list and the results will be reporter to the exporter through EF . The exporter will apply for a credit limit in respect of overseas importer . IF will grant credit line based on the assessment of credit-worthiness of the overseas importer. c) The exporter will thereafter enter into an export factoring agreement with EF. All export receivable will be assigned to the EF , who in turn will asiign them to IF. d) The exporter will ship merchandise to approved foreign buyers . Each invoice is made payable to a specific factor in the buyer’s (importer) country . Copies of invoices & shipping documents should be sent to IF through EF. EF will make prepayment to the exporter against approved export receivables. e) EF will report the transaction in relevant ENC statement detailing full particulars , such as Exporter’s Code No. ,GR Form Number , Custom No . Currency , Invoice value etc. f) On receipt of payments from buyers on the due date of invoice , IF will remit funds to EF who will convert foreign currency remittances into
rupees and will transfer proceeds to the exporter after after deducting the amount of prepayments, if made. Simultaneously , EF will report the transaction in the relative ‘R’ return enclosing duplicate copy of the respective GR form duly certified . The payment received will be the net payment after deduction of a service fee which ranges from 0.5 % to 2% of the value of the invoices. g) If an approved buyer (importer) is unable to pay the proceeds of exports , IF will pay the receivables to EF , 100 days after the due date. The transactions of this nature will be reported by EF in the half yearly XOS statements to be submitted to RBI , indicating therein the reasons for delay /non payment .
Monetary And Credit Policy 2001-02 dated 22.10.01
The major features Relating to Exports in this mid term policy are as follows: On account of global slowdown , exports have not done well during the current year & imports increased by 2.5% as against an increase of 13.8% last year . Trade deficit in the first 5 months of the current financial year at US $ 4.6 billion was higher than that of US $3.7 billion in the same period last year. The Governor recalled that as part of the efforts to provide support to exporters during the prevailing period of global uncertainty , the Reserve Bank advised reduction in ceiling interest rates on rupee export credit by 1% point across the board for a period of 6 months. Taking into account forward premia , the effective interest cost on rupee export credit is only 3.0- 4.0 percent (assuming a forward premia of 5.0% ) which is internationally competitive. Similarly , exporters are free to avail of foreign currency loans in the currency of their choice at internationally competitive rates. In the past several measures have been introduced to ensure timely delivery of credit to exporters at reasonable cost and removal of procedural hassles. RBI Governor has mentioned the work of the survey on exporters ‘ satisfaction has been launched by the National Council Of Applied Research (NCAER) New Delhi.
July 2,2001 High Court Ruling : Export Losses not Entitled to tax concessions
In a landmark judgement , the Mumbai High court ruled that only profit from exports is entitled to tax concessions under Section 80HHC of the Income tac act. Losses are not to be considered for deduction under Section 80 HHC , the court ruled. The division bench comprising of Justice S H Kapadia & Justice V C Daga , gave this ruling on 2.7.2001 , in an appeal filed by Ipca Labs against and order by the Income Tax Appelate Tribunal. Case Details : The HC had to decide whether the loss incurred in export of goods was to be ignored while determining the appellant’s entitlement to deduction u/sec 80 HHC (3) c of I-T Act . In this case , Ipca’s export income contained 2 parts : One that resulted in Profit and the other that resulted in losses . Ipca claimed deductions for the profit it had made in the export of goods manufactured by it , even though it made a loss in the export of goods made by other manufacturers . The company claimed that the loss it had incurred should be ignored because the loss was in export of gods made by others , the benefits of which had been surrendered by the company in favour of the supporting manufacturers. The It dept on the other hand , took a stand that profit & loss should be aggregated & only the balance is entitled for deductions. As per the department , the result was a net loss from the export of goods , in the case of Ipca. As a result the company did not get any benefit under Section 80 HHC. Ipca’s return indicated a net loss from the export of goods - loss from goods manufactured by supporting manufacturing at Rs.6.86 crore and profits from export of goods manufactured by it at Rs.3.78 crore. In its ruling the high court said: However , the argument is that because of the disclaimer , the loss on the export of trading goods amounting to Rs.6.86 crore be ignored and only the profits from the self manufactured goods at Rs.3.78 crore alone should be taken into account. This is an ingenious method because if this argument is accepted then the supporting manufacturers as well as the exporting house would both be entitled to the benefits of tax concessions or deductions under Section 80 HHC.
Learnings/Suggestions through this project :
♦ Export Finance is a very important branch to study & understand the overall gamut of the international finance market . ♦ Availability of favourable 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 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. The credit policy of Oct 2001 is a pointer in this direction.
A lot of efforts are taken by ECGC and EXIM Bank for Export promotion . The stategies of these 2 agencies in India should be flexible & their finance schemes should be constantly synchronised with the changing scene of world trade . This alone can help Indian exporters to stand competition in world markets effectively and more gain-fully. Finally ,a very essential question needs to be answered by the International Trade gurus with reference to “Relevance of EXIM Policy in the current times”. Exim policies had emerged when the state decided to limit imports and encourage exports in order to maintain currency reserves . However , such ideas backfired: consumers were hurt and producers turned lazy . Hence its time the experts/gurus answer the following queries:
a) Should the state get out of the way of trade? b) Is the protection inherent in the new EXIM policy good for the country? c) Would India be a major exporter if only she was equipped with a working infrastructure An appropriate , rational and feasible reply to the above three questions matched with devoted & sincere implementation by the governments will go a long way in making India a powerhouse for international trade in the years to come ……. ………………
Export –What Where & How ♦ A Guide to Export ♦ ECGC Services Manual ♦ RBI Mid term review for year 2001-02 ♦ Economic Times ♦ Financial Express ♦ Business Standard
Paras Ram M .I .Mahajan