FIN 6002 – Session 29

Pradeepta Sethi
TAPMI
Documentary Collections

• A documentary collection (D/C) is a transaction whereby the

exporter entrusts the collection of a payment to the remitting
bank (exporter’s bank), which sends documents to a collecting
bank (importer’s bank), along with instructions for payment.
• Funds are received from the importer and remitted to the
exporter through the banks in exchange for those documents.
• D/Cs involve using a bills of exchange (draft) that requires the
importer to pay the face amount either at sight (document
against payment [D/P]) or on a specified date (document
against acceptance [D/A]).
• In D/C, collecting bank acts as an agent for both buyers and
sellers and maintains control of the title documents, but it
does not contain an assurance of payment by the bank.
 The D/P transaction utilizes a sight Bills
of Exchange. Payment is on demand.

After the goods are shipped, the

exporter sends the sight draft to the
clearing bank, along with documents
D/P – necessary for the importer/buyer to
Documents obtain the goods from customs.

against The buyer has to settle the payment

Payment with the bank before the documents are
released and he can take delivery of the
goods.
If the buyer fails or refuses to pay, the
exporter has the right to recover the
goods and resell them.
 The D/A transaction utilizes a time bills of
exchange.

In this case, the documents required to take

possession of the goods are released by the
clearing bank only after the buyer accepts a time
D/A – draft drawn upon him.

Documents
against In essence, this is a deferred payment or credit
arrangement. The buyer’s assent is referred to
Acceptance as a trade acceptance.

D/A terms are usually after sight, for instance “at

90 days sight”, or after a specific date, such as
“at 150 days bill of lading date.”
 Process flow D/P
Seller ships the goods to the buyer’s country as per the
Step 1
sales contract.

Seller presents documents to the Remitting Bank with

Step 2
clear instructions for collection of payment.

Remitting Bank forwards the documents and collection

Step 3
instructions to the Collecting/Presenting Bank.

Collecting/Presenting Bank presents documents to the

Step 4
buyer for payment.

Step 5 Buyer pays for the document or take up import financing.

Collecting/Presenting Bank remits the net proceeds to the

Step 6
Remitting Bank after deducting its own charges.

Remitting Bank credits the net proceeds into the seller’s

Step 7
account after deducting its own charges.
 Authorized Money Changers

¢ Authorized Money Changers (AMCs) are entities,

authorized by the Reserve Bank under Section 10
of the Foreign Exchange Management Act, 1999.
¢ An AMC is a Full-Fledged Money Changer
(FFMC) authorized by the Reserve Bank to deal
in foreign exchange for specified purposes.
¢ Authorized Dealer Category - I Banks (AD
Category–I Banks),
¢ Authorized Dealers Category - II (ADs Category–
II)
¢ Full Fledged Money Changers (FFMCs).
 Trade Credit

• Trade Credits refer to the credits extended by the

overseas supplier, bank and financial institution for
maturity up to five years for imports into India.

• Depending on the source of finance, such trade

credits include suppliers’ credit or buyers’ credit.

• Suppliers’ credit relates to the credit for imports into

India extended by the overseas supplier.

• Buyers’ credit refers to loans for payment of imports

into India arranged by the importer from overseas
bank or financial institution.
 Buyers Credit
• Buyer’s Credit refers to loans for payment of imports
into India arranged by the importer from a bank or
financial institutions outside India.
• The supplier (exporter) is not ready to give any credit
while the buyer (importer) is also not in a position to
make immediate payment.
• The importer approaches his bank and requests for
arrangement of payment to the exporter on immediate
terms.
• The bank through their own resources or correspondent
relationships ties up with a foreign bank/financial
institution and after agreeing upon on the pricing and
costs.
• The importer’s bank provides a Letter of Undertaking
(LoU) or Letter of Comfort (LoC) to this foreign bank.
• Based on letter of undertaking of Importer’s bank,
foreign bank credits the Nostro of the importer’s bank
which in turn uses the funds to make payment to the
Suppliers bank against the import bill.
 Buyers Credit
• Regulated by exchange control guidelines issued
by RBI.
• Automatic Route: Banks are permitted to approve
trade credit for import of non-capital and capital
goods up to USD 20 million or equivalent per
import transaction.
• Approval Route: The proposals involving trade
credit for import of non-capital and capital goods
beyond USD 20 million or equivalent per import
transaction are considered by the RBI.
• Cost of raising Trade Credit: The all-in-cost ceiling
for raising Trade Credit is 350 basis points over 6
months LIBOR.
• The all-in-cost include arranger fee, upfront fee,
management fee, handling/ processing charges,
out of pocket and legal expenses, if any
 Process flow Buyers Credit
Step 1 Importer (Buyer) imports the goods under LC, D/A or D/P.

Buyer approaches its bank to arrange for banker’s credit

Step 2
before the due date of the bill.

The buyer’s bank through their correspondent

Step 3 relationships ties up with a foreign bank after agreeing for
costs.

Buyer’s bank provides LoC/LoU in favor of the overseas

Step 4
bank through SWIFT.

As per the instructions provided in LoC/LoU, the overseas

Step 5 bank either directly credits the exporter’s bank or credit
the nostro account.

On due date importer’s bank will recover principal and

Step 6 interest from importer and remit the same to overseas
bank.
 Export Credit

¢ The RBI first introduced the scheme of Export Financing in 1967.

¢ The scheme is intended to make short-term working capital finance
available to exporters at internationally comparable interest rates.
¢ Export credit is available both in rupee as well as in foreign currency.
¢ Pre-shipment - working capital requirements till the shipment stage – for
purchase of raw materials, manufacturing, processing, packaging,
transportation, and warehousing of goods.
¢ Post-shipment - credit facility extended after goods are shipped. Working
capital requirements locked in the form of export receivables during the
period of shipment of goods to the realization of export proceeds.
 Rupee Pre-shipment Credit/Packing
Credit
¢ 'Pre-shipment / Packing Credit’ - means any loan or advance granted by a bank
to an exporter for financing the purchase, processing, manufacturing or packing of
goods prior to shipment / working capital expenses towards rendering of services
on the basis of letter of credit opened in his favour by an overseas buyer.
¢ Packing credit is generally provided to eligible exporters when it lodges
irrevocable LCs established by the foreign buyer in their favor through a
reputed bank.
¢ Copies of confirmed orders or contracts placed by the foreign buyers to the Indian
exporter may also be accepted for this purpose.
¢ Computation of export credit limits are outside the purview of Maximum
Permissible Banking Finance (MPBF).
¢ Margin requirements are little lower in comparison to a normal WC.
¢ The period for which a packing credit advance will be given is decided by
individual banks.
 Running Account Facility
¢ Pre-shipment credit to exporters is normally provided on lodgment of LCs or firm
export orders.

¢ Availability of raw materials is seasonal in some cases. In some other cases, the
time taken for manufacture and shipment of goods is more than the delivery
schedule as per export contracts.

¢ In many cases, the exporters have to procure raw material, manufacture the
export product and keep the same ready for shipment, in anticipation of receipt of
letters of credit / firm export orders from the overseas buyers.

¢ Having regard to difficulties being faced by the exporters in availing of adequate

pre-shipment credit in such cases, banks have been authorized to extend Pre-
shipment Credit Running Account Facility in respect of any commodity, without
insisting on prior lodgment of letters of credit / firm export orders

¢ Interest rate charged on EPC account are in general lower.

 Exchange Earners Foreign Currency
A/C (EEFC A/C)

¢ An account maintained in foreign currency with an Authorized Dealer

Category - I bank

¢ It is a facility provided to the foreign exchange earners, including

exporters, to credit 100 per cent of their foreign exchange earnings to the
account, so that the account holders do not have to convert foreign
exchange into Rupees and vice versa, thereby minimizing the transaction
costs.

¢ Maintained only in the form of non-interest-bearing current account.

¢ No credit facilities, either fund-based or non-fund based is permitted

against the security of balances held in EEFC accounts.
 Pre-shipment Credit in Foreign
Currency (PCFC)

¢ EPC facility in foreign currencies - Pre-shipment Credit in Foreign Currency

(PCFC)

¢ Making credit available to exporters at internationally competitive rates.

¢ Exporters normally resort to this mode when they feel that Rupee may not
depreciate much in comparison to the currency in which the credit is
denominated.

¢ PCFC is available in US Dollars, Pound Sterling, Japanese Yen, Euro

¢ Is available for a maximum of 360 days (initially for 180 days which can be
extended further to a maximum of 360 days).
 Bank Guarantee

¢ A contract of guarantee is defined as ‘a contract to perform the promise or

discharge the liability of a third person in case of default’. The parties to the
contract of guarantee are:

¢ Applicant : The principal debtor - The person at whose request the

guarantee is executed.

¢ Beneficiary : The person to whom the guarantee is given and who can
enforce it in case of default.

¢ Guarantor : The person who undertakes to discharge the obligations of the

applicant in case of his default.

¢ Thus, a contract of guarantee is a collateral contract, consequential to a main

contract between the applicant and the beneficiary.
 Bank Guarantee

¢ BGs may generally be issued for the following purposes:

¢ In lieu of Security Deposits / Earnest Money Deposits for participating in
tenders.
¢ Mobilization advance or advance money before commencement of the
project by the contractor and for money to be received in various stages
like plant layout, design / drawings in project finance.
¢ In respect of raw material supplies or for advances by the buyers.
¢ In respect of due performance of specific contracts by the borrowers and
for obtaining full payment of the bills.
¢ Performance guarantee for warranty period on completion of contract
which would enable the supplier to realise the proceeds without waiting for
the warranty period to be over.
¢ Bid bonds on behalf of exporters.
 Bank Guarantee

¢ As a general rule, SCBs limit themselves to the provision of Financial

Guarantees and exercise due caution with regard to Performance
Guarantee business.

¢ The subtle difference between the two types of guarantees is that

under a Financial Guarantee, a bank guarantees the customer’s
(applicant’s) financial worth, creditworthiness and his capacity to take
up financial risks.

¢ In a Performance Guarantee, the bank’s guarantee obligations relate to

the performance related obligations of the applicant (customer).
 Margins

¢ Cash margins provide a cushion against invocation. Margin money may be

in the form of TDR or a lien marked on the DP in the constituent’s CC
Account.

¢ The margin to be stipulated would depend on the borrower’s means,

resources, creditworthiness, security available, past experience with regard
to issue of BGs, nature of guarantee and the nature of underlying
transactions.

¢ Apart from the margin, BGs are usually secured by an extension of the
charge on current assets obtained to cover WC facilities.

¢ Adequate collateral security by way of Equitable Mortgage / Extension of

charge on Current / Fixed Assets or third-party guarantee should be taken
depending on the merits of each case.