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INTRODUCTION

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A developed country is defined as a sovereign state that has a developed economy
and technologically advanced infrastructure when compares to other nations. Several
factors that determine whether or not a country is developed are HDI, GDP,
industrialization and freedom. Countries are divided into two major categories by the
United Nations, which are developed countries and in developing countries. The
classification of countries is based on the economic status such as GDP, per capital
income, industrialization, the standard of living etc.

Developed countries refer to the sovereign state, whose economy has highly
progressed and possesses great technological infrastructure, as compared to other
nations. The countries with low industrialization and low human development index
are termed as developing countries. Developed countries provide free healthy and
secured atmosphere to live whereas developing countries, lacks these things.
Developed countries are also known as advanced countries, as they are self-sufficient
nations.

Human development index (HDI) statistics rank the countries on the basis of their
development. The country which is having high child welfare, healthcare, excellent
medical, transportation, communication and educational facilities, better housing and
living conditions, industrial, infrastructural and technological advancement, higher
per capita income, increase in life expectancy etc are known as developed country.
These countries generate more revenue from the industrial sector as compared to
service sector as they are having a post-industrial economy.

The following are the names of some developed countries: Australia, Canada, France,
Germany, Italy, Japan, Norway, Sweden, Switzerland, and United States.

Developing countries are countries those come under the category of third world
countries. They are also known as lower developed countries. Developing countries
depend upon the developed countries, to support them in establishing industries
across the country. The country has a low human development index (HDI) i.e. the

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country does not enjoy healthy and safe environment to live, low Gross Domestic
Product, high literacy rate, poor educational, transportation, communication, medical
facilities, unsustainable government debt, unequal distribution of income, high death
rate and birth rate, malnutrition both to mother and infant which case high infant
mortality rate, poor living conditions, high level of unemployment and poverty.

The following are the names of some developing countries: Colombia, India, Kenya,
Pakistan, Sri Lanka, Thailand, turkey.

For many developing countries, progression from low income to middle and upper
middle-income country status rests heavily on successful trade in regional and global
markets. Conventional theory suggests that there is a standard process through which
this takes place.

 Exporting primary goods (commodities) in which a country has a natural

comparative advantage.
 Import substitution – where a country develops a domestic manufacturing
capability and capacity e.g. tomato growing businesses can build tomato
processing factories.
 Export-focused manufacturing production takes advantage of lower cost labor
and increasing economies of scale in production.

Many sub- Saharan African countries and nations such as India and Sri Lanka have a
trade ratio lower than the world average. However for others, trade is a significant
percentage of national income and competitiveness in international markets has a
huge bearing on their overall macroeconomics performance and development
prospects.

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Successful trade provides for developing/emerging countries:

 A source of foreign currency to help a nation’s balance of payments (trade

surplus countries build up US$ reserves)
 An important way of financing imports of essential imports of capital
equipment/ technologies and energy supplies
 An injection of demand into the circular flow of income and spending +
creating positive export multiplier effects
 Increased employment in export industries and related industries which can
lead to rising per capita incomes and also stronger human development index
scores
 Falling prices for consumers help to increase real incomes e.g. by opening up
markets to new competition

But overseas trade also has risks

 Volatile global prices affecting export revenues and profits

 Risks that exports will be affected by geo-political uncertainty and cyclical
shifts in demand
 Opening up an economy to trade may cause rising structural unemployment in
some industries.

International trade between different countries is an important factor in raising living

standards, providing employment and enabling consumers to enjoy a greater variety
of goods. International trade has occurred since the earliest civilizations began trading
but in recent years international trade has become increasingly important with a large
share of GDP devoted to exports and imports.

International trade refers to the exchange of goods and services between the
countries. In simple words, it means the export and import of goods and services.

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Export means selling goods and services out of the country, while import means
goods and services flowing into the country.

International trade supports the world economy, where prices or demand and supply
are affected by global events. For instance, the US changing via policies for the
software employees will impact the Indian software firms. Or, an increase in the cost
of labor in exporting country like china could mean you end paying more for the
Chinese goods in U.S.

There are three types of international trade: export trade, import trade and Entrepot
trade.

Exports are the goods and services produced in one country and purchased by
residents of another country. It doesn’t matter what the good or service is. It doesn’t
matter how it is sent. It can be shipped, sent by email, or carried in personal luggage
on a plane. If it is produced domestically and sold to someone in a foreign country, it
is an export. Exports are one component of international trade. The other component
is imports. They are the goods and services bought by a country’s residents that are

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produced in a foreign country. Combined, they make up a country’s trade balance.
When the country exports more than it imports, it has a trade surplus. When it
imports, it has a trade deficit.

What countries export?

Businesses export goods and services where they have a competitive advantage. That
means they are better than any other companies at providing that product.tey also
export things that reflect the country’s comparative advantage. Countries have
comparative advantages in the commodities they have a natural ability to produce.
For example, Kenya, Jamaica, and Colombia have the right climate to grow coffee.
That gives their industries an edge in exporting coffee.

How exports affect the economy?

Most countries want to increase their exports. Their companies want to sell more. If
they've sold all they can to their own country's population, then they want to sell
overseas as well. The more they export, the greater their competitive
advantage. They gain expertise in producing the goods and services. They also gain
knowledge about how to sell to foreign markets.

Governments encourage exports. Exports increase jobs, bring in higher wages, and
raise the standard of living for residents. As such, people become happier and more
likely to support their national leaders.

Exports also increase the foreign exchange reserves held in the nation's central bank.
Foreigners pay for exports either in their own currency or the U.S. dollar. A country
with large reserves can use it to manage their own currency's value. They have
enough foreign currency to flood the market with their own currency. That lowers the
cost of their exports in other countries.

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Countries also use currency reserves to manage liquidity. That means they can better
control inflation, which is too much money chasing too few goods. To control
inflation, they use the foreign currency to purchase their own currency. That
decreases the money supply, making the local currency worth more.

There are three ways countries try to increase exports:

First, they use trade protectionism to give their industries an advantage. This usually
consists of tariffs that raise the prices of imports. They also provide subsidies on their
own industries to lower prices. But once they start doing this, other countries retaliate
with the same measures. These trade wars lower international commerce for
everyone. For example, the Smoot-Hawley tariff lowered trade by 65% and worsened
the Great Depression.

Second,Countries also increase exports by negotiating trade agreements. They boost

exports by reducing trade protectionism. The World Trade Organization tried to
negotiate a multilateral agreement among its 149 members. The so-called Doha
agreement almost succeeded. But the European Union and the United States refused
to eliminate their farm subsidies.

As a result, most countries relied on bilateral agreements or regional trade agreements

for years. But in 2015, the Obama administration negotiated the Trans-Pacific
Partnership. In 2017, the Trump administration dropped out. But the other countries
completed the agreement without the United States.

The third way countries boost exports is to lower the value of their currencies. This
makes their export prices comparatively lower in the receiving country. Central banks
do this by lowering interest rates. A government can also print more currency or buy
up foreign currency to make its value higher. Countries that try to compete by
devaluing their currencies are accused of being in currency wars.

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Exports can be done directly or indirectly.

Direct Exporting: Direct exporting is the method of exporting goods directly to the
foreign buyers by the manufacturer himself or through his agent situated in the
foreign country.

Indirect Exporting: in case of indirect exporting, an exporter uses the services of

some specialized agencies such as merchant exporters and export houses or trading
houses for exporting goods.

India is amongst the world’s top 20 nations with respect to the export of merchandise.
With the increased liberalization of trade by the Indian Government, there’s an
abundant opportunity for establishing a profitable export business. For undertaking an
export business, an entrepreneur should have a clear understanding of the rules and
regulations along with the documentation pertaining to these export transactions.

DIRECT EXPORTING

The advantages of direct exporting for a company include more control over the
export process, potentially higher profits, and a closer relationship to the overseas
buyer and marketplace. These advantages do not come easily, however, since the
company needs to devote more time, personnel, and corporate resources than are
needed with indirect exporting.

When a company chooses to export directly to foreign markets, it usually makes

internal organizational changes to support more complex functions. A direct exporter
normally selects the markets it wishes to penetrate, chooses the best channels of
distribution for each market, and then makes specific foreign business connections in
order to sell its product. The rest of this chapter discusses these aspects of direct
exporting in more detail.

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Organizing for exporting:-

A company new to exporting generally treats its export sales no differently from
domestic sales, using existing personnel and organizational structures. As
international sales and inquiries increase, however, the company may separate the
management of its exports from that of its domestic sales.

The advantages of separating international from domestic business include the

centralization of specialized skills needed to deal with international markets and the
benefits of a focused marketing effort that is more likely to lead to increased export
sales. A possible disadvantage of such a separation is the less efficient use of
corporate resources due to segmentation.

When a company separates international from domestic business, it may do so at

different levels in the organization. For example, when a company first begins to
export, it may create an export department with a full or part-time manager who
reports to the head of domestic sales and marketing. At later stages a company may
choose to increase the autonomy of the export department to the point of creating an
international division that reports directly to the president.

Larger companies at advanced stages of exporting may choose to retain the

international division or to organize along product or geographic lines. A company
with distinct product lines may create an international department in each product
division. A company with products that have common end users may organize
geographically; for example, it may form a division for Europe, another for the Far
East, and so on. A small company's initial needs may be satisfied by a single export
manager who has responsibility for the full range of international activities.
Regardless of how a company organizes for exporting, it should ensure that the
organization facilitates the marketer's job. Schaefer Shelving has a variety of products
and solutions for ensuring the smooth organization of distribution. Good marketing

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skills can help the firm overcome the handicap of operating in an unfamiliar market.
Experience has shown that a company's success in foreign markets depends less on
the unique attributes of its products than on its marketing methods.

Once a company has been organized to handle exporting, the proper channel of
distribution needs to be selected in each market. These channels include sales
representatives, agents, distributors, retailers, and end users.

Sales representatives:-

The representative uses the company's product literature and samples to present the
product to potential buyers. A representative usually handles many complementary
lines that do not compete. The sales representative usually works on a commission
basis, assumes no risk or responsibility, and is under contract for a definite period of
time (renewable by mutual agreement). The contract defines territory, terms of sale,
method of compensation, reasons and procedures for terminating the agreement, and
other details. The sales representative may operate on either an exclusive or a
nonexclusive basis.

Agents:-

The widely misunderstood term agent means a representative who normally has
authority, perhaps even power of attorney, to make commitments on behalf of the
firm he or she represents. Firms in the developed countries have stopped using the
term and instead rely on the term representative, since agent can imply more than
intended. Any contract should state whether the representative or agent does or does
not have legal authority to obligate the firm.

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Distributors:-

The foreign distributor is a merchant who purchases merchandise from an exporter

(often at substantial discount) and resells it at a profit. The foreign distributor
generally provides support and service for the product, relieving the export company
of these responsibilities. The distributor usually carries an inventory of products and a
sufficient supply of spare parts and maintains adequate facilities and personnel for
normal servicing operations. The distributor typically carries a range of
noncompetitive but complementary products. End users do not usually buy from a
distributor; they buy from retailers or dealers.

The payment terms and length of association between the export company and the
foreign distributor are established by contract. Some export companies prefer to begin
with a relatively short trial period and then extend the contract if the relationship
proves satisfactory to both parties.

Foreign retailers:-

A company may also sell directly to a foreign retailer, although in such transactions,
products are generally limited to consumer lines. The growth of major retail chains in
markets such as Europe and Japan has created new opportunities for this type of
direct sale. The method relies mainly on traveling sales representatives who directly
contact foreign retailers, although results may be accomplished by mailing catalogs,
brochures, or other literature. The direct mail approach has the benefits of eliminating
commissions, reducing traveling expenses, and reaching a broader audience. For best
results, however, a firm that uses direct mail to reach foreign retailers should support
it with other marketing activities.

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Manufacturers with ties to major domestic retailers may also be able to use them to
sell abroad. Many large retailers maintain overseas buying offices and use these
offices to sell abroad when practicable.

Direct sales to end users:-

A business may sell its products or services directly to end users in foreign countries.
These buyers can be foreign governments; institutions such as hospitals, banks, and
schools; or businesses. Buyers can be identified at trade shows, through international
publications, or through government contact.

The company should be aware that if a product is sold in such a direct fashion, the
exporter is responsible for shipping, payment collection, and product servicing unless
other arrangements are made. Unless the cost of providing these services is built into
the export price, a company could end up making far less than originally intended.

INDIRECT EXPORTING

The principal advantage of indirect marketing for a smaller company is that it

provides a way to penetrate foreign markets without the complexities and risks of
direct exporting. Several kinds of intermediary firms provide a range of export
services. Each type of firm offers distinct advantages for the company.

Commission agents:-

Commission or buying agents are finders for foreign firms that want to purchase
domestic products. They seek to obtain the desired items at the lowest possible price
and are paid a commission by their foreign clients. In some cases, they may be
foreign government agencies or quasi-governmental firms empowered to locate and
purchase desired goods. Foreign government purchasing missions are one example.

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Export management companies:-

An EMC acts as the export department for one or several producers of goods or
services. It solicits and transacts business in the names of the producers it represents
or in its own name for a commission, salary, or retainer plus commission. Some
EMCs provide immediate payment for the producer's products by either arranging
financing or directly purchasing products for resale. Typically, only larger EMCs can
afford to purchase or finance exports.

EMCs usually specialize either by product or by foreign market or both. Because of

their specialization, the best EMCs know their products and the markets they serve
very well and usually have well-established networks of foreign distributors already
in place. This immediate access to foreign markets is one of the principal reasons for
using an EMC, since establishing a productive relationship with a foreign
representative may be a costly and lengthy process.

One disadvantage in using an EMC is that a manufacturer may lose control over
foreign sales. Most manufacturers are properly concerned that their product and
company image be well maintained in foreign markets. An important way for a
company to retain sufficient control in such an arrangement is to carefully select an
EMC that can meet the company's needs and maintain close communication with it.
For example, a company may ask for regular reports on efforts to market its products
and may require approval of certain types of efforts, such as advertising programs or
service arrangements. If a company wants to maintain this type of relationship with
an EMC, it should negotiate points of concern before entering an agreement, since not
all EMCs are willing to comply with the company's concerns.

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Export trading companies:-

An ETC facilitates the export of domestic goods and services. Like an EMC, an ETC
can either act as the export department for producers or take title to the product and
export for its own account. Therefore, the terms ETC and EMC are often used
interchangeably. A special kind of ETC is a group organized and operated by
producers. These ETCs can be organized along multiple- or single-industry lines and
can represent producers of competing products.

Export agents, merchants, or re-marketers:-

Export agents, merchants, or re-marketers purchase products directly from the

manufacturer, packing and marking the products according to their own
specifications. They then sell overseas through their contacts in their own names and
assume all risks for accounts.

In transactions with export agents, merchants, or re-marketers, a firm relinquishes

control over the marketing and promotion of its product, which could have an adverse
effect on future sales efforts abroad. For example, the product could be under priced
or incorrectly positioned in the market, or after-sales service could be neglected. On
the other hand, the effort required by the manufacturer to market the product overseas
is very small and may lead to sales that otherwise would take a great deal of effort to
obtain.

Piggyback marketing:-

Piggyback marketing is an arrangement in which one manufacturer or service firm

distributes a second firm's product or service. The most common piggybacking
situation is when a domestic company has a contract with an overseas buyer to
provide a wide range of products or services. Often, this first company does not

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produce all of the products it is under contract to provide, and it turns to other
companies to provide the remaining products. The second company thus piggybacks
its products to the international market, generally without incurring the marketing and
distribution costs associated with exporting. Successful arrangements usually require
that the product lines be complementary and appeal to the same customers.

Exports are governed by Foreign Trade (Development & Regulation) Act, 1992 and
Export-Import (EXIM) Policy. Directorate General of Foreign Trade (DGFT) is the
primary governing body responsible for the export and import policies in the country.
Since an export trade has to follow a specific set of procedures from receiving
inquiries to completion of the transaction, exporters need to get themselves registered
with these authorities for ensuring all the legal formalities as required by them are
met and also for receiving incentives which are allowed under the export promotion
schemes. The Reserve Bank of India (RBI) guidelines have to be met by the exporter.
An exporter also requires an Import-Export Code Number from the concerned
regional licensing authority.

Export process:

1. Enquiry and sending quotation receipts

Buyer send enquiry request to the entire potential seller. The seller is required
to send the quotation for the order and the buyer accepts the proposal of the
seller that suits him with last market price.

2. Order receipt

In case buyer like’s your order he will send you the order receipt contains
information related to order.

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3. Determining of credit worthiness

In this step, the seller enquires, credibility of the buyer and ask the buyer to
send a Letter of Credit to start processing order.

4. Obtaining license

An exporter is required to have a license to be able to export goods.

5. Pre-shipment finance

After obtaining the export license, the exported approaches the bank of
financial institutions for obtaining pre-shipment finance for carrying out
production activities.

6. Production of goods

The goods are being produced as per the requirement of the importer.

7. Inspection

Once the first batch of goods is made, in order to make sure the good quality
of product, if there is any fault, the production process is change.

8. Obtaining a certificate of origin

The certificate of origin is sent to the importer to certify that the goods are
actually produced in the country.

9. Shipping space reservation

You need to take service of a shipping company in order to deliver goods to

your buyer. You need to make a reservation in advance with the shipping

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 company and also tell them what kind of goods you wants to export, the
number of goods, date of shipment and destination of delivery etc.

10. Packaging

Once your order is ready you need to pack the goods so that they don’t get
damage in the process of shipment and don’t forget to mention destination
address.

11. Insurance of goods

You cannot be sure of the natural calamities or accidents when your gods are
in transit. Therefore, you must get insurance of goods in order to avoid future
loss.

12. Custom clearance

Get your goods cleared from the custom so that they can be delivered to the
buyer without any interruption in the transit.

13. Getting mate’s receipt

A mate’s receipt is generated by the commanding officer of the ship when the
cargo is loaded on the ship.

14. Preparation of invoice

Once the goods are sent the next immediate step, need to follow is, to prepare
an invoice to sent to the buyer.

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 15. Receiving payment

Lastly, the exporter communicates the importer regarding the shipment of

goods. To claim the good title, the importer require certain documents such as
invoice, insurance policy, etc on its arrival the exporting company sent these
documents to importing firms with the banker and instruct to deliver it early
when bill of exchange is accepted.

Trade is an important driver of development – but, to be effective, adequate financing

and capacity-building assistance is essential. Credit and credit insurance help to oil
the wheels of trade by bridging the gap between exporters’ and importers’ differing
expectations about when payment should be made. It is therefore important to
identify financing gaps and address them wherever they may appear. Trade financing
is often taken for granted in developed countries because importers and exporters are
backed by mature financial industries. Still, even in these countries, small and
medium-sized enterprises (SMEs) face hurdles in obtaining financing because they
typically have less collateral, guarantees and credit history than larger companies.
Hence, trade financing can be an important factor in determining SME contributions
to economic growth and development.

Adequate provision of trade finance is essential as developing economies seek to

benefit from the trade opportunities offered by shifting patterns of production. Some
argue that the problem can gradually be solved through local financial sector reform,
as has been the case in emerging markets where the financial sector’s ability to
support the trade sector has gradually increased. However, the development of the
local financial sector would typically benefit from the presence of global banks and
other actors and the transfer of pertinent knowledge – but in the post-financial crisis
era global banks are less inclined to invest in many developing counties. This harms
the prospects for the supply of trade finance in the very locations where the trade

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potential is the greatest. As a result, there are large financing gaps, particularly in
Africa and Asia, which need to be addressed.

Only a small part of international trade is paid cash in advance, as importers generally
wish to pay, at the earliest, upon receipt of the merchandise in order to verify its
physical integrity on arrival. Exporters, however, wish to be paid upon shipment. In
order to bridge the gap between the time at which exporters wish to be paid and the
time at which importers will pay, a credit or a guarantee of payment is required.
Trade finance provides the credit, payment guarantees and insurance needed to
facilitate the payment for the merchandise or service on terms that will satisfy both
the exporter and the importer. As such, trade finance is often described as a lubricant
of trade. Most trade credit, payment guarantees and insurance are short-term, with a
standard maturity of 90 days. In certain cases, trade credit can be extended for longer
periods of time, particularly for categories of goods subject to longer production and
delivery cycles such as aircraft and capital equipment.

Trade finance (TF) is an important part of the transaction services offered by most
international banks. It is a payment instrument and at the same time effectively
manages the risks associated with doing business internationally.

To succeed in today's global marketplace and win sales against foreign competitors,
exporters must offer their customers attractive sales terms supported by appropriate
payment methods. Getting paid in full and on time is the ultimate goal for each export
sale, so an appropriate payment method must be chosen carefully to minimize the
payment risk while also accommodating the buyer's needs. For exporters, any sale is a
gift until payment is received. Therefore, the exporter wants to receive payment as
soon as possible, preferably as soon as an order is placed or before the goods are sent.
For importers, any payment is a donation until the goods are received. Therefore,
importers want to receive the goods as soon as possible but to delay payment as long
as possible, preferably until after the goods are resold to generate enough income to

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pay the exporter. Payments entail a significant portion of risk especially when
executed cross-border and between relatively new trading partners. The need for
exporters to formalize a commercial contract to allow maximum coverage of the risks
to their exports is as important as knowing the different forms of trade finance
available to conclude the transaction.

Trade financing includes:

 Lending facilities
 Issuing Letters of Credit (LCs)
 Export factoring (companies receive funds against invoices or accounts
receivable)
 Forfaiting (purchasing the receivables or traded goods from an exporter)
 Export credits (to reduce risks to funders when providing trade or supply
chain finance)
 Insurance (during delivery and shipping, also covers currency risk and
exposure)

Trade financing (also known as supply chain and export finance) is a huge driver of
economic development and helps maintain the flow of credit in supply chains. It is
predicted that 80-90% of global trade is reliant on trade and supply chain finance, and
is estimated to be worth around USD $10 trillion a year. As a result of the global
economic crisis in 2008, export markets reduced in size by around 40-50%, SMEs
being the hardest hit. As a result, lending decreased as investor’s appetite for risk
decreased, and banks had to reduce the sizes of their loan books.

Export finance has many beneficiaries: developing countries, governments, small and
medium enterprises. SMEs are engines for economic growth and development,

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accounting for around 99% of businesses, 50% of employment and driving around
30% of private sector revenue in the UK.

In relation to export finance and the supply chain, many SMEs play a large role in the
running of multinational corporations and larger companies. SMEs require access to
finance to fulfill larger contracts, import goods from overseas and create wealth, jobs
and develop economies.

The benefits of Trade Finance:

 Facilitates the growth of a business

Cash and working capital are key to the success of any business. Trade
finance often helps make a company’s goods or receivables work for them,
freeing up and releasing working capital that is tied in stock. Why does this
help? You can suddenly offer more competitive terms to win your next
business, not be tied by late payment or lengthy delays between shipping an
order and receiving payment, which is ultimately good for growth and good
for your customers. Trade finance is a form of short to medium term working
capital solution which uses the security of the stock or goods being exported /
imported as a guarantee

 Increased revenue potential / Higher margins

Trade finance allows buyers to request higher volumes of stock or bigger

orders from suppliers, meaning businesses can easily benefit from economies
of scale and bulk discounts off volumes. The margin benefits of using trade
finance to grow a business can help win competition and increase revenue.
Trade finance can also help strengthen the relationship between buyers and
sellers, increasing profit margins and profits.

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 More efficiency in trades and supply chain

Managing the supply chain is so important for any business. Trade and supply
chain finance helps ease out cash constraints or cash gaps, whether it’s the
suppliers, customers, third parties, employees or providers, trade finance can
help ease and release working capital from the supply chain

 Mitigates risk from supplier

Trade financing reduces credit and payment risks or bad debt risk on suppliers
as the funders take hold over the goods being traded. Trade financing focuses
more on the trade than the underlying borrower (not balance sheet led), so
small businesses with small balance sheets can trade larger volumes more
easily and work with larger end customers

 Diversify your supplier network

Working with other international players allows business owners to diversify

their supplier network which increases competition and drives efficiency in
markets and supply chains

 Reduces bankruptcy risks

Late payments from debtors, bad debts, excess stock and demanding creditors
can have detrimental effects on a business. External financing or revolving
credit facilities can ease this pressure and prevent an SME from facing these
risks.

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Here are some examples of trade finance types:

Depending on your requirements, there are various forms of financing available for
exporters, from long term and short term loans to additional credit lines. Below are
some of the more common tools you can use to finance your export operations.

Pre Shipment Finance:-

Pre Shipment finance is provided when an exporter needs funds before the shipment
of products or goods. Funds are required for purchasing raw materials, processing of
raw materials into finished goods, packaging goods etc.

 Packing Credit: You can avail pre-shipment finance from your financier
against an export order received from the importer in the form of Packing
Credit. Once the funds are received from the overseas buyer, the concerned
export packing credit amount will be adjusted and loan will be closed against
that order.
 Business Loan: You can utilize a loan to purchase raw materials or to
undertake the manufacturing of your product.

Post Shipment Finance:-

After you have shipped the products and raised an invoice from the importer, you will
have to see through the credit period until you receive payment from your buyer. You
may need working capital for this period to fulfill other orders. This can be resolved
with post shipment finance from the following sources:

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  Bill Discounting and Invoice Factoring: You can approach your bank or a
financial institution and present your invoice to them for faster liquidation.
The banker or the financial institution could purchase, collect, or even
discount the bill. For example in Invoice Factoring you can submit your
invoice along with certain other documents to Drip Capital, which advances
up to 80% of the invoice value within 24 hours. On maturity of the invoice,
the importer pays Drip Capital, which then settles the remaining amount after
accounting for the agreed-upon fee.
 Supplier's Credit & Buyer's Credit: There are also two distinct forms of
financing you can tap - supplier’s credit, where the exporter’s bank finances
the exporter with the full amount of the invoice while the importer can make
payment in installments to the exporter’s banker; and buyer’s credit, where the
importer is given credit under the line of credit by your banker, thus
facilitating your export transaction.

There are different banks, non-banking financial corporations, and foreign trade-
specific lenders that offer financial assistance to exporters like you.

 The Export-Import (Exim) Bank of India provides buyer’s credit, corporate

banking products, lines of credit, project-based finance, etc.

 Banks, including nationalized banks, private sector banks, foreign banks,

regional rural banks, certain cooperative banks, etc. all provide financing.
Their services may include pre-shipment or post-shipment finance, lines of
credit, foreign currency loans, advances against bills sent on
collection/deemed exports/undrawn balance, etc. Of course, not all
banks/branches may offer export specific products – be sure to study your
bank’s offerings thoroughly before going ahead.

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Non-banking financial institutions can also offer one or more export-specific financial
services like bill discounting, factoring, working capital loan, buyer loan, lines of
credit, etc.

CH-2

Objectives of Studies

25
OBJECTIVES

 To discuss the concept Export finance.

 To study various Export finance sources available in developing countries
with reference to India.

26
 CH-3

Review of Literature

27
1. Sen Gupta et.al (2016), found in this study that the role and share of commercial
banks in export finance and issues in export financing i.e. aspirations and
requirements of borrowers and discontentment of banks with the regulation of
export credit.
2. Alam Ahmad (2016), found in his study, Export trade financing by EXIM Bank
of India for Various types of exports to Indian Exporters, asses as the sufficiency
of quantum of finance and the suitability for enhancing the same, its working as a
pioneer in export credit. The impacts and implication has been pointed out and
suggestions have been given to provide optimal export credit to Indian exporters.
3. Krishan K et. al (2008), found in his is study Johansen's co-integration analysis
had been used and a vector error-correction model to investigate the relationship
between economic growth, export growth, export instability and gross fixed
capital formation (investment) in India during the period 1971-2005.
4. Jaebin Ahn (2011), found in his this study provide a theory model of trade finance
to explain the “great trade collapse.” This basically explains the banks optimal
screening decisions in the presence of counterparty default risks.
5. Anamika sagar (2017), found in her study, various issues such as problems faced
by the exporters in generating the finance for exports, varied interest rates, banks
using ECGC covers which add to the burden and raised the cost of finance, also
highlighted the special schemes available to exporters in respect of pre-shipment
and post-shipment finance and also spells out the importance of the role being
played by the "Export Credit Guarantee Corporation of India (ECGC) and Export
Import Bank (EXIM)" in providing the finance to the exporters in India and
suggests the suitable measures to address these issues.

28
6. Raquel Mazal Krauss (2011), in his article “The Role and Importance of Export
Credit Agencies”, discuss about the three function of Export credit agencies
(ECAs). First, they help exporters meet officially supported foreign credit
competition. (When foreign governments subsidize their companies’ exports by
offering buyers below-market, fixed-rate financings, exporters often find it
difficult to offer financing that matches those subsidized rates.) Secondly, ECAs
provide financing to foreign buyers when private lenders cannot or will not
finance those export sales, even with the risks removed. Third, and perhaps their
most important function, ECAs assume risks beyond those that can be assumed by
private lenders. ECAs do not compete with private financial institutions. To the
contrary, they enhance the ability of their country’s lenders to compete
internationally. It should also be noted that they do not offer development
assistance to other countries; other agencies typically fulfill this role.
7. Sharma L.S. in his book "Export Management", Anmol Publications, New Delhi.,
1989 p.28 considered competition in the dynamic markets the bargaining power
has shifted from the seller to the buyer who tends to dictate terms in regard to
price, quality and delivery schedules and above all insists on appropriate credit
terms. The availability of an adequate supply of credit at reasonable cost therefore
greatly facilitates the task of the exporter. The difficult foreign exchange position
in many countries makes it imperative for importers to ask for credits of varying
duration and the credit terms offered often influence the buyer’s choice of
supplier and thus the sources of supply.
8. Khan and knight (1986), his paper results points out clearly for additional foreign
financing to reduce the need for import compression and its attendant negative
effects on the supply of exports.
9. J. Chauffour (2010), found in his study that concludes that developing countries
should consider export credit agencies only when certain pre-requirements in
terms of financial capacity, institutional capability, and governance are met.

29
10. Cihat Koksal (2018), found in study the effect of export credit insurance covered
by Export credit agencies on the developing countries export figures and GDP.
The countries subject to the analysis are Turkey and Indonesia, Malaysia,
Thailand also known as IMT countries.
11. Zengin and Yuksel (2016), found in their study the relationship between imports,
exports and growth rate in developing countries within this scope, 6 developing
countries (Argentina, Brazil, China, Malaysia, Mexico and Turkey) were analyzed
in this study. Therefore, it can be concluded that the relationship between import,
export and growth rate is not same for all developing countries.
12. Auboin and Dicaprio (2017), found in their study clarification of reasons for the
persistence of trade finance gaps. The market failure argument provides insight
into why the cost of trade finance is not consistence with the risk of providing it.
However, this explains only part of the problem.
13. Sarkar P. (1992) found in his study that casted some doubt on the effectiveness
of the policy of devaluation and depreciation under the LERM in solving India's
trade and payment deficits. Simple regression analysis confirms that during the
period 1971-90 the depreciation of the rupee had no favorable effect on the dollar
value and volume of exports and no contrary effect on the value and volume of
imports. Hence it had no influence on the balance of trade. However, the growth
in the trade deficit decelerated due to a deceleration in the growth of imports
valued in dollars which in turn was due to a deceleration in the growth of crude
oil imports.
14. A. Crespi and Alvarez (2000), found in their study the evaluation of the impact of
some public promotion instruments on the export sector. Using plant level data,
the econometric evidence shows that these kinds of policies have generated a
positive impact on firm performance. They identify qualitative and quantitative
effects. In qualitative aspects, there is a positive impact on technological
innovation and several aggressive activities in international markets. In
quantitative terms, they found that promotion instruments are effective for

30
 increasing exports and markets. However, there is no evidence of any positive
impact on the number of products exported by the firms. In addition, results
suggest that only some instruments, specifically export committees, are effective
for opening new markets and for increasing exports.
15. Auboin and Engemann (2014) found in their study that Trade finance has received
special attention during the financial crisis as one of the potential culprits for the
great trade collapse. Several researchers have used micro level data to establish
the link between trade finance and trade, especially so during the financial crisis,
and have found diverting results. There is an analysis about the effect of trade
credit on trade on a macro level through a whole cycle. We employ Berne Union
data on export credit insurance, the most extensive dataset on trade credits
available at the moment, for the period of 2005–2011.
16. Vijaykumar and S.Vadivel (2016), found in their study the exporter’s satisfaction
towards Export Credit Guarantee Corporation of India Limited at Coimbatore area
and to discuss the performance of ECGC in Coimbatore branch. For this purpose
a sample of 150 was collected and percentage analysis and chi square were used
as tools to analyze the data and the conclusion is that the study brings out the
satisfaction level of the exporters towards the corporations performance and
indicates the lagging area and the chances of further improvement. Though the
study concentrates on the exporter’s point of view, the bankers view is not
considered.
17. Hayakawa et.al (2014), found in this paper, the role of export promotion agencies
(EPAs) in promoting exports from Japan and Korea. Looking at two home
countries enables us to tackle endogeneity issues by controlling for both country-
pair time-invariant characteristics and importing country time-varying
characteristics. The results indicate that the coefficients of the EPA dummy are
similar in size to those of the FTA dummy. This implies that establishing an EPA
office in a country is equivalent to signing an FTA with that country. In addition,
found that EPAs effects are larger for manufactured products than non-

31
 manufactured products. Finally, the EPA effect is larger for low income trade
partners than for high income trade partners.
18. Mah, J. (2006), found in his study that Japan has been the heaviest user of the
export insurance system. This paper examines whether or not export insurance
subsidy has promoted Japan's export supply. The study starts from examining the
stationary nature of the concerned variables. The unit root tests show that all
concerned variables are non-stationary. The concerned variables are revealed to
be not co-integrated. The empirical evidences show that export insurance system
has not contributed to promoting export supply in Japan.
19. Martincus, C. V. & Carballo, J. (2010), found in his study answer to, how
effective are export promotion activities in developing countries? What are the
channels through which export promotion affects firms' exports, the intensive
margin or the extensive margin? Empirical evidence in this respect is scarce. This
study aim at filling this gap in the literature by providing evidence on the impact
of export promotion on export performance using a unique firm-level dataset for
Peru over the period 2001–2005. The study results in knowing that export
promotion actions are associated with increased exports, primarily along the
extensive margin, both in terms of markets and products. This result is robust
across alternative specifications and estimation methods.
20. Christopher Ragan (2008), found in his study addressing three central questions
regarding the role of Export Development Canada (EDC) in the Canadian market
for short-term export-credit insurance. These questions are: 1. Does a “market
gap” exist? 2. If yes, can EDC successfully fill the gap? 3. Is any market gap
likely to persist over time? This paper's epilogue argues that, despite the
compelling efficiency-based case in support of EDC’s current market role, the
dynamics of the market are changing. The private-sector insurers' increasing
willingness to serve high-risk Canadian exporters creates a need for the Canadian
government and EDC to think carefully about a possible “exit strategy”. EDC’s

32
 exit from the market is likely to be desirable at some point in the future, but it
should only be pursued when market conditions are appropriate.
21. Kapoor, Jha and Raychaudhuri (2012), found in their study the causal impact of
credit constraints on exporting firms. They exploit a natural experiment provided
by two policy changes in India, first in 1998 which made small scale firms
eligible for subsidized direct credit, and a subsequent reversal in policy in 2000
wherein some of these firms lost their eligibility. Using firms that were not
affected by these policy changes as our control group we find that expansion of
subsidized credit increased the rate of growth of borrowing and export earnings
by 20 percent in each case. Interestingly, the subsequent policy reversal in 2000
had no impact on the rate of growth of total borrowings and the export earnings.
22. Chauffour, Saborowski and I.Soylemezoglu (2010), found in their study the New
data on export insurance and guarantees which suggested that publicly backed
export credit agencies have played a role to prevent a complete drying up of trade
finance markets during the current financial crisis. Given that export credit
agencies are mainly located in advanced and emerging economies, the question
arises whether developing countries that are not equipped with these agencies
should establish their own agencies to support exporting firms and avoid trade
finance shortages in times of crisis. It concludes that developing countries should
consider export credit agencies only when certain pre-requirements in terms of
financial capacity, institutional capability, and governance are met.
23. Chauffour and Farole (2009) found in this study the singularity of the issues
related to trade finance in the context of the global economic crisis. This gives
cautions against the notion of a large trade finance "gap," yet highlights the
possible rationales and conditions for an effective intervention in support of trade
finance.
24. Pawan K. Chugan (1993) found in his study that it considered the Indian
automobile ancillary industry. By focusing on a particular industry, it offers many
insights. By using the multiple regression equations, the study attempts to analyze

33
 the impact on R&D, measured as DAA expenditure (as a dependent variable), of
the various variables such as size of the firm, export performance, age of firm,
number of foreign collaboration agreements, foreign equity participation,
expenditure on highly paid employees, average wages and salaries, net profit
(loss) and nature of product manufactured (critical or other product). Data were
collected with the help of a questionnaire from the seventy five units, and three
multiple regression equations worked out – the first one for all units of the study,
the second for large size industries and third for small size industries. This study
concludes that the technological efforts in Indian automobile industry are mainly
directed towards development (not innovation), adaptation and absorption.
25. Pawan K. Chugan (1997), found in hisstudy the role of MNCs and their affiliates
i.e. FCA units are assumed to bear significant advantages for the export
promotion from developing host countries, which has been widely discussed by
the economists and researchers. Considering the advantages MNCs lend to the
host country’s industry (FCA units) study says that the export performance of
FCA units is greater than that of the non-FCA units (local enterprises). This is
because the export generating dimensions of the foreign technology works in
favor of the technology recipients. To test the same, an extensive field survey was
undertaken leading to collection of relevant data by interviewing the senior
executives of the units of the study. The results of study, however, revealed that
the export generating effects of foreign technology, as mentioned above, have not
been felt in the spirit of furthering the export performances. In spite of access to
foreign technology and its advantages, the export performance of FCA units has
been found lower than the non-FCA units.
26. Pawan K. Chugan (1998), found in his study an attempts to analyze and test
certain endogenous variables such as size of the firm, application of technology
(viz. in house R &D, number of foreign collaboration agreements, foreign equity
participation), net profit/loss, average wages and salaries, expenditure on highly
paid employees, export orientation/thrust, value added, the nature of product

34
 manufactured (critical components/parts), etc. in determining the firm’s export
performance. Therefore, it is found that their higher profits (mainly from domestic
market) are associated with less export performance. Similarly, their R&D
activities are also in line with an inward looking orientation and therefore, to the
possible extent their acquired technology has also been used for the domestic
production. Their exports, however, are generally more of the capital intensive
products or critical components than that produced by small units.
27. K. Chugan and Singh (2014) found in their study Exporting plays a crucial role in
accelerating the growth and profitability of firms. This study research has
certainly enhanced the understanding of firms’ export performance; however,
work in this field is still evolving. Given the amount of export performance
research over the years, the paper presents a review of literature to highlight the
key advances in this field.
28. Abraham and Dewit (2000), found in his paper that export promotion does not
necessarily imply trade distortions and that most export destinations do not
benefit from insurance premium subsidies. A significant policy implication of
these findings is that the WTO and the EU are correct not to banish completely
official export insurance.
29. Melitz et.al (1987), found in his study that there is a valid macroeconomic case
for export credit subsidies and find that temporary measures can be useful in
reducing the recessionary costs of a disinflationary program by permitting a larger
appreciation of the exchange rate during the initial stages of the program. It also
presents detailed evidence on the impact across different industries of export
credits in France. These are heavily concentrated on a small number of industries
– specifically machine tools, construction, metalworking, aircraft/ships and
electrical equipment. The case for export credit subsidies is not persuasive.
30. Funatsu (1986), found in his study the positive analysis on several important
aspects of export credit insurance. The study shows that export credit insurance is
a useful device to protect domestic exporting firms against various political risks

35
and default risk in the foreign market. However, he points out that the government
can utilize export credit insurance aggressively to promote exports by
intentionally setting a more-than-favorable premium rate. Under such a rating
policy the government is subsidizing exporting firms through export credit
insurance.

CH-4

Research Methodology

36
  Population – all the export finance sources available.
 Sample – export finance sources available in India.
 Data – secondary
 Sample techniques – convenience
 Research methodology – A research methodology or involves specific
techniques that are adopted in research process to collect, assemble and
evaluate data. It defines those tools that are used to gather relevant
information in a specific research study. Surveys, questionnaires and
interviews are the common tools of research. Some other concepts related to
the question of “what is a research methodology?”
 Research methodologies perform a lot of functions. It applies to a number of
jobs being done in research process. Research methodology identifies the
research activity in a true sense. It further specifies and defines the actual
concepts. It further declares what sort of methods will be required for further
inquiry. Moreover, how progress can be measured. Research methodology
offers a platform to demonstrate how we can communicate research activity in
a true sense.

Research Design - Research design is the framework of research methods and

techniques chosen by a researcher. The design allows researchers to hone in on
research methods that are suitable for the subject matter and set up their studies up for

37
success. The design of a research topic explains the type of research
(experimental, survey, co-relational, semi-experimental, review) and also its sub-type
(experimental design, research problem, descriptive case-study). There are three main
types of research design: Data collection, measurement, and analysis. The type of
research problem an organization is facing will determine the research design and not
vice-versa. The design phase of a study determines which tools to use and how they
are used.

In this research project, the descriptive data design has been used.

Data collection - Data collection is defined as the procedure of collecting, measuring

and analyzing accurate insights for research using standard validated techniques. A
researcher can evaluate their hypothesis on the basis of collected data. In most cases,
data collection is the primary and most important step for research, irrespective of the
field of research.

The approach of data collection is different for different fields of study, depending on
the required information. The most critical objective of data collection is ensuring
that information-rich and reliable data is collected for statistical analysis so that data-
driven decisions can be made for research.  An impactful research design usually
creates a minimum bias in data and increases trust in the accuracy of collected data.

A design that produces the least margin of error in experimental research is generally
considered the desired outcome. The essential elements of the research design are:

1. Accurate purpose statement

2. Techniques to be implemented for collecting and analyzing research
3. The method applied for analyzing collected details
4. Type of research methodology
5. Probable objections for research

38
6. Settings for the research study
7. Timeline
8. Measurement of analysis

Data collection in this study is a secondary data through already available

information.
Data Analysis is the process of evaluating data using the logical and analytical
reasoning to carefully examine each component of the data collected or
provided. Also is one of the many steps that are taken when a research
experiment is conducted. Data is gathered from various sources related to your
research topic.

39
 CH-5

DATA ANALYSIS AND INTERPRETATION

40
In order to be competitive in markets, exporters are often expected to offer attractive credit
terms to their overseas buyers. Extending such credits to foreign buyers put considerable
strain on the liquidity of the exporting firms. Therefore, it is extremely important to make
adequate trade finances available to the exporters from external sources at competitive
terms during the post-shipment stage.

Unless competitive trade finance is available to the exporters, they often resort to
quote lower prices to compensate their inability to offer competitive credit terms. As
a part of export promotion strategy, national governments around the world offer
export credit, often at concessional rates to facilitate exports. In India, export credit is
available both in Indian rupees and foreign currency.

Though banks are providing different types of loans to customers, export finance is a
kind of advance by which not only the customer is benefited but also the country
itself as it brings valuable foreign exchange earnings. Hence, government has given
more importance to export finance and has simplified various procedures involved in
obtaining finance. Reserve Bank of India has also given instructions to commercial
banks that they should give top priority in the sanctioning of export finance.

It is no exaggeration to say that finance is the lifeblood of any business. As an

exporter, funds received through your financing channels may be used in the
preliminary stage while incurring capital expenditures. You will, of course, need to

41
find the funds needed to make the business production-ready for day-to-day working
capital requirements or to meet unforeseen contingencies.

There are different sources of export finance for exporters to meet their requirements
for capital. It is up to you to select a source of finance suitable for your needs,
ensuring that it fits the long-term strategy for financing your export business.

Why Export Finance?

However, before deciding on how to source export finance, you must identify why
exactly you need the funds. There are various reasons why you may need
investments:

To set up a new Export Business

For building a new export business, you will require financial support. Whether you
plan to acquire existing businesses like manufacturing units, renovate and modernize
your business units, or expand/improve your plants and equipment so that you are
ready to target the international market, financing requirements will always be a
consideration.

For Business Expansion

At other times, the growth of your export business may require you to tap additional
funds, for which you may have to arrange for large-scale finance. For example, say
you decide to expand into a new export market, or set up additional offices to cater to
new export lines.

For Working Capital

42
Often, business development and daily operations will constitute your biggest
requirements for finance, also known a working capital. To accept new business, you
need funds to accommodate the buyer’s credit period, accessible through loan
products like pre shipment finance. There may also be a working capital requirement
to arrange for inventory at times. Having enough cash enables you to compete in the
market and muster the financial clout to take up new ventures.

When Do You Need Export Finance?

As discussed earlier, as an exporter, you may need export finance at various stages of
your business cycle, including:

 Pre Shipment

 Post Shipment

 Finance against collection of invoices and at multiple stages of the working

capital cycle

 Finance needed in case of the suspension or removal of export subsidies and

benefits.

Different types of export finance:

43
Pre-shipment export finance:

The exporter is provided finance even for the purchase of raw materials and
processing them into finished products but this finance can be provided only when the
exporter has firm order from the importer and the importer has also given an
anticipatory Letter of Credit from his bank. So, against the export order received from
the importer, the exporter is given finance by his bank which is called pre-shipment
export finance.

Post shipment export finance:

After dispatching the goods to the importer, the exporter draws a bill, against which
the importer will make payment. But this may take a minimum period of 3 to 6
months and this time gap will affect the exporter in his continuation of production.
For this purpose after exporting, the export bill will be presented by the exporter to
his bank. The bank will prefer to purchase the bill or collect the bill or even discount
the bill, which depend on the economic status of the importing country.

44
Examples for Post shipment export finance

For example 1, if the export is made to USA against the Letter of Credit of the
importer, the exporter’s bank will purchase the bill and pay the full value to the
exporter. Here, the bank gains as the value of currency is bound to go up since it
belongs to a developed country. The entire risk of the bill is borne by the bank.

For example 2, if the export is made to Egypt or Philippines, the bill will be
discounted for 60 or 70% of the value as they both belong to developing countries. If
the export is made to countries in Africa, such as Namibia, Rwanda, Somalia, etc., the
bill will be collected and paid to the exporter after 3 or 6 months, since the importing
country happens to be a poor country.

Export finance against collection of bills:

When export is made to different countries, loan can be obtained from the bank
against the bills sent for collection. As there are institutions such as Export Credit
Guarantee Corporation, banks will come forward to provide finance to exporters. In
case of a default, the guaranteeing company will indemnify at least 80% of defaulted
amount. While financing against the export bills, the banker will take into account the
FOB invoice and not CIF invoice (FOB — Free on Board invoice — Price includes
all expenses incurred until the goods are kept on board the ship. CIF invoice includes
costs, insurance and freight and so this type of an invoice will not be taken by the
banker for financing).

Deferred export finance:

To enable the importer to purchase valuable goods, hire purchase financing or lease
finance may be arranged. There are two types of deferred export finance.

1. Supplier’s finance; and

45
 2. Buyer’s finance.

Supplier’s finance in exporting:

In the supplier’s finance, exporter’s bank will finance the exporter so that he will sell
the goods on installment basis to the importer. The exporter will receive the full value
and the payment made in installments by the importer will be received by the
exporter’s bank.

Buyer’s Finance in exporting:

In buyer’s finance, the buyer is given credit under line of credit by the exporter’s
bank and the exporter will be made to export.

Export finance against allowances and subsidies:

Exporters are given subsidies by the government so that they can sell the goods on
reduced price to importer. For example, cash compensatory support is a subsidy given
to the exporter by the government whenever there is an increase in expenditure, due
to reasons beyond the control of the exporter, such as increase in transport cost or
wage of the laborers.

There are also allowances given for increasing exports. Example for this is duty
drawback. Here, when a product is imported duty is paid. After processing, it is
exported at a higher value. The duty paid at the time of import is refunded which is
called duty drawback. Gold is imported and duty is paid. It is converted into jewel
and exported at a higher value and the import duty is refunded. It may take some time
to receive the refund but the bank will finance against the refund of duty.

When the exporter is faced with a sudden increase in expenditure due to reasons
beyond his control, the government comes forward to provide cash compensatory

46
support which is a percentage of costs of his finished product. Example: Deviation in
the shipping route due to war.

There is also export finance given to deemed exports i.e., in free trade zones at
Mumbai, Chennai, Calcutta, Delhi, Cochin and Vizag, the suppliers of goods to
foreign exporters are given finance. In these free trade zones, the value of the goods
exported should be not less than 50% from the domestic market. Hence, the suppliers
are provided finance under deemed export finance.

In the year 2000, the government has come forward to start economic zones in
Gujarat and Tamil Nadu for the purpose of increasing exports. There is also a pass
book facility available to the exporter for continuous finance from the banks.

Institutions involved in export finance:

Number of institutions has not only emerged in providing export finance but even the
existing institutions have opened up various avenues in granting export finance. The
institutions are:

47
EXIM BABK

For a long time, the need for a separate institution for export finance was not felt in
the country due to the closed market conditions and India’s limited share in world
export. It is only during the 1980s, the need to increase India’s export was felt, owing
to increased foreign debts, which compelled India to go for an Apex institution and
the Export Import Bank (Exim Bank) was set up in 1982.

The Export and Import Bank of India, popularly known as the EXIM Bank was set up
in 1982. It is the principal financial institution in India for foreign and international
trade. It was previously a branch of the IDBI, but as the foreign trade sector grew, it
was made into an independent body.

The main function of the Export and Import Bank of India is to provide financial and
other assistance to importers and exporters of the country. And it oversees and
coordinates the working of other institutions that work in the import-export sector.
The ultimate aim is to promote foreign trade activities in the country.

48
The management of the EXIM bank is done by a board, headed by the Managing
Director. There are 17 other Directors on the board. The whole paid-up capital of the
bank (100 crores currently) is subscribed by the Central Government exclusively.

Functions of the EXIM Bank:

1. Finances import and export of goods and services from India

2. It also finances the import and export of goods and services from countries
other than India.
3. It finances the import or export of machines and machinery on lease or hires
purchase basis as well.
4. Provides refinancing services to banks and other financial institutes for their
financing of foreign trade
5. EXIM bank will also provide financial assistance to businesses joining a joint
venture in a foreign country.
6. The bank also provides technical and other assistance to importers and
exporters. Depending n the country of origin there are a lot of processes and
procedures involved in the import-export of goods. The EXIM bank will
provide guidance and assistance in administrative matters as well.
7. Undertakes functions of a merchant bank for the importer or exporter in
transactions of foreign trade.
8. Will also underwrite shares/debentures/stocks/bonds of companies engaged in
foreign trade.
9. Will offer short-term loans or lines of credit to foreign banks and
governments.
10. EXIM bank can also provide business advisory services and expert knowledge
to Indian exporters in respect of multi-funded projects in foreign countries.

Importance of the EXIM Bank

49
Other than providing financial assistance, the Export and Import Bank of India bank
is always looking for ways to promote the foreign trade sector in India. In the early
1990s, EXIM introduced a program in India known as the Clusters of Excellence.

The aim was to improve the quality standards of our imports and exports. It also has a
tie-up with the European Bank for Reconstruction and Development. It has agreed to
co-finance programs with them in Eastern Europe.

In order to promote exports EXIM bank also has schemes such as production
equipment finance program, export marketing finance, vendor development finance,
etc.

COMMERCIAL BANKS

A commercial bank is a type of financial institution that accepts deposits, offers

checking account services, makes various loans, and offers basic financial products
like certificates of deposit (CDs) and savings accounts to individuals and small
businesses. Commercial banks make money by providing loans and earning interest
income from those loans. The types of loans a commercial bank can issue vary and
may include mortgages, auto loans, business loans, and personal loans. A commercial
bank may specialize in just one or a few types of loans.

Commercial banks can make loans for pre-export activities. They can also help
process letters of credit, drafts and other methods of payment discussed in this
chapter. Banks have also become increasingly involved in making export loans.

HOW CAN EXPORTERS APPROACH FOR EXPORT FINANCING?

Before approaching a bank for financial assistance, small exporters should understand
the distinction between venture capitalists and lenders. Venture capitalists invest in a
business with the expectation that as the business grows; their equity in the business

50
will grow exponentially. On the other hand, lenders are not in the venture capital
business -- they make their money on the difference between the rate at which they
borrow money and the rate at which they lend to their customers. International Trade
Services and Export Lending

Small exporters should also understand the distinction between international trade
services and international trade lending. Although many banks offer international
trade services, such as advising and negotiating letters of credit, the banks'
international divisions are not authorized to lend money. International lenders, on the
other hand, have the authority to make loans, as well as provide related services.
Exporters should verify that the bank officer with whom they are dealing has the
authority to lend for an export transaction.

Working Capital Financing and Trade Financing:

It is also important to note the difference between general working capital financing
and trade financing. A small firm's ability to qualify for general working capital
financing depends on, among other things, the strength of its balance sheet and its
prospects for generating sufficient earnings over the life of a loan to repay it.

Trade finance, on the other hand, generally refers to financing individual transactions
(or a series of like transactions). In addition, trade finance loans are often self-
liquidating -- that is, the lending bank stipulates that all sales proceeds are to be
collected by it, and then applies the proceeds to pay down the loan. The remainder is
credited to the account of the borrower.

The self-liquidating feature of trade finance is critical to many small, undercapitalized

businesses. Lenders who may otherwise have reached their lending limits for such
businesses may nevertheless finance individual export sales, if the lenders are assured
that the loan proceeds will be used solely for pre-export production; and any export

51
sale proceeds will first be collected by them before the balance is passed on to the
exporter. Given the extent of control lenders can exercise over such transactions and
the existence of guaranteed payment mechanisms unique to -- or established for --
international trade, trade finance can be less risky for lenders than general working
capital loans.

Pre-export, Accounts Receivable and Market Development Financing:

Exporters should understand the distinctions between the various types of trade
finance. Most small businesses need pre-export financing to help with the expense of
gearing up for a particular export sale. Loan proceeds are commonly used to pay for
labor and materials or to acquire inventory for export sales. Others may be interested
in foreign accounts receivable financing. In that case, exporters can borrow from their
banks an amount based on the volume and quality of such accounts receivable.
Although banks rarely lend 100 percent of the value of the accounts receivable, many
will advance up to 80 percent of the value of qualified accounts. Foreign credit
insurance (such as Exim bank's Export Credit Insurance Program) is often used to
enhance the quality of such accounts.

Financing for foreign market development activities, such as participation in overseas

trade missions or trade shows, is often difficult for small businesses to arrange. Most
banks are reluctant to finance such activities because, for many small firms, their
ability to repay such loans depends on their success in consummating sales while on a
mission -- prospects that in many cases are speculative. Although difficult for many
small firms to do, the recommended source for financing such activities is through the
working capital of the firm or, in certain cases, through the use of personal credit
cards. Finally, take time to make sure your banker understands your business and
products. Have a detailed export plan ready and, most important; be able to clearly
show how and when a loan will be repaid.

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DEVELOPMENT BANKS

Development banks are those which have been set up mainly to provide infrastructure
facilities for the industrial growth of the country. Working capital requirements are
provided by commercial banks, indigenous bankers, co-operative banks, money
lenders, etc. The money market provides short-term funds which mean working
capital requirements.

The long-term requirements of business concerns are provided by industrial banks

and the various long-term lending institutions which are created by the government.
In India, these long-term lending institutions are collectively referred to as
development banks.

STATE FINANCE CORPORATIONS

At present in India, there are 18 state finance corporations (out of which 17 SFCs
were established under the SFC Act 1951). Tamil Nadu Industrial Investment
Corporation Ltd. which is established under the Company Act, 1949, is also working
as state finance corporation.

Functions of State Finance Corporations

The various important functions of State Finance Corporations are:

(i) The SFCs provides loans mainly for the acquisition of fixed assets like land,
building, plant, and machinery.

(ii) The SFCs help financial assistance to industrial units whose paid-up capital and
reserves do not exceed Rs. 3 crores (or such higher limit up to Rs. 30 crores as may
be notified by the central government).

53
(iii) The SFCs underwrite new stocks, shares, debentures etc., of industrial units.

(iv) SFCs grant guarantee loans raised in the capital market by scheduled banks,
industrial concerns, and state co-operative banks to be repayable within 20 years.

NATIONAL SMALL INDUSTRIES CORPORATION

The National Small Industries Corporation Ltd. (NSIC), an ISO 9000 certified
company, since its establishment in 1955, has been working to fulfill its mission of
promoting, aiding and fostering the growth of small-scale industries and industry
related small-scale services/businesses in the country.

(a)Export of Products and Projects:

NSIC is a recognized export house and exporting products and projects of small
industries of India to other countries. The major areas of operation are:

a. Exports of products such as handicrafts, leather items, hand tools, pipes/ fittings,
builders’ hardware etc.

b. Supply of small industry products on turnkey basis.

(b)Credit Support:

NSIC provides credit support to small enterprises in the following areas:

Equipment Financing:

The Corporation is facilitating small enterprises in securing loans for purchase of

equipment and machinery.

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Tie-up with Commercial Banks:

To meet the credit requirements of small enterprises, NSIC has tied up with
commercial banks for sanction of term loans and working capital facilities as per the
convenience of the small enterprises. The accreted small enterprises under the
performance and credit rating scheme of NSIC will stand at a good chance to get the
credit from these commercial banks at liberal rates.

Financing for Procurement of Raw Material (Short-Term):

NSIC’s Raw Material Assistance Scheme aims at helping small-scale

industries/enterprises by way of financing the purchase of raw material (both
indigenous and imported).

The salient features of the scheme are:

a. Financial assistance for procurement of raw materials up to 90 days.

b. Bulk purchase of basic raw materials at competitive rates.

c. NSIC facilitates import of scarce raw materials.

d. NSIC takes care of all the procedures, documentation & issue of letter of credit in
case of imports.

EXPORT CREDIT GUARANTEE CORPORATION

Formerly known as the Export Credit Guarantee Corporation of India Ltd, ECGC Ltd.
was set up in 1957 as a wholly owned company of the Government of India. It
functions under the Ministry of Commerce & Industry and is managed by a diverse
group of directors who are representatives of the Government, Reserve Bank of India,
banking and insurance and exporting community. The company is designed as an

55
export promotion organization. It seeks to provide Indian exporters with adequate
credit insurance cover.

The two primary products provided by ECGC Ltd are Export Credit Insurance for
Exporter and Export Credit Insurance for Bank.

Export Credit Insurance for Exporter

A: ECIE Short Term - Turnover Based

 Shipments Comprehensive Risks Policy - (SCR)

This is a Standard Whole Turnover Policy which covers all shipments.

 Small Exporters Policy - (SEP)

This is a standard policy for small exporters whose anticipated export turnover
for the period of one year does not exceed Rs. 5 crores. The Maximum Liability
under the SEP shall be fixed as per laid down guidelines, but shall not exceed Rs. 2
crores.

 Specific Shipment Policy - (SSP)

This policy is for exporters who do not hold any of the Standard Policy/Whole
Turnover Policy.

 Services Policy - (SRC)

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 This is a policy designed to cover payments due under the contracts where
only services like technical or professional are to be rendered. There are four types of
Services Policies:

1. Specific Services Contract (Comprehensive Risks) Policy - It is issued to

provide cover for large contracts which have a relatively long period.
2. Specific Services Contract (Political Risks) Policy
3. Whole-turnover Services (Comprehensive Risks) Policy; and
4. Whole-turnover Services (Political Risks) Policy - It is issued to exporters
who provide services to a set of principles on a repetitive basis and where the
period of each contract is relatively short.

 Export Turnover Policy - (ETP)

This is a Whole Turnover declaration based Policy wherein all shipments are required
to be covered under the Policy. Turnover Policy is for the benefit of large exporters
who contribute not less than Rs.20 lakhs per annum towards premium based on
projection of the export turnover of the policy holder for a year.

 Exports (Specific Buyers) Policy (BWP)

This policy provides cover for shipments made to a particular buyer or on LC opening
bank for a set of buyers.

 Consignment Exports Policy (Stockholding Agent) - (CSA)

This is a policy designed to provide cover for shipments made by exporters on

consignment basis to their agents.

B: ECIE Short Term - Exposure Based

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  Buyer Exposure Policy (BEP)

This policy is designed to insure exporters having a large number of shipments

to a particular buyer.

 IT-Enabled Services Policy-Single Customer (SITES)

This is a special policy given in respect of contracts for rendering service

during a defined period with billing on the basis of service rendered during a period
say, a week, a month or a quarter.

 Micro Exporter Policy - (MEP)

This is an exposure based policy designed specifically for the SME sector.

 Software Project Policy

This policy provides protection to exporters of software and related services

where the payments will be received in foreign exchange.

C: ECIE - Medium & Long Term

 Construction Works Policy - (CWP)

This policy provides cover to an Indian contractor who executes a civil

construction job abroad.

 Specific Policy for Supply Contract (SITES)

This is a whole turnover policy designed to provide continuing insurance for

the regular flow of an exporter’s shipments for which credit period does not exceed
180 days.

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  Specific Shipment Policy - (SSP)

This is a specific policy which provides protection against non-receipt of

payments due to commercial and /or political risks.

 Specific Services Policy - (SRC): Same as Services Policy

Letter of Credit Confirmation Cover

Also known as a transfer cover, it is issued at the option of the bank to cover either
political risks alone, or both political and commercial risks.

 Loss due to Political Risk - 90%

 Loss due to Commercial Risk - 75%
 Rate of Premium - Depends on the country of export and the tenor of L/C

Small Industries Development Bank of India

The government established SIDBI under a special Parliament Act as a subsidiary of

the IDBI. Now the SIDBI is an independent body of its own that focuses mainly on
the financing of the Small, Micro and Medium Enterprise (MSME) Sectors of the
economy. It now is responsible for the allocation of the Small Industries
Development Fund (which was the responsibility of the IDBI previously).

SIDBI makes use of the current banking network to extend credit facilities to the
small business and micro industries sector. It provides direct financial assistance to
such banks and institutes which are passed over to the MSME sector. It also provides
indirect financial assistance via line of credit, refinancing facilities, bills discounting,
etc.

Functions of SIDBI

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 When a private bank or institution provides loans or advances to small units
for business purposes, the SIDBI will refinance such loans.
 SIDBI has arrangements with banks; government bodies other international
agencies, etc. to enable a holistic approach for the development of the MSME
sector.
 It will also discount or rediscount bills of such private institutions.
 SIDBI offers small-scale units with additional services like leasing, factoring,
etc.
 Ensures the timely flow of credit to make sure these small scale industries
always have adequate working capital.
 Provides assistance to the MSME sector to expand its market for their
products in both the domestic and the international market.
 It helps the small-scale industries modernize their technology for higher
efficiency and better products.
 Especially helps organizations such as Mahila Udyam Nidhi, National Equity
fund, etc. with initial capital, soft loans, advances, etc.
 Financially supports other organizations doing similar work. For example, it
provides financial assistance to SSI Development Corporations who then pass
on the assistance to the small units.
 Besides providing credit, SIDBI also provides these small scale industries
with support for development and promotion activities. They educate about
entrepreneurial development, responsible financing, environment protection,
energy efficiency. This we call as the Credit Plus Approach.

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 CH-7

FINDINGS

There are different sources of export finance for exporters to meet their requirements
for capital. An exporter may need export finance at various stages of business cycle,
including:

61
  Pre-Shipment

 Post-Shipment

 Finance against collection of invoices and at multiple stages of the working

capital cycle

 Finance needed in case of the suspension or removal of export subsidies and

benefits.

Number of institutions has not only emerged in providing export finance but even the
existing institutions have opened up various avenues in granting export finance. The
institutions are:

 EXPORT IMPORT BANK

 COMMERCIAL BANKS

 DEVELOPMENT BANKS

 SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

 STATE FINANCAL CORPORATIONS

 NATIONAL SMALL INDUSTRIES CORPORATION(Export of Products

&Projects and Credit Support)

 EXPORT CREDIT GUARANTEE CORPORATION (Export Credit

Insurance for Exporter and Export Credit Insurance for Bank.)

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 CH-7

SUMMARY AND CONCLUSION

63
There are various export finance sources available in India. Both the private and
government contribute in their own way to facilitate export finance to exporters. In
India, export credit is available both in Indian rupees and foreign currency.

The available export finance sources are presented in this study. I discussed what is
export finance? , why export finance is needed by exporters? And what are the export
finance sources in India. Also, various types of export finance are also discussed.

64
 CH-8

LIMITATIONS OF STUDY

65
 Time consuming.

 The study doesn’t mention the private companies specifically as a source of

export finance in India.

 Only information regarding availability of sources is mentioned not the

procedure to avail it.

 It doesn’t show the readily and reliable source for the exporters or exporting
companies.

 Also, it hasn’t shown effects of each source on export market or export sector
of India.

 Moreover, exporters opionon.

66
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