INT'L TRADE FINANCE: EXPORT & IMPORT

St.
Joseph’s College of Engineering BA7031 International Trade Finance
UNIT – II
EXPORT AND IMPORT FINANCE
UNIT II EXPORT AND IMPORT FINACE 9
Special need for Finance in International Trade – INCO Terms (FOB, CIF, etc.,) – Payment Terms
– Letters of Credit – Pre Shipment and Post Shipment Finance – Fortfaiting – Deferred Payment
Terms – EXIM Bank – ECGC and its schemes – Import Licensing – Financing methods for import
of Capital goods.
1. SPECIAL NEED FOR FINANCE IN INTERNATIONAL TRADE
Most firms rely on external capital (as opposed to their own capital, internal cash flows and
reinvested earnings) to finance fixed costs—such as research and development, advertising,
fixed capital equipment—and also to finance intermediate input purchases, inventories,
payments to workers and other frequent costs before sales and payments of their output take
place.
Extra money may be needed, for example, to research the profitability of new export markets;
to make market-specific investments in capacity, product customization and regulatory
compliance; and to set up and maintain foreign distribution networks.
Exporting activities may also generate additional variable trade costs due to shipping, duties
and freight insurance, some of which are incurred before export revenue is realized. In
addition, cross-border delivery can take longer to complete than domestic orders, increasing
the need for working capital requirements relative to those of firms that sell only
domestically. For example, ocean transit shipping times can be as long as several weeks,
during which the exporting firm typically would be waiting for payment.
Accordingly, financial institutions and governments have developed instruments to provide

so-called trade finance, i.e., financial instruments that are used and sometimes tailored to
satisfy exporters' needs. Most of these contracts require some form of collateral, e.g., tangible
assets, including inventories. The role of trade finance in international trade is quantitatively
important: Some estimates report that up to 90 percent of world trade relies on one or more
trade finance instruments
Banks and other institutions provide trade finance for two purposes. First, trade finance serves
as a source of working capital for individual traders and international companies in need of
liquid assets. Second, trade finance provides credit insurance against the risks involved in
international trade, such as price or currency fluctuations, or political risk. Each of these two
Department of MBA Semester III 32
St. Joseph’s College of Engineering BA7031 International Trade Finance
functions is fulfilled by a certain set of credit instruments, provided mostly by financial

institutions but sometimes also by government institutions.
2. INCO TERMS
INCOTERMS define the mutual obligations of seller and buyer arising from the movement
of goods under an international contract from the standpoint of risks, costs and documents.
Purpose of INCO Terms
 Designed for Parties to a Contract
 Provides a set of international rules for foreign trade
 Reduces uncertainties
 Avoids different interpretations in different countries
 Additional costs and time can be avoided
 Ensure common understanding of obligations
2000 2010
• EXW – Ex Works
• EXW – Ex Works
• FCA – Free Carrier

• FCA – Free Carrier
• FAS – Free Alongside Ship
• FAS – Free Alongside Ship
• FOB – Free On Board
• FOB – Free On Board
• CFR – Cost and Freight

• CFR – Cost and Freight
• CIF – Cost, Insurance & Freight
• CIF – Cost, Insurance & Freight
• CPT – Carriage Paid To
• CPT – Carriage Paid To
• CIP – Carriage & Insurance Paid To
• CIP – Carriage & Insurance Paid To
• DEQ – Delivered Ex Quay

• DAT – Delivered At Terminal
• DES – Delivered Ex Ship
• DAP – Delivered At Place
• DAF – Delivered at Frontier
• DDP – Delivered Duty Paid
• DDU – Delivered Duty Unpaid
• DDP – Delivered Duty Paid
Marine Restricted Omni-Modal
EXW – Ex Works (named place of delivery)
The seller’s obligation to deliver the goods under this term is complete when he places the
goods at the disposal of the buyer at his own premises or another place named there in, that is
works, factory, warehouse etc. not loaded on any collecting vehicle.
FCA - Free carrier (named place of delivery)
The seller’s obligation to deliver the goods under this term is complete when he delivers the
goods to the carrier nominated by the buyer at the named place cleared for export.
FAS - Free Alongside Ship (named port of shipment)
The seller delivers the goods by placing them along the vessel at named port of shipment. The
buyer bears all costs and risks of loss or damage to goods from that moment.
FOB - Free on Board (named port of shipment)

The seller fulfills his obligation of delivery when the goods pass the ship’s rail at the named port
of shipment. From that point on wards buyer bears all costs and risks.
CFR - Cost and Freight (named port of destination)

The seller fulfills his obligation of delivery when the goods pass the ship’s rail at the named port
of shipment. The only addition is that the seller also pays freight necessary to bring the goods to
the named port of destination but the risk of loss or damage to the goods as also any additional
cost occurring after the time of delivery are transferred from the seller to buyer.
CIF - Cost, Insurance and Freight (named port of destination)
This modality equivalent to CFR, except that the insurance costs are born by the exporter. The
exporter must deliver the goods aboard ship, at the port of embarkation, with freight and
insurance paid. The responsibility of the exporter ceases when the product is offloaded from the
ship at the port of destination. This modality may only be used for sea and inland waterway
transportation.
CPT - Carriage Paid To (named place of destination)
The seller delivers the goods to the carrier nominated by him. If subsequent carriers are used the
risk passes when the goods have been delivered to the first carrier. The seller must in addition
pay the cost of carrier to bring the goods to the named destination.
CIP - Carriage and Insurance Paid to (named place of destination)

This term corresponds to CPT except that under CIP the seller also has to incur insurance
against the risk of loss or damage to the goods during carriage. The seller has therefore to obtain
insurance and pay the insurance for the minimum cover.
DAT - Delivered at Terminal (named terminal at port or place of destination)

The seller covers all the costs of transport (export fees, carriage, insurance, unloading from main
carrier at destination port and destination port charges) and assumes all risk until destination
port, import duty/taxes/customs costs to be borne by Buyer
DAP - Delivered at Place (named place of destination)

The seller is responsible for arranging carriage and for delivering the goods, ready for unloading
from the arriving conveyance, at the named place. Duties are not paid by the seller under this
term (An important difference from Delivered At Terminal DAT, where the buyer is responsible
for unloading.)
DDP - Delivered Duty Paid (named place of destination)

The seller delivers to the buyer cleared for import but not unloaded from any arriving means of
transport at the named port of destination. The seller bears the cost and the risk involved in
bringing the goods there to including, where applicable any duty on import in the country of
destination.
DEQ - Delivered Ex Quay (named port of delivery)

The point of delivery under this term moves to the quay not cleared for import at the named port
of destination. The seller bears all the costs of discharging the goods at the quay in addition to
the cost and risk involved as per the term DES.
DES - Delivered Ex Ship

This term implies that the seller delivers the goods by placing them at the disposal of the buyer
on board the ship not cleared for import at the named port of destination. The seller bears all the
costs and risks involved in bringing the goods to the named port of destination before their
discharge.
DAF - Delivered at Frontier (named place of delivery)

The exporter must deliver the goods at the designated place and location on the frontier, prior to
crossing over to the country of destination. This term is used principally in the case of highway
or railroad transportation.
DDU - Delivered Duty Unpaid (named place of destination)

The seller delivers to the buyer not cleared for import but not unloaded from any arriving means
of transport at the named port of destination. The seller bears the cost and the risk involved in
bringing the goods there to other than where applicable any duty on import in the country of
destination.
3. PAYMENT TERMS
 To succeed in today’s global market place and win sales against International trade
presents a spectrum of risk, which causes uncertainty over the timing of
payments between the exporter (seller) and importer (foreign buyer).
 For exporters, any sale is a gift until payment is received.
 Therefore, exporters want to receive payment as soon as possible, preferably as soon
as an order is placed or before the goods are sent to the importer.
 For importers, any payment is a donation until the goods are received.
 Therefore, importers want to receive the good as soon as possible but to delay
payment as long as possible, preferably until after the goods are resold to generate
enough income to pay the exporter.

Cash-in-Advance
Cash in Advance is a pre-payment method in which, an importer the payment for the items to be
imported in advance prior to the shipment of goods. The importer must trust that the supplier will
ship the product on time and that the goods will be as advertised. Cash-in-Advance method of
payment creates a lot of risk factors for the importers. However, this method of payment is
inexpensive as it involves direct importer-exporter contact without commercial bank
involvement.
In international trade, Cash in Advance methods of payment is usually done when-
 The Importer has not been long established

 The Importer's credit status is doubtful or unsatisfactory
 The country or political risks are very high in the importer’s country
 The product is in heavy demand and the seller does not have to accommodate an
Importer's financing request in order to sell the merchandise
Documentary Collections
Documentary Collection is an important bank payment method under, which the sale transaction
is settled by the bank through an exchange of documents. In this process the seller's instructs his
bank to forwards documents related to the export of goods to the buyer's bank with a request to
present these documents to the buyer for payment, indicating when and on what conditions these
documents can be released to the buyer.
The buyer may obtain possession of goods and clear them through customs, if the buyer has the
shipping documents such as original bill of lading, certificate of origin, etc. However, the
documents are only given to the buyer after payment has been made ("Documents against
Payment") or payment undertaking has been given - the buyer has accepted a bill of exchange
issued by the seller and payable at a certain date in the future (maturity date) ("Documents
against Acceptance").
Documentary Collections make easy import-export operations within low cost. But it does not
provide same level of protection as the letter of credit as it does not involve any kind of bank
guarantee like letter of credit.
Letter of Credit
A letter of credit is the most well known method of payment in international trade. Under an
import letter of credit, importer’s bank guarantees to the supplier that the bank will pay
mentioned amount in the agreement, once supplier or exporter meet the terms and conditions of
the letter of credit. In this method of payment, plays an intermediary role to help complete the
trade transaction. The bank deals only in documents and does not inspect the goods themselves.
Letters of Credit are issued subject to the Uniforms Customs & Practice for Documentary Credits
(UCPDC). This set of rules is produced by the International Chamber of Commerce and
Industries (CII).
Open Account
In case of an open account, an importer takes the delivery of good and ensures the supplier to
make the payment at some specific date in the future. Importer is also not required to issue any
negotiable instrument evidencing his legal commitment to pay at the appointed time. This type of
payment methods are mostly seen where when the importer/buyer has a strong credit history and
is well-known to the seller. Open Account method of payment offers no protection in case of
non-payment to the seller.
There are many merits and demerits of open account terms. Under an open account payment
method, title to the goods usually passes from the seller to the buyer prior to payment and
subjects the seller to risk of default by the Buyer. Furthermore, there may be a time delay in
payment, depending on how quickly documents are exchanged between Seller and Buyer. While
this payment term involves the fewest restrictions and the lowest cost for the Buyer, it also
presents the Seller with the highest degree of payment risk and is employed only between a
Buyer and a Seller who have a long-term relationship involving a great level of mutual trust.
4. LETTER OF CREDIT
4.1 Definition
Letter of credit refers to a written undertaking given by the importer’s bank, at the request and
instruction of importer that the payment shall be made to him against stipulated documents.
4.2 Characteristics of a Letter of Credit

 Primary liability of the Issuing Bank to Make Payment
 Separated from the sales
 Dealing with documents only
 High level of protection and security to both buyers and sellers
4.3 Parties to Letter of Credit

 Applicant/buyer
 Liable for payment to the issuing bank provided no discrepancy between
documents and the credit
 Right to examine the documents and refuse payment
 Any requirement of the applicant should be satisfied by certain documents and
clearly indicated when making credit application
 Issuing application form
 Issuing bank/the buyer’s bank

 Require the applicant to hand over certain percentage of credit amount as a
margin when it opens a credit.
 After effecting the payment, the issuing bank may handle goods under the credit
and make claim on the importer if the importer is unable to pay the issuing bank.
 If there are any discrepancies in the documents, the issuing bank may reject the
payment.
 The issuing bank may be exempted from its obligation for delay or loss of
transmission.
 Beneficiary/seller
 The right to examine a credit upon receipt of it according to the sales contract
 Whether be paid or not solely depends on the fulfillment of terms and conditions
of the credit
 Advising bank
 Advising bank means the bank that advises the credit at the request of the issuing
bank.
 Advising bank is usually the correspondent bank of the issuing bank in the
exporter’s country, which verifies the authenticity of the letter of credit and any
amendment and forwards them to the beneficiary
 Confirming bank
 Confirming bank means the bank that adds its confirmation to a credit upon the
issuing bank’s authorization or request.
 Confirming bank undertakes the same independent responsibility for payment as
that of the issuing bank
 Negotiating bank
Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other
than the nominated bank) and/or documents under a complying presentation by
advancing or agreeing to advance funds to the beneficiary on or before the banking day
on which reimbursement is due to the nominated bank.
4.4 Procedure of L/C

Step 1: A buyer and a seller enter into a sales contract providing payment by a documentary
credit
Step 2: The buyer instructs the issuing bank to issue a documentary credit in favor of the seller
Step 3: The issuing bank opens a documentary credit according to the instructions of the
applicant
Step 4: The issuing bank asks another bank, usually in the country of the seller, to advise and
perhaps also to add its confirmation to the documentary credit
Step 5: The seller examines the documentary credit, and requires an amendment of the credit if
necessary.
Step 6: The seller presents his documents to the advising bank for settlement
Step 7: The negotiating bank forwards documents to the issuing bank, claiming reimbursement
as agreed between the two banks. The issuing bank examines the documents and makes
reimbursement
Step 8: The buyer redeem the documents and picks up the goods against the documents
4.5 Types of Letter of credit

1. A commercial letter of credit- is a contractual agreement between the issuing banks, on

behalf of one of its customers, authorizing another bank known as the advising or
confirming bank, to make payment to the beneficiary. ... Commercial letters of credit are
used primarily to facilitate foreign trade.
2. Export – import LOC - Import letter of credit is issued by the importer's bank on behalf
of the importer with the exporter being the beneficiary. It is a guaranteed by the
importer's or buyer's bank that the payment will be given to the exporter or seller.
An export letter of credit is a document whereby your buyer instructs their bank to pay
you, assuming that the agreed conditions specified in the original documentary credit, are
met. It is an internationally accepted method of settling trade payments.
3. Transferable LC. This LC enables the Seller to assign part of the letter of credit to other
party(ies). This LC is especially beneficial in those cases when the Seller is not a
sole manufacturer of the goods and purchases some parts from other parties, as it
eliminates the necessity of opening several LC's for other parties.
4. A non-transferable letter of credit - is when the bank makes credit available to the
beneficiary only and cannot be transferred to any other party. ... One possible reason
could be that the seller is passing fees that he is charged by his bank .
5. Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the
customer's instructions without prior agreement of the beneficiary (Seller). The Bank will
not have any liabilities to the beneficiary after revocation of the LC.
6. Irrevocable LC. This LC cannot be cancelled or modified without consent of the
beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other
party.
7. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is
confirmed by the Seller's bank or any other bank. Irrespective to the payment by the Bank
issuing the LC (issuer), the Bank confirming the LC is liable for performance of
obligations.
8. Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.

9. Stand-by LC. This LC is closer to the bank guarantee and gives more flexible
collaboration opportunity to Seller and Buyer. The Bank will honour the LC when the
Buyer fails to fulfill payment liabilities to Seller.
10. A revolving letter of credit - is a special letter of credit type which is structured in a way
so that it revolves either in value or in time covering multiple-shipments over a long
period of time under single letter of credit.
11. Red Clause LC. The seller can request an advance for an agreed amount of the LC before
shipment of goods and submittal of required documents. This red clause is so termed
because it is usually printed in red on the document to draw attention to "advance
payment" term of the credit.
12. Green clause letter of credit. This is a normal documentary letter of credit, which
provides a secured form of credit in that exporters can draw an agreed percentage of the
value of the goods to be shipped against presentation of warehouse receipts as collateral.
13. Back-to-Back LC. This LC type considers issuing the second LC on the basis of the first
letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions and
on the basis of this LC and instructions of the intermediary a new LC is opened in favor
of Seller of the goods or A back-to-back letter of credit is usually used in a transaction
involving an intermediary between the buyer and seller, such as a broker, or when a seller
must purchase the goods it will sell from a supplier as part of the sale to his buyer.
14. Sight LC. According to this LC, payment is made to the seller immediately (maximum
within 7 days) after the required documents have been submitted.
15. Deferred Letter of Credit is a type of Letter of Credit in which a conditional undertaking
is taken by the bank to pay the seller on behalf of the buyer on a specified future date
after completion of the transaction. The bank makes the payment on presentment of
necessary documents.
16. Direct letter of credit payment method in which the issuing bank makes the payments to
the beneficiary.
4.6 Advantages
To the exporter
 Assured payment against exports
 Compliance with exchange control regulations of importing country
 Facilitating borrowing
To the importer
 Enabling purchase of goods without advance remittance
 Through prescribe needed documents ensuring quality and quantity of goods
 Facilitating import finance
5. PRE SHIPMENT AND POST SHIPMENT FINANCE
Pre Shipment Finance
Pre Shipment credit is issued by a financial institution when the seller wants the payment of the
goods before shipment. The main objectives behind pre-shipment credit or pre export finance are
to enable exporter to:
 Procure raw materials

 Carry out manufacturing process
 Provide a secure warehouse for goods and raw materials
 Process and pack the goods
 Ship the goods to the buyers
 Meet other financial cost of the business
Types of Pre Shipment finance
 Packing Credit
 Advance against cheques/draft etc. representing Advance Payments.
Packing Credit
A borrowing facility provided by a financial institution to help an exporter finance the costs of
buying or making a set of products, and then packing and transporting them before shipment
occurs.
Advance against Cheque/Drafts received as advance payment

Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank
may grant export credit at concessional rate to the exporters of goods track record, till the time of
realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy
themselves that the proceeds are against an export order.
Post Shipment Finance
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or

seller against a shipment that has already been made. This type of export finance is granted from
the date of extending the credit after shipment of the goods to the realization date of the exporter
proceeds. Exporters don’t wait for the importer to deposit the funds.
Importance of Post shipment Finance

 To pay to agents/distributors and others for their services
 To pay for publicity and advertising in the overseas markets
 To pay for port authorities, customs and shipping agents charges
 To pay towards export duty or tax, if any
 To pay towards ECGC premium
 To pay for freight and other shipping expenses
 To pay towards marine insurance premium, under CIF contracts
 To meet expenses in respect of after sale service
 To pay towards such expenses regarding participation in exhibitions and trade fairs in
India and abroad
 To pay for representatives abroad in connection with their stay board
Types of Post Shipment Finance

The post shipment finance can be classified as:
 Export Bills purchased/discounted

 Export Bills negotiated
 Advance against export bills sent on collection basis
 Advance against export on consignment basis
 Advance against undrawn balance on exports
 Advance against claims of Duty Drawback
Export Bills Purchased/ Discounted

Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or
purchased by the banks. It is used in indisputable international trade transactions and the proper
limit has to be sanctioned to the exporter for purchase of export bill facility.
Export Bills Negotiated (Bill under L/C)

The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is
further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn
security available in this method, banks often become ready to extend the finance against bills
under LC.
Advance against Export Bills Sent on Collection Basis

Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies.
Sometimes exporter requests the bill to be sent on the collection basis, anticipating the
strengthening of foreign currency.
The transit period is from the date of acceptance of the export documents at the bank’s branch
for collection and not from the date of advance.
Advance against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment basis at the risk of the
exporter for sale and eventual payment of sale proceeds to him by the consignee.
However, in this case bank instructs the overseas bank to deliver the document only against trust
receipt /undertaking to deliver the sale proceeds by specified date, which should be within the
prescribed date even if according to the practice in certain trades a bill for part of the estimated
value is drawn in advance against the exports.
In case of export through approved Indian owned warehouses abroad the times limit for
realization is 15 months.
Advance against Undrawn Balance

It is a very common practice in export to leave small part undrawn for payment after adjustment
due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if
undrawn balance is in conformity with the normal level of balance left undrawn in the particular
line of export, subject to a maximum of 10 percent of the export value. An undertaking is also
obtained from the exporter that he will, within 6 months from due date of payment or the date of
shipment of the goods, whichever is earlier surrender balance proceeds of the shipment.
Advance against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country. This discount is
given only, if the inhouse cost of production is higher in relation to international price. This type
of financial support helps the exporter to fight successfully in the international markets.
In such a situation, banks grants advances to exporters at lower rate of interest for a maximum
period of 90 days. These are granted only if other types of export finance are also extended to the
exporter by the same bank.
After the shipment, the exporters lodge their claims, supported by the relevant documents to the
relevant government authorities. These claims are processed and eligible amount is disbursed
after making sure that the bank is authorized to receive the claim amount directly from the
concerned government authorities.
6. FORFAITING
Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their
medium term foreign account receivables at a discount on a “without recourse” basis. A forfaiter
is a specialized finance firm or a department in banks that performs non-recourse export
financing through the purchase of medium-term trade receivables. Similar to factoring, forfaiting
virtually eliminates the risk of nonpayment, once the goods have been delivered to the foreign
buyer in accordance with the terms of sale. However, unlike factors, forfaiters typically work
with the exporter who sells capital goods, commodities, or large projects and needs to offer
periods of credit from 180 days to up to seven years. In forfaiting,
receivables are normally guaranteed by the importer’s bank, allowing the exporter to take the
transaction off the balance sheet to enhance its key financial ratios.
 Eliminates virtually all risk to the exporter with 100 percent financing of contract value.
 Allows offering open account in markets where the credit risk would otherwise be too
high.
 Generally works with bills of exchange, promissory notes, or a letter of credit.
 Normally requires the exporter to obtain a bank guarantee for the foreign buyer.
 Financing can be arranged on a one-shot basis in any of the major currencies, usually on
a fixed interest rate, but a floating rate option is also available.
Advantages
 Eliminate the risk of nonpayment by foreign buyers
 Strong capabilities in emerging and developing markets
Disadvantages
 Cost can be higher than commercial bank financing
 Limited to medium-term and over $100K transactions
7. EXIM BANK

The Export-Import (EXIM) Bank of India is the principal financial institution in India for
coordinating the working of institutions engaged in financing export and import trade. It is a
statutory corporation wholly owned by the Government of India. It was established on January 1,
1982 for the purpose of financing, facilitating and promoting foreign trade of India.
The main functions of the EXIM Bank are as follows:
 Financing of exports and imports of goods and services, not only of India but also of the
third world countries;
 Financing of exports and imports of machinery and equipment on lease basis;
 Financing of joint ventures in foreign countries;
 Providing loans to Indian parties to enable them to contribute to the share capital of joint
ventures in foreign countries;
 To undertake limited merchant banking functions such as underwriting of stocks, shares,
bonds or debentures of Indian companies engaged in export or import; and
 To provide technical, administrative and financial assistance to parties in connection with
export and import.
Activities of Bank
1. Lending
a. To Indian Companies
i. Finance for project and service exports
 Supplier’s credit for Deferred payment exports
 Consultancy and technology services finance programme
 Pre-shipment rupee credit
 Foreign currency pre-shipment credit
 Finance for rupee expenditure for project export contracts
ii. Facilities for export capability creation
 Lending programme for export oriented units
 Working capital term loan programme for export oriented units
 Long-term working capital programme for EOU
 Import Finance
 Bulk import finance programme
 Programme for financing R&D
iii. Facilities for joint ventures abroad
 Overseas investment finance
 Asian countries investment partners programme
b. To Foreign government/companies
i. Buyers credit
ii. Lines of credit
iii. Re-lending facility
c. To Indian Bank
i. Refinance of export credit
ii. Export bills rediscounting facility
iii. Syndication of export credit risks
2. Guaranteeing
a. Guaranteeing of obligations
i. Bid bond
ii. Advance Payment Guarantee
iii. Performance Guarantee
iv. Guarantee for release of retention money
v. Guarantee for raising borrowings overseas
b. Guaranteeing facility for banks
3. Advisory services
4. Promotional Services
8. ECGC AND ITS SCHEMES
Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India Enterprise
which provides export credit insurance facilities to exporters and banks in India. It functions
under the administrative control of Ministry of Commerce & Industry, and is managed by a
Board of Directors comprising representatives of the Government, Reserve Bank of India,
banking, and insurance and exporting community. Over the years, it has evolved various export
credit risk insurance products to suit the requirements of Indian exporters and commercial banks.
ECGC is the seventh largest credit insurer of the world in terms of coverage of national exports.
The present paid up capital of the Company is Rs. 1000 Crores and the authorized capital is Rs.
1000 Crores.
ECGC is essentially an export promotion organization, seeking to improve the competitive

capacity of Indian exporters by giving them credit insurance covers comparable to those
available to their competitors from most other countries. It keeps it's premium rates at the lowest
level possible.
Functions of ECGC
 Provides a range of credit risk insurance covers to exporters against loss in export of
goods and services
 Offers Export Credit Insurance covers to banks and financial institutions to enable
exporters to obtain better facilities from them
 Provides Overseas Investment Insurance to Indian companies investing in joint ventures
abroad in the form of equity or loan
 Offers insurance protection to exporters against payment risks
 Provides guidance in export-related activities
 Makes available information on different countries with it's own credit ratings
 Makes it easy to obtain export finance from banks/financial institutions
 Assists exporters in recovering bad debts
 Provides information on credit-worthiness of overseas buyers
Need for export credit insurance

Payments for exports are open to risks even at the best of times. The risks have assumed large
proportions today due to the far-reaching political and economic changes that are sweeping the
world. An outbreak of war or civil war may block or delay payment for goods exported. A coup
or an insurrection may also bring about the same result. Economic difficulties or balance of
payment problems may lead a country to impose restrictions on either import of certain goods or
on transfer of payments for goods imported. In addition, the exporters have to face commercial
risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer
going bankrupt or losing his capacity to pay are aggravated due to the political and economic
uncertainties. Export credit insurance is designed to protect exporters from the consequences of
the payment risks, both political and commercial, and to enable them to expand their overseas
business without fear of loss.
Risks covered by ECGC
a) Commercial Risks
 Insolvency of the buyer.

 Failure of the buyer to make the payment due within a specified period, normally
four months from the due date.
 Buyer's failure to accept the goods, subject to certain conditions.
b) Political Risks
 Imposition of restriction by the Government of the buyer's country or any

Government action, which may block or delay the transfer of payment made by
the buyer.
 War, civil war, revolution or civil disturbances in the buyer's country. New import
restrictions or cancellation of a valid import license in the buyer's country.
 Interruption or diversion of voyage outside India resulting in payment of
additional freight or insurance charges which cannot be recovered from the buyer.
 Any other cause of loss occurring outside India not normally insured by general
insurers, and beyond the control of both the exporter and the buyer.
Products offered to Exporters
• Standard Policy
• Small Exporters policy
• Specific Shipment Policy (short term)
• Export Turnover policy
• Specific buyer wise policy
• Consignment export policy
• Global entity policy
• Single buyer exposure policy
• Multi buyer exposure policy

• Software project exports policy
• IT enabled (single customer) policy
• IT enabled (multi customer) policy
• SME Policy
• Customer specific policy (Tailor made)
SCR or Standard Policy
• It is issued to exporters whose anticipated export turnover for the next 12 months is more
than Rs.50 lakhs
• The appropriate policy for exporters with an anticipated turnover of Rs.50 lacs or less is
the Small Exporter's Policy, described separately
Shipments (Comprehensive Risks) Policy
• Whole Turnover principle- all exports covered

• Selective options for LC/Associates/Consignments
• 90% cover
• Advance Premium subject to Minimum premium of Rs.10,000/-
• Policy Period - 2 years
• Credit limit (Drawee wise) on all the buyers
• Monthly declarations with premium due
• Premium rates schedule issued with Policy
• No claim Bonus – every year 5% subject to maximum of 50%
Small Exporters Policy
• Export turnover not exceeding Rs.50 Lakhs per annum

• Advance Premium subject to Minimum Premium Rs.2000/-
• Policy Period - one year
• Cover for Commercial risks 95% and Political risks 100%
• No Claim bonus applicable
• Quarterly Declarations
• Premium payment as per standard premium schedule attached to Policy
Export Turnover Policy
• Minimum anticipated Premium of Rs.10 Lakhs

• Period of Policy- One year
• Monthly or quarterly declaration as per exporter’s choice
• Higher Discretionary Limit of drawee wise limits on buyers (uptoRs100 lakhs for DP and
Rs50 lakhs for DA)
• Premium rates discounted by 20%
• Premium payable upfront or in Quarterly installments based on anticipated exports
• 5% cash discount for upfront payment of full annual premium
Specific Shipment Policy (SSP)
• Covering one shipment or One contract

• Processing fee of Rs.1000/-
• 80% cover
• Premium higher than standard premium rates
• Upfront premium before issue of Policy
• Commercial / Political risks and L/C comprehensive risks covered
• Submission of Shipment Statement and realisation report later
Specific Buyer wise Policy
• Covering One buyer / One Bank

• Processing fee Rs.1000/-
• Period of cover - One year
• All shipments to buyer on Non LC terms or shipments under LC from bank covered
• Quarterly/Annual premium payable upfront based on projected exports
• 80% cover
• Monthly or quarterly shipment statements
• 5% No Claim Bonus reduction on renewal
Buyer Exposure Policy
• Cover issued on exposure basis as opposed to turnover (Exposure: Likely outstanding at

any given point of time)
• Onetime payment of premium on exposure
• Single Premium rate based on country rating for Comprehensive risks/Political risks
• Processing fee Rs.1000/- on application
• Cover is up to Exposure or the Loss limit (Credit Limit)
• Premium payable either quarterly or annually on the loss limit
• No monthly statements
• Annual statement of shipments at the end of Policy period on renewal
• Coverage is 80%
• Selective cover for each buyer at exporter’s discretion
Multi buyer exposure policy
• Cover on exposure as opposed to turnover and cover for more than 1 buyer
• Discretion to choose buyers for cover with exporter and shall be acceptable to ECGC
• Processing Fee Rs.5000/- to accompany application
• List of buyers to be given with proposal and any addition to be advised
• Minimum 10% of projected turnover will be fixed as Aggregate Loss Limit (ALL) which
will be the Maximum Liability
• Exporter can opt for higher exposure than 10% of turnover

• Cover for each buyer is 10% of ALL as Single Loss Limit (SLL)
• Exporter to have access to ECGC website for checking defaulter buyer list.
• Coverage is 80% and lower cover available with proportionate reduction of premium.
Single premium rate irrespective of country grading
• Upfront premium payable before issue or in quarterly instalments
Consignment (Stock holding Agent) Policy
• Consignment exports covered under this exclusive cover for a period of 1 year
• Premium on shipments to the agent payable on the turnover
• Upfront premium quarterly / annually
• Coverage 80%. Exporters holding Standard Policy will get 90% cover
• One Agent / Multiple buyers
• Cover on agent or on ultimate buyers as desired by exporter
• Credit limits (Drawee wise limits) to be obtained on ultimate buyers
• Discretionary Credit limit available upto 5% of turnover with max of Rs100 lakhs
• Longer period of 360 days for realization of bills
• Premium payable on the basis of country classification and tenor of 90/180/360 days.
Extension upto 540 days permissible with additional premium
Consignment Exports (Global Entity) Policy
• Coverage for selling goods through exporter’s own subsidiary or branch office during a
period of 1 year
• Premium on shipments to the GE payable on the turnover
• Upfront premium quarterly / annually
• Coverage 80%. Exporters holding Standard Policy will get 90% cover
• One GE / Multiple buyers
• Cover on GE or on ultimate buyers as desired by exporter
• Commercial cover of Insolvency of GE only if Joint stock company and equity stake not
exceeding 49%; Otherwise only Political risks cover
• Credit limits (Drawee wise limits) to be obtained on ultimate buyers
• Discretionary Credit limit available upto 5% of turnover with max of Rs100 lakhs
• Longer period of 360 days for realization of bills
• Premium payable on the basis of country classification and tenor of 90/180/360 days.
Extension upto 540 days permissible with additional premium
9. IMPORT LICENSING
An import licensing is a document issued by a national government authorizing the importation

of certain goods into its territory

Categories of Import
Freely importable items
Most capital goods fall into this category. Any product declared as Freely Importable Item does
not require import licenses.
Licensed Imports
There are number of goods, which can only be importer under an import license. This category
includes several broad product groups that are classified as consumer goods; precious and semi-
precious stones; products related to safety and security; seeds, plants and animals; some
insecticides, pharmaceuticals and chemicals; some electronically items; several items reserved
for production by the small-scale sector; and 17 miscellaneous or special-category items.
Canalised Items
There are certain canalised items that can only be importer in India through specified channels
or government agencies. These include petroleum products (to be imported only by the Indian
Oil Corporation); nitrogenous phosphatic, potassic and complex chemical fertilizers (by the
Minerals and Metals Trading Corporation) vitamin- A drugs (by the State Trading Corporation);
oils and seeds (by the State Trading Corporation and Hindustan Vegetable Oils); and cereals (by
the Food Corporation of India).
Prohibited items
Only four items-tallow fat, animal rennet, wild animals and unprocessed ivory-are completely
banned from importation.
Features of License
 Issued in Duplicate
 Period of Validity
 Actual User condition
 Value, Description and Quality
 Export Obligation
Types of Licenses
 Industrial license
 Commercial License
 Consulting and Service License
 Commercial – General trading License
Import Trade governing bodies
 Ministry of Commerce and Industry

 Directorate General of Foreign trade (DGFT)

 Central Board of Excises Customs(CBEC)
10. FINANCING METHODS FOR IMPORT OF CAPITAL GOODS
Accounts Receivable Financing
An exporter that needs funds immediately may obtain a bank loan that is secured by an
assignment of the account receivable.
Factoring
The accounts receivable are sold to a third party (the factor), that then assumes all the
responsibilities and exposure associated with collecting from the buyer.
Letters of Credit (L/C)
These are issued by a bank on behalf of the importer promising to pay the exporter upon
presentation of the shipping documents. Letters of credit (LCs) are one of the most secure
instruments available to international traders.
An LC is a commitment by a bank on behalf of the buyer that payment will be made to the
exporter, provided that the terms and conditions stated in the LC have been met, as verified
through the presentation of all required documents.
Banker’s Acceptance (BA)

This is a time draft that is drawn on and accepted by a bank (the importer’s bank).The accepting
bank is obliged to pay the holder of the draft at maturity. If the exporter does not want to wait for
payment, it can request that the BA be sold in the money market. Trade financing is provided by
the holder of the BA. The bank accepting the drafts charges an all-in-rate (interest rate) that
consists of the discount rate plus the acceptance commission. In general, all-in-rates are lower
than bank loan rates. They usually fall between the rates of short-term Treasury bills and
commercial papers
Capital Financing
Bank may provide short term loans that finance the working capital cycle, from the purchase of
inventory until the eventual conversion to cash.
Medium-Term Capital Goods Financing (Forfaiting)
The importer issues a promissory note to the exporter to pay for its imported capital goods over a
period that generally ranges from three to seven years.The exporter then sells the note, without
recourse, to a bank (the forfaiting bank).
Countertrade

These are foreign trade transactions in which the sale of goods to one country is linked to the
purchase or exchange of goods from that same country. Common counter trade type includes
barter, compensation (product buy-back) and counter purchase.
Types of countertrade:
There are six main variants of countertrade:
1. Barter: This is where the buyer and seller exchanges goods, eliminating a third-party’s
need to handle the transaction. Money is not involved, just goods.
2. Compensation Deal:In this scenario of countertrade, the seller will receive a percentage
of cash as payment and the rest in products. As an example, a Britishaircraft
manufacturer sold planes to a South American company, receiving 70 percent cash and
the balance in coffee.
3. Buyback Arrangement: The seller, in this situation, will sell to another country items
such as plants (often fruit baring), equipment, or technology and in turn, agrees to accept
as partial payment the products manufactured with the supplied plants and equipment. As
an example, a U.S. petroleum company sold and built a petroleum plant for a middle
eastern company; in exchange for payment, the middle eastern company supplied the
U.S. company with oil as partial payment.
4. Offset: The seller receives full cash payment for the product, but agrees to spend a
substantial amount of the money received in that country within a specific time period. In
this classic example, PepsiCo agreed to sell its cola syrup to Russia for money (rubles)
and agreed to buy Russian vodka at a certain rate, to sell in the United States.
5. Switch trading: Practice in which one company sells to another its obligation to make a
purchase in a given country.
6. Counter purchase: Sale of goods and services to one company in other country by a
company that promises to make a future purchase of a specific product from the same
company in that country.

INT'L TRADE FINANCE: EXPORT & IMPORT

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INT'L TRADE FINANCE: EXPORT & IMPORT

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St.

Joseph’s College of Engineering BA7031 International Trade Finance

EXPORT AND IMPORT FINANCE

UNIT II EXPORT AND IMPORT FINACE 9

1. SPECIAL NEED FOR FINANCE IN INTERNATIONAL TRADE

Accordingly, financial institutions and governments have developed instruments to provide

functions is fulfilled by a certain set of credit instruments, provided mostly by financial

• FCA – Free Carrier

• CFR – Cost and Freight

• DEQ – Delivered Ex Quay

Marine Restricted Omni-Modal

EXW – Ex Works (named place of delivery)

FAS - Free Alongside Ship (named port of shipment)

FOB - Free on Board (named port of shipment)

CFR - Cost and Freight (named port of destination)

CIF - Cost, Insurance and Freight (named port of destination)

CPT - Carriage Paid To (named place of destination)

CIP - Carriage and Insurance Paid to (named place of destination)

DAT - Delivered at Terminal (named terminal at port or place of destination)

DAP - Delivered at Place (named place of destination)

DDP - Delivered Duty Paid (named place of destination)

DEQ - Delivered Ex Quay (named port of delivery)

DES - Delivered Ex Ship

DAF - Delivered at Frontier (named place of delivery)

DDU - Delivered Duty Unpaid (named place of destination)

presents a spectrum of risk, which causes uncertainty over the timing of

payments between the exporter (seller) and importer (foreign buyer).

 For exporters, any sale is a gift until payment is received.

 Therefore, exporters want to receive payment as soon as possible, preferably as soon

as an order is placed or before the goods are sent to the importer.

enough income to pay the exporter.

Department of MBA Semester III 36

In international trade, Cash in Advance methods of payment is usually done when-

 The Importer has not been long established

4.2 Characteristics of a Letter of Credit

4.3 Parties to Letter of Credit

 Issuing bank/the buyer’s bank

Department of MBA Semester III 39

4.5 Types of Letter of credit

Department of MBA Semester III 40

1. A commercial letter of credit- is a contractual agreement between the issuing banks, on

Department of MBA Semester III 41

5. PRE SHIPMENT AND POST SHIPMENT FINANCE

Pre Shipment Finance

 Procure raw materials

Types of Pre Shipment finance

Advance against Cheque/Drafts received as advance payment

Post Shipment Finance

Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or

Importance of Post shipment Finance

Types of Post Shipment Finance

The post shipment finance can be classified as:

 Export Bills purchased/discounted

Export Bills Purchased/ Discounted

Export Bills Negotiated (Bill under L/C)

Advance against Export Bills Sent on Collection Basis

Advance against Export on Consignments Basis

Advance against Undrawn Balance

Advance against Claims of Duty Drawback

Department of MBA Semester III 45

The main functions of the EXIM Bank are as follows:

8. ECGC AND ITS SCHEMES

ECGC is essentially an export promotion organization, seeking to improve the competitive