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Export documents play a vital role in international marketing as it facilitates the smooth flow of goods and payment there of across national frontiers. Cateora and Graham say that ‘the each export shipment involves many documents to satisfy government regulations controlling exporting as well as to meet requirements for international commercial payment transactions’. They further writes that ‘the paper work involved in successfully completing a transaction is considered by mean to be the greatest of all non-tariff trade barriers. There are 125 different documents in regular or special use in more then 1000 different forms. A single shipment may require over 50 document and involve as many as 28 different parties and government agencies, or requires as few as.’ It shows that the exporting activity involves several commercial and regulatory procedures. These procedures also involve considerable documentation requirements. Besides, the documentation pertaining to the commercial aspect of the export business, there are documentation requirements of a regularly nature like excise clearance, foreign exchange regulations etc. The most frequently required documents are export declarations, consular invoices or certificate of origin, bills of lading, commercial invoices, and insurance certificates. Additional documents such as import licences, export licences, packing lists, and inspection certificates for agricultural products are often necessary. Export documentation is, however, complex as the number of documents to be filled-in is large so able is the number of concerned authorities to whom the relevant documents are to be submitted. These documents must be properly and correctly filled. Cateora and Graham opine that ‘incomplete or improperly prepared documents leads to delay in shipment. In some countries, these are penalties, fines and even confiscation of goods as results of errors in some of these documents. Export documents are the result of requirements imposed by the exporting government, of requirements set by the commercial procedures established in foreign trade, and in some cases, of the supporting import documents required by the importing government. An exporter should have the complete knowledge of these documents and he should be well familiar with complete export procedure. On the basis of above discussion, export documents may be divided on the following four categories: (i) Commercial documents (ii) Regulatory documents (iii) Export assistance documents (iv) Documentation required by importing countries.
Commercial documents are those documents by which physical transfer of good and its ownership is transfer to importer and the procedure of export sales is performed. The major commercial documents are as follows: (a) Commercial invoices (b) Bill of exchange. (c) Bill of lading. (d) Marine insurance policy. Regulatory documents are the documents which are required for complying with the rules and regulations governing export trade transactions. The major regulatory documents are as follows: (a) Foreign exchange regulations. (b) Customs formalities. (c) Export inspections etc. In export assistance documents, those documents are involved which are required for claming assistance under the various export assistance measures. Documentation required by importing countries are: (a) Certificates of origin. (b) Consular invoice. (c) Quality control certificate etc. Main documents used in export transactions: The main documents used in an export transaction are as follows:
1. Commercial Invoice: This is the basic document in an export
transaction. According to Cateora and Graham, ‘every international transaction requires a commercial invoice, that is, a bill or statement for the goods sold. This documents often serves several purposes; some countries require a copy of customes clearance, and it is one of the financial document which contains all the information which are required for the preparation of all other documents. It is, thus, a document of contents. “A commercial invoice is a bill for the goods from the buyer to seller. It contains a description of goods, the address of buyer and seller, and delivery and payment terms. Many governments use this form to assess duties.” There is no set format of this invoice. The exporter may design his own form. Some countries, however, prescribe their own forms. In such case, the exporter has necessarily to use the form prescribed by the importing country. The commercial invoice gives the description of following things: • • • • • Invoice Number date of dispatch. goods description. price charged. the terms of shipments.
• the marks and numbers on the packages containing the merchandise. • date, name and address of both seller and buyer. • Name of the shipping vessel. • Port of debarkation. Commercial invoice may be prepared according to mutual agreement between the buyer and seller. According the Price, the invoice may be of the following types. (a) Free on board or F. O. B. : Free on board at a named inland point of origin, at a named port of exportation, or at a named vessel and port of export. The price includes the cost of goods and delivery. All other charges are the buyer’s concern. In simple words, under F.O.B. quotation, the exporter will deliver the goods free on board a ship as per contract as the port named; that is, to say he will pay all expenses and give delivery of goods on the board of the ship. The buyer must take responsibility from then on, and must pay for freight, insurance and all subsequent expenses. (b) Cost, Insurance and Freight (C.I.F.): C.I.F. to a named overseas port of import. A.C.I.F. quote is more meaningful to the overseas buyer because it includes the costs of goods, insurance, and all transaction and miscellaneous charges to the named place of debarkation. The buyer responsible for loss or damage after the goods are delivered to the shipowner and must pay all expenses, custom duties etc., on arrival at the port of destination. (c) Cost and Frieight (C&F): C & F to a named overseas port. The price includes the cost of goods and transportation costs to the named place of debarkation. The cost of insurance is borne by the buyer. (d) Free Along Side (F.A.S.) F.A.S. to a named U S port of export. The price includes cost of goods and charges for delivery of the goods alongside the shipping vessel. The buyer is responsible for the cost of loading onto the vessel, transportation and insurance. (e) Ex. (named point of Origin): The price quoted concerns costs only at the point of origin. All other charges the buyer’s concern. Consular Invoice: Some countries require consular invoice. A consular invoice sometimes is required by countries as a means of monitoring imports. Government can use the consular invoice to monitor prices of imports and to generate revenue for the embassies that issue the consular invoice. In those countries where ad valorem duties are charged, it is in the interest of the importer to present to the custom authorities to the importing country, the document called ‘Consular invoice’, in order to save time and trouble while taking the delivery of the goods. This invoice has to sent by the exporter who fills in a special form and gets it duly certified by the counsal of the importing country stationed in the exporting country. The exporter is required to pay a prescribed fee for obtaining this invoice. The exporter has to submit four copies of the commercial invoice to the mission of the importing country with the requisite amount of fee.
price and delivery if the goods are actually shipped. Opines that “letter of credit shift the buyer’s credit risk to the bank issuing the letter of credit. This authority verifies if (value declared by the exporter) and send one copy of Reserve Bank of India and second copy of exporter. he will send purchase order and arrange for payment.“A letter of credit is a document containing the guarantee of a bank to honour drafts drawn on its by an exporter. (b) It helps in opening a letter to credit in the favour of exporter. from the exporter to the importer outlining the selling terms. letters of credit afford the greatest degree for protection for the seller. and (b) That they confirm to the basic contract he has entered into with the importer . under certain conditions and upto certain amounts. It is prepared in duplicate and it submitted to the custom authorities at the port of shipment. 2. Except for cash in advance. therefore. Cateore and Graham. the seller ordinarily can draw a draft against the bank issuing the credit and receive dollars by presenting proper shipping documents. At that point.R.Performa Invoice: ‘A proforma invoice is an invoice. The exporter should carefully examine the terms and conditions of the letter of credit to ensure should carefully examine the terms and conditions of the letter of credit to ensure: (a) that he can meet them. a revocable letter of credit may be cancelled at any time by banker without giving pre. If the importer like the terms and conditions. This covers contemplated shipment which may or may not be made in future. The exporter does not favour this letter of credit as it is liable to bring him into trouble on any time. When a letter of credit is employed.Form : This form has been prescribed by the Reserve Bank of India under FERA to ensure that the foreign exchange receipts in respect of exports are impatriated to India. G. the exporter can issue a commercial invoice is simply a temporary commercial invoice which is sent by the exporter to importer. like a letter of intent. safer than the revocable letter from the point of view of exporter. It is a popular method of securing payment and most important single document in international trade. In other words. an irrevocable letter of credit can not be cancelled by the bank without giving prior notice and is. Insurance of letter of credit by a bank in favour of an exporter substitutes the credit of the individual importer by its own credit and thereby gives the exporter guarantee assurance of payment. It forms the basis of very large amount of world trade. An irrevocable letter or credit means that once that seller has accepted the credit. the buyer can not alter it in any way without permission of the seller.intimation. provided that the beneficiary fulfills the stipulated conditions. 3.” The letter of credit is an assurance that the bill will be paid by the bank if it is a sight bill or accepted by the bank if it is a time bill. Letter of Credit:. A letter of credit it of two types: irrevocable and revocable. On the other. An importer may require it for the following two reasons: (a) It helps him to obtain an import license.
no endorsement. such as missing signatures or failure to designate terms of shipment as stipulated in the letter of credit. Bill Of Exchange: When a draft is drawn on a foreign bank. (ii) Bill of lading defect. . it is known as a foreign draft or bill of exchange. and a dating other than the bill of lading. such as an expired letter or one that is exceeded by the invoice figure. pay to the Punjab National Bank or order the sum of one thousand five hundred Pounds Sterling only. Here. (iii) Letter of credit defects. A bill of exchange is. Kalba Devi Road Mumbai Martin & Co. the credit of one or more banks is involved. the buyer receives the properly endorsed bill of lading that is used to acquire the goods from the carrier. such as inadequate coverage. the bank forwards it with the necessary documents to a correspondent bank in the buyer’s country. In order words. Some of the discrepancies found in documents that can delay in honoring drafts or letter of credit including the following.2003 Sixty (60) days after sight of this First Bill of Exchange (Second and third of this same tenor and date unpaid). There are the following important types of bill of exchange: (i) Sight Bill of Exchange: A sight bill is one which is required to be paid by the drawee immediately on presentation of the bill. To Messers Hiralal Motilal 81. (iv)Invoice defects. Cateora and Graham say that ‘in letter or credit. value received. but in the use of bill of exchange. The documents required are principally the same as for letter of credit. thus a means of collecting payment from the foreign buyer through the banking channel. a sight bill requires acceptance and payment on presentation of the bill and often before arrival of the goods. or counter signature. (i) Insurance defects. the buyer is then presented with the draft for acceptance and immediate or later payment with acceptance of the draft. the seller assures all risks until the actual dollars are received. The typical procedure is for the seller to draw a draft on the buyer and present this with the necessary documents to the seller’s bank for collection. It is also method of extending credit. the format of this bill is given below: 1550 Park Street Stamp London July 15. missing an endorsement. he should get in touch with the bank and the Importer to arrange for an amendment.If there are any differences. or failing to specify prepaid freight. such as the bill lacking ‘on-board’ endorsement or signature of carrier. On receipt of draft. 4.
the proforma of these bills are given below: D/A or Document against Acceptance Bill Exchange for 1500 Park Street London July 15. the exporter’s name . Time designations may be placed on sight and arrival bills to stipulate a fixed number of days after acceptance when the obligation must be paid. (iv) Documentary Bill of Exchange: Under this agreement.6 Martin & Co. pay to us or our order the sum of one thousand five hundred Pounds Sterling only shipping documents attached to be surrendered against acceptance. Shipping Bill : This is a custom documents.(ii) Arrival Bill: An arrival bill requires payment be made on arrival of the goods. (iii) Date Bill: A date bill has an exact date for payment and in no way is affected by the movement of the goods. This bill may be a D/P or D/A bill of exchange. the exporter sends the documents through his bank to be delivered to the importer against the importer’s acceptance or payment of an accompanying bill of exchange. the port at which goods are to be discharged. To Messers Ramlal Kishanlal Chandni Chowk Martin & Co. 15 and shipping document enclosed. the name of the vessel. In facet. The shipping bill contains particulars of the goods. the country of final destination. master or agents. A. it is the main documents on the basis of which the custom’s permission for export is given. Delhi – 6 Stamp D/P Documents against Payment Bill 1500 Park Street London July 15. flag. Stemp To Messers Ramlal Kishanlal Chandni Chowk Delhi . 5. 2003 Sixty(60) days after sight of this First Bill of Exchange (Second and third of this same tenor and date unpaid). 2003 On demand please pay to the First State Bank of India a sum of one thousand five hundred Pounds Sterling only against Invoice No. Here.
np. (c) Duty drawback shipping bill which is required for claming the customes drawback against goods exported.No……. Port of Mumbai Name of Vessel Date…………. or the shipping bill must be prepared according to the category of the export goods. the method of payment or term of sale require insurance of the goods.and address etc. Rs. The risks of such perils may be covered under marine insurance policy.Rate Amo. make it absolutely necessary to have adequate insurance covering loss due to damage.. Shipping Bill for dutiable goods Exporter’s Name……………… Address…………………. Assistant Collector Of Custom Mumbai………. (b) Dutiable shipping bill for gods for which there is export duty. The following three forms of the shipping bill are available with the customs authorities: (a) Shipping bill for free goods.Country Unt Unt Of DestiRs. Cateora and Graham feel that ‘the risk of shipment due to political or economic unrest is some countries. Entered……..2003 I/we hereby declare the particulars given above to the true. Here a format of shipping bill is given below: SHIPPING BILL No………………. Master or Agent Colours Port at which goods to be discharged Packages Number & Description Mark & Number Details of goods to be given separately for each class or description Quantity DescriValue ption Unit Amount Rate Duty Amo. and the possibility of damage from see and weather. so few . for which there is no export duty. or riots.2003 Signature of Exporter or his Authorized Agent 6. war. Typically. Marine Insurance Policy: The goods that are exported may be subject to certain maritime perils. nation np. The exporter is required to fill in three copies of shipping bills.
Bill of lading contains the following information: • • • • • • • • • Date and place of shipment The name of consigner. Each shipping company has its own bill of lading. (b) Four Bill of Lading : A foul bill of lading means the shipment was received in damaged conditions and the damage is noted on the bill of lading. (7) Bill of Lading: It is a document which is issued by the shipping company acknowledging that the goods mentioned therein have been placed on board the ship and an undertaking that the goods in like order and conditions as received will be delivered to the consignee. As said earlier that each shipping company has its own bill of lading.’ A policy is a contract and a legal document. Cateora and Graham Write that the ‘bill of lading is the most important document required for establishing legal ownership and facilitating financial transactions. (ii) as a receipt from the carrier for shipment. a clean bill of lading is one which bears no super-imposed clause or statement declaring a defective condition of goods or of the packaging or of some other aspect of consignment. The invoice number and the date of esxport. In other words. An exporter must put up the marine insurance policy as a collateral security when he gets an advance against his bank credit. ‘a bill of lading is a receipt for goods delivered to the common carrier for transportation. In other words. and a document of title. quality and destination of the goods.export shipment are uninsured. arrangement should be made for the goods to be transferred to a second ship at another . The number of packages. It serves the following purposes: (i) as a contract for shipment between the carrier and shipper. a contract for the services rendered by the carrier. The exporter prepares the bill of lading in the forms obtained from the shipping company or from the agents of the shipping company. The marks and numbers. The description. where there is no direct shipping link between the buyer’s port and the seller’s port. The amount of freight. Name and destination of the vessel. and (iii) As certificate of ownership or title to the goods. The gross weight and net weight. provided that the freight specified therein has been duly paid. Bill of lading frequently are referred to as either clean or foul: (a) Clean Bill of Lading : A clean bill of lading means the items presented to the carrier for shipment are properly packaged and clear of apparent damage when received.
(c) Bills of lading covering shipment by sailing vessels.A London being marked and numbered as stated to be delivered in the like good order and well conditioned at the aforesaid Port of London (the Act of God. the Enemies of the Country. In and upon the “STEAMSHIP JALUSHA” where of is Master for Present voyage Mr. It is a semi-negotiable instrument. Fire. when freight is paid at the time of shipment or in advance. the format of Bill of Lading is given below: BILL OF LADING SHIPPED on good order and condition by M/s Rathore Brothers & Co. is called a state bill of lading. Steam and all and every other Dangers and Accidents of the Seas. It is a document of title to goods. Here. It is transferable by endorsement and delivery. if the freight is not paid and is to be collected from the consignee on the arrival of the goods. In such a case. Unless specifically authorized in the credit. or to their Assigns. the bill of lading is marked ‘ freight collect’. bill of lading of the following nature will be rejected: (a) Bills of lading issued by forwarding agents. rivers and Steam Navigation of whatever nature and kind expected) into John Abbot & Sons. Black and now riding at anchor in Mumbai and bound for London. (b) Bills of lading which are issued under and are subjects to the conditions of a charter party. Functions of bill of lading are as follows: (i) (ii) (iii) (iv) (v) It denotes the contract of carriage of goods entered in by the exporter and the importer It entitles the importer to take the delivery of goods. 555 J. Ltd. Boilers. ‘freight paid’. Lading Charges and Freight for the said goods paid . Besides. A possessor of this documents becomes the owner of goods. A bill of lading that has been held too long before it is passed on to a bank or the Consignee. Machinery. 1000 Bales of Cotton Marks. it is necessary for the exporter to obtain a though bill of lading covering the whole voyage.port. the bill of lading is marked.
2003 Value and Contents unknown This bill is issued subject to the contents of 14 and 15 Geo. Here the format of Mate’s receipts is given below MATE’S RECEIPT The Indian Steamship Co. Jalusha for deliver at London the under mentioned goods from M/s : Marks Quantity Goods are Said to be Details Measurement Remarks . Ltd. who is his assistant. and who can not allow the shipping of the goods unless the shipper presents to either of them a copy of the shipping bill and the shipping order. This receipt is called the ‘Male Receipt’. ……. If the mate is not satisfied with the packing of the goods. a remark to that affect is made on the receipt.with Average as per York. Dated at Mumbai 30th October. No……………… Voy………………. 1924 and charges as accustomed. V. IN WITNESS where of the Master of the said ship hath affirmed to three bills of Lading jail of this Tenor and Date.S. Port of Mumbai Date October 28. Ref.C. The exporter must take proper care in packing his goods so as to avoid this remark on the Mate’s receipt without any bad remark is termed as a claim Mate’s receipt. Order NO……………. 2 J. 2003 Received in apparent good order and condition on board the S. the one of which three Bills being accomplished. A receipt with this remark thereon is regarded as dirty or foul receipt. Black Master 8. Mate’s Receipt: This document is got from the caption of the ship or the mate. No…. The mate issues a receipt after examining a packing and counting of the packages. the other two are to stand void. Antewerp Rules. This remark is transferred to the bill of lading when the exporter gets it in exchange for the Mate’s receipt.
In other words. Of Certificate…………….. It helps countries determine the specific tariff schedule for import.555 J. Certificate of origin: A certificate of origin indicates where the products originate and usually is validated by an external source. This certificate has also to be produced country may require this procedure. Packing Note and List: An export packing list indicates that the type of package itemises the material in each individual package indicates the type of package. This certificate is necessity where a country offers a preferential tariff to India and the former is to ensure that only goods of Indian origin benefit from concession.. Signature Caption the ship 9.. made below by………… of ………. a certificate of origin is a certificate which specifies the country of the production of the goods.and certifies. and will be carried by the company subject to the conditions set forth on the back hereof. ………………………………. Signature of Declarer Seal Secretary 10. . Number of Packages Marks Numbers Gross Weight Net Weight Description of Goods that the goods specified in the schedule above are of British original production or manufacture. Here. In respect of the under mentioned goods.A London 1000 Bales Cotton This receipt is to be exchanged for the company’s bill of lading and in the meantime the goods for which the receipt is issued are held. and it attached to the outside of the package. such as the charter of commerce.. consigned to ………. a format of certificate of origin is given below: Certificate of Origin The undersigned duly authorised by the London Chamber of Commerce hereby verifies the declaration.via………. No.at……….
and is certified export worthy. one to the shipping agent and the remaining are retained by the exporter. • the date of packing. For this purpose. Form GP 1 is used for the removal of excisable goods or payment of duty and form GP 2 is used for the removal of excisable goods without payment of duty. (b) G. The difference between a packing not and a packing list is that the packing note refers to the particulars of the contents of an individual pack. use the packing list to determine the nature of the cargo and whether the correct cargo is being shipped.The shipper or freight forwarder.Forms: A GP form is a gatepass for the removal of excisable goods from a factory or warehouse. Other documents: (a) Certificate of inspection: It is a certificate issued by the Export inspection Agency. while the packing list is consolidated statement of the content of a number of cases of packs. Normally. EIC gives an inspection certificate in triplicate to the exporter. This agency certifies that the consignment has been inspected as require under the Export (quality control and inspection) Act. 11. Emphasis is on quality control and not on inspection for export. (c) Cart Ticket: A cart ticket is prepared by the exporter and includes details of the export cargo in terms of the shipper’s name. • Contents of the goods in terms of quantity and weight. A packing note include the following things: • Packing not number. 1963. ten copies of the packing note/list is prepared in which the first is sent with the shipping documents. • Marking numbers. • name and address of the importer. the port of destination. the number of packages. the shipping bill number. and the number of the vehicle. • name and address of the exporter. carrying the cargo. and sometimes custom officials. • Shipment for S/S • bill of lading number and date. two copies in advance to the buyer. and satisfies the conditions relating to quality control and inspection as applicable to it. • Order number • Date. • Case number to which the note relates. Usually Export Promotion Council does the pre-shipment inspection. the following documents should be presented by the exporter to the custom authorities: .P. (d) Custom formalities: Goods may be shipped out of India only after customs clearance has been obtained. It should be noted here that no particular form has been prescribed for the packing Note and packing list.
a foreign order is called an indent. it becomes a confirmed order. Letter of credit. and offer to sell but given in the form of an invoice. Declaration regarding truth or statement made in the shipping bill. (f) Shipper’s export declaration: A shipper’s export declaration is used by the exporter’s government to monitor exports and to compile trade statistics. Hence. (h) Principal export documents: There are eight principal export documents which the exporter is required to send to the importer. The indent contains all important particular of the transaction. where import licenses are required by the country of entry. It may be in the form of a pro-forma invoice. When a proforma invoice is accepted by the buyer. Invoice GR from. These documents are: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Commercial invoice Packing list Bill of lading Combined Transport Document Certificate of Inspection/Quality Control Insurance policy of certificate Certificate of Origin Bill of Exchange and Shipment Advice.(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) Shipping bill. Quality control inspection certificate. a copy of license of license number is usually required to obtain a consular invoice. The exporter. at first receives the order or indent from the importer or his agent. Wherever a commodity requires an export license. Export license (wherever required). There may be a formal sale contract also. wherever available or correspondence leading to contract. Original contract. Lesson -24 Quality Control and Pr-shipment Inspection . AR-4 from Any other documents. In those cases. Packing list. (e) License: Export import licenses are additional documents frequently required in export trade. (g) Indent or order: An exporter gives a quotation or an offer for sale to the foreign buyer or importer. Contract registration certificate. An exporter is usually treated as confirmed order when letter of credit is established if favour of the exporter. it must be obtained before an export.
it is obligatory for the exporter to fulfill the conditions relating to pre-shipment inspection of export goods. Madras and Delhi in 1966 exclusively for export inspection. Under the legislation. Our export can be sustained and improved only be raising the quality of our product as it would be very difficult to reduce the price in our present day high-cost economy.are covered under a system of inprocess quality control. grading and marking of agricultural goods and mill-made cotton textiles and yarn for export have been made under the Agricultural Produce (Grading & Marking) Act. The main function of the Export Inspection Council is to advise the government with regard to measures to be taken for quality control and pre-shipment inspection of exportable commodities. Striking progress has been made in the field of compulsory pre-shipment inspection as about 85 per cent of exports from India have been covered under one or the other system of quality control. with a view to achieve this objective of raising the quality of our export products the Government of India enacted the legislation entitled “The Export (Quality Control and Inspection) Act” in the year 1963.B value of export consignment. sewing machines and electric fans known as panel items. Indian Standards Institution. one each at Bombay. and the adequacy of otherwise is adjudged by export panels consisting of representatives of the Export Inspection Council. These agencies work under the administrative and technical control of the Export Inspection Council.P.O. (ii) A crossed chaque/demand draft/I. Directorate General of Supples and Disposals. Cochin. bicycles. and the Export Inspection Council was also set up with effect from 1st January. To supplement the work of these agencies. only manufacturing units exercising adequate in-process quality control and allowed to export.In today’s sophisticated would market a product can move with any measure of success only if it is competitive enough in price and quality. items like diesel engines. the exporter should make out an application* in the prescribed from giving details of the shipment to the inspection agency. the government also established five Export Inspection Agencies. No Consignment of any notified commodity can be exported unless it is accompanied by a certificate issued by a recognised inspection agency or the article carries a recognised mark indicting that it conforms to the standard specifications. 1925 and the Textiles Committee Act. power driven pumps.O/ for the amount of inspection fee. small tools and hand tools. automobile spares. both government as well as private have been recognised under the Act for carrying out pr-shipment inspection of various goods. A large number of engineering items have been covered under compulsory pre-shipment inspection scheme. 1996 respectively. However. . A number of existing agencies. Similar arrangements for pre-shipment inspection. Calcutta.** (i) Commercial invoice giving evidence of the F. the basic procedure is outlined below: As soon as the goods are ready. Procedure and the details of pre-shipment inspection very according to the nature of export commodity. In the case of these items. Along with the application he should furnish the following documents. State Departments of Industries and representatives from the trade and industry in large as well as small scale sectors. 1964.
A copy of the export contract/order giving details of importers’ specifications and /or a sample approved by the importer.
The inspection agency will depute an Inspector to conduct the pre- shipment inspections at the exporter’s factory or were house. After the inspection is complete, and the consignment is passed, a certificate of inspection will be issued to the exporter. This certificate has to be presented by the exporter to the Export Department of the Custom House at the time of seeking customs clearance of export cargo. Since independence, there has been a conscious effort to improve the quality of our agriculture and industrial production in the country. This has, however, now assumed greater importance because of: (i) adverse balance of payments position; and (ii) Inadequate foreign aid. Moreover, we should not expect our customers abroad to buy from us goods which are of substandard quality and are relatively expensive. We should undertake to orient our production pattern so as to be able to supply goods which may exactly met the requirements of foreign buyers. It is not only the quality of the products that is important but the way they are packed. Packaging is of paramount importance in consumer goods items. Packaging and display, together with reliability of quality and continuity of supply, determine to a large extent the continued acceptability of the Indian products abroad. Export (Quality Control and Inspection) Act, 1963 To ensure a high quality of Indian goods, the government enacted a legislation known as the Export (Quality Control and Inspection) Act. 1963. Under this Act, the Government of India has been powers to: (i) notify commodities which shall be subject to quality control or inspection or both prior to export; (ii) specify the type of quality control or inspection which will be applied to the notified commodity; (iii) establish, adopt or recognise one or more standard specifications for a notified commodity; and (iv) Prohibit the export, in the course of international trade, of a notified commodity unless it is accompanied by a certificate that it satisfies the conditions relating to quality control or inspection or that it has affixed or applied to it a mark or seal recognised by the government indicating that it conforms to the standard specification applicable to it. EXPORT INSPECTION COUNCIL The Export Inspection Council Of India was set up by the Government of India under Section 3 of the Export (Quality Control and Inspection) Act, 1963, to provide for the sound development of export trade through quality control and pre-shipment inspection. The Council is an apex body for controlling the activities of the quality control and pre-shipment inspection of all the commodities meant for export. The main functions of the Council as assigned in the Act are (i) to advise the Central Government
regarding measures for enforcing quality control and inspection in respect of commodities intended for export and to draw programme therefore; (ii) to arrange preshipment inspection of notified commodities for export; and (iii) to perform such other activities as may be assigned under the Act for matters connected therein for quality control and inspection. In order to make the Act more effective, keeping in view of the experience gained, a comprehensive amendment was enacted by the Parliament through the Export (Quality Control and Inspection) Amendment Act,1984 which came into force on 2.7.1984. The amended Act Interalia provides for power to search and seizure of commodities, initiate adjudication proceeding against the erring manufactures/ exporters, cancellations/ with holding of the certificate of inspection already issued by the Inspection Agencies etc. The EIC is to advise the Indian Government on matters relating to pre-shipment inspection and quality control measures for export items. Considerable progress has been made by the EIC in: (a) defining the technical specifications for various products; (b) providing testing /survey facilities; and (c) Working out appropriate procedures. EIC is a statutory body. Eminent technologists and representatives of industry and trade, government departments and technical organisations are represented on it. As a result, the specialised knowledge, experience and technical knowledge of the various agencies in the country in the field of grading, standardisation and inspection have been pooled together under the overall coordinating role of the EIC to enable it to carry out its pre-shipment inspection programme in the most scientific manner. The secretarial of the Council is located in Calcutta, with regional offices at Bombay, Madras, Cochin and Delhi. In view of the existing inadequate testing facilities, it has been decided to set up “laboratory-cum test houses’ at important trade and industrial centres in India, Moreover, a number of existing agencies have been recoginsed for carrying out pre-shipment inspection In working out procedural details, the representative of industry and trade are consulted, and where the existing trade practices so require, the scheme is introduced initially on a voluntary basis and thereafter made compulsory. Process quality control in the light engineering industry has been made obligatory on the part of the manufactures. The secretariat of the EIC at Calcutta and its regional offices are manned with experienced technical officers and staff, who deal with all aspects- both technical and organisational- of quality control and pre-shipment inspection of exportable commodities. QUALTIY STANDARDS FOR EXPORTS In almost all the products, for which the pre-shipment inspection scheme has been introduced, great care has been taken to accept the buyer’s requirements, wherever known, as the basis of inspection. In many cases, where the buyer’s requirements are known through-an approved sample of, for example, footwear or handicrafts, inspection is carried out on the basis of the approved sample. However, for items involving safety, such as cables and conductors, only the national standards, either Indian or those of the importing country, have been adopted. In the case of commodities involving health hazard, such as fish and fishery products, statutory laws as applicable in the importing
country for these products, are adheard to. This particular approach has been found to be extremely practical and has helped the exporters to maintain the quality of their products. For adopting or establishing technical specifications, detailed discussions are held with the trade and industry and other organisations, such as the Indian Standards Institution and the Directorate of Marketing and Inspection. In certain cases, minimum specifications are laid down for a specific purpose only, as for example, n the case of deoiled rice bran, fumigation has been made compulsory for pre-shipment inspection. The procedural details of the pre-shipment inspection schemes, which have been introduced, have been worked in close collaboration and in consultation with the representative of trade and industry. While preparing these detailed procedures, the existing trade practices are taken into consideration, and the relevant Government departments, including the customs authorities, are consulted, The general procedures for inspection are thereafter notified in the form of inspection rules under the Export (Quality Control and Inspection) Act for comments form the public. These notifications, containing the proposals for pre-shipment inspection schemes, are also circulated among important foreign buyers through the Indian Embassies/Trade Missions to obtain their comments. Officers of the Export Inspection Council discuss the details of the schemes with the representatives of trade and industry in the light of the comments they receive. In many cases, where the existing trade practices so require, the scheme in the first instance is introduced on a voluntary basis for a period of about 3 to 6 months; and only thereafter it is made compulsory. All the pre-shipment inspection schemes are periodically reviewed to keep abreast of technological developments and to ensure continuous improvement in quality. Appellate penels have been set up for each commodity or group of commodities which have been brought under the compulsory pre-shipment inspection scheme so that any person. Who is aggrieved by the refusal of the inspection organisation to give a certificate of export-worthiness for his products, can appeal to the panel and get his grievance redressed. At present, the Export Council of India, the Indian Standards Institution, the Indian Statistical Institute, Calcutta, the National Productivity Council, the Indian Society of Quality Control and the Indian Institute of Foreign Trade are, by and large, responsible for generating an awareness of the problem of quality control. These organisations hold seminars, etc., and are, by and large, responsible for improvements in quality and for the formulation and implementation of standards. Certain legislative measures, which have helped in the production of quality goods, include the Prevention of Food Adulteration Act, the Drugs Act, and the Fruit Products Control Order promulgated under the Essential Commodities Act. Though these Acts do not have a direct bearing on exports, they do help in promoting quality consciousness among Indian manufactures. The Acts which are directly concerned with exports are the Export (Quality Control and Inspection) Act, 1963, the Textile Committee Act, the Certification of Goods under ISI Certification Marks Act and the Agriculture Produce (Grading and Marketing). Act. Since the enforcement of the export (Quality Control and Inspection) Act, 1963 definite improvements have taken place in the field of compulsory quality control and
The original copy of the certificate is valid for the use of the customs authorities. in which the details of the consignment are incorporated. food and agricultural products. As many as 1055 items of exportable commodities under various product groups such as engineering products. the competitiveness of the products is not affected in the international market. completed the various tasks assigned to it. sealing is done with decorative codes sigmoid seals. more and more commodities are being brought under the purview of compulsory quality control and preshipment inspection. and if the consignment is found to conform to the prescribed specification. it is endeavoured to prescribe the fees in such a manner that the scheme is self-supporting as far as possible and. etc. have been brought under the purview of compulsory quality control and pre-shipment inspection schemes. footwear and footwear and footwear components etc. coir and coir products. Whose details are given on the certificate is permitted or shipment. chemicals and allied products. a certificate of inspection is issued by the inspection agency. EXPORTWORTHY CERTIFICATES After carrying out the inspection. Those notified commodities. at the same time. for which iron hoops are used. who ensure that only the consignment. Commodities Covered under the Quality Control and Pre-shipment Inspection The Export (Quality Control and Inspection) Act empowers the Government to notify the commodities under the purview of compulsory quality control and preshipment inspection. For each consignment declared export worthy.5 per cent of the FOB value. jute and jute products. is met by the Government of India. For those items which do not involve any packing such as cast iron soil pipes. each pipe is marked in paint with a rubber stamp. such as the expenditure incurred on the establishment of an inspection office and laboratory facilities for running a new scheme. depending upon the mode of packing. . the packages of which bear a recongnised certification mark indicating conformity to notified standards. For cardboard packages. The notified commodities cannot be exported unless it is accompanied by a certificate of export worthiness from the Inspection Agencies recognised under the Act. mica. the testing to be carried out. . There types of seals are used. FEE FOR INSPECTION The expenses incurred on carrying out pre-shipment inspection are realised from the exporters by the levy of inspection fees. paper stickers are used. For wooden packages. The initial non-recurring expenditure. In working out the charges for inspection. each package in the consignment is sealed by the inspecting officers. the inspection fee varies from 0. Generally speaking. Within a period of 29 years of its coming into being. need not be accompanied by a certificate of inspection. lead seals are employed. For the purpose of making positive impact on the quality of the exportable goods and thereby generating the sense of confidence of the overseas market.1 per cent to 0. and for gunny packing.pre-shipment inspection. depending upon the nature of the inspection work involved and. the Export Inspection Council has.
these agencies have a network of 62 sub-officers located at important manufacturing /processing centres. In addition of these five Statutory Agencies. the export inspection agencies are also rendering necessary technical assistance to more and more units so s to qualify them under IPQC System. process control. The government is empowered to withdraw recognition from any agency if it is deemed to be necessary in the public interest. The Export Inspection Agencies assure the quality of the products covered under the compulsory quality control and pre-shipment inspection scheme by conducting inspection and testing of the products intended for export. each consignment is subject to inspection and testing by the inspection agency on the basis of statistical sampling plan. packaging. (iii) .Export Inspection Agencies In addition to the main officers of Export Inspection Agencies at Bombay. (ii) In process Quality Control (IPQC) (iii) Self Certification. the government have recognised 39 private Inspection Agencies and 10 Government agencies to supplement the work of fumigation and quality control certification for certain specified commodities under the Act. In-Process Quality Control (IPQC): Under the second system. raw materials and bought out components. the quality is built into the products by the manufacturing units themselves by exercising raw material and bought out component control and packaging control. ports and export points. While the system of approving units under IPQC has been simplified. These agencies have well equipped laboratories at all important centres for inspection and testing of the products offered by exporters/ manufactures for inspection for inspection. meteorological control. quality control laboratory. Cochin. Caluctta. The export Inspection Agencies also undertake voluntary inspections of those items which had not so far been brought under the ambit of the Act. The certification of inspection are issued by the inspection agency on the basis of adequacy of the above controls and after spot checks of consignment by the Agency where felt necessary. (i) Consignment inspection. the manufacturing units fulfilling the stringent norms prescribed for product quality. independent quality audit. Systems of Inspection The following three inspection systems are in operation at present for the purpose of ensuring quality of the product meant for exports. These inspections are normally done at the instance of the overseas buyers or the Indian exporters. Self Certification: Under self-certification system. house keeping and maintenance are allowed to issue certificates of inspection themselves. (i) (ii) Consignmentwise Inspection: Under the first system. aftersales service. design and development. Delhi and Madras.
The units approved under the IPQC system and Self-Certification Scheme are inspected periodically. technologists and workers engaged in the field of food and agriculture products. The various international bodies like united nations. (ii) electric laboratory.34 lakhs for strengthening the training programme in quality control of food products in India. The training centre at Madres has been approved by the Food and Agriculture Organisation (FAO) for food control training network in Asia. The project envisages the FAO would train master trainers in India who in turn will train supervisors. Through the curriculum of the training. the units are now approved for a period of three years for non-food items and for two years in respect of food items as against earlier practice of one year. the Export Inspection Council has set up a full-fledged training centre at Madras where training is imparted to the inspecting officers and the officers in the middle management. The FAO has agreed to finance to the tune of US $ 3. etc. the technical personnel involved in the production and quality control department in the trade at various levels are also given adequate training for maintenance of quality and periodic inspection of the product manufactured. . the Pilot Test House should be in a position to meet the needs of the engineering products already brought under the purview of compulsory quality control. The Test House has three major sectional laboratories namely (i) chemical laboratory. inspection and quality control prevalent in other countries. FAO has also sanctioned a project at an estimated cost of US $ 1. Pilot Test House A thrust has been made by shifting the regulatory function of the Exports Inspection Agency to quality development activities. the officers of the organisation are given training on the methodology and techniques of quality assurance including the latest techniques in standardistion.To encourage more units to adopt IPQC system and self-certification scheme. and pre-shipment inspection. the Council has been entrusted with a project of providing technical assistance to the cross section of the various industries for upgradation of quality of the product to compete successfully in the International Market. Industrial Development organisation. The scope of testing safety and health hazard items like domestic electric appliances. The Pilot Test House supposed to have 17 laboratories condensed into 13 sections for carrying out testing of the engineering products.25 lakhs through UNDP assistance. A part form training of officers of the organisation. switch gears. maintain product quality or to utilise such information towards improvement of the quality of the product. Training Facilities In order to achieve the overall objectives of the Export Development through quality control and inspection. To start with. and (iii) mechanical laboratory. has already been taken care of in the proposed laboratories. Food and Agricultural Organisation have deputed officers from different countries for training in the specialised field of quality control and inspection in different agricultural commodities in India. For this propose a Pilot Test House has been set up in Bombay with necessary infrastructural facilities of testing the product to the requirement of the international standards. Keeping this in background.
Latest Position of Quality Control as Per the New Exim Policy Announced on 31st March 1992 The Central government has launched in association with trade and industry. evaluated and used as a feed back system to remove the loopholes in the system of inspection and to improve the quality of the products. mentioned that quality control rigidities have been relased considerably as far as it goes to the established large scale units. however. rigid inspection is still there for the products of small scale units. Government though introduced a nation – wide programme on quality awareness in order to promote the concept of total quality management. some procedures have also been evolved to assess and evaluate complaints on quality received from buyers. by the regional standing committees at Bombay. Such inspection is carried out on the basis of the specifications mutually agreed to between the buyer and the seller.Procedures for Handling Complaints Apart form enforcing compulsory pre-shipment inspection and quality control. particularly for the small scale and handicraft sectors. It may however. The Central government will assist in the modernisation and upgradation of test houses and laboratories in order to bring them at per with international standards so that certification by such test houses and laboratories is recognised within the country and abroad. 1963. Voluntary Inspection In addition to carrying out compulsory quality control and pre-shipment inspection of commodities notified by the government under the Export (Quality Control) Inspection Act. they have to be quality wise more competitive if they wish to gain a foothold in international markets. Cochin. Complaints received on quality are investigated. Such manufactures are eligible for grant of special import licences. Logically. Caluctta. a major nation-wide campaign on quality awareness and is taking steps to bring Indian products to world standards. Madras and Delhi. the Export Inspection Council undertakes voluntary pre-shipment inspection at the specific requests received of foreign buyers or Indian exporters. The Central government have introduced a scheme to recognise and suitably reward manufacturers who have acquired the ISO 9000 (Series) or BIS 14000 (Series) or any other internationally recognised equivalent certification of quality. . so far government of India propose to encourage quality awareness programmes and assist state governments in kindling similar programmes in their respective states. However the response form trade and industry is not that encouraging on this score.
The scope of the duty exception scheme has been enlarged by introducing value based advanced licences besides the quantity based advance licences. credit facilities. quantitative restrictions and other regulating discretionary controls. cereals and a few other items. . and so on. The new policy eliminates licensing. 3. fertilizers. The number of canalized goods has been drastically reduced and canalization is confined to certain petroleum products. Various Recent Assistance Programmes Announced by the Central Government in July/August 1991 and in the Export Policy 1992-97 are – 1.Export Assistance In their efforts to diversity the export trade. All goods may now be freely imported and exported except for two small negative lists. trading houses and star trading houses and public sector undertakings are eligible for the facility of self certification under the Advance License Scheme against legal undertakings without any monetary limits. the allocation of indigenous raw materials. 4. Export house. This will give greater flexibility to the exporter to import and export goods within the overall value limits and without any quantitative restrictions except in the case of sensitive goods. manufactures are assisted by import licensing to meet the requirements of imported raw materials for production. railway priorities and freight concessions. 2. fiscal rebates. edible oils.
000 (series) certification of quality. trading houses or star trading houses. Only one application form each has been prescribed for exports and . Certain categories of exports and exporters will be eligible to receive special import licences. They are allowed to install not only own machinery but also machinery taken on lease. Domestic manufacturers of capital goods who may require to import components may also avail themselves of the EPCD Scheme at the concessional rate of customs duty at 15% of CIF value. export houses. All licences under duty exemption scheme are to be made transferable. 6. 7. The export procedure and documentation have been simplifies and are now easy to administer and save considerable time of the exporters. The Export Promotion Capital Goods (EPCG) Scheme has been liberalized and two windows are now available for import of capital goods at concessional rates of customs duty at 25% or 15% with corresponding export obligations.5. trading houses and star trading houses and manufactures who acquire ISO 9000 (series) or BIS 14. 8. Both new and second hand capital goods could be imported under the Scheme. These includes deemed exports. 9. Export Oriented Units (EOUs) and units in the Export Processing Zones (EPZs) have been given greater autonomy and flexibility. They could also export their production through export houses. The Registration-cum-Membership Certificate (RCMC) issued by Export Promotion Councils (EFCs) will be an essential requirement for any importer/exporter to avail of the benefits or concessions or to apply for any license.
variable PVC gang condenser. Two master documents in place of 25 earlier to be submitted to various agencies earlier is an important feature of the new documentation system. 10. in addition there are some items for which the existing drawback rates have been decreased. The items on which drawback duty stands withdrawn include cotton gloves. no drawback is admissible on the product exported under DEEC. 1992 the Government of India announced the duty drawback schedule in which it has approved 161 items to boost exports and fixed specific rates for seven new items. The new duty drawback rates continue the existing rates for 127 items including drugs. . spectacle frames made of cellulose acetate sheets. sports goods and electronic items. Upward revision of duty drawback rates is mainly attributed to the increase in the international prices for a number of imported inputs. As per the new five year export import policy. ethamutor tablets 400 mg. leather products. Therefore. the existing provision of providing the reduced rates of drawback for exporters availing of the duty exemption schemes. ceramic cartridges. as also for legal undertakings and bank guarantees as against several set of application forms earlier. have been discontinued. New export documentation system would save 50% time and cost on documentation. ceramic stylus. refills for vacuum flask with plastic outer cover.imports. partial convertibility of the rupee and general increase in prices during the past one year. On July 1.
13. 14. The new policy has scrapped the instrument of Exim Script introduced in August 1991 in favour of the partial convertibility of the rupee (PCR) in 1992 as a means for increasing export earnings. 12. Credit limits available to the export sector and banks have been substantially increased. as per latest “Liberalised Exchange Rate Management System” (LERMS) there would be two exchange rates for .11. Duty exemption schemes. The restriction on import of capital goods has been removed now. In the case of Indian rupee. A currency is convertible when it can be exchanged against any other currency. Henceforth. and that too through the banks. 17. it can be exchanged only against US dollar. duty drawback schemes and exemption from terminal excise duty have been extended to deemed exports. Now on some days dollar rules higher than on other days. 1991. 16. Restriction of 200% margin money for getting letter of credit for OGL (open general license) imports has been totally relaxed in specified thrust areas identified by the Commerce Ministry (Government of India). If imports covered by suppliers credit accompanied arrangement. Earlier atleast all exporters get the same amount for the dollar. there will be expeditious clearance. 15. To meet the import requirement particularly for raw material the Exim Bank has been allowed to given medium-term revolving line of credit. This partial convertibility has led to discrimination. The new policy allows the import of gold by Indians after a six months stay abroad. Import curbs on exporters have been relaxed on August 7.
18. export oriented unit (EOUs) and export processing . the margines would fall by over 5%. The facility of opening dollar accounts in India. The account holders will also be eligible for 80 HHC. The market rates being some 13% above the official rate. 19. worked out in each transaction as the major foreign exchange banks traded with each other or bought the remaining of 60% of exchange inflows. Dollar remittances credited in the account would be utilized to repay the hard currency loan obtained by the exporter on his own scheme for importing inputs and the surplus would be diverted to RBI’s central pool. and well below the 15% at which the RBO is expected to interview by making purchases in the market. It is expected that over a period of time Indian rupee will stabilize. The Commerce Ministry has decided to decentralize clearances of advance licences.foreign currency – the official rate fixed by the RBO at which 40% of foreign exchange inflows would have to be converted and a ‘market rate’. has been extended to other exporters too. for which a provision has already been made in the Finance Bill. However. according to one estimate exporting companies with an import requirement of over 10% could experience their margins decreasing and for high tech exporting companies with an import content 50%. hitherto granted to exporters of gem and jewellery and Maruti vehicles. The partial convertibility of the rupee has particularly affected those exporters who had to import a substantial part of their material requirements.
advance licences would be issued within 15 days in cases where input-output norms had been fixed and 45 days in other cases.5 crore to Rs. 5 crore. 5% instead of 10% for export houses/ trading houses and 10% instead of 15% for start trading houses/ The advance licensing route will remain open for exporters who wish to go through this route. 24. Importers of capital goods who have a supplier’s credit of one year or more and a buy back arrangement will henceforth get speedy clearances. 20.zones (EPZs) and the function is now being handed over to the commercial banks. 5 crore. For those traveling abroad. 2. the ”blanket permit” continues. The allowances of upto $300 per day during foreign travel is sanctioned. 23. 21. The scheme for grant of additional licences to export houses/ trading houses/ star trading houses has been abolished and in lieu of such additional licences these houses will be eligible for REP licences at lower rates. Another irritant of 15% tax as foreign travel stands withdrawn in May 1992 and the release of foreign exchange for travel has been made easier and more liberal. The ceiling limit on OGL has been raised from Rs. Thus advance licensing has been strengthened. It has been decided to extend the limit to 20% of last three years performance subject to a maximum of Rs. The government also released computer-compatible advance licences (which allow duty free imports required for exports) on September 4. . These licences will be available within 15 days of submission of application. 1991. 22.
.The REP rate for advance license exports is being increased from 10% of NEF to 20% of NFE. 25. 26. This should lead to an increase in production and upgradiation of technology. 27. electronic and high technology engineering equipment have been duly encouraged for exports. 28. there is no ceiling of the amount involved. components. certain agricultural goods. 29. Several items from the monopoly of public trading houses have been taken out. consumable and spares of EOU/EPZs units. The level of inventory holdings of imported raw materials is restricted to the levels of three months. Sixteen export and 20 import items have been decentralised. The recognised export houses whose turnover has crossed a certain limit have been allowed to open accounts in select foreign banks and avail themselves to finance their imports. This has been done with a view to impart competitive spirit. Two entries now thrown open to all exports are interesting. Marine products. Private parties have been allowed to establish warehouses within EOU/EPZ for stocking and sale of duty-free raw materials. If the equipment is bought out of foreign equity. Small scale industries and producers of life-saving drugs and equipment will continue to be eligible for supplement licences for Appendix 3 items. 30 Import of capital goods has been made easy. Implicit in this innovation is a daring start to the process of making the rupee a tradeable currency. One relates to railway passenger coaches and locomotives and the other is coke and coal.
34. restricted 62 items and canalised 10 items. The multiplicity of controlling agencies have been considerably reduced. fertilizers and cereals etc. Except for some petroleum products. permitted 46 items’ export with minimum regulations. duty drawback scheme and exemption from terminal excise duty have been extended to deemed exports. 36. Import of 3 items banned. Benefits of duty exemption scheme. . edible oils. 33. This will give greater flexibility to the exporter to export and import goods. 37. The scope of duty exemption schemes has been enlarged by introducing value-based advance licensing besides. 32. The quantity-based advance license. The functions of CCI & E are being reoriented. all others items have now been decanalised. 35. 31 Export-import controls have been made easy. The office of the CCI & E is to be redesignated as Directorate General of International Trade. there is no ceiling of the amount involved.An entrepreneur can bring in plant and equipment which are readily available in India. If the equipment is bought out of foreign equity. The pruned negative list of exports banned 7 items. Pre-shipment inspection scheme has been abolished for export houses and large scale units. An entrepreneur can bring in plant and equipment which are readily available in India.. The deemed exports have been accorded favourable treatment. 68 items restricted and 8 items canalised.
41. including remittance of commissions. Now an exporter can borrow FOREX designated export credit at 6. The banks would now be provided export credit refinance to the extent of 60% or the increase in outstanding export credit over the monthly average level of 1988-89 upto the monthly average level of 1989-90 plus 125% (as against 100% .8%. 39.5% and medium term deferred credit at 7. The RBI has modified the export credit refinance formula to provide added incentives for extending export credit. Export credit in Indian rupees carries interest as high as 15%. The Borad of trade has also been reconstituted. 38. Funds in such foreign currency accounts could be utilised for all purposes. exporters are permitted to retain in a a bank in India under the new liberalised exchange foreign currency with rate management system (LERMS). 40. Exporters should take advantage of the low rate of interest. More then 90% of the trade regulations have been removed and the remaining regulations would be gradually done away with.The role of CCI & E will be of promoter of exports instead of controller of imports and exports. Fifteen per cent of receipts. The retention upto 15% of the receipts have to be out of the stipulated 60% convertible foreign exchange under free market rates.
Export Processing Zones (EPAs): The Government of India introduced EPZs with an objective to increase production base of exportable commodities and goods. including banks outside India after fulfilling the following conditions: There should not be any direct or indirect outgo of foreign exchang. 20 crore to Rs. 1991. As per the latest RBI directive banks may grant loans and overdrafts to persons. which are not less in value then the amount of the guarantee. This modified two tier formula has been implemented in two stages. 42 The EXIM Bank’s Power for clearance of proposals for project exports have been enhanced from Rs. the guarantor should have assets in India. the loan should be fully secured by primary security in the form of hypothecation/mortgage of asset by Indian borrower. Santacruz .hitherto) of the increase over the monthly average level of outstanding export credit in 1989-90. regulations relating to normal margin. This has been done to bring about increase in exports. There are six EPZs at KANDLA. 43. The increase in export credit interest rates together with the liberalisation of the export credit refinance formula are major incentives to banks to provide export credit. interest rates etc. as stipulated by the RBI from time to time should be complied with. 30 crores. The second tier of export credit refinance was raised from 100% to 110% form November 1991 and from 110% to 125% from December 28. firms and companies.
importation is possible without prior licensing. spares. Besides foreign investment is welcome and conditions for investment are more liberal than in the domestic tariff area. .(Bombay). (a) Rejects upto 5% or such percentages may be fixed by the Board of approval. Madras. 100% Export Oriented Units (EOUs) This scheme was introduced on 31st December 1980 with the objective of generating additional production capacity for exports. All units in EPZs are eligible for a tax holiday for a period of 5 years. However. components. it is obligatory on the exporting units to export 100% of their production. Rejects may be sold in the Domestic Tariff Area (DTA). EOUs are expected to export their entire production except. Tax holiday could be availed for any continuous block of 5 years within 8 years of commencement of production. The 100% EOUs are required to undertake manufacture under bond and export for a period of 10 years ordinarily and 5 years in the case of products having high degree of technological change. subject to payment of appropriate duties. Supplies can be obtained in these zones for further production without payment of excise duty or import duty. Such units are allowed import of machinery. Cochin and Noida (near new oriented multiproduct industrial units. raw materials and consumables free of duty. Falta (west Bengal). Santacruz (Bombay) EPZ is a zone established for 100% EOUs manufacturing electronic equipments and components.
(b) Exemptions from payment of central excise duty on capital goods.(b) 25% of the production in value terms may be sold in the DTA when the use of indigenous input is more then 30% in value terms. When the use of such inputs is less than 30%. The benefits stated above shall be available provided to goods supplied are manufactured in the country and the supplies are against a letter of authority issued by the Development Commissioner. on the supplier. (a) Refund of terminal excise duty. Unlike EPZs. central sales tax and duty draw back. (c) Discharge of export obligation. 50% for the second year and 25% for third year if production had . or even MRTP/FERA. components and raw materials supplied under this paragraph. EOUs can be located any where in India. be of any size. Benefits for EPZ/EOU Units (i) Concessional Rent: The units set up in the EPZs will be eligible for concessional rent for lease of industrial plots and standard design factory (SDF) buildings/sheds allotted for the first there years at the following rates: (ii) For Plots: The concession will be 75% for the first year. Benefits for supplies from the DTA Supplies form the DTA to EOUs/EPZs untis will be regarded as “Deemed Exports” and will be eligible for the following benefits. a new branch of an existing factory or an expansion of an existing factory. DTA sale entitlement shall not exceed 15% in value terms. if any. a new factory.
(v) Clubbing of NFE: Net Foreign Exchange (NEF) earned by an EOU/EPZ units can be clubbed with the NEF of its parent/associate company in the DTA for the purpose of according export house. Inter-unit transfer (viii) Transfer of manufactured goods may be permitted by the Development Commissioner form one EPZ unit to another EPZ . (iv) Tax Holiday: EOUs and EPZ units will be exempted from payment of corporate income tax for a block of five years in the first eight years of operation. trading house or star trading house status for the latter. and (vii) 100% Foreign Equity: Foreign equity upto 100% is permissible in the case of EOUs and EPZ units.commenced in the first year or the second year. (iii) For SDF buildings/sheds: The concession will be 50% for the first year 40% for the second year if production had commenced in the first year. (vi) IPRS: The International Price Reimbursement Scheme for supply of iron and steel will be available to EOUs and EPZ units. The concession will not be available for the third year if production had not commenced by the end of the second year. The concession will not be available if production had not commenced by the end of the first year. The Concession will be 25% for the third year if production had commenced in the first year.
Such goods may also be transferred to an Actual User in the DTA with the permission of the Development Commissioner on payment of applicable duties. Disposal of scrap . it may re-export them with the permission of the Development Commissioner. fixation of input and output norms. Sale of Imported Materials (xi) In case an EOU/EPZ unit is unable. to utilise the imported goods. (xii) Imported machinery/ capital goods that have become obsolete may be disposed of.unit. for valid reasons. (ix) Goods imported by an EOU/EPZ unit may be transferred or given on loan to another EOU/EPZ unit with the permission of the Development Commissioner. subject to payment of customs duties on the depreciated value thereof. one EPZ unit to a EOU. Subcontracting (x) The EOU/EPZ units may be permitted to sub-contract part of their production for job work to units in the DTA on a case to case basis Requests in this regard will be considered by the concerned Customs authorities on the basis of factors such as feasibility of bonding. one EOU to an EPZ unit or form one EOU to another EOU. and furnishing of undertakings/bonds by the concerned units. subject to clearance from Customers with reference to valuation etc.
Period of Bonding (xv) The bonding period for units under the EOU Scheme shall be 10 years. Private bonded warehouses (xiv) Private bonded warehouses may be permitted to be set up in EPZs for stock and sale of duty-free raw materials. Percentage of such scrap/waste/ remnants shall be fixed by the Board keeping in view the norms specified by a public Notice issued in this behalf by the Chief Controller of Imports and Exports. Such debonding . to EOUs and EPZ untis subject to the following conditions: (a) The private bonded warehouse shall be located within the EPZ. it shall be open to the unit to continue under the scheme or opt out of the scheme. permit sale in the DTA of scrap/ waste/ remnants arising out of production process on payment of applicable duties and taxes. and (c) The items imported by the private bonded warehouses shall not be permitted to be sold in the DTA. components etc. subject to guidelines laid down by the BOA in this behalf. The period may be reduced to 5 years by the BOA in case of products liable to rapid technological change. On completion of the bonding period.(xiii) The Development Commissioner may.. (b) Imports for such private bonded warehouses shall be made only against specific licences. No license shall be given to import items which are not required by the consuming untis.
Such debonding shall be subject to such penalty as may be imposed and levy of the following duties: (a) Customers duty on capital goods at depreciated value but at rates prevalent on the dates of import. Value addition “Value Addition” shall be expressed as a percentage and shall be calculated according to the following formula: VA = A −B × 100. royalty. A is the FOB value realised by the EOU/EPZ unit.shall. be subject to the industrial policy in force at the time the option is exercised. however. (b) Customers duty on unused raw materials and components on the value on the dates of import and at rates in force on the dates of clearance. Where A VA is Value Addition. (xvi) On the Satisfaction of the BOA. value addition or other requirements. machinary and equipment already installed. . Conversion (xvii) Existing DTA units may also apply for conversion into an EOU but no concession in duties and taxes would be available under the scheme for plant. EOU/EPZ units may be depended on their inability to achieve export obligation. and B is the sum total of the CIF value of all imported inputs the value of all payments made in foreign exchange by way of commission.
Consumables. canters. Foreign equity covers the foreign exchange needs for import of capital goods with the proviso that the plant and machinery to be imported must be new and not second-hand. materials. NRIs and OCBs predominantly owned by them permitted to invest upto 100 per cent foreign equity in high priority industries with full benefits or repatriation of capital and income accrued. parts and packing Investment Policy for Non-Resident Indians and Overseas Corporate Bodies Liberalised The following are the highlights of the revised policy and procedure for investment by Non-Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs): 1. . Inputs mean raw materials. hospitals. shipping. intermediates. export-oriented deep-sea fishing industry and oil exploration services with full repatriation benefits.fees or any other charges. Permission for NRIs and OCBs equity holding up to 100 per cent granted in hotels. 2. diagnostics. 3. The proposed NRI and OCB project must be located within 25 Km form he periphery of the standard urban area limits of a city with a population of a million. tourism-related industry. 4. and the value of all indigenous inputs purchased by the EOU/EPZ units. Components.
Incentives granted at one point cases to be incentives at another. 7. we now turn to the related function of physical distribution. provided the items of import not covered under Appendix I. the actual movement and storage of products until they reach the final consumer.5. Existing scheme of 100 per cent NRI investment in 100 per cent EOUs (export-oriented units) as also the scheme for revival of sick units by NRIs to continue. The revised procedures demands the NRI and OCB proposal to be a composite one including detailed information on the capital goods to be imported for the project. i. 6.. When this is done the debate on incentives/assistance will weaken. Part A of the Exim Policy (1990-93). This chapter includes discussions of . Conclusion: As regards export incentives there is no beginning and no end in this in this matter. No indigenous clearance required for import of capital goods which are fully financed by NRIs out of their own resources abroad. A true incentive would be to make rupee fully convertible. Lesson 16Physical Distribution Transportation.e. Packaging and Marine Insurance for Exports Having examined the nature of international trade channels.
order processing. Bowersox offers a simplified definition stressing the business activities involved to satisfy customer needs for an assortment of goods. inventory control. USA. “Physical distribution consists of those business activities con. plant and warehouse site selection. processes orders.cerned with transporting finished inventory and/or raw material assortments that they arrive at the designated place. These activities include transportation. when needed. handling. Functions that traditionally ware delegated to freight forwarders and other third parties may be performed within the firm as it plans logistical support for its affiliates. . materials. performs the transportation and storage functions. market forecasting. The National Council of Physical Distribution Management. physical distribution is viewed as an integrated system that determines what goods are needed in specific locations.” In this definition. Anyone inspired to conduct international commerce should at least be aware of these major considerations. PHYSICAL DISTRIBUTION DEFINED Often physical distribution is seen merely as transpiration and the related area of storage. and maintains and effective information system. The export manger has two problems in working with the distribution system in an export market: (a) Transportation for the movement of goods. and in usable condition.transportation. recognized the important components when it defined physical distribution as: “…… the broad range of activities concerned with the efficient movement of finished products from the end of the production line to the consumer and in cases includes the movements of raw materials from the source of supply to the beginning of the production line. protective pack. and customer service. This chapter also includes a description of marine insurance because of its close relationship to the physical distribution function. Since the contents of this chapter are drawn from complex and technical subjects. and (b) Marketing channels to be used to reach the foreign buyers. Our objective is to provide a sketch of the area’s main concepts. Actually the physical distribution function includes a broader array of activities needed to provide efficient movement of finished products and raw materials from the factory to the final user.” The growth and development of exporters an their need for worldwide logistical support provide many opportunities for integrating the physical distribution function to improve service levels and reduce costs.aging. warehousing. The firm’s marketers and distribution specialists can work together to control distribution costs while still providing the level of customer service required to compete in the world market. Computerized communication systems facilitate document processing and enable the firm to maintain better control over the physical distribution system. a group devoted to the advancement and study of logistics. This is the definition we will use in this chapter. packing and warehousing needed for international movement of goods.
Carrying Inventory Proper level of inventory so that a balance is maintained between customer service and inventory cost. (b) Number of plants and their locations. Materials Handing Provisions for internal movement of products within the plant and warehouse facilities. Size of the Consignment (a) Minimum size of the pack. (b) Quantities to be shipped. (b) Breaking bulk shipments into smaller sizes. 3. size and geographic placement of the warehouse. (c) Preparing products for re-shipment. (c) The type of the packing to the used. Plant Location (a) Determining the number. Transportation (a) The route of the shipment to be used. Any exporter can make a particular sale because the transportation system he uses is speedy and reliable and because he can get this product to the foreign consumer when and where it is wanted at comparatively reasonable cost. 6. Transportation costs are lowered when technological improvements are made use of. because increased profits can be generated directly either through reduced costs or increased sales. . (c) Marine/air insurance. In addition. 5. The transport costs constitute a big proportion of the total cost of the merchandise.The price of the end product is heavily influenced by the way the physical product moved. (d) Markings to be used on the container. The cost of export distribution is greater then domestic distribution because involvement of additional packing and creating are often necessary and the intermediaries become necessary because the exporter does not have adequate export know-how. 2. Decision Areas of Physical Distribution The exporter should take the decisions for physical distribution in the following areas: 1. insurance for transportation may be necessary to reduce the quantum of risk. 4. (b) Mode of transportation to be used. Storage (a) Assembling.
(iii) Rail. (b) Correct documentation. However. The importance of other types depends on many other factors. ship brokers. Order Processing and Documentation (a) Procedures must be established to process orders.e. customhouse brokers. Speed of delivery and lead time. insurance firms. airlines. etc. Air transport offers the advantage of speed and dependability of delivery. Stock-holding requirements. Regularity of movement. (ii) Quality of the mode of transport. There is also an array of governmental agencies. but also the supporting terminal operators. first. and engineering and manufacturing concerns. that oversee the operations of the industry and . (iv) Truck. Nature of goods. freight forwarders. The location of port of shipment and port of entry. insurances and warehousing. Shipping the most popular mode of exports. the total cost by air turns out to be considerably high. The extent to which the export marketing manager must plan depends upon the terms of sales. financial houses.perishable or not. Packaging requirements and dispatch facilities. (ii) Air. the products must be moved both between nations and within overseas market. and truckers). The export marketing main must know the relative advantages of all the modes of transportation available to him – particularly for the markets in which he is doing business or in which he is interested in doing business. The basic types of mode of transportation available to exporter are: (i) Shipping. Factors Influencing Distribution Cost The rise of fall in distribution costs in influenced to a very large extent by the following factors: (i) Quality of customer service. Part I TRANSPORTAION The transportation industry is a complex of institution that includes not only the carriers themselves (the ocean shipping companies.7. and Methods of handling. The physical distribution system of exports is two-phased. i. The main factors which directly influence distribution costs include the following: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) The size of the consignment. and (iii) Quality of purchasing.
Buyers of industrial goods require assurance that supplies. Contiguous markets frequently can be efficiently serviced by truck or rail as might be the case for US manufactures shipping to Canada or Mexico. ELEMENTS OF THE TRANSPORTATION SYSTEM Physical distribution managers have an array of alternative methods or modes of transportation for the movement of goods across borders and within countries. High-value items such as jewellery may be shipped by a variety of methods. and land transportation may be available for use singly or in combination. low-unit-value items and basic commodities may not be capable of economically using some forms. Bangladesh or Nepal. trade-offs must be made among these various distribution functions in order to obtain the lowest total cost for the system as a whole. except for special shipments. (1) Market Location The market location affects the types of transportation that are available. In order to achieve efficient movement of goods at low cost. For both retailers and industrial buyers. The manager’s choice is influenced by the specific product and market characteristics. however. the manger of physical distribution needs to evaluate the viable alternatives. such as air transport. inventory. air. The location and size of the market and its physical facilities may limits its access by ocean freight. component parts. This analysis involves investigation of not only transportation rate structures. or for most European producers selling to other continental companies or Indian companies might sell to Pakistan. fresh flowers and perishable foods may require either fast shipment or special storage facilities. packing. Choice Criteria . Various forms of sea. bulky. Large. and communication. Changes in any of these institutions or their foreign counterparts have ramifications on the rest of the industry and affect the service provided to the shipper of goods in international trade. quick access to nearby inventories may be important in planning their own inventory levels and assortments. Retailers also need assurance that products will be available in saleable condition in time to conform the scheduled promotions. but also the effect of transportation on the other distribution costs: warehousing. Some of the possible trade-offs within the physical distribution system itself will become apparent in subsequent sections. The performance of the distribution functions can affect a company’s sales. Air transportation is increasingly making markets such as Japan and Brezil quickly which are accessible for products that can economically employ that mode. On the other hand.control the rates charged and services provided. the trade-offs also involve broader marketing considerations. Frequently. and raw materials will be available to meet projected production schedules. but their margins permit movement by high cost rapid transportation and at less risk of theft.
i. the movement process.. (c) Dependability: Dependability of delivery and safe carriage of goods can easily be as important as cost and speed in the transportation decision. The higher freight rates associated with rapid transportation lead to high transportation costs per ton per kilometer. Some arrange for pickup and delivery. but it is also significant for other products because of its effect on inventory. The rate structure for international movement is complex and cost comparisons need to be made for specific shipments based on applicable rates for the product and shipping and receiving points. permit diversion of freight to a second market. thereby lowering the inventory that a buyer must carry. Of prime importance to the buyer is the assurance that goods will be available when promised and in saleable or usable condition. for example. The buyer who can depend on delivery schedules can plan promotions and production. cost. Rapid transportation enables a firm to maintain a minimum inventory in float. Rapid transportation enables a firm to maintain a minimum inventory. dependability of performance. the use of rapid transportation modes results in a high transportation cost. array of transportation methods for distributing their products between and . the reduction of float lowers the firm’s investment while still providing satisfactory service.Achievement of the firm’s physical distribution objectives requires knowledge of all available alternatives. Schedules to achieve maximum sales impact and coordination of production and marketing. This high transportation cost may be partially or wholly offset by savings in packing. each has developed a variety of service options to attract customers. It makes possible rapid filling of customer orders. (d) Services: Each of the transportation modes has its own unique characteristics. or provide other services to meet a customer’s requirements. (b) Cost: Unfortunately. (a) Speed: Rapid transportation may be obvious factors for perishable products. or other costs. managers evaluate the alternatives on several criteria in addition to the interaction noted above. A firm’s foreign freight forwarder can aid shippers in the selection of the most advantageous services. MODERN DEVELOPMENTS IN TRANSPORTAION International marketing managers must choose from a complex. When selecting an appropriate mode of transportation and the particular carrier to be used. often bewildering. does not require the packing needed to protect ocean freight and also will reduce the time in transit. In addition. allow shipments to move. Rapid delivery shortens the period for which demand forecasts must be made.e. Since inventory carrying charges are a significant cost factor. Dependability of transportation aids the seller in making realistic delivery promises and aids the buyer by permitting close scheduling with attendant inventory and warehouse savings. Air freight. and services. inventory. Commonly used criteria include consideration of each method of transportation on the basis of speed. Speed also tends to lesson the losses due to spoilage and theft.
The containerships also effect the documentation and customs procedures as well as insurance risks and rate structures of the industry because the goods are consolidated in large containers and not readily available for inspection of individual items. Modern technology has produced the huge supertankers. and by changing trade patterns to which the transportation agencies adapt. the petroleum industry began using larger tankers as a means of reducing transportation . The Scandinavian countries.within countries. The increasing concentration of activity in these ports often serve new areas. the wide-bellied jets for air freight service. The container may be filled at the shipping point. the ultra large crude carriers. (i) Sea Transpirations: The modern containership is a prime example of advances in ocean shipping. Types of Transpirations. in turn. The increasing concentration of activity in these ports has been accompanied by improved rail and road linkages between the ports and interior areas previously served by other ports. and the routes have been adjusted so that the larger ports often serve new areas. by changes in the infrastructure of the countries. Containership are efficient carriers of large amounts of merchandise and have replaced smaller general cargo ships on many trade routes. the container are designed for repeated use by several modes of transportation. the new technology has influenced all segments of the industry. and /or planes. Other developments in ocean freight which have provided more efficiency or better service include the gigantic super tankers. carried by truck to the railway line.000 deadweight tons or larger. Furthermore. has meant that many shipping firms have been forced to replace their older ships to remain competitive. placed on a railcar. and containerships. The containers. Also some ports which ware formerly visited by the smaller ships are no longer able to provide the volume needed for efficient operation of the large containerships. and transported to the dock where it is loaded aboard ship. the largest of which. lighter abroad ship (LASH) vessels. all without intermediate loading or unloading. in addition. Following the closing of the Suez Canal. The institutional structure of the transportation industry itself changed to adapt to these environmental changes and the shifting economics of the industry. The containership is specially designed to transport shipments in relatively large boxes or containers. governments have improved roads and port facilities as part of their economic development programmes. have found that only a few of their ports have been able to support frequent and regular containership service. for example. This. Thus. They provide more efficient handling and faster turnaround times in the ports so that a smaller number of them can provide the same shipping capacity of the smaller vessels. Not only are there a larger number of alternatives that may be available at a given time. These containers permit the consolidation of items into standard-sized units for efficient handling and storage abroad ship. ships. In addition. and improved trucking facilities for land travel. are 400. but the established patterns of transportation are continually being challenged and adjusted by new technology. have aided the development of intermodal transport system which integrate the use of trucks.
The LASH vessels further aid in loading the unloading at ports where the formation of the costs and ports requires unloading by lighter equipment rather than through direct access to the piers and wharves. . Also. The carriers cut speed on their vessels to combat rising fuel costs. and automobiles. The speed of delivery may. Roll on/roll off vessels have also been used for special transportation problems such as the carrying of helicopters from the United states to Europe and the shipment of entire fivecar trains for Amtrak from France to the United States. Because of the speed factor. and at the foreign port. delivery. the air-carriers have long provided a viable alternative for some producers. by providing door-to-door service at lower costs and greater security to the merchandise. The ability of the planes to carry containers may increase the ability of the air carriers to compete in the intermodal system to further increase the value to shippers.costs. These ships required sophisticated equipment and port facilities. The high fixed costs of operating these ships require that they be in rather continuous usage. shippers could expect fewer sailings and calls at fewer ports. Often. The nose-loading feature of the 747 makes possible the use of efficient loading equipment and the loading of containers and oversized cargo that could not previously be handled. handling. They also exposed the oil industry to criticism by environmentalist who feared the catastrophic effect of a gigantic oil spill in the event of a wreck. Lighter aboard ship vessels (LASH) are designed so that entire barge. The efficiency of the newer ships led to the development of extremely large carriers that ware several times the size of earlier ones. Special vessels have been designed for the requirements of products such as liquid natural gas. Slowdowns in the shipment of oil in 1975 and due to Iraq and allied forces war in 1991 led to inactivity of these vessels at great cost to the owners. that are perishable or otherwise could profit form the great speed of aircraft. since the large ships are cost efficient only when full y used. New bulk carriers and roll on/roll off (Ro-Ro) vessels allow the shipper to transport the entire trailer or other trucks and vehicles on their own wheels for easy loading and unloading. thereby producing income earlier. sent the barge to another river location removed from the port area. Analyses of company distribution systems have sometimes shown that the higher costs of air transportation may be partially or totally off set by savings in packing. several development impacted unfavorably on the international firm using ocean shipping. the decision to use air transportation may reflect the service features of air carriage rather than costs. for example. The high-speed jet fleets of the Indian and foreign carriers have added to the industry’s capacity.all of this without multiple handling of the merchandise. especially those shipping products with a high value relative to their weight. enable the customer who purchases industrial equipment to get into production at a much earlier time than when slower forms for transportation are used. In 1980. however. air carriers have been strong proponents of the total cost approach of physical distribution. and related costs. thereby extending delivery schedules for the shipper with higher inventories and accompanying interest costs. documentation. wine. inventory. (ii) Air Transportation: Although ocean freight accounts for the largest percentage of the tonnage of goods moved in international trade to and form India.
Some of these reasons also figure in the development of land transpiration in India and elsewhere. This TIR carnet procedure has greatly simplified the movement of goods by truck. The so.4 per cent of the companies own 15 or more vehicles and account for 28 per cent of all trucks. and have sought to extend their services to a wider range of merchandise. trucks carried almost 89 percent of the tonnage of inland traffic in 1970 compared to only 75 per cent in 1960. These combinations have sometimes reslueted in a different routing for trade between widely separated points. Among the problems faced by European truckers are the varying regulations on permitted weight and length of units among the countries. and the development of the Japanese automobile industry. In Japan. however. Container shipments from Japan to Europe may leave Japan by sea. The picture may be changing. (iii) Land Transportation: While ocean and air transportation have provided some of the more glamorous applications of technology. as the European trucking industry is now consolidating and forming larger companies to improve efficiency. improved roads. even through faced with competition from the railways and inland shipping alternatives.coast Port. A truck and its contents might be subject to several inspection and to the payment of duties or subjected to considerable paper work To cope with this. The European trucking industry has provided shippers with flexibility that is often found when an industry is characterized by a large number of small firms. West. trucking has been significant in the fast movement of non-bulky goods.Innovations in the air cargo industry have not only included advanced airplane technology. Intermodal Development: Various types of transportation have been combined to provide either low costs or improved transit time. and be placed abroad a container unit train which carriers the goods to the East of cost port where they are again loaded aboard a ship for Europe. for example. emphasis on rapid and punctual delivery.called land bridges provide an interesting example of such intermodal transportation. About 3. land transportation has also undergone a transformation. New highways and the increased number of trucks available have improved the service of land carriers in many countries so that they now carry an increasing percentage of the inland freight volume. arrive at a U. A related problem has been the inspections required to move goods across several country borders. Several reasons account for this growth in Japan: an increased demand for freight service due to the growth of the economy. for example. the TIR (Transport Internationals Routiers) Convention developed a system whereby vehicles that have met certain conditions and achieved prior approval can carry merchandise across borders without examination at each. Among these have been both sea/land combinations and air/land combinations. the strained capacity of the Japanese railways. In Holland. added more fights to the schedules. especially since it is economical to use trucks for cross-border hauling within the EEC.S. . The carriers have also introduced more efficient ground handing equipment. 58 per cent of the “for hire” firms own two or less vehicles. but also improved airport facilities. In Europe.
Often the ships of the liner companies are newer and operate through an extensive network of agents. but this move has been resisted by the industrialized countries. Britain’s Overseas Container Ltd. Use of the landbridge may result in a savings of six or seven days in travel time between Europe and Japan where it is said to undercut the allwater route rates by 10 to 50 per cent. In practice the forwarder also may provide packing facility and act as a customhouse broker to facilitate the movement of goods through customs procedures. Shipping companies are common cariers. and loading of the vessel or plane. The two UNCTAD proposals attempt to secure a larger portion of the trade for lesser developed country shipping. In 1980. Under a liner code adopted by UNCTED in 1947. Bills of lading and airway bills are prepared and arrangements made for marine insurance if the shipper does not have cargo policy. unloading at the port of export. a country is entitled to demand that 40 per cent of its exports that go by liner by carried in its own ships. The forwarder consolidates small shipment into larger ones and arranges for transportation from the exporter to the destination. follows the shipments to see that they move on the required routs. Tramp ships operate on characters wherever they can get cargo. and arranges for switching. However. and it may reserve up to 40 per cent additionally for vessels of the importing country. INTERNATIONAL FREIGHT FORWARDERS The international freight forwarder is in business to facilitate export and import shipments. a shipper usually requires the use of only a portion of the hold of a vessel. estimated that the TSR land bridge carried almost 30 per cent of the traffic bound east to Japan. including those consular invoices and other documents required by the importing country. Japan-bound shipments form Europe may be landed at either the East or Gulf coast for movement to Japan.Similarly. shipping companies also charter ships and operate them in common carrier service. the shipper usually engages the entire vessel and expects to fill it with shipment Shipping companies often are divided between liner companies and tramps. more often move on chartered ships. which in the second case. and purchases with needed shipping notices. The main difference between the two is that the liner company advertises a scheduled service between ports. repacking. The forwarder’s export knowledge is available to assist the firm on general traffic management and export procedures. The United Nations Conference on Trade and Development (UNCTAD) has proposed phasing out the flags of convenience. both dry and liquid. Shipments of bulk cargo. while the charted vessels used by shippers are private carriers. up from 4. The forwarder prepares the necessary government documents for shipment. They generally serve a large number of shippers than the tramp vessel and carry a wider range of higher value goods. In the first case. The forwarder also may furnish banks. SHIPPING COMPANIES Shipment of general cargo move on the vessels of shipping companies.4 per cent in 1973. shippers. Both large and small firms find the forwarder useful. Freight Rate Quotations .
will blame the exporter. Shipping Documents Shipping documents in international marketing include: (a) Commercial documents employed by shipping forwarding and insurance companies. the only criterion used is that goods shall be packed so that they can leave the works in a satisfactory condition. the exporter more than the buyer. Bad or insufficient packing affects both the exporter and the buyer and probably. transportation.. Packing and packaging require serious consideration where goods are to be transported or stored in a warehouse either for transshipment or distribution.i. The aim should be to deliver the goods to the customers as cheaply as possible and when he wants them. the exporter will have difficulty in getting clean bills of lading. Packaging refers to the job of providing specialised containers for the packing of goods. in a good and usable condition. Only two classes of exporters do not know the precepts of goods export packing. Distinction Between Packing and Packaging There is distinction between the terms packing and packaging. before the vessel arrives. (b) Those required by governments. if there is an undue number of claims: Moreover. A part form the loss of customers.” Part – II PACKING AND PACKAGING FOR EXPORT The aim of every exporter must be to ensure that the goods arrive safely in the hands of the consumer. he may find it difficult to persuabe the shipping company to accept his goods at all. The type of packaging is dependent to some extent upon the type and mode of transport used. Packing is used for the general operation of putting goods into containers for shipment and storage. Whilst the payment of the insurance claim may satisfy the buyer financially. he will probably lose the goodwill of his customers and.e. They are: (a) Beginners in export. The details may please be referred to in the chapter “Documents for exports. The fact that the goods are fully insured is in excuse for not bothering to check whether damage or pilferage occurs during the transit. . in consequences.Freight rate quotations can be obtained from a freight forwarder or from office of a shipping company. and if his packaging are very bad. the exporter will suffer because the marine insurance company will increase its premium for him. without regard to their condition on arrival. in the long run. If he receives only a part of what he has handed in a saleable condition. Often. and (b) Those who do not care to establish a permanent export business. The buyer orders the goods because he can sell them. it will not satisfy him mentally.
(iii) To save expense by use of economical packing materials. General safeguard against pilferage is to pack the goods secularly and to put on the case nothing that will announce the character of its contents to the intending pilferer. what conditions it must withstand during the voyage. Only ingenuity and engineering applied to that end will produce the most satisfactory results. Ocean shipping space is expensive and unless care is taken to ecnomise on this space. The basic rules to insure goods export packing are: (a) He should ask from the customers for complete instructions: how to pack his order. whether the packing will affect the duties to be levied on the shipment. Have found that certain products can be successfully shipped overseas in these carons. will quickly and surely culminate and difficult that packing might present. As matter of fact.Objectives of Sound Export Packing These are (i) To insure the safe arrival of goods at destination. (b) He should institute test in the factory to determine the strength of the various styles of packing and should ask the customer to fill out a slip reporting the condition in which the goods are received by him. Such a system. with the results tabulated and kept on office record cards. (d) The climate of the place of delivery. (v) To insure the lowest possible customs duties. (ii) To economise on the shipping space. Factors to be Considered in Export Packing These are: . He should then supplement this with advice form the shipping agents and from information gathered from official reports. The type of packing which will deliver the commodity in a good condition to the foreign customer will vary with: (a) The product. it can often be as costly to the exporter as the space actually occupied by the merchandise itself. (iv) To prevent pilferage. and some exporters. It sin not always necessary or even desirable to use heavy materials or to use first grade materials. Only experience and experimentation will prove or enable the exporter to develop the type of container or packing that is best suited to the particular conditions. great advances have been made in the use of heavy paper cartons. (c) The length of journey. (e) Heat and moisture to which the goods are subjected during the voyage. (b) The port of destination.
such as machines of various types. Hardware can be well protected by wrapping each unit individually in water proof paper. In order to guard against this risk. or other container with waterproof paper. An extreme example is the careful packing of tea. The pieces can then be enclosed in cartons and the cartons in cases lined with heavy water-resisting paper. and is specially important in the case of articles which are readily affected by heat and moisture. Highly polished metal surfaces are particularly subject to the dangers of rust and corrosion. Transport and Export Packing The exporter who wishes to keep transportation charges to the minimum must consider both the weight of his shipment and the space it occupies. the exporter should inform himself of the customs regulations applicable in the country of destination. thus providing two layers of waterproofed paper. many ocean shipment are is fact charged on the basis of the space occupied by them. Many types of merchandise may be compressed into bales. Ocean freight rate are usually quoted for “weight or measurement. Generally speaking the weight of the unit is of major importance. excessive weight becomes unnecessarily costly. Additional protection may be obtained by placing the articles themselves in a waterproof wrapper. Such goods as biscuits and crackers destined for a tropical market call for a special care to be exercised for protection form moisture. Since in any vessel only a fixed amount of space is available for cargo.(i) (ii) Strength. resulting in savings in the cost of crating materials as well as of shipping charges. it is customary to coat the surfaces thickly with the slushing oil. Container must be employed that will hold together during the entire journey. . but he must be informed as to the route which the carrier of the shipment will take. Before preparing his goods for shipment. and the basis which yields the higher revenue is applied. heavy outside packing does not affect the import duty. If the “gross weight” is applied as the basis for import duties. One of the common methods of protecting merchandise from adverse climatic conditions is by lining the case. box. may be reduced in bulk by disassembly. Many items of hardware are shipped in individual boxes and packed in cases lined with waterproof paper. Climate as a factor influences packing. Not only is it essential of for the exporter to know the climate of the country for which the shipment is destined. Custom Duties and Packing The manner in which merchandise is packed may materially affect the customs duties levied on it. When “net weight” is the basis. Shipments of large and irregularly shaped articles. Climate. Articles of uniform shape may sometimes be nested. at the ship’s option”. which must be packed not only against the usual climatic perils but must also be tightly sealed so as prevent if from absorbing odours and smells from the surrounding cargo.
One of the most fundamental factors taken into consideration by marine insurance companies when quoting rates for specific shipper is the latter’s record of loss and damage on his export shipments. it will be necessary to calculate whether it will cost more to buy heavier gauge drums or to pack the existing containers into a wooden case. It is. without. he should bear in mind the conditions which the goods will have to stand up to. The choice of package is largely in the hands of the exporter himself. Only in the case of highly dangerous materials do the shipping companies lay down specifications for packages. It is doubtful whether there is any benefit in printing on the packages the words: “use no hooks. in loading and unloading. pilferage. and when making this choice. On the other hand. These companies are usually glad to extend advice based on their long experience. Some Solutions for Packing Problems There are a few practical suggestions which may be profitably offered to Indian exporters at this point. experiences a consistently high degree of breakage. the use of heavy wooden cases for packing such materials as raw cotton. cereals and other commodities which are well suited for packing in bales or sacks would be unduly wasteful. On the other hand. the insurance company may well refuse to extend further protection. there is little question that it will be obliged to pay higher premiums for its marine insurance. If an export concern. therefore. (ii) Consider that much of the loading and unloading will be done by cranes which lift the package by means of hooks.” Especially when it is more than likely that the stevedores at the other end of the journey cannot read even if they would bother to try to do so.Marine Insurance and Export Packing Marine insurance companies are naturally interested in export packing methods since it is to their advantage to reduce to the minimum the damage which goods may suffer in transit. (iii) Liquids in bulk will normally be shipped in drums of the gallonage specified by the customer. Nor is it worthwhile to use a thin wooden case. any surrounding case or crate provided that they are of sufficient thickness). and remember that. in consequence of faculty packing or other causes. and use. If the drums which the manufacture normally uses for his internal trade are too thin for safe export shipment. nondelivery because of improper marking and other losses resulting in insurance claims. if a company packs its export goods properly and thus creates a good record with its marine insurance company. foolish to trust to luck. (i) Goods can be packed in a way which is the best from the safety transit angle. the latter will quote the most favorable rates for it. jute bales for packing goods which can be irrevocably damaged by crane hook. It is . If damage is heavy and can be prevented but no steps taken to terminate the cause of loss. goods and packages may be handled somewhat wrongly in the exporter’s own ware house. which can be similarly damaged. Drums of 5-gallon capacity and over can be shipped “naked” (that is. for instance.
40/45/50. be remembered that crates have sizable openings and fragile goods should not be packed in crates owing to the possibility of the gods being pierced through one of the openings in them. The thickness of the timber must also be considered. he should decide on standard cases for his products. It may. and so on. it sis suggested that. the manufacture should consider how he is going to pack his goods before he even starts to offer them for export. The size of the case should be the absolute minimum into which the required goods can be packed. however. the gross weight of any package for shipment to main would ports should not exceed around 200/220 Ibs. there is obviously no sense in paying marine freight on empty space or on excess packing materials. common sense is the real guide.gallon drums are shipment. knot free. for it facilitates his checking. of course. The goods should fit snugly and tightly into the case. However. Again. In the packing of small items and consumer goods. for the safe carriage of this weight. Ten-gallon drums should be made of not less than 16/8 gauge material. for cases containing 100 Ibs to 150 Ibs. timber is used for the manufacturer of cases. however. he can order accordingly. and he can then include details of the method of packing in his price list. Wooden crates may be used when the goods that are shipped cannot be damaged by water and when a small number of fairly larger-sized items are to be packed together. while there is no definite rule. for 150 Ibs /200 Ibs. Also. drums made of 20/22 gauge plate are recommended. and on his proforma invoices. wherever possible. care must be taken to ensure that the buyer is in agreement with the practice. According to the usage of the trade and the total weight and the convenience of packing. there should be no room for them to shake around. A drum containing 5 gallons of liquid will weight between 50 ibs and 65 ibs. There are no firm rules about how this should be done. for cases which will have contents weighting between 50 Ibs and 100 Ibs the thickness of the timber should be not less than 1/2”. in his quotations.hand drums. as marine freight is charged on the basis of the space which the cases occupy. whilst smaller packages are preferable if the cost is not prohibitive. but this is a practice which is not recommended.not recommended that a manufacture should try to ship goods in 4 gallon square kerosene type tins without the protection of a wooden case encased not only for protection but also because some dock charges are levied at so much per package and these charges would be 24 times as much on 24 separate tins s they would be one case containing 24. Quite a lot of commodities are shipped in second. it is adopted. the thickness to be increased by 1/8” for each 50 Ibs addition in the weight of the contents. It is. a thickness of 5/8” is recommended as the minimum. according to the contents. important to see to it that good quality. The buyer is much more satisfied when he receives the consignment with an equal number of items in each case. otherwise the manufacture may be faced with an order for a quantity which is difficult to pack safely and wasteful shipping space. straight grained. When. If the buyer knows about these standard cases. The design of the case should increases its protective capacity. warehousing and dispatch. and. Case with one . 3/4 “and for 200-250 Ibs 7/8”. Wooden cases are probably the most common form of packing and will do good service if proper attention is given to their construction. It is quite definitely a false economy to accept below standard timber. the safest shape of all is a cube.
however.measurement much longer than the other should be avoided. protection against pilferage can also be achieved by strapping the case with steel banding of the thickness. When it is possible to arrange for cube shaped cases. wooden cases should be hoped. the tow opposite ends of the case should be battened. In addition. and give the case extra protection against any impact. Of all the available materials. the case should be lined inside with bituminous paper to provide waterproof and moisture-proof protection and prevent rust and corrosion. a layer of at least1/2” all round the inside of the case. and even then it is necessary to use the . Each item of bottled goods. and that these battens give the case extra rigidity. For protection against pilferage. Over-packing is a fault. in an individual wrapper of corrugated paper). makes it possible for the lid to be nailed down securely. This is especially necessary when such non-fragile goods are themselves wrapped into cartons before being packed into the case. This means that a thin steel band about 1/2" to 3/4" wide is nailed all around the case at each end. china and glassware should be encased in a sleeve (i. two such battens are required. it is preferable to pack them tightly in the case without any protective packaging materials. In other words. and it is not enough to put all the contents together and just surround the lot with protective material. The sort of internal packing material required depends upon the type of goods contained in the cases. For extra security. so that a case with a battens around it will be considerably more expensive to ship than the one without the battens. If the goods are not fragile. but applied with a special strapping machine which not only pulls the banding tightly but also applies a special seal which a pilferer cannot replace. However. Instead of the case being hopped in this way. and it does give quite a good protection. but its appearance does not recommend it for general usage..if the goods are liquid goods or if a mineral oil is used. These give the case extra strength on its weakest side. flat metal seals with points at the base can be applied by hammering over the joints in the case thus making it impossible for a pilferer to open the case without breaking the seals. wood wool is the best for general purposes. it should be battened around. This would mean that there would be a double thickness of timber around the edges of the two ends. One warning here. Battened round cases are also used when the contents are likely to be affected by moisture seeping up from the floor on which the cases are standing. When the goods are fragile. all around the case are fixed pieces of the same thickness of timber and approximately two inches wide. as far as possible. and for all except the very heavy cases. even with such non-fragile goods. Waste paper is often used for such packing. although it is fault on the right side. The measurements of cases for the calculation of marine freight are taken between the two points which protrude furthest.e. are only generally suitable for contents with a weight not exceeding 56 Ibs. and is wasteful both of packing materials and of shipping freight costs. there some countries which either ban or impose heavy penalties on the import of goods packed in straw an similar untreated vegetable materials because of the risk that such materials may carry infection germs. Whilst straw can give good protection. Many non-fragile goods can be shipped abroad in fibre board or corrugated board packages. When a case with a much longer measurement cannot be avoided. extra precautions must be taken. Such packages. the use of bituminous paper should be avoided. for it is clean and has a good resistance to shock. for any seepage of the liquid will tend to dissolve the bitumen coating and result in a stickly black mess.
or to be dispensed and sold from the containers? . (iii) How does the user recover the contents? (iv) Is packaging either permanent or for intermittent use. may be re-used. or (c) It may be high priced and re-usable. or burned or otherwise destroyed. (iv) Cubic displacement. But before adopting this form of outer packing. and (vi) Cost. (v) Ease in handling and storing. (i) Goods must be packed easily (ii) Packages must be designed for easy handling. Efficiency To ensure efficiency and safety. User The following points should be considered in so far as the needs of the user are concerned. Selection of Containers The choice of a proper outer container is the first step in good packing. The high degree of disposability of old containers may entail their return to sender.appropriate thickness of material for the manufacture of cartons. (ii) Availability. or will it be discarded immediately after opening? (v) Can customer convenience be improved? (vi) Are he goods to be used individually. (i) Requirements for storage. (iii) Tare weight. The following factors should be considered in designing containers for use in a given instance: (i) Suitability for articles to be packed. (ii) Handling facilities. (iv) The designs adopted must meet the customer’s needs. and (v) The container should be capable of being easily unpacked. it is as well to give a sample of the shipping companies upon whose vessels it is expected that shipments would be carried and obtain an assurance that such packages will be accepted for shipment without an endorsement about insufficient packing on the bills of lading. The cost of containers would be a prime consideration: (a) A container may be low-priced and disposable by the customer. (iii) Containers must comply with regulations.
(ii) Protection from damage during loading. (iv) Facilities for handling at the suppliers’ and customers’ end. (iii) The markings to be given are at times specified by the buyers when placing orders. a star or a triangle or any other pattern which can be easily reproduced by stenciling. Therefore. (iv) Where these are not given. there may be two or three other letters. It is usual to have. A A G HKS M 421 ADEN 2/7 G HKS 421 Baghdad via Basrah 4/4 M Inside the pattern will be one. and (v) Observance of railway and shipping rules. as part of the markings. These markings must be simple and easily readable so that the cases can be identified by dock workers and others. and underneath the buyer’s order number. a square. If the goods are to be transhipped en route. Some shipping companies demand that the cases should . There must be some identification so that all the packages in the same consignment can be related to each other and identified when the buyer comes to take delivery. there should be an indication as to where the goods have to be transhipped. a simple design. Below the pattern will be the name of the port at which the buyer will receive the goods. two. the vessel will carry cargo for a number of ports. such as a circle. (iii) Economy in the use of packing material.Principles Governing Packaging for Transportation These are: (i) Protection from corrosion. Case Marking and Labelling (i) Case markings facilitate identification of packages. Moreover. To ensure that the goods. (ii) Shipping companies generally insist on such markings. unlading and transit. or three letters (probably the customer’s initials). are cleared at the buyers’ end. the suppliers give their own markings. representing the exporter’s initials. On the top or at the sides outside the pattern. the packages must be quite clearly marked. the name of the final port of destination will be followed by the words “via…. a diamond.” The Name of the transshipment port will be filled in the blank space.
This may be expensive or tiring process. for any violation of such provisions but they are especially heavy if the violation is suspected of being fraudulent. On lumber pieces. tag or other method so that the marks may be durable and legible. definite. bale or bundle. Frequently. Delay and extra costs. but care must always be taken to make all marks legible. When marking or labelling is required.be marked with bands of different colours for different ports so that these cases may be identified for off loading purposes at the right port by workers who cannot read the name of the port. Not only are heavy fines and penalties imposed. bages. sulphite fibreboard or other material which is strong enough to withstand the wear and tear incidental to shipment may be used. Stencil marks cannot always be placed effectively upon bales. bundles. (b) Customs Requirements The customs regulations of foreign countries pertanng to the labelling of various kinds of imported goods are detailed. stencil. must not injure the merchandise. (a) Shipping Agency The steamship company will not accept the cargo offered to it. it must be marked and labeled to meet the requirements of three interested parties: (a) Shipping agencies. The most satisfactory marking results have been obtained by the adoption of the stencil. or his representative or his customer. metal type. make this a matter of considerable . This is particularly true where the packages are destined to the same consignee time after time. pasted label. (b) Customs officers. the words must appear in a conspicuous place and be of a permanent nature — that is they should not be capable of erosion under the ordinary conditions of the voyage. Gross net weight must be shown for import duty purposes. care must be taken to efface all the old consignment marks. All these markings should be stenciled prominently shown in letters and/or figures of about 1/2" to 1”/ Waterproof ink or paint should be used for this purpose. metal. tags made of cloth. and (c) Consignee. The actual marking may be made with a brush. Markings. After the shipment has been properly packed. crayon (not chalk). leather. They must be securely attached with a reinforced eyelet to the bag. In such cases. An identifying symbol or number must be shown on the cases. who maybe either an importer. and certain other pieces of freight. Furniture is often marked by tying identification tags securely with a length of wire or strong cord. which are imposed upon the importer. and strictly enforced. Generally speaking. rubber type. steel rods. if any exist. all the four corners of the tag in use must be tackled. The lampblack brush or free-hand marking is rapid and efficient where the destinations are diversified. of course. merchandise must be marked with the name of the country of origin. customs regulations also require that the measurements of the packages be marked on the outside. but failure to do so often results in shipments going astray. In marking a package. for transportation unless it is legibly marked.
(ix) Use a distinguishing symbol embracing a code to indicate (a) The shipper. (x) Mark. delays and expense. (c) The order number. (iii)To make known the contents of a package without removing the outer packing case and unpacking the goods. the name of the shipper or manufacturer. Customs regulations of foreign countries are also frequently strict in so far as the labelling of individual packages is concerned. (ii) Use only the necessary marks. (iv) That it shows by an initial or a number. The regulations of each country should be carefully observed with a view to avoiding unnecessary difficulties.importance to both the exporter ‘and the importer. (viii) Place the markings in a permanent manner. (iv) To facilitate the obtaining of information about the ultimate consignee through the symbols so as to reduce the number of marks on the case and keep the trade information secret. (iii) Use no advertising. Importer’s Requirements For the purpose of aiding the importer and his agents in handling packages in accordance with best commercial practices. Among the rules to be followed in marking the consignment are: (i) Remove all the old marks. (v) That it contains a letter. The leading requirements of a good symbol are: (i) That it be easily distinguished. (iii) That it be easily stamped on the package. (ii) To facilitate the singling out of a particular package of shipment for such purposes as sampling. (vi) Mark plainly to avoid error. and (viii) That a serial number be given. (b) The consignee. expediting by express. The object of placing additional marks on each package. a scientific marking policy to cover all shipments must be adopted. (d) The name of the destination. repacking. other than those for transportation and customs purposes is: (1) To enable the particular shipment to the readily recognised and picked out from the many others arriving at a busy dock. . (vi) That the lot or order numbers indicate the contents of the package. who may be the importer or his customer. (ii) That it has originality. (iv) Keep the contents of the package secret. (vii) That the name of the city or town of final delivery be given. number or a combination of both to represent the ultimate consignee. (v) Keep the names of the shipper and consignee secret. (vii) Place marks in several prominent places. showing the weight and measurement. and (e) The serial number. or warehousing. (v) To further aid in forwarding and distribution.
The cartons. Packages of all kinds can be palletized and stacked in the hold of a vessel. and reduces the number of times that individual items must be handled. rather than many small ones. of problems the export packer has no easy task.Reconciling the Packing Factors: With such an array. Advice can be obtained from associations of container manufacturers. Shipping containers usually are made of steel or aluminum. Goods are often placed on rail cars or trucks at the manufacturer’s plant and forwarded to the port or airport where they are put on planes or ships for movement to the foreign port. safety. If the container is to minimize the . but plywood or fiberglass may be used. In endeavoring to guarantee. boxes. This unitization process permits the handling of one large package. The services of expert packers and international freight forwarders may be employed. are banded together in a manner that assures safe handling as a unit. truck or airplane. have been combined into larger containers or stacked on pallets and banded together to form a single package. Freight rates and customs duties should be reduced to the detriment of security from damage or pilferage. By container we mean a relatively large box suitable for repeated use by several modes of transportation without intermediate loading and unloading. the term used in this section is in a more technical sense. or units of their products into larger cartons. The containers replace packing crates. usually of heavy lumber. In studying this problem the exporter is not left entirely to individual resources. The task is to find a method that is both efficient and safe. It is the process of stacking packages on a platform. from packing engineers. The most difficult considerations to reconcile are safety and economy. bottle. shippers have combined the individual cans. If the container is to achieve maximum utility. along with securing advice from several other sources. At the port they are again transferred to trucks or rail for carnage to the customers’ location. in turn. Containerization Containerization has become an important factor in physical distribution. bag or similar device for holding a product. These cartons. it must be designed to accommodate the requirements of intermodal transportation since most international shipments involve the use of more than one mode of transportation. Palletizing Palletizing is one method of unitization that has been practised for many years in handling freight. Unitization strives for the reduction of handling costs as well as reduced losses from damage and pilferage. and from marine insurance or Indian Institute of Packaging. While a container can be any box. although individual items must still be properly protected. weights may be increased and economy sacrificed or the pursuit of economy may sacrifice safety. Unitization In order to facilitate efficient handling and to protect merchandise during shipment and storage. The larger lots-pallets or containers — can often be moved by mechanical handling equipment. Safety is the fixed factor and is of primary importance. or items to be palletized. elevated at the bottom to permit the use of forklift trucks.
Ocean freight. Ensure quality control. In the case of air freight. (xiv) Empty containers may need to be returned from the work centre or customer and . corrosion. Marketers should also be concerned with containers because of their potential for expanding the market for products and because they may provide opportunities for alternate routings. booking-out records. (iii) Facilitate counting. (xiii) Security against pilferage should be ensured. and the use of a container may or may not result in a discount. The company made a cost analysis which showed a marginally higher cost for sending shipments from the United Kingdom to the Middle East-using overland routes with containers rather than its previous system of ocean freight and conventional packing. The greater strength of the container reduces the possibility of damage occurring during the transportation and handling phases of distribution. (xii) Security against hazards. (viii) A recessed base. The container revolution also promises the possibility of simplified documentation. may be required for pellet trucks. (x) Container should resist tough handling.handling of individual items. (ix) Weight limitations for manual handling may be indicated. containerisation. as these were more than fifty per cent lower on the overland route. The Points to Consider for a Container and Package Design (i) Maintain the stock in good condition. Damage and pilferage were lower. it must be usable on all these modes. A United Kingdom manufacturer furnished one example of containers as a tool for market penetration. should be attended to. (ii) Ensure that the full quantity reaches its destination. Packaging costs are lower with containers for many items. (iv) Facilitate removal from container for use. (vii) Provision may be made for stacking.. shippers pay a standard unit load device rate for shipping in approved containers. (v) Container should have clear labels. the containers with their driver — accompanied units enabled the company to maintain reliable transit schedules. However.. (v) Container should have clear labels. For the international marketer the container holds several potential advantages. the company reported that demand increased due to improved quality of the product. fire. (vi) Container may incorporate pre-printed data instructions. (xi) Speed in handling and loading may demand that light weight materials be used in the construction of containers. etc. Furthermore. and the reduced transit time aided the company’s cash flow. continues to move on commodity rates. however. etc. Reduced pilferage results from the greater security provided by a metal container and the possibility of door-to-door service in the original container. Some of the improvement was due to reduced transit times.
in the case of rods. commercial invoice.. the batten centres may be important. which may be shown on the commercial invoice or separately. for they are loaded and unloaded at various stages. Cases are sometimes received which are so cleverly nailed and battened that they must be completely destroyed when opening.for storage when empty. the preservation. in the matter of packing for overseas markets. or consular invoice may. second-hand cartons with soft seams and damaged compartments are liable to burst easily. Great care should be exercised to make certain that the contents of the packages are exactly as indicated in the packing list. etc. should be firmly secured. stoppers and caps on bottles. Slogans or trade marks easily identify vulnerable goods. Any variation from what is shown in the packing list. For added safety. In short. (xvii) Avoid making valuable goods too conspicuous. (xxiii) Where cases are returnable. Close coloured string to facilitate opening. (xxii) Lids. namely. may save a case from being destroyed. It should be borne in mind that goods meant for export have to undergo severe hazards in transit. should contain item by item. the exporter should take into account not merely the preference of the foreign buyers and users but also the original purpose of packaging. closed with will-driven nails of the right length. render the consignee liable to heavy fines. etc. they should be closed with gum and secured by steel banding. Packing paper or cartons should be of a stout quality. food articles have to be packed very carefully and in sanitary cans. If so. The preservation of the quality of the contents is the most important aspect of packing. Packing List The packing list. and the contents from possible damage. (xx. for instance in order to preserve the quality of pepper and cashew nuts. jars.) Cardboard containers and cartons must be rigid and undamaged. and usually does. Enclose a packing note in the package but never list the contents on the outside. “Open here”. use steel banding or wire. provision should be made for opening. (xxiv) Where fork-lift trucks are used. (xx) Canvas bales should be stitched tightly. with each item listed separately and with its weight and description set forth in such a manner as to permit a check of the contents by the customs on arrival at the port of destination as well as by the importer. Different types of goods require different types of packing to preserve the quality of the contents. protection and proper presentation of the goods. (xv) When dispatching loose articles in bundles. it may be necessary to pack them in moisture-proof polythene bags or tin containers. the purchaser should state the measurements for forks’ entry (xxv) If cases are to be stacked where the public have access to them. The packing list must be made in accordance with the instructions of the customer.. make sure that they are securely tied and. the contents of cases or containers or of a shipment’s cases. Similarly. (xvi) Humper lids should be fastened with wire and sealed with your seal or padlocked. the ends of the bundles should be sufficiently packed to prevent slipping. One simple instruction. (xviii) Parcels are best sealed with a gummed paper strip or self-adhesive tape. which the exporter should always bear in mind. The size of the . (xix) Wooden cases and crates should be made of sound undamaged timber. it may be necessary to specify that all sharp corners be removed.
etc. such instructions should be given on the packages as: “Stow away from boiler”. at some ports. The center is a warehouse that provides a merchandise assortment to meet customer requirements. preferably printed and of adequate size on the packages. If adequate identification marks are not placed on goods. stores merchandise. The warehouse assembles assortments. This should be adhered to by the trade. and prepares and arranges delivery of customer orders. next to the contents. The contents of the different packages should be uniform as far as possible. Normally. These instructions apply to markings on the Outer cover of the packages. to prepare for erratic peak demands. Products are stored in the distribution center to replenish customer assortments. say. Products are shipped in large lots to the warehouse where they are sorted into individual customer orders. put legible markings. The exporter should also give due thought to the presentation of the contents. the exporter should ensure that their appearance is enhanced and that no part of the goods is wasted. The marks should correspond with these on the shipping documents and invoices. Markings on the inside packages containing the goods are essential partly from the advertisement joint of view (since they indicate the name of the country and possibly that of the manufacturer or exporter) and partly under regulations under the Merchandise Marks Act. Generally speaking. the standards fixed under the various quality control schemes provide for standardised packing and marking. in order to facilitate the assessment of the quantum of the goods with reference to the number of packages. English. packages only of a certain maximum size can be conveniently loaded and unloaded. and it is here that the exporter should take into account the preference of the buyers in a particular country. In marking the goods. at the same time. DISTRIBUTION CENTERS The distribution center is an integral part of the international physical distribution system. In order to facilitate the inspection of the goods by the customs authorities and their quick and effective delivery at the destination by the railway and shipping authorities. for any dislocation at the inspection and is likely to throw out of gear the other arrangements of the exporter. The packing layers. in addition. have to be attractive. The main object behind making export packages is to identify the cargo. An important point to remember here is that arrangements for obtaining the delivery of the goods from the manufacturers. and to take advantage of quantity . such other markings as are required under the regulations of the country of destination may also be placed on cases and/or packages. In the case of goods which require to be specially handled. ships carry a large number of consignments belonging to various exporters. or “This side up”. At certain points~ for instance. their transportation to the port and loading on to the ship require to be dovetailed into the procedure for preshipment inspection. Marking should be in an international language.packing has also to be taken into consideration. it would be really difficult to identify the consignments of each exporter. it is essential that the exporter should avoid a multiplicity of markings and. to adjust seasonal production to demand.
Some public warehousing firms have expanded their services beyond those normally associated with physical distribution in order to provide customers with a more integrated distribution system. These are owned and operated by professional warehouse personnel and furnish not only space and break-bulk facilities. there has been a tacit assumption that the owner of the merchandise operates the warehouse or distribution center. and the necessary data are gathered to facilitate control and documentation requirements. damage. that adequate but not excessive inventories are available. and business customs. but also a wide variety of services related to physical distribution. private warehouses entail a high level of fixed expense and can be costly when demand fluctuates widely. It is a viable approach when the demand for the firm’s products is substantial and steady. or leased and personnel must be hired and trained. In summary. The term “distribution center” is used in this chapter rather than warehouse because the centre frequently serves as more than a storage and bulk point. The Public Warehousing Alternative In the previous discussion. The warehouse facility must be built. Public warehouses will receive merchandise. The emphasis. The user of a public warehouse pays only for the space that is used plus the fees for services that are requested. insurance. however.III MARINE INSURANCE What is Marine Insurance? Marine insurance is a contract of indemnity whereby the assurer or underwriter agrees. This concept is known as private warehousing. for a stated consideration.purchases or freight rates. in addition to warehousing offers customers brokerage. the public warehouse provides the shipper with the flexibility to adapt to local conditions. bought. store it. and assemble and deliver products as they are ordered by the customer. provide rapid service to customers. tariff systems. however. is on maintaining a supply to meet customer requirements rather than emphasizing long-term storage. One alternative for the firm is to use public warehouses. Some warehouses also provide space for a firm’s branch office. tax and licensing laws. and capitalize on local expertise regarding freight rates. furthermore. One firm. known as the premium. or expense in connection with . as well as storing merchandise Part . The multinational firm with several production points may find it advantageous to use distribution centers that are oriented toward production points as well as centers that are market positioned. for example. to protect and indemnify the shipper and/or owner of the goods against loss. and transportation service to all of Europe and the Middle East. It also serves as a control center to assure that customers’ orders receive prompt attention. packaging. freight forwarding. the company must establish a transportation network for servicing distributors and dealers. Public warehouses also aid the producer by issuing warehouse receipts that can be used as collateral for bank loans.
and he must arrange to insure the goods on C. and. the merchant must have some means of protecting himself against losses which he may not be able to recover from the carrier under his bill of lading. the goods most probably remain the property of the exporter until the buyer takes up the documents. The buyer may have to pay for the goods before he sees them. freight insurance may be taken out either by the cargo-owner or by the shipping company if freight has not been paid. that title is only worth as much as the goods themselves. is worthless. He is exempted by law from certain causes of loss as well as from the conditions and stipulations which may be entered in the contract of carriage between the shipper and the carrier. he may refuse to retire the draft. it is only the cargo which is insured because the freight has already been paid.~c1ean bills of lading indicating that they were apparently in good order and condition when received on board. the title to them. the worth of the title remains. The carrier in export trade is not an insurer of merchandise. the goods may be damaged or pilfered before reaching his warehouse. Hence the importance of marine insurance can well be appreciated. if the damage is caused by perils specified in the contract known as the policy of insurance. then. Another point to be considered is the fact that where no letter of credit has been established.F. For these reasons.the goods at risk. (ii) Freight insurance. In addition. the damage to the goods might occur in transit. . and if that buyer gets to know that the goods have been damaged in transit. In most cases. too. there are perils and hazards which the goods may encounter and which are beyond control of the carrier. for this reason. irrespective of whether they suffer damage or not. price quotation.I. Despite the fact that they are covered by. or even after lie sees them in the customs shed at his end.LF. But if the goods are properly insured. In the C. When the goods have left the shipper’s plant or warehouse and are in the course of transportation. Subject Matter of Marine Insurance There are three classes of properties which are the subject matter of marine insurance: (1) Cargo insurance. shipper has no physical means for the protection of these goods and must rely upon the ability of the transportation company to which he entrusts them for safe delivery at their intended destination. and if the goods are worthless because of the damage caused to them. insures himself against loss or damage. He. especially if it encounters hazardous conditions during the journey. the insurance is the responsibility of the exporter. However. therefore. Although a bill of lading are the title to the goods. and (iii) Hull insurance (insurance of the ship). transactions. goods cannot be shipped abroad unless they have full insurance cover.
The exporter is issued a pad of certificates and he himself fills in the details of each shipment. the exporter has an order which is larger than the one he originally estimated. When the exporter has done a fair amount of export trade with several shipments per month. a brief description of the goods themselves. however. The insurance brokers for insurance company then agree to give the exporter an insurance cover for any shipments made within the limits estimated without the necessity of the exporter having to advise them in advance. it must be endorsed by the shipper before it is handed over to the bank so that. then issues the appropriate policy of insurance to cover the shipment. At the same time. giving the number of cases. The exporter tells the insurance broker what his estimate of the total value of his export shipments for the next twelve months and also what he anticipates will be the value of the largest single consignment which he is likely to ship. and the value for which he wants the goods covered. who only makes occasional shipments. arrangements for an insurance cover can be speeded up and simplified by the exporter having an “open cover” with the insurance broker or insurance company. the port of shipment and the place of destination to which he is sending the goods. It may occasionally happen that a letter of credit asks for insurance policies in favour of the bank which originally opened the credit. or company. with an open cover. The other copy is retained in the exporter’s file for reference and for checking the insurance broker’s bill for premiums. If. which is shown on the certificates. As this policy is issued in the name of the shipper. which is to be covered for insurance — the details being the same as those of which he would advise the insurance brokers if he wanted a policy as described earlier. These certificates are in sets of four — the first two are the originals and the other two are non-negotiable copies. These certificates of insurance have to be endorsed in the same way as insurance policies are endorsed. may also have the benefit of the insurance cover and can claim reimbursement for any damage or shortage. whoever has the benefit of the bills of lading. If the exporter has underestimated the total yearly value of his shipments. is altered and it is necessary to send all the four copies of the certificates to the insurance company or brokers for an official approval of the alteration. and this can be arranged either by asking the insurance company to make out the policy in favour of the required party or by the exporter endorsing the policy is follows: “Pay any claims arising under this policy of insurance to the order of—” and then signing the endorsement. he . The insurance broker. the markings on the cases. the name of the ship.The exporter. Care to be Exercised Care must. care must be taken to see to it that the limit amount for any one shipment. he has to state the risks which are to be covered. The originals valid as part of the thipping documents. advises the insurance broker or company of the full details of the goods to be shipped. be taken to see to it that insurance policies or certificates are properly initialed because they are legal documents. whilst one of the copies is sent to the brokers or insurance companies that they are advised of the risk that has been covered and can make the appropriate charge for premium. and this policy is required in duplicate.
and the buyer should be asked to confirm that he will pay the cost of the excess premium. before the total value has been reached. It is not worthwhile for an exporter to try to save on premium payments and hence a less comprehensive policy because a few banks. The standard “all risks” cover. PRICES It is usual to cover 110 per cent of the actual CJ. The exporter should also remember that it is as well to cover for 110 per cent for his own sake.I. instead of himself collecting the insurance payment for damaged or missing goods. where such heavier than normal cover is requested. much of the damage and pilferage occurs during loading or unloading or in transit to the docks in the country of shipment or in transit from the docks at the destination. damage or pilferage may occur while the goods are on board. 10 PER CENT EXTRA OF THE ACTUAL C. The reason for this is that. Such a procedure will mean a higher transit cost to the exporter.I. for the total cover to be extended. which they will do by endorsing the policy and/ or certificates. She may run into a heavy storm. value. however. prices of the goods.LF. in addition to having paid for the C. provided that there has not been any excessive number of claims against the earlier shipments. negotiating letters of credit. The exporting manufacturers see to it that the goods are packed safely and in good order at his warehouse. There are a few instances when these charges have been exceptionally heavy or when the customs duty cannot be reclaimed even though paid on worthless goods. asking the latter to replace the damaged or missing goods and reimburse himself by collecting the insurance money. The exporter must bear in mind that. and in normal circumstances. is not quite sufficient for this policy which covers only normal civil happenings. therefore. and this is covered by the extra 10 per cent cover. therefore. instruct the insurance brokers or the insurance company to include a war risk cover.F. The exporter should.F. the buyer has probably also paid for the customs clearance and for the unloading and transit of the goods to his warehouse. apart from the possibility of the sinking of the ship itself. in consequence. In fact. the goods are not seen again until the cases are unsacked in the buyer’s warehouses. and the buyer cannot open all the cases for a thorough examination at the docks at his end. and the cargo may be damaged by rain or sea-water.would ask. or has accepted to make payment in any other way). and the insurance company or brokers will be glad to agree. Cover will also be invariably required against “war risk” even in peace time. cost of the actual goods when he retires the drafts (or makes payment. A reputable insurance company or a reputable firm of insurance brokers will give the “standard all risks cover” and issue polices and certificates to that effect which will be acceptable by any bank. There is always the risk of fire or of some of the goods being stolen. the shipper will be asked to cover the goods for up to 150 percent of their C. is to have an “all risks policy”. The exporter cannot reasonably have all the cases examined immediately before the goods are loaded on board. accept such a policy. or by being loaded with . may send the certificate or the policy back to the exporter. especially when the shipment is not covered by a letter of credit because it may so happen that the buyer.F. the premium for insurance is considerably higher. Yet goods are damaged by being left out in the rain on the dock. Types of Risks Insured There are many possible risks for goods that are shipped abroad. As already indicated. Some letters of credit specify the risks which must be insured against. The usual procedure.
400.000. the total F. To avoid this nuisance and expense.2.e. .440 Rs . The buyer then works out his claim on the basis of the proportion which the damaged goods bear to the whole consignment. when the C. 640 = Rs.. and a certain proportion of the claim is lost in the costs of transmission and exchange into buyer’s currency. making the invoice total Rs. If Rs.640. the buyer can set his claim paid in his own currency on the spot. 40. it is usual to have a C. This facility costs a little extra but it is well worth paying for it. Rs. Value of goods shipped is Rs.2.B. 000 The buyer would send the original insurance certificate or policy to the broker or company which issued it. there will be words to the effect that insurance agent — is authorized to settle any claims arising under this certificate or policy of insurance.hooks when they should not be so loaded. The insurance cover would normally be for Rs. with a statement of the claim and the latter would send him the money. Alternatively.000 Rs = Rs . To cover these risks. 400 and the total of the exporter’s invoice Rs. On a certificate or a policy of insurance. This is usually modified slightly by limiting the period of cover after the arrival of the ship at destination to 30 days irrespective of whether the goods have reached the buyer’s warehouse or not. 1. They examine the goods and certify the extent of the loss. which is represented by: RS . and shipping charges.200 × Rs. This claim procedure may be quite a nuisance. the buyer may send these paper to the exporter and ask him to make the claim on his behalf. which is quite normal and which covers all the risks from the time the goods leave the exporter’s warehouse up to the time they arrive at the buyer’s warehouse. For instance. Under these arrangements.A.A. and either credit the amount to the buyer’s account or remit the money to him. is referred to claims payable abroad.P. policy for marine insurance.000 (i. if the exporter’s invoice value for the goods which are damaged is Rs.O. therefore.A. 2. Marine Insurance Claim Under an ordinary marine insurance cover. 2. 400 has been added for the charges mentioned.44. and. value plus the cost of marine freight. 200 worth of goods are damaged or lost. the buyer is entitled to claim a proportion of such charges. it is advisable to have a “warehouse-to-warehouse” cover. insurance.P. 264. the buyer report the fact immediately to his local agents or the local branch of the insurance company or to the firm of insurance assessors. or by pilferage by dock workers and dock-side thieves. arrangements have been made.P. For instance. The letter of C. in the empty space. will be filled in the name of the town or city at which the insurance agent nearest to the buyer is located (usually the port to which the goods are consigned). 110 per cent of invoice value). the amount to be claimed will be: RS .40. if the goods have been damaged or pilfered or lost. the claim will be for Rs.400 × .264 Rs.O.000 If the goods have been invoiced on F.B.
depending on the type of goods that are insured and the type of containers in which they are shipped. It is quite possible to get a standard rate. (ii) Take out an open or floating marine insurance policy.A. (iii)Insist that the terms of the policy be made as broad as possible 1 not only from the point of view of the types of merchandise to be shipped but also in respect of the areas covered. in trucks. and reliable exporters. the insurance premium on goods packed in glass bottles is considerably higher than on the same goods packed in tin cans. (vii) Invariably add at least 10 per to the invoice price of the merchandise — sometimes more. (vii) If the total risk exceeds the amount of insurance named in the policy. (b) Do it immediately. can probably get all the risks covered by paying 1/2 per cent and 1 per cent of the value insured. The goods are still the exporter’s liability until buyer has taken up the documents. which means deterioration such as spoilage due to the character of the merchandise. (v) Marine insurance never covers what is known as “inherent vice”.It might be advisable even in some cases of cost and freight (C & F) shipments that the exporter should also get an insurance cover. The collection of an insurance loss may be vitiated by postponement. On normal goods to normal destinations. or in unprotected places. for he will find it difficult to make a claim under the buyer’s insurance agreements. and (c) Move without delay. the exporter will suffer. it should be possible to secure an insurance cover for all the risks including war risks under C. Some Practical Suggestions The following suggestions are likely to be helpful to the exporter who wants to protect himself against marine and related risks: (1) Employ the most experienced and most reputable marine insurance broker who can be found. The cost of marine insurance premium is quite low.A. In addition. the limit should be immediately increased Marine insurance companies and underwriting organizations are keenly interested . For instance. facilities.P. (vi) See to it that all the insured goods are moved promptly. at an average cost of about one per cent to 1¼ per cent. A small extra fee is payable for C. This should be done when the exporter ships goods without being covered by a letter of credit. doing a fair amount of business. the elapsed time and other provisions. and if he (the exporter) fails to do so and damage or loss occurs. which varies considerably according to the country of destination and in the light of the political conditions prevailing in the country of destination or in countries en route at the time of shipment. They must not be allowed to remain on docks.P. (iv) In the case of 1oss~ (a) Notify your broker. there may be an extra premium on war risks cover. irrespective of the destination of the goods.
In broad categories. the importer’s insurance may become effective only when the goods are loaded aboard ship. exclusive of war. The letter calls for furnishing an on-board bill of lading in order to collect under the credit. the importer may agree to take care of the insurance. hook damage. any loss to the shipment between the exporter’s warehouse and the vessel may not be covered. To protect against such a risk. vast variety of risks against which insurance can be effected. The insurance may be placed for the exporter’s account or for the account of the buyer. claims are paid only in case the vessel is standard. This is the most complete coverage commonly written. or breakage. pilferage. such as fresh water damage. If insurance is desired to cover excluded perils. hence. or it may be placed by the importer who has selected a particular underwriter. theft.in export packing methods and make recommendations based on their experience. on fire. let us say that the purchase is made under a letter of credit. FPA (Free of Particular Average) insurance. for example. This is a tangible measure of the packing problems of every shipper and offers a reward to effect improvements in the loss and damage record. This coverage does not include loss due to the inherent nature of the goods. nor does it cover market losses due to delays in shipment. Marine . and riots. the exporter would need to purchase an inland marine policy or a special endorsement for an open cargo policy. There are certain advantages to the exporter who takes marine insurance. except for war risk insurance. sulik. strikes. under certain very limited circumstances they can be included in the insurance policy by endorsement. Types of Risk Marine insurance differs from many other forms of insurance in that the insured has a choice of a. but it is confined to losses from physical loss or damage from any external cause. or in collision. burned. nondelivery. which requires a separate policy. One of the basic factors considered by an underwriter in quoting a marine insurance premium is the loss experience of the shipper. (3) Named perils. Marine insurance to cover cargo risks is commonly place On all shipments moving in international seaborne trade. if a loss should occur between the time the goods leave the exporter’s warehouse and before the on-board bill of lading is issued. All of these coverages include general average and salvage charges. Under this coverage. fuel oil damage. For example. the credit could not be used and the insurance taken out by the importer probably would not cover the loss. This is not as simple as it may sound. In this case. This is a very limited form of insurance and covers only total loss of the goods. (2) Fire and sea perils. when the sale is FOB vessel Bombay. and a number of additional perils may be added. For example. (4) All risk insurance. the risks that are commonly insured against are: (1) Free of damage insurance. This includes the fire and sea perils as explained directly above. partial losses are not covered. missing the Diwali sales season.
is the face amount of the insurance policy. Damage to the goods themselves is known as particular average and may be classified as follows: (1) Total loss. A classic example of general average loss is by jettison. and that sacrifice is successful in preserving at least a part of the common venture. Particular Average. This certificate or special policy is necessary only when the exporter is required to furnish evidence of insurance to some third party. The amount stated in the insurance policy is paid. In all of these situations. freight.insurance is one of the few kinds of insurance where it is permissible. Loss or damage common to the entire venture is known as general average. The policy pays the insured value of the past lost. The certificate or special policy is prepared in the exporter’s office. or in one of the offices of the insurance company. of course. Loss paid is the total Cost of a new fender. Loss Covered Under Marine Policies Basically. The common sacrifice here is damage to cargo by water. (2) Total loss of part of a shipment. all owners. such as the . and the second is to use a short declaration insurance form. carg damaged by fire or smoke is not damaged as a result of a voluntary sacrifice and therefore is not subject to general average adjustment. by theft or pilferage. packing. the limit of liability. While the sales price of goods usually includes the exporter’s profit. for example. in the office of an insurance broker. The fender of an automobile is crumpled. to insure profit. it is repaired in the country of importation. Loss paid is the amount of the repair bill. If a voluntary sacrifice is made in face of impending disaster. there are two types of losses under marine insurance policies: (1) particular average and (2) general average. The fender must be replaced by a new one which must be shipped by the exporter. etc. More common today is the case of water being used to extinguish fire. in the office of the freight forwarder. in addition to insuring the value of the goods themselves. (4) Replaceable loss. General Average. Insurance Policies and Certificates There are two ways that a risk can be declared to an insurance company. it does not include import duties or the importer’s anticipated profit. then all who survive (ship and cargo) contribute pro rata in accordance with the value saved in order to make up the value of whatever was sacrificed. contribute 10 percent of their respective values to reimburse for the loss of the cargo that was jettisoned. including the owner of the jettisoned cargo. If 10 percent of the combined value of ship and cargo is thus sacrificed. or throwing overboard certain cargo to save the ship. The first is to send the company a copy of a certificate or a special policy. In practice a common rule is to insure for an amount equal to all known costs plus 10 percent. (3) Repairable loss.
if there is not a necessity to evidence insurance to a third party and if claims are to be paid to the exporter only. Insurance Agents and Brokers Marine insurance may be obtained from an insurance agent or insurance broker. are to be paid. Since marine insurance rates are not standardized. and all necessary details. For cargo normally shipped via Suez Canal but not via Cape of Good Hope. values. Strike. If the payment on account of claims is desired in any foreign currency. 2. a policy must be provided.R. With this information. riots and civil commotion risks should be included wherever necessary. Poland. By use of an open policy. Greek. War/SRCC rates are charged extra in accordance with the rules framed by the . it should be stated accordingly. Full particulars should be given in the standard form suppled by the company. will not do. The name of the party who effects insurance or on whose behalf insurance is effected. or a third party to whom claims. a surcharge of premium is added by the insurance company. 4. 1. China. but are determine4j by the risk experience and judgement of the underwriter. In this situation. Rates are applied for the vessels of less than 2000 G.. But for the insurance underwriter to assess the risk. They often use their experience. the reduction in losses could help justify reduced rates. to make suggestions that lower a firm’s losses. Name of the steamer and voyage. a ‘certificate. Vessels under “Flags of Convenience” like Librarian. and the special policy completely reflects the open policy coverage. a policy. yield high loss ratio. a form known as “Declaration Form” is generally used.T. a short declaration insurance form can be used. Panamanian. 3. Panama. Brokers and agents represent the policy holder and help in the presentation of losses. Every shipment that is made by the exporter under this open policy is certified to the insurance company with complete descriptions. In the second way to declare risk to an insurance company. Therefore. the exporter often takes out an open insurance policy that sets forth the risks for which there is insurance. which looks very much like. If terms of sale or letters of credit call for an insurance policy. the insurance underwriter charges extra premium for shipments to Greece.bank. the exporter is protected on all shipments to the extent that the exporter advises the insurance company of every transaction. if any. hence recovery of claim is difficult. The agent or broker will help to select reliable marine underwriters and arrange the amount and kind of protection that is required. The certificates and special policies are both negotiable instruments and hence facilitate the settlements of claims in the country of the consignee. a customer. etc. and be signed by the proponent. the insurance company is in a position to calculate a rate. Bulgaria and East European countries. It is designed to include the following essential details. Provision can be made to accept certificates. There is no proposal form for marine insurance.
F. fire acts of thieves and pirates. Comprehensive or All Risks policies.A. i.. policies. Sound packing attracts lower rates. 6. a demand has gradually arisen for cover against many extraneous risks like: 1. If the goods are damaged due to fire.. Extraneous Risks Due to rapid growth of the international trade and as a result of progressive curtailment of their liability by shipping companies under the terms and conditions of bill of lading. Description of goods and their packing details should be furnished. Damage by other Cargo 9. All the above types of insurance cover loss or damage. unloading or transhipment. loss or damage to the cargo caused by heavy weather or sea water. is also covered provided the damage reaches the percentage of franchise specified in the policy. Fresh Water or Rain Water Damage 3. Damage by Mud or Acid 6.A.. 5. There are numerous non-marine perils also which could be covered under W. Policy Covers (With Particular Average) In addition to the losses under F. W. jettison barratry. Leakage 10. Oil Damage 5. If packages are totally lost during loading.P.A. Inland transit risks are not covered. W. 3. to the cargo caused by marine perils.e. T.Institute of London Underwriters. Percentage clause could be deleted at the request of the insured on payment of extra charges. collision. Heating 7. Loss or damage due to inherent vice.A.Covers (Free of Particular Average) The following losses are covered: 1.A.P. perils of seas. etc. Comprehensive. but does not include War or SRCC Risks. (Theft. Hook Damage 4. and Inland Transit. Details of risks to be covered should be given-F.P. unless specifically provided for. Pilferage and Non-Delivery) 2. sunk or burnt.D. explosion or due to ship’s contact with any fixed object and/or if the ship is damaged at the port of refuge. .N. W. 2.P.Breakage All Risks Cover This is an all embracing cover and includes all the extraneous risks as mentioned above. or losses proximately caused by delay are not covered. If the ship is stranded.A. Sweating 8. All Risks.A.
sugar. civil strike or war like operations. No liability is attached to the company in respect of goods damaged or lost while in custody of the transport carrier unless a provisional claim is lodged with the carriers.War and SRCC Risks Cover is given for capture. civil war. It is a contract for a period of time (usually twelve months) whereby the insurance underwriter agrees to grant insurance during that period not exceeding the agreed limit per vessel with . Colombo. (1)India to Japan ton). revolution. Similarly. According to the rail tariff clause. restraint. detainment. breakages of bridges. or Israel will attract more rate of premium because of the difficult and insecure port conditions. Indonesia. Tariff Rates Some of the voyages are governed by the Tariff. crockery and bullion or jewellery attract a higher rate of premium. derailment or accident of like nature. (2) India to Burma. Ports like Alexandria. Egypt.. household goods. collision. Types of Policies/Covers There are three types of policies/covers. Ceylon and Pakistan. War risks are covered only when the cargo is water borne and for fifteen days on land at a port of transhipment from the date of arrival of the steamer. hostilities. whichever is earlier. Red China. bricks. Inland Transit Cover Cover is granted for rail as well as road risks against fire. On receipt of these details the insurance company issues a stamped insurance policy in duplicate. (3) Coastal Ports of India. vegetables. Warehouse to Warehouse Cover This cover is granted on payment of extra premium. commodities like cement. i. Open Cover At the outset it should be emphasised that open cover is not a policy. Free Town. seizure. risks to be covered.e. These are discussed below: Specific Policy Marine insurance policy in respect of individual shipments is issued by the insurance underwriter on application from the exporter giving details of the consignment to be insured. value for which the cover is required and the name of the country and the currency in which claims are payable. (4) India to Persian Gulf. tiles. Red Sea ports. Pakistan. insurance commences with the loading of each package into the railway wagon and terminates three days after arrival of the train at the destination or on delivery of the goods by Railways. second hand machinery. East and West Africa. arrest.
Promotional expenditures and themes must be coordinated with financial practicality. The relationship between the two functions permeates the entire marketing plan.a view to avoiding accumulation of liability in any one vessel or location. Therefore. reaching into almost every marketing activity. . 4. CLAIMS In case of railway claims the consignees should be advised to lodge claim on railways within six months of the issue of railway receipt. Lesson – 19 Management of Risk and Export Financing Finance and marketing are inseparable in the conduct of international business. It covers all shipments of the insured until the sum insured is exhausted. The following documents are necessary in case of marine claim. Pricing. Whether packing was sufficient? If not. 2. Policy. Survey Reports. The establishment of overseas branches. the company stipulates that the shipment should be made by first class steamer (not over 20 years old) carrying highest class in any one of the classification societies mentioned in clause. The names of the steamers may not be available when the open policy is-effected. 2. 5. Survey Reports The following details are necessary in the survey report: 1. Letter of Subrogation. Bill of Lading. must consider the financial aspects of transaction if the sale is to be profitable. 3. 3. what improvement are recommended? How claim could have been minimised? Was there failure of insured to protect interest by not taking measures to avoid or minimise loss or not protecting the rights of recovery from cariers/port. etc. for example. Open Policy It is cargo policy expressed in general term and effected for an amount sufficient to cover the number of shipments. 4. Further the vessel should not be more than 15 years old. Invoices. The credit terms may be even more important than the price in a given transaction. 1.
and yet he may also find that his inability to give credit is the only hindrance which prevents him from doing business with certain class of good buyers abroad. Financing of exports is a specialised business demanding the operations of institutions that are engaged in it and have special skills in handling the intricacies of foreign exchange transactions. therefore. the export order has bee accepted. the great distances involved. and remittances accruing from the sale of these goods. export finance refers to the financing of the goods from the home port to the foreign port and the inland centres. and it is up to the exporter to indicate the way in which he wants the importer to pay him. If it is safe. This chapter describes some of the major sources of funds for international marketing. The way out may be to borrow money from a bank or any other financial institution to finance such credit. References should be checked to ascertain whether it is safe to allow credit. Furthemore. it is necessary to have a clear understanding of how and when the buyer will pay the exporter for the goods which have been ordered. In export trade. where business dealings are carried on between parties who may be separated by many thousand miles. The development of the export business is. i. and the shipping documents are issued. which allow good credit rather than by low prices. and marketing channels requires both long-term expenditures and working capital. In other words. The large size of many international transactions. Finance and Export Trade Export financing starts after the order from the buyer has been received. in one form or another. An importer may often be attracted by payment terms. It follows.subsidiaries. a network of contracts abroad and a willingness to assume the risks peculiar to it. He may find that he cannot afford to do this. and must be paid for by the exporter. the principal instruments that are used and the management of risk. marketers need more than a causal knowledge of the financial considerations in international marketing since the sources and instruments used there are different from those used in domestic trade. a capital investment. manufacturing for the export order begins. and it ends at ports when the goods are cleared. the export trade is financed like any other trade. it is up to the exporter to decide whether he can afford to give such credit at the prices he has calculated. Provision of the necessary funds with which to carry the merchandise from the date of manufacture to the date of delivery should therefore be made plus the provision of whatever credit the exporter believes should and can be extended to the buyer by the . the many sovereign nations. that good financing arrangements are a prerequisite for the success of the export trade. The investment is generally made in a less tangible form than in domestic business should not blind us to the fact that it is a capital investment and that it cannot generally be made the object of banking credit.e. whether he requires prompt payment or whether he is willing to allow credit to the buyer. Basically. and the limited knowledge about customers all combine to require close co-ordination between the financial and marketing departments..
credit. Thus. joint venture. a variety of financial institutions have evolved to aid the firm in supporting its marketing activities. Some of these funds may be obtained from the parent company’s operations and investments. credit. therefore. This bank may carry out its functions through correspondent banks . it needs funds for inventory. The parent organization also has the opportunity to aid its subsidiaries by guaranteeing any loans that the affiliate negotiates with local financial sources. credits generally cover specified shipments of merchandise and are represented by documents without which ownership of the merchandise cannot change hands. with its subsidiary. The international firm can choose from a number of banking sources for its foreign operations. while others might be generated by the affiliate itself or other subsidiary operations within the corporate structure. or other affiliate operations abroad. but others have been developed by the Indian Government and multinational sources. some within the corporate structure and some external to the firm. When the international firm makes its choice of banks. Some of the major banks not only evolved an extensive system of branch banks in foreign countries. Commercial Banks. Banks have developed different types of facilities to extend credit and otherwise support the overseas operations of their customers. and operating expenses. Even when the company limits its international activity to exporting. External Sources of Funds Usually the financing of international marketing requires funds in excess of those that can be allocated from the parent company. the firm turns to outside sources of both a private and governmental nature to meet these needs. The parent organization is an important financial sources as it provides equity for the subsidiary or loan funds directly to the local unit. In this respect. In some cases these loans may take the form of credit extended for inventory or equipment. and promotional activities. there is likewise a variety of capital requirements that must be satisfied to support these approaches. Some of these are private sources. These many needs are met from a variety of sources. In the case of export trade. the extension of credit in foreign trade is not only on a different basis but on a sounder basis than in domestic trade. Funds are needed by firms with foreign subsidiaries for physical facilities and for working capital to supply inventories. Internal Sources of Funds The multinational firm. may be able to raise a portion of the required funds internally. but they also began to expand the number and types of services they offered to meet the needs of the emerging multinational firms. there are several possibilities that are open: (1) A firm may choose to do its banking through the international department of its local bank. Sources of Funds for International Marketing As might be surmised from earlier discussions of the different marketing strategies that can be employed by the multi-national firm. Over the long course of international trading history. Banking is one of the most important facilities for the conduct of international as well as domestic marketing.exporter.
and (3) One additional possibility that has emerged in recent years is to work with one of the consortiums formed by banks of several nations. and participation in loans and investments made by private investors. IDA credits arc repayable in foreign exchange. but on very lenient terms. Various regional development banks have been established to promote the development of underdeveloped areas through the provision of intermediate and long-term loans. The corporation is to supplement and assist the investment of private capital and not to compete with it. This organization was formed in 1956 to assist in the economic development of its member countries by promoting the growth of the private sector of their economies. Regional Development Banks. Credits may be repayable over a period of 50 years. these terms substantially alleviate the repayment problems of the borrowing countries and bear less heavily on balance of payments. through banks in the foreign markets. and (3) To promote private foreign investment by guarantees. (iii) The International Development Association (IDA). and national development banks such as the National Financier South American of Mexico. (2) Alternatively. This group of three financial institutions is especially important for the financing of projects in developing countries that are related to infrastructure. (2) To make loans for productive purposes out of its own funds when private capital is not available on reasonable terms. including a grace period of 10 years. The bank makes loans on conventional terms for basic development projects chiefly to governmental bodies in the borrowing countries or for government guaranteed loans to private interests. It is a development agency that is to finance only enterprises which are productive in the sense of contributing to the development of the economies of the member countries in which they operate. (i) The International Bank for Reconstruction and Development. the African Development Bank. A government entity is usually the borrower. (ii) The International Finance Corporation (IFC). and thereby promote the long-range growth of international trade and the improvement of standards of living.abroad or it may have its own subsidiaries or branches abroad. Each of these has special advantages for certain situations and companies. the firm may choose to route certain transactions. Founded in 1946. its functions are: (1) To assist in the reconstruction and development of its member countries by facilitating the investment of capital for productive purposes. perhaps at the request of its customers. The third member of the World Bank group. The World Bank Group. has the primary objective of creating a supplementary source of development capital for countries whose balance of payment prospects would not justify their incurring external debt on conventional terms. The IBRD is the central institution of the group. Compared with conventional loans. Other development banks which have been established including regional banks such as the Asian Development Bank. . IDA.
and promptness of the exporter in the business deal. Since no documentary evidence of ownership or obligation exists. the price was stated in Italian lira. yet an exporter in India receives rupees for the merchandise that is sold. regardless of whether the price was stated in Indian rupees or in some other currency. then the Indian bank’s lira account in Italy is increased and the Italian bank’s rupee account in the Indian bank is reduced. exporters can accept foreign currencies in payments but they usually do not care to do so. incurring a loss in the use of working capital as well as loss of interest. Of course. when the exporter is financially weak. Or cash may be remitted by means of an international money order for small amounts. If accounts are maintained in banks in various countries. (3) bills of exchange. There may also be resentment of the view that the buyer is unworthy of credit. Today cash payment will probably be used when the importer is of doubtful credit standing. The conversion of the lira into Indian rupees is a foreign exchange transaction taken care of by banks. and foreign banks have deposit accounts in Indian banks. on orders requiring special instructions. competitive pressures have forced many producers use this method after years of selling on more secure terms. As a method of payment. (2) open accounts. or against certificates of manufacture as work on a complicated piece of equipment progresses. solvency. the burden of financing rests upon the exporter. the international marketing firm may use cheques like domestic trade. The buyer loses the use of funds for a considerable time before the goods are received. Open Account The open account method of payment for export shipments is the opposite of the cash method.International Commercial Payments International commercial payments may be broadly grouped into the following categories: (1) cash. Furthermore. Under the open account. Cash Cash is both a method of payment and a term of payment. Cash payment is not attractive to buyers since they bear the entire burden of financing the shipment.. Banks in India have deposit accounts abroad. Despite the disadvantages of the open account. goods are shipped without documents calling for payment — the commercial invoice of the exporter indicating the liability. for example. This requires a greater amount of working capital than other forms of payment and the exchange risks are assumed by the exporter. the buyer is dependent upon the honesty. In the open account method. Cash is also a term of payment. . and (4) letters of credit. but as a method of payment it is rarely used in international marketing. Funds may be paid from any of these accounts for purposes of financing trade. the open account presents difficulties because of differences in the laws and customs of countries which make it difficult to safeguard the interests of the exporter. or when the exporter is not cognizant of the competitive situation faced by manufacturers of other countries. The Indian government has recognized the competitive advantage of this form of credit in the system of credit guarantees. If. Cash may be called for with the order. it has established to aid Indian producers in competing with their European and American counterparts. cheques may be drawn and paid in a variety of currencies. Today credit is increasingly demanded.
but in refusing to use the facilities offered by banks. The export middleman. it is to be doubted whether this is the wisest policy to employ it in this manner. this type of financing is attractive to many manufacturers and exporters. (v). Even if manufacturers and exporters have ample capital. the availability of the merchandise. provided that he is qualified by experience and training to judge the credit risks involved in the export trade.Channels for Financing These channels are: (i) By the Exporter Himself. They are documentary drafts and transactions related to Letters of Credit. If the manufacturer is able to present a reasonably sound financial position to a bank. Terms of Credit The terms of credit are contractual matters of prior arrangements between buyer and seller. This method is most unusual because comparatively few manufacturers and professional exporters eithers have sufficient capital or wish to employ their capital in this manner. But because little or no cash is required. Charges for factoring export transactions are generally assessed on a percentage basis. the effect is the same — the importer has financed the transaction. the credit standing of the buyer. the manufacturer or exporter deprives himself of constant contact with a source of information covering a wide range of countries and subjects which may be of importance to him in deciding whether or not to extend credit in some particular instance. Credit risks which are not ordinarily acceptable to banks naturally gravitate towards this type of financing. exporters. in the overseas market to finance the transaction. particularly the export merchant or export commission house. The factor is a combination of mercantile and banking house which finances manufacturers. the country in which the consignee is . The financing of export shipments is usually done through the discount of documentary drafts by banks. not only are the fees for negotiating drafts usually quite small. he is virtually asking the importer.By Factors. In either case. Not only are the interest rates charged by banks comparatively low. The manufacturer. commission houses and selling agents through the purchase and discount of receivables created by sales of merchandise. Usually. the market customs. there seems to be every reason why he should finance his export business direct. The manufacturer may have his shipments to overseas markets financed by paying the export middlemen a fee. is paying the middleman a profit for the use of his credit. the amount involved. (ii) By the Export Middleman. and their determination depends upon a number of such factors as the type of merchandise to be shipped. The fee usually charged by a middleman for services of this nature is comparatively high. therefore. This method is useful to those exporters whose working capital is limited. When the exporter insists upon letters of credit or cash in advance with the order. the middleman turns around and refinances his own drafts through a bank. (iv) By importers. (iii) By Banks. finances export shipments. The importer does this either by placing the actual cash in the hands of the exporter or by establishing a letter of credit with some bank.
they are accepted by the bank. TERMS OF CREDIT IN EXPORT TRADE (i) Consignment. and only indirectly affect the extension of credit or the length of time for which credit is allowed. must be taken by the Indian shipper to comply with all the conditions set forth in the original Letter of Credit. credit is extended on the basis of the buyer’s “acceptance” of a draft calling for payment within a specified time. that is. the exchange restrictions existing in that country. the transaction is closed. payment is frequently made by means of a clean draft.located. the Indian bank notifies the Indian exporter that the credit is at his disposal. but in some cases this is not allowed. In this case. the availability of feight space to the country of destination. Upon the arrival of the credit. In the end. (iv) Letter of Credit. The goods are not released for . possibly because export transactions are always wholesale transactions. place and delivery of the merchandise. therefore. The terms of sale should be carefully distinguished from the closely related ‘terms of credits’. Payment is made against the documents surrendered to the named bank. after the draft is first presented to the consignee. (iii) Sight Draft. This method is probably used in the export trade. (ii) Open Account. (v) COD (Cash on Delivery). To secure payment. the amount due from the buyer at the time the shipment is made. If the documents are in order. whether the account is a new one or an old one. time. This refers to documents against acceptance (D/A). The buyer arranges for the establishment of a Letter of Credit through his local bank and specifies the conditions under which payment may be made to the seller. either directly or through his own bank in India. It may be liquidated by means of a clean draft. a draft which the buyer may honour or not as he sees fit. This involves advance payment. and the exporter receives the payment in full. Great care. The terms of sale are the conditions of content. Even experienced exporters occasionally get into difficulties by overlooking some item. (b) This specified time may be expressed as so many days after the date on which the draft is drawn. that is. a draft without any documents attached. (a) This specified time may be expressed as a certain number of days after sight. the exporter in India simply presents the necessary or specified documents covering the shipment to the notifying bank. and upon what terms. the seller (exporter) is willing to place in the buyer. and. Date drafts are preferable because they indicate a definite date for their maturity. The terms of credit are the expression of the extent of trust. the drawee is permitted to examine the merchandise before he accepts the draft. however. and many other considerations. (c) Generally. This may be worked out in one of the several ways: (a) Cash against documents at the point of shipment (usually at the port of shipment). As far as the exporter is concerned.
In the case of irrevocable credits. Partial deliveries. when once agreed upon between buyer and seller. (vi) Cash with Order (CWO). the merchandise is placed in a warehouse. Although once a practically unknown procedure. although in the case of revocable credits. due to difficulties currently encountered by foreign importers in securing merchandise. Part payment may be made in advance and part payment against documents. this may now be a practice which is used at times. Payment may be made at any time within the period specified in the draft. provided that he is able to satisfy his local bank as to his standing and the legitimacy of his requirements. INSTRUMENTS USED IN FINANCING EXPORT TRADE (1) Letters of Credit Letters of credit are the most important single factor in the export trade. the buyer. Letters of credit are also known as commercial credits and banker’s credits. can usually be arranged under this method.shipment until the buyer pays for them. authorising the seller to draw in accordance with certain terms. because alterations are made to suit the requirements of each individual transaction. and stipulating in a legal form that all such bills shall be honoured. can have his orders accepted by almost any firm in any country of the world. this promise is contingent upon the cancellation of the letter of credit or its not having been received. On arrival. All such credits. all contain an authorisation for some seller of goods to draw on a bank which promises to honour the drafts. provided that he lives to the terms specified therein. except with the consent of the beneficiary. The bank thus places the security of its name behind the buyer. A letter of credit has been defined as a written instrument issued by the buyer’s bank. It should be emphasised that the terms of sale virtually represent a contract between the buyer and the seller and include the “terms of credit”. “Terms of sale”. sixty. it may be accomplished either by actual remittance of cash by a bank draft. they also set out the ways in which the contract between the two parties is to be performed. have certain characteristics in common. c) Document against payment: (time draft) The goods are shipped without prepayment. or by a cheque on an account in India. Letters of credit are much more than a means of arranging payment between the two parties to a transaction. this security cannot be taken away. should include every condition on which the sale has been made. or by an available letter of credit. against proportionate payments. ninety or one hundred and twenty days from the date or sight. and give security to both buyer and seller. On the other hand. at which time the buyer may take possession of his goods. however. Herein lies the main point of attractiveness of letters of credit from the exporter’s point of view — he is assured of obtaining payment for his goods. (b) Cash against documents at destination: (sight draft) The goods are shipped without prepayment but the buyer must take up the draft and pay the face amount of it upon presentation. They form the basis of a very large portion of world trade. with a draft calling for payment within thirty. The terms of letters of credit vary greatly. It may be pointed out here that the bank issuing the letter of credit is the stake- .
offence to the buyer who opened the credit. entailing extra expense delay in payment.holder in the transaction and is acting on behalf of the buyer who opens the credit. and if there are any details. Every little detail must be complied with by the exporter to enable him to obtain payment against the letter of credit and one small (and often apparently senseless) divergence will lead to considerable complications. The bank is not in a position to modify any of the details contained in the credit. (ii) An irrevocable letter of credit issued by a foreign bank but without the responsibility of an Indian bank. This position must be clearly understood before describing the usual letter of credit requirements. TYPES OF LETI’ERS OF CREDIT In accordance with their terms. the negotiations between the parties. Commercial letters of credit used in connection with exports fall into the following three principal categories. however small. the exporter must ask the buyer to amend his instructions to the bank and the exporter must wait until the bank. whatever the reasons given by the exporter. It is not a party to. Irrevocable letters of credit may be either confirmed or unconfirmed. A clean letter of credit is one in which payment is made to the beneficiary against his receipt or against his clean draft. or non-payment and. The letter or credit must be minutely studied by the exporter. This type of letter of credit is referred was a “confirmed irrevocable letter of credit”. probably also. This is called an “unconfirmed irrevocable letter of credit”. the payment being made by the notifying bank against the beneficiary’s draft accompanied by the delivery of the full set of documents called for by the terms of the letter of credit. The amendments must follow the same channel as the original credit. In issuing a letter of credit. which call for adjustment. which issued the credit to him. but the basic contents are the same. (ii) Revocable and Irrevocable Letters of Credit It is obvious from the above classification of letters of credit that they may be either revocable or irrevocable. A confirmed . it is no use for the exporter to ask the bank at his end to make the amendments. It simply transmits advice of the issuance of the letter of credit. and is not interested in the goods as such. and becomes the irrevocable obligation of the Confirming Indian bank. notifies him that the letter of credit has been amended as required. (1) An irrevocable letter of credit (L/C) issued by a foreign bank and confirmed or guaranteed by an Indian bank. letters of credit may be classified as: (i) Clean and Documentary Letters of Credit Letters of credit may be either clean or documentary. Most commercial letters of credit are documentary. the bank is acting in accordance with the instructions which have been given to it by the buyer. and knows nothing about. The form and actual wording of a letter of credit vary from bank to bank. It is a frequent practice among exporters to request their foreign buyers to arrange with their local banks for the establishment of credits through a designated preferred bank in India.
letter of credit is one which is the irrecovable engagement of the issuing bank and which has been guaranteed to the beneficiary by another bank. The Indian bank gives its undertaking that drafts drawn in accordance with the terms of the letter of credit will be duly honoured. the Indian bank has no obligation to honour the drafts. The revocable form serves only as a means of arranging payment. The bank cannot cancel transactions. banks generally notify beneficiaries of changes or cancellations. but in either case. It should not be assumed that revocable credits carry no obligation on the part of the bank which establishes them. but there is no obligation on their part to do so. Under some circumstances. may not find it convenient to establish a separate letter of credit covering each transaction. in such a case. however. the exporter may be satisfied and accept the irrevocable letter of credit of a foreign bank without confirmation by an Indian bank. who’ becomes the exporter. Once the representative of the importer has found a suitable person or firm which is able and willing to ship the goods on the terms specified by the importer. at least over a certain period of time. the confirming bank charges a commission. after they take place — that is. however. It can. (iv) Revolving Letters of Credit A revolving letter of credit was devised to meet the needs of firms in different countries whose business transactions with one another were more or less regular and continuous. with the . Revocable letters of credit are obviously never confirmed. confirmation is usually avoided unless it is necessary or desirable. (iii) Assignable and Non-Assignable Letters of Credit Letters of credit may also be divided into two groups. For confirming a credit. for that reason. and collects under the terms of the letter of credit which has been assigned to him. for example. when the bank establishing the credit is practically unknown in the beneficiary’s country. depending upon their assign ability. which expects to buy a substantial quantity of fertilizers in India over a period of 4 or 5 months. for it affords the exporter no protection prior to payment and may be amended or cancelled without the consent of the beneficiary and without placing him on notice of changes or cancellations. Revocable credits are invariably addressed to a bank and not to the beneficiary. A non assignable letter of credit is one which may not be transferred by the beneficiary named in the letter of credit. under revocable letters of credit. It would be necessary. This form may provide for drafts dawn on the Indian bank. An assignable letter of credit is one which may be assigned by the beneficiary to some other party. the letter of credit will be assigned to that party. ships the merchandise. after the drafts are negotiated. arrange with a bank in Baghdad to establish a letter of credit with a bank in New Delhi to be availed of against sight documentary drafts. since confirmation would render them irrevocable so far as the confirming bank is concerned. The revocable letter of credit is less frequently used than the irrevocable letter of credit. confirmation of the credit by a local bank would enable the beneficiary to negotiate drafts drawn under it much more readily. A firm in Iraq. As a matter of courtesy. An assignable letter of credit is usually issued to a representative of the importer whom he does not know at the time he requests the letter of credit who will actually be the exporter of the merchandise. for example.
and these arrangements vary according to the countries in which the seller and the buyer are located. Two common types of revolving letters of credit are: (a) Revolving Cumulative Letters of Credit. Suppose our exporter in India has received a letter of credit for the shipment of sports goods. (ii) The invoice of the draft exceeds the maximum amount specified in the letter of credit. but receives only the difference between the amount of the draft and the amount paid by the bank on the draft drawn under the ancillary letter of credit. A credit which provides for a certain maximum payment in any one month (or some other period of time). and advise to that effect received from the bank which established the credit. requests the bank. (vii) Ancillary Letters of Credit (Back to Back Letter of Credit) These assisting letters of credit are based on the original letters of credit. honour the drafts of the seller (the owner of the sports goods) on receipt of the shipping documents and cancel the ancillary letter of credit The exporter presents his draft for the amount of the original letter of credit. (iii) The charges included in the invoice are not authorised in the letter of credit. the bank may issue its own letter of credit (ancillary letter of credit).000 is outstanding at one time. of the letter of credit to open its own letter of credit to a third party (the seller of sports goods) under the identical terms contained in the importer’s letter of credit. (b) Revolving Non-Cumulative Letters of Credit. therefore. or the tune of shipment specified in the letter of credit has expired. the paying bank may negotiate fresh bills only to the extent that those previously negotiated have been paid. He. and consequently is unable to buy the sports goods ordered by the importer. The exporter has no funds and no line of credit with a bank. these letters of credit are opened by cable. (vi) Cable Credits Under arrangement. The currency specified depends on the arrangements made between the seller and the buyer at the time the sale is effected. (v) Foreign Currency Letters of Credit Letters of credit may specify the currency in which drafts against them shall be drawn. If the importer’s letter of credit is irrevocable. . which has notified him. When once this maximum is reached. Discrepancies The discrepancies most frequently found in documents scrutiniscd by the paying bank are: (1) The letter of credit has expired.provision that not more than $ 100. A letter of credit which indicates the maximum amount of drafts which may be outstanding at any time. the amount not availed of cannot be availed of subsequently. It is a normal precaution in establishing such credits to indicate that if the credit is not drawn against during one month (or the period of time specified).
(iv) The paying or accepting bank. the party for whom the credit was originally established is not considered to be liable in any way and cannot be forced to take up the drafts so accepted or paid by the bank. (vi) The bill of lading is riot “clean”. – (xiii) The bill of lading does not indicate “freight prepaid. merchandise is not responsible for the quantity or quality of the merchandise. The buyer must be satisfied as to the integrity of the exporter before he closes the transaction. Bills of lading to some countries are prohibited and heavy penalties or additiona1 duties are imposed for failure to ship on a straight bill of lading. Main Parties to a Letter of Credit There are four main parties to a ‘letter of credit. The bank must thoroughly satisfy itself as to the accuracy and completeness of the documents attached to the drafts presented for discounting. i. But the bank is entirely responsible for the fulfilment of the conditions Specified in the letter of credit itself. or as called for in the letter of credit. not presented to the opening bank promptly after date of their issuance. (ix) Description marks and numbers of the packages are not exactly the same on all documents presented. such as C & F. CIF. (xii) Documents are “stale dated”. The bank negotiating. .(iv) The insurance coverage supplied by the consignor is not complete.. either as to amount or as to the risks covered. (iii) The bank which opens or establishes the credit. FAS. accepting and paying the drafts under a letter of credit covering shipments of. (vii) The bill of lading does nor include the “on board” endorsement. the bank is committed. (viii) The bill of lading is made out to “order” whereas the credit stipulates a “straight” bill of lading. or changes on the bill of lading have not been signed by the shipping company or have not been initialled by the same party who signed the bill of lading. called the “issuing bank”. FOB. on which the beneficiary is authonsed to draw. Once the drafts under a letter of credit have been accepted or paid. (v) The date of the insurance certificate is later than the date indicated on the bill of lading. or vice versa. They are: (i) The importer or buyer on whose account the letter of credit has been opened (ii) The seller or beneficiary who is authonsed to draw against it.e. etc. If an error has been made. It is difficult to exaggerate the importance of carrying out all these stipulations to the last detail. frequently called the “advising” or “notifying” bank.” when freight charges are included in the invoice. (xi) The invoice does not set forth the terms of shipment as stipulated in the letter of credit. (x) All the documents required under the letter of credit have not been presented.
Such assent usually consists of the acceptor writing across the face of the bill. a specified person or the bearer. (v) Description of the goods. An accepted draft or an accepted bill of exchange is called an acceptance. for negotiation to a bank other than the notifying bank. When opening a letter of credit. (ii) The name of the beneficiary. and whether confirmed or unconfirmed. “accepted payable at……. with the name of signatory and his title. (vi) How goods are to be consigned and bills of lading drawn. (iii) The person on whose account the credit has been opened.S.and affixing his signature.” (B) Drafts or Bills of Exchange A draft or a bill of exchange. as it is known throughout the world. or to the order of. under an irrevocable letter of credit. B. signed by the person giving it. (iv) The tenor of the drafts to be drawn. The form of endorsement conveys title to the bearer. This endorsement in blank is one in which the name of the company only is shown. Rathor Finance Officer. (viii) Where and how insurance is to be placed and to whose order it is payable. For example: Indian Export Company. is an unconditional order in writing. (x) The number of the letters of credit and instructions that bills drawn under it shall bear the clause “Drawn under (the name of the issuing bank) Letter of Credit No …. (ix) Expiry date. . The person to whom it is addressed is called the drawee. A draft is payable to the bearer when it is expressed to be so payable or when the only or last endorsement is an endorsement in blank. it is necessary to state: (i) Whether the letter of credit is revocable or irrevocable. and if he signifies his assent to the order in due form. requiring the person to whom it is addressed to pay. addressed by one person to another. the date. (vii) Details of documents required and the disposition to be made of them.A third bank may become a party to this transaction when. a definite sum in money to. drawn against the letter of credit. he is called the acceptor.. on demand or at a fixed or determinable future time. the beneficiary chooses to present his drafts.
S. but whilst the bank will notify the buyer that the documents have been received and are due for payment. it will not take any further action to obtain payment until it knows that the vessel has arrived. provided that the sense is clear and the bill conforms to the provisions laid down in the definitions given above. The person who makes out the draft (i. if the first of exchange is negotiated.e. a promise of payment by the buyer on the agreed date. the person who receives the money) is said to draw the draft and is called the drawer. one of which is the “first of exchange” and the other the “second of exchange”. A draft payable at some future period after sight becomes a demand for payment by the seller. or according to an indicated ascertainable rate of exchange. although it is required to be paid with interest or with collection charges. most drawees wait until the vessel carrying the goods arrives at the port of destination before doing so. and a receipt for payment after such payment has been made. The bank in the buyer’s country normally receives a sight draft and the shipping documents which accompany it sometimes before the goods arrive. A draft or a bill of exchange performs two or three functions.. a sight draft should be retired or honoured (meaning thereby the payment demanded should be made) by the drawee immediately when it is presented to him.e. If the first of exchange is lost. Indian Export Co. the bank will hand over the shipping documents (i. etc. the bill of lading. A draft payable at first sight is a demand for payment due and a receipt for payment made.) to him.A special or direct endorsement would read as follows: Pay to the order of Joe Macanzie & Co. The person to whom the draft is addressed and from whom payment is demanded is called the drawee. It is customary to send the first of exchange by the first mail and to send the second of exchange by a subsequent mail. the second of exchange then becomes negotiable. that constitute the chief supply of international currency. Rathor Finance Office The sum payable is a definite and specified sum. and when the buyer pays the draft. the draft is presented to him and this draft is called a “sight draft” which is said to be “drawn at first sight” or “on demand” or on presentation. However. insurance certificates. invoices. This notification to the buyer that the draft is with the bank awaiting payment is called presentation.. . It is drafts or bills of exchange. on people in another country who are buying the goods or using the services. drawn by the shipper of goods or the provider of services in one country. Drafts are usually drawn in pairs. but in export trade. B. No special form of words is essential for the validity of a draft.” In its Strict technical meaning. the second of exchange ceases to have any value. The buyer is then said to have taken up the documents. as these documents are sent by air mail. When the drawer expects the drawee to make payment immediately.
sometimes after he has received the goods. it will hand over the shipping documents to him and this is the explanation of the term. as soon as the draft is received by the bank abroad. If there is no letter of credit. the exporter will draw such a usance draft on the buyer. which will pay the amount of the draft. and when he receives it back. If the exporter has been paid through a letter of credit. If the exporter has agreed to send the goods abroad on D/P terms (documents against payment terms) without asking for credit to be opened. discount it. unless instructions have been given to the contrary that the bank should hold the accepted draft as agent for the exporter and recover payment from the drawee after the appropriate number of days has expired. the goods many take four or five weeks to reach the foreign port. When the draft is drawn for payment at any date later than the presentation. give the buyer credit for another four to five weeks. therefore. or to a discounting firm. he can instruct that bank to send the bill back after acceptance. When a draft is drawn at 30 days’ sight. In this case. obtain the goods which can only be released by the shipping company in exchange for one of the copies of the bill of lading. the bank aboard will notify the exporter that his draft has been accepted and give the date of acceptance. but will require the seller to submit drafts at 30 days’ sight or 60 days’ sight or after the number of days they have arranged to allow credit to the buyer. if he wants to get his money quickly. What in fact happens is that. thereby converting the draft into a post-dated cheque. there are some cases where buyers will not sign their acceptance until the vessel carrying the goods has arrived at their port. or whether other tenor is allowed. it means that the drawee has to retire it thirty days after it has first been presented to him. the bank will not hand over the shipping documents and the buyer cannot. Similarly. If he has Sent the draft and documents direct to the foreign bank. Once the draft has been accepted. less a Commission for discounting. which will vary according to the tenor of the draft and the amount of risk involved in obtaining payment from the drawees when it . When the exporter has already been paid under letter of credit.Unless and until the sight draft has been returned. in all likelihood. the exporter can. the buyer may be able to arrange with his bank to advance the money for the goods and to pay the bank back. As the documents are sent by airmail and reach the foreign bank within three or four days. it is called a usance draft or a usance bill. When the exporter has agreed to give credit to the foreign buyer for a certain number of days or weeks. it will be handed over to the drawee. The period which is allowed between presentation and payment is referred to as tenor of the draft. While it is usual for usance drafts to be presented and accepted immediately they arrive abroad. The actual wording will. As soon as the bank abroad receives the accepted draft from the drawee. the bank abroad will recover the payment after 30 days. be: “Accepted payable at and in the blank space will be inserted the name of the drawee’s own bank. he can hand it over to his own bank. have elapsed from the date on which the drawee signed this acceptance. who will then write upon the word draft accepted with the date and his signature. “D/A or documents against acceptance”. The acceptance of a draft only on the arrival of the vessel will. the bank will open a letter of credit and arrange to pay the seller. the goods will remain the exporter’s property until the drawee has paid. The bank will then remit the money to the exporter after deducting its own charges. the bank making the payment will own the goods if the drawee does not pay. therefore.
no stamp duty is required on but usance drafts must be stamped legally acceptable. Care must. goes a stage further. will in fact make payment on the sixty-third day after the date on which it was accepted. Such grace days are not allowable on at sight or on presentation drafts. the bank or discounting house can claim back the money paid to the exporter when it discounted the draft. The amount of tenor of the draft — whether it is 3 sight — but is calculated on the amount. The protest is legally necessary to enable the drawer to enforce payment from the drawee. in this instance. therefore. the exporter. the exporter’s bank will arrange for the discounting of the bill for him. After the draft has been noted. the first procedure is to have the bill noted. drafts are normally and preferably handed over by the exporter to his own bank. the same Notary Public will draw up a formal document known as protest. and the bank abroad will notify the exporter’s own bank of acceptance. In such a case. it is customary to allow the drawee three days in which to make payment after the due date of a usance draft. which sends. In some countries. In India. be taken to ensure that if such action is necessary. which may be within one week or within one month after the date on which payment should have been made. and these charges vary and depend upon whether the draft is discounted with recourse or without recourse. The term with recourse means that if the draft is not paid by the drawee. Drafts presented against a letter of credit are almost always without recourse (even though the phrase is not mentioned on the actual draft). giving also the reasons why payments as not been made. and adrawee. there may be an instance when the drawee does not make payment against the draft even if it is a draft which he has signed as accepted. . This means that the unpaid draft is handed over to Notary Public (who is a specially authorised lawyer) who again presents it to the drawee (or to the bank at which he accepted the draft as payable) for payment. Whether the bank will do this depends largely upon how well the bank knows the exporter and how much it trusts his commercial acumen and morality. The bank abroad will see to it that the unpaid draft is not noted and is unprotected if instructions to do so have been given by the exporter. In the alternative. The consequences then will be the same for the buyer who refuses acceptance. the exporter’s bank wilt normally discount the bill at the time it is handed over to it for transmission abroad and will not wait for a notification of acceptance. it is taken within the legal period. without asking for the draft to be sent back. If payment is not made. the Notary Public will note the fact on the draft. the exporter is advised to obtain an amendment before taking action to ship the goods. While it should not happen if proper care and attention is taken. Such discounting of bills Costs the exporter money in bank charges.becomes due. ‘The term without recourse means that the bank or discounting house takes the full risk of not being able to get its money back from the drawee. In actual fact. them abroad to the bank with which they have dealings. in fact. If with recourse drafts are asked for in a letter of credit. may request the foreign bank to do the discounting and remit the proceeds to him. who has accepted a draft for payment in 60 days after sight. Commercial practice. In most countries there is a time limit for noting and protesting. Noting and protesting can also be done if the drawee refuses to accept the bill. These days are called grace days.
which provides space for the exporter’s instructions to be filled in. the exporter (beneficiary) is assured of payment. Under the various credit and payment terms described earlier. The charges are not excessive. There is also difference in the way marketers appraise a particular market. add the words plus bankers’ collection. as he would when drawing against a letter of credit. instead of adding a calculated amount to the total of his invoice. however. Whenever international marketing people assemble and the subject turns to marketing conditions in particular countries. it often happens that the effect of noting and protesting is to frighten the buyer (or the drawee) into honouring his obligations because if he allows the noting and protesting to be carried out. As the actual amount of these costs is not known to the exporter before the transaction is finalised.and that is that both the exporter’s bank to which the documents are handed and the foreign bank which collects from the drawee will make a charge for their own services. The exporter hands over the drafts and shipping documents to his own banker and usually fills in a special form. all this may not happen if drafts are drawn under a letter of credit. especially when the exporter wishes to have the money remitted by cable as soon as it is collected from the drawee. One more fact should be borne in mind in connection with D/P and D/A terms of payments. supplied by the bank. It is not usual for drafts and documents to be sent direct to a collecting banks abroad. Before looking at these factors. therefore there is no credit risk. it would be well to examine closely the meaning of credit. However. Credit Extension One of the ever-present problems in international marketing is the extension of credit. Under a letter of credit. the question inevitably raised is: “What terms do you grant?” The differences in the terms are often due to the products for which the terms are cited. In other words. a buyer would receive credit under open account and under all draft transactions. Therefore. but are certainly worth considering. The Meaning of Credit Credit usually refers to the procedure of surrendering title to merchandise without immediate payment. . credit means trusting the buyer to pay for goods after title to them has been obtained by the buyer. including space headed “if paid” and “if unpaid” and it is in these spaces that the exporter will fill in the words protest or not protest he wants the banks abroad to note and protest in the case of non-acceptance or non-payment. The banks also charge extra for sending the documents by air mail. his credit and reputation with other possible suppliers will be badly damaged. which he may not be able to recover from the drawee.While the main reason for noting and protesting an unpaid or unaccepted draft is to enable the drawer to sue the drawee or a proven debt. he may. If the word protest is filled in. the exporter will be responsible for the payment of the noting and protesting fees. air mail and remittance charges immediately following the amount of draft. it would appear that the appraisal of the credit situation of a buyer in a particular market is determined by a number of factors.
transportation. Conditions Influencing Foreign Credit Extension There are several conditions peculiar to international marketing that require an exporting firm to view foreign credit differently from domestic credit. Interest rates in non-industrial areas may be substantially higher than in industrial . At the outset. The line of credit establishes a maximum amount that will be loaned to a customer. While in Canada credit conditions are practically identical with those in the United States. (v) Exchange rate fluctuations. (ii) Interest rates. there is no assurance that the draft will eventually paid by the drawee. (iv) Time in transit and business turnover. Moreover. except for foreign exchange rates and tariffs. or infrastructure improvements because local bankers were unable to provide the financing. automobiles. that should also he considered. The supply of capital is quite meagre in these countries. the conditions influencing credit extension are different in Mexico.There is another aspect of credit. however. Importers located in underdeveloped areas have depended upon foreign sellers to finance their purchases of consumer goods. These conditions are: (i) Supply of banking capital. it is well to emphasize that the influence of these conditions varies from country to country. The supply of capital varies greatly among countries and is highly dependent on the nation’s natural resources and past production. (vi) Competition. (vii) Customs. interest for the period of time for which the funds are advanced must be paid. That is the credit needs of the firm which is engaged in exporting merchandise. a payee (exporter) can make use of valuable documents to obtain immediate finances. because there is a period of time elapsing between the shipment of the order and the time that payment is received. A limit may be placed on the rupee value of discounting or borrowing that an exporter will be permitted to receive. However. A payee of a draft may discount or borrow against the draft before its maturity but in doing so. banks will not discount or loan against accepted drafts beyond a certain limit set by the line of credit that the bank has set up for each individual customer. (iii) Diversification of production. The inference may easily be drawn that under all credit and payment terms except open account. if such finances are required.
Moreover. bankers. not only the growers. the wisdom of an importer borrowing abroad at relatively low interest rates and lending the funds at home becomes apparent. In underdeveloped or developing areas of the world. It is quite conceivable that a crop failure or a low price could cause an economic collapse. Another factor accentuating this condition is the lack of diversified production. coffee. It may be weeks or months before the importer located at an inland destination receives the merchandise. utmost the that payment can be postponed and possession of the goods received is upon their arrival.countries. Counter Trade (Barter) Most international trade involves a cash transaction. In addition. If the buyer has agreed to pay for the purchases by sight draft. Many countries have only certain primary products for export such as sugar. intensive specialization in commodity or functional lines may not be warranted. and they are to be recognized by exporters selling in those markets. the exporter bears the financial burden of the import transaction. rubber. They want to offer other . Whenever a buyer receives quotations and accepts prices in a currency other than the native currency. This condition is of little significance in domestic trade where shipments may be made quickly. Because of the length of time elapsing between the date of shipment by the exporter and the time when goods are received by the importer. The buyer agrees to pay the seller in cash within a certain stated Lime period. customs duties and transportation charges may be paid before delivery. If credit of sufficient duration is granted to enable the importer to obtain the goods before making payment. An exchange loss sufficiently great to eliminate the anticipated trade profit may be incurred. there may be a considerable period during which. but the sluggishness of turnover may leave the goods in the hands of the buyer for a considerable additional period of time. liberal credit terms may be offered. distance and time compel importers to place orders for substantial quantities of goods long before the selling season opens Still another condition influencing credit extension in international marketing is the fluctuation in foreign exchange rates. As a means of promoting sales. in the case of cash payment. etc. the importer is without both — funds and goods. it may be difficult for an exporter to refuse credit terms at least as liberal as those granted by rival suppliers. and the business person may frequently combine several types of business ventures in order to earn an adequate income. In such circumstances. but in international marketing it presents an important problem. during which the buyer’s funds would also be tied up. Yet many nations today lack sufficient hard currency to pay for their purchases from other nations. and others may be placed in precarious positions. Finally. The lack of developed business system is another factor entering into the foreign credit situation. credit may also be extended for competitive reason. Certain terms are often established in each market along commodity lines. Credit extension is influenced by the credit customs of the foreign market. Moreover. but also businesses. This imposes a heavy financial responsibility. the buyer assumes a speculative risk against which protection may or may not be obtained. If this occurs.
For example. with no money and no third party involved. The Export-import ‘Bank of India was established for providing financial assistance to exporters and importers. The Logo has a two-way significance. The seller sells a plant. chemical company built a plant for an Indian company and accepted partial payment in cash and the remainder in chemicals to be manufactured at the plant.S. The Post Decades . For example. Countertrade takes following forms: (i) Barter. Here the seller receives some percentage of the payment in cash and the rest in products. For example. Daimler-Benz finally achieved payment in German currency. Although most companies dislike countertrade deals. but too many nations lack sufficient hard currency. The import arrow is thinner than the export arrow. and this has led to a growing practice called countertrade. and for functioning as the principal institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade.items in payment. Approximately 40 percent of trade with Communist-block nations in yesterycars was handled through countertrade. Its logo reflects this. Daimler-Benz agreed to sell thirty trucks to Romania and accept in exchange 150 Romanian made jeeps. equipment or technology to another country and agrees to accept as partial payment products manufactured with the equipment supplied. (iii) Buyback arrangement. It also reflects the aim of value addition to exports. Pepsi-Cola sold its cola syrup to the USSR for rubles and agreed to buy USSR vodka at a certain rate for sale in the United States. they may have no choice if they want the business. The seller receives full payment in cash but agrees to spend a substantial amount of money in that country within a stated time period. which is a growing phenomenon in world trade. Export-Import Bank of India Objectives: The objective of Exim Bank is to promote India’s international trade. Everyone agrees that international trade would be more efficient if carried out in cash. (ii) Compensation deal. 1981. A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee. More complex countertrade deals involve more than two parties. a U. which in turn it sold to a German supermarket chain for deutsch marks. (iv) Counterpurchase. Less developed countries are also pressing for more counterirade agreements when they buy. Various barter houses and counter-trade specialists have emerged to assist the parties to these transactions. The Exim Bank was established under: The Export-Import Bank of India Act.Through this circuitous transaction. For example. Barter involves the direct exchange of goods. which it sold in Ecuador for bananas. Sellers have no choice but to learn the intricacies of countertrade. The bank started its functioning in 1982. the Germany agreed to build a steel plant in Indonesia in exchange for Indonesian oil.
360 million.3 billion from the Reserve Bank of India (RBI) and Rs. finance for export marketing. 2. Rs. 338 million payable to the Industrial Development Bank of India. 48 billion have been financed. ongoing technology. Aggregate loans and advances outstanding reached Rs. These cover . export bills rediscounting. term finance for 100% export oriented units. 671 million from the Government of India.3 billion. Exim Bank also extends non-funded facility to Indian exporters in the form of guarantees. Rupee borrowings including long term loans of Rs. 17. lines of credit.4 billion raised as loans in foreign currencies. a lending programme fore export product development. (2) Second. of Rs. finance for computer software exports. Over the eight years. Paid-up capital of the Bank increased to Rs. term finance for export production. 3. with the authoriscd capital at Rs. refinance and bulk import finance to commercial banks.2 billion raised in the domestic bond market and equivalent of Rs.24 billion. on a cumulative basis over eight years reached Rs. Rs. buyers abroad may need credit terms to stimulate purchase. 17. Total staff of the Bank stands at 138. export contracts valued of Rs. exim Bank serves as a single source for export finance. pre-shipment finance is needed to acquire inputs that get convened into an export product. on account of its transfer of the international loan portfolio to Exim Bank in March 1982. 1. (5) Fifth. Reserves aggregated Rs. In the financing of non-traditional exports.34 billion. overseas investment finance. over a period of eight years.2 billion. wholly subscribed by the Government of India and accumulated reserves. 5 billion. 11. amounted to Rs. The authorised share capital of the Bank is Rs. Exim Bank is helping at all five stages. (4) Fourth finance may be needed for systematic marketing activities. buyer’s credit.35 billion. (3) Third. 989 million.18 billion. 6. Finance for exports is needed at five stages (1) First. 1. This includes paid up capital of Rs. 199Q aggregated Rs. an exporter may need finance to develop an exportable product. The Bank now offers a diversified range of lending programmes. 989 million. Resources Exim Bank’s resources as a March 31. 2.Net profits. This encompasses direct financial assistance to exporters at preshipment stage. Asset footings recorded Rs. Range of Financing Programmes Exim Bank promotes Indian exports through a range and a variety of lending programmes. Dividend to Government in cumulative terms. finance is needed to upgrade export production through acquisition of new equipments. 5 billion.
export product development and quality assurance activities which form part of a firm’s export programme. 1553 million and Rs. Direct assistance to exporters took the form of deferred payment. sanctions have increased by 12% and utilisations have increased by 22. (c) Pre-shipment Credit Pre-shipment credit is extended in participation with commercial banks for . 1235 million respectively. textile machinery. telecommunications. Outstanding as on March 31.various stages of the export cycle. post shipment credit. Lending Programmes for Indian Companies (a) Direct Financial Assistance to Exporters During the period 1989-90. Funded assistance was utilised mainly for exports to West Asia (61%) followed by South Asia (11%). sanctions and utilisations of direct financial assistance to exporters amounted to Rs. These together constitute the expanding base of non-traditional exports from India.2 billion compared with the previous year. bicycles and spares. auto ancillaries. research and product development. computer software. Sanctions and utilisations covered exports of railway rolling stock. suppliers’ credit.9 billion. pharmaceuticals. South Asia(19%). Out of sanctions for funded assistance during the period under report.. Operations under Programmes of Funded Assistance During the period 1989-90 Exim Bank sanctioned Rs. project exports. South Asia (9%). i. 8. Seventeen percent of funded sanctions and 25% utilisàtion of export credits were accounted for by construction and consultancy industry. leather and leather goods and paper mill machinery. export of technology services. 1990 stood at Rs. (b) Leading Programme for Export Product Development Exim Bank introduced in 1988-89 a lending programme which provided export development loans for purpose of R&D. foreign currency and rupees term loans to project exporters and finance for export of technology and consultancy services. pre-shipment finance. outstandings have increased by 20%. production loans. The current focus of the Bank is to promote export of industrial durables. Utilisations were largely for exports to West Asia (63%). market entry financing term loans for capacity upgradation. SubSaharan Mrica (10%) and Americas (8%). 11. 4 million. South East Asia/Far East Asia & Pacific (7%) and Sub-Saharan Africa (4%).6 billion under various programmes of funded assistance and utilisations of these programmes amounted to Rs. the largest share was for exports to West Asia (61%). Utilisation under this programme during the year amounted to Rs. 9. Compared with previous year. 1. export of computer software. power generation and distribution equipment. followed by Europe (12%).e. surgical instruments. commercial vehicles. Operations under individual programmes of funded assistance are briefly described in the following paragraphs.
374 million. Exirn Bank was designated as agency to manage a second export development programme under World Bank funding. During the period 1989-90. 80 million. Exim Bank extended sanctions of Rs. Exim Bank sanctioned to software exporters. 42 million. This is expected to catalyse exports valued at Rs. (g) Export Marketing Fund I Under this programme. Government of India has designated Exim Bank as the agency to manage the EMF. Outstandings of the end of the year stood of USS 5 million and Rs.C. The Export Marketing Fund (EMF) is a component of a World Bank loan to India for promotion of a select group of engineering export products in developed country markets. Utilisations were 1. Exim Bank sanctioned term finance of USS 1 million and Rs. (ii) Export Marketing Fund II During the year under review. 237 million was sanctioned. sports goods. 22 million during the period. 1990. The disbursals are in the form of grants. Utilisation under the programme amounted to USS 3 million and Rs. Exim Bank provides rupee term loans on a matching basis with JFC to such enterprises. Exim Bank has been named as a source of foreign exchange for software exporters. medical equipment and garments. Activities eligible for finance are new projects with expansion and modernisation plans and equipment imports. 243 million. Exim Bank extended sanctions amounting to Rs. 44 million. Sanctions were utilised to set up export-oriented units for manufacture of granite slabs. During the period. finance is available to Indian companies for undertaking export marketing activities. Utilisation in the same period covering sanctions was Rs. Washington D. 886 million over a period of 4 years. Utilisations under this programme aggregated Rs. SS 2 million and Rs. foreign currency loans of USS 6 million and rupee term loans of Rs. as well as product and process know-how to create and enhance export capabilities. 307 million by way of term loans for export oriented units. Outstandings under this programme amounted to Rs. 16 million to 36 firms for export marketing programmes. Such finance Covers upto 50% of the total cost incurred on eligible export marketing activities.procuring raw materials and inputs required to produce equipment whose manufacturing cycle exceeds 180 days. gem and jewellery.. 29 million. Utilisations under this programme amounted to Rs. finance by way of foreign currency term loan is available from IFC to Small and Medium Enterprises in the private sector for investment in plant and machinery. 25 million respectively. preshipment credit amounting to Rs. 628 million as on March 31. This programme . (d) Term Finance for 100% Export Oriented Units During the period 1989-90. (e) Term Finance For Export Production Under the Agency Credit Line concluded by Exim Bank with International Finance Corporation (IFC). (f) Finance for Computer Software Exports Under the Government of India Software Policy.
diesel engines and pumps. outstandings stood at Rs. 2. Companies and Financial Institutions. 500 million (b) Small Scale Industry Export Bills Rediscounting Under this programme. construction activity. paper mill machinery. Under this programme. Major part of utilisations ware for exports to West Asia (54%). 500 million. 7 million. Loan sanctions in respect of 2 proposals amounted to Rs. Outstandings at the end of the year stood at Rs. Utilizations under cumulative sanctions amounted to Rs. 174 million for textile industry. At the year end. at firm level.East Asia/Far East & Pacific (10%). RBI sets the lending limit. 871. followed by Sub-Saharan Africa (17%). power generation and distribution equipment.seeks to promote export of all manufactures to developed country markets. outstandings at the end of the year stood at Rs. by providing loan cum grant finance in support of strategic export development plans. auto ancillaries and spares and textile machinery. commercial banks can rediscount eligible export bills of small scale industry exporters. supply of products and services. (a) Overseas Buyer’s Credit Utilisations under this programme aggregated Rs. 880 million have been sanctioned during the period under review. Lines of credit aggregating Rs. bicycle and bicycle parts. Exim Bank provides short term funds to Indian commercial banks against export bills that have unexpired usance of a maximum of 90 days. Finance extended under this lending programme was utilised for equity investment. Outstandings on March 31. 3. Americas (11%) and South. (c) Refinance . sanctions of overseas investment finance for Indian joint ventures abroad. million. 30 million. Landing Programmes for Commercial Banks in India (a) Export Bills Rediscounting Under this programme. The major products financed under this programme were commercial vehicles. Lending Programmes for Foreign Governments. 1990 stood at Rs. and approval for grant finance was extended to one company. a manufacturer of herbal products. (b) Lines of Credit to Foreign Governments and Financial Institutions Exim Bank offers lines of credit to foreign governments or overseas financial institutions. Utilisation of lines of credit aggregated Rs. finance was utilised for investment in a subsidiary for melamine faced particle boards in USA. For this programme. amounted to Rs. the RBI sets the lending limit. Under this programme. 466 million. 27 million. (i) Overseas Investment Finance During the period 1989-90. For this programme. 26 million.
Construction projects accounted for 34% of sanctions and 36% of issues. Exim Bank also mounted a programme to finance feasibility studies in developing countries: the Project Preparatory Studies Overseas Programme. Commercial banks in India extending finance to firms engaged in the bulk import of eligible industrial inputs can avail of this facility. Operations under Programmes of Non-Funded Assistance Exim Bank sanctioned non-funded assistance in the form of guarantees worth Rs. Results Exim Bank registered for the 12 months under report a net profit of Rs. Washington D. the RBI sets the lending limit. 623 million respectively for refinance assistance to commercial banks during the period. 138 million is transferred to reserves.0 billion. (d) Bulk Import Finance Under this programme commercial banks avail of finance by discounting promissory notes drawn in their favour by importer borrowers. 498 million and guarantees worth Rs. Major part of non-funded assistance was for projects in West Asia. One approval was made during the year for a feasibility study in the transport sector in South. During the period. Funds were earmarked out of Bank’s Export promotion Reserve for financing of consultancy studies undertaken by Indian consultants enlisted by the Africa Project Development Facility. It seeks to promote private sector investment in Africa.Exim Bank sanctioned and disbursed Rs. Export Promotion Exim Bank during the year launched three promotional programmes aimed at providing finance for export promotion. 55 million into Export Promotion Reserve available for export promotion purposes.March 1990. Rs. 80 million accounts for the dividend paid to the Government of India and Rs. Refinance assistance was also extended to commercial banks for rupee term loans extended by them to project exporters executing projects in West Asia. At the year end outstandings stood at Rs. utilistions of refinance of rupee term loans amounted to Rs. A third programme.C. 21 . 192 million. as against a profit of Rs. 431 million. For this programme. 284 million for the 15 months period January 1988. 654 million and Rs. This facility has been set up by International Finance Corporation. Net profit of the export Development Fund during the period was Rs. 1. Utilistions of export credit refinance for supplier’s credit was Rs. jointly with UNDP and African Development Bank. In addition. 394 million were issued.March 1989. This is after adjusting for depreciation.East Asia/Far East & Pacific. possible loan losses and other normal provisions. 272 million (on account of General Fund) during April 1989. Out of this profit. This programme is operated primarily with the purpose of refinancing medium and long term post-shipment credit extended by banks to Indian exporters. Net profit (on an annualised basis) has increased by 20% as compared to the previous year. the Bank has transferred funds aggregating Rs. provides finance towards market entry cost incurred by Indian firms exporting to development countries. followed by South-East Asia/Far East & Pacific.
million, which is carried forward to the next year. Current Position of Exim Bank – 1991-92 105% Rise in Export Bids by Exim Bank The Export-Import Bank of India’s export bids touched Rs. 7,187 crore during 1991-92, showing a 105 per cent rise over the previous year as it completed 10 years of its operation in March 1992 posting a cumulative profit of Rs. 203.4 crore during the decade. Exim Bank’s Performance: The export contracts secured by Indian exporters shot up to Rs. 1,093 crore during 1991-92 from Rs. 896 crore, an increase of 22 per cent over the previous year. The Exim Bank’s disbursements stood at Rs. 1,107 crore as against Rs. 858 crore in the previous year, a 29 per cent increase, while loan outstanding increased by 23 per cent, moving up to Rs. 1,616 crore on March 31, 1992, from Rs. 1.315 crore last year. During the entire decade (1982-92) its exports bids were Rs. 48,740 crore, export contacts secured Rs. 6.035 crore in over 50 countries and total reserves and dividends paid, Rs. 147.5 crore and Rs. 55 crore respectively. Eighty export contacts, covering 25 countries and worth Rs. 1.093 crore, export contracts secured Rs. 6.035 crore in over 50 countries and total reserves and dividends paid, Rs. 147.5 crore and Rs. 55 crore respectively . The Bank’s net profit during the same period, on account of general fund, amounted to Rs. 37.6 crore as compared to Rs. 30.8 crore in the previous year. A sum of Rs. 10 crore would be paid to the central government as dividend, as compared to Rs. 9 crore during 1990-91. The ratio of successful bids made was 12.4 per cent over the 10- year period against the international standard of 15 per cent. Indian exporters “missed out” on 70 per cent of the bids. Many bidders did not produce bank guarantees acceptable to the importing countries and lacked of proper analysis of “hidden costs”. There ware hardly any complaints about project exports, but there were some in the case of products.
Table 19.2 EXPORT FINANCING PROGRAMMES OF EXIM BANK
Programme Export Marketing Use Enables exporters to implement market development programs 1. Grant 2. loan Enables Indian firms undertake product development, R& D for exports Enables upgradation/expansion of export Production capabilities of small and medium enterprises Rate of interest @
14% p.a. 11.2% p.a.
Export Product Development Agency Credit Line*
Computer Software Exports Hundred per cent Export oriented Unit Preshipment Credit Project Preparatory Services Overseas Consultancy and Technology services Direct Financial Assistance to Exporters Overseas Buyer’ Credit Lines of Credit
Refinance of export credit Relending facility Export Bills Rediscounting
Small Scale Industry (SSI) Export Bills Rediscounting Bulk Import Finance Overseas Investment Finance
Enable acquisition of imported and indigenous computer systems, and project related assets. Enables Indian companies to acquire: indigenous assets Imported machinery and other assets Enables Indian exporter to buy raw materials an inputs where exports require long cycle time Enables Indian Consultancy firms undertake project preparatory studies in developing countries by grant/loan financing. Enable Indian exporters of consultancy services and technology to extend term credit to importer overseas Enables Indian exporter to extend term credit to importer overseas, of eligible Indian goods Enables overseas buyer to pay cost of eligible goods imported from India on deferred terms Enables overseas financial institutions, foreign governments, their agencies to lend term loans to finance import of eligible goods from India. Enables banks to offer credit to Indian exporters of eligible goods, who extend term credit to foreign buyers Enables overseas banks to make available term finance to their clients, for import of eligible Indian goods Enables banks to rediscount usance export bills, with usance not exceeding 180 days and unexpired usance of a maximum period of 90 days. Enables banks to fund SSI Export bills, with usance not exceeding 180 days and unexpired usance of a maximum period of 90 days Enables banks to offer finance to importers for bulk import of consumable inputs Enables Indian promoter to finace equity contribution in joint ventures set up abroad
11.2% p.a. 9% p.a. 11.2% p.a. 9.5% p.a.
7.5% p.a. 7.5% p.a. 7.5% p.a.
7.5% p.a. 7.5% p.a.
7.5% p.a. 7.5% p.a.
7.5% p.a. 13.5% p.a. 12.5% p.a.
Notes: (a) interest rates are as on March 31, 1990 and subject to change. • In collaboration with International Finance Corporation, Washington.
1982* Operations 68900
Table 19.2 Past Eight Years of Exim Bank 1983 1984 1985 1986 1987
Cumula tive 380399
Value of birds approved* Commitments in Principle* Sanctions Utilisations Outstanding Not- Funded Guarantees Committed in principle* Guarantees sanctioned Guarantees Issued Guarantees outstanding Resources and Income Resources Capital Borrowings Bonds Reserves Total Resources Earnings Net Profit Dividend Staff (Numbers) Ratios Capital Assets Ratio (%)***** Net Profit on Capital and Reserves (%) Net Profit on Assets (%) Net Profit per Employee (Rs. mn)
3355 1990 1785 2199
3898 3012 2057 2930
5230 3386 3530 4147
5770 4412 3813 5544
3490 5621 5241 6438
8280 6905 5989 7232
5697 10626 9130 9347
3948 9550 8878 11178
39668 45502 40423
6833 1019 3986
3458 753 4515
4300 752 5102
3630 732 4661
1790 763 5290
10470 517 4844
4070 488 5373
3551 498 5969
750 2592 53 3559 63 10 69
1000 3486 530 121 5369 88 20 109
1275 4338 530 211 6691 120 30 132
1475 5090 780 325 8163 154 40 141
1725 6235 1175 444 10474 170 50 141
1945 6992 1610 583 12812 199 60 140
2205 7681 2620 796 14840 284 70 135
2338 8614 3200 989 17243 272 80 138
20.9 9.1 2.0 0.989
22.2 9.2 2.0 0.996
22.1 9.4 2.1 1.128
20.7 8.6 1.8 1.206
19.7 8.5 1.7 1.416
20.2 8.2 1.6 1.652
19.3 8.6 1.7 1.993
Exim Bank started its operations in March 1982, the accounting years 1982 refers to March- December 1982, 1983 are calendar years. 1988-89 years pertains to the period January 1988 to March 1989 due to change in a accounting year. 1989-90 is April 1989 to March 1990. • For approvals and commitments-in principle, where more than one Indian company has submitted tenders for the same job, only one approval and commitment –in-principle of maximum value was considered up to 1985 and minimum value since 1986. • Capital and Reserves as a % of Assets. Note: Data pertains to General fund.
Payment for exports are open to risks even at the best of times. which is a critical factor for the rapid expansion of business. too cautious an attitude in evaluating risks and selecting buyers may result in loss of hard-to-get business opportunities. create an environment in which exporters get easier access to export finance. and to enable them to expand their overseas business without fear of loss. The commercial risks of the foreign buyer going bankrupt or losing his capacity to pay are heightened due to the polticial and economic uncertainties. in Risk Management and Financial Gurantees Role of the Corporation ECGC Contributes to the country’s export efforts by improving the competitive capacity of Indian exporters. The guarantees. Through its schemes of export credit insurance. the Corporation makes it possible for exporters to match the credit terms offered by their counterparts from other countries and thereby win more export orders in the highly competitive international markets. The risks have assumed large proportions today due to the far reaching political and economic changes that are sweeping the world.The Role Played by Export Credit Guarantee Corporation of India Ltd. both political and commercial. . The Corporation also assists exporters to maximise their export turnover through the guarantees that issues to the commercial banks in India. By adopting a judicious underwriting policy which is aligned to the nation’s needs. is of crucial importance for optimising this potential. A coup or an insurrection may also bring about the same result. In addition. which reduce the lading risk of the banks. In the challenging and changing international environment. The loss of a large payment may spell disaster for any exporter. The availability of ECGC’s insurance for short –term. the Corporation also makes it possible for Indian exporters to continue trading with certain counties to which. medium-term and long-term credit transactions as well as the various types of guarantees to banks designed to facilitate easy availability of export finance. they would not be able to ship goods because of temporary payment problems faced by such countries. Export credit insurance is designed to protect exporters from the consequences of the payment risks. For this purpose. An out-break of war or civil war may block or delay the payment for goods exported. whatever is his prudence and competence. one has to contend with the usual commercial risks of insolvency or protracted default of buyers. Export credit insurance also seeks to create a favorable climate in which exporters can hope to get timely and liberal credit facilities from banks at home. India’s export growth potential will become more dependent on penetrating markets in the developed countries and increasing its market share. On the other hand. without its insurance cover. Conducting export business in such conditions of uncertainty is fraught with dangers. Economic difficulties or balance of payments problems may lead a country to impose restrictions on either import of certain goods or on transfer of payment for gods imported.
It was transformed into Export Credit & Guarantee Corporation Limited (ECGC) in 1964. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing Government. To bring the Indian identity into sharper focus. (2) Specific Policies designed to protect Indian firm against payment risks involved in (a) exports on deferred terms of payment. are issued only in special cases when goods to be exported are manufactured to non standard specifications of buyer. etc. This policy covers both commercial and political risks from the date of shipment. Insurance cover Investment Insurance and Exchanges Fluctuation Risk Insurance. The Shipments (Comprehensive Risks) Policy is the only ideally suited to cover risks in respect of goods exported on short. 1957. the Government of India set up the Export Risks Insurance Corporation (ERIC) in July. Contracts (Political Risks) Policy. Shipments (Political Risks) Policy. The covers issued by ECGC can be divided broadly into four groups: (1) Standard Policies issued to exporters to protect them against payment risks involved in exporters on short-term credit. which cover risks from the date of contract. I. and (4) Special schemes.term credit. viz. the Corporation’s name was once again changed to the present Export Credit Guarantee Corporation of India Limited in 1983. Industry. Trade. Shipments to-associates or to agents and those against letters of credit can be . consumer goods or consumer durables which can be resold easily Contracts policies.to cover both commercial and political risks from the date of contract. Insurance. Risk of pre-shipment losses due to frustration of export contracts is nil or very low since goods. Standard Policies ECGC has designed four types of Standard Policies to provide cover to shipment made on short-term credit. Contracts (Comprehensive Risks) Policy. Banking. (b) services rendered to foreign parties.export credit insurer provides gurantees to banks to protect them from the risk of loss inherent in granting various types of finance facilities to exporters. and (c ) construction works and turnkey projects undertaken abroad. (i) (ii) (iii) (iv) Shipments (Comprehensive Risks) Policy – to cover both commercial and political risks from the date of shipment. (3) Financial gurantees issued to banks in India to protect them form risks of loss involved in their extending financial support to exporters at the pre-shipmen as well s post-shipment stages.to cover only political risks from the date of shipment. ECGC is a company wholly owned by the Government of India. In order to provide export credit insurance support to Indian exporters. Transfer Guarantee meant to protect banks which add confirmation to Letter of Credit opened by foreign banks..to cover only political risks from the date of contract.
Risks Covered The risks covered under the Standard Policies are: (i) Commercial Risk (a) insolvency of the buyer. subject to certain conditions. 3. not normally insured by general insurers. (b) buyer’s protracted default to pay for goods accepted by him. and (c) buyer’s failure to accept goods.covered for only political risks by suitable endorsements to the Shipments (Comprehensive Risks) Policy. (ii) Political Risks (a) Imposition of restrictions on remittances by the government in the buyer’s country or any government action which may block or delay payment to the exporter. revolution or civil disturbances in the buyer’s country. “Deemed exports” can also be covered under the Comprehensive Risks Policies. (b) causes inherent in the nature of the goods. (e) Payment of additional handling. and (J) Any other cause of loss occurring outside India. and beyond the control of the exporter and/or the buyer. unless the exporter obtains a decree from a competent court of law in the buyer’s country in his favour. transport or insurance charges occasioned by interruption or diversion of voyage which cannot be recovered from the buyer. (c) buyer’s failure to obtain necessary import or exchange authorisation from authorities in his country. (c) New import licensing restrictions or cancellation of a valid import licence in the buyer’s country. (b) War. after the date of shipment or contract as applicable. Premium is charged on such shipments at lower rate. . Risks not covered The Standard Policies do not cover losses due to the following risks: (a) Commercial disputes including quality disputes raised by the buyer. (d) Cancellation of export licence or imposition of new export licensing restrictions in India after effective date of contract (under contracts policy). 1.
ECGC would send him an acceptance letter stating the terms of its cover and premium rates. if necessary. The policy will be issued after the exporter conveys his consent to the premium rates and pays a non-refundable policy fee which will be Rs. 6. 1001. The maximum liability fixed under the policy can be enhanced subsequently. 5 lakhs. Recoveries made after the payment of claim are shared with the ECGC in the same proportion in which the loss was borne. 100/. (f) exchange rate fluctuation. How to Obtain Policy An intending exporter should fill in a proposal form (No. 4. Whole Turnover Principle ECOC expects a fair spread of risks insured. possible where items are not of an allied nature. 20 lakhs and Rs. except those made against advance payment or Irrevocable Letters of Credit confirmed by banks in India.for policies with Maximum Liability limit upto Rs. After examining the proposal. Credit Limit Commercial risks are covered by ECGC subject to approval of a credit limit on each buyer. It will be advisable for exporters to estimate the maximum outstanding payments due from overseas buyers at any time during the policy period and to obtain the policy with Maximum Liability for such value. 3. 10 lakhs or part thereof subject to a ceiling of Rs.for each additional Rs. however. and (g) failure of the exporter to fulfill the terms of the export contract or negligence on his part.500/-. at its discretion.between Rs. Rs. 5. ECOC normally pays 90 per cent of the losses on account of political or commercial risks. In the event of loss due to repudiation of contractual obligations by the buyer. Exporter Co-insurer It is customary in credit insurance to make the insured share a small percentage of the risk. 121) available with all ECGC offices (addresses given at the end) and submit it to the nearest office. 2. The Corporation. Credit limit is the limit upto which claim can be paid under the policy for . Maximum Liability Maximum Liability is the limit upto which ECGC would accept liability for shipments made in each of the policy-years. 200/.(d) insolvency or default of any agent of the exporter or of the collecting bank (e) loss or damage to goods which can be coveted by general insurers. 5. 5 lakhs and Rs. may waive such legal action where it is satisfied that such legal action is not worthwhile and in that event also losses are indemnified upto 90 per cent. Therefore an exporter is required to insure all the shipments that may be made by him during the next 2 years. Exclusions are. ECGC identifies the exporter upto 90 per cent of the loss if final and enforceable decree against the overseas buyer is obtained in a competent court of law in the buyer’s country.
/C. exporters may request ECGC to obtain cable report on the buyer and remit an amount of Rs. ECGC provides cover for shipments to such countries on a restricted basis. 5 lakhs if he furnishes a bank report not older than 6 months.P. (b) the buyer had made payment for the shipments on due dates. exporters would be well advised to apply to ECGC for approval of credit limit on buyer in the prescribed form (No 144) before making shipment. Policyholders intending to export to such countries are required to obtain specific approval of ECGC for each shipment/contract or series of shipments contracts upon payment of Specific Approval Fee. ECGC accepts liability for commercial risks upto a maximum of Rs. ECGC obtains credit information on overseas buyers through banks and credit information agencies. (ii)Discretionary Limits If no application for Credit Limit on a buyer has been made. the same may be furnished along with credit limit application to facilitate quick decision. 5. 400/. On the basis of credit information and its own experience. cover is not available even for political risks.000/.for each application.losses on account of commercial risks. ECOC fixes suitable credit limits on overseas buyers. (i) Status Enquiry Charges ECGC spends a good amount on getting status reports on overseas buyers but charges a nominal fee of Rs. 50/.144A) giving his past experience with the buyer. In case limit is required urgently. If complete information regarding the buyer and his banker is given in the credit limit application.000/. on the buyer.A.for D. If the exporter needs an enhancement in limit. If such approval is not taken.00.towards cable expenses.00. (ii) Restricted Cover Countries When payment risks become too high in a country. he may apply in the prescribed form (NBNo.A. transactions and Rs. Alternatively exporter may obtain cable report through his bank and furnish the same in original to ECGC for a quick decision. 2. it will facilitate receipt of credit information expeditiously. In case an exporter has already obtained a credit report on the buyer or is in possession of other information that can help ECGC in fixing credit limit.D. transactions provided that: (a) at least three shipments have been effected by the exporter to the buyer during the preceding two years on similar payment terms and at least one of them was not less than the discretionary limit availed of by the exporter and. An exporter need not pay any status enquiry fee for credit limits upto Rs. 8. As commercial risks arc not covered in the absence of a credit limit. Declaration of Shipments & Payment of Premium The premium rates are closely related to the risks involved and vary according to .for D.
9. policyholders are required to take prompt and effective steps to prevent or minimise loss. 10. Granting extension of time for payment.A. 205) indicating action taken in each case. 203). This condition is waived in cases where the -Corporation is satisfied that the exporter is not at fault and that no useful purpose would be served by proceeding against the buyer. covering bills from D. ECGC considers claims after the dispute between the parties is resolved and the amount payable is established by obtaining a decree in a court of law in the country of the buyer. . An exporter who obtains a Contracts Policy has to send a declaration of all outstanding contracts immediately after the policy is issued. in the prescribed form (No. transport or insurance charges incurred by the exporter because of interruption or diversion of voyage outside India are payable after proof of loss is furnished. Settlement of Claims A claim will arise when any of the risks insured under the policy materialises. to D. Where the buyer does not accept goods or pay for them because of differences over fulfilment of the terms of contract by the exporter.countries to which goods are exported and the payment terms. Premium has to be paid along with the declaration at rates shown in the schedule attached to the policy. An exporter who has taken a Shipments Policy has to send by the fifteenth of each month. In case of protracted default. If an overseas buyer goes insolvent. ECOC may extend the waiting period and claims for such shipments are payable after the expiry of such extended period. 11. Claims in respect of additional handling. A monthly declaration of all bills which remain unpaid for more than 30 days should be submitted to ECGC in the prescribed form (No. In all other cases claim is payable after four months from the date of the event causing loss. claim is payable after four months from the due date. Consignment Exports Exports on consignment basis may be covered under Shipments (Comprehensive Risks) Policy by a suitable endorsement thereon. However. terms or resale of unaccepted goods at a lower price require prior approval of ECGC. Thereafter he shall send a monthly declaration of contracts concluded and shipments made by him during the previous month. whichever is earlier. a declaration of shipments made in the previous month. Reporting Defaults In the event of non-payment of any bill. in case of exports to countries where long transfer delays are experienced. The risk of the Agent/Stockholder not returning the unsold goods is not covered under the Policy. commercial risks are covered only alter the Agent/ Stockholder submits the ‘Accounts Sales’ to the exporter. the exporter becomes eligible for a claim one month after his loss is admitted to rank against the insolvent’s estate or after four months from the due date. While political risks are covered from the date of shipment till the date of receipt of payment in India.P.
. Debt Recovery Payment of claim by the ECGC does not relieve an exporter of his responsibility for taking recovery action and realising whatever amount that can be recovered. (ii) Specific Shipments (Political Risks) Policy to cover only political risks at the post-shipment stage in cases where the buyer is an overseas government or payments are guaranteed by a Government or by banks.12. All contracts for export on deferred payment terms and contracts for turnkey projects and construction works abroad require prior clearance of Authorised Dealers. Specific Policy for Supply Contracts Specific Policy for supply contracts may take any of the following four forms: (i) Specific Shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the post-shipment stage. Contracts Policy provides cover from the date of contract. All amounts recovered. Specific Policies The Standard Policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of an exproter’s shipments of raw materials. insured by ECGC on a case-to-case basis under specific policies. therefore. (iii) Specific Contract (Comprehensive Risks) Policy. Losses that may be sustained by an exporter at the pre-shipment stage due to frustration of contract are covered under this policy in addition to the cover provided by the Shipments Policy. For its part. Such transactions are. net of recovery expenses. therefore. II. The exporter should. and (iv) Specific Contract (Political Risks) Policy. should be shared with ECGC in the ratio in which the loss was originally shared. ECGC will help exporter by providing the name of a reliable lawyer or debt collecting agency and by enlisting the help of India’s commercial representative in the buyer’s country. 1. consult the ECGC and take prompt and effective steps for recovery of the debt. Applications for this purpose are to be submitted to the Authorised Dealer (the financing bank) which will forward applications beyond its delegated power to the Exim Bank. Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad are not of a repetitive nature. Receipt of a claim from ECGC does not relieve an exporter from obligations to the Exchange Control Authority for receiving the amount from the overseas buyers. Exim Bank or the Working Group in terms of powers delegated to them as per exchange control regulations. Consumer goods and consumer durables for which credit period does not exceed 180 days. or are made to associates.
Exporters taking such policies are required to cover under the policy all contracts that may be concluded by them over the policy period of 2 years. Under Line of Credit. The policy has been designed broadly on the lines of ECGC insurance policies covering export of goods. a loan is extended to government or financial institutions in the importing country for financing import of specified items from the lending country. If the employer is an overseas government of if payments under a contract are guaranteed by an overseas government or a bank. they would be exposed to payment risks similar to those involved in export of goods. covering risks from the date of contract. A wide range of services like technical or professional services. A Specific Services Contract (Comprehensive Risks) Policy will be appropriate for contracts concluded with private buyers not supported by bank guarantees. (iii) restriction on remittances in the buyer’s country or any Government action which may block or delay payment to the exporter .2. This kind of financing facilitates immediate payment to exporters and frees them from the problems of credit management as well as from the fear of loss on account of overseas credit risks. having regard to the terms of the credit. Contracts can be concluded with any buyer within credit limits previously approved by the Corporation and declared under the policy. Insurance Agreement will be drawn’ up on a case-to-case basis. Normally cover is issued on a case-to-case basis. If the nature of services rendered by an exporter is such that contracts covering short periods of time are concluded with a set of buyers on repetitive basis. (ii) (it) protracted default in payment. Buyer’s Credit is a loan extended by a financial institution. Services Policy offers protection to Indian firms against such payment risks. Such policies will obviate the need for getting approval of the Corporation for each and every contract. hiring or leasing can be covered under the policies. like those in several other countries. it would be convenient for him to obtain a Whole turnover Services Policy providing cover for either comprehensive risks or only political risks. The Comprehensive Risks Policy covers the following risks: (i) insolvency of the buyer. or a consortium of financial institutions to the buyer for financing a particular export contract. a Specific Services Contract (Political Risks) Policy can be obtained. 3. ECGC has evolved schemes to protect financial institutions in India which extend these types of credit for financing exports from India. have started direct lending to buyers or financial institutions in developing countries for importing machinery and equipment from India. Insurance cover for Buyer’s Credit and Line of Credit Financial institutions in India. Services Policy Where Indian firms render services to foreign parties. Financing may take the form of Buyer’s Credit or Line of Credit.
It is payable after four months from the due date or the date of the event which is the cause of loss. The policy covers 90 per cent of the loss suffered by the seller. and (vii) any other cause of loss occurring outside India and beyond the control of the buyer or the seller. The policy has been designed to cover business done under the Standard Conditions of Contract (International) prepared by the Federation Intemationale des Ingenieurs Conseils (FIDIC) jointly with the Federation Internationale due Batirnent et des Travaux Publics (FIBTP). but it may be modified to apply to other contracts. whichever is earlier. The former covers political risks in respect of contracts with overseas governments or where the payments are guaranteed by government and the latter comprehensive risks.(iv) war between India and the buyer’s country (v) revolution or other civil disturbances in the buyer’s country. Two types of policies have been evolved to cover contracts with (i) Government buyers and (ii) Private buyers. against the insolvent’s estate. Premium rates are closely related to the risks involved and vary according to the country of the buyer and the terms of payment. (ii) delay in the transfer of payments to India. the policy may be issued to cover only political risks if the payments are guaranteed by a bank or covered by L/C. . (iii) war between Indian and the employer’s country. (vi) Government action in India or in buyer’s country which prevents the performance of the contract. The policies do not cover losses arising from events preventing the completion of the contract in circumstances where such frustration could free the buyer from his obligation to make payment under the contract. The Services Policy covers such contracts under which only services are to be rendered. The claim is payable after four months from the due date of payment if the loss arises due to the risk of protracted default. Construction Works Policy ECGC’s Construction Works Policy covers civil construction jobs as well as turnkey projects involving supplies and services. claim is payable after four months from the due date of payment or one month after the loss is admitted to rank. Contracts under which rendering of services is part and parcel of a bigger contract for supply’ of goods or machinery or erection of a plant are covered under Construction Works Policies. In case of insolvency. The following risks. as the case may be if the loss is caused by any of the other risks. Quotations for any specific proposition or business on hand can be obtained by writing to ECGC giving details thereof. It provides cover for all payments that fall due to the contractor under the contract. 4. In case of contracts with private employers. are covered in case of contracts with government employers or if the payments are guaranteed by the employer’s government (i) default of the Government employer.
Export Finance Guarantee. (v) imposition of import or export licensing (or cancellation of an existing licence) for goods or materials manufactured or purchased by the contractor after the date of contract. ECGC pays thee-fourths of the loss in the case of Post-Shipment Export Credit Guarantee. estimated interest and other payments due under the contract. HI. Export Finance Guarantee.(iv) civil war or similar disturbances in the employer’s country. Export Performance Guarantee. transport or insurance charges due to interruption or diversion of voyage. on a liberal basis. The policy is issued on the basis of estimated basic contract price. Premium is payable at the outset on the estimated figures. Post-Shipment Export Credit Guarantee. and for which on the date of loss the employer has no obligation to pay in terms of the contract. The Corporation agrees to pay higher percentage of loss to banks which offer to . These guarantees give protection to banks against losses due to nonpayment by exporters on account of their insolvency or default. both at pre-shipment and post-shipment stages. Export Production Finance Guarantee. These guarantees have been designed to encourage banks to give adequate credit and other facilities for exports. Six guarantees have been evolved for the purpose: (1) (2) (3) (4) (5) (6) Packing Credit Guarantee. FINANCIAL GUARANTEES Exporters require adequate financial support from banks to carry out their export contracts. The policy is issued to cover specific contracts and takes effect from the date of contract. and (vii) the employer’s failure to pay to the contractor sums awarded in arbitration proceedings under the contract. for use on the contract. Proportionate refund of premium is allowed where the actual contract price and interest charges fall below the estimates. Export Performance Guarantee and Export Finance (Overseas Lending) Guarantee and twothirds of the loss in others. Export Finance (Overseas Lending) Guarantee. bulldozers and trucks which are used for the construction) against the risk of confiscation. The percentage of loss payable by ECGC is 85 under policies issued to cover contracts with Government employers and 75 in case of policies covering contracts with private employers. Cover can also be provided for the contractor’s equipments (such as cranes. (vi)additional handling. by means of an endorsement to the policy if the contractor so desires. ECGC’s guarantees protect the banks from losses on account of their lendings to exporters.
Packing Credit Guarantee Any loan given to an exporter for the manufacture. ‘Pie-shipment’ advances given by banks to parties who enter into contracts for export of services or for construction works abroad. These concessions are available also in respect of advances against contracts for supplies on deferred terms and for construction works. ECGC provides higher cover of 90 per cent of the loss on payment of proportionately higher premium.o. In the case of Export Performance Guarantee and Export Finance (Overseas Lending) Guarantee. 2 crores or more under a single contract.per month or part thereof. the difference representing incentives receivable. Post-shipment Export Credit Guarantee Post-shipment finance given to exporters by banks through purchase.5 paise per Rs. A lower rate of 5 paise per Rs. 100/. In special cases. 100/.per month is charged under the Whole turnover Packing Credit Guarantee (WTPCG). negotiation . processing. 2. Similarly. while under individual guarantees it is payable on maximum outstandings. The percentage of loss covered under Whole turnover Packing Credit Guarantee is 75 as against 66-2/3 per cent under individual guarantee. 3. Export Production Finance Guarantee The purpose of this guarantee is to enable banks to sanction advances at the preshipment stage to the full extent of cost of production when it exceeds the f. The premium rate is 7. but the banks will have to obtain separate guarantees for such advances. Banks having WTPCG/WTPSG are eligible for concessionary premium rate and higher coverage.b. to meet preliminary expenses in connection with such contracts are also eligible for cover under this guarantee. Premium under WTPCG is payable on the daily average product basis. Banks which opt for WTPCG will be eligible for similar concessions in respect of Export Production Finance Guarantee and Export Finance Guarantee also. purchasing or packing of goods meant for export against a firm order or Letter of Credit qualifies for Packing Credit Guarantee.cover all their pie-shipment advances under a Whole-turnover Packing Credit Guarantee. The requirement of lodgement of letter of credit/export order for granting Packing Credit advances may be waived. a higher percentage of cover is offered under Post-Shipment Export Credit Guarantee if the bank agrees to cover all its post-shipment advances on whole turnover basis. The extent of cover and the premium are the same as the Packing Credit Guarantees. value of the contract/order. as permitted by the Reserve Bank of India for certain commodities. ECGC also considers payment of claim to the extent of 80 per cent of the loss in respect of advances granted under Post-Shipment Export Credit Guarantee against shipments of engineering and metallurgical items of the value of Rs. 1.
It is necessary. Further. Banks having WTPCG/WTPSG are eligible for concessionary premium rate and higher coverage. An exporter who desires to quote for a foreign tender may have to furnish a bank guarantee for the bid bond. for obtaining import licences for raw materials or capital goods. 100/. Post-Shipment Export Credit Guarantee can also be had. The premium rate for this cover is 10 paise per Rs.per month and the cover is 75 per cent. The percentage of loss covered under the individual Post Shipment Guarantee is 75. 100/. duly supported by bank guarantees.per month. To provide protection to banks which issue the above types of guarantees. offering a higher percentage of cover at a reduced rate of premium.or discount of export bills or advances against such bills qualifies for this guarantee. The premium rate for this guarantee is 5 paise per Rs. the State Trading Corporation of India. even where an exporter does not hold an ECGC Policy for finance granted against L/C bills. If he wins the contract.per month on the highest amount outstanding on any day during the month and the percentage of cover is 75. however. provided that an exporter makes shipments solely against Letters of Credit. Commodity Boards. Export Performance Guarantee Exporters are often called upon to execute bonds. 5. 100/. This guarantee is also issued on whole turnover basis. Central Excise or Sales Tax authorities for the purpose of clearing goods without payment of duty or for exemption from tax for goods procured for export. duly guaranteed by an Indian bank. Advances to non-policy holders are also covered with percentage of cover being 60. the Minerals and Metals Trading Corporation of India or recognised Export Houses. that the exporter concerned should hold suitable shipments or contracts policy of ECGC to cover the overseas credit risks. 4. Bank guarantees arc also furnished by exporters to the Customs. Exporters also furnish guarantees in support of their export obligations to Export Promotion Councils.100/. Advances against bills under letters of credits opened by banks in countries placed under Restricted Cover shall be subject to prior approval of the Corporation. he may have to furnish bank guarantees to foreign buyers to ensure due performance or against advance payment or in lieu of retention money or to a foreign bank in case he has to raise overseas finance for his contract. .per month if advances against LJC bills are also covered under the guarantee. duty drawback etc. The premium rate is 3paise per Rs. at various stages of export business. Export Finance Guarantee This guarantee covers post-shipment advances granted by banks to exporters against export incentives receivable in the form of cash assistance. exporters may have to execute an undertaking to export goods of a specified value within a stipulated time. otherwise it is 4 paise. The premium rate for this guarantee is 5 paise per Rs. ECGC has evolved the Export Performance Guarantee. The percentage of cover under the Whole turnover Post-Shipment Guarantee is 85 for advances granted to exporters holding ECOC policy.
(c) Handloom and Handicrafts Export Corporation or state export corporations. The rate of premium is 0. ECGC provides specials facilities to small scale exporters by offering higher percentage of cover and procedural relaxations under its policies and guarantees.90% p. While the premium rate for guarantees issued to cover bonds relating to exports on short-term credit is 0.An export proposition may be frustrated if the exporter’s bank is unwilling to issue the guarantee. Small Scale Exporters With a view to enabling the small scale sector to participate to a greater extent in the export activities of the country.a. 25 lakhs shall be deemed to be small scale exporters. including exports. The Export Performance Guarantee is aimed at meeting such situations. exports made by qualifying small scale exporters through (a) co-operative of artisans. Also. 40 lakhs. it is lower for bonds relating to exports on deferred credit and projects. Premium rate will be 0.08% per annum for 90% cover. The guarantee which is in the nature pf a counter-guarantee to the bank is issued to protect the bank against losses that it may suffer on account of guarantees given by it on behalf of exporters. for 75% cover and 1. Export Finance (Overseas Lending) Guarantee If a bank financing an overseas project provides a foreign currency loan to the contractors it can protect itself from the risk of non-payment by the contractor by obtaining Export Finance (Overseas Lending) Guarantee. 6. These facilities will apply to exporters whose annual export turnover is not more than Rs. the cover may be increased upto 90 per cent subject to proportionate increase in premium. Claims under the guarantee will also be paid only in Indian rupees. (d) state small scale industries corporations.a. small scale industrial units as defined by Government of India whose annual exports do not exceed Rs. Normally cover is extended upto 75 per cent of loss but in the case of guarantees in connection with bid bonds. The balance premium of 75% becomes payable to the Corporation by the bankers if the exporter succeeds in the bid and gets the contract. for 90% cover. irrespective of their total business turnover. for 90% cover.08% p. In the case of Bid Bonds relating to exports on medium/long-term credit1 overseas projects. SPECIAL FACILITIES I. This protection is intended to encourage banks to give guarantees on a liberal basis for export purposes. and the projects India financed by international financial institutions as well as supplies to such projects. 25 lakhs and total annual turnover. (b) co-operatives or associations consortia of small scale industries.95% p. IV.a. for 75% cover and 0. ECGC is agreeable to issue Export-Performance Guarantee on payment of 25% of the prescribed premium. and (e)National Small Industries Corporation are also eligible for these special facilities. performance bonds. ices not exceed Rs. Main facilities provided under the scheme are: higher cover of 90 per cent for .90% per annum for 75% cover and 1. Premium is payable in Indian rupees.80% p. Further.a. advance payment and local finance guarantees and guarantees in lieu of retention money.
and higher cover of 90 per cent under the Whole turnover Post-shipment Export Credit Guarantee in respect of exporters who have taken ECGC contracts/ shipments policy and 65 per cent cover for non-policy holders. normal cover of 90% will be available provided that the value of each consignment does not exceed Rs.per annum on the maximum liability of the policy. along with payment of premium before the 25th of the following month. Specific approval has to be obtained in respect of exports to ‘Restricted Cover Countries’: such exports would attract payment of specific approval fee. Premium will be charged at a special low rate. In case of exports to institutions like universities. the countries to which special condition No. Shipments made in a calendar month can be declared. 100/. 2. 50. payable as a lumpsum at the time of the issue of the policy. wherever applicable. on whom Credit Limit is not fixed. provided the Maximum Liability under the policy does not exceed Rs. 5. varying with the group under which the country is classified. institution. 5. Shipments to restricted cover countries are required to be declared every month in form (No. 2. In Case of exports to regular book dealers.e. Exporters of Books and Publications In view of the special features of export trade in books and publications.000. The scheme is applicable to the exporters whose annual export turnover does not exceed Rs. Cover upto Rs. Simplified Scheme for Small Exporters With the objective of helping small exporters. on whom credit limit is not fixed. 4. The rate of premium on the policy is 50 paise per Rs. the Lumpsum Premium Scheme. Cover under Standard Policy is increased to 95 per cent against commercial risks and 100 per cent against political risks. as against the normal time limit of 15 days.000. or a dealer if at least two shipments on similar terms of payment had been made in the preceding twelve months and payment for them received on due dates. libraries and research organisations. 3.000 will be available for exports to an individual. the following liberalisaijons have been made under the Standard Policy for exporters of books and publications. 3. 6. 25.7 of . 203) by the 15th of succeeding month and premium paid thereon at the rates indicated in the premium schedule attached to the policy.banks under the Whole turnover Packing Credit Guarantee. Small exporters who opt for this scheme have to observe all the terms and conditions of policy but they are not required to submit monthly shipment declarations. ECGC has evolved a simplified scheme viz. In case of exports to individuals. 5 lakhs. normal Cover of 90% will be available provided that the value of each consignment is not more than Rs. The waiting period for payment of all types of claims is reduced to half the normal stipulated period. on whom he credit limit is fixed.000. The maximum liability of the policy under the scheme is restricted to Rs. 50. The above facilities shall apply to buyers in all countries except those which are subject to Restricted Cover (i. 1. normal cover of 90% will be available provided that the value of each consignment does not exceed Rs. 10 lakhs.. 5 lakhs.
Overseas Investment Insurance With the increasing exports of capital goods and turnkey projects from India. In case of projects involving long erection period cover may be extended for a period of 15 years from the date of completion of the project Subject to a maximum of 20 years from the . The confirming bank will suffer a loss ii the foreign bank fails to reimburse it with the amount paid to the exporter. expropriation and restriction on remittances are covered under the schemes. Transfer Guarantee When a bank in India adds its confirmation to a foreign Letter of Credits it binds itself to honour the drafts drawn by the beneficiary of the Letter of Credit without any recourse to him provided such drafts are drawn strictly in accordance with the terms of the Letter of Credit. ECOC may consider providing cover in the absence of any agreement or code. The exporter’s participation in capital and management instills confidence in the buyer about proper functioning of the project. The Transfer Guarantee seeks to safeguard banks in India against losses arising out of such risks Transfer Guarantee is issued. The risks of war. provided it is satisfied that the general laws of the country afford adequate protection to the Indian investment. at the option of the bank. For investment in any country to qualify for investment insurance there should preferably be a bilateral agreement providing investment of one country in the other. the involvement of exporters in capital participation in overseas projects has assumed importance. 2. As the investor would be-having a hand in the management of the joint venture.Annexure 2 to the Premium Schedule applies). Loss due to political risks is covered upto 90 per cent and loss due to commercial risks upto 75 per cent. who are bur main customers. SPECIAL SCHEMES 1. no cover for commercial risks would be provided under the scheme. Premium will be charged at rates normally applicable to the Corporation’s insurance policy covering export of goods. The cover would be available for the original investment together with annual dividends and interest payable. transfer delays or moratorium which may delay or prevent the transfer of funds to the banks in India. ECGC has evolved a scheme to provide protection for such investments. The developing countries. or to cover both political and commercial risks. The investments may be either in cash or in the form of export of Indian capital goods and services. This may happen due to the insolvency or default of the opening bank or due to certain political risks such as war. have the problem of scarcity of capital and management and may like to invite Indian participation in capital and manageinent when large turnkey projects are set up. either to cover political risks alone. Any investment made by way of equity capital or united loan for the purpose of setting up or expansion of overseas projects will be eligible for cover under investment insurance. V. The period of insurance cover will not normally exceed 15 years.
upto a maximum of 15 years. If the bid is successful. Exchange Fluctuation Risk Cover will normally be provided along with suitable credit insurance cover. The contract cover provides franchise of 2 per cent loss or gain within a range of 2 per cent of the reference to the exporter’s account. In other words. Where such payments are to be received in foreign currency. The reference rate for the contract cover will be either the reference rate used for the Bid cover or the rate prevailing on the date of contract. The basis for cover will be a “reference rate” agreed upon. Exchange Fluctuation Risk Cover Schemes The Exchange Fluctuation Risk Cover Schemes are intended to provide a measure of protection to exporters of capital goods. Cover under the schemes is available for payments specified In US Dollar.date of commencement of investment. French Franc. Swiss France UAE Dirham and Australian Dollar. civil engineering contractors and consultants who have often to receive payments over a period of years for their exports. The Exchange Fluctuation Risk Cover is available for payments scheduled over a period of 12 months or more. Cover can be obtained from the date of bidding right upto the final installment. per cent of the reference rate will be to the exporter’s account. If there be a gain in excess of 2 per cent of the reference rate. The Exchange Fluctuation Risk (Contract) Cover can be issued only if the payments under the contract are scheduled to be received beyond 12 months from the date of contract but in such cases. if loss exceeds 2per cent. they are open to exchange fluctuation risk and the forward exchange market does not provide cover for such deferred payments. Deutsche Mark. . the exporter/contractor is required to obtain Exchange Fluctuation (Contract) Cover for all payments due under the contract. The exporter has also an option to terminate the-contract at the expiry of the third year. The cover will be provided initially for a period of twelve months and can be extended if necessary. by giving three months’ advance notice. Pound Sterling. At the stage of bidding. Amount insured shall be reduced progressively in the last five years of the insurance period. construction work or services. an exporter/contractor can obtain Exchange Fluctuation Risk (Bid) Cover. ECOC will make good the portion of loss in excesse of 2 per cent but not exceeding 35 per cent of the reference rate. Contracts coming under Buyer’s Credit and Lines of Credit are also eligible for cover under the schemes. however. cover can be extended for payments specified in other convertible currencies at the discretion of the ECOC. 3. However. at the option of the exporter/contractor. There is. Cover will be available for all amounts receivable under the contract. the portion which is beyond 2 per cent and upto 35 per cent will be turned over the ECGC. 75 per cent of the premium paid by the exporter/contractor is refunded to him. the cover will apply for any instalment falling due within I2months as well. The reference rate can be the rate prevailing on the date of bid or a rate approximating it. provision to grant the cover independently also in which case premium will be loaded by 20%. losses upto 2 per cent and beyond 35. If he bid is unsuccessful. whether it is payment for goods or services or interest or any other payment. Japanese Yen.
Secondly. Ten per cent of the total premium payable and premium for the first two years should be paid at the Lime of issue of the policy. Gross claims paid during the same period amounted to Rs. That the year ended with a surplus of Rs.53 crores in 1988-89 (annualised) and from there to Rs. Premium income from short-term business increased from Rs.59. as against this. 1. there are pending claims for which the estimated net liability is Rs.90 crores as against a premium income of Rs. Over the Years Performance Evaluation of ECGC The total premium earned by the Corporation from its inception in the year 1957 to the end of the financial year 1989-90 amounted to Rs.730 crores indicating the extent of support provided by the Corporation to the country’s export promotion efforts. 100/per quarter for the bid cover and the total premium is payable at the time of issue of the policy.65 crores in 1989-90.272 crores. Although the lack of growth in the medium and long-term business has been a setback. The operational results of the last five years bear out this point.60 crores. 43. 9. A surplus of Rs. 100/. while the premium income from medium and long-term business remained almost stagnant at around Rs. 9 crores during this period. shot-term business under guarantees as well as policies is a steady business as compared to medium and long-term business which is subject to wide fluctuations from year to year. . 3. 56. The total value of risks covered by the Corporation during the period amounted to Rs. 203 crores. whereas the medium and long-term business is concentrated in a very small number of countries which are more risk prone. The outstanding features of the Corporation’s performance during the year are the 56% increase in Risk Value and 67% growth in premium income. claims relating to premium income added up to only Rs.The rate of premium is 40 paise per Rs. The short-term business is less risky also because it has a wide country spread. 18. 107. Between 1985 and 1989-90. Firstly. 100/per annum. It is thus clear that short-term business assuming an increasing share of the total business is a highly desirable development.18 crores in 1987. The last decade has been a turbulent period for export credit insurers in general. short. After taking into account the recovery of Rs.13 crores. On the other hand.31 crores in 1987 to Rs.32 crores and claims that may arise in respect of transactions for which premium has been received but the risks have not yet expired.term business which is composed of a very large number of small value transactions is a low risk business while the medium and long-term business which consists of a relatively small number of large-value transactions is a low risk business while the medium and long-term business which consists of a relatively small number of large-value transactions is far more risky. 274 crores. 37. claims paid under shot-term business totaled Rs. 51. 69 crores effected during the period.10 crores in 1988-89 and Rs. 71 crores has thus resulted but. the beneficial effects of the rapid growth in the income from short-term business must be recognised.per year or 10 paise per Rs. Thereafter the annual premium will have to be paid in such a manner that premium for the next two years is always kept paid to the Corporation. the net claims paid by the Corporation amounted to Rs.is another not worthy feature. 13. Premium for contract cover is also payable at the rate of 40 paise per Rs.
Their travails were further heightened by an abnormally large outgo on account of claims which arose as a result of the bad balance of payments position of an increasingly large number of developing countries. Corporation’s ability to extend to Indian exporters the kind of support that is legitimately expected of a national export credit insurer in such circumstances will be severely restricted unless Government support in one form or the other becomes available. The premium income of the Corporation which is rising fast-from Rs. The premium rates under policies and whole turnover guarantees were raised from June 1989 in order to improve the viability of the schemes. may land it in serious financial embarrassment. most export credit insures experienced decline in business and in income. therefore. 80 crores in 199091. Yet. The main job of the officer. on the other hand. 47. the total amount of the Corporation’s money blocked in half-a-dozen African countries on account of claims paid due to transfer delays comes to as much as Rs. Much has been achieved in the last tow years through improved systems and procedures and the increased use of computers. The field organisation was strengthened last year with a view to increasing personal contact with customers and getting new business. Eastern Europe and Western Europe. therefore. The number of steady and satisfied customers needs to be continually increased and this is possible only be responding better to their needs and by improving the quality of service. It is necessary for the Corporation to keep on expanding its business base and augmenting its financial strength to the maximum extent possible. Added to this are the uncertainties arising from certain fundamental changes that are taking place in the political and economic spheres in the former USSR. ECGC was not as badly affected as some of the other export credit insurers who had large exposures on the heavily indebted countries.Except for the last 2 or 3 years of the decade.has already imparted a measure of strength to the financial position of the Corporation and has considerably augmented its capacity to meet claims. it is necessary that the capital of the . The immediate future of export credit insurers. ECGC has. These claims are tapering off but the relief arising on this account appears to be short lived because of certain new developments. But. These claims relate mainly to business underwritten by the Corporation in late 1970s and early 1980s when these countries were considered as acceptable credit risks. to transactions for which it would not be possible for the Corporation to grant cover on its own account on grounds of financial prudence. Too much caution will run counter to its very objective of export promotion.25 crores in 1987 to Rs. in the national interest. 22. ECGC had made a proposal to the Government of India for setting up a National Export Insurance Fund under which the Corporation can grant insurance. The turmoil in the Middle East following Iraqi annexation of Kuwait holds the threat of large claims not only on account of counties directly involved in the conflict but also from some other countries because of the adverse impact of the conflict on them. Too liberal an attitude. looks far from rosy.46 crores in 1989-90 and targeted to touch Rs.118 crores. In any event. will be to develop business form certain centers which have export activity that is too small to justify setting up of a branch office. A decision has recently been taken to post additional officers in the Regional and Branch officers to specifically take care of satellite centers in the geographical area covered by the respective officers. to tread warily in the coming years. A lot more along these lines needs to be done in the coming years to turn the corporation into a modern and highly efficient organisation capable of creating and retaining an ever-increasing number of customers. who will be based in the Regional or Branch Office. considering the nature of the business and the very large risk exposure of the corporation.
This growth infused vitality and strength to the financial position of the corporation and makes it possible for it to take larger claims in its stride.change in the fortunes of the Corporation during the last two years.69 +54.465 19.34 5. The total value of business covered under all the schemes increased from Rs.56 +38.834 22. The premium income in this sector increased only marginally from Rs.24 1985 10. 25. Table 9. 47. Recoveries also showed a marked improvement.42 19. 29. The premium on short term policies and guarantees increased from Rs.49 4.23 31.09 +5.63 +7.86 24.083 21. From Stagnation to Rapid Growth There has been a sea.93 67. It is most significant to note that the total income of Corporation has increased from Rs.81 Crores in 1989-90.93 crores in 1988-89 to Rs.60 7. effective monitoring of the monthly progress and strengthening of marketing efforts are the main reasons for this remarkable performance. Fixing of challenging business targets for all officers. 84.46 crores in 1989-90.42 crores in 1988-89 to Rs. 31. is raised further so that equity will bear a reasonable relation to risk exposure.63 1986 12. 34. On an annualised basis.14 54.60 +9.340 crores in 1988-89 which was a 15 month period.Corporation.35 1984 10. in the last fifteen years.62 1988-89 25.42 8. 4.26 26. This brings into sharper focus the fact that the growth in the short term sector has been very fast.48 crores in 1987 to Rs.709 crore in 1989-90. which are the highest rates of growth achieved by the Corporation. 13.97 crores as compared to Rs.3 (Value Rs. Premium income rose from Rs.10 1987 14.48 +4. The stagnation encountered by the Corporation between 1983 and 1987 has since been transformed into an era of rapid growth as would be evident from the Table 19. 9.79 crores in 198889 to Rs.03 28.94 cores crores in 1987 to Rs.340 35.138 21. 43. Net claim payments went up form Rs.25 9.19 crores for the year 1990-91. 34. which is at present Rs.39 crores in 1989-90 and have a healthy target of Rs.58 crores in 1989-90.66* 1989-90 31. 8.72 crores in 198889.39 crores in 1989-90. Claims paid during the year were higher at Rs. 67.709 47. 35. 9.39* * growth on annualised basis This improvement has been achieved despite a stagnation in the project and term exports sectore.293 21. 50 crores.3.65 crores in 1989-90. rising from Rs. to Rs.46 19. 31. Standard Policies and Transfer Guarantees . the growth rate was 56% in business covered and 67% in premium income. Performance Highlights The operational results for the year were very satisfactory.67 30. Crores) YEAR Risk value Premium Other Total % growth* Income Income 1983 8.31 crores in 1987 to Rs. 37.
3.561crores. Guarantees The guarantees issued to banks have been designed to encourage banks to give adequate credit and other facilities for exports. 0. Of this. The total number of policies in force at the end of the year was 678 as against 655 in the preceding year. Mozambique. 24. Premium income at Rs.69 crores for the preceding year.91% of exports covered and 10.66 crores showed an impressive growth of 84. 4. readymade garments. The net position was surplus of Rs. Engineering goods.768 for the preceding year. 73. USA.93 crores. 4.28% over that of 1988-89 on an annualised basis. 480 crores in 1989-90. lines of credit. Seventy six fresh Policies were issued during the year as against 150 policies in the preceding year.57% over the corresponding figure of 8.79% in 1989-90. 333 crores in 1988-89 to Rs. buyers credit and overseas investments.45 crores in 1988-89 to Rs. leather goods and chemicals continued to account for a major portion of the value of exports covered by the Corporation. the deficit in this sectore rose from Rs.65 crores.04% respectively. The premium income amounted to Rs.28 crores as against Rs. .22% of premium income in 1989-90 as against 8.05 crore in 1988-89.67 crores in 1989-90. Malaysia and Italy.94 crores. in the preceding year. This growth is the highest registered in the last two decades. 10. The number of Standard Policies in force at the end of the year was 10. Policies.71% were claims paid on account of commercial risks viz. Claims paid during the year amounted to Rs. mainly in the UK.Project and Term Exports Business in this sector comprising policies issued to cover credit risks involved in exports on medium and long term credit. The Contribution of the four commodity groups to the premium income also increase from 52. 12. The total value of shipments declared under both the schemes amounted to Rs.29% in 1989-90. The value of business covered rose from Rs. 18.23% in 1988-89 to 61. France. 2. 8\18 crores as against a deficit of Rs.34 crores in 1988-89. 1.29% on and annualised basis. Recoveries amounted to Rs. which is a substantial increase over the figure of Rs. registering a growth of 11. 7. constriction works. insolvency and repudiation.The Standard Policies provide insurance for shipments made on short term credit covering commercial and political risks. Their share in the total exports covered by the Corporation increase from 54. registering year. Tanzania and Sudan accounted for the major portion of claim payments.385 showing and increase of 23. Thirty six Transfer Guarantees were issued during the year s against 60 in 1988-89. Claims paid during the year amounted to Rs. default. Zambia. services. Transfer guarantees protect the banks in India against certain losses which may arise when they add confirmation to foreign Letters of Credit. These protect the banks from losses inherent in their granting advances to exporters or their giving guarantees oh behalf of exporters.40% in 1988-89 to 55. The highest rate of growth was seen in respect of chemicals which contributed to 14.. showed marginal improvement.
58croes to Rs. 16. registering a growth of 48. registering a very impressive annualised growth of 114. The Corporation receives only 5% of the gross premium towards administrative costs. 19.473 crores.. 69 lakhs was issued during the year. comprising Rs.Project and Term Exports Business under this sector showed an improvement in the year under report.51 crores and a low recover of Rs. three policies were in force covering a total Risk Value of Rs. As at the end of March. The value of bank finance covered by the guarantees rose by 57. . 6. 6.63% on an annualised basis. in terms of value covered. The Packing Credit Guarantee continued its pre-eminent position accounting for 72% of advances covered and 75% of the premium income under all guarantees. 8. 84. 5. 0. The scheme covering Exchange Fluctuation Risk on account of export-linkedimport-transactions.52% over the annualised figure for the previous year to reach the level of Rs.65 crores were less than Rs. however. 12. (ii) Guarantees.28 crores in 1988-89. 13 policies were in force covering a total value of Rs.41 crore.41 crores.19 crores.71 crores in 1988-89. 93.80 lakh being ECGC’s service charges. etc.Short Term Exports The guarantees relating to short term exports showed excellent results. 1990. The net position was a surplus of Rs. 0. 195 crores in 1989-90 from Rs. Premium income allocable for the year. 1988 At the end of the year. and advance payments for exports was suspended in January.75 crore in the preceding year. 26.88 crores (the accounting practice is to allocate the premium income proportionately to the year years during which the guarantees remain in force). 24.87 crores.77 crores as compared to Rs. 1990 pending review in the light of unsatisfactory experience gained in operating the scheme since its introduction in September.88 lakhs. Exchange Fluctuation Risk Cover The scheme covering exchange fluctuation risk at bid and contract stages are operated by the Corporation on behalf of the Government of India and the operational gains or losses are transferred to the Market Development Fund administered by the Ministry of Commerce. The total income for the year under both the schemes came to Rs. one policy covering a Risk Value of Rs. 28. 11.33 lakhs. 753 lakhs of claims paid and Rs. The outgo was Rs. 0. Recoveries at Rs. With very high claim payments of Rs. 164 crores in 1988-89. 14. The post shipment Guarantee contributed 26% to the advances covered and 17% to the premium income in this sector.71 cores in 198889 to Rs. declined from Rs.22 crores as against a surplus of Rs. The value of risks covered rose to Rs.94 lakhs comprising premium income of Rs. this sectore of business showed a deficit of Rs.99 crores. 0. Premium income also rose from Rs.06 lakhs and exchange gains amounting to Rs.(i) Guarantees . Under this scheme which covers export receivable. 4. 6.32%. The total value of claims paid during the year came to Rs. 2.
0.99 crores as compared to Rs.47% on an annualised basis.97 crores as compared to Rs. registering an annualised growth rate of 84. 43. The reinsurance that corporation has obtained. Guarantees for short term exports yielded a premium of Rs. reflecting the sluggish conditions of India’s export trade in this line. 47.92% on account of short term guarantees and the remaining 4.in 1988-89 evidencing the fact that the various recovery steps initiated by the Corporation are bearing fruit. 20. 1. 4.37% related to long term guarantees. 11.65 crores was paid as claims under policies for project and Term Exports.61 lakhs.53% was on account of Standard policies and Transfer Guarantees.94 crores. 1990 was a net surplus of Rs. A claim of Rs. 9. 14. 24.87 crores and for Standard Policies and Transfer Guarantees Rs.32%.44 crore pertaining to the underwriting year 1982 was received during the year under report. 6. 12. 77. however. As much as Rs.59 crores in 1988-89 to Rs. 24.18% on account of policies for Project and Term exports. Claims and Recoveries The total amount of claims paid during the year came to Rs.42 crores for the year 1988-89 registering a growth of 67.81 crores in the year under report. 11. provides a certain amount of protection to the Corporation when claims exceed an agreed cut off point ant it is proving to be generally beneficial.28%. Of the total recoveries made during the year. Claims under guarantees for short term exports came to Rs. Premium Income from Project and Term Export Policies and Guarantees. 5. Claims under Guarantees for long term Exports accounted for another Rs. Premium income The total premium income for the year 1989-90 amounted to Rs. 9. No claim has arisen in respect of underwriting year’ 1983 and onwards since the Ultimate Net Loss figures were below the cut-off point for the respective years.39 crores as against Rs. 35. 8. 34. 214.72 crores in 1988-89.25 crores jn 198889 to Rs.46 crores as compared to Rs.79 crores. 12. which is on an excess of loss basis.51 crorcs. Foreign Exchange Earnings and Expenses . There was a significant improvement in the recoveries which amounted to Rs. The cumulative financial result of the schemes from their inception upto 31st March. The main contribution to the growth came from Standard Policies and Transfer Guarantees and Guarantees for short term exports.5 8 crores in 198889 registering a very impressive growth of 114.resulting in a surplus of Rs.66 crores in 1989-90.91 lakhs. Premium from Standard Policies and Transfer Guarantees rose from Rs. declined from Rs. Reinsurance The Corporation has been reinsuring the political risks covered by it with the Lloyds of London since the underwriting year 1981.
74 crore of interest received on claims recovery. comprising Rs. the balance being expense on account of member ship fees and travel expenses. 3. parts and products not otherwise available. 0. This flow of goods and services from abroad provides a wide variety of critical materials.Foreign exchange earned by the Corporation during the year came to Rs.18 crores.13 crores. Merchandise imports exceeded exports. of which reinsurance premium accounted for Rs. 3.000 crores. the flow provides a basis for foreigners to pay for Indian exports and provides a basis for foreigners to pay for Indian exports and provides Indian . Lesson 22 Import Management In 1992. 50. 1. 044 crore of reinsurance claims received and Rs. Additionally.40 crores. Outgo of foreign exchange amounted to Rs. imports of goods and services into India ware valued at Rs.
Preparing documentation and customs processing to facilitate movement among countries and organisations. exchange. Thus. Locating and negotiating with sources of supply. It is appropriate to anlyse the import system and to inquire into the ramifications of the system with which importers must deal. and may be native to the market. remains little understood by many in universities. and administrative barriers to exporting. 3. Now we need to take a closer look at some barriers that foreigners meet in exporting to India. 4. This knowledge can. negotiating the import documentation and customers procedure. Essentially the import process comprise the following five stages: 1. 2. (3) to portray the problems confronting Indian importers. or otherwise stated. the import function. 1. Determining Market Demand and Purchase Motivation. Development a plan for resale or use. and businesses alike. The import function. (4) to elucidate major facets of the customs law and procedure. Despite the quantitative importance of the function and the critical need for imported goods. They are familiar with information sources and institutions. providing for transfer of the product to the home market. The discussion should aid you in conceptualizing the import process and should provide a somewhat different perspective on Indian commercial policy. Importing refers to the purchase of foreign products for use or sale in the home market. and (5) because of its close relationship to customs arrangements. Securing physical distribution. governments. THE IMPORT PROCESS Importing has been considered in several places in this text. The usual interpretation is that such obstacles are placed by foreigners against Indian exports. may live there. quota. Earlier sections of the text presented many of the tariff. 5. They are closer to the market. Importers can have a distinct advantage over foreigners in the home market. The importing firm has the responsibility to determine whether the foreign product or service will meet the needs to the home market. because often they know or can more easily learn the requirements and nuances of the market. what are the problems found by foreigners or Indian national in importing into the Indian market? This chapter presents many such obstacles.produced products. It involves searching foreign markets for acceptable products and sources of supply. be a disadvantage when familiarity leads to carelessness and individuals assume . The present chapter service: (1) to organize the various aspects of importing by presentation of the import process. (2) to describe major importing institutions. often receives little attention because of the emphasis on the expansion of exports. however. arranging financing. however. it requires planning for acceptance of the product and delivery of the promised benefits. Such inconsistencies in foreign commercial policies are common. Determining market demand and purchases motivation. Successful importing depends on more than good buying.consumers with a wider selection of goods from which to purchase. and developing plans for use or for resale of the item of service. except when imports directly compete with domestically.
. (4) Documentation . Risk management policies will very with the negotiated results. the product involved. may be the responsibility of either the buyer or seller or both. The importer and the importer’s customers are interested in supply sources that are capable for producing the quantities and the quality levels needed as well as having financial stability and dependability. educational. commercial. Foreign products may be perceived differently than local ones. Enthusiastic exclamations of family and friends over souvenirs from abroad are no substitute for careful market analysis. Where possible. be aware of the potential differences perceived by their customers. The quality perception can change over time. These considerations affect the ability of the ability of the importer to deliver goods to customers or the assemble line on time and they affect the final cost. The potential for such material and parts is determined by the expected sales of the manufactures who use them. A careful analysis of trade reports and business conditions will aid importers in determining the market potential for both final products and components. (2) Locating and negotiating with Sources of supply Importers must develop dependable supply sources in order to assure customers and themselves of their ability to deliver promised goods at the negotiated time and place and in the correct quantity and quality. Manufactures may not only buy crude materials from abroad but may operate mines and processing plants abroad from which they import to meet their requirements. (3) Physical Distribution The logistics of supply. Some equipment and supplies are imported to facilitate and make more efficient our manufacturing. Studies similar to those proposed in Chapter 8 or described elsewhere in standard marketing research texts are needed also by the local importer to achieve realistic estimates of market potential and as a basis for development of the promotional plan. at least. Raw material and component parts are imported for use by home country manufactures in fabricating their own final products.a level of knowledge that does not really exist. transportation modes. and claims servicing. sources should be operating in an environment that is conducive to satisfactory future performance if the relationship is expected to continue. including delivery dates.and may be subject to negotiation. Product quality is partly a technical matter of specifications or conformance to samples or description. It also has another dimension. Some foreign products from some countries may be seen as being of higher quality than local products (e. Affluence and the lifestyles of the population affect the level and types of manufactured products imported by merchants for resale. and the importer’s ability to finance and manage the operation. or middlemen to the ownership and control of supplying firms. and governmental processes. but importers should.g. Various types of sourcing strategies are available ranging form a constant scouring of the foreign market by the importer. The choice among the various options is dependent on supply market characteristics. inventory policy. resident buyer. cars) while other foreign products may find it difficult to overcome an image of poor quality.
importation licensing has been liberalised by the government of India. The distances between trading partners and the sovereign rights of nations require more elaborate systems than those in domestic trade. public-utilities. Customs procedures are especially relevant. The distribution channels. Failure to carry out documentation procedures can be costly and result in nondelivery. government agencies. and financing should be organized for orderly and effective marketing because selling in the home market may be even more competitive and difficult than in foreign markets. (a) Private Industrialists Private industrialists who buy and sell for their own account. supplies. end users. Each business person desires to protect a personal interest and each nation wishes to be certain its laws are upheld. pricing.. promotional activities. They purchase raw materials. and equipment to facilitate their own operations and gear the level of their importing to their . machinery. hospitals. In Western countries these industrialists may carry on a significant portion of the import business while in India. and they are often unable to get government approval to import on deferred payment terms. some large and many very small. who buy for their own use. For industrial raw materials. There are numerous private industrialists. The individual importer has little choice but to conform. Restrictions such as the following are not unusual: Private industrialists are precluded from importing any item on the controlled list. then. colleges. (5) Developing a Plan for Resale or Reuse Importers need to have a plan for resale or use of the goods they buy Otherwise. Exporters who require irrevocable confirmed letters of credit will not ship merchandise on revocable unconfirmed letters. for the importer to have plan for convincing others of the merits of a product or service. the activities of industrialists are hampered by governmental attempts to achieve economic development goals. (b) End Users End users are manufactures.Documentation is important in international trade. and its sovereignty maintained. universities etc.at least in the short-run. they may find themselves stuck with a product that doesn’t appleal to the local people or does not necessarily fit the production and use systems of a specific business or institution. it revenues protected. Previous chapters have indicated some of the documents needed to support these systems. These are augmented by many agents of foreign suppliers. It is advantageous. Competitive products and sources make a marketing plan necessary for successful selling if resale if resale is contemplated. and facilitating agencies. There is no reason to expect that the majority of foreign products will sell themselves any more than it would be true for domestic goods. TYPES OF IMPORTERS Four basic types of importing institutions are found in most countries: private industrialists.
supply shortages. and others have expended their research and development. Traditionally Indian Industrial buyers purchased from abroad only when the domestic suppliers could not service their requirements. thereby permitting domestic manufacturers to be more competitive when they incorporate materials and parts in their final product. . The value of their services is indicated by the fact that over 90 per cent of all imports are processed through customhouse brokers. trade mark restrictions. (b) Custom’s bonded warehouse. and attempted close co-ordination with governmental development and social plants. The exact role of governmental agencies varies among countires. licensing requirements. Imports of this group often constitute the major source of imports for our country. Japanese. (d) Facilitating Agencies (a) Clearing agents. The customshoues broker is useful in expediting the shipment. For the routing associated with clearing merchandise through customs as well as resolving controversies that may ensure. jointly with the proprietor. usually being subject to an extensive budgeting process. Furthermore. Importers may not always want to take immediate possession of imported merchandise They can postpone the payment of duty by storing dutiable imports in customs bonded warehouses where they may clean. detailed procedures for biding and ordering. and increased exposure to foreign firms have led to increased use of foreign sources. (c) Governmental Agencies Governmental agencies constitute a separate class of importers because of their operating characteristics. has custody of all stored merchandise subject to detailed customs. and controls set by other governmental agencies. improved transportation and communication. They often combine functions and serve also as forwarding agents. classifications. Custom’s bonded warehouses are in the charge of a customs officer who. the growth of multinational companies. These intermediaries are experts in the complicated paperwork connected with customs procedures. For these services brokers charge a service fee. and duty rates. In India purchases by government agencies and government-owned corporations account for a large percentage of all imports. repack and make certain change in the condition of merchandise. sort. The clearing agent verifies the documents on shipments into India. The importation of goods form abroad has enabled many end users to gain the advantages of technological developments abroad as the Europeans. Not only must broker have knowledge of documents. Recently however. Importation of products from subsidiaries abroad may lead to more efficient utilization of those palnts due to greater volume. and arranges for the shipment of goods from ports to importers. sees to the payment of duties and collects freight charges.expected level of operations. an importer may engage the services of a customhouse broker. imports provide materials that are in short supply. This is true of all developing countires where the emphasis is on developmental plants and conservation of foreign exchange. but they must also be familiar with countervailing duties. Often goods are available at lower prices than from domestic sources.
An entry is filed with the district customs collector by submitting (1) a special customs. As an enforcement organization. Imported merchandise may be withdrawn from the warehouse: (1) for consumption (upon payment of import duties and accrued charges). excisable material without payment of customs duties and indigenous excisable material without payment of central excise duty. The decision of the Customs department may be relied upon as the basis for placing orders for goods to be imported. taxes. indicates the rate of duty (if any) and tariff classification of the merchandise. for use in the manufacture of a finished product. ships. duties may be assessed on an ad valorem. and when the duties are finally determined. and merchandise across national boundaries. In line with this general statement. In this situation a deposit is made with customs equal to the estimated duty. In India. specific. the importer may obtain it from the customs service by furnishing the necessary information. it engages in combatin smuggling and frauds on the revenue and enforces the regulations of numerous other governmental agencies. . If information on the classification and rate for goods is desired. Indian Customs The customs service of a country administers regulations governing the movement of persons. (2) a bill of lading. These is no provision under Indian law for prepayment of duty or taxes prior to the importation of goods as liability for the payment of duty is fixed at the time goods are entered. commercial.regulations. (2) for transportation and exportation. This postpones the release of dutiable goods and postpones payment of duty. the primary activities of the Indian Customs include: The assessment and collection of all duties. This facility would enable the manufactures to take into bonded warehouse. a consumption entry is filed. or pro forma invoice. and fees on imported merchandise. (2) Dutiable Status All goods imported into India are subject to duty unless they are specifically exempted. Major Facets Customs Procedure that affect Indian Importers. the consignee declares the value of the merchandise. Among the first requirements is one that states the good must be formally “entered” by the consignee. and the administration of certain navigation laws and treaties. and designates how the goods will be disposed. vehicles. or compound basis according to classifications and rates in the Tariff Schedules of India. the enforcement of customs and related laws. If the goods are to be released from customs custody immediately. In the entry. (1) Entry of Goods Careful adherence to customs procedure is necessary if foreign goods are to be brought into India. Provision exists under Section 65 of the Sea Customs Act and under Rule 191-A of the Central Excise Rules for the manufacture of goods under Bond. and (3) a declaration that prices and other data in the invoice are correct. a refund or an additional payment is made. or (3) for transportation and warehousing at another port. A warehouse entry permits merchandise to be placed in a customs bonded warehouse.
(b) Transaction value of identical merchandise. (4) Valuation Basis The basis used for valuation of an imported article in the appraisal process is established by law. The importer is responsible for ensuring that all the statements and the information in the documents field with customs officials are correct to the best of the importer’s knowledge. (e) Computed value (similar to previous constructed value). and appraisals should be more uniform among importers. Customs Rules Simplified . as amended: (a) The transaction value is defined as “the price actually paid or payable for the merchandise when sold for exportation to India. Many of these valuation systems have protective features that can act as non-tariff barriers. it must be appraised by customs officials to determine the value for duty purposes. or use of imported merchandise. but this assessment is usually avoided by separating the different articles.” If sufficient information is not available to establish transaction value of the Imported merchandise. disposal. This is another indication of how seemingly minor variations can affect the final cost of imported goods. If a package contains several articles subject to different rates of duty. to be used in the following order of preference. of subsequent resale. © Transaction value of similar merchandise.(3) Appraisal of Merchandise by Customs Officials When a shipment is classified as dutiable. The proceeds. (ii) Any selling commission incurred by the buyer. plus amounts equal to: (i) The packing costs incurred by the buyer. The Agreement establishes rules that seek to be more fair and to preclude the use of arbitrary and fictitious customs values. This new basis reflects the multilateral trade negotiations under GATT (The General Agreement of Tariffs and Trade) in the so-called Tokyo Round. (iii) (iv) Any royalty or license fee that the buyer is required to pay as a condition of the sale. The value of any assistance (materials. (d) Deductive value to similar to previous Indian value). the assessment may be at the rate applicable to the highest dutiable product in the package. several other bases of value are prescribed. accruing to the seller. Indian customs valuation has been based on systems established under Sea Customs Act. design undertaken outside India). tools. Use of transaction values should enable the importer to more redily determine the appraised value of imports. The Agreement was negotiated because of dissatisfaction with the multitude of systems then in use.
Self.assessment of import document by which importer of proven identity with unblemished record of past conduct to self-assess the goods.Import document up to a value of rupees one lakh to be assessed by the appraisers.Controversies over valuation. . . therefore.Duty-free allowance to passengers enhanced from Rs 2000 to Rs 3000. This includes those arriving from Sri Lanka and Maldives provided their stay abroad is more than three days.Greater facility to imports through international courier service to be provided. determine duty liability and disburse the duty.Only 10 percent consignments to be selected at random for physical verification. the government of India have announced major concessions in customs duty for capital goods and their components. An importer may protest a decision and get an administrative review by the customs authorities. In a significant extension of liberalisation schemes. . MAJOR CONCESSIONS IN CUSTOMS DUTY In further bid to boost exports and bring tariffs down to international levels. government of India have simplified and rationalised customs laws and procedures as pert of the liberalised economic. and other customs maters are common.Green channel for clearance of cargo under which cargo imported by persons of proven identity with unblemished record as well as private sector units to be cleared without scrutiny. . The level of duty cut and value up which the articles to e imported through courier raised. . . subject to specified conditions.Bonafide commercial samples restricted to Rs. .The powers of assistant collectors and deputy collectors enhanced. . .This is applicable to government departments and undertakings. . both for goods and passengers. 200 duty free imports allowed up to Rs. 1300 . . industrial and trade policies of the government in June 1992.Chemical test of samples to be extended to other institutes and laboratories in view of the congestion in the central revenues control laboratory. The following is the gist of official announcement on simplification of customs rules and procedures. which the government has been following over the past one year. a procedure for resolution has been established.Passenger clearance rules simplified and inconvenience and irritants eliminated. . Classification.Any breach of trust to attract penalty. The first notification prescribes a concessional rate of customs duty of 25 per cent ad valorem or 15 per cent ad valorem on capital goods imported under the export promotion capital goods (EPCG) scheme. Export documents in certain prescribed categories not required to be put up to assistant collector.
machinery. 5 lakhs) have to apply for licence through the sponsorship of the Director of Industries of the State where the factory is located unless some other authority is expressly prescribed by the Government. an importer undertaking an export obligation equivalent to three times the CIF value of the capital goods over a period of four years would attract customs duty at the rate of 25 per cent ad valorem. that is. and (b) other. testing equipment and equipment required for research and development activity. The third notification fully exempts capital goods and components imported under the scheme from auxiliary duty to customs. IMPORT PROCEDURE Preliminaries The first step toward the import of goods from abroad into India will be to set up an establishment for importing things and secure recognition from the government as an importer.I. and spare parts for his own use in an industrial manufacturing process. In such cases. The quota certificate entitles the established importer to import up to the value indicated therein which is calculated on the basis of past imports.exporters under the EPCG scheme. one who requires raw materials. In case the importer is an actual user. machinery. If the firm imported goods of the class in which it is interested during the basis period prescribed for such class. The sponsoring authority for Scheduled Industries borne on the Register of the Director-General to Technical Development have to move through the Director General of Technical Development (Technical Cell).The second notification prescribes customs duty at a concessional rate of 15 per cent ad valorem on components imported for the manufacture of capital goods to be supplied to the manufactures. and others have to move though the authority prescribed for them. For other categories of importers – (a) those importing against exports made under a scheme of export promotion. equipment or accessories required by an importer for manufacture of goods and also machinery for packing goods. subject to specifed conditions. Small industries (with a capital of less than Rs. he has to secure licence through the prescribed sponsoring authority which certifies his requirement and recommends the grant of licence. For this the intending importer furnishes details of the goods imported in any one year in the basic period prescribed for the goods together with documentary evidence including the Bill to Entry/Postal Declaration forms and Customs Duty receipts with relevant invoices and Bank Drafts/Chartered Accountant’s Certificates in the prescribed from certifying the C.F value of the goods imported in the selected year. New Delhi. The second notification prescribes a concessional rate of customs duty of 15 per cent ad valorem on components imported for the manufacture of capital goods. According to the first notification. it will be treated as an established importer. A person or a firm can import goods only on the strength of an import licence issued by the Controller of Exports and Imports. application can be made to secure a quota certificate. Imports undertaking an export obligation equivalent to four times the CIF value of the capital goods over a period of five years would have to pay customs duty at the rate of 15 per cent ad valorem. accessories. All such imports of capital goods and components have also been fully exempted from the additional customs duties.licences have to be . Capital gods include plant.
2. etc. shipping and insurance. 1. Though one can order goods directly. The import licences are usually issued for a period of one year at a time. In Indian. The details of the orders taken down by the salesmen in their note-books are entered in the indent form. An ‘indent’ may be ‘open’ or ‘closed’. An open indent is one which does not specify the price and other details of the goods ordered but leaves them to the discretion of the buyer in the exporting country. In such a case. Two copies of the indent form are sent to the importer for his acceptance. it may give rise to negotiations between the parties. etc. The exchange bank through which the payment is proposed to be routed puts its endorsement on the application form. The Indent houses maintain close touch with the well. The indent firms serve as middlemen between the exporters and importers and charge a certain percentage of commission from the importer. and the details of packing. if indent specifies the price at which goods are sought to be imported. the price at which they are to be purchased.Transaction The following stages mark the various steps involve in importing goods into India under an import licence and quota. Obtaining Foreign Exchange The foreign exchange reserves of any country are controlled by the Government and are released through the central bank. Madras. Placing the Indent The importer places orders for the goods he requires. In India. Calcutta. On the strength of the application and the licence . generally importers prefer to make use of the services of indent houses for this purpose. an importer is able to get the foreign exchange only from an exchange bank approved and recognised by the Reserve Bank of India for dealings in foreign exchange. the indent incorporating the price finally settled is called a ‘Confirmatory indent’. The order is called ‘indent’ and may be placed either directly or through specialised intermediaries called “indent houses” The word “indent” is used for import of goods. the Exchange Control Department of the Reserve Bank of India deals with applications for the release of foreign currency. many of the big indent houses have their officers in port towns like Bombay. The importer has to produce the import licence along with the prescribed form for securing foreign exchange required to pay for the goods ordered from another country. Stages in an Import. Their salesmen take these samples to the intending importers and book orders from them. If an importer does not act through and indent house.known foreign foreign firms who send the samples of their products to them. according to which two or three copies of the order are prepared and indented. A closed indent. and for which he holds and import licence.secured from the Office of the Chief Controller of Exports and Imports. The importer returns one of the copies duly accepted and signed to the indent house which then sends a copy of the indent to its agent in the foreign country concerned. However. on the order hand specifies the brand of the goods ordered. he may place an order directly with the exporter.
the importer cannot comply with the requirements regarding acceptance or payment. The attached documents are handed over to him immediately thereafter if it is a D/A bill. Arrangement for Payment After the importer has succeeded in securing the requisite amount of foreign exchange from the Reserve Bank of India. when the shipper (exporter) his shipped the goods. That is why it is called the ‘Documentary Bill”. This paves the way for the importer to go ahead with the other formalities in connection with an import transaction.. or its agent there. ( D/A = Documents against Acceptance. In Case. Various documents like master document.and the exchange policy of the strength of India in force at the time of application. A Documentary bill may either be D/A or D/P. 3. Generally. exchange is released and made available only for a specific transaction for which an order has been placed. It must be noted that while licence by the Government for all imports during the period of its validity. the Reserve Bank of India sanctions the release of a certain amount of the desired foreign currency. D/P = Documents against Payment). i. arranges for the bill to be presented to the drawee (importer). Clearing the Goods Assuming that the importer has taken possession of the various documents relating to the goods shipped. When the ship carrying the goods touches at a port. The first thing for him to do is to obtain the ‘Endorsement for Delivery’ Delivery or order on the back of the Bill of Lading which is the document of title to the goods. If freight has not already been paid by the shipper or exporter.e. Another method will be to request the exporter to forward the documentary bill through his banker to the importer for being delivered to him either against acceptance of the bill of exchange or against its payment. the bank delivers the documents only after the importer pays the amount of the bill on maturity. the banker through which it is sent may be instructed to deliver the documents against the acceptance of the bill-by the importer or against the payment by him. he sends an advice not to the importer stating the date of shipment of goods and the probable date when the ship is expected to reach its destination. indent House is mentioned as the ‘Referee in case of need’ on the bill. the indent house does so on his behalf 4. he will have to comply with the formalities prescribed for clearing the goods. This may be done through an L/C where it is intended to enable the shipper to obtain payment for the goods immediately on surrendering a documentary bill to a bank in his own country. At the same time he draws a bill of exchange on the importer (also called indentor) for the full invoice value of the goods. bill of lading and certificate of origin are attached to this bill. it is notified in the newspaper and the importer has to secure the release of cargo from the custody of the customs authorities. In such cases. in case of a D/P bill. The bank’s branch in the importing country. The shipping company will make such endorsement only if is satisfied that the freight has been paid. the importer will have to make the payment on this score before he can be given . he has to make arrangements for paying for the goods ordered. insurance policy.
considerable delegation of powers has been made to the regional licensing authorities.. However. etc. decentralised . Thereafter. The importer then presents two copies of the Port Trust Dues Receipt and three copies of the Bill of Entry to the Port Trust Office to obtain clearance regarding dock dues. components and consumables in the negative list of imports. one copy of the first form and tow copies of the second are presented to the Customs office. To save themselves from the botheration of going through all the above mentioned. (ii) goods for home consumption. Separate forms of the Bill of Entry are used for each one of the three classes of good: (i) free goods which are exempted from customs duty. (4) Other highlights of import procedures are: grant of licences for certain items of raw materials. drawn in triplicate. where licensing is required. Clearing agents charge commission for their services. capital goods licences and customs clearance permits will be valid for 24 months.a green signal by the shipping company. However. these agents will take it upon themselves to deliver the goods at the exporter’s warehouse. The duty payable on a particular consignment of goods received at the customs is charged to the account and the importer is informed of this. etc. measurements. an importer may maintain a running account with the Customs office and make deposits from time to time. On dutiable goods.. i. (3) Under the new procedure. IMPORT PROCEDURE SIMPLIFIED As per the new Import Policy 1992-1997 Import procedure has been simplified: (1) Against seven application forms required for import of various items in the negative list only on form will now be required (2) Most of the imports are now free from licensing. no import duty is to be paid at the Customs Office. based on weight. the importer or his agent will pay the import duty which may be specified. Payment of Customers Duties if the goods are free. value and description are entering the bounds of the country. it may be ad valorem. he may apply to the customs authorities to get them placed in the ‘Bonded Warehouse’ He can then pay the duty on each installment of good that he withdraws from time to time. Payment of customs duty can also be made under the system called the “Permanent Deposit System” Under this system.cases like duty-fee imports for export production. In such as case. In case the importer is not in a position to pay the customs duty on the whole of imported goods. 5. attests the fact that goods of specified quantity. and (iii) bonded goods. Revalidation may be granted on merits. i. the importers may entrust the job to clearing and forwarding agents. according to the tariff value or the market value of the commodity or its invoice value. Bill of Entry The Bill of Entry.e.e. import licences/ customs clearance permits will have validity of 12 months.
(14) Import licences issued under various provisions of the policy will indicate the value both in rupees and in foreign currency at the exchange rate prevailing on the date to the issue of licence. aircraft spares can also be imported without a licence on the basis of the manual of the aircraft or on the recommendations of the department of civil aviation. Items qualifying for exports include tea. (5) Imports though courier service upto a value of Rs. (8) Import of motor vehicles including tourist coaches and air-conditioning units will be permitted within the entitlement of the licences given to hotels. in the case of gods imported with actual user condition can be transferred only with the prior permission of the licensing authority. 5.000 for tractors for each imported vehicle can be made without a licence. travel agents and tour operators. 50 lakh to be considered by the regional licensing authorities. tobacco and certain spices. (15) Authorised dealers of foreign exchange will indicate the value in foreign currency as well as in rupees determined on the basis of the market and official exchange rate in the letters of credit opened for import of freely importable items or the items proposed to be imported against a licence. (7) Dealers of books may be granted licences on the basis of 20 per cent of the purchases turnover for import of fiction and other books. (11) Import of spares for imported motor vehicles and tractors upto a maximum value per year of Rs.application for second hand capital goods upto a CIF value of Rs.000 (for motor vehicles) and Rs. 20. coffee. subject to fulfillment of export obligations. No enhancement of rupee value will be necessary if the imports are covered by the amount of foreign currency indicated in the licence. (9) The import entitlement of any one licensing year can be carried forward. cinnamon and cassia to be granted to the extent of 10 per cent of best year’s imports in value in any of the preceding 5 licensing years. (13) Goods imported without restrictions may be transferred to others However. 10.000 at a time can be made in accordance with the policy (6) Licences for import of cloves. either in full or in part and added to the entitlement of the two succeeding licensing years. (10) A special licensing committee headed by the Chief Controller of Imports and Exports may consider applications for advice on the grant of licence for import of restricted items. (12) Similarly. .
Foreign Exchange and Exchange Control .
the buyer pays the consideration money and the seller receives the value of merchandise sold.The edifice of foreign exchanges arrests on the foreign trade as every transaction in foreign exchange originates from foreign trade. for example. Einzig. which can aptly be described as a “coexistence between internationalism of trade and the nationalism of currencies.. India. i. credits and balances payable in any foreign currency. the USA. the rupee in the possession of the Indian buyer will need to be exchanged into US dollars demanded by his supplier for settlement of the transaction. the dealings between the banks and their customers of between the banks themselves within the same markets are based on tow different systems.1 Again. his bank buys. who asks his foreign branch or correspondent at seller’s place of domicile for ultimate payment to the seller. which plays the part of a clearing house. which are “means of payment in which currencies are converted into each other and with which international transfers are made. Dr. Switzerland and in some other . Einzig refers them as foreign exchange (plural form to be noted). through which the twin purposes of purchases and sales of foreign exchange are off set against each other. In Other words. all claims for the value are settled by payment of money. When the buyer in another country desires settlement of any claim he has to do so either in his home currency or in the currency of the seller’s country or even in the currency of a third country. travelers’ cheques. Through the modus operandi in international dealings in exchange between different foreign centres is more or less uniform. i. in the words of Dr.. For this. Canada.3 To the holders of these instruments mean a right to wealth. the buyer has to arrange for foreign currency (by converting his home currency) through his bank. and any drafts. also the activity of transacting business in such means..”4 Foreign Exchange Market Every deal in foreign trade is a two-way transaction. an American businessman sells to an Indian a machine. In the UK. “Foreign Exchange” means foreign currency and includes all deposits.2 According to Indian Exchange Control. every international transaction involves an exchange of currency. letters of credit and bills of exchange and promissory notes.” Meaning of Foreign Exchange Foreign exchange is a branch of economic science which seeks to deal with the means and methods by which rights to wealth in one country’s currency are converted into rights to wealth in terms of the currency of another country. If. and the buyer of the goods to take delivery of the shipping documents pays into this bank the equivalent value of foreign currency. i.e.e. In the world today it is frequent that the product of one country crosses its border and money being a common medium. foreign exchange is the system or process of converting one national currency into another and of transferring money from one country to another. his bank sells the required foreign currency. Therefore. the seller obtains money form his bank against shipping document. in which the relative value of goods can be expressed. the purchase and sale of foreign currencies take place at two different countries.e. Thus. Thus. to bridge the gap there arises the need for a foreign exchange market.
inter-bank) at times supplemented by the central banks. The activities in first tow levels are. This two-faced problem in all cases is solved where both parties are favourable known to their own bankers. etc. i. broadly at four different levels. in order to transact business and to fix official exchange rates. The importer may also settle his obligation by a cheque on his own bank or its correspondent either in the exporter’s country or in any other country. it is very much usual that when the exporter parts with his goods. The transactions in foreign exchange are effected. The importer. Italy. at times. (c) between the banks and their branches in different foreign centres . in fact. The above methods of settlement of transactions arising form sale and purchase of goods are common. or on the importer’s banks (or even on any third party) and hand the bill to his banker either for collection (i. it should be borne in mind that when an exporter (c reditor) has to draw a bill of exchange on the importer (debtor) he will ordinarily draw the bill of exchange in any one of the following methods: . prevailing in France. the exporter can draw on his counterpart.. meaning thereby a number of buyers and sellers systematically in contact with each other for the purposes of transacting business in foreign exchange. does not want to pay the goods until arrival of the carrying vessel. Whereas. (b) between the banks themselves in the same market (i.. while. proceeds are received only after realisation from the importer) or he may outright sell the bill to his banker. authorised dealers) and their customers. similarly. viz. remits to the exporter the value of goods-maybe in advance or on receipt of advice of shipment from the exporterthrough the latter’s bank. It is not totally impossible that the importer. Netherlands and Germany.. (a) between the banks (who are authorised to deal in foreign exchange. Means of Setting International Transactions It has already been stated that a foreign exchange market plays the part of a clearing house.e. They are really informal markets and not actual meeting places for the participants. Nevertheless.countries. the buyers and the sellers. the importer. either he wants money immediately or wants to be sure that it will be paid at the predetermined date without any contestation. banks (authorised dealers in foreign exchange) act as clearing agents for international debts.. The term ‘foreign exchange market’ is applied in an abstract sense only.e. and (d) between the central banks. where operators in foreign exchange meet on every business day at a fixed time. Depending upon the terms of agreement.e. foreign exchange market usually means a section of the Bourse (not connected with the dealing of shares and stocks). on the other hand. The authorised dealers buy rights to wealth from those who have them to dispose of and sell rights to wealth who wish to acquire them. in the continental sense. In practice. confined to the local or domestic markets while the dealing at the other two levels are on international plane. the foreign exchange markets are not ‘markets’ in the concrete sense of the term.
For that reason the rate applied by paying bank is slightly inferior to that quoted for TTs. the buying and selling of which are virtually the primary operations of an exchange dealer. this system was in use and had its utility as postal transit time was relatively more.. borrowing money from one another and paying interest on such borrowing. In whatever manner the buyer and the seller of goods agree to settle the transactions.5 There is also a great volume of transactions which does not result from commercial deals and the bills of exchange are not indeed the means of settlement for such transactions. Before the airmail transfers developed. Under this method. consequently there occurs a time lag of some days in each case before the relevant instructions are received by the paying banks and the payments are actually effected. is confined to banks and large commercial houses who maintain ample funds abroad. used to advice their correspondents by cable . the mechanism is similar to that of TTs except that the instructions to pay to the beneficiaries are transmitted by mail (generally by air-mail) instead of cable. On the importer’s bank under a letter of credit established by the same bank. The availability of sufficient funds at the other end is the criterion for such remittances and. The principal credit instruments are: (a) Telegraphic Transfers (TTs) or Cable Transfers: These are the speediest mode of effecting remittances without involving any loss of interest and the principal banking means of transferring funds in large amounts to a foreign centre. financial and large commercial houses. etc. after dispatch of mil transfer.(i) (ii) (iii) (iv) On the importer (may be under a letter of credit. it will not be too much to say that in foreign trade payment for goods in ultimately made between one bank and another. viz. and disbursements are effected either by payment of cash to a third party or by credit to the account of the beneficiary (ies). The rate of exchange quoted by banks for such remittances is considered to be the basic rate of exchange between two currencies. Banks. On his own banks or any other banks in his own country under a letter of credit opened by the importer’s bank. if any). (b) MTs (Air or Sea-Mail):These are the orders for payment transmitted by letter by banks. therefore. These can be settled by the use of various credit instruments. (c) Guaranteed Mail Transfer (GMT): This is a combination of the qualities of mail transfer and cable transfer. or On a third country bank (Obviously a correspondent of the importer’s bank) under a letter of credit established by the importer’s bank. It may also be called as deferred cable transfer (or deferred TTs). If the paying banks does not have an account with the issuing bank the former remains out of funds until it is re-imbursed by the latter’s correspondent. exchange of service.
The issuance of such instruments in a foreign currency is simply a sale of that currency against ready cash and until the instruments are encashed abroad or the issuer’s account abroad is debited. These accounts are known as ‘Nostro’ Vostro’ and ‘Loro’ accounts. are encashed by a bank abroad there is an actual outlay of funds by that bank and there are also occurs a time lag to get the amount credited to its foreign currency account abroad. expressed in ‘foreign currency. in order to meet its requirements for transactions in pound sterling. or effecting remittances for any other purposes. the paying bank has to make necessary provision for loss of interest in the rate of exchange applicable for such transactions. maintains an account in pound sterling with its . there is no outlay of fund. there is a gain of interest on the amount involved in the transaction. The value date. retirement of a bill of exchange under a letter of credit or a remittance. Cheques of this nature are also purchased by dealers from the selected customers with recourse to them. Although these instruments were widely used in the past for settlement of debts. As a result. Calcutta (an authorised dealer).the issuance of such instructions and on receipt of the cable they could pay on the stated value date irrespective of the date of receipt of the relevant mail transfer. (d) Cheque or Draft: This is another means of payment of debts abroad. The balances of such accounts – debit or credit – are taken into overall financial position of the banks involved. The instruments are ordinarily drawn on their own foreign branch or correspondent. be it a purchase of commercial documents. if fact. As and when such instruments. (e) Circular Credits and Travellers Cheques: These instruments are treated at sight basis by any bank (or travel agents handing banking business) called upon to issue such instruments or to make payment (encashment) against them. ABC Bank. used to be future or deferred date. With the development and popularity of airmail services. their popularity now –a – days is on the wane as the risks of loss and delay in transit are there. The uses of cheques drawn by firms/ companies on their account and sent abroad for settlement of debts is however not totally absent. Accounts in Foreign Currency While dealing in any transaction in foreign currency. the guaranteed mail transfer (or deferred cable transfer) has lost much of its importance and is rarely used now as remittance facility. a bank must have accounts (normally current accounts) in foreign currencies with its overseas correspondents through which the transactions in relevant – Currencies can be put. Therefor. ‘Nostro’ accounts mean current accounts of banks maintained in the books of their branches or correspondents in foreign centers in terms of the latter’s currency. For example.
acquiring (purchase) of the foreign currency by the buyer of the goods for payment to the seller and a purchase of the same foreign currency by a bank at seller’s end. the rupee account of Rs Bank. Even when the price is paid by the buyer in his home currency and its remittance to the foreign seller. Calcutta. is the former’s ‘Nostro’ account and they will refer it to the latter as ‘our account with you’. Calcutta. London. New York.e. there arises the occasions of a sale of foreign currency by a bank at buyer’s end. disposing (selling) of the foreign currency by the seller of the goods.Called Vostro accounts are the Nostro account of another bank involved. Similarly. ‘Vostro’ accounts are current accounts of foreign banks maintained in the books of their correspondents in terms of the latter’s currency. with ABC Bank. is the ‘Loro’ account and the XY Bank will refer this account to the ABC Bank as ‘their account with you’. In short. Calcutta. may maintain a current account in Indian rupee with ABC Bank. which. also keeps a rupee account with ABC Bank. ‘Loro’ accounts represent current accounts of third parties (banks) kept with foreign correspondents in terms of either foreign currencies or in the home currency. to meet its requirements in Indian rupee. in the light of the examples cited above. London. London. This account will be designated by XY Bank as its ‘Nostro’ account. RS Bank. these mean ‘third party’ accounts. Calcutta. can be summarized as under: (i) (ii) (iii) ABC Bank’s account in pound sterling with XY Bank.. the XY Bank in their correspondence with ABC bank will refer the account of RS Bank as ‘their account with you’ The three types of accounts. Taking the example under ‘Nostro’ account above. From the point of view of the XY Bank. New York. while ABC Bank will designate it as XY Bank’s ‘Vostro’ account. the XY Bank. As and when there is a sale and purchase of a commodity and the settlement of Value thereof has to be effected in a foreign currency. A remittance in rupee made by the XY Bank. The so. suppose.e. XY Bank will treat the ABC Bank’s account with them as the latte’s ‘Vostro’ account and the former will refer it to the ABC Bank as ‘your account with us’. In the instant transaction. to the ABC Bank for account of RS Bank will mean the proceeds of the remittance are ‘for credit of Loro account’ of RS Bank. To explain the position. say XY Bank. means the acquiring of right to wealth for he can at any time withdraw the amount and utilise in the manner he likes. Such an account would be designated by the ABC Bank as its Nostro account with the XY Bank. at some point of . London. as ‘Vostro’ account. i. or credit of the amount to the seller’s account with a bank in the buyer’s country.correspondent in the UK.. the XY bank London will refer the pound sterling account of ABC Bank. i.
which is a foreign currency to the buyer of the goods). the sale and purchase of goods by traders at international plane give rise to buying and selling of foreign currencies by banks at foreign centers. it needs a conversion of one currency into another. we can conclude that to pay for the goods purchased (imported) there takes place a conversion of home currency into foreign currency which. is widely known as foreign exchange transaction. If it is viewed form the customer’s point of view.e. The seller’s bank purchases the relevant documents and pays his customers an amount in Indian rupee. is a sale transaction and to receive payment for the goods sold (exported) there occurs a conversion of foreign currency into home currency which is a purchase transaction in the bank’s book. however. equivalent of $ 1.. The analyses are reflected in the following chart which.e. a bank in India issues to his customer travellers cheques for £ 50 against rupees. the main principles involved.S. Again. Therefore.e. Conversely. the buyer settles the value by payment in his home currency and the seller received the amount in predetermined currency (presumably in his home currency. if viewed from the angle of the bank. Let us also take another case.e. dollars for remittance to the seller’s bank in settlement of the transaction.. purchase of foreign Import (i.e. the value of the machine is S 500 and in order to pay the seller’s bill the Indian buyer has to deposit an appropriate amount in Indian rupee (i. means conversion of the amount into foreign currency. of foreign exchange. the former is case of buying of foreign exchange while the latter is a case of selling of foreign exchange. It may be also noted that the buying and selling of foreign specialised job for allo concerned including the professionals engaged in the foreign exchange dealings. Sale and Purchase Transactions: Two-In-One It has already been stated that every deal in foreign trade is a two-way transaction. will afford a clear understanding of the affair. Foreign Exchange Transaction Involve Export (i.time. Now let us take the example of the American businessman selling an Indian a machine. can be easily understood by anyone interested in it. In these twin examples. This affair of buying or selling.. From the above analysis. purchase by trader) Importer pays in home currency to . i.500 to an American buyer.. while the latter is a purchase..e. i. conversion of foreign currencies.500. form the bank’s point of view. the buyer’s home currency) which has banker will convert into U.. sale by trader) Exporter receives home Currency from i. An Indian sells certain quantity of the jute goods worth of $ 1. Suppose. This involves a conversion of dollar into Indian rupee. the former is a sale.e. Thus. a foreign tourist encashes in a bank in India a travellers cheque for £ 10 and obtains from the bank the proceeds in Indian rupees. sale of foreign Bank (i. if examined carefully..
currency by exporter which means) Bank’s purchase of foreign Currency (i.e., conversion of Foreign currency into home Currency
currency by importer from bank which means) Bank’s sale of foreign currency (i.e., conversion of home currency into foreign currency
The banks provide a service to their customers by converting foreign exchange into vice versa. In a single day they will both purchase foreign exchange from some customers and sell it to others. In orders to meet the needs of their customers, the larger bank maintain deposits in branches of commercial banks abroad, while smaller and inland banks work through these banks on a correspondent basis. The bank quotes rates at which it will buy of sell foreign exchange. The rates will differ among the currencies, thereby establishing the price of one currency in terms of another. A distinction is to be drawn between spot and forward exchange. When an importer purchases sport exchange. Actual delivery is taken of a definite amount of foreign exchange at the time of purchase, and the rate then being quoted is paid for the particular bill of exchange. When a forward exchange contract is purchased, the purchaser agrees to buy a given amount of exchange on a fixed date in the future at the rate specified in the forward contact, this future rate many be higher or lower than the spot rate. The direction and extent of the deviation from the sport rate is largely governed by two factors; (1) the supply and demand for delivery of a given currency at a future time, and (2) the speculative opinion of the market concerning the future course of the rate of exchange. Factors Affecting Exchange Rate Fluctuations. (A) Demand and Supply of Currencies Exchanged Free or uncontrolled exchange rates fluctuate almost continuously, for they are constantly subject to a variety of influences. If countries were still on the gold standard, the fluctuations would be limited by the cost of shipping gold from one country to another, but between these limits constant fluctuations could occur. In the absence of the gold standard, gold embargos, currency inflation, or similar abnormal disturbing factors, the fluctuations in the exchange rate are caused basically by the supply of and the demand for the currencies being exchanged. A maze of merchandise and other business transactions is constantly conducted between India and foreign countries. These transactions influence the supply of and the demand for foreign exchange.
The transactions comprising the credit items (in-payments) of the India’s balance of payments tend to increase Indian holding of foreign exchange and /or to reduce foreign holdings of rupee exchange; the debit items (out-payment) have, of course, the reverse effect. The principal items that normally constitute the supply of foreign exchange in India are exports, shares and bonds sold to investors abroad, foreign capital movements to India, interest and dividend payments on foreign securities held in India, foreign securities resold to foreigners, and payments due to Indian companies for shipping, insurance, and other services. All of these items, require remittances to this country and, therefore, result in a demand for rupees or a large volume o claims against foreign currencies. The principal items constituting the demand for foreign exchange are merchandise imports into India, foreign shares and bonds sold in India, Indian securities bought back from foreigners, interest and dividends on Indian securities held abroad, Indian tourist expenditures abroad, and payments to foreigners for services. (B) Other Factors Foreign exchange rates, however, are not always dominated by these normal forces of supply and demand. A number of other factors may cause people to lose confidence in a currency and lead to a decline in its value. Loss of confidence may result from: (i) (ii) (iii) (iv) (v) government instability: large public debts; high rates of inflation; major industrial of banking failures, etc; At times speculative trading may also contribute to exchange fluctuations even though speculators usually have stabilizing effect. However, if a preponderance of them believe the currency is overvalued, they may all be trying to sell at the same time. Exchange rates also are influenced by the money markets in India and foreign countries, because interest rates influence the flow of funds and, consequently, the supply of and demand for foreign exchange, Rising interest rates in India normally attract foreign bank funds to this country and bring home Indian bank balances held abroad. The effect is to depress exchange rates. Declining interest rates in India tend to reverse this flow of bank funds and to raise exchange rates. Similarly, a rise in money rates in a foreign money market normally tends to draw foreign bank funds held in India and available Indian bank balance in the foreign market, while a decline in money rates abroad tends to cause a reverse flow of bank funds. It does not follow that every fluctuation in the money market will be promptly reflected in foreign exchange rates. In the absence of exchange
control or restriction plans, however, changing money rates frequently are associated with fluctuation in foreign exchange rates. Effect of Exchange Fluctuations. When a seller quotes an export price for a product or receives an offer in terms of foreign currency, there is concern with the exchange rate fluctuations that may occur before the seller receives payment. When quoting prices in terms of the foreign currency, the exporter knows how many rupees are to be received at the current rate of exchange. However, when the customers pays in sterling pounds, deutsche marks, pesos, US dollars, Japanese yen or some other acceptable foreign currency, the amount received in terms of rupees will depend upon the rate of exchange when the currency is converted. When the price is quoted in the foreign currency, the exporter accepts the risk of exchange fluctuation. Unless steps are taken to protect expected profits, a decline in exchange rates may reduce profits or even convert them into a loss. Exporter’s Means of Protection An Indian exporter can obtain protection against exchange losses by quoting a price in terms of Indian rupees, thereby shifting the exchange risk to the foreign importer. In that case, unless the importer seeks protection, an unfavourable change in the exchange rate may cause the importer to pay a higher price (on the basis of his/her currency) then had been anticipated. When quoting prices in a foreign currency, an exporter may deliberately accept an exchange risk if it is believed that the rate will be more favourable later, then the exporter is speculating on the merchandise export transaction, for the amount of profit will not be known until the payment has been converted to domestic currency. The exporter may be more inclined to accept this if exchange rates have recently been quite stable and if a product carries a wide price margin. Although the exchange risk may be taken into account in quoting export prices, such action could raise the price and thereby limit sales. (i) Agreed- Upon Exchange Rate. When exchange rates fluctuate within a comparatively narrow range, the exporter may be able to induce the foreign importer to agree upon a fixed or guaranteed rate of exchange, but arrangements such as these may be unbtainable at the very time the exporter is most anxious to protect profits. When the exchange risk is greatest because of wide fluctuations, the exporter who quotes foreign currency prices may find that the only safeguard is in the open exchange market, where foreign currency bills for future delivery are bought and sold. Hedging. When an exporter makes a sale, foreign currency may be sold for future delivery. Later, when a draft from the foreign customer is received, the exporter will present it to a banker and
but in doing so the importer ties up funds until the merchandise is received. If the sale to a small country.upon rate. The profit derived from this future exchange transaction will approximately balance the reduced number of rupees the exporter is’ paid for the merchandise. This will eliminate the danger of a rise in the exchange rate in the importing country. of course. hit will be able to cover or buy back at a reduced rate the foreign currency that had been sold for future delivery. In effect a fixed rate of exchange will again have surfaced for the exporter. the exchange rate fluctuations may increase the exporter’s credit and commercial risks The importer who has purchased foreign goods in terms of domestic currency may have an indirect interest in exchange rate fluctuations because losses resulting from exchange fluctuations may include the foreign seller to delay shipment or fail to make delivery of the ordered merchandise. the importer may hedge transactions by purchasing a future exchange contract. If the exchange rate declines. are faced with a possible loss of profit resulting from unfavourable exchange fluctuations. The sale of future contracts often affords real protection to the exporter. Thus. business is disrupted and. Bankers also have at times withdrawn from future exchange operations in some currencies. Fluctuations following the closing of the sales contract may be so unfavourable that the foreign customer may refuse to accept delivery. the exporter has A businessperson may hedge or protect export profits in a large measure by selling future contracts. Hedging through the use of future contracts implies that there is such a market. the exporter who expects to receive foreign currency at some future date may sell an equivalent amount of foreign Currency for delivery in future at the time the foreign currency is expected to be received by the exporter. but it does not always eliminate the exchange risk entirely because the exporter may be unable to close the export sales contract and sell the futures contract at exactly the same moment. Importer’s Means of Protection Importers. Thus. When a sale is made. the importer cannot deliver. Indirect Risks The most complete safeguard against unfavourable exchange fluctuations is. may be unable or unwilling to meet the financial obligation. Although the importer will not make payment and therefore will not suffer a direct loss from exchange rate fluctuations. or one with few international dealings. if any of the ordered items has been resold in advance of its receipt. if there is a future market for the foreign currency.receive payment on the basis of the agreed. there may be no future market for the currency. enjoyed by marketers when payment is to be made in their domestic currency. knowing that a given amount of foreign currency will have to be delivered at a future date. but even then they have an interest in exchange fluctuations. When purchasing imports in terms of a foreign currency for which there is a market for future exchange rate. so hedging may not be possible in currency. In the meantime the exporter bears the exchange risk. Thus. the importer is assured that when the time comes for payment. . or. The importer. The futures and spot markets may not fluctuate in the same amount. when buying merchandise in terms of foreign currencies. having accepted the goods. the exporter will receive fewer rupees for the merchandise transaction than anticipated. may purchase spot exchange when ordering imported merchandise. the necessary foreign currency will be available at a price determined when the future contract was purchased. so the transactions exactly offset each other.
or if price offers from aboard are accepted on that basis. Exchange rates can depreciate very substantially. Thus. the exporter whose products are price-sensitive faces either a declining market or the need to cut the export price and receive a lower profit. inflation may result in a reduction of exports and an increase in imports in the inflationary country. relative to the higher domestic prices. Such a prompt readjustment. would be attractive. Lower prices abroad. in terms of Indian rupees.Influence of Price Levels If price levels could be promptly readjusted as exchange rates depreciate and a socalled international purchasing power parity could be maintained.-even though the general commodity price level within a country does not change. i.. the monetary managers want to make exports cheaper. pressure to formally devalue the currency. now more expensive. exporters find sales more difficult. then the exporter would receive fewer rupees than before the exchange rates depreciated. the depreciated exchange would have little effect upon merchandise exports and imports.e. rarely occurs. The exchange situation also is complicated by inflationary conditions. When inflation occurs within a country. will be reduced. quoted on the basis of the current depreciated exchange rate with a view to obtaining the number of rupees normally expected. may lead to increased use of foreign sources of supply. therefore. would appear high to the foreign importer in comparison with the general level of the domestic prices prevailing in the other country and higher than the import prices that were formerly paid. the prices of its products increase and. it would pressure the country to consider a change in par value. Indian prices. If this persists. In a managed currency system. Anti-dumping laws in many countries might make the latter policy unlawful. however. hopefully. If a foreign currency depreciated relative to the rupee while Indian prices remained stable. even if the exchange rate does not change. Consumers and industries in the country with the inflated currency would find. that the rise in internal prices has made importing more attractive. . the exports will expand and imports. or floating. as under the IMF. If an exporter quotes prices in line with the domestic price level of the foreign country. but also the demand and supply for the currencies of the various countries. exports from India would be handicapped. The resulting decline of exports and increase of imports would eventually tend to readjust the exchange rates because there would be an increasing demand for the foreign currency and a declining demand for the rupee. In a fluctuating. Imports received from the foreign country would be encouraged because the importer could temporarily purchase merchandise at prices that. By devaluing the currency. this should change the rate of exchange to partially compensate for the shift to the use of foreign suppliers. however. The inflation thus affects not only the market for domestic and foreign goods and services. exchange system. The increased cost of imported items leads foreign buyers to other countries.
Most countries have employed them from time to time. interest on foreign loans. stabilization funds were used to buy and sell foreign currencies in the open market. and blocked accounts were used to overcome exchange rate depreciation problems. (iii) To prevent the flight of capital. gold exports were controlled.Foreign Exchange Control In today’s world nations are reluctant to have the value of their currency determined solely by the normal supply and demand in order to facilitate trade and investment. Sometimes the restrictions prevent the use of exchange for trade with a given (unfriendly) country. Direct Government Intervention When countries suspended the gold standard in the 1930s they often took direct action to change or stabilize exchange rates. Furthermore. In the latter case the purpose may be political. licence requirements. all imply a certain amount of exchange control. A country may restrict the importation of certain goods in conformance with its economic development programme in order to conserve foreign exchange for projects with a higher priority. exchange restrictions are designed: (i) To provide the exchange necessary for the financing of essential imports and to discourage specific imports that are considered to be luxuries or that may be available from local producers. More specifically. Furthermore. and trade agreements. and on other specific purposes. Monetary authorities intervene in the foreign exchange market either to stabilize the value of the currency in accordance with arrangements under the IMP or because of other trade and national goals. governmental price control. Foreign exchange may be allocated specially for the payment of import bills. An exchange restriction plan implies that the government of a nation restricts the uses to which the available supply of exchange shall be put. . Developing countries especially have found restrictions necessary to secure compliance with their development plans. Any governmental measures affecting the volume of exports and imports influence exchange rates. governments can restrict the amount of exchange that is available for trade and investment and thus indirectly influence exchange rates. (ii) To allocate or limit exchange for the servicing of exterlial debts and investments. import quota. (iv) To limit speculation. they do not fully serve the needs of countries with a continuous shortage of foreign exchange. To supplement the direct measures many countries adopted a number of exchange restrictions. Foreign Exchange Restrictions Although the direct intervention methods referred to have influenced many exchange rates. Currencies were devalued in order to increase exports. thereby altering the market potentials. (v) To encourage lagging exports. (vi) To encourage tourist travel. export subsidies. protective tariff rates. but the basic reason for most exchange restrictions is the shortage of foreign exchange sufficient to meet freely all of the requirements of international marketing and finance.
and other foreign trade control measures. various measures have been used to affect capital movements. This is known as a system of multiple exchange rates. Effects of Exchange Restrictions Exchange restrictions. The least favourable rates are set for luxury goods such as automobiles. Marketers are interested in these rates because the rate affects the price of. it fixes the nation’s official exchange rates. thereby tying up the importer’s capital and increasing the cost of importing. policy of a country. all of which are primarily related to a shortage of exchange. The exchange rates fixing power of some government’s further enhanced by import quotas. exchange restrictions also contribute to influencing or determining of foreign exchange rates. at an official selling rate. When a government limits and prescribes the uses of all or most of the available exchange. As they are imposed primarily because certain countries are faced with a shortage of foreign exchange. Countries also have levied import surcharges and have provided export subsidies to local producers. international trading as a whole has not always been curtailed. especially if these are also produced locally. the essential character of imports being considered in the allocation of exchange. Other types of exchange restriction systems of interest to marketers include those in which a country requires that a licence be obtained in order to import certain products. In some countries there is also a free exchange market in which exchange derived from certain exports or from other authorized services may be obtained. As the economy develops. Multiple exchange rates are most likely to be used by developing countries when a nation faces a shortage of foreign exchange. the items might be shifted from one category to another. (2) affected the trade of some exporting countries more seriously than that of others. usually at higher cost~ to the buyer. Multiple rates are established to inhibit the importation of specific products. although intended to accomplish the internal objectives of the country enforcing them. Thus. But it is clear• that exchange restrictions have: (1) affected the importation of some classes of goods more adversely than others. Administration of Exchange Restrictions In India exchange restrictions are administered through RBI. . their products. there may be one or more pegged exchange rates for official exchange and also a free market rate. Exporters are required to receive payment in foreign currency and turn over to the RBI all or such portion of their exchange as the current regulations require at an official buying rate. In addition. in a single country. have necessarily affected the international trading of the other trading nations throughout the~ entire world. so far as the restrictions permit. Importers and others requiring foreign exchange then purchase it. This ability of a government to manipulate the rate of its exchange can thus become an important instrument in the foreign commercial and even political. These import licences are allocated by the exchange control authority in accordance with priorities set by the government.In addition to these objectives. licensing plans. They have required that importers pay an advance deposit for desired exchange.
manner of realisation of exports proceeds etc. the prescribed authority to whom the declaration is to be made. (5) been utilized by some countries for the purpose of subsidizing particular exports. . Unfortunately. Business have adjusted and have become better in managing of foreign exchange.’ Floating exchange rates probably have not inhibited trade to the degree expected by the proponents of fixed rates. however. control exchange rates in the national interest. regulate interest and other financial payments. professional literature in marketing has not adequately reflected these broader managerial considerations. Exchange restrictions have: (1) stabilized exchange rates for both importers and exporters. the Government of India have issued two notifications on 1st January. “Foreign exchange or political developments may often outweigh strictly marketing considerations in tipping management’s judgments regarding certain market decision. stated. different forms of declarations to be completed by the exporter. 1974. however. David Carson.•These rules deals with the allotment of code number to the exporter. 1974. protect their economy to some extent against unfavourable commodity price changes. and (7) Complicated the routine work of importers and exporters. In exercise of powers confered in this section. Exchange restriction measures. to channelize trade bilaterally. No marketing programme is complete until it has taken into account the potential effect of anticipated changes in governmental policies and rates of exchange. (6) influenced domestic prices in some countries so as to handicap exports. a student of international marketing. (2) aided various needy Countries in obtaining a larger supply of the commodities considered most necessary by their governments. and (3) enable debtor nations to safeguard their currency. one relating to exports by post and the other pertaining to exports otherwise than by post. Exchange Control Regulations Relating to Exports Section 18 of the Foreign Exchange Regulation Act 1973 forms the basis for various regulations framed to regulate export transactions.(3) tended. particularly in connection with certain international agreements. In general it is clear that marketing opportunities and efforts for specific firms have been altered as a result of governmental Intervention in the exchange process. and otherwise protect themselves against threatening disturbances. also have certain desirable features under conditions of serious and more than seasonal or strictly temporary exchange shortages. (4) been used by some countries for bargaining purposes. altered the conditions under which international marketing occurs. The larger multinational firms and commercial banks arc improving their information systems for monitoring the foreign exchange market and forecasting foreign exchange rates. They have. The Central Government have also framed the “FERA 1973” which also came into force on 1st January.
Government of India issued a Notification in August 1983 amending the Foreign Exchange Regulation Act 1973 when the export declaration forms were revised. Chapter II of the Exchange Control Manual (1987 edition) published by the Reserve Bank of India contains the various provisions to be followed by the authorised dealers as well as exporters in matters relating to exports from India. Under FERA it is obligatory for an exporter to surrender to RBI foreign exchange earned through exports within 180 days of its realisation. It is essential for the persons/firms/companies engaged in export trade to be aware of the relevant provisions contained in this Act, Notifications and Manuals issued by the RB! (Government of India) from time to time. Recent Trends Currently the balance of payments position facing the country had become critical and foreign exchange reserves had been dcplcted to dangerously low levels. The export momentum built up during the period 1986-87 to 1989-90, when India’s exports grew at an average annual rate of 17% in terms of US dollars, was lost in 1990-91 when export growth decelerated to only 9% in terms of US dollars. Export in April-May 1991 have actually shown a decline of 5.8% in terms of US dollars compared with April-May 1990, imports had to be severely contained in the course of 1990-91 because of the shortage of foreign exchange. This effected the availability of many essential items and also led to a distinct slow down in industrial growth. Restoration of viability in our external payments situation is an urgent task and requires action on several fronts. The government is of the view that Imports and Exports (Control) Act 1947 and the orders thereunder require review. The present finance minister is of the view that RBI should remove import curbs fully on the export sector. FOREX SALE NORMS LIBERALISED In a further liberalisation of the foreign exchange control regulations, the Reserve Bank of India (RBI) instructed authorised dealers o sell exchange at market rate without its prior approval to seven categories of people, including businessmen, exporters and journalists. Instructions had been issued to the dealers to increase from $100 to $500 the existing ceiling on sale of foreign exchange in the form of currency notes to travellers proceeding abroad. These steps had been taken as part of the Liberatised Exchange Rate Management System (LERMS), which came into effect from March 1, 1992. The Foreign Exchange Dealers Association of India had been asked to instruct banks that Foreign Inward Remittance Payment System (FTRPS) instruments should be issued to resident beneficiaries immediately on receipt of relatives remittance up to Rs. 50,000 as against the existing limit of Rs. 10,000. Under the new rules, authorised dealers can now sell foreign exchange without prior RBI approval for business visits overseas sponsored by firms, companies and organisations. They can also do so in the case of visits by self-employed professionals and journalists on short-term assignments.
In these cases, the visit should be a single trip not exceeding 20 days and the exchange availability would not exceed $300 a day. The facility will be available for medical treatment abroad, subject to the recommendation of the competent medical authority and to persons going abroad on employment or emigration to meet initial expenses up to $500. It will extend to persons going abroad on the hospitality of overseas organisations up to S300 by way of incidental expenses and to exporters, by way of agency commission not exceeding 13 per cent of the invoice value. The new rules will also extend to exporters by way of settlement of quality and other claims not exceeding 15 per cent of the invoice value and for sundry personal and commercial remittances not exceeding Sl00 for any purpose. Applications not covered by the authority delegated to authorised dealers would be dealt with by the regional offices of the Exchange Control Department and in approved cases permits would be issued by them. In all these cases (including cases approved and covered by permits issued by the RB!) foreign exchange would be sold by the dealers at market determined rates and subject to payment of tax, wherever applicable. Transactions of the official and free market exchange rates would have to be done within the framework of the existing regulations. For instance, a person wishing to travel aboard would be required to purchase foreign exchange at the free market rate but only to the extent permitted under the exchange control regulations. The rationale for deciding that 40 per cent of export earnings would be converted at the official exchange rate and the remaining 60 per cent at the market rate. This takes into account the quantum of foreign exchange required for essential imports during the coming year. Further, this had not taken into consideration the expected boost in earnings from exports and invisibles as a result of the liberalised economic policies. The 40 per cent would not cover the government debt servicing needs, which would have to be met at the market rates. The new system, which replaced Exim scrips, would cover workers’ remittances also unlike the earlier facility. Initiatives have been taken by the government to deal with the third oil shock. Briefly speaking, measures were introduced to reduce consumption of petroleum products to contain the POL import bill. A set of measures were put in place to cut government expenditure and, more particularly, its import and foreign exchange component. Judicious import management geared to curtailment of non-essential/low priority imports, without at the same time introducing sharp changes in existing policies governing imports, was emphasised. Measures to generate additional exports were initiated which included exports of surplus agricultural commodities and certain manufactured items. Efforts were initiated to mobilise quick-disbursi4ig assistance from bilateral and multilateral sources, accelerate the utilisation of the authorised but
undisturbed external assistance, tap surpluses in the oil-exporting Gulf countries and attract inflow of resources through special investments, particularly from NRIs. Measures were taken to raise revenue and improve fiscal balance of the government. Short-term administrative measures were introduced to defer outflows and advance inflows in foreign exchange. During the early months of 1991-92 initiatives were taken to lighten the import regime and credit facilities for imports in the face of a worsening balance of pa3lments situation. Exchange Rate Adjustment The Indian rupee is linked to a basket of important currencies of the country’s major trading partners. The major objective of exchange rate policy is to adjust exchange rates in such way as to promote the competitiveness of Indian exports in the world market. Adjustments in the external value of the rupee are therefore made from time to time. The Reserve Bank of India effected an exchange rate adjustment on 1 July, 1991 in which the value of the rupee declined by about 7 to 9 per cent against the major currencies (the pound sterling, the US dollar, the deutsche mark, the French franc and the yen). There was another exchange rate adjustment on 3 July, 1991 in which the value of the rupee declined by about 10 to 11 per cent against the major currencies. Between 28 June and 3 July, 1991, the rupee depreciated by about 18 per cent vis-a-vis the basket of 5 currencies while this basket appreciated vis-a-vis the rupee by about 23 per cent. These adjustments had been necessitated by the growing external and internal imbalances in the economy. The balance of payments situation had become very critical and that was reflected in the sharp drawdown on, and low level of, foreign exchange reserves. Since October, 1990 there has been an appreciation in the relatively high rate of inflation in the country and a much slower rate of depreciation in the nominal exchange rate leading to an erosion in the international competitiveness of the economy. It was equally necessary to curb destablising market expectations which were generated by perceptions of a growing misalignment of the exchange rate. It is expected that these exchange rate adjustments will stop further deterioration in the country’s balance of payments in the short run and. improve it in the medium term by improving the trade balance. The primary objective of the exchange rate adjustment is one of strengthening the viability of external payments position, i.e., to ensure that exchange rate movements maintain a reasonable incentive for export promotion and encourage efficient import substitution activities, and at the same time, to stem the flight of capital from India and discourage how of remittances from abroad through illegal channels. In the immediate short run, exchange rate adjustment is expected to facilitate realisation of outstanding export receipts and accelerate, in general, the inflow of remittances by quelling destabilizing market expectations. Downward adjustment in the exchange rate raises the~ relative price of traded goods (by increasing the domestic price of foreign currency) to non-traded (or home) goods, thereby encouraging production of tradeables while discouraging their consumption. This expenditure-switching effect at a macro level results in correcting the imbalances in the trade and current account. The real effective exchange rate (REER) of a currency which is the nominal exchange rate adjusted for the relative change in prices in the respective countries, is a proxy for a country’s degree of competitiveness in world markets. Appreciation in REER reflects deterioration in the country’s international competitiveness, while depreciation in REER reflects the converse.
On the other hand. Exchange rate depreciation could lead to an improvement of the current account only if export volumes rise and/or import volumes fall sufficiently to outweigh the price effect. whereas the increase in consumer prices in China and Indonesia were lower at 100 per cent and 111 per cent. To restore the competitiveness of our exports and to bring about a reduction in trade and current account deficits. However. the yen and the French franc). the US dollar. The Reserve Bank of India effected the exchange rate adjustment in two steps in early July 1991. The timing of the exchange rate adjustment was necessitated by the need to nullify adverse expectations and restore international confidence. China and Indonesia.4 per cent against the major five currencies over the same period) and the widening inflation differentials as the country’s domestic inflation accelerated after October 1990. Further. the expected deterioration of trade deficit did not happen. for instance. lags in such response to exchange rate changes are also to be reckoned with. following the stringent monetary restrictions on imports. respectively. the relevant factors were: differentials in the price levels between India and her major trading partners. 1991 the value of the rupee declined by 8 to 9 per cent against the major currencies (pound sterling. There is the well known “J curve” effect of the improvement in balance of trade occurring after an initial deterioration. All this resulted in an erosion of India’s international competitiveness. 1991. the nominal effective exchange rate of rupee decreased only by 2. UNCTAD Advises Against “Big Bang” Approach The United Nations Conference on Trade and Development (UNCFAD) had advised developing nations with moribund economies not to go in for “ultra shock treatment” of sweeping reforms as it would lead to increased political resistance and . the extent of real depreciation of the currencies of competitors. Taking all these factors into account the magnitude of downward adjustment in the external value of the rupee by about 23 per cent was appropriate. The trade deficit during the first six months of the financial year 1991-92 contracted significantly. Between October 1990 and March 1991 the REER of the rupee appreciated by about per cent as a result of a much slower rate of depreciation in the nominal exchange rate (2. a downward adjustment of the rupee had become inevitable. China depreciated by 68 per cent and Indonesia by 65 per cent while India depreciated by only 53 per cent against US dollar.5 per cent while the inflation differentials continued to widen. On July 1. Besides. A basic requirement for the success of this policy is that relative price change should bring forth requisite change in production and consumption patterns. the deutsche mark. and market expectations. Over the period end-December 1980 to end-December 1989. in the five month period between February 1991 and June 1991. against India’s 114 per cent over the same period. depreciated their currencies against the US dollar more than India did despite their lower inflation. On July 3.Many of India’s trade competitors made substantial exchange rate adjustments over the past few years. the degree of correction required in our balance of payments. In determining the extent of adjustment. the magnitude of the adjustment was predicted on the need to restore competitiveness of the country vis-a-vis her competitors in trade. the value of the rupee was further lowered by 10 to 11 per cent against the major currencies.
possibility result in its reversal due to foreign exchange constraints. what is worse. The recession. . has wrecked the world economy. Africa’s two key export earners. The experience of developing Countries in the eighties supported the view that macroeconomic stability was a necessary condition for successful structural change and economic growth. including trade reforms. the most severe since World War II. For the first time in many years a positive net transfer of resources has taken place in Latin America. Africa and much of Asia face economic stagnation. experience had also shown that macroeconomic stability. are currently at their lowest level in 17 years. Microcconomic instability was characteriscd by constant changes in prices. Don’t Make 90s Another Lost Decade The current turmoil in European currencies provides a sobering lesson for developing countries. The monetarism and free market philosophy that characterised the 1980s seem to have failed. “This is not an appropriate environment for investment and growth. The production has fallen in the USA and stagnated in Western Europe and Japan. Prices of coffee and cocoa. A number of countries also have severe drought. the”big bang” approach. Industrial and farm production have declined and trade flows have been disrupted. “The evidence suggests that a more traditional sequencing is preferable to the current inclination to mix together stabilisation and structural reforms. and. while necessary was not a sufficient condition for economic growth. The world economy is in a “danger zone” due to the policies of the 1980s. growth has picked up in Latin America and East Asia. In Africa poor export earnings have compounded the problems faced by the IMF-dictated structural adjustment programmes.” Growth was unlikely to he resumed unless microeconomic stability was guaranteed. It remains to be seen how long it stays that way. At the same time. Commodity prices declined by 11 per cent in 1991. Eastern Europeans are now finding out what many in Third World know from bitter experience: that the market is not the global panacea. It has shown how the market can reduce governments to mere spectators while bankers make billions. However. However. there are few signs of recovery. In the Third World.” The “traditional sequencing” model presumed that macroeconomic stability — reflected in moderate inflation — was ensured before launching structural changes. — described as the ultra shock treatment by UNCTAD -— prescribed simultaneous introduction of major stabilisation policies and structural reforms. Post-Communist countries in Eastern Europe and the former Soviet Union have found that under capitalism living standards have actually fallen. economic policies and the possibility of profiting from speculation on changes in short term conditions.
Despite recession in the North. Banks are less willing to give loans because of their losses. Recommend A phased approach is recommended whereby economic stabilisation comes first and structural reforms are implemented in a gradual sequence. Developing countries which have rapidly liberalised their economies could face political instability.5 per cent. More generous debt relief for the poorest countries is needed. Governments must resume their responsibilities. protectionism in developed ones. but the industrialised countries must relax their import restrictions The trend towards greater openness in developing countries has been accompanied by more. In 1991.” Export-oriented growth is necessary for the Third World. by acting to foster a return to financial stability and to stimulate the level of economic activity.000 billion. A successful conclusion to the stalledGATT (General Agreement on Tariffs and Trade) talks on world trade is needed to stimulate global trade. The experience of developing countries in the 1980s suggests that liberalising trade can have a destabilising effect if the economy has insufficient foreign exchange to finance an adequate level of imports. .” “A private sector weighed down by debt and high long-term interest rates will not generate stability or growth unaided. Gradualism is watchword. Import capacity of some Asian countries rose by 15 per cent and in some Latin American countries it rose by 10 per cent. total longterm debt of developing countries was $ 1. at a time when imports of industrial countries were growing by only 1. The developing countries being forced by the IMF and the World Bank to “reform” their economies under structural adjustment programmes should exercise caution. not less. Keynesian policies of “raising government spending to stimulate private consumption and investment demand may be desirable and make fuller use of productive capacities. Third World growth depends on the economic health of the industrialised world. This “debt deflation” in the world’s major economies has prolonged the recession. especially those with fledgling democracies. because it may need to be accompanied by sharp devaluation. some Third World countries have been able to maintain high growth rates.
720 7.046 0.343 9.005 0.515 0.037 0.005 0.013 0.800 1.018 0.006 0.006 0.563 10.009 Korean Won 14 0.299 1.929 2.482 16.864 22.007 0.021 0.072 22.368 24.009 0.Without urgent policy measures the world economy will continue to stagnate.145 0.837 20.039 0.028 0.012 0. equal to 1000 old Cruzados was introduced. new Cruzado. .340 0.011 0. On January 15.011 0.011 0.007 8.960 14.010 0.025 0.117 0.988 4.417 14.923 15.016 0.450 3. US Doll-ar 2 7.015 0.137 0.555 6.039 0.792 0.800 0.202 9 10.457 7.027 Mexicn Pesos 13 0.966 14. was introduced.009 0.340 11.011 0.575 0.009 0.914 11.014 0.777 0.030 0.830 0.810 8.178 10.335 10.452 0.710 0.791 0.011 0.188 3.015 0.918 33.008 0.056 0.028 0. For global growth “1980s thinking should not be allowed to stand in the way by producing another lost decade.121 19.005 Indonesian rupiah 11 0.297 7.009 0.899 0.013 0.016 0.847 19.435 11.877 0.049 0.085 0.805 0.007 0.014 0.087 25.461 0.403 0.941 11.309 9.491 1.093 15.025 0. 1989 the.867 16.007 0.398 (Rupees per unit of foreign currency) * On February 28.009 0.076 0.960 3.007 0.442 17.008 0.094 0.235 12.007 0.270 1.792 0.007 0.009 0.360 0.110 16.387 3.954 16.010 0.651 0.203 0.152 0.875 Pound Sterling 3 18.042 0.034 Pakis-tani Rupee 15 0.889 12.013 Brozi-lian Cruzados 12 0.570 1.788 0.849 26.002 0.193 34.015 0.005 0.012 0.634 36.422 0.764 0.400 8.537 25.680 3.425 1.011 0.128 0.” Table 10.2 Exchange Rate of Rupee Vis-à-vis Selected Currencies of the World Year Month 1 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 April May Dec.841 Candia n Dollar 7 6.949 27.827 1. 1986 the Cruzado.015 0.500 17.292 6.933 12.752 0.092 11.551 Yen French France 6 1.038 0.427 47.080 0.210 17.343 0.262 21.908 8.074 0.254 Deut-she Mark 4 4.861 3.889 9.733 35.071 Thiland Bhat 16 0.666 10.149 0.008 0.778 12.049 9.022 SDR Turkish Lira 10 0.022 0.010 0.096 0.598 Italian Lira 8 0.968 9.485 0.061 0.447 17.008 0.370 2.013 0.940 3.622 11.494 0.596 26.018 0. equal to 1000 Cruzerios.136 15.528 4.044 0.388 0.014 0.301 1.827 0.943 19.079 0.014 0.076 0.056 0.007 0.203 2.113 0.016 0.006 0.874* 0.042 5 0.649 17.888 1.
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