Export Financing In India

 Exports are very critical for any economy and more so for developing economies like India, as they
influence the underlying conditions in the domestic economy and also help in keeping the BOP
position under control.

 The Export – Import Policy for the following year is usually announced by the Ministry of
Commerce on 31st March every year , laying down the Export target for the next year.

 Usually , there is a close relationship between export earnings and domestic growth rates. Higher
domestic growth rates are usually associated with higher export growth too. Conversely, countries
with low export growth tend to have low domestic growth.

• Since external stability is dependant upon strong export growth, Government and RBI have been
taking several measures to promote and sustain exports growth one of which has been to make
available export credit to exporters on liberal terms.

Exports can be broadly classified into two categories –

1) Cash Exports – These are exports where proceeds are expected to be received from abroad within
usually 180 days from the date of shipment.

2) Deemed Exports – These are transactions in which goods supplied do not leave the country and the
payment for the goods is not received from abroad , but the supplies earn or save foreign exchange for
the country.

Pre Shipment Finance

Export Finance is usually extended as pre shipment finance or post shipment finance.

Pre shipment finance is financial assistance extended to the exporters prior to the shipment of goods and
is commonly known as Packing Credit.

Packing Credit is normally sanctioned on the basis of confirmed export orders or irrevocable letters of
credit received by the exporters in their favor.

Generally , exporters and importers are required to register themselves with the Director General of
Foreign Trade ( DGFT ) who allots a unique importer – exporter code number to each entity, which is
required to be quoted while availing export finance from banks.

Quantum and Period Of Packing Credit

• Packing Credit granted to exporters generally does not exceed the FOB value of the exports or the
domestic value of the goods whichever is lower.

• However, packing credit may be granted up to the domestic value of the goods even if it is higher
than the FOB value, provided the goods are covered by export incentives and Export Production
Finance Guarantee of ECGC is obtained.

• Pre shipment finance, being a working capital finance, is essentially a short term finance usually
up to 180 days. The actual period of finance is determined on the basis of production cycle,
shipment schedule etc. The period is extended up to 270 days in deserving cases and even up to
360 days in rare cases, but at a higher rate of interest.
Follow Up & Recovery Of Packing Credits

 Packing credits are expected to be liquidated within the stipulated 180 days or extended period as
the case may be, out of the export proceeds received form the buyer abroad. If the packing credit
is not liquidated within the stipulated period or if no exports take place, a penal interest is charged
@ 2 % over the domestic lending rate.

 To facilitate close follow up and monitoring , packing credits are usually granted as distinct short
term demand loans ( on an order to order basis ). In case of established exporters with a
satisfactory track record, running facilities may be granted , just like the usual working capital
cash credit limits.

Substitution Of Contracts

• Exporters , who have availed packing credits against export orders, may face a situation where
owing to cancellation of export orders or for any other reason beyond their control, the exports
can not take place, and they are unable to liquidate the packing credit. In such cases, banks are
given some discretion and operational flexibility to recover the packing credit from the proceeds
of a substituted export order subject to certain conditions-

1) The repayment of packing credit should be with export documents relating to any other order
covering the same commodity or any other commodity exported by the exporter,

2) The existing packing credit should be liquidated with export proceeds of documents against which no
packing credit has been availed,

3) The exporter should have a good track record, and

4) While allowing substitution of a contract, the bank has to ensure that it is commercially necessary and
unavoidable.

Pre Shipment Credit In Foreign Currency

• Pre Shipment Credit In Foreign Currency ( PCFC ) was introduced in November, 1993, by RBI. The
objective of the scheme is to enable the exporters to have access to foreign currency funds for the
purpose of financing imported raw materials / components and also domestic inputs for the goods
to be exported.

• Another advantage for the exporter in availing PCFC would be getting the finance at
internationally competitive rates of interest, which will enable them to offer more competitive
rates for their products in the international markets.

• This scheme covers only cash exports.

Banks’ Sources of Funds For Funding PCFC

The banks have the following sources of funds for granting PCFC facilities –

1) Exchange Earners’ Foreign Currency Accounts (EEFC ),

2) Resident Foreign Currency Accounts ( RFC ) ,
3) Foreign Currency Non Resident Accounts (Banks’ ),
4) Exporters’ Foreign Currency Accounts, and
5) Lines of credit secured by banks abroad.
 PCFC facility can be availed of in any of the freely convertible currencies. However, ECGC cover will be
available in Rupees only.

Post Shipment Finance

 Post Shipment Finance can be defined as any finance granted by a bank to an exporter of goods
from India from the date of shipment of goods till the date of realization of export proceeds or on
the security of any export incentives receivable by the exporter from Government of India.

 Post shipment finance can be classified as under –

1) Purchase / Discount / Negotiation of export bills, with or without a letter of credit backing it,
2) Advances against export bills sent on collection basis,
3) Advances against exports on consignment basis,
4) Advances against incentives receivable from the Government of India, and
5) Advances against deemed exports.

RBI Guidelines For Post Shipment Credit

1) Post shipment finance can be extended to the actual exporter or to an exporter in whose name
the documents are transferred,
2) Post shipment finance can be extended up to 100% of invoice value. Where the domestic value
of the goods exported exceeds the invoice value, finance for the price difference also can be
extended if the same is covered by the export incentives receivable from the GOI.
3) Post shipment finance should be extended only against evidence of shipment or export of
goods,
4) For the purpose of application of interest rates, exports on consignment basis are treated on
par with cash exports.
5) Banks have to ensure crediting of export proceeds on receipt of credit advices from their
overseas correspondents.

Schemes Of Post Shipment Credit

 Exporters can avail of Post shipment credit under any one of the following schemes –

1) Post Shipment Credit in Rupees,

2) Discounting / Rediscounting of export bills abroad in foreign currency.

Banks may provide post shipment credit by way of negotiation / purchase / discounting of foreign
currency bills at the appropriate exchange rates subject to the usual safe guards and precautions.

Rediscounting of Export Bills Abroad

In order to provide an additional window for export proceeds, authorized dealers in India and exporters
can access overseas market for rediscounting of export bills. Authorized Dealers can have the eligible
export bills in their portfolio for rediscounting abroad. Indian exporters have also been permitted by RBI,
to arrange for them selves, on their own, lines of credit with an overseas bank or any other agency
( including factoring agencies ) for re discounting their export bills , directly.
Letters Of Credit - Basics

A Documentary Letter Of Credit (LC )is one of the most convenient methods of settling payments in
international trade. It provides complete financial security to the seller of goods.

A Letter of Credit is a Bank’s guarantee ( Buyer’s Bank) on behalf of the buyer to pay to the seller a given
sum of money provided that documents presented meet the terms of the credit and are presented within
a specified time and at a specified place. These elements are common to all letters of credit. The bank that
issues the letter of credit is called the Opening Bank or LC issuing Bank.

Letters of credit offer the seller greater protection against the Buyer’s default than a documentary
collection. This is because a Bank undertakes to pay the seller on behalf of the Buyer , provided the seller
submits all documents in time in full compliance of the terms of the letter of credit. The seller is assured
of payment even if the buyer can not and will not pay.

Various Parties To a Letter Of Credit

The rules governing the use and operation of the letters of credit and the role and responsibilities of the
various parties are laid down by the ICC ( International Chamber Of Commerce ) in a publication called
UCPDC-700 (Uniform Customs & Practices For Documentary Credits)

The LC should always state that it is subject to UCPDC-700, or subject to the current revised version of
UCPDC.

There are various parties involved in a LC transaction –

1) The LC Opener or Buyer – He applies to his bank for opening the LC and is known as Opener of
LC.

2) The Beneficiary or Seller – The LC is established to enable the seller to receive the benefits
under the LC and hence he is known as Beneficiary of the LC.

3) Buyer’s Bank or LC Opening Bank – Buyer’s Bank establishes the LC at the request of the buyer
and is known as LC opening Bank.
4) Seller’s Bank -They usually negotiate the documents under the LC and pay the seller. They may
advise the LC to the seller initially either themselves or through another Bank known as Advising
Bank.
5) Negotiating Bank – This is the Bank who actually negotiate the documents submitted by the
seller in compliance of the LC and pay him. They may or may not be the seller’s bank.

Types of Letters Of Credit

There are different types of letters of credit which give different levels of security to the seller and are,
therefore , appropriate under different circumstances. These are –

1) Revocable & Irrevocable letters of Credit – A Revocable letter of credit can be cancelled or
amended by the opener or opening bank at any time, without prior notice to the beneficiary, up to the
point of submission of all the required documents to the negotiating bank. Whereas , an Irrevocable letter
of credit can only be cancelled or amended with the consent of all parties concerned.

Quite obviously, a revocable LC offers no security to the seller. Hence, in practice , it is usually the
Irrevocable LC s that are used.

As per UCPDC, if a letter of credit does not state if it is Revocable or Irrevocable, then it must be treated
as Irrevocable.
2) Confirmed & Unconfirmed Letters of Credit – An unconfirmed LC is a payment undertaking from
one bank, the issuing bank. A confirmed LC has the payment undertaking of another bank , usually the
Advising Bank, if it is other than the seller’s own bank. Confirmed LC is useful when the buyer’s country
poses a sovereign risk or a country risk. Sovereign Risk is the risk that the Government may default on it’s
payment obligations. Country risk refers to the risk that a business may be unable to meet it’s payment
obligations due to political or economic factors such as civil unrest, shortage of foreign exchange,
embargo on outward remittances etc.

Confirmed LC s , especially when confirmed by seller’s own bank, or another reputed bank in his own
country, offers much more comfort to the seller. The second Bank, which adds it’s confirmation to the LC
at the request of the opening bank, is known as Confirming bank.

3) A Stand By Letter of Credit - It is like an insurance against the buyer’s default. When two parties
have been trading successfully for a considerable time using LC s, they may wish to save on the costs of
the banks for LC s. But the seller would still like to have some comfort against the unexpected but likely
default of the buyer.

In such a case, the Buyer’s bank offers to establish a Stand by letter of credit which is not opened for
any particular transaction or consignment. It is opened for a specific amount for a specific period and is
to be used in case of a default on the part of the buyer to pay for a consignment. It is opened for a specific
amount but without any specific last date for shipment etc.

A Stand By LC is more risky for the opener and the LC opening bank, for obvious reasons.

4) Transferable LC – A Transferable LC is an LC where a part of the LC amount can be transferred or

passed on to another beneficiary. The trader or Merchant Exporter will be the first beneficiary. There can
be any number of other beneficiaries.

5) Back to Back Letter of Credit – This is another way traders seek to give payment assurances to their
suppliers. It is different from the transferable LC in one crucial aspect. The transferable LC is one LC the
value of which can be shared by more than one beneficiary. Back to Back LC s are two separate LC s in
which one LC is being offered as security for the other. A trader or merchant exporter offers his bank a LC
in his favor from an overseas bank as security and requests his bank to issue another LC in favor of his
supplier.

6) Revolving Letters Of Credit – Trading partners often undertake a series of similar transactions
periodically with each other, such as –

a) A delivery of bulk crude oil once a month, or

b) Regular consignments of the same goods over a period of time, say , one year.

In such a situation, it is convenient for both parties to use the same LC to cover a number of
transactions. This is a Revolving Credit , which automatically gets itself reinstated immediately after a
complete set of documents are submitted in compliance of the terms of LC.

7) A Red Clause Letter of Credit – Sometimes, the terms of a letter of credit include an initial payment
to the beneficiary, to be made upon receipt of the LC but before the shipment of goods. Such a LC is
known as a Red Clause LC since such clause is usually printed in Red ink.
Medium Term Export Credit

 Pre shipment credit in the form of Packing Credit and post shipment credit in the form of
discounting, negotiation or purchase of export bills is usually a form of short term working capital
finance.

 But, there are certain categories of exports such as engineering goods, capital goods and project
exports in which case short term finance does not meet the desired objective. It is because, the
importers generally withhold a part of the cost of goods and services towards a guarantee of
performance. It thus necessitates medium term credit . Medium term credit is of two types –
Suppliers’ Credit and Buyers’ Credit.

Suppliers’ Credit

The exporter provides deferred payment terms to the importer. The importer pays in installments.

To meet the working capital requirements , due to deferred payment , the exporter borrows from his
bank. The supplier’s credit is provided by the bank either at the pre shipment stage or post shipment
stage, or both.

Besides extending credit to the exporter, the bank may execute a performance guarantee on behalf of the
exporter. The exporter bears the credit risk in this case since he has to repay his bank even if the
importer fails to pay. The exporter also faces exchange risk in this case. ECGC covers such exchange risks.

Buyer’s Credit

In the case of buyer’s credit, the exporter gets the export proceeds immediately , but the buyer or
importer gets the deferred term facilities from the exporter’s bank. In other words, the importer makes
payment to the exporter out of the credit facility given to him by the exporter’s bank. This credit is repaid
in installments. The buyer’s credit is also extended at both pre and post shipment stages.

At the pre shipment stage , such credit normally takes the form of opening a Red Clause LC by the
importer authorizing the exporter’s bank to extend pre shipment finance to the exporter.

At the post shipment stage, credit extended by the exporter’s bank is used by the importer for making
payment for the imports. However, in such cases, the importer’s bank guarantees the repayment of loan
by the importer.

Buyer’s credit is different from the Supplier’s credit. In the former, it is not the exporter but the
exporter’s bank that bears the credit risk, if the importer fails to pay. In India, banks desirous of
extending Buyer’s credit to overseas importers need to obtain RBI approval before extending credit
facilities.

Advances Against Duty Draw Back Scheme

The Duty Draw back Scheme provides that the import duties paid on imported raw materials and
components / spares and excise duties on goods produced for exports are refunded to the exporter on
completion of the exports.

Since his working capital is locked up to this extent, banks usually extend credit facility to exporters
against their estimated duty draw back entitlements. After the exports are completed, the banks claim
and receive the duty draw back and other such incentives from GOI on behalf of the exporters and adjust
the same against credit extended to them.
Factoring

The exporter gets the payment for exports usually after a number of days of the shipment. During this
period, it is treated as account receivable. Again, there is a chance of bad debts. Hence to avoid the risk of
bad debts and to eliminate the collection costs, the exporter sells the export receivables to his bank or
any bank, without recourse. The bank now faces the risk of non payment and has to incur collection
expenses. Hence the bank usually buys such receivables at a discount. This process of discounted sale of
receivables is known as “Factoring”.

Factoring Agencies exist in many countries and have their own network to assist each other.

Forfaiting

Forfaiting is similar to factoring in the sense that it is the forfaiting agency and not the exporter who
bears the credit risk. But, in many respects, forfaiting is different. Forfaiting is done usually for large and
medium to long term transactions covering export of capital goods and project exports.

When the exporter exports capital goods, the amount involved is usually large and the importer takes a
longer time to repay. What happens is that the importer writes a promissory note to the exporter for a
period ranging usually from 3 to 7 years and the exporter sells that promissory note to the Bank or
Forfaiting Agency, without recourse.

This sale of promissory note is called “Forfaiting”.

The forfaiting transaction is usually covered by a guarantee form the importer’s bank or by LC issued by
importer’s bank. This reduces the credit risk .If the amount involved is very large, a syndicate of forfaiting
agencies may collectively buy a promissory note.

Forfaiting facilities are available to an exporter for a single shipment or for a series of shipments. But ,
the rate of discount may vary from one shipment to another based on risk factors. The credit risk, in turn,
depends upon the credit period, distance of the shipment, nature of trade and contractual terms, political
and economic conditions prevailing in the importing country , etc.

In India, the sole agency for forfaiting was the EXIM Bank until 1997, when banks were allowed to
undertake forfaiting. SBI Factors and Canbank Factors are two such subsidiaries established by public
sector banks to undertake forfaiting services. EXIM bank collaborates with foreign factoring / forfaiting
agencies while doing this business.

Export Import Bank Of India

EXIM Bank is the apex body in India for the purpose of providing direct finance and refinance to banks for
promoting export finance .

EXIM Bank is a public sector financial institution established in 1982 through an act passed by
Parliament. It’s sources for funds are –

1) Share Capital and reserves,

2) Loans from the Government & RBI,
3) Loans from the foreign sources,
4) Public Deposits, and Funds from the capital market.

It provides various facilities to Indian companies engaged in foreign trade and foreign governments
and to Indian banks and foreign companies in the form of refinance facilities.
Main Functions Of EXIM Bank

1) The bank extends financial support to the domestic entities, overseas entities and the commercial
banks. It also carries out advisory and promotional activities.
2) To the Indian entities, it provides pre and post shipment finance, suppliers’ credit, medium term
credit, export marketing finance, export vendor development finance, funds to finance rupee
expenditures in respect of project exports, consultancy and technology services etc.
3) The Bank provides equity finance to joint ventures, underwrites the issues, and does forfaiting.
4) To foreign entities, it provides mainly buyer’s credit.
5) To the commercial banks in India, it provides refinance.