EXPORT IMPORT FINANCE

CHAPTER – 1

EXPORT FINANCE AND PAYMENTS

          Financing of goods from the home country port to the foreign port is known as export finance. The concept of export financing begins as soon as an export order is received and accepted due to the fact that manufacturing activity starts with the confirmation of an export order. Besides, export finance constitutes payments methods and credit benefits available to an exporter both at the pre-shipment and post-shipment levels. After examining the concept of export finance, one of the most important questions is what is the importance of export finance in a less developed country like India 

IMPORTANCE OF EXPORT FINANCE

          The main importance of export finance are presented below:-

(1)It enhances more exports in competitive world market: Increasing exports are essential for a developing or a developed country.  But export market has been operating under great competition. Hence, the government or banking institutions usually extend soft credit to its exporters, who are in need of such credits to meet their export obligations

 

(2)Different levels of technological development across the countries: The degree of technological know-how is generally less in less developed countries than in developed countries. So, less developed countries hire the services of experts from other countries but their charges are very high. For the purpose of repayment of service charges, huge finance is needed by these developed countries.
 

(3)Easier terms and conditions: If the credit is available to the exporter on easier terms, he will be in a position to sell the goods to the importer on easier payment terms. Under such an arrangement, the financial institutions in India make payment of for the exported goods on the basis of shipping documents and collect the money from the importer  on half-yearly or yearly basis as per terms of agreement.

(4)It is a source for economic development of nations:-Developing countries are having deficiency of foreign exchange reserve to cope with their development needs. Hence, they obtain long-term credit from specialized financial institutions to meet payment of imports. Thus finance is helpful for economic development of less developed countries.

 

(5)It is helpful for balance growth: The deficiency of finance is one of the main constraints for economic development of developing countries. In this context, export finance contributes to economic development and helps to establish balanced industrial development of different nations.

 

(6)It reduces adverse balance of payments: Adverse balance of payment has serious consequences on development activities of any nation. With sufficient export finance, the manufacturers of a country may produce more and export more to different markets in the world. Enhancement of export earnings will help to improve the acute payments problem.

(7)Export Finance acts as a finance for factors of production: Under the arrangement of export finance, a manufacturer will be able to obtain raw materials, labour and other factors of production to fulfill his export commitments.

(8)It is helpful for sales promotion: The various sales promotion programme like advertising, publicity, trade fairs and exhibitions, etc. need adequate finance.  Export finance can be used for undertaking aggressive promotional measures to meet the competition effectively.

 (9)It enhances customer services: There is need for enhancement of product adaptation, improvement of quality, adding new uses to the product and use an appropriate pricing method to increase export performances of any firm for which finance is an essential ingredient.

 (10) Export finance is essential to meet short, medium and long terms financial needsA manufacturer needs short-term, medium term and long-terms finance to meet his production and distribution requirements. Banks provide short term-credit extending to a period up to one year and the other terms of financial needs are met from other financial, national and international agencies. Long-terms credit helps bring modernization and adoption of latest technology.

(11) Export finance acts as a source to enhance exports: There is a need for employing modern techniques of production, enhancement of quality of product and qualified persons to produce the best quality of products which will have higher levels of market in export market.  Export finance is needed to obtain the above mentioned items.

EXPORT CREDIT

           Competition in the world markets, both for consumer and capital goods, is becoming increasingly intensified and in this situation, the bargaining power has shifted from the seller to buyer, who tends to dictate terms with regard to price, quality and delivery schedules and above all, insists on appropriate credit terms. The availability of an adequate supply of credit at reasonable cost, therefore, greatly facilitates the task of exporter and serves as an incentive to augment his export efforts. The difficult foreign exchange position in many countries make it imperative for importers to ask for credits of varying duration and the credit terms offered often influence the buyer’s choice of supplier and thus the source of supply.

           According to David Kinley, “ By credit we mean the power which one person has to induce another to put economic goods at his disposal for a time on promise of future payment. Credit is thus an attribute of power of the borrower”. Thus the main elements of credit are: The element of trust, the element of capital and assets, the element of amount of credit and the element of duration of credit.

 METHODS AND SOURCES OF EXPORT CREDIT AND FINANCE

          The main methods of export credit and finance can be grouped into two. They are:

[i] Short-term credit and

[ii] Medium and Long term credit.

SHORT – TERM CREDIT

          Short-term credit facility is extended for a period from 30 days to 180 days. It is granted by the commercial banks for import-export trade in consumer goods and industrial goods like small machines, commercial vehicles, spare parts, etc.

          The main importance of short-term credit to exporters are presented below:

[1] procuring raw material,

[2] manufacturing and processing or making advances to other producers from whom the exportable goods are ordered.

[3] meeting expenses of packing, handling, internal transport and to meet insurance and ware-housing charges, and

[4] shipment and other related needs

 

          The requirement of short-term credit to the importer are as follows:

 

[1] For payment of advance to the exporter

[2] For meeting the shipping charges, insurance, etc.

[3] To pay duty in obtaining import license, etc.

          The main short-term credit or finance includes pre-shipment finance and post-shipment finance. The are explained below.

Pre-shipment Finance.

          Pre-shipment finance may be defined as any loan or advance granted or any other credit provided, by a financial institution to an exporter for financing the purchase, processing or packing of goods on the basis of letters of credit opened in his favour by an overseas importer of the goods, or upon a confirmed and irrevocable order for the export of the goods or any other evidence of the placement of an order with the exporter. The maximum period for which any loan or advance may be granted or any other credit facility may be provided does not usually exceed 180 days, or such extended period as the central bank of the exporting country may allow. Normally, there are two ways open to an exporter to obtain finance at the pre-shipment stage. They are anticipatory letters of credit and packing credits.

Anticipatory Letters of Credit.

        Anticipatory letters of credit are also known as red clause letters of credit. It is a normal letter of credit, which contains a special clause ( usually typed in red ) authorizing the negotiating or confirming bank.

         The Red Clause of Letters of Credit is generally opened to enable the exporter to procure material and execute the foreign buyer’s order without locking up too much of his own funds. The advance made to the exporter is of course at the risk of the opening bank and is restricted to the amount authorized in the red clause letter of credit. The bank must ensure that there are proper instructions on the red clause letter of credit as regards reimbursement of the amount to be advanced to the exporter. Generally, the reimbursement of the pre-shipment advance under a red clause letter of credit is provided by the negotiation of a clean draft under a letter of credit, in which case the invoice submitted at the time of negotiation of a documents should show a deduction to the extent of the drawings already made. Before advancing against a red clause letter of credit, it is advisable to ensure that the bank will be in a position to negotiate the bills drawn under the letter of credit.

Packing of Credit

          Packing of credit is essentially a loan or advance granted by a bank to an exporter to assist him in buying, processing, packing and shipping the goods. These advances are generally made by commercial banks in different forms. This concept has been pioneered in the Indian system of export credit provision.

Forms of Advances

          The main three forms of financing the exports at the pre-shipment stage are:-

[1] loans

[2] overdrafts, and

[3] cash credits.

          In countries like Federal Republic of Germany, France, Italy, Switzerland and the United Kingdom, overdrafts are the most common form of short-term lending. Term loans are familiar in the United States and Japan. Cash credit which is similar to Overdraft, is widely used in countries like India. The main features of the above mentioned forms of advances are briefly explained below:

(1)  Loans: Under loan account, the entire amount is paid to the borrower either in cash or by transfer to his current account at one time. Generally its repayment is stipulated in installments. The main advantage of the loan system is that the loans are for pre-determined short periods and have a built-in-programme of repayment. They are automatically reviewed by banks on the due dates. The main advantage of the system is its inflexibility and the need for borrowers to negotiate fresh loans every time. Verification of the ultimate use of funds is difficult in this system compared to the cash credit system.

 

(2)  Overdrafts: An overdraft is a fluctuating account and its balance sometimes in credit and sometimes in debit. Cheques drawn on a current account are normally honoured only if the balance is in credit, but the overdraft arrangement enables a customer to draw over and above his own balance up to the extent of the limit stipulated. Drawings and repayment are permitted as need by the customer, provided the total amount overdrawn does not exceed the agreed limit.

(3)  Cash Credits: Cash credits are ordinarily allowed against pledge of hypothecation of goods or against personal security. If there is a goods turnover in the account and quick movements of goods, a cash credit limit is renewed periodically.

 

The cash credit system has the advantage of flexibility. It enables the borrowers to route all their cash earnings through the account and keep drawings at the minimum level, thereby minimizing interest charges. The main advantage of the system is that the banks may find it difficult to ensure the end-use of funds due to its emphasis on the security aspect and the roll-over nature of credits.

OPERATIONAL MECHANISMS FOR PRE-SHIPMENT FINANCING. 

          Pre-shipment finance is essentially working capital made available for specific purpose of purchase of manufacturing of goods meant for export. all costs prior to shipment would be eligible for financing under packing credits. Two essential characteristics of such credits are the existence of an export order, and the liquidation of the advance out of the proceeds of the relative export bills. The following points will usually be examined by the banks when considering proposals for export packing credits:

1.    The capacity of the exporter to execute the orders within the stipulated delivery schedules.

2.    The ability of the exporter to absorb export business loss.

3.    Whether the quantum of finance asked for is on equal rate with the company’s turnover.

4.    The degree of arrangements made for the import of raw materials and its component

5.    The spread of risk

6.    Whether the exports are covered by irrevocable letters of credit

7.     The status of the issuing banks

8.    The status of the buyer’s country in terms of economic and political conditions

9.     The availability of security such as export credit insurance cover

10.  Covering of exchange risk.

POST-SHIPMENT FINANCE

          Post-shipment finance is defined as any loan or advance granted or any other credit provided by an institution to an exporter of goods from India from the date of extending the credit after shipment of goods to the date of realization of export proceeds, in consideration or on the security of any drawback or any cash payment by way of incentive from the Marketing Development Assistance (MDA) or any other relevant source, Thus, post-shipment finance is given against.

1.    Export bills drawn of foreign buyers, and

2.     Export cash incentives to be received by the exporter.

          The methods of financing are known in the banking  system as negotiation and collection of bills payable abroad.

Negotiation of Bills

          Bills of exchange drawn either in Indian rupees or foreign currencies under a letter of credit or otherwise are offered to banks for negotiation such as sale or discount. Normally, the bills drawn against a letter of credit are accepted without any difficulty due to the fact that banks do not have any risk. Besides, the negotiation of bills depends upon the following factors:

1.   Credit rating: Status report on both drawee and drawer in terms of both financial and moral standing is the prime consideration in accepting a bill for negotiation.

2.   Product characteristics: The nature, quality and price of the export product also influence the banker’s decision in accepting a bill. For instance, banks will accept the bill if the product is of international standard and quality and offered at most competitive rates and has good demand abroad.

3.   Documentary requirement: In case of documentary bill, the banks will examine the documents like bill of lading and invoice on various aspects such as whether the bill is supported by all the documents mentioned in the letter of credit.

4.   Credit limit of drawer: If the amount does not generally exceed the credit limit of the drawer a fixed by the bank, then the bills are accepted.

5.   Rate of Negotiation: The rate of negotiation mainly depends upon the currency in which the bill is drawn, the banking organization in the country concerned, period of maturity, etc. The banker treats the negotiation of the bill as an advance of rupees for a period from the date of negotiation until the return the remittance is received. The banks consider the following factors is calculating such a rate:

(i)   Prevailing rate of interest

(ii)  The period which the bill has to run before maturity.

(iii) Stamp duty to which the bill is liable in the foreign centre.

(iv) Charges for collection which the foreign banks may make

(v)  An appropriate allowance for possible delays of mails or other contingencies and the banker’s own profit over the transaction.

6.   Collection of bills: The “Sight” as well as “Usance “ bills can be offered to the banks on collection basis. Banks send such bills to their foreign branch for collection of payment. Banks may give advance against such bills and it may take the following forms.

i)     Cent Percent advance: Bank may discount the bill of exchange by advancing to the drawer the full face value of the bills if a rupee bill of exchange has been drawn and received by the bank for discount with the instructions from the drawer that in addition to face amount of the bill, the drawer is pay interest, collection charges and foreign bill stamps.

ii)    Percentage of advance: The usual procedure is that the bank will advance upto a certain percentage of the amount of each bill of exchange depending upon the integrity and financial standing of the drawer. Besides, the collection charges are made on the full value of the bill.

iii)   Percentage advance against pending collections: Under this system the drawing limit is calculated as a percentage times of outstanding amount and the customer can draw, if he needs, up to the amount indicated by the drawing limit.

SOURCES OF SHORT-TERM EXPORT CREDIT AND FINANCE.

The main sources of short-term export credit and finances are presented below:

1.Foreign Trade Financed by Exporter.

          This is one of the main sources of export credit but very few exporter will employ their capital in export credit. Exporter will employ this method when he is financially sound and he may consider to supply goods to the importer on the basis of credit. In this situation, exporter will provide to the importer on the following terms.

(i)           Open Current Account: Generally, this method will operate between the exporter and importer who have long-term dealings. Exporter sends the letter of rights to the importer. Importer makes payment within appointed time on the basis of the exporter’s letter of rights. Interest is charged at certain rates if the importer delays the payment beyond the agreed limit.

(ii)          Open Account: Exporter ships the goods without financial documents to his advantage except commercial invoice. Sales on open account are settled through agreed periodic remittances. Considerable risk is involved in the open account method as seller carries no documentary evidences of transaction with him. Hence, this method is generally confined to interrelated companies.

(iii)         Payment by return mail: Under payment by return mail method, the seller ships the goods and a shipment advice is sent to the importer. The importer must make the remittance immediately on receipt of shipment advice.

(iv)         Payment against bills of exchange: Under this method, the exporter ships the goods to the importer on the basis of bills of exchange drawn on importer’s name. In addition to documentary bill of exchange, invoice shipping bill and insurance are enclosed. The exporter sends the bills of exchange directly or through the bank for collection of payment

 

2.Foreign Trade Financed by the Exporter with the Assistance of the Bank.

             

              Under this category, exporter obtains bill of exchange from the importer which will remain with him for a certain period of time. After the expiry period the exporter accepts payment from the importer. Besides, the exporter can discount the bill from any commercial bank for

 finance if he needs finance before the expiry period of the bill.

 

3.Foreign Trade Financed by the Importer.

 

              Sometimes, the importer imports the goods on paying cash in advance.

The following are the main types of short-term credit given to the exporter by the importer.

(i)   Payment on placing orders: The importer makes full payment in advance on placing firm orders with the exporter.

(ii)  Cable transfers: Under this system, a cable message will be sent to the importer by the exporter once the goods are ready for dispatch. On the receipt of the cable message, payments are made

(iii) Payments through confirming houses: Resident buyer of a Forwarding Agent may be confirming houses. The payments will be made by the confirming houses to the exporter on the basis of firm order by the importer. However, exporter will be prepared to accept payment on the basis of credit worthiness of confirming houses.

 

3.   Foreign Trade Financed by Importer with Bank Assistance.

The exporter can obtain finance through a bank by any of the following two methods with the help of letters of credit.

(i)   Bill of Exchange: Documentary bill or documentary draft is one of the main methods of payment in export trade. Under this system, the exporter has to draw a bill of exchange on the buyer, payable at sight when no trade credit is being extended or payment at some future date to take care of inherent credit terms. The exporter is supposed to submit the bill with documents of title namely commercial and custom invoices, marine insurance policy. The sets of documents are to be surrendered to the importer on the payment of the bill. In respect of sight bill, the amount is realized and remitted back to the exporter’s bank account. But in time bills, after the bill is accepted by the importer is returned to the exporter’s bank to be presented again to the buyer for payment on the date of maturity.

(ii)  Letters of credit: Under letters of credit method, the exporter who desires to get assurance of payment against documents usually stipulates in his contract with the overseas importer by means of banker’s letter of credit which enables the exporter to obtain immediate payment of his invoice against shipping documents. The two main kinds of letter of credit are: 1] Irrevocable Letter of Credits and 2] Revocable Letter of Credits. An irrevocable letter of credit is one which after issuance cannot be cancelled without the consent of parties concerned. A revocable letter of credit can be altered or cancelled at any time without any consent or reference to the beneficiary or seller or exporter.

5.Foreign Trade Financed by Banks.

          Under this category, on the basis of the request of the importer, the banks opens documentary credit and makes payment to the exporter obtaining the documents. The bank accepts the bills drawn by the exporter gets the accepted bills discounted and gets the short-term finance.

6.Foreign Trade Financed by Accepting Houses.

          The main function of an accepting house is to accept the bills drawn by the exporters. Normally, the importer and an Accepting house will have a written agreement in which the house accepts the bill drawn by an exporter. Accepting house accepts commission for its work from the importer, After sending the acceptance from Acceptance house, the exporter gets such bills discounted and gets payments.

7. Foreign Trade Financed by Discount Houses.

           Discount houses are trading houses engaged in discounting of bills. The Discount houses discount bill if it is accepted by any accepting house, Further, the Discount houses discounts the bill on the basis of credit worthiness and financial soundness of the exporter as well as importer even if the bill is non-accepted by an Accepting House.

MEDIUM AND LONG-TERM CREDITS AND FINANCE.

          By long-term credit we mean the credit facility is extended up to a period from five to twenty years. It is provided for a long-term development activities such as purchase of capitalized heavy items, such as ship-building, purchase of electric machines, heavy engineering goods, etc.  Long-term credit generally involves higher levels of risk than short-term credit. Hence, the interest rate is more than other forms of credit. World Bank, International Monetary Fund, International Development Association and Asian Development Bank are some of the international institutions granting long-term credit. The main importance of long-term credit for both exporter and importer are presented below:

(i)           Importer-export of capital goods.

(ii)          To provide credit facility on liberal terms to the importer.

(iii)         To execute the export promotion programme,

(iv)         Establishment of new enterprise and

(v)          Capital investment in other countries.

The medium and long-term credit can be divided into two. They are:

(i)           Supplier’s Credit, and

(ii)          Buyer’s Credit.

(i)   Supplier’s Credit:- Under this system, the Indian exporter will offer credits to the overseas buyer. The exporter can, on the other hand secure reciprocal credits from commercial banks which in turn can get refinance from the Exim Bank.

(ii)  Buyer’s Credit: It is a means of financing an export transaction involving capital goods and equipment of large value or complete  turnkey projects on long-term credit. Load is extended be a bank or other financial institutions in the supplier’s country to the overseas buyer who is thus in a position to pay cash for the supplies received.  The loan is guaranteed by the buyer’s bank or often extended to the buyer’s bank itself for the specific purpose in view.  The main tow points to be made in this connection are : (1)Supplier gets his money if he fulfills his responsibility, and (2)There is no involvement of transfer of funds from one country to another.

METHODS/TERM OF PAYMENT IN INTERNATIONAL MARKETING:

          An export contract payment terms are determined on the basis of the specific circumstances of the exporters and importers. It is not possible to make any generalization about the payment methods in any  export  transaction. However, there are five methods of payments which involve varying degrees of risk for the exporter and they are presented below:

[i]   Payment in advance,

[ii]  Open account,

[iii] Documentary bills,

[iv] Documentary credit under Letters of Credit, and

[v] Shipment on consignment basis.

(i)   Payment in advance: Under this method, a bank advice received by the exporter either on confirmation of the order or at any time before shipment. This is one of the most advantageous ways of payment from the point of view of exporter as he does not have any risk. However, the method is possible in two ways: [1] there is a higher level of demand for the goods and [2] the goods are tailor made for the customer. Besides exporter ay also insist upon advance payment if (i) political conditions in the importing country are unstable and (ii) the credit standing of the buyer is poor.

(ii)   Open account: Under Open Account form of payment, the exporter sends documents directly to the overseas buyer with a covering letter asking for the invoice value to be remitted to him. There is no evidence of the obligation to pay due to the fact that the exporter doesn’t pay any bill of exchange. The importer is to make the payment on the expiry of the credit period. Open Account method is simple and avoids additional charges involved in other payment arrangements. Further, the burden of finance is carried by the exporter under this method of payment. It also involves real risk to the exporter. But the exporter may have to accept such method if there is keen competition among exporters. Besides, one of the basic conditions in this system is that there are no exchange regulations of the exporting country should permit such an arrangement.

(iii) Documentary bills: Documentary bills finance a large proportion of overseas trade transactions. It acts as a bridge between [i] exporter’s unwillingness to part with the goods until he is paid for and [ii] importer’s unwillingness to part with his money unless he is sure of receiving the goods. Banks acts via media by giving the necessary assurances to both the parties. Under this system, the exporter agrees to submit the documents to his bank a long with the bill of exchange. The documents required are a full set of bill of lading, invoice and a marine insurance policy. Under this procedure, there are two types of payments, ie: Documents against payments (D/P) and Documents against acceptance (D/A). Under the system of Documents, the exporter’s bank will send the documents to its correspondent bank in the buyer and on payment of the bill of exchange will deliver the documents to the buyer and on payment of the bill of exchange will deliver the documents to him so that he can take possession of the goods. But in the case of Documents against acceptance Bills, the correspondent bank will submit the bill of exchange so signed by the buyer indicating his acceptance of the payment obligation. Once the importer accepts the bill, he will get possession of the documents. On the due date of payment, the bank will again present the bill to the buyer who then makes the payment. The money received is remitted through the usual banking channels to sight.ie., no credit is involved. The main types of commercial risks which an exporter must take into account before he agrees to accept payment are as follows: The importer may fail to accept the documents by making the required payment under Documents against payment. But the documents will still remain in the hands of the bank, and the exporter will at least not lose possession of the title to the goods. Therefore, he would be able to find alternative buyers for his merchandise or in the extreme case, ship the goods back to his own country. But, the risk is higher in the case of Documents against acceptance bill than the Documents against payment bill, because the importer has already taken possession of the goods which may or may not be in the exporter’s custody on the maturity date. The risk which is common to both documentary bills form of payment is the inability of the importer to remit the purchase price due to exchange control restrictions. But, institutional facilities are available to cover such commercial risks relating to non-payment by the exporter in almost all countries. Export Credit Guarantee Corporation Ltd., is offering this facilities in India.

7.   Documentary Letter of Credit.

                      Documentary letter of credit has been defined as ‘any arrangement’ however, named or described, whereby a bank (issuing bank) acting on the request and in accordance with the instructions of a customer [the applicant for credit] : (a) is to make payment to or to pay, accept or negotiate bills of exchange{draft} drawn by the beneficiary, or [b] authorize such  payment to be made or such draft to be paid, accepted or negotiated by another bank against stipulated documents, provided that the terms and conditions of the credit are compiled with. According to the  definition of Documentary Letter of Credit, there are four parties essential to a letter of credit [i] the opener (importer), [ii] the issuer (the bank which opens the credit), [iii] the beneficiary (the seller), and [iv] the negotiating bank ( the bank located in the country of the beneficiary).

[a] Revocable of letter of credit: Revocable letter of credit is deemed to be revocable at any time without prior notice to the beneficiary. But the issuing bank is bound to reimburse a branch or other bank to which such a credit has been transmitted or made available for acceptance or negotiation complying with the term and conditions of the credit. Further, revocable letters of credits are not legally binding between banks and beneficiaries. Revocable letters of credits are not legally binding between banks and beneficiaries. Revocable letters of credit do not protect the interest of the exporter. The Irrevocable letters of Credit guarantees the payment from the standpoint of the responsibility of the bank.

[b] Confirmed and unconfirmed letters of credits : By confirmed letters credit we mean a letter of credit is confirmed by a bank in the beneficiary’s country and it implies upon the confirming bank the responsibility as that of the endorser gets payment from the local bank. The disadvantage to the importer is that the credit becomes costlier because the advising bank will ask for confirmation charges from the issuing bank and the same in turn from the importer. No confirmation is given by the issuing bank unless the consent of the beneficiary is obtained in the Unconfirmed Letters of Credit. Under this method of letters of credit, the responsibility of the issuing bank is more. Besides, the exporter need not bother about the confirmation because he knows the issuing bank well.

[c] Assignable and non-assignable letters of credit: The beneficiary assigns his rights to another beneficiary, under the Assignable Letters of Credit. Normally, it is issued to a representative of the exporter when the importer actually does not know the exporter at the time of letters of credit. But, the named beneficiary cannot transfer his rights to another under  the Non-Assignable Letters of Credit.

[d] Revolving Letters of Credit: The provision of Revolving Letter of Credit may be made for making available the credit as soon as the importer reimburses the issuing bank with the drafts already negotiated by the paying bank when the transactions are more or less continuous.

[e] Shipment on Consignment Basis: Under this method of shipment on consignment basis the exporter retains the title to the goods are sold in the export market even if the consignee will have the physical possession of goods. Under this method, no bill of exchange is involved. Normally, the exporter appoints a reliable agent to hold the consignment on his behalf abroad who sells the consignments as and when there is a demand and repatriates the money received for the sales. In such transactions it is essential to enter into a legally binding consignment contract with the agent. If the agent fails to sell the goods, he may return the goods to exporter without incurring any liability on his part. In India, certain items like tea, diamond, wool and tobacco are shipped on consignment.

COUNTERTRADE: In recent years there has been a growing tendency in some countries to resort to trading practices that constitutes a retreat from multilateralism. These practices are collectively known as “ counter trade”. Counter trade may take a variety of forms, but basically it is a barter or a quasi-barter arrangement that more or less explicitly links import and export transactions. For, example an exchange of 50000 tons of Brazilian soya-beans for 50000 tons of Mexican black-beans in 1996, involved no cash. However, many counter-trade transactions are highly complex. They may involve several products, moving at different points in time engaging several countries, and may include financial payments as well.

Counter trade involves trading arrangements between tow countries or government organizations, such as foreign trade organizations by which the seller is obliged to accept, as a partial or total settlement for his export of goods ( or in some instances services, such as technology or industrial licenses) specified goods or services from the buyer.

Four types of counter trade may be distinguished on the basis of types of goods traded, financial arrangements involved and the length of time it takes to complete the transactions. They are 1. barter, 2.compensation,3.buy-back and counter purchase.

1.Barter

Under this system the exporter sells specified goods to the importer in exchange for specified goods. This type of transaction involves a limited number of products and without the participation of a third party. It is a one-time operation and the transaction is completed in a relatively short time

2. Compensation Arrangement.

Under this arrangement, the exporter agrees to take full or a partial payment in kind for the goods sold, but the exporter transfers the purchasing commitment to a third party who may be an end – user of the products or a trading house. Compensation arrangements are also not very common because it takes time to find a suitable third party to whom the exporter can transfer the purchasing commitment.

3. Buy-back  Arrangement.

Under this arrangement, the exporter provides plant equipment of technology to an importer and agrees to accept as a partial or full payment, goods to be produced by the importer with the exporter’s equipment or technology. In contrast to other systems of counter trade arrangement, where the value of purchase by the exporter is always less than the value of exports, the value of buy-back commitment may exceed that of the original export transaction. Besides, buy back system of counter trade is the most prevalent and involves a relatively large volume of trade.

3. Counter Purchase system.

Under this system of counter trade, the exporter exports goods technology or services to an importer, and agrees to import from the latter, with a specified period. Unlike  barter and compensation arrangements must use a trade firm to market the goods they purchase. The exporters do not use these goods themselves, although under certain buy back arrangements they may agree to purchase raw materials or parts that could be used in their production processes. Counter purchase system is a useful tool for companies seeking to enter new markets and get an edge over competitors.

Some other varieties of counter trade transactions are described below:-

1] Swap.  Under this system of counter trade, products from different locations are traded to save transportation costs. This is ideally suited for commodities such as sugar, chemicals, coal, and oil. An example is the swap of Soviet oil bound for Cuba and Mexican oil heading to Europe and Asia Minor. In the 1978 agreement, the Soviet supplied oil to Mexico’ s customer in Greece, Eastern Europe and Turkey and Mexico supplied oil to Cuba: thus both countries saved considerable transportation costs.

Besides, in swap transactions, differences in the quality of goods being substituted are worked out in the swap contract.

2] Clearing Agreement. The clearing agreement reduces the problem by establishing clearing accounts to hold deposits and effect withdrawals of trades. The currencies in the account represent purchasing power. They are not directly withdrawable as cash. As a result, the parties can agree in a single contract to purchase goods or services of a specified value. The account may be out of balance to one side or the other on a transaction – by – transaction basis; however the agreement provides to keep the account for a longer  period of time. Frequently, the goods available with clearing account funds are sightly stipulated, funds have been labbled “apple clearing dollars” or “horseradish clearing funds”.

3.Switch – Trading: Sometimes the clearing account is given additional flexibility by permitting switch trading in which credits to the account can be sold or transferred to a third party. This provides creative intermediaries with the opportunities for deal making by identifying clearing account relationships with major imbalances and structuring transactions to reduce those imbalances.

4.Blocked Currencies. When a company or individual cannot repatriate holdings of funds from a country because of currency restrictions, several methods can be employed to use up the accumulated local money and get products out of the country that can be sold for cash. In this context some companies buy local products with local currency, then export them. Another solutions is to pay for the production of a movie in a country with blocked currencies, the make money from the royalties when the film is shown outside  the nation where it was produced.

5.Debt Swaps . Debt swaps are a newly emerging from of counter trade. These swaps are particularly prevalent in deals involving less-developed countries in which both government and the private sector carry large debt burdens. Because the debtors are unable to pay up any time soon, debt holders have increasingly grown amenable to exchange the debt for something else. Four type of debt swaps are most prevalent. They are explained below:-

(1) Debt for Debt: Under this system, the loan held by one creditor is simply exchanged for a loan held by another, for example, a United States bank may swap Argentine debt with a European bank for Chilean debt.

(2) Debt of Equity: Under this arrangement, debt is converted into foreign equity in a domestic firm. The swap therefore serves as the vehicle for direct foreign investment.

(3) Debt for product: Additional cash payments are needed for the product under this system arrangement. For example, Interstate Bank of California made an arrangement with Peruvian authorities through which a commitment was made to purchase $ 3 worth of Peruvian products

for every $ 1 paid by Peru against debt.

(4) Debt for Social Purpose: One of the newest emerging forms of debt swap is debt for social purchases. For example, the green movement has inspired swaps in which debt is applied to the preservation of nature. These sophisticated variations of counter trade stray from the original form of straight barter. They underscore certain realities about international marketing today.

Factors Responsible for Countertrade Growth:

     The reasons to engage in countertrade include those basic business to enter new markets,

sell products and gain an edge over competition. Several factors are responsible for growth of counter trade and some of them are mentioned below:

(i)   Balance of payments difficulties arising from sluggish export growth and rising external debt-service burden have prompted some to seek new ways of economizing on scare foreign exchange resources.

(ii)  Emphasis on the growth of manufacturing sectors, originally aimed at promoting import-substitution, has created over capacity and has produced pressures to find markets for surplus goods;

(iii) Given the difficulties of gaining access to the markets of the industrial countries for certain primary and manufactured products counter trade arrangements that commit industrial country exporters to purchasing a given quantity of products over a specified period are seen as a means of penetrating existing markets or establishing new ones;

(iv) Counter trade in the form of buy-back arrangements is seen as means of securing reliable sources of essential raw materials while exporting equipment and technology that have become out-dated at home;

(v)  Countertrade transaction may provide some slight additional certainty in an uncertain world;

(vi) It permits concealed discounting in a period of weak markets. OPEC countries have sold oil at a discount through countertrade transactions without openly breaking the price maintenance provisions of the OPEC. With high unemployment and excess capacity, many firms in industrial countries have wanted to sell anything they could be above their variable cost-provided such sales did not disturb their normal markets  and pricing patterns;

(vii)        Sellers in developing countries may feel that they can expand markets for their own products by drawing on someone else’s expertise with respect to world markets, if the counter purchaser of their products indeed sells them in channels that had not been developed before.

However, there are some difficulties in promoting counter trade and they are mentioned below:

(i)   Counter trade transactions are often extremely complex and difficult as compared with the straight forward trade particularly if they involve transactions of time and intricate pricing mechanism.

(ii)  The degree of risk and uncertainties are more in countertrade. Uncertainty about availability and quality of products to be purchased in future years is a specially serious disadvantage. Potential change in the political and national security considerations adds to the uncertainty when a large sale of plant and equipment is involved.

(iii) Countertrade arrangements are time consuming due to the complexities involved. High ratio of talk to action is required in countertrade or barter. For every ten to twenty deals that are talked about, perhaps one gets done.

(iv) Under counter trade arrangements, there is a need for careful planning to ensure that the imported products will be of good quality, easily marketable delivered on schedule and reasonably priced to take account of the additional marketing cost that may be involved. But in most cases, when a company exports to a nation requiring countertrade, it must accept goods that the country cannot or would not try to sell in international markets. In this context, usually company has to cut price

 

CHAPTER - 2

TRADE FINANCE MODEL

          In the earlier unit we examined the credit payment and bankers acceptance financing structures. Besides, we know the technical logic behind the classical trade services. On the basis of these two, let us construct trade finance model to delineate acceptable payment and financing practice. Trade finance model will be very useful to design and evaluate payment and financing arrangements. Trade Finance Model is based on four principles and it is presented below :

i.        The banking transaction is completely separate from the underlying commercial transaction.

ii.       Documents represent the banking transaction.

iii.       The bank's undertaking is conditional.

iv.      The obligation to repay a bank for the financing it provides is contained in a legally enforceable debt instrument.

The above principles are explained below :

i.          The banking transaction is completely separate from the underlying commercial transaction.

          This principle refers to a bank's reluctance to become involved in the following situations :

a.       Non-acceptance of the goods by the importer.

b.       Commercial disputes over the underlying sales contract, and

c.       Fraud.

          Banks generally attempt to device the banking transactions from the risks involved in the underlying commercial transaction. Article 3 of I.C.C. publication points out that credits by their nature, are separate transactions from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts. For instance, the Issuing bank's payment to the exporter under a letter of credit is made without recourse, i.e., the issuing bank cannot recover funds from the seller if the buyer cannot reimburse the bank for financial reasons. In respect of exporter's draft, an intermediary bank will negotiate it under letter of credit with recourse, i.e., if the issuing bank falls to reimburse the negotiating bank for any reason, the negotiating bank can recover the funds from the exporter.

          In general, recourse mechanism may be issued to allocate risk in a financing arrangement. For example, a bank may accept the political risk of the importer's country and the commercial credit risk of the importer but refuse to accept the risks such as non-acceptance of the goods by the importer, commercial disputes over the underlying sales contract, and fraud.

ii.        Documents represent the banking transaction

          In documentary credit operations all parties concerned deal in documents and not in goods. We already discussed documents of control such as bill of lading and the draft in the earlier unit. Here, a bank can control the timing of the exchange of documents or examine them to assure conformity. In this cases, the net effect is that banks act based on documentary representation rather than on the actual events or facts on which the documents are presumably based.

iii.       The bank's undertaking is conditional

          Banks normally specify the conditions under which they undertake to make payment or to finance a transaction. For instance, under a letter of credit, a bank undertakes to pay the seller up to the stated amount of the credit provided that the seller presents conforming documents before the credit expires. In a documentary collection the remitting bank will pay the seller provided that it was received the necessary funds from the collecting bank.

iv         The importer's obligation to repay the bank for the financing is contained in a legally enforceable debt instrument.

          The legal debt instrument under a letter of credit is the agreement contained in the application for a commercial credit: in a banker's acceptance the instrument is the acceptance agreement executed by the bank's customer prior to creation of a banker's acceptance. The debut instrument in a term loan is implicit in the standard loan documentation that accompanies the loan. Finally the draft is the legally enforceable debt instrument. Thus, in all these, the importer is having an obligation to repay the bank for the financing which is contained in a legally enforceable debt instrument.

PRACTICAL APPLICATION OF TRADE FINANCE MODEL

          The practical application of trade finance model will be examined with different methods of finance available to an exporter requiring financing of his or her foreign receivables. The main methods of finance available are :

i.        Advances against collection

ii.       Discounting trade acceptances

iii.       Funding with banker's acceptances

iv.      Transferable letter of credit

v.       Back to Back credit

vi.      Assignment of proceeds

vii.      Deferred payment of credit

viii.     Red clause of credit

i.          Advances against collection

          Under advances against collection, the bank lends to the exporter under a collateral pool of export receivables. Here cash should come from the importer but the exporter retains the full obligation to pay the bank whether the importer pays or not. In advancing to the exporter, the exporter's bank consider the factors such as exporter's credit strength, reputation, and performance, importer's credit strength and reputation, collection record of importer's country and nature of goods in determining the percentage it is willing to advance.

          The transaction steps under advance against collections are explained below :

i.        The exporter's bank establishes a facility for advancing funds against the exporter's outward collections.

ii.       The exporter ships goods.

iii.       The exporter submits draft and documents to the bank, which advances funds to the exporter up to the agreed-upon maximum percentage.

iv.      The exporter's branch sends documents and draft to the collecting bank.

v.       The collecting bank notifies importer that documents have arrived and when the importer either pays or accepts the draft and the bank releases the title documents to him.

vi.      At maturity the collecting bank presents the trade acceptance for payment and debits the importer's account.

vii.      When the collection department of the remitting bank receives payment, it credits the exporter's account and advices the loan department, which debits the exporter's account and thus it reduces the outstanding balance and freeing the line for additional advances.

ii.        Discounting Trade Acceptances

          A trade acceptance is a draft or bill of exchange accepted by a buyer. Under negotiable instruments law, it carries the full credit obligation of the importer to pay at maturity. An exporter may choose to hold a trade acceptance in portfolio and present it himself to the importer at maturity. An exporter who needs the funds prior to maturity may ask the bank to discount the acceptance with or without recourse to him

The transaction flow under discounting trade acceptance are :

i.        The exporter arranges for his bank to discount the trade acceptance.

ii.       The exporter ships goods.

iii.       The exporter submits documents to the remitting bank including a time draft drawn on the importer.

iv.      The remitting bank sends documents, time draft, and collection order to the collecting bank in the importer's country.

v.       The importer bank notifies the importer who accepts the draft, then the importer returns the draft to the bank for safe keeping, whereupon the bank releases the documents to him.

vi.      The collecting bank normally advises the remitting bank of creation of the trade acceptance and holds it for presentation to the importer at maturity.

vii.      The exporter asks the bank to discount the trade acceptance. The bank advances the face value of the draft minus discount charges until maturity.

viii.     At maturity the collecting bank presents the draft to the importer for payment and debits the importer's account.

ix.       The collecting bank sends the payment to the exporter's bank.

iii.       Funding with Banker's Acceptances

          A bank may choose to finance its customer's foreign receivables on an acceptance basis. Banks will finance goods sold on 180-days terms and it is normally for raw materials, components and general commodity. The various stages of transaction involved in funding with banker's acceptance are presented below :

i.        The exporter and bank conclude an acceptance agreement.

ii.       The exporter ships the goods.

iii.       The exporter draws two drafts. They are : (a) A time draft drawn on the foreign importer with a maturity date, (b) A time draft drawn on the bank.

iv.      The exporter's bank accepts the draft drawn on itself and discounts it, crediting the net proceeds to the exporter's account. In turn the bank rediscounts the banker's acceptance and uses the rediscounted proceeds to restore its own liquidity position.

v.       The exporter's bank sends the trade draft to the collecting bank which notifies the importer.

vi.      The importer accepts the draft and returns it to the collection bank for safe keeping, then the bank releases the documents to the importer.

vii.      At maturity, the collecting bank presents the trade acceptance to the importer and receives the face value that it remits to the exporter's bank which credits it to the exporter's account.

viii.     After maturity, the investor presents the banker's acceptance to the accepting bank for payment. The bank debits the exporter's account for the face value of the banker's acceptance and pays the full face value of the banker's acceptance to the investor.

iv.       Transferable Letter of Credit

          Under transferable credit, the middleman or beneficiary transfers all or a portion of his or her rights and obligations under the letter of credit to the supplier. The parties in this transaction are :

a.       Importer

b.       Issuing bank

c.       Exporter

d.       Advising or Transferring bank,

e.       Supplier or second beneficiary. The transaction steps involved under transferable letter of credit are presented below :

          i.        The importer applies for a transferable letter of credit.

          ii.       The bank issues a credit in favour of the exporter or middleman and sends it to a branch or correspondent in the exporter's country, which advises the credit to the exporter.

          iii.       The exporter or middleman submits a transfer application to the bank requesting that the full amount of the letter of credit be transferred to his supplier.

          iv.      The advising bank effects the transfer by sending the letter of credit to the supplier. This is the original letter of credit with a notation that the full amount has been transferred to the supplier.

          v.       The supplier ships the goods directly to the importer.

          vi.      After shipment, the supplier submits required documents and a draft to the advising bank for payment.

          vii.      The bank examines the documents and, if they comply with the terms and conditions of the credit, then the bank debits the issuing bank's account and pays the supplier.

          viii.     The advising or paying bank then forwards the documents and draft to the issuing bank.

          ix.       The issuing bank reviews the documents and, if they conform to the terms and conditions of the credit, it debits the importer's account and releases the documents to him.

v.         Back-to-Back Letter of Credit

          Back-to-Back letter of credit allows the middleman or beneficiary to assign the proceeds of the primary letter of credit to the bank as security for a brief time and separate credit in favour of the supplier. Back-to-Back credits are rarely used in the United States but they are prevalent in the Far East, particularly in commodities markets.

          The parties involved in a back-to-back credit are importer, importer's bank, middleman's bank and primary beneficiary under primary credit. The parties involved under secondary back-toback credit are middleman middleman's bank beneficiary of Back-to-back letter of credit.

          Normally, the exporter's bank would agree to issue a back-to-back credit only if : (i) it is the paying bank of the original credit, exporter and the original issuing bank, and the political risk of the importing country.

          The transaction steps involved in back-to-back credit are as follows:

i.        The importer applies for a letter of credit say for 10,000 dollars.

ii.       The importer's bank issues the letter of credit in favour of the exporter, and sends it to a branch or correspondent, which advise the credit to the exporter.

iii.       The exporter applies for a back-to-back credit for 8000 dollars in order to pay his supplier.

iv.      The exporter's bank issues the back-to-back credit for 8000 dollar in favour of the supplier.

v.       The supplier prepares and ships the goods to the middleman.

vi.      After shipment, the supplier presents the required back-to-back documents to the back along with an invoice and draft for 8000 dollars.

vii.      The bank examines the documents and, if they comply with the terms and conditions of the back-to-back credit, it pays the supplier 8000 dollars.

viii.     The bank releases the back-to-back documents to the middleman or account party.

ix.       The middleman ships to the importer and submits to the same bank the documents required under the primary letter of credit along with an invoice for 10000 dollars.

x.       The bank examines the middleman's documents and if they conform to the terms and conditions of the primary letter of credit, it debits the account of the correspondent credit worth of 10000 dollars and pays the middleman 2000 dollars.

xi.       The middleman's bank sends the documents to the importer's bank.

xii.      The importer's bank examines the documents and, if they conform, it debits the importer's account for 10000 dollars and releases the documents to the importer.

vi.       Assignment Proceeds

          Assignment proceeds is an alternative to transferable and back-to-back credits as a means for the middleman to pay the supplier. The transaction steps involved in the assignment proceeds are as follows :

i.        The importer applies for the letter of credit.

ii.       The importer's bank issues the credit and sends it to the advising bank, which notifies the middleman.

iii.       The middleman completes an Assignment of proceeds by instructing the paying bank to pay the supplier a specific percentage of the value of the shipment against conforming documents prepared and submitted by middleman.

iv.      The bank advises the supplier of the assignment.

v.       The supplier prepares and ships the goods to the middleman.

vi.      The supplier presents the shipping documents to the middleman.

vii.      The middleman ships to the importer and submits all documents required under the credit to the advising bank, along with an invoice for the full value of the shipment.

viii.     The bank examines the documents and, if they comply with the terms and conditions of the letter of credit it debits the account of the issuing bank. Then it pays the supplier a percentage of the invoice as instructed on the assignment form and pays the balance of the invoice to the middleman.

ix.       The advising bank sends the documents to the issuing bank.

x.       The issuing bank examines the documents and, if they conform, the bank debits the importer's account and releases the documents to the importer.

vii.      Deferred Payment Credit

          By Deferred payment credit we mean payment is delayed for a specified time period following shipment and the exporter delays the presentation of a sight draft until a specified number of days. The parties involved under deferred payment credit are :

i.        Importer

ii.       Issuing bank

iii.       Advising bank, and

iv.      Exporter

          The transaction steps involved under deferred payment credit are as follows:

i.        The importer applies for a deferred payment letter of credit in favour of the exporter.

ii.       The importer's bank issues the credit and sends it to a branch in the exporter's country, which advises the credit to the exporter.

iii.       The exporter ships the goods to the importer.

iv.      The exporter submits the required documents and a sight draft to the advising bank along with his authorization to release the documents to the importer.

v.       The bank examines the documents and, if they comply with the terms and conditions of the credit, then, it sends an approval letter to the exporter and sends the original documents and authorization to the issuing bank.

vi.      The issuing bank examines the documents and it releases them to the importer.

vii.      On the deferred payment due date, the advising bank retrieves the draft from safekeeping. Then, it debits the issuing bank's account and pays the exporter.

viii.     The issuing bank debits the importer's account.

viii.     Red Clause Credit

          In the Red Clause Credit, the clause is originally stamped on the letter of credit in red ink. Here, the issuing bank authorizes the negotiating bank to advance funds to the exporter prior to shipment of goods and presentation of documents. Further, the negotiating bank grants a loan to the exporter under the importer's line of credit guaranteed by the issuing bank's letter of credit. The main parties involved in the Red Clause credit are :

i.        Importer

ii.       Issuing bank

iii.       Advising bank, and

iv.      Exporter

          The main transaction steps involved in the Red Clause Credit are given below :

i.        The importer applies for a red clause credit in favour of the exporter.

ii.       The bank issues the credit and sends it to a branch in exporter's country which advises the credit to the exporter.

iii.       The advising bank advances the amount stipulated in the credit to the exporter.

iv.      The exporter purchases the goods and ships them to the importer.

v.       After shipment, the exporter submits documents to the advising bank.

vi.      The bank examines the documents and if they conform to the terms of conditions of the credit, it debits the issuing bank's account. Then it deducts the advance and interest and pays the exporter the net difference.

vii.      The advising bank sends the documents to the issuing bank.

viii.     The issuing bank examines them and it debits the account of the importer and releases the documents to him.

 CHAPTER - 3

INSTITUTIONAL SUPPORT FOR EXPORT

FINANCE IN INDIA

INTRODUCTION

          The international market is generally very competitive and sensitive, and the credit facilities made available to the buyers are one of the important determinants of export business.

          The extent to which the credit must be extended to the importer depends on the sale terms. If the exporter gets cash in advance, there will not be any problem in respect of finance, but this is not so common. Even if the exporter gets the payment at the time of the shipment of the goods, he has to make his own arrangements to meet his financial needs at the pre-shipment stage. If the sale is on credit, as it usually is, the exporter will be still more constrained financially. It is, therefore, necessary to make institutional credit available to the export sector to meet its pre-shipment and post-shipment financial requirements at the pre-shipment stage and also to extend reasonable credit facilities to foreign buyers.

          Sometimes, institutional credit is extended to foreign buyers instead of to exporters. All the countries which are serious export promotion have, therefore made institutional arrangements for the provision of both pre-shipment and post-shipment finance. In India the export sector is regarded as a priority sector.

EXPORT FINANCE AND RBI

          The Reserve Bank of India (RBI) does not directly provide financial assistance to the export sector, but only through commercial banks and other financial institutions. At present, the RBI accommodation is available on easiler terms and at cheaper cost.

          The Reserve Bank's role in export promotion is twofold. First, it formulates the policies regarding bank advances to exports under its different schemes.

          Secondary, the RBI stipulates the ceiling rates to be charged by banks on advances to exports. To encourage export advances to this sector, exporters are exempted from selective credit controls and other control measures. Besides, it allocates foreign exchange to exporters for business trips and market development expenses abroad. At present the RBI helps the foreign trade under the following schemes :

i.        Export Bills Credit Schemes, 1963;

ii.       Pre-Shipment Credit Scheme, 1969;

iii.       Refinance under Duty Drawback Credit Scheme, 1976.

Export Bills Credit Scheme

          This scheme was introduced in March 1963 under Section 17(3A) of the RBI Act 1934. Under this scheme the RBI grants advances to scheduled banks against:

a.       Their promissory notes repayable on demand; and

b.       Upon their declaration of holding of eligible usance export bills, maturing within 180 days, drawn in foreign currencies or Indian rupees, and purchased or negotiated by them. No margin is kept for the refinance.

          Credit limits are fixed for each office of the scheduled banks and for rupee export bills, and foreign currency export bills separately.

          Initially, the minimum limit of a loan had been fixed at Rs.1 lakh and the amount of usance promissory notes at Rs.5000. In order to qualify for accommodation, the maximum rate that could be charged against export credit was fixed at 6%

          The main advantage of this scheme is that as an export promotion measure, refinance is made available to banks at concessional rates. This is found to be very useful, particularly during the busy season and tight money conditions.

Pre-shipment Credit Scheme

          This scheme was introduced from February 1969 by making pre-shipment loans available for refinance under Sec.17(3A) of the RBI Act 1934. On the same terms and conditions refinance was sanctioned for post-shipment credits are granted upto 180 days to bonafide exporters on the strength of firm orders or letters of credit established by banks abroad in favour of the local exporter. No margin is kept under this cheme. The total outstanding borrowings for the RBI at any time must be fully covered by the amount of pre-shipment advances. The RBI may at any time recall an advance without assigning any reason. The interest rate on pre-shipment and post-shipment credit is 9.5 percent for a period below 180 days and 11.5 percent for a period over 180 days.

Duty Drawback Credit Scheme, 1976

          The RBI introduced this scheme in February 1976 as an export promotion device. It is intended to benefit exporters who can avail themselves of interest free advances from the bank upto 90 days against shipping bills provisionally certified by the customs authorities towards a refund of customs duty i.e., duty drawback. This scheme covers almost all the commodities (about 700) for export. The amount of duty drawback is computed by customs house; but in order to facilitate quick and direct payment of drawback claims, disbursement is made through scheduled commercial banks. The advances under this scheme are eligible for refinance, free of interest, from the RBI for a maximum period of 90 days from the date of advance. The other terms and conditions of the scheme are

i.          Eligible banks

          All the licensed scheduled banks which are authorised dealers in foreign exchange are eligible for grant of advances under the scheme.

ii.        Minimum limit borrowing

          The minimum limit of amount to be borrowed by a bank at a time is Rs.20,000.

iii.       Margin

          The RBI grants advances up to cent percent of the amount of eligible loans reported by the borrowing bank in the declaration. The total outstanding borrowings of a bank from the Reserve Bank under the scheme shall not, at any point, exceed the amount of eligible loans advanced by its exporters against their provisional entitlement for duty drawback.

iv.       Interest rate

          Both advances by banks to exporters and refinance by the RBI to banks are interest free. A bank may, however, charge a fee by reimbursing itself for the administrative expenses or charges incurred by it for the transmission of cheques, bills or other instruments on behalf of an exporter. Under this scheme, if the borrower is not eligible for the drawback amount as claimed by him, or if he is entitled for a smaller amount, the bank shall be entitled to charge the borrower, from the date of the advance, the interest on the said amount or the difference, as the case may be, at the rate normally charged by it on its cash credit or advances.

v.         Procedure for borrowing from the RBI

          Fixation of limit : An eligible bank desiring to avail itself of the facility under the scheme should apply to RBI for a limit. The limit will be sanctioned for a period of one year, commencing on November 1. It may be renewed at the request of the bank.

          For the purpose of borrowing under the scheme, the main office of the borrowing bank shall execute the following loan documents :

a.       A stamped agreement for the amount of the limit, setting out the various conditions governing the advances;

b.       A demand promissory note for the stated amount;

c.       For increasing the limit, a letter extending the provisions of the agreement to the increased limit, together with a consolidated demand promissory note for the fresh limit.

d.       A board resolution authorising the borrowings under the scheme.

e.       The authorised branch of the eligible bank should, at each time it wants to draw on the limit, make a written request to the office concerned of the RBI indicating the amount of loan required and also submit a declaration.

Procedure for Granting of Loans to Exporters

1.       The borrower should make a declaration on the relative shipping bill in respect of the claim of duty drawback.

2.       The borrower should furnish to the bank a copy of the shipping bill bearing the certificate of the customs authorities, stating the amount of duty drawback as provisionally determined by them, and mentioning that the duty drawback will, on sanction, be paid by them through the RBI to the bank concerned;

3.       The borrower should irrevocably authorise the bank to receive, through the RBI the amount of duty drawback as sanctioned under the Customs Act 1962, by the customs house concerned.

4.       The borrower should agree that if, within a period of 90 days, no duty drawback has been sanctioned or if the amount of drawback sanctioned is less than the advance he has received, he will, on being called upon by the bank to do so, refund to the bank the entire amount advanced by the bank to him,, or the difference between the amount advanced and the amount sanctioned, as the case may be.

5.       If the advance continues beyond 90 days at the rate normally charged by it on its cash credits/advances, no refinance from the RBI will be admissible in respect of an advance outstanding beyond 90 days.

Deferred Payment-Imports and Issuance of Guarantees

          Background : To avail of the foreign currency loans available at various foreign centers at attractive interest rates, Government of India recently liberalised its policy towards imports of plant and machiney needed by Indian industries towards modernisation, replacement of their existing manufacturing units. Also 100 percent export oriented units can import their entire plant and machinery against deferred terms.

Commercial Banks and Deferred Import Business

          In the extent of stringent rupee resources position of commercial banks, they are unable to grant term loans be it short/medium/long to their customers in a big way. Further, their role in this regard is also restricted in view of extant instructions of RBI in regard to granting of term loans which are as under :

Term Loans - New Projects

1.       Projects cost upto Rs.1.5 crores-term loans can be extended by commercial banks in participation with State level financial institutions.

2.       Project cost between Rs.1.5 crores and Rs.5 crores - commercial banks need not ordinarily participate.

3.       Above Rs.5 crores - commercial banks may grant term loans to 25 to 30% of the total project cost including deferred payment guarantees in participation with All India Financial Institutions.

4.       Where aggregate rupee finance is more than Rs.1 crore, prior clearance of financing pattern by EXIM bank is necessary.

          In view of this, deferred import business has become an attractive propositions for banks as it causes no strain on their resources position as well as the above referred restrictions also do not apply for obvious reasons.

COMMERCIAL BANK CREDIT FOR EXPORT TRADE

          Export finance refers to the credits required by exporters for financing their export transactions from the time of getting an export order to the time of the full realisation of the payment from the importers. Broadly speaking, exporters require two types of credit assistance - pre-shipment credit and post-shipment credit. Commercial banks have been traditionally concerned with the provision of export credits on short term basis. They meet the various credit needs of exporters, collect, purchase, rediscount and negotiate their bill drafts. Commercial banks making advances to the export sector are eligible for following benefits.

i.        Refinance of the advances by the Reserve Bank of India:

ii.       Interest subsidy to compensate the banks for making export credits available at concessional rates; and

iii.       Export credit guarantees.

Packing Credit or Pre-Shipment Credit

          Pre-shipment credit or packing credit refers to the working capital finance granted by commercial banks against specific export orders or contracts. It is short-term credit/advance for financing the procurement or production of goods, and meeting the expenses incurred on special packing, packaging, storing, inland transport costs, shipping, insurance, port dues, export duties, etc. This type of credit is available to all types of eligible exporters, be they merchant-exporters, manufacturer-exporters, or export houses. It is generally granted in the form of loans or cash credits; or it may be granted in the form of overdraft facilities. When an export order is executed, the packing credit is repaid out of the proceeds of the bill drawn on the foreign buyer. This is of great importance especially for small-scale indigenous manufacturers and exporters, who do not possess sufficient financial resources or have no access to large financial resources to meet the expenditure involved in the production of goods for exports. As this type of financing has a direct bearing on the country's export performance, the advance is strictly governed by the scheme evolved for the purpose by the Reserve Bank, Advances under packing credit are eligible for interest subsidy and refinance, either from the RBI or the IDBI.

Packing Credit Scheme/Conditions

i.          Eligibility Criteria

          The exporter has to make a formal application to his banker, an authorised dealer in foreign exchange, either in a specified format or make an ad hoc application, depending on the requirements imposed by the banker. To support his application, he should enclose :

a.       A confirmed order placed by the buyer for the export of goods from India; and

b.       A letter of credit received against the contract.

          Exporters who do not receive the export order in order own names, such as suppliers to export houses, are also eligible, provided that they produce a letter from the concerned export house that a portion of the order has been allotted to them and that the export house does not wish to seek packing credit in respect of such portion. Sub-contractors, supplying goods for export under a consortium arrangement, ar also eligible for the credit. Where it is not possible for the exporter to lodge the letter of credit or a firm order, pre-shipment advances may be given if he belongs to the STC or MMTC; in other cases, only on production of sufficient evidence, i.e., cables, telex messages, letters, etc., provided that the aforesaid documents are lodged with the bank within a reasonable time for the grant of such advances. In the case of certain goods, such as tea, precious and semi-precious stones, and machine tools, packing credit may be granted on the basis of the past performance of the exporting firm

ii.        Credit limit

          The amount of packing credit loans depends on the f.o.b. value of goods and the incentives for them, and generally conforms to the norms set up by the ECGC under its Export Production Finance Guarantee schemes. The limits had down for this purpose by the ECGC are 50 percent over and above the f.o.b. value of goods subject to a maximum of 100 percent of the domestic cost of the export product. The ECGC covers the financial risks of the bank when such packing credit loans are extended.

iii.       Rate of interest

          The interest payable on the credit is a confessional rate of interest. Currently, the interest rate is 9.5 percent per annum for a period of upto 90 days. For delays caused by factors beyond the control of the exporter, this period may be extended by another 45 days at an interest rate of 11.5 percent. For specified medium and heavy engineering goods, the rate of interest is 9.5 percent for 180 days and 11.5 percent for another 90 days provided that the delays are caused by factors beyond the control of the exporter.

iv.       Period

          Packing credit loans are generally made available from 90 days to a maximum period of 180 days; a longer period of credit may be granted, on the approval of the Reserve Bank, for the export of capital goods. The ECGC allows a period of eight months from the date of advance under its Export Production Finance Guarantee Scheme.

v.         Security

          Packing credit is granted by the bank only against the lodgement of a documentary letter of credit, a firm export order as evidence of having received an order, the relevant policy issued by the ECGC, and a personal bond if the party is already known to the banker.

vi.       Liquidation of credit

          All packing credit advances must be repaid from the proceeds of the relative export bills negotiated or from remittances received from abroad for the exported goods. Packing credit advances made against export incentives, such as cash subsidy, refund of excise and customs duties, reimbursement of the differential between indigenous and international prices of certain raw materials, particularly steel should be repaid by the exporter as soon as these are realised.

vii.      Follow-up of packing credit

          Ensuring the end-use of the funds advanced under packing credit is an important function of a bank, since the purpose of the advance has entitled the borrower to concessional rates of interest and priority treatment in lending. A close watch on the conduct of the account has to be kept to ensure that the money borrowed from the bank is used for the declared purpose.

Post-shipment Credit

          The term post-shipment credit refers to the finance required by the exporters for extending credit to their buyers so as to bridge the financial gap between the time of the shipment of goods and the realisation of full payment from the importers. According to the existing exchange control regulations, export credits can be granted only for a period extending up to 180 days (or 90 days in the case of exports to Pakistan and Afghanistan) for the export of consumer goods, consumer durables and light engineering goods. Such credits are known as the short-term post-shipment credits. About 90 per cent of our exports are made on cash or short-term credit basis, which are again adequately taken care of by the commercial banking system of the country. For exports of heavy engineering goods, equipment, turnkey projects and construction contracts, where the full payment is received after a considerable span of time, exporters are allowed to extend credits for a period beyond 180 days. The credits extended in such cases may be medium term (up to 5 years) or long-term (beyond 5 years) credit. For post-shipment loans on deferred payment basis, commercial banks constitute the primary source of providing credits.

          Commercial banks in India finance exporters at the post-shipment stage chiefly by :

i.        Negotiating against documents under letters of credit.

ii.       Purchasing D/P and D/A bills;

iii.       Lending against the security of claims for export incentives.

          Banks usually charge a commission according to the rates prescribed by the Foreign Exchange Dealers' Association.

          After the shipment of goods, the exporter usually presents the relative documents to the negotiating bank for negotiation. i.e., sale or discount. The following documents are generally called for in a documentary credit as evidence that the goods have been despatched:

a.       Bill of lading;

b.       Marine insurance policy;

c.       Commercial invoice;

d.       Consular invoice;

e.       Certificate of origin;

f.        Inspection certificate;

g.       Customs invoice;

h.       Shipping bill; and

i.        Packing list.

          The exact form of shipping documents depends largely on the method of payment and the requirements of the importing country. The bill of exchange drawn either in Indian rupes or foreign currencies under letters of credit is also handed over to the negotiating bank with the above mentioned documents. While the bills drawn against a letter of credit are accepted without any hesitation because the banks do not incur any risk, other bills are not usually accepted till the bank is fully satisfied about the credit rating of the parties or is otherwise secured in case payment is not received. The exporter is given an advance, with recourse to him, for the full amount, less negotiation charges, against the security of the bill. The negotiation of the bills depends upon

a.       The credit rating of the drawer and drawer;

b.       Exported product characteristics;

c.       Documentary requirements, such as a bill of lading, a customs invoice;

d.       Credit limit of the drawer as fixed by the bank;

e.       Borrowing powers of the person who has signed it, particularly in case of companies and firms; and

f.        The rate of negotiation

          Generally speaking, a banker who negotiates a bill under a letter of credit should satisfy himself that;

i.        The letter of credit is genuine;

ii.       The period of its validity has not expired;

iii.       The amount of the bill to be negotiated is within the unutilised balance of the amount given in the letter of credit;

iv.      The terms of the letter and satisfied; and

v.       The party, whose bill the banker is asked to negotiate, is the same as given in the letter of credit.

          If the documents are not in order, the issuing bank may refuse to honour its commitments; and in such an eventuality, the negotiating bank has to take recourse to the drawer of the draft.

          The sight as well as usance bills may be offered to the bank on the bank's own collection basis. i.e., the bank sends such bills to its foreign branch/correspondent for the collection of the payment. The amount of such bills is not credited to the exporter's (drawer's) account till the necessary advice about the receipt of payment from abroad has been received. However, the bank may give advice of receipt of payment from abroad against such bills. Besides collection charges, the bank charges interest on the advance for the intervening period between the date of the advance and realisation of proceeds. Charges for collection vary from transaction to transaction, depending upon the documentary work involved, such as postage, registration, insurance, foreign agent's charges, manner of remittance, etc.

          It should be noted that while submitting a bill of exchange to the bank for collection, the exporter must send along with it comprehensive and explicit instructions regarding the manner of the remittance of the proceeds against such bills, the action to be taken in case of non-acceptance or non-payment and consequent disposal of goods, whether partial deliveries are permitted, whether a rebate is to be allowed if the bill is paid before its due date. etc.

          Export incentives are provided under the Export Promotion Scheme by the Government of India and other agencies to compensate exporters of selected products for the losses incurred by them in the export business. For example, a cash compensatory allowance on the export of selected products to meet international price competition, a refund of excise and customs duties known as duty drawback, reimbursement of the differential between indigenous and international prices of certain raw materials. etc. In practice, payment from government agencies against an application for export incentives takes time. The banks have, therefore, evolved schemes on the basis of the Reserve Bank guidelines to advance loans against them so that the exporter's funds are not blocked. Banks normally obtain a power of attorney from the exporter, which is executed in their favour before an advance is extended to him. It is then sent to the Joint Chief Controller of Imports and Exports and the Collector of Customs in respect of cash compensatory allowance and customs duty drawback respectively. Such advanced are also covered by the ceiling rate of interest applicable to export credits; and exporters are eligible for a subsidy under the Export Credit (Interest Subsidy) Scheme

Export Credit Guarantee Corporation

          Exports constitute an essential part of any nation's economic activity. Export earnings provide the wherewithal to import equipment raw materials and other goods. Export promotion is particularly important for developing countries so that they may obtain all their development requirements and service their external debt. With increasing competition in international trade, exporters have to compete not only in quality, price, delivery schedule and service, but also in payment terms. Credit has assumed a major role in present day international trade.

Export Credit Insurance

          The sale of goods to a foreign buyer has two inherent risks, namely, marine and general risks, and export credit risks. While marine and general risks are taken care of by general insures, export credit risks are underwritten by credit insures. Extending credit generally poses two problems to an exporter. First, he should be able to find enough resources to offer credit to his overseas buyer and in getting the payment from him on the due date. The overseas buyer may default or may go bankrupt: this is a commercial risk. A war, a civil commotion, or a coup or a change in political or economic conditions in his country may wreck the fortunes of the buyer. There may be sudden import or exchange restrictions or a moratorium on external payments. These are political risks which may block or delay the receipt of export proceeds, thereby causing loss or financial strain to the exporter.

          As a tool of export promotion, credit insurance schemes have been introduced in several countries to provide protection to exports against the risks of export trade. Export credit insurance facilities originated in the inter-war years in Germany and the United States of America. Its main object was to protect manufacturers, exporters and financial houses, including banks, against losses arising out of the insolvency of overseas buyers. In the UK and Japan, export credit insurance facilities are provided by their respective government departments i.e., the Export Credit Guarantee Department of the Board of Trade in UK and the Ministry of International Trade and Industry (MITI) in Japan. The EXIM bank (of the USA) and Campaign Fracaise d'Assurance Pour le Commerce Exterieur underwrite credit risks in the United States of America and France respectively. Such facilities exist in India, Canada, Holland, Italy, Norway, Spain, Sweden, Australia, Belgium, Denmark. Switzerland, etc.

THE ECGC

          The Export Credit Guarantee Corporation of India Ltd., (ECGC) is a wholly owned government company. It was originally set up in 1957 as the Export Risks Insurance Corporation Pvt. Ltd., (ERIC) to provide credit insurance cover to Indian exporters. As a result of the recommendations of the Study Group headed by Shri Mathrani, it was transformed into the Export Credit and Guarantee Corporation Limited on January 15,1964, with the enlarged scope of extending guarantees to banks. The ECGC functions under the administrative control of the Ministry of Commerce, Government of India. It is managed by a Board of Directors, representing the government, banking, insurance, trade, industry and other interests. It has its head office at Express Towers (10th floor) Nariman Point. Bombay-400 021 and regional offices at Calcutta, Madras, New Delhi, Ahmedabad, Hyderabad, Ludhiana, Bangalore, Pune, Cochin and Varanasi.

Covers Issued by ECGC

          The covers issued by the ECGC may be divided broadly into four groups;

i.        Standard policies issued to exporters to protect them against the risk of not receiving payment while trading with overseas buyers on short-term credit;

ii.       Specific policies designed to protect Indian firms against the risk of not receiving payment in respect of exports on deferred payment terms, services rendered to foreign parties, and construction works, including turnkey projects undertaken abroad;

iii.       Financial guarantees issued to banks against risks involved in providing credit or guarantee facilities to exporters; and

iv.      Special schemes, viz., transfer guarantee issued to protect banks which confirm letters of credit; insurance cover for buyer's credit; lines of credit; joint ventures; and overseas investment.

A.        STANDARD POLICIES

          The ECGC issues four types of standard policies which provide cover to exporters on whole turnover basis for a minimum period of one year.

i.        Shipments (Comprehensive Risks) Policy-to cover both commercial and political risks from the date of shipments;

ii.       Shipments (Political Risks) Policy-to cover only political risks from the date of shipment;

iii.       Contracts (Comprehensive Risks) Policies - to cover both commercial and political risks from the date of the contract;

iv.      Contracts (Political Risks) Policies to cover only political risks from the date of the contract.

          For goods which are manufactured to the buyer's specifications and cannot easily be sold to alternate buyers, the exporter may obtain cover from the date of the contract covering pre-shipment risks as well by taking out a contract policy covering comprehensive risks or political risks only. Under the contract policy, in addition to the risks covered under the shipment policy, the risk of loss due to governmental ban on the export of goods after the date of contract is also covered.

          An exporter may obtain cover for all his shipments either for comprehensive risks, i.e., both political and commercial risks under a comprehensive risks insurance policy, or only for political risks under a political risks insurance policy, However, shipments to associates or to agents and those against letters of credit are covered only for political risks, even under the comprehensive risks insurance policy. The risks covered under the policies are :

i.          Commercial risks : These are :

a.       Insolvency of the buyer;

b.       Buyer's protracted default in paying for the goods accepted by him; and

c.       Buyer's failure to accept goods, when it is proved to the satisfaction of the ECGC that such non-acceptance does not arise from the exporter's actions.

ii.        Political risks : These are :

a.       Imposition of restrictions on remittance by the government in the buyer's country or any government action which may block or delay payment to the exporter;

b.       War, revolution or civil disturbances in the buyer's country;

c.       New import licensing restrictions or cancellation of a valid import license in the buyer's country;

d.       Cancellation of an export license or imposition of new export licensing restrictions in India (under the contracts policy);

e.       Payment of additional handling, transport or insurance charges occasioned by an interruption in, or division of, the voyage which cannot be recovered from the buyer;

f.        Any other cause of loss occurring outside India, not normally insured by commercial insurers, and beyond the control of the exporter and/or the buyer.

iii.       Risks not covered : The standard policies do not cover the risk of loss due to:

a.       Commercial disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyer's country in his favour;

b.       Causes inherent in the nature of goods;

c.       Buyer's failure to obtain the necessary import or exchange authorisation from the authorities in his country;

d.       Insolvency or default of any agent of the exporter or of the collecting bank;

e.       Risk of loss, damage or destruction of goods which are covered by commercial insurers;

f.        Exchange fluctuations.

iv.       Exporter Co-Insurer

          It is customary in credit insurance to make the insured share a small percentage of the risk. The ECGC normally pays 90 percent of the losses arising out of political or commercial risks. In the event of loss due to repudiation of contractual obligations by the buyer, the ECGC indemnifies the exporter upto 90 percent of the loss if a final and enforceable decree against the overseas buyer is obtained in a competent court of law in the buyer's country. The ECGC, however, may, at its discretion, waive the enforcement of such legal action where it is satisfied that such legal action is not worthwhile. In that event, losses are indemnified upto 60 percent. Recoveries made after the payment of the claim are shared with the ECGC in the same proportion in which the loss was borne.

v.         How to obtain policy

          An intending exporter should fill in a proposal form available from all ECGC offices and submit it to the nearest office. After examining the proposal, the ECGC would send him an acceptance letter, stating the terms of its cover and the premium rates. The policy will be issued after the exporter conveys his consent to the premium rates and pays a non-refundable policy fee of Rs.25 or Rs.100 or Rs.200 for a maximum liability upto to Rs.1 lakh between Rs.1 lakh and Rs.5 lakhs and above Rs.5 lakhs respectively.

vi.       Maximum liability

          The maximum liability is the limit upto which the ECGC would accept liability under the policy for shipments made during the period of the policy. The policy may be for one, three or five years. It will be advisable for exporters to estimate the maximum outstanding payments due from overseas buyers at any time during the policy period and obtain the policy with maximum liability of equal value. The maximum liability fixed under the policy may be enhanced subsequently, if necessary.

vii.      Whole-turnover principle

          The ECGC expects a fair spread of risks it insures. Therefore, an exporter is required to insure all his exports except those made against advance payment or irrevocable letters of credit confirmed by banks in India. The exclusions are, however, possible for the following categories of business under a shipments policy:

a.       Items which are not of an allied nature when an exporter deals in different commodities; and

b.       Shipments against letters of credit not confirmed by banks in India if the exporter does not want to cover them against political risks.

viii.     Declaration of shipments and payment of premium

          The premium rates are closely related to the risks involved and vary according to countries to which goods are exported and the payment terms. The premium rates charged by the ECGC on its insurance policies and guarantees have not been increased since its inception, and are among the lowest in the world. An exporter, who has taken out a shipment policy, has to send, in the prescribed form (No.203) and by the tenth of each month, a declaration of shipments made in the previous

month. An exporter, who obtains a contracts policy, has to send a declaration of all outstanding contracts immediately after the policy is issued. Thereafter, he shall send a declaration of contracts entered into and shipments made by him during the previous month by the tenth of each month. The premium has to be paid at the rates prescribed, together with the declaration.

Consignment Exports

          Exports on consignment basis may be covered under the Shipments (Comprehensive Risks) Policy by a suitable endorsement thereon. While political risks are covered from the date of the shipment till the date of the receipt of payment in India, commercial risks are covered only after the agent/stockholder submits the "Account Sales" to the exporter. The risk of the agent/stockholder who does not return the unsold goods is not covered under the policy.

Credit Limit

          Commercial risks are covered by the ECGC, subject to the approval of the credit limit for each buyer. The credit limit is the limit upto which a claim may be paid under the policy for the losses incurred on account of commercial risks. As commercial risks are not covered in the absence of a credit limit, exporters would be will advised to apply to the ECGC for the approval of a credit limit for the buyer before making a shipment. If complete information about the buyer and his banker are given in the credit limit application, it will facilitate an expeditious receipt of the credit information. The ECGC obtains credit information on overseas buyers through banks and crdit information agencies. On the basis of credit information and its own experience, the ECGC fixes suitable credit limits for overseas buyers.

          In case an exporter has already obtained a credit report on the buyer, that report may be furnished, along with the credit limit application, to facilitate a quick decision. If the exporter needs an enhancement in limit, he may apply for it in the prescribed form, referring to his past experience with the buyer

i.          Status enquiry charges

          The ECGC spends a good amount on getting status reports on overseas buyers but charges a normal fee of Rs.10 for each application. An exporter need not pay any status enquiry fee for credit limits upto Rs.2 lakhs, if he furnishes a bank report on the buyer. In case the limit is required urgently, exporters may request the ECGC to obtain cabled report on the buyer and remit an additional amount of Rs.200 towards cable expenses. Alternatively, the exporter may obtain a cabled report through his bank and furnish the same in original to the ECGC for a quick decision.

ii.        Discretionary limits

          If no application for a credit limit for a buyer has been made, the ECGC accepts liability for commercial risks upto a maximum of Rs.60,000 for D.P./C.A.D. transactions and Rs.30,000 for D.A. transactions, provided that :

a.       Atleast 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 for an amount that was not less than the discretionary limit availed of by the exporter: and

b.       The buyer had made payment for the shipments on due dates.

iii.       Restricted cover countries

          When payment risks become too high in a country, the ECGC provides cover for such countries on a restricted basis. Policy-holders intending to export to such countries are required to obtain the specific approval of the ECGC for each shipment/contract or series of shipments/contracts. If such approval is not taken, the cover is not available even for political risks

Reporting Defaults

          In the event of non-payment of any bill, policy-holders are required to take prompt and effective steps to prevent or minimise the loss. A monthly declaration of all bills which remain unpaid for more then 30 days should be submitted to the ECGC in the prescribed form, indicating the action taken in each case. Granting extension of time for payment, converting bills from D.P. to D.A. terms, or re-sale of unaccepted goods at a lower price require the prior approval of the ECGC.

Settlement of Claims

          A claim arises when any of the risks insured under the policy materialises. If an overseas buyer goes insolvent, 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, whichever is earlier. In the event of protracted default, the claim is payable after four months from the due date. Claims in respect of additional handling transport or insurance charges incurred by the exporter because of an interruption in, or a diversion of, the voyage outside India are payable after proof of loss is furnished. In all other cases, the claim is payable after four months from the date of the event causing the loss. However, for the exports to countries where long transfer delays are experienced, the ECGC may extend the waiting period, and claims for such shipments are payable after the expiry of such extended periods.

          When the buyer does not accept goods or pay for them because of differences over the fulfillment of the terms of the contract with the exporter, or because of counter-claim or set-off, the ECGC considers the 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. This condition is waived in cases where the Corporation is satisfied that the exporter is not a fault, and that no useful purpose would be served by proceeding against the buyer

Exchange Transfer Delay

          If the proceeds of shipments are held up because of foreign exchange shortage in the buyer's country, the ECGC considers the claim after the waiting period as applicable to the country concerned. Exchange transfer delay claims should be made with documentary proof to the effect that :

a.       The buyer has made the payment in the local currency and

b.       He has complied with all the exchange control regulations necessary to effect the transfer of the payment.

          Claims should be submitted to ECGC office that issued the policy. All claims will be paid in Indian rupees through the bank which handled the concerned bills. A receipt of a claim from the ECGC does not relieve an exporter from obligations to the Exchange Control Authority for recovering the amount from the overseas buyers.

B.        SPECIFIC POLICIES

          The standard policy is a whole-turnover policy designed to provide a continuing insurance for the regular flow of an exporter's shipments of raw materials, consumer goods and consumer durables for which the credit period does not exceed 180 days. Contracts for the export of capital goods or tunkey projects or construction works or rendering services abroad are not of a repetitive nature. Such transactions are, therefore, insured by the ECGC on a case-to-case basis under specific policies.

          All contracts for exports on deferred payment terms exceeding Rs.50 lakhs in value, and all contracts for turnkey projects and construction works abroad, require prior clearance by the Working Group consisting of representives of the Reserve Bank of India, the Industrial Development Bank of India and the ECGC. Applications for this purpose should be sent to the IDBI through the exporter's bank. And in principle clearance at the working group enables the exporters to get the necessary facilities from the institutions concerned.

A specific policy may take any of the following four forms :

i.        Specific shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the post-shipments stage;

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, or are made to associates;

iii.       Specific Contracts (Comprehensive Risks) Policy;

iv.      Specific Contracts (Political Risks) Policy.

          A contracts policy provides a cover from the date of the contract. The losses that may be sustained by an exporter at the pre-shipment stage due to the frustration of the contract are covered under this policy in addition to the cover provided by the shipments policy.

Services Policy

          When Indian firms render services to foreign parties, they are exposed to payment risks similar to those involved in the export of goods. A serviced policy offers protection to Indian firms against such payment risks. The policy has been designed broadly on the lines of the ECGC insurance policies covering the export of goods, and is issued to cover specific transactions. Two types of policies are available:

a.       Specific Services Contract (Comprehensive Risks) Policy, to cover commercial as well as political risks; and

b.       Specific Services Contract (Political Risks) Policy, to cover only political risks.

          When the contracts are with overseas government or payments are guaranteed by overseas governments or are covered by bank guarantees/letters of credit, or are with associates, political risks policies are issued

          A wide range of services, such as technical or professional services, hiring or leasing may be convened under the policies. The Comprehensive Risks Policy covers the following risks:

1.       The insolvency of the buyer;

2.       Protracted default in payment;

3.       Restrictions on remittances in the buyer's country or any government action which may block or delay payment to the exporter;

4.       War between India and the buyer's country;

5.       Revolution or other civil distribances in the buyer's country;

6.       Government action in India or in the buyer's country which prevents the performance of the contract; and

7.       Any other cause of loss occurring outside India and beyond the control of the buyer or the seller.

          The policies do not cover losses arising from events that prevent the completion of the contract in circumstances where such frustration might free the buyer from his obligation to make payment under the contract. The policy covers 90 per cent of the loss suffered by the seller. The claim is payable after four months from the due date of payment if the loss arises from the risk of protracted default. In the event of insolvency, the claim is payable after four months from the due date of payment or one month after the loss is admitted to rank against the insolvent's estate, whichever is earlier. It is payable after four months from the due date or the date of the event which is the cause of loss, as the case may be, if the loss is caused by any of the other risks. The premium rates are closely related to the risks involved, and vary according to the country of the buyer and the terms of payment. Quotations for any specific proposition or business on hand may be obtained by writing to the ECGC, giving details thereof. The services policy covers contracts under which only services are to be rendered. Contracts under which the rendering of services is part and parcel of a bigger contract for the supply of goods or machinery or the erection of a plant are covered under the construction works policies

Construction Works Policy

          The ECGC's Construction Works Policy covers civil construction jobs as well as turnkey projects involving supplies and services, whether construction works are involved in them or not. It provides cover for all the payments that fall due to the contractor under the contract. Two types of policies have been evolved to cover contracts with government buyers and with private buyers. The former covers political risks in respect of contracts with overseas governments or when the payments are guaranteed by the government, and the latter cover comprehensive risks. For contracts with private employers, the policy may be issued to cover only political risks if the payments are guarantee by a bank or covered by a letter of credit.

          The policy has been designed to cover the business done under the Standard Conditions of Contrast (International) prepared by the Federation International des Ingenieurs Conseils (FIDC) jointly with the Federation International du Batiment at des Travaux Publics (FIBTP) ; but it may be modified to apply to other contracts. The following risks are covered for contracts with government employers or for the payments which are guaranteed by the employees' government :

          i.        Default of the government employer;

          ii.       Delay in the transfer of payments to India;

          iii.       War between India and the employer's country;

          iv.      Civil war or similar disturbances in the employer's country;

          v.       Imposition of import or export licensing rules (or cancellation of an existing license) for goods or materials manufactured or purchased by the contractor after the date of the contract, for use on the contract, and for which on the date of loss the employer has no obligation to pay in terms of the contract ;

          vi.      Additional handling, transport or insurance charges due to interruption in, or diversion of, the voyage ; and

          vii.      The employer's failure to pay to the contractor sums awarded in arbitration proceedings under the contract

          The percentage of loss payable by the ECGC is 85 under policies issued to cover contracts with government employers and 75 in case of policies covering contracts with private employers. The policy is issued on the basis of estimated basic contract prices, estimated interest and other payments due under the contract. The premium is payable at the outset on the estimated figures. A proportionate refund of premium is allowed when the actual contract price and interest charges fall below the estimates. Cover can also be provided for the contractor's equipment (such as cranes, bulldozers and trucks which are used in the construction job against the risks of confiscation, by means of an endorsement on the policy, if the contractor so desires. The policy is issued to cover specific contracts and takes effect from the date of the contract.

C.        FINANCIAL GUARANTEES

          Exporters require adequate financial support from banks to carry out their export contracts. The ECGC's guarantees protect the banks from the losses incurred on account of their lendings to exporters. These guarantees have been designed to encourage banks to give adequate credit and other facilities for exports, both at the reshipment and postshipment stages, on a liberal basis. Five guarantees have been evolved for this purpose. These are:

          a.       Packing Credit Guarantee ;

          b.       Export Production Finance Guarantee ;

          c.       Post-Shipment Export Credit Guarantee ;

          d.       Export Finance Guarantee ; and

          e.       Export Performance Guarantee.

          These guarantees give protection to banks against losses arising from non - payment by exporters by reason of their insolvency or default. The ECGC pays three-fourths of the loss under the post - shipment exports credit guarantee, export finance guarantee and export performance guarantee, and two - thirds of the loss under others. The Corporation agrees to pay a higher percentage of loss to banks which offer to cover all their pre-shipment advances under a whole turnover packing credit guarantee. A higher percentage of cover is offered under the post-shipment export credit guarantee if the bank agrees to cover all its post - shipment advances on a whole turnover basis.

          In special cases, the ECGC considers the payment of a claim to the extent of 80 percent of the loss in respect of advances granted under the post-shipment export credit guarantee against shipments of engineering and metallurgical items of the value of Rs.2 crores or more under a single contract. Under the Export Performance Guarantee, the ECGC provides a higher cover of 90 percent of the loss on payment of proportionately higher premium.

(i)       Packing Credit Guarantee 

          Any loan given to an exporter for the manufacture, processing, purchasing or packing of goods meant for export against a firm order or letter of credit qualifies for a packing credit guarantee. Pre-shipment advances given by banks to parties, who enter into contracts for the export of services or for the construction works a broad, to meet their preliminary expenses in connection with such contracts are also eligible for cover under this guarantee. The requirement of the lodgement of the letter of credit/export order for the grant of packing credit advances may be waived, as permitted by the Reserve Bank of India for certain commodities. 

          The premium rate is 7.5 paise per Rs.100 per month or part thereof. A lower rate of 3.5 paise / 5 paise per Rs.100 per month is charged under the whole - turnover Packing Credit Guarantee (WTPCG) scheme, depending upon the volume of business. The premium under the WTPCG is payable on the daily average product basis, while, under the individual guarantees, it is payable on maximum outstanding. The percentage of loss covered under the whole turnover packing credit guarantees is 75 as against 66 - 2/3 percent under the individual guarantee.

          Banks which opt for the WTPCG are eligible for similar concessions under the export production finance guarantees and the export finance guarantee. These concessions are also available in respect of advances against contracts for supplies on deferred terms and for construction works; but the banks have to obtain separate guarantees for such advances.

ii.        Export Production Finance Guarantee

          The purpose of this guarantee is to enable banks to sanction advances at the pre-shipment stage to the extent of the cost of production when it exceeds the f.o.b. value of the contract / order, the difference representing the incentives receivable. The extent of cover and the premium are the same as for packing credit guarantees. 

iii.       Post-Shipment Export Credit Guarantee 

          Post-Shipment finance given to exporters by banks through purchase, negotiation or discount of export bills or advances against such bills qualifies for this guarantee. It is necessary, however, that the exporter concerned should hold shipment documents or a contract policy of the ECGC to cover the overseas credit risks. The premium rate for this guarantee is 5 paise per Rs.100 per month. This guarantee is issued on a whole turnover basis as well, offering a higher percentage of cover at reduced rate of premium. The percentage of cover under the whole turnover post-shipment guarantee is 85 for advances granted to exporters holding an ECGC policy. Advances to non - policy holders are also covered, the percentage of cover being 60. The premium rate is 2 paise per Rs.100 per month if advances against L/C bills are also covered under the guarantee ; otherwise it is 2.5 paise. 

iv.       Export Finance Guarantee 

          This guarantee covers the post-shipment advances granted by banks to exporters against export incentives receivable in the form of cash assistance, duty drawback, etc. The premium rate for this guarantee is 7.5 paise per Rs.100 per month and the cover is 75 percent.

v.         Export Performance Guarantee 

          Exporters are often called upon to execute bonds, duly guaranteed by an Indian Bank, at various stages of the export business. An exporter who desires to quote for a foreign tender may have to furnished an and guarantee for the bid-bond. If he wins the contract. 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. Further in order to obtain import licences for raw materials or capital goods, exporters may have to execute an undertaking to export goods of a specified value within a stipulated period of time duly supported by bank guarantees. Bank guarantees are also furnished by exporters to the customs, 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. Exporters furnish guarantees in support of their export obligations to Export Promotion Councils, Commodity Boards, the State Trading Corporation of India, the Minerals and Metals Trading Corporation of India, or recognised export houses. To provide protection to banks which issue the above types of guarantees, the ECGC has evolved the export performance guarantees. 

          An export proposition may be frustrated if the exporter's bank is unwilling to issue the guarantee. The export performance guarantee is designed to meet such situations. The guarantee, which is in the nature of a counter-guarantee to the bank, is issued to protect the bank against the losses it may suffer on account of guarantees given by it (the bank) on behalf of exporters. This protection is intended to encourage banks to give guarantees on a liberal basis for export purposes.

          The premium rate for the guarantee is 7.5 paise for Rs.100 per month. Normally, cover is extended upto 75 percent of the loss ; but for guarantees in connection with bid - bonds, performance bonds, advance payment and local finance guarantees and guarantees in lieu of retention money, the cover may be increased upto 90 percent, subject to a proportionate increase in the premium.In the event of the invocation of the guarantees by the foreign beneficiary, banks can lodge a claim immediately after they pay the amount guaranteed, and call on the exporter for reimbursement. In other cases, the claim is admitted after a waiting period of four months. As a measure of relief of exporters engaged in international bidding, the ECGC allows a rebate of 75 percent in the premium paid in all cases of unsuccessful bids. 

D.        SPECIAL SCHEMES FOR SMALL - SCALE EXPORTERS 

i.          For Small - Scale Export 

          With a view to enabling the small - scale sector to participate to a great extent in the export activities of the country. The ECGC provides special facilities to small - scale exporters by offering a higher percentage of cover under its policies and guarantees, and a relaxation in its procedural formalities. 

          These facilities apply to exporters whose annual export turnover is not valued at more than Rs.10 lakhs and the total turnover, including exports, does not exceed Rs.25 lakhs. Also, small - scale industrial units, as defined by the Government of India (that is, those whose annual exports do not exceed Rs.10 lakhs), shall be deemed to be small - scale exporters even though their total turnover may exceed Rs.25 lakhs. Further, the exports made by qualifying small - scale exporters through co-operatives of artisans, co-operatives or associations or consortia of small - scale industries, handloom and handicrafts export corporations, state small - scale industries corporations and national small industries corporation are also eligible for these special facilities. 

          The main facilities provided under the scheme are: Higher cover of 90 percent for banks under the whole turnover packing credit guarantee; and higher cover 90 percent under the whole turnover post-shipment export credit guarantee for exporters who have taken ECGC contracts/shipments policies and 65 percent cover for non-policy holders. Cover under a standard policy is increased to 95 percent against commeresal risks and 100 poercent against political risks, provided that the maximum liability under the policy does not exceed Rs.5 lakhs. The waiting period for the payment of all types of claims is reduced to half the normal stipulated period. Cabled reports on foreigh buyers may be obtained wherever necessary, free of cost to exporters. 

(ii) Transfer Guarantee 

          When a bank in India adds its confirmation to a froeign letter or credit without any recourse to him provided that such drafts are drawn strictly in accordance with the terms of the letter of credit. The conforming bank will suffer a loss if the foreign bank fails to re-imburse it the amount paid to the exporter. This may happen due to the insolvency or default of the opening bank or due to certain political risk, such as war, transfer, delays or moratorium which may delay or prevent the transfer of funds to the bank in India. The Transfer Guarantee seeks to safeguard banks in India against losses arising out of such risks. It is issued, at the option of the bank, either to cover political risks alone, or to cover both political and commercial risks. A loss due to political risks is covered upto 90 percent and a lossdue to commerical risks upto 75 percent. Ther premium is charged at rates normally applicable to the Corporation's insurance policy covering the export of goods. 

(iii) Insurance Cover for Buyer's Credit & Lines of Credit 

          Financial institutions in India, like those in several other countries have started direct lending to buyers or financial institutions in developing countries for the import or machinery and equipment from India. 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 arising out of overseas credit risks.
          Financing may take the form of buyer's credit or line of credit. The buyer's credit is a loan extended by a financial institution, or a consortium of financial institutions, to the buyer to enable him to finance a particular export contract. Under the line of credit a loan is extended to the government or a financial institution in the importing country to enable it to finance the import of specified items from the lending country. The ECGC has evolved schemes to protect financial institutions in India which extend these types of credit to finance exports from India. An insurance agreement is drawn up on a case-to-case basis, having regard to the terms of the credit. 

(iv) Joint Venture Insurance 

          As a result of the large-scale efforts made by the less developed countries to develop their economies through industrialisation, there has been a spurt in industrial projects and other infrastructrural works undertaken in those countries. This has opened up wide opportunities for industrially advanced countries to boost their export earnings by exporting projects and construction works abroad. By the very nature of the jobs, the exporters/contractors may have to enter into collaboration arrangement with parties in Third World countries for the execution of such projects by way of sub contracts of joint contracts. For the benefit of Indian entrepreneurs who enter into such collaborations, the ECGC has evolved suitable agreements with its counterparts to extend joint insurance facilities 

(v) Overseas Investment Insurance 

          With the increasing export of capital goods and turnkey projects from India, the involvement of exporters in capital participation in overseas projects has assumed importance. The developing countries, which are our main customers, suffer from the problem of scarcity of capital and managements skills, and may like to invite Indian participation in capital and management when large turnkey projects are set up. The exporter's participation in capital and management instills confidence in the buyer about the proper functioning of the project. 

          The ECGC has forumlated a scheme to provide protection for such investments. Any investment made by way of equlity capital or united loan for the purpose of setting up or expanding overseas projects is eligible for cover under investment insurance. The investments may be either in cash or in the form of the export of Indian capital goods and services. The cover is available for the original investment as well as the annual dividends and interest payable. The risks of war, expropriation, and restriction on remittances are covered under the scheme. As the investor has a hand in the management of the joint venture, no cover for commercial risk is provided under the scheme. For investment in any country to quality for investment insurance there should, preferably, be a bilateral agreement protecting the investment of one country in the other, or in the absence an investment protection code. The ECGC may consider offering a cover in the absence of any  agreement or code, provided that it is satisfied that the general laws of the country afford adequate protection to Indian investment. 

          The period of insurance cover does not normally exceed 15 years. For projects involving a long erection period, the cover may be extended for a period of 15 years from the date of the omplection of the project, subject to a maximum of 20 years from te date of the commencement of the investment. The amount insured shallbe reduced progressively in the last five years of theinsurance period. 

(vi) Exchange Fluctuation Risk Cover Schemes 

          The ECGC has recently introduced two new schemes, namely the Exchanges Flutuation Risk (Bid) Cover Scheme and the Exchange Fluctuataion Risk (Cover) Scheme, as approved by the government. These schemes are wide-ranging and are of considerable assistance to exporters engaged in the export of goods that involve deferred payment terms. Under the schemes, the exchange fluctuation risk is protected from the date of the bid. When the contract is won, the exporter-contractor is given the option to have the exchange rate as on the date of bid or as on the date of the contract, whichever is more advantageous to him as the referecne rate for the purpose of indemnification by the Corporation. If the bid is not won, 75 percent of the premium is refunded. The bid cover is provided for a maximum period of 12 months; but it may be extended. The contract cover is available for contracts with payments going beyond 12 months, with a maximum period of 15 years. Any instalment payable during the first 12 months is also to be covered in such cases. The cover is available for all amounts receivable in India in foreign currency under the contract. Besides supply contracts may be covered under the schemes. While the pound sterling, the US dollar, the Deutschemark, the Japanese yen, the French franc and the Swiss franc have been specified, cover may be considered for any other convertible surrencies approved by the government. Contracts falling under the buyer's credit and lines of credit arrangements may also be covered. 

          While the cover is normally provided along with credit insurance, there is any independent provision for exchange fluctuationcover. The exprter has the option to discontinue the cover by giving due notice to the coporation. There is a provision for the payment of the premium on instalment basis. In accordance with international practice, a franschise of two percent is provided for, under which the exporter has to bear the loss of the first two percent and has also to receive the benefit of the profit of the first two percent. Losses exceeding two percent and upto 35 percent loss in excess of 35 percent and any profit of more than 35 percent. Any loss in excess of 35 percent and any profit of more than 35 percen with reference to the agreed rate is to the account of exporter. The profit between 2 percent and 35 percent of the agreed rate is payable to the Corporation. The premium rate under both the schemes is fixed at 40 paise per Rs.100 per yest, chargeable on a quarterly basis. 

Two New Schemes 

          The Corporation has recently introduced two new schemes, namely, Service (Comprehensive Risks) Policy and Services (Political Risks) Policy. At present, the Corporation is covering comprising technical or professional, royalties, hiring and leasing under its specific services policies. These policies cover individual contracts on a case=to-case basis. The new schemes will cover risks after the services are rendered by exporters who provide technical services and who are engaged in recruiting high value professionals for services in countries all over the world. These schemes will also provide cover to organisations who provide technical services by way of export of consultancy in projects. 

          The distinct features of these schemes are that the cover is being offered to a consultant on a whole turnover basis i.e., an exporter need not approach the Corporation individually for cover on each of the contracts. The contracts which are not represented by formal written documents but evidenced by letters, telex-messages, memoranda recording, telephone conversation recording and such other evidence may also qualify for cover subject to the terms and conditions specified in these schemes. The Corporation's liability towards claims will be limited to the extent of the maximum liability which will be determined in respect of each policy-holder. 

          While credit limits will be fixed by the Corporation in respect of each overseas employer/buyer, the consultant is given the discretion upto a limit of Rs.25,000 to accept business as long as the consultant has dealt with such employer/buyer, in the past and has had satisfactory performance record, as provided in the policy.

          Export of services to countries in the restricted cover category may be eligible for cover subject to the Corporation's prior permission being obtained. The premium rates applicable to short-term export transactions as in the case of standard shipments policy shall apply under this scheme. The area for which the services have been rendered abroad are diverse and varied covering irrigation, architecture civil engineering, construction management projects, highways, roads, textile mills, paper and pulp mills, transport facilities and repair workshops, steel pipeline projects, sugar plants, railway network, computer software, agriculture and agro-based industries, management information systems, financial management and other related services.

1.4      EXIM (EXPORT AND IMPORT) BANK

          Establishment of an Export-Import Bank (EXIM) is a long felt need for India. The need arises out of the absence of a comprehensive package of facilities to the exporter with least difficulty. Further the existing institutions are not in a position to enter into international banking on a large scale. The following points are put forward for the establishment of an EXIM bank for India.

1.        Multiplicity of Institutions  

          There are a number of institutions like commercial banks, IDBI, ECGC, etc, which are engaged in provision of one facility or other to exporters. Apart from the fact that an exporter has to comply with the cumbersome procedures of these institutions, the cost of export increases. This places the exports from India at a disadvantageous position while competing with exports from other countries with comparatively lesser cost.

2.        Inadequate facilities  

          Though there are a number of institutions engaged in export financing, none is able to meet fully the requirements of exporters. For the commercial banks which are the prime source of short-term finance for exports, this is only one of the multitude of sector and national priorities to concentrate in a large scale on exports sector which requires adequate professionally skilled manpower and huge financial resources comparable with other international banks. IDBI finances deferred payments exports but such exports constitute only a small portion of the total exports from India. Most of the exports from India are traditional and consumer items which require large flow of short-term funds. ECGC concentrates only on providing credit insurance. RBI's role is mainly confined to formulation of export policies and administration of exchange control. Therefore there is need for an institution which could make available at one place all the facilities in adequate measure and with least delay. In this respect the existing arrangement of the working group with IDBi as a focal point does serve a good purpose; but, at least, this can only be a temporary arrangement

3.        Capital Base of Indian Banks

          Indian banks do not command adequate confidence in international markets due to lower capital base. The fact that the banks are government owned does not make any impact on the market rating because main reliance is placed on the capital deposit ratio and the amount of capital in credit rating. The remedy therefore lies in increasing the capital of all banks in India. An easier solution would be to establish a single institution with adequate capital.

4.        Foreign branches of Indian Bank

          Existence of branches of Indian banks in foreign countries would improve their efficiency and reduce cost of handling foreign exchange transactions. But Indian banks have few branches abroad. Even the branches operating in foreign countries find it difficult to complete effectively with other giant banks in the financial centers due to absence of a network of branches.

5.        Cost of Exchange Dealings

          At present about 60 banks in Indian deal in foreign exchange each with its own arrangement for position maintaining in foreign currencies. Many banks are public sector units and exchange trading between them is only a technical exercise which from the national point of view is unnecessary and counterproductive. When the transactions are concentrated in a single institution, matching of transactions would be easier and multiplicity of foreign currency accounts maintained abroad can be minimixed. With adequate sources such an EXIM bank can open dealing rooms abroad at important financial centers which would afford cover to the exchange dealings at all time and at a most profitable margin

Establishment of Exim Bank

          The EXIM bank is an outcome of the recommendations of several committees and study groups, such as the Alexander Committee on Exports Imports 1977, the Tandon Committee on Exports 1980, the study group of the Indian Institute of Foreign Trade etc. The Government of India introduced a bill in the Lok Sabha on May 8, 1981, for the setting up of Export Import Bank of India. The Bill was passed on August 18, 1981. It is a statutory corporation.

Functions of EXIM Bank of India

The functions of the bank includes :

1.       Financing of exports from and imports into, not only India, but also third countries, of goods and services;

2.       Financing of export and import of machinery and equipment on lease basis;

3.       Financing of joint ventures in foreign countries;

4.       Providing loans to an Indian party so as to enable it to contribute to the share capital of joint ventures in a foreign country;

5.       Undertaking limited (international) merchant banking functions such as underwriting of stocks, shares, bonds, etc.

6.       Developing and financing export oriented industries.

7.       Undertaking transactions involving a combination of government to government and commercial credit for the purpose of exort and import;

8.       Giving lines of credit to foreign governments and foreign financial institutions in developing countries by participation in the share capital of such institutions;

9.       Providing refinance facilities to commercial banks by discounting export bills;

10.     Underwriting certain types of transactions in all permissible currencies which are incidental to its normal functions :

11.     Conducting techno - marketing studies with a view to promoting exports ; and

12.     Co-ordinating the working of institutions engaged in financing and importing goods and services to promote the country's international trade.

Financial Resource of the Bank

          Initially the bank has an authorised capital of Rs.200 crores which is to be increased to 500 crores in course of time. The initial subscribed and paid-up capital is 50 crores which was paid entirely by the Government of India.

          In case of need the bank would raise funds in foreign currents in India or in international financial markets. Recently the bank supplemented its resources by borrowing $25 million from the Eurocurrency market to finance the foreign currency requirements of exports of capital goods and projects.

          The bank is exempted from paying income tax and all other taxes on income, profit or gains on the lines of exemptions given to the RBI and IDBI. The Export Development Fund, to be set up within the bank would be utilised for the purposes of research, training, survey and market intelligence relating to India's international trade.

Schemes of Assistance

          The present focus of the EXIM Bank is on medium term and long term creditors. Deferred export credit is available for the sale of machinery, manufactured goods and related services. Such credit may be in the form of "Supplier's Credit" or "Buyer's Credit". Supplier's credit arises when an Indian exporter extends credit to the overseas buyers and finances himself through the EXIM bank. Deferred export credit takes the form of Buyer's credit when the EXIM bank extends credit directly to the buyer

Loan to Indian Companies

Direct financial assistance to exporters

          Funds are provided on deferred payment terms, to Indian exporters of plant, equipments and related services, which enables the exporter to extend deferred credit to the overseas buyer. The programme covers projects of exports which could be turnkey projects, construction projects. Such project exports arise when an Indian company contracts either to set up on a turnkey basis any textile mill, sugar plant or contract construction project overseas. Financing export of eligible goods to be covered under this programme.

Consultancy and technology services

           Indian companies can borrow funds from EXIM bank and provide deferred credit to overseas buyers of Indian Consultancy for technology services.

Overseas investment financing

           The bank provides financing where an Indian company establishes a joint venture overseas and requires funds towards equity participation.

Pre-shipment credit

           The programme is available for companies that have won export contract for the eligible goods and are seeking finance to produce the goods which entails a production period exceeding six months

Loans to Foreign Government, Companies and Financial

Institutions Overseas buyer's credit

           This is offered directly to foreign importers for the import of eligible Indian goods and related services with repayment terms spread over a period of one year.

Lines of credit to foreign Government

           Besides foreign governments such lines of credit are available to foreign financial institutions. Such lines provide long-term finance for import of Indian capital goods and related services.

Relenting facility to banks overseas

           Relenting facility to banks overseas is made available to enable them to provide term finance to importers, for import of Indian capital goods. Banks overseas would intermediate between foreign buyer and Exim bank, and the latter would intermediate with the supplier.

Loans to Commercial Banks in India

Export bills rediscounting 

          This lending programme is available to commercial banks in India, who are authorised to deal in foreign exchange. Such banks a can rediscount their short-term usance export bills portfolio with Exim bank. Exim bank provides funds under this programme, for a period of 90 days against export bills that have equal period to run, before realisation.

Refinance of export credit  

          Under this programme, commercial banks, in India, who are authorised to deal in foreign exchange, can obtain from Exim bank 100 percent refinance of term loans extended for export of eligible Indian goods. Such credit enables contract upto Rs.10 million, can alone be brought under this programme. For contracts above Rs.10 million, commercial banks can obtain financing participation under Exim Bank's other programmes, including Risk Syndication facility.

Guaranteeing of Obligations

          The Guarantee programme is available in the case of construction and turnkey contracts. Construction contracts involve erection, civil works and commissioning. In a turnkey contract, say for setting up of a textile mill, supply of equipment accounts for major value of the contract. In such contracts, an Indian exporter usually requires bid bond, advance payment guarantee, performance guarantee, guarantee for retention money and guarantee for borrowings abroad. Exim bank participates with commercial banks in India, in the issue of guarantees.

FACILITIES FOR EXPORTERS OF ENGINEERING GOODS AND TURNKEY PROJECT EXPORTERS

          Deferred payment exports arise when the export proceeds are to be received beyond six months from the date of shipment (in case of exports to Afghanistan and Pakistan, beyond three months). Turnkey projects are those which involve rendering of services like design, civil construction, erection and commissioning of plant along with supply of equipment. Typically projects include supply, erection and commissioning of equipment for generation, transmission and distribution of power and plants for manufacturer of cement, sugar, textiles, chemicals, etc

          When an Indian exporter extends deferred credit directly to the overseas buyer, the export contract falls under the category of "Supplier's Credit". On the other hand, if a foreign buyers is offered credit by a financial institution or a consortium of financial institutions in India and the Indian exporter is paid the export value by the institution(s) concerned, the relative export contract falls under the category of "Buyer's Credit".

Funded Facilities

Supplier's Credit

           Credit is provided by the Exim Bank on deferred payment basis, in participation with commercial banks, to Indian exporters of engineering goods and turnkey projects to enable them to extend credit to importers overseas. Where individual contract value is not more than Rs.1 crore, banks may provide the credit and avail 100 percent refinance from the Exim Bank.

Overseas Buyer's Credit

           As an alternative to Supplier's Credit availed by the exporters, credit is extended by the Exim Bank to buyers abroad, with a view to enable the latter to import engineering goods and projects from India, on deferred credit terms. Credit to overseas buyers is also available from the Exim bank in the form of Lines of Credit to overseas financial institutions, foreign Governments and agencies, and relenting facility to overseas banks.

Pre-Shipment Credit

           Credit is available to eligible exporters to buy raw materials and inputs required to produce capital equipment that has to be exported. Exim Bank's participation in the credit of the requirements is for a period of more than 180 days.

Foreign Currency Loans  

          Foreign currency loans can be availed of from the Exim Bank at market rates to cover purchase/procurement of machinery from third countries

Technology and Consultancy Services Finance

           Credit is available to eligible Indian exporters of technology and consultancy services to enable them to extend term credit to importers overseas.

Non - Funded Facilities

          Exporters of engineering goods and turnkey projects abroad are also provided the following facilities :

          a.       issue of Bid Bonds ;

          b.       issue of Advance Payment Guarantees;

          c.       issue of Performance Guarantees ;

          d.       issue of Guarantees for release of Retention Money ; and

          e.       issue of Guarantees for raising Borrowing Overseas.

FACILITIES TO OVERSEAS CONSTRUCTION PROJECT EXPORTS

          Construction projects involve civil work, steel structural works, as well as design, equipment supply, erection and commissioning. Typical projects include electrification and utility, power transmission, pipelines, water resource management systems, airports, roads, bridges, hotels, housing and erection of industrial plants. The Exim Bank offers funded, non - funded and advisory services to Indian construction project exporters.

Funded Facilities

Pre-shipment Credit

           The Exim Bank finances the exports from Indian and the preliminary expenses in rupees relating to the execution of the project. Commercial banks also extend this facility for definite periods at confessional rates of interest

Post-shipment Rupee Credit  

          The Exim Bank enables financing of exports until progress payments are received. Commercial banks extend this facility at confessional rates of interest.

Foreign Currency Loan

           Foreign currency loan can be availed of form the Exim Bank, at market rates, to cover purchases / procurement of machinery from third countries.

Deferred Credit

           The Exim Bank provides deferred credit facilities against security for a portion of the contract covering export of selected items and technical services from India.

Non - Funded Facilitie

          Exporters of construction projects overseas are also provided the following facilities :

          a.       issue of Bid Bonds :

          b.       issue of Advance Payment Guarantees;

          c.       issue of Performance Guarantees ;

          d.       issue of Guarantees for release of Retention Money ; and

          e.       issue of Guarantees for raising Borrowing Overseas.

          Exporters are encourage to avail of Exim Bank's advisory services with regard to opportunities in new markets and information on various countries.

Consultancy and Technology Services Finance

          Indian companies executing overseas contracts, involving consultancy and technology services, can avail of Exim Bank's financing programme with a view to offer deferred payment terms to their clients. This enlarges the market for export of Indian consultancy services. The consultancy and technology services for this purpose include :

          a.       providing personnel including skilled and unskilled workmen and persons for rendering technical or other services;

          b.       transfer of technology, know how, expertise or other skills;

          c.       furnishing any information, blue - prints, plants or advice ; and

          d.       any other activity considered acceptable by the Exim Bank.

          Indian consultants, having corporate status or otherwise, who have secured a contract for export of services wherein deferred payment terms need to be offered to the client, can utilise the facility.

Lines of Credit

          Exim Bank extends lines of credit to overseas Governments or agencies nominated by them to enable buyers in these countries to import capital engineering goods, from India on deferred payment terms. This facility enables Indian exporters to offer deferred credit terms to customers in those countries as per terms and conditions already negotiated between the Exim Bank against negotiation of shipping documents without recourse to the exporters.

Facilities for Syndication of Export Credit Risks

          Commercial banks, in participation with Exim Bank, provide long - terms credit, at competitive rates of interest, to Indian exporters of capital goods, turnkey projects and consultancy services, thereby enabling Indian exporters to compete effectively in the international markets

          The facility for syndication of term export credit risks lends flexibility to the export credit mechanism by allowing banks to assume risks, without blocking their funds for long terms, at fixed interest rates. Commercial banks can now support export proposals without impairing their liquidity. Commercial banks seeking enhancement in their export portfolio can avail of this facility and participate in the syndication arrangement.

Facilities for Deemed Exports

          "Deemed Exports" occur in case of specified transactions within India which result in foreign exchange earnings or foreign exchange savings.

          Deemed export involving supply of capital goods and other eligible goods have access to the Exim Bank's deferred credit facility at internationally competitive interest rates. Exim bank extends credit through the supplier or directly to the buyer. Intermediating Bank / institutions can also avail of refinance facility from the Exim Bank covering the full value of the term credit. Exim Bank may, in addition, provide pre-shipment (working capital), facility, normally for large transactions involving long manufacturing cycle time.

          Other facilities available from the Exim Bank relating to "deemed exports" include issue to guarantees and bridge financing in foreign currency. These facilities are normally availed of by project exporters.

Advisory Services

          Through its International Merchant Banking Division, the Exim Bank offers the following advisory services :

          a.       work closely with Indian companies in designing financing packages for joint ventures in third countries;

          b.       advise Indian companies executing contracts abroad on sources of favorable financing overseas;

          c.       providing access to Euro-financing sources and global credit sources to Indian companies engaged in exports ;

          d.       advise and design control practices globally ; and

          e.       advise and design financial packages for export - oriented industries in India.

          These services are being added to in order that tailor made financing packages for high value export contracts are available.

Forward Cover for Trade

          The possibility of the Exim Bank of India creating a medium term forward cover market on its carrying a predominant portion of export receivables was hinted at by Mr.Kalyan Banerji, Chairman and Managing Director, Exim Bank of India. This, of course, implied the co-operations of importers, exporters as well as the financial institutions. The hope was that the Bank in the near future should be able to design a scheme to offer forward cover for one to five years to Indian importers and exporters in co-operation with the financial institutions who carried the major portion of the deferred import payables. Dealings in the global market now bore the characterization of a tumultuous stock market. Therefore, for corporations that export, import and operate abroad, currency swings could render the product prices uncompetitive or destroy profits when they were translated into a company's home currency.

          However, exporters should not look to currency fluctuations in a trade transaction for profits. It was hardly part of a business firm's arena to take a view on a currency. It was best, therefore, to hedge whether through forward cover or other market mechanisms the risk of currency swings. The experience was that few exporters when they quoted in a foreign currency sought to cover their currency risks. This dimension of currency disk grow, all the more, when exports were on a deferred payment basis. In such cases, unless an exporter covered his currency risk, he laid himself open to a long period of currency risks. Like a product, a corporation, a currency also had a life cycle, ups and down.

Bridge Finance

          Exporters of engineering goods and civil construction projects have been complaining that the bridging finance, provided by commercial banks for civil construction contracts, erected the normal interest rate, which is high enough, and consequently the Indian bids often became over - priced. Therefore, they have been asking for a confessional rate of interest for such bridging finance. In order to meet this demand, the Exim Bank has agreed to consider providing bridging finance for civil construction contracts abroad at a confessional rate of interest. It has also offered to finance 100 percent of the f.o.b. value of exports, including freight charges, to a country where India has extended a line of credit, provided that the entire shipment is made in national carriers.

          It must be said to the credit of the Exim Bank that it has continued to expand its activities at a rapid pace notwithstanding the various constraints under which it has been functioning. During a period of credit squeeze, it is difficult for commercial banks to find large export orders because of the paucity of funds and low earnings from export credit. In order to overcome this difficulty, the Exim Bank has decided to take care of the funding matter, provided that the banks are ready to shoulder the risk, or at least to share it with the Exim Bank. At a recent meeting of the Bengal Nation Chamber of Commerce, the Chairman and Managing Director of the Exim Bank noted that there was no limit as such to the extent to which the bank would provide funds in such cases. That would be determined on the merit of each case, depending on the size of the order, the exporter's standing, and the guarantee back-up. He also pointed out that the Exim Bank might work as the focal point for providing the necessary finance to 100 percent export units which according to him had been found to be nobody's baby on many occasions

Merchant Banking Division

          Apart from introducing various types of financial facilities, the Exim Bank has started work on the development aspects of exports, which is very necessary in today's uncertain economic environment. It has finaliser the arrangements for setting up a merchant banking division and a until dealing in foreign currency. The merchant banking division of the Exim Bank caters to the requirements of the borrowers for reliable and comprehensive data on various countries in the absence of which borrowers find it rather difficult to evaluate the tender, the country and the economic problems that may crop up on the way.

          The foreign currency unit has become important in view of the Exim Bank's decision to accept contracts in foreign currencies. To make Indian exports more competitive, it has decided to accept export quotations it approved foreign currencies. Under its new scheme, exporters would be paid the rupee value of the contracts, but the Exim Bank will receive the payment from the borrowers/importers in foreign exchange over a period of time, for which the credit has been extended. In such a situation, the Exim Bank might come to have different foreign currencies disproportionate to its requirements. Therefore, there will be a need for in to keep buying and selling different currencies, depending upon what it has and what it needs, and how much of each. In today's world, when the exchange rates of different currencies move violently on a daily basis, the need for a unit dealing in exchange probably cannot be over - emphasized.

Tie-up with Regional / Global Institutions

          The Exim Bank also plans to tie-up its operations with similarly institutions in other countries and global and regional institutions in order to make its operations more diversified. It has established strong contracts with different international institutions, like the World Bank and the Asian Development Bank, so that it is possible for it now to collect information on different tenders and export opportunities and pass it on to Indian exporters in advance. Such information will be sent to exporters through different associations, and also individually to important exporters, so that they may submit tenders for the projects in those countries.

          At important development that should boost the Exim Bank's standing in the would community of similar institutions is that the Export-Import Bank of the United States ha spicked up the Exim Bank as an "Ideal partner" in the promotion of joint ventures in other countries. The initiative has been taken at the level of none other than the U.S. Exim Bank Chief, Mr.William Draper, who was in India recently. The arrangement will enable American promoters to profitably utilise Indian skilled personnel.


CHAPTER - 4

EXPORT FINANCE

          Export finance is a short term, working capital finance allowed to an exporter. An exporter may avail financial assistance from any bank provided following two conditions are satisfied :

i.        Funds should be available to the exporter at the required time: To ensure availability of funds to eligible borrowers; Reserve Bank has prescribed time schedule to Commercial Banks for speedy sanctioning of export credit limits. Further, banks are advised that 12% of their total credit should be under export finance.

ii.       Cost of the funds should be affordable : In order compete in the International market exporter may require credit facility at the cheapest interest rate. Since Interest subsidy has been withdrawn from 1991, new products (export finance schemes) are available to the exporters at the cheapest interest rates.

REGULATIONS RELATING TO EXPORT FIANCE

          When a commercial bank deals in export finance it is bound by the following guidelines/regulations :

          a.       Reserve Banks Guidelines

                   -         Exchange Control Regulations - FEMA 1999

                   -         IECD guidelines

                   -         DBOD guidelines

          b.       Trade Control Regulations. (Exim Policy 1997-2002)

          c.       International Chambers of Commerce (ICC) guidelines - UCPDC - ICC 500 & URC - ICC 522

          d.       Export Credit Guarantee Corporation guidelines

          e.       FEDAI guidelines.

DIFFERENT STAGES OF EXPORT FINANCE

         Pre-shipment Finance : An exporter may need financial assistance for execution of an export order from the date of receipt of an export order till the date of realisation of the export proceeds at any stage. Financial assistance extended to the exporter from the date of receipt of export order till the date of shipment is known as Pre-shipment credit. Pre-shipment finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of good meant for exports.

          Credit facility extended to an exporter from the date of shipment of goods till the realisation of the export proceeds is known as Post-shipment credit.

TYPES OF PRE-SHIPMENT FINANCE

          i.        Packing credit

          ii.       Advances against receivables form the Government like duty drawback, etc.

          iii.       Advance against cheques/drafts received as Advance payment

TYPES OF POST-SHIPMENT FINANCE

          i.        Export bills purchased/negotiated/discounted.

          ii.       Advances against bills sent on collection basis.

          iii.       Advances against exports on consignment basis.

          iv.      Advances against undrawn balances.

          v.       Advances against Duty Drawback

OPERATIONAL FEATURES OF EXPORT FINANCE

            RBI guidelines for sanctioning Export Finance by Commercial Bank

          Following factors will be taken into consideration by the bank while sanctioning credit limits to an exporter

a.       Banks should meet the genuine credit requirements of the export sector promptly and in full. They should review their internal arrangements and take such action as is necessary, including delegating enough powers to Branch Managers/Regional Managers to dispose of export credit proposals promptly and ensure smooth not be raised in piecemeal or information sought at various stages, leading to delays in extending credit.

b.       Banks may adopt a flexible attitude with regard to debt-equity ratio; margin and security norms but there could be no compromise in respect of viability of the proposal and the integrity of the borrower.

c.       Exporters should be able to satisfy their banker about their capacity to execute the orders within the stipulated time and have proper expertise to manage the export business.

d.       The quantum of finance sought for should commensurate with the expected export turnover and the cost of inputs required.

e.       If the exports will be covered under letters of credits, banks would need to be satisfied about the standing of the credit opening bank and also the acceptability of the conditions specified in the credit.

f.        Where exports are not covered by Letters of Credit and will be on the basis of firm contracts, banks may insist for obtaining a satisfactory status report on the buyer's capacity

g.       Banks may also look into the regulations, the political and financial conditions of the buyer's country.

h.       While sanctioning fresh facility, it is should be noted that sanctioning authority should sanction the facility, if found feasible, within 45 days from date of receipt of the application. Renewal of limits to be considered within 30 days and ad-hoc limits within 15 days from date of receipt of the application. To ensure that the exporter should not miss export of worthwhile order due to non-availability of bank finance, rejections of export proposals should be done by the next higher authority to the sanctioning authority. Bank's internal Audit and Inspection teams are required to comment specifically on timely sanction of export credit limits.

i.        Exporter's credit requirements at pre and post shipment stages are to be considered in total.

DIFFERENT STAGES OF EXPORT FINANCE

Appraisal & sanction of Export Finance Credit Limits                      

          Pre-shipment finance generally known as Packing Credit is essentially a working capital advance made available for the specific purpose of procuring/processing/manufacturing of goods meant for export. All costs prior to shipment would be eligible for being financed under Packing Credit. Advance should be liquidated from the export proceeds (exempted category separately discussed)

          While considering credit facilities for export activities, in addition to the normal routine appraisal, bank should specifically look into the aspect of the Product profile, Country Profile and the Commodity Profile. Moreover, the bank should also look into the status report on the prospective buyer with whom our exporter proposes to deal. To get a status report on the buyer, the services of ECGC or any of international consultants like Dun & Bradstreet can be engaged.

          At the time of appraising an export credit proposal a commercial banker is obliged to comply with the following regulations:

Under Exchange Control Regulations - FEMA

a.       Exporter should be regular customer, bonafide exporter and have a good standing in the market.

b.       Exporter should not be under the cautionlist of RBI. 

Under Exim Policy (1997 - 2002) 

a.       Exporter should have an IE Code number allotted by DGFT. 

b.       Goods must be freely exportable i.e., should not be classified as banned/canalised/restricted. If it is restricted there should be a valid license allowing the export. This information will be available from Exim Policy 1997-2002 Volume II - Handbook of Procedures. Under this chapter, an unique identification code number has been allotted for each item know as ITC HS Code Number and the relevant information regarding the exportability of the goods will be specified against this number. If the commodity falls under quota system, proper quota should have been granted. 

c.       Country with which the prospective exporter wants to trade should not be under the list of trade barrier. As on date we have trade barrier with Iraq. But under a specific trade agreement between the two countries and also under United Nations special programme exports to Iraq is permitted.

Under Export Credit Guarantee Corporation (ECGC) guidelines:

          Since most of the banks have taken guarantees with ECGC covering their export finance at Pre-shipment and at Post shipment stages through Whole Turnover Packing Credit Guarantee and Whole Turnover Post Shipment Guarantee, it is obligatory on the part of Banker to verify whether:

a.       Party to whom the bank proposes to extend credit facility is not under ECGC's Specific Approval List (SAL).

b.       Country with which the exporter wants to deal should not be under the Restricted Cover Countries (RCC).

c.       Limit proposed to be sanctioned should be within the Discretionary Limit prescribed by ECGC per borrower for the bank. In case, if the proposed sanctioned limit exceeds the Discretionary limit fixed by ECGC and the exporter's account falls under "Standard Asset", the branch can disburse but sanction details should be communicated to ECGC within 30 days from date of sanction.

d.       In case, if the sanctioned limit falls within the discretionary limit fixed by the ECGC the bank should ensure reporting of such sanctioned limit to ECGC within 30 days from date of sanction in the prescribed format.

e.       In case, the limit is sanctioned by the higher authorities or by a separate credit department, the disbursing branch must ensure notification of the sanction details to ECGC in the prescribed format within 30 days from date of receipt of sanction advice at their end.

DISBURSEMENT OF PACKING CREDIT ADVANCE

          After proper sanctioning of credit limits the disbursing branch should ensure :

a.       The exporter in terms of the sanction must have executed proper documents. Banks have their own set of documents that are to be obtained from the borrowers while extending credit facilities. In addition to the normal documents that will be executed in case of commercial domestic credits, in case of export finance, Export Credit agreement covering Packing Credit Advance and depending upon the mode of charge offered by the exporter and the terms of the sanction.

b.       Exporter should submit following documents at the time of availing Packing credit :

i.        Formal application for releasing packing credit with the undertaking to the effect that the exporter would ship the goods within the stipulated due date and submit the relevant shipping documents to the bank within the prescribed time limit.

ii.       Firm order to Letter of Credit or original cable/telex/fax messages exchanged between the exporter and the buyer.

iii.       License issued by DGFT if the merchandise to be exported falls under the restricted or canalized category under Exim Policy. Or if the item falls under any quota system, proper quota allotment.

          On the basis the above documents packing credit disbursements will be considered. There are certain special type of export activities which may be of seasonal in nature, in which exporter may not be able to produce the export order at the time of availing the packing credit. In these cases, a special Packing Credit facility, known as Running Account Packing credit, will be considered for sanction by the competent authority of the bank.

c.       Before disbursing Packing Credit the bank will scrutinize the application and the details submitted by the exporter. Following particulars should be recorded in the Packing Credit Application.

                   name of the buyer

                   commodity to the exported

                   quantity

                   value (either on FOB or CIF basis)

                   last date of shipment/negotiation

                   any other terms to be complied with

                   On the basis of the above particulars, bank will be fixing the quantum of finance and period of finance for this shipment.

d.       Quantum of finance will be fixed on the FOB (Free One Board) value of the contract/LC or on the domestic value of the goods whichever is lower Normally Insurance and Freight charges will not be financed at the initial stage of disbursement. If the exporter wants to avail advance against Insurance and freight charges, that may be considered at the later stage of the pre-shipment operations when the consignment is ready for shipment.

          If the contract or the LC is on CIF basis, the FOB value will be arrived at by deducting 15% (representing freight and insurance charges) from the CIF value if the despatch is through sea and around 25% if the despatch is by air. After arriving at the FOB value the usual margin i.e., profit margin stipulated in the sanction terms to be reduced.

          There may be cases where :

          i.        Packing credit advance may be required to the extend of domestic market value of the goods even though such value is higher than the FOB value of the export order/LC value. In this case, the advance will be covered by receivables from Govt. of India and should be liquidated from the receivables from Govt. of India. Advance allowed against duty receivables incentives at pre-shipment stage should be covered under ECGC's "Export Production Finance Guarantee".

          ii.       Packing credit advance can be more than the LC or contract value where the exporter may be getting some by-products such as oil and oil cakes. The exporter will dispose off the by-products in the local market. In this case, the entire advance will be treated as export finance and concessional rate of interest will be applicable to this excess portion only upto 30 days from date of advance (which will be liquidated with the local sale proceeds).

e.       Distribution are made only in stages and preferably not in cash. Payments will be made to the supplier directly by drafts/bankers cheques.

f.        The period for which a packing credit advance extended by a bank depends upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the relative goods. It is primarily for the bank to decide the period for which the packing credit advance may be given having regard to the various relevant circumstances, but it should be sufficient to enable the exporter to ship the goods. Normally this period should not exceed 180 days.

g.       For reasons beyond the control of the exporter, if the shipment could not be made within 180 days from the date of advance, a further extension of 90 days can be granted by the banks themselves without referring to Reserve bank. This extension will be considered by the appropriate authority in the bank subject to the following :

          -         Such extension should have been permitted by an amendment of the LC or the contract which was produced by the exporter at the initial stage of disbursement.

          -         Reasons represented for requesting extension should be genuine.

          Extension of any packing credit beyond 360 days requires ECGC's prior approval

          If a packing credit advance is sanctioned for a specific period say 45 days and the exporter could not ship the goods within this 45 days, exporter must seek extension of such packing credit from the Authorised Dealer. If the exporter has not officially requested for extending the Packing credit and the relative export documents are submitted after 45 days, the period beyond 45 days till the date of submission of export documents will be treated as overdue period and looses concessional rate of interest for such period which was not officially extended.

          In view of the concessional element in the rate of interest on export credit, banks will keep a close watch on the end-use of the funds and ensure that pre-shipment credit is used for genuine requirements of exports. They will also monitor the progress made by the exporter in timely fulfillment of export orders.

FOLLOW UP OF PACKING CREDIT ADVANCES

a.         Submission of Stock Statement : Exporter should submit stock statement reporting the stocks, which are under pledge or hypothecation to the bank for securing the Packing Credit Advance. Frequency of submission of stock statement must be decided by the Bank at the time of sanctioning the Packing credit and should be adhered to, by the exporter. Q.Is return, should be submitted as per stipulation. 

b.         Physical inspection of stocks : Stocks pledged / hypothecated by the exporter must be duly inspected by the Bank at regular interval.

c.         Payment of ECGC Premium : Payment of monthly premium at 7 paise per Rs.100 on the monthly average debit products should be remitted to ECGC to the debut of exporter's account.

LIQUIDATION OF PACKING CREDIT ADVANCES

          Packing credit advance will always be liquidated with the export proceeds of the relevant shipment. At this stage the pre-shipment liability of the exporter will be covered into post shipment liability. 

          For any reasons, if export does not take place at all, the entire advance will be recovered at appropriate interest applicable to "Export credit not otherwise specified" plus 2% from the original date of advance.

          With the recent liberalisation and deregulation of interest rates, banks will have operational flexibility for liquidating packing credit advances as per RBI's guidelines issued with effect from 14.12.1994.

They are :

a.       The normal stipulation to liquidate the packing credit with export documents of the same export order against which Packing Credit was granted should be ensured. However, adjustment of packing credit can be allowed with export documents relating to any other order covering the same or any other commodity exported by the exporter. That is to say, substitution of commodity and substitution of the buyer can be allowed by the Bank himself without reference to Reserve Bank. 

b.       Existing packing credit may be liquidated with any other export proceeds against which no packing credit has been availed by the exporter. Bank should also ensure that the exporter has not availed any packing credit with any other bank against this export proceeds.

CRITERIA TO BE APPLIED FOR ALLOWING ABOVE RELAXATION 

          Even though Reserve Bank has now permitted the above relaxations for liquidating a Packing Credit advance, each bank has got their own conditions to extend this facility to the exporter customer. In general, the following conditions are observed while extending this facility to the exporter

          Bank should ensure that substitution is commercially necessary and unavoidable. The sanctioning authority must also satisfy himself abut the valid reasons as to why packing credit extended for shipment of a particular commodity cannot be liquidated in the normal method. It is suggested that as far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium. Further, following conditions should be fulfilled:

          -         Exporter should be a regular customer of the bank and should have a sound track record.

          -         Credit rating should be `A' : health code - 1: Standard Asset.

          -         Credit limit should have been reviewed annually.

          -         Prompt submission of QIS.

          -         Prompt realisation of export bills and overdue export bills outstanding should not be more than 5% of the total export proceeds realised in the previous calendar year.

OVERDUE PACKING CREDITS AND ECGC PROCEDURES

          If the borrower fails to pay the amount on due date/extended due date and bank considers it as overdue, an overdue report of advance will be made to concerned Regional/Branch office of ECGC in prescribed form within 30 days. If the overdue position persists, bank should take necessary steps to realize dues as per its usual recovery procedure and report the default to ECGC. This default report will be sent to concerned Regional/Branch office of ECGC in prescribed form within one month from date of recalling the advance or within 4 months from due date/extended due date of the loan amount whichever is earlier. Payment of ECGC premium may be discontinued after the month in which the default is reported to ECGC. If the exporter is reported insolvent premium need not be paid after the month in which insolvency of the exporter is reported to ECGC. 

          Bank will recover the overdues by liquidating the securities if any, available. Nursing programme may be initiated, if found feasible, with the consent of ECGC. If necessary is not possible back will prefer Claim under the WTPC Guarantee within 6 months from the date of report of default. 

SPECIAL CASES

a.         Packing credit to sub-supplier 

          Packing credit may be shared between an Export Order Holder (EOH) and the manufacturer of the goods on the basis of a disclaimer issued by the EOH to the effect that he has not availed / is not availing any credit facility against the portion of the order transferred in the name of the manufacturer. This letter of disclaimer may preferably countersigned by the banker of EOH. Banks may accordingly apportion between the EOH and sub-supplier, the permissible period of Packing Credit at concessional interest.

          Packing credit may be extended to the sub-supplier on the basis of an export order or letter of credit in the name of EOH. The banker to EOH may open inland LC specifying the goods to be supplied by the sub-supplier to EOH as a part of the export transaction. On the basis of such an LC the sub-supplier's banks may grant EPC to the sub-supplier to manufacture the components required for the goods to be exported.

          On supply of the goods, the LC opening bank will pay to the sub-supplier's banker against the inland documents received on the basis of inland LC opened. Such payments will thereafter become the EPC of EOH.

          The total period of Packing credit availed by the sub-suppliers individually or severally and the EOH will be within the normal cycle of production required of the exported goods. 

          Normally the total period will be computed from the date of first drawl of Packing Credit by any one of the sub-suppliers to the date of submission of export documents by EOH. 

          The EOH will be responsible for exporting the goods as per export order or overseas LC and any delay in the process will subject him to the penal provisions issued from time to time. 

          Once the sub-supplier makes available the goods as per inland LC terms to the EOH, his obligation of performance under the scheme will be treated, as complied with and penal provisions will be applicable to him for delay if any.

          The scheme is intended to cover the first stage of production cycle and is not to be extended to cover suppliers of raw materials / components etc. to the sub-suppliers. 

          The case EOH is merely a trading house, the facility will be available commencing from the manufacturer to whom the order has been passed on by the Trading house. 

          In case of PCFC granted to the manufacturer the amount may be repaid by transfer of PCFC availed of by the EOH or by discounting of bills under EBR. 

          Banks will however ensure that there is not double financing and the total period of PC does not exceed the actual cycle of production of the commodity.

b.        Running Account Facility 

          With effect from 14th March 1992 banks have been authorise to grant Pre-shipment advances for exports of any commodity without insisting on prior lodgment  of letters of credit/firm export orders under "Running Account" facility subject to the following conditions :

          The facility may be extended, provided the need for "Running Account" facility has been established by the exporters to the satisfaction of the bank.

          The banks may extend the "Running Account" facility only to those exporters whose track record is good.        

          In all the cases where Pre-shipment Credit "Running Account facility has been extended, letters of credit/firm orders should be produced within a reasonable period of time.

          In the case of commodities covered under Selective Credit Control, banks will insist for production of letters of credit/firm order within a period of one month from the date of sanction. 

          Banks will mark off individual export bills as and when they are received for negotiation / collection against the earliest outstanding pre-shipment credit on "First in First Out" (FIFO) basis. Banks will also ensure the Pre-shipment credit does not remain outstanding beyond 180 days from date of advance. 

c.         Packing Credit facilities to Deemed Exporters

          Deemed exports involving supplies made to IRD/IDA/ADB or any multilateral funds aided projects and programmes, under orders secured through global tenders for which payment will be made in free foreign exchange are eligible for concessional rate of interest facility both at pre and post supply stages. Packing credit can be extended to eligible deemed exporters on lines similar to physical exports with necessary precautions. Period of post-supply credit is restricted to 30 days in all such cases. It may be noted that export packing credit facilities will not be available to other categories of deemed exporters. 

d.         Pre-shipment Credit in foreign Currency (PCFC) 

          This facility will be an additional window available to the exporters along with the existing rupee packing credit. The facility will be available in all convertible currencies and the Scheme will cover cash exports only. 

          The scheme envisages banks extending PCFC to cover both the domestic as well as imported inputs, which will be used for the exports. The facility will generally be available for a period of 180 days on the basis of firm export order or irrevocable L/C. The source of funds to Banks will be foreign exchange funds available with them by way of balances in Exchange Earner's Foreign Currency Accounts (EEFC), Resident Foreign Currency Account (RFC) and Foreign Currency (Non-Resident) A/c (Banks) Scheme. 

          The banks have also been permitted to raise lines of credit abroad without prior permission of the Reserve Bank so long as the spread for their borrowing does no exceed 1% over 6 months LIBOR. The ultimate cost to the exporter will not exceed 2% over 6 months LIBOR excluding withholding tax. In case of Indian banks not having branches overseas the spread allowed is not exceeding 2 1/2% over LIBOR. 

          With effect from 18th May, 1994, Banks have been advised to extend `Running Account Facility' under PCFC Scheme also to all commodities on the same line of the facility available under rupee credit. Considering the large interest rate differential between rupee credit and foreign currency credit, the banks have been advised to introduce a system to closely monitor the production of firm order or L/C subsequently and also the end-use of the funds.

          In case of any early delivery beyond one month, banks will charge the exporters the funding cost, if any, involved in absorbing mismatches. 

e.         Packing Credit facilities for Consultancy Services 

          In the case of Consultancy services. Export will not involve in physical movement of goods out of Indian customs territory. In such  cases, pre-shipment finance at concessional rate of interest will be extended by banks to the exporters to enable them to undertake preliminary arrangements such as mobilizing technical personnel and other staff and training them. 

f.         Advance against cheques/drafts received as advance payment 

          If an exporter receives either a cheque or draft representing advance payment towards future exports and in case if a bank advances funds against the security of such instruments, this advance will be treated as export finance and only concessional rate of interest will be charged like a normal pre-shipment advance.

CHAPTER - 5
                                         
POST-SHIPMENT ADVANCE

          Post-shipment finance is essentially an advance against receivable, which will be in the form of shipping documents. The responsibility of a Bank will be felt more in case of post shipment advances because Reserve Bank will be monitoring the realisation of full proceeds of individual shipments. Some of the major exchange control regulations concerning export finance at the post shipment stage are as follows : 

a.       Exporter should have IEC No. and each shipment should accompany the prescribed declaration (GR/SDF/PP/SOFTEX) form in which the value of export will be declared and duly certified by the customs authority. 

b.       Shipping documents along with relative GR form must be submitted to and AD within 21 days form the date of shipment. If there is any genuine delay beyond the control of the exporter, AD has been delegated with powers to condone the delay and accept the shipping document even after 21 days form date of shipment. 

c.       The payment should be received in an approved manner within the prescribed time limit but within a maximum period of six months from the date of shipment. For realisation of export proceeds, countries all over the world has been divided into 2 groups i.e., Asian Clearing Union (ACU) and Non ACU countries, Exports to the group of ACU countries (Myanmar, Bangladesh, Pakistan, Iran and Sri Lanka) should be realised in ACU dollars (US Dollars). Other than ACU countries realisation of export proceeds can be in any freely convertible currencies.

DIFFERENT TYPES OF POST-SHIPMENT ADVANCES

          i.        Export Bills Purchased/Discounted.

          ii.       Export Bills Negotiated.

          iii.       Advance against export bills sent on collection basis.

          iv.      Advance against exports on consignment basis.

          v.       Advance against undrawn balances.

          vi.      Advance against Duty Drawback. 

i.          Exports Bills Purchased/Discounted - DA & DP bills : (other than L/C bills)

          The export bills, representing genuine international trade transactions, strictly drawn in terms of the sale contract/live firm contract/order may be discounted or purchased by banks. Proper limit should be sanctioned to the exporters for purchase of exports bills facility. Since the export is not covered under Letter of Credit, risk of non-payment may arise. The risk is more pronounced in case of documents under acceptance. In order to safeguard the interest of the bank and also the exporter, ECGC offers coverage of credit risks through their guarantees/policies at the post shipment stage. The bank will be normally covering the advance under Whole Turnover Post Shipment Guarantee scheme. In addition to this guarantee, exporter should go for a separate buyer wise policy also. By having this additional policy, wider coverage will be available to the exporter in case of any risk. 

ii.        Export Bills Negotiated : (Bills Drawn under letter of Credit)

          When export documents, drawn under LC, are presented to the bank for negotiation, they should be scrutinized carefully with the terms and conditions of the LC. The operation of Letter of Credit is governed by Uniform Customs & Practices for Documentary Credits (1993 Revision) of the International Chamber of Commerce, Brochure No.500.

          All the documents tendered should be strictly in accordance with the L/C terms. It is to be noted that the L/C issuing bank undertakes to honour its commitment only if the beneficiary submits the stipulated documents conforming to L/C terms. Every slightest deviation form those terms and conditions specified in the L/C can give an excuse to the issuing bank for refusing the payment to the negotiating bank which might have already been made to the beneficiary - i.e., the exporter, by the negotiating bank. 

Some of the discrepancies commonly observed are listed below : 

1.       Late negotiation - Submission of documents after the expiry of the L/C.

2.       Late shipment of goods.

3.       Late presentation of documents even when the L/C current-documents not submitted within the limitation period of specified in the LC or within 21 days from date of shipment. (Art 43 of UCPDC).

4.       Drawings in excess of L/C amount.

5.       Shipments made from and shipped to ports other than those stipulated in L/C.

6.       Partial shipments/Transshipments effected, not authorised by the L/C.

7.       Bill of lading AWB not properly signed, not properly dated and not properly stamped. Alterations, if any, not properly authenticated.

8.       Presentation of insufficient and/or incomplete set of B/L.

9.       Presentation of closed Bill of Lading/Received for Shipment Bill of Lading/Short Form Bill of Lading/Charter Party Bill of lading/when not permitted in the L/C.

10.     Presentation of Bill of Lading in which `On Board' endorsement not dated.

11.     Variations in the weight in the invoice and the weight list and other documents.

12.     Presentation of documents, like invoice, packing list, weight list, insurance certificate/policy, certificate of origin, inspection certificate, Bill of Lading/AWB that, are inconsistent with each other.

13.     Inadequate of insurance policy/certificate.

14.     Presentation of insurance documents unsigned, undated unstamped and drawn in a different currency other than the currency of the LC.

15.     Description of goods including charges in the invoice presented not authorised by L/C.

16.     Incomplete or incorrect Drafts/Bills of Exchange.

17.     Insufficient number of copies of various documents a called for in the L/C.

18.     Non-submission of certain documents as called for in the L/C.

          The above discrepancies, which are commonly found, should be considered as deviation from the terms and conditions of the L/C and the opening/issuing bank may refuse documents even if the discrepancies are not materially significant. 

iii.       Advance against export bills sent on collection basis

          At times, the exporter might have fully utilised bills limit and in certain cases the bills drawn under LC may have some discrepancies. In such cases the bills will be sent on collection basis. In some cases, the exporter himself may request for sending the bills on collection basis anticipating the strengthening of the foreign currency. Banks may allow advance against these collection bills to an exporter. Concessive rate of interest can be charged for this advance into the transit period in the case of DP bill and transit period + Usance Period + grace period (if any) in the case of Usance Bills. Beyond this period, the interest rate will be subject to the various rates prescribed by RBI depending upon the Usance of the bill.

iv.       Advance against goods sent on consignment basis

          Goods are exported on consignment basis at the risk of the exporter for sale abroad. Eventual remittance of sale proceeds will be made by agent / consignee. The overseas branch/correspondent of the bank will be instructed to deliver the documents against Trust Receipt. Advances granted against the export bill covering goods sent on consignment basis would be liquidated form remittance of the sale proceeds within six months from the date of shipment, conforming to the Exchange Control Regulations. In the case of exports through approved Indian owned warehouses abroad, the time limit for realisation would be 15 months.

v.         Advance against Undrawn balances

          In certain line of export trade, it is the practice of the exporter to leave a part of the amount as undrawn balance. Adjustment will be made by the buyer for difference in weight, quality etc. ascertained after arrival and inspection or analysis of the goods. Authorised dealers will handle such bills provided the undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export trade subject to maximum of 10% of the full export value. 

          The exporter should give an undertaking that he would surrender or account for the balance of the proceeds within the period prescribed for realisation. A proper follow-up should be made for the realisation of the undrawn balance. The Authorise Dealer will retain the duplicate copy of the GR form till such time the full export proceeds are realised. 

          Advance against undrawn balance can be made at a concessive rate of interest for a maximum period of 90 days. Proper margin should be maintained for the advance, as there is a possibility some deduction out of the undrawn balance for quality claim reduction in weight etc. 

vi.       Advance against receivables form Government such as Duty Drawback

          Where the domestic cost of production of certain goods is higher in relation to international price, the exporter may get support form the Government so that he may compete effectively in the overseas market. The Government of India and other agencies provides export incentives under the Export Promotion Scheme. This can only be in the form of refund of excise and customs duty known as Duty Drawback.

          Banks will grant advances to exporters against their entitlements under above category at lower rate of interest for a maximum period of 90 days. These advances being in the nature of unsecured advances cannot be granted in isolation and could be granted only if all other types of the export finance are extended to the exporter by the same bank.

          After the shipment, the exporters will lodge their claim supported with relevant paper and documents to the Customs Authorities. The customs will process the claim and disburse the eligible amount.

          These advances would be liquidated out of the settlement of claims lodged by the exporters. It should be ensured that the bank is authorised to receive the claim amount directly from the concerned Government authorities.

PERIOD OF FINANCE

          Export bills can be drawn either on DP basis or on DA basis depending upon the contract between the exporter and the overseas buyer. Confessional rate of interest on this advance will depend upon the nature of bill.

         If the bill is drawn on DP basis, confessional rate of interest will be for a period unto normal transit period (NTP).

          DA bills (usance bills) can be drawn as follows :

          i.        90 days from date of shipment/date of draft

          ii.       90 days from date of acceptance

          In case of usance bills drawn from date of shipment/bill of lading/bill of exchange/draft, the due date can be decided by the exporter's bank since the details on shipment date or bill or exchange date will be readily available and the bank has to arrive at the due date.

          In case usance bills where due date has to be arrived at from date of acceptance, in addition to the usance, Normal Transit Period will be added and the Notional Due Date will be arrived at.

          In both case confessional rate of interest will be available to the exporter unto the Due date or the Notional due date. In any case the confessional rate of interest cannot exceed 180 days from date of shipment.

         Detailed table on Normal Transit Period stipulated by FEDAI, which has been revised with effect from 1.10.1999 is provided in Annexure I. 

MAXIMUM ELIGIBLE FINANCE 

          In case of post shipment advances, normally no margin is maintained for bills drawn under LCs. Only in case of export bills purchased against contracts/firm orders, depending upon the additional security available, some banks prescribe certain amount of margin.

EFFECTIVE DATE OF PAYMENT OF AN EXPORT BILL

          In case of foreign currency bills, date of credit in the bank's nostro account and in case of Rupee bills the date of debit in the vostro account will be taken as the effective date of realisation of an export bill.

EXTENSION OF TIME LIMIT

          If the export bill is not realised within 180 days from date of shipment the exporter should apply for extension to Reserve Bank in the prescribed format "ETX" through the AD.

CRYSTALLISATION OF OVERDUE EXPORT BILLS

          Exporters are liable for the repatriation of proceeds of the export bills negotiated/purchased/discounted or sent for collection by the Authorised Dealers. Authorised Dealers will take into account the exchange risk inherent in an unpaid export bill negotiated/ purchased /discounted and transfer the exchange risk to the exporter by crystallising the foreign currency liability into rupee liability, on the 30th day after the expiry of the Normal Transit Period in case of unpaid demand bills and on 30th day after notional due date in case of unpaid usance bills. In case the 30th day happens to be a holiday or Saturday, the export bill shall be crystallised on the next working day.

          Where the actual due date is advised by the foreign correspondent after the notional due date has been arrived at, it will be in order for banks to crystallise the bill on the 30th day after the actual due date in the event of non-payment.

          However, the bill may be crystallised by the Authorised Dealers before the said period of 30th day with specific understanding and written request from the customer.

          For crystallisation into Rupee liability the Authorised Dealer will apply the ready TT selling rate of exchange ruling on the date of crystallisation or the original bill buying rate whichever is higher.

          After receipt of advice of realisation, the Authorised Dealers will adjust the Rupee liability on the bill crystallised as above by applying the TT buying rate of exchange or the contracted rate in case a forward contract has been booked by the customer after crystallisation. Any difference shall be recovered from/paid to the customer.

PAYMENT OF ECGC PREMIUM

          Under EGCC's Whole Turnover Post Shipment Guarantee (WTPSG) bank can cover bank their contract bills and LC bills. Some banks have covered only their contract bills. Premium will depend upon the type of coverage. The bank absorbs cost of premium themselves and not to be passed on to the exporter in view of the fact that the post-shipment guarantee is mainly intended to benefit the banks against the exporters failure.

PAYMENT OF COMPENSATION TO EXPORTERS IN RESPECT OF DELAYED CREDIT OF EXPORT PROCEEDS

          Banks are required to pay commission to the exporter without waiting for a demand from the exporter, in respect of delay in affording credit in cases where credit advice have been received containing all required information. Banks should also.

NEW SCHEME OF EXPORT FINANCING

Rediscounting of Export Bills abroad (EBRD)

          This facility will be an additional window available to exporter along with the existing rupee financing schemes to an exporter at post-shipment stage. This facility will be available in all convertible currencies. The Scheme will cover export bills unto 180 days from the date of shipment (inclusive of normal transit period and grace period).

          The scheme envisages Banks rediscounting the export bills in overseas markets by making arrangements with an overseas agency/bank by way of a line of credit or banker's acceptance facility or any other similar facility at rates linked to London Inter Bank Offered Rate (LIBOR) for six moths. Prior permission of the Reserve Bank will not be required for arranging the rediscounting facility abroad so long as the spread for rediscounting does not exceed one percent over the six months LIBOR in the case of rediscounting `with recourse' basis and 1.5 percent in the case of `without recourse' facility. Spread, however, should be exclusive of any withholding tax. In all other cases, the Reserve Bank's permission will be needed.

          In other words banks are allowed a spread not exceeding one percent over the rediscount rate. The effective cot (excluding withholding tax) to the exporters will therefore, not exceed 2 percent and 2.5 percent over six months LIBOR (for Indian Banks not having overseas the spread will be 2 1/2% 3% respectively) in respect of `with recourse' facility, respectively.

          In case of re-discounting of export bills on `without recourse' basis the credit limits of the exporters will be restored immediately. ADs have also been permitted to utilise the on-shore foreign exchange funds available with them by way of balances in Exchange Earner Foreign Currency Accounts (EEFC), Resident Foreign Currency Account and Foreign Currency (Non-Resident) Account (Banks) Scheme.

          Exporters can also directly arrange for rediscounting facilities abroad without prior permission from the Reserve Bank provided the spread stipulations mentioned in the above paragraph are adhered to. The exporters will, however, be required to arrange the facility through a designated branch of an authorised dealer.

Options for the Exporters

Now exporters have got the following options

          a.       To avail of Pre-shipment Credit and Post-shipment in rupees.

          b.       To avail pre-shipment in Rupees and Post shipment in the form of rediscounting of export bills in foreign currency.

          c.       To avail pre-shipment in Foreign Currency (PCFC) and avail post as export bills rediscounting scheme in foreign currency. (EBRD

          Exporter will try to avail any facility in a denominated foreign currency depending upon the premium/discount factor of the currency in which he has got exposure. For example if the exporter has got an exposure in US Dollar and if this currency is at premium beyond particular level, he will not go for any foreign currency facility. Instead he will prefer to avail Rupee loan and try to earn the premium factor the Dollar

ANNEXURE - I

TABLE OF NORMAL TRANSIT PERIOD

i.        Normal Transit Period of purposes of all bills in Foreign Currencies ..... 25 days. 

ii.       Normal to Iraq : In respect of Exports to Iraq United Nations Guidelines where payment under letters of credit is made on arrival of goods upon issuance of certificate by UN agency to the effect that the export conform to the guidelines laid down by United Nations the applicable Normal Transit Period shall be for a maximum of 60 days, for which concession rate of interest shall be recovered. 

iii.       Normal Transit Period for purposes of bills drawn in Rupees: 

a.       In case of bills drawn under letter of credit where reimbursement is provided at the center of Negotiation -3 days. 

          If reimbursement for Negotiation of Rupee bills drawn under a Letter of Credit is obtained in the center of Negotiation by debit to the Non-Resident Account of the credit Opening Bank held, either with the negotiating Bank itself or with any of its branches in the same center, interest for the transit period of 3 days as allowed shall not be collected.

b.       In the case of bills drawn under Letter of Credit where reimbursement is provided at a center in India other than the center negotiation - 7 days. 

c.       In the case of bills drawn under Letter of Credit where reimbursement is provided by banks situated outside India and also for bills for under letter of credit the transit period will be 20 days.

d.       Exports to Russia against L/C providing for reimbursement by RBI under state credit arrangements - 20 days.

FIXED DUE DATE 

          In case of export usance bills (foreign currency and rupee bills) where due dates are reckoned date of shipment or date of bill of exchange etc. Normal Transit Period shall not be applicable since the actual due date is known.

a.         TT REIMBURSEMENT UNDER LETTER OF CREDIT 

1.       In case of bills where reimbursement is to be obtained by SWIFT/TT/TELEX (i.e where the reimbursing bank is other than the one where the negotiating bank maintains its nostro Accountant), the authorised dealer will recover at the time of negotiation transit period interest for 5 days and SWIFT/TT/TELEX charges from the customer. 

2.       Where the negotiating bank is authorised to claim reimbursement by SWIFT/TT/TELEX directly (i.e where the re-imbursing Bank maintains the negotiating Bank's Nostro Account) no interest will be charged to the customer. In case the reimbursement instructions stipulate claiming of SWIFT/TELEX/TT reimbursement after a certain period from the date of negotiation/despatch of documents, this additional period shall be added to the permitted normal transit period for recovery of concessive rate of interest for TT reimbursement. 

3.       In case of bill negotiated under a Letter of Credit and reimbursement claimed by SWIFT/TELEX/TT from opening Bank, which arranges reimbursement through another bank, interest for 5 days, shall be recovered from the customer. 

OVERDUE INTEREST

          Overdue Interest in all cases shall be recovered from the customer if payment is not received on or before the expiry date of Normal Transit Period in case of demand bills, and on or before the notional due date/actual due date as the case may be in case of usance bill as per RBI directives. 

EARLY REALISATION

i.        In case of early realisation of export bill proportionate interest will be refunded from the date of realisation i.e by credit to Nostro Account in the case of Foreign Currency bill and debit to Vostro Account in case of Rupee bill and unto the last date of normal transit period in the case of demand bill and unto notional due date in case usance bill. Such a refund shall become payable only on receipt of relative credit advice/statement of account of bank. 

ii.       In case of early realisation of an export bill Authorised dealers shall recover or pay swap cost as in case of early deliveries under a forward contract.

                                                                ANNEXURE - II

 

                                              ECGC POLICIES AND GUARANTEES

 

 

S.

No.

Type of Cover

Nature of cover

% of cover

Premium Rate

1.

Standard Policies

 

 

 

 

i.        Shipments (Comprehensive Risks) policy issued to exporter with turnover in the next 12 months exceeding Rs.25 lakhs

Coverage for goods exported on short term credit basis either only Political risks or both Political and Commercial risks together (under Comprehensive policies) at the post shipment stage.

90

Premium rates vary for different countries for different payment terms. Normally schedule of premium is attached to the policy.

 

ii.       Small exporter's policy for exporters whose anticipated export turnover in the next 12 months does not exceed Rs.25 lakhs

Coverage for goods exported on short term credit basis. The policies cover either only political risks or both political and commercial risks together (under comprehensive Politices) at the post shipment stage

95% for commercial risks and 100% for political risks.

Premium rates vary for different countries for different payment terms. Normally schedule of premium is attached to the policy.

2.

Specific policies (For supply contracts)

 

 

 

 

i.        Specific shipments (Comprehensive Risks policy)

Coverage for Medium and Long term exports Cover is available only for political risks or commercial risks and political risks together. Further the coverage can be from the date of shipment or date of contract depending upon the nature of export commodities and type of cover. In case of contract policies reshipment losses as well as post shipment losses are covered. In other cases only post shipment losses are covered

90

Premium rates vary for different countries for different terms of payment.

 

ii.       Specific Shipments (Political Risks policy)

 

 

 

 

iii.       Specific  contracts (Comprehensive Risks) Policy

 

 

 

 

iv.      Specific Contracts (Political Risks) Policy

 

 

 

3.

Service Policies

 

 

 

 

i.        Specific services contract (Political Risks) Policy

Coverage for Overseas services contracts. Cover is available only for political risks or commercial and political risks together

90

Premium rates vary for different countries for different terms of payment

 

ii.       Specific services contract (Comprehensive Risks) Policy

 

 

 

4.

Construction works policy

Coverage for Overseas Construction contracts. Cover is available only for political risks or commercial and political risks together.

85

Premium rates vary for different countries for different terms of payment

5.

Insurance cover for Buyers' Credit and Line of Credit

Coverage for finance for deferred credit exports under Buyers' credit scheme or under lines of credit extended by financial institutions in India

90

Premium rates is decided by ECGC on case-to - case basis.

 

                                    FINANCIAL GUARANTEES ISSUED TO BANKS

 

Sr.

No.

Type of Cover

Nature of Cover

% of Cover

Premium Rate

1.

Packing Credit Guarantee

Reshipment advances extended by banks to exporters against LC or firm order for the purpose of purchasing manufacturing, processing and final packing of goods meant for export

Individual       )

Guarantee      ) 66 2/3%

10 paise/Rs.100/Month calculated on the highest amount outstanding for the month.

 

 

 

WTPCG

For exporters           )

of perishable )  66

& hazardous  )  2/3%

goods           )

 

7 paise/Rs.100/Month calculated on the average amount outstanding for the month.

 

 

 

Others            75%

 

Small Scale    ) 90%

Exporters       )

 

Note :

  Preshipment advances granted for exports involving deferred payment terms are eligible for cover under the scheme but individual guarantee cover needs to be taken for each project. However, the benefits of WTPCG cover like higher cover at a lower premium rate will be available for such guarantees provided the bank is holding the WTPCG cover.

2.

Post-Shipment Guarantee

Post-shipment advances are given to exporters through purchase, negotiation or discount of export bills or advances against such export bills sent on collection

Individual Guarantee

If exporter              ) 75%

holds SC Policy         )

with LC

inclusion                  )

 

If exporter              ) 60%

holds SC Policy         )

with LC

exclusion                 )

7 paise/Rs.100/month calculated on the highest amount outstanding for the month.

 

 

 

All advances            )

are against LC          ) 75%

10paise/Rs.100/Month calculated on highest amount outstanding. Exporter need not hold SC Policy

 

 

 

WTPSG

Exporters holding SC Policy

 

 

 

 

 

If WTPSG includes LC advances

 

 

 

Small Scale              ) 90%

Exporters                )

 

Other                     ) 85%

4 paise/Rs.100/month calculated on the average daily product basis.

 

 

 

 

If WTPSG excludes LC advances

 

 

 

Exporters not holding SC policy

 

Small Scale              ) 65%

Exporters                )

 

Other                     ) 60%

5 paise/Rs.100/month calculated on the average daily product basis.

3.

Export production finance guarantee*

Preshipment finance granted to the full extent of the cost of production/market value of goods when it exceeds FOB value of contract/order LC, the difference representing the incentives receivables

66 2/3%

10 paise/Rs.100/month calculated on the highest amount outstanding for the month

(* Banks holding WTPCG cover will be entitled to the benefits of higher cover and lower premium rate as applicable to WTPCG in respect of EPFGs obtained by them)

4.

Export Finance Guarantee**

Post-shipment finance granted to exporters against export incentives receivable in the form of Duty Draw Back. IPRS. etc.

75%

7 paise/Rs.100/month calculated on the highest outstanding for the month.

(* Banks holding WTPCG will be entitled to the benefits of higher cover and lower premium rate as applicable to WTPCG in respect of EPFGs obtained by them)

5.

Export performance Guarantee

Bank guarantees issued on behalf of exporters in favour in local/overseas authorities/beneficiaries connected with export transactions

Short term

 

75%

 

Medium & Long Terms

 

75% 90%

0.9% per annum on the amount guaranteed.

 

 

0.8% per annum on the amount guaranteed for 75% cover.

 

0.95% per annum on the amount guaranteed for 90% cover.

6.

Export Finance (Overseas Lading) Guarantee

Foreign currency loans provided by banks to Exporters executing overseas projects (Project exports)

75% 90%

0.9% per annum on the amount guaranteed for 75% cover.

 

1.08% per annum on the amount guaranteed for 90% cover.


 

                                                            SPECIAL SCHEMES

 

S.

No.

Type of Cover

Nature of cover

% of cover

Premium Rate

1.

Overseas Investment Insurance Agreement

Coverage for Overseas Investment in Equity Capital or untied loan for the purpose of setting up or expansion of overseas projects. Investment can be in the form of cash or in the form of export of Indian goods and services. This covers principal investment and annual dividends/interest.

 

 

2.

Exchange Fluctuation Risk Cover

Coverage for exchange fluctuation risks arising on payments to be received in foreign currency in respect of deferred payment exports. Coverage available for period of 12 months or more upto a maximum of 15 years from the date of bidding to the date of final settlement

Within the range of 2% to 35% of reference rate.

For bid cover 10 paise/Rs.100 per quarter

 

i.          Exchange Fluctuation Risk (BID) cover

 

Any gain in this range has to be turned over to ECGC

For contract cover 40 paise/Rs.100 per annum

 

ii.          Exchange Fluctuation Risk (Contract) cover

 

 

 

3.

Transfer Guarantee

Risks involved in confirming a foreign Letter of Credit by banks in India - Risks covered are both commercial and political risks.

LC Opening bank's  ) 75%

bankruptcy and  )

default   )

(Commercial Risks)

 

Political risks  ) 90%

in the country of

LC opening bank

At rates normally applicable for insurance policies covering export of goods.

 


CHAPTER - 6

FINANCING SOFTWARE AND IT INDUSTRY

          Significant changes in Indian economy has witnessed after implementation of liberazation package is the spectacular growth of the service sector. Over the past few years, the service sector has been growing at an approximate annual rate of 9 per cent. Among the service sector industries, the Software and Information Technology (IT) occupies an important place.

          Union Finance Minister Mr.Yashwant Sihna in his budget speech (1998-99) stated that, "The Government have set itself a target of making India a Global Information Technology Power and one of the largest generators and exporters of software in the world within Ten years". The Finance Minister also announced certain fiscal incentives to support rapid development of this crucial software sector. 

          In May 1998, the Government of India constituted a "National Task Force on Information Technology and Software Development", to recommend steps to remove bottlenecks in the part of rapid development of Information technology and give a boost to IT and software industry. The Task Force has drawn up an Information Technology Action Plan for initiating action campaign on various aspects of development of the industry. The task force has identified bank credit as an essential input for organic growth of IT and Software industry.

          Following this, the RBI constituted a working group under the leadership of the SBI to frame fresh guidelines for extending working capital finance to various software units. Finally, in August 1998 RBI formulated certain operational guidelines to supply bank credit to software units.

          These guidelines are discussed in this chapter by presenting current scenario of software industry.

The Indian Software Industry

          In India the software industry is majorly an export driven, more than 60 per cent of Indian exports are from software industry. Over a period of five years the industry has grown up magnanimously, and the growth is mind boggling.

          The exports have grown up at a Compounded Annual Growth rate of 55 per cent, whereas the domestic turnover recorded a growth of 44 per cent. More than 60 per cent of software exports are USA and around 25 per cent to Europe.

          According to "Business Today" survey of most valued companies, the Indian Corporate Sector has witnessed a significant sectorial migration from traditional sectors to brain power business. The scraps of knowledge industries - infotech and other software companies are preference of the stock markets. Among the top 10 companies which increased their market value in 1997-98, five belongs to IT industry.

          The main reasons for growth of software industry are (i) India has a large pool of trained scientific manpower, who are mainly English speaking, World Software Industry is being dominated by English as the main languages. (ii) The Indian Software products have gained a brand of equity. Most of the Fortune 500 companies are clients of Indian Software Units (iii) The problem of Y2K and Conversion to Euro money have provided opportunities for Indian Software Units.

          Around 48 per cent of domestic activity is developing of products and packages and 38 per cent from Turnkey projects. These Parameters indicate that the Industry has reached to state of maturity. A sizeable portion of offshore activity is offering professional services and consultancy. The growth of IT Industry increases the operational efficiency of manufacturing and other service sector units like Banks.

          An estimate of NASSCOM (an industry association of Software companies) is the software industry may grow the $ 16 billions by 2003. This indicates an annual growth rate of 43 per cent.

          The year wise projections of the industry (both domestic and export activity) are as follows :

Year

Industry Projections (in US$ billions)

2000-2001

08.80

2001-2002

12.00

2002-2003

16.00

(Source : Nasscom)

          Presently the size of world software services market are estimated to be $307 billion, in which India accounts exports of only $1.5 billion, which indicates there is an immense potential for the Indian IT industry to capture the global market. The conversion to Euro by European Union offered attractive opportunities for the Indian IT industry. The government appointment IT task force has made several recommendations for the growth industry. One of the recommendations is banks should evolve a suitable framework for fulfillment of working capital needs of software units.

Bank Credit to Software and IT Industry

          In August 1998, the RBI has issued general and operational guidelines to Commercial Banks to decide the permissible bank finance for software units. These guidelines are as follows :

Product range of IT Industry

          The guidelines issued by RBI Classifies software and Information Technology into four categories. They are (i) Software Services (ii) Project Services (iii) Software Products and Packages, and (iv) IT related services. These guidelines also suggest the nature of working capital facility required for each type of activity.

          Activity-wise working capital requirements are presented in Exhibit I.

Operational Guidelines

          The operational guidelines suggested by RBI are as follows :

Assessment of Permissible Working Capital Finance.

1.       Monthly Cash Budget system would be ideal for arriving the cash gaps and deciding the Permissible Bank Finance (PBF).

2.       Working Capital requirements of borrowers up to Rs.2 cr. may be assessed on the basis of 20 per cent of projected turnover. However if the borrower prefers, cash budget method may be adopted

3.       For above Rs.2 Cr. the cash budget system may be confined. Peak deficit in cash budget would determine the Permissible Bank Finance (PBF).

4.       Credit budgets may be reviewed frequently and credit limits may be accordingly modified

Long Term Finance

          Banks can finance software units by providing Equity, Seed money, and Venture capital on case-to-case basis. However, this should not exceed the limit of five per cent of their incremental deposits of the previous year. 

Appraisal

          Promoter's background, his qualifications and experience in developing software products is a crucial important factor in appeasing the credit proposal. Other professional manpower associated with full commitment is also to be considered seriously.

Documentation

          The bank should obtain from the borrower (i) Operating statement (ii) Balance sheet (iii) Cash Budget (iv) Statement of Economics (v) A note on the assumptions underlying the operating statement. In addition to these, every proposal must be a companied by a detailed project report and business plan.

Credit delivery

i.

Upto Rs.10 Cr

Banks have freedom to sanction credit facilities by way of cash credit facility or overdraft.

ii.

Rs.10 Cr and above

Cash credit component would be 20% of the aggregate credit limit after excluding export credit sanctioned and disburse the balance as demand loan.

iii.

Specific orders from abroad

It would be treated as pre-shipment or post shipment finance as the case may be.


Margin

          Banks have to stipulate reasonable promoter's contribution as Margin.

Security

i.        There are no tangible assets or no generation of tangible goods. Hence, Banks can obtain collateral security.

ii.       If current assets are available first or second charge may be created. 

iii.       The success of the activity depends upon the skills of the professionals or promoters the banks would have to carefully evaluate the factors like; the promoter's track record, their competence, their stake in the business and marketing strategies. 

iv.      Banks can obtain collateral security subject to availability.

Pricing (Rate of interest)

i.        In respect of pre-shipment and post shipment credit extending for financing exports, the concessional rate prescribed by RBI is applicable.

ii.       For all other types of advances banks have to follow guidelines applicable to general category of borrowers.

Monitoring and Follow up

i.        Periodically banks should (once in a quarter) obtain the actual cash flow statement and compare it with projected statement. Corrective steps are to be taken for large variations in actual and projected figures.

ii.       Banks have to develop tailor made follow-up system for paying additional attention to these advances by themselves. 

Risk factors in financing Software Units

1.       Absence of tangible current assets.

2.       High obsolescence, fixed assets depreciate rapidly.

3.       As the Capital requirements are very low and there are no barriers, rapid growth of small and medium units have taken place and subsequently the rate of failures is very high.

4.       High manpower turnover which affects execution and completion of the job.

5.       Project could turnout to be non marketable or overtaken by a similar product of a competitor. 

Prerequisites for Financing Software Industry

1.       Banks have to streamline their administrative arrangements to provide timely and adequate credit to software industry.

2.       Identify the centers where the IT software and Services Units are sufficiently large and create IT Financing cells at identified branches.

3.       Constitute appropriate screening Committee for appraisal of credit proposals and monitoring the progress/performance.

4.       Banks should arrange for requisite in-house training for their staff on financing software industry.

Software Business Activity and Nature for working Capital Facility

No.

Type of Business Facility

Features of the Activity

 Nature of Working Capital Facility

1.

Software Service Staffing Service and programming services

It involves deputation of professionals for delivering, programming, services at customers' location within the country as well as abroad

Initial Travel cost for order canvassing and mobilization expenses. Travel cost and living expenses of the personnel deputed for executing orders.

 

 

 

Working capital Finance is bridging the gap between advance cash flows received and Balance payments

2.

Project Services

a) Customised Software development

It is providing solution to specific problems of the customer which would be utilized by corporate mainframe and mini computer users. These services could be rendered either at customer's location or delivered on floppies and diskettes or through satellite communication networks.

 

 

Meeting the cash gaps discharged by cash flow staliments.

 

b) Systems solution and Integration

Providing a complete business solution using Information Technology

Expenditure on professional, purchase of software packages/tolls.

 

c) Maintenance of software

The party takes up an assignment for maintenance of clients software

Meeting Expenditure on professionals

3.

Software products and packages (Systems software and application software)

These products are prepared to meet standard requirements of end users and are sold as package units comprising software manual and other user aids

It involves fairly large investment the return on which can be realized only after the product is fully developed and sufficient demand is generated. Generally buyer will not pay any amount in advance. Working capital requirement would be mainly meeting expenditure on salaries and expenses of the professionals associated with the development of the product. The development period may be 24 months. After taking considerable risk assessment financing is to be made.

4.

Information technology related services

IT services include call centers, mentoring teleconferencing, etc.

Meeting the expenditure incurred on providing these services.

CHAPTER - 7

IMPORT FINANCE

          Banks normally do oit extend any fund based finance to meet import needs of their customers, barring few exceptions. However, they enable industrial units and others to have access to imported inputs and machinery by establishing letters of credit in favour of the overses suppliers/sellers. Letter of Credit is a non-fund credit facility offered by banks to their constitutents of integrity and proven track record in meeting their commitments promptly, without need for any post import finance. 

          Banks establish LCs only on account of their customers, who hold a valid Importer-Exporter Code Number from the Regional Licensing Authorities and produce underlying sales contract between the Indian importer and the overseas sellers, accompained by valid import licence in the name of the importers, wherever necessary. Banks take into account the norms for holding imported inventory, make and appraisal of the request for opening an LC like any other fund based working capital facility, prescribe suitable margin/securities and then decide to estabish the LC.

          Banks have simplified the documentation procedures for LC limits sanctioned to their customers and usually; every time when an LC is to be established, an LC application - cum - agreement is obtained from the importer which will also serve as an advance document for the LC.

          Banks also ensure that the terms of import as per underlying sales contract do not contradict the current Trade/Exchange Control Regulations in force.

Post Import Finance

          Issuing Bank, on receipt of documents under the LC established by it, examines them and ensures that they conform to the terms of LC. If so, they intimate the importer/applicant to pay for and retire the documents. The applicant at this stage, may utilise the balance in his Cash Credit Account (if the item of import is a raw material, etc.) or Teram loan limit (if the item of import is a capital good or equipment) and retire the documents. In respect of imports made by exporters, banks may grant packing credit advances to meet the cost of imported goods.

          Otherwise, normaily banks do not extend any specific post import finance to importers who have to suitably manage their fund flows to meet the bills in time/on the due dates.

          Now wer can examine time procedural aspects of Import Letters of Credit 

Import Letters of Credit

          Banks in India normally open Import (foreign) Letters of Credit under following circumstances :

A.       When a resident in India is importing goods into India.

B.       When a resident merchant trader (known as intermediary) is purchasing goods from one country, for sale to another country, for the purpose of merchanting trade.

C.       When an Indian exporter who is executing a contract abroad requires to import goods from a third country to the country where he is executing the contract. 

          The first category referred to above is the most common category and they are the Indian Import letters of Credit in the real sense of the term. Opening of such credits involve compliance of :

          A.       Trade Control Requirements

          B.       Exchange Control Requirements

          C.       Credit Norms of R.B.I.

          D.       FEDAI and U.C.P.D.C. Provisions

          E.       Bank's Internal Procedures.

Scope of requirements of each agency concerned is discussed below:

A.        Trade Control Requirements

          Trade Control lays down the policy and regulations relating to physical movement of goods into India. Since letter of credit envisages payment for goods being brought into the country, the first step a banker needs to ensure is whether the goods concerned can be physically brought into India or not as, per the current Exim policy. He can proceed with the opening of an import of credit when this crucial aspect is in the affirmative.

          Therefore, a person who wishes to open an import letter of Credit must have the basic authorisation for import of goods. Other detailed guidelines are discussed later.

B.        Exchange Control Requirements

          The scope of exchange control is to oversee the payments and receipts by residents to non - residents and vice - versa. Import Letter of Credit to be opened by a bank is to effect settlement of payment due by the Indian importer (resident) to the overseas supplier (non - resident). Hence, the opening of letter of credit automatically falls under the purview of exchange control and payment authorised or committed under the letter of credit must be within the scope of exchange control guidelines. The scope of these regulations is in addition to the guidelines of trade control and covers basically the methods of payment, time limit etc. Detailed guidelines are discussed later.

C.        Credit Norms of RBI

          Opening of a letter of credit is undertaking a payment commitment on behalf of the applicant. Hence, it amounts to extension of credit to the applicant, which should naturally be within the credit norms of R.B.I. Though a letter of credit facility is a non - funded credit facility, it has the potential to turn to funded facility, if the applicant does not reimburse the bank at the appropriate time (on presentation of documents or on due date). Further, as per credit norms extending usance (DA) letter of credit facilities tantamount to substitution of funded facilities (in other words extending to the funded facility). In the light of these, R.B.I, has advised all banks to assess the facilities of import letter of credit requirements like any other normal credit assessment. Other aspects kept view by bankers while sanctioning import letters of credit facility are :

a.       If the facility is to cover import of commodities covered by selective credit control the guidelines of selective credit control (mainly relating to margin requirements and quantum of facilities sanctioned) will be complied with.

b.       When the import letter of credit facility is to cover import of capital goods, banks will ensure availability of adequate long term funds for value of import and customs duties thereon. Banks will assess and extend the facility with all the precautions that are taken for granting of a term loan or Deferred Payment Guarantee (DPG).

c.       When import letter of credit facility is granted on D/A basis the usance period allowed (after taking into account the time taken for movement and clearance of goods etc). should be within the period of inventory norms suggested by R.B.I. (wherever applicable) or the reasonable period required by the unit concerned.

d.       Though import letter of credit facilities are non - funded facilities, banks will assess the requirements like funded facilities and to ensure that borrowers are/will be in a position to honour their commitments as and when they fall due.

D.        FEDAI and UCPDC Provisions

          Foreign Exchange Dealers' Association of India, which is an apex forum of banks authorised to deal in foreign exchange issues guidelines at the instance or with the concurrence of R.B.I. for safe and smooth conduct of various foreign exchange operations. Import letters of credit being one of the important areas of Forex operations, fall within the scope of their guidelines. In 1984, on the eve of introduction of 1983 Revision of UCPDC, FEDAI issued detailed guidelines for the opening of Import letters of Credit by banks in India. Standard formats of credit application and letter of credit to be opened by banks was also circulated for the information and adoption by banks. With a few modifications/additions these guidelines are still in vogue are followed by Authorised Dealers.

E.         Bank's Internal Procedure 

          All Banks will normally have their own internal procedures for carrying out foreign exchange operations, particularly a facility like import letter of credit which involves a credit decision. R.B.I. has also advised banks to issue internal guidelines, covering various forex areas of operation to their staff at various levels. These guidelines cover certain decision making discretionary powers at appropriate levels in areas like determining the value limit beyond which credit reports on beneficiaries are to be obtained, waiver of standard conditions of letters of credit to suit specific requirements of customer etc. 

Operational Features - Opening of Import Letters of Credit

          Stepwise operational procedures in opening import letters of credit are discussed below :

1.        Sanction of Limits

          As per exchange control guidelines, banks are expected to open import letters of credit for their own clients who are regularly dealing with them and who are known to be participating in the trade. Hence, selection of a client must be discreet. Banks may obtained the following information to establish the bonafides of the importer :

a.       The importer - exporter code number allocated by Trade Control Authorities which goes to establish that they are registered importers.

b.       Details of their industrial license, DGTD Registration, SSI Registration, Registration Certificate issued by trade bodies, R & D Recognition Certificate. Food and Due Administration Department License, Registration Certificate Under Shops and Establishment etc. as applicable. This would not only establish their bonafides but also help determine their eligibility for import, particularly of imports subject to `Actual user' conditions.

          After client selection, the facilities required will be assessed taking the same precautions as would be taken for fund based facilities keeping in view the credit guidelines of R.B.I. Normally import letter of credit facilities will be assessed considering factors like production / trading capacity of the unit, its import requirements, time taken by suppliers for shipment, time involved in movement of goods, credit period offered by suppliers etc.

          Banks will Extra care while sanctioning facilities on DA basis or for import of capital goods. Wherever required, adequate margins (particularly in case of DA facilities, SCC commodities and facilities to traders) will also be stipulated. As per exchange control regulations, banks can accept margin monies from third parties at their discretion, but must ensure that the applicant will be in a position to retire the bills and be able to clear the goods by payment of duties.

2.        Documentation Formalities

          After the limits are sanctioned, banks normally obtain main security documents like guarantee from borrowers/sureties, execution of pledge/hypothecation agreements, obtaining of collateral securities etc. as per the sanction terms. This documentation is in addition to the individual credit application - cum - agreements, take at the time of opening the letter of credit.

3.        Submission of Letter of Credit Application

          At the time of opening letter of credit the applicant needs to give an application - cum - agreement. FFDAI has evolved a standard credit format for adoption by banks based on ICC standard credit application with suitable modifications to suit Indian situations. It has the main application and an agreement part. The application, being a request - cum - agreement to open a letter of credit, has to be affixed with necessary stamp duty. 

          Bank supply printed and stamped formats to applicants. The applicants has to fill in all details properly and sign them.

          Along with the application, the importer needs to submit; 

a.       The underlying sales contract which forms the basis for opening the letter of credit.

b.       Exchange control copy of import license(s) or a declaration stating that the goods are not covered under negative lists etc.

4.        Scrutiny of Letter of Credit Application General Aspects

          The application must be filled in all respects without inconsistencies and ambiguities. The documents and conditions requested for should be in accordance with the underlying sales contract and the provisions of Trade and Exchange Control Regulations. The application being also an agreement will be verified with reference to specimen signatures lodged with the bank.

Trade Control Aspects

•        The applicant must possess an IMPORTER-EXPORTER CODE NUMBER allocated by ITC Authorities (unless they belong an exempted category).

•        If import is covered under license, he must submit Exchange Control copy of the same. License will be scrutinised to ensure that:

a.       It has not been canceled by any notification/order etc.

b.       It is issued on security paper

c.       It has a printed number and date.

d.       It has a security seal (including on the annexure, if any)

e.       It is issued in the name of applicant or properly transferred in his name with proper transfer letters authorising him to effect import and open letter of credit etc. by the licensee as per provisions of ITC Policy.

f.        Commodity specified is in agreement with the item specified in the application.

g.       Quantity or amount limits specified are in agreement with those mentioned in the application. It is pertinent to note that irrespective of the sale terms for which letter of credit is proposed to be opened, license must have adequate value to cover CIF value plus agency commission and interest, if any.

h.       Country of origin of goods authorised in the license agrees with that specified in the letter of credit application 

i.        Country of shipment authorised is in agreement with the one stated in the letter of credit application.

j.        It is valid for shipment at least upto the last shipment date requested for in the letter of credit application

k.       If license stipulates any specific conditions, such conditions should be complied with by the holder/applicant. 

l.        If license is issued under any bilateral or multilateral agreement, the conditions stated in the concerned agreements and the relative ITC notification should be complied with.

m.      If license stipulates placement of order within a specified time limit, the sale contract submitted must confirm compliance of the condition.

Exchange Control Aspects

•        The applicant must be the bank's customer, who has a regular account and is known to be participating in the trade (Normally this aspects will be taken care of at the time of sanction of limits).

•        The LC should, in particular stipulate a condition that the bill of lading (i.e. transport document) should indicate the name and address of the importer in India and also the authorised dealer opening the credit. 

•        LC, should not be opened for import of goods covered by the negative lists unless the importer submits a license marked `For Exchange Control Purposes'. 

•        If import is from Nepal or Bhutan the payment    must be made in Indian rupees treating the same for all practical purposes as adometic LC.

•        If LC is opened in favour of beneficiary of ACU country (other than in Nepal), or letter of credit envisages good to be shipped from a ACU country, it should be denominated in ACU dollar which is equivalent value - wise to one US dollar.

•        If import is made under a foreign loan or credit agreement and payment is authorised under letter of commitment method letter of credit should not envisage any remittance from India. In the case of import licenses where reimbursement method applies authorised dealers should make appropriate stipulations to ensure that the prescribed documents are submitted to them without fail.

•        If import is of technology drawings and designs, applicant must be advised to pay Research and Development Cess, before allowing remittance, as required under Research and Development Cess Act 1987. For this purpose the bank may take the necessary undertaking from the applicant, at the time of opening the letter of credit.

•        If import is on cash basis payment terms should be such that the remittance is completed within six months from the date of shipment. However, where small payments, to exceeding 15 percent are withheld for guarantee and performance etc. payment terms for such amount can exceed six months but no interest payment should be involved for such payment with held. 

•        In the case of import bills negotiated under letter of credit and retired by importer after expiry of six months from the date of shipment, it will be in order if reimbursement to the overseas bank was within six months from shipment date.

•        If the letter of credit envisages interest payment on account of supplier's credit offered by the beneficiary, under normal interest clause, the rate of interest should not exceed `prime' lending rate or LIBOR of the country of currency in which the goods are invoiced. 

•        If a letter of credit is to be opened for transaction of merchanting or intermediary trade, it should be ensured that there is a letter of credit for the other leg of the transaction on back to back terms or there is full advance payment. LC should be opened only in favour of the clients of the bank who are genuine traders in goods and not mere financial intermediaries.

•        If the Indian exporter desires to open a letter of credit for import from third countries to the country where he is executing the construction/turnkey contract it can be opened subject to following conditions. 

          a.       The applicant exporter holds necessary approval as may be necessary under the Exchange Control regulations.

          b.       Letter of credit is being opened on back-to-back basis against the letter of credit opened by the project authorities (employees) and such letter of credit has been advised by the same bank opening the letter of credit.

FEDAI & UCPDC GUIDELINES

          Since all import letters of credit need to be opened subject to provisions of UCPDC 1993 Revision (ICC Brochure No.500), the application will also be scrutinised to see that it is opened on line with international trade practices related to the relevant import. FEDAI also suggested several safeguards and standard conditions to be incorporated in import letters of credit keeping in view of the provisions of UCPDC 400 and Indian Trade/Exchange Control aspects. These are discussed in the following paragraphs with reasons/rationale. (The article numbers are as in UCPDC 500). 

RBI Credit Norms / Sanction Terms of Bank

          The application must also comply with RBI credit norms and the sanction terms of the bank for opening the letter of credit.

5.        Seeking Changes in Instructions 

          After the application has been scrutinised from all angles if the bank feels that the applicant's instructions are not consistent or suitable it may ask the applicant for revised instruction even though the wording of UCPDC Article 2 which reads "Whereby a bank (`Issuing Bank') acting at the request and on the instructions of a customer (the applicant) for the credit", offers leeway for the bank to modify / rectify the instruction, banks may obtain revised instructions wherever the applicant's instruction are not clear.

6.        Opening of Letter of Credit 

         Normally banks have their own internal procedures/system for obtaining the specific approval of manager / authorised officer before opening a letter of credit. Such formalities if any, will be completed before the letter of credit is actually established.

          Following are the illustrative steps involved in opening the letter of credit :

Entry in Letter of Credit Issued Register 

          After the request for opening the letter of credit is formally approved, a chronological letter of credit serial number will be assigned and details will be entered in the import letter of credit issued register. In this register apart from all essential details of the letter of credit, following particular will also be entered at appropriate stages :

          a.       Details of commission and other charges collected (including margin etc.).

          b.       Details of import licenses if any against which the letter of credit is established.

          c.       Details of endorsements made on Import Licenses.

          d.       Actual date of despatch / transmission of letter of credit

Passing of Entries in the Books / Collection of Charges etc.

          Normally banks pass contra entries in respect of all contingent liabilities undertake by them on behalf of the customers. As per the procedure followed by the banks, such entries will be passed in the books (converting foreign currency liabilities at the bank's bill selling rates). Commission must also be collected as per policy of the Bank apart from collecting out of pocket expenses, stipulated margins and other expenses.

Selection of Advising Bank / Confirming Bank and Advising Instructions 

          Normally, banks do not advise the import letters of credit directly to beneficiaries. They are advised by branches / correspondents in the country of the beneficiary. Normally a bank which has a branch of its own in the country of the beneficiary will advice LCs through that branch. If it has multiple branches, then the letter of credit will be advised preferably through the branch located in the city/state of the beneficiary. Some banks advise the letters of credit only through one designated branch in the foreign country. If the bank has no branch of its own, it my advise the letters of credit through the correspondent, preferably, the one located in the place of beneficiary. If the customer has given the name(s) of the banks through which letter of credit has to be advised as far as possible, it should be advised through the specified bank if it has arrangements for advising letters of credit.

          If the letter of credit needs confirmation, the bank must advise the letter of credit through a bank/branch will which it has credit confirmation lines. If the bank has no credit confirmation lines, it may request the Head/Central Office to set up confirmation lines and make necessary arrangements for confirmation of letter of credit. Letter of credit will not be advised till the branch is sure of confirmation of its letter of credit by the bank concerned.

          In any case, suitable indication on the following lines will be given to the Advising / Confirming Bank (on the copy of the Advising Bank) at the time of advising the L.C.

          •        LC to be advised without adding its confirmation.

          •        LC to be advised after adding its confirmation.

          •        Authority to add confirmation if required by the beneficiary

Mode of Transmission of Letter of Credit

          Generally the mode of transmission of letter of credit is indicated by the applicant. However, at times the bank may not be able to accede to the mode requested. For example, when the letter of credit has to be sent by telecommunication, the bank concerned may not have arrangements for testing the message. Test keys of other banks may be used only if agreeable to the bank concerned. Even this may not be possible at all times and the bank may not be able to send the LC by telecommunication. In such cases the bank may inform its customer and seek alternate instructions. 

Guidelines for Formation

          The Conditions of letter of credit, wording etc. based on ICC guidelines (for credit opening bank), FEDAI guidelines, UCPDC provisions, Indian Trade and Exchange Regulations are given below explaining the reasons / rationale :

1.       Credit Number          :         This would be the chronological LC serial number of the issuing bank. 

2.       Date of Issuance      :         This would be the date when the bank has passed contingent liability entries in its books. The style of mentioning the date should be as per I.S.O. Codes and Standards, namely, the year should be mentioned first followed by the month and date. 

                                                For eg. 2000 Sept. 26 or 2000 - 09 - 26

3.       Place of Insurance    :         This must be indicated to enable the bank or beneficiary to contact the Issuing Bank concerned (even if the letter of credit has a printed address it is better to mention the place of issuance again and separately). 

4.       Indication of

          Confirmation of

          cable advice            :         When a mail confirmation is preceded by Confirmation of a brief cable advice, the letter of Cable credit must be clearly marked as "Operative Credit instrument in confirmation of our tele - transmission of .....(Date)". 

5.       Indication of

          Revocable

          / Irrevocable

          Credit            :         As per Art 6.b. of UCPCD every letter Type of Letter credit must indicate whether it is of Credit "REVOCABLE" or "IRREVOCABLE" lest it be deemed as irrevocable as per Art.6.c UCPDC. 

6.       Indication of

          Availability

          of Credit                 :         As per Art. 10 of UCPDC, the Issuing bank must indicate how a credit is available, whether by Sight Payment, by Deferred Payment, by Acceptance or by Negotiation. Banks in India mostly open letters of credit available by NEGOTIATION (i.e. Negotiation Credits).

          The important step in the process of issuance of a letter of credit is the proper drafting of letter of credit with suitable conditions. The ultimate undertaking and liability of the issuing bank will be determined on the basis of the conditions given in the letter of credit. Hence, this is a very crucial step and must be done with utmost care and attention. While drafting the letter of credit, the banks. 

a.       The letter of credit must be complete and precise.

b.       It must be devoid of inconsistencies and ambiguities.

c.       Conditions imposed must be documentary i.e. those which can be evidenced from the documents. Non-documentary conditions must be limited only to time factors.

d.       Excessive details must be avoided.

e.       Typing errors etc. must be avoided and all visible errors, corrections must be corrected/authenticated. 

7.        Nomination of Bank for Settlement

          As per Art.10.b FUCPDC unless the Credit is available only with the Issuing Bank, or it is a freely negotiable credit, the Issuing Bank is duty-bound to nominate a bank (called a Nominated Bank) for effecting settlement of the drawings made by the beneficiary as per letter of credit terms. Normally, banks nominate the Advising Bank itself for the purpose. In case of negotiation Credits, the bank can nominate more than one bank. In case it is nominating one or more specified banks by name, it is deemed as restricted credit and if credit is made available for negotiation with any bank (General Nomination), it is deemed as unrestricted credit. From the point of view of operational convenience, it is better to restrict to a few well - known banks preferably those located in the place of Beneficiary. 

8.        Drawing of Drafts And Nomination of Drawee 

          As already stated, Drafts must be drawn in case of acceptance Credits. They are optional in case of sight payment Credits (and mostly it is customary not to call for Drafts due to heavy stamp duties, even on sight Credits in certain countries), and not drawn in case of deferred payment credits. However, if Drafts have to be drawn, it must be clearly indicated on whom they have to be drawn and for what amount. Normally a draft is requested for, to be drawn a sa percentage of the invoice value. This would indirectly prevent the Beneficiary to draw invoices value. This would indirectly prevent the Beneficiary to draw invoices for values exceeding the total credit (Art. 37.b, and would meet with the import restriction requirements under licenses and also avoid problems with customs. Also, in the case of usance Credits, the letter of credit must indicate clearly the tenor at which the Draft has to be drawn and the date from which such tenor would be reckoned. The Drafts should preferably be got drawn payable from a definite determinable date, such as 90 days from date of transport document or invoice etc. They should normally be asked to bear a clause reading "drawn under documentary credit No....... dated ........ of ....... Bank". However, it should be borne in mind that in terms of article 9 (a) iv and (b) iv, a credit should not be issued calling for drafts on the applicant. If the credit calls for draft on the applicant, banks will consider such draft as an additional document. 

9.        Name and Address of Applicant and Beneficiary 

          This must be completed in full with street address rather than with Post Box / Bag Number, addresses.

10.      Name and Address of Advising Bank 

          Should be completed in full.

NOTE :         While indicating the name of country, ICC suggests that banks can adopt two letter country code as given in I.S.O. Country and Currency Code. This would avoid the likely confusion arising out of different places with the same names in the same or in different countries and help identification of countries by I.S.O. Standard Code.

11.      Amount of Credi 

          While indicating the amount (value) of credit, FEDAI has suggested the use of the words "NOT EXCEEDING....." before the amount, the rationale being : that in terms of Art. 39 of UCPDC words "ABOUT" will be taken to mean as 10% more or less. Further, as per Art. 39.b. even if fixed amount is stated, it would be taken on mean that the credit allows a tolerance of 5% more or less. By prefixing words "NOT EXCEEDING", it is ensured that the beneficiary will not be able to draw more than the amount indicated, while there is no objection for his drawing for a lesser amount. This would be ideal in case of imports covered by import licenses where a bank cannot allow drawings for more than the value of license. 

NOTE:          For these very reasons the same wordings are recommended to be used if quantities are mentioned in the description of goods.

                   While mentioning the amount, the currency and the I.S.O. currency code must be indicated, to avoid any confusion. As per Art. 34.f.i. the insurance document must be expressed in the same currency as credit. To enable the beneficiary to comply with this condition currency indication is a must.

                   The avoid misunderstanding it is always better to indicate the amount both in figures as well as in words.  While mentioning the amount in figures and words, indication should not be made in lakhs, crores etc. but in terms known the world over such as, hundreds, thousands, millions, etc.

12.      Date of Expiry 

          This would be the last date for presentation of documents by the beneficiary under the letter of credit and is referred to as validity date of letter of credit. This date should not fall beyond 15 days from the last date for shipment permitted under the license. Art 42.a. of UCPDC also stipulates that every Credit must state the date of expiry of credit. This date should be mentioned as per ISO Standard. 

13.      Place of Expiry

          Along with the date of expiry, credit must also specific the place for presentation of documents as per Art. 42.a. 

14.      Last Date of Shipment 

          Though UCPDC does not require it as such, a last date of shipment must be specified, in the letter of credit. This date should not exceed the last date for shipment permitted in the import license or OGL against which the letter of credit is established. This date should also be mentioned as per ISO Standard. 

15.      Documents Presentation Period

          As per Art 43 a of UCPDC, every credit which calls for a transport document must stipulate a specified period of time after the date of issuance of the transport documents during which Beneficiary must present the documents to the nominated bank (for settlement). If no such period is stipulated, banks will not accept documents presented later than 21 days after the date of shipment. This period should coincide with the number of days gap given between shipment and expiry date. The period to be allowed should be optimum depending upon factors like time taken by the beneficiary to collect various documents from the issuers and preparation of documents at his end etc. In case of air shipments this period should as far as possible be kept down to the minimum (say 3 to 10 days) because the goods carried by air would arrive earlier than the documents and may incur heavy demurrage at the port of discharge. 

          It is pertinent to mention that credit should not normally use the words like "Stale documents acceptable", etc. since the word "Stale" is not a defined term and can be misleading. The better way to say it "documents issued days after the date of issuance of transport document acceptable". 

16.      Port of Shipment and Despatch 

          Both must be specified. The port of shipment should agree with the port of shipment if any stipulated in the import license. If import is without specific license, shipment can be allowed from any port other than those of countries with which trade ban is in force. As far as possible the port of shipment must be specified clearly and fully. Abbreviated words like "UAE Port", "E.C. Port" or loosely defined expressions as "any major port", "any Middle East Port" etc. should be avoided. 

17.      Partial Shipments 

          Credit should indicate expressly whether partial shipments are allowed or not. If nothing is stated, by virtue of Art. 40.a. The partial shipments are deemed as allowed. (Art 40 lists cases which will not be deemed as partial shipments). Whenever partial shipments are allowed, it is better to mention the unit prices of goods to be shipped to avoid claiming of amounts disproportionate to shipment. 

18.      Transhipment 

          Art 23.b. of UCPDC defines Transhipment. Further, as per Art 23.c., unless specifically prohibited, transhipment is deemed as allowed. Also Art 23.d. allows transhipment in certain cases even, if the credit specifically prohibits transhipment. In the light of all these provisions, it is upto the banks to act prudently and to allow transhipment wherever credit allows combined transport. Otherwise it has to follow the specific instructions of the applicant.

19.      Transferability of Letter of Credit 

          As per Art. 48.b. a letter of credit becomes transferable only if it is expressly designated as "TRANSFERABLE".

20.      Description of Goods

          While stating the description of goods, excessive details (particularly technical specifications etc). must be avoided they should be as brief as possible. Reference to proforma invoices must be avoided and proforma invoices should not be attached to the Credit to form part of the Credit. In the description, trade terms such as "CIF BOMBAY", of "FOB TOKYO" etc. should be stated, the ideal description would read somewhat like : 

"Not exceeding 20 METRIC TONS `BRASS SCRAP' AT US$ 1500 PER METRIC TON CIF BOMBAY"

21.      Documents 

          As per Art 5.b., Credit must state precisely the documents against which payment/acceptance/negotiation is to be made. It is thus incumbent upon the Issuing Bank to fulfill the obligation of specifying the documents required to be presented and the terms and conditions to be fulfilled. A Credit must therefore specify the following:

          i.        List of all documents required to be submitted.

          ii.       Number of copies of each document required.

          iii.       Whether required in original (c.f.provisions of Art.20b).

          iv.      Where necessary the Credit must state by whom the document must be issued  and its wording or data content.

          As per the standard application for letter of credit evolved by FEDAI, documents are required to be sought for "IN ENGLISH IN DUPLICATE UNLESS OTHERWISE SPECIFIED".

          As per Art. 20(a) certain terms like "First Class" etc. should not be used to describe the issuer of the documents. ICC guidelines suggest that while enumerating documents, following sequence must be followed: 

          A        -         Commercial Invoice

          B        -         Transport Document

          C        -         Insurance Document

          D        -         Other Documents 

Commercial Invoice

          To avoid invoices being drawn for amounts in excess of the credit (refer Art.37b) and to comply with Import License requirements. FEDAI has suggested the incorporation of a clause reading "The gross FOB/C&F/CIF value of the invoices before deduction of agents' commission/rebate if any must not exceed the credit amount". Further if interest payment is involved, the value of such interest amount also should be within the Credit amount. 

Transport Document

          The type of transport document to be called for in the credit depends on how the goods are being transported viz. By Air, Post (Air or surface), Rail Road, Sea, Inland water way or by Combined Transport. Under current UCPDC the whole range of transport documents are covered under articles 23 to 33 (both inclusive). 

•        Basic function of a transport document is to evidence the contract of carriage and hence, it must show the name of the carrier. However, if it is required to be issued by a specific carrier (say Shipping Corporation of India or Air  India) it must stipulate so.

•        As an Exchange Control requirement, every transport document must contain the name and address of the Issuing Bank and the Applicant.

•        LC must stipulate that the transport document should not be dated prior to the date of LC. If this is not mentioned, as per UCPDC, Beneficiary may present a transport document bearing a date prior to the date of issuance of credit which may result in shipment being made prior to the date of issuance of import license or OGL authorisation and may render the shipment illegal (an unauthorised import) in India.

Airway Bill

          When LC allows shipment by air it must call for Airway Bill (Air consignment note) or a House Airway Bill as instructed by the applicant. In either case:

•        LC should not call for more than one original (since it is only the 3rd original issued to shipper that is required) and should not say "Full set of original Airway Bills" 

•        If a House Airways Bill is called in, it is better to stipulate the following:

          •        Master Airways Bill Number.

          •        Name of the Airline company

          •        Flight number and date.

          •        Issuer's IATA Registration number.

Bill of Lading

          If the carriage of goods is exclusively by sea from port to port, the LC can call for a Marine Bill of Lading (B/L). When a marine B/L is called for, it must stipulate of "Full set of original Bills of Lading" showing "ON BOARD". It must also specify whether Freight has to be "Prepaid" or is "Payable at Destination" (least as per Art. 33 a Beneficiary can present a B/L showing "Freight to Pay" if not inconsistent with other documents presented under the LC). 

          If the LC allows the submission of a Charter Party B/L, it must specify that the name of the carrier must be shown (less it can be presented without mentioning the name of the carrier). Since B/Ls are quasi negotiable documents they can be issued "TO ORDER" and "BLANK ENDORSED". In case B/Ls, RBI suggested that the Credit must stipulate shipments should be made only by conference vessels which are in the approved list of Lloyds Register of Shipping (A classification society which issues class certificate to the vessels and it should be classified in its Register as (100 A1) or of any other classification society (there are about nine classification societies world over which are approved by London underwriters) whose classification should be equivalent to Lloyds 100 A1. For this purpose, FEDAI has suggested the incorporation of the following Clause:

          "Shipping Agent's Certificate Agent's Certificate that the vessel is registered with an approved classification society as per the Institute Clause and class mentioned equivalent to Lloyds 100 A1 and the vessel is seaworthy." 

          ICC has suggested that whenever a bank calls for shipment by conference vessel it must specify the name(s) of conference and should clearly state as to which document should evidence that it is a vessel belonging to such conference.

          If shipment is expected by combined transport, credit must allow for presentation of a  combined transport document. In such a case credit must allow for transhipment. Also, for multimodal transport, a document showing "Despatch"or "Taking in charge" would be more appropriate than calling for an "On Board" document. 

          In case of import of certain goods it is customary to carry them on deck only. In such cases LC must specifically allow for shipment on "Deck" (which is otherwise not permitted as per Art 31.1.)

Insurance Document

          In case of FOB or C&F or Ex-works contracts, insurance is normally covered by Applicant. In such cases, before opening the LC, Applicant would obtain an open cover note or open policy and declare the shipments as soon as he comes to know of the same. To enable prompt coverage of insurance LC must stipulate that the beneficiary must inform details of shipment within 24 hours of shipment by teletransmission and a copy of telex, cable  or facsimile message sent should be asked to be submitted. In case of CIF, CIP and other terms of contract where beneficiary has to obtain insurance, LC must specify the type of insurance required. A standard instance clause suggested by FEDAI is "Marine Insurance Policy" or certificate dated not later than the date of transport document issued unto order and blank endorsed for 10% over the invoice value covering Institute Cargo/Air Cargo Clause A, Institute War Clause (Cargo/Air Cargo), Institute Strikes Clause (cargo/Air Cargo) with claims payable in India". If the customer requests for any additional risks to be covered, it must additionally stipulate so. If insurance is not to be subject to a Franchise or an Excess (Deductible), as referred to in Art 35 of UCPDC, the credit must call for the insurance to be issued irrespective of percentages.

Other Documents 

          Among other documents, LC must stipulate the submission of a Certificate of Origin issued by an independent third party like a Chamber of Commerce etc. as may be required. Whenever any other document is called for, the credit must specify by whom such a document is to be issued and what should be its wording or data content. 

22.      Other Terms and Conditions 

          LC can stipulate various other terms and conditions required to be fulfilled by the beneficiary which should be capable of being evidenced by the documents presented or separate certificates submitted by the beneficiaries issued by third parties. For example "Shipments to be made in installments", is condition which will be apparent from the date of transport document. "Shipments to be made in containers" is a condition which can be evidenced by mentioning the container number on the transport document or by a separate certificate. Thus, depending upon the nature of the applicant's requirement, suitable conditions may be stipulated in the LC.

23.      UCPDC Incorporation Clause

          Since every LC is to be issued subject to provisions of UCPDC, Credit must incorporate a Clause stating that "Except as otherwise expressly stated" this Documentary credit is issued subject to Uniform Customs and Practice for Documentary Credit, 1993 Revision, ICC Publication No.500.

24.      Reimbursement Instruction and Reimbursement Authorisation 

          LC must clearly state as to how the bank nominated to effect settlement under the LC will be able to obtain payment. Normally, banks adopt one of the following authorisation methods: 

•        By Debit to the account of Issuing Bank or its Head Office/Link Office held with the Nominated Bank or its branch (with whom it maintains its NOSTRO Account). 

•        By lodging reimbursement claim with a third bank nominated for the purpose either in the country of the beneficiary or any other country (with whom the issuing bank maintains the account). 

•        Issuing Bank would undertake the responsibility of reimbursement upon receipt of documents either by credit to the Nominated for the purpose either in the country of the Issuing Bank or elsewhere.

          It must be remembered that in terms of Art 19.b. of UCPDC, it should not be made a condition that the bank claiming reimbursement must certify to the Reimbursing Bank as having complied with the terms and conditions of the credit. Whenever another bank is authorised as Reimbursing Bank, simultaneous reimbursement instruction must be provided to the bank concerned. It should also be noted to ensure the funding of such an account at the appropriate time. If LC is of large value, and funding the account at short notice appears difficult, the Nominated Bank may be asked to give a few days notice to the Issuing Bank before it lodges its reimbursement claim or debit the Issuing Bank's account with itself. Special instruction such as claiming reimbursement by Mail or TT may also be indicated. 

25.      Instructions To Nominated Bank

          Other instruction to bank(s) nominated to effect settlement such as (a) mailing of documents should be done in stipulated number of set, (b) the mode of sending the documents, (c) Noting of settlements on the reverse of original LC (d) mailing of a minimum number of invoices/other documents with the first set of documents etc (Normally in standard printed LCs, these conditions are mostly reprinted.

26.      Indication of Number of Pages

          The Issuing Bank will on the first page of LC as to in how many pages the Credit is issued (applies only when LC is sent by mail).

Rechecking of LC 

          After drafting the LC for the purpose of teletrasmission or typing the same, and before it is despatched, the entire LC must be checked once again with reference to underlying sale contract and LC application of the applicant to ensure that all conditions are incorporated and that there are no inconsistencies/ambiguities.

Endorsement of Import Licenses

          If the import is covered by an import license the amount of LC opened will be endorsed on the import license. It should also be endorsed on the transfer letter if the import license is transferred in the name of the applicant. Since the import LCs are always issued for CIF value, irrespective of the sale terms for which LC is opened the license will always be endorsed in the relevant column thereof, for CIF value of the import.

Delivery of Import Licenses to Applicant

          After the endorsement, as far as possible, the import license will be retained with the bank. If it is required by the applicant for further utilisation or endorsements by other banks or for securing enforcement/modification thereon by ITC authorities, it will be returned to the applicant against his acknowledgement.

Amendments to LCs 

          Normally amendments to the LC are sought for when there are changes in the terms of underlying sale contract sale contract, or the Beneficiary is not in a position to obtain the documents stipulated in the LC or comply with conditions stipulated therein. When a request for an amendment is it must be ensured that the request letter is signed by the authorised signatory (ies).

          Every amendment will have the same implications as the opening of a LC and hence, all precautions taken at the time of opening the LC must be observed while amending the LC also. Some important tips are enumerated below :

•        If amendment is with regard to description, quantity, value, unit price etc. corresponding amendment to the sale contract must be similar.

•        If request is for extension of shipment/expiry dates it must be ensured that the extended dates would be within the authorised dates as per the relative import license.

•        If request is for enhancement in the value and import is covered by Import License, adequate balance must be available in the third column for endorsement (i.e. where Opening of the LC has to be endorsed) also additional insurance should be obtained by the applicant, where necessary.

•        If amendment is for change of port of despatch/Country of Origin, it should be within the provisions of relative import license/Exchange Control Regulations.

•        It should be ensured that by carrying out the amendment/s no violation/contravention of Exchange Control Regulations or Import regulations result in. Also, the terms and conditions should not become inconsistent. For this reason, if an existing condition is amended, all other conditions related thereto must also be amended. If a new clause is incorporated, it should not result in contradiction of any existing clause.

•        A mendments are sent normally either by mail or by tele transmission, the same procedure followed for despatch of LCs must be followed in case of amendments also.

Scrutiny of Documents Received Under LCs 

          The basic responsibility of the issuing bank is to pay the Beneficiary / Remitting Bank on presentation / due date, as the case may be when the documents are presented to it under its letter of credit. Such payment will be made by the Issuing Bank only when the documents presented to it are in strict conformity with the terms and conditions of the LC.

 

Buyer’s Credit – Definition & Meaning

BUYER’S CREDIT:

Definition / Meaning of Buyer’s Credit

Buyer’s Credit refers to loans for payment of imports into India arranged for the importer through an overseas bank. The offshore branch credits the nostro of the bank in India and the Indian bank uses the funds and makes the payment to the exporter’ bank as an import bill payment on due date. The importer reflects the buyers credit as a loan on the balance sheet.

Benefits of Buyers Credit:

The benefits of buyers credit for the importer is as follows:

·         The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows

·         The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.

·         The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.

·         The importer can use this financing for any form of trade viz. open account, collections, or LCs.

·         The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.

Process flow:

The Indian customer will import the goods either under LC, Collections or open account

The Indian customer request the Buyer’s Credit Arranger before the due date of the bill to avail buyers credit financing

Arranger to request overseas bank branches to give a buyers credit offer letter in the name of the importer. Best rate is quoted to importer

Overseas Bank to fund your existing bank nostro account for the required amount

Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment)

On due date existing bank to recover the principal and amount from the importer and remit the same to Overseas Bank on due date.

Cost Involved:

The cost involved in buyers credit is as follows:

·         Interest cost: This is charged by overseas bank as a financing cost

·         Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking

·         Forward / Hedging Cost

·         Arrangement fee: Charged by person who is arranging buyer’s credit for you.

·         Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges.

·         WHT: The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities.

Regulatory Framework:

Banks can provide buyer’s credit upto USD 20M per import transactions for a maximum maturity period of 1 year from date of shipment. In case of import of capital goods banks can approve buyer’s credits upto USD 20M per transaction with a maturity period of upto 3 years. No roll over beyond this period is permitted.

RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for short term credit for financing — by way of either suppliers’ credit or buyers’ credit — of import of goods into India, based on uniform criteria. Credit is to be extended for a period of less than three years; amount of credit should not exceed $20 million, per import transaction; the `all-in-cost’ per annum, payable for the credit is not to exceed LIBOR  for credit up to one year, and LIBOR  for credits for periods beyond one year but less than three years, for the currency of credit. (Now 6 months Libor + 200 Basis Points)

All applications for short-term credit exceeding $20 million for any import transaction are to be forwarded to the Chief General Manager, Exchange Control Department, Reserve Bank of India, Central Office, External commercial Borrowing (ECB) Division, Mumbai. Each credit has to be given `a unique identification number’ by authorised dealers and the number so allotted should be quoted in all references. The International Banking Division of the authorised dealer is required to furnish the details of approvals granted by all its branches, during the month, in Form ECB-ST to the RBI, so as to reach not later than 5th of the following month. (Circular AP (DIR Series) No 24 dated September 27, 2002.

As per RBI Master Circular on ECB and trade finance 2010, interest cost of overseas lender has been capped at 6 month libor + 200bps for tenure upto <3 years.

(LOC/LOU) Charges

Letter of Comfort Charges

Normally one would tend to look at Interest Cost provided by Foreign bank (Indian bank overseas branches or Foreign bank) on deciding which offer to accept. But this is a wrong approach. One should look at overall cost. Overall cost would be Foreign bank interest cost and LOU charges of the bank.

Letter of Comfort / Undertaking Charges

- Buyer’s Credit  service charges for XYZ Bank – 1.20% p.a

XYZ Bank offer: L + 1.50.

Overall cost in case of XYZ Bank  : 0.80 %(LIBOR) + 2.00% + 1.20% = 4.00%

Procedure for Buyers Credit in India

Internal Checks from your end:

Non Fund based Limit. In order to avail buyers credit, it requires to have non fund based limit with existing bank. Under banking terms, Non Fund based limits are defined as Letter of Credit (LC) limits, Bank Guarantee (BG) limits etc. Normally during sanction, bank tends to keep these limits inter changeable between LC / BG or fund based limits. If not, bank would not be able to issue Letter of Undertaking (LOU)/ Comfort (LOC) for buyers credit. Some nationalized bank insist on using word buyers credit in sanction before availing buyers credit. Thus as a first check, check if these limits are available in the sanction letter, if not get bank to add this limits or make it interchangeable.

Gap availability in Non fund based (NFB) limits: Incase, where you already have non fund based limits but it is fully utilized for say LC or BG than you might not be able to utilize it for buyers credit. Thus at the time of sanction of loan or at the time of renewal, make sure that there are enough limit available and interchange with fund based limit as well, if required, can convert Fund based (FB) limit to non fund based for that much amount.

Tenure of Buyers Credit: At the time of sanction, bank clearly mentions the tenure for which a LC or BG can be issued. This needs to be checked, as maximum tenure for which buyers credit can be availed. Say you want buyers credit for 180 days whereas sanctioned tenure of the non funds based limits is for 90 days, than you can avail buyers credit for maximum of 90 days at a time and then roll it over afterwards.

Forward Booking: Bank may insist on booking forward cover for the currency risk upto the amount of buyers credit. So before moving into transaction, check on the approximate forward premium for the tenure. 

Format of Letter of Comfort: Every Foreign bank offering buyers credit has their own format of letter of comfort / letter of undertaking. There might be a chance that your bank might not issue letter of comfort in that format or might insist on using their own format. Thus check with your bank on this before proceeding.

Operational Issue: Say each of the above issue is taken care off and you got the offer letter issued for buyers credit for a payment due in next couple of days. Now your bank has to issue letter of comfort which normally should not take more than few hours if the above points were already taken care off. But some nationalized bank branches would still take couple of days to issue letter of comfort. To avoid any delay payments keep provision of few days. Secondly some international bank might insist on getting Letter of comfort / undertaking to be sent by authenticated swift. Thus you might have to check if there is swift key arrangement between your bank and the foreign bank.

Initial requirement for getting quote issued

Amount and Currency of Transaction: Exact value as per invoice or LC has to be provided here.

Tenure for which buyers credit is required: Details of tenure for which buyers credit is required has to be provided here. As per RBI regulation, under non capital goods (Raw material etc) payment has to be made with 360 days from the shipped on board date of Bill of Lading (BL) and for Capital goods with 3 years. Thus according to requirement, RBI regulation and your sanction (as per point 3 of initial check), will decide what tenure to be mentioned.

Due date of transaction: Date on which Bill / LC / payment becomes due. Normally one should mention 1 day before due date. Also take care to if the same is not Saturday, Sunday or Currency holiday for that particular currency. Otherwise it would delay your transaction.

Bank which will give letter of comfort / undertaking: Mention your bank name. Every bank has line (limit) of credit on other bank. It might be possible that overseas bank from where you are arranging quote does not have line on your bank and thus would not be able complete your transaction

Underlying transaction (Goods involved): What goods are involved in the transaction? As per bank’s internal policy, they would not deal in funding for certain goods and thus would not offer funds for the transaction. For example, some banks does not give buyers credit if the underlying goods involves wood.

Country of Origin of Goods: Internationally few countries are under UN sanction or OFAC sanction and thus dealing under a particular currency is not allowed for that country. For example, import from Iran, Libya etc, international branches would not offer buyers credit on such transaction because of OFAC sanction.

Other than above, bank might ask for more information like, in case of LC transaction, LC number, issue date, expiry date, last date of shipment etc.

As seen above, there are many operational checks before entering into a buyers credit transaction. Thus is it suggested that to take help of consultant.

WHT (Withholding Tax) on interest on Buyers Credit

What is WHT (Withholding Tax) ?

Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them

Why is it a deterrent ?

Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs is borne by the borrower

Impact on you ?

·         Tax is paid @ 20% (As per Income Tax Act, 1961) or as per DTA (Double Taxation Agreement) agreement between India and the lender’s country

·         No Withholding tax on loans raised from overseas branch of Indian bank

Withholding tax is 10% of the gross amount of the interest on loans made or guaranteed by a bank or other financial institution carrying on bona fide banking or financing business or by an enterprise which holds directly or indirectly at least 10 per cent of the capital of the company paying the interest.

To explain you mathematically:

Foreign Bank BC with Withholding tax

= (L + 1.00) + ((L+ 1.00)*10%)
= (0.25 + 1)+ ((0.25+1)*10%)
= 1.25 + 0.125
= 1.375

Indian bank overseas branches

= L + 1.50
= 0.25 + 1.50
= 1.75

Assumption

- 90 days Transaction USD LIBOR = 0.25

* Note: Above content is collected from various sources. Request to consult a tax expert before using the same.

FORMAT OF LOU (LETTER OF UNDERTAKING)

QUOTE REF :

CONSIDERING THAT YOUR BANK ACCEPT/WILL CONSIDER OUR REQUEST & THE SAID OFFER WE CONFIRM THAT :

(A)   NECESSARY APPROVALS FROM COMPETENT AUTHORITY AS PER EXCHANGE CONTROL / FEMA REGULATIONS THAT ARE IN FORCE HAVE BEEN DULY COMPLIED WITH .

(B)  NO OTHER FINANCIAL LIABILITY IS OUTSTANDING IN RESPECT OF THE SAID TRANSACTION.

(C)  WE WILL MAKE AVAILABLE TO YOU AND /OR YOUR AUTHORIZED REPRESENTATIVES ALL THE DOCUMENTS RELATING TO THE ABOVE TRANSACTION FOR YOUR EXAMINATION, IN CASE OF NEED.

(D) NECESSARY KYC HAS BEEN DONE IN RESPECT OF OUR IMPORTER CUSTOMER AND THE TRANSACTION IS A BONAFIDE COMMERCIAL TRADE RELATED TRANSACTION.

(E) THE VARIOUS CREDIT FACILITIES GRANTED BY US TO THE CONSTITUENT HEREIN ARE CLASSIFIED AS STANDARD ASSETS AS ON DATE.

(F) WE CONFIRM NEITHER THE IMPORTER OR NOR THE EXPORTER ARE IN OF AC/OTHER SECTIONS LISTS AND WE UNDERTAKE TO INDEMNIFY YOU AGAINST ANY LOSS THAT YOU MAY SUSTAIN IN UNDERTAKING THIS TRANSACTION IN CASE ANY OF THE INVOLVED PARTIES ARE LATER FOUND APPEARING IN OF AC/OTHER SANCTIONS LISTS.

1. THE PARTICULARS REGARDING IMPORTS ARE AS UNDER:

NAME OF THE IMPORTER AND ADDRESS:

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

----------------------------------

SELLERS NAME AND ADDRESS:

----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------

-------------------------------------------------

SELLERS BANK AND ADDRESS: -------------------------------------------------

AWB NO AND DATE: ----------------------------------------------------------------

NAME OF THE AIRLINE: -----------------------------------------------------------

DESCRIPTION OF THE GOODS: ---------------------------------------------------

RAW MATERIAL OR CAPITAL GOODS ---------------------------------------

ORIGIN OF GOODS: ------------------------------------------------------------------

TENOR (BUYER CREDIT PERIOD): -----------------------------------------------

AMOUNT OF LOAN: -----------------------------------------------------------------

INTEREST RATE: APPLICABLE LIBOR (NOT EXCEEDING 06

MONTHS LIBOR) + ----------- BPS.

2. PLEASE EXTEND THE LOAN OF -----------------------------------FOR THE

ABOVE IMPORT TRANSACTIONS PLEASE REMIT THE RELEVANT

SUM TO OUR -----ACCOUNT WITH ----------------------------- (SWIFT ----

ACCOUNT NO ---------------------- QUOTING OUR REF ----------------------

DATED: --------------AND VALUE DATED -----------------------------------.

3. WE -------------BANK, HEREBY UNCONDITIONALLY AND

IRREVOCABLY AGREE TO REPAY THE PRINCIPAL AND INTEREST

ON DUE DATE AT APPLICABLE -----MONTH LIBOR PLUS -------BPS

UNDER THIS LOAN.

4. WE UNDERTAKE TO CREDIT PRINCIPAL PLUS INTEREST WITHOUT

DEDUCTIONS OF ANY CHARGES IN BETWEEN BY ANY BANK TO JP

MORGAN CHASE, NEW YORK (CHASUS33) FOR CREDIT ACCOUNT

NO 544720348 OF CANARA BANK LONDON WITH THEM. WE

WOULD BE LIABLE TO PAY FOR THE SHORTFALL AMOUNT &

INTEREST FOR THE DELAYED PERIOD AT USD PRIME RATE PLUS

2.00 PCT WITH LATE PAYMENT CHARGES OF USD 500.00 & SWIFT

CHARGES USD 100.00 PER MESSAGE WHICH WOULD BE

IMMEDIATELY PAID UPON BEING ADVISED.

5. WE -----------------BANK, HEREBY AGREE THAT INTEREST WILL BE

REMITTED TO YOU AT THE ABOVE RATE NET OF WITHOLDING

TAX IF ANY AT OUR END.ON ACCOUNT OF ANY TAXES OR ANY

CHARGES OF OURSELVES, NO DEDUCTION WILL BE LEVIED TO

YOU.

REGARDS

---------------BANK.

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