ex im financing

Financing Of Export - Import

INTRODUCTION

Exports are a subject of significance to every economy whether developing or

developed because they represent the biggest source of earning foreign exchange. The

need is all more acute for a developing economy account. Increasing exports enables

the economy to earn foreign exchange, enhance foreign exchange reserves, improve

balance of trade, balance of payments, correct deficits in BOP, and improve exchange

value of its currency. In view of these advantage many of the countries go with the

Maximum “Export or Perish” in its economic policy. Every government encourages

the growth of exports and reduction in imports.

The bank extends financial assistance to the exporters at pre-shipment and

post-shipment stages. While extended such facilities banks are mainly governed by

the guidelines issued by the RBI. Financial assistance extended to the exporter prior to

shipment of goods from India falls within the scope of the pre-shipment finance while

that extended after shipment of goods falls under post-shipment finance. While pre-

shipment finance is provided for working capital for the purchase of raw material,

processing packaging, transportation, warehousing, etc., of the goods meant for

export, post shipment fiancé is generally provided in order to bridge the gap between

shipment of goods and the realization of proceeds.

Export finance means the credit required by exporters for financing their

export transactions from the time of getting an export order to the time of full

realization of the payment from the importer. Importers also need finance for making

payments for their imports. The success of exports-imports depends upon extension of

credit. This credit policy may be short term or medium term.

T.Y.B.Com (Banking & Insurance) 1


The determination of a credit policy may be more important than any other

element of an export policy. The credit policy may depend upon sales volume, types

of organization, pricing policy and product policy. It may also depend upon the

overall financial strength of the company.

A manufacturer exporter needs credit from the point for the various purposes

such as import of capital goods, to provide liberal terms to the importer, to execute the

export promotion programmed, establishment of new enterprise and capital

investment in other countries.

The nature of export-import finance may be short term or long-term credit.

Short-term credit facility is extended for a period from 30 days to 180 days. The

exporter and Importer both may require short-term credit, which is granted by the

commercial banks. Long-term credit is extended for a period from 5 years to 20 years.

Long-term finance is provided for long-term development activities such as purchase

of capital goods, machinery and the volume of credit is generally large. ECGC, IDBI,

and Exim Bank may provide the long-term credit.



Incentives Available To Exporters

The Reserve Bank of India has introduced various measures in its effort to encourage

exports.

Exporters are eligible to avail finance at concessional rates of interest.

Banks being the main source of finance are encouraged to external credit

liberally to exporters, including granting lines of credit for 2-3 years at a

stretch.

It is mandatory for banks to extend a minimum of 12% of net bank credit to

exporter sector.

To compensate banks for extending finance at lower rates of interest, the

Reserve Bank of India provides export refinance facility.

To encourage banks to grant credit to exporters liberally, credit guarantee is

arranged from ECGC, for loans extended to exporters at both pre and post

shipment stage.

Exporters are also granted loans against duty draw back entitlements.

Export earnings are not fully taxed.

Basically the financing of export can be classified in two categories as under

depending upon the purpose and stage at which the finance is made available.

1. Pre-shipment (Packing credit) Finance

2. Post shipment Finance



Further the export credits both pre and post shipment may be permitted either in

Indian Rupees or in foreign currency.

FUND BASED

Pre-shipment Post-shipment

NON-FUND BASED

Advising/confirming Export guarantees Derivatives Back to back L/C

Export L/Cs



Importance of Finance at Pre-Shipment Stage

1. To Purchase raw materials, and other inputs to manufacture goods.

2. To assemble the goods in the case of merchant exporters.

3. To store the goods in suitable warehouses till the goods are shipped.

4. To pay for packing, marking and labeling of goods.

5. To pay for pre-shipment inspection charges.

6. To import or purchase from the domestic market heavy machinery and other

capital goods to procedure export goods.

7. To pay for export documentation expenses.

8. Meet the expenses for processing of goods.

Importance of Finance at Post-Shipment Stage

1. To pay to agents / distributors and others for their services.

2. To pay for publicity and advertising in the overseas markets.

3. To pay for port authorities, customs and shipping agent’s charges.

4. To pay towards ECGC premium.

5. To pay for freight and other shipping expenses.

6. To pay towards marine insurance premium, under CIF contract.

7. To pay towards various expenses in connection with visits abroad for

market surveys, or for some other purpose.

8. To pay towards export duty or tax, if any.

9. To meet expenses in respect of after-sale-service.

10. To pay towards such expenses regarding participation in exhibitions

and trade fairs in India and abroad.

11. To pay for representatives abroad in connection with their stay abroad.

12. To pay for any other activity in connection with export of goods.



PRE - SHIPMENT FINANCE

Pre-shipment is basically a short-term finance (inventory finance) extended

to exporters in anticipation of export of goods. This finance enables exporters to

procure raw materials, process, manufacture, warehouses and ship the goods

meant for export.

Pre-shipment finance can be classified as:

1. Packing credit

2. Advance against incentives receivable from government covered by

ECGC guarantee.

3. Advance against Cheques / drafts received as advances payment.

PACKING CREDIT:

It is a loan or advance granted to the exporter for purchase of raw material

/processing/packing based on Letter of Credit (LC) opened in his favor by the

importer. The LC/Confirmed order will be retained by the bank and will be

endorsed accordingly indicating that the exporter has availed of packing credit.

In terms of RBI DBOD circular no BM/78/C.297 (m)-69 dated 20.01.69,

pre-shipment credit/packing credit has been defined as ‘any loan or advance

granted or any other credit provided by a bank to an exporter for financing

the purchase, processing, manufacturing or packing’ of goods for exports.

Presently Reserve Bank of India is issuing Master circulars on export credit

consolidating regulatory guidelines in one place on yearly basis. The provisions of

RBI guidelines/ regulations are incorporated by head office in their policy of

implementation.



ELIGIBILITY:

An exporter who wants to avail of pre-shipment finance should obtain an

importer-exporter code number from the DGFT. In addition, the exporter should

not be under the caution list/special approval list of the RBI/ECGC.

Usually, packing credit is extended to exporters who have the export

order/Letter of Credit in their name. It can also be extended where the contract is

concluded by exchange of messages between the two parties with the opening of

letter of credit to be followed later on. In such instances banks may grant packing

credit based on the communication, provided the following information is made

available.

a) Name of the overseas buyer.

b) Particulars of goods to be exported.

c) Quantity and unit prices or value of order.

d) Date of shipment

e) Terms of sales and payments

Packing credit is also extended to supporting manufacturers/suppliers of

goods who do not have LCs in their own name but an LC holder has placed orders

on them for supply of goods.



Persons Eligible For Finance:

An exporter to be eligible for finance must have an importer-exporter code

number (IEC) allotted by the Director General of Foreign Trade (DGFT) and

should not be in the caution list of the concerned Export Credit Guarantee

Organization (e.g., ECGC of India).

Margin Requirements:

Pre-shipment finance being a need based finance; banks have the freedom to

determine the margin that is to brought in by the exporters.

Margins serve three important purposes:

a) To ensure that the exporter has a stake in the business

b) To take care of erosion in the value of goods charges to the banker.

c) To ensure that bank finance is not extended to cover exporter’s profit margin.

The percentage of margin will depend on the nature of the order,

commodity, capability of the exporter, etc. Disbursement of funds under packing

credit takes place in phases depending on the length of the operating cycle.

Period of Finance:

Packing credit can be extended at a concessional rate of interest for a

maximum period of 180 days or for the operating cycle of the particular activity

whichever is lower. Banks may further extend this period to an additional 90 days

(i.e., 180 + 90 = 270 days). Alternately, banks may extend packing credit for a

maximum period of 270 days from the beginning itself. If the packing credit is

outstanding after the due date it is called overdue packing credit. Overdue packing

credit is not eligible for concessional rate of interest.

It should be noted that concessional rate of interest will be applicable only of

export of goods takes place within the time stipulated. This period has been fixed



as 360 days from the date of availing the finance. In case exports of goods do not

take place within the stipulated period, banks are eligible to charge interest from

the very first day of advance at a rate prescribed for “Export credit not otherwise

specified”.

Pre-shipment Credit in Foreign Currency (PCFC)

Exporters often complain about the high cost of capital vis-à-vis their

competitors from other countries. In order to make their prices competitive and

thereby give a boost to exports, the Government of India made available yet

another mode of financing-financing exports, in foreign currency at internationally

competitive interest rates.

The scheme is an additional window for providing pre-shipment credit to

Indian exporters at internationally competitive rates of interest. It will be

applicable to only cash exports.

This facility may be extended in one of the convertible currencies viz. US

Dollars, Pounds, Japanese Yen, Euro, etc. Further banks may extend PCFC in one

convertible currency in respect of an order invoiced in another convertible

currency. The risk and cost of cross currency transactions in such cases will be

that of the exporter.

Liquidation Of Packing Credit

After shipment of goods, exporter will prepare necessary documents and

present the same to the branch. The branch negotiate/purchase/discount the export

bill as per terms of sanction and adjust the packing credit.



PROCEDURE TO OBTAIN PACKING CREDIT

Application to Bank

The exporter should apply in a prescribed form to his bankers giving details

of the credit requirements. The application for packing credit should be

accompanied by the following documents:

An undertaking stating that the advance will be utilized for the specific

purpose in respect of export of goods.

An undertaking stating that the shipment will be effected within a certain time

limit and submit the relevant shipping documents to the bank in time.

In case the exporter wants to obtain the credit against preliminary information

of contract, whereby, at later stage the export order or letter of credit will be

received by him, an undertaking to the effect to the same will be produced to

the bank, within reasonable time.

In case of manufacturer, who exports through export house/ merchant

exporter, an undertaking from the export house/ merchant exporter stating that

they have not/will avail of packing credit against the same transaction and for

the same purpose till the original credit is liquidated.

Agreement of hypothecation or letter of pledge.

Demand promote signed on behalf of the company/firm.

Letter of continuity signed on behalf of company/firm.

Certificate of the board resolution (in case of limited companies).



Letter of authority to operate the account.

Confirmed export order and/or letter of credit in origin al.

Appropriate policy/ guarantee of Export Credit Guarantee Cover.

Copy of valid Registration Cum Membership Certificate.

Processing Of Application

The application is processed taking into consideration the following:

Documentary evidence in the form of export order/ letter of credit or

correspondence exchanged between the applicant and the importer.

Credit worthiness of the applicant.

Sanctioning Of Loan

If the applicant is found in order the bank sanctions the amount. Normally

the loan is sanctioned depending upon Free On Board (FOB) value exporter order/

letter of credit or market value of the goods whichever less.

Loan Agreement

Before disbursement of loan, the banks require the exporter to execute a

formal loan agreement. The loan agreement contains terms and conditions relating

to the loan.

Disbursement Of Loan

Normally, packing credit advances are not sanctioned in lump sum but are

disbursed in a phased manner.



Maintenance Of Accounts

As per RBI directives, banks must maintain separate accounts in respect of

each pre shipment advance.

Monitoring Of Accounts

The bank advancing packing credit should monitor the use of packing credit

by the exporter, i.e. whether the amount is used for export purpose or not.

Repayment

As soon as the export proceeds and/or incentives are received, the exporter

should repay the amount to bank advancing credit. Normally, the advancing bank

realizes the export proceeds and the makes necessary entries in the exporter’s

account.



FORMS OF PRE-SHIPMENT FINANCE

Advances against Hypothecation

Packing credit is given to process the goods for export. The advance is given

against security remains in possession of the exporter. The exporter is required to

execute the hypothecation deed in favour of the bank.

Advance against Pledge

The bank provides packing credit against security. The security remains in

the possession of the bank. On collection of export proceeds, the bank makes

necessary entries in the packing credit account of the exporter.

Advance against Red L/C

The L/C received from the importer authorities the local bank to grant

advances to the exporter to meet working capital requirements relating to

processing of goods for exports. The issuing bank stands as a guarantor for

packing credit.

Advances against Back-To-Back L/C

The merchant exporter who is in possession of the original L/C may request

his bankers to issue back-to-back L/C against the security of original L/C in

favour of the sub-supplier. The sub-supplier, thus, gets the back-to-back L/C on

the basis of which he can obtain packing credit.



Advance against Exports through Export Houses

Manufactures who export through export houses or other agencies can

obtain packing credit, provided such manufacture submits an undertaking from the

Export Houses that they have not or will not avail of packing credit against the

same transaction.

Advance Against Duty Draw Back (DBK)

DBK means refund of custom duties paid on the import of raw materials,

components parts and packing material used in the export production. It also

includes refund of central exercise duties paid on indigenous materials. Banks

offer pre-shipment as well as post-shipment advances against claims for DBK.



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 from India from the date of

extending the credit after shipment of the good to the date of realization of the export

proceeds”. It is basically meant for financing export sale receivables of the exporter.

Post-shipment finance can be availed on submission of commercial documents

evidencing export to the Authorized Dealer. The exporter is required to submit the

documents to the bank within 21 days from the date of shipment of good. The

documents to be submitted include all shipping documents and an extra copy of

invoice, relating to any export declaration from endorsed by Customs/Postal

authorities.

Post –Shipment finance can be classified as under;

Negotiation/Payment/Acceptance of export documents under Letter of Credit.

Purchase/discount of export documents under confirmed orders/export

contracts, etc.

Advances against export bills sent on collection basis.

Advances against exports on consignment basis.

Advances against undrawn balance on exports.

Advances against receivables from the Government of India.

Advances against retention money relating to exports.

Advances against approved deemed exports.



ELIGIBILITY

Post-shipment finance is extended to the actual exporter or to an exporter in

whose name the exporter documents are transferred. In case of deemed exports,

finance is extended to the deemed exporters.

QUANTUM

Post-shipment finance can be extended up to 100% of the invoice value of

the goods. However, banks are free to stipulate margin requirements as per their

lending norms.

PERIOD OF FINANCE

The period of Post –shipment Finance will depend on the terms of contract

between the exporter and overseas importer. As per exchange control regulations,

for cash exports it can be for a maximum period of 180 days from the date of

shipment. For project exports and deferred payment exports the tenure may differ

from contract to contract.

INTEREST RATE APPLICABLE

Rate of interest depends on the nature of the bills, i.e., whether it is a

demand bill or usance bill. A demand bill or a sight bill is one, which is applicable

immediately on presentation. In case of a usance bill, the terms of payment are

specified on the bill. Under this arrangement the importer is allowed a grace

period for payment of the bill. The rate of interest charged for the overdue period,

i.e., from the due date to 180 days from the date of shipment will be “Export

credit not otherwise specified”. For the period beyond 180 days from the date of

shipment, higher rate of interest as given in the interest rate directive will be

charged.



PROCEDURE TO OBTAIN POST-SHIPMENT FINANCE

Post shipment finance means an advance to an exporter after shipment of

goods. The exporter should apply in a prescribed form to his bankers, giving

details of the credit requirements.

The bank generally advances credit against:

Shipping documents

Export incentives receivable.

APPLICATION

The application must be supported by relevant shipping documents and such

other documents/undertakings as required by the bank. The other documents may

include:

Demand promote signed on behalf of the company/firm.

Letter of continuity signed on behalf of the company/firm.

Certificate of the Board of Directors resolution.

Letter of authority to operate the account.

PROCESSING OF APPLICATION

The application is processed after verification of shipping documents. The

bank also takes into consideration the credit worthiness of the exporter and the

importer and also the characteristics of the product exported.

LOAN AGREEMENT

Before disbursement of loan, the banks require the exporter to execute a

formal loan agreement.



MAINTENANCE OF ACCOUNTS

As per RBI directives, banks must maintain separate account in respect of

each post-shipment advance. However, running accounts are permitted in case of

units in Special Economic Zone/Export Promotional Zone and 100% Export

Oriented Units.

REPAYMENT

As soon as the export proceeds and/or, incentives are received, the exporter

should repay the amount to bank advancing credit. Normally, the advancing bank

realizes the export proceeds and then makes necessary entries in the exporter’s

account.



FORMS OF POST-SHIPMENT FINANCE

Export bills negotiated under Letter of Credit

The exporter can claim post-shipment finance by drawing bills or drafts

under Letter of Credit. The bank insists on the necessary documents as stated in

the letter of credit. If all documents are in order, the bank negotiates the bill and

advance is granted to the exporter.

Purchase of export bills drawn under confirmed contracts

The banks may sanction advance against purchase or discount of export bills

drawn under confirmed contracts. If the letter of credit is not available as security,

the bank is totally dependent upon the credit worthiness of exporter.

Advance against bills under collection

In this case, the advance is granted against bills drawn under confirmed

export order or letter of credit and which sent for collection. They are not

purchased or discounted by the bank. However, this form is not as popular as

compared to advance against purchase or discounting of bills.

Advance against claims of Duty Drawback (DBK)

Duty Drawback means refund of custom duties paid on import of raw

materials, component parts and packing material used in export of product. It also

includes refund of central excise duty paid on indigenous materials. Banks offer

pre-shipment as well as post-shipment advances against claims for duty drawback.

Advance against goods sent on consignment basis

The bank may grant post-shipment finance against goods sent on

consignment basis.



FORFEITING

Forfeiting is a proven method of providing fixed-rate financing for

international trade transactions. In recent years, it has assumed an important

role for exporters who desire cash instead of deferred payments, especially

from countries where protection against credit, economic and political risks

has become more difficult.

Forfeiting goes beyond credit insurance cover provided by government and

private institutions, which usually require partial risk retention by the exporter,

and provides the exporter with cash at the time of shipment, and on a non-

recourse basis.

In Forfeiting, the importer’s bank usually guarantees a series of promissory

notes or bills of exchange, which cover repayment of a supplier’s credit,

provided by the exporter to the importer, for a period of from 180 days to 7

years.

These notes or bills (“notes”) are usually structured to mature semiannually,

and the face amounts of such notes include principal, and a fixed interest rate

paid by the importer for the supplier’s credit.

The notes are initially given to the exporter at the time of shipment (or

performance of other services) and become its property. The notes represent

the unconditional and irrevocable commitment of the buyer and/or its bank

(where the latter has added its guarantee) to pay the notes at maturity.

The payment of these notes is independent of, and without any direct

relationship to, the underlying commercial contract, which usually provides

for other remedies to ensure the exporter’s due performance.



Once the exporter becomes the bona fide owner of the notes, it can sell them

to a third party at a discount from their face amounts, for immediate cash

payment. This sale is without recourse to the exporter, and the buyer of the

notes assumes all of the risks. The buyer’s security is the guarantee of the

importer’s bank. The notes can be denominated in U.S. Dollars or almost any

major currency.

A commitment to purchase the notes from the exporter can (and in many cases

should) be made in advance for reasons explained below.

FORFEITING DOCUMENTATION

Promissory Notes / Bills of Exchange in international format with bank avail

or guarantee; OR Conformed copy of underlying letter of credit including any

amendments

Conformed copy of commercial invoice and shipping documents

Confirmation of the authenticity and validity of all signatures appearing on the

documentation



LETTER OF CREDIT

Authorized dealers/Banks are permitted to open letters of credit (L/c) on

behalf of their customers, subject to the normal banking procedures and other

provisions, Letter of Credits are opened against specific licenses or under Open

General List (OGL) only on behalf of their customers who maintain accounts with

them. Before opening L/cost, the underlying sales contract in original should be

verified. In the absence of this banks can accept a confirmed order, proforma

invoice countersigned by the importer etc. Letter of Credits must provide for

payment against delivery of shipping documents. Letter of Credit is a safe and

secured means of payment against delivery of shipping documents. Letter of

Credit is a safe and secured means of payment especially in the present business

world where it is not possible for the seller to meet the buyer personally or know

the credit worthiness of the buyer. Thus, under Letter of Credit the credit risk

shifts on the bank instead of the buyer. On the due date, if the L:/c terms are met,

the issuing bank/ opening bank will be bound to make the payment.

Letter of Credit is an undertaking by the bank, issued at the instance of the

buyer or importer undertaking to honour the bills of exchange (drafts) drawn

under the Letter of Credits subject to the documents confirming to the Letter of

Credit terms.

A letter of credit can be defined as” an undertaking by importer’s bank

stating that payment will be made to the exporter if the required documents are

presented to the bank within the validity of the Letter of Credit”.



PARTIES TO LETTER OF CREDIT

Applicant: The buyer or importer of goods.

Issuing Bank: Importer’s bank who issues the Letter of Credit.

Beneficiary: The party to whom the Letter of Credit is addressed, i.e. the

seller or supplier of goods.

Advising Bank: Issuing bank’s branch or correspondent bank in the exporter’s

country to which the Letter of Credit is sent forward.

Confirming Bank: The Bank in beneficiary’s country, which guarantees the credit

on the request of the issuing bank.

Negotiating Bank: The bank to whom the beneficiary present his documents for

payment under Letter of Credit. Negotiating bank pays the

proceeds of the documents to the exporter and seeks the

repayment from the issuing bank.

TYPES OF LETTER OF CREDIT

1. Revocable & Irrevocable Letter of Credit

A revocable credit can be amended or cancelled by the issuing bank at any

time, without notice to or approval by the seller.

On the other hand, in case of irrevocable credit, the buyer and issuing bank

cannot amend or cancel the credit without the express approval of the seller.



2. Confirmed Irrevocable Letter of Credit

Payment under an irrevocable documentary credit is guaranteed by the

issuing bank. However, the seller might wish that a local bank, add its guarantee

(confirmation) of payment to that of the issuing bank. It arises because the issuing

bank’s guarantee may be of limited value since it may be

In a foreign country;

Small, or unknown to the seller;

Subject to unknown foreign exchange control regulations.

Hence, the seller may request the buyer to arrange for a confirmed.

3. Revolving Letter of Credit In case where buyer wishes to have quantities of the ordered goods delivered

at specified, such as in a multiple delivery contract, the Revolving Letter of Credit

is used. This is a commitment on the part of the issuing bank to restore the credit

to the original amount after it has been used or drawn down.

For example a buyer may stipulate that the seller has to supply 1 container of

computers each on february1, March 1 and April 1 in case of revolving Letter of

Credit the seller would be paid separately for each shipment only if it is on time

and conforms to the Letter of Credit. This avoids having to open three different

Letter of Credits for the same contract.

4. Transferable Letter of Credit In cases where the seller is a trading house or where the seller does not

manufacture all the ordered goods in-house, the seller may wish to transfer part or

all the Letter of Credit to his supplier. To be able to do so the seller asks the buyer

to arrange for a transferable Letter of Credit.

For Transferring the Letter of Credit in favour of its suppliers, the seller has

to request the bank authorized to effect the transfer. The request for transfer

contains details like name of the second beneficiary, amount to be transferred and

the description of goods to be supplied.



On receiving the transferred Letter of Credits, the suppliers manufacture and

ship goods directly to the buyer. The suppliers submit documents as specified in

the Letter of Credit and obtain payment from the negotiating bank in the usual

manner.

5. Back-to-back Letter of Credit When a trader receives a non-transferable Letter of Credit, he can opt for a

Back-to-Back Letter of Credit. This is used by Traders to make payment to the

ultimate supplier. The trader received a documentary credit from the buyer and

then opens another documentary credit in favour of the ultimate supplier. The first

documentary credit is used as collateral for the second credit.

The original Letter of Credit is also called a selling credit’ and the back-to-

back Letter of Credit is also known as a ‘buying credit’. The original Letter of

Credit and the back-to-back Letter of Credit are separate instruments independent

of each other and are in no way legally connected.

6. Red Clause Letter of Credit When the seller does not possess enough finances to procure the raw

material for fulfilling the order, the buyer may arrange for a Red Clause Letter of

Credit. A red clause credit has a special clause that authorizes the confirming bank

to make advances to the beneficiary (seller) for purchase/ procurement of raw

material prior to the presentation of the shipping documents.

7. Green Clause Letter of Credit

A slight variant of the red clause Letter of Credit is the Green Clause Letter

of Credit. In the green clause Letter of Credit, financing is also extended for

packaging, warehousing and shipping the goods meant for export.



ADVANTAGES OF LETTER OF CREDIT

Letter of Credit is more preferred in foreign trade as compared to other

methods of payment. There is some element of unforeseen risks while dealing

with other methods. Hence to overcome the risks, an exporter prefers Letter of

Credit as the methods of payment.

Advantages to the Exporter

1. No Blocking of Funds

Once the exporter fulfills all the conditions of Letter of Credit and presents

the documents for negotiation to his bankers, he receives payment as per the terms

of LC. The exporter is entitled to receive the full payment of the exports.

2. Free from Liability

Where the Letter of Credit is a confirmed and without recourse one, liability

of the exporter ceases once he presents the documents and adheres to all the

conditions of terms of trade.

3. Pre-shipment Finance

In India, pre-shipment finance is granted by commercial banks on the

strength of Letter of Credit received by the exporter from the importer’s bank.

4. Non-refusal by Importer

It is difficult for importer to refuse to take possession of goods and make

payment against bills drawn under Letter of Credit.



5. Reduction in Bad Debts

Under LC, the exporter does not run the risk of bad debts because the issuing

bank guarantees the payment. In the case of confirmed Letter of Credits, there is a

double guarantee by the issuing bank and confirming bank.

Advantages to the Importer

1. Better Terms of Trade

The issuing bank lends the advantage of its own credit to the importer. This

enables the importer to secure better terms of trade from the foreign supplier,

which otherwise may not be granted.

2. Sure of shipment of Goods

The importer is reasonably assured, in case of documentary Letter of Credit

that the exporter cannot obtain any benefit under the LC without actually shipping

the goods and handing over the documents to the bank.

3. Overdraft Facility

The importer can get the goods even though he may not make actual

payment to the issuing bank, if the bank so agrees to offer overdraft facility. Thus,

the importer can purchase goods under bank’s surety/overdraft facility.

4. No Blocking of Funds

The importer need not block his funds by making advance payment to the

exporter.



EXPORT COSTING AND PRICING

Meaning and Importance of Export Pricing

Price is the exchange value of a product or service expressed in terms of

money. It is that amount for which the seller is willing to sell and the buyer is

willing to buy a particular product. Export pricing, therefore, involves fixing the

price of export product or service which the exporter intends to sell in the overseas

markets. Price is one of the important elements of marketing mix. (Marketing mix

refers to 4P’s- Product, Price, Promotion and Place). Unless the price element

satisfies the customer, he may not buy the item.

The importance of pricing can be expressed as follows:

Pricing Affects Revenue

When there is proper pricing, the exporter may be in a position to sell his

products in a large number.

Pricing Affects Profitability

Pricing is an important decision in any business. It directly affects sales

revenue and thus profitability. In other words, when there is proper pricing, there

will be more sales, and more will result in higher profitability to the exporter.

Pricing Helps to Penetrate the Market

Proper pricing enables the exporter to penetrate the markets. When the

products are reasonably priced, then it would be much easier to the exporter to

enter into markets and thus capture the market.



Pricing Helps To Develop Brand Image

Given the right prices in the market, the consumers may purchase the

product and repeat their purchases. This brings a good image to the brand. The

good image of the brand develops brand loyalty. Customers continue to buy the

same brand in spite of several competing brands available in the market.

Pricing Facilitates Growth and Diversification

Good prices lead to good sales which in turn lead to good profits. The

increased profits can be utilized on Research & Development. R&D may enable

the firm to develop new and better products, thus a firm can grow and diversify

into markets and in different product lines.

Pricing Reflects The Quality Of The Product

Many-a-times, people tend to develop a direct relationship between price

and quality. Too low a price may mean low quality and vice-versa. Therefore, the

exporter should not fix low prices. At the same time very high prices are not

advisable in overseas markets.



Factors Determining Export Prices

Price of goods depends upon a number of factors. Besides manufacturing

costs, exporters must evaluate, demand in each foreign market along with

competitive environment and government regulations. Apart from these factors

there are a number of other factors that are to be considered while fixing prices.

The various factors that affect pricing decisions are:

Costs

Cost is one of the important factors while fixing export price, since costs

constitutes a large part of the price. The export price should cover up direct costs

such as raw material cost and also indirect cost such as distribution overheads.

Demand

Price of goods to a great extent depends upon demand curve. For instance,

an increase in the demand may lead to an increase in price even though there is no

rise in costs and rise in costs may justify an increase in price, yet it may not be

possible to do so because of low demand and market conditions.

Competition

The competition in foreign market is much severe than in the domestic

market, for the exporter has to compete not only with the local suppliers but more

so with competitors from other countries. There is much greater possibility of

developing countries exports being substituted by products coming from

developed countries, if there is price advantage. Therefore, the price should be

reasonable and within the range of that of competitors.



Attitude towards developing countries’ products

Overseas buyers generally develop prejudice against products manufactured

in developing countries. This factor must be taken into account while fixing price

as goods from developed countries command higher prices as compared to the

goods from the developing ones.

Quality and Price relationships

Consumers tend to rely on price as an indicator of a product’s quality,

especially in the case of prestige products. Generally, it is believed that lower

prices lead to higher sales, but it may not be the case. It is also to be noted that

buyers in developed countries are willing to pay higher prices as compared to

those from developing ones.

Exchange and inflation rate

While fixing export price, different prices can be charged for different

countries taking into account the stability of exchange and inflation rates.

Nature of consumers

The exporter should take into account the levels of income of the consumers,

their buying habits, purchasing power, etc. The buyers from developed countries

can be induced to pay higher prices if it is a qualitative product. But it may be

difficult in case of consumers of developing ones.

Government factor

The government policies in respect of import and export must be taken into

account while fixing prices. The importing as well as the exporting countries

government plays a good role in export pricing.



INCOTERMS (TERMS OF SHIPMENT)

The process of securing the export order begins with the exporter sending a

price quotation to the prospective importer. The export price quotation defines (a)

the terms of delivery for the export of goods and (b) the rights and obligation of

the exporter and the importer. Thus, the price quotation should be stated in

unambiguous terms as any ambiguity can make a lot of difference between profit

and loss for the export firm. Such terms are also referred to as Terms of

delivery/Shipment or INCOTERMS (International Commercial Terms).

The international Chambers of Commerce (ICC, Paris) had prepared a set of

standard terms of delivery to be used by the exporters and importers worldwide in

the year 1953. These terms could be used by the export price quotations, known as

Incoterms. These terms were revised in 1980, 1990 and then 2000. There are 13

Incoterms most commonly used in the Intl. Trade, their international codes are

given below:

EX-WORKS (EXW)

‘Ex-Works’ means that the exporter undertakes to deliver the goods to the

importer at the gate of his factory or works.

FREE CARRIER (FCA)

“Free Carrier” means that the exporter fulfills his obligation to deliver when

he has handed over the goods, cleared for export, into the charge of the carrier

named by the importer at the named place or point. This term of delivery is

practiced by the importers having their own arrangements for taking delivery

goods in the buyer’s country and then shipping across their country.



FREE ALONGSIDE SHIP (FAS)

‘Free alongside Ship’ means that the exporter fulfils his obligation to deliver

when the goods have been placed alongside the vessel on the quay or in lighters at

the named port of shipment. This means that the importers have to bear all costs

and risks of loss or damage to the good from that moment.

The FAS term requires the importer to clear the goods for export. It should

not be used when the importer cannot carry out directly or indirectly the export

formalities. The term can only be used for sea and inland waterway transport.

COST AND FRIEGHT (CFR)

‘Cost and Freight’ means that the exporter must pay the costs and freight

necessary to bring the goods to the named port of destination but the risk of loss or

damage to the goods, as well as any additional costs due to events occurring after

time the goods have been delivered on board the vessel, is transferred from the

exporter to the importer when the goods pass the ship’s rail in the port of

shipment.

The CFR term requires the exporter to clear the goods for export. The term

can be used for Sea, Road, Air and inland water-way transport. Before shipment

of goods, the exporter should ensure that the buyer / importer have the insurance

done for the goods exported by the exporter.

COST, INSURANCE AND FREIGHT (CIF)

Cost, Insurance and Freight’ means that the exporter has the same

obligations as under CFR but with the addition that he has to procure marine

insurance against the importer’s risk of loss of or damage to the goods during the

carriage. The exporter contracts for insurance and pays the insurance premium.



Under the CIF term the exporter is required to obtain the insurance on

minimum coverage or as agree as part of the Performa invoice or agreement /

contract.

The CIF term requires the exporter to clear the goods for export, pay for the

voyage freight and insurance. The term can be used for Sea, Road, Air and inland

waterway transport.

CARRIAGE PAID TO (CPT)

‘Carriage paid to.’ Means the exporter pays the freight for the carriage of the

goods to the named destination. The risk of loss of or of damage to the goods, as

well as any additional costs due to events occurring after the time the goods have

been delivered to the carrier, is transferred from the exporter to the importer when

the goods have been delivered into the custody of the carrier. It may be used for

any mode of transport.

CARIAGE AND INSURANCE PAID TO (CIP)

‘Carriage and insurance paid to...’ means that the exporter has same

obligation a under CPT but with the addition that the exporter has to procure cargo

insurance against the importer’s risk of loss of or damage to the goods during the

carriage. The exporter contracts for insurance any pay the insurance premium.

DELIVETED EX QUAY- DUTY PAID (DEQ)

“Delivered ex quay-duty paid” means that the exporter fulfils his obligation

to deliver when he has made the good available to the importer on the quay at the

named port of destination, cleared for importation. The exporter has to bear all

risks and costs including duties, taxes and other charges of delivering the goods

there to.



This term should not be used if the exporter is unable directly or indirectly to

obtain the import license.

DELIVERED DUTY UNPAID (DDU)

“Delivered duty unpaid” means that the exporter fulfils his obligation to

deliver when the goods have been made available at named place in the country of

the importation. The exporter has to bear the costs and risks involved in bringing

the goods there excluding duties, taxes and other official charges payable upon

importation as well as the costs and to bear any risks caused by this failure to clear

the import in time.. This term may be used irrespective of the mode of transport.



FINANCING IMPORTS

Bank lending activities under import and financing are mainly concentrated

on activities like:

Import of consumable inputs and channelised items.

Import of plant and machinery

Imports are made under short – term credit facility extended by overseas

seller.

Credit support to imports is usually extended in the form of:

Opening of import letter of credit.

Financing imports in the form of cash credit, loans mostly against import trust

receipt, effecting payment in foreign exchange directly to overseas.

Issuing deferred payment guarantees favoring overseas seller on behalf of

importer who is importing capital goods on long-term credit.

As a general rule, any credit facility extended to an importer is basically

appraised like any other domestic credit proposal, to ascertain that the business

has scope to generate cash flows that are sufficient to service the debt besides

leaving a reasonable profit with the borrowers. In addition to these normal credit

appraisal techniques, banks are expected to assess the loan requirement for

compliance with trade and exchange regulations that are applicable to the

respective import activity. It is in fact incumbent upon everyone concerned with

imports to comply with these regulations. In view of this, we shall now discuss

about opening of imports LCs or financing an importer against import trust

receipt, etc., and compliance with regulations in detail.

Scrutiny of Application for opening an Import Letter of Credit

Whenever an importer approaches a bank for opening an import LC, banks

usually subject the request for scrutiny under the premises of:

1. Trade Control Requirements.



2. Exchange Control Requirements.

3. Credit Norms of the RBI.

4. Bank’s Internal Procedures.

According to the exchange control guidelines banks are required to open

Letters of Credit for their own customer’s known to be participating in the trade.

The opening of a Letter of Credit involves two stages where in the importer is first

required to make an application in the required format to the bank for opening the

LC.

Along with the application the applicant is also required to submit certain

important documents like:

The exchange control copy of the import license / open general license

declaration form, in case the items to be imported are covered under

OGL.

Letter of authority signed by the licenser in favor of the applicant, in case the

applicant is not the holder of the license.

Pro forma invoice indent / sale contract, etc., covering the goods to be

imported.

Board resolution in the case of limited companies authorizing the company to

establish the Letter of Credit.

Board resolution for availing of import loan wherever necessary.

Evidence of the Import – Export Code Number allotted by the Director

General Of Foreign Trade (DGFT) to the importer.

While submitting the application, the importer should take care to ensure that—

The application form is duly stamped according to the law of the concerned

state and dated.

The application form is signed on all pages by the authorized signatory.



The application is filled in completely and any corrections or alterations are

duly authenticated.

Particulars furnished conform to the pro forma invoice / contract / indent

backing the Letter of Credit.

The tenor of the bill of exchange does not exceed that provided by the

exchange control regulations in force.

Currency in which payment is to be made is in conformance with the

permitted methods of payment.

Goods are consigned only in the name of the LC opening bank. Similarly,

documents of title to goods are in the name of the LC issuing bank and never

directly to the importer.

The LC application clearly mentions the origin of the goods.

The indent / contract continues to be valid.

Terms and conditions mentioned are compatible with each other.

The rate of interest if any for the usance period does not exceed the prime rate

of interest in the country of the currency in which goods are invoiced.

The import license should be:

Be valid.

Be issued on security paper and have a printed number and date.

Have a security seal.

Be in the name of the importer or properly transferred in his name with proper

transfer letters authorizing him to effect import and open letter of credit, etc.,

by the license as per provisions of ITC policy.

Commodity specified in the license should be the same as that indicated in the

application. Similarly, quantity or amount limits specified in the license should

be in agreement with that mentioned in the application. Also, irrespective of

the sale terms for which the letter of credit is proposed to be opened, the

import license should have adequate value to cover CIF value plus agency

commission and interest, if any.



Country of origin of goods authorized in the license and country of shipment

as authorized should be in agreement with that which is stated in the letter of

credit agreement.

The license should be valid for shipment at least up to the last shipment sate

requested for in the letter of credit application.

If license is issued under any bilateral or multilateral agreement, the conditions

stated in the concerned agreements and the relative ITC notifications are

complied with.

Similarly, an import letter of credit will have to comply with certain exchange control aspects and hence the importer should be aware that—

LCs will be opened by bankers only in favor of their customers who are

known to be participating in the trade.

For those goods, which are covered under the negative list of imports, LC will

be opened only if the importer submits a license marked “For Exchange

Control Purposes”.

Where goods are imported from Nepal or Bhutan, payment will be made in

rupees and such an LC would be treated as a domestic LC.

If import is made under a foreign loan or credit agreement and payment if

authorized 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 Authorized Dealers will make appropriate

stipulations to ensure that the prescribed documents are submitted to them

without fail.

In case of import of technology and drawings, the applicant will be required to

pay Research and Development, before allowing remittance. An undertaking

to this effect is required to be given by the importer at the time of opening the

LC. In case of imports on cash basis, remittance should be completed within

six months from the date of shipment. However, in a situation where there is

un-drawn balance, payment for such amount can exceed six months, but no



interest will be paid on such amount withheld. If a letter of credit is to be

opened for transaction of merchanting or intermediary trade, a letter of credit

for the other leg of the transaction on back-to-back terms will have to be LCs

only in favor of their clients who are genuine traders in goods and not mere

financial intermediaries.



EXIM BANK

EXIM Bank is fully owned by the Government of India and is managed by

the Board of directors with repatriation from Government, financial institutions,

banks and business commodity. It provides financial assistance to promote Indian

exports through direct financial assistance, overseas investment fiancé, term

fiancé for export production and export development, pre-shipping credit, buyer’s

credit, lines of credit, re-lending facility, export bills rediscounting refinance to

commercial banks. The EXIM Bank also extends non-funded facility to Indian

exporters in the form of guarantees. The diversified lending programme of the

EXIM Bank now covers various stages of exports, i.e., from the development of

export markers to expansion of production capacity for exports of manufactured

goods, project exports, exports of technology services, and exports of computer

software.

Financing Programs

I. To Indian Companies II. Foreign Government III. To Indian Banks Foreign Companies

i. Direct Assistance i. Buyer’s Credit i. Bill Rediscounting

ii. Overseas Investment ii. Lines of Credit ii. Refinance Finance

iii. Pre-shipment Credit iii. Re-lending Facility

iv. Deemed Exports

v. 100% Export Oriented Units and Free Trade Zones

vi. Forfeiting



Lines Of Credit

Procedural Flow –Chart

1

5 9

7

8 4

2

3

6


COMMERCIAL BANKS

OVERSEAS BORROWERS

EXIM BANK

INDIAN EXPORTER’S

OVERSEAS IMPORTER’S


1. EXIM bank signs agreement with Borrower and announces when

effective.

2. Exporter checks Producers and Services fee with EXIM Bank and

negotiates contract with Importer.

3. Importer consults borrower and signs contract with Exporter.

4. Borrower approves contract.

5. EXIM Bank approves contract and advises borrower and also

exporter and commercial bank.

6. Exporter ships goods.

7. Commercial bank negotiates shipping document and pays exporter.

8. EXIM Bank reimburses Commercial bank on receipt of claim by debit

to borrower.

9. Borrower repays EXIM Bank on due date.



EXPORT CREDIT GURANTEE CORPORATION OF INDIA LTD.

Government of India set up the Export Risks Insurance Corporation (ERIC)

in July 1957 in order to provide export credit insurance support to Indian

exporters. It was transformed into Export Credit & Guarantee Corporation

Limited (ECGC) in 1964. To bring the Indian identify into sharper focus, ECGC’s

name was once again changed to the present Export Credit Guarantee Corporation

of India Limited in 1983. ECGC is a company wholly owned by the Government

of India. It functions under the administrative control of the Ministry of

Commerce and is managed by a Board of Directors representing Government,

Banking, Insurance, Trade, Industry, etc.

STANDARD POLICIES Issued to exporters to protect them against payment risks involved in export

on short-term credit.

Risk Covered under the Standard policies

Commercial Risks

Political Risks

Specific Policies

Designed to protect Indian firms against payment risk involved in i) exports

on deferred terms of payments ii) services rendered to foreign to foreign parties,

and iii) construction works and turnkey projects undertaken abroad.

Financial Guarantees



Issued to banks in India to protect them from risks of loss involved in their

extending support to exporters at pre-shipment and post-shipment stages.

Guarantees By ECGC

Timely and adequate credit facilities, at the pre-shipment as well as post-

shipment stage, are essential for exporters to realize their full export potential.

Exporters may not, however, be able to obtain such facilities from their banks

with a view to enhancing the credit worthiness of the exporters so that they would

be able to secure better and large facilities from their bankers.

The guarantees assure the banks, that in the event of an exporter failing to

discharge his liabilities to the bank, and thereby making the bank incur a loss,

ECGC would make good a major portion of the bank’s loss. The bank is required

to be co-insurer to the extent of the remaining loss. The bank is required to be co-

insurer to the extent of the remaining loss. Any amount recovered from the

exporter subsequent to payment of claims shall be shared between the corporation

and the bank in the same ratio in which the loss was borne by them at the time of

settlement of claim. Recovery expenses shall be first charged on the amounts

recovered.

To meet the varying needs of exports, ECGC has evolved the following types of guarantees:

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 refers

to Packing credit guarantee. Pre-shipment advances given by banks to parties who

enter intro contracts for export of services or for construction with such contracts

are also eligible for cover under the guarantee.

Export Production Finance Guarantee



The purpose of this Guarantee is to enable banks to sanction advances of the

pre-shipment stage to the full extent of cost of production when it exceeds the

f.o.b. value of the contract / order, the differences representing incentives

receivable. The extent of cover and the premium rate are the same of Packing

Credit Guarantee.

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

suitable policy of ECGC to cover the overseas credit risks.

Export Performance Guarantee Exporters are often called upon to execute bonds duly guaranteed by an

Indian Bank at various stages of export business. An exporter who desires to quote

for a foreign tender may have to furnish a bank guarantee for the big 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 had to raise overseas finance for his contract.

Further, for obtaining import licences for raw materials of capital goods, exporters

may have to execute an undertaking to export goods of a specified value within a

stipulated time, duly supported by bank guarantees.

Export Finance (Overseas Lending) Guarantee If a bank financing an overseas project provides a foreign currency loan to

the contractor, it can protect itself from the risk of non-payment by the contractor

by obtaining Export Finance (overseas lending) Guarantee.



SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICSSURVEY REPORT ON FINANCING OF EXPORT-IMPORT

NAME:DESIGNATION:SIGNATURE:

1. Are you aware about Export – Import in India?

YES NO

2. Do you know when Pre-Shipment Finance is given?

Before Export Of Goods After Export Of Goods

3. Do you know when Post-Shipment Finance is given?

Before Export Of Goods After Export Of Goods

4. What undertaking is given by Importer’s bank to Exporter as a guarantee of payment?

Letter Of Credit Bank Guarantee

5. Which main Government Financial Institution promotes Import – Export Finance?

EXIM Bank Central Bank SBI

6. Suggestions:



Project Guide: Nishikant Jha PAYAL G. JANI(Signature) TYBBI – 23

ANALYSIS ON SURVEY REPORT

1. Are you aware about Export – Import in India?

YES

NO

2. Do you know when Pre-Shipment Finance in given?



Before Export Of Goods

After Export Of Goods

3. Do you know when Post-Shipment Finance is given?

Before Export Of Goods

After Export Of Goods

4. What undertaking is given by Importer’s bank to Exporter as a guarantee of payment?



Letter Of Credit

Bank Guarantee

5. Which main Government Financial Institution promotes Import – Export Fianace?

EXIM Bank

Central Bank

SBI



ANNEXURE

Report on Visit to Central Bank

Q1 What facility do you provide to Importer & Exporter?

We provide all types of finance facility to both Importer and Exporter such as granting of loan, Pre-shipment finance, Post-Shipment Finance, Short-Term and Long-Term credit facility, etc.

Q2 On what basis do you provide finance?

We provide finance on the documents submitted. Say, in case of importer, w ask for Import License, sale contract covering the goods to be imported, evidence of import-export code number allotted by the Director General of Foreign Trade (DGFT) to the importer and other such required documents for issuing of loan or finance.

Creditworthiness of the person is also taken into consideration. Asking for his accounts in banks and from where the person had taken finance before.

Q3 Is simple bank guarantee in force now for issuing finance?



Yes, bank guarantee is being given but mostly Letter Of Credit is being issued.

Q4 Do you have Purchase Bill Discounting facility?

Yes, we do have discounting facility.

Q5 When do you give the guarantee, means you give after you receive receipt of shipment?

Yes, the guarantee is given by us to the Exporter’s bank only after we receive receipt of shipment.

Q6 For Post-Shipment finance what documents are required?

The documents include all shipping documents and an extra copy of invoice, relating to any report declaration form endorsed by Customs or Postal authorities.

Q7 What is the procedure to acquire Post-Shipment finance?

Exporter has to submit an application to the bank with required documents or undertaking as asked by the bank. Then application is verified. Bank also takes into account the creditworthiness of Exporter and also characteristics of the product exported.



CONCLUSION

By making project on Financing Export Import, I like to conclude that the

export and import is very important for every country whether it’s developed

country or a developing country as exports enable a country to earn valuable

foreign exchange and strengthen the national economy. It also enables countries to

import basic raw materials, advanced technology and various components

required for production.

A strong foreign exchange helps the countries to face financial difficulties.

As now a days in India mostly all banks deals in International Trade and Finance

for Export and Imports so this is positive point for our country.

Through export cordial relations is develop among the nations which helps

in bringing world peace and economy development at the global level. No country

is completely independent or self sufficient as regards of all its requirements.

Interdependence of countries is bound to continue in future with increasing

exports.



BIBLIOGRAPHY

International Banking ICFAI University.

Export-Import Procedures andDocumentation

N. G. Kale

SIFT MANAGEMENT

WEBLIOGRAPHY

www.eximindia.com



www.ecgc.comwww.google.comwww.dgft.comwww.ieport.com


ex im financing

Business

credit policy

export finance

export policy

longterm credit

shipment of goods

volume of credit

financing of export

preshipment finance