export finance-countertrade and forfaiting

7/28/2019 Export Finance-Countertrade and Forfaiting

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Export Finance

Role of ECGC Primary goal is to supportand strengthen the export promotion drive- provides a range of credit risk insurance

covers to exporters against loss in exportof goods and services as also by offeringguarantee covers to banks and FIs


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Export Finance

Refinance

Different types of Export DeferredPayment Export, Project Exports, DeemedExports.

Different types of exporters

Trade Controls Exchange Control


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Export Finance

Pre-shipment Finance packingcredit,advance against duty drawback /incentives, cheque purchase

Features of P/C

Who can avail P/C ? Basic eligibilitycriteria

Export Order country of import, last dateof shipment


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Export Finance

Maximum period of finance

Maximum amount of finance

Type of account Repayment

PCFC


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Export Finance

Post-Shipment credit

After shipment and submission ofdocuments to bank

Against evidence of shipment of goods

From date of shipment till date ofrealisation

By way ofpurchase/discounting/negotiation of exportbills - self liquidating in nature


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Export Finance

Post Shipment quantum

Different types of Post-shipment finance(1) Export Billsnegotiated/purchased/discounted (2)Export Bills sent on collection (3) Exporton consignment basis


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Export Finance Post Shipment

Buyers Credit a financial arrangementwhereby a financial institution in theexporting country extends a loan to a

foreign buyer to finance purchase of goodsand services from the exporting country

Suppliers Credit a financingarrangement where exporter extendscredit to the buyer in the importing countryto finance the buyers purchase


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Forfaiting


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Forfaiting is used for international trade transactions.

Forfaiting is the purchase, on a non-recourse basis, of aseries of notes, usually bills of exchange or other

promissory notes, which are freely negotiable andtransferable, and which arise from the provision of goodsor services.

Forfaiting provides a flexible, creative alternative totraditional international trade financing methods, and isparticularly useful for transactions with buyers indeveloping nations.


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The forfaiter deducts interest at an agreed ratefor the full credit period covered by notes.

The debt instruments are drawn by the exporter(seller) and accepted by the importer (buyer),and will bear an aval, or unconditionalguarantee.

The guarantee will normally be issued by theimporters bank.


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FORFAITING OPERATING PROCEDURE

APPLICATIONFOR LC

IMPORTER

EXPORT COUNTRYCUSTOMS /

REGULATORYCLEARANCE

2

EXPORTERS

BANK /

NEGOTIATING

BANK

INLAND MOVEMENTOF GOODS

EXPORTER

EXPORT DOCS/ASSIGNMENT OF

PROCEEDS

37

IMPORTERS BANK/

LC ISSUING BANK1

TRANSFEROF FUNDS

IMPORT COUNTRYCUSTOMS/ REGULATORY

CLEARANCE

INLANDMOVEMENTOF GOODS

LC ISSUED

NOTICE OFASSIGNMENT

FORFAITING

BANK

REPAYMENTAT MATURITY

8

CONFIRMATIONOFASSIGNMENT

4NOTICE OFASSIGNMENT

6ASSIGNMENT

OF PROCEEDS

5


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What documents are required by the

Forfaiter from the exporter?

Usually required are:

a) Copy of supply contract, or of its payment terms

b) Copy of signed commercial invoice

c) Copy of shipping documents including certificates ofreceipt, railway bill, airway will, bill of lading or equivalentdocuments

d) Letter of assignment and notification to the guarantor

e) Letter of guarantee, or aval The aval is the Forfaiters'

preferred form of security of payment of a bill or note.For an aval to be acceptable, the avalizing bank must beinternationally recognized and credit worthy.


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What are the commonly used debt

instruments?

Letter of credit

Promissory notes, Bills of exchange (or drafts)


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Forfaiting as a Risk Mitigation andSales Tool

Since there is a direct relationship between sales & financing manycompanies use Forfaiting as a means to grant credit terms to theirforeign buyers.

In a forfaiting transaction , the exporter sells his trade receivable,usually evidenced by a negotiable instrument, such as a Bill ofExchange, or a Promissory Note, to a financier, for cash, andwithout recourse.

Forfaiting technique starts at the beginning of the selling cycle,before a sale is concluded, and at the beginning of the negotiationprocess.

It is critical that the forfaiter be involved in the preliminary process,before any pricing discussions are held between the exporter andbuyer.


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What information does a Forfaiter need?

The Forfaiter needs to know : who the buyer is and his nationality;

what goods are being sold;

detail of the value and currency of the contract;

the date and duration of the contract,

the credit period and number and timing of payments(including any interest rate already agreed with thebuyer).

what evidence of debt will be used (either promissorynotes, bills of exchange, letters of credit), and

the identity of the guarantor of payment (or avalor).


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Forfaiting eliminates:

COUNTRY / POLITICAL RISK

CURRENCY / TRANSFER RISK

FINANCIAL / COMMERCIAL RISK


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Export-Import Bank of India (Exim Bank) and AD Bankshave been permitted to undertake forfaiting, for financingof export receivables.

Remittance of commitment fee / service charges, etc.,payable by the exporter as approved by the Exim Bank/

AD Banks concerned may be done through an AD Bank.

Such remittances may be made in advance in one lumpsum or at monthly intervals as approved by the authorityconcerned.


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How does Forfaiting work in practice?

In a typical Forfait transaction, the sequence is as follows:

1) The exporter approaches a Forfaiter who confirms that he is willing to quoteon a prospective deal, covering the export in x months' time bearing the avalof XYZ Bank.

2) If the transaction is worth $1M, the Forfaiter will calculate the amount of thebills/notes, so that after discounting the exporter will receive $1M, and willquote a discount rate of 'n' per cent.

3) The Forfaiter will also charge for 'x' days grace and a fee for committinghimself to the deal, worth 'y per cent per annum computed only on theactual number of days between commitment and discounting.

4) The Forfaiter will stipulate an expiry date for his commitment (that is, whenthe paper should be in his hands). This period will allow the exporter to shiphis goods and get his bills/notes avalized and to present them fordiscounting.


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5) The exporter gets immediate cash on presentation of relevantdocuments, and the importer is then liable for the cost of thecontract and receives credit for 'z years at 'n' per cent interest.

6) Many exporters prefer to work with Forfait brokers who, because

they deal with a large number of Forfait houses, can assure theexporter of competitive rates on a timely and cost effective basis.

7) Brokers typically charge a nominal 1% fee to arrange thecommitment. This is a onetime fee on the principal amount and

frequently is added to the selling price by the exporter.

8) The broker frequently consults with the exporter to structure thetransaction to fit the Forfait market.


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Countertrade


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Countertrade is exchanging goods or services that arepaid for, in whole or part, with other goods or services.

Agreement by one nation to buy a product from anothersubject to the purchase of some or all of the componentsand raw materials from the buyer of the finished product,or the assembly of such product in the buyer nation


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There are five main variants of countertrade:

Barter: Exchange of goods or services directly for other goods orservices without the use of money as means of purchase orpayment.

Switch trading: Practice in which one company sells to another itsobligation to make a purchase in a given country.

Counter purchase : Sale of goods and services to a country by acompany that promises to make a future purchase of a specificproduct from the country.

Buyback occurs when a firm builds a plant in a country - or suppliestechnology, equipment, training, or other services to the country -and agrees to take a certain percentage of the plant's output as

partial payment for the contract. Offset : Agreement that a company will offset a hard - currency

purchase of an unspecified product from that nation in the future.


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Counter-Trade Arrangement

Counter trade proposals involving adjustment of value of goodsimported into India against value of goods exported from India interms of an arrangement voluntarily entered into between the Indianparty and the overseas party through an Escrow Account opened inIndia in U.S. dollar is considered by the Reserve Bank.

(i) All imports and exports under the arrangement should be atinternational prices in conformity with the Foreign Trade Policy andForeign Exchange Management Act, 1999 and the Rules andRegulations made there under.

(ii) Application for permission for opening an Escrow Account may bemade by the overseas exporter/organisation through his AD Banksto the concerned Regional Office of the Reserve Bank.


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(iii) No interest will be payable on balances standing to thecredit of the Escrow Account but the funds temporarilyrendered surplus may be held in a short-term deposit upto a total period of three months in a year (i.e., in a block

of 12 months) and the banks may pay interest at theapplicable rate.

(iv) No fund based/or non-fund based facilities would bepermitted against the balances in the Escrow Account.


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In 2000, India and Iraq agreed on an "oil for wheat andrice" barter deal, subject to UN approval under Article 50of the UN Gulf War sanctions, that would facilitate300,000 barrels of oil delivered daily to India at a price of

$6.85 a barrel while Iraq oil sales into Asia were valuedat about $22 a barrel.

In 2001, India agreed to swap 1.5 million tonnes of Iraqi

crude under the oil-for-food program.

export finance-countertrade and forfaiting

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