Definition of Export and Import Finance

Introduction

Export means any goods which are to be taken out of a country to a place outside the country. The exports are classified into the following categories:

Merchandise Exports;

Services Exports;

Project Exports;

Deemed Exports.

Export finance mechanism and institutional support are vital for the promotion of exports. Today,

A number of financial institutions exist that provide financial assistance for export.

The various institutions involved in the provisions of finance in India are:

Reserve Bank of India,

Export – Import Bank of India,

Commercial Bank,

Export Credit and Guarantee Corporation and

Industrial Development Bank of India.

The RBI formulates the lending policies and guidelines and all the nationalized banks, private and foreign banks are required to operate within the policies and guidelines laid down by the former. It provides re-financing facilities of the short term credit sanctioned by various commercial banks and thereby it facilitate the lending operation of the latter.

The EXIM bank is the main source of long term export finance to the exporters of India. It either solely or in participation with other commercial banks constitutes the primary source of export finance. Generally, funds given by these banks are in the form of both pre – shipment and post – shipment finance.

Next to commercial banks, the fourth financial institution involved in export financing is ECGC. Their main functions are: providing insurance cover to Indian exporters; extending financial guarantees to banks that extends credit to exporters etc.

Finally, IDBI has been operating several schemes for providing credit to Indian exporters. Further, refinancing facilities are also provided by IDBI to commercial banks against the medium term export credit given to exporters.

The EXIM Bank of India came into existence on 1st January 1982, and started functioning from March 1st 1982. It has its headquarters’ in Mumbai and its branch offices in important centre in India and abroad. EXIM Bank is a wholly government – owned financial institution, set up for the purpose of financing, facilitating and promoting India’s foreign trade. The main focus of the EXIM bank of India is export finance related to export of capital goods and other manufactured goods, consultancy and technology services involving deferred payment terms. The bank also provides Pre – shipment finance where the production process exceeds months. In addition to extending non fund based assistance by way of guarantees on behalf of Indian exporters for construction, turnkey and consultancy projects abroad, the EXIM bank provides various financial assistance for the export of Indian goods under its various schemes of assistance such as direct assistance to exporters includes post – shipment term finance; pre – shipment credit; term loans for export – oriented units; overseas investment finance; finance for export marketing, loans to foreign government, importers and financial institutions include overseas buyers’ credit; lines of credit; re-lending facility to banks abroad, re- finance facility for banks in India include rediscounting of export bills; small- scale industry export bills; refinance of export credit; bulk import finance.

Finance is the basic requirement of all business activities. The need for export finance arises as soon as the exporter received export order. Export financing transactions come to an end when the goods are loaded on the vessel and export proceeds received from importer. Exporters should plan in advance is arranging export finance from the beginning and to the end of the export trade for sanctioning export finance. Export financing is a complicated lending transaction because is involved traders of two countries and foreign exchange transactions. it export trade, buyers and sellers are far away and sellers do not know the socio, economic and cultural environment of the end users of their products. Exporters have to exercise greater care is allowing credit to importers in other overseas market. They should be very careful regarding terms of payment. Export document procedures should be duly fulfilled.

competition in would market, both for consumer and capital goods, is becoming increasingly intensified and, in this situation, the bargaining power has shifted from the seller to the buyer, who tend 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 as reasonable rat, therefore, greatly facilities the task of the exporter and serves as an incentive to augment his export effort. he depleting foreign exchange position is many developing countries makes is imperative for importers to ask for credits of varying duration, and the credit terms offered often influence the buyer’s choice of supplied 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 as 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 asset, the element of amount of credit and element of duration of credit.

INCO Terms

Price quotations to the overseas buyer are quoted in following internationally accepted items

Ex-Works (EXW)

‘Ex-works’ means that the seller’s responsibility is to make the goods available to the buyer at works or factory. The full cost and risk involved in bringing the goods from this place to the desired destination will be borne by the buyer this term thus represents the minimum obligation for the seller. It is mostly used for sale of plantation commodities such as tea, coffee and cocoa.

Free Carrier (FC)

‘Free carrier’ means the seller’s obligations are fulfilled when the goods are delivered to the carrier named by the buyer at the named place. The term may be used for all modes of transport including multimodal transport.

Free Alongside Ship (FAS)

Once the goods have been placed alongside the ship, the seller’s obligations are fulfilled and the buyer notified. The seller has to contract with the sea carrier for the carriage of goods to the destination and pay the freight. The buyer has to bear all costs and risks of loss or damage to the goods from that point. The seller is required to clear the goods for export.

Free On Board (FOB)

The seller’s responsibility ends the movement the contracted goods pass the ship’s rail at the port of shipment named in the sales contract. This means that the buyer has to bear all costs and risks of loss or damage to the goods from that point. The seller is required to clear the goods for export.

Cost and Freight (CFR)

‘Cost and Freight’ means that the seller delivers when the goods pass the ship’s rail in the port of shipment. The seller must on his own risk contract for the carriage of the goods to the port of destination named in the sale contract and pay the freight. This being a shipment contract, the point of delivery is fixed to the ship’s rail and the risk of loss or damage to the goods is transferred from the seller to the buyer at the very point. As will be seen though the seller bears the cost of carriage to the named destination, the risk is already transferred to the buyer at the port of shipment itself.

Cost, Insurance, Freight (CIF)

the term is basically the same as CFr, but with the addition that the seller has to obtain the insurance at his cost against the risk of loss or damage to the goods during the carriage.

Cost Paid To CPT

‘CPT’ means that the seller delivers the goods to the carrier nominated by him, but the seller must, in addition pay the cost of carriage necessary to bring the goods to the named destination. The buyer bears all risks and any other costs after the point of delivery. The seller is required to clear the goods for export.

Carriage and Insurance Paid To (CIP)

CIP is the same as CPT, with the addition that the seller is also required to produce the insurance at the buyer’s risk of loss of or damage to the goods during the carriage

Delivered At Frontier (DAF)

The term is primarily intended to be used when the goods are to be carried by rail or road. The seller’s obligations are fulfilled when the goods have arrived at the frontier, but before the customs’ border of the country named in the sales contract.

Delivered Ex-Ship (DES)

This is an arrival contract and means that the seller makes the goods available to the buyer in the ship at the named port of destination as per sales contract. The seller has to bear to the full cost and risk involved in bringing the goods there. The sellers’ obligations are fulfilled before the customs border of the foreign country and it is for the buyer to obtain necessary import licence at his own risk and expense.

Delivered Ex-Quay (DEQ)

Ex-quay means that the seller makes the goods available to the buyer at the named quay. As in the term ‘ex-ship’ the points of divisions of cost and risks coincide, but they have now been moved one step further from the ship in the quay or wharf i.e. after crossing the customs border at destination. Therefore, in addition to arranging for carriage and paying freight and insurance the seller has to bear the cost of discharging the goods at the quay.

The buyer is required to clear the goods for import and to pay for al formalities, duties, taxes and other charges upon import.

Delivered Duty Unpaid (DDU)

‘DDU’ means that the seller delivers goods to the buyer, at the port of destination. The seller has to bear the costs and risks involved in bringing the goods thereto. The buyer has to get the goods unloaded and cleared for import, by paying the applicable duty.

Delivered Duty Paid (DDP)

This term may be used irrespective of the transport involved and denotes the seller’s maximum obligations as opposed to ‘ex-works’. The seller has not fulfilled his obligation till such time that the goods are made available at his risk and cost to the buyer at his premises or any other named destination. In the latter case the necessary documents (e.g., transport document or warehouse warrant) will have to be made available to the buyer to enable him to take delivery of the goods.

Export Finance

Finance is the life blood of any business activity. Finance is the most significant aspect In export trade. Once the exporter order is received, production of exportable commodities should take in time is required adequate finance for procuring the needed raw materials and other components. In some cases, materials are to be imported from foreign is required foreign currency. Unless the financial requirements for exports are fulfilled, export order cannot be met in the scheduled time,. Further, getting payment for the export cargo will take some time. Adequate credit facilities are to be extended to the exporters till they receive export proceeds from foreign courtiers. Realizing the significance of export finance and to encourage exports, the |RBI has come forward to extend export finance to the Indian exporters as concessional rate.

There are two types of export finance. They are,

Pre-shipment credit or packing credit and

Post- shipment credit

The RBI has defined pre-shipment credit as “as any loan to an exporter for financing the purchase, processing, manufacturing or packing of goods.”

Pre shipment credit is given by the commercial banks for purchasing and processing of materials, manufacturing of exportable commodities and packing of such commodities pre-shipmen credit is granted by the commercial banks for a period of 180 days from the date sanctioning the credit. Further extension will be given for a period of 90 days, provided adequate reasons are given by the exporters for such extension a period of 90days provided adequate reasons are given by the exporters for such extension.

Interest rate for the Pre-shipment credit is lower than the normal rate of interest. Concessional interest rate is charged for pre-shipment credit in order to maintain price competitiveness in the overseas market and to reduce interest burden to the exporters Commercial banks charge a rate of 11 percent of pre-shipment credit up to 180 days pre-shipment credit between 180 days to 270 days will cost exporters 12 to15 the interest rate for pot-shipment credit of usance bill beyond 90 days is 11 percent. The concessional rate of interest is one of the important incentives provided by the Government for export trade. In order to reduce the interest rate for export credit, the RBI has reduced the export refinance rate 9% to 7% exporters should fulfill all the procedures prescribed by the commercial banks for export credit. Exporters should submit export order of letter of credit along with the application form for pre-shipment credit.

Exporters should give an undertaking that the advance will be used exclusively for the purpose of procuring /manufacturing/ shipping of commodities means for export as given in export order of Letter of Credit. Banks will sanction the pre-shipment credit after verifying all the documents required for it. the credit worthiness of the exporter, their capacity to produce exportable commodities and the reputation of the organisation are also assessed by the banks before sanctioning pre-shipment credit. Exporters are advised to get appropriate insurance policy for export credit form the Export Credit Guarantee Corporation (ECGC). Exporters should get Packing Credit Guarantee also from the ECGC. Insurance Policy and guarantee from the ECGC are insisted by the commercial banks for sanctioning pre-shipment credit Exporters can avail pre-shipment credit in foreign currency also.

Post-shipment credit refers to any loan or-any other credit provided by any institution to an exporter of goods from India from the date of extending the credit after shipment of goods o the date of realization of export proceeds and included any loan on advance granted to an exporter, on consideration of or on the security of any drawback of any case receivable by way of incentives from the Government.

Dr.Varma and Agarwal, in their book Foreign Trade Management have specified the need for export finance.

Procuring raw materials and components to process and product exportable commodities,

Refinancing facilities so as to get the proceeds of bill after the shipment,

Making availability of funds until the export benefits are realized and

Refinancing facilities for long term credit offered for the export of products.

The RBI in its letter dated January 31 03 informed banks to use foreign currency funds borrowed in terms of Para 4(2)(i) of notification no FEMA 3.2 000 as also foreign currency funds generated through by sell swaps in the domestic forex market for granting export credit, subject to the aggregate gap limit approved by it in simple terms, it means that banks can give such loans by exporters. The directive to this effect from the industrial and export credit department of RBI was meant to provide flexibility to banks to source foreign currency funds for granting PCP/EBR to exporters.

Pre-shipment means 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 prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgment of export orders o letter of credit with the bank has been waived.

Post-shipment Credit means 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 credit after shipment of goods to the date of realization of export proceeds.

Banks are allowed to rediscount export bills abroad at rates linked to international interests’ rates in the post shipment stage. With a view to making credit available to exporters at internationally competitive rates, authorised dealers have been permitted to extend Pre-shipment Credit in Foreign Currency (PCFC) to exporters for domestic and imported inputs of exported goods at LIBOR/EURO LIBOR/EURIBOR related rates of interest.

An Exporter has the Following Export Finance Options

To avail of pre-shipment credit in rupees and then the post-shipment credit either in rupees or discounting/ rediscounting of export bills under EBR Scheme. If the pre-shipment credit is n foreign currency, the post shipment credit has necessarily to be under the EBR scheme since the foreign currency pre-shipment credit has to be liquidated in foreign currency.

Choice of currency The facility may be extended in one of the convertible currencies viz. US Dollars, Pound Sterling, Japanese Yen, Euro, etc. To grant exporters greater operational flexibility, it will be in order for banks to extend PCFC in one convertible currency in respect of an export order invoiced in another convertible currency. For example, an exporter can avail of PCFC in US Dollar against an export order invoiced in Euro. The risk and cost of cross currency transaction will be that of the exporter.

The foreign currency balances available with the bank in Exchange Earners Foreign Currency (EEFC) Accounts, Resident Foreign Currency Accounts (RFC) and Foreign currency (Non-Resident) Accounts (Banks) Scheme could be utilized for financing the pre-shipment credit in foreign currency and EBR.

Hence banks allow an exporter to book forward contracts on the basis of a confirmed export order prior to availing PCFC.

Finance and Export Trade

The reserve bank of India export import banks of indie development finance institutions and commercial banks both private and public sector banks are actively involved in providing export finance. The RHI regulates interests’ rate for export finance. The export credit and guarantee corporation of India is also involved in the process of export finance transaction. Commercial banks provide two types of export finance. They are pre-shipment finance and post-shipment finance.

Commercial banks are directed by the RBI to provide 12% of their new bank credit for export finance. Export finance is needed to exporters to identify emerging export market and to develop exportable products, establish production infrastructure and facilities, procure raw materials and other assemblies for producing export cargo, undertake export promotion activities and fulfill financial requirements during the period between shipment of goods and the actual receipt of payment.

RBI Initiatives for Export Finance

While the bank rate gas come down to 7 percent, export credit remains comparatively costlier as 10 per cent in to case of both pre-shipment as well as post-shipment credit. The Federation of Indian export organisation (FIEO) president KK Jain met RBI governor Dr Bimal Jalan to seen reduction in export credit and also waives of bank processing charges in the case of exports. Industry sources said the apex bank’s chief has given positive indications regarding reduction in export credit, without going into details of the quantum of reduction.

Interest charges of export credit stood as 11 per cent as of April 1998 while the bank rate stood as 1 per cent. Subsequently, bank rate came down first t 8 percent and then to 7 per cent. Interest charged on export credit came down to 10 percent with effect from April 1 1991 but has been staying as the same level despite a two percentage point reduction in bank rate since then.

Exporters have also pointed out that rival exporters based in other countries enjoy cheaper export credit and this blunts the competitiveness of the Indian industry. China for example, charges only 3.2 percent interests on export credit while Japan offers credit to exporters as 1.38 percent.

Indonesia charges 2.17 percent interest on export credit while Singapore and Taiwan charge, respectively, 5.7 percent and 4.9 percent.

The FIEO president also informed the RBI chief that service charges imposed by banks stand as 13.97 per cent and this is in addition to the cost of export credit which stands as 10 per cent. Export credit outstanding increased from ` 38885 crore in 1998-99 to ` 44 872 crore in 1999-2000 in line with the growth in the country’s exports. The export community accounted for 10.7 per cent of the total new bank credit outstanding in 1999-2000 as compared to 11 per cent in 1998-99.

Exporters have been demanding that the government should provide cheaper credit so that Indian export could become internationally competitive. However, officials feel that any subsidy of export credit may not be in line with norms laid out by the world trade organisation.

The central bank slashed export credit rates by one percentage point across the board, raising hopes of a further reduction in key interest rates. Expectation of a cut in the bank rate pushed down forward premium on the dollar immediately after the export rate cut was announced.

In addition, the RBI in consultation with the government, announced a special financial package for large value exports of six products pharmaceuticals, agri chemicals, transport equipment, cement, iron and steel and electrical machinery, which are internationally competitive and gave high value addition.

Manufactures exporters in these products with export contracts of ` 100 crore and above in one year will be eligible for the special financial package. This will be valid for one year from October 1, 2001.

Exporters covered under the special financial package will be extended credit for an extended period up to 365 days as the pre-shipment as well as post-shipment stage the rates of interest which are now decided by hanks on a commercial basis up to a maximum of prime lending rate plus 4 percentage points, has now been capped at PLR+0.5 per cent for the extended period of pre shipment and post shipment credit. This measure, applicable for large value exports is over and above the reduction in ceiling rates on export credit. Export will also be allowed to import raw material on credit terms for periods beyond 180 days as one percentage point above the prevailing Libor rate. EXIM bank has been permitted to extend buyers credit of ` 200 crore without reference to RBI. Similar permission will also be granted to the participating banks.

Importance of Export Finance

The importance of export finance is present below

It enhances exports in the competitive market; export finance paves the way to increase exports. Increasing exports are essentials for a developing as well as developed country. But export market is operating in the competitive environment. Hence, the government or banking institutions usually extend concessional credit to its exporters, who are is need of such credits to fulfill their export obligations.

Technological Development: the degree of technical know-how is very low in less developed and developing countries. So, less developed countries hire the services from other developed countries but their charges are very high. Huge finance is needed to the less developed countries to repay service charges. Export finance is needed to pay such charges.

Easier terms and conditions: if the credit is available on easier terms, exporters will be in a position to sell the goods to the importer on easier payment terms.

It is a source for the economic development of nation. Developing countries are having deficiency of foreign exchange reserve to copy with their development needs. Exporters obtain long-term export credit from specialized financial institutions to meet import commitments. Thus, export finance does not create pressure over foreign exchange position and help for economic development.

Balanced growth. The deficiency of finance is one of the main constraints for economic development of developing countries. In this context, export finance contributed to economic development and helps to establish balanced industrial development of different nations

It reduces adverse balance of payments. Adverse balance payment creates 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. Increase in export earnings will help to solve balance of payment of crisis.

It helps for sales promotion. The various sales promotion programme like advertising, publicity, trade fairs and exhibitions, etc., need adequate fiancé. Export finance can be used for undertaking aggressive export promotion measured to increase export market.

It enhances customer service. Export finance is needed for product adaptation, improvement of quality, adding new uses to the product and to use an appropriate pricing method to increase export performance.

Export finance fulfils short, medium and long-term financial needs. Exporters need short-term medium-term and long term finance to meet their production and distribution requirements. Banks provide short-term credit extending to a period up to one year, and other terms of financial needs are met from other national and international financial institutions. Long-term credit helps to bring modernization and adoption of latest technology.

Methods and Sources of Export Finance

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

Short-term Finance, and

Medium and Long-term Finance

Short-Term Finance

Short term fiancé 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 finance to export is presented below:

Producing raw materials,

Manufacturing and processing of making advances to other producers from whom the exportable goods are ordered.

Meeting expenses of packing, handling, internal transport and to meet insurance and warehousing charges, and

Shipment and other related needs.

The requirement of short-term finance to the importer is as follows

For payment of advance to the exporter

For meeting the shipping charges, insurance etc.

To pay duty is obtaining import licence etc.

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

Pre-Shipment Finance

Pre-shipment means 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 prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order with the exporter. the maximum period for which any loan on advance may be granted or any other credit facility may be provided does not usually exceed 180 days, on such extended period as the central bank of the exporting country may allow. normally, there are two ways open to an exporter to obtain license as the pre-shipment stage. they are anticipatory letters of credit and packaging credits.

Preshipment Finance in Foreign Currency

Exporters can get pre-shipment finance in foreign currency from commercial banks. Exporters can use the foreign currency for the purpose of importing necessary raw materials and other inputs for manufacturing exportable commodities. Pre-shipment finance in foreign currency is made available to the exporters who have a fire export order or a letter of credit. This type of financial arrangement is provided by banks for a maximum period of 180 days. Pre-shipment finance in foreign currency can be obtained any authorised dealers in foreign exchange.

Commercial banks provide pre-shipment finance to the exporters against the security of (i) Pledge,(ii) Hypothecation(iii) Export Trust Receipt, (iv) Incentives Receivables, (v) Red Clause Letter and (vi) Back-to-Back Letter of Credit.

Banks will insist exporters to take appropriate export credit, insurance policy from the export credit guarantee corporation of India limited, for providing pre-shipment finance. the following documents are required for getting pre-shipment finance from banks;(i) Confirmed export order,(ii) letter of credit,(iii) policy of export credit guarantee corporation,(iv) copy of audited financial statement and income tax assessment, v) copy of the CNO exporter code number and (vi) copy of the registration –cum membership certificate issued by an exporter promotion council.

Anticipatory Letters of Credit

Anticipatory letters of credit is 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 letter of credit is generally opened to enable the exporter to procure material and executed the foreign buyer’s order without looking up to much of his own funds. the advance made to the exporter is of course as the risk of the opening bank and in restricted to the amount authorised 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 amount to be advanced to the exporter under a red clause letter of credit is provided by the negotiation of clear draft under the letter of credit, in which case the invoice submitted as the time of the negotiation of the 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 is a position to negotiate the bills drawn under the letter of credit.

Packing Credit

Packing credit is essentially a loan or advance granted a bank to an exporter to assist him in buying, packing and shipping the goods. These advances are generally made by commercial banks in different forms.

Forms of Advances

The main form of financing the exports as the pre-shipment stage is:

Loans

Overdrafts, and

Case credit

Loans

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

Overdrafts

An overdraft is a fluctuating account and its balance is sometimes in credit and sometimes in debit. Cheques drawn on a current overdraft arrangement enabled a customer to draw over and above his own balance up to the extent of the limit stipulated. Drawings and repayments are permitted as needed by the customer, provided the total amount overdrawn does not exceed the agree limit.

Case Credit

Case credits are ordinarily allowed against pledge or hypothecation of goods against personal security. If there is a good turnover in the account and quick movements of goods, a case credit limit is renewed periodically. The case credit system has the advantage of flexibility. it enables the borrower as to route all their case earnings through the account and keep drawings as the minimum level, thereby minimizing interest charges. the main disadvantage of the system is that the banks may find is difficult to ensure the end-use of funds due to its emphasis or the security aspect and the roll-over nature of credits.

Operational Mechanisms for Pre-Shipment Financing

Pre-shipment finance is essentially a working capital finance made available for the specific purpose of manufacturing of goods means for export. All costs prior to shipment would be eligible for financing under packing credits. The following points will usually be examined by the banks when considering proposals for export packing credits.

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

The ability of te exporter to absorb export business loss.

Whether the quantum of finance asked for in or equal rate wint the company’s turnover.

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

The spread of risk

Whether the exports are covered by irrevocable letters of credit

The statue of the issuing banks

The statue of the buyer’s country in terms of economic and political conditions

The availability of security such as export credit insurance cover

Covering of exchange risk.

Post-Shipment Finance

Post-shipment finance is defined as any loan of 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 on any case payment by way of incentive from the market development assistance or any other relevant source. Thus post-shipment finance is given against.

Export bills drawn on foreign buyers, and

Export case incentives to be received by the exporter.

Negotiation of Bills

Bills of exchange either in Indian rupees of foreign currencies under a letter of credit of otherwise are offered to banks for negotiation such as sale of 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 depends, the negotiation of bill depends upon the following factors:

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

Productcharacteristics:thenature,qualityandpriceoftheexportproductalsoinfluence 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 as most competitive rates and bas good demand abroad.

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

Credit of negotiation: if the amount does not generally exceed the credit limit of the drawee a fixed by the bank, them the bills are accepted

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 until the final remittance is received. the banks consider the following factors is calculating such a rate:

Prevailing rate of interest,

The period which the bill has to run before maturity,

Stamp duty to which the bill is liable in the foreign centre,

Charges for collection which the foreign banks may make,

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

Collection of bills: the Sight Documents against payment as well as usance bills documents against acceptance can be offered to the banks of collection basis. banks send such bills to their foreign branch for collection of payment. Banks may give advance against such bills and is may take the following forms:

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 instructions from the drawees that in addition to face amount of the bill, the drawee is to pay interest, collection charges and foreign bill stamps.

Percentage of advance; the usual procedure is that the bank will advance up to a certain percentage of the amount of cash 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.

Percentageadvanceagainstpendingcollection;underthissystemthedrawerlimit 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 Finance

The mail source of short-term export finance is presented below;

Foreign Trade Financed by Exporter

This is one of the sources of export credit buy very few exporters will employ their capital to finance to finance for export. Exporter will employ this method when he is financially sound and he may consider supplying goods to the importer on the basis of credit. In this situation, exporter will provide credit to the importer on the following terms:

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 as certain rates if the importer delays the payment beyond the agreed time limit.

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.

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

Payment against bills of exchange: under this method, the exporter ships the goods to the importer on the basis of bills of exchange drawn or 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.

Foreign Trade Financed by the Exporter with the Assistance of his Bank

Under this category, exported obtains bill of exchange from the importer which will remain with his 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.

Foreign Trade Financed by the Importer

Sometimes, the importer imports the goods of paying case is advance. The following are the main types of short-term credit given to the exporter by the importer.

Payment of placing orders: The importer makes full payment in advance of placing fire orders with the exporter

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

Payments through confirming houses: Resident Buyer or a Forwarding Agent may be confirming houses. The payment will be made by the confirming houses to the exporter on the basis of fire order by the importer. However, exporter will be prepared to accept payment on the basis of credit worthiness of confirming houses.

Foreign Trade Financed by Importer with Bank Assistance

The exporter can get import finance through a bank by any of the following two methods:

Bills of Exchange: Documentary bill of 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 as sight when no trade credit is being extended or payment as 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 document are to be surrendered to the importer of the payment of the bill in respect to sigh bill the amount is realized and remitted back to the exporter’s bank account. But, in time bill, after the bill in 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.

Letter of credit Under letter of credit method, the exporter why desired to get an assurance of payment against documents usually stipulated in his contract with the overseas imported 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 kind (i) irrevocable letter of credit and (ii) Revocable letter of credit, at Irrevocable letter of credit in one which after issuance cannot be cancelled without the consent of parties concerned- A Revocable letter of credit can be altered or cancelled as any time without any consent or reference to the beneficiary or seller or exporter

Foreign Trade Financed by Banks

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

Foreign Trade Financed by Accepting Houses

The main function of an accepting house is to accept the bills drawn by the exporters. Normally, the imported and Accepting house will have a written agreement is 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-

Foreign Trade Financed by Discount Houses

Discount houses are trading houses engaged in discounting of bills. The Discount houses discount the bill if it is accepted by any accepting house. Further, the Discount house 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 Finance

Long-term finance refers to the credit facility extended up to a period from five to twenty years. It is provided for 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 finance generally involved higher levels of risk that short-term finance. Hence the interest rate for long term finance is more that other forms of credit. The World Bank International Monetary Fund, international Development Association and Asian Development Bank are some of the international financial institutions granting long term credit. The main purposes of long-term credit for both exporter and the importer are presented below:

To import and export of capital goods.

To provide credit facility on liberal terms to the importer.

To execute the export promotion programme.

To establish new enterprise and

To make capital investment in other countries.

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

Supplier’s Credit. And

Buyer’s Credit

Suppliers 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 the commercial banks which in turn can get refinance from the EXIM Bank.

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. Loan is extended by a bank or other financial institutions in the supplier’s country to the overseas buyer why in thus in a position to pay case for the supplier 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 two points to be made in this connection are: (i) supplies get his money if he fulfils his responsibility, and (ii) there is no involvement of transfer of funds from one country to another.

Forfaiting

The term Forfait is derived from the French meaning the surrender of rights. Forfaiting is non-recourse discounting of export bills. Forfaiting is one of the forms of financing to the exporters. The export-import bank of India authorised by RBI to undertake forfeiting for export financing. Alan C Shapiro in his book “Multinational Financial Management” has defined Forfaiting as “the discounting as a fixed rate without recourse of medium term export receivables denominated in fully convertible currencies.”

Example. ABC Co Ltd has exported to a buyer in London and ABC Co Ltd will get export payment after 5 months. In this situation, under forfeiting, ABC Co Ltd can get export bill discounted with a forfaiting agency, through EXIM Bank. The forfaiting agency will pay the amount after deducting a few commitment fee, discount fee and documentation fee prescribed for forfeiting.