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About export of india

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About export of india

About export of india

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  • 1. CHAPTER 1 - INTRODUCTION OF EXPORTSExport in simple words means selling goods abroad. International market being a very wide market, hugequantity of goods can be sold in the form of exports.Export refers to outflow of goods and services and inflow of foreign exchange.Export occupies a very prominent place in the list of priorities of the economic set up of developingcountries because they contribute largely to foreign exchange pool.Exports play a crucial role in the economy of the country. In order to maintain healthy balance of trade andforeign exchange reserve. It is necessary to have a sustained and high rate of growth of exports.Exports are a vehicle of growth and development. They help not only in procuring the latest machinery,equipment and technology but also the goods and services, which are not available indigenously. Exportsleads to national self-reliance and reduces dependence on external assistance which howsoever liberal,may not be available without strings.Though India’s export compared to other countries is very small, but one of the most important aspects ofour export is the strong linkages it is forging with the world economy which is a great boon for adeveloping nation like India.CHAPTER 2 - EXPORT FINANCE2.1 - INTRODUCTIONCredit and finance is the life and blood of any business whether domestic or international. It is moreimportant in the case of export transactions due to the prevalence of novel non-price competitivetechniques encountered by exporters in various nations to enlarge their share of world markets.
  • 2. The selling techniques are no longer confined to mere quality; price or delivery schedules of the productsbut are extended to payment terms offered by exporters. Liberal payment terms usually score over thecompetitors not only of capital equipment but also of consumer goods.The payment terms however depend upon the availability of finance to exporters in relation to its quantum,cost and the period at pre-shipment and post-shipment stage.Production and manufacturing for substantial supplies for exports take time, in case finance is notavailable to exporter for production. They will not be in a position to book large export order if they don’thave sufficient financial funds. Even merchandise exporters require finance for obtaining products fromtheir suppliers.This project is an attempt to throw light on the various sources of export finance available to exporters,the schemes implemented by ECGC and EXIM for export promotion and the recent developments in theform of tie-EXIM tie-ups, credit policy announced by RBI in Oct 2001 and TRIMS.2.2 - CONCEPT OF EXPORT FINANCE:The exporter may require short term, medium term or long term finance depending upon the types of goods to beexported and the terms of statement offered to overseas buyer.The short-term finance is required to meet “working capital” needs. The working capital is used to meet regular andrecurring needs of a business firm. The regular and recurring needs of a business firm refer to purchase of rawmaterial, payment of wages and salaries, expenses like payment of rent, advertising etc.The exporter may also require “term finance”. The term finance or term loans, which is required for medium andlong term financial needs such as purchase of fixed assets and long term working capital.E xport finance is short-term working capital finance allowed to an exporter. Finance and credit are available not onlyto help export production but also to sell to overseas customers on credit.2.3 -OB IE CTIVE S OF E XP OR T FINANCE To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer. To cover natural risks like an earthquake, floods etc.
  • 3. An exporter may avail financial assistance from any bank, which considers the ensuing factors:a) Availability of the funds at the required time to the exporter.b) Affordability of the cost of funds.2.4 - APPRAISALAppraisal means an approval of an export credit proposal of an exporter. While appraising an export credit proposalas a commercial banker, obligation to the following institutions or regulations needs to be adhered to.Obligations to the RBI under the Exchange Control Regulations are: Appraise to be the bank’s customer. Appraise should have the E xim code number allotted by the Director General of Foreign Trade. P arty’s name should not appear under the caution list of the RB I.Obligations to the Trade Control Authority under the EXIM policy are: Appraise should have IE C number allotted by the DGFT. Goods must be freely exportable i.e. not falling under the negative list. If it falls under the negative list, then a valid license should be there which allows the goods to be exported. Country with whom the Appraise wants to trade should not be under trade barrier.Obligations to ECGC are: Verification that Appraise is not under the S pecific Approval list (S AL). S anction of P acking Credit Advances.GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE:When a commercial bank deals in export finance it is bound by the ensuing guidelines: -a) Exchange control regulations.b) Trade control regulations.c) Reserve Bank’s directives issued through IECD.d) E xport Credit Guarantee Corporation guidelines.e) Guidelines of Foreign E xchange Dealers Association of India.
  • 4. CHAP TE R 3 -TYP E S OF E XP OR T F INANCEThe export finance is being classified into two types viz. P re-shipment finance. P ost-shipment finance. 3.1 -P R E -S HIP ME NT FINANCEME ANING:P re-shipment is also referred as “packing credit”. It is working capital finance provided by commercial banks to theexporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods iscalled pre-shipment finance or packing credit.DE FINITION:Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment isknown as pre-shipment credit. S uch finance is extended to an exporter for the purpose of procuring raw materials,processing, packing, transporting, warehousing of goods meant for exports.IMP OR TANCE OF F INANCE AT P R E -S HIP ME NT S TAGE : To purchase raw material, and other inputs to manufacture goods. To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labelling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. To pay for consultancy services. To pay for export documentation expenses.
  • 5. F OR MS OR ME THODS OF P R E -S HIP ME NT F INANCE :1. Cash P acking Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security.2. Advance Against Hypothecation: Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank.3. Advance Against P ledge: 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.4. Advance Against R ed L/C: The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit.5. Advance Against B ack-To-B ack 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-Bank L/C on the basis of which he can obtain packing credit.6. Advance Against E xports Through E xport Houses: Manufacturer, who exports through export houses or other agencies can obtain packing credit, provided such manufacturer submits an undertaking from the export houses that they have not or will not avail of packing credit against the same transaction.7. Advance Against Duty Draw B ack (DB K): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as post-shipment advance against claims
  • 6. for DBK.8. S pecial P re-S hipment F inance S chemes: E xim- ank’s scheme for grant for F oreign Currency P re-S hipment Credit (FCP C) to exporters. B P acking credit for Deemed exports.S OME S CHE ME S IN P R E -S HIP ME NT S TAGE OF F INANCE1. P ACKING CR E DIT SANCTION OF PACKING CREDIT ADVANCES: There are certain factors, which should be considered while sanctioning the packing credit advances viz. i. Banks may relax norms for debt-equity ratio, margins etc but no compromise in respect of viability of the proposal and integrity of the borrower. ii. S atisfaction about the capacity of the execution of the orders within the stipulated time and the management of the export business. iii. Quantum of finance. iv. S tanding of credit opening bank if the exports are covered under letters of credit.
  • 7. v. Regulations, political and financial conditions of the buyer’s country.DISBURSEMENT OF PACKING CREDIT:After proper sanctioning of credit limits, the disbursing branch should ensure:To inform E CGC the details of limit sanctioned in the prescribed format within 30 days from the date of sanction.a) To complete proper documentation and compliance of the terms of sanction i.e. creation of mortgage etc.b) There should be an export order or a letter of credit produced by the exporter on the basis of which disbursements are normally allowed.In both the cases following particulars are to be verified: i. Name of the B uyer. ii. Commodity to be exported. iii. Quantity. iv. Value. v. Date of S hipment /Negotiation. vi. Any other terms to be complied with.2. FOREIGN CURRENCY PRE-SHIPMENT CREDIT (FCPC) The FCPC is available to exporting companies as well as commercial banks for lending to the former. It is an additional window to rupee packing credit scheme & available to cover both the domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance. To avail him of pre-shipment credit in rupees & then the post shipment credit either in rupees or in foreign currency denominated credit or discounting /rediscounting of export bills. To avail of pre-shipment credit in foreign currency & discounting/rediscounting of the export bills in foreign currency. FCPC will also be available both to the supplier EOU/EPZ unit and the receiver EOU/EPZ unit.Pre-shipment credit in foreign currency shall also be available on exports to ACU (Asian Clearing Union)countries with effect from 1.1.1996.Eligibility: PCFC is extended only on the basis of confirmed /firms export orders or confirmed L/C’s. The“Running account facility will not be available under the scheme. However, the facility of the liquidation ofpacking credit under the first in first out method will be allowed.Order or L/C : Banks should not insist on submission of export order or L/C for everydisbursement of pre-shipment credit , from exporters with consistently good track record.
  • 8. Instead, a system of periodical submission of a statement of L/C’s or export orders in hand, should beintroduced.Sharing of FCPC: Banks may extend FCPC to the manufacturer also on the basis of the disclaimer from theexport order. 2.2 -P OS T-S HIP ME NT FINANCEME ANING:P ost shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridgesthe financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. Whereasthe finance provided after shipment of goods is called post-shipment finance.DE F E NITION:Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds iscalled P ost-shipment Credit.IMP OR TANCE OF F INANCE AT P OS T-S HIP ME NT S TAGE : To pay to agents/distributors and others for their services. To pay for publicity and advertising in the over seas markets. To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards E CGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service. To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. To pay for representatives abroad in connection with their stay board.F OR MS /ME THODS OF P OS T S HIP ME NT F INANCE
  • 9. 1. E xport bills negotiated under L/C: The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter.2. P urchase 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 L/ is not available as security, the C bank is totally dependent upon the credit worthiness of the exporter.3. Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/ and which are sent for collection. They are not purchased or discounted by the bank. C However, this form is not as popular as compared to advance purchase or discounting of bills.4. Advance against claims of Duty Drawback (DB K): DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. B anks offer pre-shipment as well as post-shipment advance against claims for DBK.5. Advance against goods sent on Consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis.6. Advance against Undrawn B alance of B ills: There are cases where bills are not drawn to the full invoice value of gods. Certain amount is undrawn balance which is due for payment after adjustments due to difference in rates, weight, quality etc. banks offer advance against such undrawn balances subject to a maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank.7. Advance against Deemed E xports: S pecified sales or supplies in India are considered as exports and termed as “deemed exports”. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/IDA/ADB aided projects. Credit is offered for a maximum of 30 days.8. Advance against R etention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/services towards guarantee of performance or completion of project. B anks advance against retention money, which is payable within one year from date of shipment.9. Advance against Deferred payments: In case of capital goods exports, the exporter receives the amount from the importer in installments spread over a period of time. The commercial bank together with E XIM bank do offer advances at concessional rate of interest for 180 days.
  • 10. S OME S CHE ME S UNDE R OP E R ATION IN P R E -S HIP ME NT FINANCE1. DE F E R R E D CR E DITMeaning:Consumer goods are normally sold on short term credit, normally for a period upto 180 days. However, there arecases, especially, in the case of export of capital goods and technological services; the credit period may extendbeyond 180 days. S uch exports were longer credit terms (beyond 180 days) is allowed by the exporter is called as“deferred credit” or “deferred payment terms”.How the payment is received?The payment of goods sold on “deferred payment terms” is received partly by way of advance or down payment,and the balance being payable in installments spread over a period of time.P eriod of financial credit support:Financial institutions extend credit for goods sold on “deferred payment terms” (subject to approval from RBI, ifrequired). The credit extended for financing such deferred payment exports is known as Medium Term and LongTerm Credit. The medium credit facilities are provided by the commercial banks together with E XIM B ank for a periodupto 5 years. The long term credit is offered normally between 5 yrs to 12 yrs, and it is provided by E XIM B ank.Amount of credit support:Any loan upto R s.10crore for financing export of capital goods on deferred payment terms is sanctioned by thecommercial bank which can refinance itself from E xim bank. In case of contracts above R s.10 Lakhs but not morethan R s50crore, the E XIM B ank has the authority to decide whether export finance could be provided. Contractsabove R s.50crore need the clearance from the working group on E xport Finance.2. REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) SCHEME:The exporter has the option of availing of export credit at the post-shipment stage either in rupee or inforeign currency under the rediscounting of export bills abroad (EBRD) scheme at LIBOR linked interestrates.This facility will be an additional window available to exporter along with the exiting rupee financingschemes to an exporter at post shipment stage. This facility will be available in all convertible currencies.This scheme will cover export bills upto 180 days from the date of shipment (inclusive of normaltransit period and grace period) .The scheme envisages ADs rediscounting the export bills in overseas markets by makingarrangements with an overseas agency/ bank by way of a line of credit or banker’s acceptance
  • 11. facility or any other similar facility at rates linked to London Inter Bank Offered Rate (LIBOR) forsix months.Prior permission of RBI will not be required for arranging the rediscounting facility abroad so longas the spread for rediscounting facility abroad does not exceed one percent over the six monthsLIBOR in the case of rediscounting ‘with recourse’ basis & 1.5% in the case of ‘without recourse’facility. Spread, should be exclusive of any withholding tax. In all other cases, the RBI’s permissionwill be needed.3. FINANCE FOR RUPEE EXPENDITURE FOR PROJECT EXPORT CONTRACTS (FREPEC) 1. What is FREPEC Program? This program seeks to Finance Rupee Expenditure for Project Export Contracts, incurred by Indian companies. 2. What is the purpose of this Credit? To enable Indian project exporters to meet Rupee expenditure incurred/required to be incurred for execution of overseas project export contracts such as for acquisition/purchase/acquisition of materials and equipment, acquisition of personnel, payments to be made in India to staff, sub-contractors, consultants and to meet project related overheads in Indian Rupees. 3. Who are eligible for Assistance under FREPEC Program? Indian project exporters who are to execute project export contracts overseas secure on cash payment terms or those funded by multilateral agencies will be eligible. The purpose of the new lending program is to give boost to project export efforts of companies with good track record and sound financials. 4. What is the quantum of credit extended under this program? Up to 100% of the peak deficit as reflected in the Rupee cash flow statement prepared for the project. Exim Bank will not normally take up cases involving credit requirement below Rs. 50 lakhs. Although, no maximum amount of credit is being proposed, while approving overall credit limit,
  • 12. credit-worthiness of the exporter-borrower would be taken into account. Where feasible, credit may be extended in participation with sponsoring commercial banks. 5. How are Disbursements made under this Program? Disbursements will made in Rupees through a bank account of the borrower-company against documentary evidence of expenditure incurred accompanied by a certificate of Chartered Accountants. 6. How is a FREPEC Loan to be extinguished? Repayment of credit would normally be out of project receipts. Period of repayment would depend upon the project cash flow statements, but will not exceed 4 (four) years from the effective date of project export contract. The liability of the borrower to repay the credit and pay interest and other monies will be absolute and will not be dependent upon actual realization of project bills. 7. What is the security stipulated for FREPEC loan? Hypothecation of project receivables and project movables. Optional: where available P ersonal Guarantees of Directors of the Company. Available collateral security. CHAPTER - LETTER OF CREDITINTRODUCTION:The cycle of a business transaction can be said to be complete prima facie when the buyer has received the product
  • 13. he desires to buy and the seller gets his payment in due consideration of the product supplied.While the seller is keen to receive the payment for his supplies, the buyer is equally keen that he gets what he wantsby the paying for the same.Tough there are many merit and demerits in each of the different mode of payments we have discussed earlier, inrelation either to the buyer or to the seller, we shall now deal in detail about the mode of payment under theDocumentary Credit.Generally, though exporters are complacent once they get the letter of Credit on hand feeling that their payment issecured, let me say it is as much a dubious instrument as is a safe instrument.If one does not understand the implications of the terms and condition of a letter of credit, the provisions under UCP500, how co-operative are the exporter’s bank and how good are the L/ opening bank and the reimbursement bank, Che is sure to land in trouble at once stage or another.There are ample cases of frauds under the Letter of Credit. More and more ingenious methods are adopted tocircumvent the provisions of UP C 500 by fair or foul means. Hence, even the safety and security under the Letters ofCredit may prove to be no better than a mirage for a man in the desert.Hence, sufficient care is to be taken by the exporter to ensure that instrument is received in order and the conditionsof the L/ can be well complied with, and there are no clauses of ambiguity. CThis is one of the most popular and more secured of method of payment in recent times as compared toother methods of payment. A L/C refers to the documents representing the goods and not the goodsthemselves. Banks are not in the business of examining the goods on behalf of the customers. Typicaldocuments, which are required includes commercial invoice, transport document such as Bill of lading orAirway bill, an insurance documents etc. L/C deals in documents and not goods.DEFINITION:A Letter of Credit can be defined as “an undertaking by importer’s bank stating that payment will bemade to the exporter if the required documents are presented to the bank within the validity of the L/C”.PARTIES INVOLVED IN LETTER OF CREDIT:Applicant: The buyer or importer of goods
  • 14. Issuing bank: Importer’s bank, who issues the L/CBeneficiary: The party to whom the L/C is addressed. The Seller or supplier of goods.Advising bank: Issuing bank’s branch or correspondent bank in The exporter’s country to whom the L/C is send for Onward transmission to the beneficiary.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 presents his Documents for payment under L/CA Letter of Credit contains these elements: A payment undertaking given by the bank (issuing bank) on behalf of the buyer (applicant) To pay a seller (beneficiary) a given amount of money on presentation of specified documents representing the supply of goods within specific time limits These documents conforming to terms and conditions set out in the letter of credit Documents to be presented at a specified place.In simple words, the Issuing B anks role is twofold: To guarantee to the seller that if complete documents are presented, the bank will pay the seller the amount due. This offers security to the seller – the bank says in effect "We will pay you if you present documents (XYZ)" To examine the documents and only pay if these comply with the terms and conditions set out in the letter of credit. This protects the buyers interests - the bank says "We will only pay your supplier on your behalf if they present documents (XYZ) that you have asked for"ADVANTAGES OF LETTER OF CREDITADVANTAGES TO THE EXPORTER: No blocking of funds. Clearance of import regulations.
  • 15. Free from liability. Pre- shipment finance. Non-refusal by importer. Reduction in bad-debts.ADVANTAGES TO THE IMPORTER: Better terms of trade. Assurance of shipment of goods. Overdraft facility. No blocking of funds. Delivery on time. Better relations.DISADVANTAGES OF LETTER OF CREDIT: Lacks flexibility. Complex method Expensive for importer Problem of revocable L/CWhat is a Documentary Credit?
  • 16. To say in simple language, this is an Undertaking by a B ank associated with the buyer to make the payment for thesupply of goods by a seller subject to compliance of various requirements that may be specified in the document ofundertaking by the B ank. This document is known as Documentary Credit. A Documentary Credit is also called aLetter of Credit (L/C).CONTENTS OF A LETTER OF CREDITA letter of credit is an important instrument in realizing the payment against exports. S o, needless to mention that theletter of credit when established by the importer must contain all necessary details which should take care of theinterest of Importer as well as E xporter. Let us see shat a letter of credit should contain in the interest of the exporter.This is only an illustrative list. name and address of the bank establishing the letter of credit letter of credit number and date The letter of credit is irrevocable Date of expiry and place of expiry Value of the credit P roduct details to be shipped P ort of loading and discharge Mode of transport Final date of shipment Details of goods to be exported like description of the product, quantity, unit rate, terms of shipment like CIF, FOB etc. Type of packing Documents to be submitted to the bank upon shipment Tolerance level for both quantity and value If L/ is restricted for negotiation C Reimbursement clausePROCEDURE INVOLVED IN THE LETTER OF CREDITThe following are the step in the process of opening a letter of credit: E xporter’s R equest: The exporter requests the importer to issue LC in his favor. LC is the most secured form of payment in foreign trade. Importer’s R equest to his B ank: The importer requests his bank to open a L/ He May either pay the C. amount of credit in his current account with the bank. Issue of LC: The issuing bank issues the L/ and forwards it to its correspondent bank with also request to C inform the beneficiary that the L/ has been opened. The issuing bank may also request the advising bank C to add its confirmation to the L/ if so required by the beneficiary. C, Receipt of LC: the exporter takes in his possession the L/ He should see it that the L/ is confirmed. C. C
  • 17. S hipment of Goods: Then exporter supplies the goods and presents the full set of documents along with the draft to the negotiating bank. S crutiny of Documents: The negotiating bank then scrutinizes the documents and if they are in order makes the payment to the exporter. Negotiation: The exporter’s bank negotiates the document against the letter of credit and forwards the export documents to the L/ opening bank or as per their instructions. C Realization of payment: The issuing bank will reimburse the amount (which is paid to the exporter) to the negotiating bank. Document to Importer: the issuing in turn presents the documents to the importer and debits his account for the corresponding amount.In order to have uniformity and to avoid disputes, the ICC P aris has evolved uniform customs and practices ofdocumentary credit (UCP DC), in short known as UCP 500 effective from 1- 96. These are rules have been adopted 1-by more than 150 countries. They provide the comprehensive and practical working aid to banker, lawyer, importers,exporters, E xporters, transporters, executives involved in international trade.Note: as soon as an L/ is received ensure that the same is authenticated. Meaning that the genuineness of the L/ C Cis certified by the Advising B ank by an endorsement with the marking ‘AUTHE NTICATE D’ OR E LS E THE L/ IS OF CNO US E .Different Type of Documentary Credits.There are various types of Documentary Credit opened by a bank in favour of it’s customer depending upon therequirement. Let us talk about few types of Documentary Credit which are in common use. Revocable /Irrevocable Documentary Credit :A R evocable Documentary Credit can be revoked (cancelled) by the buyer at his own discretion and this does not require the consent of the seller. The risk factor here is that the L/ may be cancelled even after the shipment is done and before the beneficiary present the C documents to the bank for claiming the reimbursement. Hence, a revocable L/ is as goods as no L/ C C. obviously, no seller will entertain a revocable L/ Contrary to this, an Irrevocable Documentary Credit once C. established and advised to the beneficiary, cannot be revoked or cancelled unilaterally by the buyer without the consent of the beneficiary (S eller).A S eller must always ask for an Irrevocable Letter of Credit. Restricted/Unrestricted Documentary Credit: A Documentary Credit stipulates the name of the bank who is authorized to negotiate the document for claming the reimbursement. In this case the beneficiary is obliged to negotiate the documents only through the specified bank i.e. Negotiation of document is restricted to that particular bank. On the contrary if no specific bank is nominated for negotiation, it may say ‘Negotiation by any bank’ which means the beneficiary is free no negotiate the document through the bank of his choice. This is beneficial because he can negotiate the documents through his own bank where he is having an account. S ince the bank is not alien to him, he will not face any practical/procedural difficulty in negotiating the document. It is suggested to have an unrestricted L/ or L/ which may be restricted to the bank of the C C beneficiary’s choice.
  • 18. Confirmed/Unconfirmed Documentary Credit: Confirmed Documentary Credit is one in which the beneficiary has the option to have the L/ confirmed by a bank in the beneficiary country i.e. the bank who confirms the C L/ takes the responsibility of making the final payment to the beneficiary upon negotiation of the document C in strict compliance with the terms and conditions of the Letter of Credit. B y this process the final payment will be made in the beneficiary’s country by the bank which confirms the L/ immediately upon negotiation of C the documents. The beneficiary do not stand the risk of waiting for the document to reach the opening bank who will have the final say so to the compliance under the L/ before making the payment. Further, the C payment is also made immediately after negotiation and without recourse to the beneficiary i.e. the payment once made by the confirmed bank cannot be revoked. Moreover, if the importing country’s regulation changes and the money is not allowed to be repatriated, this will eliminate the risk. On the contrary, in an unconfirmed L/ the negotiating bank only accepts the documents and pays for the same with recourse i.e. C, if as and when the documents reach the opening bank, and the opening find some discrepancy in the documents it may refuse to make the payment or seek clarification for the applicant before reimbursement. The beneficiary is fully at the mercy of the opening bank for payment. It is suggested to ask for a Confirmed L/C. With R esource and Without (S ans) R esource Letter of Credit: The revocable or irrevocable LC can further be classified as with resource and without resource LC. o With resource LC: In this type the exporter is held liable to the paying/negotiating bank, if the draft drawn against LC is not honored by the importer/issuing bank. The negotiating bank can make the exporter to pay the amount along with the interest, which it has already paid to the beneficiary. o Without (S ans) R esource LC: In the case of sans (without) resource letter of credit, the negotiating bank has no recourse to the exporter, but only to the issuing bank or to the confirming bank.Normally, the negotiating bank makes advance payment to the exporter in resource of letter of credit either by discounting bills against letter of credit or by purchasing the bills of exchange. In such an instance, if the issuing bank fails to make payment or dishonor the letter of credit, then the negotiating bank cannot get the money back from the exporter or hold him liable to pay the amount. However, in the case of with resource letter of credit, the negotiating bank can ask the exporter to pay back the money along with certain other expenses. For the exporter, sans R esource letter of credit is more safe as compared to With R esource letter of credit. Transferable/Non-transferable Documentary Credit: In a transferable L/ the beneficiary can transfer the C, L/ opened in his name in favor of a third party who may effect the shipment and negotiate the documents C and claim payment under the said L/C. Revolving Documentary Credit: Where an exporter is having a regular shipment for a particular customer and the value of each shipment may also be of more or less equal value, and then one can call for a Revolving Documentary Credit. The salient feature of this L/ is that C
  • 19. the buyer opens an L/ which can take care of shipments, say, may be for a period of one year on a Cmonthly basis.For e.g. an exporter enters into a contract for supply of 5000 pairs of Trousers valued approx.US .$.75,000/-to be shipped every month. The buyer can open an L/ for a value of US .$.75000/ with validity for 12 C -months stipulating shipment every month for a value of US $. 75000/ and by adding a clause to make 12 -shipment of like value the L/ stands replenished for the full value of the L/ after each shipment is made C Cthe documents are negotiated for which payment are also made immediately for the value of the shipment.The main benefit in this L/ is that the buyer, the bank and the exporter are saved from the routine of Copening one L/ every month, the anxiety of non- C receipt of the L/ on time, the amendments that may be Cwarranted every time, the bank charges for opening number of L/ etc.,. A revolving Documentary Credit Csmay have cumulative effect i.e. if a particular shipment is not made, then the value is added to the value forfuture utilization. In an automatic R evolving Credit, the bank is liable for the total amount covering the entireshipment and where it is non-automatic its responsibility is restricted to the value of one shipment. Inautomatic Revolving Credit the value of the credit is automatically replenished by an amendment.Where there are continuous shipments like the one stated above one can call for a R evolving Letter ofCredit.Assignable Documentary Credit: In this type of L/ the benefit is shared between the first beneficiary and Cthe parties whose names are assigned on the L/ The assignee is not a party to the letter of credit but he C.only derives the benefit as per the L/ this is more beneficial to the assignee because he receives his part C.of the money once the documents are negotiated by the first beneficiary in whose name the L/ is opened. CCalls for an L/ as necessary. CS tand by Letter of Credit: This is aimed at providing a security to a seller in case the buyer fails to performhis part. Thus this L/ is used in case of non- C performance while the other types of L/ are generally for Cssome performance. S uch credits are paying on first presentation and the only document required therein is asimple declaration of non-performance along with the statement of claim. This type of L/ is mainly common Cin U.S .A.A standby Documentary Credit is generally common on open account trading where the seller may expectsome security for getting his payment. This is not permitted in India.Red Clause LC: The red clause LC is the usual irrevocable LC with further authorities the negotiating bankto make advance to the beneficiary for the purpose of processing the export goods. Thus, the red LCenables the exporter to obtain packing credit facility for the purpose of processing the goods. It is called ared-cause LC because it is generally printed/typed in red ink.Green Clause LC: The Green LC in addition to permitting packing credit advance also provides for thestoring facilities at the port of shipment. Green LCs is extensively used in Australian wool creditors.Back- B ack LC: B ack- B ack LC is a domestic letter of credit. It is a ancillary credit created by a bank to- tobased on a confirmed export LC received by the direct exporters. The direct exporter keep the original LC
  • 20. (received from issuing bank) with the negotiating or some other bank in India, as a security, and obtains another LC in favour of domestic supplier. Through this route the domestic supplier gains direct access to a pre-shipment loan based on the receipt of domestic or back- back LC. to- Documentary LC: Most of the L is documentary L P ayment is being made by the bank against delivery C C. of the full set of documents as laid down by the terms of credit. The important documents required to be submitted by the exporter under documentary LC includes the following: o Bill of Lading /Airway Bill or any other transport document o Commercial Invoice o Insurance P olicy o S hipping Bill o Certificate of Origin o Combined Invoice and Certificate of Value and Origin o GS P /CWP certificate o P acking List o Certificate of Quality Inspection o Bill of E xchange o Any other document if required.A letter of credit may call for some or most of the above documents and may also call for some other documentsspecific to the shipment. Traveler’s LC: Traveler’s LC is issued to the person who intends to make a journey abroad. The correspondent/agent of the bank honors all the cheques drawn on this credit by its holder up to the amount mentioned in LC. Traveler’s LC has more advantages as compared to traveler’s cheques. In case of cheque, the holder can withdraw up to the amount of the cheque. Again, he has to carry a number of cheque. In case of traveler’s LC, the holder can draw any amount up to the limit mentioned in the LC, and he need to carry only one paper of LC.Types of P ayments under a Documentary Credit.P ayment under a documentary credit can be of the following types: P ayment at S ight: In this mode, the payment is made by the L/ opening bank or its nominated bank or by a C confirming bank on presentation of the documents in full conformity with the L/ The L/ may or may not C. C call for draft at sight for the full value of the documents. Deferred P ayment S cheme: In this case the payment is to be made at a future date as stipulated in the L/C. Here, generally NO draft is required as the due date of payment is defined in the L/ In case of a confirmed C. L/ the final payment is made by the confirmed bank on due date and by the issuing bank or its nominated C, bank if the L/ is not confirmed. C
  • 21. Acceptance Credit : This type of credit requires a usance draft to be drawn on a nominated or accepting bank. The payment is made by the nominated/accepting bank on the due date as per instructions of the negotiating bank. In case of a confirmed L/ the payment on due date is made by the negotiating bank C (confirming bank). Negotiation Credit: Here the payment is made by the negotiating bank upon negotiation of the documents if it prepares to take the risk and will recourse to the beneficiary. If the credit is confirmed, then the negotiation bank is obliged to make the payment upon submission of a clean document by the beneficiary.E xpect in the case of confirmed L/ there is always a time lag between the date of negotiation of the document and Cthe date of receipt of the payment. This is a grey area. If the bank acts swiftly and without prejudice, one getspayment within a week’s time. If the payment is delayed beyond this time, though an exporter has every right to askfor compensation, in actual practice, no justice is done to the exporter for the delayed payment. Very rarely, onpersistent approach by the exporter/their banker, does a defaulting bank comes forward to compensate for thedelayed payment. Generally the exporter has to forego lot of money in correspondence through the negotiating bankbecause every communication of the bank is charged to the exporter. It is no surprise many exporter suffer this losssilently.Feature of a Documentary CreditA documentary credit is a document in writing issue by the bank on behalf of its customer (The B uyer). DocumentaryCredit must stipulate the Type of Credit as detailed above and inter alia will also stipulate theFollowing details : the name of the Bank issuing the Documentary Credit.(The L/ Opening Bank) C the name and address of the buyer on whose behalf the credit is Issued.(The Applicant) the name and address of a bank in the country of the seller the credit through Whom the L/ is to be C advised to the seller. The name and address of the S eller (Beneficiary) The Maximum Value the opening bank undertakes to pay to the Beneficiary. The date of issue of the credit. The E xpiry Date of the L/C The Validity Date for shipment. The Details of the product to be shipped.(Description) Details of document required for claiming the payment from the Opening bank. The name and address of the bank authorized to negotiate the documents. The Reimbursement Clause.As soon as an L/ is received ensure that the L/ is authenticated. If the L/ received in mail the signatures are got C C Cto be verified by the advising bank. In case of telex/swift the bank should endorse on the document authenticated andthen only the L/ is a valid document. C
  • 22. While the above details are the minimum that a Documentary Credit may have in actual practice there can be otherstipulations mutually agreeable to the buyer, seller and the opening bank as also the negotiating bank.The guidelines for the interpretation and usage of Letter of Credit are governed by the UCP 500 (Uniform CustomsP ractice for Documentary Credit) published by the International Chamber of Commerce (ICC). The UP C 500 coversall the procedural aspects relating to the transactions under a Letter of Credit. Hence one is suggested to be familiarwith all the 49 Articles as detailed in the UCP 500 of 1994.While all the elements and events that one may encounter in each and every organization can not be explained, theUCP 500 has attempted to take care most of the queries that one may encounter normally.The ICC Uniform Customs and P ractice was first published in 1993. Taking into the consideration of the variousdevelopments in the transactions under the Documentary Credit the ICC has been reviewing these rules andupdating the same. As time changes and the international transactions faces new aspects, attempts will be made toget the UCP 500 revised.S crutiny of letter of creditMere receipt of letter of credit is no guarantee of payment. There are many ifs and buts before the documents aresubmitted to the bank against the letter of credit for realization of proceeds from the opening bank. As soon as theletter of credit is received a through scrutiny is to be undertaken to ensure that First and foremost that the credit is properly authenticated by the advising bank. The letter of credit has been opened in accordance with the terms of the contract. The name and address of the beneficiary has been spelt properly. The details of product description, quality, and value are in order. The validity of shipment and expiry are correct. The documents that are required can be submitted. There is sufficient % of tolerance of quantity and value. The unit price and the terms of contract are correct. The terms and conditions stipulated can be complied with. That the credit is available for negotiation without restriction. In case of exports requires the credit to be confirmed by the local, then necessary clause is incorporated by the opening bank on the credit. Last but not the least; the credit has a reimbursing clause enabling the negotiation bank to get reimbursement of the money paid to the exporter against the documents.There are only few suggestions. The requirement may differ for different exporter and the scrutiny has be done
  • 23. relative to the requirement.AMENDMENTS TO THE CREDITOn scrutiny of the letter of credit, if the exporter finds that some change are required to be made in the credit, heshould immediately request the buyer to make necessary change in the letter of credit and the opening bank issuednecessary amendment in this respect. Any oral and written agreement by the importer about change in the creditdirectly to the exporter should not be accepted as it is not valid under the credit. Any change must be advised by theimporter through the opening bank only as a sort of amendment to the original credit.DOCUMENTARY CREDIT IN GENERALOf all the various type of payments, the most safest as far as the exporter is concerned is to get an advance paymentin full for the value of shipment to be effected. Obviously, this puts the buyer totally at the mercy of the seller andunless the buyer feels unavoidable he will not be prepared to make advance payment. Hence, of the rest of themodes of payment, the best is calling for a Documentary Credit for any shipment. Now let us see how we can takecare of the interest of the exporter while an L/ is established. CIt is suggested that the exporter gives the full details as to the various requirements to the buyer for incorporation inthe L/ this will avoid the necessary of asking for amendments and will save both time and money. Bear in mind C.every amendment costs you badly. Care are should be taken to ensure that there are NO spelling mistakes,omission and commission of “, or”, or such small things. A discrepancy is a discrepancy and there is nothing likeminor discrepancy or major discrepancy as far as the bank is concerned. A bank strictly deals in documents and thedocuments are expected to be cent percent in line with details give in the Documentary Credit. E nsure that theValidity for shipment and for negotiation of documents can be complied with. If not possible, call for amendmentextending the validity as required.Unless the L/ specifies the tolerance for the quantity and value, the exporter should follow the quantity and value as Cstipulated in the L/ There is provision for a tolerance of the quantity up to 5 percent more or less than stipulated in C.the L/ even if the L/ does not specify tolerance exclusively and unless tolerance is prohibited 0 specifically. C CHowever, the value of documents, on no account, could exceed the limits of the L/C.Check the description of the product properly, the rates if specified, and quantity of each of the items. Ask foramendment where you cannot copy with the terms. Make sure that all the documents as called for by the Credit canbe submitted without any exception.The last but not the least is the R eimbursement clause (Getting the funds for the shipment made). An L/ without this Cclause is no L/ if there is no provision as to from where the exporter is going to get paid for, the whole exercise of C.the L/ is futile. The opening bank may specify the reimbursement clauses as follows: C The negotiating bank to send the documents to the opening bank who will, upon receipt of the documents, arrange for reimbursement as claimed by the negotiation bank.
  • 24. The negotiating bank can claim reimbursement directly from a nominated bank (say ABC B ank, New York) either upon negotiation of documents or after a period of ¾ days of negotiation subject to the documents being submitted by the beneficiary is strictly in conformity with terms and condition of the letter of credit.These are some of the aspects one should take care to ensure that the L/ established in his favor is in order and Cthat he can comply with all the provision thereof. However, one is advised to make a checklist and take a note ofeach and every condition of the L/ for compliance at the right time. CWhere an L/ stipulates that the Negotiation is restricted to a specific bank which is not the Advising B ank or Where Cthe L/ is not restricted, and the seller desires to negotiate the document which is not the advising bank, then we Chave a separate Negotiating B ank.Where the opening bank prefers to advise the L/ through its own branch in the beneficiary country or through Canother bank of its choice, then the L/ may be advised to the beneficiary directly by this bank or if it instructed to Cadvise the L/ through the buyer’s nominated bank then it does so. Here, we have two advising bank. CAs far as possible, one should restrict the involvement of the number of the banks to the minimum. More the numberof the banks, more the time in the transmission of the L/ in addition to multiplicity of bank charges. C,S P E CIAL NOTEThough one may strongly feel that a Letter of Credit is the safest mode of payment, one will face innumerouspractical difficulties in so far as compliance with the terms and conditions of the L/ since several documents are C.involved, there are every possible of discrepancy in the documents either between different documents or betweenthe document or between the document and the L/ the Negotiating bank soft pedal some of the discrepancies C.which they feel may not be pointed out by the opening bank as discrepancy to favour its customer. In the like mannerthe opening bank, to safeguard the interest of the buyer, would like to ensure that the document submitted against aLetter of Credit are strictly in full conformity of the L/C.For mastery of the operation under the Letter of Credit one is advised to completely study the various articles of theUCP 500 so that one can be clear in his mind as to the various provisions available under the Documentary Creditwhich will stand good while negotiating the documents with the bank. While the articles of UCP 500 come safeguardthe interest of both the buyer and the seller, there are certain elements which may be outside the definition of theUP C 500. Also there is certain flexibility provisions in the UP C 500 which one might like to exploit to his favour.S o, in spite of the L/ being the safest method to ensure the payment, unless both the buyer and the seller follow the Cbusiness ethics there is every chance that one gets cheated by the other. As a prudent exporter one should be verycareful in selecting his customer apart from taking other safety measures.If the customer is too good, and you have been dealing with them for a long time, one may relax and term the L/ as Cthe best method to receive payment. If the customer turns out to be unscrupulous then he can play havoc. This isapplicable to both the seller and the buyer. There are books on fraudulent us of the Documentary Credits. S ometimes
  • 25. it may be the buyer who is at the receiving end and some time it may be the other way.A study of such book as above may help one to take adequate care. B ut, the brain is always working in multidirections. It will be no surprise if one comes across newer and newer dubious methods being adopted by thecontracting parties.TOTAL OPERATION UNDER THE LETTER OF CREDIT.The Unconfirmed L/C. The Buyer makes an application to his bank to open an L/C. Opening bank establishes the L/C. Opening bank advises the L/ through his associate or through the bank. Nominated by the beneficiary. C The B ank in the beneficiary country which receives the L/ sends the Original L/ to the customer either C C directly or through the bank S pecified in the L/C. The buyer complies with the L/ requirements and submits the relevant documents. To the bank for claiming C reimbursement. The negotiating bank negotiates and sends the documents to the opening bank or as Directed. Meantime pays the beneficiary. Advises the opening bank or the reimbursement bank the details of his Accounts and the nominated bank where the proceeds are to be credited. Once the credit is received, the nominated bank advises the negotiating bank of the credit. Thus the negotiating bank gets the credit for the L/ documents. CThe Confirmed L/C.All the steps from 1to6 as far as the beneficiary are concerned since the payment is made to the beneficiary withoutrecourse. However, the negotiating bank may have to follow the subsequent steps since he has to receive his moneyfrom the opening bank.S ample Document: Letter of Credit (Documentary Credit)
  • 26. THE MOON B ANK INTE R NATIONAL OP E R ATIONS 5 MOONLIGHT B LVD., E XP OR T-CITY AND P OS TAL CODE E XP OR T-COUNTR YOUR ADVICE NO. IS S UING B ANK R E F . NO. & DATE MB-5432 S BRE -777 J anuary 26, 2005To,UVW E xports88 P rosperity S treet E ast, S uite 707E xport-City and P ostal CodeDear S irs:We have been requested by The S un B ank, S unlight City, Import-Country to advise that they have opened withus their irrevocable documentary credit number S B -87654For account of DE F Imports, 7 S unshine S treet, S unlight City, Import-Country in your favor for the amount of notexceeding Twenty Five Thousand U.S . Dollars (US $25,000.00) available by your draft(s) drawn on us at sightfor full invoice valueAccompanied by the following documents: 1. Signed commercial invoice in five (5) copies indicating the buyers Purchase Order No. DEF-101 dated January 10, 2005 2. Packing list in five (5) copies. 3. . Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable copies, issued to order of The Sun Bank, Sunlight City, Import-Country, notify the above accountee, marked "freight Prepaid", dated latest March 19, 2005, and showing documentary credit number. 4. Insurance policy in duplicate for 110% CIF value covering Institute Cargo Clauses (A), Institute War and Strike Clauses, evidencing that claims are payable in Import-Country. Covering: 100 Sets ABC Brand Pneumatic Tools, 1/2" drive, complete with hose and quick couplings, CIF Sunny PortS hipment from: Moonbeam P ort, E xport-Country to S unny P ort, Import-CountryP artial shipment P rohibited
  • 27. Tran-shipment P ermitted S pecial conditions: 1. All documents indicating the Import License No. IP /123456 dated J anuary 18, 2005. 2. All charges outside the Import-Country are on beneficiarys account Documents must be presented for payment within 15 days after the date of shipment. Draft(s) drawn under this credit must be marked Drawn under documentary credit No. S B-87654 of The S un B ank, S unlight City, Import-Country, dated J anuary 26, 2005 CHAP TE R 5 -S OME IMP OR TANT CONCE P TS IN E XP OR T FINANCE5.3 -S uppliers Credit for deferred payment exportsDefinition of Deferred Payment Exports:In terms of R egulation 9 of the Foreign E xchange Management Act 1999, the amount representing the full exportvalue of goods exported must be realized and repadriated to India within 6 months of date of export.E xports where more than 10% of the value is realized beyond the prescribed period, i.e. 6 months from date ofshipment, are treated as Deferred P ayment E xports 1. What is an offer? Exim Bank offers Suppliers Credit in Rupees or in Foreign Currency at post-shipment stage to finance export of eligible goods and services on deferred payment terms.
  • 28. Suppliers Credit is available both for supply contracts as well as project exports; the latter includes construction, turnkey or consultancy contracts undertaken overseas.2. Who can seek finance? Exporters can seek Suppliers Credit in Rupees/ Foreign Currency from Exim Bank in respect of export contracts on deferred payment terms irrespective of value of export contracts.3. What are the general terms of Suppliers Credit? E xtent of S uppliers Credit: 100% of post-shipment credit extended by exporter to overseas buyer. Currency of Credit: S uppliers Credit from E xim B ank is available in Indian R upees or in Foreign Currency. R ate of Interest: The rate of interest for S uppliers Credit in R upees is a fixed rate and is available on request. S uppliers Credit in Foreign Currency is offered by E xim B ank on a floating rate basis at a margin over LIB OR dependent upon cost of funds. S ecurity: Adequate security by way of acceptable letter of credit and/ guarantee from a bank in the or country of import or any third country is necessary, as per RBI guidelines. Period of Credit and Repayment: Period of credit is determined for each proposal having regard to the value of contract, nature of goods covered, security, competition. Repayment period for Suppliers Credit facility is fixed coinciding with the repayment of post-shipment credit extended by Indian exporter to overseas buyer. However, the Indian exporter will repay the credit to Exim Bank as per agreed repayment schedule, irrespective of whether or not the overseas buyer has paid the Indian exporter. Overseas Buyers Credit: Credit is offered directly to overseas buyer for a specific project/ contract.
  • 29. Import Trade Procedures & Documentation Liberalisation of Imports. Categories of Importers. Special Schemes for Importers. Import Procedure :­ 1. Pre-import Procedure. 2. Legal Dimensions of Import Procedure. 3. Retirement of Import Documents. 4. Customs Clearance. Classification of Goods for Import Policy & Assessment of Duty. Bill of Entry. A Note on Forward Contract.Liberalisation of ImportsConsequent upon a comfortable balance of payments position of the country,increasing nec~ssity of imports for export production and globalisation of Indian economy, theGovernment of India has liberali~ed the import regime from time to time. At present, practically, allcontrols on imports have been lifted. Under the new EXIM Policy 2002-07 announced on March 31 , 2002,the Government has initiated a comprehensive package intended to make international trade a vital .partof development strategy. It has substantially eliminated licensing, quantitative restrictions and. -otherregulatory and discretionary controls both on exports and imports.All goods may be imported freely in India without any restriction except to the extent such imports areregulated by the provisions of.the EXIM Policy 2002-07 or any other law for the time being in force.Moreover, the customs duties on importshave been considerably reduced and rationalised during the last few years. Theprocedure for imports has been considerably simplified and the bureaucratic controls have been reducedto the bare minimum. Besides, availability of foreign exchange for imports has also been eased.Regulations regarding personal imports such as consumer goods, baggage etc., have been substantiallyliberalised.Categories of Importers
  • 30. Importer means a, person who imports or intends to import and holds an Importer-Exporter.Code (lEC)Number. They can be divided into two categories :­ Actual User (a) Actual user (Industrial) :- Actual users (industrial) means person who utilises the imported goods for manufacturing in his own industrial unit or manufacturing, for his own use in another unit including, a jobbing unit . (b) Actual user (Non-industrlal) :- Actual user (non industrial) means a person who utilises the imported goods for his own use in any commercial establishment carrying on business, trade or profession or any. laboratory, scientific research and development institution university or other educational institution OF hospital; or . any service industry. Non-actual userNon-actual users include:• Importers for Stock and Sale.• Personal Impqrts.• Imports of Gifts~ etc.Special Schemes for ImportersAs per the latest EXIM Policy 2002-07, import of goods is permissible under the ¬following specialschemes, designed for encouraging exports :¬(a) Export Promotion Capital Goods Scheme (EPCG) :- EPCG scheme was introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporter to import machinery and other capital goods for export production at concessional or no customs duties at all. This facility is subject to export obligation i.e, the exporter is required to guarantee
  • 31. exports certain minimum value, which is in multiple of the value of capital goods imported. (b) Duty Free Replenishment Certificate (DFRC}:- DFRC is issued to a merchant exporter or manufacturer exporter for the duty free import of inputs such as raw materials components, intermediates, consumables, spare parts , including packing materials to be used for export: production. Such certificate is subject to the fulfilment. of time bound export obligation and is issued in ¬ respect of products covered. under the standard Input,Output Norms (Sions)(C) Duty Eritltleme.t Passbook Scheme (DEPB}:- under the DEPB scheme ¬an. exporter may apply for credit as a specified percentage of FOB value of exports , made in freely convertible currency: The credit shall be available Against such export products and at such rates as may be specified by the Director General of foreign Trade (DGF) by way of public notice issued in this behalf, for import of raw materials, intermediates, components, parts, packaging materials, etc.(D) Advance Licence :- An advance licence is issued for duty free import of components which are physically incorporated in the products manufactured for export. In addition, fuel, oil, energy, catalysts, etc.which are consumed in the course of production process may also be allowed.Duty free import of mandatory spares up to 10% of the C.I.F. value of the licence which are required to beexported or supplied with the resultant product may also be allowed. Advance Licence can be issued for :¬• Physical Exports.• Intermediate Supplies• Deemed exports.Pre-Import Procedure(a) Selecting the Commodity :- An importer should select the commodity for import after consideringvarious commercial factors as well as legal considerations including the regulations contained in the EXIMPolicy. Imports may be made freely except to the extent they are regulated by the provisions of the EXIMPolicy. Prohibited goods cannot be imported at all. Import of restricted items is permitted throughlicensing only while canalised items can be canalised through specified State Trading Enterprises (STEs).
  • 32. (b) Selecting the Overseas Supplier :- Imports can be made from any country of the world except Iraq.However, there shall be no ban on the import of items form Iraq in case where the prior approval of theconcerned sanction committee of the UN Security Council has been obtained. The information regardingoverseas suppliers can be obtained from various trade directories,consulate generals, international trade fairs and exhibitions and chamber of commerce. (c) Capability and Creditworthiness of Overseas Supplier :- Successful completion of an importtransaction mainly depends upon the capability of the overseas supplier to fulfil his contract. Therefore, itis advisable to verify the creditworthiness of the overseas supplier and his capacity to fulfil the contractthrough confidential reports about him.from the banks and Indian embassies abroad. It is. advisable tofinalise contract through fndenting agents of overseas suppliers situated in India.(d) Role of Overseas Suppliers Agents in India :- Some reputed overseas suppliers have their indentingagents stationed in India. These agents procure orders from the Indian parties and arrange for the supplyof goods from their principal abroad. It is advisable to import through such agents as they can be readilycontacted in case there is any dispute regarding quality or quantity of goods imported, receipt ofpayment, documentation formalities, etc.e) Inquiry, Offer and Counter-offer :- It is advisable that before finalising the terms of import order, oneshould call for the samples or catalogue andother relevant literature and the specifications of t,he items to be imported. Import of samples of goods isexempted from import duties under Geneva Convention of 7th November 1952. After satisfying himselfwith the samples and the creditworthiness of the overseas supplier, the iinporter should proceed tofinalise the terms, of the contract to be entered into.Legal Dimensions of Import Procedure(a) Finalisation of the Terms of Contract :- The. import contract should be carefully and comprehensivelydrafted incorporating therein precise terms as well as all relevant conditions of the trade deal. Thereshould not be any ambiguity regarding the exact specifications of the goods and terms of the purchaseincluding import price, mode of payment, type of packaging, port of shipment, delivery schedule, licenceand permits, discount commission, insurance, arbitration, etc.(b) Mode of Pricing and INCO TERMS :- While finalising terms cof import contract, the importer should,inter-alia, be fully conversant with the mode of pricing and the manner of payment for the imports. Asregards mode of pricing, the overseas supplier should quote the terms prevailing in international trade.International Chamber of Commerce (ICC) , paris given detailed definition of a few standard terms
  • 33. popularly known as “ INCOTERMS. These terms have almost universal acceptance.(c) Mode of Settlement of Payment :- There are mainly three modes settling international transactionsdepending upon the creditworthiness of the importer or exporter, demand for the commodity in theinternational market, exchange control regulations prevailing in the importer or countries and otherrelevant factors Advance Payment. Payment or Acceptance against Document Collections. Payment under Letter of Credit.(d) Obtaining IEC Number :- In India, it is obligatory for every importer and exporter to register themselveswith the Director General of Foreign trade (DGFT) and obtain Import-Export Code (IEC) Number. Theapplication formfor obtaining IEC number should be accompanied by a fee of Rs.1000 andtwo copies of passport size photographs of the applicant duly attested by the banker of the applicant andother, relevant documents.(e) Obtaining Import Licence :- If the item to be imported falls in the prohibited list, then such item cannotbe imported at all. How, if it falls in restricted list then the necessary clearance must be obtained fromappropriate licensing authority. Similarly, if it is subject to the canalisation through State TradingEnterprises (STEs), then the necessary formalities are to be completed pertaining to the same.(f) Obtaining Foreign EXchange :- In India, all foreign exchange transactions are regulated by theExchange Control Department of the Reserve bank of India (RBI). Therefore, every importer is required tomake to the Reserve Bank of India (RBI) for getting. sanction for making overseas.Payments. The Exchange Control Department scrutinises the application and if satisfied, sanctionsnecessary foreign exchange for the import transaction.(g) Arranging Finance for Import :- It is advisable that the financial planning for imports should be done inadvance in order to avoid huge demurrages on the imported goods lying uncleared for want of payment.Banks normally do not extend any fund based assistance to importers. However, they enable industrialunits and others to have access to imported inputs and machinery by establishing letters of credit infavour of the overseas suppliers.
  • 34. (h) Obtaining Import L/C Umit:- Import L/C limits are sanctioned by the banks on submission of completeloan proposal as in the case of other types of credit facilities. This requires advance financial planning soas to retire import bills under L/C on time. Any delay in retirement of bills not only strains the relations ofthe importer with his bank but also results in additional costs by by of extra commission, penal interest,demurrage charges, etc.(i) Despatching Letter of Credit :- If the term of payment agreed between the importer and the overseassupplier is a letter of credit then the importershould obtain the letter of credit from his bank and forward it to the overseas supplier well within the timeagreed for the same. The importer must see to it that the letter of credit has been prepared in the strictconformity of the import contract entered between them.Retirement of Import Documents(a) Loading of Goods and Receipt of Shipment Advice :- On loading of goods the oyerseas supplierdespatches the shipment advice to the importerinforming him about the shipment of goods. The shipment advice contains" invoice number, bill of lading,airways bill number and date, name of the vessel with date, the port of export, description of goods andquantity and the date of sailing of the vessel.(b) Retirement of Import Documents :- After shipping the goods, the overseassupplier prepares the necessary documents as per the terms of contractand letter of credit and hands them over to his bank for their onward negotiation" to importer in themanner as specified in the L/C.The set normally contains bill of exchange," commercial invoice, bill oflading, packing list, certificate of origin, marine insurance policy, etc.For the retirement of documents, the importer is require~ to submit the following documents to his bank :¬(a) A letter authorising his bank to debit the equivalent Indian rupees to the value of documents including bank charges. .(b) Exchange control copy of the Import Licence, if applicable. .(c) FormAl duly completed for the remittance in foreign exc(c) Acceptance of the Bill of Exchange :- Bill of Exchange accompanied by the above documents is knownas the Documentary Bill of Exchange.IT is of
  • 35. two types :¬ Documents against Payment (Sight Drafts) :- In case of sigh draft, the drawer instructs the bank to hand over the relevant documents the importer only against payment. Documents against Acceptance (Usance Draft) :- In case of usance draft, the drawer instructs the bank to hand over the relevant documents to the importer against his acceptance of the bill of exchange.(d) Scrutiny of Documents Received under L/c :- After receipt of importdocuments from the exporters bank, the importers bank will scrutinise the documents as to theircorrectness as per the terms and conditions of L/C and hands over them to the importer after payment.The importer should also scrutinise the documents and ensure that there are no discrepancies.(e) Appointment of C & F Agent :- In India, the procedure for clearance imported goods is very lengthy,time consuming and involves lots of legal formalities. Therefore, it is advisable to hire the services of C&Fagents who are well versed with such formalities. The C&F Agent prepares bill of entry containing detailsof goods to be cleared from the customs ,in case the C&F agent does not have relevant information aboutthe goodsto be cleared, he prepares a bill of sight in order to enable himself to physically check thegoods imported and prepare bill of entry on that basis.Customs Clearance Procedure for Imported GoodsUnder the Ministry of Finance (Department of Revenue), there are twoindependent Boards of Revenue :- . (a) Central Board of Direct Taxes (for Income Tax, Wealth Tax etc.)(b) Central Board of Excise and Customs.The Customs administration vests with the Central Board for excise and Customs, which shapes the policyand decides the functions of the formalities in the country, in terms of the provisions of the Customs act1962All goods imported in India have to pass through the customs clearanceafter they cross the Indian border.The goods so imported are examined appraised assessed, evaluated and then allowed to be taken out ofcustoms charge for use by the importer.
  • 36. The procedure for customs clearance in general for goods imported as follows :¬(a) Import Manifest :- As per the section 30 of the Customs Act 1962,thepersons in charge of a conveyance carrying imported goods should handover, within 24 hours of the arrivafof the conveyance, an import manifest to the customs. The, importmanifest is a complete, list of all items the conveyance carries on board, including those to be transhippedand those to be carried to the subsequent ports of call. (b) Entry in the Import Department of Customs House :- On receipt of information regarding the arrival ofthe goods, the importers or their agents have to make an entry by filing a Bill of Entry, in a prescribedform in the Import Department of Customs House. The. date of presentation of Bill of Entry is animportant date as the rate of duty applicable to the imported goods will be the rate, which is in force ontl1e date of apresentation.(c) Presentation of Bill of Entry for Appraisal :- After the Bill of Entry is noted in the import department, thesame should be presented to the Appraising Counters along with the following necessary documents :¬ Import licence, if necessary. Exporters Invoice. A copy of Letter of Credit. Original Bill of Lading and its non-negotiable copy. Two copies of Packing List. Weight specifications. Manufacturers test certificate. Certificate of Origin. Delivery order issued by Shipping company or its agent. Freight and insurance amount certificate if the import is on FOB terms A declaration from importer that he has not paid any commission to agents in India.: CUstoms declaration Catalogue/drawing, etc for machinery imported.In addition to the above, the following documents are also required to be submitted wherever necessary :-If the spare parts are imported - exporters invoice showing unit priceand extended tptal of each item;If the, secondhand machinery is imported - Chartered Engineers Certificate;
  • 37. If the steel is imported - Manufacturers Analysis Certificate;If Chemicals and alIled products are imported - Literature showing chemical consumptionIf the textiles items are imported - Textile Commissioners endorsement or certificate.If the above documents furnished by the importer are found to be adequate for acceptance of the declaredvalue and determination of classification and acceptance of ITC Licence, the bill of Entry is completed bythe Appraiser. Itis then countersigned by the, Assistant Collector and sent to the LicenceSection with an order to the Dock Staff for examination of good clearance.(d) Clearance of Goods :- After payment of duty (the original copy of bill ofEntry is retained in the Customs House) the importer should obtain theduplicate copy of Bill of Entry on which order for examination of the goodsis given by Customs and get the goods examined. If the description of goodsis found to be correct, on the basis of declared and accepted paarticulars ,clearance of goods is allowed by the appraiser.(e) Warehousing the Goods :- The imported goods can be warehoused at the port of shipment without thepayment of duty by presenting a "Bill of entry for Warehousing" to the Bonds Department along with abond for twice theamount of duty payable. Initially the facility is granted for 3 months, whichmay be extended upto a period one year. The warehoused goods cleared in one or more installments. Forclearance of goods from the warehouse the importer is required to present what is known as Ex-bond Billof entry.(f) Import Follow-up :- Once an importer is allowed to remit foreign exchange out of the country he has anobligation to import the permitted goods of equivalent value in the country. If no goods or goods forlesser values are imported, it would lead to leakage of foreign exchange.Bill of Entry
  • 38. The bill of entry is a document, prepared by the importer or his clearing agent in the prescribed formunder Bill of Entry Regulations, 1971, on the strength of which clearance of imported goods can be made.When goods are imported in a particular country, the importer has to pay necessary import duty. For thispurpose, necessary information about the goods imported must be given to the customs authorities in aprescribed form called bill of entry form. Bill of entry is a document, which states that the goods of thestated values and description in the specified quantity have entered into the country from abroad. The billof entry is drawn in triplicate. The customs authorities may ask the importer to supply other documentsinvoice brokers note and insurance policy, etc., in order to verify the correctness of the informationsupplied in the bill of entry form.Types of Bill of EntryFor the purpose of giving information in the bill of entry form,goods are classified into three categoriesnamely :­(a) Bill of Entry for Goods Imported for Home Consumption {white coloured} :- This kind of bill of entry isused for clearing imported goods paying customs duty at the port.(b) Bill of Entry for Bonded Goods (Yellow coloured) :- This kind bill of entry is used when no duty is paidon imported goods and therefore are transferred to customs recognised bonded warehouses.(c) Bill of Entry for Ex-bond Clearance for Home Consumption {green coloured} :- This kind of bill of entryis used where the importer intends to clear the dutiable goods, either in part or full, from a bondedwarehouse by paying necessary duty.Contents of Bill. of EntryThe main contents of the Bill of Entry are :­(a) Name and address of the importer.(b) Name and address of the exporter.
  • 39. (c) Import licence number of the importer.(d) Name of the port/dock where goods are to be cleared.(e) Description of goods.(f) Value of goods.(g) Rate and amount of import duty payable.(h) Other relevant documents.However, no bill of entry is required in the following cases :­(a) Passengers baggage;(b) Favour parcels;(c) Mail bags and Post parcels; .(d) Boxes, kennels of cages containing live animals or birds;(e) Post parcels, ship stores in small quantities for personal use.(f)Un-serviceable stores, such as, dunnage wood, empty bottles, drums, etc.,of reasonable value (belowRs. 50);(g) Cargo by sailing vessels from Customs Ports when landed at open bunders only.FORWARD CONTRACTInternational contracts are either concluded in Indian rupees or in foreign currency. If the contract isconcluded in terms of Indian rupees, all relevant documents are prepared in Indian rupees and hence noconversion is involved. However, if the contract is concluded in some internationally accepted currencythen the importers have to pay Indian rupees equivalent to the amount of foreign currency.Where the international contract has been concluded in foreign currency, an importer is always at risk dueto adverse fluctuations in the exchange rates in the international market. Such risks can be avoided by thefollowing methods :¬(a) Invoicing the Goods in Indian Rupees :- The first remedy to adversemovements in exchange rates is invoicing goods in Indian rupees. However, foreign seller may not agreeto invoicing goods in Indian rupees.(b) Entering into a Forward Exchange Contract :- This i~ the most commonly practised alternative forinsuring the risks arising out of adverse movements in exchange rates. Under this adjustment, theimporter enters into contract with its bank to purchase from the bank, foreign exchange at a future dateor period and- the bank agrees to sell the firm the foreign exchange on that date or during the agreedperiod at certain predetermined rate agreed upon at the time of entering into contract. Thus,. the importer
  • 40. knows in advance the exchange rate that he is going to pay on delivery of import documents. TERMS OF SHIPMENTS – INCOTERMSThe INCOTE R MS (International Commercial Terms) is a universally recognized set of definition of international tradeterms, such as FOB , CFR & CIF, developed by the International Chamber of Commerce(ICC) in P aris, France. Itdefines the trade contract responsibilities and liabilities between buyer and seller. It is invaluable and a cost-savingtool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction.Once they have agreed on a commercial terms like FOB , they can sell and buy at FOB without discussing who will beresponsible for the freight, cargo insurance and other costs and risks.The INCOTE R MS was first published in 1936 - - INCOTE R MS 1936 - - and it is revised periodically to keep with - -changes in the international trade needs. The complete definition of each term is available from the currentpublication - -INCOTE R MS 2000. Under INCOTE R MS 2000, the international commercial terms are grouped into E , -F, C and D, designated by the first letter of the term, relating to the final letter of the term. E .g. E XW—exworks comesunder grouped ‘E ’.The purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly usedtrade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries canbe avoided or at least reduced to a considerable degree. The scope of Incoterms is limited to matters relating to therights and obligations of the parties to the contract of sale with respect to the delivery of goods. Incoterms deal withthe number of identified obligations imposed on the parties and the distribution of risk between the parties.
  • 41. In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms thatwould hold the seller responsible for the import customs clearance and/ payment of import customs duties and ortaxes and/ other costs and risks at the buyer’s end, for example the trade terms DE O (Delivery E x Quay) and DDP or(Delivered Duty P aid)Quite often, the charges and expenses at the buyer’s end may cost more to the seller than anticipated. To overcomelosses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines.S imilarly, it would be best for importers not to deal in E XW (E x Works) which would hold the buyer responsible for theexport customs clearance, payment of export customs charges and taxes, and other costs and risks at the seller’sendMORE CLARIFICATION ON INCOTERMSE XW {+the named place}E x W orks: E x means from. Works means factory, mill or warehouse, which are the seller’s premises. E XW applies togoods available only at the seller’s premises. Buyer is responsible for loading the goods on truck or container at thesellers premises and for the subsequent costs and risks. In practice, it is not uncommon that the seller loads sthegoods on truck or container at the sellers pre4mises without charging loading fee. N the quotation, indicate thenamed place (sellers premises) after the acronym E XW for example E XW Kobe and E XW S an Antonio.The term E XW is commonly used between the manufacturer (seller) and export-trader(buyer), and the export-traderresells on other trade terms to the foreign buyers. S ome manufacturers may use the term E x Factory, which meansthe same as E x Works.F CA {+the named point of departure}F ree Carrier: The delivery of goods on truck, rail car or container at the specified point(depot) of departure, which isusually the sellers premises, or a named railroad station or a named cargo terminal or into the custody of the carrier,at sellers expense. The point(depot) at origin may or may not be a customs clearance centre. B uyer is responsible forthe main carriage/freight, cargo insurance and other costs and risks.In the air shipment, technically speaking, goods placed in the custody of an air carrier are considered as delivery onboard the plane. In practice, many importers and exporters still use the term FOB in the air shipment. The term FCAis also used in the RO/RO (roll on/ off) services rollIn the export quotation, indicate the point of departure (loading) after the acronym FCA, for example FCA Hong Kongand FCA S eattle. S ome manufacturers may use the former terms FOT (Free on Trucks) and FOR (Free on R ail) inselling to export-traders.F AS {+the named port of origin}
  • 42. F ree Alongside S hip: Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, withinreach of its loading equipment so that they can be loaded aboard the ship, at seller’s expense. Buyer is responsiblefor the loading fee, main carriage/freight, cargo insurance, and other costs and risks In the export quotation, indicatethe port of origin(loading)after the acronym FAS , for example FAS New York and FAS B remen. The FAS term ispopular in the break-bulk shipments and with the importing countries using their own vessels.F OB {+the named port of origin)F ree on B oard: The delivery of goods on the board the vessel at the named port of origin (Loading) at seller’sexpense. B uyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the exportquotation, indicate the port of origin (loading) after the acronym FOB, for example FOB Vancouver and FOBS hanghai.Under the rules of the INCOTE RMS 1990, the term FOB is used for ocean freight only. However, in practice, manyimporters and exporters still use the term FOB in the air freight. In North America, the term FOB has otherapplications. Many buyers and sellers in Canada and the US A dealing on the open account and consignment basisare accustomed to using the shipping terms FOB Origin and FOB destination.FOB Origin means the buyer is responsible for the freight and other costs and risks. FOB Destination means theseller is responsible for the freight and other costs and risks until the goods are delivered to the buyer’s premiseswhich may include the import custom clearance and payment of import customs duties and taxes at the buyer’scountry, depending on the agreement between the buyer and seller. In international trade, avoid using the shippingterms FOB Origin and FOB Destination, which are not part of the INCOTE RMS (International Commercial Terms).CF R {+the named port of destination}Cost and F reight: The delivery of goods to the named port of destination (discharge) at the sellers expenses. Buyeris responsible for the cargo insurance and other costs and risks. The term CFR was formerly written as C&F. Manyimporters and exporters worldwide still use the term C&F.In the export quotation, indicate the port of destination (discharge) after the acronym CFR, for example CFR Karachiand CFR Alexandria. Under the rules of the INCOTE RMS 1990, the term Cost and Freight is used for ocean freightonly. However, in practice, the term Cost and Freight (C&F) is still commonly used in the air freight.CIF {+named port of destination}Cost, Insurance and Freight: The cargo insurance and delivery of goods to the named port of destination(discharge) at the seller’s expense. B uyer is responsible for the import customs clearance and other costs and risks.In the export quotation, indicate the port of destination (discharge) after the acronym CIF, for example CIF P usan andCIF S ingapore. Under the rules of the INCOTE RMS 1990, the term CIFI is used for ocean freight only. However, inpractice, many importers and exporters still use the term CIF in the air freight.
  • 43. CP T {+the named place of destination}Carriage P aid To: The delivery of goods to the named port of destination (discharge) at the sellers expenses. Buyerassumes the cargo insurance, import custom clearance, payment of custom duties and taxes, and other costs andrisks. In the export quotation, indicate the port of destination (discharge) after the acronym CP T, for example CP TLos Angeles and CP T Osaka.CIP {+ the named place of destination)Carriage and Insurance P aid To: The delivery of goods and the cargo insurance to the named place of destination(discharge) at seller’s expense. B uyer assumes the importer customs clearance, payment of customs duties andtexes, and other costs and risks.In the export quotation, indicate the place of destination (discharge) after the acronym CIP , for example CIP P arisand CIP Athens.DAF {+ the names point at frontier}Delivered At F rontier: The delivery of goods to the specified point at the frontier at sellers expense. Buyer isresponsible for the import custom clearance, payment of custom duties and taxes, and other costs and risks.In the export quotation, indicate the point at frontier (discharge) after the acronym DAF, for example DAF B uffalo andDAF Welland.DE S {+named port of destination}Delivered E x S hip: The delivery of goods on board the vessel at the named port of destination (discharge) at sellersexpense. B uyer assumes the unloading free, import customs clearance, payment of customs duties and taxes, cargoinsurance, and other costs and risks.In the export quotation, indicate the P ort of destination (discharge) after the acronym DE S , for example DE S Helsinkiand DE S S tockholm.DE Q {+the named port of destinationDelivered E x Quay: The delivery of goods to the Quay (the port) at the destination at buyers expense. S eller isresponsible for the importer customs clearance, payment of customs duties and taxes, at the buyers end. Buyer
  • 44. assumes the cargo insurance and other costs and risks. In the export quotation, indicate the P ort of destination(discharge) after the acronym DE Q, for example DE Q Libreville and DE Q Maputo.DDU {+the named point of destination}Delivered Duty Unpaid: The delivery of goods and the cargo insurance to the final point at destination, which isoften the project site or buyers premises at sellers expense. B uyer assumes the import customs clearance, paymentof customs duties and taxes. The seller may opt not to insure the goods at his/ own risks. herIn the export quotation, indicate the point of destination (discharge) after the acronym DDU for example DDU La P azand DDU N’djamena.DDP {+ the named point of destination)Delivered Duty P aid: The seller is responsible for most of the expenses which include the cargo insurance, importcustom clearance, and payment of custom duties, and taxes at the buyers end, and the delivery of goods to the finalpoint of destination, which is often the project site or buyers premise. The seller may opt not to insure the goods athis/her own risk. In the export quotation, indicate the point of destination (discharge) after the acronym DDP , forexample DDP B ujumbura and DDP Mbabane.“E ”-term,”F ”-term, “C”-term &”D”-term: Incoterms 2000, like its immediate predecessor, groups the term in fourcategories denoted by the first letter in the three-letter abbreviation. Under the “E ”- R M (E XW ), the seller only makes the goods available to the buyer at the seller’s own TE premises. It is the only one of that category. Under the “F”- R M (FCA, FAS , &FOB ), the seller is called upon to deliver the goods to a carrier appointed TE by the buyer. Under the “C”-TE R M (CFR, CIF, CP T, & CIP ), the seller has to contract for carriage, but without assuming the risk of loss or damage to the goods or additional cost due to events occurring after shipment or discharge. Under the “D”- R M (DAF, DE Q, DE S , DDU & DDP ), the seller has to bear all costs and risks needed to TE bring the goods to the place of destination.All terms list the seller’s and buyer’s obligations. The respective obligations of both parties have been grouped underup to 10 headings where each heading on the seller’s side “mirrors” the equivalent position of the buyer. E xamplesare Delivery, Transfer of risks, and Division of costs. This layout helps the user to compare the parties respectiveobligations under each Incoterms.
  • 45. CHAPTER 6 - MAJOR FINANCIAL AND OTHER INSTITUTIONSFor providing credit and finance and insuring export credit risk, there are 2 primary institutions i.e.EXIM Bank and ECGC.Although there are other commercial banks, nationalized institutions and private institutions such asIFCI, IDBI, engaged in providing finance to exporter. The major institutions are EXIM Bank, ECGC, andRBI.6.1 - EXIM BANKExim Bank Act-Completed 20 years of operations. S et up by an Act of P arliament in S eptember 1981. Commenced operations in March 1982. Wholly owned by the Government of India. Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting foreign trade in India. Exim is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports.
  • 46. INTRODUCTIONThe Export-Import bank of India is the apex institution for project finance, which provides direct financeand coordinates the working of the institution, which is engaged in financing export or import of goodsand services. It has taken over the operations of international finance wing of the industrial developmentbank of India (IDBI). The EXIM bank of India came into existence on 1st January 1982, and startedfunctioning from 1st march 1982. It has it’s headquarter in Mumbai and its branches and offices inimportant cities in India and abroad.OfficesHead office – Mumbai.A network of 13 offices in India and Overseas.Domestic Offices -Ahmedabad, B angalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, P une.Overseas Offices -B udapest, J ohannesburg, Milan, S ingapore, Washington DC.
  • 47. PURPOSEThe EXIM bank was established for the purpose of financing medium and long term loan to the exportersthereby promoting foreign trade of India.MAIN OBJECTIVES To provide financial assistance (medium and long term) to exporters and importers. To function as the principal financial institution for coordinating the working of institutions engaged in providing export finance. To promote Foreign Trade of India. To deal with all matters that may be considered to be incidental or conducive to the attainment of above objectives.FUNCTIONSThe assistance provided by EXIM Bank to the exporters can be grouped under two heads: A. Fund Based Assistance. B. Non-Fund based Assistance.The various assistance provided by EXIM Bank can be charted as follows: ASSISTANCE OFFERED BY EXIM BANK FUND BASED NON-FUND BASED ASSISTANCE ASSISTANCE INDIAN PARTIES. FINANCIALA. F UND B AS E D AS S IS TANCE : INDIAN BANKS. GUARANTEES. OVERSEAS BUYERS. ADVISORY AND Assistance to IndianBANKS. OVERSEAS E xporters: OTHER SERVICES. (a) It provides financial assistance to “Deferred credit exports”. (b) It offers credit facilities to “Deemed E xports”. (c) It finances “Indian Joint Ventures in Foreign countries” .
  • 48. (d) Finances units in“EPZ/ SEZ and 100% EOU’s”. (e) It provides P re-shipment finance to exporters for procuring raw materials and other inputs. (f) It finances export/import of machinery and equipment on lease basis. (g) It provides Computer S oftware exporters foreign exchange loan subject to RB I clearance. (h) It provides finance facility against deferred credit to exporters of consultancy, technology and other services. (i) It provides finance to Indian exporters to undertake various export marketing activities in India and abroad through E xport Marketing Fund (E MF). (j) It also operates E xport Development Fund (E DF) to finance techno-economic survey/research or any other study for the development of Indian E xports. Assistance to Indian Commercial B anks: (a) It provides R efinance Facilities so as to Indian exporters who extend term credit to importers. (b) It offers E xport Bills R ediscounting Facility to commercial banks in India who have earlier discounted bills of exporters. Assistance to Overseas B uyers: (a) It offers “Overseas B uyer’s Credit” facility to foreign importers for import of Indian capital goods and related services with repayment spread over a period of years. Assistance to Overseas B anks: (a) Long term finance is also provided under “Lines of Credit” to finance financial institutions abroad, who in turn, extend finance to importers of their country to buy Indian Capital goods. (b) It provides R elending Facility to overseas Banks to make available term finance to their clients for import of Indian goods.2. NON-FUND B AS E D AS S IS TANCE Guarantees and B onds:E XIM Bank provides non-fund base assistance in the form of guarantees in the nature of B id B onds, P erformanceGuarantee etc. These guarantees are provided together with Commercial B anks. Advisory and Other S ervices: (a) It advises Indian companies, in Executing Contracts Abroad, and on sources of overseas financing. (b) It advises Indian exporters on global exchange control practices. (c) The E XIM Bank offers Financial and Advisory Services to Indian construction projects abroad. (d) It advises small-scale manufacturers on export markets and product areas. (e) It provides Euro Financing sources and Global Credit sources to Indian exporters.
  • 49. (f) It assists the exporters under F orfeiting scheme.FREQUENTLY ASKED QUESTIONS (FAQ’s) IN EXIM BANK1. W hat is E xport-Import B ank of India? W hat are its objectives? The E xport-Import B ank of India (E xim Bank) is a public sector financial institution created by an Act of P arliament, the E xport-import B ank of India Act, 1981. The business of E xim B ank is to finance Indian exports that lead to continuity of foreign exchange for India. The B anks primary objective is to develop commercially viable relationships with a target set of externally oriented companies by offering them a comprehensive range of products and services, aimed at enhancing their internationalization efforts.2. W hat is the place of E xim B ank in the institutional structure for financing developmental needs? There are apex institutions in the country, which deal with major economic activities, viz. industry, agriculture and foreign trade. The Industrial Development B ank of India extends term industrial loans; the National B ank for Agricultural loans; and the E xim Bank extends term loans for foreign trade. All these institutions are wholesale banks. They, therefore work closely with commercial banks and other state level financial institutions that operate the retail banking system in the country.3. W hat are the types of services provided by E xim B ank? E xim B ank provides a range of analytical information and export related services. The B anks fee based services help identify new business propositions, source trade and investment related information, create and enhance presence through joint network of institutional linkages across the globe, and assists externally oriented companies in their quest for excellence and globalization. S ervices include search for overseas partners, identification of technology suppliers, negotiating alliances, and development of joint ventures in India and abroad. The B ank also supports Indian project exporters and consultants to participate in projects funded by multilateral funding agencies.
  • 50. 4. How does E xim B ank support Indian consultants to secure assignments overseas? E xim B ank encourages Indian consultants to gain and enhance their international exposure by assisting them in securing assignments overseas. Assignments are awarded under programme sponsored by International Finance Corporation (IFC) in Washington to promote private sector development in select countries and regions. Arrangements set in place cover: Africa P roject Development Facility African Management S ervices Company Africa E nterprise Fund S outh-east E urope E nterprise Development Facility Mekong P roject Development Facility Business Advisory and Technical Assistance S ervices (BATAS ) Other Technical Assistance & Trust FundsE xim B ank assists these agencies in the recruitment of Indian consultants and meets the professional fees of theconsultant selected by IFC.Consultancy assignments undertaken comprise pre-feasibility studies, project and investment related services,management information systems, operations and maintenance support mainly for S ME s in a variety of sectors likeagriculture, agro-industry, consumer goods, light engineering, telecom.5. W hat are the various types of financial facilities provided by E xim B ank to Indian Companies for export of turnkey/ construction projects, export of services and export of capital/ engineering goods & consumer durables? E xim B ank provides financial assistance to Indian Companies by way of a variety of lending P rogrammes, viz.Non-F unded Bid B ond Advance P ayment Guarantee P erformance Guarantee Guarantee for release of R etention Money Guarantee for raising B orrowings Overseas Other guaranteesF unded P re-shipment R upee Credit P ost-shipment R upee Credit Foreign Currency Loan Overseas B uyers Credit Lines of Credit
  • 51. Loan under FRE P E C programme Refinance of E xport Loans6. W hat are the various types of financial facilities provided by E xim B ank to Indian Companies for export capability creation? Exim Bank provides financial assistance to Indian Companies for export capability creation by way of a variety of lending programmes, viz., Lending P rogramme for E xport Oriented Units P roduction E quipment Finance P rogramme Import Finance E xport Marketing Finance P rogramme Lending P rogramme for S oftware Training Institutes P rogramme for Financing R esearch & Development P rogramme for E xport Facilitation: P ort Development E xport Vendor Development Lending P rogramme Foreign Currency P re- hipment Credit S Working Capital Term Loan P rogramme for E xport Oriented units7. W hat type of financial assistance is extended by E xim B ank in setting up joint ventures? Assistance is extended to Indian P romoter Companies by way of programmes that address to different requirements of the promoter company in setting up of the joint venture. Overseas Investment Finance P rogramme for setting up joint ventures and wholly owned subsidiaries abroad. Asian Countries Investment P artners (ACIP ) P rogramme for creation of a joint venture in India with E ast Asian countries, through four facilities that address different stages of a project cycle.EXPORT FINANCING PROGRAMMES PROVIDED BY EXIM BANKEXIM INDIA offers a range of financing programs that match the menu of Exim Banks of the industrializedcountries. However, the Bank is atypical in the universe of Exim Banks in that it has over the years evolved,so as to anticipate and meet the special needs of a developing country. The Bank provides competitivefinance at various stages of the export cycle covering:EXIM INDIA operates a wide range of financing and promotional programs. The Bank finances exports ofIndian machinery, manufactured goods, and consultancy and technology services on deferred paymentterms. EXIM INDIA also seeks to co finance projects with global and regional development agencies toassist Indian exporters in their efforts to participate in such overseas projects.
  • 52. The Bank is involved in promotion of two-way technology transfer through the outward flow of investmentin Indian joint ventures overseas and foreign direct investment flow into India. EXIM INDIA is also a PartnerInstitution with European Union and operates European Community Investment Partners Program (ECIP)for facilitating promotion of joint ventures in India through technical and financial collaboration withmedium sized firms of the European Union.The Export- Import Bank of India (Exim Bank) provides financial assistance to promote Indian exportsthrough direct financial assistance, overseas investment finance, term finance for export production andexport development, pre-shipping credit, buyers credit, lines of credit, relending facility, export billsrediscounting, refinance to commercial banks. Loans to Indian Entities Deferred payment exports: Term finance is provided to Indian exporters of eligible goods and services, which enables them to offer deferred credit to overseas buyers. Deferred credit can also cover Indian consultancy, technology and other services. Commercial banks participate in this program directly or under risk syndication arrangements. Pre-shipment credit: finance is available form Exim Bank for companies executing export contracts involving cycle time exceeding six months. The facility also enables provision of rupee mobilization expenses for construction/turnkey project exporters. Term loans for export production: Exim Bank provides term loans/deferred payment guarantees to 100% export-oriented units, units in free trade zones and computer software exporters. In collaboration with International Finance Corporation. Washington, Exim Bank provides loans to enable small and medium enterprises upgrade export production capability. Facilities for deeded exports; Deemed exports are eligible for funded and non- funded facilities from Exim Bank. Overseas Investment finance: Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture. Finance for export marketing: This program, which is a component of a World Bank loan, helps exporters implement their export market development plans. Loans to Commercial Banks in India
  • 53. Export Bills Rediscounting: Commercial Banks in India who are authorized to deal in foreign exchange can rediscount their short term export bills with Exim Banks, for an unexpired usance period of not more than 90 days. Refinance of Export Credit: Authorized dealers in foreign exchange can obtain from Exim Bank 100% refinance of deferred payment loans extended for export of eligible Indian goods. Guaranteeing of Obligations: Exim Bank participates with commercial banks in India in the issue of guarantees required by Indian companies for the export contracts and for execution of overseas construction and turnkey projects. Loans to Overseas Entities Overseas Buyers Credit: Credit is directly offered to foreign entities for import of eligible goods and related services, on deferred payment. Lines of Credit: Besides foreign governments, finance is available to foreign financial institutions and government agencies to on-lend in the respective country for import of goods and services from India. Relending Facility to Banks Overseas: Relending facility is extended to banks overseas to enable them to provide term finance to their client’s worldwide for imports from India. A R ANGE OF E XP OR T S E R VICE S P R OVIDE D B Y E XIM B ANKEXIM INDIA provides a range of analytical information and export related services necessary forglobalization of Indian companies. EXIM INDIA through its wide network of alliances with financialinstitutions, trade promotion agencies, information providers across the globe assists externally orientedIndian companies in their quest for excellence and globalization. Services include search for overseaspartners, identification of technology suppliers, negotiating alliances, and development of joint venturesin India and abroad.
  • 54. A. ADVIS OR Y S E R VICE SI. MULTILATE R AL AGE NCIE S F UNDE D P R OJ E CTS OVE R S E AS (MF P O)S ervices Information and support services to Indian companies to help improve their prospects for securing business in multilateral agencies funded projects. Dissemination of business opportunities in funded projects P roviding detailed information on projects of interest Information on P rocurement Guidelines, P olicies, P ractices of Multilateral Agencies Assistance for Registration with Multilateral Agencies
  • 55. Advising Indian companies on preparation of E xpression of Interest, Capability P rofile. Bid Intervention II. P R OMOTING INDIAN CONS ULTANCY TIE -UP W ITH: International Finance Corporation, Washington D.C. Africa P roject Development Facility Africa E nterprise Fund Technical Assistance & Trust Funds Mekong P roject Development Facility E astern & S outhern African Trade & Development Bank (P TA B ank) African Management S ervices Company (AMS CO), NetherlandsE XAMP LE S Gems & J ewellery S tudy -Zambia Financial Training Mission -Kenya Cement P roject -Cameroon S oftware -Madagascar Wool Knitting -Vietnam Textile -Nigeria Refrigeration -Ghana Financial Training -P oland III. E XIM B ANK AS A CONS ULTANT Feasibility study for establishment of an export credit and guarantee facility for Gulf Cooperation Council countries. Regional cooperation in export finance and export credit guarantees for E S CAP . S tudy on promotion of international competitiveness and exports of manufactured goods for E S CAP . S etting up the AFR ICAN- XIM Bank. E Designing of E xport Financing P rogrammes -Turkey S etting up an E xim Bank in Malaysia Design of E xport Marketing S eminars for S ME s in Vietnam
  • 56. E xport Development P roject : Ukraine E nterprise S upport Fund : Armenia E stablishing an E xport Credit Guarantee Company in Zimbabwe Advisory services to Industrial Development Corporation of S outh Africa for international finance productsB. KNOW LE DGE B UILDING I. E XIMIUS CE NTR E F OR LE AR NING, B ANGALOR E S et up, in October 1994, to organize seminars and workshops in areas such as international trade & investment, export marketing, quality, packaging, business opportunities in multilateral agencies funded projects, sector and country specific programmes Guest faculty from network partners such as IFC, World B ank, E BRD, UNIDO. Number of P rogrammes Conducted: 53II. R E S E AR CH S TUDIE S Research S tudies on products, sectors, countries, macro economic issues relevant to international trade and investment Number of research studies published as Occasional P apers: 85C. INFORMATION E xporters/Importers Industry/Market R eports Trade R egulations & Laws Country R eports International Quality S tandards P artner Identification P roduct Display E xamples of Information S ervices Hungarian P harmaceutical S ector Importers of S anitary ware, Castings in North America Importers of Agro-chemicals in E astern E urope S tudy for ear buds market in Hungary
  • 57. S tudy of the Indian Wine market for a Hungarian Company P artner identification for an Italian S anitary ware manufacturer S tudy of the Indian Crane Industry for a Finnish company Regulatory Framework for setting up a P harma P roject in China Market report for Computer Monitors in India for a S ingaporean firm S tudy on Bicycle market in E astern E urope for Indian Cycle exporter Market P otential for Denim in S outh E ast Asia6.2 -E XP OR T CR E DIT GUAR ANTE E COR P OR ATION OF INDIA LTD. In order to provide export credit and insurance support to Indian exporters, the GOI set up the E xport RisksInsurance Corporation (E R IC) in J uly, 1957. It was transformed into export credit guarantee corporation limited (E CGC)in 1964. S ince 1983, it is now know as E CGC of India Ltd. E CGC is a company wholly owned by the GOI. It functions under the administrative control of the Ministry ofCommerce and is managed by a B oard of Directors representing government, B anking, Insurance, Trade and Industry.The E CGC with its headquarters in B ombay and several regional offices is the only institution providing insurance coverto Indian exporters against the risk of non-realization of export payments due to occurrence of the commercial andpolitical risks involved in exports on credit terms and by offering guarantees to commercial banks against losses that thebank may suffer in granting advances to exports, in connection with their export transactions. OB J E CTIVE S OF E CGC: To protect the exporters against credit risks, i.e. non-repayment by buyers To protect the banks against losses due to non-repayment of loans by exporters COVE R S IS S UE D B Y E CGC: The covers issued by E CGC can be divided broadly into four groups: 1. S TANDAR D P OLICIE S – issued to exporters to protect then against payment risks involved in exports on short-term credit. 2. S P E CIFIC P OLICIE S – designed to protect Indian firms against payment risk involved in (i) exports on deferred terms of payment (ii) service rendered to foreign parties, and (iii) construction works and turnkey projects undertaken abroad. 3. F INANCIAL GUAR ANTE E S – issued to banks in India to protect them from risk of loss involved in their extending financial support to exporters at pre-shipment and post-shipment stages; and 4. S P E CIAL S CHE ME S such as Transfer Guarantee meant to protect banks which add confirmation to letters of credit opened by foreign banks, Insurance cover for Buyer’s credit, etc.
  • 58. (A) S TANDAR D P OLICIE S : E CGC has designed 4 types of standard policies to provide cover for shipments made on short term credit: 1. S hipments (comprehensive risks) P olicy – to cover both political and commercial risks from the date of shipment 2. S hipments (political risks) P olicy – to cover only political risks from the date of shipment 3. Contracts (comprehensive risks) P olicy – to cover both commercial and political risk from the date of contract 4. Contracts (P olitical risks) P olicy – to cover only political risks from the date of contract R IS KS COVE R E D UNDE R THE S TANDAR D P OLICIE S : 1. Commercial R isks Insolvency of the buyer Buyer’s protracted default to pay for goods accepted by him Buyer’s failure to accept goods subject to certain conditions 2. P olitical risks Imposition of restrictions on remittances by the government in the buyer’s country or any government action which may block or delay payment to exporter. War, revolution or civil disturbances in the buyer’s country. Cancellation of a valid import license or new import licensing restrictions in the buyer’s country after the date of shipment or contract, as applicable. Cancellation of export license or imposition of new export licensing restrictions in India after the date of contract (under contract policy). P ayment of additional handling, transport or insurance charges occasioned by interruption or diversion of voyage that cannot be recovered from the buyer. Any other cause of loss occurring outside India, not normally insured by commercial insurers and beyond the control of the exporter and /or buyer.R IS KS NOT COVE R E D UNDE R S TANDAR D P OLICIE S :The losses due to the following risks are not covered: 1. Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyer’s country in his favour, unless the exporter obtains a decree from a competent court of law in the buyers’ country in his favour 2. Causes inherent in the nature of the goods. 3. Buyer’s failure to obtain import or exchange authorization from authorities in his county 4. Insolvency or default of any agent of the exporter or of the collecting bank. 5. loss or damage to goods which can be covered by commerci8al insurers 6. E xchange fluctuation 7. Discrepancy in documents.
  • 59. (B). SPECIFIC POLICIESThe standard policy is a whole turnover policy designed to provide a continuing insurance for the regular flow ofexporter’s shipment of raw materials, consumable durable for which credit period does not normally exceed 180days.Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad arenot of a repetitive nature. Such transactions are, therefore, insured by ECGC on a case-to-case basis under specificpolicies.Specific policies are issued in respect of Supply Contracts (on deferred payment terms), Services Abroad andConstruction Work Abroad.1) Specific policy for Supply Contracts:Specific policy for Supply contracts is issued in case of export of Capital goods sold on deferred credit. It can be ofany of the four forms: Specific Shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the Post-shipment stage. Specific Shipments (Political Risks) Policy to cover only political risks after shipment stage. Specific Contracts (Comprehensive Risks) Policy to cover political and commercial risks after contract date. Specific Contracts (Political Risks) Policy to cover only political risks after contract date.2) Service policy:Indian firms provide a wide range of services like technical or professional services, hiring or leasing to foreignparties (private or government). Where Indian firms render such services they would be exposed to payment riskssimilar to those involved in export of goods. Such risks are covered by ECGC under this policy.If the service contract is with overseas government, then Specific Services (political risks) Policy can be obtainedand if the services contract is with overseas private parties then specific services (comprehensive risks) policy canbe obtained, especially those contracts not supported by bank guarantees.Normally, cover is issued on case-to-case basis. The policy covers 90%of the loss suffered.3) Construction Works Policy:This policy covers civil construction jobs as well as turnkey projects involving supplies and services. This policycovers construction contracts both with private and foreign government.This policy covers 85% of loss suffered on account of contracts with government agencies and 75% of loss sufferedon account of construction contracts with private parties.
  • 60. (C). FINANCIAL GUARANTEESExporters require adequate financial support from banks to carry out their export contracts. ECGC backs thelending programmes of banks by issuing financial guarantees. The guarantees protect the banks from losses onaccount of their lending to exporters. Six guarantees have been evolved for this purpose:-(i). Packing Credit Guarantee(ii). Export Production Finance Guarantee(iii). Export Finance Guarantee(iv). Post Shipment Export Credit Guarantee(v). Export Performance Guarantee(vi). Export Finance (Overseas Lending) Guarantee.These guarantees give protection to banks against losses due to non-payment by exporters on account of theirinsolvency or default. The ECGC charges a premium for its services that may vary from 5 paise to 7.5 paise permonth for Rs. 100/-. The premium charged depends upon the type of guarantee and it is subject to change, ifECGC so desires.(i) Packing Credit Guarantee: Any loan given to exporter for the manufacture, processing, purchasing or packingof goods meant for export against a firm order of L/C qualifies for this guarantee.Pre-shipment advances given by banks to firms who enters contracts for export of services or for constructionworks abroad to meet preliminary expenses are also eligible for cover under this guarantee. ECGC pays two thirdsof the loss.(ii) Export Production Finance Guarantee: this is guarantee enables banks to provide finance at pre-shipmentstage to the full extent of the of the domestic cost of production and subject to certain guidelines.The guarantee under this scheme covers some specified products such a textiles, woolen carpets, ready-madegarments, etc and the loss covered is two third.(iii) Export Finance Guarantee: this guarantee over post-shipment advances granted by banks to exportersagainst export incentives receivable such as DBK. In case, the exporterDoes not repay the loan, then the banks suffer loss? The loss insured is up to three fourths or 75%.(iv) Post-Shipment Export Credit Guarantee: post shipment finance given to exporters by the banks purchase ordiscounting of export bills qualifies for this guarantee. Before extending such guarantee, the ECGC makes surethat the exporter has obtained Shipment or Contract Risk Policy. The loss covered under this guarantee is 75%.(v) Export Performance Guarantee: exporters are often called upon to execute bid bonds supported by a bankguarantee and it the contract is secured by the exporter than he has to furnish a bank guarantee to foreign partiesto ensure due performance or against advance payment or in lieu of or retention money. An export propositionmay be frustrated if the exporter’s bank is unwilling to issue the guarantee.This guarantee protects the bank against 75% of the losses that it may suffer on account of guarantee given by iton behalf of exporters.
  • 61. (vi) Export Finance (Overseas Lending) Guarantee: if a bank financing overseas projects provides a foreign currency loan to the contractor, it can protect itself from risk of non-payment by the con tractor by obtaining this guarantee. The loss covered under this policy is to extent of three fourths (75%). (D) SPECIAL SCHEMES A part from providing policies (Standards and Specific) and guarantees, ECGC provides special schemes. These schemes are provided o the banks and to the exporters. The schemes are: I. Transfer Guarantee: the transfer guarantee is provided to safeguard banks in India against losses arising out of risk of confirmation of L/C. the risks can be either political or commercial or both. Loss due to political risks is covered up to 90 % and that due to commercial risks up to 75%. II. Insurance Cover for Buyer’s Credit and Lines of Credit: Financial Institutions in India have started direct lending to buyers or financial institutions in developing countries for importing machinery and equipment from India. This sort of financing facilitates immediate payment to exporters and frees them from the problem of credit management. ECGC has evolved this scheme to protect financial institutions in India which extent export credit to overseas buyers or institutions. III. Overseas Investment Insurance: with the increasing exports of capital goods and turnkey projects from India, the involvement of exporters in capital anticipation in overseas projects has assumed importance. ECGC has evolved this scheme to provide protection for such investment. Normally the insurance cover is for 15 years.6.3 - RESERVE BANK OF INDIAINTRODUCTION:The RBI with its head quarters in Mumbai and several regional offices is the central banks of our country to authorizeextend and regulate export credit and transaction including foreign exchange affairs. RBI does not directly provideexport finance to the exporters, but it adopts policies and initiates measures to encourage commercial banks andother financial institutions to provide liberal export finance.The Two Departments of RBI are: Industrial and credit department and Exchange control departmentThese Departments administers various policies related to export finance/credit and foreign exchange.SCHEMES OFFERED BY RBI TO ENCOURAGE COMMERCIAL BANKS TO PROVIDE EXPORT CREDIT TO THE EXPORTERS: EXPORT BILLS CREDIT SCHEME, 1963: Under this scheme, RBI used to grant advance to scheduled banks against export bills maturing within 180 days. Now this scheme is not in operation. PRE-SHIPMENT CREDIT SCHEME, 1969: Under this scheme, RBI provides re-finance facilities to scheduled banks that provide pre-shipment loans to bonafide customers.
  • 62. EXPORT CREDIT INTEREST SUBSIDIES SCHEME, 1968: Under this scheme, RBI provides interest subsidies of minimum 1.5 % p.a. to banks, which provide export finance to exporters, provided that the banks charge interest to exporter within the ceiling prescribed by RBI. The subsidies are given both against packing credit and post-shipment. DUTY DRAW BACK CREDIT SCHEME, 1976: Under this scheme, the exporters can avail an interest free advances from the bank up to 90 days against shipping bill provisionally certified by the customs authority towards a refund of customs duty. The advances made by commercial banks under this scheme are eligible for re-finance, free of interest from RBI for maximum period of 90 days form the date of advance.Other approves or sanctions of application made by the exporters with RBI Extension of time limit for realization of export proceeds. Deduction in invoice price of exports goods. Fixation of commission to overseas consignee or agents. Provision of blanket permit where a lump sum exchange is released for a number of purposes. Remittance abroad in respect of advertising, legal expenses etc. Any other matters relating to foreign trade that require clearance form the exchange Control department of RBI. Clearance in respect of joint venture abroad.GUIDELINES ISSUED BY RBI under section 47 of THE FEMA, 1999.Issued by RBI under S ec. 47 of Foreign E xchange Management Act, 1999.Types of E xports covered: E xport of Goods on Deferred P ayment Terms (e.g. E xport of machinery, equipment, manufactured products) Turnkey P rojects (e.g. S etting up of S ugar P lant, Cement P lant) Construction P rojects (e.g. Construction of R oads, Dams, B ridges) Consultancy & Technical S ervices (e.g. Operation & Maintenance Contracts) collectively referred to as P ROJ E CT & S E RVICE S E XP OR TS .TURNKEY, CONSTRUCTION & SUPPLY BIDS / CONTRACTS Upto R s. 50 crores: S cheduled Commercial Banks. Upto R s. 200 crores: E xim B ank. Above R s. 200 crores: Working Group.SERVICES BIDS / CONTRACTSOn Cash Terms
  • 63. Upto R s. 5 crores: S cheduled Commercial B anks. Upto R s. 10 crores: E xim B ank. Above R s. 10 crores: Working Group.On Deferred P ayment Terms F or any amount: Working Group.How to apply for loan? The proposal is to be submitted in the prescribed application form (R ef: Memorandum P E M) along withimplementation schedule, currency-wise cash flows and write- with regard to site and infra- up structural condition, andsub-contracting arrangements envisaged. In case of a non-Government buyer, status report on the client/primecontractor would first need to be obtained. The completed applications are to be submitted to the sponsoring bank, for consideration, within fifteen days ofentering into contract. It would also be necessary to consult E CGC in advance in cases where corporations insurance cover and/orcounter guarantees are required. The applications are forwarded by the sponsoring banks with their comments, to thefollowing agencies which constitute the Working Group: E xim B ank, Mumbai. Reserve Bank of India, E xchange Control Department, Mumbai. E xport Credit Guarantee
  • 64. Corporation of India Limited, Mumbai. Ministry of Finance, Department of E conomic Affairs, Banking Division, New Delhi. Ministry of Finance, Department of E conomic Affairs (FT), New Delhi. Ministry of Commerce, New Delhi. Other participating banks E xport Capability Creation P rogrammes: Lending P rogramme for E xport Oriented Units P roduction E quipment Finance P rogramme Technology Up gradation Fund S cheme for Textile and J ute Industries Overseas Investment Finance P rogramme E quity Investment in Indian Ventures Abroad Asian Countries Investment P artners P rogramme E xport Marketing Finance P rogramme E xport P roduct Development P rogramme E xport Vendor Development P rogramme P rogramme for E xport Facilitation: P ort Development S oftware Training Institutes Foreign Currency P re-shipment Credit Working Capital Term Loan P rogramme for E xport Oriented Units Bulk Import Finance Finance for Research & Development for E xport Oriented Units Long Term Working Capital Import FinancePost-Award Clearance of Export Contracts E xporter submits application in prescribed from along with copies of contract through his commercial bank for P ost Award Clearance. E xporter can directly approach E xim B ank for proposals of value limits upto R s.200 crores. On receipt of application and contract copies from the commercial bank, E XIM B ank approves the proposal if the same falls within its delegated powers or convenes Working Group meeting. In approved cases, E xim B ank/Working Group accords clearance to the final terms and conditions of the contract including various fund based and non-fund based facilities and requisite exchange control approvals. On the basis of package post award clearance granted by E xim B ank/Working Group, final approvals for fund based and non-fund based facilities and requisite exchange control approvals are issued by the concerned institutions and exports banks.
  • 65. Criteria for Consideration for Clearance of Export ProposalsE xporters financial position, track record.S tatus of overseas client -Government/P rivate.Break- of contract value -Indian /Third Country /Local. upRisk Assessment of B uyers Country.E stimates of Cost and P rofitability.Currency of P ayment -Convertible Currency /Local CurrencyS ecurity -Letter of Credit, B ank Guarantee, Government Guarantee, E xternalization undertaking of Central Bank.Foreign E xchange Outgo.Facilities required by the exporter.S alient P arameters of Appraisal for Clearance of E xport P roposalsP ayment Terms : Advance P ayment, P rogress /Down P ayment, Deferred P ayment, R etention MoneyAvailability of E CGC Cover, where necessaryImportant Contractual Clauses :P reshipment InspectionArbitrationForce Majeure
  • 66. S tatus of E xporter : P rime Contractor/ ub- S contractor/Consortium Member P enalty /Liquidated Damages for delay in Contract E xecution P rice E scalation S ource of Funding : Multilateral /Local Foreign E xchange Outgo Facilities required by the exporterCHAP TE R 9 -CONCLUS ION Learning’s/Suggestions through this project: E xport Finance is a very important branch to study & understand the overall gamut of the international finance market. Learning of the proper documentation during imports and exports is very essential while doing trade. Also the exporter and importer by studying the entire process of export and import finance can get exposure to risks, and therby he can hedge himself or the same by booking a forward contract. Availability of favorable E xport finance schemes directly impacts the local trade, encourages exporters, enlarges markets abroad, improves quality of domestic goods and overall helps the nation boost its exchange earnings. The Government of any nation plays a very vital role in boosting export turnover. The credit policy of the Indian Government is also changed depending upon the needs of the exporters, global trade environment etc. E CGC and E XIM B ank take a lot of efforts for E xport promotion. The strategies of these 2 agencies in India should be flexible & their finance schemes should be constantly synchronized with the changing scene of world trade. This alone can help Indian exporters to stand competition in world markets effectively and more gain-fully.

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