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Leob session5&6 export finance_mfm3

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  • Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit.Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community.

Transcript

  • 1. • Need for such type of finance?• The institutions which provides the credit, – EXIM BANK – COMMERCIAL BANK – ECGC
  • 2. Need for such type of finance?• In regard to the export business, funds are required: – at the time of establishment of business (long term funds) – and for carrying the business (short term funds)
  • 3. EXIM BANK / COMMERCIAL BANK / ECGC• EX-IM bank of India is exclusively meant for promotion of exports from India and provide long term funds to export units.• Commercial banks provide short term loan to the exporters.• Schemes of Export Credit and Guarantee Corporation of India (ECGC) facilitate the grant of short term loans to the exporters through various credit risk insurance policies.• The commercial banks provide funds to the exporter both before sending shipment (at pre-shipment stage) and after sending the shipment (at the post-shipment stage)
  • 4. NATURE OF EXPORT FINANCE• RBI ensures a free flow of financial assistance to the export sector at a concessional rate of interest against export order.• The commercial banks provide the loan.• The commercial banks are provided the re-finance facility by the RBI and the EX- IM bank against the loan extended by them to the exporters.
  • 5. GENERAL GUIDELINES TO THE BANKS FOR EXPORT FINANCING• The application for export finance are to be disposed off immediately in the benefit of the exporters.• The banks should consider the export activity in totality and grant adequate amount of credit .• While assessing the credit proposals from exporters, the bank should keep in mind their past performance and the future potential of their business activity.• In case of new exporters, their experience of conducting domestic business and other factors must be taken care of.
  • 6. •The banks should ensure that the funds lent by them areused for the implementation for the export order in time. so,they should keep a close eye on the end use of the fundslent by them.•RBI has allowed several relaxations of the credit normsrelating to the exports. they area) while computing overall working capital gap/max.permissible bank finance (MPBF), banks can exclude exportreceivables out of such computation process.b) Banks should decide on their own the amount of holdingof individual items of inventory and receivables the exportershould hold in relation to the amount of bank financesanctioned to the exporter. the bank should consider theproduction/processing cycle of the industry in question atthe time of taking this decision.
  • 7. MAXIMUM PERMISSIBLE BANK FINANCE• MPBF represents the max. amount of credit the bank would sanction to a business firm to meet its working capital needs.• Working capital is defined as the difference b/n the amount of current assets and the current liabilities.
  • 8. • Pre-shipment finance• Post-shipment finance
  • 9. • Provides working capital finance to an exporter• Basic purpose is to enable the eligible exporters to procure raw materials, supplies, process or manufacture, warehouse or ship the goods meant for exports
  • 10. • Packing credit• Advance against incentives receivables from govt. covered by ECGC guarantee• Advance against cheque /drafts received as advance payment
  • 11. • Facility can be shared with supporting manufacturer or the sub-supplier.• It refers to the credit granted by a bank to enable an exporter to pack the goods meant for exports.• It includes the loan or advance or credit granted by a bank to an exporter for financing the purchase of raw materials, supplies, etc. required for processing or manufacture of the goods as well as for the packing materials for exports to foreign country.
  • 12. Person eligible for packing credit:• Export company/firm having an export order or a letter of credit in its favour for the export of goods in its name• A business firm/ company which does not have L/C in its own name and is exporting through merchant exporters or export houses, subject to compliance of norms laid by RBI
  • 13. Sharing of packing credit with manufacturers:• A merchant exporter or an export house is allowed to share the facility of packing credit at the concessional rate of interest with its supporting manufacturer of the goods. the bank allows sharing this facility subject to terms and conditions.• Similarly exporters can share the packing credit with the sub-supplier of raw materials, components, etc. required for the manufacture of export product.
  • 14. Steps• Application• Documentation formalities• ECGC formalities• Scrutiny of packing credit application• Determination of eligible loan amount• Disbursal of loan amount
  • 15. SUMMING UP:The exporters can avail of the facility ofpacking credit at concessional rates of interestso as to be competitive in the internationalmarket. They can share this facility with theirsupporting manufacturer or the sub-supplier.Hence mobilisation of adequate amount offunds enables an exporter to obtain thesupplies from the supplier needed for themanufacture of the product for export.
  • 16. Period of finance:• Pre-shipment finance is granted for a short period of time as it is essentially a working capital finance.• Max. period is 270 days. – Initially the amount of packing credit is granted for a max. 180 days subject to time involved in production cycle. – In case the circumstances of the export firm are beyond its control then the bank may extend the period of credit by a max of 90 days.
  • 17. PERIOD OF CREDIT RATE OF INTERESTUp to 180 days not exceeding PLR minus 2.5 %age points.180-270 days not exceeding PLR plus 2.5 %age points.270-360 days fixed by the bank.
  • 18. POST SHIPMENT FINANCE
  • 19. • Exporter should: – arrange the set of docs as stipulated in the L/C – submit the docs. along with the Standardized Letter to bank for collection/negotiation of docs. – This letter to the bank provides comprehensive coverage of the various points
  • 20. • This form of finance is available after the shipment of goods.• This facility is extended to the exporters in whose name the goods were shipped OR an exporter in whose name export documents are transferred.• It can be short term finance or a long term finance depending upon the nature of export.• It is essentially a working capital finance granted on the strength of accounts receivables.
  • 21. • This facility is extended only against the shipping documents which evidence that the goods have been shipped• Credit is extended to finance export receivables for the period commencing from the date of submission of docs. to the bank to the date of realisation of export proceeds.• The post shipment credit is essentially a form of fund based financing• The concessional rate of interest is charged upto a maximum period of 6 months from the date of shipment of goods
  • 22. Types of Post Shipment Finance• The post shipment finance can be classified as : – Export Bills purchased/discounted. – Export Bills negotiated – Advance against export bills sent on collection basis. – Advance against export on consignment basis – Advance against undrawn balance on exports – Advance against claims of Duty Drawback.
  • 23. Crystallization of Overdue Export Bills• Exporter foreign exchange is converted into Rupee liability, if the export bill purchase / negotiated /discounted is not realize on due date.
  • 24. General Discrepancies• Late Shipment• Claused Bill of Lading• Draft for the amount exceeding the value of credit• Differences in the description of goods in different documents• Inconsistency in the documents as regards marks and numbers• Bill of Exchange drawn on wrong party or not drawn as per tenor stated in the credit• Bill of Lading not marked “Shipped on board”• Goods under-insured• Transshipment/Partial shipment made when prohibited under the L/C and so on
  • 25. Exchange Control Regulations
  • 26. Exchange Control RegulationsWhy is it important to understandthe exchange control regulationsand facilities?
  • 27. Export transaction  inflow of forexIf inputs are Imported  outflow of forexParticipations in trade fairSales tours (INR/$) Outflow/ Inflow??Subscription for trade magazines (INR/$)Advertisements in foreign media??Payment of agency commission, etc.??
  • 28. FOREIGN EXCHANGEMANAGEMENT ACT(FEMA)
  • 29. FEMA & Exchange Control RegulationsFramed by the Exchange Control Authority ofIndia (RBI)…..according to provisions of FEMA,1999
  • 30. Introduction• Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organisation (WTO). Foreign Exchange Management Act was earlier known as FERA (Foreign Exchange Regulation Act), which has been found to be unsuccessful with the proliberalisation policies of the Government of India.• FEMA is applicable in all over India and even branches, offices and agencies located outside India, if it belongs to a person who is a resident of India.
  • 31. Some Highlights of FEMA• It prohibits foreign exchange dealing undertaken other than an authorised person;• It also makes it clear that if any person residing in India, received any Forex payment (without there being a corresponding inward remittance from abroad) the concerned person shall be deemed to have received they payment from a nonauthorised person.• There are 7 types of current account transactions, which are totally prohibited, and therefore no transaction can be undertaken relating to them. These include transaction relating to lotteries, football pools, banned magazines and a few others.
  • 32. • FEMA and the related rules give full freedom to Resident of India (ROI) to hold or own or transfer any foreign security or immovable property situated outside India.• Similar freedom is also given to a resident who inherits such security or immovable property from an ROI.• An ROI is permitted to hold shares, securities and properties acquired by him while he was a Resident or inherited such properties from a Resident.
  • 33. • The exchange drawn can also be used for purpose other than for which it is drawn provided drawl of exchange is otherwise permitted for such purpose.• Certain prescribed limits have been substantially enhanced. For instance, residence now going abroad for business purpose or for participating in conferences seminars will not need the RBIs permission to avail foreign exchange up to US$. 25,000 per trip irrespective of the period of stay, basic travel quota has been increased from the existing US$ 3,000 to US$ 5,000 per calendar year.
  • 34. Various exchange control Rules & Regulations1. Foreign Exchange Management (Current AccountTransactions) Rules, 20002. Foreign Exchange Management (EXIM of Goodsand Services) Regulations, 20003. Foreign Exchange Management (Manner ofReceipt and Payment) Regulations, 2000
  • 35. EXEMPTIONS from Exchange Control DeclarationFollowing transactions are exempt from ECD:1.Export of samples of goods and publicity materialsupplied free of payment2.Export of goods with a declaration that value <INR 25,0003.Export of goods by way of GIFT with a declarationthat value < INR 5,00,000
  • 36. EXEMPTIONS from Exchange Control Declaration4. Goods imported free of cost on re-export basis5. Goods worth < $1,000 in value/transaction exported to Myanmar
  • 37. EXEMPTIONS from Exchange Control Declaration6. Re-export of the following goods as permitted by development commissioner (a) imported goods found defective (b) goods imported from suppliers, collaborators on loan basis (c) surplus goods imported from foreign suppliers.
  • 38. EXEMPTIONS from Exchange Control Declaration7. Replacement goods exported free of charge as permitted by the EXIM Policy
  • 39. Every shipment has to be cleared by I.central excise authority & II.customs authority
  • 40. Central Excise Clearance Procedures ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~There are 2 categories in case of centralexcise clearancei.Procedure for excise clearance in the caseof exempted unitsii.Procedure for excise clearance in the caseof units other than exempted units
  • 41. Claiming Rebate ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~After shipping the goods, exporter can fileclaim of rebate before the specified rebateauthorityExporter has to clearly indicate the option onARE.1 along with address of rebate authority(Maritime Collector of Central Excise ORJurisdictional Asst. Collector of Central Excise)
  • 42. Claiming Rebate ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Docs to be filed for claiming rebate:i.Application in the prescribed formii.ARE.1(original) + ARE.1 (duplicate-*sealed)iii.Duly attested copy of Bill of Ladingiv.Duly attested copy of Shipping Billv.Disclaimer certificate (if claimant is otherthan the exporter)
  • 43. Claiming Rebate ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Rebate sanctioning authority verifies andcompares 1original(from exporter) ANDduplicate (from customs officer) AND 3triplicate2(from Superintendent of Central Excise)If ALL is O.K., rebate is sanctioned
  • 44. Time limit for disposal ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Rebate sanctioning authority shall point out alldeficiency within 15 days of filing of claimExporter must rectify the deficiencies withinnext 15 daysclaim of rebate of duty is generally disposed ofwithin 15 days
  • 45. “Once the goods are ready for transportationto the importer, it is in the interest of theexporter to secure the shipment against allpossible risks”
  • 46. RISK……..possibility of loss in business
  • 47. RISK Credit risk – importer may not pay for the goods Risk of physical damage - there may be damage to the goodsdue to various factors during transportation from port of loading to the port of discharge Product liability – the exporter may be required to pay forcompensation to the consumer due to the faulty product Exchange rate fluctuation risk – the possibility of lossdue to exchange rate fluctuation Political risk – loss due to various political factors resulting in delay in thetransfer of funds or non-remittance by the buyer’s bank
  • 48. Risk ManagementRisk management refers to  identification of the risks associated withan export transaction & planning for the measures to secureagainst those risks with the objective ofminimising the cost of export transaction
  • 49. Risk ManagementRisk management involves  Identification of the risk Quantification of the risk Prevention or reduction of the risk Developing one’s own risk policy Transferring the risk to the third party
  • 50. Export Risk IdentificationRisk = possibility of loss in biz. & can beattributed to those factors whoseoccurrence or non-occurrence can beanticipated and the probabilities can beassigned Different from UNCERTAINTY
  • 51. Risk ManagementSome factors which cause risk in biz.1.poor planning for funds2.lack of market knowledge3.misunderstanding foreign buyers4.overestimation of one’s own capacity5.default by the foreign buyers6.Faulty nature of the product7.Damage during transportation8.Political development in the importer’s country9.Fluctuation in the rate of exchange
  • 52. Credit Risk Insurance and ECGCIn India,credit risk insurance cover is provided byECGC (fully owned company of the GOI)main functions of ECGC1.covers the risk of non-payment due tocommercial and political risks arising inrespect of exports on credit terms
  • 53. Credit Risk Insurance and ECGC2. It issues guarantees to bank underwriting a major part of losses that may arise in respect of advance or other support they extend to exporters in connection with their export business.
  • 54. Credit Risk Insurance PoliciesECGC offers the following policiesI. Standard PoliciesII. Specific Shipment PoliciesIII. Specific Policies
  • 55. Cargo Insurance (Marine) Insurance Need for cargo (marine) insuranceCargo can be damaged during transit fromport of loading to port of dischargeInsurance cover against such risks arising dueto physical damage to the goods is known ascargo/marine insurance.AIR CARGO, SHIPMARINE
  • 56. Cargo Insurance (Marine) Insurance Need for cargo (marine) insuranceLegal requirementEach of the intermediaries involved intransportation of goods have limited liabilityAs per law, intermediaries have no liabilityfor losses caused by uncontrollable factors andfor losses caused in spite of reasonable care
  • 57. Cargo Insurance (Marine) Insurance Need for cargo (marine) insuranceLegal requirementIn case of sea shipment  maximum liability -£100.00/packageIn case of air shipment maximum liability –US $ 20.00/package
  • 58. Cargo Insurance (Marine) Insurance Need for cargo (marine) insuranceCommercial requirementIt’s not just loss of goods; it is loss of profitstoo.If goods are damaged  buyer won’t acceptgoods/Bill of Exchange in case of D/P or D/A
  • 59. Cargo Insurance (Marine) InsuranceParties to the Contract of Insurance1.Insurance company (underwriters)2.The insured (buyer of insurance orbeneficiary)
  • 60. Cargo Insurance (Marine) InsurancePrinciples governing the contract of insurance1. Principle of utmost good faith insured must fully disclose material details to insurer2. Principle of insurable interest no person can enter into a valid contract of insurance unless he has insurable interest in the object/life insured
  • 61. Cargo Insurance (Marine) InsurancePrinciples governing the contract of insurance3. Principle of indemnity: cargo owners are allowed a reasonable anticipated profit. Therefore Policy provides commercial indemnity I/O pure indemnity4. Causa Proxima: implies that insurer becomes liable to pay for loss if the insured peril is the proximate cause of loss
  • 62. Cargo Insurance (Marine) InsuranceWHO INSURES?CIF/CFR  shipper/exporterFOB buyer. In this case exporter shouldobtain Seller’s Contingency Insurance to coverpossible loss before goods are on board
  • 63. Features of Marine Insurance Policy1. Freely assignable (transferable) as goods pass through various hands before delivery2. Assignment is done by endorsement and delivery3. Insurable interest of the claimant must exist at the time of loss of cargo4. Value of policy is the sum agreed between the insured and insurer. (110% of CIF value)
  • 64. Features of Marine Insurance Policy5. It’s a contract of commercial indemnity & NOT pure indemnity6. Duration includes 1period of transit + 2 time of discharge + 3time of arrivalAir shipment Generally 30 days after arrivalSea shipment Generally 60 days after arrival
  • 65. Kinds of losses A. Actual Total Loss1. Total loss B. Constructive Total Loss c. General Average2. Partial loss d. Particular Average
  • 66. Kinds of lossesa. Actual Total Lossi.Cargo is physically destroyed,ii.Cargo is not the same anymore (cementconcrete)iii.Cargo is irretrievably lost (ship sinks)b. Constructive Total LossCargo is damaged to such an extent thatcost of salvaging > value of goods
  • 67. Kinds of lossesc. General AverageAn extraordinary sacrifice or expenditureintentionally and reasonably made orincurred for the common safety
  • 68. Kinds of lossesG.A. arises when the Captain of the ship decides to:i. throw away some cargo to lighten the ship caught inrough weatherii. make payment to nearby agency to tow the shipaway from dangeriii. pour water on the cargo to extinguish the fire, etc.*loss/expenditure is borne by each cargo ownerproportionately
  • 69. Kinds of lossesd. Particular averageArises when partial loss or damage iscaused accidently by a peril insured. It isthe loss of particular cargo owner.
  • 70. Scope of cargo insurance policyScope depends on the risks (perils)covered in the insurance policy1.Maritime perils2.Extraneous perils3.War perils4.Strike perils
  • 71. Maritime perils“losses due to acts of God or man-made events”Acts of God earthquake, volcanic eruption,lightening, entry of seawater into vessel, washingoverboard of cargo, rain water damageManmade events fire, explosion, smoke,water used to extinguish fire, piracy, deliberatedamage, vandalism, sabotage, arson, etc.
  • 72. Extraneous perils“perils that arise on account of faults in loading,keeping, carrying and unloading of the cargo”Rough handling, breakage, leakage, pilferage,non-delivery, improper stowage, wave impacts,pressure caused by vibration on the road-railtrack
  • 73. War perils“losses due to war”Civil war, revolution, rebellion, etc. andcapture, seizure, arrest or detainment of thecarrier during war, civil war, revolution etc.
  • 74. Strike perils“Damage or loss to cargo caused by strikes, lock-outs, labour disturbances, riots, civil commotionand by any terrorist acting from a politicalmotive”