Facilities provided by the bank to importer & exporter


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Facilities provided by the bank to importer & exporter

  2. 2. DECLARATION I AMIT.K.PANWAR student of SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS from T.Y.B.COM (Banking & Insurance), Semester-V, hereby declare that I have completed this project on “FACILITIES PROVIDED BY THE BANK TO THE IMPORTER & EXPORTER - SBI” in the academic year 2006-2007. The information submitted is true and original to the best of my knowledge. Signature of the student AMIT PANWAR CERTIFICATE I PROF. MADHURI KHOT, hereby certify that AMIT.K.PANWAR student of SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS of T.Y.B.COM (Banking & Insurance) Semester-V has completed project on “FACILITIES PROVIDED BY THE BANK TO THE IMPORTER & EXPORTER - SBI” in the academic year 2006-2007. The information submitted is true and original to the best of my knowledge. Signature of the project guide Signature of the principal PROF. MADHURI KHOT MRS.MALINI JOHRI T.Y.B.B.I 2
  3. 3. ACKNOWLEDGEMENT It gives me pleasure to present this project on “Facilities Provided By The Bank To The Importer And Exporter-SBI” to the student of B.Com (Banking & Insurance). The subject matter is made more compact and logical. I am gratefully acknowledged the valuable efforts, suggestion and clarifications provided by many by making this project practical. It would be rather unfair on my part for not thanking my college Shri Chinai College of Commerce and Economics for having shown their continuous faith in me. I extend my sincere gratitude to the honorable principal Mrs. Malini johri for work that I am; able to present would just not have been possible without her guidelines. I take this opportunity to express my sincere appreciation and gratitude to my college librarian who made the references and data available. I express my grateful thanks to every one who have contributed even in a small way towards successful completion of this project. Last but not least, I would like to thank my parents for providing me with such good education and me in the completion of this project. T.Y.B.B.I 3
  4. 4. SPECIAL THANKS I would like to take this opportunity to sincerely thank Prof. Madhuri Khot, my project guide, foe extending her support, guidance and co- operation in completing this project. She deserves special thanks for her kind support and encouragement during the preparation of this project. I would also like to thank Prof. Nishikant Jha for his kind co-operation to complete the project in time. I would also like to express my gratitude to Mr. Ashok Menon, Chief Manager of State Bank of India Industrial Finance Branch, Andheri (E), Mum-69, and his staff members for the help & guidance provided by them for the project. T.Y.B.B.I 4
  7. 7. EXECUTIVE SUMMARY This project titled “Facilities provided by the bank to the Importer and Exporter- SBI.” Is an attempt to unveil the Facilities attached to Importer and Exporter and various steps taken by the RBI and Government for the Encouragement of the Export and Import in the country. The project has been divided into two phases,  Facilities to the Importer, and  Facilities to the Exporter. FIRST phase discuss the Facilities attached to the Importer by the bank and various Promotion / Incentives Scheme provided by the RBI and Commerce Ministry. RBI has issued Guidelines within which all the bank has to Act. & SECOND phase discuss various facilities provided to the Exporter, which covers the risk of exports. To counter the risk bank has adopted certain parameters like Export Finance, Export Factoring, Forfeiting, Export Credit Guarantee Corporation etc. and various other Special Scheme & Incentives which can encourage exporting the goods & services without botheration of risk attached to it. To promote export and import in the country bank provide finance at the concessional rate of interest and other facilities which can minimizes the risk involved in trade. In this project I have tried to bring to light measure taken by RBI as well as govt. to counter the risk. T.Y.B.B.I 7
  8. 8. -:IMPORT:- INTRODUCTION: i) Each country has different natural resources and climatic conditions. Some are rich in minerals whereas other is rich with forest resource. A country cannot produce all the commodities required by the nation. At the same time a country may have some commodities surplus, which is not fully required of one or other commodities. Hence countries are dependent on one another. ii) A country exports, those commodities in which it has comparative cost advantage and import those other commodities in which it has disadvantage. This interdependency result into international trade. This exchange of goods benefits both the countries in developing their economy. iii) It is important to note that even developed countries will be equally benefited due to international trade. Growth of undeveloped and under developing countries act will provide scope of industrialization in developed countries. Poverty of undeveloped countries at as limiting factor in international trade. iv) In case of gulf countries where there are no source to cultivate food grains, these countries have to depend on imports. v) Similarly, Indian govt. requirements of crude oil is being met twenty percent by domestic production and balance eighty percent requirement is required to be imported. vi) In view of the removal of trade restrictions as per the guidelines of W.T.O. imports are going to be inevitable as such import management assumes greater importance. vii) An import (also termed as international purchasing) activity may be defined as a process of procuring goods and service from the supplier/s situated in the foreign countries. This activity involves inflow of goods and service from the foreign country (exporter country) into the base country (importing country) & in-tune outflow of T.Y.B.B.I 8
  9. 9. IMPORTER GOODS & SERVICES MONEY IN FOREIGN CURRENCY EXPORTER foreign currency from base country to the foreign country towards payments for the goods and services purchased. NEEDS FOR IMPORTS: The decision of importing goods /services is made for the reasons like:  The products are not available at all in the domestic markets.  The products are available but not in the sufficient quality in domestic markets.  The products are available but not of desired quality in the domestic markets.  The price of the product in domestic market is higher than imported product. The raw materials, spare parts, components, consumables, plant & machinery etc. required for undertaking a business activity may not be available in terms of quality / quantity / price within the country and hence might have to be imported from abroad. This activity not only involves the transaction between the buyer & seller belonging to different countries but also the payment in foreign currency. Over & above this, the import from the foreign countries may also affect the indigenous industries & therefore the government of the base country always monitors the inflow of goods & services as also outflow of precious foreign exchange. OBJECTIVES Trade is not an end in itself, but a means to economic growth and national development. The primary purpose is not the mere earning of foreign exchange, but T.Y.B.B.I 9
  10. 10. the stimulation of greater economic activity. The foreign trade policy is rooted in this belief and built around two major objectives. These are 1) To double our percentage share of global merchandise trade with in the next five Years. 2) To act as an effective instrument of economic growth by giving a thrust to employment generation. SPECIAL SCHEME FOR IMPORT: As per the current foreign trade policy & procedures, import of goods is also permissible under the following special schemes designed for encouraging exports. 1) Export promotion capital goods scheme under which capital goods can be imported at concessional customs duty rate of 5% subject to export obligation. 2) Duty exemption / remission scheme and duty entitlement pass book scheme, duty free replenishment certificate under which imported raw material and components etc. required as inputs for exports production are made available to the registered exporters in advance and that too free of customs duty. 3) Diamond, Gem & Jewellery export promotion scheme and diamond dollar account scheme for promoting export of Gold, Silver and Jewellery articles etc. 4) Export oriented units (EOUs), units in export processing zones (EPZs), electronic hardware technology parks (EHTPs) And software technology parks (STPs) and biotechnology parks which are permitted to import all types of permissible capital goods, raw material etc. free of excise and customs duty. 5) Units in special economic zones which are permitted to import without payment of duty all types of goods, including capital goods, whether new or second hand, required by them for their activities or in connection there with. T.Y.B.B.I 10
  11. 11. The commercial banks also finance the import requirements of the customer. This finance mainly takes the form of letter of credit and bank guarantees. IMPORT FINANCE: The commercial banks also finance the import requirements of the customer. This finance mainly takes the form of letter of credit and bank guarantees. I. LETTER OF CREDIT : Letter of credit is a document issued by the importer’s bank in favor of the exporter giving him the authority to draw bills up to a particular amount (as per the contract price) covering a specified shipment of goods and assuring him of payment against the delivery of shipping documents. Banker’s commercial letter of credit is known as ‘documentary letter of credit’ because it envisages payment against exporters’ bill provided they are accompanied by the shipping documents covering the goods contracted to be purchased by the importer. It is also described as ‘commercial letter of credit’ because it is known in commercial transaction (i.e. sale and purchased of goods) The operations of letters of credit have been regulated and are governed by the articles of “uniform customs and practice for documentary credits” of international chamber of commerce adopted by more than 165 countries which were latest revised in 1993 for implementation w.e.f. 1st January, 1994. The uniform customs and practice (1993) revision (UCP 500) defines a letter of credit as “documentary credit(s) and standby letters of credit” means any arrangement, however named or described, whereby a bank (the issuing bank) acting at the request and on the instructions of the customer (the applicant) or its own behalf : a) Is to make payments to or to the order of a third party (the beneficiary) or is to accept and pay bills of exchange (drafts) drawn by the beneficiary or T.Y.B.B.I 11
  12. 12. b) Authorizes another bank to effect such payments, or to accept and pay such bills of exchange [draft(s)], or c) Authorizes another bank to negotiate against stipulated document(s) provided that the terms and conditions of the credit are complied with. OPERATIONS UNDER LETTER OF CREDIT The aspects of letter of credit & transaction can be easily understood from the following:  Importer (opener) concludes a purchase contract for buying of certain goods with his overseas supplier who wants payments by letter of credit. The importer asks his bank to open a letter of credit in favor of his overseas supplier.  After the request from the importer and considering the proposal in line with existing trade policy, his bank opens its letter of credit in favor of the overseas supplier (exporter)  The negotiating bank receives credit from the opening bank and after satisfying itself about the authenticity of the credit, it forwards the same to the beneficiary for acceptance.  After receiving the credit from the advising bank the exporter checks it thoroughly to ensure that it confirms to the terms of sale contract and if necessary, effect amendments to the credit and then proceeds to effect the shipment of goods.  The acceptance of the letter of credit is then communicated to the importer through his bank.  After the shipment is effected the exporter prepares the documents & draws his bill under letter of credit for obtaining payments from the negotiating bank. T.Y.B.B.I 12
  13. 13. IMPORTER’S BANK (OPENING BANK)  After getting documents and the bill from the exporter, the negotiating bank checks them with the letter of credit terms and if in order, negotiates the bill & pays to the exporter.  The opening bank (importer’s bank) receives the bill & documents from the negotiating bank (exporter’s bank), checks them and if found in order, confirms & reimburses to the negotiating bank. The opening bank presents the bill for payments to the opener (importers).  The importer (opener) receives the bill, checks the documents and if in order then accepts / pays the bill. On acceptance/payments, the importer gets the shipping documents covering the goods purchased by him. OPERATION UNDER LETTER OF CREDIT T.Y.B.B.I 13 IMPORTER EXPORTER (BENEFICIARY) DOCUMENTS MOVEMENT L/C MOVEMENT EXPORTER’S BANK (NEGOTIATING BANK) SHIPMENT
  14. 14. PARTIES TO A LETTER OF CREDIT  Applicant / Importer: Importer is the “opener” on whose behalf or account, the letter is issued by his bank.  Applicant’s / Importer’s bank: The bank who issues or opens the letter of credit on behalf of the importer / customer.  Exporter: Exporter is the “Beneficiary” of the letter of credit who is entitled to receive the payments of his bills according to the terms of letter of credit.  Intermediary / confirming bank: Intermediary bank is the bank usually a branch or the correspondent of the opening bank in the exporting country through which the credit is advised to the exporter. If it merely forwards the credit, without any obligation on its part, it is called the “advising” or “notifying” bank. If the beneficiary bank adds its own undertaking to the beneficiary, it becomes the ‘confirming bank’.  Paying / negotiating bank: The bank, which negotiates the beneficiary’s bills under the credit and pays for it is known as ‘paying / negotiating bank’. TYPES OF LETTERS OF CREDIT Basically, the letter of credit is either (a) revocable or (b) irrevocable, all credits, therefore, should clearly indicate whether they are revocable or irrevocable. In the absence of such indication, the credit shall be deemed to be irrevocable. Following are the various types of letter of credit: 1) Revocable and irrevocable letter of credit:-A Revocable L/C is one the terms of which can be altered / amended without the consent of the beneficiary. An Irrevocable L/C is one whose terms cannot be changed without the consent of all the T.Y.B.B.I 14
  15. 15. parties to the L/C. an Irrevocable L/C is therefore the safest guarantee of payment that a creditor can have. 2) Confirmed and unconfirmed letter of credit: A L/C in which confirmation is added by another bank, it is known as confirmed L/C. In case of unconfirmed L/C there is no confirmation. 3) Clean letter of credit and documentary letter of credit: A clean L/C is one under which no documents of title accompany the bill. In case of documentary credit, the L/C is accompanied by the list of documents. 4) Sight letter of credit and usance letter of credit: A sight L/C is one where the draft drawn under the L/C are on sight or payment basis i.e. where the documents of title to goods (shipping does) will be handed over to the importer on receipt of payment by the L/C opening bank. Usance L/C is one in which the drafts grant a period / usance for payments say 30 / 60 / 90 days from acceptance. In such cases, the documents will be handed over to the importer by the opening bank on acceptance of the drafts. 5) Fixed credit or Revolving credit: In case of fixed credit, it is open for a stated amount and the credit becomes completely exhausted as soon as bill aggregating to the amount of the credit have been drawn. Revolving credit is one, which enables the seller to export the goods, and the credit becomes continuous. The buyer need not time and again open L/C each time. 6) Red clause letter of credit and green clause letter of credit: A Red clause is one with a clause printed in red and enables the correspondent bank in the exporter’s country to grant advances to the beneficiary. The issuing bank accepts responsibility for such advances. Green clause is one, which authorizes the warehouse charges as advance to be given. T.Y.B.B.I 15
  16. 16. 7) Transferable letter of credit: - It is a credit, which can be transferred to another. For e.g. a buyer may open in favor of the exporter or middleman. The beneficiary has the advantage of transferring the credit to same other person from whom he will be procuring the goods for onward export. The terms of transferred L/C are same as the parent or original L/C. 8) Back to back letter of credit:-This is a credit opened on the basis of another L/C. the difference between the transferable L/C an back to back is that whereas in back to back, a second credit is opened on the strength of the first L/C. In the case of transferable L/C the benefit of the credit is transferred to the seller of the goods. II. BANK GUARANTEES At the request of the customer, the bank issues guarantees favoring the beneficiaries. Thus the contract of a guarantee is a tri-partite contract. The customer is the person at whose request the guarantee is issued, the bank is the guarantor and the payee / beneficiary i.e. the person in whose favor the guarantee is issued. the bank charges commission for issue of guarantee, which is an income for the bank. The guarantee is a non-fund based facility as the liability on the bank may or may not crystallize on the due date based on the failure to perform the contract by the borrower. Therefore they are shown as contingent liability by way of footnote to accounts. The guarantees are of 2 types they are as follow:- A. Performance Guarantee: - performance guarantees normally guarantees the performance of the contract. For e.g. the borrower getting a contract for construction of a bridge against which the BMC may insists on issue of guarantee towards the performance of the contract from the borrower. T.Y.B.B.I 16
  17. 17. B. Financial Guarantee: - Financial guarantees represent the guarantee for ensuring the financial obligations. For instance:- BEST may float a tender for supply of BUS from interested contractors and may insists on 10% tender money / earnest money to be deposited along with the quotations. This is to invite only capable and serious bidders. In case, the bidders who are awarded the contract do not accept the same; the bid money will be forfeited. Through the credit facility at the same stage of issue of guarantee is a non fund based facility, the bank has to be careful in assessing the credit facility viz. Borrower’s standing, financial position, business record etc. to lending a fund based facility. Therefore, many times the bank insists on cash margin ranging from 5% to 100% depending upon the customer. IMPORT PROCEDURE: REGISTRATION WITH LICENSING AUTHORITY  Obtaining Importer Exporter Code Number (IEC No.) NO person can import goods without obtaining an Importer-Exporter Code Number from the concerned Regional Licensing Authority (Jt.DGFT) unless he has been specifically exempted from obtaining the same in other words, registration with Regional Licensing Authority is a pre-requisite for import of goods. The Customs Authority is a pre-requisite for import of goods. The Customs Authorities will not clear the goods unless the importer has obtained importer Exporter.  Procedure for obtaining Importer Exporter Code Number (IEC No) For obtaining IEC Code Number, an Application for grant of IEC Number is to be submitted by the Registered/ Head Office of the applicant to the concerned Regional Licensing authority in the specified Format, along with all the relevant documents and T.Y.B.B.I 17
  18. 18. the requisite application fee of Rs. 1000/- With the application. An application is also required to furnish Profile of his Company in the prescribed format along with Bank’s confidential report confirming details of applicant’s current account. An IEC Number allotted to an applicant will remain valid permanently for all its branches /divisions/ units/ factories as indicated on the IEC Number. The licensing Authority will issue the IEC Number in their Format in favour of an applicant with a copy endorsed to the applicant’s banker. SOURCING THE OVERSEAS SUPPLIER As per the prevailing Foreign Trade Policy, Imports can be made from any country of the world except Libya However, for import of items from Iraq, the prior approval of the concerned sanctions committee of the UN Security Council has to be obtained. Sources for Finding out International Suppliers • Trade Directors & Yellow Pages • International Trade Fairs and Exhibitions • Chambers of Commerce • Directorate of Industries • Indenting Agents of Foreign Suppliers • Visiting websites • The advertisements in foreign papers Some overseas suppliers have also appointed their agents in India. These agents procure orders from the Indian parties and arrange for the supply of goods from their principal abroad. It is advisable to import through such agents as they can be readily contacted in case of any difficulty with regard to quality of goods, payment and documentation etc. T.Y.B.B.I 18
  19. 19. FLOATING IMPORT ENQUIRIES In view to obtain competitive offers from the overseas suppliers, the Importer will have to send their enquiries to these probable suppliers indicating the Quantity Required Desired (specification) of the item, Time when the item is required & the place where it is required The Importer should be very specific on these aspects (no approximations) as the price offered by the supplier will depend on these elements. Any change in either quantity/quality/time or place will change the price offer. The Importer should also indicate the terms of offer desired by him (FOB/C&F/ CIF etc.) so that the suppliers can submit their offers accordingly. FINDING CREDIBILITY OF OVERSEAS SUPPLIER Successful completion of an import transaction will mainly depend upon the capability of the overseas supplier to fulfill his contract. The credit worthiness of the overseas supplier, his capacity to fulfill that contract etc. should, therefore, be properly verified before entering into a contract with him. Confidential reports about the supplier may be obtained through EXIM Bank, the Commercial banks and Indian embassies abroad. FINALISING THE TERMS OF IMPORT This is an important aspect & should be handled with extreme care and caution. It is advisable that before finalizing the terms of Import Order, the Importer should call for the samples or catalogue and other relevant literatures and the specifications of the items to be imported. The different aspects of an import contract are enumerated as under: • Product, Standards and specifications. • Quantity T.Y.B.B.I 19
  20. 20. • Inspection procedure • Total value of the Contract • Terms of Delivery • Taxes, Duties and Charges. • Period of Delivery/Shipment. • Packing, Labeling and Marking • Terms of Payment- Amount, Mode & Currency. • Discounts and Commissions • Licenses and Permits. • Insurance • Documentary Requirements. • Guarantees • Remedies & Arbitration. IMPORT PRICING AND INCOTERMS While finalizing the terms of import-contract, the importer should be fully conversant with the mode of pricing and the manner of payment for the imports. International Chamber of Commerce, Paris has given detailed definition of a few standard terms of international transactions popularly known as “INCOTERMS” and these terms have universal acceptance. Some of the INCOTERMS commonly used in this country are as flows. Ex-works (EXW) T.Y.B.B.I 20
  21. 21. ‘Ex-works’ means that the Exporter’s responsibility is to make the goods available to the importer at Exporter’s works or factory. Free Alongside Ship (FAS) Once the goods have been placed alongside the ship at the port of loading, the Exporter’s obligations are fulfilled and the Importer’s responsibility starts right from the loading of the goods in the career. Free on Board (FOB) The Exporter’s responsibility ends the moment the contracted goods are delivered on the carrier at the port of shipment named in the sales contract * the receipt of the goods is duly acknowledged by the captain of the ship/Pilot of the Aircraft Cost and Freight (C & F) The term ‘Cost and Freight’ means that the Exporter arranges for shipment of the goods by paying the freight on behalf of the Importer & delivers the goods to the Port authorities at the port of discharge. The responsibility of exporter also includes obtaining of all the relevant shipping documents including Bill Lading from the shipping company. Cost Insurance Freight (CIF) The terms CIF includes the FOB cost + Freight Charges+ Insurance cost. Under this term, the Exporter also has to obtain insurance at his cost covering the risks of loss or damage to the goods during the transit of the goods besides all the responsibilities covered under C&F contract terms. RBI RELAXES NORMS FOR IMPORT CREDIT UP TO $20 M After virtual freeing external commercial borrowings till $50 million (Rs 250 crore) for normal business operations, RBI governor Bimal Jalan is now focusing on import T.Y.B.B.I 21
  22. 22. credit. Central bank's control on import finance up to $20 million (Rs 100 crore) per transaction was removed by a circular issued on September 25. Import credit up to three years from both the supplier abroad as well as credit arranged by the importer from a foreign bank, known as buyer's credit, will be subject to a summary approval against RBI guidelines. The RBI has dropped its earlier insistence that import payments must be retired within six months failing which the remittance can be made only after going through a cumbersome approval procedure. Large importers will become competitive with access to low interest funds. Banks in India prepare themselves for some competition and share the monopoly on import finance with foreign banks. The relaxation is not without conditions. The maximum annual cost for the credit cannot exceed 50 basis point above one-year Libor. Libor is currently at an all-time low of 1.87%. Interest is allowed to go up to 125 basis point above Libor for maturates above one year but less than three years. The dispensation is virtually free money for importers compared to the 18% interest slapped on import finance by the banks which are actually taxes in the garb of interest. It is a moot point whether the normal importer will be able to benefit from the relaxation. Banks in India do not help importers. Their own fees for handling the loan approving the credit, and the cost of hedging exchange rate movements turn out to be more than the interest on the loan. This forces the exporter to take the foreign currency loans from the Indian banks who in turn borrow the world market to benefit from the low interest rate. The interest rate risk on the change in the Libor rate itself, which is known to go up to 7-8%, is passed on to importers. T.Y.B.B.I 22
  23. 23. Income-tax is yet another problem area. There is withholding tax on the interest and other fees payable o the foreign banks. This means that the Indian bank will remit the interest only after deducting the 30% withholding tax. Considering the thin margin on which foreign banks operate, it is a moot point whether they would be interested in lending to Indian importers if they have to go through the rigmarole of the income-tax department. The RBI could take a lead from the trade facilitation dialogue at WTO to make sure that there is actual throughput of low cost funds from the foreign bank to the importer. The barriers should be identified and removed through dialogue and pressure. Interest rate in exports: THE RBI has kept its promise of making the banks offer a confessional interest rate regime for exports. The interest rate concession of 2.5% on prime lending rate to exporters which was due to expire on September 30 will continue for another seven months till April 30. The interesting point about the circular is that even where the credit period exceeds the normal period of 180 days pre-shipment credit, the interest rate goes up to PLR plus 0.5% for another period of 90 days. After 270 days, the normal interest rate applicable to domestic loans will apply. The interest rate circular is useful if the PLR itself is low. However, the typical PLR in India is in the range of 11% plus. Banks contend that while deposit rate are below right percent, they have to service past borrowings at high interest rates when monetary policy was used to manage the inflation rate. It will take a few years for the economy to adjust to low interest rate at which time the current deposit rate will be seen as high by international standards. T.Y.B.B.I 23
  24. 24. -:EXPORT:- Introduction: • Trade is exchange of goods and services between a buyer and a seller • If the buyer and seller reside within a country and exchange of goods and services takes place in the same country, such trade is known as ‘inland trade’ and the transactions are knows as inland trade transactions. • If the buyer and seller of goods/services are residing in different countries and exchange of goods/services takes place across the borders abroad, such trade is said to be foreign trade and the transactions are known as foreign trade transactions or cross border transactions. • Foreign trade is of two types- a) Import trade & b) Export trade • If the seller is abroad and buyer is in the home country, the trade is known as import and if the seller is in the home country and buyer is abroad, the trade is known as export. • In foreign trade, sellers of goods and services are known as exporters and buyer of goods and services are known as importers • The foreign trade can also be divided into two types- a) visible trade b) invisible trade • Visible trade is one which can be seen, that is trade of goods – merchandise • On the other hand, exchange of services between a buyer and seller is invisible. Examples are transfer of technical know-how, payment of insurance premium, T.Y.B.B.I 24
  25. 25. transportation charges, and fees payable to professional experts whose services are sought from abroad. • FOREIGN EXCHANGE – a foreign exchange is a process by which a currency of one country is converted into the currency of another. EXPORT PROMOTION SCHEME “TARGET PLUS”:- A new scheme to accelerate growth of exports called ‘target plus’ has been introduced. Exporters who have achieved a quantum growth in export would be entitled for duty free credit based on incremental exports substantially higher than the general actual export target fixed. Rewards will be granted based on a tiered approach. For incremental growth of over 20%, 10% & 15% of FOB value of incremental exports. “Vishesh krishi upaj yojana”:- Another new scheme called ‘vishesh krishi upaj yojana’ (special agricultural produce scheme) has been introduced to boost exports of fruits, vegetables, flowers, minor forest produce and their value added products. Export of these products shall qualify for duty free credit entitlement equivalent to 5% of FOB value of exports. The entitlement is freely transferable and can be used for import of a variety of inputs and goods. EXPORT FINANCE: Exporters need finance both at the pre-shipment stage and at the post-shipment stage. The finance required to meet various expenses before shipment of goods is called as T.Y.B.B.I 25
  26. 26. pre-shipment finance or “packing credit”. The finance which is provided by banks after shipment of goods comes under post-shipment finance. In India, commercial banks are directly concerned with export financing. The Reserve Bank of India, is indirectly concerned with export financing, as it frames rules and regulation regarding terms and condition of export finance to be followed by commercial banks and other financial institutions. The ECGC is also connected with export financing. It protects the exporter against risks of non-payment by the importer. The exporter may require short term, medium terms, or long term finance depending upon the type of goods exported/to be exported and the terms of payment offered to overseas buyer. The short term finance is required to meet “working capital” needs. The working capital is used to meet regular and recurring needs of a business firm. The regular and recurring finance needs of a business firm refer to purchase of raw materials, 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 term and for long term. The term finance is required to finance fixed assets and long-term working capital needs. An exporter may require financial assistance from his bank at both shipment & post shipment stages. While extending such facilities banks are mainly governed by the guidelines issued by the RBI. The trade & exchange control regulations & the international conventions & codes of the international chamber of commerce. Exporters may get pre shipment credit (packing credit) & post shipment credit (short term) from the Indian commercial banks & branches of foreign commercial banks in India & post shipment credit (medium / long term) on deferred payment term from commercial banks as well as from the export-import bank of India (EXIM) Export finance is broadly classified into following two categories: depending upon what stage of export activity the finance is extended- T.Y.B.B.I 26
  27. 27. A. PACKING CREDIT Packing credit or pre-shipment credit is available to all type of exporter i.e. manufacturer-exporters, merchant exporters, export houses and even to manufacturers of goods who do not receive the export order in their own name, but they supply goods to the merchant-exporters or export houses for overseas sales, provided- 1. They produce a letter from the concerned merchant exporter / export houses that a portion of the order has been allotted to them; and 2. an undertaking from merchant-exporter / export house stating that they have not / will not avail of packing credit facility against the same transaction for the same purpose till the original packing credit is liquidated; and 3. The letter addressed by the merchant-exporter / export house is countersigned by the bank advising the letter of credit. Packing credit advances are normally granted on secured basis. Nevertheless, something clean packing credit advances have to be granted. Many advances clean at their initial stage when goods are not yet acquired. Once the goods are acquired and are in the custody of the customer, banks usually convert the clean advance into hypothecation / pledge. In these cases rules regarding submission of stock statements and insurance would have to be complied with, Packing credit advance is made available to the exporter for the purpose of purchasing, manufacturing, processing, Trans-porting warehousing, packing and shipping etc. of the goods meant for export against lodgment of documentary letter of credit established / transferred in his favor by the overseas buyer or against confirmed order / contract placed by the buyer for exports of goods from India. In some cases, the finance is granted on production of sufficient evidence of receipt of export order i.e. cables, letter or fax / telex messages received from the overseas buyer. Such type of communication must contain at least the following information:- T.Y.B.B.I 27
  28. 28. i) Name of the buyer ii) Value of the order iii)Terms of payment iv)Quality and particulars of the goods to be exported v) Date of shipment In such cases, the exporter is required to give an undertaking to the financing bank that he will submit the firm order/letter of credit at a latter stage as and when available for verification and endorsement. The period of packing credit depends upon the circumstances of the individual case such as the time required for manufacturing, processing and shipping the relevant goods. The maximum period for which the credit can be granted is 180 days from the date of disbursement. The period can be extended by another 90 days at the discretion of the commercial bank, subject to the payment of additional interest by the exporter for extended period. B. FEATURES 1. Eligibility: Pre-Shipment finance can be granted only to those exporters who produce a confirmed export order and/or a letter of credit received against the export contact. Indirect exporter who exports through export houses and others can also obtained packing credit provided: He produces a letter from concerned export house or other concerned party stating that a portion of the export order has been allotted in his favour. The export house or other concerned party should also state that they do not wish to obtain packing credit for the same. 2. Purpose: T.Y.B.B.I 28
  29. 29. The Pre-Shipment finance is required by the exporter to meet working capital requirement before shipment of goods such as payment for raw materials, payment of wages, etc. 3. Documentary Evidence/Security: The pre-shipment finance can be granted against the following Confirmed export order Letter of credit received against the contract. 4. Forms/Methods of Pre-Shipment finance: Cash Packing Credit Loan Against Hypothecation. Against pledge, etc 5. Amount of Packing Credit: The amount of packing credit depends on the amount of export order and credit rating of the exporter by the bank. The bank may also consider the export incentives receivable such as DBK. 6. Period of Packing Credit: It is normally granted for a period of 180 days. Further extension of 90 days can be provided without the prior permission of RBI. Thereafter, permission is required to be obtained from RBI. 7. Rate of Interest: Packing credit is provided at a concessional rate of interest. The difference in normal rate of interest and export finance rate of interest is reimbursed by RBI to banks. 8. Loan Agreement: Before disbursement of loan, the banks require the exporter to execute a formal loan agreement. 9. Maintenance of Accounts: T.Y.B.B.I 29
  30. 30. As per RBI directives, banks must maintain separate accounts in respect of each Pre- Shipment advance. However, running accounts are permitted in case of units in SEZ/EPZ and 100% EOUs & other exporters, having good track record. 10. Disbursement of Loan: Normally packing credit advances are not sanctioned in lumpsum, but are disbursed in a phased manner 11. Monitoring the use of advance: The bank advancing packing credit should monitor the use of packing credit by the exporter, i.e., whether the amount is used for export purpose or not. 12. Repayment: The repayment of loan must be made out of export proceeds only. No repayment can be made out of local funds in which case, the advance will not be treated as Pre- Shipment finance and no benefits of concessional rate will be applicable. C. PROCEDURE TO OBTAIN PACKING CREDIT 1. Application to Bank : The exporter should apply in a prescribed form to his bankers giving detail of the credit requirements. The application for packing credit should be accompanied by the following documents: a) An undertaking stating that the advance will be utilized for the specific purpose in respect of export of goods. b) An undertaking stating that the shipment will be effected within a certain time limit and submit the relevant shipping documents to the bank in time. c) In case the exporter wants to obtain the credit against preliminary information of contract, whereby, at later stage the export order or L/C will be received by him, an T.Y.B.B.I 30
  31. 31. undertaking to the effect that the same will be produced to the bank within reasonable time. d) In case of manufacturer, who exports through export house/ merchant exporter, an undertaking from the EH/Merchant exporter stating that they have not/will not avail of packing credit against the same transaction and for the same purpose till the original credit is liquidated. e) Agreement of hypothecation or letter of pledge. f) Demand pronote signed on behalf of the company / firm. g) Letter of continuity signed on behalf of the company / firm. h) Certificate of the board resolution (in case of limited companies) i) Letter of authority to operate the account. j) Confirmed export order and /or LC in original. k) Appropriate policy / guarantee of ECGC. l) Copy of valid RCMC (Registration-cum-Membership Certificate.) 2. Processing of application: The application is processed taking into consideration the following: i) Documentary evidence in the form of export order/LC or correspondence Exchanged between the applicant and the importer. ii) Credit worthiness of the applicant. 3. Sanctioning of loan: If the application is found in order the bank sanctions the amount. Normally the loan is sanctioned depending upon FOB value of exporter order/LC or Market value of the goods whichever is less. 4. Loan agreement: Before disbursement of loan, the bank requires the exporter to execute a formal loan agreement. The loan agreement contains terms and conditions relating to the loan. T.Y.B.B.I 31
  32. 32. 5. Disbursement of loan: Normally, packing credit advances are not sanctioned in lump-sum but are disbursed in a phased manner. 6. Maintenance of accounts: As per RBI directives, banks must maintain separate accounts in respect of each pre-shipment advance. However, running accounts are permitted in case of units in EPZ/SEZ and 100% EOUs. 7. Monitoring of accounts: The bank advancing packing credit should monitor the use of packing credit by the exporter, i.e. whether the account is used for export purpose or not. 8. Repayment: As soon as the export proceeds and / or incentives are received, the exporter should repay the amount to the bank advancing credit. Normally, the advancing bank realizes the export proceeds and the makes necessary entries in the exporter’s account. D. Forms / methods of pre-shipment finance • Advance against hypothecation: Packing credit is given to process the goods for export. The advance is given against and the security remains in possession of the exporter. The exporter is required to execute the hypothecation deed in favor of the bank. • Advance against pledge: The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter. • Advance against red L/C: T.Y.B.B.I 32
  33. 33. The red L/C received from the importer authorizes the local bank to grant advances to the exporter to meet working capital requirements relating to processing of goods for exports. The issuing bank stands as a guarantor for packing credit. • Advances against back-to-back L/C: The merchant exporter who is in possession of the original L/C may request his bankers to issue back-to-back L/C against the security of original L/C in favor of the sub-supplier. The sub-supplier, thus, gets the back to back L/C on the basis of which he can obtain packing credit. • Advance against exports through export houses: Manufacturers, who exports through export houses or other agencies can obtain packing credit, provided such manufacturer submits an undertaking from the exports houses that they have not or will not avail of packing credit against the same transaction. • Advance against duty draw back (DBK): DBK means refund of custom duties paid on the import of raw materials, components parts and packing material used in the export production. It also includes refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well post-shipment advances against claims for DBK. E. Importance of Finance at Pre-Shipment Stage 1) To purchase raw materials, and other inputs to manufacture goods. 2) To assemble the goods in the case of merchant exporters. 3) To store the goods in suitable warehouses till the goods are shipped. T.Y.B.B.I 33
  34. 34. 4) To pay for packing, marking and labeling of goods. 5) To pay for pre-shipment inspection charges. 6) To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods. 7) Meet the expenses for processing of goods. F. POST SHIPMENT CREDIT Post shipment credit (short term) is given by the banks after the shipment of goods and submission of commercial documents to them for negotiation or collection. The period of post-shipment credit will be from the date of negotiation or collection of export documents and up to the due date (not more than 180 days in any case) mentioned on the relative export bill or till the date of realization of export proceeds from the overseas bank. Post-shipment credit (medium or long term) is given for export on deferred payment terms for the period of over one year. However, the concessive rate of interest is available only in respect of specified capital and producer goods as are approved by the EXIM bank of INDIA, from time to time. While sanctioning the post-shipment credit, the bank will first liquidate the packing credit from the bill proceeds and then convert the entire amount of bill into post-shipment credit. As stated earlier post-shipment finance could be granted under various methods. It is necessary for the exporter to choose the type of facility most suitable to his needs after discussion with his bank. FEATURES  Eligibility: T.Y.B.B.I 34
  35. 35. It is extended to the exporter who has export documents in his name, attested by the customers.  Purpose: Post shipment finance provides working capital to the exporter from the date of shipment to the date for realization for export proceeds.  Documentary Evidence: It is extended against the evidence of shipping documents indicating the actual shipment of goods.  Forms of Post-shipment: Post shipment may be provided in one of the following forms : a) Exports bills negotiated under LC b) Advance against DBK c) Advance against bills under collection, etc.  Amount post shipment Credit: The amount of post-shipment finance is generally provided for its full value of shipment.  Period of Post-Shipment Finance: The short term period is usually 90 days. The loan provided by commercial banks. Additional 90 days may be provided from date of negotiates till date of payment.  Rate of Interest: Post-Shipment finance facility is granted at a concessional rate of interest, as compared to the rate of interest charged for domestic or local parties.  Loan Agreement: T.Y.B.B.I 35
  36. 36. Before disbursement of loan, the bank requires the exporter ot execute a formal loan agreement.  Maintenance of Accounts: As per RBI directives, banks must maintain separate accounts in respect of each post- shipment advance. However, running accounts are permitted in case of units in SEZ/EPZ and 100% EOUs.  Disbursement of loan Account: Normally, post shipment credit advances are not sanctioned for full value of exports.  Repayment: As soon as the export proceeds and/or, incentives are received, the exporter should repay he amount to bank advancing credit. Normally, the advancing bank realized the export proceeds and then makes necessary entries in the exporter’s account. It is to be noted that no repayment of post shipment advance can be effected from local funds. PROCEDURE TO OBTAIN POST-SHIPMENT FINANCE 1) Application: The application must be supported by relevant shipping documents and such other documents / undertakings as required by the bank. The other documents may include :  Demand pronote signed on behalf of the company / firm.  Letter of continuity signed on behalf of the company / firm.  Certificate of the board of Directors resolution.  Letter of authority to operate the account. T.Y.B.B.I 36
  37. 37. 2) Processing of application: the application is processed after verification of shipping documents. The bank also takes into consideration the credit worthiness of the exporter and the importer and also the characteristics of the product exported. 3) Loan agreement: Before disbursement of loan, the banks require the exporter to execute a formal loan agreement. 4) Maintenance of accounts: As per RBI directives, banks must maintain separate account in respect of each post shipment advance. However, running accounts are permitted in case of units in EPZ/SEZ and 100% EOUs. 5) Repayment: As soon as the export proceeds and / or incentives are received, the exporter should repay the amount to the bank advancing credit. Normally, the advancing bank realizes the export proceeds and the makes necessary entries in the exporter’s account. FORMS /TYPES OF POST-SHIPMENT FINANCE: a) Export bills negotiated under L/C: The exporter can claims post-shipment finance by drawing bills or draft under L/C. The bank insists on the necessary documents as stated in the LC. If all documents are in order, the bank negotiates the bill and advance is granted to the exporter. b) Purchase of exports bills drawn under confirmed contracts : The banks may sanction advance against purchase discount of exports bills drawn under confirmed contracts. If the LC is not available as security, the bank is totally dependent upon the credit worthiness of the exporter. c) Advances against bills under collection : In this case, the advance is granted against bills drawn under confirmed export order / LC and which sent for collection. They are not purchased or discounted by T.Y.B.B.I 37
  38. 38. the bank. However, this form is not as popular as compared to advance against purchase or discounting of bills. d) Advance against goods sent on consignment basis: The bank may grant post-shipment finance against goods sent on consignment basis. e) Advance against Undrawn balance of bills: There are cases where bills a not drawn to the full invoice value of goods. 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 banks. 4. Advance against duty draw back (DBK): DBK means refund of custom duties Paid on the import of raw materials, components parts and packing material used in the export production. It also includes refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well post-shipment advances against claims for DBK. IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE • To pay to agents / distributors and others for their services. • To pay for publicity and advertising in the overseas markets. • To pay for port authorities, customs and shipping agent’s charges. • To pay towards export duty or tax, if any. • To pay towards ECGC (Export Credit Guarantee Corporation Of India LTD) premium • To pay for freight and other shipping expenses. T.Y.B.B.I 38
  39. 39. • To pay towards various expenses in connection with visits abroad for market surveys or for some other purpose. • To pay towards marine insurance premium, under CIF contract. • 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 abroad. • To pay for any other activity in connection with export of goods. DISTINGUISH BETWEEN PRE-SHIPMENT FINANCE POST SHIPMENT FINANCE MEANING: Financial assistance extended to the exporter prior to shipment of goods. Po st shipment finance is provided after the actual shipment of goods from India. BENEFICIARY: It is offered to Indian exporters / or suppliers of export goods. It is offered to Indian parties as well as to overseas buyers, and agencies. PURPOSE: It is required to meet working capital before shipment of goods for exports. It is required to meet working capital needs after shipment of goods. DOCUMENTARY EVIDENCE: Pre-shipment finance is provided against the documentary evidence of Export order / Letter of credit. It is provided against the documentary evidence of shipping documents (attested by customs). FORM OF FINANCE: It T.Y.B.B.I 39
  40. 40. It can be granted against duty draw back (DBK), letter of hypothecation, red L/C, back-to-back L/C, etc. can be granted against purchase of bills deferred exports, deemed exports, etc. AMOUNT: The amount of finance depends upon the export order and credit rating by the bank. The amount of finance depends upon the type and value of goods exported. DEFERRED CREDIT Consumer goods are normally sold on short term credit, normally for a period up to 180 days. However, there are cases, especially, in case of export of capital goods and technological services; the credit period may extend beyond 180 days. Such exports where longer credit term (beyond 180 days) is allowed by the exporter is called as “deferred credit” or “deferred payment terms”. How the payment is received? The payment for 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 Period of financial credit support: Financial; institution extend credit for goods sold on “deferred payment terms” (subject to approved from RBI, if required). The credit extended for financing such deferred payment exports is known as medium term and long term credit. The medium term credit facilities are provided by the commercial banks together with EXIM bank for a period up to 5 years. The long term credit is offered normally between 5 years to 12 years, and it is provided by EXIM bank. T.Y.B.B.I 40
  41. 41. Amount of credit support: Any loan up to Rs.10crore for financing export of capital goods on deferred payment terms is sanctioned by the commercial bank which can refinance itself from EXIM bank. In case of contracts above Rs.10crore but not more than Rs.50crore, the EXIM bank has the authority to decide whether export finance could be provided. Contracts above Rs.50crore need the clearance from the working group on export finance. ECGC YOU FOCUS ON YOURS EXPORT, WE COVER THE RISKS. EXPORT CREDIT & GUARANTEE CORPORATION (ECGC) There are many risks, involved in trading with overseas buyers on credit terms. These risks may be commercial as well as political. The overseas buyers may not accept exporter’s goods or go insolvent or default in payment. There may be war, revolution or civil disturbances, restrictions on remittances and moratorium on payment, thereby, blocking or delaying of export proceeds. The exporter has to bear all these risks while trading with overseas buyer who is thousands of miles away and of whom he has at best imperfect knowledge. Besides bearing these risks, the exporter has to find finance not only to offer liberal credit terms to his overseas buyer but also to smoothly carry on his production schedule. ECGC was established in 1957 by the government of India under the administrative of the government, reserve bank of India, and insurance and exporting community. ECGC is fifth largest credit insurer of the world, presently cover’s 17.31% of India’s total exports with a paid up capital of Rs.1.50bn. T.Y.B.B.I 41
  42. 42. YOU FOCUS ON YOURS EXPORT, WE COVER THE RISKS COVER / GUARANTEES ISSUED BY ECGC To suit the varying pattern of trade, the ECGC issues cover/guarantees, which are broadly divided into four groups: 1) Standard policies issued to exporters to protect themselves against the risk of not receiving payments while trading with overseas buyers on credit terms. 2) Policies designed to protect Indian firms the risk of not receiving payments in respect of: a) service rendered to foreign parties & b) construction works undertaken abroad. 3) Financial guarantees issued to the banks against the risks involved in providing credit to exporter at pre-shipment and post-shipment stage. 4) Special scheme e.g. transfer guarantee issued to protect banks. POLICIES AND SCHEME OF ECGC T.Y.B.B.I VISION To excel in providing Export credit insurance and trade-related services MISSION To support the Indian Export Industry by providing cost-effective insurance and trade-related services to meet the growing needs of the Indian export market through the optimal utilization of available resources. 42
  43. 43. A. Standard policy: The standard policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of an exporter’s shipments of raw materials, consumer goods and durable for which credit period does not exceed 180 days. The policy covers both commercial and political risks from the date of shipment. The policy is also known as shipments (comprehensive risks) policy, suited to cover short term credit i.e. credit not exceeding 180 days. The risks covered under the policy are enumerated below : i) Commercial risks : • Insolvency of the buyer. • Failure of the buyer to make the payment on the due date. • Normally, within 4 months from the due date. YOU FOCUS ON YOURS EXPORT, WE COVER THE RISKS ii) Political risks : • Imposition of restrictions by the government of the buyer’s country or any action (govt.), which may block or delay the transfer the payment made by the buyer. • War, civil war, revolution or civil disturbances in the buyer’s country. • New import restriction or cancelled of a valid import license. • Any other cause of loss occurrence outside India, not normally insured by general insurers, and beyond the control of both the export and the buyer. iii) Shipments covered: The shipments (comprehensive risks) policy is meant to cover all the shipments that may be made by an exporter on credit terms during a period of 12 months. iv) Premia: T.Y.B.B.I 43
  44. 44. The banks have to pay the premium on an annual basis to ECGC for getting cover on the export advances. However, during the last 3 years, ECGC has adopted a discriminating policy of charging premium on export advances from different banks. the stronger banks with a good record of export advances, strong export recovery etc. will have to pay a lower premium via a via the weak banks with a weak track record. The premium ranges from 8ps per Rs.100 to 15ps per Rs.100/-. YOU FOCUS ON YOURS EXPORT, WE COVER THE RISKS B. SPECIFIC POLICES: The specific policy is designed for providing continuity in insurance against the risks, particularly to the exporters shipping the goods where the credit period does not exceed 180 days. Contracts for the export of capital goods and construction works or turnkey projects or rendering service abroad are not of a repetitive nature. Such transactions are issued by the ECGC on a case-to-case basis under specific policy. It is always advisable for exporters that at the time of negotiating the export contract to contact the ECGC to find whether the insurance cover is available to the importing country in question as also to check the creditworthiness of the foreign buyer. C. Financial guaranties : Exporter requires adequate financial support from the banks in order to carry out their export contracts. The ECGC guarantees protection to the banks from the losses incurred because of their lending to these exporters. There are five types of guarantees issued by ECGC, they are: • Packing credit guarantee. • Export production finance guarantee. T.Y.B.B.I 44
  45. 45. • Post-shipment export credit guarantee. • Export finance guarantee. • Export performance guarantee. The guarantee gives protection against the losses arising due to non-payment by exporters for reason of their insolvency or default. YOU FOCUS ON YOURS EXPORT, WE COVER THE RISKS The ECGC pays 75% of the losses under the scheme. They also pay higher percentage of losses to the banks, which offer to cover all their pre-shipment advances under the whole turnover packing credit guarantee. Under export performance guarantee the ECGC pays 90% of the loss of payment by charging higher premium for the same. D. Others : Special schemes  Transfer guarantee: - when a bank in India adds its confirmation to a foreign L/C, it binds itself to honor the draft by the beneficiary of the L/C without any recourse provided such drafts are drawn in line with the credit terms. The confirming banks will suffer a loss if the foreign bank fails to reimburse the amount paid to the exporter. This many happen due to solvency or default of the opening banks or due to certain political risks in that country. The transfer guarantee seeks to safeguard the banks in India against losses arising out of such risks.  Overseas investment insurance: - ECGC has evolved a scheme to provide protection for Indian investments abroad. Any investment made by way of equity capital; loan for the purpose of setting up or expansion of overseas project will be eligible for cover under investment insurance. T.Y.B.B.I 45
  46. 46.  Exchange fluctuation risk cover: - These provide a measure of protection to exporter of capital goods. Civil engineering contractors and consultants who often receive payments over a period of year for their exports or construction services. Where such payments are to be received in foreign currency, he runs a risk of exchange fluctuations which are covered by ECGC. YOU FOCUS ON YOURS EXPORT, WE COVER THE RISKS Commodity wise value of shipments covered under short term polices-2005-2006 (Rs.in Crores) 7445.41 3325.13 3217.4 2442.23 2153.78 1863.01 16759.19 Eingineering goods :eather &Leather Manufactures Readymade Garments Chemical Allied Products Cotton Including handloom Basic Chemical Pharmaceuticals Cosmetics others T.Y.B.B.I 46
  47. 47. TOTAL CLAIM PAID (Rs.crore) 487.12 437.06 449.26 352.12 390 212.49 134.42121.08 235.76 203.03220.87 0 100 200 300 400 500 600 95-96 96-97 97-98 98-99 99-2000 2000- 2001 2001- 2002 2002- 2003 2003- 2004 2004- 2005 2005- 2006 YOU FOCUS ON YOURS EXPORT, WE COVER THE RISKS TOTAL RECOVERIES MADE (RECEIVED) 0 20 40 60 80 100 120 140 95-96 96-97 97-98 98-99 99-00 00-01 2001- 02 2002- 03 2003- 04 2004- 05 2005- 06 47.37 29.64 20.45 7.42 23.83 126 87.57 62.9363.41 21.45 26.76 From the above all graphs we can see that the Business of ECGC is increasing day which is very important for the growth of foreign trade as this is an organization which cover the risk of Bank and exporter, the following diagram states that:- • The paid up capital was increased to Rs 700 crores during the year. The authorized capital is Rs. 1000 crores T.Y.B.B.I 47
  48. 48. • Net worth is expected to be Rs.1016 crores • Gross premium incomes is Rs 578.57 crores (Rs.516 crores*) • Recoveries made against claims paid during earlier years is Rs 126 crores (Rs 87 crores*) • Other income which includes interest on investment is Rs113.72 crores (Rs 115 crores*) • Profit before tax for the financial year 2005-2006 is Rs 175 crores. • Interim dividend paid to the Govt. of India is Rs.10 crores (* Figures in bracket are for the previous year 2004-2005) EXPORT FACTORING  Factoring is a modern financial arrangement in the field of finance. It is a type of suppliers’ credit.  The need for factor services has arisen in view of increasing sales and hence managing its realizations.  If one wants to realize money of the books debts without waiting for the contractual period, then the services of the factor is required.  Factoring is a complete financial package that combines credit protection, accounts- receivables bookkeeping, collection-services and advances against receivables with or without recourse basis..  Hence, factor is a type of working capital finance. If an organization has availed of the services of a factor then its dependence on working capital would be reduced.  Factoring first started in USA in early 1900 and widely prevalent in Europe and their colonies in Asia and Africa in last three decades. T.Y.B.B.I 48
  49. 49.  The factor acts between the buyer and the seller. The factor can be a bank, financial institution or a factoring enterprise by itself.  The factor first enters into an MOU with the seller for providing factoring services. The MOU should be drafted clearly setting out various terms and conditions of the business.  Whenever the seller sales his goods/services on credit, the copies of the credit /or invoices are sent to the Factor.  Factor depending upon the arrangement, pays in advance say_80% of the credit s amount to the seller.  The seller gets the liquidity immediately and can concentrate on his business.  Factor receives the full payment on the due date from the buyer. After deducting the necessary factoring charges, the factor pays the balance amount to the seller.  Factor can be with or without recourse to the seller. • If the factor is with recourse, when the buyer fails to pay for the credit sales on due date, the factor can recover from the seller. • In case of without recourse to the seller, the factor has to collect the same only from the buyer. If the buyer fails to pay, then factor has to recover through legal recourse. However, the charges will be more for factor services carried on without recourse basis. In the factoring, by virtue of MOU, the seller assigns the receivables to the factor. • The seller should inform all the terms and conditions of the sales to the factor as entered into between him and the buyer. • By virtue of assignment, the factor gets the full charge of the credit sales and he is fully entitled to recover the same from the buyer. T.Y.B.B.I 49
  50. 50. Types on the basis of Agency: a) Disclosed Factoring: In this case, the name of the factor will be disclosed in the invoice itself. Further the buyer will be asked to make the payment to the factor named in the invoice. b) Undisclosed Factoring: Here the name of the factor is not disclosed in the invoice. The factor maintains sales registers as per the credit sales reported by the seller. The seller gets the money in advance and on realization, the factor gets the money back. Undisclosed factoring is famous in UK. Types on the basis of Service: a) Full Factoring: This can be called as complete factoring also. In this, the factor tenders all types of services and in addition to that, the client or the seller is allowed to exceed his credit limit at his own risk. This type of factoring is also called without recourse. Further, going into the depth of the word, non-recourse is true only to the extent of financial ability of the debtors is concerned. In other words if the payments are withheld for other reasons such as quality, quantity, counterclaim etc., recourse will be available to the factor against the client or the seller. b) Recourse Factoring: This service is rendered based on the non-acceptance of credit risk by the factor. Hence, the factor acts merely as collecting agents of the seller. If the required collection of debt is not done, then an invoice is assigned back to the client. c) Maturity Factoring: In this factoring, the factor bears probably the minimum risk. The factor pays the seller and collects the amount from the buyers at the end of the T.Y.B.B.I 50
  51. 51. credit term or on agreed maturity date, after recovering the factoring charges. Maturity factoring can be with or without recourse. d) Credit Factoring: This factoring service is also called as Invoice Discounting: Under this arrangement, the factor purchases all or selected invoices of the client at a discount. The buyer is not aware about the service obtained by the seller. e) Bulk Factoring: This is one more type of Invoice discounting. The difference between the Credit factoring and this type is that in this case, the discounting is provided at the instance/indication of the customers. f) Agency Factoring: This is an extension of bulk factoring in which the factor provides with repayment facility and insurance cover. Advantages of Factoring:  Factoring enables the Companies to improve their cash flows.  Factoring may also improve the balance sheet and the also the capital adequacy since the factoring is treated as off balance sheet item. FACTORING IN INDIA: RBI had appointed a Committee under the Chairmanship of Mr. C.S. Kalyanasundaram, former Managing Director of State Bank of India to examine the feasibility and mechanism of starting factoring organization in India. The committee submitted its report in January 1989. Following the recommendation of the Committee, RBI issued the following guidelines to govern the conduct of factoring business by banking industry in India: T.Y.B.B.I 51
  52. 52. a) Banks should not take up the factoring business directly but can do the same indirectly through its subsidiary or can invest in existing factoring company along with other banks. b) Prior permission of RBI is a must. c) The factoring company or subsidiary should only do the factoring business and not compete with the banks in financing any other activities. d) The investment in the subsidiary or in the company carrying on factor business should not exceed 10% of the paid up capital of the Bank. e) RBI had permitted on 6th April, 1990 the following banks to start the factoring services 1) State Bank of India for Western Region — Name of the Subsidiary is ‘SBI Factors and Commercial -Service Pvt. Ltd. 2) Canara Bank for Southern Region — Name of the Subsidiary is ‘Canara’ Bank Factors Ltd’. 3) Allahabad Bank, United Bank of India and UCO Bank for eastern region. Punjab National Bank for northern region. EXPORT FORFEITING  The word ‘Forfeit’ is derived from the French term ‘a forfeit’ which means surrender of rights over something in favor of someone else.  Under Forfeiting, an exporter forfeits his tights towards his receivables in favor of a forfeiter who in reciprocation loses his right of recourse to the exporter in the event of non-payment by the importer.  In the simplest term forfeiting is the purchase, at a fixed rate of medium term claims of an exporter on the foreign buyer, without recourse to the exporter. The claims are T.Y.B.B.I 52
  53. 53. generally represented by promissory notes or bills-of exchange payable by the importer on maturity.  Normally, the forfeiting is for medium term to cover exports of deferred basis.  Forfeiting affords advantage of better liquidity and faster turnover of resources of credit risks, elimination of exchange risks etc to the exporter.  Forfeiting is a development of post war period. Its origin is from Austria and Switzerland. Subsequently, Forfeiting has been found popular in Germany and Italy. The Banks in London are also actively engaged in the primary and secondary market of forfeiting transactions. -  Forfeiting is a commercial source of finance and no credit insurance just like ECGC or other costs are involved as in export credit insurance.  In forfeiting, for the exporter, the credit sales become the cash s-ales.  Exporters incur no further liability or risk except arising on account of deficiency of quality or shortage of quantity of goods supplied.  Mechanism of Forfeiting: In case of forfeiting business, four parties are involved i.e. exporter, importer, forfeiter and the banker of the importer. The steps involved in case of forfeiting business are as under:  The exporter and the importer negotiate the business-transaction as regard-s the quantity, quality, price, currency, delivery period, credit terms etc.  The exporter based on these facts, contacts the forfeiter to ascertain the terms of forfeiting.  The forfeiter in turn will compile a risk appraisal on the exporter as well as on the importer.  Depending upon the nature and extent of risk, the forfeiter indicates the discount rate and tenor of the facility to the exporter. T.Y.B.B.I 53
  54. 54. Forfeiting in India: Exim Bank has introduced a scheme of forfeiting as an instrument of financing exports. The arrangement envisages discounting by Indian exporters of bills of exchange/promissory notes relating to export transaction which are ‘availed’ or guaranteed by the buyers’ bankers with overseas forfeiting agencies on ‘without recourse’ basis. The procedure of Exim Bank is given below;  Exporter initiates negotiations with the prospective overseas buyer with regard to the basic contract price, period of credit, rate of interest etc.  After successful negotiations, he furnishes the relative particular such as name and country of overseas buyer, contract value, nature of goods, tenor of credit, name and country of guaranteeing bankers to the Exim bank and requests for an indicative discounting quote.  Exim Bank obtains the indicative’ quote of forfeiting discount together with commitment fee and other charges if any, to be paid by the exporter, from an overseas forfeiting agency.  On receipt of the indicative quote from the Exim Bank, the exporter finalizes the terms of contract, loading the discount and other charges and approaches Exim Bank for obtaining a firm quote.  Exim Bank arranges to get the same from an appropriate overseas forfeiting agency and furnished the same to the exporter. At this stage, exporter would be required to confirm acceptance of the arrangement to Exim Bank within a specific period as stipulated by the Bank.  The export contract should clearly indicate that the overseas buyer would prepare a series of availed Promissory Notes in favor of the exporter and hand them over against the shipping documents to his banker. The Promissory Notes will be T.Y.B.B.I 54
  55. 55. endorsed with the words ‘without recourse’ by the exporter and handed over to his banker in India for onward transmission to the Exim Bank.  Alternatively the export contract may provide for exporter to draw a series of Bills of Exchange on the overseas buyer, which will be sent with the shipping documents through the exporter’s bank for acceptance by the overseas buyer.  Overseas buyer’s banks will handover the documents against acceptance of bills of exchange by the buyer along with the co-acceptance of the guaranteeing bank.  The co-accepted bills of exchange will be returned to the exporter through his banker.  After this, the exporter will endorse the Bills of Exchange with the words ‘without recourse’ and return them to his banker for onward transmission to the Exim Bank.  Exim Bank will forward the Bills of exchange/Promissory notes after verification to the forfeiting agency for discounting by the latter.  Exim Bank will arrange to collect the discounted proceeds of Promissory Notes/Bills of exchange from the Overseas Forfeiting agency and effect payment to the Nostro account of the exporter’s bank as per the latter’s instructions.  The role of Exim Bank is to work as an intermediary between the Indian exporter and the overseas forfeiting agency.  Exim Bank will issue a certificate to the exporter with a copy to his bank indicating the rate of forfeiting discount. While completing the respective GR/PP form(s), the exporter should indicate the total invoice value of the goods inclusive of the forfeiting discount in the GR/PP form.  Exim Bank will also issue one more certificate to the exporter, once the exporter accepts the firm forfeiting quote, indicating the rate of commitment fee payable by T.Y.B.B.I 55
  56. 56. the exporter to the overseas forfeiting agency together with other service charges if any.  The forfeiter presents the bill and other documents to the importer for payment on due date to the importer’s bank or can immediately sell in the secondary market.  Forfeiting Cost: In case of forfeiting facility, there are three types of cost, which are involved in a transaction. They are; • Commitment fee is payable to forfeiter for his commitment to execute a particular transaction at a firm discount rate within a specific period. • Discount fee is nothing but interest cost for the period of credit involved in the transaction. This fee is normally based on the London Inter-Bank Offered Rate for the credit period and currency involved together with credit risk as a mark up. • Documentation fee covers the charges of documentation and paper for legal work wherever necessary. Under the present guidelines of RBI, all the costs and fee must be transferred to the overseas buyer (importer). • To give boost to forfeiting business, Exim Bank has opened a separate subsidiary by name ‘Global Trade Finance’. This subsidiary has taken over the business of forfeiting from Exim Bank. FORFEITING IN THE PRESENT CONTEXT:  International trade in Forfeiting amounts to a gigantic USD 1.3 trillion.  In India forfeiting business is to the extent of USD 50 to 60 millions only.  The prime reason for low business of forfeiting in India is lack of awareness amongst Indian exporters as well as the Banks. That is the reason; only Exim Bank is into this business. T.Y.B.B.I 56
  57. 57.  One more reason is the up front high fee charged by the forfeiting agency, which the exporters are reluctant to pay. However, this business is slowly increasing in India also. RBI GUIDELINES ON FORFEITING:  RBI has permitted Ads to introduce scheme of forfeiting of medium- term export receivables without its prior approval.  Earlier, the exchange control department of RBI has only permitted the EXIM Bank to introduce forfeiting as an instrument for financing exports.  Forfeiting is a form of trade finance involving discounting of medium- term export receivables with or without recourse to the exporters.  The arrangement envisages discounting by domestic exporters of bills of exchange and promissory notes relating to export transactions, which are guaranteed by the buyer’s (importer abroad) bankers with overseas forfeiting agencies on a ‘without recourse’ basis.  The role of the party offering forfeiting as a service in India called as Intermediary (that is EXIM Bank or Ads) will be to act as an ‘intermediary between country’s exporter and the overseas forfeiting agency.  The Intermediary will receive ‘availed’ (Co-accepted or guaranteed) bills of exchange or promissory notes from the exporter and send the same to the forfeiter for discounting. After the forfeiter discounting the bills, he will arrange for crediting the discounted proceeds to the Nostro account of the exporter’s bank.  The exporter’s bank after sighting the credit will convert the foreign currency into rupee and credit the account of the exporter. T.Y.B.B.I 57
  58. 58.  Further the intermediary will issue a certificate to the exporter with a copy to the exporter’s bank indicating the rate of forfeiting discount.  While completing the respective forms, the exporter will have to indicate the total invoice value of the goods inclusive of the forfeiting discount, and should show the amount of discount against the item ‘other deductions’ to arrive at the net realizable value.  The intermediary will also issue a certificate to the exporter, once the exporter accepts the firm forfeiting quote, indicating the rate of commitment fee payable by the exporter to the overseas forfeiting agency together with other service charges, if any.  In case the commitment fee and other charges exceed 1.5% of the invoice value, the exporter will have to obtain the prior approval of RBI. The intermediary will charge a service fee for rendering these services to the Indian exporter, which will be payable in rupees. Difference between Factoring and Forfeiting 1) Factoring which is available in domestic trade, forfeiting is a method of trade finance involving the discounting of bank guaranteed overseas trade bills or notes. 2) While factoring can be with or without recourse basis, in case of forfeiting it has no recourse to exporter as he surrenders his right in return for cash payment from the forfeiter. 3) While factoring is of short-term nature of advance, forfeiting is medium to long term advance ranging from 3 to 10 years. 4) In short, Forfeiting is nothing but factoring in international trade. T.Y.B.B.I 58
  59. 59. 5) Factoring is always as a tool for short term financing whereas forfeiting is used for medium term financing at a fixed rate of interest. 6) Factoring is generally employed to finance both the domestic & export business. but. Forfeiting is invariable employed in export business only. 7) The central theme of factoring is the purchase of invoice of the client whereas it is only the purchase of the export bill under forfeiting 8) Under factoring, the client is able to get only 80% of the total invoice as “credit facilities” Whereas 100% of the value of Export bill (of course deducting service charges) is given as credit under forfeiting. 9) Forfeiting is a specific one in the sense that it is based on a single export bill arising out of an individual transaction only. But factoring is based on the “whole turnover” i.e., a bulk finance is provided against a number of unpaid invoices. 10) Forfeiting is done without recourse to the client whereas it may or may not be so under factoring 11) The bills under forfeiting may be held by the forfeiter bill the due date or they can be sold in the secondary market or to any investor for cash such a possibility does not exist under factoring DERIVATIVE A derivative is an instrument whose value is derived from the value of one or more underlying which can be commodities, precious metals, currency, bonds, stocks, stock indices etc. Four most common examples of derivative instrument are Kinds of financial derivative  FORWARD It is also known as “Forward Rate Agreements”, it is an interest rate derivative. A forwards rate agreement is a contract between two parties by which they agree to settle between them the interest differential on a notional principal on a future settlement T.Y.B.B.I 59
  60. 60. date for a specified future period. The promise assets may be currency, commodities instrument etc. For example:- On July 1 Raju entered into an agreement to buy 100 bales of cotton on december1 at Rupees 2000 per bales from peter, a cotton dealer it is a case of forward contract where Raju has to pay Rs 1 lac on dec1 to peter and peter has to supply 100 bales of cotton . In a forward contract a user who promises to buy the specified assets at agreed price at fixed future date is said to be in the long position and on the other hand, the user (holder) who promise to sell at an agreed price at a future date is said to be in short position. Thus, long position or short position take the form of buy and sell in a forward contract.  FUTURE A future contract is very similar to a forward contract in all respect excepting the fact that it is completely a standardized one. Clark has defined future trading, as a special type of futures contract bought & sold under the rules of organized exchange. The term future trading includes both speculative transactions where futures are brought & sold with the objective of making profit from the price change & also the hedging or protective transactions where future are bought & sold with a view to avoid unforeseen losses resulting from price fluctuations. To trade in future contracts, one has to become a member of exchange by paying the initial margin and maintain a variable margin A/c too with the future Exchange. The maturity & the size of the standardized  OPTION An option contract is essentially a contract between two parties where in one parties buys the rights to sell or buy a given underlying at a future date at the pre-agreed price & the other sells this right. Obviously, this means options are basically forward T.Y.B.B.I 60
  61. 61. contracts on right. In other word, they are simply insurance products against adverse movement in the market price. For example:- when we insured a motor vehicles by paying a certain premium on an Annual basis, we have the right to claim damages in case something happens to our vehicles form the Insurance companies which is obliged to pay us. If nothing happen, we do not claim anything from the Company and our premium is lost. Similarly, in an option contracts, the buyer of the right enjoys all benefits by paying of the premium on the price of the options upfront and the seller of the options is under obligation to honors its commitment in case he is asked to do so. The seller is also known as the righter of the option. Hence, if I write an option in your favour, it means that I have sold options to you and you are buyer of the option. The right to buy an underlying is called the call options & the right to sell an underlying is called put option. The option which can be exercised by the buyer only on the date of maturity is called a European option and the option which can be exercised on all working day before the maturity or on the maturity is called an American option.  SWAPS Swaps are yet other trading instruments. It is combination forwards by two counterparties. It is arranged in order to leap the benefits arising from the fluctuation in the market. It may be either currency market or Interest rate market or any other market. EXPORT PROCEDURE a) Obtain IEC NO. T.Y.B.B.I 61
  62. 62. b) Registration with sales tax authority (it is necessary to get exemption from payment of sales tax.) c) Registration with excise authority.(excise duty are to be paid on manufactured goods & also on raw materials purchased. To get an exemption registration is to be done.) d) Registration with export promotion council (EPC) or FIEO or commodity board FIEO – federation of Indian exporter’s organization. For registration with EPC, IEC No. is necessary. Exporters are given RCMC. It is valid for 5 years. If the items to be exported is not covered by EPC or commodity board registration with FIEO is to be made or if exporter is dealing with multiple items, he can register with FIEO (these are sponsoring authority) e) Sending the sample (since it is sent on no commercial value it has to pay no custom duties. But it has to be justified that it is not consignment. But if samples are charged then duties are to be paid) for perishable items samples are not sent. f) Receiving an inquiry. g) Giving an offer: while giving an offer, details by product is also required regarding L/C should be mentioned. Central bank to issue fresh norms for export-import transactions Our Economic Bureau New Delhi, Aug 26: The Reserve Bank of India will issue fresh guidelines to bankers on all export and import-related transactions, including external commercial borrowings next week, said RBI chief general manager (exchange control department) PK Biswas. He gave this indication while responding to several queries raised by exporters on the new Foreign Exchange Management Act (Fema) and Exchange Earners Foreign Currency Account (EEFC) at an open house meeting organized by Federation of T.Y.B.B.I 62
  63. 63. Indian Export Organizations (FIEO) in New Delhi on Saturday. Biswas also indicated that the recent cut in EEFC account maintained by exporters was a “temporary" measure, adding that he could not say whether the measure had helped stem the slide in the value of the rupee. Special secretary (Banking) Devi Dayal said that exporters "deserved" income tax and excise concessions so long as exports performed well and the balance of payments position remained comfortable. Stating that Fema was more "export-friendly" than FERA (Foreign Exchange Regulation Act, 1973,) Biswas said the enforcement directorate would investigate cases only if they were reported to it. Further, a sunset clause had been introduced in FEMA whereby all previous FERA cases would have to commence before May 30, 2002, he added. Exports of services had been defined and brought under Fema, he said adding that a threshold has been set $5,000 a year for travel abroad by exporters and others and beyond this amount, RBI's permission was required. Dayal said that the net export credit to net bank credit was 12.5 per cent in 1993-94, 13.5 per cent in 1994-95, 13.6 per cent in 1995-96, Central bank to issue fresh export import transaction guidelines but it declined to 11.01 per cent in 1996-97 and further to 10.7 per cent in 1999-2000. He assured adequate and timely bank credit to exporters and noted that some banks had been rather conservative in their approach in this regard. Bank credit should not be denied to the exporting community or industry purely on grounds that a collateral security could not be provided for the purpose, he stressed. MA Sheikh, General Manager, Export Credit and Guarantee Corporation (Northern region), Mumbai, urged exporters to initiate action to recover claims due from their buyers through solicitors, lawyers abroad before ECGC stepped in. Earlier, FIEO president Navrata Samdria noted that Fema had some provisions which he said would like to be moderated. For instance, the penalty imposed under the Act was quite hefty, which he feared that many exporters would find it difficult to comply T.Y.B.B.I 63
  64. 64. with, as the amount had to be paid at the time of adjudication. Fema had, however, some features as well, he stated. He wanted the government to accord exports a top priority status for lending so that the interest rate charged to exporters could remain within the prime lending rate. He also suggested that that in the case of exporters, the concept of "overdue credit" should not figure for a period falling within 180 days. CONCLUSION From the above project report on “Facilities provided by the bank to the importer and exporter-SBI”. I conclude that there is various facilities like Incentives, Promotion scheme, Export and Import Finance at a concessional rate of interest. Have been introduced by the RBI & govt. of India to promote & encouragement the export and import in our country in recent years. The Reserve Bank of India also relaxes the norms & eligibility criteria to bank for financing export and import and played an important role to tackle the risk from importer and exporter. T.Y.B.B.I 64
  65. 65. Apart from this, even as RBI has introduced many innovative schemes at a concessional rate of interest to the exporter & importer. They are not aware of such schemes due to this many exporters & importers in the country cannot take the maximum benefit of such schemes. The bank & govt. should take the measure such as promotion of scheme by way of television, banners, pamphlets, seminars etc. such steps should be adopted that the exporter now the benefits of such schemes. After taking the following steps the export & import trade of India will grow to earn foreign currency for development of the economy. After going through this project if at least one exporter and importer is aware of such scheme. I would think that the reason behind for making this project is successfully completed. The details given in this project report are true to the best of my knowledge & the information made available to me during my project tenure. AMIT PANWAR BIBLOGRAPHY Book References  Export (policy, procedure & Document) ---13th Edition M.I.Mahajan.  Export Finance Banking & Exchange Control.  Import Management. Website  www.sbi.co.in T.Y.B.B.I 65
  66. 66.  www.exim.com  www.rbi.co.in T.Y.B.B.I 66