2. NON-FUND BASED FACILITIES
Non-fund based facilities are such facilities
extended by banks which do not involve outgo of
funds from the bank when the customer avails
the facilities but may at a later date
crystallise
customer
into financial liability if the
fails to honour the commitment
made by availing these facilities.
The banker undertake a risk to the amount on
happening of a contingency.
3
3. ADVANTAGES OF NON-FUND BASED FACILITIES
No immediate outlay of funds;
Future or contingent deployment of funds;
Risks are similar to funded exposure and
procedure is same;
Earnings by way of Up Front commission, fees
and exchange income;
Source for mobilisation of deposits;
Comparative easy monitoring;
Costs less to Banker;
Low probability of default. 4
4. VARIOUS TYPES OF NON BORROWING FACILITIES
–Letters of Credit
–Inland LCs
–Foreign (Import) LCs
–Guarantees
–Inland Guarantees
–Foreign Guarantees
5
6. GUARANTEE
Section 126 of Indian Contract Act,1872
defines guarantee:
“A contract to perform the promise or
discharge the liability of a third person
in case of his default.”
7
7. GUARANTEE PARTIES INVOLVED
The parties to the contract of guarantee are:
a. Applicant : The principal debtor : The person at
whose request the guarantee is executed.
b. Beneficiary : The person to whom the guarantee is
given and who can enforce it in case of default.
c. Guarantor : The person who undertakes to
discharge the obligations of the applicant in case of
his default.
Thus, a contract of guarantee is a collateral contract,
consequential to a main contract between the
applicant and the beneficiary.
8
8. GUARANTEE TYPES
Guarantee may be classified by nature as
under:
1. Inland Guarantee and
Foreign Guarantee.
2. Financial Guarantee and
Performance Guarantee.
9
9. BANK GUARANTEE
Guarantee issued must be unconditional and for:
Definite period
Definite amount
Definite purpose
Guarantee may be based on location of beneficiary, Purpose and
Currency:
Inland: Issued with in India in favour of beneficiary located in
India for any contract or purpose originating within India.
Foreign: Issued in India in favour of beneficiary located in any
other country in Foreign Currency. 10
10. VARIOUS TYPES OF BANK GUARANTEES
As per nature of contract, Bank Guarantees
are classified in three types;
1) Financial Guarantee
2) Performance Guarantee
3) Deferred Payment Guarantee
11
11. FINANCIAL GUARANTEE
Financial Guarantees are issued by bank on behalf of
customer’s requirement to deposit a cash security or earnest
money.
Most Government department insist that before contract is
awarded to contractor, insist on a Earnest Money Deposit.
Issued in respect of Excise / Custom duties and Octroi under
dispute etc.
Issued in respect liabilities towards tax, excise duties, custom
duties etc. to Govt. authorities in relation of specific
transaction;
Issued for covering payments for supplies/services favouring
Oil Companies, SAIL, Railways etc.
12
12. PERFORMANCE GUARANTEE
Performance Guarantees are issued by the
bank on behalf of its customer whereby the
bank assure a third party, that the customer will
perform the contract as per condition stipulated
in the contract.
These are issued on behalf of customer, who
enters into contracts to do certain things on or
before a given date.
It involves a contractual obligation.
13
13. DEFERRED PAYMENT GUARANTEES
It is issued in favour of suppliers to guarantee
payment of installments for capital goods purchased
on deferred payment basis.
It required when goods or machinery are purchase
on long term credit and payment is made through
cheque or bills of different dates.
Bank issue guarantee of payment of installments
on due date, in event of default by
Buyer
Ex - Rs. 50 Lacs is cost of Machinery. Repayable in 5 yearly
installments. Default in payment by the buyer.
14
14. GUARANTEE EXCLUSIONS
of shipping
• Guarantees
companies
goods in the
in favour
to obtain
absence
delivery of
of Bills of
Lading should not be issued unless the
import bills of the customer are routed
through the Branch and adequate
margin is taken for issue of the
guarantee.
15
15. GUARANTEE EXCLUSIONS
• Wherever specific sanction is not
available, Branches
prior approval from
should
Head
obtain
Office
before issuing any guarantee where
Foreign Exchange is involved.
• Partly secured guarantee involving excise
or disputed tax payment should not be
issued without prior permission of Head
office
16
16. GUARANTEE ONEROUS CLAUSE
Any provision in the guarantee which is likely to
give rise to further pecuniary liability like interest
or liability which is unlimited in terms of money
as well as validity period is considered as an
ONEROUS CLAUSE:
Auto Renewal / Extension.
Jurisdiction clause in different places.
Where time limit is specified for payment say
24 hours, 48 hours etc.
Payment of interest on invoked amount.
17
17. DELEGATION OF POWERS
Delegation provides full powers at all levels to
sanction issue of guarantees for periods up to 3
years in case of guarantees fully secured by
cash margin or term deposit or counter guarantee
of other Banks/FIs.
Restrictive powers for issue of guarantees not
fully secured for periods up to 3 years provided
there is no onerous clause in the guarantee.
18
18. DELEGATION OF POWERS
Guarantees beyond 3 years (fully/partly
secured) can be sanctioned by scale VI
onwards as per their respective delegated
powers.
Guarantees in favour of Banks/FIs/
Other lending institutions can be
sanctioned by scale V onwards only as
per their respective delegated powers in
SME/SBS model.
19
19. The branch should obtain request letter
for issue of guarantee which contains the
following :
Authority to –adjust margin money,
appropriate principal or collateral securities
on default & recover all charges in respect
of issue of guarantee.
The customer also accepts the responsibility
to get back the original guarantee.
APPLICATION
20
20. SOME IMPORTANT CLAUSES REQUIRED
• All guarantees must carry limitation
clauses invariably.
• Minimum claim period to be mentioned in
the BG is 1 year
(1)Limitation clause as to time and
amount.
GUARANTEE LIMITATION CLAUSE
21
21. GUARANTEE LIMITATION CLAUSE
Notwithstanding anything contained herein above
our liability under this guarantee is restricted to Rs.
------- (Rs. ---------------) and this guarantee is valid
up to ------------and we shall be released and
discharged from all liabilities hereunder unless a
written claim for payment under this guarantee
lodged on us within ------- months from the date of
expiry of this guarantee
i. e. on or before ------------- irrespective of whether
or not the original guarantee is returned to us.
22
22. GUARANTEE CONFIRMATION CLAUSE
All guarantees must contain the following clause
in the forwarding letter of the guarantee:
“The confirmation of this bank guarantee is
available with our controlling office. The
beneficiary in his own interest should
obtain such confirmation from the
controlling office at the following
address………”
23
23. INVOCATION OF GUARANTEE
Whenever a guarantee is invoked, the amount claimed
there under should be settled without delay.
Branches are not empowered to postpone beyond 3 days
from the date of invocation payment of a guarantee.
Invocation has to be made by the same authority in whose
favour guarantee is issued.
In case the payment is to be refused, controlling
authorities permission must be obtained before refusal.
24
24. SECURITY DOCUMENTS
LG11 or LG12– Counter Guarantee and Indemnity. Copy
of original contract certified as true copy and marked
“Annexure A” should be attached to the counter
guarantee taken.
LG13 Letter of appropriation.
LG14/15 Counter guarantee from guarantor. LG500
Supplemental agreement of hypothecation. Extension
of equitable mortgage.
LG - 444 - Renewal documents
25
25. PRECAUTIONS
Letter requesting for guarantee should be
taken each time a guarantee is issued.
Guarantees should be serially numbered.
Guarantees should be signed by two delegatees.
The name, designation and code no. of the
officers signing the guarantee should be
incorporated.
26
27. LETTER OF CREDIT
Letter of Credit is an undertaking issued by a
Bank (Issuing Bank), on behalf of the buyer (the
importer), to the seller (the exporter) to pay for
goods and services provided that the seller presents
documents which comply with the terms and
conditions of the Letter of Credit.
In a simple words, If LC opened on seller name
as beneficiary, seller will receive amount though
the buyer’s bank (opening bank) on the agreed
time.
28 28
28. LETTER OF CREDIT &
DOCUMENTARY CREDIT
All Letters of Credit for export import
trade is handled under the guidelines of
Documentary Credit
Uniform Customs and Practice of
of International
Chamber of Commerce (UCPDC 600).
The ICC Banking Commission approved
UCPDC 600 in 25 October 2006, which
came into effect from 1st July 2007.
29 29
29. NEED OF LETTER OF CREDIT
International trade covers very large distance between two
countries and exporter & importers are not known to each
other. Letter of credit can resolve the complications arise in
international trade of two countries separated by differences
in:
a) Physical barriers - long distances;
b) Political systems /legal systems;
c) Currencies;
d) Trade and exchange regulations;
e) Markets and marketing conditions;
f) Trade practices;
g) Financial and commercial conditions.
30
30. MAJOR ADVANTAGES TO BUYER
Letter of Credit plays a major role in this transaction. Both
exporter and importer are benefited to do business through
letter of credit. Major advantages to buyer (importer) from
letter of credit are as follows:
No cash advance payment has to be made to the
seller;
Seller is paid only after shipment and delivery of
documents within the LC validity;
possibility to obtain more favourable payment terms;
Shipment schedule ensured.
31
31. MAJOR ADVANTAGES TO SELLER
Major advantages to seller (exporter) from letter of
credit are as follows:
Obligation of the buyer’s bank for payment;
Payment is assured if credit terms are fulfilled;
Date of receipt of payment can be determined;
Seller need not bother about the fluctuation of
currency;
Seller need not bother about the import regulation of
buyer country.
A financing possibility by discounting receivables
under LC.
32
32. 33
Mechanics of Documentary Credit
CONTRACT
DOCS
GOODS
DOCS
GOODS
EXPORTER
IMPORTER
PA
YMENT
PA
YMENT
Letter of
Credit
Negotiating Bank/
Confirming Bank
Reimbursing Bank
Advising bank
DOCUMENTS
DOCUMENTS
33
33. 34
PARTIES TO LETTER OF CREDIT
1) Opener/Buyer
2) Beneficiary/Seller
3) Issuing Bank
4) Advising Bank
5) Confirming Bank
6) Nominated Bank/Negotiating Bank
7) Reimbursing Bank
34
34. PARTIES OF LETTER OF CREDIT
Applicant: Applicant is the party who opens Letter of
Credit. He is the buyer / importer of the goods (generally
borrower of the issuing bank). The applicant arranges to
open letter of credit with his bank as per
the termsand conditions of Purchase
business contract between buyer and
order and
seller. The
applicant has to make payment if documents as per LC are
delivered.
Beneficiary party: The seller or exporter is the beneficiary
in whose favour the letter of credit is issued. It gets
payment against documents as per LC from the nominated
bank within validity period for negotiation.
35
35. PARTIES OF LETTER OF CREDIT
Issuing Bank: Issuing Bank is the bank that opens letter
of credit. Letter of credit is created by issuing bank who
takes responsibility to pay amount on receipt of
documents from supplier of goods (beneficiary under
LC).
Advising Bank: Advising bank, as a part of letter of
credit takes responsibility to communicate with
necessary parties under letter of credit and other required
authorities. The advising bank is the party who sends
documents under Letter of Credit to opening bank.
36
36. PARTIES OF LETTER OF CREDIT
Confirming Bank: Confirming bank as a party of letter of
credit confirms and guarantees to undertake the responsibility
of payment or negotiation acceptance under the credit.
Negotiating Bank: Negotiating Bank, who negotiates
documents delivered to bank by beneficiary of LC.
Negotiating bank is the bank that verifies documents and
confirms the terms and conditions under LC on behalf of
beneficiary to avoid discrepancies.
Reimbursing Bank: Reimbursing bank is the party who
authorized to honour the reimbursement claim of negotiation/
payment/ acceptance.
37
37. TYPES OF LETTER OF CREDIT
Revocable LCs: In revocable LC, the buyer and the
bank that established the LC are able to manipulate
the LC or make corrections without informing or
getting permissions from the seller. According to
UCPDC 600, all LCs are irrevocable, hence this type
of LC is obsolete.
Irrevocable LC: A letter of credit that does not allow
the issuing bank to make any changes without the
approval of the beneficiary, applicant bank and
confirming bank, if any.
38
38. TYPES OF LETTER OF CREDIT
Deferred or Usance LC:.A letter of credit, that ensures
payment after a certain period of time. The date of
payment is accepted by both buyer and seller. The
bank may review the documents early but the
payment to the beneficiary is made after the agreed-
to time passes. It is also known as Usance LC.
Sight LC: A letter of credit that demand payment on
the submission of the required documents. The bank
reviews the documents and pays the beneficiary if the
documents meet the conditions of the letter.
39
39. TYPES OF LETTER OF CREDIT
With & Without Recourse LC: Where the beneficiary holds
himself liable to the holder of the bill if dishonoured, it is
considered with-recourse LC. Where he does not hold himself
liable, the credit is said to be without-recourse LC.
As per RBI directive (Jan 23, 2003), banks should not
open such LCs. Under LC, the Banks can negotiate bills
bearing the 'without recourse' clause.
Restricted LC: A restricted LC is one wherein a specified bank
is designated to pay, accept or negotiate payment will be made.
The confirming bank's liability is similar to the issuing bank.
The confirming bank has to negotiate documents if tendered
by the beneficiary.
40
40. TYPES OF LETTER OF CREDIT
Transferable LC: It is an LC, where the beneficiary is entitled to
transfer the LC, in whole or in part, to the 2nd beneficiary/s
(supplier of beneficiary). The 2nd beneficiary, however, cannot
transfer it further, but can transfer the unused portion, back to the
original beneficiary. It is transferable only once.
A Back to Back credit: A pair of LCs in which one is to the benefit
of a seller who is not able to provide the corresponding goods for
unspecified reasons. In that event, a second credit is opened for
another seller to provide the desired goods. Back-to- back is
issued to facilitate intermediary trade. Intermediate companies
such as trading houses are sometimes required to open LCs for a
supplier and receive Export LCs from buyer.
41
41. TYPES OF LETTER OF CREDIT
A Red Clause LC: It referred to a packing or anticipatory credit,
has a clause permitting the correspondent bank in the exporter's
country to grant advance to beneficiary at issuing bank's
responsibility. These advances are adjusted from proceeds of the
bills negotiated.
A Green Clause LC: It permits the advances for storage of goods
in a warehouse in addition to preshipment advance. It is an
extension of the red clause LC.
Standby Credits: is similar to performance bond or guarantee,
but issued in the form of LC. The beneficiary can submit his
claim by means of a draft accompanied by the requisite
documentary evidence of performance, as stipulated in the credit.
42
42. PROCEDURE FOR OPENING LC
Buyer entered in to a contract with overseas supplier to import
machinery at his factory. As per their contract, buyer needs to open
a Letter of credit (LC) in favour of exporter/seller. Banker has to
verify the following documents of the buyer/importer:
IEC No. of the buyer,
Whether Goods/Services under LC is permitted under
Foreign Trade Policy or not,
Import License of the buyer if applicable,
FEMAGuidelines about the items imported.
The customer’s financial standing, line of business, frequency of
imports, sales, account turnover, satisfactory track record of
importer for import of goods, etc. are also scrutinised.
43
43. SWIFT CODE
SWIFT is the short form of "Society or Worldwide Interbank Financial
Telecommunication". In simple terms swift has two main roles in international
financial transactions, firstly SWIFT provide a secure communications platform
by which financial institutions can communicate each other reliably & fast and
secondly SWIFT establishes standard message formats which can be used on
secure SWIFT platforms.
Today banks use SWIFT platform to communicate each other when sending a
wire transfer, issuing a letter of credit, advising a discrepancy message etc.
Each of these message formats have a different code, which is called swift
message types. For example a bank must use MT700 Issue of a Documentary
Credit when issuing a letter of credit and MT 734 advice of a refusal when
giving its refusal message. (MT means Message Type)
Important Note: According to the current letters of credit rules, UCP 600, a
letter of credit will be deemed to be operative letter of credit if it is transmitted
via an authenticated electronic platform such as SWIFT. 44
44. When making payment for product on behalf of its
customer, the issuing bank must verify that
all documents and drafts conform precisely to
the terms and conditions of the letter of credit.
The most common documents that must
accompany the draft include:
Commercial Invoice: The billing for the goods
and services. It includes a description of
merchandise, price, FOB origin, and name and
address of buyer and seller.
STANDARD FORMS OF DOCUMENTATION
45
45. STANDARD DOCUMENTS
Bill of Exchange: This is a financial document. Payment
is made on this document. In a letter of credit transaction
the right to draw a bill is conferred only on the beneficiary.
The bill amount should be within the limit fixed in the
letter of credit. The tenor, endorsement and the drawee
should be the same as given in the letter of credit.
Transport Documents: The mode of dispatch of goods or
the transporting of goods would depend on terms of
contract between buyer and seller and the same is
incorporated in letter of credit. The two main modes of
transport of goods are either by se or by air.
46
46. STANDARD DOCUMENTS
Bill of Lading: A document evidencing the receipt of
goods for shipment and issued by a freight carrier
engaged in the business of forwarding or transporting
goods. The documents evidence control of goods.
Airway Bill: This is a document, which evidences that
the goods have been received by an airline company or
its agent.
Postal Parcel Receipt and Courier Receipts: When the
goods to be sent are small in quantity, then they can be
sent through post or courier. The document issued by the
postal department or courier are similar in nature to the
airway bill.
47
47. STANDARD DOCUMENTS
Warranty of Title: A warranty given by a seller to a buyer of
goods that states that the title being conveyed is good and that
the transfer is rightful. This is a method of certifying clear title
to product transfer.
Insurance Document: The goods shipped, if required to be
insured under the terms of the letter of credit should be so
insured. The type of insurance cover should be the same as
specified in the credit.
Letter of Indemnity: Specifically indemnifies the purchaser
against a certain stated circumstance. Indemnification is
generally used to guaranty that shipping documents will be
provided in good order when available.
48
48. INCOTERMS (INTERNATIONAL
COMMERCIAL TERMS) 2000
INCOTERMS introduced by International chamber of
commerce in 1936. INCOTERMS or International
Commercial Terms are a series of international sales terms
widely used throughout the world.
INCOTERMS are designed to create a bridge between different
members of the industry by acting as a uniform language they
can use.
From 1st January 2000, the ICC once again updated Incoterms
to follow the modern trends in international trade.
INCOTERMS 2000 are the standard terms of trade that define
the rights and obligations of the parties involved in trade.
49
49. INCOTERMS 2000
INCOTERMS 2000 are divided into 4 groups namely
E,F,C & D.
GROUP– E (Ex Work or Factory Cost)
This group contains only one Incoterm namely EXW.
EXW (Ex. Works) - This term represents minimum
liability on the part of the Seller. Seller’s
responsibility ends with delivering goods at his
factory doc. The rest of the risk and expenses
involved are borne by the Buyer and would have to
be carried out through his agent at origin. 50
50. INCOTERMS 2000
GROUP– F (Freight Unpaid)
Consists of FCA, FAS & FOB terms. Under this category the seller pays for
the pre carriage expenses at the origin and the main carriages as well as
destination charges are borne by the buyer.
FCA (Free Carrier) - Seller delivers goods to the Buyer’s nominated
vehicle and his responsibility ceases with delivery. Unloading,
transportation as well as Insurance from this point will be borne by the
Buyer.
FAS (Free Alongside Ship) - Seller completes export formalities and
delivers cargo alongside ship. From this point onwards the risk and costs
including transportation and Insurance pass on to the Buyer.
FOB (Free on Board) - Seller is responsible for inland transportation,
export clearance as well as delivery cargo onboard the Ship. Once onboard
the Ship the risk and responsibility shifts to the Buyer who pays the
transportation, Insurance and destination charges. 51
51. INCOTERMS 2000
GROUP– C (Freight Paid)
Under this group the Seller arranges for and pays for transportation but
does not take on the risk.
CFR (Cost and Freight) - Seller pays transportation cost up to destination
port. Insurance and risk are with the buyer from the time the seller delivers
cargo on board.
CIF (Cost, Insurance & Freight) - Seller pays for transportation and
insurance but the risk passes to the buyer as soon as the cargo is delivered
on board the ship.
CPT (Seller pays Transportation) - Seller pays transportation cost. The
risk and insurance lies with the buyer from the point of delivery of cargo to
the carrier by the seller.
CIP (Carriage & Insurance Paid to) - Seller pays transportation and
insurance. The risk passes to the buyer when seller delivers cargo to
carrier. 52
52. INCOTERMS 2000
GROUP– D (Delivery at Destination)
Under this group the seller assumes all or most of the risk and takes responsibility of
delivery at destination up to the agreed point of delivery.
DAF (Delivered at Frontier) - Seller responsible to deliver cargo up to the point of
entry at destination. Risk and responsibility further passes on to the buyer.
DES (Delivered Ex Ship) - Seller assumes risk until the ship with the cargo reaches
the port of destination. Then the risk shifts to buyer from the point of discharge of
vessel onwards.
DEQ (Delivered Ex. Quay Duty Paid) - Seller takes responsibility until the cargo is
delivered after import clearance at destination and customs duty paid and delivered
to the point on buyers dock.
DDU (Delivered Duty Unpaid) - Seller takes responsibility to deliver cargo at the
destination port where the buyer takes on the responsibility for import clearance,
Import duties and onward delivery.
DDP (Delivered Duty Paid) - Seller takes responsibility until the cargo reaches
destination, clears the customs, pays the duty and delivers cargo at buyer’s dock. 53
54. RISKS IN LETTER OF CREDIT
TRANSACTIONS
Letter of credit transactions are not risks free.
The risks inherent in these types of transactions include:
Fraud Risks: The payment will be obtained for
non-existent
presentation
or worthless merchandise against
by the beneficiary of forged or
falsified documents. Credit itself may be funded.
Sovereign and Regulatory Risks: Performance of the
Documentary Credit may be prevented by
government action outside the control of the parties.
55
55. RISKS IN LETTER OF CREDIT
TRANSACTIONS
Legal Risks: Possibility that performance of
a documentary credit may be disturbed by
legal action relating directly to the parties and
their rights and obligations under the
documentary credit.
Force majeure risk: in which completion of
the transaction is prevented by an external
force, such as war or natural disaster.
56
57. Export
• Export in simple words means selling goods
abroad. International market being a very
wide market, huge quantity of goods can be
sold in the form of exports.
• Export refers to outflow of goods and services
and inflow of foreign exchange.
58
58. Export Finance
• The exporter may require short term, medium term or
long term finance depending upon the types of goods
to be exported and the terms of statement offered to
overseas buyer.
• The short-term finance is required to meet “working
capital” needs. The working capital is used to meet
regular and recurring needs of a business firm. The
regular and recurring needs of a business firm refer to
purchase of raw material, payment of wages and
salaries, expenses like payment of rent, advertising etc.
59
59. • Export finance is short-term working capital finance
allowed to an exporter. Finance and credit are available
not only to help export production but also to sell to
overseas customers on credit.
• An exporter may avail financial assistance from any
bank, which considers the ensuing factors:
• Availability of the funds at the required time to the
exporter.
• Affordability of the cost of funds.
Export Finance
60
60. OBJECTIVES OF EXPORT FINANCE
• To cover commercial & Non-commercial or
political risks attendant on granting credit to a
foreign buyer.
• To cover natural risks like an earthquake, floods
etc.
• The exporter may also require “term finance”.
The term finance or term loans, which is required
for medium and long term financial needs such as
purchase of fixed assets and long term working
capital.
61
61. • Appraisal means an approval of an export
credit proposal of an exporter. While
appraising an export credit proposal as a
commercial banker, obligation to the following
institutions or regulations needs to be
adhered to.
APPRAISAL
62
62. • Appraise to be the bank’s customer.
• Appraise should have the Exim code number
allotted by the Director General of Foreign
Trade.
• Party’s name should not appear under the
caution list of the RBI.
Obligations to the RBI under the
Exchange Control Regulations are:
63
63. • Appraise should have IEC number allotted by the
DGFT.
• Goods must be freely exportable i.e. not falling
under the negative list. If it falls under the
negative list, then a valid license should be there
which allows the goods to be exported.
• Country with whom the Appraise wants to trade
should not be RESTRICTED
Obligations to the Trade Control
Authority under the EXIM policy are:
64
64. • The export finance is being classified into two
types viz.
• Pre-shipment finance.
• Post-shipment finance.
65
65. MEANING:
• Pre-shipment is also referred as “packing
credit”. It is working capital finance provided
by commercial banks to the exporter prior to
shipment of goods. The finance required to
meet various expenses before shipment of
goods
PRE-SHIPMENT FINANCE
66
66. Definition for pre-shipment
• Financial assistance extended to the exporter
from the date of receipt of the export order
till the date of shipment is known as pre-
shipment credit. Such finance is extended to
an exporter for the purpose of procuring raw
materials, processing, packing, transporting,
warehousing of goods meant for exports.
67
67. • To purchase raw material, and other inputs to manufacture goods.
• To assemble the goods in the case of merchant exporters.
• To store the goods in suitable warehouses till the goods are
shipped.
• To pay for packing, marking and labelling of goods.
• To pay for pre-shipment inspection charges.
• To import or purchase from the domestic market heavy machinery
and other capital goods to produce export goods.
• To pay for consultancy services.
• To pay for export documentation expenses.
IMPORTANCE OF FINANCE AT
PRE-SHIPMENT STAGE:
68
68. Cash Packing Credit Loan:
• In this type of credit, the bank normally grants packing
credit advantage initially on unsecured basis. Subsequently,
the bank may ask for security.
Advance Against Hypothecation:
• Packing credit is given to process the goods for export. The
advance is given against security and the security remains
in the possession of the exporter. The exporter is required
to execute the hypothecation deed in favour of the bank.
FORMS OR METHODS OF
PRE-SHIPMENT FINANCE:
69
69. 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:
• The Red L/C received from the importer authorizes the
local bank to grant advances to exporter to meet working
capital requirements relating to processing of goods for
exports. The issuing bank stands as a guarantor for packing
credit.
70
70. Advance 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 favour 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:
• Manufacturer, who exports through export houses or other
agencies can obtain packing credit, provided such manufacturer
submits an undertaking from the export houses that they have not
or will not avail of packing credit against the same transaction.
71
71. Advance Against Duty Draw Back (DBK):
• DBK means refund of customs duties paid on the
import of raw materials, components, parts and
packing materials used in the export production. It also
includes a refund of central excise duties paid on
indigenous materials. Banks offer pre-shipment as well
as post-shipment advance against claims for DBK.
Special Pre-Shipment Finance Schemes:
• Exim-Bank’s scheme for grant for Foreign Currency Pre-
Shipment Credit (FCPC) to exporters.
• Packing credit for Deemed exports. 72
72. SOME SCHEMES IN PRE-SHIPMENT
STAGE OF FINANCE
PACKING CREDIT
SANCTION OF PACKING CREDIT ADVANCES:
• There are certain factors, which should be considered while sanctioning the
packing credit advances viz.
• Banks may relax norms for debt-equity ratio, margins etc but no compromise in
respect of viability of the proposal and integrity of the borrower.
• Satisfaction about the capacity of the execution of the orders within the stipulated
time and the management of the export business.
• Quantum of finance.
• Standing of credit opening bank if the exports are covered under letters of credit.
• Regulations, political and financial conditions of the buyer’s country.
73
73. • After proper sanctioning of credit limits, the disbursing
branch should ensure:
• To inform ECGC the details of limit sanctioned in the
prescribed format within 30 days from the date of
sanction.
• To complete proper documentation and compliance of
the terms of sanction i.e. creation of mortgage etc.
• There should be an export order or a letter of credit
produced by the exporter on the basis of which
disbursements are normally allowed.
DISBURSEMENT OF PACKING CREDIT:
74
74. • Name of the Buyer.
• Commodity to be exported.
• Quantity.
• Value.
• Date of Shipment / Negotiation.
• Any other terms to be complied with.
In both the cases following particulars
are to be verified:
75
75. • The FCPC is available to exporting companies as well as commercial
banks for lending to the former.
• It is an additional window to rupee packing credit scheme &
available to cover both the domestic i.e. indigenous & imported
inputs. The exporter has two options to avail him of export finance.
• To avail him of pre-shipment credit in rupees & then the post
shipment credit either in rupees or in foreign currency
denominated credit or discounting /rediscounting of export bills.
• To avail of pre-shipment credit in foreign currency &
discounting/rediscounting of the export bills in foreign currency.
FOREIGN CURRENCY PRE-SHIPMENT CREDIT (FCPC)
76
76. 2.2 - POST-SHIPMENT FINANCE
MEANING:
• Post shipment finance is provided to meet working capital
requirements after the actual shipment of goods. It bridges the
financial gap between the date of shipment and actual receipt of
payment from overseas buyer thereof. Whereas the finance
provided after shipment of goods is called post-shipment finance.
DEFENITION:
• Credit facility extended to an exporter from the date of shipment of
goods till the realization of the export proceeds is called Post-
shipment Credit.
77
77. 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 over seas markets.
• To pay for port authorities, customs and shipping agents charges.
• To pay towards export duty or tax, if any.
• To pay towards ECGC premium.
• To pay for freight and other shipping expenses.
• To pay towards marine insurance premium, under CIF contracts.
• To meet expenses in respect of after sale service.
• To pay towards such expenses regarding participation in exhibitions and
trade fairs in India and abroad.
• To pay for representatives abroad in connection with their stay board.
78
78. FORMS/METHODS OF POST SHIPMENT
FINANCE
Export bills negotiated under L/C:
The exporter can claim post-shipment finance by drawing bills or
drafts under L/C. The bank insists on necessary documents as stated
in the L/C. if all documents are in order, the bank negotiates the bill
and advance is granted to the exporter.
Purchase of export bills drawn under confirmed contracts: The banks
may sanction advance against purchase or discount of export bills
drawn under confirmed contracts. If the L/C is not available as
security, the bank is totally dependent upon the credit worthiness of
the exporter.
79
79. • Advance against bills under collection: In this case, the
advance is granted against bills drawn under confirmed
export order L/C and which are sent for collection. They are
not purchased or discounted by the bank. However, this
form is not as popular as compared to advance purchase or
discounting of bills.
• Advance against claims of Duty Drawback (DBK): DBK
means refund of customs duties paid on the import of raw
materials, components, parts and packing materials used in
the export production. It also includes a refund of central
excise duties paid on indigenous materials. Banks offer pre-
shipment as well as post-shipment advance against claims
for DBK.
80
80. • Advance against goods sent on Consignment basis:
The bank may grant post-shipment finance against
goods sent on consignment basis.
• Advance against Undrawn Balance of Bills: There are
cases where bills are not drawn to the full invoice value
of gods. Certain amount is undrawn balance which is
due for payment after adjustments due to difference in
rates, weight, quality etc. banks offer advance against
such undrawn balances subject to a maximum of 5% of
the value of export and an undertaking is obtained to
surrender balance proceeds to the bank.
81
81. • Advance against Deemed Exports: Specified sales or supplies in
India are considered as exports and termed as “deemed exports”.
It includes sales to foreign tourists during their stay in India and
supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is
offered for a maximum of 30 days.
• Advance against Retention Money: In respect of certain export
capital goods and project exports, the importer retains a part of
cost goods/ services towards guarantee of performance or
completion of project. Banks advance against retention money,
which is payable within one year from date of shipment.
• Advance against Deferred payments: In case of capital goods
exports, the exporter receives the amount from the importer in
installments spread over a period of time. The commercial bank
together with EXIM bank do offer advances at concessional rate
of interest for 180 days.
82
82. SOME SCHEMES UNDER OPERATION IN
PRE-SHIPMENT FINANCE
DEFERRED CREDIT
Meaning:
Consumer goods are normally sold on short term credit, normally for
a period upto 180 days. However, there are cases, especially, in the
case of export of capital goods and technological services; the credit
period may extend beyond 180 days. Such exports were longer
credit terms (beyond 180 days) is allowed by the exporter is called as
“deferred credit” or “deferred payment terms”.
83
83. How the payment is received?
• The payment of goods sold on “deferred payment terms” is received
partly by way of advance or down payment, and the balance being
payable in installments spread over a period of time.
Period of financial credit support:
• Financial institutions extend credit for goods sold on “deferred
payment terms” (subject to approval from RBI, if required). The credit
extended for financing such deferred payment exports is known as
Medium Term and Long Term Credit. The medium credit
facilities are provided by the commercial banks together with EXIM
Bank for a period upto 5 years. The long term credit is offered normally
between 5 yrs to 12 yrs, and it is provided by EXIM Bank.
84
84. Amount of credit support:
Any loan upto 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.10 Lakhs but not more than Rs50 crore,
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.
85
85. REDISCOUNTING OF EXPORT BILLS
ABROAD (EBRD) SCHEME:
• The exporter has the option of availing of export credit at the post-shipment stage
either in rupee or in foreign currency under the rediscounting of export bills abroad
(EBRD) scheme at LIBOR linked interest rates.
• This facility will be an additional window available to exporter along with the
exiting rupee financing schemes to an exporter at post shipment stage. This
facility will be available in all convertible currencies. This scheme will cover export
bills upto 180 days from the date of shipment (inclusive of normal
transit period and grace period) .
• The scheme envisages ADs rediscounting the export bills in overseas markets by
making arrangements with an overseas agency/ bank by way of a line of
credit or banker’s acceptance facility or any other similar facility at rates
linked to London Inter Bank Offered Rate (LIBOR) for six months.
86
86. FINANCE FOR RUPEE EXPENDITURE FOR
PROJECT EXPORT CONTRACTS (FREPEC)
What is FREPEC Program?
This program seeks to Finance Rupee Expenditure for Project Export
Contracts, incurred by Indian companies.
What is the purpose of this Credit?
To enable Indian project exporters to meet Rupee expenditure
incurred/required to be incurred for execution of overseas project export
contracts such as for acquisition/purchase/acquisition of materials and
equipment, acquisition of personnel, payments to be made in India to staff,
sub-contractors, consultants and to meet project related overheads in
Indian Rupees. 87
87. Who are eligible for Assistance under
FREPEC Program?
• Indian project exporters who are to execute project export contracts overseas
secure on cash payment terms or those funded by multilateral agencies will be
eligible. The purpose of the new lending program is to give boost to project
export efforts of companies with good track record and sound financials.
• What is the quantum of credit extended under this program?
• Up to 100% of the peak deficit as reflected in the Rupee cash flow statement
prepared for the project. Exim Bank will not normally take up cases involving
credit requirement below Rs. 50 lakhs. Although, no maximum amount of
credit is being proposed, while approving overall credit limit, credit-worthiness
of the exporter- borrower would be taken into account. Where feasible, credit
may be extended in participation with sponsoring commercial banks.
88
88. How are Disbursements made under this Program?
• Disbursements will made in Rupees through a bank account
of the borrower-company against documentary evidence of
expenditure incurred accompanied by a certificate of
Chartered Accountants.
How is a FREPEC Loan to be extinguished?
• Repayment of credit would normally be out of project
receipts. Period of repayment would depend upon the
project cash flow statements, but will not exceed 4 (four)
years from the effective date of project export contract.
The liability of the borrower to repay the credit and pay
interest and other monies will be absolute and will not be
dependent upon actual realization of project bills.
89
89. What is the security stipulated for FREPEC loan?
• Hypothecation of project receivables and project
movables.
• Optional: where available
• Personal Guarantees of Directors of the Company.
• Available collateral security.
90
