Financing, Insurance & Medium Term Plan for Leather Product Exports

1
Awareness Seminar on
Financing, Insurance & Medium Term Plan
for
Leather Product Exports
( For Private Circulation only)
At
Hotel Taj Palace, New Delhi
Organised by
Council of Leather Exports
Govt. of India, Ministry of Commerce & Industry
On
23rd December 2010
Saurabh Agarwal
Vice-Chairman, Indian Institute of Finance, Delhi, INDIA
Saurabh Agarwal, Financing, Insurance and Medium Term Plan for Leather
Exports

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Acknowledgement
The author gratefully acknowledge the technical support of Indian
Institute of Finance and Faculty of Management Studies (DU). We
would specially like to thank Prof. J. D. Agarwal (IIF), Prof. Manju
Agarwal (DU) and Prof. Madhu Vij (FMS) who have inspired me in
many ways to work on this complex issue.
We would also like to convey our thanks to Prof. Aman Agarwal (IIF),
Prof. Yamini Agarwal (IIF) and Prof. Megha Agarwal (DU) for giving
me their suggestions and comments.
The views and reviews presented in the presentation are views and opinions of the
author, based on his research and do not depict institutional or countries views or
of the institutions the author is associated with. All errors and omissions are my
own.
Exports

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 Section I: Medium Term Plan
 Section II: Financing Perspective
 Section III: Insurance Perspective
Focus
Exports
Indian Institute of Finance

Exports
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Introduction - Trends
Source: http://www.leatherindia.org/

Exports
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Introduction - Trends
Annual turnover of over US$ 7 billion
 The export of leather and leather products increased
manifold over the past decades and touched US$ 3.40 billion
in 2009-10
Cumulative annual growth rate of about 5.43% (5 years)
India accounts for a share of close to 3% in the global
leather import trade of US$ 137 billion (2008)
Own raw material source – 2 billion sq ft of leather
produced annually

Exports
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Entire leather sector is de-licensed facilitating for expansion
on modern lines with state-of-the-art machinery and
equipments
100% Foreign Direct Investment permitted through
automatic route
Import of specified machinery for use in leather and
footwear industry allowed at a 5% concessional import duty
Duty free import of raw hides and skins, wet blue chrome
tanned leather, crust leather and finished leather of all kinds
including splits and sides thereof
Government Support Measures

Exports
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Two taxable services, namely “transport of goods by road”
and “commission paid to foreign agents” exempted from the
levy of service tax, should the exporter be liable to pay service
tax on reverse charge basis
‘Terminal handling charges’ added to the list of services
eligible for refund
Services provided for transport of export goods through
national waterways, inland water and coastal shipping included
in the list of services eligible for refund of service tax
Refund of Service Tax & Exemptions

Exports
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Exemption from service tax leviable under “banking and
other financial services” or under “foreign exchange broking
services” provided to inter-bank purchase and sale of foreign
currency between scheduled banks
GST Rate Structure
Exports would be zero-rated under GST Rate Structure
The GST will be levied on imports with necessary
Constitutional Amendments.
Refund of Service Tax & Exemptions

Exports
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Full exemption from customs duty presently available to
specified raw materials and equipment imported by
manufacturer exporters of leather goods
Priority-sector Lending
Foreign banks having offices in India, the target for lending
to the priority sector has been kept at 32 per cent of adjusted
net bank credit (ANBC) or credit equivalent amount of off-
balance sheet exposures (OBEs), whichever is higher.
Exemption from Customs Duty and Priority Sector
Banking

Exports
10
Within the overall target of 32 per cent to be achieved by
foreign banks, advances to the MSE and export sectors should
not be less than 10 per cent and 12 per cent of the ANBC or
credit equivalent amount of OBE, whichever is higher,
respectively
Problems of Exporters
Lack of trade credit and other forms of finance, such as
working capital and pre-export financing, has affected growth in
world trade
Priority Sector Banking & Problems of Exporters

Exports
11
Exporters increasingly asked their banks for export credit
insurance (ECI) or asked importers to provide Letters of Credit
(LCs)
Importers were asked to pay for goods before shipment and
exporters sought more liquidity to smooth their cash flow
Further, the realization of export proceeds was not taking place
on the due date. This led firms to trim down inventories, and
direct the funds so generated to meet their working capital
requirements.
Problems of Exporters

Exports
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the main actions taken by Governments can be grouped in two
categories:
(i) to increase banks’liquidity to alleviate liquidity pressure
including for trade finance
(ii) to enhance the long-term competitiveness of the country’s
exports by developing and expanding export promotion
programmes
Actions Taken

Exports
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The limit for the export credit refinance facility [(under
section 17(3A) of the RBI Act], which was raised to 50 per
cent of eligible outstanding rupee export credit, was returned to
the pre-crisis level of 15 per cent
Interest Rate Cap
The ceiling rate on export credit in foreign currency
increased to LIBOR plus 350 basis points
The all-in-cost ceiling for raising trade credit was
revised to 200 basis points over six months of LIBOR
from the then (October 2008) prevailing ceiling of 75
basis points over six months of LIBOR
Actions Taken

Exports
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 Credit Extension: The prescribed interest rate as applicable
to postshipment rupee export credit was extended to overdue
bills up to 180 days
The period of entitlement has been extended by 90
days for the first slab of pre-shipment and postshipment
rupee export credit with effect from November 15, 2008
Foreign exchange (US dollars) has been sold through
agent banks to augment supply in the domestic foreign
exchange market or intervene directly to meet any
demand-supply gaps.
Actions Taken

Exports
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While India has diversified its export basket as well as export
markets, a more systematic approach of diversification of
dynamic products to developed countries and non-dynamic
products to developing countries could pay better dividends
The UAE has displaced the USA as the topmost destination of
India’s exports in 2008-09 and 2009-10 (April-September) with
an export share of 13.1 per cent and 14.4 per cent respectively.
Diversification of Exports

Exports
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Region-wise, over half of India’s exports (55 per cent) in the
first half of 2009-10 were to Asia (including ASEAN), up from
around 40 per cent in 2001-02
Policy for promoting State-wise exports
To encourage exports by States, outlay under the Assistance to
States for Developing Export Infrastructure and Allied
Activities (ASIDE) Scheme has been increased in the Eleventh
Five Year Plan to Rs. 3,793 crore (tentative) as against the
actual release of funds of Rs. 2,050.5 crore in the Tenth
Five Year Plan
Diversification of Exports

Exports
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Interest subvention of 2 per cent from December 1,2008 to
September 30, 2009 to the labour-intensive sectors of exports
such as textiles (including handloom), handicrafts, carpets,
leather, gems and jewellery, marine products and SMEs. This
was further extended to March 2010.
Provision of additional fund of Rs 1,400 crore for the textile
sector to clear the backlog claims of the Technology
Upgradation Fund (TUF). – Should be extended to leather
Industry
Trade policy measures

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Excise duty reduction across the board by 4 per cent for all
products except petroleum products and those products
where the current rate was less than 4 per cent
Extension of the adjustment assistance scheme to provide
enhanced Export Credit Guarantee Corporation (ECGC)
cover at 95 per cent to badly hit sectors up to March 2010

Exports
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Sections 10A and 10B related to sunset clauses for STPI and
EOUs schemes respectively extended for the financial year
2010-11
Anomaly removed in Section 10AA related to taxation benefit
of ‘unit vis-à-vis assessee’
Additional items allowed within the existing duty-free
imports entitlement for some employment-oriented sectors like
sports goods, leather garments, footwear and textile items.
 Diversification of exports to emerging markets of Africa,
Latin America, Oceania and CIS countries under the Focus
Market Scheme and Market Linked Focus Product Scheme

Exports
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Setting up a Directorate of Trade Remedy Measures to
support Indian industry and exporters especially the MSMEs, in
availing of their rights through trade remedy instruments under
the WTO framework
Introduction of EPCG at zero duty for engineering and
electronic products, basic chemicals, pharmaceuticals, apparels
and textiles, plastics, handicrafts, chemicals and allied products
and leather and leather products till March end 2011.

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 Widening the coverage of the ECGC by making available
back up guarantee to the ECGC to the extent of Rs350 crore to
enable it to provide guarantees for exports to difficult
markets/products
Constituting two high-level committees, one chaired by the
Prime Minister and the other by the Cabinet Secretary for
regular monitoring – It should include Industry Representatives
A Committee under the Chairmanship of Finance Secretary
constituted to resolve all problems related to non-availablity
of dollar credit to exporters by the concerned Banks

Exports
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Source: Economic Survey 2010

Exports
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Source: Economic Survey 2010

Exports
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Long Term Financing ( Capital Structure Management)
Short Term Financing ( Working Capital Management)
Financing of Exports

Exports
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Long Term Financing (Capital Structure
Management)
SME Exchange
Guidelines Issued by SEBI
Low Eligibility Norms
It removed the need to comply with the eligibility norms for
initial public offerings and follow-on public offerings as
prescribed by SEBI's (Issue of Capital and Disclosure
Requirements) Regulations, 2009.

Exports
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Removed the requirement of an SME to have a track record to
be listed on the bourse, thereby making it even possible for
start-ups to approach the equity market
The submission of their financial results will also be done on a
half-yearly basis instead of quarterly.
Reduction in the expenses associated with public issues and
the subsequent listing on exchanges.
SME Exchange

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Venture Finance is the investment made by an institution,
company or wealthy individuals in ventures or ideas having
potential of growth.
Eg. TATAs, Infosys, Reliance Industries, Bajaj Industries, Zee
TV, Biocon, VLCC, Kshema Technologies, Airtel, Kinetic
Motors Ltd., Paras Pharma (Actis) in India
&
Intel, Cisco, Microsoft, Oracle, Amazon.com, Hotmail.com,
Yahoo in United States
Exports
Venture Capital and Private Equity

Exports
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Venture
Capitalist/PE
Player
Actis ICICI Ventures Black Stone
Investment $495 mn $201 mn $458 mn
Exits 4
Ceylone Oxygen
Nitrex Chemicals
Paras Pharma
Punjab Tractors
3
Ace Refractories
Arvind Brands
Infomedia India
VA Tech Wabag
0
Buyouts ConJoin
Halonix
Nilgiri Dairy Farm
Sterling Hospital
Metalcastello
Radiant Research
RFCL
Remba Shipyard
CMS Computers
Gokaldas Exports
Intelenet Global
Services
Source: ET, 17th December 2010

29
Exports
Year Venture Venture Finance Provider/ Contributer Country
527 BCNalanda University (527BC to 1197) Kumaragupta India
518 BCTakshashila King Taksha India
350 BC
Chandragupta Mauryan Empire (350-
283 BC) Chankaya (Kautilya) India
1492
Christopher Columbus expedition
(Colonization) Isabella, Queen of Spain Spain
1869Alexandra Cotton Mill Jamsetji TATA India
1906Xerox Haloid Corporation US
1908General Motors DuPont (VF in 1920) US
1915
Banaras Hindu University (Oriental
learning and Theology)
Kashi Naresh and Sri RS Bahadur,
Maharaja of Darbhanga India
1919Yarn and Jute Mill Ramnath Goenka India
1924IBM (Punched Card)
TMC (1896), CSC(1891) and ITRC
(1900) merged US
1926Bajaj motors (Motor Vehicles) Seth Bachhraj India
1938
Eastern Airlines and Douglas Airlines
Laurance Rockerfeller funded Venrock US
1946Amul
Gujarat Co-operative Milk Marketing
Federation Ltd. India
1950
Share cropping farming institution
(Tobacco) Landlords and farmers India
1957Digital Equipment Corp. (now HP)
Georges Doriot, Ralph Flanders and Karl
Compton/ ARDC US
1959
Fairchild Semiconductor (Practical
integrated circuit) Laurance Rockefeller funded Venrock US

30
Exports
Year Venture Venture Finance Provider/ Contributer Country
1959Lijjat Papad Shri Mahila Griha Udyod Lijjat Papad India
1960
Florida Foods Corporation (Nutritional
one minute juice) J.H. Whitney and Company US
1962Reliance Commercial Corp. Dirubhai Ambani India
1968Intel (X86 Microprocessors) Robert Noyce and Gordon Moore US
1977Oracle (Database software) Larry Ellison, Bob Miner and Ed Oates US
1978Microsoft, DOS (Disk Operating System)Bill Gates and Paul Allen US
1978Biocon
Biocon Biochemical Ltd. (Ireland) and
Kiran Mazumdar Shaw India
1981Infosys Sudha Murthy India
1984Cisco (Router) Len Bosack and Sandy Lerner US
1987Business Finance Education in India Indian Institute of Finance India
19873i Group Bank of England UK
1989VLCC Vandana Luthur and family India
1992MASTEK ICICI and UTI promoted TDICI India
1994Amazon.com (Online Book store) Jeffrey P. Bezos US
1994Yahoo (Search Engine) Sequoia Capital US
1996Hotmail (Free Webmail service) Draper Fisher Jurvetson US
1997Anant Koppar (Customised IT Services) Kshema Technologies India

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 Three main forms of Venture Finance
 Informal Venture Finance (William Wetzel, 1993)
- funded by wealthy individuals
 Corporate Venture Finance (McNally, 1994)
- Internal (Spin offs ) and External semi and fully
autonomous firms
 Institutional Venture Finance (Bygrave and Timmons,
1992)
- Professional investors including Pension funds,
insurance companies, captive subsidiaries of large banks
or independent limited partnerships
Review of Literature
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32
India
Foreign Venture Capital Investors Regulations, 2000.
- In this the foreign VC have the freedom to buy and sell the shares of
new companies at any valuation which they deem fit
- Can exit any time provided they are registered investors.
Fiscal Issues
- Service tax
- Income Tax Act
- Dividend Distribution Tax
- Bilateral agreements with Mauritius, Cayman Islands and Singapore
- Infrastructure
Growth of Venture Finance
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 Prisoners Dilemma (Sahlman ,1990; Arthurs and Busenitz,
2003; Zahra, Yavuz and Ucbasaran, 2006; Alvarez and
Barney, 2001)
 Geographical Clustering (Fritsch and Schilder, 2006; Florida
and Kenney, 1998; Florida and Smith, 1991; Mason and
Rogers, 1996)
 Innovation Management (Kortum and Lerner, 2000; Bygrave
and Timmons, 1992)
 Signalling Theory (Prasad, Bruton andVozikis, 2000)
Exports

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 Venture Synergy (Hochberg, Ljungqvist and Lu, 2004; Engel
2004; Nahata, 2004; Kaplan and Stromberg , 2000; Maula,
2005; Lim and Lee, 2006; Zahra, Velde and Larraneta, 2006)
 Bridging Gap between entrepreneurs and Fund providers
(Wetzel, 1983; Stedler and Perters, 2003; Blatt and Riding,
1996; Koppel, 1996; Lumme, Mason and Suomi, 1998;
Kostopulosz , 2004)
 Information Asymmetry (Gompers and Lerner, 2001; Akerlof
, 1970)
 Financial Engineering
Exports

Exports
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HRCB1 = α + P1
+/- DPS + P2
+/- DAS + P3
+/- DSS + P4
+/- DNS
+ P5
+/- DM
Where,
α = Entrepreneur and/ or innovator
DPS = Deal proposing staff
DAS = Deal accepting staff processing both solicited and
unsolicited proposals
DSS = Deal screening staff undertaking technical and
economic feasibility of the venture
DNS = Deal negotiating staff
DM = Deal Makers who may or may not form the
board of the new venture
Pre-Investment Human Resource Capacity building
Model

Exports
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HRCB2 = P6
+/- PDS + P7
+/- MS + P8
+/- RS + P9
+/- OS +
P10
+/- ES + P11
+/- FS + P12
+/- PIMS+ P13
+/- SDMS + P14
+/-
HHS + P15
+/- LSS + P16
+/- CCS + P17s
+/- SLS
Where,
PDS = Product/service development staff
MS = Marketing staff commercialising the new
product/service
RS = Research staff reviewing the product/service (including receptiveness in
the market) and suggesting changes for further development
OS = Operational staff undertaking both order and sales
ES = Evaluation staff (ensuring quality and cost control)
FS = Finance staff (managing the future liquidity requirements of the venture)
PIMS = Post investment monitoring staff of the venture capitalist
SDMS = Strategic decision making staff may serve on the board of the new
ventures
HHS = Head Hunting staff
LS = Legal services staff taking care of patents
CCS = Customer care staff
SLS = Supplier liaison staff
EDS = Exit determining staff of the venture capitalist
Post Investment Human Resource Capacity
building Model

Exports
37
Δ HRCB = 1/1- bH Δ β
Where,
β represents factors except Entrepreneur and
bH is representing marginal propensity to hire
Aggregate effect on the Economy

Exports
38
Employment Market Equilibrium Model
Ф = α + P1,1
+/-β1........ + Pi,k
+/-βk + Єi
Subject to = 1
0 ≤ Pi,k
+/- ≤ 1 i = 1,2, ....., N


N
k
kPi
1
/,

Exports
39
Micro-Economic Perspective of the Human
Resource Augmentation at firm level

Exports
40
Macro-Economic Perspective of the Human
Resource Augmentation Spiral at international level

Exports
41
Enterprise
Innovator/
Entrepreneur
Venture
Capital
Provider
Successful
Venture
Exit Spectrum
Angel Investor
Or
Life Cycle Hypothesis for a Venture Capital
provider and Innovator/Entrepreneur

Exports
42
Short Term Financing ( Working
Capital Management)
There is a mismatch between Buyer and Seller
Goals
Now! Later!

Exports
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Obtain 100% Advance Payment
Letter of credit
Financial Institutions
Factoring
Forfaiting
Financing Options

Exports
44
Procuring raw materials and components, and
manufacturing the product
Refinance facilities so as to get the proceeds of export bills
at the time of negotiation of export benefits are realized
Refinance facilities for long-term credits offered for the
export of products
Financing Requirements after one obtains an
export order will be:

Exports
45
1)Reserve Bank of India
2)Commercial Banks
3)Export Import Bank (EXIM BANK)
4)Export credit and Guarantee corporation (ECGC)
Institutional framework for export finance;

Exports
46
1)As Central Bank of India, lays down policy frame work and
provides guidelines
2)Refinances short and Medium term loans respectively
provided by commercial Banks/Exim bank
3) Rationalization and liberalization of export credit interest rates
4)Flexibility in repayment/prepayment of pre-shipment credit
5)Special financial package for large value exporters
Role of RBI

Exports
47
6)Export finance for agricultural exports
7)Gold Card Scheme for exporters etc
8)Further, banks have been granted freedom by RBI to source
funds from abroad without any limit for exclusively for the
purpose of granting export credit in foreign currency, which has
enabled banks to increase their lendings under export credit in
foreign currency substantially during the last three years.
Role of RBI

Exports
48
Facilities provided –
Non- Fund Based
Letters of credit
Bank Guarantees
Fund based
Pre shipment Finance
Post Shipment Finance
Project Finance
Role of commercial banks

Exports
49
Bid Bond Guarantee
Advance Payment Guarantee
Performance Guarantee
Down Payment Guarantee
Retention Money Guarantee
Maintenance Guarantee
Overseas Borrowing Guarantee
Bank Guarantees

Exports
50
Pre shipment Finance-
Provided to the exporter for purchasing raw materials,
processing them and converting them finished goods.
It is a short term credit against exportable goods
Loans at a concessional rate and for a period of 180 days.
Extendable for 90 days if need be and justified.
Documents required;
1)Export order copy/LC copy/contract copy, in original.
2)Undertaking that loan will be used only for
procuring/manufacturing and will be used for specific export
order
Packing Credit

Exports
51
Advance against drafts
Depending on the exporters standing ,the bank can provide
temporary finance against Draft received from the buyer as
advance and adjust it against the proceeds when credited.
Packing credit in foreign currency(pcfc)
Advance given in Foreign currency at concessional rate-Libor
plus depending on the currency In USD, Pound sterling, Japanese
Yen, Euro etc
Credit Facilities

Exports
52
Post shipment finance
Loan or Advance or any other credit provided
After shipment of Goods to date of realisation of proceeds.
Various types of post shipment finance
Negotiation of Export documents-as per conditions and
stipulations of LC
Purchase/Discount of Foreign Bills-Depends upon the
creditworthiness of Exporter/buyer.-
Advance against Bills sent for collection-Post shipment finance
against bills sent on collection basis in the following cases;
a) When the discount/purchasing limits have been exceeded
b) When export bills drawn under L/C have discrepancies

Exports
53
Advance against Export Incentives
The practice is to obtain a Power of Attorney from the exporter in
the banks favour .It is then sent to the DGFT, Commissioner of
Customs etc
Advance against Retention Money
Advance against money held by the customer
Post shipment credit in Foreign Currency
Credit granted under Rediscounting of Export Bills Abroad
Scheme. The rates are linked to LIBOR. The advance is for 180
days

Exports
54
Established in 1981
LOANS TO INDIAN COMPANIES
Indian exports through direct financial assistance
Overseas investment finance-JVs in which Indian companies
participate
Term finance for export production and export development,
Pre-shipping credit
Relending facility
Export bills rediscounting
Refinance to commercial banks
Exim Bank

Exports
55
Non-funded facility to Indian exporters in the form of
guarantees
The diversified lending programme of the Exim Bank now
covers various stages of exports, i.e., from the development of
export to expansion of production capacity for exports,
Production for exports and postshipment financing
Exim Bank

Exports
56
Lines of Credit : Besides foreign governments, finance is
available to foreign financial institutions and government
agencies to on-lend in the respective country for import of goods
and services from India.
Relending Facility to Banks Overseas : Relending facility is
extended to banks overseas to enable them to provide term
finance to their clients world-wide for imports from India
Exim Bank

Exports
57
Export Bills Rediscounting : Commercial Banks in India who are
authorized to deal in foreign exchange can rediscount their short
term export bills with Exim Banks, for an unexpired usance
period of not more than 90 days
Refinance of Export Credit : Authorized dealers in foreign
exchange can obtain from Exim Bank 100% refinance of deferred
payment loans extended for export of eligible Indian goods
Loans to commercial banks in India – Exim Bank

Exports
58
Guaranteeing of Obligations
Exim Bank participates with commercial banks in India in the
issue of guarantees required by Indian companies
for the export contracts and for execution of overseas
construction and turnkey projects
Exim Bank

Eximbank Programs
 Pre-Shipment
- Working capital guarantee
 Post-Shipment
- Short Term
* Small business insurance policies
* Single sale and portfolio policies
* Buyer policy
* Bank insurance policy
- Medium Term
* Small business policies
* Single sale
* Guarantees
* Loans
* Project finance

Factoring services include coverage of credit risk, collection of
export proceeds, maintenance of accounts receivable etc.
Purchase of receivables of its clients without recourse to the
exporter is the most important service of a Factor
Exports
60
Factoring

Exports
61
Refers to non recourse discounting of export receivables
It converts a credit sale into cash sale for exports
Forfaiting is a transaction based operation
In Forfaiting, the firm sells one of its transactions
An L/C or a guarantee by a bank, usually in importer's
countract
EximBank plays an Intermediary role between exporter and
overseas Forfaiter.
Forfaiting

Exports
62
Factoring
1.Suitable for ongoing open
account sales, not backed by
LC or accepted bills or
exchange
2. Usually provides financing
for short-term credit period of
upto 180 days
Forfaiting
1. Oriented towards single
transactions backed by LC or
bank guarantee
2. Financing is usually for
medium to long-term credit
periods from 180 days upto 7
years though shorterm credit
of 30–180 days is also
available for large
transactions
Difference between factoring and forfaiting

Exports
63
3.Requires a continuous
arrangement between factor
and client, whereby all sales
are routed through the factor
4. Factor assumes responsibility
for collection, helps client to
reduce his own overheads
3. Seller need not route or
commit other business to the
forfaiter. Deals are concluded
transaction-wise
4. Forfaiter’s responsibility
extends to collection of
forfeited debt only. Existing
financing lines remains
unaffected

Exports
64
5. Separate charges are applied
for
— financing
— collection
— administration
— credit protection and
— provision of information.
5. Single discount charges is
applied which depend on
— guaranteeing bank and
country risk,
— credit period involved
and
— currency of debt.
Only additional charges is
commitment fee, if firm
commitment is required prior
to draw down during delivery
period.

65
6. Service is available for
domestic and export
receivables
7. Financing can be with or
without recourse; the credit
protection collection and
administration services may
also be provided without
financing
6. Usually available for export
receivables only denominated
in any freely convertible
currency
7. It is always ‘without
recourse’ and essentially a
financing product

66
8. Usually no restriction on
minimum size of transactions
that can be covered by
factoring .
9. Factor can assist with
completing import formalities
in the buyer’s country and
provide ongoing contract
with buyers
8. Transactions should be of a
minimum value.
9. Only clean documentation in
conformity with all
regulations in the
exporting/importing countries

67
Multiple vs Consortium banking
Multiple banking
A situation when one borrower is banking with many banks
 Different banks provide finance and different banking
facilities to a single borrower without having a common
arrangement and understanding between the lending banks
Consortium financing
 Several banks (or financial institutions) finance a single
borrower with a common appraisal, common documentation,
joint supervision and follow-up exercises


Exports
Indian Institute of Finance68
Buyer (Importer) Perspective
• Open Account
• Documentary Collection
• Letter of Credit
• Cash In Advance
Seller (Exporter) Perspective
• Cash In Advance
• Letter of Credit
• Documentary Collection
• Open Account
Buyer & Seller have Reversed Priorities!
Four Method for Payment

Letters of Credit
An undertaking issued by a bank for the account of the applicant
(buyer) to pay to the beneficiary (seller) the value of the letter
of credit, provided that the terms and conditions evidenced by
documents presented, are complied with
In other words:
- A letter of credit substitutes a bank’s creditworthiness, which
is generally well known or easily ascertainable for that of its
customer, which may not be as well known

Independence Principle
Importer (Buyer)Buyer has an obligation
to the Issuing Bank to
pay upon claim for
payment
Issuing Bank has the obligation to the Exporter to
pay if he has complied with all the terms and
conditions in the L/C
Exporter and Importer
have a sales contract
between them which
supports the underlying
transaction
Issuing Bank Exporter (Seller)
Separate
Contracts
Advising/
Confirming bank

Exports
71
a) Irrevocable LC: Irrevocable LC is one which cannot be
revoked or cancelled without the consent of the beneficiary. This
form of LC is generally used by Importers and Exporters
b)Confirmed LC: is a LC which is confirmed by a third bank,
Sometimes the beneficiary wants the LC of buyers bank to be
confirmed by a bank in his country
c)Transferable LC: In Transferable LC, the buyer can transfer a
part of the value of LC or the full value of LC in favour of one or
more beneficiaries. Transferability should be expressed
specifically in the LC. Since the buyer relies on the integrity of
beneficiary, transferability in favour of someone unknown has
risks.
Types of LCs

Exports
72
d) Back to Back LCs: In back to back LCs, Beneficiary's banks
open several LCs within the value of the mother LC. This is
also known as countervailing LCs. The terms and conditions
of the second LC are exactly the same as that of the first LC.
The second LC may be a Domestic LC. Any change in the
second LC is possible only when the opener of the original LC
agrees to such a change in the mother LC.
e) Red clause LC: In Red clause LC, advance payment is
provided against the supply of certain documents like
drawings and manufacturing schedule as mobilization advance
for manufacture of capital goods whose manufacturing cycle
time is high. The Advance payment details are printed in RED
thereby being called Red clause LC.
.
Types of LCs

Exports
73
f)Green clause LC: In this type of LC ,advance is provided
against goods, which are manufactured and kept in a warehouse
for a buyer against warehouse receipt, before the same is
shipped.
g)Sight LC or DP LC: Sight LC or Document against LC means
that as soon as the Bill of Exchange of seller is presented to the
buyer ,he should make payment for the same. And only then the
documents would be handed over to the buyer. Thus no credit is
given to the buyer.
h)Usance LC OR DA LC: Usance LC or Documents against
Acceptance means that payment can be made after a particular
period from presentation of Bill of Exchange presented to him
.By DA or Usance ,credit is given to the buyer
Types of LCs

Sales Contract
(Issuing Bank) (Advising Bank)
Sight LC Transaction Flow
Buyer (Applicant) Seller (Beneficiary)
2
Application
Indian BANK
4
LC Advised
3
LC Issued
1
Importer
(Buyer)
Issuing Bank
Exporter
(Seller)
Advising/
Confirming bank
U S Bank

Shipment
Buyer pays BEFORE receipt of goods
Sight Collection (D/P)
2
Documents2
Documents3
4
$
4 $4$
Documents
4
Indian BANKU S Bank
Buyer Seller
Buy/Sell
Agreement
1

Shipment
Documents
Payment Claim
Buyer pays
BEFORE receipt
of goods
5
$
Buyer Seller
(Applicant)
Indian BANK
8
7
$
8
6$8
U S Bank
Sight LC Transaction Flow

Buyer pays AFTER receipt of goods
Time Collection (D/A)
Documents2
Documents3
6
$
6 $6$
Documents
5
Indian BANK
Payment at Maturity
5 Acceptance
Buyer Seller
Shipment2
Buy/Sell
Agreement
1
U S Bank

Time LC Transaction Flow
Shipment
Payment Documents
Payment
At
Maturity
5
$
Buyer Seller
(Applicant)
Indian BANK
8
$
8
6$8 Documents
6 Documents
Acceptance7
6U S Bank

Exports
79
Confirmed Letters of Credit
Eliminates issuing bank country and commercial risk
If the issuing bank’s letter of credit is confirmed, the
confirming bank substitutes its own creditworthiness for that of
the issuing bank’s and takes on all duties and responsibilities of
an issuing bank
Must be requested by issuing bank to confirm credit
If the issuing bank is not deemed creditworthy, or if there are
country risk issues a bank may refuse to add confirmation

Financing Options for Exporters
 Banks:
 Letters of Credit
 Documentary Collections
 Other Private Sources:
 Accounts receivable financing
 Factoring
 Forfaiting
 Credit Insurance
 Countertrade
 Government:
 Eximbank
 ECGC

Trade Finance Products
 Export working capital loans
 Loans to provide working capital during production cycle
 Foreign receivable financing
 Loans and financial structures to finance export sales
 Financial Institution Buyer Credit Facilities
 Short-term loans extended to foreign buyers for the
purchase of Indian goods
 Medium term export sales finance
 Term loans up to five years in length to foreign buyers

Exports
83
What does Export Credit Gaurantee Corporation
(ECGC) do?
Provides a range of credit risk insurance covers to exporters
against loss in export of goods and services
Offers guarantees to banks and financial institutions to enable
exporters to obtain better facilities from them
Provides Overseas Investment Insurance to Indian companies
investing in joint ventures abroad in the form of equity or loan

Exports
84
How does ECGC help exporters?
Offers insurance protection to exporters against payment
risks
Provides guidance in export-related activities
Makes available information on different countries with its
own credit ratings
Makes it easy to obtain export finance from banks/financial
institutions
Assists exporters in recovering bad debts
Provides information on credit-worthiness of overseas
buyers

Financing, Insurance & Medium Term Plan for Leather Product Exports

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