The document discusses financing as a marketing tool for exports. It covers various financing options for export orders like letters of credit, advances, and factoring. It also describes the roles of institutions that provide export financing like commercial banks, the Reserve Bank of India, Export-Import Bank of India, and discusses facilities like pre-shipment financing, post-shipment financing, and project financing. Islamic banking methods for export financing using concepts like Musharakah and Murabahah are also summarized.

1. Workshop on Export Management FINANCE AS A MARKETING TOOL Department of Management Studies Sir M.Visvesvaraya Institute of Technology, BY CA N.VENKATAKRISHNAN

2. Workshop on Export Management Topics to be covered WHY FINANCING AS A MARKETING TOOL? FINANCING OPTIONS FOR AN EXPORT ORDER INSTITUTIONAL FRAMEWORK FOR EXPORT FINANCE ROLE OF COMMERCIAL BANKS ROLE OF EXIM BANK ISLAMIC BANKING METHODS FOR EXPORTS CASE STUDY OF HMT-WATCHES –RANIBAG(UP)

3. Workshop on Export Management WHY FINANCING AS A MARKETING TOOL? Finance is the bloodstream of any business Businesses are run to make profits and make money Financing, Financial control, Financial Management, Financial Engineering, Financial Discipline etc are derivatives of FINANCE.

4. Workshop on Export Management Why is Financing a Marketing Tool? Finance and Marketing are Interwoven for success of any organization. Evolution of Finance and Marketing functions. Effective Marketing per-se embraces effective use of Financial resources leading to revenue/profit maximization. Concept of Revenue Management Optimizing revenues through effective Marketing

5. Workshop on Export Management FINANCING OPTIONS FOR AN EXPORT ORDER Obtain 100% Advance Payment Letter of credit Financial Institutions Factoring Forfaiting

6. Workshop on Export Management The areas where finance would be essentially needed, after one obtains an export order will be : 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.

7. Workshop on Export Management INSTITUTIONAL FRAMEWORK FOR EXPORT FINANCE ; 1)Reserve Bank of India. 2)Commercial Banks. 3)Export Import Bank (EXIM BANK). 4)Export credit and Guarantee corporation (ECGC).

8. Workshop on Export Management Role of RESERVE BANK OF INDIA; 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,

9. Workshop on Export Management RBI- 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.

10. Workshop on Export Management ROLE OF COMMERCIAL BANKS; Facilities provided – Non- Fund Based Letters of credit Bank Guarantees Fund based Pre shipment Finance Post Shipment Finance Project Finance Limits are fixed by the banks for these facilities

11. Workshop on Export Management How does LC work Buyer-------seller-----seller issues a Proforma Invoice---- Buyer Goes to his bank (A)—opens LC in favour of sellers Bank (B)---Bank A sends the LC to seller-on receiving the LC seller checks the LC to see whether it is as per terms discussed and agreed-If OK, seller ships the goods as agreed. Seller collects all relevant documents as mentioned in the LC and submits to his bank B---Bank B sends all documents to Bank A who opened the LC.----Bank A checks all documents are as required under the LC and makes payment to bank B who credits it to sellers account. Bank A releases the documents to buyer who takes all the original documents and gets the goods cleared from the Air/sea freight agents.

12. Workshop on Export Management Types of LCs 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.

13. Workshop on Export Management 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. .

14. Workshop on Export Management 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

15. Workshop on Export Management BANK GUARANTEES; Bid Bond Guarantee - Advance Payment Guarantee Performance Guarantee Down Payment Guarantee Retention Money Guarantee Maintenance Guarantee Overseas Borrowing Guarantee

16. Workshop on Export Management PACKING CREDIT; 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 3)Other documents as required by the Bank

17. Workshop on Export Management 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 Risks associated with the currencies are that of exporters. PC FOR DEEMED EXPORT AND CONSULTANCY SERVICES RUNNING ACCOUNT FACILITY- Even without lodgment of LC or Firm order/contract Loan amounts depends on the export order and credit rating of the exporter. Generally will not exceed FOB value or their domestic value whichever is less. Interest rate less than the PLR.

18. Workshop on Export Management 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

19. Workshop on Export Management 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

20. Workshop on Export Management PROJECT FINANCE ; Conditions; 1)Commercial banks who are ADs in foreign exchange can provide in principle clearance for contracts valued up to Rs 25 crores. They can avail refinance from Exim Bank. 2)Exim Bank is empowered to give clearances for contracts of value of above Rs 25 crores up to Rs 100 crores. 3) Above Rs 100 Crores,it would be cleared by a working group from all Institutions. Normally allowed only for export of engineering goods, turnkey projects involving rendering of services like designing, civil construction etc.

21. Workshop on Export Management PROJECT FINANCE (contd) Exports of Engineering goods under Deferred payments-- contracts for export of goods and services against payment to be secured partly or fully BEYOND 180 days. TURNKEY PROJECTS-These projects involve supply of equipment along with related services design, detailed engineering ,civil construction, erection and commissioning. (EPC CONTRACTS) CONSTRUCTION projects---involve civil works, steel structural works as well as equipment supply. Technical and Consultancy service contracts-which include feasibility studies, project reports etc, Front End Engineering Design (FEED services).

22. Workshop on Export Management EXIM BANK- 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.

23. WORKSHOP ON EXPORT MANAGEMENT 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 post- shipment financing. LOANS TO FOREIGN,GOVERNMENTS,COMPANIES, INSTITUTIONS ; Overseas Buyer's Credit : Credit is granted directly/jointly with an authorized dealer, to foreign buyers for import of capital goods and turnkey projects from India, on deferred payment. The buyers have to comply with the terms of export contracts.

24. Workshop on Export Management 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

25. Workshop on Export Management LOANS TO COMMERCIAL BANKS IN INDIA ; 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.

26. Workshop on Export Management 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 FACTORING - 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.

27. Workshop on Export Management FORFAITING -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. Characteristics of a Forfaiting transaction are: Credit is extended by the exporter for period ranging between 180 days to 7 years. Minimum bill size should be US$ 250,000/- (US$ 500,000/- is preferred) The payment should be receivable in any major convertible currency. An L/C or a guarantee by a bank, usually in importer's country. The contract can be for either goods or services. Normally exports of capital goods made on medium to long term credit are eligible to be financed through forfaiting. In India EXIM Bank plays an Intermediary role between exporter and overseas Forfaiter.

28. DIFFERENCE BETWEEN FACTORING AND FORFAITING 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.

29. DIFFERENCE BETWEEN FACTORING AND FORFAITING 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.

30. DIFFERENCE BETWEEN FACTORING AND FORFAITING 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.

31. DIFFERENCE BETWEEN FACTORING AND FORFAITING 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.

32. DIFFERENCE BETWEEN FACTORING AND FORFAITING 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 of USD 250,000. 9. Forfaiting will accept only clean documentation in conformity with all regulations in the exporting/importing countries

33. Workshop on Export Management PROJECT FINANCE(CONTD ) Exim Bank has been closely associated with the growth of project exports from India by way of providing finance, information and business advisory services. The bank supports Indian companies at all stages of the project cycle from advance tender information, guidance in preparation of competitive bids to providing financial facilities, including loans and guarantees . The bank extends funded and non-funded facilities for overseas industrial turnkey projects, civil construction contracts, as well as technical and consultancy service contracts

34. Workshop on Export Management . Exim Bank has in place a specialized cell to provide advance information to Indian companies on projects being funded by multilateral funding agencies in various countries. Lines of Credit (Locs) signed by Exim Bank with a number of countries provide for financing specific projects instead of project exports . Examples include railway line project in Angola, Mozambique and Myanmar; cricket stadium in Guyana, road network in Myanmar, electrification projects in Sudan and Ghana; cement plant in Djibouti; electrification project in Surinam and Azerbaijan .

35. Workshop on Export Management 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 Under consortium financing, several banks (or financial institutions) finance a single borrower with a common appraisal, common documentation, joint supervision and follow-up exercises. The practice of multiple banking has increased tremendously during the last years . This is due to the increasing competition and the bankers desire to grow in a short span of time .

36. Workshop on Export Management Islamic Banking method of Financing Exports- An Islamic bank plays two very important roles in Exports. It acts as a negotiating bank and charge a fee for this purpose, which is allowed in Shariah. Secondly it provides export-financing facility to the exporters and charge interest on this service. These services are of two types Pre shipment financing Pre shipment financing needs can be fulfilled by two methods 1.Musharakah / Mudarabah 2.Murabahah Post shipment financing As interest cannot be charged in any case, experts have proposed certain methods for financing exports.

37. Workshop on Export Management Islamic Banking method of Financing Exports- Musharakah / Mudarabah: The most appropriate method for financing exports is Musharakah or Mudarbah. Bank and exporter can make an agreement of Mudarabah (zero % margin) provided that the exporter is not investing; other wise Musharakah agreement (with margin) can be made. Agreement in such case will be easy, as cost and expected profit is known. The exporter will manufacture or purchase goods and the profit obtained by exporting it will be distributed between the bank and the exporter according to the agreed ratio .

38. Workshop on Export Management Islamic Banking method of Financing Exports- Murabahah Murabahah is being used in many Islamic Banks for export financing. Banks purchases goods that are to be exported at price that is less than the price agreed between the exporter and the importer. It then exports goods at the original price and thus earns profit. Murabahah financing requires bank and exporter to sign at least two agreements separately, one for the purchase of goods and the other for appointing the exporter as the agent of the bank (that is agency agreement). Once these two agreements are signed, the exporter can negotiate and finalize all the terms and conditions with the importer on behalf of the bank

39. Workshop on Export Management Islamic Banking method of Financing Exports- Post shipment financing- Post shipment finance is similar to the discounting of the bill of exchange The exporter with the bill of exchange can appoint the bank as his agent to collect receivable on his behalf. The bank can charge a fee for this service and can provide interest free loan to the exporter, which is equal to the amount of the bill, and the exporter will give his consent to the bank that it can keep the amount received from the bill as a payment of the loan. Here two processes are separated, and thus two agreements will be made. One will authorize the bank to collect the loan on his behalf as an agent, for which he will charge a particular fee. The second agreement will provide interest free loan to the exporter, and authorize the bank for keeping the amount received through bill as a payment for loan. These agreements are allowed according to Shariah because collecting fee for service and giving interest free loan is permissible

40. Workshop on Export Management CASE STUDY-HMT RANIBAG PROJECT 1985-With the success of Tumkur plant for manufacture of Mechanical watches 2mlln per annum, the then Min of Heavy Industries Mr N D Tiwari, wanted a similar plant in his home state UP to produce components to be assembled at satellite Assembly units No proper Commercial and economic feasibility was done, the Bureaucrats simply agreed for the project and Govt approved it. Approx Rs 60 Cr was needed in FE. SBI Tokyo agreed to finance at 1 or 2% interest rate. Exchange rate was 1 yen= 15 paise approx. Repayment was 3 years moratorium and 10 yearly installments. Mechanical watches went out of vogue. Electronics watches took over. Tumkur plant was converted into Quartz unit. Ranibag unit was retained to produce Mechanical watches to cater to rural areas, where it was assumed will take considerable time to go in for quartz.

41. Workshop on Export Management Every thing went wrong. Ranibag unit stated losing. During 90s Liberalization, Privatization and Globalization (LPG) led to starting of industries like Titan, who started outsourcing. Outsourced components brought down the cost of production and the competition became fierce. Profits dwindled. Installment- repayments got postponed . Meanwhile yen strengthened and touched to 40 paise., In about 10-12 years time 300 yen/Dollar became 80 yen/Dollar . Loan principal more than got doubled plus interest on that had to be paid. Ranibag was a mill stone around neck for HMT Watches. Finally Gov gave some money in the Rs 850 Cr rehabilitation package. A mile- stone project became a mill-stone Project.

42. Workshop on Export Management (US $ Million) *Figures for 2007-08 are the latest revised whereas figures for 2008-09 are provisional. -119055 -4045 2008-2009 -88522 -6320 2007-2008 TRADE BALANCE 14.3 -34.0 %Growth 2008-2009/ 2007-2008 287759 15561 2008-2009 251654 23574 2007-2008 IMPORTS 3.4 -33.3 %Growth 2008-2009/ 2007-2008 168704 11516 2008-2009 163132 17254 2007-2008 EXPORTS (including re-exports) APRIL-March March EXPORTS & IMPORTS : (PROVISIONAL) in USD MILLIONS DEPARTMENT OF COMMERCE ECONOMIC DIVISION

43. Workshop on Export Management -538568 -20720 2008-2009 -356449 -25504 2007-2008 TRADE BALANCE 29.0 -16.2 %Growth 2008-2009/ 2007-2008 1305503 79717 79717 1012312 95134 2007-2008 IMPORTS 16.9 -15.3 %Growth 2008-2009/ 2007-2008 766935 58997 2008-2009 655863 69630 2007-2008 EXPORTS (including re-exports) APRIL-March March EXPORTS & IMPORTS : (PROVISIONAL) RS CRORES DEPARTMENT OF COMMERCE ECONOMIC DIVISION

44. Workshop on Export Management I define Globalization as “ S ourcing capital where it is cheapest sourcing Talent from where it is best available producing where it is most cost-effective and selling where the Markets are without being constrained by national boundaries ” Mr N.R. NARAYANAMURTHY Founder-Infosys

45. Thank you N.VENKATAKRISHNAN