Index

Sr noTopicsPg no.

1.Executive Summary2

2.Objectives of Study4

3.Introduction5

4.Exim policy8

5.FEDAI12

6.FEMA13

7.Letter of Credit15

8.Bank guarantee17

9.Types of Export Finance20

10.Payment methods in export import trade33

11.Trade documents37

12.Various risk in export trade39

13.Forfeiting42

14.Factoring45

15.Gold card scheme for exporters47

16.Deemed export49

17.Export credit guarantee schemes51

18.Compilation & Submission of reports to RBI53

19.Export credit refinance by RBI55

20.Conclusion57

21.Bibliography61

EXECUTIVE SUMMARY

Exports are engines of growth. Therefore adequate credit must be given to exporters to enable them to supply the goods. The working capital finance, allowed to an exporter for short term is called Export finance. Commercial banks are required to achieve a target of allocation at least 12% of their total net bank credit as export finance as well as ensure timely flow to exporters. The exporters are also eligible for concessive rate of interest.

Export finance by banks essentially consists of pre shipment and post shipment finance. Pre shipment finance/ Packing credit is the loan granted by banks for producing and processing the goods prior to shipment. It can be availed in rupees or in foreign currency

Post shipment credit is the advance given against receivables and can be made in rupees or in foreign currency. Both Pre shipment and Post shipment credit is available for a period of 180 days. RBI (Reserve Bank Of India) has set a ceiling on the interest rates that banks may charge which is, not more than BPLR(Banks Prime Lending Rate) minus 2.5 percentage points in case of rupee finance and not exceeding 1% over LIBOR(London Inter Bank Offer Rate) in case of foreign currency finance. Further, as per directives of RBI, some exporters, with good track record are termed as Gold Card holders who become eligible for better service and interest rates.

Since there exists a risk of non-payment by the importer, ECGC (Export Credit Guarantee Corporation of India Limited) offers various schemes to exporters as well as banks. To cover such risks and reduce the risk of bad debts, in exchange for premium.

In order to monitor export credit, RBI requires commercial banks to compulsorily submit repots, some which include R Returns, XOS statement and report on Export Credit Data (Disbursement/Outstanding). Based on these reports, the outstanding export credit for refinance is also worked out. Banks can avail refinance from RBI against export credit outstanding, at repo rates.

A Working committee was setup on 2005 by RBI under Mr Anand Sinha to review export credit. This committee has reported a significant increase in export credit in foreign currency. Thus, several initiatives have been taken by the RBI and the Central Government which has contributed to an impressive increase in our exports. However, certain credit related problems of SMEs (Small and Medium scale Enterprise), including providing them with good treatment in terms of service and interest rates should be addressed by commercial banks, to help boost Indias exports which in turn will help to increase forex reserves and result in the growth of the economy.

OBJECTIVES OF STUDY To get a clear idea of what Export Finance is all about. To understand the meaning & importance of export & import in India To study the types of export finance To understand various risk in export finance To study Export Import Policy in India

RESEARCH METHODOLOGY

The research methodology used is secondary data which includes data collected from various books, magazines, newspapers, online available case studies and websites.

INTRODUCTION

Exports play an important role in accelerating the economic growth of developing countries like India. Therefore several initiatives have been taken by the RBI (Reserve Bank of India) and the Central Government which have contributed to the impressive increase in our exports. From the several factors influencing export growth, credit is a very important factor which enables exporters in efficiently executing their export orders. Indias exports have been increasing significantly over the years.

Export Credit Working Group

In 1998, Shri Y. V. Reddy, governor, RBI desired that a Working Group consisting of Department of Banking Operations, Development and Monetary Policy Department of RBI, banks and export organizations to suggest measures of improving services to exporters to make available export credit in Rupees and foreign currency. The Group interacted with Bank officials in Export Centers especially where small and medium size exporters are located.

The important suggestions made by the committee were, that, Banks should meet the genuine credit requirement of exporters promptly, preferable within 45 days from date of receipt of application if found feasible and that banks can adopt a flexible attitude towards debt-equity ratio, margin and security norms, but no compromise is expected by the banks in terms of validity of the proposal and integrity of the borrower.

Importance of Exports for a business unit

The factors that motivate a firm to go international may be classified as :

a) Pull Factors :- Pull factors are proactive reasons, which motivate firms to internationalize. For example, profit advantage, greater market share and spreading risks.

b) Push Factors :- Push factors are reactive reasons, which make it compulsory for domestic firms to internationalize. For example, government rules and regulations and declining business in domestic market.

Let us analyze some of these factors in detail :-

Profit advantage : An important incentive for international business is profit advantage. Although, international business is less profitable due to high competition it certainly increases the overall profitability due to optimum utilization of resources and economies of scale.

Goodwill And Reputation : An organization operating globally acquires reputation and prestige in the domestic market and is recognized as an Export Oriented Unit (EOU). Such units get a special package of incentives from the government.

Spreading Risks : Trade cycles are global phenomenon. A domestic firm can spread its risks to different markets by exporting goods to different countries of the world. Thus, a depression in one market can be set off by prosperity in some other markets.

Financial Benefits and Incentives : The Government of India gives various incentives to exporters such as Duty Drawback (DBK), exemption from excise, octroi duty etc. In order to avail the benefits of such incentives, local firms may be motivated to internationalize.

Optimum Utilization of Installed Capacity : If a firm's installed capacity remains unutilized or underutilized for want of demand in the domestic market, it can be utilized by exporting surplus production. This makes firm more competitive by bringing in economies of scale.

Government Policies and Regulations : Sometimes, government policies and regulations also make it compulsory for firms to internationalize. Excessive government control and discouraging industrial policy for a specific sector may compel domestic firms to internationalize.

EXIM POLICY

Export Import (EXIM) Policy Benefits for Export Business

Introduction

Export Import Policy or better known as EXIM Policy is a set of guidelines and instructions related to the import and export of goods. The Government of India notifies the EXIM Policy for a period of five years (2009 - 2014) under Section 5 of the Foreign Trade (Development and Regulation Act), 1992. The current policy covers the period 2009 to 2014. The Export Import Policy is updated every year on the 31st of March and the modifications, improvements and new schemes becomes effective from 1st April of every year. All types of changes or modifications related to the EXIM Policy is normally announced by the Union Minister of Commerce and Industry who coordinates with the Ministry of Finance, the Directorate General of Foreign Trade and its network of regional offices.

Highlight of EXIM Policy 2009 14Support for Technological up-gradation: Zero duty EPCG scheme, introduced in August 2009 and valid for only two years upto 31.3.2011, has been extended by one more year till 31.3.2012. In addition, to give a boost to technological up-gradation for additional sectors as well, the benefit of the scheme has been expanded to cover paper & paperboard and articles thereof, ceramic products, refractories, glass & glassware, rubber & articles thereof, Plywood and allied products, marine products, sports goods and toys and additional engineering products.

Benefit and flexibility to Status Holders: Status Holders contribute to a substantial part of our exports. To support them to upgrade their technology, 1% Status Holder Incentive Scheme (SHIS) introduced in August 2009 and valid for only two years upto 31.3.2011, has been extended by one more year for 2011-12 exports. In addition, to give a boost to technological up-gradation for additional sectors as well, the benefit of the scheme has been expanded to cover chemical & Allied products, paper, paperboard and articles thereof, ceramic products, refractories, glass & glassware, rubber & articles thereof, plywood and allied products, electronics products,sports goods and toys and additional engineering products.Leather Sector: Leather sector shall be allowed re-export of unsold imported raw hides and skins and semi-finished leather from Public bonded warehouses, without payment of any export duty. This will facilitate the logistics for establishment of such warehouses and easy access to raw material for the leather sector. Handloom sector: Duty free import of specified trimmings, embellishments etc.shall be available on Handloom made-ups exports @ 5% of FOB value of exports.Textiles sector: Duty free import of specified trimmings, embellishment etc shall be available @ 3% on exports of polyester made-ups in line with the facility available to sectors like Textiles & Leather. It will promote export of products such as micro cloth, which has become popular in home textiles. Gems & Jewellery sector: The list of items allowed for duty free import by Gems & Jewellery sector has been expanded by Inclusion of additional items such as Tags and labels, Security censor on card, Staple wire, Poly bag. This will reduce the cost of the product to some extent. Handicraft Sector: The facility of duty free import of tools under Duty Free Import scrips for Handicraft sector shall be made operational. Service sector: Scrips issued under Served From India Scheme (SFIS) can now be used for payment of duty on import of Vehicles, which are in the nature of professional equipment.Agriculture and Plantation: Oil Meals (Cotton, rape seed, groundnut), Castor Oil derivatives, Packed Coconut Water and Coconut Shell worked items shall be entitled for benefits @ 2% of FOB value of exports to all markets under FPS.Engineering and Electronics: Additional 2% bonus benefits over and above the existingbenefits under Focus Product Scheme will significantly benefit Bicycle parts and Grinding Media Balls exporters. A number of Engineering items namely, Machine Tools, Compressors, Iron & Steel Structures including Transmission Towers and Scaffolding, LPG Cylinders, Ductile Tubes & Pipes shall now be entitled for benefits @ 2% of FOB value of exports to all markets under FPS instead of their exports to specific markets under MLFPS earlier. Telecom Equipments, Colour TVs, Audio Systems, Optical Media, Semi-conductors, Capacitors, Resistors, PCBs, LEDs, Conductors, Desktops and Notebooks shall now be entitled for benefits @ 2% of FOB value of exports to all markets under FPS instead of their exports to limited market under MLFPS earlier.Toys and Sports goods: Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme will significantly benefit the Toys and Sports Goods Sector. Benefits under Zero duty EPCG and SHIS schemes will significantly promote technological upgradation of Toys and Sports Goods sectors.

FEDAI Guidelines for Foreign Exchange

Established in 1958, FEDAI (Foreign Exchange Dealers' Association of India) is a group of banks that deals in foreign exchange in India as a self-regulatory body under the Section 25 of the Indian Company Act (1956).

The role and responsibilities of FEDAI are as follows:

Formulations of FEDAI guidelines and FEDAI rules for Forex business.

Training of bank personnel in the areas of Foreign Exchange Business. Accreditation of Forex Brokers.

Advising/Assisting member banks in settling issues/matters in their dealings. Represent member banks on Government/Reserve Bank of India and other bodies. Rules of FEDAI also include announcement of daily and periodical rates to its member banks.

FEDAI guidelines play an important role in the functioning of the markets and work in close coordination with Reserve Bank of India (RBI), other organizations like Fixed Income Money Market and Derivatives Association (FIMMDA), the Forex Association of India and various other market participants.

Foreign Exchange Management Act (FEMA) for Export Import Foreign Exchange.

Introduction

Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organisation (WTO). Foreign Exchange Management Act was earlier known as FERA (Foreign Exchange Regulation Act), which has been found to be unsuccessful with the proliberalization policies of the Government of India.

FEMA is applicable in all over India and even branches, offices and agencies located outside India, if it belongs to a person who is a resident of India.

Some Highlights of FEMA

It prohibits foreign exchange dealing undertaken other than an authorised person;

It also makes it clear that if any person residing in India, received any Forex payment (without there being a corresponding inward remittance from abroad) the concerned person shall be deemed to have received they payment from a non-authorized person.

There are 7 types of current account transactions, which are totally prohibited, and therefore no transaction can be undertaken relating to them. These include transaction relating to lotteries, football pools, banned magazines and a few others.

FEMA and the related rules give full freedom to Resident of India (ROI) to hold or own or transfer any foreign security or immovable property situated outside India.

Similar freedom is also given to a resident who inherits such security or immovable property from an ROI.

An ROI is permitted to hold shares, securities and properties acquired by him while he was a Resident or inherited such properties from a Resident.

The exchange drawn can also be used for purpose other than for which it is drawn provided drawl of exchange is otherwise permitted for such purpose.

Certain prescribed limits have been substantially enhanced. For instance, residence now going abroad for business purpose or for participating in conferences seminars will not need the RBI's permission to avail foreign exchange up to US$. 25,000 per trip irrespective of the period of stay, basic travel quota has been increased from the existing US$ 3,000 to US$ 5,000 per calendar year.

LETTER OF CREDIT

Introduction

Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provides the necessary instructions in preparing the document.

Parties to Letters of Credit

Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or customer of the goods, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his instructions.

Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker

Beneficiary: Beneficiary is normally stands for a seller of the goods, who has to receive payment from the applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of stipulated document and comply with the term and conditions of the L/c.

Advising Bank: An Advising Bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank and is normally located in the country of the beneficiary.

Confirming Bank: Confirming bank adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment/negotiation acceptance under the credit, in additional to that of the issuing bank. Confirming bank play an important role where the exporter is not satisfied with the undertaking of only the issuing bank.

Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents submitted to them by the beneficiary under the credit either advised through them or restricted to them for negotiation.

Bank Guarantee

Introduction

A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.

In case of any changes or cancellation during the transaction process, a bank guarantee remains valid until the customer dully releases the bank from its liability.

Benefits of Bank Guarantees

For Government

1) Increases the rate of private financing for key sectors such as infrastructure.

2) Provides access to capital markets as well as commercial banks.

3) Reduces cost of private financing to affordable levels.

4) Facilitates privatizations and public private partnerships.

5) Reduces government risk exposure by passing commercial risk to the private sector.

For Private Sector

1) Reduces risk of private transactions in emerging countries.

2) Mitigates risks that the private sector does not control.

3) Opens new markets.

4) Improves project sustainability.

Legal Requirements

Bank guarantee is issued by the authorised dealers under their obligated authorities notified vide FEMA 8/ 2000 dt 3rd May 2000. Only in case of revocation of guarantee involving US $ 5000 or more need to be reported to Reserve Bank of India (RBI).

Types of Bank Guarantees

1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or indirect.

a) Direct Bank Guarantee: It is issued by the applicant's bank (issuing bank) directly to the guarantee's beneficiary without concerning a correspondent bank. This type of guarantee is less expensive and is also subject to the law of the country in which the guarantee is issued unless otherwise it is mentioned in the guarantee documents.

b) Indirect Bank Guarantee : With an indirect guarantee, a second bank is involved, which is basically a representative of the issuing bank in the country to which beneficiary belongs. This involvement of a second bank is done on the demand of the beneficiary. This type of bank guarantee is more time consuming and expensive too.

2. Confirmed Guarantee

It is cross between direct and indirect types of bank guarantee. This type of bank guarantee is issued directly by a bank after which it is send to a foreign bank for confirmations. The foreign banks confirm the original documents and thereby assume the responsibility.

3. Performance Bonds

This is one of the most common types of bank guarantee which is used to secure the completion of the contractual responsibilities of delivery of goods and act as security of penalty payment by the Supplier in case of non-delivery of goods.

How to Apply for Bank Guarantee

Procedure for Bank Guarantees are very simple and are not governed by any particular legal regulations. However, to obtained the bank guarantee one need to have a current account in the bank. Guarantees can be issued by a bank through its authorised dealers as per notifications mentioned in the FEMA 8/2000 date 3rd May 2000. Only in case of revocation of guarantee involving US $ 5000/ or more to be reported to Reserve Bank of India along with the details of the claim received.

Bank Guarantees vs. Letters of Credit

A bank guarantee is frequently confused with letter of credit (LC), which is similar in many ways but not the same thing. The basic difference between the two is that of the parties involved. In a bank guarantee, three parties are involved; the bank, the person to whom the guarantee is given and the person on whose behalf the bank is giving guarantee. In case of a letter of credit, there are normally four parties involved; issuing bank, advising bank, the applicant (importer) and the beneficiary (exporter).

Also, as a bank guarantee only becomes active when the customer fails to pay the necessary amount whereas in case of letters of credit, the issuing bank does not wait for the buyer to default, and for the seller to invoke the undertaking.

Types of Export Finance

A. Pre shipment Finance

Meaning Of Pre-shipment Finance

Pre-shipment finance refers to the credit extended to the exporters prior to the shipment of goods for the execution of the export order. It is also known as ' Packing Credit '. It refers to any loan to an exporter for financing the purchase, processing, manufacturing or packing of goods as defined by the Reserve Bank Of India. Exporters can get pre-shipment credit from : (a) The Indian commercial banks(b) The branches of foreign commercial banks in India.

Features Of Pre-shipment Finance

The features of Pre-shipment finance are as under :

(a) Eligibility : It is available to all categories of exporters, such as

Merchant exporters; Manufacturer exporters; Export houses; (b) Documentary Evidence : The following documents are required to be submitted by the direct exporter for availing pre-shipment finance :-

A confirmed export order and /or; An irrevocable letter of credit opened in the favour of the exporter.Indirect exporters are also eligible for the packing credit on the production of the following documents :a) A letter from the concerned export house/trading house certifying the portion of export order allotted in their favor; andb) An undertaking from the concerned export house/trading house stating that they do not wish to obtain packing credit facility against the same transaction for the same purpose.

(c) Purpose: Packing credit is granted for specific purposes such as purchase, processing, manufacturing or packing of goods as defined by the Reserve Bank of India.

(d) Form of Finance: Packing credit is extended in different forms:

Extended Packing Credit Loan; Packing Credit Loan (Hypothecation); Packing Credit Loan (Pledge); Secured Shipping Loan.

(e) Amount of Finance: It is based on:

The amount of export order; The credit rating of the exporter done by the bank and; The exporters receivable's on account of incentives like International Price Reimbursement Scheme (IPRS), duty drawback (DBK), etc.

(f) Period of Credit: The Packing credit can be granted for a maximum period of 180 days from the date of disbursement. However, it can be further extended for a period of 90 days with a prior permission of the RBI.

(g) Rate of Interest: The Interest payable on pre-shipment finance is usually lower than the normal rate, provided the credit is liquidated from the export proceeds received from abroad within the period specified.

(h) Loan Agreement and Disbursement of the Loan: Before the disbursement of loan, the bank requires the exporter to execute a formal loan agreement. Though, the entire amount of packing credit is sanctioned at one time, it is generally released in installments.

(i) Monitoring the Use of Loan: Packing credit should be used strictly for the purposes for which it is granted. Hence, the lending bank monitors the use of finance by the exporter. Any default on the part of exporter is charged with a higher rate of interest.

(j) Repayment of Loan: The exporter should repay the amount of packing credit out of the export proceeds within the specified period. The use of local funds is not permitted for the repayment of packing credit.

Importance of Pre-shipment Finance

Pre-shipment finance is generally granted for the following purposes:

(a) To acquire raw materials, components, machinery, equipments and technology required for export production.(b) To improve quality of the goods so as to conform to international standards.(c) To conform to international packing and packaging standards, labelling and marking, etc.(d) To store the goods in warehouses before shipment.(e) To pay for internal transportation and marine freight.(f) To fulfill customs formality, excise clearance and pre-shipment inspection.(g) To pay for export documentation.Procedure for Obtaining Pre-shipment Finance

The following is the procedure for obtaining pre-shipment finance:(a) Submission of Application: The exporter is required to make an application in a specific format, as provided by the bank, for availing packing credit. The application should be accompanied by the relevant documents as specified in the application form.

(b) Processing of the application: On receiving the application, the bank scrutinizes the application and necessary documents. If the bank is satisfied regarding the documentary evidence submitted and credit-worthiness of the exporter, it goes ahead with the sanctioning of loan.

(c) Sanctioning of Loan: Generally the amount of packing credit does not exceed the FOB value of the goods to be exported or their domestic value whichever is less.

(d) Loan Agreement and Disbursement of the Loan: Before the disbursement of loan, the bank requires the exporter to execute a formal loan agreement. Though, the entire amount of packing credit is sanctioned at one time, it is generally released in installments.

(e) Monitoring the use of Loan: Packing credit should be used strictly for the purpose of which it is granted. Hence, the lending bank monitors the use of finance by the exporter. Any default on the part of exporter is charged with a higher rate of interest.

(f) Repayment of Loan: The exporter should repay the loan out of the export proceeds within the specified period. The use of local funds is not permitted for the repayment of packing credit. Methods/Types of Pre-shipment Finance

The various types are:

(a) Extended packing credit loan: It is extended to those exporters who are rated as first class exporters by the commercial banks on the basis of their credit worthiness. It is granted for making advance payment to the suppliers for acquiring goods to be exported. Such advance is generally clean, i.e. granted without any documentary evidence for a very short period of time.

(b) Packing Credit Loan (Hypothecation): It is extended for the acquisition of raw materials, work-in-process or finished goods meant for exports. The goods so acquired are treated as security for sanctioning of loan. Under this facility, the exporter is required to execute a hypothecation deed in favour of the bank, while the possession of goods remains with the exporter.

(c) Packing Credit Loan (Pledge): It is extended for the acquisition of seasonal raw materials or raw materials in odd or bunched lots. The export takes place in due course after processing as per the shipping and delivery schedule agreed upon by the overseas buyer. The documents relating to raw materials are pledged with the bank while the possession remains with the exporter.

(d) Secured Shipping Loan: It can be obtained once the goods are handed over to the transport operator or clearing and forwarding agent for the shipment. It is released against lorry receipt or railway receipt. It is extended for a very short duration considering the time taken for dispatch of goods to the port and completion of shipping and customs formalities.

(e) Pre-shipment Credit in Foreign Currency (PCFC): EXIM bank has introduced a scheme for Indian exporters to enable them to avail pre-shipment credit in foreign currencies to finance the cost of imported inputs for manufacture of export products. The credit period for an advance under PCFC cannot exceed 180 days.

(f) Advance against export incentive: Generally pre-shipment advance is not granted against export incentives. However, under certain circumstances such as when the value of materials required exceeds the FOB value of the goods to be exported, such advances are granted at pre-shipment stage.

B. Post- Shipment Finance Meaning of Post-shipment Finance

Post-shipment finance (short term) refers to the credit extended to the exporters after the shipment of goods for meeting working capital requirement. It is given by the commercial banks after the shipment of goods and submission of commercial documents to them for negotiation or collection.

Post-shipment credit (medium and long-term) is given for exports on deferred payment terms for the period of over one year.

Features of Post-shipment Finance

The features of Post-shipment finance are as under:

(a) Eligibility : It is available to all types of exporters such as :

Merchant exporters; Manufacturer exporters; Export houses;

(b) Documentary Evidence : The following documents are required to be submitted by the direct exporter and exporter of capital goods for availing post-shipment finance :

Shipping documents indicating the fact that the goods have been actually shipped for the export purpose. Necessary documents substantiating the facility under which the credit has been availed.

Even indirect exporters are eligible for post-shipment finance on the production of the following documents :

a) A letter from the concerned export house/trading house certifying that the goods supplied by the deemed exporter have actually been shipped for export purpose.b) An undertaking from the concerned export house/trading house stating that they do not wish to obtain post-shipment facility against the same transaction for the same purpose till the original post-shipment finance is liquidated.

(c) Purpose: Post-shipment finance (short-term) is extended to the exporter after the shipment of goods for meeting working capital requirement. Post-shipment credit (medium or long term) is given for exports on deferred payment terms for a period of over one year.

(d) Forms of Finance : It is extended in different forms :

Discounting of Export bills; Advance against bills sent on collection; Advance against goods sent on consignment basis; Advance against undrawn balances; Advance against retention money etc.

(e) Amount of Finance: Post-shipment finance can be given to the extent of 100% of the invoice value of the goods exported.

Loans up to Rs 10 crores are sanctioned by the commercial bank, which can be refinanced from the EXIM Bank. Loans above Rs 10 crores but up to Rs 50 crores are sanctioned by the EXIM bank. Loans above Rs 50 crores need clearance from the Working Group on Export Finance, consisting of the representatives of the EXIM Bank, the RBI, the ECGC and the exporter's bankers. If the contract is very large, representatives from the Ministries of Commerce and Finance are also included in the Working Group.

(f) Period of Finance: Post-shipment finance can be availed for short-term, medium-term and long-term.

Short-term finance is extended by the commercial banks usually for a period of 90 days Medium-term loan is extended by the commercial banks together with EXIM Bank for a period of 90 days to 5 years. Long-term finance is extended by the EXIM Bank for the export of capital goods and turnkey projects for a period of 5 years to 12 years.

(g) Rate of Interest : The interest payable on post-shipment finance (short term) is usually lower than the normal rate, provided the credit is liquidated from export proceeds received from abroad within the period specified. For medium-term and long-term loans, the interest rates are applicable as per the directives issued by the RBI from time to time.

(h) Loan Agreement and Disbursement of loan : Before the disbursement of loan, bank requires the exporter to execute a formal loan agreement. Though, the entire amount of post-shipment finance is sanctioned at one time, it is generally released in installments.

(i) Monitoring the use of Loan : Post-shipment finance should be used strictly for the purposes for which it is granted. Hence, the lending bank monitors the use of finance by the exporter. Any default on the part of exporter is charged with a higher rate of interest.

(j) Repayment of Loan : Post-shipment finance is generally adjusted towards the incentives given by the government or against the export proceeds received by the bank. The use of local funds is not permitted for the repayment of post-shipment finance.

Procedure for Obtaining Post-shipment finance

The following is the procedure for obtaining post-shipment finance

(a) Submission of Application: The exporter is required to make an application in a specific format, as provided by the bank, for availing post-shipment finance. The application should be accompanied by the relevant documents as specified in the application.

(b) Processing of the Application: On receiving the application, the bank scrutinizes the application and necessary documents.

(c) Sanctioning of Loan: The bank sanctions the post-shipment finance for short-term, medium-term or long-term taking into consideration the requirements of the exporter.

(d) Loan Agreement and disbursement of Loan: Before the disbursement of Loan, the bank requires the exporter to execute a formal loan agreement. Though, the entire amount of post-shipment finance or sanctioned at one time, it is generally released in installments.

(e) Maintenance of Accounts: As per the RBI directives, the banks are required to maintain a separate account in respect of each post-shipment finance. However, running accounts are permitted in case of exporters situated in FTZs, EPZs and 100% EOUs.

(f) Monitoring the use of Loan: Post-shipment finance should be used strictly for the purposes for which it is granted. Hence, the lending bank monitors the use of finance by the exporter. Any default on the part of exporter is charged with a higher rate of interest.

(g) Repayment of Loan: Post-shipment finance is generally adjusted towards the incentives given by the government or against the export proceeds received by the bank. The use of local funds is not permitted for the repayment of post-shipment finance.

Importance of Post-shipment Finance

It is generally granted for the following purposes :

a) To provide working capital so as to fill up the gap between the shipment of goods and the realisation of sales proceeds.b) To pay insurance charges for insuring goods against perils of sea.c) To pay ECGC premium for insuring commercial and political risks.d) To pay commission and brokerage to oversea's agents and distributors.e) To undertake export promotion activities and advertising.f) To pay customs duties, port charges and export duty, if any.g) To pay marine freight and other shipping charges.h) To pay for participation in international trade fairs and exhibitions.

Methods/types of Post-shipment Finance

The various types of post-shipment finance are :-

(a) Export Bills negotiated under L/C : If the exporter has obtained documentary letter of credit and has submitted the required documents, as mentioned in the L/C, to the bank, the bank negotiates them and sanctions the equivalent amount of post-shipment finance to the exporter. The post-shipment finance is released after liquidating the pre-shipment finance availed by the exporter.

(b) Purchase/Discounting of Export Bills : If export bills are not covered under letter of credit (L/C), the bank may extend post-shipment finance by either purchasing or discounting the export bills. But before extending such finance, the bank ensures that the exporter has complied with the terms of the export. Such advances are generally insured by an appropriate policy of the ECGC.

(c) Advance against Bills sent for collection.

(d) Advance against goods sent on consignment.

(e) Advance against Incentives : The Government of India extends certain incentives to the exporters such as Duty Drawback (DBK), International Price Reimbursement Scheme (IPRS), etc. Such incentives are realized only after the shipment of goods and receipt of the export proceeds. Banks offer pre-shipment as well as post-shipment finance against such incentives.

(f) Advance against Undrawn balances : In certain lines of exports, exporters do not draw bills for the full invoice value of goods but leave a small part undrawn for adjustments on account of differences in rates, weight, quality, etc. Such differences can be adjusted only on the approval of the goods. Banks offer post-shipment finance against such undrawn balances.(g) Advance against Retention money : In case of exports of capital goods or construction contracts, the importer retains a part of the contract price towards guarantee of performance or completion of the project. This unpaid part is known as retention money. Banks offer post-shipment finance against such retention money for a period of 90 days.

(h) Advance against Deferred Payments : In case of exports of capital goods or construction contracts, the exporter recieves a certain portion of the contract price as advance or down payment while the balance is received in installments over a period of time. Banks together with the EXIM Bank offer post-shipment finance against deferred payment at a concessional rate of interest.

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Payment Methods in Export Import Trade

There are 3 standard ways of payment methods in the export import trade international trade market:

Clean Payment Collection of Bills Letters of Credit L/c

1. Clean Payments

In clean payment method, all shipping documents, including title documents are handled directly between the trading partners. The role of banks is limited to clearing amounts as required. Clean payment method offers a relatively cheap and uncomplicated method of payment for both importers and exporters.

There are basically two type of clean payments:

a) Advance Payment

In advance payment method the exporter is trusted to ship the goods after receiving payment from the importer.

b) Open Account

In open account method the importer is trusted to pay the exporter after receipt of goods. The main drawback of open account method is that exporter assumes all the risks

2. Payment Collection of Bills in International Trade

In this method of payment in international trade the exporter entrusts the handling of commercial and often financial documents to banks and gives the banks necessary instructions concerning the release of these documents to the Importer. It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system.There are two methods of collections of bill :

a) Documents Against Payment (D/P)

In this case documents are released to the importer only when the payment has been done.

b) Documents Against Acceptance (D/A)

In this case documents are released to the importer only against acceptance of a draft.

3. Letter of Credit L/c

Letter of Credit also known as Documentary Credit is a written undertaking by the importers bank known as the issuing bank on behalf of its customer, the importer (applicant), promising to effect payment in favor of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. It is published by the International Chamber of Commerce under the provision of Uniform Custom and Practices (UCP) brochure number 500.

Various types of L/Cs are :

a) Revocable & Irrevocable Letter of Credit (L/c):

A Revocable Letter of Credit can be cancelled without the consent of the exporter. An Irrevocable Letter of Credit cannot be cancelled or amended without the consent of all parties including the exporter.

b) Sight & Time Letter of Credit:

If payment is to be made at the time of presenting the document then it is referred as the Sight Letter of Credit. In this case banks are allowed to take the necessary time required to check the documents.If payment is to be made after the lapse of a particular time period as stated in the draft then it is referred as the Term Letter of Credit.

3. Confirmed Letter of Credit (L/c):

Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the issuing bank. By adding its commitment, the Confirming Bank takes the responsibility of claim under the letter of credit, assuming all terms and conditions of the letter of credit are met.

TRADE DOCUMENTS

Introduction

International market involves various types of trade documents that need to be produced while making transactionsThe following is a list of documents often used in international trade:

Air Waybill Bill of Lading Certificate of Origin Combined Transport Document Draft (or Bill of Exchange) Insurance Policy (or Certificate) Packing List/Specification Inspection Certificate

1. Air Waybills

Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample consists of of three originals and nine copies. The first original is for the carrier and is signed by a export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the goods.

2. Bill of Lading (B/L)

Bill of Lading is a document given by the shipping agency for the goods shipped for transportation form one destination to another and is signed by the representatives of the carrying vessel. It will indicate whether cost of freight/ carriage has been paid or not : The bill of lading must meet all the requirements of the credit as well as complying with UCP 500.

3. Certificate of Origin

The Certificate of Origin is required by the custom authority of the importing country for the purpose of imposing import duty. It is usually issued by the Chamber of Commerce and contains information like seal of the chamber, details of the good to be transported and so on.

4. Combined Transport Document

Combined Transport Document is also known as Multimodal Transport Document, and is used when goods are transported using more than one mode of transportation. The liability of the combined transport operator starts from the place of shipment and ends at the place of delivery.

5. Commercial Invoice

Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or import invoice, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation.

6. Bill of Exchange

A Bill of Exchange is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where large amount of money involved.

7. Insurance Certificate

Also known as Insurance Policy, it certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered.It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents.

8. Packing List

Also known as packing specification, it contain details about the packing materials used in the shipping of goods. It also include details like measurement and weight of goods.

The packing List must :

Have a description of the goods ("A") consistent with the other documents. Have details of shipping marks ("B") and numbers consistent with other documents

9. Inspection Certificate

Certificate of Inspection is a document prepared on the request of seller when he wants the consignment to be checked by a third party at the port of shipment before the goods are sealed for final transportation.

VARIOUS RISKS IN EXPORT TRADE

Export International Trade Transport Risk

It is quite important to evaluate the transportation risk in international trade for better financial stability of export business. About 80% of the world major transportation of goods is carried out by sea, which also gives rise to a number of risk factors associated with transportation of goods. The major risk factors related to shipping are cargo, vessels, people and financing.

Credit Risk in Export Business

Contract risk and credit risk are the part of international trade finance and are quite different from each other.A contract risk is related to the Latin law of "Caveat Emptor", which means "Buyer Beware" and refers directly to the goods being purchase under contract, whether it's a car, house land or whatever.On the other hand a credit risk may be defined as the risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss.Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade financing, foreign exchange, swaps, bonds, equities, and inter bank transactions.

Payment Risk

This type of risk arises when a customer charges in an organization or if he does not pay for operational reasons. Payment risk can only be recovered by a well written contract. Recovery can not be made for payment risk using credit insurance.

Country Political Risk in Export

Country risk includes a wide range of risks, associated with lending or depositing funds, or doing other financial transaction in a particular country. It includes economic risk, political risk, currency blockage, expropriation, and inadequate access to hard currencies. Country risk can adversely affect operating profits as well as the value of assets.With more investors investing internationally, both directly and indirectly, the political, and therefore economic, stability and viability of a country's economy need to be considered.

Currency Risk in Export International Trade

Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency against another. This is a permanent risk that will remain as long as currencies remain the medium of exchange for commercial transactions. Market fluctuations of relative currency values will continue to attract the attention of the exporter, the manufacturer, the investor, the banker, the speculator, and the policy maker alike.

FORFEITING

Forfeiting and factoring are services in international market given to an exporter or seller. Its main objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is a short termed receivables (within 90 days) and is more related to receivables against commodity sales.

Definition of Forfeiting :

The terms forfeiting is originated from a old French word forfait, which means to surrender ones right on something to someone else. In international trade, forfeiting may be defined as the purchasing of an exporters receivables at a discount price by paying cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment from the importer.

How forfeiting Works in International Trade?

The exporter and importer negotiate according to the proposed export sales contract. Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate. The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. Export takes place against documents guaranteed by the importers bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date.

Documentary Requirements

In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected in the following documents associated with an export transaction in the manner suggested below:

Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately instead, these could be built into the FOB price, stated on the invoice.

Shipping Bill and GR form : Details of the forfeiting costs are to be included along with the other details, such FOB price, commission insurance, normally included in the "Analysis of Export Value "on the shipping bill. The claim for duty drawback, if any is to be certified only with reference to the FOB value of the exports stated on the shipping bill.

The forfeiting typically involves the following cost elements:

1. Commitment fee, payable by the exporter to the forfeiter for latters commitment to execute a specific forfeiting transaction at a firm discount rate within a specified time.

2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfaiter from the amount paid to the exporter against the availised promissory notes or bills of exchange.

Benefits to Exporter

100 per cent financing : Without recourse and not occupying exporter's credit line That is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt.

Improved cash flow : Receivables become current cash in flow and its is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability.

Reduced administration cost : By using forfeiting , the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly.

Advance tax refund: Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing.

Risk reduction : forfeiting business enables the exporter to transfer various risk resulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank.

Increased trade opportunity : With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more competitive in the market.

Benefits to Banks

Forfeiting provides the banks following benefits:

Banks can offer a novel product range to clients, which enable the client to gain 100% finance, as against 8085% in case of other discounting products.

Bank gain fee based income.

FACTORING

Definition of Factoring

Definition of factoring is very simple and can be defined as the conversion of credit sales into cash. Here, a financial institution which is usually a bank buys the accounts receivable of a company usually a client and then pays up to 80% of the amount immediately on agreement. The remaining amount is paid to the client when the customer pays the debt. Examples includes factoring against goods purchased, factoring against medical insurance, factoring for construction services etc.

Characteristics of Factoring

1. The normal period of factoring is 90-150 days and rarely exceeds more than 150 days.

2. It is costly.

3. Factoring is not possible in case of bad debts.

4. Credit rating is not mandatory.

5. It is a method of offbalance sheet financing.

6. Cost of factoring is always equal to finance cost plus operating cost.

Types of Factoring

1. Disclosed

2. Undisclosed

1. Disclosed Factoring

In disclosed factoring, clients customers are aware of the factoring agreement.

Disclosed factoring is of two types:

a) Recourse factoring: The client collects the money from the customer but in case customer dont pay the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of interest and is in very common use.

b) Nonrecourse factoring: In nonrecourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.

2. Undisclosed

In undisclosed factoring, client's customers are not notified of the factoring arrangement. In this case, Client has to pay the amount to the factor irrespective of whether customer has paid or not.

Gold Card Scheme for Exporters

The Government (Ministry of Commerce and Industry), in consultation with RBI had indicated in the EXIM Policy 2003-04 that a Gold Card Scheme would be worked out by RBI for credit worthy exporters with good track record for easy worked out availability of export credit on best terms. Accordingly, in consultation with select banks and exporters, a Gold Card Scheme was drawn up. The Scheme envisages certain additional benefits based on the record of performance of the exporters. The Gold Card holder would enjoy simpler and more efficient credit delivery mechanism. Some of the benefits to the holders are as follows:

Gold Card holder exporters, depending on their track record and credit worthiness, will be granted better terms of credit including rates of interests as compared to others.

They will enjoy simple application procedures for credit and credit will be disbursed to them faster.

He charges and the fee structure for services are lower to these exporters compared to others.

These customers are given preference for granting credit in foreign currency.It is totally up to the discretion of banks to classify a customer as a Gold Card Holder.

The Working group under Anand Sinha reviewed the position regarding issue of Gold Cards to eligible Exporters under the scheme. The following is an excerpt from the research done by the Group:

Name of the BankNumber of cards issued till April 25, 2005

State Bank of India1,004

Bank of India667

Punjab National Bank396

Canara Bank390

Central Bank of India79

ICICI Bank19

Source: Working Committee Report, 2005

Thus, one can observe that some banks like State Bank of India, Canara Bank, Bank of India, etc, have made progress in issuing Gold Cards to eligible exporters; some banks could not show much progress. While large corporate exporters have been getting the benefits spelt out in the Gold card Scheme in normal course, the Gold Card Scheme would immensely benefit the small and medium exporters.However, the representatives of banks are in general of the opinion that it is only the advice by RBI and not mandatory and should be left to banks themselves to decide. Other reasons for the tardy progress in implementation of the scheme include cumbersome procedures laid down by banks by calling for information in lengthy forms and banks being of an opinion that they are under pressure to extend such Schemes to large number of borrowers, whose credit worthiness cannot be assessed properly.

Deemed Exports-Concessive Export Credit

Deemed Exports refers to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received in either Indian rupees or in free foreign exchange.

A. Rupee Credit to Deemed Exporters.

Rupee Credit to Deemed Exporters is given at Pre-shipment and Post-shipment stage for maximum period of 30 days or up to the actual date of payment to be received from the supplier. Credit is available to all categories of suppliers specified as Deemed Exporters in chapter 8 of the EXIM Policy. Some of these categories include:

Projects aided/financed by bilateral or multilateral agencies/funds ( including World Bank, IBRD, UN agencies), as notified from time to time by Ministry Of Economic Affairs, Ministry Of finance

Supply of goods to Export Oriented Units (EOU), Export Processing Zones (EOZ), Software Technology Parks, etc

Supply of capital goods to holders of license under Export Promotion Capital Goods (EPGC), Scheme etc

The post-supply advances would be treated as overdue after the period of 30 days. In cases where such overdue credits are not liquidated within a period of 180 days from notional due date (I.e. 210 days from the day of advance), the banks are required to charge, for such extended period, interest prescribed for the category ECNOS at post-shipment stage. If the bills are not paid within the aforesaid period of 210 days, banks should charge from the date or advance, the rate prescribed for ECNOS- Post shipment.Banks would be eligible for refinance form RBI for such rupee export credits extended both at Pre-shipment and Post supply stages.

B. Foreign Currency Credit to Deemed Exporters

PCFC may be allowed only for deemed exports for supplies to projects finances by multilateral/bilateral agencies/funds. PCFC released for deemed exports is liquidated by grant of foreign currency loan, for a maximum period of 30 days or up to the date of payment by the project authorities, whichever is earlier.

The credit available to Deemed Exporters at Pre Shipment and Post Shipment stage is adjusted from the free foreign exchange representing payment from the agencies against supply of goods. It can also be repaid out of balances in EEFC account or Rupee resources of the exporter to the extent supplies have actually been made.

Export Credit Guarantee Schemes

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. In addition, there is a commercial risk of insolvency or protracted default of buyers. Thus, Export Credit Guarantee Corporation of India Limited (ECGC), issues covers to protect banks from the risk of a build-up of NPAs from export credit, ECGC covers act as an additional line of security for bank while financing the exporter.

Policies that are generally availed by exporters include:

1. Standard policies:

This is also called as comprehensive policy which covers risk of credit when goods are exported for short period, i.e. credit not exceeding 180 days. It is issued for exporters whose anticipated export turnover for next 12 months is more than Rs. 50 lakh. This policy covers:

(a) Commercial Risks which includes insolvency of the buyer or default in payment by the buyer

(b) Political Risks which include risk of war, revolution or civil disturbance in the buyers country, payment of additional handling, transport or insurance charges which cannot be covered from the buyer, restrictions imposed by the government which may delay payments, etc.

A separate cover for only commercial or political risk can also be taken individually.

Financial Guarantees that are generally taken by banks include:

(a) Whole Turnover Packing Credit Guarantee (WTPCG)

In consideration of large volume of risks due to the large volume if business offered by banks, ECGC issues policies at lower premium rates with considerable reduction in procedural formalities. Banks are required to notify ECGC, the limits sanctioned by it to all its customers but they are required approval of ECGC, for the limits if they exceed an agreed value. The percentage of cover varies from 55%-75% depending on the claim premium ratio. Premiums vary form 7 paise to 10 paise for RS 100 per month, on the daily average product is charged on the scheme,

(b) Whole Turnover Post shipment Export Credit guarantee

Post shipment finance given to exporters by banks through purchase, negotiation or discount of export bills qualify for this guarantee. Premium rates vary from 7 paise to 10 paise for RS. 100 per month. The percentage of loss covered is 75%.

When policies are extended to banks , to cover the credit disbursed, the amount of the policy, etc, it is issued always in terms of Rupees, even though, ECGC may have extended a policy for PCFC or ERBD.

Compilation and Submission of Reports RBI

The information about the inflows and outflows is of immense importance to the government and the Reserve Bank. As a member of IMF (International Monetary Fund), India has an obligation to present quarterly balance of payment statistics to IMF.

All foreign exchange transactions are routed through banking channels. Therefore, banks undertaking export financing have to submit certain reports to RBI in respect of its operations. Some of the important reports include:

(A) R-Return

This return is submitted by banks every fortnightly, which reports data in respect of total forex operations. It reports total outflows and inflows of foreign exchange through banks in a particular fortnight.The return must reach RBI within 7 days of the end of the fortnight. This is a summary of the transactions that take place by way if credits and debits in the Nostro Account maintained by banks abroad and Vostro account of non-resident banks maintained with banks in India. In case the bank fails to submit these returns, a penalty of Rs. 10,000 is imposed and if the default continues, an additional penalty up to Rs. 20,000 for everyday of default can be levied.

(B) XOS statement

A consolidated statement n Form XOS giving details of all export bills outstanding beyond six months from date of shipment have to be submitted by banks to RBI within 15 days from the close of the relative half year.However, units that are in SEZ, and certain Status Holders in terms of EXIM policy have been allowed an extension for realization and repatriation of full value of goods/exports to 360 days. The bill value outstanding beyond 180 days of these units is deleted from the total outstanding export bill figure of the bank.

(C) Export Credit Data (Disbursement/Outstanding)

A quarterly statement showing export credit outstanding in rupee and foreign currency has to be submitted to the RBI by commercial banks. This annexure also contains, specifically, the quarterly disbursals and outstanding balances of the Banks Gold Card holders, including the number of Gold Cards issued. This statement has to reach the RBI, by the end of the month, following the quarter .

These reports help RBI to monitor all the export transactions that have taken place through commercial banks. The figures reported by commercial banks are analyzed regularly and accordingly certain changes in the policies related to export credit may be made, if required.

Export Credit Refinance by RBI

The Reserve Bank of India RBI) provides export credit refinance facility to all scheduled banks (excluding RRBs), under Section 17(3A) of the Reserve Bank of India Act 1934, in order to encourage banks to extend more liberal export credit. This facility is given on the basis of banks eligible outstanding rupee export credit both at the pre-shipment and post-shipment stages. The quantum of refinance which can be availed varies based on the monetary and credit policy of the RBI. Outstanding export credit for working out refinance limits , as modified effective April, 2000, also would include export bills rediscounted with EXIM Bank/other banks/Financial Institutions and export credit against which refinance has been obtained from EXIM Bank.

However, it will not include Pre-shipment Credit in Foreign Currency (PCFC), export bills discounted/rediscounted under the scheme of Rediscounting of Export Bills Abroad (EBR), overdue rupee export credit and other export credit not eligible for refinance.

Interest Rates and Limits

The borrowing bank should submit to the Monetary Policy Department, Reserve Bank of India, a fortnightly declaration in Form No. DAD.389 together with a statement of Export Refinance Entitlement in form No.DAD.390 to enable Reserve Bank of India to monitor the position of the outstanding borrowings under the scheme in relation to its outstanding export credit advances. Scheduled banks can avail export credit refinance to the extent of 15.00 percent of the outstanding export credit eligible for refinance as at the end of the second preceding fortnight.

Export credit refinance facility is available at the Repo Rate (as announced from time to time. The interest is payable in monthly rents.

Other Requirements

Export Credit Refinance requires no margin. The amount is repayable on demand or on the expiry of fixed periods not exceeding 180 days. The minimum amount that can be availed under this facility is Rupees 100,000 and multiples thereof and can be availed at centers wherever the Reserve Bank has a Banking Department.Export Credit refinance is extended by RBI against the Demand Promissory not (DPN) of banks supported by a declaration that they have been extended export credit and the outstanding amount eligible for refinance is not less than the loan/advance from RBI

A penal rate of interest as decided by the Reserve Bank from time to time will be charged on the outstanding loan in the event of irregular a ailment of Export Credit Refinance. These instances would include;

Utilization of Export Credit Refinancing exceeds the total limit

Wrongly calculation/reporting of refinance limit by banks

Non-repayment of refinance within 180 days

Delay in reporting excess utilization by banks

In such case, banks have to adjust to repay the excess refinance.

It is observed that Banks generally avail of this refinance facility only if there is a liquidity in the economy.

Conclusion

Indias Merchandise Trade

Exports ( April 2012 June 2012)

Indias export growth started moderating in the second half of 2011-12 which turned negative during Q1 of 2012-13 reflecting the continued impact of global economic slowdown and the contraction in world trade (Chart 1).

Exports during Q1 of 2012-13 stood at US$ 75.2 billion, a decline of 1.7 per cent as compared with an increase of 36.4 per cent during Q1 of 2011-12 (Table 1 and Statement 1). Despite the rupee depreciation in the second half of 2011-12, export performance continued to deteriorate in Q1 of 2012-13 as major trading partner economies did not show any signs of revival and risks surrounding the economic outlook continued to be on the downside particularly for the euro area.

Commodity-wise Exports 2012

Commodity-wise exports data available upto March 2012 show that the share of manufacturing sector in total merchandise exports declined marginally from 62.9 per cent in 2010-11 to 61.3 per cent in 2011-12. However, the respective share of petroleum products and primary products increased during the period (Table 2). Within exports of manufacturing sector, the share of engineering goods and textile & textile products declined while that of chemical and related products improved marginally.

In order to keep the cost of borrowing for the exporters within limits, RBI has fixed ceiling on rate of interest for export credit. Banks, however are free to fix a lower rate of interest for exporters on the basis of their actual cost of funds, operating expenses and taking into account the track record and the risk perception of the exporter. Even after deregulation of interest rates, exporters have not been able to take advantage of the competition among banks in lowering the interest rates as it is very difficult for exporters to shift from one bank to another. Since large corporate exporters have been receiving good treatment in terms of service and interest rates, unlike SMEs, it is recommended that commercial banks must appoint special Regional Managers to attend to credit related problems of SMEs.

Interest on pre and post-shipment credit is around 9 per cent, which we feel is on the higher side and the same often varies from bank to bank. In this era of globalisation, it is important for the units to be competitive in the foreign markets. Therefore, interest rate should be uniform and not more than 7 per cent if units are to remain competitive on the export front.

The Gold Card Scheme worked out by RBI provides a lot of Benefits to the holders of such a card. However, such cards which are actually issued are very few as the procedures are lengthy. Banks should simplify the procedures for filing the application form and take up the initiative of increasing their Gold Card Holders.The recently originated factoring and forfeiting can also be used by banks to finance exports. Both these methods of financing may be a real boon to the small exporters who, unlike the large exporters may get finance at a slightly higher rate. However, the minimum value of a forfeiting transaction is very high. Therefore SMEs cannot make use of these services for all their transactions. It is recommended to bring down this amount so that all the exporters can make use of this product.

RBI strictly monitors the export credit disbursed, outstanding and the transactions that take place by banks that affect the foreign exchange by compulsorily requiring banks to submit all the returns to RBI. With these documents, RBI can also monitor if any amendments to RBIs policy is needed in order to increase the export credit.

Jawaharlal Nehru has long gone but his economic ideology, Export or Perish, has to still be followed in India.

Providing hassles free export credit by commercial banks to exporters will further increase exports, which would in turn help in increasing the inflow of Indias forex reserves which in turn determines the growth of our economy and is therefore of utmost importance to our economy.

BIBLIOGRAPHY

Websites

http://www.eximguru.com

http://www.unescap.org/tid/publication/chap8_2224.pdf

http://www.rbi.org.in

http://www.commerce.nic.in/

www.smallb.in

www.camanojgupta.com

www.investopedia.com

www.iiem.com/em/exportimportfinance/chapter_12.pdf

www.exim-policy.com

http://www.mepz.gov.in

www.business.gov.in

www.indiatradepromotion.com/indian-exim-policy.html

www.cybex.in/Exim-Policy

Publications:

Export-Import Act of India 1981

Annual Report 2012-2013 Exim Bank.

Brochure- Exim Bank Of India

Foreign Trade Policy 2009-14

Newspapers:

DNA

Economic Times

The Times of India

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