loans to importers and exporters (trade finance)
DESCRIPTION
Project 100 marksTRANSCRIPT
LOANS TO IMPORTERS AND EXPORTERS.
OBJECTIVES
To study and understand in detail about the loan facilities provided to
the importers and exporters by the banks.
To identify the role of Banks in encouraging Exports by providing
finance.
To know the Interest rates charged by the banks for various facilities.
To study the fee based services provided by banks that are included in
trade finance.
To see the growth of trade finance in the economy.
SCOPE
This project concentrates on the following areas:
Exports Finance types, objectives .
Imports Finance types.
Factoring and forfeiting concepts in foreign markets.
Role and objectives and services of EXIM bank.
Role of Export credit guarantee corporation of India.
Nature of financing by banks and various interest rates charged by
different banks in Mumbai.
Contribution of various banks in trade finance.
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LOANS TO IMPORTERS AND EXPORTERS.
LIMITATIONS.
The banks were reluctant to provide with information about the rates of
interest. Lack of information on the part of employees. These was found
in both private and nationalized banks.
METHODOLOGY
Methodology is the means, techniques and frames of references
by which researches approach and carry out enquiry on a particular topic.
Following methodology was adopted:
2
Primary Data
visit to banksApproaching bankersFilling up of questionnaire
Secondary
Data
InternetBooksBanks websites
LOANS TO IMPORTERS AND EXPORTERS.
NO. CHAPTER NAME PAGE
NO
1 INTRODUCTION 6-7
2 EXPORT 8-22
3 IMPORTS 23-30
4FACTORING AND FORFEITING
31
5 EXIM BANK 32-36
6ECGC
37-44
7DIFFERENT INTEREST RATES OFFERED BY BANKS
45-47
8NATURE OF FINANCING BY BANKS
48-50
9 RELATIONSHIP BETWEEN NUMBER OF
TRANSACTIONS AND INTEREST CHARGES
51
10 CONTRIBUTION BY VARIOUS BANKS IN TRADE FINANCE
52
11.CONCLUSION
53-54
12 ANNEXURES 55-56
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LOANS TO IMPORTERS AND EXPORTERS.
INTRODUCTION
Imports and Exports have been an integral part of our economy since a
very long time. Trade financing is a way to import and export goods and
finance their business. Trade finance is a specific topic within the
financial service industry. Today trade finance is a massive billion of
dollars of business. Since world trade is increasing the good and
commodities are bought and sold, and banks and financial institutions
should lend money to finance the purchase of these goods and
commodities.
Trade finance refers to a wide range of tools that determine how cash,
credit, investments and other assets can be used for trade. Banks also play
a central role in facilitating trade, both through the provision of finance
and bonding facilities and through the establishment and management of
payment mechanisms such as telegraphic transfers and documentary
letters of credit (L/Cs). Amongst the intermediated trade finance
products, the most commonly used for financing transactions is L/Cs,
whereby the importer and exporter essentially entrust the exchange
process (i.e., payment against agreed delivery) to their respective banks in
order to mitigate counterparty risk. Typical trade-related financial
services include letters of credit, import bills for collection, import
financing, shipping guarantees, letter of credit confirmation, checking and
negotiation of documents, pre-shipment export financing, invoice
financing, and receivables purchase. Trade finance instruments can be
structured to include export credit guarantees or insurance. Trade finance
differs from other forms of credit (e.g., investment and working capital)
in several ways.
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LOANS TO IMPORTERS AND EXPORTERS.
Trade finance is much different than commercial lending, mortgage
lending or insurance. A product is sold and shipped overseas; therefore, it
takes longer to get paid. Extra time and energy is required to make sure
that buyers are reliable and creditworthy. Also, foreign buyers - just like
domestic buyers - prefer to delay payment until they receive and resell the
goods. Due diligence and careful financial management can mean the
difference between profit and loss on each transaction.
All sellers want to get paid as quickly as possible, while buyers usually
prefer to delay payment, at least until they have received and resold the
goods. This is true in domestic as well as international markets.
Increasing globalization has created intense competition for export
markets. Importers and exporters are looking for any competitive
advantage that would help them to increase their sales. Flexible payment
terms have become a fundamental part of any sales package.
Trade finance is the lifeline of trade because more than 90% of trade
transactions involve some form of credit, insurance or guarantee. Import
export trade assumes huge importance in the context of overall
performance of the world economy. An upward trend of import export is
indicative of smooth functioning of the world economy; whereas a
downward trend results from economic instability.
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LOANS TO IMPORTERS AND EXPORTERS.
1. EXPORTS
Export is one of the most lucrative business activities in India. Exporting
is a major component of international trade. Exports entail transfer of
goods and services from a home country to the foreign consumers. Export
in simple words means selling goods abroad. International market being a
very wide market, huge quantity of goods can be sold in the form of
exports. Export refers to outflow of goods and services and inflow of
foreign exchange. Export occupies a very prominent place in the list of
priorities of the economic set up of developing countries because they
contribute largely to foreign exchange pool.
Exports play a crucial role in the economy of the country. In order to
maintain healthy balance of trade and foreign exchange reserve it is
necessary to have a sustained and high rate of growth of exports.
Exports are a vehicle of growth and development. They help not only in
procuring the latest machinery, equipment and technology but also the
goods and services, which are not available indigenously. Exports leads
to national self-reliance and reduces dependence on external assistance
which howsoever liberal, may not be available without strings.
Exports play a very vital role for Indian macroeconomic settings as they
influence the underlying conditions in the domestic economy and also
help in keeping the balance of payments under control.
It is seen that there exists a close relationship between export earnings
and domestic investment. Higher rates of economic growth tend to be
associated with higher rates of exports growth. Conversely, most
countries with low rates of export growth also tend to have, in general,
low rates of economic growth.
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LOANS TO IMPORTERS AND EXPORTERS.
Though India’s export compared to other countries is very small, but one
of the most important aspects of our export is the strong linkages it is
forgoing with the world economy which is a great boon for a developing
nation like India.
1.1 EXPORT FINANCE
Credit and finance is the life and blood of any business whether domestic
or international. It is more important in the case of export transactions
due to the prevalence of novel non-price competitive techniques
encountered by exporters in various nations to enlarge their share of
world markets.
Export finance is a part of global finance given to the corporate. Export
financing enables businesses to bring their products all over the world.
India has to compete effectively with other countries in the export
markets in order to penetrate into new markets and widen its hold on the
existing markets. Since many countries have been pursuing policies
geared to the promotion of exports through adequate export credits at low
rates of interest, India has also pursued the same policy in regard to
export finance.
In all major industrialized countries, banks and other financial institutions
are deeply involved in financing of exports on special terms. Some of
them are granting mixed credits that combine export credit with foreign
aid to developing countries. In all such cases, the governments and
central banks of those countries are directly involved in subsidizing
exports.
Exporters naturally want to get paid as quickly as possible, while
importers usually prefer to delay payment until they have received or
resold the goods. Because of the intense competition for export markets,
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LOANS TO IMPORTERS AND EXPORTERS.
being able to offer attractive payment terms customary in the trade is
often necessary to make a sale. Exporters should be aware of the many
financing options open to them so that they choose the most acceptable
one to both the buyer and the seller. In many cases, government
assistance in export financing for small and medium-sized businesses can
increase a firm's options. The following factors are important to consider
in making decisions about financing:
The need for financing to make the sale: - In some cases, favorable
payment terms make a product more competitive. If the competition
offers better terms and has a similar product, a sale can be lost. In other
cases, the buyer may have preference for buying from a particular
exporter, but might buy your product because of shorter or more secure
credit terms.
The length of time the product is being financed: - This determines
how long the exporter will have to wait before payment is received and
influences the choice of how the transaction is financed.
The cost of different methods of financing: - Interest rates and fees
vary. Where an exporter can expect to assume some or all of the
financing costs, their effect on price and profit should be well understood
before a pro forma invoice is submitted to the buyer.
The risks associated with financing the transaction: - The riskier the
transaction, the harder and more costly it will be to finance. The political
and economic stability of the buyer's country can also be an issue. To
provide financing for either accounts receivable or the production or
purchase of the product for sale, the lender may require the most secure
methods of payment, a letter of credit (possibly confirmed), or export
credit insurance or guarantee.
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LOANS TO IMPORTERS AND EXPORTERS.
The need for pre-shipment finance and for post-shipment working
capital: -Production for an unusually large order, or for a surge of orders,
may present unexpected and severe strains on the exporter's working
capital. Even during normal periods, inadequate working capital may
curb an exporter's growth. However, assistance is available through
public and private sector resources.
OBJECTIVES OF EXPORT FINANCE
To cover commercial & Non-commercial or political risks
attendant on granting credit to a foreign buyer.
To cover natural risks like an earthquake, floods etc.
An exporter may avail financial assistance from any bank, which
considers the ensuing factors:
Availability of the funds at the required time to the exporter.
Affordability of the cost of funds
APPRAISAL
Appraisal means an approval of an export credit proposal of an exporter.
While appraising an export credit proposal as a commercial banker,
obligation to the following institutions or regulations needs to be adhered
to.
Obligations to the RBI under the Exchange Control Regulations are:
Appraise to be the bank’s customer.
Appraise should have the EXIM code number allotted by the
Director General of Foreign Trade.
Party’s name should not appear under the caution list of the RBI.
Obligations to the Trade Control Authority under the EXIM policy are:
Appraise should have IEC number allotted by the DGFT.
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LOANS TO IMPORTERS AND EXPORTERS.
Goods must be freely exportable i.e. not falling under the negative
list. If it falls under the negative list, then a valid license should be
there which allows the goods to be exported.
Country with whom the Appraise wants to trade should not be
under trade barrier.
Obligations to ECGC are:
Verification that Appraise is not under the Specific Approval list
(SAL).
Sanction of Packing Credit Advances.
GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE:
When a commercial bank deals in export finance it is bound by the
ensuing guidelines: -
Exchange control regulations.
Trade control regulations.
Reserve Bank’s directives issued through IECD.
Export Credit Guarantee Corporation guidelines.
Guidelines of Foreign Exchange Dealers Association of India.
1.2 PRE-SHIPMENT FINANCE
'Pre-shipment/Packing Credit' means any loan or advance granted or any
other credit provided by a bank to an exporter for financing the purchase,
processing, manufacturing or packing of goods prior to shipment
/working capital expenses towards rendering of services on the basis of
letter of credit opened in his favour or in favour of some other person, by
an overseas buyer or a confirmed and irrevocable order for the export of
goods/services from India or any other evidence of an order for export
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LOANS TO IMPORTERS AND EXPORTERS.
from India having been placed on the exporter or some other person,
unless lodgment of export orders or letter of credit with the bank has been
waived.
IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE:
To purchase raw material, and other inputs to manufacture goods.
To assemble the goods in the case of merchant exporters.
To store the goods in suitable warehouses till the goods are
shipped.
To pay for packing, marking and labeling of goods.
To pay for pre-shipment inspection charges.
To import or purchase from the domestic market heavy
machinery and other capital goods to produce export goods.
To pay for consultancy services.
To pay for export documentation expenses.
FORMS OR METHODS OF PRE-SHIPMENT FINANCE/PACKING
CREDIT
Packing Credit is extended in the following forms:
1. Packing Credit in Indian Rupee
2. Packing Credit in Foreign Currency (PCFC)
1. Packing credit in Indian rupee
This is taken in Indian Rupees and is given to the exporter in the form of
the Rupee Loan and the interest is charged at the rate as per RBI
directives. When any export proceeds are realized, the packing credit is
automatically adjusted. If it becomes overdue the rate of interest will be
charged at the rate determined by the individual bank.
2.Packing credit in Foreign Currency (P.C.F.C.)
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LOANS TO IMPORTERS AND EXPORTERS.
In the case of PCFC, the bankers have their own line of credit with
their foreign banks and the interest is charged at ‘LIBOR' rate i.e.
London Inter Bank Offered Rate plus the interest spread that is
mutually agreed upon between the bankers and the exporter subject
to a minimum of 1.0%, till the due date. This is denominated in a
foreign currency. The above mentioned interest is for 90 days,
since the period of liquidation of pre-shipment credit normally
granted by the bankers for diamond Industry is 90 days from the
date of availing the facility. Beyond 90 days, if the PCFC becomes
overdue the interest will be charged based on fresh LIBOR rate
prevalent on the 91st day plus the interest spread and additional
interest at 2% for the overdue period. If the payment is not received
after 30 days from the due date, the Packing credit will be
crystallized. It means that the bankers will convert the balance
PCFC, at the TT selling interbank rate into Indian Rupees and the
interest will be charged on the entire amount at commercial rate of
interest from day one of availing the PCFC. The rate of interest
varies with different banks and is in the range of 15 to 20%.
DISBURSEMENT OF PACKING CREDIT
i. Ordinarily, each packing credit sanctioned should be maintained as
separate account for the purpose of monitoring period of sanction
and end-use of funds.
ii. Banks may release the packing credit in one lump sum or in stages
as per the requirement for executing the orders/LC.
iii. Banks may also maintain different accounts at various stages of
processing, manufacturing, etc. depending on the types of
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LOANS TO IMPORTERS AND EXPORTERS.
goods/services to be exported, e.g. hypothecation, pledge, etc.,
accounts and may ensure that the outstanding balance in accounts
are adjusted by transfer from one account to the other and finally
by proceeds of relative export documents on purchase, discount,
etc.
iv. Banks should continue to keep a close watch on the end-use of the
funds and ensure that credit at lower rates of interest is used for
genuine requirements of exports. Banks should also monitor the
progress made by the exporters in timely fulfillment of export
orders.
'RUNNING ACCOUNT' FACILITY
i. Pre-shipment credit to exporters is normally provided on lodgment
of L/Cs or firm export orders. It is observed that the availability of
raw materials is seasonal in some cases. In some other cases, the
time taken for manufacture and shipment of goods is more than the
delivery schedule as per export contracts. In many cases, the
exporters have to procure raw material, manufacture the export
product and keep the same ready for shipment, in anticipation of
receipt of letters of credit/firm export orders from the overseas
buyers. Having regard to difficulties being faced by the exporters
in availing of adequate pre-shipment credit in such cases, banks
have been authorized to extend Pre-shipment Credit ‘Running
Account’ facility in respect of any commodity, without insisting on
prior lodgment of letters of credit/firm export orders, depending on
the bank’s judgment regarding the need to extend such a facility
and subject to the following conditions:
a) Banks may extend the ‘Running Account’ facility only to those
exporters whose track record has been good as also Export
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LOANS TO IMPORTERS AND EXPORTERS.
Oriented Units (EOUs)/Units in Free Trade Zones/ Export
Processing Zones (EPZs) and Special Economic Zones (SEZs).
b) In all cases where Pre-shipment Credit ‘Running Account’ facility
has been extended, letters of credit/firm orders should be produced
within a reasonable period of time to be decided by the banks.
c) Banks should mark off individual export bills, as and when they
are received for negotiation/collection, against the earliest
outstanding pre-shipment credit on 'First In First Out' (FIFO) basis.
Needless to add that, while marking off the pre-shipment credit in
the manner indicated above, banks should ensure that concessive
credit available in respect of individual pre-shipment credit does
not go beyond the period of sanction or 360 days from the date of
advance, whichever is earlier.
d) Packing credit can also be marked-off with proceeds of export
documents against which no packing credit has been drawn by the
exporter.
ii. If it is noticed that the exporter is found to be abusing the facility,
the facility should be withdrawn forthwith.
iii. In cases where exporters have not complied with the terms and
conditions, the advance will attract commercial lending rate ab
initio. In such cases, banks will be required to pay higher rate of
interest on the portion of refinance availed of by them from the
RBI in respect of the relative pre-shipment credit. Running account
facility should not be granted to sub-suppliers.
1.3 POST-SHIPMENT FINANCE
'Post-shipment Credit' means any loan or advance granted or any other
credit provided by a bank to an exporter of goods/services from India
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LOANS TO IMPORTERS AND EXPORTERS.
from the date of extending credit after shipment of goods/rendering of
services to the date of realization of export proceeds and includes any
loan or advance granted to an exporter, in consideration of, or on the
security of any duty drawback allowed by the Government from time to
time.
TYPES OF POST-SHIPMENT CREDITS:
1. Purchase of Export Documents drawn under Export Order:
Purchase or discount facilities in respect of export bills drawn
under confirmed export order are generally granted to the
customers who are enjoying Bill Purchase/Discounting limits from
the Bank. As in case of purchase or discounting of export
documents drawn under export order, the security offered under
L/C by way of substitution of credit-worthiness of the buyer by the
issuing bank is not available, the bank financing is totally
dependent upon the credit worthiness of the buyer, i.e. the
importer, as well as that of the exporter or the beneficiary. The
documents dawn on DP basis are parted with through foreign
correspondent only when payment is received while in case of DA
bills documents (including that of title to the goods) are passed on
to the overseas importer against the acceptance of the draft to make
payment on maturity. DA bills are thus unsecured. The bank
financing against export bills is open to the risk of non-payment.
Banks, in order to enhance security, generally opt for ECGC
policies and guarantees which are issued in favor of the
exporter/banks to protect their interest on percentage basis in case
of non-payment or delayed payment which is not on account of
mischief, mistake or negligence on the part of exporter. Within the
total limit of policy issued to the customer, drawee-wise limits are
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LOANS TO IMPORTERS AND EXPORTERS.
generally fixed for individual customers. At the time of purchasing
the bill bank has to ascertain that this drawee limit is not exceeded
so as to make the bank ineligible for claim in case of non-payment.
2. Advances against Export Bills Sent on Collection: It may
sometimes be possible to avail advance against export bills sent on
collection. In such cases the export bills are sent by the bank on
collection basis as against their purchase/discounting by the bank.
Advance against such bills is granted by way of a 'separate loan'
usually termed as 'post-shipment loan'. This facility is, in fact,
another form of post- shipment advance and is sanctioned by the
bank on the same terms and conditions as applicable to the facility
of Negotiation/Purchase/Discount of export bills. A margin of 10
to 25% is, however, stipulated in such cases. The rates of interest
etc., chargeable on this facility are also governed by the same rules.
This type of facility is, however, not very popular and most of the
advances against export bills are made by the bank by way of
negotiation/purchase/discount.
3. Advance against Goods Sent on Consignment Basis: When the
goods are exported on consignment basis at the risk of the exporter
for sale and eventual remittance of sale proceeds to him by the
agent/consignee, bank may finance against such transaction subject
to the customer enjoying specific limit to that effect. However, the
bank should ensure while forwarding shipping documents to its
overseas branch/correspondent to instruct the latter to deliver the
document only against Trust Receipt/Undertaking to deliver the
sale proceeds by specified date, which should be within the
prescribed date even if according to the practice in certain trades a
bill for part of the estimated value is drawn in advance against the
exports.
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LOANS TO IMPORTERS AND EXPORTERS.
4. Advance against Undrawn Balance: In certain lines of export it
is the trade practice that bills are not to be drawn for the full
invoice value of the goods but to leave small part undrawn for
payment after adjustment due to difference in rates, weight, quality
etc. to be ascertained after approval and inspection of the goods.
Banks do finance against the undrawn balance if undrawn balance
is in conformity with the normal level of balance left undrawn in
the particular line of export subject to a maximum of 10% of the
value of export and an undertaking is obtained from the exporter
that he will, within 6 months from due date of payment or the date
of shipment of the goods, whichever is earlier surrender balance
proceeds of the shipment. Against the specific prior approval from
Reserve Bank of India the percentage of undrawn balance can be
enhanced by the exporter and the finance can be made available
accordingly at higher rate. Since the actual amount to be realised
out of the undrawn balance, may be less than the undrawn balance,
it is necessary to keep a margin on such advance.
5. Advance against Retention Money: Banks also grant advances
against retention money, which is payable within one year from the
date of shipment, at a concessional rate of interest up to 90 days. If
such advances extend beyond one year, they are treated as deferred
payment advances which are also eligible for concessional rate of
interest.
6. Advances against Claims of Duty Drawback: Duty Drawback is
permitted against exports of different categories of goods under the
'Customs and Central Excise Duty Drawback Rules, 1995'.
Drawback in relation to goods manufactured in India and exported
means a rebate of duties chargeable on any imported materials or
excisable materials used in manufacture of such goods in India or
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LOANS TO IMPORTERS AND EXPORTERS.
rebate on excise duty chargeable under Central Excises Act, 1944
on certain specified goods. The Duty Drawback Scheme is
administered by Directorate of Duty Drawback in the Ministry of
Finance. The claims of duty drawback are settled by Custom House
at the rates determined and notified by the Directorate. As per the
present procedure, no separate claim of duty drawback is to be
filed by the exporter. A copy of the shipping bill presented by the
exporter at the time of making shipment of goods serves the
purpose of claim of duty drawback as well. This claim is
provisionally accepted by the customs at the time of shipment and
the shipping bill is duly verified. The claim is settled by customs
office later. As a further incentive to exporters, Customs Houses at
Delhi, Mumbai, Calcutta, Chennai, Chandigarh, and Hyderabad
have evolved a simplified procedure under which claims of duty
drawback are settled immediately after shipment and no funds of
exporter are blocked.
However, where settlement is not possible under the simplified procedure
exporters may obtain advances against claims of duty drawback as
provisionally certified by customs.
LIQUIDATION OF POST-SHIPMENT CREDIT:
Post-shipment credit is to be liquidated by the proceeds of export bills
received from abroad in respect of goods exported/services
rendered .Further, subject to mutual agreement between the exporter and
the banker it can also be repaid/prepaid out of balances in Exchange
Earners Foreign Currency Account (EEFC A/C) as also from proceeds of
any other unfinanced (collection) bills. Such adjusted export bills should
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however continue to be followed up for realization of the export proceeds
and will continue to be reported in the XOS statement.
RUPEE POST-SHIPMENT EXPORT CREDIT
PERIOD
i. In the case of demand bills, the period of advance shall be the
Normal Transit Period (NTP) as specified by FEDAI.
ii. In case of usance bills, credit can be granted for a maximum
duration of 180 days from date of shipment inclusive of Normal
Transit Period (NTP) and grace period, if any. However, banks
should closely monitor the need for extending post-shipment credit
upto the permissible period of 180 days and they should influence
the exporters to realise the export proceeds within a shorter period.
iii. 'Normal transit period' means the average period normally involved
from the date of negotiation/purchase/discount till the receipt of
bill proceeds in the Nostro account of the bank concerned, as
prescribed by FEDAI from time to time. It is not to be confused
with the time taken for the arrival of goods at overseas destination.
iv. An overdue bill:
a) In the case of a demand bill, is a bill which is not paid before the
expiry of the normal transit period, and
b) In the case of a usance bill, is a bill which is not paid on the due
date
1.4 GOLD CARD SCHEME FOR EXPORTERS
The applicable rate of interest to be charged under the Gold Card Scheme
will not be more than the general rate for export credit in the respective
bank and within the ceiling prescribed by RBI. In keeping with the spirit
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LOANS TO IMPORTERS AND EXPORTERS.
of the Scheme banks will endeavour to provide the best rates possible to
Gold Card holders on the basis of their rating and past performance.
In respect of the Gold Card holders, the concessive rate of interest on
post-shipment rupee export credit applicable up to 90 days may be
extended for a maximum period up to 365 days.
The salient features of the scheme are:
i. All creditworthy exporters, including those in small and medium
sectors with good track record would be eligible for issue of Gold
Card by individual banks as per the criteria to be laid down by the
latter;
ii. Banks would clearly specify the benefits they would be offering to
Gold Card holders
iii. request from card holders would be processed quickly by banks
within 25 days/15 days and 7 days for fresh application/renewal of
limits and ad hoc limits, respectively;
iv. ‘in principle’ limits would be set for a period of 3 years with a
provision for stand by limit of 20% to meet urgent credit needs;
v. card holders would be given preference in the matter of granting of
packing credit in foreign currency;
vi. banks would consider waiver of collaterals and exemption from
ECGC guarantee schemes on the basis of card holder’s
creditworthiness and track records, and
vii. The concessive rate of interest on post-shipment rupee export
credit applicable upto 90 days may be extended for a maximum
period upto 365 days.
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2. IMPORTS
Each country has different natural resource and different climatic
conditions. Some are rich in minerals while some are rich in forest
resources. A country cannot produce all the commodities required by the
nation. It may have some commodities in excess while some commodities
which are available in limited quantity. Hence countries have to depend
on other countries.
A country exports those commodities which are in excess with the
country and import those which are not available at large within the
country, this interdependency of one country on other result into
international trade. The exchange of goods helps both the countries in
developing their economy.
An import (also termed as international purchasing) activity may be
defined as a process of procuring goods and service from the supplier/s
situated in the foreign countries. This activity involves inflow of goods
and service from the foreign country (exporter country) into the base
country (importing country) & in-tune outflow of foreign currency from
base country to the foreign country towards payments for the goods and
services purchased.
There are basically four main reasons for which a country may decide to
import a certain good or service:
1. It simply does not exist in the country: a mineral which is not in the
country's soil, an agriculture product that can't be produced there, an
innovation that has been introduced in other countries;
2. It does not exist at a specific level of quality; thus, a country imports
better products than domestic production, also as far as advertising or
packaging are concerned;
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LOANS TO IMPORTERS AND EXPORTERS.
3. It is cheaper abroad, since producers there are more efficient, are faced
by lower costs, better exploit economies of scale and/or accept lower
profits;
4. At the current domestic price, producers do not supply enough good or
service as the demand requires, also because of ex ante coordination
problems; accordingly, consumers buy abroad for insufficient domestic
production.
2.1 IMPORT FINANCE
Banks normally do not extend a fund based finance to meet import needs
of their customers, barring few exceptions. However, they enable
industrial units and others to have access to imported inputs and
machinery by establishing letters of credit in favour of the overseas
suppliers/sellers. Letter of Credit is a non-fund credit facility offered by
banks to their constitutes of integrity and proven track record in meeting
their commitments promptly without need for any post import finance.
2.2 LETTER OF CREDIT:
A Letter of Credit is a signed instrument including an undertaking by the
banker of a buyer to pay the seller a certain sum of money on presentation
of documents evidencing shipment of specified goods and subject to
compliance with the stipulated terms and conditions.
Banks establish LCs only on account of their customers, who hold a valid
Importer-Exporter Code Number from the Regional Licensing
Authorities and produce underlying sales contract between the Indian
importer and the overseas sellers, accompanied by valid import license in
the name of the importers, wherever necessary. Banks take into account
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the norms for holding imported inventory, make an appraisal of the
request for opening an LC like any other fund based working capital
facility, prescribe suitable margin/securities and then decide to establish
the LC.
Banks have simplified the documentation procedures for LC limits
sanctioned to their customer and usually, every time when an LC is to be
established, and LC application-cum-agreement is obtained from the
importer which will also serve as an advance document for the LC.
Documents that can be presented for payment
To receive payment, an exporter or shipper must present the documents
required by the letter of credit. Typically, the payee presents a document
proving the goods were sent instead of showing the actual goods.
However, the list and form of documents is open to imagination and
negotiation and might contain requirements to present documents issued
by a neutral third party evidencing the quality of the goods shipped, or
their place of origin or place. Typical types of documents in such
contracts might include:
23
LOANS TO IMPORTERS AND EXPORTERS.
Financial Documents
Bill of Exchange, Co-accepted Draft
Commercial Documents
Invoice, Packing list
Shipping Documents
Transport Document, Insurance Certificate, Commercial, Official
or Legal Documents
Official Documents
License, Embassy legalization, Origin Certificate, Inspection
Certificate, Phytosanitary certificate
Transport Documents
Bill of Lading (ocean or multi-modal or Charter party), Airway
bill, Lorry/truck receipt, railway receipt, CMC Other than Mate
Receipt, Forwarder Cargo Receipt, Deliver Challan...etc
Insurance documents
Insurance policy or Certificate but not a cover note.
RISKS INVOLVED IN LETTER OF CREDIT
Fraud Risks
The payment will be obtained for nonexistent or worthless
merchandise against presentation by the beneficiary of forged or
falsified documents.
Credit itself may be forged.
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LOANS TO IMPORTERS AND EXPORTERS.
Sovereign and Regulatory Risks
Performance of the Documentary Credit may be prevented by
government action outside the control of the parties.
Legal Risks
Possibility that performance of a Documentary Credit may be
disturbed by legal action relating directly to the parties and their rights
and obligations under the Documentary Credit
Force Majeure and Frustration of Contract
Performance of a contract – including an obligation under a
Documentary Credit relationship – is prevented by external factors
such as natural disasters or armed conflicts
Risks to the Applicant
Non-delivery of Goods
Short Shipment
Inferior Quality
Early /Late Shipment
Damaged in transit
Foreign exchange
Failure of Bank viz Issuing bank / Collecting Bank
Risks to the Issuing Bank
Insolvency of the Applicant
Fraud Risk, Sovereign and Regulatory Risk and Legal Risks
Risks to the Reimbursing Bank
No obligation to reimburse the Claiming Bank unless it has issued a
reimbursement undertaking.
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LOANS TO IMPORTERS AND EXPORTERS.
Risks to the Beneficiary
Failure to Comply with Credit Conditions
Failure of or Delays in Payment from, the Issuing Bank
Credit Issued by Party other than Bank
Risks to the Advising Bank
The Advising Bank’s only obligation – if it accepts the Issuing Bank’s
instructions – is to check the apparent authenticity of the Credit and
advising it to the Beneficiary
Risks to the Nominated Bank
Nominated Bank has made a payment to the Beneficiary against
documents that comply with the terms and conditions of the Credit
and is unable to obtain reimbursement from the Issuing Bank
Risks to the Confirming Bank
If Confirming Bank’s main risk is that, once having paid the
Beneficiary, it may not be able to obtain reimbursement from the
Issuing Bank because of insolvency of the Issuing Bank or refusal of
the Issuing Bank to reimburse because of a dispute as to whether or
not payment should have been made under the Credit
Margin
The banks while sanctioning import Letter of Credit limits may
require additional securities to cover their risk. A cash margin as per
RBI/banks rules is also stipulated for Letter of Credit limits. Third
party margin or security is acceptable subject to certain conditions.
The margin is taken at the time of establishing the Letter of Credit is
released only after the bill under Letter of Credit has been retired. It is,
therefore, necessary that the margin may preferably be kept in the
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LOANS TO IMPORTERS AND EXPORTERS.
shape of fixed deposit for a suitable period to earn interest on the
margin deposit.
2.3 POST IMPORT FINANCE
Issuing bank in, in receipt of documents under the LC established by it,
examines them and ensures that they conform to the terms of LC. If so,
they intimate the importer/applicant to pay for and retire the documents.
The applicant, at this stage, may utilize the balance in his Cash Credit
Account (the item of import is a raw material, etc) or Term loan limit (if
the item of import is a capital good or equipment) and retire the
documents. In respect of imports made by exporters, banks may grant
packing credit advances to meet the cost of imported goods.
Otherwise, normally banks do not extend any specific post import finance
to importers who have to suitably manage their own funds to meet the
bills in time/on the due dates.
Before handing over the import documents to the applicant, banks collect
charges by way of interest commission, etc. to the debit of applicant’s
account.
Within 3 months from date of retirement of import documents, importers
are required to submit the documentary proof of import in the form of
Customs certified Exchange Control copy of Bill of Entry to the bank,
failing which banks will report the importers as defaulters to RBI.
2.4 BANK GUARANTEES
At the request of the customer, the bank issues guarantees favoring the
beneficiaries. Thus the contract of a guarantee is a tri-partite contract. The
27
LOANS TO IMPORTERS AND EXPORTERS.
customer is the person at whose request the guarantee is issued, the bank
is the guarantor and the payee / beneficiary i.e. the person in whose favor
the guarantee is issued. The bank charges commission for issue of
guarantee, which is an income for the bank. The guarantee is a non-fund
based facility as the liability on the bank may or may not crystallize on
the due date based on the failure to perform the contract by the borrower.
Therefore they are shown as contingent liability by way of footnote to
accounts.
The guarantees are of 2 types they are as follow:-
i. Performance Guarantee: - performance guarantees normally
guarantees the performance of the contract. For e.g. the borrower
getting a contract for construction of a bridge against which the
BMC may insists on issue of guarantee towards the performance of
the contract from the borrower.
ii. Financial Guarantee: - Financial guarantees represent the guarantee
for ensuring the financial obligations. For instance:- BEST may
float a tender for supply of BUS from interested contractors and
may insists on 10% tender money / earnest money to be deposited
along with the quotations. This is to invite only capable and serious
bidders. In case, the bidders who are awarded the contract do not
accept the same; the bid money will be forfeited. Through the
credit facility at the same stage of issue of guarantee is a non fund
based facility, the bank has to be careful in assessing the credit
facility viz. Borrower’s standing, financial position, business
record etc. to lending a fund based facility. Therefore, many times
the bank insists on cash margin ranging from 5% to 100%
depending upon the customer.
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LOANS TO IMPORTERS AND EXPORTERS.
3. FACTORING & FORFEITING
Factoring, or invoice discounting, receivables factoring or debtor
financing, is where a company buys a debt or invoice from another
company. In this purchase, accounts receivable are discounted in order to
allow the buyer to make a profit upon the settlement of the debt.
Essentially factoring transfers the ownership of accounts to another party
that then chases up the debt.
Factoring therefore relieves the first party of a debt for less than the total
amount providing them with working capital to continue trading, while
the buyer, or factor, chases up the debt for the full amount and profits
when it is paid. The factor is required to pay additional fees, typically a
small percentage, once the debt has been settled. The factor may also
offer a discount to the indebted party.
Forfeiting (note the spelling) is the purchase of an
exporter's receivables – the amount importers owe the exporter – at a
discount by paying cash. The purchaser of the receivables, or forfeiter,
must now be paid by the importer to settle the debt.
As the receivables are usually guaranteed by the importer's bank, the
forfeiter frees the exporter from the risk of non-payment by
the importer. The receivables have then become a form of debt
instrument that can be sold on the secondary market as bills of
exchange or promissory notes.
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LOANS TO IMPORTERS AND EXPORTERS.
4. EXIM BANK
INTRODUCTION
Export-Import Bank of India is the premier export finance institution of
the country, set up in 1982 under the Export-Import Bank of India Act
1981. Government of India launched the institution with a mandate, not
just to enhance exports from India, but to integrate the country’s foreign
trade and investment with the overall economic growth. Since its
inception, EXIM Bank of India has been both a catalyst and a key player
in the promotion of cross border trade and investment. Commencing
operations as a purveyor of export credit, like other Export Credit
Agencies in the world, EXIM Bank of India has, over the period, evolved
into an institution that plays a major role in partnering Indian industries,
particularly the Small and Medium Enterprises, in their globalization
efforts, through a wide range of products and services offered at all stages
of the business cycle, starting from import of technology and export
product development to export production, export marketing, pre-
shipment and post-shipment and overseas investment.
OBJECTIVES
“… for providing financial assistance to exporters and importers, and for
functioning as the principal financial institution for coordinating the
working of institutions engaged in financing export and import of goods
and services with a view to promoting the country’s international
trade…”
“… shall act on business principles with due regard to public interest”
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LOANS TO IMPORTERS AND EXPORTERS.
INITIATIVES
EXIM Bank in India has been a prime mover in encouraging
project exports from India.
The Bank extends lines of credit to overseas financial institutions ,
foreign Govt. And agencies , enabling them to finance Import of
goods and services from India.
The Bank’s overseas Investment finance program offers a variety
of facilities for Indian Investments and acquisition overseas.
Under it’s Export Marketing Finance Programme , Exim Bank
supports small and medium enterprises (SME) in their export
marketing efforts.
The Bank has launched the rural initiatives program with the
objective of linking Indian rural industry to global market.
It also provides value-added information , advisory and support
services.
Exim Bank offers the following Export Credit facilities, which can be
availed of by Indian companies, commercial banks and overseas entities.
For Indian Companies executing contracts overseas
Pre-shipment credit
Exim Bank's Pre-shipment Credit facility, in
Indian Rupees and foreign currency, provides
access to finance at the manufacturing stage -
enabling exporters to purchase raw materials and other inputs.
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LOANS TO IMPORTERS AND EXPORTERS.
Supplier's Credit
This facility enables Indian exporters to extend term credit to importers
(overseas) of eligible goods at the post-shipment stage.
For Project Exporters
Indian project exporters incur Rupee expenditure while executing
overseas project export contracts i.e. costs of mobilisation/acquisition of
materials, personnel and equipment etc. Exim Bank's facility helps them
meet these expenses.
For Exporters of Consultancy and Technological Services
Exim Bank offers a special credit facility to Indian exporters of
consultancy and technology services, so that they can, in turn, extend
term credit to overseas importers.
Guarantee Facilities
Indian companies can avail of these to furnish requisite guarantees to
facilitate execution of export contracts and import transactions.
FINANCE FOR EXPORT ORIENTED UNITS
Term Finance (For Exporting Companies)
Project Finance
Equipment Finance
Import of Technology & Related Services
Domestic Acquisitions of businesses/companies/brands
Export Product Development/ Research & Development
General Corporate Finance
Working Capital Finance (For Exporting Companies)
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LOANS TO IMPORTERS AND EXPORTERS.
Funded
o Working Capital Term Loans [< 2 years]
o Long Term Working Capital [upto 5 years]
o Export Bills Discounting
o Export Packing Credit
o Cash Flow financing
Non-Funded
o Letter of Credit Limits
o Guarantee Limits
Working Capital Finance (For Non- Exporting Companies)
Bulk Import of Raw Material
Term Finance (For Non- Exporting Companies)
Import of Equipment
Export Finance
Pre-shipment Credit
Post Shipment Credit
Buyers' Credit
Suppliers' Credit [including deferred payment credit]
Bills Discounting
Export Receivables Financing
Warehousing Finance
Export Lines of Credit (Non-recourse finance)
33
LOANS TO IMPORTERS AND EXPORTERS.
Equity Participation (In Indian Exporting Companies)
To part finance project expenditure(Project, inter alia, includes new
project/ expansion/ acquisition of business/company/
brands/research & development)
Note:-
a. Exim Financing is available in Indian Rupees and in Foreign
Currency
b. Term finance, except for long term working capital, is available for
periods up to 10 years [in select cases 15 year finance can also be
made available]
c. Interest: Fixed & Floating options [Benchmarks for floating rates -
LIBOR/G-Sec/MIBOR]
d. Repayments: Amortizing/ Ballooning/ Bullet [As per cash flows]
5. ECGC
(EXPORT CREDIT GUARANTEE CORPORATION OF INDIA )
34
LOANS TO IMPORTERS AND EXPORTERS.
What is ECGC?
Export Credit Guarantee Corporation of India Limited, was established in
the year 1957 by the Government of India to strengthen the export
promotion drive by covering the risk of exporting on credit.
Being essentially an export promotion organization, it functions under the
administrative control of the Ministry of Commerce & Industry,
Department of Commerce, Government of India. It is managed by a
Board of Directors comprising representatives of the Government,
Reserve Bank of India, banking, insurance and exporting community.
ECGC is the fifth largest credit insurer of the world in terms of coverage
of national exports. The present paid-up capital of the company is Rs.800
crores and authorized capital Rs.1000 crores.
What does ECGC do?
Provides a range of credit risk insurance covers to exporters against
loss in export of goods and services
Offers guarantees to banks and financial institutions to enable
exporters to obtain better facilities from them
Provides Overseas Investment Insurance to Indian companies
investing in joint ventures abroad in the form of equity or loan
How does ECGC help exporters?
Offers insurance protection to exporters against payment risks
Provides guidance in export-related activities
Makes available information on different countries with its own
credit ratings
Makes it easy to obtain export finance from banks/financial
institutions
Assists exporters in recovering bad debts
Provides information on credit-worthiness of overseas buyers
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LOANS TO IMPORTERS AND EXPORTERS.
Need for export credit insurance.
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. A coup or
an insurrection may also bring about the same result. Economic
difficulties or balance of payment problems may lead a country to impose
restrictions on either import of certain goods or on transfer of payments
for goods imported. In addition, the exporters have to face commercial
risks of insolvency or protracted default of buyers. The commercial risks
of a foreign buyer going bankrupt or losing his capacity to pay are
aggravated due to the political and economic uncertainties. Export credit
insurance is designed to protect exporters from the consequences of the
payment risks, both political and commercial, and to enable them to
expand their overseas business without fear of loss.
5.1 STANDARD POLICIES:
ECGC has designed 4 types of standard policies to provide cover for
shipments made on short term credit:
1. Shipments (comprehensive risks) Policy – to cover both political
and commercial risks from the date of shipment
2. Shipments (political risks) Policy – to cover only political risks
from the date of shipment
3. Contracts (comprehensive risks) Policy – to cover both commercial
and political risk from the date of contract
4. Contracts (Political risks) Policy – to cover only political risks
from the date of contract
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LOANS TO IMPORTERS AND EXPORTERS.
RISKS COVERED UNDER THE STANDARD POLICIES:
1. Commercial Risks
Insolvency of the buyer
Buyer’s protracted default to pay for goods accepted by him
Buyer’s failure to accept goods subject to certain conditions
2. Political risks
Imposition of restrictions on remittances by the government in the
buyer’s country or any government action which may block or
delay payment to exporter.
War, revolution or civil disturbances in the buyer’s country.
Cancellation of a valid import license or new import licensing
restrictions in the buyer’s country after the date of shipment or
contract, as applicable.
Cancellation of export license or imposition of new export
licensing restrictions in India after the date of contract (under
contract policy).
Payment of additional handling, transport or insurance charges
occasioned by interruption or diversion of voyage that cannot be
recovered from the buyer.
Any other cause of loss occurring outside India, not normally
insured by commercial insurers and beyond the control of the
exporter and / or buyer.
RISKS NOT COVERED UNDER STANDARD POLICIES:
The losses due to the following risks are not covered:
1. Commercial disputes including quality disputes raised by the
buyer, unless the exporter obtains a decree from a competent court
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LOANS TO IMPORTERS AND EXPORTERS.
of law in the buyer’s country in his favour, unless the exporter
obtains a decree from a competent court of law in the buyers’
country in his favour
2. Causes inherent in the nature of the goods.
3. Buyer’s failure to obtain import or exchange authorization from
authorities in his county
4. Insolvency or default of any agent of the exporter or of the
collecting bank.
5. loss or damage to goods which can be covered by commerci8al
insurers
6. Exchange fluctuation
7. Discrepancy in documents.
5.2 COVERS ISSUED BY ECGC:
The covers issued by ECGC can be divided broadly into four groups:
1. STANDARD POLICIES – issued to exporters to protect then
against payment risks involved in exports on short-term credit.
2. SPECIFIC POLICIES – designed to protect Indian firms against
payment risk involved in (i) exports on deferred terms of payment
(ii) service rendered to foreign parties, and (iii) construction works
and turnkey projects undertaken abroad.
3. FINANCIAL GUARANTEES – issued to banks in India to protect
them from risk of loss involved in their extending financial support
to exporters at pre-shipment and post-shipment stages; and
4. SPECIAL SCHEMES such as Transfer Guarantee meant to protect
banks which add confirmation to letters of credit opened by foreign
banks, Insurance cover for Buyer’s credit, etc.
38
LOANS TO IMPORTERS AND EXPORTERS.
7445.41
3325.13
3217.4
2442.232153.781863.01
16759.1899999999
Commodity wise value of shipment covered under short term policies by ECGC
Rs. in crores
Engineering goods
Leather Manufactures
Readymade Garments
Chemical Allied Products
Cotton handloom
Basic Chemical Pharmaceu-ticals Cosmetics
Others
5.3 SPECIFIC POLICIES
The standard policy is a whole turnover policy designed to provide a
continuing insurance for the regular flow of exporter’s shipment of raw
materials, consumable durable for which credit period does not normally
exceed 180 days.
Contracts for export of capital goods or turnkey projects or construction
works or rendering services abroad are not of a repetitive nature. Such
transactions are, therefore, insured by ECGC on a case-to-case basis
under specific policies.
Specific policies are issued in respect of Supply Contracts (on deferred
payment terms), Services Abroad and Construction Work Abroad.
1) Specific policy for Supply Contracts: Specific policy for Supply
contracts is issued in case of export of Capital goods sold on deferred
credit. It can be of any of the four forms:
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LOANS TO IMPORTERS AND EXPORTERS.
Specific Shipments (Comprehensive Risks): Policy to cover both
commercial and political risks at the Post-shipment stage.
Specific Shipments (Political Risks): Policy to cover only political
risks after shipment stage.
Specific Contracts (Comprehensive Risks): Policy to cover
political and commercial risks after contract date.
Specific Contracts (Political Risks): Policy to cover only political
risks after contract date.
2) Service policy: Indian firms provide a wide range of services like
technical or professional services, hiring or leasing to foreign parties
(private or government). Where Indian firms render such services they
would be exposed to payment risks similar to those involved in export of
goods. Such risks are covered by ECGC under this policy.
If the service contract is with overseas government, then Specific
Services (political risks) Policy can be obtained and if the services
contract is with overseas private parties then specific services
(comprehensive risks) policy can be obtained, especially those contracts
not supported by bank guarantees.
Normally, cover is issued on case-to-case basis. The policy covers
90%of the loss suffered.
3) Construction Works Policy: This policy covers civil construction
jobs as well as turnkey projects involving supplies and services. This
policy covers construction contracts both with private and foreign
government.
This policy covers 85% of loss suffered on account of contracts with
government agencies and 75% of loss suffered on account of construction
contracts with private parties.
40
LOANS TO IMPORTERS AND EXPORTERS.
5.4 FINANCIAL GUARANTEES
Exporters require adequate financial support from banks to carry out their
export contracts. ECGC backs the lending programmes of banks by
issuing financial guarantees. The guarantees protect the banks from losses
on account of their lending to exporters. Six guarantees have been
evolved for this purpose.
These guarantees give protection to banks against losses due to non-
payment by exporters on account of their insolvency or default. The
ECGC charges a premium for its services that may vary from 5 paisa to
7.5 paisa per month for Rs. 100/-. The premium charged depends upon
the type of guarantee and it is subject to change, if ECGC so desires.
The six guarantees are as follows:
i. Packing Credit Guarantee: Any loan given to exporter for the
manufacture, processing, purchasing or packing of goods meant for
export against a firm order of L/C qualifies for this guarantee.
Pre-shipment advances given by banks to firms who enters
contracts for export of services or for construction works abroad to
meet preliminary expenses are also eligible for cover under this
guarantee. ECGC pays two thirds of the loss.
ii. Export Production Finance Guarantee: this is guarantee enables
banks to provide finance at pre-shipment stage to the full extent of
the domestic cost of production and subject to certain guidelines.
The guarantee under this scheme covers some specified products
such a textiles, woolen carpets, ready-made garments, etc and the
loss covered is two third.
41
LOANS TO IMPORTERS AND EXPORTERS.
iii. Export Finance Guarantee: this guarantee over post-shipment
advances granted by banks to exporters against export incentives
receivable such as DBK. In case, the exporter
Does not repay the loan, then the banks suffer loss? The loss
insured is up to three fourths or 75%.
iv. Post-Shipment Export Credit Guarantee: post shipment finance
given to exporters by the banks purchase or discounting of export
bills qualifies for this guarantee. Before extending such guarantee,
the ECGC makes sure that the exporter has obtained Shipment or
Contract Risk Policy. The loss covered under this guarantee is
75%.
v. Export Performance Guarantee: exporters are often called upon
to execute bid bonds supported by a bank guarantee and it the
contract is secured by the exporter than he has to furnish a bank
guarantee to foreign parties to ensure due performance or against
advance payment or in lieu of or retention money. An export
proposition may be frustrated if the exporter’s bank is unwilling to
issue the guarantee.
This guarantee protects the bank against 75% of the losses that it
may suffer on account of guarantee given by it on behalf of
exporters.
vi. Export Finance (Overseas Lending) Guarantee: if a bank
financing overseas projects provides a foreign currency loan to the
contractor, it can protect itself from risk of non-payment by the con
tractor by obtaining this guarantee. The loss covered under this
policy is to extent of three fourths (75%)
6.INTEREST RATES OF DIFFERENT BANKS
42
LOANS TO IMPORTERS AND EXPORTERS.
PRE-SHIPMENT FINANCE
State Bank Of India
Oriental Bank Of
Commerce
Syndicate Bank
Saraswat Bank
Citi Bank0
2
4
6
8
10
12
14
16
18
20
Upto 180 daysFrom 180 to 270 daysBeyond 270 days
The above chart gives a clear picture of the rates of interest charged by
various Banks for pre-shipment credit extended by the Banks to
Exporters. Here, we have Banks from different sectors of the economy
i.e. public sector banks, private sector banks as well as cooperative banks.
Out of the above six banks SBI , Oriental Bank Of Commerce and Dena
Bank are Public Sector Banks. Saraswat Bank is Co-operative Banks
whereas Citi Bank is a foreign Bank.
The interest rates vary from bank to banks as well as depending upon the
period for which credit is given by the banks to the exporters. While
providing pre-shipment credit to exporters it is categorized into three
types, i.e.
i. for a period of 180 days
ii. From 180 to 270 days
iii. And Beyond 270 days.
43
LOANS TO IMPORTERS AND EXPORTERS.
The interest rates vary depending on the above types. As the period of
credit increases, the rate of interest also increases.
The rate of interest for a period of 180 days is seen to be ranging in
between 8% to 12%, and that from 180 to 270 days is found to be in
between 10% to 13%. The rate of interest beyond 270 days is the most
highest among all i.e. in between 11% to 19%.
44
LOANS TO IMPORTERS AND EXPORTERS.
POST SHIPMENT FINANCE
State Bank Of India
Oriental Bank Of
Commerce
Syndicate Bank
Saraswat Bank
Citi Bank0
2
4
6
8
10
12
14
16
18
On demand BillsOn usance bill - Upto 90 daysFrom 90 days to 6 monthsBeyond 6 months
From the above chart we can see that the interest rates on demand bills
are ranging from 8% to 12%. The interest rates on usance bill for 90 days
are also found to be ranging in between 8% to 12%. Also as the period of
usance bill increases for 90 days to 6 months the rate of interest is found
to be increasing. It stands to be ranging in between 9% to 15%. And
finally the rate of interest for usance bills beyond 6 months is ranging
from 9% to 18%.
If we do a comparison between Oriental Bank Of Commerce and State
Bank of India, we will find that the interest rate on demand bill and
usance bill upto 90 days and beyond 6 months is extended at around
similar interest rates however there is a difference in the interest rates on
usance bill for 90 days to 6 months .
7.NATURE OF FINANCING BY BANKS
45
LOANS TO IMPORTERS AND EXPORTERS.
Depending upon the relationship of the borrower with the bank
Relationship Documentation Amount of Loan Charges
Strong
Weak
The above table is based on the research done to find out how banks
actually decide upon providing finance to a particular exporter or
importer. The table gives details of how relationship of the importer and
the exporter with the banker affect various aspects such as the
documentation process, the amount of loan and the charges associated
with it. It is found that if the relationship of the importer or exporter with
the bank is strong then the documentation required is comparatively low
than a weak relationship. Also as the bank know the customer well due to
a strong relationship, the bank can extend higher amount of finance to
them. However in case of weak relationship, the bank may not allow
higher amount of finance as the banker might not be familiar with the
credit standing of the importer or exporter.
Similarly, the amount charged also differs with the difference in
relationship. It has an inverse relationship i.e. when the relationship is
strong the bank can charge comparatively less amount from the importer
or exporter and vice versa.
46
LOANS TO IMPORTERS AND EXPORTERS.
Depending upon the securities offered by the borrower to the
bank:
Securities Documentation Amount of Loan Charges
More
Less
Here the extension of finance to the importer or exporter depends upon
the securities provided by them against the finance taken.
To ensure the safety of funds lent, the first and most important factor
considered by a bank is the capacity of borrowers to repay the amount of
loan; the bank therefore, relies primarily on the character, capacity and
financial soundness of the borrower. The choice of security to be
provided to the lender/supplier is left to the borrower. But the bank can
hardly afford to take any risk in this regard and hence it also has the
security of assets owned by the borrower. In case the borrower fails to
repay the loan, the bank can recover the amount by attaching the assets. It
can sell the assets offered as security and realize the amount.
Depending of this factor also the bank decides upon whether to provide
finance to the exporter. For instance, if the securities provided by the
importer or exporter are more than the bank will definitely give finance to
the firm. This is because it will minimize the risk involved if the loan is
47
LOANS TO IMPORTERS AND EXPORTERS.
not repaid. The bank can sell the securities and recover the loan amount.
Also the charges will be less for the importer or exporter. However the
documentation process will be lengthy as the bank will have to verify the
securities provided by the borrower.
In case if the securities provided are less than the amount of loan
provided will reduce with higher charges against it. However the
documentation process will not have an effect on it.
48
LOANS TO IMPORTERS AND EXPORTERS.
8. RELATIONSHIP BETWEEN NUMBER OF TRANSACTIONS
AND INTEREST CHARGES
As the number of transaction of the importer/exporter with the bank
increases the amount charged by the bank goes on decreasing. The bank
would charge higher rate of interest against export finance or high
charges against letter of credit to the importer or exporter at the initial
stage. But if the importer/exporter approaches the same bank for its
further financing, they will reduce the charges or the rate of interest. It
indirectly implies that as the relationship of the banker with the
importer/exporter grows older the fees charged by the bank reduces. This
can be illustrated from the following diagram:
49
Greater the transactions with the bank
Lower the charges
LOANS TO IMPORTERS AND EXPORTERS.
9. CONTRIBUTION BY VARIOUS BANKS IN TRADE
FINANCE
23%
32%
20%
25%
Private Sector Banks Co-operative Banks Public Sector BanksForeign Banks
The above pie diagram gives us a picture of the contribution of various
banks in trade finance. It is based on a research done to find out which
banks are preferred by the importers and exporters while going for trade
finance. The selection of banks for trade finance is strongly dependent
upon the relationship of the client with the bank.
According to the survey, most of the importer/exporters are found to be
approaching cooperative banks for their business finance. The co-
operative banks provide many facilities to the borrowers and this can be
the reason why their contribution is found to be more in trade financing.
The second highest preference of the borrowers is foreign banks and the
least preferred banks are public sector banks. However there is not much
difference between the contribution of private sector banks and public
sector banks.
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LOANS TO IMPORTERS AND EXPORTERS.
CONCLUSION
The questionnaire that was given to the banks covered all the aspects
about the loans / services to the importers and exporters . While
collecting primary data , nationalized , co-operative and private banks are
taken into consideration.
Following are some points that are extracted from the answers given by
some banks.
1. Almost all the Banks provide trade finance facility.
2. The common type of finance which they provide are:
For EXPORTERS.
i. Pre-shipment Finance
ii. Packing credit in foreign currency (PCFC)
iii. Post shipment Finance
iv. Exchange Bills Rediscounting (EBR)
For IMPORTERS.
i. Opening of L/C
ii. Buyers Credit
iii. Foreign Currency Loan.
3. There is no ceiling on the amount of finance to be provided as such
for domestic as well as foreign currency loans.
4. The finance is given only after checking the creditworthiness of the
applicant. Out of total trade finance, finance for exporters is more.
5. Banks may take primary security by the way of Stock , Finished
goods , Book debts, Raw material etc. and collateral security by the
way of Equitable mortgage of factory,
Personal property, Fixed deposit Receipt, NSC’s, Personal
guarantees.
6. The documents that bank take from applicant are :-
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LOANS TO IMPORTERS AND EXPORTERS.
Demand promissory notes
Invoice of shipment
Order invoice
Hypothecation deed
Mortgage deed
7. The interest rate charged for the foreign currency import finance is
LIBOR + 200 bps maximum as per RBI guidelines.
8. QUESTIONNAIRE
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LOANS TO IMPORTERS AND EXPORTERS.
I. Name of the bank:-
II. Do you provide finance to importers and exporters?
Yes No
III. What type of finance is provided for exporters?
IV. What type of finance is provided for importers?
V. What is the rate of interest charged for Preshipment finance?180 days Beyond 270 days
180 to 270 days
VI. What is the rate of interest charged for Post shipment finance?
For 90 days 90 days to 6 months
Beyond 6 months
VII. Is there any ceiling on the amount of finance to be provided? Yes No (specify the ceiling if yes )
VIII. What type of securities does the bank take from the
applicant?
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LOANS TO IMPORTERS AND EXPORTERS.
IX. What type of documents does the bank take from the applicant?
X. Do you provide import/export loan in currency other than the domestic currency?
Yes No
XI. If yes, is there any ceiling on amount of loan given in foreign currency? Yes No
XII. What is the % of export import finance out of you total finance provided?
XIII. Out of the total finance provided to importers and exporters, which finance is more?
Finance to importers
Finance to exporters
XIV. Do you look for the credit worthiness of the borrower?
Yes No
XV. What is the rate of interest charged for import finance?
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