Presented By: Anudeep AroraExportFinancing

Sources:Commercial banks which are members of the Foreign Exchange Dealers Association provide finance at a concessional rate of interest and are refinanced by the Reserve Bank/ Export Import Bank of India. In case they do not wish to avail refinance, they are entitled for an interest rate subsidy.Export Financing- Sources

ContExport Import Bank of India, in certain cases, participates with commercial bank in extending medium term loans to exportersOther Related Institutions:Reserve Bank of India, being the central bank of country, lays down the policy frame work and provides guidelines. The RBI functions as refinancing institution for short and medium term loans respectively, provided by commercial banks.

Cont..Export Credit & Guarantee Corporation (ECGC) also plays an important role through various policies and guarantees providing cover for commercial and political risks involved in export trade.

Export Financing- Forms Forms of Export Credit Pre-shipment credit Post-Shipment credit Factoring Forfaiting

A. Pre-shipment CreditPre Shipment Finance is provided by financial institutions when the Exporter wants the payment of the goods before shipment. The objectives of pre shipment finance is to enable the exporter to:Procure raw materials.Carry out manufacturing process.Provide a secure warehouse for goods and raw materials.

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Process and pack the goods.Ship the goods to the buyers.Meet other financial cost of the business.

Cont.. TypesPacking CreditAdvance against Cheques /Draft etc. representing Advance Payments. Forms Packing Credit in Indian RupeePacking Credit in Foreign Currency (PCFC)

Pre-shipment Credit- EligibilityIssued to exporter who has the export order in his own name. As an exception, it can also be granted to third party manufacturer/ supplier who do not have export orders in their own name.

A ten digit importer exporter code number allotted by DGFT

ContDGFT if the goods to be exported fall under the restricted category.If the goods to be exported are not under OGL (Open General Licence), the exporter should have the required license /quota permit to export

Cont..Formal application for releasing the packing credit to the effect that the exporter would ship the goods and submit the relevant shipping documents to the banks within prescribed time limit. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer.

Cont..The confirmed order received from the overseas buyer should reveal the information about the full name and address of the Overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.

A. Pre-shipment Credit- StagesAppraisal and Sanction of Limits: Banks Check Exporter profile, Product profile, political and economic details about country, and the exporters license/ permitDisbursement of Packing Credit Advance: normally allowed when all the documents are properly executed. The quantum of finance depend on the FOB value of contract /LC or the domestic

values of goods, whichever is found to be lower. Normally insurance and freight charged are also considered.Follow up of Packing Credit Advance: Exporter needs to submit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance.

ContLiquidation of Packing Credit Advance: Packing Credit Advance needs to be liquidated out of the export proceeds of the relevant shipment, thereby converting pre-shipment credit into post-shipment credit. In case the export does not take place then the entire advance can also be recovered at a certain interest rate.

Overdue Packing:Bank considers packing credit as an overdue, if the borrower fails to liquidate the packing credit on the due date. And, if the condition persists then the bank takes the necessary step to recover its dues as per normal recovery procedure.

Pre-shipment Credit in Foreign CurrencyAuthorized dealers are only permittedThe rate of interest on PCFC is linked to LIBOR.The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency transaction is that of the exporter

Cont Sources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Earner Foreign Currency Account, Resident Foreign Currency Accounts and Foreign Currency (Non Resident) Accounts.

Pre-shipment Credit Other issuesPacking Credit Facilities to Deemed Exports: Deemed exports made to multilateral funds aided projects and programs, under orders secured through global tenders for which payments will be made in free foreign exchange, are eligible for concessional rate of interest both at pre and post supply stages.

ContPacking Credit facilities for Consulting Services Do not involve physical movement of goods out of Indian Customs territory. Pre-shipment finance can be provided to allow the exporter to mobilize resources like technical personnel and training them

ContAdvance against Cheque /Drafts received as advance payment Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters, till the time of realization of the proceeds of thecheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.

Post-shipment CreditPurpose : meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies. Basis : provided against evidence of shipment of goods/supplies

Cont Nature: Can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self liquidating. In case it involves advance against un-drawn balance, it is usually unsecured in nature.

ContQuantum : Can be extended up to 100% of the invoice valuePeriod : Can be short terms or long term, depending on the payment terms offered by the exporter to the importer. Six months in case of cash exports.

Cont..Type of Exports covered: Physical exports, Deemed export (provided to the supplier of the goods which are supplied to the designated agencies) and for Capital goods and project exports.

Post-shipment Credit- TypesExport Bills purchased/discounted. Export Bills negotiatedAdvance against export bills sent on collection basis.Advance against export on consignment basisAdvance against un-drawn balance on exportsAdvance against claims of Duty Drawback

Export Bills Purchased/ Discounted : (DP & DA bills)Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable export transactions and the proper limit has to be sanctioned to the exporter .

Export Bills Negotiated (Bill under L/C):Because of the security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks:The risk of nonperformance by the exporter, In which case, the issuing banks do not honor the letter of credit.

ContDocumentary risk where the issuing bank refuses to honor its commitment. So, it is important for the for the negotiating and the lending bank to properly check all documents before submission

Advance Against Export Bills Sent on Collection BasisBills can only be sent on collection basis if the bills drawn under LC have some discrepancies. Banks may allow advance against these collection bills to an exporter with concessional rates depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill. Transit period is from the date of acceptance of the export documents for collection by the bank

Advance Against Export on Consignments BasisBank may finance goods exported on consignment basis at the risk of the exporter. In this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date which should be within the prescribed date.

Advance against Undrawn BalanceIt is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, subject to a maximum of 10 percent of the export value against an undertaking from the exporter

Advance Against Claims of Duty DrawbackThis credit is given only if the in house cost of production is higher in relation to export price due to the existing duty structure. Banks grant advances at lower rate of interest for a period of 90 days and only if other types of export finance are extended to the exporter by the same bank. After the shipment the exporters lodge their claims to the relevant government authorities. The bank is authorized to receive the claim amount directly from the concerned government authorities

Forfaiting

Definition 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..

ContForfaiter pays exporter in cash and undertakes the risk associated with the export.EXIM bank plays intermediary role between exporter and the overseas forfaiting agency. The exporter approaches EXIM bank for forfaiting transaction. The bank receives bills from the exporter and sends them to the forfaiter for discounting

Cont..The bank arranges for the discounted proceeds to be remitted to the Indian exporter. The bank issues appropriate certificates to enable exporters to remit commitment fees and charges.RBI has allowed Authorized dealers to undertake forfaiting of medium term export receivables.

Cont..Involves two cost elements: Commitment fee, payable by the exporter to the forfeiter and Discount fee 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 availed bills of exchange.

Forfaiting- Benefits Eliminates RiskRemoves political, transfer and commercial riskProvides financing for 100% of contract valueProtects against risks of interest rate increase and exchange rate fluctuation

Enhances Competitive AdvantageEnables sellers of goods to offer credit to their customers, making their products more attractive Helps sellers to do business in countries where the risk of non-payment would otherwise be too high

Improves Cash FlowForfaiting enables sellers to receive cash payment while offering credit terms to their customers

Removes accounts receivable, bank loans or contingent liabilities from the balance sheet

Increases Speed and Simplicity of TransactionsFast, tailor-made financing solutionsFinancing commitments can be issued quicklyDocumentation is typically concise and straightforwardNo restrictions on origin of export Relieves seller of administration and collection burden

Factoring

Cont..It is an attractive way of providing export finance to exporters. In this system, factor bears the risk who complete credit risk. A factor is a special type of agent who, depending upon the type of agreement, offers a variety of services.

Cont..These services include coverage of credit risk, collection of export proceeds, maintenance of accounts receivables and advance of funds.Purchase of receivables of its clients without recourse is the most important service of the factor. A big advantage to the exporter is that it is without recourse financing. This means that the risk of non-payment by the importer is to be borne entirely by the factor.

Cont..In India, International Export Factoring services on with recourse basis have been approved by the RBI. It provides a new dimension to management of export receivables.SBI Factors and Commercial Services Pvt. Ltd., Bombay have been permitted to provide International Export Factoring.

Cont..In this system, the exporter enters into an export factoring agreement with exporters factor. The exporters ship goods to approved foreign buyers. Each invoice is made payable to a specific factor in the importers country. Copies of invoices and shipping documents are sent to the Importers factor. Exporters factor will make prepayment to the export against approved export receivables.

Cont..On receipt of payments from the importer on due date of invoice, importers factor remits the fund to the exporters factor. The exporters factor pays to the exporter after deducting the amount of prepayments

Note 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.

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