Export Financing (Final)

7/30/2019 Export Financing (Final)

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EXPORT FINANCING


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Export Financing describes the activity ofgovernments helping companies by financing theirexport activities.

It can be in form of working capital loans or termfinancing for foreign buyers, packing credits etc.

It involves various risks such as political risks,exchange risks, commercial risks etc.

Export Financing


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WORKING:


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Selling on Open Account

Cash in Advance

Pre-Shipment Finance

Post-Shipment Finance

Payment Types:


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Trade Finance


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Promoting Foreign Trade.

It helps in reducing Trade Deficit.

Helps in building Foreign exchange reserves.

Internationalisation of Products.

Building Relationships.

BENEFITS:


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COMMERCIAL BANKS:

It serve as an important intermediary for inter-country transactions.

It oversee the transactions, offer credit checks on potential buyers,

contract with overseas banks in dealing with foreign purchases andsmooth out any currency exchanges necessary for the exporting firm.

It offers pre-shipment credit, which is short-term financing for workingcapital at the beginning of the export process.

Banks also offer credit to foreign buyers, advance payment prior tocurrency changing hands and offer loans secured by the existence offoreign demand.

MARKET PLAYERS


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Set up by an Act of Parliament in September 1981.Wholly owned by the Government of India.Exim is the principal financial institution in the country for

coordinating working of institutions engaged in financing

exports and imports.

Offices:Head office Mumbai

A network of 13 offices in India and Overseas.Domestic Offices - Ahemdabad, Bangalore, Chennai,Hyderabad, Kolkata, Mumbai, New Delhi, Pune.

Overseas Offices - Budapest, Johannesburg, Milan,Singapore, Washington DC.

EXIM BANK


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From financing FacilitatingIndia foreign trade andpromoting Foreign trade.

To creating export capabilityby arranging competitivefinancing at various stages ofexport cycle.

Providing Consultancy andhigh range of services toexporters.

FUNCTIONS OF EXIM BANK


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Pre-shipment Credit

Post-shipment Credit

Factoring

Forfaiting

Forms of Export Financing


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Pre-shipment credit means any loan or advance

granted or any other credit provided by bank to anexporter for financing the purchase, processing,manufacturing or packing of goods prior to shipment.

It is also referred to as PackingCredit.

Pre-shipment Credit


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The objective is to enable the exporter to:

Procure raw material. Carry out manufacturing process.

Procure a secure warehouse for goods and rawmaterial.

Process and pack the goods. Ship the goods to the buyers.

Meet the financial cost to the business

Objectives Pre-shipment Credit


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Types:

Packing Credit

Advance against cheques /drafts etc. representingadvance payment.

Forms:

Packing credit in Indian rupees.

Packing credit in foreign currencies.

Types and Forms of Pre-shipment Credit


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Issued to exporter who has export in his own name.

A Ten digit Exporter code number allotted by DGTF.

Exporter should not be in caution list of RBI.

The confirmed order received from the overseasbuyer should reveal the information about the fullname and address of the overseas buyer, descriptionquantity and value of goods (FOB or CIF), destinationport and the last date of payment.

Eligibility for Pre-shipment Credit


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Appraisal and sanction of limits.

Disbursement of packing credit advance.

Follow up packing credit advance.

Liquidation of packing credit advance.

Overdue packing

Stages of Pre-shipment Credit


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Authorized dealers are only permitted.

The 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 currencytransaction is that of the exporter.

Sources of funds for the banks for extending PCFC facilityinclude the Foreign Currency balances available with theBank in Exchange, Earner Foreign Currency Account(EEFC), Resident Foreign Currency Accounts RFC(D) andForeign Currency (Non Resident) Accounts.

Pre-shipment Credit in Foreign Currency


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DEFERRED CREDIT- Consumer goods are normally

sold on short term credit, normally for a period up to180 days. However, there are cases, especially, in thecase of export of capital goods and technologicalservices; the credit period may extend beyond 180

days. Such exports were longer credit terms (beyond180 days) is allowed by the exporter is called asdeferredcredit ordeferred payment terms.

SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE


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REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD)

SCHEME - This facility will be an additional windowavailable to exporter along with the exiting rupeefinancing schemes to an exporter at post shipmentstage. This facility will be available in all convertible

currencies. This scheme will cover export bills up to180 days from the date of shipment (inclusive ofnormal transit period and grace period) .


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PURPOSE: Post-shipment meant to finance export sales

receivables after the date of shipment of goods to the dateof realisation of exports proceeds.

BASIS: provided against evidence of shipment of

goods/supplies.

POST-SHIPMENT FINANCE


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NATURE:can be both secured as well a unsecured. It can beextended up to 100% of the invoice value.

PERIOD:depending on the payment terms offered by theexporter to the importer finance can be short terms or longterm.

TYPE OF EXPORTS COVERED: physical exports, capital goodsand project exports and deemed exports (provided to thesupplier of the goods which are supplied to the designated

agencies).


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EXPORT BILLS PURCHASED/DISCOUNTED (DP & DA Bills): Export Bills(Non L/C Bills) is used in terms of sale contract/order may bediscounted or purchased by the banks. Used in indisputable exporttransactions with proper limit sanctioned to the exporter.

EXPORT BILLS NEGOTIATED (BILL UNDER L/C): Due to the availability

of the security, banks often become ready to extend the financeagainst bills under L/C. However, this arises two major risk factors forthe banks:

Firstly, the risk of non-performance by exporter, (in this case, issuingbanks do not honour the letter of credit)

Secondly, documentary risk in which the issuing bank refuses tohonour its commitment. Thus, its important for the negotiating bankto check all documents before submission.

POST-SHIPMENT CREDIT TYPES


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ADVANCE AGAINST EXPORT BILLS SENT ON COLLECTIONBASIS: Bills can only be sent on collection basis if the

bills drawn under L/C have some discrepancies. Banksmay allow advance against these collection bills toexporters depending upon the transit period in case ofDP Bills and transit period plus usance period in case of

usance bill.

ADVANCES AGAINST EXPORTS ON CONSIGNMENTSBASIS: Banks may finance goods exported on the

consignment basis at the risk of the exporter. In thiscase bank instructs the overseas banks to deliver thedocuments only against trust receipts/undertaking todeliver he sale proceeds by specified date which should

be within the prescribed date.


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ADVANCES AGAINST UNDRAWN BALANCE: It is a verycommon practice in export to leave small part undrawn

for payment after adjustment due to difference inrates, weight, quality etc. Banks do finance against theundrawn balance, subject to a maximum of 10% of theexport value against an undertaking from the exporter.

ADVANCES AGAINST CLAIMS OF DUTY DRAWBACKS: Thiscredit is given only if the in house cost of production ishigher in relation to export price due to the existing

duty structure. Banks grant advances at lower rate ofinterest for a period of 90 days and only if other typesof export finance are extended to the exporter by thesame bank.


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Factoring is an arrangement in which receivables on

account of sale of goods or services are sold to thefactor at a certain discount.

As the factor gets the title to the receivables onaccount of the factoring contract, factor becomesresponsible for all credit control, sales ledgeradministration and debt collection from thecustomers

Factoring


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3 parties are involved in Factoring transactionsas shown below:


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The process of conversion of credit sales into cash.

Here, a financial institution which is usually a bank(Factor) buys the accounts receivable of a companyusually a client and then pays up to 80% of theamount immediately on agreement.

The remaining amount is paid to the client when thecustomer pays the debt.

Export Factoring


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Parties involved: Importer, Exporter, Import factor, Export factor.

Factor bears the complete credit risk and provide a variety of

services.

These services include maintenance o accounts receivables,collection of export proceeds, coverage of credit risk.

Export factoring is different from the general factoring as there are4 parties involved in export factoring transactions namely:

Two Separate but interrelated contracts : Between Exporter and export factor

Export factor and import factor


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Applies to businesses engaged in international market.

Period for factoring is 90 to 150 days.

Considered to be a costly source of finance

An ideal financial solution for new and emerging firmswithout strong financials.

Credit rating is not mandatory

Characteristics of Export Factoring


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Cost of factoring = Finance cost + Operating cost. (Variesfrom 1.5% to 3 % per month).

For delayed payments beyond the approved credit period,penal charge of around 1-2% per month over and above thenormal cost is charged

Not possible in case of Bad Debts.

In India Factoring can be done for invoices as low asRs.1,000.


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RBI as a measure to solve the problem of the working capital

of the suppliers extended the factoring as the new form ofthe financial services in India.

It was set up after the recommendation of the

KalyanasundaramCommittee in 1988.

They initially developed the concept of the inland Factoring.

But later on Export Financing become one of theiremphasized sector.


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Exporter sells goods on open credit.

Export receivables are factored to the factor on the non-recoursebasis(generally). All the supporting documents relating to the exporttransaction are given to the export factor.

Export factor performs its function of credit collection, sales

ledger accounting and collection to the import factor with respect to thecustomers located in the importing country.

Import factor collects the money due from the customers concerned.

Import factor effects the payments to the export factor on assignmentor maturity or collection or as per the agreement.

Export factor makes payment to the exporter upon assignment ormaturity or collection or as per the agreement.

Mechanism


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Disclosed: Seller notifies the buyer of the factor's name in the invoice,

telling the buyer to make payment to the factor on due date. thedebtor is informed of the assignment of debts to the factor, and isaccordingly required to cooperate with the factor for futuretransactions and collections.

1. Recourse Factoring: The client collects the money from the customerbut in case customer dont pay the amount on maturity then theclient is responsible to pay the amount to the factor. It is offered at alow rate of interest and is in very common use.

2. Non-recourse factoring: factor undertakes to collect the debts from

the customer. Balance amount is paid to client at the end of thecredit period or when the customer pays the factor whichever comesfirst. The advantage of nonrecourse factoring is that continuousfactoring will eliminate the need for credit and collectiondepartments in the organization.

Types of Factoring


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Undisclosed Factoring: In undisclosed factoring

(factoring without notification), the seller does notnotify the buyer of the existence of the factoringdeal, so the name of the factor is not disclosed on theinvoice. In undisclosed factoring, the factor none-the-

less retains control, maintaining the seller's salesledger and providing short-term finance against salesinvoices, even though the transactions take place inthe name of the seller.


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Increases working capital

Avoid additional liabilities Improves credit monitoring

Reduces administrative cost

Reduces suppliers credit cost

Protection against bad debts in case of non recourse

Better management of organization

Advantages of Export Factoring


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1. In Discount factoring, the factor issues an advance of funds againstthe exporters receivables until money is collected from the importer.The cost is variable, depending on the time frame and the dollar

amount advanced.

2. In Collection factoring, the factor pays the exporter, less acommission charge, when receivables are at maturity, regardless ofthe importers financial ability to pay. The cost is fixed, ranging

generally between 1 and 4 per cent, depending on the country, salesvolume, and amount of paperwork involved. However, as a rule ofthumb, export factoring usually costs about twice as much as exportcredit insurance.

Two Common Export FactoringFinancing Arrangements and Their Costs


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SBI Global Factors Limited (SBIGFL) is the only provider ofinternational factoring, domestic factoring and forfaiting servicesunder one roof in India. SBIGFL has established itself as a marketleader in international factoring providing value added services toits clients.

Canbank Factors Ltd

Foremost Factors Ltd (FFL)

The Hongkong and Shanghai Bank Corporation Limited (HSBC)

Export Credit Guarantee Corporation of India Ltd. (ECGC)

India Factoring and Finance Solutions Pvt Ltd (India Factoring)

Companies offering export factoringservice:


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Factoring transactions in India are governed by the following Acts:-

a) Indian Contract Act 1872

b) Sale of Goods Act 1930

c) Transfer of Property Act 1882

d) Banking Regulation Act 1949

e) Foreign Exchange Regulation Act 1973

Statutes applicable to exportfinancing in India:

Wh F t i h t b


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Banks reluctance to provide factoring services

Banks resistance to issue Letter of Disclaimer (Letter of Disclaimeris mandatory as per RBI Guidelines).

Problems in recovery.

Factoring requires assignment of debt which attracts Stamp Duty.

Cost of transaction becomes high.

Why Factoring has not becomepopular in India


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FACTORINGv/s

BILLS DISCOUNTING

BILL DISCOUNTING

1. Bill is separately examined

and discounted.

2. Financial Institution does not

have responsibility of Sales

Ledger Administration and

collection of Debts.

3. No notice of assignment

provided to customers of the

Client.

FACTORING

1. Pre-payment made against allunpaid and not due invoicespurchased by Factor.

2. Factor has responsibility ofSales Ledger Administrationand collection of Debts.

3. Notice of assignment isprovided to customers of theClient.

FACTORING


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FACTORING

v/s

BILLS DISCOUNTING (contd)

BILLS DISCOUNTING

4. Bills discounting is usually

done with recourse.

5. Financial Institution can get

the bills re-discounted before

they mature for payment.

FACTORING

4. Factoring can be done

without or without recourse

to client. In India, it is donewith recourse.

5. Factor cannot re-discount the

receivable purchased under

advanced factoringarrangement.


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Forfaiting is a mechanism by which the right for

export receivables of an exporter (Client) ispurchased by a Financial Intermediary (Forfaiter)without recourse to him.

Credit Sale gets converted as Cash Sale

Finance available up to 100% of value

Forfaiting


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MECHANICS OF FORFAITING

EXPORTER IMPORTER

FORFAITER AVALLING BANK

HELD TILL MATURITY

SELL TO GROUPS OF INVESTORS

TRADE IN SECONDARY MARKET


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Promissory notes are sent for avalling to the Importers Bank.

Availed notes are returned to the Importer.

Availed notes sent to Exporter.

Availed notes sold at a discount to a Forefaiter on a NON-RECOURSEbasis.

Exporter obtains finance.

Forfaiter holds the notes till maturity or securitises these notes and sellsthe Short Term Paper either to a group of investors or to investors at largein the secondary market.

Process


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Converts Deferred Payment Exports into cash transactions,providing liquidity and cash flow to Exporter.

Absolves Exporter from Cross-border political or conversion riskassociated with Export Receivables.

Finance available up to 100% (as against 75-80% under conventionalcredit) without recourse.

Acts as additional source of funding and hence does not have

impact on Exporters borrowing limits. It does not reflect as debt inExporters Balance Sheet.

Provides Fixed Rate Finance and hence risk of interest ratefluctuation does not arise.

CHARACTERISTICS OF FORFAITING


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Exporter is freed from credit administration.

Provides long term credit unlike other forms of bank credit.

Saves on cost as ECGC Cover is eliminated.

Simple Documentation as finance is available against bills.

Forfait financer is responsible for each of the Exporters tradetransactions. Hence, no need to commit all of his business or

significant part of business.

Forfait transactions are confidential.


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Commitment Fee:- Payable to Forfaiter by Exporter in considerationof forfaiting services.

Commission:- Ranges from 0.5% to 1.5% per annum.

Discount Fee:- Discount rate based on LIBOR for the periodconcerned.

Documentation Fee:- where elaborate legal formalities areinvolved.

Service Charges:- payable to Exim Bank.

COSTS INVOLVED


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Relatively new concept in India.

Depreciating Rupee

No ECGC Cover

High cost of funds

High minimum cost of transactions (USD 250,000)

RBI Guidelines are vague.

Very few institutions offer the services in India. Exim Bankalone does.

Long term advances are not favored by Banks as hedgingbecomes difficult.

Lack of awareness.

WHY FORFAITING HAS NOT

DEVELOPED


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Drawback means the rebate of duty chargeable on any

imported materials or excisable materials used inmanufacture of processing of goods which aremanufactured in India and exported. Duty drawback isequal to:

Custom Duty paid on imported inputs SAD + Excise dutypaid on indigenous inputs.

Duty Drawback Scheme


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Duty paid on packing material

Rebate/refund is available only on the part on whichthe duty is paid in case of partial custom/excise duty.

No drawback is available on other taxes like Sales taxand Octroi.

Drawback is available on processing and job work.The rate is fixed under rule 3

Activities covered:


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Individual exporter is not required to produce any evidencein respect of actual duties paid by him on inputs

In special type of products brand rate is fixed under rule 6

Value for the purposes of section 76(1)(b) will be value at

the time of export and not the original value of import ofthe goods


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MAJOR INSTITUTIONS

INVOLVED IN EXPORT FINANCEReserve Bank of India (RBI)

Regulate export credit and transaction includingforeign exchange affairs

RBI does not directly provide export finance to the

exporters

Adopts policies and initiates measures to encourage

commercial banks and other financial institutions to

provide liberal export finance.


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Foreign Exchange Regulations Act, 1973

RegistrationThe exporter shall register with and obtain

importer-exporter code number from the DirectorGeneral of Foreign Trade (DGFT).

Declaration

Prior to export of goods to any country, the exporter

should furnish a declaration on The full export value of goods

The exact value is not deducible, the expected valuehas been or will be paid within the period


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Time Limit for Realization of Export Proceeds

The full export value of the goods must be realizedon the due date for payment or within six months

from the date of shipment whichever is earlier.

In respect of export to Indian owned warehouses

abroad a maximum period of fifteen months isallowed.


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Export Credit & Guarantee Corporation (ECGC)

Export Credit Guarantee Corporation of IndiaLimited, was established in the year 1957 by theGovernment of India

Aim to strengthen the export promotion drive bycovering the risk of exporting on credit.

It is the fifth largest credit insurer of the world interms of coverage of national exports.


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Objectives

Offers insurance protection to exporters againstpayment risks

Provides guidance in export-related activities

Makes available information on different countrieswith its own credit ratings

Makes it easy to obtain export finance frombanks/financial institutions

Assists exporters in recovering bad debts Provides information on credit-worthiness of

overseas buyers

GOLD SCHEME


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GOLD SCHEME

Minister for Commerce & Industry had proposed issuance of aGold Card to creditworthy exporters with good track recordfor easy availability of export credit on best terms

Objectives of the Scheme

Better terms of credit rates of interest

Faster processing of the application at simpler norms

The credit limits will be sanctioned for a period of 3 years Gold Card holders will be given preference for grant of

packing credit in foreign currency


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Issuance of foreign currency credit cards for

meeting urgent payment obligations

The charges schedule and fee-structure of services

by banks will be lower

Norms in respect of security and collaterals relaxed

The banks may consider any other facility/benefit tothe exporters


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Export credit as a percentage of total exports fell from 19.8per cent in 2008 to 13.4 per cent in 2011

The government is now looking at various measures forextending easy loans to the exporting community

Year Exports Export Credit Export Credit

2007-08 655,863 129,983 19.8

2008-09 840,755 128,940 15.3

2009-10 845,533 138,143 16.3

2010-11 1,142,648 153,794 13.4


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RBI has sets a target of reaching 12 per cent export credit tonet bank credit to banks, Aug23,2012

Export credit given to agriculture and small industries will betreated as priority sector loans.

The export credit of 5.5% available to pharma companies has

now been withdrawn and a duty drawback has beenintroduced that will reimburse companies by just 1-2 % forusing imported raw material in their exports


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Over the four fiscal years ended March 31, 2012, thegovernment injected Indian rupee (INR) 3 billion annually in

EXIM, increasing the bank's paid-up capital to INR23 billion,from INR11 billion

Axis, ICICI, IDBI raises 250mn USD, 750mn USD & 250mn SD.


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Group 5:

Saurabh KumarRajat Kathuria

Urvashi Chopra

Priya Gupta

Gaurav MittalKanika Aggarwal

Sharad Goel

THANK YOU!!

Documents

Export Financing (Final)