Roll No.

1205002417

Spring 2014

Master of Business Administration- MBA Semester 4

IB0018 Export-Import Finance -4 Credits

(Book ID: B1910)

Assignment- 60 marks


Q.1. Discuss the role of EXI M bank in promoting foreign trade.

Ans.

The Export-Import Bank popularly known as EXIM bank has been set up under an Act of Parliament passed in 1982. The
EXIM Bank has taken over the operations of the International Finance Wing of the Industrial Development Bank of India
(IDBI). It came into existence on 1 January 1982 and started its operations from 1 March 1982. The headquarters of the bank
is situated in Mumbai and it has branches in India and abroad. The main purpose of the bank is to finance medium and long-
term loans to the exporters and thus facilitate international trade in the country. The main objectives of EXIM Bank are:

i. To provide financial assistance (medium and long-term) to exporters and importers
ii. To promote international trade from the country
iii. To function as the principal financial institution for coordinating the working of institutions engaged in providing
trade finance
iv. To deal with all the issues that may be considered to be incidental or conducive to the attainment of above objectives

Functions of EXIM Bank: - The main functions of EXIM Bank are to provide fund based and non fund based assistance.
This can be summarized as follows:




The fund based and non fund based assistance can be further explained as:
A. Fund based assistance:-

i. Assistance to exporters in India: -
a) Assistance in the form of deferred credit exports
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b) Credit facilities for deemed exports
c) Financing of Indian joint ventures abroad
d) Financial assistance to units located in EPZ/SEZ and EOUs
e) Availability of pre-shipment finance in order to procure raw materials and other intermediate goods
f) Financial assistance for exporting/importing machinery and equipment on lease
g) Foreign exchange loans for computer software exporters subject to clearance from RBI
h) Deferred credit financing facility for exports of consultancy, technology and other services
i) Export financing assistance for undertaking export marketing activities through the export marketing fund
j) The export development fund has been earmarked for undertaking technology and economic survey to
develop Indian exports

ii. Assistance to Indian commercial Banks :-
a) Refinance facilities to lend to Indian exporters who extend term credit to importers
b) Export bills rediscounting facility to commercial banks in India who have earlier discounted bills of
exporters.

iii. Assistance to Overseas Buyers: -
a) EXIM Bank offers Overseas Buyers Credit facility to foreign importers. This is offered for importing
capital goods and related services. The repayment period is spread over a period of years.

iv. Assistance to Overseas Banks: -
a) The EXIM Bank extends lines of credit to provide finance to financial institutions overseas. These
international financial institutions extend finance to importers to buy capital goods
b) The Bank also provides relending facilities to banks in foreign countries and makes available finance to the
clients for import of goods into the country.


B. Non-fund based assistance: -

i. Guarantees and bond: - EXIM Bank provides guarantees as a non-fund based assistance. These
guarantees are usually in the form of bid bonds, performance guarantee, etc. The commercial banks also
assist in providing these guarantees.

ii. Advisory services: -
a) The Bank advises Indian companies abroad in order to find sources of financing abroad
b) The Bank also provides advisory services on international exchange control practices
c) It also offers financial and advisory services for constructions abroad
d) The small scale manufacturers are also advised on the feasible markets for exports and products
e) The bank also provides euro financing and global credit to Indian exporters
f) Forfeiting services are also offered for the exporters

The EXIM bank also provides export financing programmes and promotes exports through direct financial assistance, term
finance, overseas investment finance, pre shipment credit, buyers credit, relending facility, export bills rediscounting, lines of
credit and refinancing schemes to commercial banks.

Thus, the EXIM Bank offers a wide range of services for exports to their clients. The Bank provides a range of information
and services to aid in globalization of the Indian organizations. The services being offered include searching of overseas
partners, identifying suppliers of technology, negotiating contracts and developing joint ventures abroad.


Q.2. What is the need for export finance in I ndia? Write a short note on export financing facilities in I ndia

Ans.

Need for export finance: -
RBI introduced the export financing scheme in 1967 for the first time specifically for meeting the exporters requirements.
Previously exporters used to avail commercial loans from various banks to fund their export operations. This was a costly
affair as there were no public sector banks by then, and private banks and money lenders used to charge an exorbitant rate of
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interest from exporters. Since 1968, RBI ensured some schemes to make short-term export finance available to exporters at
internationally competitive interest rates while at the same time ensuring that the rates are well above the financing banks
cost of finance for short-term loans of the same duration in the relevant currency. The nationalization of banks in 1969
provided further leverage to RBI and the Government of India to devise schemes for exporters for export credit in a liberal
way in order to enable them to remain competitive in relation to their competitors from other countries. Under the export
financing scheme, banks extend working capital loans to exporters at pre and post shipment stages. The credit limits
sanctioned to exporters are based upon the financing banks perception of the exporters creditworthiness, requirement of the
business assessed by way of trade cycle and past performance.

Export financing may be denominated either in Indian Rupees or in foreign currency. For both types of pre shipment
financing, RBI sets a ceiling on the interest rate that banks may charge from borrowers under the scheme. Since RBI fixes
only the ceiling rate of interest for export credit; hence banks are free to fix lower rates of interest for exporters on the basis of
their actual cost of funds, operating expenses and taking into account the track record and the risk perception of the
borrower/exporter.

The Government of India understands that there is much stake involved in export-import business as trade is the lifeline of
any economy. Many countries worldwide give much importance to export-import operations as international trade provides
nations the opportunities of reaping benefits of competitive and comparative advantage in their trade operations. In the era of
economic globalization, both merchandise and services exports are an important tool of employment generation.

Export Financing facilities: -
Having realized that Indian exporters have to be supported by appropriate financing options, the Government of India has
decided that export finance shall be available at both stagespre and post shipment stages of international trade transactions.
There may be different financing requirements of exporters at pre and post shipment finance stage such as packing credit to
sub supplier, running account facility, packing credit in foreign currency, packing credit for deemed exports, packing credits
for consulting services and advance against cheques/ drafts received as advance payments.

The scheme of export financing was first introduced by the RBI in 1967. The scheme is intended to make short-term working
capital finance available to exporters at internationally comparable interest rates. Under the earlier scheme in force up to 30
June 2010, RBI fixed only the ceiling rate of interest for export credit while banks were free to decide the rates of interest
within the ceiling rates keeping in view the BPLR (Benchmark Prime Lending Rate) and spread guidelines and taking into
account the track record of the borrowers and the risk perception.

In order to enhance transparency in banks pricing of their loan products, banks were advised to fix their BPLR after taki ng
into account the following factors:

a) Actual cost of funds
b) Operating expenses
c) A minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin.

Bank BPLR was introduced in 2003 but fell short of its original objective of bringing transparency to lending rates. This was
mainly because banks could lend below BPLR under the BPLR system. Due to all these reasons, there exists unhealthy
competition among banks, difficulty in assessing the transmission of RBI policy rates, assessing the actual costs of fund of
exporters, etc. Keeping these factors in mind, RBI appointed a committee under the chairmanship of RBI Deputy Governor
Anand Sinha, to look into the issue of transparency in export credit pricing and functioning of BPLR system. The Anand
Sinha Committee recommended the introduction of Base Rate system, after studying the efficacy of base rate with respect to
transmission of monetary policy.


Q.3. As an exporter, what benefits you can get from Post shipment finance scheme? Discuss the types of post shipment
credits.

Ans.

The purpose of post shipment finance scheme was to ensure credit to the Indian exporter with better trade terms in
comparison to their competitors in international markets. Post shipment credit is given in Indian rupee as well as foreign
currency and is provided in order to fulfill the short-term working capital requirements of the Indian exporters at
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internationally comparable interest rates. There have been changes in post shipment finance schemes from time-to time in
order to make it compatible with the emerging economic realities of the world.

Benefits of Post Shipment Finance Scheme: - The benefits of post shipments scheme for an Indian exporter can be
summarized as:

I. Post shipment finance enables an exporter to pay to agents or distributors or any other party of the export chain for
their services.

II. Post shipment finance helps Indian exporter to pay for publicity/sales promotion and advertising expenditures in the
overseas markets.

III. Post shipment credit facility helps exporter to pay for post shipment expenditure like terminal handling charges, port
charges, customs fee and shipping agents charges.

IV. Exporter can pay export duty and other taxes through post shipment finance. Exporter can also cover all expenditure
at destination of goods through post shipment credit.

V. Post shipment credit helps Indian exporter to pay the ECGC premium in order to save him from credit risks, if any

VI. Post shipment credit helps the Indian exporter to pay his freight charges, freight forwarder fee and other shipping
expenses.


VII. Exporter can pay his marine insurance premium under CIF/DAT/DAP and DDU terms through post shipment credit
extended by the bank.

VIII. Exporter can meet the expenditures relating to after sale service through post shipment credit.

IX. Post shipment helps exporters pay for expenditures like participation in exhibitions and trade fairs in India and
abroad.

X. Exporter can pay for expenditures relating to representatives abroad in connection with their stay abroad.

Types of post shipment credits: -
Post shipment credit is offered by commercial banks in the form of any loan or advance after the shipment of goods/services
from India. As per RBI guidelines, post shipment export credit can take any of the following forms:



Thus, post shipment finance is sanctioned and offered to the exporter only after the shipment of goods/rendering of services
and is usually granted after the liquidation of pre shipment finance on the submission of export documents by the exporter.

Post shipment finance in India is offered and granted by banks and financial institutions for any of the followings three types
of export:

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Physical exports: - Post shipment finance can be extended to the actual exporter of goods or to the exporter in whose name
the trade documents are prepared or transferred.

Deemed Export: - Post shipment finance can be extended to the supplier of the goods which are supplying the goods to
designated agencies/bodies/ organization as allowed in chapter 8 of Foreign Trade Policy 2009-14.

Capital goods and project exports: - Post shipment finance in cases of capital goods and project exports can be extended in
the name of the overseas buyer. However, the disbursal of post shipment credit is directly made to the domestic exporter.

Suppliers Credit: - Supplier credit can be specific to supplier or can be against lines of credit whereby such credit is offered
by bank to the buyers for procuring/importing the large scale contract. Once the bank approved loans to the overseas importer,
the exporter shoulders all or part of the interests incurred in such deals.


Q.4. Write short notes on:
a. Export credit guarantee corporation
b. Foreign exchange risk

Ans.

a. Export Credit Guarantee Corporation (ECGC): - The Government of India established the Export Credit
Guarantee Corporation of India Limited (ECGC) in the year 1957, for the purpose of strengthening and boosting the
export promotion efforts by covering the risk of exporting on credit. ECGC is managed by a Board of Directors
having expertise in the area of insurance, banking and management and comprises of representatives from the
Government of India, Reserve Bank of India, banking, insurance and exporting community of the nation.

Role of ECGC: - ECGC designed its polices keeping in mind the interests of various sections of exporters such as
small exporters, large scale exporters, IT services exporters and occasional exporters. Main roles of ECGC are
explained as under:

i. ECGC provides a wide range of credit risk insurance covers and products to exporters so as to enable them
against the losses in export of goods and services in international transactions.

ii. ECGC helps the exporters in financing their trade transactions by offering guarantees to commercial banks
and financial institutions particularly in cases where the exporter has risky payment options and are having
problems in pre shipment and post shipment finances for export transactions.

iii. ECGC also provides overseas investment insurance to Indian companies which are investing in joint
ventures abroad in the form of equity or loan thereby covering their exposure to risks and enabling them to
make foray in international markets.

iv. ECGC, with its networks with other credit risk agencies in the world, occasionally publish the information
on risk perception on different countries with its own credit ratings and helps the exporters to avoid them.

v. ECGC assists the exporters in recovering bad debts from defaulters by helping them through legal and
diplomatic channels.

vi. ECGC maintains the database of domestic and international exporters and importers and shares with other
Credit Risk Insurance agencies and provides information on credit-worthiness of overseas and domestic
traders.


b. Foreign Exchange Risk: - The risk that arises due to changes in exchange rate due to fluctuations is termed as
exchange risk. This risk is based on anticipated or forecasted rates considering the fluctuations and the organizations
vulnerability to such risks. This uncertainty in the value of the currency is the reason behind this exchange risk. This
exchange or currency risk can be classified as recurring risks or non recurring risks. The main cause of recurring
risks is the organizations financial structure. These risks arise due to changes in the composition of currency or the
activities of business of the firm. On the other hand, non recurring risks arise from specific transactions and are
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related to transaction exposure. To avert these risks, specific strategies need to be formulated like short-term
strategies for non recurring risks and long term strategies for recurring risks. To manage risks it is important to
determine the frequency of the occurrence of these risks.

Assessing Exchange Risk: - The entire process of assessing foreign exchange risk is a dynamic and ongoing task. It
begins from the initial forecasting and is carried out continuously till the completion of the transaction. To assess risk
it is important to understand the presence of transaction, translation and economic exposure. Assessment of risk
involves the following steps:

Forecasting
Assumptions
Measurement


Q.5. Discuss the payment options available to exporter and importer.

Ans.

In international business, major factors that drive the exporters decision criteria about the mode of payment in exports are
based on the importers ability, willingness and honesty to make payments. There are five basic methods of receiving
payments from the importers in international trade. In addition to these five; new adaptations in the mode of payments have
evolved in the globalized era such as sales on consignment basis, electronic or telegraphic transfer, collections against
documents, PayPal, etc. The various methods of payment have been ranked as under in order from being the most secure for
the exporter to least secure and similarly for importer. They are as follows:

i. Payment in Advance
ii. Letter of Credit
iii. Documentary collections
a) Documents Against Payment
b) Documents Against Acceptance
c) Cash against Documents
iv. Open account


i. Payment in Advance: - Payments in advance, alternatively known as cash in advance is the safest and most
secure mode of realization of export proceeds for an exporter as he will receive the payment before the goods
are shipped to the country of the importer. By using this method of payment, exporter can not only avoid the
credit risk involved in the trade deal, but also he will receive the payments well in advance before the actual
transfer of ownership of goods in favour of the importer.

ii. Letter of Credit: - The Letters of Credit (L/Cs) are considered to be among the safest and most secure modes of
payment available to the exporters. A L/C is a commitment by the L/C issuing bank on behalf of the importer
that payment will be made to the exporter subject to the fulfillment of the terms and conditions which has been
agreed upon between the exporter and importer in the letter of credit. The exporter has to submit the trade
documents as agreed in the L/C through his collecting bank to the issuing bank for the fulfillment of contract of
payments. Once the issuing bank is satisfied with the verification of documents submitted by the exporter for
fulfillment of terms and conditions, the bank is bound to release the payment to the exporter.

iii. Documentary Collection: - Under this mode of payment, the exporter submits the trade documents to his bank
and entrusts it to the collection of payment from the importer. The exporter bank, here known as the remitting
bank, sends the trade documents to the importers bank, here known as collecting bank for making the payment
and handing over the documents to the importer. This payment mode is very competitive, cost effective and less
risky than the open account method. However, it is more risky than payment in advance and letter of credit.
There are rules which govern the roles and responsibilities of the banks and every party involved in the trade
deal. Rules are known as Universal Rules for Collection of Documents and are published by the International
Chamber of Commerce, Paris. Payment settlement under this mode may be under any of following methods.

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a. Documents against Payments: - When payment is received on handing over the documents; this will be
known as Sight Drafts or Documents against Payments. This is the best payment option as it is cost
effective, competitive and mutually acceptable to both the exporter and importer.
b. Documents against Acceptance: - The exporter sometimes has to extend the credit to the importer so as to
win buyers or penetrate new markets. Such payment option is also known as Time Draft or Usance Bill. The
exporter extends definite credit period as mutually agreed between the seller and buyer and the importer
accepts trade documents but will make payment in subsequent time during mutually agreed period of 30 to
90 days.
c. Cash against Documents: - Cash against documents (CAD) is a term used in documentary collection and
is often used when firms are sister concerns hence, there are no doubts about payments. Additionally,
certain countries require bill of exchange to be tax stamped, thus creating unnecessary expenses in the
payment realization process. Under this term, trade documents are released to an importer against the
receipt of payment. CAD terms are usually used when the government of the importing country requires tax
stamps affixed to drafts. The exporter as well as importer are interested in saving such expenses, thus they
use the CAD method under documentary collections.

iv. Open Account: - Open account method is the most risky mode of payment for an exporter as under this method
goods are shipped or transported and delivered to the importer on credit basis and payment is realized after the
due date, which can usually take up to 30 to 90 days. Under open account, the exporter is required to directly bill
to the importer and he is expected to make the payment under agreed terms and conditions at a future date. In
the present turbulent times, this is the most advantageous preposition to any importer as he can sell the goods in
local market during the credit period and then make the payment to the exporter. The importer not only enjoys
cash flow but is also free from all kinds of commercial, economic and political risks.



Q.6. What is custom duty? Discuss its types

Ans.

Customs duties are sometimes also referred as the external excise tax, as it includes an export duty or an import duty on
cargo traded across national boundaries.

In independent India, customs duty along with excise duty is one of the most important sources of revenue to the State
contributing as much as 35 per cent of the total Central Government Revenue. Customs duty is a kind of indirect tax which is
collected by the Central Government on the import and export of goods from India. It has also been referred as consumption
tax in the true economic sense. Customs duty imposed by the government with regard to imported goods is known as import
duty and the duties which are realized on the export of goods are known as export duty. Hence, it can be said that customs
duty is a kind of tariff which is imposed on the export and import of goods and the list for such tariff is provided by the
Department of Revenue, Government of India every year based on ITC (HS) classification as the leviable rate or amount of
customs duty may vary from commodity to commodity.

Being an indirect tax, the incidence of customs duty is actually borne by the end consumer of the goods and not by the
importer or the exporter who pay for such duty while exporting or importing.

Types of Customs Duties: - Following are the duties which are collected in India under customs duties

i. Basic Customs Duty: - All goods which are imported into India are chargeable with Basic Customs Duty under
Customs Act, 1962. The applicable rates of Basic Customs Duty are given in the First Schedule of the Customs
Tariff Act, 1975 as amended from time-to-time under Finance Acts. The Basic Customs Duty can be fixed on
the basis of ad-valorem rate or on specific rate basis.

ii. Additional (Countervailing) Duty of Customs: - Additional (countervailing duty) duty of customs is a
customs duty which is imposed on goods which have received government subsidies in the originating or
exporting country. The importing country in order to reduce the impact of such subsidies and low cost of
products, flooding into the domestic market may impose such duty for the protection of domestic industry and
neutralize the impact of subsidies. For customs purpose, it is treated in the same way as antidumping duty. It is
possible to have both anti-dumping duty and countervailing duty on the same product.
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iii. Education Cess: - Education cess is leviable at the rate of 2 per cent on the aggregate of duties of customs
(except safeguard duty under section 8B and 8C, CVD under Section 9 and anti- dumping duty under section 9A
of the Customs Tariff Act, 1985). Items attracting Customs Duty at bound rates under international
commitments are exempted from this cess. In addition to primary education cess, secondary education cess is
also applicable at the rate of 1 per cent on the aggregate of duties of customs.

iv. Special CVD: - Special Countervailing Duty (CVD) is leviable at the rate of 4 per cent on all imported goods in
order to compensate/neutralize the incidence of VAT with reference to the Indian producer. Since the exporter
has been exempted from payment of VAT, same is imposed at the time of import to ensure level playing field
between domestic producers and importers. In case, goods imported are for sale, one can claim either exemption
or refund of same.