SUMMER PROJECT REPORT

A study on the mechanism of export finance for

Tessitura Monti India PVT.LTD

Prepared for the Mumbai University in the partial fulfillment of the requirement for the
award of the degree in
MASTERS OF MANAGEMENT STUDIES
Submitted By:
Name: Kalpesh Anand Paradkar
Roll No. 58
Year: 2015-17

Under the guidance of

Dr. Smita Jesudasan

SFIMAR

St Francis Institute Of Management And Research, Mt. Poinsur,

S.V.P Road, Borivali (W) Mumbai.
Batch- 2014-2016

DECLARATION
I, Kalpesh Anand Paradkar here-by declare that the project report on mechanism of export
finance through internship for the fulfillment of the requirement of my course from St.
Francis Institute of Management & Research is an original work of mine and the data
provided in the study is authentic, to the best of my knowledge.
This study has not been submitted to any other Institution or University for award of any
other degree.
However, I accept the sole responsibility of any possible error or omission.

Kalpesh Anand Paradkar

Roll.No.58 MMS 2015-2017.

COMPANY CERTIFICATE

Company Logo/
Address

Date:
TO WHOMSOEVER IT MAY CONCERN
This is to certify that Kalpesh Anand Paradkar has successfully completed his/her Summer
project on Mechanism of Export Finance for a period of __________ months. i.e. from
______ to ______ 2016.
During this period, we found him/her sincere, honest & hardworking.

We wish him/her all the best for further assignments.

For (TESSITURA MONTI INDIA Pvt.Ltd)

Signing Authority
Name
Designation
Department

ACKNOWLEDGEMENT

Any task that is under taken reaches successful completion not only by an Individuals effort
but also by the guidance and support of many others. Here I acknowledge a few of those who
have helped me to carry out this project work successfully.

I express my deep gratitude to Mr. Shrikrishna Kelkar, Director and

Mr. G.M. Lakshaminarayan , AGM, for giving me this opportunity to undertake this
project in this prestigious organization and providing a good environment to my work.

I would also like to thank my project Guide Dr. Smita Jesudasan and entire staff for the
invaluable help and support they extended during the project work.
I would like to express my special gratitude and thanks to my institute, St Francis Institute of
Management & Research.

My sincere thanks and appreciation to all the people who were involved in the project
completion and collection of data which helped in developing the project and who have
willingly contributed with their time, talents and abilities.

EXECUTIVE SUMMARY

FINANCE IS THE LIFE AND BLOOD OF ANY BUSINESS. Success or failure of any
export order mainly depends upon the finance available to execute the order. Nowadays
export finance is gaining great significance in the field of international finance.
Many Nationalized as well as Private Banks are taking measures to help the exporter by
providing them pre-shipment and post- shipment finance at subsidized rate of interest. Some
of the major financial institutions are EXIM Bank, and other financial institutions and banks.
EXIM India is the major bank financing capital expenditure in the field of export and import
in India and abroad . It has introduced various schemes like forfeiting, FREPEC Scheme,etc.
Even Government is taking measures to help the exporters to execute their export orders
without any hassles. Government has introduced schemes like Duty Entitlement Pass Book
Scheme, Duty free Materials, setting up of Export Promotion Zones and Export Oriented
Units, and other scheme promoting export and import in India. Initially the Indian exporter
had to face many hurdles for executing an export order, but over the period these hurdles
have been removed by the government to smoothen the procedure of export and import in
India.

CONTENTS:
Sr.No.
1
2
3
4
5
6
7
8
10

11
12
13
15

Contents
Company profile
Objective of the Report
Textile industry overview
Concept of international trade
Concept of international finance
Export procedure
Methods / terms of payment
Export incentives
Export finance
1.1. Pre-shipment finance
1.2. Post shipment finance
1.3. Forfeiting
1.4. Factoring
1.5 FCNR
Risk mitigation
Conclusion
Glossary of terms
Bibliography

Page Number
07
09
12
17
18
19
33
43
45
45
48
50
51
52
54
68
69
78

INTRODUCTION TO COMPANY PROFILE

Over a century has passed since Gruppo Tessile Monti set up in Italy in 1911. Through the
decades, Monti has grown into an institution of fine design and craftsmanship, weaving Giza
cotton into intricate yarn-dyed cotton shirting fabrics that have changed fashion and
influenced the worlds leading brands.
A subsidiary of GTM ( Gruppo Tessile Monti ) Tessitura Monti India Pvt. Ltd. (TMIPL), is a
unit setup in India ; in the pleasant town of Kolhapur, Maharashtra. With a complete hold on
the trends in local production as well as in global markets, a goal was set to provide premium
yarn-dyed fabrics to cover the demand for fine shirting fabric.
In the beginning, the unit started as EOU & the production facilities were primarily for
weaving. In time 200 looms were set up. The facility is well equipped with modern processes
for dyeing yarn, warping, sizing, and weaving. Processing with over 900 employees the
facility covers an area of 20,000 square meters.
The management took a strategic step of entering into the domestic market by supplying
goods to the organized premium Apparel brands & the Over the counter retail (OTC) market
through distributor channels.
As of now approximately 60.0 million USD has been invested into this unit so far. At present
the unit operates in complete sync with Italy Unit by delivering the same quality standards
with the advantage of a price benefit to the buyers.
The employees in the unit are trained by their Italian counterparts and hence the legacy and
expertise of a hundred years is well reflected in every step of production.

The quality of fabric in poplin, twill, oxford, stripes, checks and all yarn-dyed products starts
with the selection of the best quality Egyptian Giza yarn followed by using high quality dye
agents.

This is subjected to a modern and progressive manufacturing process and very stringent
quality control, where finally every meter of fabric woven is thoroughly inspected.
It is this unwavering quality that has influenced customer expectation, putting the company
ahead of its competitors.
TMIPL understands the importance of impeccable service and hence provide the best service
when compared to competitors. This necessitates optimum logistical control of material flow
through the plant and a very careful and precise scheduling in the preparation and weaving
departments, which is being managed centrally by headquarters in Italy. Through the
dynamic management of the company, modern manufacturing equipment, finely tuned
logistics and a very well trained and motivated group of employees, TMIPL has the capability
to face the ever-increasing challenges of the international market in the future.

OBJECTIVE OF THE REPORT:

Report will help company to list down all procedures of export trade. Various documents
required in the report will help company to make a detailed analysis of documents prepared
by various departments for SAP implementation.
To study various available financing options for company by using appropriate Risk
Arbitrage tools .

Limitation of the Study

The Marketing and Production aspect of the company is not studied in the project as the
report will mostly concentrate on the Export Procedure and Export Financing part.

Scope of the project

Detailed Export Procedure

Types and importance of different Documents

Different types mode in which payment is received by the company

Types and procedure of Export Financing

Various types of Incentives available and the procedure for applying for the same

Different types of risk arbitrage tools.

TEXTILE INDUSTRY OVERVIEW

The World Market

Textile and Apparel sector is a major sector globally. Since the initial stages of global
industrialization, Textile and Apparel sector has remained at the forefront in generating
employment and adding significantly to manufacturing output and exports for
countries. Textile & Apparel industry can be attributed as the first organized industry
when it grew out of the industrial revolution in the 18th Century. Countries like Britain,
Italy, France, Japan, etc. had a thriving Textile & Apparel industry during their initial
phase of development, which supported their economic growth. The same is true today for
nations like Bangladesh, Vietnam and Cambodia.
Since the output of Textile & Apparel industry is a basic requirement for sustenance, the
long term growth trend of industry had always been positive. However, production
bases have kept shifting all along. Increase in manufacturing costs in developed
countries, which were the main markets also, caused growth of Textile & Apparel sector
in Asian countries which had raw material advantage as well. Soon enough the
manufacturing base spread to smaller nations, particularly those which got preferential
access to major markets of USA, Europe and Japan.

10

The current global garment market is approximately US$ 1.15 trillion which forms
nearly 1.8% of the world GDP. Almost 75% of this market is concentrated in EU27,
USA, China and Japan

The world garment market is growing at a CAGR of 5% and attaining a size of about
US$ 2.21 trillion by 2025
An analysis of per capita spend on garment in various countries shows a significant
difference between numbers in developed and developing economies. Within the major
markets, India has the lowest per capita spend on garment (US$ 37) which is only 3% of
the highest one viz. Australia (US$ 1,131).

11

Indian Textile Market Scenario

Indias textiles sector is one of the oldest industries in Indian economy dating back several
centuries. Even today, textiles sector is one of the largest contributors to Indias exports with
approximately 11 per cent of total exports. The textiles industry is also labour intensive and is
one of the largest employers. The industry realised export earnings worth US$ 41.4 billion in
2014-15, a growth of 5.4 per cent, as per The Cotton Textiles Export Promotion Council
(Texprocil). The textile industry has two broad segments. First, the unorganised sector
consists of handloom, handicrafts and sericulture, which are operated on a small scale and
through traditional tools and methods. The second is the organised sector consisting of
spinning, apparel and garments segment which apply modern machinery and techniques such
as economies of scale.
The Indian textiles industry is extremely varied, with the hand-spun and handwoven textiles
sectors at one end of the spectrum, while the capital intensive sophisticated mills sector at the
other end of the spectrum. The decentralised power looms/ hosiery and knitting sector form
the largest component of the textiles sector. The close linkage of the textile industry to
agriculture (for raw materials such as cotton) and the ancient culture and traditions of the
country in terms of textiles make the Indian textiles sector unique in comparison to the
industries of other countries. The Indian textile industry has the capacity to produce a wide
variety of products suitable to different market segments, both within India and across the
world.
Market Size
The Indian textiles industry, currently estimated at around US$ 108 billion, is expected to
reach US$ 223 billion by 2021. The industry is the second largest employer after agriculture,
providing employment to over 45 million people directly and 60 million people indirectly.
The Indian Textile Industry contributes approximately 5 per cent to Indias gross domestic
product (GDP), and 14 per cent to overall Index of Industrial Production (IIP).
The Indian textile industry has the potential to reach US$ 500 billion in size according to a
study by Wazir Advisors and PCI Xylenes & Polyester. The growth implies domestic sales to
rise to US$ 315 billion from currently US$ 68 billion. At the same time, exports are implied
to increase to US$ 185 billion from approximately US$ 41 billion currently.
Investments
The textiles sector has witnessed a spurt in investment during the last five years. The industry
(including dyed and printed) attracted Foreign Direct Investment (FDI) worth US$ 1.77
billion during April 2000 to September 2015.
Some of the major investments in the Indian textiles industry are as follows:
Reliance Industries Ltd (RIL) plans to enter into a joint venture (JV) with China-based
Shandong Ruyi Science and Technology Group Co. The JV will leverage RIL's existing
textile business and distribution network in India and Ruyi's state-of-the-art technology and
its global reach.

12

Giving Indian sarees a green touch, Dupont has joined hands with RIL and Vipul Sarees for
use of its renewable fibre product Sorona to make an environment-friendly version of this
ethnic ladies wear.
Grasim Industries has invested Rs 100 crore (US$ 15 million) to develop its first fabric brand,
Liva', which it will distribute through 1,000 outlets as part of a plan to stay in sync with
changing consumer behaviour.
Snapdeal has partnered with India Post to jointly work on bringing thousands of weavers and
artisans from Varanasi through its website. This is an endeavour by Snapdeal and India Post
to empower local artisans, small and medium entrepreneurs to sustain their livelihood by
providing a platform to popularise their indigenous products, said Mr Kunal Bahl, CEO and
Co-Founder, Snapdeal.
Welspun India Ltd (WIL), part of the Welspun Group has unveiled its new spinning facility at
Anjar, Gujarat - the largest under one roof in India. The expansion project reflects the ethos
of the Government of Gujarats recent Farm-Factory-Fabric-Fashion-Foreign Textile Policy,
which is aimed at strengthening the entire textile value-chain.
American casual fashion retailer Aropostale, Inc. has inked a licensing agreement with
Arvind Lifestyle Brands Ltd to open standalone stores in the country. Aropostale will open
30 stores and 25 shop-in-shop locations over the next three years.
Government Initiatives
The Indian government has come up with a number of export promotion policies for the
textiles sector. It has also allowed 100 per cent FDI in the Indian textiles sector under the
automatic route.
Some of initiatives taken by the government to further promote the industry are as under:
The Government of India has started promotion of its India Handloom initiative on social
media like Facebook, Twitter and Instagram with a view to connect with customers,
especially youth, in order to promote high quality handloom products.
The Ministry of Textiles launched Technology Mission on Technical Textiles (TMTT) with
two mini-missions for a period of five years (from 2010-11 to 2011-12 in the 11th five year
plan and 2012-13 to 2014-15 in 12th five year plan) with a total fund outlay of Rs 200 crore
(US$ 30 million). The objective of TMTT is to promote technical textiles by helping to
develop world class testing facilities at eight Centres of Excellence across India, promoting
indigenous development of prototypes, providing support for domestic and export market
development and encouraging contract research.
The Government of India is expected to soon announce a new National Textiles Policy. The
new policy aims at creating 35 million new jobs by way of increased investments by foreign
companies, as per Textiles Secretary Mr S K Panda.

13

Subsidies on machinery and infrastructure

The Revised Restructured Technology Up gradation Fund Scheme (RRTUFS) covers
manufacturing of major machinery for technical textiles for 5 per cent interest reimbursement
and 10 per cent capital subsidy in addition to 5 per cent interest reimbursement also provided
to the specified technical textile machinery under RRTUFS.
Under the Scheme for Integrated Textile Parks (SITP), the Government of India provides
assistance for creation of infrastructure in the parks to the extent of 40 per cent with a limit up
to Rs 40 crore (US$ 6 million). Under this scheme the technical textile units can also avail its
benefits.
The major machinery for production of technical textiles receives a concessional customs
duty list of 5 per cent.
Specified technical textile products are covered under Focus Product Scheme. Under this
scheme, exports of these products are entitled for duty credit scrip equivalent to 2 per cent of
freight on board (FOB) value of exports
The Government of India has implemented several export promotion measures such as Focus
Market Scheme, Focus Product Scheme and Market Linked Focus Product Scheme for
increasing share of Indias textile exports.
Under the Market Access Initiative (MAI) Scheme, financial assistance is provided for export
promotion activities on focus countries and focus product countries.
Under the Market Development Assistance (MDA) Scheme, financial assistance is provided
for a range of export promotion activities implemented by Textiles Export Promotion
Councils.
The government has also proposed to extend 24/7 customs clearance facility at 13 airports
and 14 sea ports resulting in faster clearance of import and export cargo.
The Ministry of Textiles has approved a 'Scheme for promoting usage of geotechnical textiles
in North East Region (NER)' in order to capitalise on the benefits of geotechnical textiles.
The scheme has been approved with a financial outlay of Rs 427 crore (US$ 64.1 million) for
five years from 2014-15.
A Memorandum of Understanding (MoU) has been signed between India and Kyrgyzstan
seeking to strengthen bilateral cooperation in three fields -Textiles and Clothing, Silk and
Sericulture, Fashion
Road Ahead
The future for the Indian textile industry looks promising, buoyed by both strong domestic
consumption as well as export demand. With consumerism and disposable income on the rise,
the retail sector has experienced a rapid growth in the past decade with the entry of several
international players like Marks & Spencer, Guess and Next into the Indian market. The
organised apparel segment is expected to grow at a Compound Annual Growth Rate (CAGR)
of more than 13 per cent over a 10-year period.

14

SWOT ANALYSIS OF INDIAN TEXTILE INDUSTRY

Strengths:

Strong and diverse raw material base

-Third largest producer of cotton

-Fifth largest producer of man-made fiber and yarn

Vertical and horizontal integrated textile value chain

Globally competitive spinning industry

Average cotton yarn spinning cost at US$ 2.5 per kg, which is lower
countries including China

than all the

Low wages: Rate at 0.51 US$ per operator hour as compared to USD
and USD 2.5 of Turkey

1 of China

Unique strength in traditional handlooms and handicrafts

Flexible production system

Diverse design base

Weaknesses:
Structural weaknesses in weaving and processing
-

2% of shuttle-less looms as percentage of total looms as against world average of 16%

and China, Pakistan and Indonesia 15%, 9% and 10% respectively.

Highly fragmented and technology backward textile processing sector

Highly fragmented garment industry
Except spinning, all other segments are predominantly decentralized.
Rigid labor laws: proving a bottleneck particularly to the garment sector. Large seasonal
orders cannot be taken because the labour strength cannot be reduced during the slack season.
Inadequate capacity of the domestic textile machinery manufacturing sector.
Big demand and supply gap in the training facilities in textile sector.
Infrastructural bottlenecks in terms of power, utility, road transport etc.

15

Opportunities
Quota phase out pushing the export growth
Buoyant domestic economy
- Increasing disposable income levels.
- Increasing working female population: The propensity to spend in the case of working
women is higher by 1.3 times as compared to a house wife.
Increased usage of credit cards and availability of cheap finance would also provide fillip to
impulsive apparel purchases.
The revolution in organized retailing would increase the consumption of apparel and madeups.

Threats
FOREX rate fluctuations and world economic conditions
Higher competition especially after 2008 when China cannot be restrained under WTO.
Non-availability of indigenous textile machinery.
Lack of domestic capital and absence of appetite of domestic industries to invest in the
quantities envisaged for 12 percent growth target.

16

CONCEPT OF INTERNATIONAL TRADE:

International trade is the exchange of goods and services between countries. This
type of trade gives rise to a world economy, in which prices, or supply and demand, affect
and are affected by global events. Political change in Asia, for example, could result in an
increase in the cost of labor, thereby increasing the manufacturing costs for an American
sneaker company based in Malaysia, which would then result in an increase in the price that
you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on
the other hand, would result in you having to pay less for your new shoes.
Trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in their own countries. Almost every kind of product can be
found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks,
currencies and water. Services are also traded: tourism, banking, consulting and
transportation. A product that is sold to the global market is an export, and a product that is
bought from the global market is an import. Imports and exports are accounted for in a
country's current account in the balance of payments.
Trade is what keeps economies and nations alive. Trade demands create domestic
production and the inflows of funds from overseas. Countries that have limited domestic
resources, such as Singapore, must be able to keep up with domestic production of various
goods and services so as to maintain a trade surplus, as they cannot produce everything they
need in within their own borders.
Exporting is increasing yearly, globally. This is due to various factors. First, both large and
small firms export not just large firms. Also, under the World Trade Organization (WTO)
there has been a decline in trade barriers. This holds true for other regional trade agreements
such as the European Union (EU) and North American Free Trade Agreement (NAFTA).

Some important benefits of International Trade

Enhances the domestic competitiveness

Takes advantage of international trade technology

Increase sales and profits

Extend sales potential of the existing products

Maintain cost competitiveness in your domestic market

Enhance potential for expansion of your business

Gains a global market share

Reduce dependence on existing markets

17

Stabilize seasonal market fluctuations

INTERNATIONAL FINANCE
CONCEPT

Export financing is another important area of export business. Export finance

refers to the credit facilities ex-tended to the exporters at pre-shipment and post-shipment
stages. It includes any loan to an exporter for financing the purchase, processing,
manufacturing or packing of goods meant for overseas markets. The exporter may require
short term, medium term or long term finance depending upon the types of goods to be
exported and the terms of payments offered to overseas buyer.
The short-term finance is required to meet working capital needs. The working capital is
used to meet regular and recurring needs of a business firm. The regular and recurring needs
of a business firm refer to purchase of raw material, payment of wages and salaries, expenses
like payment of rent, advertising etc.
The exporter may also require term finance. The term finance or term loans, which is
required for medium and long term financial needs such as purchase of fixed assets and long
term working capital.
Export finance is short-term working capital finance allowed to an exporter. Finance and
credit are available not only to help export production but also to sell to overseas customers
on credit.
Credit is also extended after the shipment of goods to the date of realization of export
proceeds. In this unit, you will learn various schemes of finance avail-able to exporters at preshipment and post-shipment stages.

Institutional Framework
Institutional framework for providing finance comprises Reserve Bank of lndia, Commercia1
Banks, Export Import Bank of India and Export Credit and Guarantee Corporation. Reserve
Bank of India, being the central bank of country, lays down the policy frame work and provides guidelines for implementation. Finance, short or medium term, is provided exclusively
by the Indian and foreign commercial banks which are members of the Foreign Exchange
Dealers Association. The Reserve Bank of India function as refinancing institutions, for
short and medium term loans respectively, Provided by commercial banks. Export Import
Bank of India, in certain cases, participates with commercial bank in extending medium term
loans to exporters. Commercial banks provide finance at a concessional rate of interest and in
turn are refinanced by the Reserve Bank! Export Import Bank of India at concessional rate. In
case they do not wish to avail refinance, they are entitled for an interest rate subsidy. Export
Credit & Guarantee Corporation (ECGC) also plays an important role through its various
policies and guarantees providing cover for commercial and political risks involved in export
trade.
18

EXPORT PROCEDURE

Once the contract has been won, the export department (which handles the documentation)
takes over with preparation of all the documents necessary to be prepared at each stage of the
transaction.

The export procedure can be split into 3 stages:

(i) Pre-shipment
(ii) Shipment
(iii) Post-shipment

Pre-Shipment process
Quotation & Order Confirmation
The organization, upon inquiry from a prospective buyer issues a quotation mentioning its
terms and conditions related to shipping of goods, payments, price and quality of goods. It
also provides value & volume of goods, terms for letter of credit, as per the case and other
details related to trade like date and time period for shipment, destination port, and final
destination. The quotation here maybe of two types

Firm quotation

without engagement quotation

i)

In case of a firm quotation, it is analogous to an unconditional undertaking on

the part of the seller and if the buyer accepts the quotation, it binds the seller in a
contract of sale. In order not to bind himself indefinitely the seller usually
specifies a period of validity for the contract by using the words firm until
which implies that the buyer should make his decision regarding the quotation
within a specified period of time.

ii)

A quotation including the clause without engagement gives the seller more
latitude and does not bind him into the contract upon simple acceptance from the

19

seller. In other words the seller can still choose to ignore the quotation if he so
desires, even after the buyer has agreed to it. A further confirmation is required
from the seller to bring the contract into existence. The importer on accepting the
terms & conditions, sends a Purchase order (PO).
Once the customer has sent the purchase order, it is usually followed up by an order
confirmation from the seller (irrespective of whether it is a firm or without engagement
quotation). While the order confirmation from the seller is not necessary in case of a firm
quotation, it is sent merely to ensure clarity between the parties. This must also be
accompanied by a pro-forma invoice, which is prepared by the exporter and is an indication
of what the real invoice will look like after delivery. The importance of this document should
not be overlooked as it forms the basis for the preparation of all the documents required at
various stages of the transaction. It is issued against the export order and is basically an
acceptance and reconfirmation of the terms of contract. Providing a detailed and
unambiguous pro-forma invoice is essential, since it provides a base for establishing Letter of
Credit (L/C) or receiving remittance from the importer as the case may be. (Letter of credit
and an advance payment are two modes of pre-shipment payment and will be dealt with in
detail later). The opening of a letter of credit (hereinafter referred to as L/C) is made easier
with a pro-forma invoice since it establishes in advance the various terms and conditions,
how the buyer and seller intend to divide the risks arising out of the export contract, how
payment will be made and other specifications. Thus it allows the bankers to make an
accurate assessment of the essentials of the contract and open the L/C on behalf of the
importer.
Given below are the various details/terms/clauses that must be mentioned while preparing the
pro-forma invoice. The terms in these clauses which require explanation are described in the
following pages and also with appropriate endnotes.

The various clauses for a pro-forma invoice include:

Address of the prospective buyer/consignee
Details of goods to be shipped
Details of the price, quantity, rate and amount of shipment
Mode of shipment (Air/Sea/Road)
Port of Loading (Any Port/Airport in India)
Port of Discharge (Named port and country)
Final Destination (place of delivery, port of discharge or inland destination)
Terms of Payment (TT, L/C, D/P(CAD), D/A etc)
Price Basis (FOB, CFR, CIF etc, which are incoterms)

20

 Apart from these mandatory details that are required to be included in the pro-forma
invoice, other details that must be disclosed vary according to the terms and mode of
payment.

In case the mode of payment is Letter of Credit the following additional details/terms must be
mentioned:

Specify date/s of shipment

L/Cs should be irrevocablei and opened by a prime bankii
Tolerance (+/- in % ) in quantity and value to be permittediii
L/C to be freely negotiable with any bank in India
Place of expiry of L/C should be India
Provide sufficient time to present original documents to the negotiating bankiv
Partialv and Transshipmentvi to be allowed
All bank charges outside country of issue (of L/C) to be on applicants account
(importers account).
In case the mode of payment is through T/T, D/P, and D/A the following additional
details/terms must be included:

Specify date/s of shipment

Tolerance (+/- in % ) in quantity and value to be permitted
To provide beneficiarys banking details (exporters banking details) for calling funds
in case of payment by T/Tvii
Partial and Transshipment to be allowed
Specify payment terms, i.e. T/T or documents against payment (D/P), Cash against
documents (CAD) or documents against acceptance (D/A)
Bank details of the buyer need to be obtained in case of payment terms being D/P
(CAD) or D/A.

21

Shipment of Goods:
Once the pre-shipment procedures are complete shipment of goods becomes the next
stage in the export process. For carrying out the procedures related to shipment of goods,
selection of a freight forwarding agent is very important.
Freight Forwarder: An international freight forwarder is an agent for the exporter in moving
the export goods to an overseas destination. Freight forwarders assist exporters in preparing
price quotations by advising on freight costs, port charges, consular fees, costs of special
documentation, insurance costs, and their handling fees. Once the order is ready for shipment,
freight forwarders should review all documents to ensure that everything is in order.
The cost of the shipment, the delivery schedule, and the accessibility to the shipped product
by the foreign buyer are all factors to consider when determining the method of international
shipping.
Broad categories of export shipments are:
Under claim of Drawback of duty
Without claim of Drawback
Export by a 100% Export Oriented Unit
Under Duty Entitlement Pass Book (DEPB) Scheme
Largely, the following procedure may be followed for shipment of goods:
Submit documents to Freight Forwarder, instructing him to book space on the steamer/
airline. The Exporter is expected to provide the following documents to the Clearing &
Forwarding Agents, who are entrusted with the task of shipping the consignments, either by
air or by sea.

Invoice
Packing List
Declaration in FORM SDFviii (to meet the requirements as per FEMA) in duplicate.
A.R.E. - From 1 and 2 copy

22

Any other declarations, as required by Customs

On account of the introduction of Electronic Data Interchange (EDI) system for processing
shipping bills electronically at most of the locations - both for air or sea consignments - the
C&F (Clearing & Forwarding) Agents are required to file with Customs the shipping
documents, through a particular format, which will vary depending on the nature of the
shipment. The C&F agents are also charged with the task of getting Shipping Bill/ Bill of
Export passed by Custom Authorities (obtaining customs authorities LET EXPORT (LEO)
endorsement on the shipping bill).
After completing the shipment formalities, the C & F Agents are expected to forward to the
Exporter the following documents:
Customs endorsed Export Invoice & Packing List
Duplicate of Form SDF
Exchange control copy of the Shipping Bill, processed electronically
A.R.E. (original & duplicate) duly endorsed by Customs
Bill of Lading or Airway bill, as the case may be
Once the goods have been shipped, exporter is required to send a Shipment Advice in
aligned format to the importer intimating the date of shipment of the consignment by a named
vessel and its expected time of arrival at the destination port.

Post shipment process

The export department on receiving documents from CHA prepares various post shipment
documents and sends them to the advising/negotiating bank to get the payment. The post
shipment documents are prepared in two sets; one set is for buyer and one set for
advising/negotiating bank.

Buyer Set
Bill Of Exchange

Commercial Invoice

Packing List / Weight List

Bill of lading / Forward Cargo Receipt / Truck Receipt / Airways Bill

Insurance Certificate

Certificate of Origin

Courier receipt

23

Shipment Advice

Any other document as per L/C.

Bank Set

Covering Letter

Invoice

Packing List

Bill of lading

Exchange Control Copy & SDF

Bank Realization Certificate (BRC)

Freight Certificate

If the export is against an LC then the bank documents to be sent is mentioned in L/C
(Document to be couriered to be Bank Address). The negotiating bank will scrutinize these
documents and if found in order, negotiate the same. If the export is DA/DP then one set of
documents is sent to bank in which payment from that particular buyer is going to be received
and one to buyer directly for release of goods from port.
The issuing bank makes the payment to the negotiating bank if there is no discrepancy in the
terms and conditions as mentioned in L/C. If there is any discrepancy then the issuing bank
asks for a NOC or a discrepancy waiver approval from the importer and after it is given then
only the payment is released to the negotiating bank.
Then the beneficiarys bank gets the payment from issuing bank and on receiving the
payment it issues a Bank realization Certificate (BRC). This document confirms the export
realization and is used for getting the incentives hence it is send to the DGFT for the DEPB
scheme. A copy of BRC is sent to RBI directly by the negotiating bank.

Commercial Invoice
A bill for the goods from the seller to the buyer. These invoices are often used by
governments to determine the true value of goods when assessing customs duties.
Governments that use the commercial invoice to control imports will often specify its form,
content, number of copies, language to be used, and other characteristics. A commercial
invoice is a prima-facie evidence of the contract of sale and purchase. It is a document made
by the exporter on the importer indicating details like description of the goods consigned,
24

consignors name, consignees name, name of the steamer, number and date of bill of lading,
country of origin of goods, price, terms of payment, amount of freight etc.

Following are the conditions that must be exercised in order to ensure that an invoice is
considered valid:
The invoice should be made out in the name of the applicant or the party specified in LC
To be signed by an authorized signatory of the exporter.
The invoice should be drawn in the same currency of LC unless otherwise specified also
mentioning the terms of delivery & routing of merchandize.
The invoice should not include any charges not stipulated in the LC. Also, the gross value of
invoice should not exceed credit value.
The invoice should show deduction towards advance payment made, agency commission
payable etc. as applicable.
Final amount of invoice or the percentage of drawing as permitted in the LC should
correspond with the draft amount.
If partial shipments are affected, amount of drawings should preferably correspond to
proportionate quantities shipped.
If invoices issued for an amount in excess of the amount permitted by the credit, the drawing
should not exceed the amount of credit. Details stated on the invoice should correspond
exactly to details specified in all other documents. Also, the details should certify the facts
like origin of goods etc, stipulated in the LC

Consular Invoice
Mainly needed for the countries like Kenya, Uganda, Tanzania, Mauritius, New Zealand,
Burma, Iraq, Ausatralia, Fiji, Cyprus, Nigeria, Ghana, Zanzibar etc. It is prepared in the
prescribed format and is signed/ certified by the counsel of the importing country located in
the country of export.

Customs Invoice
Mainly needed for the countries like USA, Canada, etc. It is prepared on a special form being
presented by the Customs authorities of the importing country. It facilitates entry of goods in
the importing country at preferential tariff rate.

25

 Legalized Invoice
This shows the seller's genuineness before the appropriate consulate/ chamber of commerce/
embassy. It do not have any prescribed form.

Packing List /Weight Note

The weight certificate---weight list or weigher's certificate---is most often used in the export
goods sold on weight basis. It is issued by the official weigher on the dock or the independent
certified weigher.
In case of transport other than by sea and unless the letter of credit (L/C) specifically
stipulates that the certification of weight must be by means of a separate document, a weight
stamp or declaration of weight that is superimposed on the transport document by the carrier
or his agent is acceptable.
Considerably more detailed and informative than a standard domestic packing list, it
itemizes the material in each individual package and indicates the type of package, such as a
box, crate, drum, bales, pallets or carton. Both commercial stationers and freight forwarders
carry packing list forms.
Color, Size, Set/pair, Cartoons, Pieces, Weight, Measurement & Dimension of the goods
packing. Shipping company utilizes this information to calculate the volume of space to be
occupied by a consignment.

It also states other details like name of exporter, consignee, port of loading, discharge
& destination.

Bill of lading
A document that establishes the terms of a contract between a shipper and a transportation
company under which freight is to be moved between specified points for a specified charge.
Usually prepared by the shipper on forms issued by the carrier, it serves as a document of
title, a contract of carriage, and a receipt for goods. Also see Air waybill, Inland bill of lading,
Ocean bill of lading
Bill of lading is closely related to the LC. It is a very important document when it comes to
LC mode of payment. Each & every LC has the provision of presentation of Bill of Lading
before payment is discharged on it. The possession of the original bill of lading enables the
holder to claim the goods from the carrier. It is the only negotiable document. It is generally
issued in three originals and all the three are sent to the buyer as a post shipment document.

26

The bill of lading must contain the following elements:

Show the name of the carrier and must be issued by a named carrier or his agent, the bill of
lading must also be signed by the named carrier or his agent.
Bear a distinct number
Indicate the date and place of issuance
Indicate the name of the consignor and consignee
Indicate a brief description of the goods being carried
Indicate port of loading and/or taking in charge
Indicate port of discharge
Be issued in full set of originals
Meet all other stipulation of the credit
Must indicate whether freight is prepaid or payable
Delivery agent contact details
All terms & conditions of carriage at the revers
There are various types of bill of lading

Container bill of lading

House bill of lading

Master bill of lading

Express bill of lading

Charter party bill of lading

Combined transport bill of lading

Clean bill of lading

Claused bill of lading

Short-form bill of lading

27

Liner bill of lading

Through bill of lading

Switch bill of lading

Lash bill of lading

Stale bill of lading

On-board bill of lading

FCR/LR/Airways Bill:
All the three documents are issued for the same purpose but for different means. Freight
cargo receipt is issued when the goods are exported through sea route, Lorry receipt is issued
in the case when goods are exported by road and Airways Bill is issued when goods are
exported via airways. In absence of BL these documents act as a proof for export of goods.
These documents are issued in lieu of BL, which is issued and sent to the buyer with the
shipment itself by the shipping company

Shipping Bill:
This document is issued by the customs and is certificate of custom clearance. A copy of
shipping bill is sent to the sellers bank as a post shipment document. It contains all the
details about the goods like:Bears a distinct number known as SB number.

Indicate the date and place of issuance

Name and mode of the carrier
Indicate the name of the consignor and consignee
Indicate a brief description of the goods being carried
Indicate port of loading or taking in charge
Indicate port of discharge
FOB value of goods in both foreign currency as well as domestic currency
Amount of freight & insurance paid, if any.
Invoice number and Forex account number also.

Bill of Exchange
The bill of exchange, commonly referred to as the draft or the bill, is an unconditional order
in writing, signed and addressed by the drawer (the exporter usually) to the drawee (the

28

confirming bank or the issuing bank usually), requiring the drawee to pay the drawer a certain
sum of money at sight or at a fixed or determinable future time.
The draft is widely used in international trade, most frequently in the payment against a
letter of credit (L/C). It is also used in the open account without any L/C involved.

Drawer
The drawer is the party who issues the draft and to whom the payment is made. The drawer is
the seller (the exporter) and the payee of the draft. The payee could be another party rather
than the exporter, or could be the bona fide holder (the bearer) of the draft.

Drawee
The drawee is the party who owes the money or agrees to make the payment and to whom the
draft is addressed (made out). The drawee is the buyer (the importer), the acceptor and the
payer of the draft in a documentary collection. In a letter of credit the drawee most often is
the confirming bank or the issuing bank, which is the acceptor and the payer of the draft.

Remitting Bank
The exporter's bank to whom the exporter sends the draft, shipping documents and
documentary collection instructions, and who subsequently relays them to the collecting bank
in a documentary collection is called the remitting bank.
The term remitting bank as used under a letter of credit may refer to a nominated bank from
whom the issuing bank or the confirming bank, if any, receives the shipping documents.

Collecting Bank (Presenting Bank)

The bank in the importer's country (the importer's bank usually) involved in
processing
the collection---presents the draft to the importer for payment or acceptance, and thereafter
releases the shipping documents to the importer in accordance with the instructions of the
exporter---is called the collecting bank or the presenting bank.

Inspection Certificate or Inspection Report

29

The inspection certificate---inspection report or report of findings---is required by some

importers and/or importing countries. The export-trader uses such a report in the inspection of
goods purchased from a manufacturer. The export-manufacturer also uses such a report in the
inspection of its own productions.
In case an inspection certificate is required, the importer may stipulate in the letter of credit
(L/C) to use a specific independent surveyor.
In the case of a foreign government required pre-shipment inspection, which is stipulated in
the L/C, the report of findings can be in the form of a security label attached on the invoice.
The label bears the number and date of the corresponding report of findings issued by the
foreign government engaged surveyor

Certificates of Origin
The certificate of origin is a document certifying the country in which the product was
manufactured, and in certain cases may include such information as the local material and
labour contents of the product.
Some importing countries require a certificate of origin to establish whether or not a
preferential duty rate is applicable. A popular example of the certificate of origin is the Form
A, which is often called the GSP Form A.
The certificate of origin (C/O) is an alternative to the declaration or the certification and/or
legalization of the commercial invoice. The C/O is based on the rules of the country of origin.
The country of origin is the country where the goods are grown, produced or manufactured.
The manufactured goods must have been substantially transformed in the exporting country
as the country of origin, to their present form ready for export. Certain operations such as
packaging, splitting and sorting may not be considered as sufficient operations to confer
origin.
The certificate of origin includes the Form A, Chamber of Commerce Certificate of Origin,
Exporter's Certificate of Origin, and Free Trade Market Certificate of Origin. The trade
agreement, import practice, and letter of credit (L/C) stipulation determine the type of C/O
needed.

Exporter's Certificate of Origin

Unless the letter of credit (L/C) stipulates a specific certificate of origin (C/O) form and/or
the issuer and/or the wording (data content), the exporter may issue his/her own C/O using
the company letterhead. The C/O contents may include the same data as in the commercial
invoice and packing list, adding a declaration that the goods in question are manufactured in
the exporting country, and that the amount shown on invoice is the true and correct value.
Depending on the L/C stipulation, the certificate of origin issued by the exporter may be
self-certified and/or require certification by a Chamber of Commerce or the government
30

foreign trade office. The certification normally requires payment of a fee, unless selfcertified.

Shipping Advice
The shipping advice is a notice to the importer on summary of the shipment.
Foreign importer may arrange the cargo insurance on time based on the shipping advice (if
buyer is to arrange the insurance). Moreover, importer may know when to receive the goods
and arrange with a customs broker for the cargo clearance.
The shipping advice is particularly important in short-sea trades, for example within the
Asian countries where the goods may arrive at the port of destination before the shipping
documents, and in the ports of destination where theft and pilferage of the imported goods is
rampant.

Beneficiary's Certificate
The beneficiary's certificate, sometimes referred to as the certificate of assurance, is a
certification issued by the beneficiary of the letter of credit (L/C) showing, unless wording is
specified in the L/C, the summary of a consignment and declaring (i.e., assuring the
consignee) that the shipment in question conforms to the specifications in the sales contract.
The exporter can issue a beneficiary's certificate using company letterhead.

Health Certificate
Phytosanitary or Plant Health Certificate
The prefix 'phyto' means plant. The phytosanitary certificate---plant health certificate---is
issued by the government agricultural department or certified inspector for such agricultural
products as seeds, fruits, vegetables, rice, wheat, soybean, corn, and milled materials (e.g.
flour and soybean meal), certifying that the goods are free from harmful pests and diseases.

Fumigation Certificate
The fumigation certificate is issued by a specialized treatment plant or firm for agricultural
and forestry products, certifying that the goods have been treated with smoke or fumes. The
purpose of fumigation is to kill insects or disinfect. For example, wood may be fumigated
with methyl bromide.

31

 In some countries, a fumigation certificate may be required to obtain a phytosanitary

certificate for the forestry products.

Analysis Certificate
The analysis certificate is required by certain importing countries and/or importers for tariff
or other purposes, usually issued as proof of product composition or contents. It is obtained
from an independent testing laboratory. Importers may specify a testing laboratory in the
letter of credit (L/C).

Fax Shipping Advice

The fax shipping advice is an advance facsimile (fax) notice to the importer on summary of
the shipment. It varies slightly from the mail shipping advice. The information in a fax
shipping advice may include the purchase order or contract number, letter of credit (L/C)
number and date, description of goods (in general terms), total number of packages, carrier
and voyage/flight number, ETD (estimated time of departure) from named port or point of
origin, and ETA (estimated time of arrival) at named port or point of destination.
In practice, a fax shipping advice is often sent to the importer even if the L/C does not
specifically call for such advice.
The printout of the fax transmission report will show whether or not the advice is
successfully transmitted to the importer, the report is a proof of transmission.

Insurance certificate
Used to assure the consignee that insurance will cover the loss of or damage to the cargo
during transit. These can be obtained from freight forwarder or with direct insurance
company.

32

Methods/Terms of Payment
There are 4 primary methods of payment in international trade.
i)

Cash in Advance

ii)

Letters of Credit

iii)

Documentary Collections

iv)

Open Account

1) Cash in Advance

The cash-in-advance method of payment is the safest for exporters since the payment is made
before the goods are shipped and credit risk (risk of non-payment) is mitigated. It also
involves the least paperwork and payment is made quick and in a secure manner. In todays
scenario, an adapted version of this method is often used, wherein a part payment (40-70%) is
made in advance and the remainder of the payment is made upon receipt of goods. This
method is also expensive for the importer since the fee for an international wire transfer is
paid by the sender (importer)ix. This is a common form of this method used in Alok Industries
as well.
Applicability: It is recommended in high-risk trade transactions where risk of non-payment is
more prominent due to political instability in the country of import, or when the credit rating
of the importer is unverifiable or doubtful. Although it is highly beneficial to the exporter, it
must be used with caution since unattractive payment terms may lead to a drop in sales and
33

loss of market. However, if the product is rare and in demand, the exporter can always use it
to his advantage and lobby for cash-in-advance payment terms.
While using this method, exporters must provide clear routing instructions to the importer
and the required details such as, banks name, address, account number, SWIFT code
(Society for World Interbank Financial Telecommunication) and in case of U.S. dealings the
ABA (American Banking Association) number.
On occasions the importer may insist on an advance payment guarantee, which would
allow him to recover the payment in case the exporter fails to deliver according to the
contract. In such cases it is advisable for the exporter to instruct the bank to make the
guarantee inoperative until he receives the full payment.

2) Letter Of Credit
The buyer and the seller who are located in different countries, may not know each other and
hence many times the problem of Buyers creditworthiness hampers the trade between the
buyer and the seller. The main objectives of the buyer and the seller in any international trade
and contradictory in terms of Buyer will always try to delay the payment while the seller
would like to receive funds at the earliest.

To mitigate this problem, Seller always request Buyer to arrange for a Letter of Credit to be
issued by Buyers Bank. Upon issuance of Letter of Credit, the Buyers bank replaces its own
Creditworthiness to that of the Buyer, it undertakes to reimburse the Seller for the value of
the Letter of Credit Irrevocably provided two underline conditions are fulfilled by the
Seller:
All the documents stated in the LC are presented;
All the terms and conditions of the LC are complied with.

A standard, commercial letter of credit is a document issued mostly by a financial

institution undertaking.
The LC can also be the source of payment for a transaction, meaning that redeeming the letter
of credit will pay an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a customer
in another. The parties to a letter of credit are usually a beneficiary who is to receive the

34

money, the issuing bank of whom the applicant is a client, and the advising bank of whom
the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended
or canceled without prior agreement of the beneficiary, the issuing bank and the confirming
bank, if any.
Some of the Documents Called for under a LC

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

Cert , Phyto-sanitary 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.

Legal principles governing documentary credits

One of the primary peculiarities of the documentary credit is that the payment obligation is
abstract and independent from the underlying contract of sale or any other contract in the
transaction. Thus the banks obligation is defined by the terms of the credit alone, and the sale
contract is irrelevant. The defences of the buyer arising out of the sale contract do not concern
the bank and in no way affect its liability. Article 3(a) UCP states this principle clearly.
Article 4 the UCP further states that banks deal with documents only, they are not concerned
with the goods (facts). Accordingly, if the documents tendered by the beneficiary, or his or
her agent, appear to be in order, then in general the bank is obliged to pay without further
qualifications.
The policies behind adopting the abstraction principle are purely commercial and reflect a
partys expectations: firstly, if the responsibility for the validity of documents was thrown
onto banks, they would be burdened with investigating the underlying facts of each
transaction and would thus be less inclined to issue documentary credits as the transaction
would involve great risk and inconvenience. Secondly, documents required under the credit
could in certain circumstances be different from those required under the sale transaction;
banks would then be placed in a dilemma in deciding which terms to follow if required to
look behind the credit agreement. Thirdly, the fact that the basic function of the credit is to
provide the seller with the certainty of receiving payment, as long as he performs his
documentary duties, suggests that banks should honour their obligation notwithstanding
allegations of misfeasance by the buyer. Finally, courts have emphasised that buyers always
have a remedy for an action upon the contract of sale, and that it would be a calamity for the
business world if, for every breach of contract between the seller and buyer, a bank were
required to investigate said breach.

35

The principle of strict compliance also aims to make the banks duty of effecting payment
against documents easy, efficient and quick. Hence, if the documents tendered under the
credit deviate from the language of the credit the bank is entitled to withhold payment even if
the deviation is purely terminological.
The price of LCs
All the charges for issuance of Letter of Credit, negotiation of documents, reimbursements
and other charges like courier are to the account of applicant or as per the terms and
conditions of the Letter of credit. If the LC is silent on charges, then they are to the account of
the Applicant. The description of charges and who would be bearing them would be indicated
in the field 71B in the Letter of Credit.

Parties involved in LC transaction:

1. The Applicant is the party that arranges for the letter of credit to be issued.
2. The Beneficiary is the party named in the letter of credit in whose favor the letter of credit
is issued.
3. The Issuing or Opening Bank is the applicants bank that issues or opens the letter of credit
in favor of the beneficiary and substitutes its creditworthiness for that of the applicant.
4. An Advising Bank may be named in the letter of credit to advise the beneficiary that the
letter of credit was issued. The role of the Advising Bank is limited to establish apparent
authenticity of the credit, which it advises.
5. The Paying Bank is the bank nominated in the letter of credit that makes payment to the
beneficiary, after determining that documents conform, and upon receipt of funds from the
issuing bank or another intermediary bank nominated by the issuing bank.
6. The Confirming Bank is the bank, which, under instruction from the issuing bank,
substitutes its creditworthiness for that of the issuing bank. It ultimately assumes the issuing
banks commitment to pay.

36

 Letter of Credit Process:

Commercial Letter of Credit Flow

Applicant approaches Issuing/ Opening Bank with LC application form duly filled and
requests Issuing Bank to issue a Letter of Credit in favour of Beneficiary.
Issuing Bank issues a Letter of Credit as per the application submitted by an Applicant and
sends it to the Advising Bank, which is located in Beneficiarys country, to formally advise
the LC to the beneficiary.
Advising Bank advises the LC to the Beneficiary.
Once Beneficiary receives the LC and if it suits his/ her requirements, he/ she prepares the
goods and hands over them to the carrier for dispatching to the Applicant.
He/ She then hands over the documents along with the Transport Document as per LC to the
Negotiating Bank to be forwarded to the Issuing Bank.
Issuing Bank reimburses the Negotiating Bank with the amount of the LC post Negotiating
Banks confirmation that they have negotiated the documents in strict conformity of the LC
terms. Negotiating Bank makes the payment to the Beneficiary.

Simultaneously, the Negotiating Bank forwards the documents to the Issuing Bank to be
released to the Applicant to claim the goods from the carrier.
Applicant reimburses the Issuing Bank for the amount, which it had paid to the Negotiating
Bank.
Issuing Bank releases all documents along with the titled Transport Documents to the
Applicant.

37

 Types of Letter of Credit

1) Irrevocable
An irrevocable letter of credit can neither be amended nor cancelled without the agreement of
all parties to the credit. Under UCP500 all letters of credit are deemed to be irrevocable
unless otherwise stated. Here, the importer's bank gives a binding undertaking to the supplier
provided all the terms and conditions of the credit are fulfilled.

2) Unconfirmed
The advising bank forwards an unconfirmed letter of credit directly to the exporter without
adding its own undertaking to make payment or accept responsibility for payment at a future
date, but confirming its authenticity.

38

3) Confirmed
A confirmed letter of credit is one in which the advising bank, on the instructions of the
issuing bank, has added a confirmation that payment will be made as long as compliant
documents are presented. This commitment holds even if the issuing bank or the buyer fails
to make payment. The added security to the exporter of confirmation needs to be considered
in the context of the standing of the issuing bank and the current political and economic state
of the importer's country. A bank will make an additional charge for confirming a letter of
credit. In many cases, the confirming bank is located in Beneficiarys country.
Confirmation costs will vary according to the country involved, but for many countries
considered a high risk will be between 2%-8%. There also may be countries issuing letters of
credit, which banks do not wish to confirm - they may already have enough exposure in that
market or not wish to expose themselves to that particular risk at all.

4) Standby Letters of Credit

A standby letter of credit is used as support where an alternative, less secure, method of
payment has been agreed. They are also used in the United States of America in place of bank
guarantees. Should the exporter fail to receive payment from the importer he may claim
under the standby letter of credit. Certain documents are likely to be required to obtain
payment including: the standby letter of credit itself; a sight draft for the amount due; a copy
of the unpaid invoice; proof of dispatch and a signed declaration from the beneficiary stating
that payment has not been received by the due date and therefore reimbursement is claimed
by letter of credit. The International Chamber of Commerce publishes rules for operating
standby letters of credit - ISP98 International Standby Practices.

39

5) Revolving Letter of Credit

The revolving credit is used for regular shipments of the same commodity to the same
importer. It can revolve in relation to time or value. If the credit is time revolving once
utilised it is re-instated for further regular shipments until the credit is fully drawn. If the
credit revolves in relation to value once utilised and paid the value can be reinstated for
further drawings. The credit must state that it is a revolving letter of credit and it may revolve
either automatically or subject to certain provisions. Revolving letters of credit are useful to
avoid the need for repetitious arrangements for opening or amending letters of credit.

6) Transferable Letter of Credit

A transferable letter of credit is one in which the exporter has the right to request the paying,
or negotiating bank to make either part, or all, of the credit value available to one or more
third parties. This type of credit is useful for those acting as middlemen especially where
there is a need to finance purchases from third party suppliers.

7) Back-to-Back Letter of Credit

A back-to-back letter of credit can be used as an alternative to the transferable letter of credit.
Rather than transferring the original letter of credit to the supplier, once the letter of credit is
received by the exporter from the opening bank, that letter of credit is used as security to
establish a second letter of credit drawn on the exporter in favour of his importer. Many
banks are reluctant to issue back-to-back letters of credit due to the level of risk to which they
are exposed, whereas a transferable credit will not expose them to higher risk than under the
original credit.

40

 Advantages of Letter of Credit:

The beneficiary is assured of payment as long as it complies with the terms and conditions of
the letter of credit. The letter of credit identifies which documents must be presented and the
data content of those documents. The credit risk is transferred from the applicant to the
issuing bank.
The beneficiary can enjoy the advantage of mitigating the issuing banks country risk by
requiring that a bank in its own country confirm the letter of credit. That bank then takes on
the country and commercial risk of the issuing bank and protects the beneficiary.
The beneficiary minimizes collection time as the letter of credit accelerates payment of the
receivables.
The beneficiarys foreign exchange risk is eliminated with a letter of credit issued in the
currency of the beneficiarys country.

Risks involved in Letter of Credit.

Since all the parties involved in Letter of Credit deal with the documents and not with the
goods, the risk of Beneficiary not shipping goods as mentioned in the LC is still persists.
The Letter of Credit as a payment method is costlier than other methods of payment such as
Open Account or Collection
The Beneficiarys documents must comply with the terms and conditions of the Letter of
Credit for Issuing Bank to make the payment.

The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political risk on the
Issuing Banks country and Foreign Exchange Risk in case of Usance Letter of Credits Letter
of Credit Process:

41

3) Open Account:

Open Account is the term used to indicate that the payment will be made by the importer after
the goods have been received by him. As is evident this is clearly the riskiest option for the
exporter but with increasing competition exporters are being pressed into granting open
account terms in an effort to capture greater market share. However despite the benefits of
greater market share, exporters must thoroughly consider the political and economic stability
of the importing country and be convinced that they have accurately assessed and taken all
the risks into account.
In this case, apart from the goods being shipped, all the required documents of title to the
goods are also sent to the importer to enable him to claim the goods and clear them through
customs. The exporter has only the importers word that the payment will be made in full at a
stipulated future date, which usually ranges between 1-3 months from the date of shipment. It
is advisable to use the open account terms in combination with various export finance
techniques such as export credit insurance and factoring so as to mitigate the risks associated
with this method.
Since such liberal terms are based largely on mutual trust between the exporter and importer,
it is essential that the exporter is confident about the buyers credit rating and has accurately
determined the reliability of the importer. Open Account terms should be used only while
dealing with politically and economically stable markets backed by well established trade
relations between the two parties.
In recent times there has been a shift in the international trading community, with traders
moving away from the well established L/C to more liberal open account structures
especially for short-term contracts. This is the result of globalization which fosters an
intensely competitive trading environment. In Asia, the stringent credit control measures
adopted by the countrys policy makers (central banks) have also led to a reduced potential to
lend to importers, thus bringing about a decline in the use of the L/C instrument.

42

EXPORT INCENTIVES

1) Advance Authorization Scheme

It is issued to allow duty free import of inputs, which are physically incorporated in
export product (making normal allowance for wastage). Advance Authorizations are issued
for inputs of export items given under SION (Standard Input Output Norms). These can also
be issued on the basis of Adhoc norms or self declared norms
Validity: 24 months from the date of issue for both import and export activity

2) Duty Entitlement Passbook (DEPB) Scheme

The Objective of DEPB is to neutralize incidence of customs duty on import content
of export product. Neutralization shall be provided by way of grant of duty credit against
export product. Credit shall be available against such export products and at such rates as
may be specified by DGFT by way of public notice. Credit may be utilized for payment of
Customs Duty on freely importable items
Validity: for import it shall be as prescribed in Hand Book of Procedures v1. The
DEPB shall be valid for a period of 24 months from the date of issue
DEPB and / or items imported against it are freely transferable

3) Duty drawback on export of goods

Various schemes like EOU, SEZ, DEEC, manufacture under bond etc. are available to
obtain inputs without payment of customs duty, excise duty and service tax or obtain refund
of duty paid on inputs
Manufacturers can avail Cenvat credit of duty paid on inputs and utilized the same for
payment of duty on other goods sold in India, or they can obtain refund

43

Manufacturers or processors who are unable to avail any of these schemes can avail duty
drawback. Here, the excise duty, customs duty and service tax paid on inputs is refunded to
the exporter of finished product by way of duty drawback
Payment of drawback
The payment of drawback is made under the rules and interest, by the Custom/Central
Excise Collectorate having Jurisdiction over the port /airport / land customs station
through which exports are affected to the exporter or to the agent specially authorised by
the exporter to receive the said amount of drawback and interest. The payment of
drawback and interest is made by credit in the exporter's account maintained with the
respective Custom House

4) Export Promotion Capital Goods Scheme (EPCG)

This scheme allows import of capital goods for pre production, production and post
production (including CKD / SKD thereof as well as computer software systems) at 5%
Customs duty subject to an export obligation equivalent to 8 times of duty saved on capital
goods imported under EPCG scheme to be fulfilled in 8 years reckoned from Authorization
issue-date
Eligibility: EPCG scheme covers manufacturer exporters with or without supporting
manufacturer(s) / vendor(s), merchant exporters tied to supporting manufacturer(s) and
service providers

Broad categories of export shipments

Under claim of Duty Drawback
Without claim of Drawback (Advance Authorization, Free, under payment of duty,
etc.)
Export by a 100% Export Oriented Unit (EOU )
Under DEPB Scheme

44

EXPORT FINANCE

In the previous sections we have studied export finance from the point of view of the various
modes of payment that the exporter has at his disposal. This section focuses on export finance
from the point of view of the credit facilities extended to the exporters at pre and post
shipment stages. It deals with credit extended to the exporter for financing the purchase,
manufacture and packing of goods intended for overseas markets. The objective is to educate
the reader about pre and post shipment credit.

PRE-SHIPMENT FINANCE
Pre-shipment finance is provided to the exporters for the purchase of raw materials,
processing them and converting them into finished goods for the purpose of export.

Modes of Pre- Shipment Finance

1) Packing Credit
The basic purpose of packing credit is to enable the eligible exporters to procure process,
manufacture or store the goods meant for export. Packing credit refers to any loan to an
exporter for financing the purchase, processing, manufacturing or packing of goods as famed
by the Reserve Bank of India. It is a short-term credit against exportable goods. Packing
credit is normally granted on secured basis. Sometimes clear advance may also be granted.
Many advances are clean at their initial stage when goods are not yet acquired. Once the
goods are acquired and are in the custody of the exporter banks usually convert the clean
advance into hypothecation! pledge. Let us first discuss the detail procedure of packing
credit.

45

Eligibility: Packing credit is available to all exporters whether merchant exporter, Export/
Trading/ Star Trading/ Super Star Trading Houses and manufacturer exporter. Manufacturers
of goods supplying to Export/ Trading/ ST/ SST Houses and Merchant exporters are eligible
for packing credit. The-foreign buyer through the medium of a reputed bank gives the credit
to eligible exporters, for specified purposes against irrevocable letter of credit. It is also
available against a confirmed or firm export order/contract placed by the buyer for export of
goods from India.
2) Running Account Facility:
The RBI has permitted banks to grant packing credit advances even without lodgment of-L/ C
or firm-order/ contract under the scheme of Running Ac-count Facility subject to, the
fol1owing.conditions
i) The bank may extend this facility only to those exporters whose track record has been
good.
ii) L/C or firm order is produced within a reasonable period of time. For Commodities under
selective credit control, banks should insist on production of LCs or firm orders within one
month from the date of sanction.
iii) The concessional credit available in respect of individual pre-shipment credit should not
go beyond 180 days. Packing credit may also be given under the Red Clause letter of credit.
In this method, credit is given at the instance and responsibility of the foreign bank
establishing the LC. Here, the packing credit advance is made against a simple receipt and is
unsecured.

Amount: - The loan amount is decided on the basis of export order and the credit rating of the
exporter by the bank. Generally the amount of packing credit will not exceed FOB value of
the export goods or their domestic value whichever is less. It can be to the extent of domestic
value of the goods even
though such value is higher than their FOB value provided the goods are entitled to duty draw
back and also covered by the Export Production Finance Guarantee of the ECGC.

46

Period: - The packing credit can be granted for a maximum period of 180 days from the date
of disbursement. The banks are authorised by RBI to extend this period. This period can be
extended for a further period of 90 days, in case of nonshipment of goods within 180 days.
The extension can be done provided the banks are satisfied that the reasons for extension are
due to circumstances beyond the control of the exporters. Pre-shipment credit may be given
for a longer period upto a maximum of270 days, if the banks are satisfied about the need for
longer duration of credit.

Rate of Interest:-The interest payable on pre-shipment finance is usually lower than the
normal rate, provided the credit is extinguished by lodging the export bills on remittances
from abroad. If the exporter fails to do so they would not be able to avail concessional rate of
interest. In order to avail the packing credit; exporters are expected to make a formal
application to the bank giving details of credit requirements along with the required
documents.

3) Advance against Incentives

When the value of the materials to be procured for export is more than FOB value of the
contract, the exporters may get packing credit advance more than the FOB value of the
goods. The excess of cost of production over the FOB value of the contract represents
incentives receivables. For example, when the domestic price of goods exceeds the value of
export orders, the difference represents duty drawback entitlement. Banks can grant advances
against duty drawback at pre-shipment stage= subject to the condition that the loan is covered
by Export Production Finance Guarantee of Export Credit Guarantee Corporation (ECGC).
This guarantee enables banks to sanction advances at the pre-shipment stage to the full extent
of cost of
production. The extent of cover and the premium are the, same as for packing credit
guarantee.

4) Pre-shipment Credit in Foreign Currency

47

This is an additional window to rupee packing credit scheme. This credit is available to cover
both the domestic and imported inputs of the goods exported from India. The facility is
available in any of the convertible currencies. The credit will be self-liquidating in nature and
accordingly after the shipment of goods the bills will be eligible for discounting/
rediscounting or for post-shipment credit in foreign currency. The exporters can avail this
finance under the following two options.
i) The exporters may avail pre-shipment credit in rupees and, then, the post-shipment credit
either in rupees or in foreign currency denominated credit or discounting/ rediscounting of
export bills.
ii) The exporters may avail pre-shipment credit in foreign currency and discounting/
rediscounting of the export bills in foreign currency.
PCFC credit will also be available both to the supplier units of EPZ/ EOU and the receiver
units of EPZ/ EOU. The credit in foreign currency shall also be available on exports to Asian
Clearing Union (ACU) Countries. This will be extended only !l the basis of confirmed! firm
export orders or confirmed L/Cs. The Running Account facility will not be available under
the scheme.
POST-SHIPMENT FINANCE

It may be defined as any loan or advance granted or any other credit provided
by a bank to an exporter of goods from India from the date of extending the credit after
shipment of goods to the date of realization of export proceeds. It includes any loan or
advance granted to an exporter on consideration of or on the security of, any duty drawback
or any cash receiv ables by way of incentive from the government.
While granting post-shipment finance, banks are governed by the guidelines issued by the
RBI, the rules of the Foreign Exchange Dealers Association of India (FEDAI), the Trade
Control and Exchange Control Regulations and the International Conventions and Codes of
the International Chambers of Commerce. The exporters are required to obtain credit limits
suitable to their needs. The quantum of credit depends on export sales and receivables. Post
shipment finance is granted under various methods. The exporter may choose the type of
facility as per his requirement. The Banks scrutinize the documents submitted for compliance
of exchange control provisions like:

48

i) The documents are drawn in permitted currencies and payment receivable as permitted
method of payment;
ii) The relevant GR/PP form duly certified by the customs is submitted and particulars as
stated in the GR/PP form

Modes of Post- Shipment Finance

1) Negotiation of Export Documents under Letters of Credit

Negotiation of Export Documents under Letters of Credit where the exports are under letter
of credit arrangements, the banks will negotiate the export bills provided it is drawn in
conformity with the letter of credit. When documents are presented to the bank for
negotiation under L/C, they should be scrutinized carefully taking into account all the terms
and conditions of the credit. All the documents tendered should be strictly in accordance with
the L/C terms. It is to be noted that the L/C issuing bank under-takes to honour its
commitment only if the beneficiary submits the stipulated documents. Even the slightest
deviation from those specified in the L/C can give an excuse to the issuing bank of refusing
the reimbursement of the payment that might have been already made by the negotiating
bank.

2) Purchase/Discount of Foreign Bills

Purchase or discount facilities in respect of export bills drawn under confirmed export
contracts are generally granted to exporters who enjoy bill purchase/discounting limits
sanctioned by the bank. As the security offered by the issuing bank under letter of credit
arrangement is not available, the financing bank is totally dependent upon the credit

49

worthiness of the foreign buyer. The documents, under the Documents against Payment (D/P)
arrangements, are released through foreign correspondent only when payment is received.
Whereas in the case of Documents against Acceptance (D/A) bills, documents are delivered
to the overseas importers against acceptance of the draft to make payment on maturity. Since
the financing banks are open to the risk of non-payment, ECGC policies issued in favor of
exporters and assigned to banks are insisted upon.
Under the policy, ECGC fixes limits and payment terms for individual buyers and the
financing bank has to ensure that the limit is not exceeded so that the benefits of policy are
avail-able. Banks also secure a guarantee from ECGC on the post shipment finance extended
by them either on a selective or whole turnover basis. Banks sometimes do obtain credit
reports on foreign buyers before they purchase the export bills drawn on the foreign buyer.

3) Advance against Bills Sent on Collection

Post-shipment finance is granted against bills sent on collection basis in certain situations

FORFEITING
Forfeiting is another method of medium term financing (1-5 yrs) which is open to the
exporter should he require it. It involves the purchase of receivables (bills drawn on the
importer) from the exporter such as acceptance drafts drawn under L/C, bills of exchange,
promissory notes and other negotiable instruments. These are usually purchased sans
recourse i.e. without recourse to the exporter. This means that the exporter will not be held
liable in case of non-payment by the importer. These receivables are bills drawn by the
exporter upon the importer containing an unconditional guarantee (generally issued by the
importers bank) to pay. The banks in turn can deal with these bills in two ways. They can
either hold them until maturity and follow up with the importer or sell these bills to other
investors (again sans recourse).
A term commonly interchanged with forfaiting, is factoring. However it must be
remembered that factoring involves the financing smaller claims such as for consumer goods
and is usually provided for periods ranging from 90-180 days. Forfaiting on the other hand is
used to finance capital goods exports ranging from 3-5 yrs. Factoring effectively takes care of

50

commercial risk while forfaiting covers political risk also since the applicant gets cash in
hand without recourse.

FACTORING

Factoring is similar to forfeiting in that it also allows the exporter to raise finance against his
outstanding export bills and involves the purchase of the exporters receivables. The
difference is that it factoring houses provide credit for a term ranging between 90-180 days
and is therefore a sound and flexible source of financing working capital finance compared to
loans. Factoring is a suitable option when export bills are of large amounts, collection of
debts is uniform and distributed fairly evenly over the financial year. Unlike forfaiting which
is always without recourse, in order to avail non-recourse factoring, credit limits must be
agreed on for each customer.
Factoring houses prefer the debtors to be varied and are usually averse to provide factoring
services in cases where one debtor accounts for a majority of the organizations sales.
Factoring houses may typically take control of the exporters sales ledger. Thus as and when
a sale is made, the invoice is and the export bill is sent to the factor, who arranges the finance
of a sizeable proportion (80-85%) of the value of the export bill. The factor then follows up
with the importer and collects payments on the exporters behalf. The remainder of the bill
value (15-20%), less service charges will be received once the factor collects payment from
the importer.

51

The advantage that factoring provides over the more traditional methods of overdrafts is that
while an overdraft hypothecated against export bills can arrange for only around 50-60% of
the value of the bill, factoring can extend up to 85%, thereby maximizing cash flow.
Factoring is considered to be a costly source of financing compared to other short term
finance options but factoring and forfaiting are extremely advantageous to the exporter
especially while attempting to venture into new markets where he is under pressure from
competitors to offer liberal payment terms such as open account.

FCNR

Foreign Currency Non-Resident account is a form of term deposit option available to Non
Resident Indians who wish to operate a bank account in India. These can be opened in four
currencies, Dollar, Euro, Pound and Japanese Yen. What makes it the preferred option for
most NRIs is that under this scheme, repayments are made in the same foreign currency in
which they were opened, thus protecting the account holder from fluctuations in exchange
rates.
Out of funds mobilized through this scheme, banks can lend money to corporates in foreign
currencies (available under this scheme). This is advantageous since the rates at which loans
are extended through the FCNR route are linked to LIBOR and are low cost compared to
traditional rupee credit. Thus corporates can convert their rupee liabilities into foreign
currency liabilities at low cost. Moreover the regulations are relaxed compared to ECBs
which makes it attractive for corporates who are looking for a low cost alternative to meet
their working capital requirements. Amounts for which credit is extended is generally greater
than USD 100,000.
However, as with any means of financing this is also not without some degree of risk. It goes
without saying that where two currencies are involved the risk posed through fluctuating
52

exchange rates is always present. On a smaller level, there is also the risk of the LIBOR being
set higher than domestic rates. Of the two the exchange rate risk is the one that corporates
must watch out for. However, they can quite easily hedge this risk with a forward contract
which will be explained in the next section.

The following illustration will help understand how the FCNR route works out more costfriendly:

ILLUSTRATION 1:
Domestic rupee credit = 13.5%
On the other hand a 6 month LIBOR loan would work out to

6 month LIBOR = 7.2%*

Banks margin = 2%
Other transaction costs = 0.52%
Total Cost: 9.72% * Libor assumed to be 1.2%

Thus the overall result is a net saving of 13.5-9.72% = 3.78%

This is the net saving on an unhedged FCNR loan, and therefore is open to risk of fluctuating
exchange rates. In order to cover this risk the appropriate option would be to enter into a
forward contract to buy foreign currency forward in the market. This procedure will be
explained in the following sections.
*In the illustrations LIBOR has been taken at an assumed rate and is not an indication
of current LIBOR levels.

53

RISK MITIGATION
Risk presents itself in various forms, from movements in competitors prices, shortage of raw
material leading to fluctuation in its prices, foreign exchange rates and interest rates. The
exporter concerns himself mainly with the risk posed by fluctuating foreign exchange rates
since his entire business fuels itself from earnings denominated mostly in foreign exchange.
Foreign exchange risk exposure is common to all who participate in international trade where
buying/selling of goods denominated in foreign currencies is unavoidable. Thus any change
in rates from the time of shipment of goods to the time the receivables are realized can affect
the exporters margin either favorably or unfavorably. Thus it is the risk that the exporter runs
of being able to adjust his cost and price to offset changes in exchange rates. In order to avoid
the unfavorable the exporter must have in place a sound strategy to combat these risks. This
opens up the subject of risk management in export finance.
Fluctuating exchange rates need not always be unfavorable, since if the dollar appreciates
(rupee declines) he can stand to make a substantial profit. For instance if the export value was
$ 2000 and the rupee depreciates from 40 to 45, the exporter would now receive Rs 90000 in
place of 80000. Considering that export orders are usually in numbers of over $100000, this
can result in windfall gains for the exporter. However on downside, with appreciation on the
rupee he can incur a substantial loss, which is why managing this exposure (foreign currency
risk) is top priority for an exporter. Exposure can be understood to mean any future expected

54

cash flow whose magnitude is subject to change due to fluctuations in the variables that
determine it (exchange rates).
Before we go into the risk mitigation procedures and techniques the exporter can turn to, it is
necessary to be acquainted with the market for foreign exchange dealings which forms the
regulatory body through which risk mitigation is carried out.

Foreign Exchange Exposure

When the condition prevalent in the market results in the exchange rates becoming extremely
volatile the exchange rate movements destabilize the cash flows of a business significantly.
Such destabilization of cash flows that affects the profitability of the business is the risk from
foreign currency exposures.
Exposure is thus the degree to which a company is affected by such fluctuations in currency
rates. Such exposure may be of four types:

Transaction Exposure
Translation Exposure
Economic Exposure
Operating Exposure

Transaction Exposure:
Transaction exposure is the exposure that arises from foreign currency denominated
transactions which an entity is committed to. It may arise from contractual, foreign currency,
future cash flows. For instance, if a firm has entered into a contract to sell computers at a
fixed price denominated in a foreign currency, the firm would be exposed to exchange rate
movements till it receives the payment and converts the receipts into domestic currency. The
exposure of a company in a particular currency is measured in net terms, i.e. after setting off
potential cash inflows with outflows.
Suppose that a company exporting in USD, while costing the transaction had reckoned on
getting say Rs 44 per dollar. By the time the exchange transaction materializes and the
proceeds are sold for rupees, the exchange rate moved to say Rs 40 per dollar. The
profitability of the export transaction can be completely wiped out by the movement in the

55

exchange rate. Such transaction exposure arises when a business has foreign currency
denominated receipt and payment. The risk is an adverse movement of the exchange rate
from the time the transaction is budgeted till the time the exposure is extinguished by sale or
purchase of the foreign currency against the domestic currency.
The firm may not necessarily have losses from the transaction exposure; it may earn profits
also. In fact, the international firms have a number of items in balance sheet (as stated above);
at a point of time, on some of the items (say payments), it may suffer losses due to weakening
of its home currency; it is then likely to gain on foreign currency receipts. Notwithstanding
this contention, in practice, the transaction exposure is viewed from the perspective of the
losses. This perception/practice may be attributed to the principle of conservatism.

Translation Exposure:
Translation exposure is the exposure that arises from the need to convert values of assets and
liabilities denominated in a foreign currency, into the domestic currency. Any exposure
arising out of exchange rate movement and resultant change in the domestic-currency value
of the deposit would classify as translation exposure. It is the potential for change in reported
earnings and/or in the book value of the consolidated corporate equity accounts, as a result of
change in the foreign exchange rates.
Translation exposure arises from the need to "translate" foreign currency assets or liabilities
into the home currency for the purpose of finalizing the accounts for any given period.
Translation exposure relates to the change in accounting income and balance sheet statements
caused by the changes in exchange rates; these changes may have taken place by/at the time
of finalization of accounts vis--vis the time when the asset was purchased or liability was
assumed. In other words, translation exposure results from the need to translate foreign
currency assets or liabilities into the local currency at the time of finalizing accounts. The
following example illustrates the impact of translation exposure:

ILLUSTRATION 2:
An Indian corporate firm has taken a loan of US $ 10 million, from a bank in the USA to
import plant and machinery worth US $ 10 million. On the date of the transaction, the

56

exchange rate was Rs 47.0. Thus, the imported plant and machinery in the books of the firm
was shown at Rs 47.0 x US $ 10 million = Rs 47 crore and loan at Rs 47.0 crore.
Assuming no change in the exchange rate, the Company at the time of preparation of final
accounts, will provide depreciation (say at 25 per cent) of Rs 11.75 crore on the book value of
Rs 47 crore.
However, the exchange rate of the US dollar is unlikely to remain unchanged at Rs 47. Let us
assume, it appreciates to Rs 48.0. As a result, the book value of plant and machinery will
change to Rs 48.0 crore, i.e., (Rs 48 x US$ 10 million); depreciation will increase to Rs 12.00
crore, i.e., (Rs 48 crore x 0.25), and the loan amount will also be revised upwards to Rs 48.00
crore. Evidently, there is a translation loss of Rs 1.00 crore due to the increased value of loan.
Besides, the higher book value of the plant and machinery causes higher depreciation,
reducing the net profit. This is translation exposure. However, translation losses (or gains)
may not be reflected in the income statement; they may be shown separately under the head
of 'translation adjustment' in the balance sheet, without actually affecting accounting income.

Economic Exposure:
An economic exposure is more a managerial concept than an accounting concept. A
company can have an economic exposure to say the Yen in even if it does not have any
transaction or translation exposure in the Japanese Currency. This would be the case if the
company's competitors are using Japanese imports. If the Yen weakens the company loses its
competitiveness, since imports from Japan become cheaper thereby reducing cost of
production to the competitor.
Thus, economic exposure to an exchange rate is the risk that a change in the rate affects the
company's competitive position in the market and hence, indirectly the bottom-line.
Economic exposure affects the profitability over a longer time span than transaction and even
translation exposure. Despite this being a huge risk to the company, under the Indian
exchange controls, while translation and transaction exposures can be hedged, economic
exposure cannot be hedged.

Operating Exposure:

57

Operating exposure as the extent to which the value of a firm stands exposed to exchange
rate movements, the firms value being measured by the present value of its expected cash
flows. Operating exposure is a result of economic ramifications of exchange rate movements
on the value of a firm, and hence, is also termed economic exposure. While Transaction and
translation exposure is the risk of the profits of the firm being affected by a movement in
exchange rates, operating exposure is the risk of future cash flows of a firm being reduced
due to changes in the exchange rate.
Operating exposure has an impact on the firm's future operating revenues, future operating
costs and future operating cash flows, thus clearly has a longer-term perspective. Given the
fact that the firm is valued as an entity that will exist for eternity x, its future revenues and
costs are likely to be affected by the exchange rate changes.
This becomes especially true for all those firms that deal in exchange of goods and services
that are subject to foreign competition and/or inputs from abroad.
If the firm succeeds in passing on the impact of higher input costs (caused due to appreciation
of foreign currency) by increasing its selling price, it does not have any operating risk
exposure as its operating future cash flows are likely to remain unaffected. An economic
concept, price and demand elasticity play a major role in this decision. The less price elastic
the demand of the goods/ services the firm deals in, the greater is the latitude it has in
determining its selling price and thus greater flexibility to exchange rate changes. The more
differentiated a firm's products are, the less competition it is likely to encounter and the
greater is its ability to maintain its domestic currency prices, both at home and abroad.
Evidently, such firms have relatively less operating risk exposure. In contrast, firms that sell
goods/services in a highly competitive market (in technical terms, have higher price elasticity
of demand) run a higher operating risk exposure as they are constrained to pass on the impact
of higher input costs (due to change in exchange rates) to the consumers.

The firm's ability to shift production and sourcing of inputs is also looked at as another major
factor affecting operating risk exposure. In operational terms, a firm having higher elasticity
of substitution between home-country and foreign-country inputs or production is less
susceptible to foreign exchange risk and hence encounters low operating risk exposure. Alok
Industries for instance sources some of their inputs from countries like Egypt, thus
diversifying their source of inputs.
58

Thus, the firm's ability to adjust its cost structure and raise the prices of its products and
services is the major determinant of its operating risk exposure.

Managing Foreign Currency Risks

The importance of having in place a comprehensive strategy to counter foreign currency risk
cannot be overstated. The treasury department of an organization engaged in international
trade usually assigns their very best to keep track of fluctuating exchange rates in order to
cover themselves from their unfavorable impact. Apart from this there is scope for more
fundamental means to counter this risk. One option is to negotiate for lower prices from the
supplier or higher prices from the buyer. These however leave a lot to the whim of the
supplier/buyer.
One alternative that is available to the exporter is to diversify sourcing. This can be an
effective strategy in cases where the domestic currency has appreciated significantly against a
particular supplier foreign currency making raw material imports expensive from that
country. If such raw materials are available in other countries where the currency is more
stable it would be an effective ploy to source from such countries.
When all such measures fail, the only sure shot cover that the exporter has to guard against
such risk is to hedge his export proceeds to prevent them being depleted due to unforeseen
fluctuations in exchange rates.

Hedging Foreign Currency Risks

Despite the numerous options mentioned above to manage and attempt to mitigate foreign
currency risk, the most popular and effective method employed by the treasury department of
an organization is to hedge the risks through a forward contract. A forward contract involves
the exchange of two currencies by the two parties in the transaction. The advantage of a
forward contract is that the customer locks-in the exchange rate at which he will buy or sell
the currency thus eliminating the uncertainty regarding the future movements of the exchange
rate. Thus by locking in the exchange rate at which the exporter will sell the currency (at
which his exports are realized), he obviates the possibility of declining profits if the domestic
currency appreciates (if dollar/rupee exchange rate declines).

59

The following illustration will explain the benefits of entering into a forward contract:

ILLUSTATION 3:
On the date of billing the customer the exchange rate stood at 1$ = 40 Rs. The exporter, who
intends to sell for Rs 100000 prepares the invoice for $ 2500 to be received after 3 months. At
the same time he enters into a forward contract to purchase dollars from the bank at a rate of
1$ = 41 Rs. On the date of realization the rupee has appreciated and the exchange rate stands
at 1$ = 38 Rs. However having booked a forward contract the exporter can sell the $2500 to
the bank and receive an amount equal to Rs (2500x41) = 102500 minus bank charges. In
doing so the exporter has obviated the possibility of having lost Rs 50000 (2500x2), due to
appreciation of the rupee in the currency market. Another option available to the exporter is
to do nothing and hold on until the exchange rate favors him, and then sell currency in the
spot market. This however becomes limiting since valuable reserves are locked up. Thus
booking a forward contract provides a viable alternative.
However booking a forward contract and making good the possibility of declining revenues
is not always as simple as the above illustration. Having discussed the benefits of the forward
contract in brief, let us now get down to the specifics of a forward contract, the market in
which this instrument can be used and the nuances of its functioning.

60

Foreign Exchange Market

The foreign exchange market commonly referred to as the FOREX or FX market is the
largest financial market in the world, with a daily turnover that is nearly 30 times that of the
U.S. Equity Markets. Foreign Exchange can be understood to mean the simultaneous
exchange (buying of one currency and selling of another) in the market. The FOREX market
is vital to an international trader since they buy/sell products and services in foreign countries
and convert their foreign currency earnings to domestic currency.

The FOREX market is different from a traditional stock market in that, trading is not
centralized in an exchange, but is Over the Counter (OTC).
Any transaction involving the use of foreign currencies is executed at the FOREX market.
Booking of forward contracts is done on an everyday basis at this exchange. Foreign
exchange markets are open 24/7 and overnight orders can also be executed by contacting the
dealing room of the respective bank and requesting them to place an order with their overseas
correspondents.
The market has diversified participation in the form of commercial and investment banks,
central banks, corporations, global funds, and individual traders.

Quotation
Before we get into the specifics of how prices are quoted in the FOREX market, it is
necessary to acquaint oneself with the terminology used while quoting exchange rates. Let us
take an example. If the USD/INR is trading at 45, it means that 1 USD would fetch Rs 45 at
the current rate. Further if the rupee appreciates (dollar declines) it is akin to the rupee
strengthening, thus the USD/INR would decline and go below Rs 45 for a dollar. Conversely,
if the rupee depreciates (dollar appreciates) it is akin to the rupee weakening, thus the rate
would rise above Rs45 for a dollar.

61

Trading

In the FOREX market, currencies are always traded in pairs, e.g. USD/INR. A trader
purchases one currency while selling another at the same time. The first currency (USD) is
called the base currency, while the second (INR) is called the counter currency. A participant
in the Foreign Exchange Market will usually ask for a price in, for example, 'dollar-rupee', i.e.
the number of Indian Rupees, which can be bought for one US Dollar. This will be quoted by
way of a two-way quote ($1 = Rs 43.6362-75), called a bid price and an ask price
respectively. This will be quoted as 43.6362-75, or "sixty two - seventy five", i.e. they buy
dollars at 43.6362 and sell dollars at 43.6375. The difference between the two rates is the
profit that the bank makes while purchasing and selling currencies.
A trader who wants to buy dollars against the rupee at the market must deal at the offer of
43.6375. The trader will do this if he believes the dollar will strengthen against the yen. An
exporter would use this if he cites a possibility of the dollar getting weaker (i.e. a decline in
the rate). If a trader wants to sell dollars against the rupee, he must deal at the bid of 43.6362.
The trader will do this if he believes that the dollar will decline (increase in the rate). The
rates may be cash rates (for delivery today), Tom rates (for tomorrow), and Spot rates
(settled two working days from the date of deal). Any rate more than two working days from
the date of the deal is termed the forward rate. Similarly a spot deal will be settled two days
from the date on which the deal is struck, Tom deals will be settled on the next day and
forward deals will be settled at a future date. Value date is the date on which the trade is
settled.

62

The difference between the bid and ask rates is referred to as the "spread" and expressed in
pips. In the above example the difference between the bid and ask price is 13 pips,
which is the spread. It represents the cost of transacting in the FOREX market. This spread
will fluctuate throughout the trading day depending on the liquidity in the market (availability
of currencies). The more liquid a particular currency pair, the smaller will be the spread and
hence, the cost. The rule to remember is Lower the volume lesser the liquidity wider the
spread. This price transparency is another advantage of the FOREX market as the trader
knows without doubt the price at which a trade can be done.

FOREX traders often use a margin account in executing their transactions. Margin is the
deposit that must be maintained in the account by the trader. This is an extremely beneficial
system since it allows a trader to affect trades in large volume of for a relatively small deposit
in the margin account, held with the broker. The advantage a margin account gives a trader is
measured by the leverage, which is expressed as a ratio. Thus a leverage of 100:1 means that
a trader can control assets equal to 100 times the margin deposit. In other words, with a 1%
margin account one can control trades worth $100000 with a deposit of 1000$.
The benefit of using a margin is explained through the following illustration:
ILLUSTRATION 4:
Continuing with the USD/INR example, a change in the price of USD (hypothetically) from
43.6263 to 43.6463, the change of 200 pips could translate into a profit or 100000 * 0.0200 =
$2000, with the use of margin (as explained above). The same transaction without a margin
and $1000 of currency would mean a profit of only $20. However it is necessary to maintain
sufficient deposit for use as margin in the account, since if the potential losses supersede the
amount deposited as margin, the broker might close the position (end the transaction).
The FOREX market consists of the spot market, the forward market and the futures and
options market. Exporters deal in the forward market since their objective is to hedge the risk
that may materialize during realization of export proceeds which will only happen a few
months down the line. However it is important to take into account the spot rates in order to

63

determine the forward rates in the forward market. The following illustration will explain
howxi:

Assume the following rates for USD/INR

USD/INR Spot: 40.50/40.51
USD/INR 6 Months: 40.96/40.98

In the above illustration the bank is willing to buy dollars at 40.50 today and sell dollars
40.96 in 6 months time. Thus the dollar is expected to appreciate against the rupee. When the
forward spot rate is greater than that current spot rate the dollar is said to be at a premium to
the rupee. Conversely if the dollar forward spot rate is lesser than the current spot rate it is
said to be at a discount. The dollar usually trades at a premium to the rupee. The premium or
discount is added to or subtracted from the spot rate in order to determine the forward rate.
Such premium or discount depends upon the interest rate differentials between the two
currencies involved.
The forward foreign exchange rate is a function of the two interest rates (domestic and
foreign) and the spot price prevailing on the day of contract and is given by:
Ft= S * [(1+R1)/ (1+R2)]
Where, Ft= forward foreign exchange rate at time period t
S= Todays spot foreign exchange rate
R2= foreign interest rate for time period (t), R1= domestic interest rate for time period (t)
The reasoning behind this can be understood clearly with the following example:
ILLUSTRATION 5:

64

Assume the USD/INR is trading currently at Rs 45 to the dollar. The interest rate in India is
currently 10% and the interest rate in the US is currently 5%. The forward exchange rate 3
months hence would be calculated as follows. 3 months hence 1 dollar would be worth 1 * 1
+ [(.05*90/360)] = $1.0125. Similarly 45 Rs would be worth 45* [1 + (0.10* 90/360)] =
46.125. The forward exchange rate would then be (46.125/1.0125) = 45.56. Thus the
premium in this case is Rs 0.56. It can be understood from this example that the forward spot
rate is a function of the spot rate today and the interest rate in the two countries. Another
finding that can be derived from the above calculation is that if the base currency in a
currency pair has a lower interest rate than the counter currency the forward rate will be
higher than the spot rate.
While this finding is applicable in most cases, the interaction of the dollar/rupee supply and
demand forces in India brings forth an interesting phenomenon. The dollar like most other
currencies is at a premium to the rupee.
In case of other currencies, demand/supply for the currencies leads to spot rate fluctuations,
and premiums/discounts reflect the interest rate differentials. In India however, fluctuations in
demand/supply leads to changes in the premium/discount with or without any movement in
the spot rates. This is the case in India since the absence of a well-developed rupee money
market allows arbitrage opportunitiesxii.
Having understood the manner in which premiums are calculated, the following illustration
will depict how a bank determines the forward rate at which it would buy dollars from an
exporter.
ILLUSTRATION 6:
Assuming an exporter wants to book a forward contract 3 months hence for USD 1000000
and Dollars are being quoted in the interbank market as follows:

Spot USD/INR: 42.8150/42.8190

Spot/Jan: 0200/0400
Spot/Feb: 0600/0800
Spot/March: 1000/1200

The forward exchange rate to be offered would be calculated as follows. Since contract is for
a period of three months, the forward USD buying rate will be based on Spot/March.
65

USD/INR Spot: 42.8150

Add: Forward Premium: 0.1000
= Forward Rate: 42.9150.
Assuming the margin charged by banks to be 2%;
Rate quoted to the customer will be: 42.9150-0.0200 = 42.8950.
Thus an exporter who is to receive $ 1 million in 3 months time and wants to protect his sale
proceeds instability in the currency market can book a forward contract with a bank and
receive Rs (1000000 * 42.8950) = 42895000 no matter what the situation is in the currency
markets on the date of realization.
In this manner the exporter, during times of turbulence in world markets, instability in
exchange rates can book a forward contract and secure his export receivables. It is clear now
why the forward currency market is an ingenious instrument that is of tremendous advantage
to the international trader. It enhances profitability, while at the same time reducing risk and
uncertainty.

Packing Credit in Foreign Currency vs Rupee Packing Credit

The utility of booking forward contracts does not end here. Judicious use of this instrument
can enhance cost competitiveness by reducing an organizations cost of funds. In the previous
section which dealt with export finance, I mentioned that the choice between procuring
packing credit in foreign currency (PCFC) and rupee packing credit is an important decision
in the exporters to do list. The decision must be taken by sizing up his options in view of the
situation in the foreign currency markets.
Law gives the exporter the option to enter into forward contracts under the rupee packing
credit facility, through which the exporter can significantly reduce his cost of financing. To
appreciate how this mechanism aids the exporter consider the following illustrationxiii:
ILLUSTRATION 7:
Packing Credit in Foreign Currency (PCFC)
66

 LIBOR + 1.5%
A 90 days Dollar Packing Credit can be availed at 3m LIBOR + 1.5%.
5.4* + 1.50 = 6.9%.
*Assuming LIBOR to be at 1.8 %
Under this facility, the exporter does not have the option of booking a forward contract nor
can he gain from any dollar appreciation against the rupee.

Rupee Packing Credit

Interest charged at 9% (assumed BPLR @ 13.5% 4.5% for textile sector.)
In addition, under this facility, the exporter has the option of booking a forward contract for
the export proceeds, thereby getting back some money in the form of premium.
Assuming the levels of premiums (refer illustration 5), assuming the exporter will get Rs.0.50
(0.56 bank charges) for booking his dollar export proceeds forward for 90 days. This would
be akin to receiving 4.44% interest back. (0.50/45*100*360/90).
The net interest cost of a rupee packing credit with a simultaneous booking of forward
contract is 4.56% (9% - 4.44%), which compares quite favorably with that of the dollar
packing credit rate of 6.90%. Thus when premiums go up, the net rate for the rupee packing
credit will reduce even further. In a high premium scenario, it is therefore advisable to opt for
rupee packing credit backed with a judiciously booked forward contract. The choice depends
heavily on the forward premium that can be expected and the LIBOR rate. At a low
LIBOR rate, it may be more beneficial to procure packing credit in foreign currency. In
the illustration LIBOR has been taken at an assumed rate and is not an indication of
current LIBOR levels.

67

Forward contracts are therefore an ingenious mechanism that is invaluable to the international
trader. They can be used not only as a means of securing the export proceeds but also to
increase cost competitiveness as illustrated above. In todays scenario with competitors
fighting tooth and nail to gain the edge over one another, a sound policy employing the use of
such mechanisms keeps the organization one step ahead of the competition, which is vital
since as the saying goes the market is always a step ahead of you; so the best we can do is
to stay ahead of the competition

CONCLUSION
Throughout the report I have dealt extensively on export trade, the benefits, the incentives,
the financing, the economics, the procedures and its applications. It leaves no doubt that
International trade is absolutely vital to a country from an economic perspective. Its GDP,
economy, job market, all benefit tremendously from the proliferation of international trade. It
generates invaluable foreign exchange which a country can dip into during times of financial
crisis. With the easing of regulations in financial transactions, the field has opened up for
foreign investors to move in and out of a country with little hassle. This is a double edged
sword in that while it can improve the health of an economy it can at the same time
destabilize it if large chunks of foreign currency leaks out of a country. The only saving grace
at such a time is the foreign currency flowing in through exports which keeps the exchange
rate stable. It is for this
reason primarily that any country that wants to establish itself in the world, cannot ignore its
export industry.
But apart from these material gains, what I have failed so far to touch upon is one of the most
significant contributions of trade, which comes from its unseen benefits. George Bernard
Shaw once famously stated that If you have an apple and I have an apple and we exchange
68

these apples then you and I will still each have one apple. But if you have an idea and I have
an idea and we exchange these ideas, then each of us will have two ideas. That is what
international trade gives us. An interaction between countries and nations that brings about
understanding and mixing of cultures.
By fostering the continuance of globalization it gives countries a platform to come forward
and exchange ideas, innovations, technologies in a manner that promotes peace and harmony
in an increasingly turbulent world.

GLOSSARY OF TERMS:

Acceptance: The act of giving assurance in writing on the face of a bill of exchange
stating the payment of a bill on the date of maturity.
Acceptance Credit: A documentary credit, which requires the beneficiary to draw a usance
bill for subsequent acceptance by the issuing

Accommodation Bill: In the context of fraud, a bill drawn without a genuine underlying
commercial transaction.

Accountee: Another name for the applicant or opener of a documentary credit

Amendment: Any changes to the term of a DC must be initiated by the applicant and issued
and advised to the beneficiary

69

Applicant: Any party, usually the importer, who applies for a documentary credit.

Advising bank:
A bank, operating in the exporter's country, that handles letters of credit for a foreign bank by
notifying the export firm that the credit has been opened in its favor. The advising bank fully
informs the exporter of the conditions of the letter of credit without necessarily bearing
responsibility for payment.

Alongside: The side of a ship. Goods to be delivered "alongside" are to be placed on the dock
or barge within reach of the transport ship's tackle so that they can be loaded aboard the ship.

Balance of trade: The difference between a country's total imports and exports. If exports
exceed imports, a favorable balance of trade exists; if not, a trade deficit is said to exist.

Back-to-Back Credit: A credit issued on the security of an existing credit ("the master
credit").

Beneficiary: A payee or recipient, usually of money or a party in whose favor a documentary

credit is established, usually the exporter.

Bill for Collection (BC): Document(s) or check(s) submitted through a bank for collection of
payment from the drawee.

Bill of Exchange (B/E): An unconditional order in writing, addressed by one person to

another, signed by the person giving the order.

Bill of Lading (B/L): A receipt for goods for shipment by sea. It is a Document of Title

70

Bill Receivable (BR): Bills which are financed by the receiving branch, whether drawn under
a DC or not, are treated as Bills Receivable by both the remitting branch and the receiving
branches.

Carrier: Person or company whose business is the conveyance of goods e.g. shipping
company

Clean Import Loan (CIL): A loan granted to an importer for payment of import bills, without
the Bank having any claim to the goods.

Collection Bank: The bank in the drawee's country that is instructed to collect payment from
the drawee.

Collection Order: A form submitted by an exporter to the remitting or negotiating bank,

accompanied by documents, and carrying the exporter's instructions.

Consignment: Shipment of goods.

Consignee: The person or company/bank to whom the goods are delivered - usually the
importer or the Collecting Bank.

Consignor: The party who sends goods by ship, by land or air.

Contingent Liability: A liability that arises only under specified conditions.

Deferred Payment Credit (DPC): Using stipulated documents, a bank can effect payment on a
DC at a maturity date that is specified or determinable in the credit terms.
71

Demurrage: A charge made by a shipping company or a port authority for failure to load or
remove goods within the time allowed.

Discounting: An accepted usance bill of exchange is sold at an amount less than its face
value.

Dishonor: Non-payment or non-acceptance.

Documentary Credit (DC): A conditional undertaking by a bank to make payment, often

abbreviated to credit.

DC Bills: Bills drawn under documentary credits.

Documents Against Acceptance (D/A): Instruction for commercial documents to be released

to the drawee on acceptance of the bill of exchange.

Documents Against Payment (D/P): Instruction for documents to be released to the drawee
only on payment.

Documents of Title: Documents that give their owner the right to the goods, i.e. Bill of
Lading.

Due Date: Maturity date for payment

72

Expiration Date: Latest date, usually in the country of the beneficiary, on which
negotiation/payment of a DC can take place.

Export Line: Financing for exporters.

Financed Bills: Bills sent on collection in which the remitting bank has a financial interest.

Foreign Bill Purchased (FBP): A bill remitted to a correspondent bank in which the remitting
bank is financing the exporter

Forward Exchange Contract: Contract between the bank and its customer to buy/sell a fixed
amount of foreign currency at a future date at a specified rate

Freight: Goods OR the cost of transporting goods.

ICC: International Chamber of Commerce

International Chamber of Commerce (ICC): The international body which promotes and
facilitates world trade, and which codifies world trade practices in various publications

Import License: A permit issued by the importing country's authorities for goods that are
subject to import licensing restrictions.

Import Line: Finance facilities for importers covering documentary credits (DC), bills
receivables (BR), and import loans (LAI).

Incoterms: Shipping Terms

73

Inward BC: A bill received by the import department of the collecting bank (IBC).

Issuing Bank: The bank that opens a documentary credit at the request of its customer, the
applicant.

Letter of Credit (L/C): Out of date term for documentary credit. Avoid using it, as it now has
other meanings.

Letter of Hypothecation: Loan-holders for goods imported on a collection basis must provide
a letter of hypothecation, which is a promise to hold goods as security.

Loan Against Imports (LAI): Loans granted to Imports customers for payment of bills,
usually bills under our DC.

Marginal Deposit: Money held by the Bank to secure the opening of a DC. Normally no
interest is paid on these deposits which are held in the Banks name whenever possible.

Master Credit: In back-to-back operations, the original export credit against which the second
credit is opened

Maturity: Payment due date of a usance bill or promissory note.

Net Weight: The weight of the merchandise before any packaging.

74

Non-DC Bills: Bills not drawn under DC i.e. sent on a collection basis (D/P or D/A). Non DC
bills are financed collections and DC bills are non-financed collections.

Non-Financed Bills: Bills sent on collection in which the remitting branch has no financial
interest.

Outward BC: Bill received for collection by the (OBC) Remitting Bank, handled by the
Exports Department.

Paying Bank: The bank that makes payment to the beneficiary of a payment DC after
presentation to it of documents stipulated in the DC.

Perils of the Sea: These are accidents or casualties of the sea due to heavy or tempestuous
weather

Power of Attorney: Authority given to one party to act for another

Presentation: The act of requesting the importer's payment/acceptance of an import bill

Presenting Bank: The bank that requests payment of a collection bill. This may be the
collecting bank or its nominated branch

Principal: The initiator of a given transaction whose instructions are followed at all stages. In
collection transactions the principal is generally the exporter. In other cases the principal may
be the customer who opens a DC.

Promissory Note: A signed statement containing a written promise to pay a stated sum to
specified person at a specified date or on demand.

75

Recourse; The right to claim a refund from another party who has handled a bill at an earlier
stage.

Red Clause Credit: A credit with a clause, which authorizes the advising bank to make an
advance payment to the beneficiary

Reimbursing Bank: The bank that the DC-issuing bank has named to pay the value of the DC
to the negotiating or paying bank.

Remitting Bank: The exporter's bank, which remits the bill to the collecting bank.

Revolving Credit: A credit that is automatically reinstated each time a draw takes place or
upon receipt of authorization from the DC-issuing bank.

Retirement: To pay or settle an outstanding bill or import loan. Example: payment to the bank
by the importer.

Revocable Credit: Credit that may be amended or canceled without notice to the beneficiary.

Shipment Date: A bill of lading evidences that goods have been received on board. Therefore
the date that is entered on the B/L is considered to be the shipment date for documentary
credit purposes.

Self-Liquidating: A transaction is said to be self-liquidating when there is a known source of

funds available for its settlement on the due date.

76

Standby Credit: Established as security for facilities granted at another branch or bank

Shipping Register: The register that lists all goods for which the imports department is
handling documents, listed according to the ship carrying the goods.

Technical D/A: A D/P transaction in which the bank purchases bills but it does not control the
goods.

Trade Financing General Agreement (TFGA): An agreement between the bank and all of its
import and export customers that gives the bank recourse in all transactions.

Trade and Credit Information (TCI): The bank department that provides details of the
creditworthiness and business background of traders and manufacturers.

Transferable Credit: Permits the beneficiary to transfer all or some of the rights and
obligations of the credit to a second beneficiary or beneficiaries

Transit Interest: The amount of interest that is incurred on a DC from the date of negotiation
to the date that the bank receives reimbursement.

Usance Bill: A bill of exchange, which allows the drawee to have a usance (period of credit or
term).

Undertaking: A written promise to deliver a security within the time specified. An

undertaking is usually synonymous with the actual delivery of the security.

77

Waive: A drawer can waive the right to collect BC and/or interest charges under
circumstances as set forth in ICC 522, Uniform Rules for Collections

REFERENCES
1.
2.
3.
4.
5.
6.
7.
8.
9.

Web Pages:
http://www.monti.co.in
www.rbi.org.in
www.exim.indiamart.com
www.indianindustry.com
www.fibre2fashion.com
www.depb.net
www.infodriveindia.com
www.tradechakra.com
www.wikipedia.org

Books:

78

1. LEE JOW YIN., June 2003, Overview of Trade Finance, International Trade Institute
of Singapore.
2. SABOOR H. ABDULJAAMI., Export Transactions: Finance and Risk. AbdulJaami,
PLLC.
3. Economic Advisory Council to the Prime Minister of India, January 2008, Review of
the Economy 2007/08, New Delhi.
4. International Financial Consulting., 2004: Concept Paper on the creation of a
Regional Export Credit and Finance Scheme. (Submitted to the Asian Development
Bank). April 19th 2004.

79

80

i
ii
iii
iv

v
vi
vii
viii
ix
x
xi
xii
xiii