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Export

Financing
Presented By: Anudeep Arora

Export Financing- Sources


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

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

Cont..

Export Credit & Guarantee Corporation


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

Export Financing- Forms

1.

2.

3.

4.

Forms of Export Credit


Pre-shipment credit
Post-Shipment credit
Factoring
Forfaiting

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

Cont..

Process and pack the goods.


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

Cont..
Types

Packing Credit
Advance against Cheques /Draft etc.
representing Advance Payments.
Forms
Packing Credit in Indian Rupee
Packing Credit in Foreign Currency
(PCFC)

Pre-shipment CreditEligibility

Issued to exporter who has the export


order in his own name. As an exception, it
can also be granted to third party
manufacturer/ supplier who do not have
export orders in their own name.
A ten digit importer exporter code number
allotted by DGFT

Cont

DGFT if the goods to be exported fall


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

Cont..

Formal application for releasing the


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

Cont..

The confirmed order received from the


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

A. Pre-shipment Credit- Stages


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

values of goods, whichever is found to


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

Cont

Liquidation of Packing Credit Advance:


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

Overdue Packing:

Bank considers packing credit as an


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

Pre-shipment Credit in Foreign


Currency

Authorized dealers are only permitted


The rate of interest on PCFC is linked to
LIBOR.The exporter has freedom to avail
PCFC in convertible currencies like USD,
Pound, Sterling, Euro, Yen etc. However,
the risk associated with the cross currency
transaction is that of the exporter

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

Pre-shipment Credit Other


issues

Packing Credit Facilities to Deemed


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

Cont

Packing Credit facilities for Consulting


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

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

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

Cont

Nature: Can be secured or unsecured.


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

Cont

Quantum : Can be extended up to 100%


of the invoice value
Period : Can be short terms or long
term, depending on the payment terms
offered by the exporter to the importer. Six
months in case of cash exports.

Cont..

Type of Exports covered: Physical


exports, Deemed export (provided to the
supplier of the goods which are supplied
to the designated agencies) and for
Capital goods and project exports.

Post-shipment Credit- Types


Export Bills purchased/discounted.
Export Bills negotiated
Advance against export bills sent on
collection basis.
Advance against export on consignment
basis
Advance against un-drawn balance on
exports
Advance against claims of Duty Drawback

Export Bills Purchased/


Discounted : (DP & DA bills)

Export bills (Non L/C Bills) is used in terms


of sale contract/ order may be discounted
or purchased by the banks. It is used in
indisputable export transactions and the
proper limit has to be sanctioned to the
exporter .

Export Bills Negotiated (Bill


under L/C):

Because of the security available in this


method, banks often become ready to
extend the finance against bills under LC.
However, this arises two major risk factors
for the banks:
The risk of nonperformance by the
exporter, In which case, the issuing banks
do not honor the letter of credit.

Cont

Documentary risk where the issuing bank


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

Advance Against Export Bills


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

Advance Against Export on


Consignments Basis

Bank may finance goods exported on


consignment basis at the risk of the
exporter. In this case bank instructs the
overseas bank to deliver the document
only against trust receipt /undertaking to
deliver the sale proceeds by specified date
which should be within the prescribed
date.

Advance against Undrawn


Balance

It is a very common practice in export to


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

Advance Against Claims of


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

from the concerned government authorities

Forfaiting

Definition

The terms forfeiting is originated from a old French word


forfait, which means to surrender ones right on
something to someone else. In international trade,
forfeiting may be defined as the purchasing of an
exporters receivables at a discount price by paying
cash. By buying these receivables, the forfeiter frees the
exporter from credit and the risk of not receiving the
payment from the importer..

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

Cont..

The bank arranges for the discounted


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

Cont..

Involves
two
cost
elements:
Commitment fee, payable by the
exporter to the forfeiter and Discount
fee payable by the exporter for the
entire period of credit involved and
deducted by the forfaiter from the
amount paid to the exporter against the
availed bills of exchange.

Forfaiting- Benefits

Eliminates Risk
Removes political, transfer and
commercial risk
Provides financing for 100% of contract
value
Protects against risks of interest rate
increase and exchange rate fluctuation

Enhances Competitive
Advantage

Enables sellers of goods to offer credit to


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

Improves Cash Flow

Forfaiting enables sellers to receive cash


payment while offering credit terms to their
customers
Removes accounts receivable, bank loans
or contingent liabilities from the balance
sheet

Increases Speed and


Simplicity of Transactions

Fast, tailor-made financing solutions


Financing commitments can be issued
quickly
Documentation is typically concise and
straightforward
No restrictions on origin of export
Relieves seller of administration and
collection burden

Factoring

Cont..

It is an attractive way of providing


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

Cont..

These services include coverage of credit


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

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

Cont..

In this system, the exporter enters into an


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

Cont..

On receipt of payments from the


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

Note

Forfeiting and factoring are services in


international market given to an exporter or
seller. Its main objective is to provide smooth
cash flow to the sellers. The basic difference
between the forfeiting and factoring is that
forfeiting is a long term receivables (over 90
days up to 5 years) while factoring is a short
termed receivables (within 90 days) and is more
related to receivables against commodity sales.

Thank You