Expor t Finance

Introduction
 An exporter, like any other businessman, needs
money to continue operating in business. Since
export business is generally based on credit
terms i.e. the exporter ships the goods and the
payment is realized at a later date, till the period
his funds are blocked. In order to make able the
exporter from the problem of lack of finance the
commercial banks provides finances to him at
two distinct stages
 pre-shipment stage
 post shipment stage.
Pre-shipment Finance

 As known finance provided to the exporter prior

to the shipment of goods is called pre-shipment
finance. Pre-shipment finance facilities offer
liquidity to the exporter. Pre-shipment finance is
generally provided for the following purposes :
 Procurement/purchase of raw material
 Production
 Processing
 Packing
 Warehousing
 Transportation
of goods meant for export purposes
 Eligible Parties
 An exporter with an export order or an LC
in his own name who will actually perform
the act of exporting.
 Supporting manufacturer, provided the
exporter gives a letter stating the
particulars of an export order or LC and
states that he is not going to avail of
export finance.
 Process of Availing Pre-shipment
Finance
 An application for pre-shipment advance should be made by
the exporter to its bank along with following documents :
 Conformed export order or LC in original.
 An undertaking that the advance will be utilized for the specific
purpose of procuring/manufacturing/shipping etc. of goods meant for
export only, as stated in the relative conformed export order or the
LC.
 Copy of IEC number (Importer Exporter Code).
 Copy of valid RCMC (Registration Cum Membership Certificate).
 Appropriate policy/guarantee of the ECGC.
 Copies of Income Tax/Wealth Tax Assessment Order for the last 2/3
years in case of sole proprietary and partnership firm.
 Any other documents required by the bank
 Liquidation of Pre-shipment Credit
 The pre-shipment credit granted to an exporter
is liquidated out of the proceeds of the bill drawn
for exported commodities.
 Period of Finance

Upto 180 days not exceeding BPLR – 2.5%

Beyond 180 days banks are free to charge
Upto 270 days interest considering BPLR

 If export is not completed upto 360 days

banks can determine the rate which would
become leviable from the first day itself.
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ii) Beyond180daysandupto270 Days < BPLR -2.5PP**

Against incentivesreceivable

fromGovernment coveredbyECGC

iii) Guaranteeupto90days < BPLR -2.5PP

2 Post -shipmentCredit*

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Beyond90daysanduptosixmonthsfromthedateof
b) shipment < BPLR -2.5PP**

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Upto365daysforexportersndertheGoldCard
d) Scheme < BPLR -2.5PP
Against incentivesreceivablefromGovernment cov
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iii) ECG CG uarantee(u pto90da ys) < BPLR -2.5PP
iv
) Aga inst undraw n ba lance(upto9 0days) < BPLR -2.5PP
Aga inst retentionmoney(forsupplie sportiononly)payable
v) withinoneyearfromtheda teofship ment (upto90days) < BPLR -2.5PP
3 DeferredC
redit
Deferredcredit fortheperiod
beyond180days Free
4 Export Credit, n oto therwis
especified
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b Post -shipm en t credit @
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 Running Account Facility

 Generally, pre-shipment credit is given to the exporter after the

submission of confirm export order or LC.

 It has also been observed that in some cases the availability of raw
material is seasonal whereas the time taken for manufacture and
shipment of goods is more than the delivery schedule mentioned in
expert contract. Besides in many cases an exporter has to procure
raw materials, manufacture the export products, and keep the same
ready for shipment in anticipation of receipt of firm export order or
LC from the overseas buyers.

 In view of the difficulties faced by the exporters in arranging pre-

shipment finance in such cases, banks have been authorized to
extend pre-shipment credit ‘running a/c facility’.

 Such running a/c facility is extended in respect of any commodity

without insisting on the prior submission of firm’s export order or LC
depending upon banks judgment regarding the need to extend such
a facility subject to following conditions :
 Banks extend running a/c facility to those exporters whose
track record has been good and also to EOUs /units in
FTZz/EPZs and SEZs.
 In all cases where this facility has been extended, letter of
credit or firm’s export orders are required to be produced
within a reasonable period of time.
 Banks mark off individual export bills as and when they are
received for negotiation or collection against the earliest
outstanding pre-shipment credit on first-in first-out (FIFO)
basis. Banks also ensure that concessive credit available
in respect of individual pre-shipment credit does not go
beyond the period of sanction or 360 days from the date of
advance, whichever is earlier.
 If it is noticed that the exporter is abusing the facility, the
facility may be withdrawn.
 In cases where the exporter have not complied with the
terms and conditions, the advance attracts commercial
lending rates.
 Running a/c facility is not granted to sub-suppliers.
Pre-shipment Credit in
Foreign Currency (PCFC)
 Under the PCFC, the exporter can approach the
bank and request for export finance in any of the
convertible currencies such as US $, Japanese
Yen, Pound, Sterling or Euro which can be used
for acquiring domestic and/or imported inputs.
 Such credit is offered at internationally
competitive interest rates to enable the exporter
to take advantage of the same under stiff
competitive environment.
 The Loans are extended at LIBOR /EURIBOR
/EURO LIBOR interest rates.
 London Inter Bank Offer Rate which refers to the
rates of interest at which banks are ready to lend
money to each other in London’s inter-bank
market. LIBOR rates are the world’s most widely
used short term interest rates.

 EURIBOR is Euro Inter Bank Offer Rate, the rate

released by European Banking Federation, used
for Euro Inter Banks loan transactions between
banks and Euro region. EURIBOR is generally
used as the underlying interest rate for Euro
denominated transactions.

 EURO LIBOR, as the name suggest, refers to

LIBOR denominated in EURO.
 Forms of Pre-shipment Credit

 Packing credit
 Advances against cheques / drafts received as
advance payment
 Advance against incentives receivables

 Banks may also extend loans prior to shipments against the

drawback/incentives receivable from the govt. covered by
ECGC guarantee in certain exceptional case. This type of
advance is normally extended after the goods have been
shipped. The exporter will have to present his case as a special
one to the satisfaction of bank. The bank in its own discretion
may advance a loan for upto 90 days at an interest within the
ceiling of BPLR – 2.5%.
Post-shipment Credit
 Once the exporter has shipped the goods, there
will always be a time gap between the date of
shipment and receipt of payment. Post-shipment
credit refers to the facilities extended by the
banks to the exporter during this period to enable
him to tide over his financial needs.
 Post shipment finance is provided at concessional
rates as per RBI guidelines. The proof of
shipment of goods, serves as the basis of grant of
such facility. The basic purpose of this facility is to
finance export receivables.
 Post-shipment finance can be granted upto
100% of the invoice value although the
normal practice is to give 90%. This credit
gets liquidated by the proceeds of export
bills receivables from overseas in respect
of exported goods.
 The following options are available to the
exporter for post-shipment credit :
 Purchase of Export Documents drawn Under Export Order
 Advances against Bills sent for Collection
 Advance against Undrdrawn Balance

 Advances against Claims of Duty Drawback

 Advance against goods sent on Consignment Basis
 Negotiation of Export Documents under L/C
 1. Purchase of Export Documents
drawn Under Export Order
 Purchase or discount facilities in respect of export bills drawn under
confirmed export order are generally granted to credit worthy
customers, since the bank financing is totally dependent on the
credit worthiness of the buyer i.e. the importer as well as that of
exporter or beneficiary in the absence of any security offered as
under LC by way of substitution of credit worthiness of the buyer by
the issuing bank.
 Further more risk is much more in case bills are drawn under DA
agreements where documents including title of goods is passed on
to the overseas importer against the acceptance of the draft to make
payment on maturity. The bank financing against export bills is thus
open to risk of non-payment.
 Banks in order to enhance security, generally opt for ECGC policies
and guarantees which are issued in favor of exporter/banks to
protect their interest in case of non-payment or delayed payment
which is not on account of mischief, mistake or negligence on the
post of exporter
 2. Advances against Bills sent for
Collection

 It may sometimes be possible to avail advance against

export bills sent for collection, by the exporter’s bank to
importer’s bank.

 Advance against such bills is granted by way of ‘separate

loan’ usually termed as ‘post-shipment loan’. This facility is
in fact, another form of post-shipment advance and is
sanctioned by the bank on the same terms and conditions
as applicable to facility of negotiation/purchase/discount of
export bills. A margin of 10 to 25% is, however, stipulated
in such cases.
 3. Advance against Undrdrawn Balance

 In certain lines of export it is the trade practice that the bills are not
drawn for the full invoice value of goods but to leave small part
undrawn for payment after adjustment due to difference in rates,
weights, quality etc, to be ascertained after approval and inspection
of goods. Banks do finance against the undrawn balance if such
undrawn balance is in conformity with the normal level of balance left
undrawn in the particular line of export subject to maximum of 10% of
the value of exports and an undertaking is obtained from the exporter
that he will within 6 months from due date of payment or the date of
shipment, whichever is earlier, surrender the balance proceeds of
shipment.

 Since the actual amount to be realized out of the undrawn balance,

may be less than the undrawn balance, it is necessary to keep
margin on such advance.
 4. Advances against Claims of Duty
Drawback
 Duty drawback is permitted against exports of different categories of
goods under ‘Customs and Central Excise Duty Drawback Rules,
1995’. As per the present procedure, no separate claim of duty
drawback is to be filed by the exporter. A copy of shipping bill
presented by the exporter at the time of making shipment of goods
serves the purpose of claim of duty drawback as well. This claim is
provisionally accepted by customs at the time of shipment and the
shipping bill is duly verified. The claim is settled by customs office
later.

 As a further incentive to exporters, various Customs Houses in India

have evolved a simplified procedure under which claims of duty
drawback are settled immediately after shipment and no funds of
exporter are blocked.

 However, where settlement is not possible under the simplified

procedure, exporters may obtain advances against claim of duty
drawback as provisionally certified by customs.
 5. Advance against goods sent on
Consignment Basis
 When the goods are exported on consignment basis at
the risk of the exporter for sale and eventually remittance
of sale proceeds to him by the agent/consignee, bank
may finance against such transactions subject to the
customer enjoying specific limit to that effect.

 However, the bank should ensure while forwarding

shipping documents to its overseas branch /
correspondent to instruct the latter to deliver the
documents only against Trust Receipt/Undertaking to
deliver the sale proceeds by specified date.

 6. Negotiation of Export Documents under

L/C
Post-shipment Credit in
Foreign Currency (PSCFC)
 The exporters also have the option to avail of post-
shipment export credit in either foreign currency a
domestic currency. However, the post-shipment credit
has to be in foreign currency of the pre-shipment credit
has already been availed in foreign currency in order to
liquidate the pre-shipment credit.

 Normally, the scheme covers bills with usance period

upto 180 days from the date of shipment. However, RBI
approval has to be obtained for longer periods.

 Similar to PCFC scheme, post shipment credit can also

be obtained in any convertible currency, but most Indian
banks provide credit in US dollars.
 Under Export Bill Re-discounting Scheme (EBR), for
post-shipment finance at international rates of interest,
PCFC will be liquidated with the discounting of bills.

 The foreign currency of bill which is applied to PCFC in

foreign currency and if there is any surplus of the bill
after adjusting to PCFC, the surplus portion will be
converted in Indian rupees and credited to exporter’s
current account.

 The EBR advance, which is a foreign currency loan, will

be eventually closed when the overseas buyer pays the
bill and the export proceeds are realized.
Other forms of Export
Finance (Post-shipment)
 Factoring :

 An exporter can also avail of factoring services

for his export receivables to finance his post-
shipment activities. Under export-factoring, the
factoring agency factors export invoices drawn
on overseas buyers and prepay the clients an
agreed % of invoice value immediately. The
following steps are involved :
 The exporter ships the goods to the importer.

 The exporter assigns his invoices through the export factor

to the import factor who assumes the credit risk.

 The export factor prepays invoices.

 The importer pays the proceeds to the import factor, who

transfers the amount to the export factor.

 The export factor deducts pre-payment already made, other

charges and pays the balance proceeds to the exporter.

 The agency handling the collection of export receivables of

clients (exporters) is called Export Factor (EF) and the
factor in the buyer’s country who undertakes collection and
credit protection services, is called Import Factor (IF).
 Advantages to exporter

 It not only facilitates immediate payment against

receivables but also increases working capital.
 The tasks related to credit investigations,
collection of a/c receivables from the importer, and
other book keeping services are carried out by
factors.
 In the event of buyer’s default or refusal to pay,
factors assume risk.
 Factoring often services as a good substitute for
the bank credit, especially when bank credit is
either uneconomical or restrictive.
 It improves their purchasing power without
drawing on bank credit lines.
Operational Mechanism of Factoring

1.Sales Contract

2. Goods Importer
Exporter

6.Presentation of

(on due date)

4. Payment

7. Payment
Invoice
3. Invoice

5. Invoice
Export Factor 8. Payment Import Factor
 Forfaiting

 The term forfaiting is derived from the French

word ‘forfait’, which means relinquish or to
surrender the rights. Thus forfeiting refers to the
exporter relinquishing his rights to a receivable
due at a future date in exchange for immediate
cash payment at an agreed discount, passing in
the process all risks and responsibilities for
collecting the debt to the forfaiter.
 Forfaiting is particularly used for medium term
credit sales (1-3 years) and involves the issue of
bill of exchange by the exporter or promissory
note by the buyer on which a bank of buyer’s
country guarantees payment.
 Forfaiting is the discounting of receivables,
typically by negotiating bills drawn under letter of
credit (LC). Generally, forfeiting is applicable in
cases where the export of goods is on credit
terms and the export receivables are guaranteed
by importer’s bank. This allows the forfeiting bank
to buy the risk without recourse’ to the exporter.

 By forfeiting, the exporter surrenders the right to

claim for payment of goods exported in return for
immediate cash payment. As a result the exporter
can convert a credit sale into a cash sale. Thus
forfaiting is a mechanism for financing exports.