•Export and Import Finance

Pre Shipment Finance

Post Shipment Finance.
 Export Finance
• Pre-shipment finance deals with the finance schemes available
before the shipment has been made.
• Post shipment ,on the contrary ,deals with credit available after
the goods have been shipped.
• Both stages are crucial for the exporter. He needs finance to get
the procurement/ production going after receipt of the exporter
order. Money is also needed to fund the working capital expenses
for day to day activities.
• Post- shipment finance is required to take care of the financial
needs after the shipment is over.
• Pre –shipment finance facilities offer liquidity to the exporter to
procure raw material, carry out processing packing transporting
and warehousing of the goods to be exported. Post shipment
finance provides credit facility from the date of shipment of the
goods to the time export payment is realized.
 Sources of Short Term Funds
An MNC has wider options compared to domestic firm. It can get
funds from 3 short-term financing options :-

(1) Intercompany Financing (3) Euro notes & Euro

Commercial Paper
(2) Local currency Financing

 Intercompany Financing : means to have either parent

company or sister affiliate provide an intercompany loan.
 These loans may be limited in amount or duration by official
exchange control.
 Interest rates are frequently required to fall within set limits.
 Relevant parameters in establishing cost of such loan include
lender’s opportunity cost of funds, expected exchange rate
movements over term of loan.
 Cont…
 Local currency Financing : means like most domestic firms,
affiliates desiring local financing attempts to finance their working
capital requirements locally i.e., through commercial banking system.
 Bank Loans – are loans from commercial banks
• form of short-term interest-bearing financing
• described as self-liquidating
• short-term bank credits are unsecured
• borrower signs a note evidencing its obligation to
repay loan when due + accrued interest
• loan must be repaid or renewed after specific
interval
• banks usually insert a cleanup clause on company to
ensure that short-term credits not being used for
permanent financing
 Cont…
 Forms of Bank financing/Bank Credit include :-
1. Term loans – are attractive; straight loans; often unsecured; made
for fixed period of time, usually 90 days;
 made for specific purpose with specific conditions & is repaid in a
single lump sum;
 used by borrowers who have infrequent need for bank credit.
2. Line of credit – is an informal agreement permits the company to
borrow up to a stated maximum amount (line of credit) from the
bank when it requires funds & pay back the loan when it has excess
cash;
it is usually good for 1 year, with renewals renegotiated every year;
 used by frequent borrowers.
3. Overdraft – is simply a line of credit against which draft (cheques)
can be drawn (written) up to a specified maximum amount(overdraft
line). The borrower pays interest on debit bal. only.
 Cont…
4.Revolving credit agreement – is similar to line of credit except
that now the bank is legally committed to extend credit up to the
stated maximum limit.
 firm pays interest on its outstanding borrowings + commitment fee
on unused portion of credit line.
5. Discounting – of trade bills is preferred short-term financing
technique in many countries.
these bills can be rediscounted with Bank.
 discounting results from some set of transactions.
 Interest Rates on Bank Loans :-
 is based on personal negotiation b/w banker & borrower.
 There are certain bank loan pricing conventions :
-- Interest on loan can be paid at maturity or in advance.
 Cont…
Sources of Non-Bank Funds include :-

Commercial paper – CP is a short-term unsecured promissory

note sold by large corporations on a discount basis to institutional
investors & to other corporations.
 Euro notes & Euro Commercial Paper : a recent innovation in
nonbank short-term credits that bears a strong resemblance to
commercial paper is called Euronote.
 denominated in foreign currency (like $) & issued by corporations &
govt.
 the prefix “Euro” indicates – notes are issued outside country in whose
currency they are denominated.
 interest rates are adjusted each time the notes are rolled over.
Euronotes are often called Euro-commercial paper(Euro-CP).
 Criterion to select particular source
of Fund
 Selection of a particular source of funds is based on a perfect trade-off
between liquidity & profitability.
 It means that the cost of funds is to be minimised but, at the same
time, sufficient liquidity needs to be maintained.
 In order to evaluate cost of different types of funds, finance managers
compare b/w costs of –
(a) Internal funds & the external funds
(b) International money market funds & the host-country funds
Internal Sources of Capital for International
Businesses
 Need of Export Financing

Export Order Shipment Payment

Receipt Date/Period Realization

1. Procurement of
1. The Expenses
raw material
between the
2. Production
period of
,Processing
shipment
3. Packing
dispatch and
4. Warehousing
payment
5. Transportation
realization
 Export Financing- Forms
Forms of Export Credit

1. Pre-shipment credit
2. Post-Shipment credit
3. Factoring
4. Forfeiting
5. Other incentives and facilities
 Pre-shipment Finance
• Pre –shipment credit/finance is provided to the
exporter for meeting their needs of getting the
shipment ready.
• It is generally offered as Packing Credit.
• The exporter has to submit the prescribed
application form for obtaining packing credit
together with the required papers to the bank.
• Commercial banks/EXIM Bank provide loan to the
exporters at the concessional rates of interest
against export order both at pre-shipment and
post-shipment stage.
 A. Pre-shipment Credit
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.
• Process and pack the goods.
• Ship the goods to the buyers.
• Meet other financial cost of the business.
 Facilities for Exporter
1. Exporters are provided timely and adequate
credit to meet the exports commitments.

2. Exporters are allowed pre and post-shipment

credit at competitive interest rates.

3. Export Credit is made available both in Indian

Rupee and Foreign Currency as well.
 Cont….
Types
• Packing Credit
• Advance against Cheques /Draft etc.
representing Advance Payments.
• Advance against incentives receivable from
government covered by ECGC Guarantee.
Forms :
• Packing Credit in Indian Rupee
• Packing Credit in Foreign Currency (PCFC)
 Packing credit
• Eligibility
1. LOC or export order must be in the name of export company/firm.
2. Funds should be divided by merchant exporter and export company.Criteria
for the grant of packing credit:-
3. Name of the overseas buyer
4. Particulars of goods
5. Quantity and unit price or value of order
6. Date of shipment
7. Terms of sales and payment
Margin requirement:-
Margins are stipulated mainly to serve the following purposes:-
1. To make the exporter have some stake in the business, so that he will be
more conscious
2. To take care of erosion in the value of goods charged to the bank
3. To ensure that bank finance is not extended to cover exporter’s profit
margin.
 Advance against Cheques/ Drafts received as
Advance Payment
• The banks may grant advance to the exporter at the
concessional rates of interest notified by the Reserve
Bank of India, against the proceeds to be realised by
them in respect of any cheque or draft received by them
as advance payment towards an exporter order.
• This facility is extended by the banks to only those
exporters who have an unblemished track record of
dealings with the bank.
• Thus, it is a kind of accommodation granted by the bank
to the exporter for the transit period stipulated by the
Foreign Exchange Dealers Association of India for
collection of the instrument or till the date of realisation
of proceeds thereof whichever is earlier.
 B. Post-shipment Credit- Types
1. Export Bills purchased/discounted.
2. Export Bills negotiated
3. Advance against export bills sent on
collection basis.
4. Advance against export on consignment
basis
5. Advance against un-drawn balance on
exports
6. Advance against claims of Duty
Drawback.
 Post-shipment Credit-types
1. Export Bills Purchased/ Discounted : (DP & DA bills)
The banks may sanction advance against purchase or discount of
export
bills drawn under confirmed contracts.
If the L/C is not available as security, the bank is totally dependent
upon the credit worthiness of the exporter.
2. 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.
• Documentary risk where the issuing bank refuses to honor its
commitment.
So, it is important for the negotiating and the lending bank to properly
check all documents before submission.
3. 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.

4. Advance Against Export on Consignment Basis

The bank may grant post-shipment finance against goods sent on

consignment basis.
5. 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.

6. Advance Against Claims of Duty Drawback

DBK means refund of customs duties paid on the import of raw
materials, components, parts and packing materials used in the
export production.
It also includes a refund of central excise duties paid on indigenous
materials. Banks offer pre-shipment as well as post- shipment
advance against claims for DBK.
 Banker’s Acceptance (B/A)
This is a time draft that is drawn on and accepted by a bank (the
importer’s bank). The accepting bank is obliged to pay the holder
of the draft at maturity.

If the exporter does not want to wait for payment, it can request that
the B/A be sold in the money market. Trade financing is provided by
the holder of the B/A.

¤ The bank accepting the drafts charges an all-in-rate (interest

rate) that consists of the discount rate + acceptance
commission.
– In general, all-in-rates are lower than bank loan
rates. They usually fall between the rates of
short-term Treasury bills and Commercial
papers.
 Factoring (after exports)
Definition
 Factoring is defined as ‘a continuing legal relationship b/w a
financial institution (the factor) and a business concern (client),
selling goods or providing services to trade customers (customers) on
open account basis whereby the Factor purchases the client’s book
debts (accounts receivables) for cash at a discount from the face
value either with or without recourse to the client , normally
without recourse.
 The factoring house/ factor pays upto 80% of the bill amount to
Exporter.
 In India, factoring is done with recourse.

In Simple
Terms
 It is conversion of credit sales into cash.
3 Parties to factoring Services

Buyer

Client customer

factor
 Factoring Services
Purchase of a/cs receivable
+
Sales Ledger Administration
+
Debt collection Services
+
Credit Information Services
+
Advisory Services

Cross-Border/ International Factoring

In international business transaction, factoring services are provided

by factors of both countries.
 STATUTES APPLICABLE TO FACTORING

Factoring transactions in India are governed by the following

Acts:-

a) Indian Contract Act

b) Sale of Goods Act

c) Transfer of Property Act

d) Banking Regulation Act.

e) Foreign Exchange Regulation Act.

 Forfaiting (Before exports}
 “Forfait” is derived from French word ‘A Forfait’ which means
surrender of rights.
 Exporter under Forfaiting surrenders his right for claiming
payment for services rendered or goods supplied to Importer in
favour of forfaiteur.

Definition
 Forfaiting (specialized factoring technique) is a mechanism by
which the right for export receivables of an exporter (Client) is
purchased by a Financial Intermediary (Forfaiteur) without
recourse to him.
 The forfaiteur is then responsible for collecting the invoices from the
importer, and bearing the risks and losses of unpaid credits.
 The seller surrender his rights to forfaiteur in consideration for a
discounted value received immediately.
The face value of the Notes is discounted
28
at an agreed rate (about
1.25% or above LIBOR).
 Forfaiting Flowchart
2. Sales Contract

Exporter 3. Shipment of the goods Buyer

5. Hands over avalized
documents

notes, etc.) for avalization.

4.(a) Presents documents (or
6. Delivers documents

4.(b) Provides avalization

against the documents
7. Discounts and pays

9. Repays at maturity
1. Binding
agreement
on the
forfaiting
terms

9. Repay at maturity Buyer’s bank/

International
Guaranteeing
bank/forfaiter 8. Presents documents for
payment at maturity bank
29
 COSTS INVOLVED IN
FORFAITING
 Commitment Fee:- Payable to Forfeiter by Exporter in
consideration of Forfaiting services.

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

 Discount Fee:- Discount rate based on LIBOR for the period

concerned.

 Documentation Fee:- where elaborate legal formalities are

involved.

 Service Charges:- payable to Exim Bank.

 FACTORING vs. FORFAITING

BASIS FACTORING FORFAITING

Extent of Finance Usually 75 – 80% of the 100% of Invoice value

value of the invoice

Credit Worthiness Factor does the credit The Forfaiting Bank

rating in case of non- relies on the
recourse factoring creditability of the
transaction Avaling Bank.

Services provided Day-to-day administration No services are

of sales and other allied provided
services

Recourse With or without recourse Always without

recourse
Cont…

Basis FACTORING FORFAITING

Sales Administration Done Not Done

Term Usually provides Financing is usually for

financing for short- medium to long-term
term credit period of credit periods from 180
up to 180 days. days up to 7 years
though short-term
credit of 30–180 days is
also available for large
transactions
• Factoring and Forfaiting …..
in detail
 Forfeiting(Before the export)
• Forfeiting refers to non-recourse discounting of
export receivables. The exporter surrenders, without
recourse to him, his rights to claim for payment on
goods delivered to an importer.
• Forfeiter pays exporter in cash and undertakes the
risk associated with the export.
• EXIM bank plays intermediary role between
exporter and the overseas forfeiting agency. The
exporter approaches EXIM bank for forfeiting
transaction.
• The bank receives bills from the exporter and
sends them to the forfeiter for discounting.
• 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
forfeiting of medium term export receivables.
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
forfeiter from the amount paid to the exporter
against the availed bills of exchange.
 Factoring(After export)
It is an attractive way of providing export finance to exporters. In
this system, factor bears the complete credit risk.
Who is a factor? A Bank authorised to offer factoring services. A
factor is a special type of agent who, depending upon the type
of agreement, offers a variety of services.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.
 Factoring
• In this system, the exporter enters into an export factoring
agreement with exporter’s factor. The exporters ship goods to
approved foreign buyers.
• Each invoice is made payable to a specific factor in the importer’s
country. Copies of invoices and shipping documents are sent to the
Importer’s factor.
• Exporter’s factor will make prepayment to the export against
approved export receivables.
• On receipt of payments from the importer on due date of invoice,
importer’s factor remits the fund to the exporter’s factor.
• The exporter’s factor pays to the exporter after deducting the
amount of prepayments.
 List of Major 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.
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.
Other Institutions:-
Although there are other commercial banks, nationalized institutions
and private institutions such as IFCI, IDBI, engaged in providing
finance to exporter.
The major institutions are EXIM Bank, ECGC, and RBI.
 Other Facilities
• Incentives linked to export performance
• Incentive for marketing of export Goods
• Fiscal incentives
• Export Financing
• Rupee Export Credit (pre-shipment and post-
shipment
• Pre-shipment Credit in Foreign Currency
(PCFC)
• Export Bill Rediscounting(EBRD)
 Role of Exim Bank
Principal financial institution in India for
coordinating working of institutions engaged in
financing exports and imports

 Range of Financing Programmes

 Export Credits
 Finance for Export Oriented Companies

 Export Services

 Support Programmes
 Classification of preshipment finance
• Packing credit
• Advance against incentives receivable from
govt. covered by ECGC guarantee.
• Advance against cheques/draft received
advance payment
 1.Packing credit
• It refers to the credit granted by bank to
enable an exporter to pack the goods meant
for export.
• It is granted on the basis of a confirmed
export order or irrevocable letter of credit
opened by an importer in favor of exporter.
 Persons eligible for packing credit
• Export company having an export order or a
letter of credit in its favor for the export of
goods in its name.
• A company which does not have export order
or letter of credit in its name and Is exporting
as merchant exporters or export houses,
subject to compliance with the norms as laid
down by the RBI in the regard.
Criteria for the grant of packing credit
Banks generally provide packing credit against the
confirmed export order or letter of credit, but it
can provide loan also if the following information
is provided to the bank
• Name of overseas buyer
• Particulars of goods
• Quantity of goods
• Date of shipment
• Terms of sale and payments
 Form of finance
• It is a fund based credit and assumes
different forms depending upon the stage of
execution of the order, for e.g. it is called
(a)packing credit loan at the time of purchase
of raw material and manufacturing goods and
(b)shipping loan when the goods are packed
and are in the process of shipment and
(c)advance against anticipatory credit when a
green or red clause of LOC is available.
 Quantum of finance
• There is no fixed formula of determining the
quantum of finance to be granted to an
exporter against a specific order or LOC or an
expected order.
• The banks generally provide finance up to the
extent of cost of domestic production of
goods however this is higher than the FOB
value of the goods.
 Margin requirements
Banks ask the exporters to contribute a part of
funds from their own source called margin
money. Margins are stipulated mainly to serve
the following purposes-
• To make the exporter have some stake in the
business to make him more concerned
• To take care of erosion in the value of goods
charged to the bank
• To ensure that bank finance is not extended to
cover exporter’s profit margin.
 Period
• This is a short term finance and generally bank
provides this for a period of 270 days at the
concessional rates of interest as announced by
RBI
• Initially the loan is provided for 180 day but if
the factors which make the firm unable to pay
at time are uncontrollable then additional 90
are provided.
 Running account facility
Banks provide this facility to the exporters
subject to the following t&cs-
. Exporter has established the need for running
account facility to the satisfaction of the bank
.can be granted to exporters with clean record
.and the exporter has to provide LOC or export
order too in a stipulated time.
2. Credit against receivables from govt.
In certain exceptional circumstances when the
value of material to be procured for the
execution of the order is more than FOB value
of the export order then the bank may provide
packing credit against the amount of incentive
to be received from govt. of India.
3. Advance against cheques/draft received as
advance payment.
 Post shipment finance
Any loan or advance granted or any other credit
provided by an institution to an exporter of
goods from India from the date of extending
credit after shipment of goods to the date of
realization of export proceeds and includes
any loan or advance granted to an exporter ,
in consideration of , or on the security of, any
duty drawback or any other incentive
receivable from govt. of India.
 Features of post shipment finance
• Available after shipment
• Given to exporter only in whose name exports
have been done
• Can be short term or long term
• Its a working capital finance
• Fund based credit
• Maximum period of concessional rates of interest
from the date of shipment is six months.
Classification of post shipment finance
1. negotiation/payment/acceptance of export
documents drawn under export letter of credit
2. Purchase/discount of export document drawn
under confirmed orders/export contracts.
3. Advances against export bills sent on collection
basis.
4. Advance against exports on consignment basis
5. Advances against undrawn- balances
6. Advances against receivables from govt. of India
7. Advances against retention money to exports.
 EXPORTS UNDER DEFERRED
PAYMENTS
• Commercial banks can provide finance up to 25
crores
• Exim bank can provide finance up to 100 crores
• For above 100 crores finance consortium can
provide finance which is constituted by
representatives of all the above institutions.
• Deferred credit facility is normally allowed only
for Turnkey projects, Construction projects,
Technical and consultancy service contracts
 DEFERRED CREDIT FACILITIES
• Exporter(Supplier's) Credit: The exporter
extends credit directly to the overseas buyer
and seeks refinance from commercial
banks/EXIM bank.
• Importer (Buyer's) Credit: It is a loan
extended by a financial institution or a
consortium of financial institutions to the
overseas buyer for financing a particular
contract
 Factors taken into account by EXIM
Bank
• competence and capability of Indian exporters
in complying with the proposed commercial
terms of the contract
• justifiability of the contract on commercial
considerations
• economic viability of the overseas projects
• credit worthiness of foreign borrower.
 ROLE OF EXPORT IMPORT BANK OF
INDIA
• Finance- The Bank finances export of Indian
machinery, manufactured goods, consultancy
and technology services on deferred payment
terms
• Services: EXIM Bank provides information,
advisory services to enable exporters to
evaluate the international risks, export
opportunities and competitiveness.
• Research &Analysis.
 RECENT DEVELOPMENTS IN EXPORT
FINANCING
• Factoring: Itis an attractive way of providing export finance to
exporters. In this system, factor bears the complete credit risk.
Who is a factor? Bank.
A factor is a special type of agent who, depending upon the type
of agreement, offers a variety of services. 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.
 Forfeiting
Forfeiting refers to the non-recourse discounting of
export receivables. It is a mechanism of financing
exports that involves less risk and enhances
international competitiveness.
It converts a credit sale into cash sale for an exporter. In
this system forfeiting agency discounts international
trade receivables of the exporter.
The forfeiter pays the exporter in cash and undertakes
the risk associated with the export deal. The exporter
surrenders, without recourse to him, his rights to
claim for payment on goods delivered to an importer
 Operational features
• A) Sanction of limits
• Documentation formalities-
1. Post shipment credit agreement
2. Agreement of hypothecation of book debit
3. Power of attorney to receive the export
receivables
4. Corporate guarantees
5. Insurance policy covering export shipments
6. Necessary undertaking letters
7. ECGC appropriate standard policy or standard
 Contd.
• C) ECGC formalities
• D) receipt of export documents
• E) scrutiny of documents
• F) dispatch of documents and disbursal of
funds.