Leob session5&6 export finance_mfm3

• Need for such type of finance?
• The institutions which provides the credit,
– EXIM BANK
– COMMERCIAL BANK
– ECGC

Need for such type of finance?
• In regard to the export business, funds are
required:
– at the time of establishment of business (long
term funds)
– and for carrying the business (short term
funds)

EXIM BANK / COMMERCIAL BANK / ECGC

• EX-IM bank of India is exclusively meant for promotion of
exports from India and provide long term funds to export
units.
• Commercial banks provide short term loan to the
exporters.
• Schemes of Export Credit and Guarantee Corporation of
India (ECGC) facilitate the grant of short term loans to
the exporters through various credit risk insurance
policies.
• The commercial banks provide funds to the exporter
both before sending shipment (at pre-shipment stage)
and after sending the shipment (at the post-shipment
stage)

NATURE OF EXPORT FINANCE
• RBI ensures a free flow of financial
assistance to the export sector at a
concessional rate of interest against
export order.
• The commercial banks provide the loan.
• The commercial banks are provided the
re-finance facility by the RBI and the EX-
IM bank against the loan extended by
them to the exporters.

GENERAL GUIDELINES TO THE
BANKS FOR EXPORT FINANCING
• The application for export finance are to be disposed off
immediately in the benefit of the exporters.
• The banks should consider the export activity in totality
and grant adequate amount of credit .
• While assessing the credit proposals from exporters, the
bank should keep in mind their past performance and the
future potential of their business activity.
• In case of new exporters, their experience of conducting
domestic business and other factors must be taken care
of.

•The banks should ensure that the funds lent by them are
used for the implementation for the export order in time. so,
they should keep a close eye on the end use of the funds
lent by them.
•RBI has allowed several relaxations of the credit norms
relating to the exports. they are
a) while computing overall working capital gap/max.
permissible bank finance (MPBF), banks can exclude export
receivables out of such computation process.
b) Banks should decide on their own the amount of holding
of individual items of inventory and receivables the exporter
should hold in relation to the amount of bank finance
sanctioned to the exporter. the bank should consider the
production/processing cycle of the industry in question at
the time of taking this decision.

MAXIMUM PERMISSIBLE BANK
FINANCE
• MPBF represents the max. amount of
credit the bank would sanction to a
business firm to meet its working capital
needs.
• Working capital is defined as the
difference b/n the amount of current
assets and the current liabilities.

• Pre-shipment finance
• Post-shipment finance

• Provides working capital finance to an
exporter
• Basic purpose is to enable the eligible
exporters to procure raw materials,
supplies, process or manufacture,
warehouse or ship the goods meant for
exports

• Packing credit
• Advance against incentives receivables
from govt. covered by ECGC guarantee
• Advance against cheque /drafts received
as advance payment

• Facility can be shared with supporting manufacturer or
the sub-supplier.
• It refers to the credit granted by a bank to enable an
exporter to pack the goods meant for exports.
• It includes the loan or advance or credit granted by a bank
to an exporter for financing the purchase of raw materials,
supplies, etc. required for processing or manufacture of the
goods as well as for the packing materials for exports to
foreign country.

Person eligible for packing credit:
• Export company/firm having an export order
or a letter of credit in its favour for the export
of goods in its name
• A business firm/ company which does not
have L/C in its own name and is exporting
through merchant exporters or export houses,
subject to compliance of norms laid by RBI

Sharing of packing credit with
manufacturers:
• A merchant exporter or an export house is
allowed to share the facility of packing credit at
the concessional rate of interest with its
supporting manufacturer of the goods. the bank
allows sharing this facility subject to terms and
conditions.
• Similarly exporters can share the packing credit
with the sub-supplier of raw materials,
components, etc. required for the manufacture of
export product.

Steps
• Application
• Documentation formalities
• ECGC formalities
• Scrutiny of packing credit application
• Determination of eligible loan amount
• Disbursal of loan amount

SUMMING UP:
The exporters can avail of the facility of
packing credit at concessional rates of interest
so as to be competitive in the international
market. They can share this facility with their
supporting manufacturer or the sub-supplier.
Hence mobilisation of adequate amount of
funds enables an exporter to obtain the
supplies from the supplier needed for the
manufacture of the product for export.

Period of finance:
• Pre-shipment finance is granted for a short
period of time as it is essentially a working
capital finance.
• Max. period is 270 days.
– Initially the amount of packing credit is granted
for a max. 180 days subject to time involved in
production cycle.
– In case the circumstances of the export firm are
beyond its control then the bank may extend the
period of credit by a max of 90 days.

PERIOD OF CREDIT RATE OF INTEREST

Up to 180 days not exceeding PLR minus
2.5 %age points.

180-270 days not exceeding PLR plus
2.5 %age points.

270-360 days fixed by the bank.

• Exporter should:
– arrange the set of docs as stipulated in the
L/C
– submit the docs. along with the Standardized
Letter to bank for collection/negotiation of
docs.
– This letter to the bank provides
comprehensive coverage of the various
points

• This form of finance is available after the
shipment of goods.
• This facility is extended to the exporters
in whose name the goods were shipped
OR an exporter in whose name export
documents are transferred.
• It can be short term finance or a long
term finance depending upon the nature
of export.
• It is essentially a working capital finance
granted on the strength of accounts
receivables.

• This facility is extended only against the shipping
documents which evidence that the goods have
been shipped
• Credit is extended to finance export receivables
for the period commencing from the date of
submission of docs. to the bank to the date of
realisation of export proceeds.
• The post shipment credit is essentially a form of
fund based financing
• The concessional rate of interest is charged upto
a maximum period of 6 months from the date of
shipment of goods

Types of Post Shipment Finance
• The post shipment finance can be
classified as :
– Export Bills purchased/discounted.
– Export Bills negotiated
– Advance against export bills sent on collection
basis.
– Advance against export on consignment basis
– Advance against undrawn balance on exports
– Advance against claims of Duty Drawback.

Crystallization of Overdue Export
Bills
• Exporter foreign exchange is converted
into Rupee liability, if the export bill
purchase / negotiated /discounted is not
realize on due date.

General Discrepancies
• Late Shipment
• Claused Bill of Lading
• Draft for the amount exceeding the value of credit
• Differences in the description of goods in different
documents
• Inconsistency in the documents as regards marks and
numbers
• Bill of Exchange drawn on wrong party or not drawn as
per tenor stated in the credit
• Bill of Lading not marked “Shipped on board”
• Goods under-insured
• Transshipment/Partial shipment made when prohibited
under the L/C and so on

Exchange Control
Regulations

Exchange Control Regulations

Why is it important to understand
the exchange control regulations
and facilities?

Export transaction  inflow of forex
If inputs are Imported  outflow of forex
Participations in trade fair
Sales tours (INR/$)
Outflow/
Inflow??
Subscription for trade magazines (INR/$)
Advertisements in foreign media??
Payment of agency commission, etc.??

FOREIGN EXCHANGE
MANAGEMENT ACT(FEMA)

FEMA & Exchange Control Regulations

Framed by the Exchange Control Authority of
India (RBI)…..according to provisions of FEMA,
1999

Introduction
• Foreign Exchange Management Act or in short (FEMA)
is an act that provides guidelines for the free flow of
foreign exchange in India. It has brought a new
management regime of foreign exchange consistent with
the emerging frame work of the World Trade
Organisation (WTO). Foreign Exchange Management
Act was earlier known as FERA (Foreign Exchange
Regulation Act), which has been found to be
unsuccessful with the proliberalisation policies of the
Government of India.
• FEMA is applicable in all over India and even branches,
offices and agencies located outside India, if it belongs
to a person who is a resident of India.

Some Highlights of FEMA
• It prohibits foreign exchange dealing undertaken
other than an authorised person;
• It also makes it clear that if any person residing
in India, received any Forex payment (without
there being a corresponding inward remittance
from abroad) the concerned person shall be
deemed to have received they payment from a
nonauthorised person.
• There are 7 types of current account
transactions, which are totally prohibited, and
therefore no transaction can be undertaken
relating to them. These include transaction
relating to lotteries, football pools, banned
magazines and a few others.

• FEMA and the related rules give full freedom to
Resident of India (ROI) to hold or own or transfer
any foreign security or immovable property
situated outside India.
• Similar freedom is also given to a resident who
inherits such security or immovable property
from an ROI.
• An ROI is permitted to hold shares, securities
and properties acquired by him while he was a
Resident or inherited such properties from a
Resident.

• The exchange drawn can also be used for
purpose other than for which it is drawn provided
drawl of exchange is otherwise permitted for
such purpose.
• Certain prescribed limits have been substantially
enhanced. For instance, residence now going
abroad for business purpose or for participating
in conferences seminars will not need the RBI's
permission to avail foreign exchange up to US$.
25,000 per trip irrespective of the period of stay,
basic travel quota has been increased from the
existing US$ 3,000 to US$ 5,000 per calendar
year.

Various exchange control
Rules & Regulations
1. Foreign Exchange Management (Current Account
Transactions) Rules, 2000
2. Foreign Exchange Management (EXIM of Goods
and Services) Regulations, 2000
3. Foreign Exchange Management (Manner of
Receipt and Payment) Regulations, 2000

EXEMPTIONS from Exchange Control
Declaration
Following transactions are exempt from ECD:
1.Export of samples of goods and publicity material
supplied free of payment
2.Export of goods with a declaration that value <
INR 25,000
3.Export of goods by way of GIFT with a declaration
that value < INR 5,00,000

Declaration
4. Goods imported free of cost on re-export
basis
5. Goods worth < $1,000 in value/transaction
exported to Myanmar

Declaration
6. Re-export of the following goods as permitted by
development commissioner
(a) imported goods found defective
(b) goods imported from suppliers,
collaborators on loan basis
(c) surplus goods imported from foreign
suppliers.

Declaration

7. Replacement goods exported free of
charge as permitted by the EXIM Policy

Every shipment has to be cleared by
I.central excise authority
&
II.customs authority

Central Excise Clearance Procedures
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

There are 2 categories in case of central
excise clearance
i.Procedure for excise clearance in the case
of exempted units
ii.Procedure for excise clearance in the case
of units other than exempted units

Claiming Rebate
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

After shipping the goods, exporter can file
claim of rebate before the specified rebate
authority
Exporter has to clearly indicate the option on
ARE.1 along with address of rebate authority
(Maritime Collector of Central Excise OR
Jurisdictional Asst. Collector of Central Excise)

Claiming Rebate
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Docs to be filed for claiming rebate:
i.Application in the prescribed form
ii.ARE.1(original) + ARE.1 (duplicate-*sealed)
iii.Duly attested copy of Bill of Lading
iv.Duly attested copy of Shipping Bill
v.Disclaimer certificate (if claimant is other
than the exporter)

Claiming Rebate
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Rebate sanctioning authority verifies and
compares 1original(from exporter) AND
duplicate (from customs officer) AND 3triplicate
2

(from Superintendent of Central Excise)
If ALL is O.K., rebate is sanctioned

Time limit for disposal
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Rebate sanctioning authority shall point out all
deficiency within 15 days of filing of claim
Exporter must rectify the deficiencies within
next 15 days
claim of rebate of duty is generally disposed of
within 15 days

“Once the goods are ready for transportation
to the importer, it is in the interest of the
exporter to secure the shipment against all
possible risks”

RISK

……..possibility of loss in business

RISK
Credit risk – importer may not pay for the goods
Risk of physical damage - there may be damage to the goods
due to various factors during transportation from port of loading to the port of discharge

Product liability – the exporter may be required to pay for
compensation to the consumer due to the faulty product

Exchange rate fluctuation risk – the possibility of loss
due to exchange rate fluctuation

Political risk – loss due to various political factors resulting in delay in the
transfer of funds or non-remittance by the buyer’s bank

Risk Management

Risk management refers to 
identification of the risks associated with
an export transaction &
planning for the measures to secure
against those risks with the objective of
minimising the cost of export transaction

Risk Management

Risk management involves 
Identification of the risk
Quantification of the risk
Prevention or reduction of the risk
Developing one’s own risk policy
Transferring the risk to the third party

Export Risk Identification

Risk = possibility of loss in biz. & can be
attributed to those factors whose
occurrence or non-occurrence can be
anticipated and the probabilities can be
assigned
Different from UNCERTAINTY

Risk Management
Some factors which cause risk in biz.
1.poor planning for funds
2.lack of market knowledge
3.misunderstanding foreign buyers
4.overestimation of one’s own capacity
5.default by the foreign buyers
6.Faulty nature of the product
7.Damage during transportation
8.Political development in the importer’s country
9.Fluctuation in the rate of exchange

Credit Risk Insurance and ECGC
In India,
credit risk insurance cover is provided by
ECGC (fully owned company of the GOI)
main functions of ECGC
1.covers the risk of non-payment due to
commercial and political risks arising in
respect of exports on credit terms

Credit Risk Insurance and ECGC
2. It issues guarantees to bank underwriting a
major part of losses that may arise in
respect of advance or other support they
extend to exporters in connection with their
export business.

Credit Risk Insurance Policies
ECGC offers the following policies
I. Standard Policies
II. Specific Shipment Policies
III. Specific Policies

Cargo Insurance (Marine) Insurance
Need for cargo (marine) insurance

Cargo can be damaged during transit from
port of loading to port of discharge
Insurance cover against such risks arising due
to physical damage to the goods is known as
cargo/marine insurance.
AIR CARGO, SHIPMARINE


Legal requirement
Each of the intermediaries involved in
transportation of goods have limited liability
As per law, intermediaries have no liability
for losses caused by uncontrollable factors and
for losses caused in spite of reasonable care


Legal requirement
In case of sea shipment  maximum liability -
£100.00/package
In case of air shipment maximum liability –
US $ 20.00/package


Commercial requirement
It’s not just loss of goods; it is loss of profits
too.
If goods are damaged  buyer won’t accept
goods/Bill of Exchange in case of D/P or D/A


Parties to the Contract of Insurance
1.Insurance company (underwriters)
2.The insured (buyer of insurance or
beneficiary)


Principles governing the contract of insurance
1. Principle of utmost good faith insured
must fully disclose material details to
insurer
2. Principle of insurable interest no person
can enter into a valid contract of insurance
unless he has insurable interest in the
object/life insured

Principles governing the contract of insurance
3. Principle of indemnity: cargo owners are
allowed a reasonable anticipated profit.
Therefore Policy provides commercial
indemnity I/O pure indemnity
4. Causa Proxima: implies that insurer
becomes liable to pay for loss if the insured
peril is the proximate cause of loss


WHO INSURES?
CIF/CFR  shipper/exporter
FOB buyer. In this case exporter should
obtain Seller’s Contingency Insurance to cover
possible loss before goods are on board

Features of Marine Insurance Policy
1. Freely assignable (transferable) as goods
pass through various hands before delivery
2. Assignment is done by endorsement and
delivery
3. Insurable interest of the claimant must exist
at the time of loss of cargo
4. Value of policy is the sum agreed between
the insured and insurer. (110% of CIF value)

Features of Marine Insurance Policy
5. It’s a contract of commercial indemnity &
NOT pure indemnity
6. Duration includes 1period of transit +
2
time of discharge + 3time of arrival
Air shipment Generally 30 days after
arrival
Sea shipment Generally 60 days after
arrival

Kinds of losses
A. Actual Total
Loss
1. Total loss
B. Constructive
Total Loss

c. General
Average
2. Partial loss
d. Particular
Average

Kinds of losses
a. Actual Total Loss
i.Cargo is physically destroyed,
ii.Cargo is not the same anymore (cement
concrete)
iii.Cargo is irretrievably lost (ship sinks)
b. Constructive Total Loss
Cargo is damaged to such an extent that
cost of salvaging > value of goods

Kinds of losses
c. General Average
An extraordinary sacrifice or expenditure
intentionally and reasonably made or
incurred for the common safety

Kinds of losses
G.A. arises when the Captain of the ship decides to:
i. throw away some cargo to lighten the ship caught in
rough weather
ii. make payment to nearby agency to tow the ship
away from danger
iii. pour water on the cargo to extinguish the fire, etc.

*loss/expenditure is borne by each cargo owner
proportionately

Kinds of losses

d. Particular average
Arises when partial loss or damage is
caused accidently by a peril insured. It is
the loss of particular cargo owner.

Scope of cargo insurance policy

Scope depends on the risks (perils)
covered in the insurance policy
1.Maritime perils
2.Extraneous perils
3.War perils
4.Strike perils

Maritime perils

“losses due to acts of God or man-made events”
Acts of God earthquake, volcanic eruption,
lightening, entry of seawater into vessel, washing
overboard of cargo, rain water damage
Manmade events fire, explosion, smoke,
water used to extinguish fire, piracy, deliberate
damage, vandalism, sabotage, arson, etc.

Extraneous perils
“perils that arise on account of faults in loading,
keeping, carrying and unloading of the cargo”
Rough handling, breakage, leakage, pilferage,
non-delivery, improper stowage, wave impacts,
pressure caused by vibration on the road-rail
track

War perils
“losses due to war”
Civil war, revolution, rebellion, etc. and
capture, seizure, arrest or detainment of the
carrier during war, civil war, revolution etc.

Strike perils
“Damage or loss to cargo caused by strikes, lock-
outs, labour disturbances, riots, civil commotion
and by any terrorist acting from a political
motive”

Leob session5&6 export finance_mfm3

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