Export Finance

Group 5

AGENDA

1) Definition of Export Finance.

2) Types of Export Finance. (Pre-shipment and Post-shipment)PCFC and Rupee PC3) RBI Norms

4) Eg. Products with (A) SBI and (B) ICICI and their Terms and Conditions.

5) Compare the products of the above two banks.

Definition

Operating Cycle

Cash

Goods in process

Finished goods

Receivables

Raw Material

Regulators

1) Ministry of Commerce– DGFT– ECGC– Foreign Trade Policy

2) Ministry of Finance– FEMA, 1999

RBI Norms• Appraise to be the bank’s customer.

• Appraise should have the Exim code number allotted by the Director General of Foreign Trade.

• Party’s name should not appear under the caution list of the RBI.

• Goods must be freely exportable i.e. not falling under the negative list. If it falls under the negative list, then a valid license should be there which allows the goods to be exported.

• Country with whom the Appraise wants to trade should not be under trade barrier.

Types of Export Finance

• Pre-Shipment Finance– Rupee Packing Credit– Packing Credit in Foreign Currency

• Post-Shipment Finance– Advance against Export bill purchased– Advance against Export bill collection– Advance against duty drawback– Advance against consignment export

Documents Required

• Airway Bill/Bill of Lading• Certificate of Origin• Invoice• Draft (or Bill of Exchange)• Insurance Policy (or Certificate)• Packing List/Specification• Inspection Certificate

I] Pre–Shipment Finance• This is the credit facility known as packing credit loan which means

the credit limit provided by the bank to the exporters till the packing of the finished materials.

• This facility is basically given to the exporters to enable them to obtain the required raw materials and for processing the same i.e. for the payment of labour charges and other expenses.

• This facility can be availed in the following two manners: – PCFC (Packing credit in Foreign Currency), OR– Rupee PC (Rupee Packing Credit).

Objectives of Pre-Shipment Finance

• 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.

Eligibility• Issued to exporter who has the export order in his own name.

• A ten digit importer exporter code number allotted by DGFT.

• Exporter should not be in the caution list of RBI.

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

• Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer.

• 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.

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.

• 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.

Rupee Packing Credit

Packing Credit in Foreign Currency

Common discrepancies observed while granting PC

1. Order not studied thoroughly.2. Order/LC has expired or going to expire shortly.3. OPL on the buyer not available.4. ECGC buyer’s credit limit not available.5. Cost of production not calculated correctly.6. Advance payment if any received not deducted.7 After determining the quantum of advance, drawing power not ensured.8. End use not verified.9. Date of shipment not followed and necessary extension not

obtained if overdue.

II] Post-Shipment Finance

• Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made.

• This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds.

• Exporters do not have to wait for the importer to deposit the funds.

Objective of Post-Shipment Finance

• To pay for publicity and advertising in the over seas markets.

• To pay for port authorities, customs and shipping agents charges.

• To pay towards export duty or tax, if any and ECGC premium.

• To pay for freight and other shipping expenses.

• To pay towards marine insurance premium, under CIF contracts.

• To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad.

• To pay for representatives abroad in connection with their stay board.

Post-Shipment Finance

• Purpose: Meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. I

• Basis : Provided against evidence of shipment of goods/supplies

• 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.

• 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.

Types of Post Shipment Finance1.Export Bills Purchased/ Discounted:•Export bills (Non LC 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 .

2. Export Bills Negotiated (Bill under LC):•Due to 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 for the negotiating and the lending bank to properly check all documents before submission.

Types of Post Shipment Finance3. 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 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.

Types of Post Shipment Finance5. 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.

E.C.G.C. Guarantee

• Post -shipment finance, given to an exporter by bank through purchase, negotiation or discount of an export bill against an order, qualifies for post -shipment export credit guarantee. I t is necessary, that exporters obtain a shipment or contracts risk policy of E.C.G.C. Banks insist on the exporters to take a contracts shipments (comprehensive risks) policy covering both political and commercial risks. The Corporation, on acceptance of the policy, would f ix credit limits for individual exporters and the Corporation's liability will be limited to the extent of the limit so fixed for the exporter concerned irrespective of the policy amount.

SBI• State Bank of India is the largest banking and financial

services company in India.

• The State Bank Group, with over 16,000 branches, has the largest banking branch network in India.

• SBI provides Rupee export credit at most competitive rates at 449 branches and PCFC facility at 64 branches across the country.

• SBI has Export Bill Rediscounting (EBR) for post shipment finance at international rates of interest for a maximum period of 180 days.

Products with SBI

Pre-Shipment Financei. Packing Credit in Foreign currencyii. Rupee Packing Credit

Post-Shipment Financei. To get export bills purchased /discounted / negotiated.ii. To get advances against bills for collection.iii. To receive advances against duty drawback receivable from the Govt.

What are the special advantages in availing PCFC & EBR from SBI?

• Vast network of designated branches to handle the schemes and also a well laid out system of customers of non designated branches availing the schemes at the nearest designated branches.

• No minimum amount is prescribed for drawals under PCFC and EBR schemes

• No withholding tax need be paid by the exporters, as the lines of credit for funding PCFC and EBR are drawn by SBI from its own foreign offices.

• Competitive rates of interest for customers with good credit rating and high value business.

• Forward contracts can be booked in respect of future PCFC drawals.

How do the schemes operate?

PCFC & EBR schemes go hand in hand. The operation of these schemes is in three stages, which are:i) Disbursement of PCFC ii) Disbursement of EBR and simultaneous repayment of PCFC and iii) Repayment of EBR.

Rate of Interest

ICICIICICI Bank (Industrial Credit and Investment Corporation of India) is the largest private sector bank in India.

It is the 2nd largest bank in India.

The bank also has a network of 2,016 branches and about 5,219 ATMs in India.

It has the largest international balance sheet among Indian banks.

It also has wholly-owned subsidiaries, branches and representatives offices in 19 countries such as USA, UK, Canada, Russia, Dubai, Hong kong, etc.

Products with ICICI

Pre-Shipment Financei. Available in the form of Export Packing Creditii. Upto 60% of the loan value

Post-Shipment Financei. Available in the form of Export Bill Negotiation

To get export bills purchased /discounted / negotiated.ii. To get advances against bills for collection.iii. To receive advances against duty drawback receivable from the Govt.

Export Finance with ICICI Bank

Pre – Shipment Finance

- Available in the form of Export Packing Credit

- Based on Actual Trading cycle of the past 3 years (min.)

- Usage: 1. Purchase / Import of Raw Materials 2. Processing of Goods 3. Packing for Export

- Granted up to 60% of the value.

Export Finance with ICICI Bank

• Finances post export of goods and before realisation of proceeds.

• Available in the form of Export Bill Negotiation– Tenure of max. 180 days– Subject to documents being in accordance with LC