MIB 3.6 UNIT –II

NEGOTIATION OF EXPORT Bil ls NEGOTIATION OF EXPORT Bil ls

Instructions for Opening a Letter of Credit Examination of a Letter of Credit Common Discrepancies Negotiation with Discrepancies Documents for Negotiation Presentation of Documents

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NegotiationNegotiationNegotiation means the purchase by the

nominated (negotiating) bank of drafts and shipping documents under a complying presentation by advancing or agreeing to advance funds to the beneficiary

An exporter presents a draft (a bill of exchange) and shipping documents specified in the letter of credit to a nominated bank or any bank if there is no nominated bank, which becomes a negotiating bank, to get paid.

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Instructions for Opening a Letter of Instructions for Opening a Letter of CreditCredit

Items usually included in the instructions to open an L/C.

(1) An Irrevocable letter of credit subject to the UCP of the latest version; UCP No. 600 (2007 Revision)

(2) Whether the L/C is to be confirmed by a U.S. bank or not.

(3) The name and address of the beneficiary: in favor of exporter.

(4) Whether the L/C is to be transferable or not (5) Terms of payment such as at sight or usance (6) Where negotiation or payment is to be effected

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Instructions for Opening a Letter of CreditInstructions for Opening a Letter of Credit

(7) Whether the payment is to be made in for e.g U.S. dollars or other foreign currency

(8) What trade terms are to be used: FOB, CFR or CIF?

(9) Coverage of marine insurance: (10) Documents to be required for negotiation

Commercial invoice Packing list Marine insurance policy or certificate Ocean bill of lading Other documents specified in the L/C

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Instructions for Opening a Letter of CreditInstructions for Opening a Letter of Credit

(11) Whether partial shipments are allowed or not

(12) Whether transshipments are allowed or prohibited

(13) Presentation period/date: A period of time for presentation of documents after shipment

(14) Ports of loading and unloading

(15) The latest shipment date

(16) The expiry date

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Examination of a Letter of CreditExamination of a Letter of CreditWhen a letter of credit is received, exporter must:(1)Examine the conditions and documents specified in

the L/C and determine whether he can meet them or not.

(2) If there are any conditions he cannot meet, request his buyer to amend the L/C as ap before he starts manufacturing export goods.

(3) If the L/C calls for a time draft, have the L/C specify that the discount interest for the time draft shall be for account of accountee (importer), when agreement was a sight draft but L/C is opened with a time draft

(4) Hold off shipping the order until he receives an amendments to the L/C as requested.

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Common DiscrepanciesCommon Discrepancies

A discrepancy: any inconsistence or difference from the terms and conditions stipulated in the letter of credit in minute details.

(1) Draftsa. Draft amount is different from invoice

b. Draft tenor is different from the L/C

c. Wrong drawee

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Common DiscrepanciesCommon Discrepancies(2) Commercial invoicesa. Different merchandise description from the

L/Cb. Invoices is not issued by the beneficiaryc. Insufficient copies are presentedd. Incorrect accountee's name and address are

statede. Different prices from the L/C f. Terms of trade such as FOB, CFR or CIF

different from the L/C

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Common DiscrepanciesCommon Discrepancies(2) Commercial invoices (continued)

g. Marks and numbers of packages are different from all other documents

h. Weight is different from the L/C

i. Different currency from the L/C

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Common DiscrepanciesCommon Discrepancies(3) Packing lista. Different description of merchandise

from the L/C

b. Different number of unit, net weight and gross weight from the L/C

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Common DiscrepanciesCommon Discrepancies(4) Ocean Bill of Ladinga. Less than a full set of original B/L is presentedb. The B/L not properly endorsedc. The B/L not marked with "On Board“

notation, if B/L contains the indication “intended vessel” or "Received for shipment"

d. The B/L not properly consigned.e. In the case of CFR or CIF, the term "Freight

Prepaid" is not marked, that is, no indication of freight prepaid by the exporter

f. Merchandise description is different from the L/C

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Common Discrepancies(4) Ocean Bill of Lading (continued)g. Different ports of loading and/or unloading from

the L/C h. Notations on the B/L that the merchandise or

packages are damaged i. The B/L indicates the "On Deck" shipmentj. Stale B/L : Not presented within time limit after

shipment as stipulated in the L/C : within ____ days after date of issuance of bills of lading

k. Late shipment: The bill of lading date marked later than the shipment date specified in the L/C

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Common DiscrepanciesCommon Discrepancies(5) Marine Insurance Certificate or Policya. Different coverage from the L/C

b. Insufficient coverage

c. Not the same currency as the L/C

d. Different merchandise description

e. The effective date later than the shipment date

f. Broker's cover note presented instead of insurance certificate or policy

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Common DiscrepanciesCommon Discrepancies

(6) Other discrepancies

a. Not all documents required in L/C are presented

b. Documents are presented after the expiry date of the L/C

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Negotiation with Negotiat ion with DiscrepanciesDiscrepancies

In case discrepancies are found by negotiating bank, exporter must correct the discrepancies.

If exporter cannot correct them such as the shipping date, then exporter should

(1) request the issuing bank to amend the letter of credit to cover discrepancies or authorize to pay in lieu of discrepancies

(2) At the same time, inform the buyer of the discrepancies and request his acceptance and amendment to the Letter of Credit.

(3) Release shipping documents to issuing bank after the L/C is amended. Buyer’s acceptance of discrepancies are not enough. The Letter of Credit must be amended.

(4) Do not send the shipping documents to the issuing bank on a collection basis.

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Documents for NegotiationDocuments for NegotiationDepend on the stipulation in the

letter of credit. Exporter must present all documents

specified in the letter of credit for negotiation.

Any missing document or incorrect document becomes a discrepancy.

Issuing bank of the L/C has under no circumstances an obligation to honor the draft and shipping documents with discrepancies.

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Documents for NegotiationDocuments for NegotiationCommon documents used in the international trade

accompanying exporter’s Draft (Bill of Exchange)(1) Commercial Invoice(2) Packing List(3) Ocean Bill of Lading(4) Marine Insurance Certificate(5) Any other documents if required by the L/C

• Certificate of Country Origin• Consular Invoice• Inspection Certificate• Beneficiary's statement

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Presentation of DocumentsPresentation of DocumentsDraft and all shipping documents must

be presented to a negotiating bank together with the original letter of credit.

Presentation must be made within a specified period of time after shipment in the L/C, but not later than 21 days after shipment

A bank must determine whether or not presentation is a complying presentation in 5 banking days

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Presentation of DocumentsPresentation of DocumentsIf a nominated (negotiating) bank, a

confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honor or negotiate,

then it must give a single notice to presenter

no later than the close of the 5th banking days. 20

Presentation of DocumentsPresentation of DocumentsThe notice must state

The bank is refusing to honor or negotiate Each discrepancy The bank’s disposal of shipping documents:• The bank is holding documents pending

instructions from the presenter or• The issuing bank is holding documents until it

receives a waiver from the applicant & agrees to accept it or• The bank is returning documents or• The bank is acting according to the previous

instructions from the presenter.21

Presentation of DocumentsPresentation of Documents If a bank does not follow these negotiation and notice

provisions,• The bank cannot claim that the documents do not

constitute a complying presentation.• The bank must honor or negotiate.

A document presented but not required by the Credit will be disregarded.

If a Credit contains a condition without stipulating the document to indicate compliance with the condition,• Banks will deem such condition not stated and will

disregard it.

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Export Financing Methods and Terms of Payment

•METHODS OF PAYMENT

Open Account,Collections, Letters of Credit, Cash in Advance

Methods of Payment-Decision Factors

Relationship Amount of OrderType of ProductCompetitor’s TermsFlow NeedsWorking Capital NeedsCostsProfit MarginsCurrent Interest Rates

Key Factors in Payments• Internationaltradepresentsaspectrumofrisk,causinguncerta

intyoverthetimingofpaymentsbetweentheexporter(seller)and importer(foreign buyer).

• To exporters, any sale is a gift until payment is received.• Therefore, the exporter wants payment as soon as

possible, preferably as soon as an order is placed or before the goods are sent to the importer.

• To importers, any payment is a donation until the goods are received.

• Therefore, the importer wants to receive the goods as soon as possible, but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to make payment to the exporter.

Cash in Advance• Seller requires payment prior to shipment• Seller has no commercial or country risk; use of

funds for working capital; no cost; uncompetitive from sales standpoint.

• Buyer has risk of non- receipt of goods; bears all financing costs; capital tied up.

• Used for relatively small amounts, new customers, one-time sales, when seller needs working capital source, when buyer or country risk is high, down payment

CHARACTERISTICS OF PAYMENT IN ADVANCE

ApplicabilityRecommended for use in high-risk trade relationships or

export markets, and ideal for Internet-based businesses.RiskExporter is exposed to virtually no risk as the burden of risk

is placed nearly completely on the importer.ProsPayment before shipmentEliminates risk of non paymentConsMay lose customers to competitors over payment termsNo additional earnings through financing operations

Open Account• Exporter ships goods and bills the importer for

payment at sight or at a future date• Seller has full risk and country risk; no use of

funds; full cost of financing; competitive sales terms. Risks may be mitigated through credit insurance or standby LC.

• Buyer has use of funds; no product risk • Used for well-established customers with good

credit; low risk country; competitive sales reasons

O/A Least secure for exporter,

most attractive to buyer. Goods are shipped and documents are sent for payment at the appropriate time as may be agreed.

Exporter has little or no control over the process

Characteristics of Open Account PaymentsApplicability:Recommended for use (1) in secure trading relationships or

markets or (2) in competitive markets to win customers with the use of one or more appropriate trade finance techniques.

Risk:Exporter faces significant risk as the buyer could default on

payment obligation after shipment of the goods.

Pros: Boost competitiveness in the global market Establish and maintain a successful trade relationship

Cons:Exposed significantly to the risk of non payment Additional costs associated with risk mitigation measures

Documentary Collection• Exporter ships goods and routes documents

through banks• Seller retains title until payment or acceptance. • Buyer must agree to allow bank to pay seller on

a sight draft, or accept a time draft prior to receiving title docs for Customs.

• Used for well-established customers with good credit; low risk country; competitive sales reasons

Sight Draft• The sight draft is most commonly used in international trade. In a sight

draft, the payment is on demand or on presentation of the negotiation documents to the paying bank or the importer. In practice, the bank may pay within three (3) working days (not instantly) after the receipt and review of the negotiation documents and if they are in order, that is, the documents comply exactly to the letter of credit (L/C) stipulations.

• In certain countries where the business relationships between the exporter and the bank is well established, the bank may pay the exporter a few hours after the receipt of the negotiation documents that are in order.

• In the sample L/C it was stipulated "available by your draft(s) drawn at sight", as such the payment is by sight draft(s).

Term DraftThe term draft--(time draft or usance draft)---is used in a

deferred payment arrangement. The payment is on the maturity date determinable in accordance with the stipulations of the letter of credit (L/C). The maturity date can be at a stated period after sight or after date:

After sight after the draft is presented to the drawee for acceptance, for example, "at 90 days sight" and "at 120 days after sight".

After date after a specific date, for example, "at 150 days B/L date" (i.e., the maturity date is 150 days after the date of the bill of lading) and "at 180 days after date" (i.e., the maturity date is 180 days after the date of the draft).

Unless the maturity date is tied to a specific date, the importer may refuse to accept the draft until the goods have arrived, such deferred acceptance can extend the maturity date.

Documentary Collections-The Role of the BanksBoth banks act as facilitators, similar to a trusted “collection

agency”, each looking out for their client’s interestsNeither bank guarantees payment Seller’s Bank:Receives copy of Direct Collection Letter (DCL) w/ tracking

numberTracks maturity dates and follows up with messages to buyer’s

bank if necessaryBuyer’s Bank:Receives DCL and shipping docs from seller (or their forwarder)Gets instructions from buyer to pay / not payResponsibility to retain title docs until payment/acceptancePays seller’s bank (not seller), OR notifies seller’s bank of non-

payment and returns title documents to seller’s bank

Documentary Collections-The Seller’s PerspectiveAs a selling term Fairly competitive payment term relative to cash

in advance or LC:-

Benefits / Risks Buyer could refuse the shipment• Incoterm Issues• Air shipment v. Ocean shipment• Time draft v. Sight draft• Stock item v. Custom manufactured

Cost / ConvenienceLow cost• Easy documentation (often done by forwarder) by web

software or paper• No examination of docs

Best Bet (lowest risk)Sight drafts, ocean shipments

Documentary Collections-The Buyer’s Perspective

As a purchasing term Strongly preferable to having to issue an import LC or provide cash in advance.

Benefits / Risks Retain ability to refuse shipment• If a sight draft, no inspection of goods prior to payment• Control when and if payment is made, even on an

accepted time draft• No meaningful examination of docs

Cost / Convenience No credit line usage • Low processing costs• Can defer payment on sight drafts until ship arrives

Direct Collection-Sight Draft

1.Seller makes shipment to buyer2.Draft, documents and direct collection letter sent to

buyer’s bank copy of DCL to seller’s bank (2a)3.Draft and copy of invoice sent to buyer4.Buyer agrees to allow bank to debit account and pay5.Title documents released to buyer for Customs

clearance6.Payment made to seller’s bank7.Seller’s acc’t is credited

Direct Collection-Time Draft1.Seller makes shipment to buyer2.Draft, documents and direct collection letter sent to

buyer’s bank with copy of DCL to seller’s bank3.Time draft and invoice sent to buyer4.Accepted (signed) draft returned to buyer’s bank5.Title documents released to buyer for Customs

clearance6.Advice of acceptance sent to seller’s bank7.Acknowledgement of acceptance sent to seller8.At maturity and uyer’s authorization, buyer’s

account is debited9.Payment made to seller’s bank10.Seller’s acct is credited

Characteristics of Documentary Collection

Applicability:Recommended for use in established trade relationships

and in stable export markets.Risk:Exporter is exposed to more risk as D/C terms are more

convenient and cheaper than an LC to the importer.Pros:Bank assistance in obtaining paymentThe process is simple, fast, and less costly than LCsCons:Banks’ role is limited and they do not guarantee paymentBanks do not verify the accuracy of the documents

Letter of Credit L/C• An LC, also referred to as a documentary credit, is a

contractual agreement where by a bank in the buyer’s country, known as the issuing bank, acting on behalf of its customer (the buyer or importer), authorizes a bank in the seller’s country, known as the advising bank, to make payment to the beneficiary (the seller or exporter) against the receipt of stipulated documents.

• The LC is a separate contract from the sales contract on which it is based and, therefore, the bank is not concerned whether each party fulfills the terms of the sales contract.

• The bank’s obligation to pay is solely conditional upon the seller’s compliance with the terms and conditions of the LC. In LC transactions, banks deal in documents only, not goods.

Characteristics of Letter of CreditApplicability:Recommended for use in new or less-established trade

relationships when you are satisfied with the credit worthiness of the buyer's bank.

Risk:Risk is evenly spread between seller and buyer provided all

terms and conditions are adhered to.Pros:Payment after shipment.A variety of payment, financing and risk mitigation optionsCons:Process is complex and labor intensiveRelatively expensive in terms of transaction costs

TYPES OF LETTER OF CREDITIrrevocable Letter of Credit Revocable letter of creditConfirmed Letter of CreditUnconfirmed Special Letters of Credit or Standby letter of

creditInland letter of creditBack to Back letter of CreditBank lines of Credit LOC

7. Documents

3. Letter of Credit

Applicant Importer/Buyer

Exporter’s Bank/ Advising Bank

Importer’s Bank/ Issuing Bank

Buyer & Seller Agree

6. Documents 8.

Documents

2. Application

1. 1.

5. Product is Shipped

2.

9.

10.

Export Letter of Credit Cycle

4.Letter of Credit

BeneficiaryExporter/Seller

7. Documents

3. Letter of Credit

Applicant Importer/Buyer

Exporter’s Bank/ Advising Bank/

Confirming Bank

Importer’s Bank/ Issuing Bank

Buyer & Seller Agree

6. Documents 8.

Documents

2. Application

1. 1.

5. Product is Shipped

2.

9.

10.

ConfirmedLetter of Credit

Cycle

4.ConfirmedLetter of

Credit

BeneficiaryExporter/Seller

Confirming Bank

3a. L/C

3a. Confirmed L/C

Transferable Letter of Credit

Seller/Exporters Bank Advising Bank

Transferring BankManufacturer’s Bank

Importer

Exporter/Seller

9. $50,000 Received6.

Documents & BL

1. LC Application

5. Product Shipped to Seller or directly to Importer

Product

Importer’s Bank/ Issuing Bank

2. Transferable LC $50,000

3. Transferable LC $30,000

4. LC $30,000

7. Documents

& BL

8. Documents

& BL

9. Documents

& BL

10. $30,000

Received

Export Financing Exporters naturally want to get paid as quickly as

possible, while importers usually prefer to delay payment until they have received the goods. Because of the intense competition for export markets, being able to offer attractive payment terms customary in the trade is often necessary to make a sale. Exporters should be aware of the many financing options open to them so that they choose the most acceptable one to both the buyer and the seller.

Export credit can be broadly classified into

• Pre-shipment finance and • post shipment finance. • Preshipment

finance refers to finance extended to purchase, processing or packing of goods meant for exports

• Financial assistance extended after the shipment of exports falls within the scope of post shipment finance

PACKING CREDIT• As loan or cash credit against pledge or hypothecation.• Verification of Exporter-Importer Code No. issued by

DGFT.• Party should not be in the RBI Caution

list or ECGC Special Approval List.• Export is not to a listed country• Verify order/LC• Up-to date knowledge of export policy• Commodity should not be in the negative list.• Commodity should have a good market• Terms of contract• No FEMA violation• Borrower should be credit worthy.

• Working capital may be defined as funds required to carry the required level of Current assets to enable the industry to carry on its operations at the expected levels uninterruptedly..

• The guidelines set by Nayak Committee for computation of WC finance quantum for village, tiny and other SSI industries to a minimum extent of 20% of Projected/ Accepted Turnover to continue Guidelines with regard to specific activities / industries / situations to continue (Sugar / tea industries, Rehabilitation cases, Export Financing etc.) Banks may consider Cash Flow approach of financing in order to close the gap between the sanctioned limits and the utilization levels …

Quantum of finance:• FOB value of goods minus profit and credit

margin Cost of production less margin (can be more if the domestic cost is more than the FOB value and the difference is accounted as incentives like duty draw-back etc. subject to export production finance guarantee of ECGC).

• In the case of exports on CIF value basis PC can be granted towards insurance and freight also

• Period of finance: to coincide with the date for shipment and normally up to 180 days

Clean Packing Credit• Granted to credit worthy parties where advance

payment is required to be made to the supplier. • Quantum determined based on the likely purchase

pattern of the exporter with their suppliers. • Period of CPC is determined based on the

facts of each case (but not later than the period of contract /LC.

• A higher margin of say 25% should be stipulated, collected each time and remitted along with PC to the supplier.

• CPC should be converted as PC or Bills

EXPORT FINANCE

• PRE SHIPMENT finance : Deals with the finance schemes available before the shipment has been made.

• POST SHIPMENT finance : on the contrary deals with credit available after the goods have shipped.

Both stages are crucial for the exporter

Pre-shipment finance

• PSF.. Offer liquidity to the exporter to produce raw materials, carry out processing, packing, transporting and warehousing of the goods to be exported.

• Pre-Export Finance: provision of funds to cover the period between signing of purchase orders and payment (short-term, working capital)

• –Pre-export finance typically covers:• Cost of inland transport to port• Purchase of raw materials for processing

• Cost of processing• Storage costs

Illustrative procedure (commodities)

• Exporter provides title to or pledges products to bank• –Products that have yet to be produced• –Products that have been produced (warehouse

receipt)• Bank provides credit facility• Payment• –Trader takes delivery• –Bank receives payment directly from buyer• »Escrow account• »Evidence account

Methods of Pre-Export Finance• Open Account: –Exporter ships goods without any guarantee of

payment, thereby financing importer–Risk of transaction dependent on relationship/importer integrity.

• Documentary letter of credit (see UCC Art. 5 and UCP 500): Letter from bank, addressed to exporter, in which bank promises to pay or accept drafts if exporter conforms 100% to conditions within the letter.

• Three parties: • –Issuer: the issuing bank• –Account party (importer)• –Beneficiary (exporter) • •Three agreements• –Trade contract between importer and exporter• –Documentary credit between bank and exporter• –Reimbursement agreement between bank and importer

Documentary Letter of creditRevocable/Irrevocable• –A revocable letter of credit can be cancelled or amended by the issuing

bank; the bank does not need the exporter/beneficiary’s consent.Confirmed/Unconfirmed• –Issuing bank forwards letter of credit to exporter’s bank• –Exporter’s bank promises to pay exporter (confirms l/c)• –In an unconfirmed transaction, the advising bank acts as the issuing

bank’s agent and bears no obligation to exporterBack-to-back• –Typically used by brokers, the letter of credit allows the beneficiary to

assign its rights in one letter of credit to the issuer of a second letter of credit

• –Both letters of credit must require identical documentsTransferable• –The original beneficiary can transfer the letter of credit to third parties

Documentary Letter of credit• Revolving• –Typically used in construction contracts• –Allows beneficiary to draw on the letter of credit, up to a certain

amount, usually without presentation of documents• –The account party replenishes the account“Red clause” letter of credit• –Exporter can use to obtain pre-shipment finance by providing either (i)

a statement of purpose or (ii) an undertaking to provide specified documents.

• –Issuing bank provides exporter with a percentage of the L/C amount• –Advising bank guarantees reimbursement“Green clause” letter of credit• –Similar to “red clause” letters of credit, but pre-shipment finance is

contingent upon the production of warehouse receipts…

Letter of credit SettlementSight payment (sight draft)• –Exporter presents documents and receives paymentDeferred payment (dated draft)• –Exporter presents documents and receives payment at some

specified future timeAcceptance (time draft)• –Exporter (i) presents documents and (ii) draws a usance draft• –Bank accepts bill of exchange for payment on a future date Negotiation• –Exporter may choose a bank and negotiate the payment of a

sight or usance draft• –Bank will either:• »Advance payment with recourse to the exporter• »Advance payment less a fee (discount)• »Pay exporter when issuing bank provides payment

Post shipment Finance

• Provides credit facility from the date shipment of the goods to the time export payment is realized ( expenses between period of shipment dispatch and payment realisation…

Export Finance –Post-Export

Post-Export Finance (medium/long-term)• –Post-Export finance typically covers:• •Account receivables• •Equipment• •Other fixed assets–Methods of Post-Export Finance• •Revolving line of credit• •Term loan • •Finance accounts receivable

Methods of Post-Export FinanceFinance account receivables–Typically used in two instances• •Undercapitalized company with permanent financing

need• •Temporary insufficient cashflow–Banks provide loan secured by:• •Assignment of receivables• •Assignment of commodity inventory–Loan• •Made on a revolving basis against a pool of receivables–Borrower• •Responsible for collecting from customers• •Responsible for 100% loan repayment despite inability to

collect from customers

Export Finance –Forms of Risk

Commercial risk•The risk that either party will not fulfill its

obligationsTransportation risk•The risk that goods become damaged or destroyed

during transportExchange risk• •The risk that currency fluctuations will affect the

value of the transactionPolitical risk• •The risk that government policy changes, wars,

embargoes, etc., will prevent the conclusion or affect the value of the transaction

Indian Case study ; RBI sources !• PRE-SHIPMENT EXPORT CREDIT, Definition:

…any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment / working capital expenses towards rendering of services on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods / services from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgement of export orders or letter of credit with the bank has been waived.

Period of AdvanceThe period for which a packing credit advance may be

given by a bank will depend upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the relative goods / rendering of services.

It is primarily for the banks to decide the period for which a packing credit advance may be given, having regard to the various relevant factors so that the period is sufficient to enable the exporter to ship the goods / render the services

• If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest to the exporter ab initio.

• RBI would provide refinance only for a period not exceeding 180 days.

Disbursement of Packing Credit

Banks may also maintain different accounts at various stages of processing, manufacturing, etc. depending on the types of goods / services to be exported, e.g. hypothecation, pledge, etc., accounts and may ensure that the outstanding balance in accounts are adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount, etc.

Banks should continue to keep a close watch on the end-use of the funds and ensure that credit at lower rates of interest is used for genuine requirements of exports. Banks should also monitor the progress made by the exporters in timely fulfillment of export orders.

Liquidation of Packing CreditThe packing credit / pre-shipment credit granted

to an exporter may be liquidated out of proceeds of bills drawn for the exported commodities on its purchase, discount etc., thereby converting pre-shipment credit into post-shipment credit. Further, subject to mutual agreement between the exporter and the banker it can also be repaid / prepaid out of balances in Exchange Earners Foreign Currency A/c ( EEFC A/c ) as also from rupee resources of the exporter to the extent exports have actually taken place.

Running Account' FacilityIn many cases, the exporters have to procure raw

material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of letters of credit / firm export orders from the overseas buyers. Having regard to difficulties being faced by the exporters in availing of adequate pre-shipment credit in such cases, banks have been authorized to extend Pre-shipment Credit ‘Running Account’ facility in respect of any commodity, without insisting on prior lodgment of letters of credit / firm export orders, depending on the bank’s judgment regarding the need to extend such a facility and subject to the following conditions:

a) Banks may extend the ‘Running Account’ facility only to those exporters whose track record has been good as also to Export Oriented Units (EOUs) / Units in Free Trade Zones / Export Processing Zones (EPZs) and Special Economic Zones (SEZs)

(b) In all cases where Pre-shipment Credit ‘Running Account’ facility has been extended, letters of credit / firm orders should be produced within a reasonable period of time to be decided by the banks.

(c) Banks should mark off individual export bills, as and when they are received for negotiation / collection, against the earliest outstanding pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to add that, while marking off the preshipment credit in the manner indicated above, banks should 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.

(d) Packing credit can also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter.

Export Credit against Proceeds of Cheques, Drafts, etc. Representing AdvancePayment for Exports

Where exporters receive direct remittances from abroad by means of cheques, drafts, etc. in payment for exports, banks may grant export credit at concessive interest rate to exporters of good track record till the realization of proceeds of the cheque, draft etc. received from abroad, after satisfying themselves that it is against an export order, is as per trade practices in respect of the goods in question and is an approved method of realization of export proceeds as per extant rules.

Rupee Export Packing Credit to Manufacturer Suppliers for Exports Routed through STC/MMTC/Other Export Houses,

Agencies, etc.

Banks may grant export packing credit to manufacturer suppliers who do not have export orders/letters of credit in their own name, and goods are exported through the State Trading Corporation/Minerals and Metal Trading Corporation or other export houses, agencies, etc.

Requirements (a) Banks should obtain from the export house a letter

setting out the details of the export order and the portion thereof to be executed by the supplier and also certifying that the export house has not obtained and will not ask for packing credit in respect of such portion of the order as is to be executed by the supplier.

(b) Banks should, after mutual consultations and taking into account the export requirements of the two parties, apportion between the two i.e. the Export House and the Supplier, the period of packing credit for which the concessionary rate of interest is to be charged. The concessionary rates of interest on the pre-shipment credit will be available up to the stipulated periods in respect of the export house/agency and the supplier put together.

The export house should open inland L/Cs in favour of the supplier giving relevant particulars of the export L/Cs or orders and the outstandings in the packing credit account should be extinguished by negotiation of bills under such inland L/Cs. If it is inconvenient for the export house to open such inland L/Cs in favour of the supplier, the latter should draw bills on the export house in respect of the goods supplied for export and adjust packing credit advances from the proceeds of such bills. In case the bills drawn under such arrangement are not accompanied by bills of lading or other export documents, the bank should obtain through the supplier a certificate from the export house at the end of every quarter that the goods supplied under this arrangement have in fact been exported. The certificate should give particulars of the relative bills such as date, amount and the name of the bank through which the bills have been negotiated.

Export of Services

In view of the large number of categories of service exports with varied nature of business as well as in the environment of progressive deregulation where the matters with regard to micromanagement are left to be decided by the individual financing banks, the banks may formulate their own parameters to finance the service exporters.

Exporters of services qualify for working capital export credit (pre and post shipment) for consumables, wages, supplies etc.• The proposal is a genuine case of export of services.• The item of service export is covered under

Appendix – 36 of the Hand Book (Vol.1)• The exporter is registered with the Export

Promotion Council for services • There is an Export Contract for the export of the

Service• There is a time lag between the outlay of working

capital expense and actual receipt of payment from the service consumer or his principal abroad.

• There is a valid Working Capital gap i.e. service is provided first while the payment is received some time after an invoice is raised.

• Banks should ensure that there is no double financing/excess financing.

• The export credit granted does not exceed the foreign exchange earned less the

• margins if any required, advance payment/credit received.

• Invoices are raised• Inward remittance is received in Foreign

Exchange.• Company will raise the invoice as per the

contract where payment is received from overseas party, the service exporter would utilize the funds to repay the export credit availed of from the bank.

India: POST-SHIPMENT EXPORT CREDIT

Post-shipment Credit' means any loan or advance granted or any other credit provided by a bank to an exporter of goods / services from India from the date of extending credit after shipment of goods / rendering of services 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 allowed by the Government from time to time.

Types of Post-shipment Credits:(i)Export bills purchased/

discounted/ negotiated.

(ii) Advances against bills for collection.

(iii) Advances against duty drawback receivable from Government

Liquidation of Post-shipment Credit:Post-shipment credit is to be liquidated by the

proceeds of export bills received from abroad in respect of goods exported / services rendered. Further, subject to mutual agreement between the exporter and the banker it can also be repaid / prepaid out of balances in Exchange Earners Foreign Currency Account (EEFC A/C) as also from proceeds of any other unfinanced (collection) bills. Such adjusted export bills should however continue to be followed up for realization of the export proceeds and will continue to be reported in the XOS statement.

Rupee Post-shipment Export Credit

• the case of demand bills, the period of advance shall be the Normal Transit Period (NTP) as specified by FEDAI.

• In case of usance bills, credit can be granted for a maximum duration of 365 days from date of shipment inclusive of Normal Transit Period (NTP) and grace period, if any. However, banks should closely monitor the need for extending post shipment credit up to the permissible period of 365 days and they should influence the exporters to realize the export proceeds within a shorter period.

• Normal transit period' means the average period normally involved from the date of negotiation / purchase / discount till the receipt of bill proceeds in the Nostro account of the bank concerned, as prescribed by FEDAI from time to time. It is not to be confused with the time taken for the arrival of goods at overseas destination.

Post-shipment Advances against Duty Drawback Entitlements• Banks may grant post-shipment advances to exporters

against their duty drawback entitlements as provisionally certified by Customs Authorities pending final sanction and payment.

• The advance against duty drawback receivables can also be made available to exporters against export promotion copy of the shipping bill containing the EGM Number issued by the Customs Department. Where necessary, the financing bank may have its lien noted with the designated bank and arrangements may be made with the designated bank to transfer funds to the financing bank as and when duty drawback is credited by the Customs

ECGC Whole Turnover Post-shipment Guarantee Scheme

The Whole Turnover Post-shipment Guarantee Scheme of the Export Credit Guarantee Corporation of India Ltd. (ECGC) provides protection to banks against non-payment of post-shipment credit by exporters. Banks may, in the interest of export promotion, consider opting for the Whole Turnover Post-shipment Policy. The salient features of the scheme may be obtained from ECGC.

DEEMED EXPORTS - CONCESSIVE RUPEE EXPORT CREDIT

Banks are permitted to extend rupee pre-shipment and post-supply rupee export credit at concessional rate of interest to parties against orders for supplies in respect of projects aided/financed by bilateral or multilateral agencies/funds (including World Bank, IBRD, IDA), as notified from time to time by Department of Economic Affairs, Ministry of Finance under the Chapter "Deemed Exports" in Foreign Trade Policy, which are eligible for grant of normal export benefits by Government of India.

INTEREST ON EXPORT CREDIT• A ceiling rate has been prescribed for rupee export credit

linked to Benchmark Prime Lending Rates (BPLRs) of individual banks available to their domestic borrowers. Banks have, therefore, freedom to decide the actual rates to be charged within the specified ceilings. Further, the ceiling interest rates for different time buckets under any category of export credit should be on the basis of the BPLR relevant for the entire tenor of export credit.

• ECNOS: ECNOS means Export Credit Not Otherwise Specified in the Interest Rate structure for which banks are free to decide the rate of interest keeping in view the BPLR and spread guidelines. Banks should not charge penal interest in respect of ECNOS.

Interest Rate Structure• Pre-shipment Credit (from the date of advance) : (a) Up to 180

days / (b)Against incentives receivable from Government covered by ECGC Guarantee up to 90 days.

• Post-shipment Credit (from the date of advance) : a) On demand bills for transit period (as specified by FEDAI) (b) Usance bills (for total period comprising usance period of export bills, transit period as specified by FEDAI, and grace period, wherever applicable)

Up to 90 days

Up to 365 days for exporters under the Gold Card Scheme.

(c) Against incentives receivable from Govt. (covered by ECGC Guarantee) up to 90 days

(d) Against undrawn balances (up to 90 days)

(e) Against retention money (for supplies portion only) payable within one year from the date of shipment (up to 90 days)

EXPORT CREDIT IN FOREIGN CURRENCY• Pre-shipment Credit in Foreign Currency (PCFC): The

scheme is an additional window for providing pre-shipment credit to Indian exporters at internationally competitive rates of interest. It will be applicable to only cash exports. The instructions with regard to Rupee Export Credit apply to export credit in foreign currency also mutatis mutandis, unless otherwise specified.

Source of Funds for Banks• The foreign currency balances available with the bank in

Exchange Earners Foreign Currency (EEFC) Accounts, Resident Foreign Currency Accounts RFC(D) and Foreign Currency (Non-Resident) Accounts (Banks) Scheme could be utilized for financing the pre-shipment credit in foreign currency.

• Banks are also permitted to utilise the foreign currency balances available under Escrow Accounts and Exporters Foreign Currency Accounts for the purpose, subject to ensuring that the requirements of funds by the account holders for permissible transactions are met and the limit prescribed for maintaining maximum balance in the account under broad based facility is not exceeded.

Post-shipment Export Credit in Foreign Currency• Banks may utilise the foreign exchange

resources available with them in Exchange Earners Foreign Currency Accounts (EEFC), Resident Foreign Currency Accounts (RFC), Foreign Currency (Non-Resident) Accounts (Banks) Scheme, to discount usance bills and retain them in their portfolio without resorting to rediscounting. Banks are also allowed to rediscount export bills abroad at rates linked to international interest rates at post-shipment stage.