export financing - concept and strategic issues

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A Report on

Presented for

Seminar On

CONTEMPORARY MANAGEMENT ISSUE

Submitted to Rajasthan Technical University ,Kotain partial fulfillment for the Award of the Degree of

Master of Business Administration

SUBMITTED BY SUBMITTED TO SAURABH JAIN Dr. AMIT SHARMA

GOVT. ENGINEERING COLLEGE, AJMER GOVT ENGINEERING COLLEGE, AJMER

MBA-: PART 1 ( 2ND SEM )

EXECUTIVE SUMMARY - :

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Credit and finance is the life blood of any business whether domestic or

international. It is more important in the case of export transactions due to

the prevalance of novel non-price competitive techniques encountered by

exporters in various nations to enlarge their share of world markets.

The selling techniques are no longer confined to mere quality, price or delivery

schedules of the products but are extended to payment terms offered by

exporters. Liberal payment terms usually score over the competitors not only

of capital equipment but also of consumer goods.

The payment terms however depend upon the availability of finance to

exporters in relation to its quantum, cost and the period at pre-shipment

and post-shipment stage.

India has a mission to capture 2% of the global share of trade by 2010, up from

the Present level of less than 1%. Export is one of the lucrative business

activities in India. In the light of growing need & importance of exports for our

country it is of utmost importance that everyone should have an insight in thefield of exports.

In the course of last decade, the export scenario in India has undergone a

tremendous change. The liberalization initiated by the government, the keen

competition in the market place & the rapid increase in the export of services

have all combined to change the picture completely. The government also

provides various promotional schemes to the exporters for earning valuable

foreign exchange for the country and for meeting their requirements for importing

modern technology and essential inputs. Besides, the income from export

business is also exempted to the specified extent under the Income Tax Act,

1961, Refund of Central Excise and Custom Duty on export is also made under

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the Duty Drawback Scheme of the Government. There is no Sales Tax on

products meant for exports.

This project is an attempt to throw light on the various sources of export finance

available to exporters, the schemes implemented by ECGC and EXIM for export

promotion and analysis of risk in export trade related services.

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TABLE OF CONTENTS

S.No TITLE PAGE No.

1. Introduction to Exports 5

2. Concept of Export Financing 8

3. Import Export Procedure 10

4. Types of Export Finance 15

5. Letter of Credit 17

6. Some Importanant Concepts in 23

Export Financing

7. Risks Involved In Export Business 26

8. Major Financial Institutions 30

9. Export Promotion Schemes 41

And Incentives

10. Policy Initiatives And Incentives by 45

the State Government

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1) INTRODUCTION TO EXPORTS:-

Export in simple words means selling goods abroad. International market being a

very wide market, huge quantity of goods can be sold in the form of exports.

Export refers to outflow of goods and services and inflow of foreign exchange.

Export finance is a short term working capital finance allowed to an exporter.

Finance and credit are available to help not only export production but also

to sell overseas customers on credit . The Foreign Trade (Development and

Regulation) Act, 1992 defines export as taking out of India any goods by land,

sea or air. "Export" with its grammatical variations and cognate expressions,

means taking out of India to a place outside India, as per Section 2 (18) or the

Customs Act, 1962. The CA further defines "export goods" as "any goods which

are to be taken out of India to a place outside India".

The Customs Act also contains definition of exporter, who in relation to any

goods at any time between their entry for export and the time when they are

exported includes any owner or any person holding himself out to be the

exporter.

NEED & IMPORTANCE OF EXPORT:-

A. From the Viewpoint of a Nation:

1. Foreign Exchange :- Export helps country to earn valuable foreign

exchange, which is mainly required to pay for import of capital goods,

raw materials, spares and components.

2. Balance of Payments: A countrys external economic strength depends

upon its balance of payment position. Since export brings in foreign

exchange, it helps a country to solve and improve its Balance of

Payments position.

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3. Employment opportunities: Export trade calls for more production,

which ultimately opens door for more employment opportunities, not

only in the export sector but also in allied sectors like banking,

insurance etc.

4. Financing of Development plans: Export earning can be a source of

financing development plans through the import of capital goods and

technology. The foreign exchange earned thru exports can be utilized

for planned economic development of a country.

5. Optimum utilization of Resources: There can be optimum use of

resources. The excess production can be directed to other countries,

there by enabling the exporting country to earn favorable foreign

exchange.

6. Research & Development: Goods to be exported to other countries

may not be sold in the same form as it is available in the local markets.

Products have to be redesigned according the requirement of the

importing country. This leads to constant R & D, which ultimately leads

to improve technology and production system. The fruits of R & D

would benefit the customers not only in the overseas market but also in

the domestic markets.7. Spread Effect: Because of export industry, other sectors also expand

such as banking, transport, insurance etc. and at the same time a

number of ancillary industries come into existence to support the

export sector.

8. High Standard of Living: Export trade calls for more production, which

in turn increases employment opportunities. More employment means

more purchasing power as a result of which people enjoy new and

better quality goods, which in turn improves standard of living of the

people.

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B. From the viewpoint of a business organization:

1. Reputation: An organization, which undertakes exports can exports,

can bring fame to its company not only in export market but also in

domestic market. These companies enjoy worldwide reputation.

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2) CONCEPT OF EXPORT FINANCING :-

Export finance is a short term working capital finance allowed to an exporter.

Finance and credit are available to help not only export production but alsoto sell overseas customers on credit . The short-term finance is required to

meet working capital needs. The short-term finance is required to meet

working capital needs. The working capital is used to meet regular and

recurring needs of a business firm. The regular and recurring needs of a

business firm refer to purchase of raw material, payment of wages and salaries,

expenses like payment of rent, advertising etc.

The exporter may also require term finance. The term finance or term loans,

which is required for medium and long term financial needs such as purchase of

fixed assets and long term working capital.

2.1) OBJECTIVES OF EXPORT FINANCE

To cover commercial & Non-commercial or political risks attendant on

granting credit to a foreign buyer.

To cover natural risks like an earthquake, floods etc.

2.2) APPRAISAL

Appraisal means an approval of an export credit proposal of an exporter. While

appraising an export credit proposal as a commercial banker, obligation to the

following institutions or regulations needs to be adhered to:-

Obligations to the RBI under the Exchange Control Regulations

Obligations to the Trade Control Authority under the EXIM policy

Obligations to ECGC

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Guidenlines for Banks dealing in Export Finance : -

When a commercial bank deals in export finance it is bound by the ensuing

guidelines: -

a) Exchange control regulations.

b) Trade control regulations.

c) Reserve Banks directives issued through IECD.

d) Export Credit Guarantee Corporation guidelines.

e) Guidelines of Foreign Exchange Dealers Association of India.

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3 ) Import Export Procedure

1 Seller and Buyer conclude a sales contract, with method of payment usually

by letter of credit (documentary credit).

2 Buyer applies to his issuing bank, usually in Buyer's country, for letter of

credit in favor of Seller (beneficiary).

3 Issuing bank requests another bank, usually a correspondent bank in Seller's

country, to advise, and usually to confirm, the credit.

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4 Advising bank, usually in Seller's country, forwards letter of credit to

Seller informing about the terms and conditions of credit.

5 If credit terms and conditions conform to sales contract, Seller

prepares goods and documentation, and arranges delivery of

goods to carrier

6 Seller presents documents evidencing the shipment and draft (bill

of exchange) to paying, accepting or negotiating bank named in the

credit (the advising bank usually), or any bank willing to negotiate.

under the terms of credit

7 Bank examines the documents and draft for compliance with credit

terms. If complied with, bank will pay, accept or negotiate.

8 Bank, if other than the issuing bank, sends the documents and

draft to the issuing bank.

9 Bank examines the documents and draft for compliance with credit

terms. If complied with, Seller's draft is honored.

10 Documents release to Buyer after payment, or on other terms

agreed between the bank and Buyer.

11 Buyer surrenders bill of lading to carrier (in case of ocean freight)

in exchange for the goods or the delivery order.

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4) TYPES OF EXPORT FINANCE

4.1) PRE-SHIPMENT FINANCE

Meaning :

Pre-shipment is also referred as packing credit. It is working capital finance

provided by commercial banks to the exporter prior to shipment of goods. The

finance required to meet various expenses before shipment of goods is called

pre-shipment finance or packing credit.

Definition :

Financial assistance extended to the exporter from the date of receipt of the

export order till the date of shipment is known as pre-shipment credit. Such

finance is extended to an exporter for the purpose of procuring raw materials,

processing, packing, transporting, warehousing of goods meant for exports.

Importance of Finance at Pre- shipment stage :

To purchase raw material, and other inputs to manufacture goods.

To assemble the goods in the case of merchant exporters.

To store the goods in suitable warehouses till the goods are shipped.

To pay for packing, marking and labelling of goods.

To pay for pre-shipment inspection charges.

To import or purchase from the domestic market heavy machinery and othercapital goods to produce export goods.

To pay for consultancy services.

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To pay for export documentation expenses.

POST-SHIPMENT FINANCE

Meaning :

Post shipment finance is provided to meet working capital requirements after the

actual shipment of goods. It bridges the financial gap between the date of

shipment and actual receipt of payment from overseas buyer thereof. Whereas

the finance provided after shipment of goods is called post-shipment finance.

Definition :

Credit facility extended to an exporter from the date of shipment of goods till the

realization of the export proceeds is called Post-shipment Credit.

Importance of Finance at post-shipment stage

To pay to agents/distributors and others for their services.

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.

To pay towards ECGC premium.

To pay for freight and other shipping expenses.

To pay towards marine insurance premium, under CIF contracts.

To meet expenses in respect of after sale service.

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.

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5) LETTER OF CREDIT

Introduction :

This is one of the most popular and more secured of method of payment in

recent times as compared to other methods of payment. A L/C refers to the

documents representing the goods and not the goods themselves. Banks are not

in the business of examining the goods on behalf of the customers. Typical

documents, which are required includes commercial invoice, transport document

such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in

documents and not goods.

Definition :

A Letter of Credit can be defined as an undertaking by importers bank stating

that payment will be made to the exporter if the required documents are

presented to the bank within the validity of the L/C.

Parties involved in Letter of Credit:

Applicant: The buyer or importer of goods

Issuing bank: Importers bank, who issues the L/C

Beneficiary: The party to whom the L/C is addressed. The

Seller or supplier of goods.

Advising bank: Issuing banks branch or correspondent bank in

The exporters country to whom the L/C is send for

Onward transmission to the beneficiary.

Confirming bank: The bank in beneficiarys country, which

Guarantees the credit on the request of the issuing

Bank.

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Negotiating bank: The bank to whom the beneficiary presents his

Documents for payment under L/C

A Letter of Credit contains these elements:

A payment undertaking given by the bank (issuing bank) on behalf of the

buyer (applicant)

To pay a seller (beneficiary) a given amount of moneyon presentation of

specified documents representing the supply of goods within specific time

limits

These documents conforming to terms and conditions set out in the letter

of credit

Documents to be presented at a specified place.

The Issuing Bank's role is twofold:

To guarantee to the seller that if complete documents are presented, the

bank will pay the seller the amount due. This offers security to the seller

the bank says in effect "We will pay you if you present documents (XYZ)"

To examine the documents and only pay if these comply with the terms

and conditions set out in the letter of credit. This protects the buyer's

interests - the bank says "We will only pay your supplier on your behalf if

they present documents (XYZ) that you have asked for"

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Advantages of Letters of Credit

To the exporter:

No blocking of funds.

Clearance of import regulations.

Free from liability.

Pre- shipment finance.

Non-refusal by importer.

Reduction in bad-debts.

To the importer:

Better terms of trade.

Assurance of shipment of goods.

Overdraft facility.

No blocking of funds.

Delivery on time.

Better relations.

Disadvantages of Letters of Credit :

Lacks flexibility.

Complex method

Expensive for importer

Problem of revocable L/C

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Sample Document: Letter of Credit (Documentary Credit)

THE MOON BANK

INTERNATIONAL OPERATIONS

5 MOONLIGHT BLVD.,

EXPORT-CITY AND POSTAL CODE

EXPORT-COUNTRY

OUR ADVICE NO.

MB-5432

ISSUING BANK REF. NO. & DATE

SBRE-777 January 26, 2005

To,

UVW Exports

88 Prosperity Street East, Suite 707

Export-City and Postal CodeDear Sirs:

We have been requested by The Sun Bank, Sunlight City, Import-Country to advise

that they have opened with us their irrevocable documentary credit number SB-

87654

For account of DEF Imports, 7 Sunshine Street, Sunlight City, Import-Country in

your favor for the amount of not exceeding Twenty Five Thousand U.S. Dollars

(US$25,000.00) available by your draft(s) drawn on us at sight for full invoice value

Accompanied by the following documents:

1. Signed commercial invoice in five (5) copies indicating the buyer'sPurchase Order No. DEF-101 dated January 10, 2005

2. Packing list in five (5) copies.

3. . Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable

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copies, issued to order of The Sun Bank, Sunlight City, Import-Country, notify

the above accountee, marked "freight Prepaid", dated latest March 19, 2005,

and showing documentary credit number.

4. Insurance policy in duplicate for 110% CIF value covering Institute Cargo

Clauses (A), Institute War and Strike Clauses, evidencing that claims are

payable in Import-Country.

Covering: 100 Sets 'ABC' Brand Pneumatic Tools, 1/2" drive,

complete with hose and quick couplings, CIF Sunny Port

Shipment from: Moonbeam Port, Export-Country to Sunny Port, Import-Country

Partial shipment Prohibited

Tran-shipment Permitted

Special conditions:

1. All documents indicating the Import License No. IP/123456 dated January 18, 2005.

2. All charges outside the Import-Country are on beneficiary's account

Documents must be presented for payment within 15 days after the date of shipment.

Draft(s) drawn under this credit must be marked

Drawn under documentary credit No. SB-87654 of The Sun Bank,

Sunlight City, Import-Country, dated January 26, 2005

We confirm this credit and hereby undertake that all drafts drawn under and in conformity

with the terms of this credit will be duly honored upon delivery of documents as specified, if

presented at this office on or before March 26, 2005

Very truly yours,

__________________________

Authorized Signature

Unless otherwise expressly stated, this Credit is subject to the Uniform Customs and Practice

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for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No.

500.

6) SOME IMPORTANT CONCEPTS IN EXPORT

FINANCING

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6.1 - FORFEITING

Forfeiting is a mechanism of financing exports.

By discounting export receivables

Evidenced by bills of exchange or promissory notes

Without recourse to the seller (viz. exporter)

Carrying medium to long term maturities

On a fixed rate basis (discount)

Upto 100 percent of the contract value.

The word `forfeit' is derived from the French word `a forfeit' which means the

surrender of rights.

Simply put, Forfeiting is the non-recourse discounting of export receivables. In a

forfeiting transaction, the exporter surrenders, without recourse to him, his rights

to claim for payment on goods delivered to an importer, in return for immediate

cash payment from a forfeiter. As a result, an exporter in India can convert a

credit sale into a cash sale, with no recourse to the exporter or his banker.

All exports of capital goods and other goods made on medium to long term credit

are eligible to be financed through forfeiting.Receivables under a deferred

payment contract for export of goods, evidenced by bills of exchange or

promissory notes, can be forfaited.

Benefits accrue to an exporter from forfeiting - :

Converts a deferred payment export into a cash transaction, improving liquidity

and cash flow

Frees the exporter from cross-border political or commercial risks associatedwith export receivables

Finance up to 100 percent of the export value is possible as compared to 80-85

percent financing available from conventional export credit program

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As forfeiting offers without recourse finance to an exporter, it does not impact

the exporter's borrowing limits. Thus, forfeiting represents an additional source of

funding, contributing to improved liquidity and cash flow

Provides fixed rate finance; hedges against interest and exchange risks arising

from deferred export credit

Exporter is freed from credit administration and collection problems

Forfaiting is transaction specific. Consequently, a long term banking

relationship with the forfeiter is not necessary to arrange a forfeiting transaction

Exporter saves on insurance costs as forfeiting obviates the need for export

credit insurance

6.2 - FACTORING

Factoring may be defined as A contract by which the factor is to provide at least

two of the services, (finance, the maintenance of accounts, the collection of

receivables and protection against credit risks) and the supplier is to assigned to

the factor on a continuing basis by way of sale or security, receivables arising

from the sale of goods or supply of services.

Factoring offers smaller companies the instant cash advantage that was once

available only to large companies with high sales volumes. With Factoring,

there's no need for credit or collection departments, and no need to spend your

profits on maintaining accounts receivables.

In simple words...Factoring turns your receivable into cash today, instead of

waiting to be paid at a future date.

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7) RISKS INVOLVED IN THE EXPORT BUSINESS

Whether it be the exporter himself, or the bank financing the exporter in the pre-

shipment and post-shipment stages, or the bank negotiating the documents of

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the exporter, or the bank purchasing the Letter of Credit on behalf of the

exporter, or the bank adding its own confirmation to the overseas Irrevocable

Letter of Credit, or the factoring agent, or the forfaiting agent, or the bank adding

its guarantee in a bid bond each of these agencies or organisations are faced

with risk.

To understand each type of risk and to appreciate the effects of such risk, we

must delve into each of these kinds of risk associated with export trade

Payment for Goods

the risk of non-payment for goods will be dealt with in maximum detail while

compared to the other kinds of risk related to export trade. This is because the

risk of non-payment has several aspects to it.

COMMERCIAL RISKS

Insolvency of the buyer : - He is declared bankrupt if -

He has made a valid assignment, composition or other arrangement for thebenefit of his creditors generally.

If the buyer be an incorporated body -

An order has been made for compulsory winding up, or

An effective resolution has been passed for voluntary winding up provided that

such resolution is not merely for the purpose of reconstruction or amalgamation.

Wilful default of the buyer: - : This is reflected in the failure of the buyer to make

payment due within a specified period, normally four months from the due date,

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to the exporter. Here, by payment, we refer to the gross invoice value of the

goods delivered to and accepted by the buyer.

Buyers failure to accept the goods:- This means failure or refusal on the part of

the buyer to accept goods which have already been exported by the exporter.

Reasons generally cited for such events include quality disputes.

Insolvency of the bank opening the Irrevocable Letter of Credit:

Default of the bank opening the irrevocable Letter of Credit:

POLITICAL RISKS

Transfer of Payment risk: This refers to the imposition of any restriction by the

Government of the buyers country or any Government action which may block or

delay the transfer of payment made by the buyer.

War:

New import restrictions:

OTHER RISKS

Causes inherent in the nature of the goods:

Buyers failure:

Agents

failure: Risk also comes in the form of insolvency or protracted default

of any agent of the exporter.

Collecting Banks failure: Again, as in the above point, there is the risk of

insolvency or default of the collecting bank.

Shipments on consignment basis: Here the risk is two-fold: there is the political

risk of the agents country; there is also the commercial risk of non-payment by

ultimate buyers if the agent sells the goods to them on credit terms.

Shipments made by air: Where shipments are made by air, the buyers are

often able to obtain delivery of the goods from the airlines before making

payment of the bills or accepting them for payment, as the case may be. There

is the risk of the buyer failing to make the payment subsequently as per the

contract. This is generally referred to as shipping on OPEN DELIVERY terms.

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Exchange Risk

Exchange rate volatility is a fact of life. There is a continuous fluctuation in

exchange rates, thereby bringing uncertainty in receipt for exports and payments

against exports.

Extended Credit Period Risk

Extended credit period refers to bills carrying medium or long term maturities.

This involves receivables under a deferred payment contract for export of goods,

evidenced by bills of exchange or promissory notes. All exports of capital goods

and other goods made on medium to long term credit are classified as having an

extended credit period.

Risk arising out of an extended credit period or deferred payment for goods

exported is reduced to some extent through the mechanism of Forfaiting.

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8) MAJOR FINANCIAL AND OTHER INSTITUTIONS

For providing credit and finance and insuring export credit risk, there are 2

primary institutions i.e. EXIM Bank and ECGC.

8.1 - EXIM BANK

Exim Bank Act-Completed 28 years of operations.

Set up by an Act of Parliament in September 1981.

Commenced operations in March 1982.

Wholly owned by the Government of India.

Export-Import Bank of India was set up for the purpose of financing, facilitating

and promoting foreign trade in India. Exim is the principal financial institution in

the country for co-ordinating working of institutions engaged in financing

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exports .

Offices :-

Head office Mumbai.

A network of 13 offices in India and Overseas.

Domestic Offices - Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata,

Mumbai, New Delhi, Pune.

Overseas Offices - Budapest, Johannesburg, Milan, Singapore, Washington DC.

Purpose : -

The EXIM bank was established for the purpose of financing medium and long

term loan to the exporters thereby promoting foreign trade of India.

Main Objectives : -

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To provide financial assistance (medium and long term) to exporters and

importers.

To function as the principal financial institution for coordinating the working of

institutions engaged in providing export finance.

To promote Foreign Trade of India.

To deal with all matters that may be considered to be incidental or conducive to

the attainment of above objectives.

Functions : -

The assistance provided by EXIM Bank to the exporters can be grouped under

two heads:

Fund Based Assistance.

Non-Fund based Assistance.

The various assistance provided by EXIM Bank can be charted as

follows:

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INDIAN PARTIES.INDIAN BANKS.OVERSEAS BUYERS.OVERSEAS BANKS.

FINANCIALGUARANTEES.ADVISORY AND OTHERSERVICES.

ASSISTANCE OFFERED BY EXIM BANK

FUND BASED

ASSISTANCE

NON-FUND BASED

ASSISTANCE


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A. Fund Based Assistance : -

Assistance to Indian Exporters:

(a) It provides financial assistance to Deferred credit exports.

(b) It offers credit facilities to Deemed Exports.

(c) It financesIndian Joint Ventures in Foreign countries.

(d) Finances units inEPZ/ SEZ and 100% EOUs.(e) It provides Pre-shipment finance to exporters for procuring raw

materials and other inputs.

(f) It finances export/import of machinery and equipment on lease

basis.

(g) It provides Computer Software exporters foreign exchange loan

subject to RBI clearance.

(h) It provides finance facility against deferred credit to exporters of

consultancy, technology and other services.

(i) It provides finance to Indian exporters to undertake various export

marketing activities in India and abroad through Export Marketing

Fund (EMF).

(j) It also operates Export Development Fund (EDF) to finance techno-

economic survey/research or any other study for the development

of Indian Exports.

Assistance to Indian Commercial Banks:

(a) It provides Refinance Facilities so as to Indian exporters who

extend term credit to importers.

(b) It offers Export Bills Rediscounting Facility to commercial banks in

India who have earlier discounted bills of exporters.

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Assistance to Overseas Buyers:

(a) It offers Overseas Buyers Credit facility to foreign importers for

import of Indian capital goods and related services with repayment

spread over a period of years.

Assistance to Overseas Banks:

(a) Long term finance is also provided under Lines of Credit to

finance financial institutions abroad, who in turn, extend finance to

importers of their country to buy Indian Capital goods.

(b) It provides Relending Facility to overseas Banks to make available

term finance to their clients for import of Indian goods.

3. Non - fund Based Assistance : -

Guarantees and Bonds:

EXIM Bank provides non-fund base assistance in the form of guarantees in the

nature of Bid Bonds, Performance Guarantee etc. These guarantees are

provided together with Commercial Banks.

Advisory and Other Services:

It advises Indian companies, in Executing Contracts Abroad, and on sources of

overseas financing.It advises Indian exporters on global exchange control

practices.The EXIM Bank offers Financial and Advisory Services to Indianconstruction projects abroad.It advises small-scale manufacturers on export

markets and product areas.It provides Euro Financing sources and Global Credit

sources to Indian exporters.It assists the exporters under Forfeiting scheme.

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Exim Bank plays the role of an intermediary for facilitating the forfaiting

transaction between the Indian exporter and the overseas forfeiting agency.

Assistance is extended to Indian Promoter Companies by way of programmes

that address to different requirements of the promoter company in setting up of

the joint venture.

Overseas Investment Finance Programme for setting up joint ventures

and wholly owned subsidiaries abroad.

Asian Countries Investment Partners (ACIP) Programme for creation of a

joint venture in India with East Asian countries, through four facilities that

address different stages of a project cycle.

A RANGE OF EXPORT SERVICES PROVIDED BY EXIM BANK

EXIM INDIA provides a range of analytical information and export related

services necessary for globalization of Indian companies. EXIM INDIA through its

wide network of alliances with financial institutions, trade promotion agencies,

information providers across the globe assists externally oriented Indian

companies in their quest for excellence and globalization. Services include

search for overseas partners, identification of technology suppliers, negotiating

alliances, and development of joint ventures in India and abroad.

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It promotes Indian consultancy by having tie up with

International Finance Corporation, Washington D.C.

Africa Project Development Facility

Africa Enterprise Fund

Technical Assistance & Trust Funds

Mekong Project Development Facility

Eastern & Southern African Trade & Development Bank (PTA Bank)

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African Management Services Company (AMSCO), Netherlands

EXAMPLES

Gems & Jewellery Study - Zambia

Financial Training Mission - Kenya

Cement Project - Cameroon

Software - Madagascar

Wool Knitting - Vietnam

Textile - Nigeria

Refrigeration - Ghana

Financial Training - Poland

It promotes Knowledge building .There is EXIMIUS CENTRE FOR

LEARNING, BANGALORE which was set up, in October 1994, to organize

seminars and workshops in areas such as international trade & investment,

export marketing, quality, packaging, business opportunities in multilateral

agencies funded projects, sector and country specific programmes. It have

guest faculty from network partners such as IFC, World Bank, EBRD, UNIDO.

Research Studies on products, sectors, countries, macro economic issues

relevant to international trade and investment are carried out

INFORMATION Function

Exporters/Importers

Industry/Market Reports

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Trade Regulations & Laws

Country Reports

International Quality Standards

Partner Identification

Product Display

Examples of Information Services

Hungarian Pharmaceutical Sector

Importers of Sanitary ware, Castings in North America

Importers of Agro-chemicals in Eastern Europe

Study for ear buds market in Hungary

Study of the Indian Wine market for a Hungarian Company

Partner identification for an Italian Sanitary ware manufacturer

Study of the Indian Crane Industry for a Finnish company

Regulatory Framework for setting up a Pharma Project in China

Market report for Computer Monitors in India for a Singaporean firm

Study on Bicycle market in Eastern Europe for Indian Cycle

exporter

Market Potential for Denim in South East Asia

6.2 - EXPORT CREDIT GUARANTEE CORPORATION OF INDIA

LTD.

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In order to provide export credit and insurance support to Indian exporters,

the GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was

transformed into export credit guarantee corporation limited (ECGC) in 1964. Since

1983, it is now know as ECGC of India Ltd.

ECGC is a company wholly owned by the GOI. It functions under the

administrative control of the Ministry of Commerce and is managed by a Board of

Directors representing government, Banking, Insurance, Trade and Industry. The

ECGC with its headquarters in Bombay and several regional offices is the only

institution providing insurance cover to Indian exporters against the risk of non-

realization of export payments due to occurrence of the commercial and political

risks involved in exports on credit terms and by offering guarantees to commercial

banks against losses that the bank may suffer in granting advances to exports, in

connection with their export transactions.

OBJECTIVES OF ECGC:

To protect the exporters against credit risks, i.e. non-repayment by buyers

To protect the banks against losses due to non-repayment of loans by

exporters

COVERS ISSUED BY ECGC:

The covers issued by ECGC can be divided broadly into four groups:

1. STANDARD POLICIES issued to exporters to protect then against

payment risks involved in exports on short-term credit.

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2. SPECIFIC POLICIES designed to protect Indian firms against payment risk

involved in (i) exports on deferred terms of payment (ii) service rendered to foreign

parties, and (iii) construction works and turnkey projects undertaken abroad.

3. FINANCIAL GUARANTEES issued to banks in India to protect them from

risk of loss involved in their extending financial support to exporters at pre-shipment

and post-shipment stages; and

4. SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks

which add confirmation to letters of credit opened by foreign banks, Insurance cover

for Buyers credit, etc.

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9) EXPORT PROMOTION SCHEMES AND INCENTIVES

Schemes for Concessional Imports

Inorder to reduce or remove the anti-export bias inherent in the system of indirect

taxation and to encourage exports, several schemes have been established

which allow importers to benefit from tariff exemptions, especially on inputs. The

schemes have been summarized as under:

Scheme About the Scheme Objective

DutyDrawback

The rebate of duty chargeable onany imported or excisablematerial used in the manufactureof goods exported from India;based on industry drawback rates

Provide a level playing field to the

countrys exporters so as to excludethe export production from theincidence of import duty and otherindirect taxes

ExportPromotionCapitalGoods

Import of capital goods atconcessional rate of duty subjectto an appropriate exportobligation accepted by theexporter

Reduce the incidence of highcapital cost on export prices tomake exports competitive by way ofreduced import duty on capitalgoods

DutyExemption

An advance licence is used toallow duty free import of physicalinputs used in producing exportsproducts after making normalallowance for wastage

Promote duty free imports whenlarge quantities of standard rawmaterials are required for exportproduction

DutyRemission

The grant of customs duty creditis on post export basis as a

Neutralizes the incidence ofcustoms duty by assuming the

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specified percentage of fob valueof exports made in freelyconvertible currency

inputs as imported and additionalduty is not levied

Schemes to Promote Export Production and RelatedInfrastructure

The development of export related infrastructure and enclaves, which create an

environment conducive for export production, is crucial to sustain the export

growth. Schemes for concessional import for firms primarily engaged in export

production are summarized as under:

Scheme About the Scheme ObjectiveExport-orientedUnits

Offers wide option in locations forunits under DTA(Domestic TariffArea)

Attract large number of exporters toset up their units in these zones

Export

ProcessingZones

Special enclaves separated from

DTA by fiscal barriers

Develop infrastructure for exportproduction at internationally

competitive prices and environmentand economic development

SpecialEconomicZones

A duty-free enclave to be treatedas a foreign territory for tradeoperations and duties and tariffs

Act as growth engines that boostmanufacturing, augment exportsand generate employment

Agri-Export

Zones

Services which are expected tobe managed and coordinated bystate government/corporate

sector and include variousprovisions

Promote agricultural exports fromthe country and remunerativereturns to the farming community in

a sustained manner

SoftwareTechnologyParks

A software development unit isset up for software development ,data entry and conversion, dataprocessing, data analysis andcontrol data management or callcenter services for exports

Facilitate export oriented productionof computer software

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ElectronicHardwareTechnologyParks

A unit can be set up for manufacture and development ofelectronic hardware or electronichardware and software in anintegrated manner

Facilitate export oriented productionof computer hardware

Export Houses/Trading Houses/Star Trading Houses/SuperstarTrading Houses

The objective of the scheme Export Houses, Trading Houses, Star Trading

Houses, Superstar Trading Houses is to give recognition to the establishedexporters and large export houses to build up the marketing infrastructures and

expertise required for export promotions.

The registered exporters having a record of export performance over a number of

years are granted the status of export/trading houses or star trading houses

subject to the fulfillment of minimum annual average export performance in terms

of FOB value or net exchange earning on physical export or services prescribed

in the Exim policy.

CategoryAverage FOB/FOR value during thepreceding 3 licensing years (in Rs)

Export House 15 crores

Trading House 100 crores

Star Trading Houses 500 crores

Super Star Trading House 2000 crores

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The exporters who have been granted the status of export house/trading house

are entitled to a number of benefits under the EXIM policy including the following:

License/Certificate/Permission and customs clearances for both imports

and exports on self declaration basis

Fixation of input-output norms on a priority basis

Priority finance for medium and long-term capital requirement as per

conditions notified by RBI

Exemption from compulsory negotiation of documents through banks. The

remittance, however, would continue to be received through banking

channels

100% retention of foreign exchange

Enhancement in normal repatriation from 180-360 days

The registered exporters are provided certain extra benefits.

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10) POLICY INITIATIVES AND INCENTIVES BY THE

STATE GOVERNMENTS

The state governments generally do not distinguish between production fordomestic market and production for export market. Therefore, there had

been few specific measures taken by the state governments especially

targeted at exporting units. However, the state governments have taken a

number of policy measures to encourage industrial activity in the state.

These measures mainly relate to

(a) Capital investment subsidy or subsidy for the preparation of

feasibility report, project report, etc.;

(b) Waiver or deferment of sales tax or providing loans for sales tax

purposes;

(c) Exemption from entry tax, octroi duty, etc.;

(d) Waiver of electricity duty;

(e) Power subsidy;

(f) Exemption from taxes for certain captive power generation

units;

(g) Exemption from stamp duties; and

(h) Provision of land at concessional rate, etc.

It may be noted that most of the exemptions tend to encourage

capital or power-intensive units, though some concessions are linked to

turnover. Most of the concessions in the state industrial policies have been

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designed keeping in view the manufacturing industries. An analysis of

industrial policies of various states indicates that most state governments

do compete among themselves in extending such concessions.

On examination of export promotion initiatives by the state

governments, it is difficult to find commonality among various states.

However, some of the measures taken by the state governments are as

follows.

(a) provide information on export opportunities

(b) allot land for starting an export-oriented unit (EOU)

(c) plan for the development of export promotion industrial parks

(d) exemption from entry-tax on supplies to EOU/EPZ/SEZ units

(e) exemption from sales tax or turnover tax for supplies to

EOU/EPZ/SEZ units and inter-unit transfers between them.

ASSISTANCE TO STATES FOR INFRASTRUCTURE

DEVELOPMENT OF EXPORTS (ASIDE)

The State Governments shall be encouraged to participate in promoting exports

from their respective States. For this purpose, Department of Commerce has

formulated a scheme called ASIDE.

Suitable provision has been made in the Annual Plan of the Department of

Commerce for allocation of funds to the states on the twin criteria of gross

exports and the rate of growth of exports.

The States shall utilise this amount for developing infrastructure such as roads

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connecting production centres with the ports, setting up of Inland Container

Depots and Container Freight Stations, creation of new State level export

promotion industrial parks/zones, augmenting common facilities in the existing

zones, equity participation in infrastructure projects, development of minor ports

and jetties, assistance in setting up of common effluent treatment facilities,

stabilizing power supply and any other activity as may be notified by

Department of Commerce from time to time.

MARKET DEVELOPMENT ASSISTANCE (MDA)

In order to encourage exporters to explore the overseas markets and to promote

their exports, Market Development Assistance (MDA) Scheme of the Department

of Commerce is available for the following activities.

Assist Export Promotion Councils, Commodity Boards, and Exports

Development Authorities to undertake promotional activities for their

products and commodities

Assist consortium approach for overseas marketing

Assist trade bodies/approved organization for carrying out non-recurring

innovative activities for export promotion

Assist export promotion councils to contest countervailing duty/anti-

dumping cases initiated abroad

Assist focus export promotion programmes in specific regions abroad like

FOCUS LAC programme

Assist individual exporters for export promotion activities abroad

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Residual essential activities connected with marketing promotion efforts

abroad.

MARKET ACCESS INITIATIVE (MAI)

In order to supplement the Market Development Scheme and facilitate

promotional efforts on a sustained basis, Market Access Initiative (MAI) Scheme

was launched in 2001-02. The scheme is formulated on focus product-focus

country approach to evolve specific strategy for specific market and specific

product through market studies or surveys. Under the scheme, assistance is

provided to export promotion organizations/trade promotion organizations or

exporters for the enhancement of export through venturing into new markets or

through increasing the share in the existing markets.

Financial assistance is provided for the following activities under the scheme:

To identify the priorities of research relevant to the Department of

Commerce and to sponsor research studies consistent with the priorities

To carry out studies for evolving a WTO-compatible strategy

To support EPCs/trade promotion organizations in undertaking market

studies/surveys for evolving proper strategies

To support marketing projects abroad based on focus product-focus

country approach. Under marketing projects, the following activities

are funded

Opening of showrooms

Opening of warehouses

Display in international department stores

Publicity campaign and brand promotion

Participation In trade fairs abroad

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Research and product development

Reverse visits of the prominent buyers from the project focus

countries

To undertake export potential survey of the states

To take registration charges for product registration abroad for

pharmaceuticals, bio-technology, and agro-chemicals

To test charges for engineering products abroad

To support cottage and handicraft industries

To support recognized associations in industrial clusters for marketing

abroad

Under the scheme, the financial assistance is given to central and state

governments and its departments, export promotion councils, commodity

boards, registered trade promotion organizations and apex trade bodies,

recognized industrial clusters, and individual exporters.

However, the assistance to individual exporters is available only for

evaluating the charges of engineering products abroad and registration

charges of pharmaceuticals, biotechnology, and agro-chemicals. The

proposals for assistance are examined by an Empowered Committee under

the Championship of Commerce Secretary for a particular product and a

particular market.

The Market Access Initiative scheme provides an excellent opportunity,

especially for public and private-sector export promotion organizations, tofianc their marketing activities for the thrust products in the pre-identified

markets. The scheme could not make the anticipated headway mainly due to

limited initiatives by the state and central government organizations, which

had been the target principal beneficiaries, and also because of non-

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awareness among the target beneficiaries due to poor marketing of the

scheme.

Learnings/Suggestions through this project:

Export Finance is a very important branch to study & understand the overall

gamut of the international finance market.

Availability of favorable Export finance schemes directly impacts the local

trade, encourages exporters, enlarges markets abroad, improves quality of

domestic goods and overall helps the nation boost its exchange earnings.

The Government of any nation plays a very vital role in boosting exportturnover. The credit policy of the Indian Government is also changed

depending upon the needs of the exporters, global trade environment etc.

The credit policy of Oct 2001 is a pointer in this direction.

ECGC and EXIM Bank take a lot of efforts for Export promotion. The

strategies of these 2 agencies in India should be flexible & their finance

schemes should be constantly synchronized with the changing scene of world

trade. This alone can help Indian exporters to stand competition in world

markets effectively and more gain-fully.

Finally, a very essential question needs to be answered by the International

Trade gurus with reference to Relevance of EXIM Policy in the current

times. Exim policies had emerged when the state decided to limit imports

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and encourage exports in order to maintain currency reserves. However, such

ideas backfired: consumers were hurt and producers turned lazy.

Bibliography- :

Assistance provided by Exim ( 1998 ) . Retrieved on August 12 , from

www.eximbank.com

Indian Trade Marching ( 2002 ) . Retrieved on July 15, from

www.exportimporttrade.com

Indian prospectives of Business ( 2006 ) . Retrieved on July 10 from

www.tradeindia.com

Ram Paras ( 2005 ). Export What Where & How . Delhi : Trade India Books

Mahajan M.. I. A Guide to Export . Mumbai : Export Intro Books

ECGC Services Manual

RBI Mid term review for year 2001-02

Import Export Procedure ( 2004 ) Retrieved on August 10, 2009 from www.

Exportprocedures.com

A.D. Pillai ( 2003 ) .Risks involved in Export Financing. New Delhi The

Financial Express

Borleaug D. Global Exports ( 2006 ) Washington D.C. -Economic Times

Pillai . M . Analysis of Risk ( 2008 ), New Delhi The Business Standard

Objectives and Scope ( 2002 ) . Retrieved on August 10 , from

www.ecgcindia.com

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