loans to importers and exporters (trade finance)

LOANS TO IMPORTERS AND EXPORTERS.

OBJECTIVES

To study and understand in detail about the loan facilities provided to

the importers and exporters by the banks.

To identify the role of Banks in encouraging Exports by providing

finance.

To know the Interest rates charged by the banks for various facilities.

To study the fee based services provided by banks that are included in

trade finance.

To see the growth of trade finance in the economy.

SCOPE

This project concentrates on the following areas:

Exports Finance types, objectives .

Imports Finance types.

Factoring and forfeiting concepts in foreign markets.

Role and objectives and services of EXIM bank.

Role of Export credit guarantee corporation of India.

Nature of financing by banks and various interest rates charged by

different banks in Mumbai.

Contribution of various banks in trade finance.

1


LIMITATIONS.

The banks were reluctant to provide with information about the rates of

interest. Lack of information on the part of employees. These was found

in both private and nationalized banks.

METHODOLOGY

Methodology is the means, techniques and frames of references

by which researches approach and carry out enquiry on a particular topic.

Following methodology was adopted:

2

Primary Data

visit to banksApproaching bankersFilling up of questionnaire

Secondary

Data

InternetBooksBanks websites


NO. CHAPTER NAME PAGE

NO

1 INTRODUCTION 6-7

2 EXPORT 8-22

3 IMPORTS 23-30

4FACTORING AND FORFEITING

31

5 EXIM BANK 32-36

6ECGC

37-44

7DIFFERENT INTEREST RATES OFFERED BY BANKS

45-47

8NATURE OF FINANCING BY BANKS

48-50

9 RELATIONSHIP BETWEEN NUMBER OF

TRANSACTIONS AND INTEREST CHARGES

51

10 CONTRIBUTION BY VARIOUS BANKS IN TRADE FINANCE

52

11.CONCLUSION

53-54

12 ANNEXURES 55-56

3


INTRODUCTION

Imports and Exports have been an integral part of our economy since a

very long time. Trade financing is a way to import and export goods and

finance their business. Trade finance is a specific topic within the

financial service industry. Today trade finance is a massive billion of

dollars of business. Since world trade is increasing the good and

commodities are bought and sold, and banks and financial institutions

should lend money to finance the purchase of these goods and

commodities.

Trade finance refers to a wide range of tools that determine how cash,

credit, investments and other assets can be used for trade. Banks also play

a central role in facilitating trade, both through the provision of finance

and bonding facilities and through the establishment and management of

payment mechanisms such as telegraphic transfers and documentary

letters of credit (L/Cs). Amongst the intermediated trade finance

products, the most commonly used for financing transactions is L/Cs,

whereby the importer and exporter essentially entrust the exchange

process (i.e., payment against agreed delivery) to their respective banks in

order to mitigate counterparty risk. Typical trade-related financial

services include letters of credit, import bills for collection, import

financing, shipping guarantees, letter of credit confirmation, checking and

negotiation of documents, pre-shipment export financing, invoice

financing, and receivables purchase. Trade finance instruments can be

structured to include export credit guarantees or insurance. Trade finance

differs from other forms of credit (e.g., investment and working capital)

in several ways.

4


Trade finance is much different than commercial lending, mortgage

lending or insurance. A product is sold and shipped overseas; therefore, it

takes longer to get paid. Extra time and energy is required to make sure

that buyers are reliable and creditworthy. Also, foreign buyers - just like

domestic buyers - prefer to delay payment until they receive and resell the

goods. Due diligence and careful financial management can mean the

difference between profit and loss on each transaction.

All sellers want to get paid as quickly as possible, while buyers usually

prefer to delay payment, at least until they have received and resold the

goods. This is true in domestic as well as international markets.

Increasing globalization has created intense competition for export

markets. Importers and exporters are looking for any competitive

advantage that would help them to increase their sales. Flexible payment

terms have become a fundamental part of any sales package.

Trade finance is the lifeline of trade because more than 90% of trade

transactions involve some form of credit, insurance or guarantee. Import

export trade assumes huge importance in the context of overall

performance of the world economy. An upward trend of import export is

indicative of smooth functioning of the world economy; whereas a

downward trend results from economic instability.

5


1. EXPORTS

Export is one of the most lucrative business activities in India. Exporting

is a major component of international trade. Exports entail transfer of

goods and services from a home country to the foreign consumers. 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 occupies a very prominent place in the list of

priorities of the economic set up of developing countries because they

contribute largely to foreign exchange pool.

Exports play a crucial role in the economy of the country. In order to

maintain healthy balance of trade and foreign exchange reserve it is

necessary to have a sustained and high rate of growth of exports.

Exports are a vehicle of growth and development. They help not only in

procuring the latest machinery, equipment and technology but also the

goods and services, which are not available indigenously. Exports leads

to national self-reliance and reduces dependence on external assistance

which howsoever liberal, may not be available without strings.

Exports play a very vital role for Indian macroeconomic settings as they

influence the underlying conditions in the domestic economy and also

help in keeping the balance of payments under control.

It is seen that there exists a close relationship between export earnings

and domestic investment. Higher rates of economic growth tend to be

associated with higher rates of exports growth. Conversely, most

countries with low rates of export growth also tend to have, in general,

low rates of economic growth.

6


Though India’s export compared to other countries is very small, but one

of the most important aspects of our export is the strong linkages it is

forgoing with the world economy which is a great boon for a developing

nation like India.

1.1 EXPORT FINANCE

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

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

due to the prevalence of novel non-price competitive techniques

encountered by exporters in various nations to enlarge their share of

world markets.

Export finance is a part of global finance given to the corporate. Export

financing enables businesses to bring their products all over the world.

India has to compete effectively with other countries in the export

markets in order to penetrate into new markets and widen its hold on the

existing markets. Since many countries have been pursuing policies

geared to the promotion of exports through adequate export credits at low

rates of interest, India has also pursued the same policy in regard to

export finance.

In all major industrialized countries, banks and other financial institutions

are deeply involved in financing of exports on special terms. Some of

them are granting mixed credits that combine export credit with foreign

aid to developing countries. In all such cases, the governments and

central banks of those countries are directly involved in subsidizing

exports.

Exporters naturally want to get paid as quickly as possible, while

importers usually prefer to delay payment until they have received or

resold the goods. Because of the intense competition for export markets,

7


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. In many cases, government

assistance in export financing for small and medium-sized businesses can

increase a firm's options. The following factors are important to consider

in making decisions about financing:

The need for financing to make the sale: - In some cases, favorable

payment terms make a product more competitive. If the competition

offers better terms and has a similar product, a sale can be lost. In other

cases, the buyer may have preference for buying from a particular

exporter, but might buy your product because of shorter or more secure

credit terms.

The length of time the product is being financed: - This determines

how long the exporter will have to wait before payment is received and

influences the choice of how the transaction is financed.

The cost of different methods of financing: - Interest rates and fees

vary. Where an exporter can expect to assume some or all of the

financing costs, their effect on price and profit should be well understood

before a pro forma invoice is submitted to the buyer.

The risks associated with financing the transaction: - The riskier the

transaction, the harder and more costly it will be to finance. The political

and economic stability of the buyer's country can also be an issue. To

provide financing for either accounts receivable or the production or

purchase of the product for sale, the lender may require the most secure

methods of payment, a letter of credit (possibly confirmed), or export

credit insurance or guarantee.

8


The need for pre-shipment finance and for post-shipment working

capital: -Production for an unusually large order, or for a surge of orders,

may present unexpected and severe strains on the exporter's working

capital. Even during normal periods, inadequate working capital may

curb an exporter's growth. However, assistance is available through

public and private sector resources.

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.

An exporter may avail financial assistance from any bank, which

considers the ensuing factors:

Availability of the funds at the required time to the exporter.

Affordability of the cost of funds

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 are:

Appraise to be the bank’s customer.

Appraise should have the EXIM code number allotted by the

Director General of Foreign Trade.

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

Obligations to the Trade Control Authority under the EXIM policy are:

Appraise should have IEC number allotted by the DGFT.

9


Goods must be freely exportable i.e. not falling under the negative

list. If it falls under the negative list, then a valid license should be

there which allows the goods to be exported.

Country with whom the Appraise wants to trade should not be

under trade barrier.

Obligations to ECGC are:

Verification that Appraise is not under the Specific Approval list

(SAL).

Sanction of Packing Credit Advances.

GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE:

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

ensuing guidelines: -

Exchange control regulations.

Trade control regulations.

Reserve Bank’s directives issued through IECD.

Export Credit Guarantee Corporation guidelines.

Guidelines of Foreign Exchange Dealers Association of India.

1.2 PRE-SHIPMENT FINANCE

'Pre-shipment/Packing Credit' means 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

10


from India having been placed on the exporter or some other person,

unless lodgment of export orders or letter of credit with the bank has been

waived.

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 labeling of goods.

To pay for pre-shipment inspection charges.

To import or purchase from the domestic market heavy

machinery and other capital goods to produce export goods.

To pay for consultancy services.

To pay for export documentation expenses.

FORMS OR METHODS OF PRE-SHIPMENT FINANCE/PACKING

CREDIT

Packing Credit is extended in the following forms:

1. Packing Credit in Indian Rupee

2. Packing Credit in Foreign Currency (PCFC)

1. Packing credit in Indian rupee

This is taken in Indian Rupees and is given to the exporter in the form of

the Rupee Loan and the interest is charged at the rate as per RBI

directives. When any export proceeds are realized, the packing credit is

automatically adjusted. If it becomes overdue the rate of interest will be

charged at the rate determined by the individual bank.

2.Packing credit in Foreign Currency (P.C.F.C.)

11


In the case of PCFC, the bankers have their own line of credit with

their foreign banks and the interest is charged at ‘LIBOR' rate i.e.

London Inter Bank Offered Rate plus the interest spread that is

mutually agreed upon between the bankers and the exporter subject

to a minimum of 1.0%, till the due date. This is denominated in a

foreign currency. The above mentioned interest is for 90 days,

since the period of liquidation of pre-shipment credit normally

granted by the bankers for diamond Industry is 90 days from the

date of availing the facility. Beyond 90 days, if the PCFC becomes

overdue the interest will be charged based on fresh LIBOR rate

prevalent on the 91st day plus the interest spread and additional

interest at 2% for the overdue period. If the payment is not received

after 30 days from the due date, the Packing credit will be

crystallized. It means that the bankers will convert the balance

PCFC, at the TT selling interbank rate into Indian Rupees and the

interest will be charged on the entire amount at commercial rate of

interest from day one of availing the PCFC. The rate of interest

varies with different banks and is in the range of 15 to 20%.

DISBURSEMENT OF PACKING CREDIT

i. Ordinarily, each packing credit sanctioned should be maintained as

separate account for the purpose of monitoring period of sanction

and end-use of funds.

ii. Banks may release the packing credit in one lump sum or in stages

as per the requirement for executing the orders/LC.

iii. Banks may also maintain different accounts at various stages of

processing, manufacturing, etc. depending on the types of

12


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.

iv. 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.

'RUNNING ACCOUNT' FACILITY

i. Pre-shipment credit to exporters is normally provided on lodgment

of L/Cs or firm export orders. It is observed that the availability of

raw materials is seasonal in some cases. In some other cases, the

time taken for manufacture and shipment of goods is more than the

delivery schedule as per export contracts. In 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 Export

13


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 pre-shipment 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.

ii. If it is noticed that the exporter is found to be abusing the facility,

the facility should be withdrawn forthwith.

iii. In cases where exporters have not complied with the terms and

conditions, the advance will attract commercial lending rate ab

initio. In such cases, banks will be required to pay higher rate of

interest on the portion of refinance availed of by them from the

RBI in respect of the relative pre-shipment credit. Running account

facility should not be granted to sub-suppliers.

1.3 POST-SHIPMENT FINANCE

'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

14


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:

1. Purchase of Export Documents drawn under Export Order:

Purchase or discount facilities in respect of export bills drawn

under confirmed export order are generally granted to the

customers who are enjoying Bill Purchase/Discounting limits from

the Bank. As in case of purchase or discounting of export

documents drawn under export order, the security offered under

L/C by way of substitution of credit-worthiness of the buyer by the

issuing bank is not available, the bank financing is totally

dependent upon the credit worthiness of the buyer, i.e. the

importer, as well as that of the exporter or the beneficiary. The

documents dawn on DP basis are parted with through foreign

correspondent only when payment is received while in case of DA

bills documents (including that of title to the goods) are passed on

to the overseas importer against the acceptance of the draft to make

payment on maturity. DA bills are thus unsecured. The bank

financing against export bills is open to the risk of non-payment.

Banks, in order to enhance security, generally opt for ECGC

policies and guarantees which are issued in favor of the

exporter/banks to protect their interest on percentage basis in case

of non-payment or delayed payment which is not on account of

mischief, mistake or negligence on the part of exporter. Within the

total limit of policy issued to the customer, drawee-wise limits are

15


generally fixed for individual customers. At the time of purchasing

the bill bank has to ascertain that this drawee limit is not exceeded

so as to make the bank ineligible for claim in case of non-payment.

2. Advances against Export Bills Sent on Collection: It may

sometimes be possible to avail advance against export bills sent on

collection. In such cases the export bills are sent by the bank on

collection basis as against their purchase/discounting by the bank.

Advance against such bills is granted by way of a 'separate loan'

usually termed as 'post-shipment loan'. This facility is, in fact,

another form of post- shipment advance and is sanctioned by the

bank on the same terms and conditions as applicable to the facility

of Negotiation/Purchase/Discount of export bills. A margin of 10

to 25% is, however, stipulated in such cases. The rates of interest

etc., chargeable on this facility are also governed by the same rules.

This type of facility is, however, not very popular and most of the

advances against export bills are made by the bank by way of

negotiation/purchase/discount.

3. Advance against Goods Sent on Consignment Basis: When the

goods are exported on consignment basis at the risk of the exporter

for sale and eventual remittance of sale proceeds to him by the

agent/consignee, bank may finance against such transaction subject

to the customer enjoying specific limit to that effect. However, the

bank should ensure while forwarding shipping documents to its

overseas branch/correspondent to instruct the latter to deliver the

document only against Trust Receipt/Undertaking to deliver the

sale proceeds by specified date, which should be within the

prescribed date even if according to the practice in certain trades a

bill for part of the estimated value is drawn in advance against the

exports.

16


4. Advance against Undrawn Balance: In certain lines of export it

is the trade practice that bills are not to be drawn for the full

invoice value of the goods but to leave small part undrawn for

payment after adjustment due to difference in rates, weight, quality

etc. to be ascertained after approval and inspection of the goods.

Banks do finance against the undrawn balance if undrawn balance

is in conformity with the normal level of balance left undrawn in

the particular line of export subject to a maximum of 10% of the

value of export and an undertaking is obtained from the exporter

that he will, within 6 months from due date of payment or the date

of shipment of the goods, whichever is earlier surrender balance

proceeds of the shipment. Against the specific prior approval from

Reserve Bank of India the percentage of undrawn balance can be

enhanced by the exporter and the finance can be made available

accordingly at higher rate. Since the actual amount to be realised

out of the undrawn balance, may be less than the undrawn balance,

it is necessary to keep a margin on such advance.

5. Advance against Retention Money: Banks also grant advances

against retention money, which is payable within one year from the

date of shipment, at a concessional rate of interest up to 90 days. If

such advances extend beyond one year, they are treated as deferred

payment advances which are also eligible for concessional rate of

interest.

6. Advances against Claims of Duty Drawback: Duty Drawback is

permitted against exports of different categories of goods under the

'Customs and Central Excise Duty Drawback Rules, 1995'.

Drawback in relation to goods manufactured in India and exported

means a rebate of duties chargeable on any imported materials or

excisable materials used in manufacture of such goods in India or

17


rebate on excise duty chargeable under Central Excises Act, 1944

on certain specified goods. The Duty Drawback Scheme is

administered by Directorate of Duty Drawback in the Ministry of

Finance. The claims of duty drawback are settled by Custom House

at the rates determined and notified by the Directorate. As per the

present procedure, no separate claim of duty drawback is to be

filed by the exporter. A copy of the shipping bill presented by the

exporter at the time of making shipment of goods serves the

purpose of claim of duty drawback as well. This claim is

provisionally accepted by the customs at the time of shipment and

the shipping bill is duly verified. The claim is settled by customs

office later. As a further incentive to exporters, Customs Houses at

Delhi, Mumbai, Calcutta, Chennai, Chandigarh, and Hyderabad

have evolved a simplified procedure under which claims of duty

drawback are settled immediately after shipment and no funds of

exporter are blocked.

However, where settlement is not possible under the simplified procedure

exporters may obtain advances against claims of duty drawback as

provisionally certified by customs.

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

18


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

PERIOD

i. In the case of demand bills, the period of advance shall be the

Normal Transit Period (NTP) as specified by FEDAI.

ii. In case of usance bills, credit can be granted for a maximum

duration of 180 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

upto the permissible period of 180 days and they should influence

the exporters to realise the export proceeds within a shorter period.

iii. '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.

iv. An overdue bill:

a) In the case of a demand bill, is a bill which is not paid before the

expiry of the normal transit period, and

b) In the case of a usance bill, is a bill which is not paid on the due

date

1.4 GOLD CARD SCHEME FOR EXPORTERS

The applicable rate of interest to be charged under the Gold Card Scheme

will not be more than the general rate for export credit in the respective

bank and within the ceiling prescribed by RBI. In keeping with the spirit

19


of the Scheme banks will endeavour to provide the best rates possible to

Gold Card holders on the basis of their rating and past performance.

In respect of the Gold Card holders, the concessive rate of interest on

post-shipment rupee export credit applicable up to 90 days may be

extended for a maximum period up to 365 days.

The salient features of the scheme are:

i. All creditworthy exporters, including those in small and medium

sectors with good track record would be eligible for issue of Gold

Card by individual banks as per the criteria to be laid down by the

latter;

ii. Banks would clearly specify the benefits they would be offering to

Gold Card holders

iii. request from card holders would be processed quickly by banks

within 25 days/15 days and 7 days for fresh application/renewal of

limits and ad hoc limits, respectively;

iv. ‘in principle’ limits would be set for a period of 3 years with a

provision for stand by limit of 20% to meet urgent credit needs;

v. card holders would be given preference in the matter of granting of

packing credit in foreign currency;

vi. banks would consider waiver of collaterals and exemption from

ECGC guarantee schemes on the basis of card holder’s

creditworthiness and track records, and

vii. The concessive rate of interest on post-shipment rupee export

credit applicable upto 90 days may be extended for a maximum

period upto 365 days.

20


2. IMPORTS

Each country has different natural resource and different climatic

conditions. Some are rich in minerals while some are rich in forest

resources. A country cannot produce all the commodities required by the

nation. It may have some commodities in excess while some commodities

which are available in limited quantity. Hence countries have to depend

on other countries.

A country exports those commodities which are in excess with the

country and import those which are not available at large within the

country, this interdependency of one country on other result into

international trade. The exchange of goods helps both the countries in

developing their economy.

An import (also termed as international purchasing) activity may be

defined as a process of procuring goods and service from the supplier/s

situated in the foreign countries. This activity involves inflow of goods

and service from the foreign country (exporter country) into the base

country (importing country) & in-tune outflow of foreign currency from

base country to the foreign country towards payments for the goods and

services purchased.

There are basically four main reasons for which a country may decide to

import a certain good or service:

1. It simply does not exist in the country: a mineral which is not in the

country's soil, an agriculture product that can't be produced there, an

innovation that has been introduced in other countries;

2. It does not exist at a specific level of quality; thus, a country imports

better products than domestic production, also as far as advertising or

packaging are concerned;

21


3. It is cheaper abroad, since producers there are more efficient, are faced

by lower costs, better exploit economies of scale and/or accept lower

profits;

4. At the current domestic price, producers do not supply enough good or

service as the demand requires, also because of ex ante coordination

problems; accordingly, consumers buy abroad for insufficient domestic

production.

2.1 IMPORT FINANCE

Banks normally do not extend a fund based finance to meet import needs

of their customers, barring few exceptions. However, they enable

industrial units and others to have access to imported inputs and

machinery by establishing letters of credit in favour of the overseas

suppliers/sellers. Letter of Credit is a non-fund credit facility offered by

banks to their constitutes of integrity and proven track record in meeting

their commitments promptly without need for any post import finance.

2.2 LETTER OF CREDIT:

A Letter of Credit is a signed instrument including an undertaking by the

banker of a buyer to pay the seller a certain sum of money on presentation

of documents evidencing shipment of specified goods and subject to

compliance with the stipulated terms and conditions.

Banks establish LCs only on account of their customers, who hold a valid

Importer-Exporter Code Number from the Regional Licensing

Authorities and produce underlying sales contract between the Indian

importer and the overseas sellers, accompanied by valid import license in

the name of the importers, wherever necessary. Banks take into account

22


the norms for holding imported inventory, make an appraisal of the

request for opening an LC like any other fund based working capital

facility, prescribe suitable margin/securities and then decide to establish

the LC.

Banks have simplified the documentation procedures for LC limits

sanctioned to their customer and usually, every time when an LC is to be

established, and LC application-cum-agreement is obtained from the

importer which will also serve as an advance document for the LC.

Documents that can be presented for payment

To receive payment, an exporter or shipper must present the documents

required by the letter of credit. Typically, the payee presents a document

proving the goods were sent instead of showing the actual goods.

However, the list and form of documents is open to imagination and

negotiation and might contain requirements to present documents issued

by a neutral third party evidencing the quality of the goods shipped, or

their place of origin or place. Typical types of documents in such

contracts might include:

23


Financial Documents

Bill of Exchange, Co-accepted Draft

Commercial Documents

Invoice, Packing list

Shipping Documents

Transport Document, Insurance Certificate, Commercial, Official

or Legal Documents

Official Documents

License, Embassy legalization, Origin Certificate, Inspection

Certificate, Phytosanitary certificate

Transport Documents

Bill of Lading (ocean or multi-modal or Charter party), Airway

bill, Lorry/truck receipt, railway receipt, CMC Other than Mate

Receipt, Forwarder Cargo Receipt, Deliver Challan...etc

Insurance documents

Insurance policy or Certificate but not a cover note.

RISKS INVOLVED IN LETTER OF CREDIT

Fraud Risks

The payment will be obtained for nonexistent or worthless

merchandise against presentation by the beneficiary of forged or

falsified documents.

Credit itself may be forged.

24


Sovereign and Regulatory Risks

Performance of the Documentary Credit may be prevented by

government action outside the control of the parties.

Legal Risks

Possibility that performance of a Documentary Credit may be

disturbed by legal action relating directly to the parties and their rights

and obligations under the Documentary Credit

Force Majeure and Frustration of Contract

Performance of a contract – including an obligation under a

Documentary Credit relationship – is prevented by external factors

such as natural disasters or armed conflicts

Risks to the Applicant

Non-delivery of Goods

Short Shipment

Inferior Quality

Early /Late Shipment

Damaged in transit

Foreign exchange

Failure of Bank viz Issuing bank / Collecting Bank

Risks to the Issuing Bank

Insolvency of the Applicant

Fraud Risk, Sovereign and Regulatory Risk and Legal Risks

Risks to the Reimbursing Bank

No obligation to reimburse the Claiming Bank unless it has issued a

reimbursement undertaking.

25


Risks to the Beneficiary

Failure to Comply with Credit Conditions

Failure of or Delays in Payment from, the Issuing Bank

Credit Issued by Party other than Bank

Risks to the Advising Bank

The Advising Bank’s only obligation – if it accepts the Issuing Bank’s

instructions – is to check the apparent authenticity of the Credit and

advising it to the Beneficiary

Risks to the Nominated Bank

Nominated Bank has made a payment to the Beneficiary against

documents that comply with the terms and conditions of the Credit

and is unable to obtain reimbursement from the Issuing Bank

Risks to the Confirming Bank

If Confirming Bank’s main risk is that, once having paid the

Beneficiary, it may not be able to obtain reimbursement from the

Issuing Bank because of insolvency of the Issuing Bank or refusal of

the Issuing Bank to reimburse because of a dispute as to whether or

not payment should have been made under the Credit

Margin

The banks while sanctioning import Letter of Credit limits may

require additional securities to cover their risk. A cash margin as per

RBI/banks rules is also stipulated for Letter of Credit limits. Third

party margin or security is acceptable subject to certain conditions.

The margin is taken at the time of establishing the Letter of Credit is

released only after the bill under Letter of Credit has been retired. It is,

therefore, necessary that the margin may preferably be kept in the

26


shape of fixed deposit for a suitable period to earn interest on the

margin deposit.

2.3 POST IMPORT FINANCE

Issuing bank in, in receipt of documents under the LC established by it,

examines them and ensures that they conform to the terms of LC. If so,

they intimate the importer/applicant to pay for and retire the documents.

The applicant, at this stage, may utilize the balance in his Cash Credit

Account (the item of import is a raw material, etc) or Term loan limit (if

the item of import is a capital good or equipment) and retire the

documents. In respect of imports made by exporters, banks may grant

packing credit advances to meet the cost of imported goods.

Otherwise, normally banks do not extend any specific post import finance

to importers who have to suitably manage their own funds to meet the

bills in time/on the due dates.

Before handing over the import documents to the applicant, banks collect

charges by way of interest commission, etc. to the debit of applicant’s

account.

Within 3 months from date of retirement of import documents, importers

are required to submit the documentary proof of import in the form of

Customs certified Exchange Control copy of Bill of Entry to the bank,

failing which banks will report the importers as defaulters to RBI.

2.4 BANK GUARANTEES

At the request of the customer, the bank issues guarantees favoring the

beneficiaries. Thus the contract of a guarantee is a tri-partite contract. The

27


customer is the person at whose request the guarantee is issued, the bank

is the guarantor and the payee / beneficiary i.e. the person in whose favor

the guarantee is issued. The bank charges commission for issue of

guarantee, which is an income for the bank. The guarantee is a non-fund

based facility as the liability on the bank may or may not crystallize on

the due date based on the failure to perform the contract by the borrower.

Therefore they are shown as contingent liability by way of footnote to

accounts.

The guarantees are of 2 types they are as follow:-

i. Performance Guarantee: - performance guarantees normally

guarantees the performance of the contract. For e.g. the borrower

getting a contract for construction of a bridge against which the

BMC may insists on issue of guarantee towards the performance of

the contract from the borrower.

ii. Financial Guarantee: - Financial guarantees represent the guarantee

for ensuring the financial obligations. For instance:- BEST may

float a tender for supply of BUS from interested contractors and

may insists on 10% tender money / earnest money to be deposited

along with the quotations. This is to invite only capable and serious

bidders. In case, the bidders who are awarded the contract do not

accept the same; the bid money will be forfeited. Through the

credit facility at the same stage of issue of guarantee is a non fund

based facility, the bank has to be careful in assessing the credit

facility viz. Borrower’s standing, financial position, business

record etc. to lending a fund based facility. Therefore, many times

the bank insists on cash margin ranging from 5% to 100%

depending upon the customer.

28


3. FACTORING & FORFEITING

Factoring, or invoice discounting, receivables factoring or debtor

financing, is where a company buys a debt or invoice from another

company. In this purchase, accounts receivable are discounted in order to

allow the buyer to make a profit upon the settlement of the debt.

Essentially factoring transfers the ownership of accounts to another party

that then chases up the debt.

Factoring therefore relieves the first party of a debt for less than the total

amount providing them with working capital to continue trading, while

the buyer, or factor, chases up the debt for the full amount and profits

when it is paid. The factor is required to pay additional fees, typically a

small percentage, once the debt has been settled. The factor may also

offer a discount to the indebted party.

Forfeiting (note the spelling) is the purchase of an

exporter's receivables – the amount importers owe the exporter – at a

discount by paying cash. The purchaser of the receivables, or forfeiter,

must now be paid by the importer to settle the debt.

As the receivables are usually guaranteed by the importer's bank, the

forfeiter frees the exporter from the risk of non-payment by

the importer. The receivables have then become a form of debt

instrument that can be sold on the secondary market as bills of

exchange or promissory notes.

29


4. EXIM BANK

INTRODUCTION

Export-Import Bank of India is the premier export finance institution of

the country, set up in 1982 under the Export-Import Bank of India Act

1981. Government of India launched the institution with a mandate, not

just to enhance exports from India, but to integrate the country’s foreign

trade and investment with the overall economic growth. Since its

inception, EXIM Bank of India has been both a catalyst and a key player

in the promotion of cross border trade and investment. Commencing

operations as a purveyor of export credit, like other Export Credit

Agencies in the world, EXIM Bank of India has, over the period, evolved

into an institution that plays a major role in partnering Indian industries,

particularly the Small and Medium Enterprises, in their globalization

efforts, through a wide range of products and services offered at all stages

of the business cycle, starting from import of technology and export

product development to export production, export marketing, pre-

shipment and post-shipment and overseas investment.

OBJECTIVES

“… for providing financial assistance to exporters and importers, and for

functioning as the principal financial institution for coordinating the

working of institutions engaged in financing export and import of goods

and services with a view to promoting the country’s international

trade…”

“… shall act on business principles with due regard to public interest”

30


INITIATIVES

EXIM Bank in India has been a prime mover in encouraging

project exports from India.

The Bank extends lines of credit to overseas financial institutions ,

foreign Govt. And agencies , enabling them to finance Import of

goods and services from India.

The Bank’s overseas Investment finance program offers a variety

of facilities for Indian Investments and acquisition overseas.

Under it’s Export Marketing Finance Programme , Exim Bank

supports small and medium enterprises (SME) in their export

marketing efforts.

The Bank has launched the rural initiatives program with the

objective of linking Indian rural industry to global market.

It also provides value-added information , advisory and support

services.

Exim Bank offers the following Export Credit facilities, which can be

availed of by Indian companies, commercial banks and overseas entities.

For Indian Companies executing contracts overseas

Pre-shipment credit

Exim Bank's Pre-shipment Credit facility, in

Indian Rupees and foreign currency, provides

access to finance at the manufacturing stage -

enabling exporters to purchase raw materials and other inputs.

31


Supplier's Credit

This facility enables Indian exporters to extend term credit to importers

(overseas) of eligible goods at the post-shipment stage.

For Project Exporters

Indian project exporters incur Rupee expenditure while executing

overseas project export contracts i.e. costs of mobilisation/acquisition of

materials, personnel and equipment etc. Exim Bank's facility helps them

meet these expenses.

For Exporters of Consultancy and Technological Services

Exim Bank offers a special credit facility to Indian exporters of

consultancy and technology services, so that they can, in turn, extend

term credit to overseas importers.

Guarantee Facilities

Indian companies can avail of these to furnish requisite guarantees to

facilitate execution of export contracts and import transactions.

FINANCE FOR EXPORT ORIENTED UNITS

Term Finance (For Exporting Companies)

Project Finance

Equipment Finance

Import of Technology & Related Services

Domestic Acquisitions of businesses/companies/brands

Export Product Development/ Research & Development

General Corporate Finance

Working Capital Finance (For Exporting Companies)

32


Funded

o Working Capital Term Loans [< 2 years]

o Long Term Working Capital [upto 5 years]

o Export Bills Discounting

o Export Packing Credit

o Cash Flow financing

Non-Funded

o Letter of Credit Limits

o Guarantee Limits

Working Capital Finance (For Non- Exporting Companies)

Bulk Import of Raw Material

Term Finance (For Non- Exporting Companies)

Import of Equipment

Export Finance

Pre-shipment Credit

Post Shipment Credit

Buyers' Credit

Suppliers' Credit [including deferred payment credit]

Bills Discounting

Export Receivables Financing

Warehousing Finance

Export Lines of Credit (Non-recourse finance)

33


Equity Participation (In Indian Exporting Companies)

To part finance project expenditure(Project, inter alia, includes new

project/ expansion/ acquisition of business/company/

brands/research & development)

Note:-

a. Exim Financing is available in Indian Rupees and in Foreign

Currency

b. Term finance, except for long term working capital, is available for

periods up to 10 years [in select cases 15 year finance can also be

made available]

c. Interest: Fixed & Floating options [Benchmarks for floating rates -

LIBOR/G-Sec/MIBOR]

d. Repayments: Amortizing/ Ballooning/ Bullet [As per cash flows]

5. ECGC

(EXPORT CREDIT GUARANTEE CORPORATION OF INDIA )

34


What is ECGC?

Export Credit Guarantee Corporation of India Limited, was established in

the year 1957 by the Government of India to strengthen the export

promotion drive by covering the risk of exporting on credit.

Being essentially an export promotion organization, it functions under the

administrative control of the Ministry of Commerce & Industry,

Department of Commerce, Government of India. It is managed by a

Board of Directors comprising representatives of the Government,

Reserve Bank of India, banking, insurance and exporting community.

ECGC is the fifth largest credit insurer of the world in terms of coverage

of national exports. The present paid-up capital of the company is Rs.800

crores and authorized capital Rs.1000 crores.

What does ECGC do?

Provides a range of credit risk insurance covers to exporters against

loss in export of goods and services

Offers guarantees to banks and financial institutions to enable

exporters to obtain better facilities from them

Provides Overseas Investment Insurance to Indian companies

investing in joint ventures abroad in the form of equity or loan

How does ECGC help exporters?

Offers insurance protection to exporters against payment risks

Provides guidance in export-related activities

Makes available information on different countries with its own

credit ratings

Makes it easy to obtain export finance from banks/financial

institutions

Assists exporters in recovering bad debts

Provides information on credit-worthiness of overseas buyers

35


Need for export credit insurance.

Payments for exports are open to risks even at the best of times. The risks

have assumed large proportions today due to the far-reaching political

and economic changes that are sweeping the world. An outbreak of war

or civil war may block or delay payment for goods exported. A coup or

an insurrection may also bring about the same result. Economic

difficulties or balance of payment problems may lead a country to impose

restrictions on either import of certain goods or on transfer of payments

for goods imported. In addition, the exporters have to face commercial

risks of insolvency or protracted default of buyers. The commercial risks

of a foreign buyer going bankrupt or losing his capacity to pay are

aggravated due to the political and economic uncertainties. Export credit

insurance is designed to protect exporters from the consequences of the

payment risks, both political and commercial, and to enable them to

expand their overseas business without fear of loss.

5.1 STANDARD POLICIES:

ECGC has designed 4 types of standard policies to provide cover for

shipments made on short term credit:

1. Shipments (comprehensive risks) Policy – to cover both political

and commercial risks from the date of shipment

2. Shipments (political risks) Policy – to cover only political risks

from the date of shipment

3. Contracts (comprehensive risks) Policy – to cover both commercial

and political risk from the date of contract

4. Contracts (Political risks) Policy – to cover only political risks

from the date of contract

36


RISKS COVERED UNDER THE STANDARD POLICIES:

1. Commercial Risks

Insolvency of the buyer

Buyer’s protracted default to pay for goods accepted by him

Buyer’s failure to accept goods subject to certain conditions

2. Political risks

Imposition of restrictions on remittances by the government in the

buyer’s country or any government action which may block or

delay payment to exporter.

War, revolution or civil disturbances in the buyer’s country.

Cancellation of a valid import license or new import licensing

restrictions in the buyer’s country after the date of shipment or

contract, as applicable.

Cancellation of export license or imposition of new export

licensing restrictions in India after the date of contract (under

contract policy).

Payment of additional handling, transport or insurance charges

occasioned by interruption or diversion of voyage that cannot be

recovered from the buyer.

Any other cause of loss occurring outside India, not normally

insured by commercial insurers and beyond the control of the

exporter and / or buyer.

RISKS NOT COVERED UNDER STANDARD POLICIES:

The losses due to the following risks are not covered:

1. Commercial disputes including quality disputes raised by the

buyer, unless the exporter obtains a decree from a competent court

37


of law in the buyer’s country in his favour, unless the exporter

obtains a decree from a competent court of law in the buyers’

country in his favour

2. Causes inherent in the nature of the goods.

3. Buyer’s failure to obtain import or exchange authorization from

authorities in his county

4. Insolvency or default of any agent of the exporter or of the

collecting bank.

5. loss or damage to goods which can be covered by commerci8al

insurers

6. Exchange fluctuation

7. Discrepancy in documents.

5.2 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.

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 Buyer’s credit, etc.

38


7445.41

3325.13

3217.4

2442.232153.781863.01

16759.1899999999

Commodity wise value of shipment covered under short term policies by ECGC

Rs. in crores

Engineering goods

Leather Manufactures

Readymade Garments

Chemical Allied Products

Cotton handloom

Basic Chemical Pharmaceu-ticals Cosmetics

Others

5.3 SPECIFIC POLICIES

The standard policy is a whole turnover policy designed to provide a

continuing insurance for the regular flow of exporter’s shipment of raw

materials, consumable durable for which credit period does not normally

exceed 180 days.

Contracts for export of capital goods or turnkey projects or construction

works or rendering services abroad are not of a repetitive nature. Such

transactions are, therefore, insured by ECGC on a case-to-case basis

under specific policies.

Specific policies are issued in respect of Supply Contracts (on deferred

payment terms), Services Abroad and Construction Work Abroad.

1) Specific policy for Supply Contracts: Specific policy for Supply

contracts is issued in case of export of Capital goods sold on deferred

credit. It can be of any of the four forms:

39


Specific Shipments (Comprehensive Risks): Policy to cover both

commercial and political risks at the Post-shipment stage.

Specific Shipments (Political Risks): Policy to cover only political

risks after shipment stage.

Specific Contracts (Comprehensive Risks): Policy to cover

political and commercial risks after contract date.

Specific Contracts (Political Risks): Policy to cover only political

risks after contract date.

2) Service policy: Indian firms provide a wide range of services like

technical or professional services, hiring or leasing to foreign parties

(private or government). Where Indian firms render such services they

would be exposed to payment risks similar to those involved in export of

goods. Such risks are covered by ECGC under this policy.

If the service contract is with overseas government, then Specific

Services (political risks) Policy can be obtained and if the services

contract is with overseas private parties then specific services

(comprehensive risks) policy can be obtained, especially those contracts

not supported by bank guarantees.

Normally, cover is issued on case-to-case basis. The policy covers

90%of the loss suffered.

3) Construction Works Policy: This policy covers civil construction

jobs as well as turnkey projects involving supplies and services. This

policy covers construction contracts both with private and foreign

government.

This policy covers 85% of loss suffered on account of contracts with

government agencies and 75% of loss suffered on account of construction

contracts with private parties.

40


5.4 FINANCIAL GUARANTEES

Exporters require adequate financial support from banks to carry out their

export contracts. ECGC backs the lending programmes of banks by

issuing financial guarantees. The guarantees protect the banks from losses

on account of their lending to exporters. Six guarantees have been

evolved for this purpose.

These guarantees give protection to banks against losses due to non-

payment by exporters on account of their insolvency or default. The

ECGC charges a premium for its services that may vary from 5 paisa to

7.5 paisa per month for Rs. 100/-. The premium charged depends upon

the type of guarantee and it is subject to change, if ECGC so desires.

The six guarantees are as follows:

i. Packing Credit Guarantee: Any loan given to exporter for the

manufacture, processing, purchasing or packing of goods meant for

export against a firm order of L/C qualifies for this guarantee.

Pre-shipment advances given by banks to firms who enters

contracts for export of services or for construction works abroad to

meet preliminary expenses are also eligible for cover under this

guarantee. ECGC pays two thirds of the loss.

ii. Export Production Finance Guarantee: this is guarantee enables

banks to provide finance at pre-shipment stage to the full extent of

the domestic cost of production and subject to certain guidelines.

The guarantee under this scheme covers some specified products

such a textiles, woolen carpets, ready-made garments, etc and the

loss covered is two third.

41


iii. Export Finance Guarantee: this guarantee over post-shipment

advances granted by banks to exporters against export incentives

receivable such as DBK. In case, the exporter

Does not repay the loan, then the banks suffer loss? The loss

insured is up to three fourths or 75%.

iv. Post-Shipment Export Credit Guarantee: post shipment finance

given to exporters by the banks purchase or discounting of export

bills qualifies for this guarantee. Before extending such guarantee,

the ECGC makes sure that the exporter has obtained Shipment or

Contract Risk Policy. The loss covered under this guarantee is

75%.

v. Export Performance Guarantee: exporters are often called upon

to execute bid bonds supported by a bank guarantee and it the

contract is secured by the exporter than he has to furnish a bank

guarantee to foreign parties to ensure due performance or against

advance payment or in lieu of or retention money. An export

proposition may be frustrated if the exporter’s bank is unwilling to

issue the guarantee.

This guarantee protects the bank against 75% of the losses that it

may suffer on account of guarantee given by it on behalf of

exporters.

vi. Export Finance (Overseas Lending) Guarantee: if a bank

financing overseas projects provides a foreign currency loan to the

contractor, it can protect itself from risk of non-payment by the con

tractor by obtaining this guarantee. The loss covered under this

policy is to extent of three fourths (75%)

6.INTEREST RATES OF DIFFERENT BANKS

42


PRE-SHIPMENT FINANCE

State Bank Of India

Oriental Bank Of

Commerce

Syndicate Bank

Saraswat Bank

Citi Bank0

2

4

6

8

10

12

14

16

18

20

Upto 180 daysFrom 180 to 270 daysBeyond 270 days

The above chart gives a clear picture of the rates of interest charged by

various Banks for pre-shipment credit extended by the Banks to

Exporters. Here, we have Banks from different sectors of the economy

i.e. public sector banks, private sector banks as well as cooperative banks.

Out of the above six banks SBI , Oriental Bank Of Commerce and Dena

Bank are Public Sector Banks. Saraswat Bank is Co-operative Banks

whereas Citi Bank is a foreign Bank.

The interest rates vary from bank to banks as well as depending upon the

period for which credit is given by the banks to the exporters. While

providing pre-shipment credit to exporters it is categorized into three

types, i.e.

i. for a period of 180 days

ii. From 180 to 270 days

iii. And Beyond 270 days.

43


The interest rates vary depending on the above types. As the period of

credit increases, the rate of interest also increases.

The rate of interest for a period of 180 days is seen to be ranging in

between 8% to 12%, and that from 180 to 270 days is found to be in

between 10% to 13%. The rate of interest beyond 270 days is the most

highest among all i.e. in between 11% to 19%.

44


POST SHIPMENT FINANCE

State Bank Of India

Oriental Bank Of

Commerce

Syndicate Bank

Saraswat Bank

Citi Bank0

2

4

6

8

10

12

14

16

18

On demand BillsOn usance bill - Upto 90 daysFrom 90 days to 6 monthsBeyond 6 months

From the above chart we can see that the interest rates on demand bills

are ranging from 8% to 12%. The interest rates on usance bill for 90 days

are also found to be ranging in between 8% to 12%. Also as the period of

usance bill increases for 90 days to 6 months the rate of interest is found

to be increasing. It stands to be ranging in between 9% to 15%. And

finally the rate of interest for usance bills beyond 6 months is ranging

from 9% to 18%.

If we do a comparison between Oriental Bank Of Commerce and State

Bank of India, we will find that the interest rate on demand bill and

usance bill upto 90 days and beyond 6 months is extended at around

similar interest rates however there is a difference in the interest rates on

usance bill for 90 days to 6 months .

7.NATURE OF FINANCING BY BANKS

45


Depending upon the relationship of the borrower with the bank

Relationship Documentation Amount of Loan Charges

Strong

Weak

The above table is based on the research done to find out how banks

actually decide upon providing finance to a particular exporter or

importer. The table gives details of how relationship of the importer and

the exporter with the banker affect various aspects such as the

documentation process, the amount of loan and the charges associated

with it. It is found that if the relationship of the importer or exporter with

the bank is strong then the documentation required is comparatively low

than a weak relationship. Also as the bank know the customer well due to

a strong relationship, the bank can extend higher amount of finance to

them. However in case of weak relationship, the bank may not allow

higher amount of finance as the banker might not be familiar with the

credit standing of the importer or exporter.

Similarly, the amount charged also differs with the difference in

relationship. It has an inverse relationship i.e. when the relationship is

strong the bank can charge comparatively less amount from the importer

or exporter and vice versa.

46


Depending upon the securities offered by the borrower to the

bank:

Securities Documentation Amount of Loan Charges

More

Less

Here the extension of finance to the importer or exporter depends upon

the securities provided by them against the finance taken.

To ensure the safety of funds lent, the first and most important factor

considered by a bank is the capacity of borrowers to repay the amount of

loan; the bank therefore, relies primarily on the character, capacity and

financial soundness of the borrower. The choice of security to be

provided to the lender/supplier is left to the borrower. But the bank can

hardly afford to take any risk in this regard and hence it also has the

security of assets owned by the borrower. In case the borrower fails to

repay the loan, the bank can recover the amount by attaching the assets. It

can sell the assets offered as security and realize the amount.

Depending of this factor also the bank decides upon whether to provide

finance to the exporter. For instance, if the securities provided by the

importer or exporter are more than the bank will definitely give finance to

the firm. This is because it will minimize the risk involved if the loan is

47


not repaid. The bank can sell the securities and recover the loan amount.

Also the charges will be less for the importer or exporter. However the

documentation process will be lengthy as the bank will have to verify the

securities provided by the borrower.

In case if the securities provided are less than the amount of loan

provided will reduce with higher charges against it. However the

documentation process will not have an effect on it.

48


8. RELATIONSHIP BETWEEN NUMBER OF TRANSACTIONS

AND INTEREST CHARGES

As the number of transaction of the importer/exporter with the bank

increases the amount charged by the bank goes on decreasing. The bank

would charge higher rate of interest against export finance or high

charges against letter of credit to the importer or exporter at the initial

stage. But if the importer/exporter approaches the same bank for its

further financing, they will reduce the charges or the rate of interest. It

indirectly implies that as the relationship of the banker with the

importer/exporter grows older the fees charged by the bank reduces. This

can be illustrated from the following diagram:

49

Greater the transactions with the bank

Lower the charges


9. CONTRIBUTION BY VARIOUS BANKS IN TRADE

FINANCE

23%

32%

20%

25%

Private Sector Banks Co-operative Banks Public Sector BanksForeign Banks

The above pie diagram gives us a picture of the contribution of various

banks in trade finance. It is based on a research done to find out which

banks are preferred by the importers and exporters while going for trade

finance. The selection of banks for trade finance is strongly dependent

upon the relationship of the client with the bank.

According to the survey, most of the importer/exporters are found to be

approaching cooperative banks for their business finance. The co-

operative banks provide many facilities to the borrowers and this can be

the reason why their contribution is found to be more in trade financing.

The second highest preference of the borrowers is foreign banks and the

least preferred banks are public sector banks. However there is not much

difference between the contribution of private sector banks and public

sector banks.

50


CONCLUSION

The questionnaire that was given to the banks covered all the aspects

about the loans / services to the importers and exporters . While

collecting primary data , nationalized , co-operative and private banks are

taken into consideration.

Following are some points that are extracted from the answers given by

some banks.

1. Almost all the Banks provide trade finance facility.

2. The common type of finance which they provide are:

For EXPORTERS.

i. Pre-shipment Finance

ii. Packing credit in foreign currency (PCFC)

iii. Post shipment Finance

iv. Exchange Bills Rediscounting (EBR)

For IMPORTERS.

i. Opening of L/C

ii. Buyers Credit

iii. Foreign Currency Loan.

3. There is no ceiling on the amount of finance to be provided as such

for domestic as well as foreign currency loans.

4. The finance is given only after checking the creditworthiness of the

applicant. Out of total trade finance, finance for exporters is more.

5. Banks may take primary security by the way of Stock , Finished

goods , Book debts, Raw material etc. and collateral security by the

way of Equitable mortgage of factory,

Personal property, Fixed deposit Receipt, NSC’s, Personal

guarantees.

6. The documents that bank take from applicant are :-

51


Demand promissory notes

Invoice of shipment

Order invoice

Hypothecation deed

Mortgage deed

7. The interest rate charged for the foreign currency import finance is

LIBOR + 200 bps maximum as per RBI guidelines.

8. QUESTIONNAIRE

52


I. Name of the bank:-

II. Do you provide finance to importers and exporters?

Yes No

III. What type of finance is provided for exporters?

IV. What type of finance is provided for importers?

V. What is the rate of interest charged for Preshipment finance?180 days Beyond 270 days

180 to 270 days

VI. What is the rate of interest charged for Post shipment finance?

For 90 days 90 days to 6 months

Beyond 6 months

VII. Is there any ceiling on the amount of finance to be provided? Yes No (specify the ceiling if yes )

VIII. What type of securities does the bank take from the

applicant?

53


IX. What type of documents does the bank take from the applicant?

X. Do you provide import/export loan in currency other than the domestic currency?

Yes No

XI. If yes, is there any ceiling on amount of loan given in foreign currency? Yes No

XII. What is the % of export import finance out of you total finance provided?

XIII. Out of the total finance provided to importers and exporters, which finance is more?

Finance to importers

Finance to exporters

XIV. Do you look for the credit worthiness of the borrower?

Yes No

XV. What is the rate of interest charged for import finance?

54

loans to importers and exporters (trade finance)

Documents

gold card

normal transit

fund based

export credit

creditfirm

public sector

valid import

exchange control