Methods of Financing Exporters

8/4/2019 Methods of Financing Exporters

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METHODS OF FINANCINGEXPORTERS


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Conventional Banks play two very

important roles in Exports.

They act as anegotiating bank and charge a fee for thispurpose.

Secondly they provide export-financing facility to theexporters and charge Interest on this service.


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These services are:

Pre-shipment finance

Post-shipment finance


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PRE-SHIPMENT FINANCE


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Financial assistance extended to the exporterbefore the shipment of goods, is termed aspre-shipment finance.

Exporter can avail pre-shipment finance inthe form of :

Packing credit in local currency

As pre-shipment credit for foreign currency.


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Main objectives behind pre

shipment finance is to enableexporter to: Procure raw materials.

Carry out manufacturing process.

Provide a secure warehouse for goods andraw materials.

Process and pack the goods.

Ship the goods to the buyers. Meet other financial cost of the business.


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Requirement for getting packing

credit This facility is provided to an exporter who

satisfies the following criteria

A ten digit importer exporter code numberallotted by DGFT.

Exporter should not be in the caution list ofRBI.

If the goods to be exported are not underOGL (Open General Licence), the exportershould have the required license /quotapermit to export the goods.


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Evidences to be provided to the

bank Formal application for release the packing credit withundertaking to the effect that the exporter would be ship thegoods within stipulated due date and submit the relevantshipping documents to the banks within prescribed time limit.

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

Licence issued by DGFT if the goods to be exported fall under therestricted or canalized category. If the item falls under quotasystem, proper quota allotment proof needs to be submitted.

The confirmed order received from the overseas buyer should

reveal the information about the full name and address of theoverseas buyer, description quantity and value of goods (FOB orCIF), destination port and the last date of payment.


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Quantum of finance

The Quantum of Finance is granted to anexporter against the LC or an expected order.The only guideline principle is the concept of

need based finance. Banks determine thepercentage of margin, depending on factorssuch as:

The nature of Order.

The nature of the commodity.

The capability of exporter to bring in therequisite contribution.


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Different stages of pre-

shipment financeBefore making any an allowance for Creditfacilities banks need to check the different

aspects like product profile, political

and economic details aboutcountry. Apart from these things, the bankalso looks in to the status report of the

prospective buyer, with whom theexporter proposes to do the business.


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The Bank extended the packing credit facilitiesafter ensuring the following"

The exporter is a regular customer, a bona

fide exporterand has a good standing inthe market.

Whether the exporter has the necessarylicense and quota permitor not.

Whether the country with which the exporterwants to deal is under the list ofRestrictedCover Countries(RCC)or not.


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Disbursement of packing credit

advance Once the proper sanctioning of the documents is done, bank ensures whetherexporter has executed the list of documents mentioned earlier or not.Disbursement is normally allowed when all the documents are properlyexecuted.

Sometimes an exporter is not able to produce the export order at time ofavailing packing credit. So, in these cases, the bank provide a special packingcredit facility and is known as Running Account Packing.

Before disbursing the bank specifically check for the following particulars in thesubmitted documents"

Name of buyer

Commodity to be exported

Quantity

Value (either CIF or FOB)

Last date of shipment / negotiation.

Any other terms to be complied with


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The quantum of finance is fixed depending on the FOB value of contract/LC or the domestic values of goods, whichever is found to be lower.Normally insurance and freight charged are considered at a later stage,when the goods are ready to be shipped.

In this case disbursals are made only in stages and if possible not incash. The payments are made directly to the supplier bydrafts/bankers/cheques.

The bank decides the duration of packing credit depending upon thetime required by the exporter for processing of goods.

The maximum duration of packing credit period is 180 days, howeverbank may provide a further 90 days extension on its own discretion,without referring to RBI.


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Closure of packing credit

loan2 important points an exporter should beaware of, regarding the closure of packingcredit loan. The exporter can close the loaneither:

Out of realization of sales proceeds of exportorder; or

If the exporter is not able to export, for onereason or other, the bank charges higher rateof interest on such a loan.


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Running Account Facility

Banks have the autonomy to sanction runningaccount facility even in the absence of aconfirmed purchase order / letter of

credit(LC),subject to the following conditions: A need for RAF has to be established by the

exporter, to the satisfaction of the bank.

Banks extend this facility only to those exporters

who have a good track record. The concessional credit facility, available to the

exporter, should not exceed 180 days.


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Pre-shipment credit in foreign

currency(PCFC) Authorised dealers are permitted to extend Preshipment Credit

in Foreign Currency (PCFC) with an objective of making the creditavailable to the exporters at internationally competitive price.This is considered as an added advantage under which credit isprovided in foreign currency in order to facilitate the purchase of

raw material after fulfilling the basic export orders.

The rate of interest on PCFC is linked to London InterbankOffered Rate (LIBOR). According to guidelines, the final cost ofexporter must not exceed 0.75% over 6 month LIBOR, excludingthe tax.

The exporter has freedom to avail PCFC in convertible currencieslike USD, Pound, Sterling, Euro, Yen etc. However, the riskassociated with the cross currency truncation is that of theexporter.


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The sources of funds for the banks for extending PCFC facility includethe Foreign Currency balances available with the Bank in Exchange,Earner Foreign Currency Account (EEFC), Resident Foreign CurrencyAccounts RFC(D) and Foreign Currency(NonResident) Accounts.

Banks are also permitted to utilize the foreign currency balancesavailable under Escrow account and Exporters Foreign Currencyaccounts. It ensures that the requirement of funds by the accountholders for permissible transactions is met. But the limit prescribed formaintaining maximum balance in the account is not exceeded.

In addition, Banks may arrange for borrowings from abroad. Banks may

negotiate terms of credit with overseas bank for the purpose of grant ofPCFC to exporters, without the prior approval of RBI, provided the rateof interest on borrowing does not exceed 0.75% over 6 month LIBOR.


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POST-SHIPMENT FINANCE


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Post Shipment Finance is a kind of loanprovided by a financial institution to anexporter or seller against a shipment that hasalready been made.

This type of export finance is granted fromthe date of extending the credit after

shipment of the goods to the realization dateof the exporter proceeds. Exporters dont

wait for the importer to deposit the funds.


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Basic features

Purpose of Finance: Postshipment financeis meant to finance export sales receivable afterthe date of shipment of goods to the date of

realization of exports proceeds. In cases ofdeemed exports, it is extended to financereceivable against supplies made to designatedagencies.

Basis of Finance: Postshipment finances isprovided against evidence of shipment of goodsor supplies made to the importer or seller or anyother designated agency.


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Types of Finance Postshipment finance can be secured or unsecured.

Since the finance is extended against evidence ofexport shipment and bank obtains the documents oftitle of goods, the finance is normally self liquidating.In that case it involves advance against undrawnbalance, and is usually unsecured in nature.

Further, the finance is mostly a funded advance. Infew cases, such as financing of project exports, theissue of guarantee (retention money guarantees) isinvolved and the financing is not funded in nature.


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Quantum of finance

As a quantum of finance, postshipment financecan be extended up to 100% of the invoice valueof goods. In special cases, where the domestic

value of the goods increases the value of theexporter order, finance for a price difference canalso be extended and the price difference iscovered by the government. This type of finance

is not extended in case of preshipment stage. Banks can also finance undrawn balance. In such

cases banks are free to stipulate marginrequirements as per their usual lending norm.


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Period of Finance Postshipment finance can be off short terms or

long term, depending on the payment terms

offered by the exporter to the overseas importer. In case of cash exports, the maximum periodallowed for realization of exports proceeds is sixmonths from the date of shipment. Concessiverate of interest is available for a highest period of

180 days, opening from the date of surrender ofdocuments. Usually, the documents need to besubmitted within 21days from the date ofshipment.


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Post-shipment finance can be

provided for three types of

export: Physical exports: Finance is provided to the

actual exporter or to the exporter in whose name

the trade documents are transferred. Deemed export: Finance is provided to thesupplier of the goods which are supplied to thedesignated agencies.

Capital goods and project exports:Finance is sometimes extended in the name ofoverseas buyer. The disbursal of money isdirectly made to the domestic exporter.


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Suppliers credit

Buyer's Credit is a special type of loan that a

bank offers to the buyers for large scalepurchasing under a contract. Once the bankapproved loans to the buyer, the sellershoulders all or part of the interests incurred.


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Types of post-shipment

financeThe post shipment finance can be classified as : Export Bills purchased/discounted.

Export Bills negotiated Advance against export bills sent on

collection basis.

Advance against export on consignment basis

Advance against undrawn balance on exports

Advance against claims of Duty Drawback.


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Purchase/discount of foreign

bills Export bills (Non L/C Bills) is used in terms of

sale contract/ order may be discounted orpurchased by the banks. It is used inindisputable international trade transactionsand the proper limit has to be sanctioned tothe exporter for purchase of export bill

facility.


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Negotiation of export documents

under LCThe risk of payment is less under the LC, as the issuing bankmakes sure the payment. The risk is further reduced, if a bankguarantees the payments by confirming the LC. Because of theinborn security available in this method, banks often becomeready to extend the finance against bills under LC.

However, this arises two major risk factors for the banks:

The risk of nonperformance by the exporter, when he is unable tomeet his terms and conditions. In this case, the issuing banks donot honor the letter of credit.

The bank also faces the documentary risk where the issuing bankrefuses to honour its commitment. So, it is important for the forthe negotiating bank, and the lending bank to properly check allthe necessary documents before submission.


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Advance against export bills

sent on collection Bills can only be sent on collection basis, if the bills

drawn under LC have some discrepancies.Sometimes exporter requests the bill to be sent onthe collection basis, anticipating the strengthening

of foreign currency. Banks may allow advance against these collection

bills to an exporter with a concessional rates ofinterest depending upon the transit period in case ofDP Bills and transit period plus usance period in case

of usance bill. The transit period is from the date of acceptance of

the export documents at the banks branch forcollection and not from the date of advance.


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Advance against claims on duty

drawback Duty Drawback is a type of discount given to the exporter in his own

country. This discount is given only, if the inhouse cost of production ishigher in relation to international price. This type of financial supporthelps the exporter to fight successfully in the international markets.

In such a situation, banks grants advances to exporters at lower rate ofinterest for a maximum period of 90 days. These are granted only ifother types of export finance are also extended to the exporter by thesame bank.

After the shipment, the exporters lodge their claims, supported by the

relevant documents to the relevant government authorities. Theseclaims are processed and eligible amount is disbursed after making surethat the bank is authorized to receive the claim amount directly fromthe concerned government authorities.


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Factoring

Factoring is a financial transaction whereby abusiness job sells its accounts receivable (i.e.,invoices) to a third party (called a factor) at adiscount in exchange for immediate moneywith which to finance continued business


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INSURANCE


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Export credit guarentee

corporation(ECGC) Export Credit Guarantee Corporation of India Limited, was

established in the year 1957 by the Government of India tostrengthen the export promotion drive by covering the risk ofexporting on credit.

Being essentially an export promotion organization, it functionsunder the administrative control of the Ministry of Commerce &Industry, Department of Commerce, Government of India. It ismanaged by a Board of Directors comprising representatives ofthe Government, Reserve Bank of India, banking, insurance andexporting community.

ECGC is the fifth largest credit insurer of the world in terms ofcoverage of national exports. The present paid-up capital of thecompany is Rs.800 crores and authorized capital Rs.1000 crore


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What does ECGC do?

Provides a range of credit risk insurance coversto exporters against loss in export of goods andservices

Offers guarantees to banks and financialinstitutions to enable exporters to obtain betterfacilities from them

Provides Overseas Investment Insurance toIndian companies investing in joint venturesabroad in the form of equity or loan


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How does ECGC help

exporters?ECGC

Offers insurance protection to exporters against payment risks

Provides guidance in export-related activities

Makes available information on different countries with its own creditratings

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

Methods of Financing Exporters

Documents

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