Ex im financing

Financing Of Export - Import
INTRODUCTION
Exports are a subject of significance to every economy whether developing or
developed because they represent the biggest source of earning foreign exchange.
The need is all more acute for a developing economy account. Increasing exports
enables the economy to earn foreign exchange, enhance foreign exchange reserves,
improve balance of trade, balance of payments, correct deficits in BOP, and improve
exchange value of its currency. In view of these advantage many of the countries go
with the Maximum “Export or Perish” in its economic policy. Every government
encourages the growth of exports and reduction in imports.
The bank extends financial assistance to the exporters at pre-shipment and
post-shipment stages. While extended such facilities banks are mainly governed by
the guidelines issued by the RBI. Financial assistance extended to the exporter prior
to shipment of goods from India falls within the scope of the pre-shipment finance
while that extended after shipment of goods falls under post-shipment finance. While
pre-shipment finance is provided for working capital for the purchase of raw
material, processing packaging, transportation, warehousing, etc., of the goods meant
for export, post shipment fiancé is generally provided in order to bridge the gap
between shipment of goods and the realization of proceeds.
Export finance means the credit required by exporters for financing their
export transactions from the time of getting an export order to the time of full
realization of the payment from the importer. Importers also need finance for making
payments for their imports. The success of exports-imports depends upon extension
of credit. This credit policy may be short term or medium term.
T.Y.B.Com (Banking & Insurance) 1

The determination of a credit policy may be more important than any other
element of an export policy. The credit policy may depend upon sales volume, types
of organization, pricing policy and product policy. It may also depend upon the
overall financial strength of the company.
A manufacturer exporter needs credit from the point for the various purposes
such as import of capital goods, to provide liberal terms to the importer, to execute
the export promotion programmed, establishment of new enterprise and capital
investment in other countries.
The nature of export-import finance may be short term or long-term credit.
Short-term credit facility is extended for a period from 30 days to 180 days. The
exporter and Importer both may require short-term credit, which is granted by the
commercial banks. Long-term credit is extended for a period from 5 years to 20
years. Long-term finance is provided for long-term development activities such as
purchase of capital goods, machinery and the volume of credit is generally large.
ECGC, IDBI, and Exim Bank may provide the long-term credit.

Incentives Available To Exporters
The Reserve Bank of India has introduced various measures in its effort to encourage
exports.
 Exporters are eligible to avail finance at concessional rates of interest.
 Banks being the main source of finance are encouraged to external credit
liberally to exporters, including granting lines of credit for 2-3 years at a
stretch.
 It is mandatory for banks to extend a minimum of 12% of net bank credit to
exporter sector.
 To compensate banks for extending finance at lower rates of interest, the
Reserve Bank of India provides export refinance facility.
 To encourage banks to grant credit to exporters liberally, credit guarantee is
arranged from ECGC, for loans extended to exporters at both pre and post
shipment stage.
 Exporters are also granted loans against duty draw back entitlements.
 Export earnings are not fully taxed.
Basically the financing of export can be classified in two categories as under
depending upon the purpose and stage at which the finance is made available.
1. Pre-shipment (Packing credit) Finance
2. Post shipment Finance

Further the export credits both pre and post shipment may be permitted either in
Indian Rupees or in foreign currency.
FUND BASED
Pre-shipment Post-shipment
NON-FUND BASED
Advising/confirming Export guarantees Derivatives Back to back L/C
Export L/Cs

 Importance of Finance at Pre-Shipment Stage
1. To Purchase raw materials, and other inputs to manufacture goods.
2. To assemble the goods in the case of merchant exporters.
3. To store the goods in suitable warehouses till the goods are shipped.
4. To pay for packing, marking and labeling of goods.
5. To pay for pre-shipment inspection charges.
6. To import or purchase from the domestic market heavy machinery and
other capital goods to procedure export goods.
7. To pay for export documentation expenses.
8. Meet the expenses for processing of goods.
 Importance of Finance at Post-Shipment Stage
1. To pay to agents / distributors and others for their services.
2. To pay for publicity and advertising in the overseas markets.
3. To pay for port authorities, customs and shipping agent’s charges.
4. To pay towards ECGC premium.
5. To pay for freight and other shipping expenses.
6. To pay towards marine insurance premium, under CIF contract.
7. To pay towards various expenses in connection with visits abroad for
market surveys, or for some other purpose.
8. To pay towards export duty or tax, if any.
9. To meet expenses in respect of after-sale-service.
10. To pay towards such expenses regarding participation in exhibitions
and trade fairs in India and abroad.
11. To pay for representatives abroad in connection with their stay abroad.
12. To pay for any other activity in connection with export of goods.

PRE-SHIPMENT FINANCE
Pre-shipment is basically a short-term finance (inventory finance) extended
to exporters in anticipation of export of goods. This finance enables exporters
to procure raw materials, process, manufacture, warehouses and ship the goods
meant for export.
Pre-shipment finance can be classified as:
1. Packing credit
2. Advance against incentives receivable from government covered by
ECGC guarantee.
3. Advance against Cheques / drafts received as advances payment.
 PACKING CREDIT:
It is a loan or advance granted to the exporter for purchase of raw
material /processing/packing based on Letter of Credit (LC) opened in his favor
by the importer. The LC/Confirmed order will be retained by the bank and will be
endorsed accordingly indicating that the exporter has availed of packing credit.
In terms of RBI DBOD circular no BM/78/C.297 (m)-69 dated 20.01.69,
pre-shipment credit/packing credit has been defined as ‘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 for exports.
Presently Reserve Bank of India is issuing Master circulars on export credit
consolidating regulatory guidelines in one place on yearly basis. The provisions

of RBI guidelines/ regulations are incorporated by head office in their policy of
implementation.
 ELIGIBILITY:
An exporter who wants to avail of pre-shipment finance should obtain an
importer-exporter code number from the DGFT. In addition, the exporter should
not be under the caution list/special approval list of the RBI/ECGC.
Usually, packing credit is extended to exporters who have the export
order/Letter of Credit in their name. It can also be extended where the contract is
concluded by exchange of messages between the two parties with the opening of
letter of credit to be followed later on. In such instances banks may grant packing
credit based on the communication, provided the following information is made
available.
a) Name of the overseas buyer.
b) Particulars of goods to be exported.
c) Quantity and unit prices or value of order.
d) Date of shipment
e) Terms of sales and payments
Packing credit is also extended to supporting manufacturers/suppliers of
goods who do not have LCs in their own name but an LC holder has placed
orders on them for supply of goods.

 Persons Eligible For Finance:
An exporter to be eligible for finance must have an importer-exporter code
number (IEC) allotted by the Director General of Foreign Trade (DGFT) and
should not be in the caution list of the concerned Export Credit Guarantee
Organization (e.g., ECGC of India).

 Margin Requirements:
Pre-shipment finance being a need based finance; banks have the freedom
to determine the margin that is to brought in by the exporters.
Margins serve three important purposes:
a) To ensure that the exporter has a stake in the business
b) To take care of erosion in the value of goods charges to the banker.
c) To ensure that bank finance is not extended to cover exporter’s profit margin.
The percentage of margin will depend on the nature of the order,
commodity, capability of the exporter, etc. Disbursement of funds under packing
credit takes place in phases depending on the length of the operating cycle.
 Period of Finance:
Packing credit can be extended at a concessional rate of interest for a
maximum period of 180 days or for the operating cycle of the particular activity
whichever is lower. Banks may further extend this period to an additional 90 days
(i.e., 180 + 90 = 270 days). Alternately, banks may extend packing credit for a
maximum period of 270 days from the beginning itself. If the packing credit is
outstanding after the due date it is called overdue packing credit. Overdue
packing credit is not eligible for concessional rate of interest.

It should be noted that concessional rate of interest will be applicable only
of export of goods takes place within the time stipulated. This period has been
fixed as 360 days from the date of availing the finance. In case exports of goods
do not take place within the stipulated period, banks are eligible to charge interest
from the very first day of advance at a rate prescribed for “Export credit not
otherwise specified”.
 Pre-shipment Credit in Foreign Currency (PCFC)
Exporters often complain about the high cost of capital vis-à-vis their
competitors from other countries. In order to make their prices competitive and
thereby give a boost to exports, the Government of India made available yet
another mode of financing-financing exports, in foreign currency at
internationally competitive interest rates.
The scheme is an additional window for providing pre-shipment credit to
Indian exporters at internationally competitive rates of interest. It will be
applicable to only cash exports.
This facility may be extended in one of the convertible currencies viz. US
Dollars, Pounds, Japanese Yen, Euro, etc. Further banks may extend PCFC in one
convertible currency in respect of an order invoiced in another convertible
currency. The risk and cost of cross currency transactions in such cases will be
that of the exporter.
 Liquidation Of Packing Credit
After shipment of goods, exporter will prepare necessary documents and
present the same to the branch. The branch negotiate/purchase/discount the
export bill as per terms of sanction and adjust the packing credit.

PROCEDURE TO OBTAIN PACKING CREDIT
 Application to Bank
The exporter should apply in a prescribed form to his bankers giving details
of the credit requirements. The application for packing credit should be
accompanied by the following documents:
 An undertaking stating that the advance will be utilized for the specific
purpose in respect of export of goods.
 An undertaking stating that the shipment will be effected within a certain time
limit and submit the relevant shipping documents to the bank in time.
 In case the exporter wants to obtain the credit against preliminary information
of contract, whereby, at later stage the export order or letter of credit will be
received by him, an undertaking to the effect to the same will be produced to
the bank, within reasonable time.
 In case of manufacturer, who exports through export house/ merchant
exporter, an undertaking from the export house/ merchant exporter stating
that they have not/will avail of packing credit against the same transaction
and for the same purpose till the original credit is liquidated.
 Agreement of hypothecation or letter of pledge.
 Demand promote signed on behalf of the company/firm.

 Letter of continuity signed on behalf of company/firm.
 Certificate of the board resolution (in case of limited companies).
 Letter of authority to operate the account.
 Confirmed export order and/or letter of credit in origin al.
 Appropriate policy/ guarantee of Export Credit Guarantee Cover.
 Copy of valid Registration Cum Membership Certificate.
 Processing Of Application
The application is processed taking into consideration the following:
 Documentary evidence in the form of export order/ letter of credit or
correspondence exchanged between the applicant and the importer.
 Credit worthiness of the applicant.
 Sanctioning Of Loan
If the applicant is found in order the bank sanctions the amount. Normally
the loan is sanctioned depending upon Free On Board (FOB) value exporter
order/ letter of credit or market value of the goods whichever less.
 Loan Agreement
Before disbursement of loan, the banks require the exporter to execute a
formal loan agreement. The loan agreement contains terms and conditions
relating to the loan.

 Disbursement Of Loan
Normally, packing credit advances are not sanctioned in lump sum but are
disbursed in a phased manner.
 Maintenance Of Accounts
As per RBI directives, banks must maintain separate accounts in respect of
each pre shipment advance.
 Monitoring Of Accounts
The bank advancing packing credit should monitor the use of packing credit
by the exporter, i.e. whether the amount is used for export purpose or not.
 Repayment
As soon as the export proceeds and/or incentives are received, the exporter
should repay the amount to bank advancing credit. Normally, the advancing bank
realizes the export proceeds and the makes necessary entries in the exporter’s
account.

FORMS OF PRE-SHIPMENT FINANCE
 Advances against Hypothecation
Packing credit is given to process the goods for export. The advance is
given against security remains in possession of the exporter. The exporter is
required to execute the hypothecation deed in favour of the bank.
 Advance against Pledge
The bank provides packing credit against security. The security remains in
the possession of the bank. On collection of export proceeds, the bank makes
necessary entries in the packing credit account of the exporter.
 Advance against Red L/C
The L/C received from the importer authorities the local bank to grant
advances to the exporter to meet working capital requirements relating to
processing of goods for exports. The issuing bank stands as a guarantor for
packing credit.
 Advances against Back-To-Back L/C
The merchant exporter who is in possession of the original L/C may request
his bankers to issue back-to-back L/C against the security of original L/C in

favour of the sub-supplier. The sub-supplier, thus, gets the back-to-back L/C on
the basis of which he can obtain packing credit.
 Advance against Exports through Export Houses
Manufactures who export through export houses or other agencies can
obtain packing credit, provided such manufacture submits an undertaking from
the Export Houses that they have not or will not avail of packing credit against
the same transaction.
 Advance Against Duty Draw Back (DBK)
DBK means refund of custom duties paid on the import of raw materials,
components parts and packing material used in the export production. It also
includes refund of central exercise duties paid on indigenous materials. Banks
offer pre-shipment as well as post-shipment advances against claims for DBK.

POST-SHIPMENT FINANCE
Post-shipment finance is defined as “any loan or advance granted or any
other credit provided by an institution to an exporter from India from the date of
extending the credit after shipment of the good to the date of realization of the export
proceeds”. It is basically meant for financing export sale receivables of the exporter.
Post-shipment finance can be availed on submission of commercial documents
evidencing export to the Authorized Dealer. The exporter is required to submit the
documents to the bank within 21 days from the date of shipment of good. The
documents to be submitted include all shipping documents and an extra copy of
invoice, relating to any export declaration from endorsed by Customs/Postal
authorities.
Post –Shipment finance can be classified as under;
 Negotiation/Payment/Acceptance of export documents under Letter of Credit.
 Purchase/discount of export documents under confirmed orders/export
contracts, etc.
 Advances against export bills sent on collection basis.
 Advances against exports on consignment basis.

 Advances against undrawn balance on exports.
 Advances against receivables from the Government of India.
 Advances against retention money relating to exports.
 Advances against approved deemed exports.
 ELIGIBILITY
Post-shipment finance is extended to the actual exporter or to an exporter in
whose name the exporter documents are transferred. In case of deemed exports,
finance is extended to the deemed exporters.
 QUANTUM
Post-shipment finance can be extended up to 100% of the invoice value of
the goods. However, banks are free to stipulate margin requirements as per their
lending norms.
 PERIOD OF FINANCE
The period of Post –shipment Finance will depend on the terms of contract
between the exporter and overseas importer. As per exchange control regulations,
for cash exports it can be for a maximum period of 180 days from the date of
shipment. For project exports and deferred payment exports the tenure may differ
from contract to contract.

 INTEREST RATE APPLICABLE
Rate of interest depends on the nature of the bills, i.e., whether it is a
demand bill or usance bill. A demand bill or a sight bill is one, which is
applicable immediately on presentation. In case of a usance bill, the terms of
payment are specified on the bill. Under this arrangement the importer is allowed
a grace period for payment of the bill. The rate of interest charged for the overdue
period, i.e., from the due date to 180 days from the date of shipment will be
“Export credit not otherwise specified”. For the period beyond 180 days from the
date of shipment, higher rate of interest as given in the interest rate directive will
be charged.
PROCEDURE TO OBTAIN POST-SHIPMENT FINANCE
Post shipment finance means an advance to an exporter after shipment of
goods. The exporter should apply in a prescribed form to his bankers, giving
details of the credit requirements.
The bank generally advances credit against:
 Shipping documents
 Export incentives receivable.
 APPLICATION
The application must be supported by relevant shipping documents and
such other documents/undertakings as required by the bank. The other documents
may include:

 Demand promote signed on behalf of the company/firm.
 Letter of continuity signed on behalf of the company/firm.
 Certificate of the Board of Directors resolution.
 Letter of authority to operate the account.
 PROCESSING OF APPLICATION
The application is processed after verification of shipping documents. The
bank also takes into consideration the credit worthiness of the exporter and the
importer and also the characteristics of the product exported.
 LOAN AGREEMENT
Before disbursement of loan, the banks require the exporter to execute a
formal loan agreement.
 MAINTENANCE OF ACCOUNTS
As per RBI directives, banks must maintain separate account in respect of
each post-shipment advance. However, running accounts are permitted in case of
units in Special Economic Zone/Export Promotional Zone and 100% Export
Oriented Units.
 REPAYMENT
As soon as the export proceeds and/or, incentives are received, the exporter
should repay the amount to bank advancing credit. Normally, the advancing bank
realizes the export proceeds and then makes necessary entries in the exporter’s
account.

FORMS OF POST-SHIPMENT FINANCE
 Export bills negotiated under Letter of Credit
The exporter can claim post-shipment finance by drawing bills or drafts
under Letter of Credit. The bank insists on the necessary documents as stated in
the letter of credit. If all documents are in order, the bank negotiates the bill and
advance is granted to the exporter.
 Purchase of export bills drawn under confirmed contracts

The banks may sanction advance against purchase or discount of export
bills drawn under confirmed contracts. If the letter of credit is not available as
security, the bank is totally dependent upon the credit worthiness of exporter.
 Advance against bills under collection
In this case, the advance is granted against bills drawn under confirmed
export order or letter of credit and which sent for collection. They are not
purchased or discounted by the bank. However, this form is not as popular as
compared to advance against purchase or discounting of bills.
 Advance against claims of Duty Drawback (DBK)
Duty Drawback means refund of custom duties paid on import of raw
materials, component parts and packing material used in export of product. It also
includes refund of central excise duty paid on indigenous materials. Banks offer
pre-shipment as well as post-shipment advances against claims for duty
drawback.
 Advance against goods sent on consignment basis
The bank may grant post-shipment finance against goods sent on
consignment basis.
FORFEITING
 Forfeiting is a proven method of providing fixed-rate financing for
international trade transactions. In recent years, it has assumed an important
role for exporters who desire cash instead of deferred payments, especially
from countries where protection against credit, economic and political risks
has become more difficult.

 Forfeiting goes beyond credit insurance cover provided by government and
private institutions, which usually require partial risk retention by the
exporter, and provides the exporter with cash at the time of shipment, and on
a non-recourse basis.
 In Forfeiting, the importer’s bank usually guarantees a series of promissory
notes or bills of exchange, which cover repayment of a supplier’s credit,
provided by the exporter to the importer, for a period of from 180 days to 7
years.
 These notes or bills (“notes”) are usually structured to mature semiannually,
and the face amounts of such notes include principal, and a fixed interest rate
paid by the importer for the supplier’s credit.
 The notes are initially given to the exporter at the time of shipment (or
performance of other services) and become its property. The notes represent
the unconditional and irrevocable commitment of the buyer and/or its bank
(where the latter has added its guarantee) to pay the notes at maturity.
 The payment of these notes is independent of, and without any direct
relationship to, the underlying commercial contract, which usually provides
for other remedies to ensure the exporter’s due performance.
 Once the exporter becomes the bona fide owner of the notes, it can sell them
to a third party at a discount from their face amounts, for immediate cash
payment. This sale is without recourse to the exporter, and the buyer of the
notes assumes all of the risks. The buyer’s security is the guarantee of the
importer’s bank. The notes can be denominated in U.S. Dollars or almost any
major currency.

 A commitment to purchase the notes from the exporter can (and in many
cases should) be made in advance for reasons explained below.
 FORFEITING DOCUMENTATION
 Promissory Notes / Bills of Exchange in international format with bank avail
or guarantee; OR Conformed copy of underlying letter of credit including any
amendments
 Conformed copy of commercial invoice and shipping documents
 Confirmation of the authenticity and validity of all signatures appearing on
the documentation
LETTER OF CREDIT

Authorized dealers/Banks are permitted to open letters of credit (L/c) on
behalf of their customers, subject to the normal banking procedures and other
provisions, Letter of Credits are opened against specific licenses or under Open
General List (OGL) only on behalf of their customers who maintain accounts
with them. Before opening L/cost, the underlying sales contract in original should
be verified. In the absence of this banks can accept a confirmed order, proforma
invoice countersigned by the importer etc. Letter of Credits must provide for
payment against delivery of shipping documents. Letter of Credit is a safe and
secured means of payment against delivery of shipping documents. Letter of
Credit is a safe and secured means of payment especially in the present business
world where it is not possible for the seller to meet the buyer personally or know
the credit worthiness of the buyer. Thus, under Letter of Credit the credit risk
shifts on the bank instead of the buyer. On the due date, if the L:/c terms are met,
the issuing bank/ opening bank will be bound to make the payment.
Letter of Credit is an undertaking by the bank, issued at the instance of the
buyer or importer undertaking to honour the bills of exchange (drafts) drawn
under the Letter of Credits subject to the documents confirming to the Letter of
Credit terms.
A letter of credit can be defined as” an undertaking by importer’s bank
stating that payment will be made to the exporter if the required documents are
presented to the bank within the validity of the Letter of Credit”.
 PARTIES TO LETTER OF CREDIT

Applicant: The buyer or importer of goods.
Issuing Bank: Importer’s bank who issues the Letter of Credit.
Beneficiary: The party to whom the Letter of Credit is addressed, i.e. the
seller or supplier of goods.
Advising Bank: Issuing bank’s branch or correspondent bank in the exporter’s
country to which the Letter of Credit is sent forward.
Confirming Bank: The Bank in beneficiary’s country, which guarantees the credit
on the request of the issuing bank.
Negotiating Bank: The bank to whom the beneficiary present his documents for
payment under Letter of Credit. Negotiating bank pays the
proceeds of the documents to the exporter and seeks the
repayment from the issuing bank.
 TYPES OF LETTER OF CREDIT
1. Revocable & Irrevocable Letter of Credit
A revocable credit can be amended or cancelled by the issuing bank at any
time, without notice to or approval by the seller.
On the other hand, in case of irrevocable credit, the buyer and issuing bank
cannot amend or cancel the credit without the express approval of the seller.
2. Confirmed Irrevocable Letter of Credit

Payment under an irrevocable documentary credit is guaranteed by the
issuing bank. However, the seller might wish that a local bank, add its guarantee
(confirmation) of payment to that of the issuing bank. It arises because the
issuing bank’s guarantee may be of limited value since it may be
 In a foreign country;
 Small, or unknown to the seller;
 Subject to unknown foreign exchange control regulations.
Hence, the seller may request the buyer to arrange for a confirmed.
3. Revolving Letter of Credit
In case where buyer wishes to have quantities of the ordered goods
delivered at specified, such as in a multiple delivery contract, the Revolving
Letter of Credit is used. This is a commitment on the part of the issuing bank to
restore the credit to the original amount after it has been used or drawn down.
For example a buyer may stipulate that the seller has to supply 1 container
of computers each on february1, March 1 and April 1 in case of revolving Letter
of Credit the seller would be paid separately for each shipment only if it is on
time and conforms to the Letter of Credit. This avoids having to open three
different Letter of Credits for the same contract.
4. Transferable Letter of Credit
In cases where the seller is a trading house or where the seller does not
manufacture all the ordered goods in-house, the seller may wish to transfer part
or all the Letter of Credit to his supplier. To be able to do so the seller asks the
buyer to arrange for a transferable Letter of Credit.
For Transferring the Letter of Credit in favour of its suppliers, the seller has
to request the bank authorized to effect the transfer. The request for transfer
contains details like name of the second beneficiary, amount to be transferred and
the description of goods to be supplied.

On receiving the transferred Letter of Credits, the suppliers manufacture
and ship goods directly to the buyer. The suppliers submit documents as specified
in the Letter of Credit and obtain payment from the negotiating bank in the usual
manner.
5. Back-to-back Letter of Credit
When a trader receives a non-transferable Letter of Credit, he can opt for a
Back-to-Back Letter of Credit. This is used by Traders to make payment to the
ultimate supplier. The trader received a documentary credit from the buyer and
then opens another documentary credit in favour of the ultimate supplier. The
first documentary credit is used as collateral for the second credit.
The original Letter of Credit is also called a selling credit’ and the back-to-
back Letter of Credit is also known as a ‘buying credit’. The original Letter of
Credit and the back-to-back Letter of Credit are separate instruments independent
of each other and are in no way legally connected.
6. Red Clause Letter of Credit
When the seller does not possess enough finances to procure the raw
material for fulfilling the order, the buyer may arrange for a Red Clause Letter of
Credit. A red clause credit has a special clause that authorizes the confirming
bank to make advances to the beneficiary (seller) for purchase/ procurement of
raw material prior to the presentation of the shipping documents.
7. Green Clause Letter of Credit
A slight variant of the red clause Letter of Credit is the Green Clause Letter
of Credit. In the green clause Letter of Credit, financing is also extended for
packaging, warehousing and shipping the goods meant for export.

ADVANTAGES OF LETTER OF CREDIT
Letter of Credit is more preferred in foreign trade as compared to other
methods of payment. There is some element of unforeseen risks while dealing
with other methods. Hence to overcome the risks, an exporter prefers Letter of
Credit as the methods of payment.
 Advantages to the Exporter
1. No Blocking of Funds
Once the exporter fulfills all the conditions of Letter of Credit and presents
the documents for negotiation to his bankers, he receives payment as per the
terms of LC. The exporter is entitled to receive the full payment of the exports.
2. Free from Liability
Where the Letter of Credit is a confirmed and without recourse one, liability
of the exporter ceases once he presents the documents and adheres to all the
conditions of terms of trade.
3. Pre-shipment Finance
In India, pre-shipment finance is granted by commercial banks on the
strength of Letter of Credit received by the exporter from the importer’s bank.
4. Non-refusal by Importer
It is difficult for importer to refuse to take possession of goods and make
payment against bills drawn under Letter of Credit.

5. Reduction in Bad Debts
Under LC, the exporter does not run the risk of bad debts because the
issuing bank guarantees the payment. In the case of confirmed Letter of Credits,
there is a double guarantee by the issuing bank and confirming bank.
 Advantages to the Importer
1. Better Terms of Trade
The issuing bank lends the advantage of its own credit to the importer. This
enables the importer to secure better terms of trade from the foreign supplier,
which otherwise may not be granted.
2. Sure of shipment of Goods
The importer is reasonably assured, in case of documentary Letter of Credit
that the exporter cannot obtain any benefit under the LC without actually
shipping the goods and handing over the documents to the bank.
3. Overdraft Facility
The importer can get the goods even though he may not make actual
payment to the issuing bank, if the bank so agrees to offer overdraft facility.
Thus, the importer can purchase goods under bank’s surety/overdraft facility.
4. No Blocking of Funds
The importer need not block his funds by making advance payment to the
exporter.

EXPORT COSTING AND PRICING
 Meaning and Importance of Export Pricing
Price is the exchange value of a product or service expressed in terms of
money. It is that amount for which the seller is willing to sell and the buyer is
willing to buy a particular product. Export pricing, therefore, involves fixing the
price of export product or service which the exporter intends to sell in the
overseas markets. Price is one of the important elements of marketing mix.
(Marketing mix refers to 4P’s- Product, Price, Promotion and Place). Unless the
price element satisfies the customer, he may not buy the item.
The importance of pricing can be expressed as follows:
 Pricing Affects Revenue
When there is proper pricing, the exporter may be in a position to sell his
products in a large number.
 Pricing Affects Profitability
Pricing is an important decision in any business. It directly affects sales
revenue and thus profitability. In other words, when there is proper pricing, there
will be more sales, and more will result in higher profitability to the exporter.
 Pricing Helps to Penetrate the Market
Proper pricing enables the exporter to penetrate the markets. When the
products are reasonably priced, then it would be much easier to the exporter to
enter into markets and thus capture the market.

 Pricing Helps To Develop Brand Image
Given the right prices in the market, the consumers may purchase the
product and repeat their purchases. This brings a good image to the brand. The
good image of the brand develops brand loyalty. Customers continue to buy the
same brand in spite of several competing brands available in the market.
 Pricing Facilitates Growth and Diversification
Good prices lead to good sales which in turn lead to good profits. The
increased profits can be utilized on Research & Development. R&D may enable
the firm to develop new and better products, thus a firm can grow and diversify
into markets and in different product lines.
 Pricing Reflects The Quality Of The Product
Many-a-times, people tend to develop a direct relationship between price
and quality. Too low a price may mean low quality and vice-versa. Therefore, the
exporter should not fix low prices. At the same time very high prices are not
advisable in overseas markets.

 Factors Determining Export Prices
Price of goods depends upon a number of factors. Besides manufacturing
costs, exporters must evaluate, demand in each foreign market along with
competitive environment and government regulations. Apart from these factors
there are a number of other factors that are to be considered while fixing prices.
The various factors that affect pricing decisions are:
 Costs
Cost is one of the important factors while fixing export price, since costs
constitutes a large part of the price. The export price should cover up direct costs
such as raw material cost and also indirect cost such as distribution overheads.
 Demand
Price of goods to a great extent depends upon demand curve. For instance,
an increase in the demand may lead to an increase in price even though there is
no rise in costs and rise in costs may justify an increase in price, yet it may not be
possible to do so because of low demand and market conditions.
 Competition
The competition in foreign market is much severe than in the domestic
market, for the exporter has to compete not only with the local suppliers but more
so with competitors from other countries. There is much greater possibility of
developing countries exports being substituted by products coming from
developed countries, if there is price advantage. Therefore, the price should be
reasonable and within the range of that of competitors.

 Attitude towards developing countries’ products
Overseas buyers generally develop prejudice against products manufactured
in developing countries. This factor must be taken into account while fixing price
as goods from developed countries command higher prices as compared to the
goods from the developing ones.
 Quality and Price relationships
Consumers tend to rely on price as an indicator of a product’s quality,
especially in the case of prestige products. Generally, it is believed that lower
prices lead to higher sales, but it may not be the case. It is also to be noted that
buyers in developed countries are willing to pay higher prices as compared to
those from developing ones.
 Exchange and inflation rate
While fixing export price, different prices can be charged for different
countries taking into account the stability of exchange and inflation rates.
 Nature of consumers
The exporter should take into account the levels of income of the
consumers, their buying habits, purchasing power, etc. The buyers from
developed countries can be induced to pay higher prices if it is a qualitative
product. But it may be difficult in case of consumers of developing ones.
 Government factor

The government policies in respect of import and export must be taken into
account while fixing prices. The importing as well as the exporting countries
government plays a good role in export pricing.
INCOTERMS (TERMS OF SHIPMENT)
The process of securing the export order begins with the exporter sending a
price quotation to the prospective importer. The export price quotation defines (a)
the terms of delivery for the export of goods and (b) the rights and obligation of
the exporter and the importer. Thus, the price quotation should be stated in
unambiguous terms as any ambiguity can make a lot of difference between profit
and loss for the export firm. Such terms are also referred to as Terms of
delivery/Shipment or INCOTERMS (International Commercial Terms).
The international Chambers of Commerce (ICC, Paris) had prepared a set of
standard terms of delivery to be used by the exporters and importers worldwide in
the year 1953. These terms could be used by the export price quotations, known
as Incoterms. These terms were revised in 1980, 1990 and then 2000. There are
13 Incoterms most commonly used in the Intl. Trade, their international codes are
given below:
 EX-WORKS (EXW)
‘Ex-Works’ means that the exporter undertakes to deliver the goods to the
importer at the gate of his factory or works.
 FREE CARRIER (FCA)
“Free Carrier” means that the exporter fulfills his obligation to deliver when
he has handed over the goods, cleared for export, into the charge of the carrier
named by the importer at the named place or point. This term of delivery is

practiced by the importers having their own arrangements for taking delivery
goods in the buyer’s country and then shipping across their country.
 FREE ALONGSIDE SHIP (FAS)
‘Free alongside Ship’ means that the exporter fulfils his obligation to
deliver when the goods have been placed alongside the vessel on the quay or in
lighters at the named port of shipment. This means that the importers have to bear
all costs and risks of loss or damage to the good from that moment.
The FAS term requires the importer to clear the goods for export. It should
not be used when the importer cannot carry out directly or indirectly the export
formalities. The term can only be used for sea and inland waterway transport.
 COST AND FRIEGHT (CFR)
‘Cost and Freight’ means that the exporter must pay the costs and freight
necessary to bring the goods to the named port of destination but the risk of loss
or damage to the goods, as well as any additional costs due to events occurring
after time the goods have been delivered on board the vessel, is transferred from
the exporter to the importer when the goods pass the ship’s rail in the port of
shipment.
The CFR term requires the exporter to clear the goods for export. The term
can be used for Sea, Road, Air and inland water-way transport. Before shipment
of goods, the exporter should ensure that the buyer / importer have the insurance
done for the goods exported by the exporter.
 COST, INSURANCE AND FREIGHT (CIF)

Cost, Insurance and Freight’ means that the exporter has the same
obligations as under CFR but with the addition that he has to procure marine
insurance against the importer’s risk of loss of or damage to the goods during the
carriage. The exporter contracts for insurance and pays the insurance premium.
Under the CIF term the exporter is required to obtain the insurance on
minimum coverage or as agree as part of the Performa invoice or agreement /
contract.
The CIF term requires the exporter to clear the goods for export, pay for the
voyage freight and insurance. The term can be used for Sea, Road, Air and inland
waterway transport.
 CARRIAGE PAID TO (CPT)
‘Carriage paid to.’ Means the exporter pays the freight for the carriage of
the goods to the named destination. The risk of loss of or of damage to the goods,
as well as any additional costs due to events occurring after the time the goods
have been delivered to the carrier, is transferred from the exporter to the importer
when the goods have been delivered into the custody of the carrier. It may be
used for any mode of transport.
 CARIAGE AND INSURANCE PAID TO (CIP)
‘Carriage and insurance paid to...’ means that the exporter has same
obligation a under CPT but with the addition that the exporter has to procure
cargo insurance against the importer’s risk of loss of or damage to the goods
during the carriage. The exporter contracts for insurance any pay the insurance
premium.
 DELIVETED EX QUAY- DUTY PAID (DEQ)

“Delivered ex quay-duty paid” means that the exporter fulfils his obligation
to deliver when he has made the good available to the importer on the quay at the
named port of destination, cleared for importation. The exporter has to bear all
risks and costs including duties, taxes and other charges of delivering the goods
there to.
This term should not be used if the exporter is unable directly or indirectly
to obtain the import license.
 DELIVERED DUTY UNPAID (DDU)
“Delivered duty unpaid” means that the exporter fulfils his obligation to
deliver when the goods have been made available at named place in the country
of the importation. The exporter has to bear the costs and risks involved in
bringing the goods there excluding duties, taxes and other official charges
payable upon importation as well as the costs and to bear any risks caused by this
failure to clear the import in time.. This term may be used irrespective of the
mode of transport.

FINANCING IMPORTS
Bank lending activities under import and financing are mainly concentrated
on activities like:
 Import of consumable inputs and channelised items.
 Import of plant and machinery
 Imports are made under short – term credit facility extended by overseas
seller.
Credit support to imports is usually extended in the form of:
 Opening of import letter of credit.
 Financing imports in the form of cash credit, loans mostly against import trust
receipt, effecting payment in foreign exchange directly to overseas.
 Issuing deferred payment guarantees favoring overseas seller on behalf of
importer who is importing capital goods on long-term credit.
As a general rule, any credit facility extended to an importer is basically
appraised like any other domestic credit proposal, to ascertain that the business
has scope to generate cash flows that are sufficient to service the debt besides

leaving a reasonable profit with the borrowers. In addition to these normal credit
appraisal techniques, banks are expected to assess the loan requirement for
compliance with trade and exchange regulations that are applicable to the
respective import activity. It is in fact incumbent upon everyone concerned with
imports to comply with these regulations. In view of this, we shall now discuss
about opening of imports LCs or financing an importer against import trust
receipt, etc., and compliance with regulations in detail.
 Scrutiny of Application for opening an Import Letter of Credit
Whenever an importer approaches a bank for opening an import LC, banks
usually subject the request for scrutiny under the premises of:
1. Trade Control Requirements.
2. Exchange Control Requirements.
3. Credit Norms of the RBI.
4. Bank’s Internal Procedures.
According to the exchange control guidelines banks are required to open
Letters of Credit for their own customer’s known to be participating in the trade.
The opening of a Letter of Credit involves two stages where in the importer is
first required to make an application in the required format to the bank for
opening the LC.
Along with the application the applicant is also required to submit certain
important documents like:
 The exchange control copy of the import license / open general license
declaration form, in case the items to be imported are covered under
OGL.
 Letter of authority signed by the licenser in favor of the applicant, in case the
applicant is not the holder of the license.

 Pro forma invoice indent / sale contract, etc., covering the goods to be
imported.
 Board resolution in the case of limited companies authorizing the company to
establish the Letter of Credit.
 Board resolution for availing of import loan wherever necessary.
 Evidence of the Import – Export Code Number allotted by the Director
General Of Foreign Trade (DGFT) to the importer.
While submitting the application, the importer should take care to ensure that—
 The application form is duly stamped according to the law of the concerned
state and dated.
 The application form is signed on all pages by the authorized signatory.
 The application is filled in completely and any corrections or alterations are
duly authenticated.
 Particulars furnished conform to the pro forma invoice / contract / indent
backing the Letter of Credit.
 The tenor of the bill of exchange does not exceed that provided by the
exchange control regulations in force.
 Currency in which payment is to be made is in conformance with the
permitted methods of payment.
 Goods are consigned only in the name of the LC opening bank. Similarly,
documents of title to goods are in the name of the LC issuing bank and never
directly to the importer.
 The LC application clearly mentions the origin of the goods.
 The indent / contract continues to be valid.
 Terms and conditions mentioned are compatible with each other.
 The rate of interest if any for the usance period does not exceed the prime rate
of interest in the country of the currency in which goods are invoiced.

The import license should be:
 Be valid.
 Be issued on security paper and have a printed number and date.
 Have a security seal.
 Be in the name of the importer or properly transferred in his name with
proper transfer letters authorizing him to effect import and open letter of
credit, etc., by the license as per provisions of ITC policy.
 Commodity specified in the license should be the same as that indicated in the
application. Similarly, quantity or amount limits specified in the license
should be in agreement with that mentioned in the application. Also,
irrespective of the sale terms for which the letter of credit is proposed to be
opened, the import license should have adequate value to cover CIF value
plus agency commission and interest, if any.
 Country of origin of goods authorized in the license and country of shipment
as authorized should be in agreement with that which is stated in the letter of
credit agreement.
 The license should be valid for shipment at least up to the last shipment sate
requested for in the letter of credit application.
 If license is issued under any bilateral or multilateral agreement, the
conditions stated in the concerned agreements and the relative ITC
notifications are complied with.
 Similarly, an import letter of credit will have to comply with
certain exchange control aspects and hence the importer should
be aware that—
 LCs will be opened by bankers only in favor of their customers who are
known to be participating in the trade.
 For those goods, which are covered under the negative list of imports, LC will
be opened only if the importer submits a license marked “For Exchange
Control Purposes”.

 Where goods are imported from Nepal or Bhutan, payment will be made in
rupees and such an LC would be treated as a domestic LC.
 If import is made under a foreign loan or credit agreement and payment if
authorized under letter of commitment method, letter of credit should not
envisage any remittance from India. In the case of import licenses where
reimbursement method applies Authorized Dealers will make appropriate
stipulations to ensure that the prescribed documents are submitted to them
without fail.
 In case of import of technology and drawings, the applicant will be required
to pay Research and Development, before allowing remittance. An
undertaking to this effect is required to be given by the importer at the time of
opening the LC. In case of imports on cash basis, remittance should be
completed within six months from the date of shipment. However, in a
situation where there is un-drawn balance, payment for such amount can
exceed six months, but no interest will be paid on such amount withheld. If a
letter of credit is to be opened for transaction of merchanting or intermediary
trade, a letter of credit for the other leg of the transaction on back-to-back
terms will have to be LCs only in favor of their clients who are genuine
traders in goods and not mere financial intermediaries.

EXIM BANK
EXIM Bank is fully owned by the Government of India and is managed by
the Board of directors with repatriation from Government, financial institutions,
banks and business commodity. It provides financial assistance to promote Indian
exports through direct financial assistance, overseas investment fiancé, term
fiancé for export production and export development, pre-shipping credit, buyer’s
credit, lines of credit, re-lending facility, export bills rediscounting refinance to
commercial banks. The EXIM Bank also extends non-funded facility to Indian
exporters in the form of guarantees. The diversified lending programme of the
EXIM Bank now covers various stages of exports, i.e., from the development of
export markers to expansion of production capacity for exports of manufactured
goods, project exports, exports of technology services, and exports of computer
software.
Financing Programs

I. To Indian Companies II. Foreign Government III. To Indian Banks
Foreign Companies
i. Direct Assistance i. Buyer’s Credit i. Bill Rediscounting
ii. Overseas Investment ii. Lines of Credit ii. Refinance
Finance
iii. Pre-shipment Credit iii. Re-lending Facility
iv. Deemed Exports
v. 100% Export Oriented
Units and Free Trade
Zones
vi. Forfeiting
Lines Of Credit
Procedural Flow –Chart
1
5 9
7
8 4
COMMERCIAL
BANKS
OVERSEAS
BORROWERS
EXIM
BANK

2
3
6
1. EXIM bank signs agreement with Borrower and announces when
effective.
2. Exporter checks Producers and Services fee with EXIM Bank and
negotiates contract with Importer.
3. Importer consults borrower and signs contract with Exporter.
4. Borrower approves contract.
5. EXIM Bank approves contract and advises borrower and also
exporter and commercial bank.
6. Exporter ships goods.
7. Commercial bank negotiates shipping document and pays exporter.
8. EXIM Bank reimburses Commercial bank on receipt of claim by debit
to borrower.
INDIAN
EXPORTER’S
OVERSEAS
IMPORTER’S

9. Borrower repays EXIM Bank on due date.
EXPORT CREDIT GURANTEE CORPORATION OF INDIA
LTD.
Government of India set up the Export Risks Insurance Corporation (ERIC)
in July 1957 in order to provide export credit insurance support to Indian
exporters. It was transformed into Export Credit & Guarantee Corporation
Limited (ECGC) in 1964. To bring the Indian identify into sharper focus,
ECGC’s name was once again changed to the present Export Credit Guarantee
Corporation of India Limited in 1983. ECGC is a company wholly owned by the
Government of India. It functions under the administrative control of the Ministry
of Commerce and is managed by a Board of Directors representing Government,
Banking, Insurance, Trade, Industry, etc.
 STANDARD POLICIES
Issued to exporters to protect them against payment risks involved in export
on short-term credit.

Risk Covered under the Standard policies
 Commercial Risks
 Political Risks
 Specific Policies
Designed to protect Indian firms against payment risk involved in i) exports
on deferred terms of payments ii) services rendered to foreign to foreign parties,
and iii) construction works and turnkey projects undertaken abroad.
 Financial Guarantees
Issued to banks in India to protect them from risks of loss involved in their
extending support to exporters at pre-shipment and post-shipment stages.
 Guarantees By ECGC
Timely and adequate credit facilities, at the pre-shipment as well as post-
shipment stage, are essential for exporters to realize their full export potential.
Exporters may not, however, be able to obtain such facilities from their banks
with a view to enhancing the credit worthiness of the exporters so that they would
be able to secure better and large facilities from their bankers.
The guarantees assure the banks, that in the event of an exporter failing to
discharge his liabilities to the bank, and thereby making the bank incur a loss,
ECGC would make good a major portion of the bank’s loss. The bank is required
to be co-insurer to the extent of the remaining loss. The bank is required to be co-
insurer to the extent of the remaining loss. Any amount recovered from the
exporter subsequent to payment of claims shall be shared between the corporation
and the bank in the same ratio in which the loss was borne by them at the time of
settlement of claim. Recovery expenses shall be first charged on the amounts
recovered.

To meet the varying needs of exports, ECGC has evolved the following
types of guarantees:
 Packing Credit Guarantee
Any loan given to an exporter for the manufacture, processing, purchasing
or packing of goods meant for export against a firm order or letter of credit refers
to Packing credit guarantee. Pre-shipment advances given by banks to parties
who enter intro contracts for export of services or for construction with such
contracts are also eligible for cover under the guarantee.
 Export Production Finance Guarantee
The purpose of this Guarantee is to enable banks to sanction advances of
the pre-shipment stage to the full extent of cost of production when it exceeds the
f.o.b. value of the contract / order, the differences representing incentives
receivable. The extent of cover and the premium rate are the same of Packing
Credit Guarantee.
 Post –Shipment Export Credit Guarantee
Post-Shipment finance given to exporters by banks through purchase,
negotiation or discount of export bills or advances against such bills qualifies for
this guarantee. It is necessary, however, that the exporter concerned should hold
suitable policy of ECGC to cover the overseas credit risks.
 Export Performance Guarantee
Exporters are often called upon to execute bonds duly guaranteed by an
Indian Bank at various stages of export business. An exporter who desires to
quote for a foreign tender may have to furnish a bank guarantee for the big bond,
if he wins the contract, he may have to furnish bank guarantees to foreign buyers

to ensure due performance or against advance payment or in lieu of retention
money or to a foreign bank in case he had to raise overseas finance for his
contract. Further, for obtaining import licences for raw materials of capital goods,
exporters may have to execute an undertaking to export goods of a specified
value within a stipulated time, duly supported by bank guarantees.
 Export Finance (Overseas Lending) Guarantee
If a bank financing an overseas project provides a foreign currency loan to
the contractor, it can protect itself from the risk of non-payment by the contractor
by obtaining Export Finance (overseas lending) Guarantee.
SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS
SURVEY REPORT ON FINANCING OF EXPORT-IMPORT
NAME:
DESIGNATION:
SIGNATURE:
1. Are you aware about Export – Import in India?
YES NO
2. Do you know when Pre-Shipment Finance is given?
Before Export Of Goods After Export Of
Goods
3. Do you know when Post-Shipment Finance is given?

Before Export Of Goods After Export Of
Goods
4. What undertaking is given by Importer’s bank to Exporter as a
guarantee of payment?
Letter Of Credit Bank Guarantee
5. Which main Government Financial Institution promotes Import –
Export Finance?
EXIM Bank Central Bank SBI
6. Suggestions:
Project Guide: Nishikant Jha PAYAL G. JANI
(Signature) TYBBI – 23
ANALYSIS ON SURVEY REPORT
1. Are you aware about Export – Import in India?

YES
NO
2. Do you know when Pre-Shipment Finance in given?
Before Export Of Goods
After Export Of Goods
3. Do you know when Post-Shipment Finance is given?

Before Export Of Goods
After Export Of Goods
4. What undertaking is given by Importer’s bank to Exporter as a
guarantee of payment?
Letter Of Credit
Bank Guarantee
5. Which main Government Financial Institution promotes Import –
Export Fianace?

EXIM Bank
Central Bank
SBI
ANNEXURE

Report on Visit to Central Bank
Q1 What facility do you provide to Importer & Exporter?
We provide all types of finance facility to both Importer and Exporter
such as granting of loan, Pre-shipment finance, Post-Shipment Finance,
Short-Term and Long-Term credit facility, etc.
Q2 On what basis do you provide finance?
We provide finance on the documents submitted. Say, in case of
importer, w ask for Import License, sale contract covering the goods to be
imported, evidence of import-export code number allotted by the Director
General of Foreign Trade (DGFT) to the importer and other such required
documents for issuing of loan or finance.
Creditworthiness of the person is also taken into consideration.
Asking for his accounts in banks and from where the person had taken
finance before.
Q3 Is simple bank guarantee in force now for issuing finance?
Yes, bank guarantee is being given but mostly Letter Of Credit is
being issued.
Q4 Do you have Purchase Bill Discounting facility?
Yes, we do have discounting facility.
Q5 When do you give the guarantee, means you give after you receive receipt of
shipment?
Yes, the guarantee is given by us to the Exporter’s bank only after we
receive receipt of shipment.

Q6 For Post-Shipment finance what documents are required?
The documents include all shipping documents and an extra copy of
invoice, relating to any report declaration form endorsed by Customs or
Postal authorities.
Q7 What is the procedure to acquire Post-Shipment finance?
Exporter has to submit an application to the bank with required
documents or undertaking as asked by the bank. Then application is verified.
Bank also takes into account the creditworthiness of Exporter and also
characteristics of the product exported.

CONCLUSION
By making project on Financing Export Import, I like to conclude that the
export and import is very important for every country whether it’s developed
country or a developing country as exports enable a country to earn valuable
foreign exchange and strengthen the national economy. It also enables countries
to import basic raw materials, advanced technology and various components
required for production.
A strong foreign exchange helps the countries to face financial difficulties.
As now a days in India mostly all banks deals in International Trade and Finance
for Export and Imports so this is positive point for our country.
Through export cordial relations is develop among the nations which helps
in bringing world peace and economy development at the global level. No
country is completely independent or self sufficient as regards of all its
requirements. Interdependence of countries is bound to continue in future with
increasing exports.

BIBLIOGRAPHY
 International Banking
ICFAI University.
 Export-Import Procedures and
Documentation
N. G. Kale
 SIFT MANAGEMENT
WEBLIOGRAPHY
www.eximindia.com
www.ecgc.com
www.google.com
www.dgft.com
www.ieport.com

Ex im financing

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Semelhante a Ex im financing

Semelhante a Ex im financing (20)

Mais de Dharmik

Mais de Dharmik (20)

Último

Último (20)

Ex im financing