export finance - shivali mehta

Export Finance

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL

FULFILLMENT OF MASTER DEGREE IN MANAGEMENT STUDIES

EXPORT FINANCE

SUBMITTED BY

SHIVALI MEHTA

MMS (2009-2011)

Roll No. : 426

INDUSTRY GUIDE

Mr. Hitesh Shah

AVP - Finance

Alok Industies Ltd

Export Finance


ACKNOWLEDGEMENT

Every endeavor in itself is an impression of the efforts of not only those who pursue it but of those as

well who provide guidance and motivation towards its successful completion. Likewise, this project

bears an imprint of all those who helped me at various stages and it would be unfair on my part not to

thank them.

I would like to express my sincere gratitude to Mr. Sunil Kandelwal(CFO), and Mr.Alok Mehrotra for

providing me with an opportunity to undergo training with their esteemed organization.

The successful completion of this project could not have been possible without the co-operation and

encouragement of Mr. Hitesh Shah AVP Finance and Mr. Hussain Tayebkhan and the entire Product

Team who provided me with their unending support from the very beginning of the project, which

helped in timely completion of the project.

I would also like to thank Mr.Satyanarayan, Mr.Sagar, Mr.Ajit, Mr. Sandeep, Ms. Shilpy, Mr. Saurabh for

all their valuable assistance in the project work.

I think it is most essential to thank Prof P.L. Arya, My Mentor Prof Gulab Mohite and all other Professors

who continued to have an impact on my thinking which helped me to complete this project.

Doing training at Alok Industries Ltd was a wonderful experience for me, as it instilled in me a great deal

of confidence and ability to work with the co-team members which bought in the ability to coordinate

with compliance.

Export Finance


Certificate of Originality

This is to certify that this project Export Finance is the original work of Ms. Shivali Mehta and is being

submitted in partial fulfillment of the requirement of the MBA program of N.L. Dalmia Institute Of

Management Studies And Research.

No part of this project has been submitted prior to this to any college or institution. The project is based

on export procedure and export finance and has been compiled at the Corporate Office of Alok

Industries under the guidance and supervision of the company guide, Mr. Hitesh Shah.

For Alok Industries Limited

Mr. Hitesh Shah

Assistant Vice-President, Finance

Export Finance


SUMMARY

Finance is the very life-blood of a business organization. Before we can even start setting

financial goals, we need to determine where we stand financially. It goes without saying that

being such a vital cog in the machine, the lack of it can stifle even the most mammoth of

organizations. In a world as turbulent as the one we live in, financial freedom is a term that is

rarely even whispered in the most sophisticated financial circles. A big part of financial freedom

is having your heart and mind free from worry about the what-ifs of life. Colorless as this may

sound; in the export business the what-ifs of life are usually the volatility in the currency

markets! Sudden, unforeseen movements in exchange rates can cripple an organizations

finances. While there can be no absolute manner to determine and predict the movements as a

consequence of such volatility, there can always be a strategy to neutralize it. The essence of this

project attempts to explain the means through which that strategy may be achieved. It would be

injudicious however to dive straight into the world of export finance without discussing in some

detail the procedures that precede it and therefore the first two sections of the report are

dedicated to the pre and post-shipment procedures, the documentation involved and the terms of

financial settlement in international trade. Export finance has only been dealt with in the next

two sections and has been backed with appropriate examples and illustrations wherever required.

It is my intention, to develop a project/manual that simplifies the procedures and the

fundamentals of export finance for the reader. I hope to have achieved this through this project.

Export Finance


TABLE OF CONTENTS

Sr. No. Page No.

1. Introduction 1

World 2

India 3

2. Swot Analysis Of Indian Textile Industry 4

3. Company Profile of Alok Industries 6

4. Export 9

5. Technicalities involved in export 12

6. Pre shipment Process 15

Quotation & Order Confirmation 16

Modes of Payment 18

Inco terms 21

Documentation 22

7. Shipment of Goods 37

8. Export Incentive Schemes 39

9. Post-Shipment 43

10. Risk in Export Finance 45

11. Export Finance And Risk Mitigation 48

12. Pre-shipment Finance 48

13. Post-shipment Finance 55

14. Application of interest rates 58

15. Period of credit 61

Export Finance


16. Export Factoring Vis--Vis Other Payment Options 64

17. Risk Arbitrage Tools 69

18. Foreign Exchange Market 78

19. Conclusion 83

20. References 84

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OBJECTIVE OF THE REPORT

Report will help company to list down all procedures of export trade. Various documents

required in the report will help company to make a detailed analysis of documents prepared by

various departments for SAP implementation.

To study various available financing options for company by using appropriate Risk

Arbitrage tools .

Scope of the project

Detailed Export Procedure

Types and importance of different Documents

Different types mode in which payment is received by the company

Types and procedure of Export Financing

Various types of Incentives available and the procedure for applying for the same

Different types of risk arbitrage tools.

Export Finance

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH 1

Introduction

Textile industry is providing one of the most basic needs of the people and the holds importance;

maintaining sustained growth for improving quality of life. It has a unique position as a self

reliant industry, from production of raw materials to the delivery of the finished products, with

substantial value addition at each stage of processing. It is a major contribution to the countrys

economy.

Its vast potential for creation of employment opportunities in agricultural, industrial, organized

and decentralized sectors and rural and urban areas is noteworthy

Although the development of textile sector was earlier taking place in terms of general policies,

in recognition of the importance of the sector, for the first time a separate policy statement was

made in 1985 in regard to the development of the sector.

Export Finance


TEXTILE INDUSTRY OVERVIEW

THE WORLD MARKET

The global textile trade (including clothing) is estimated to be around US$ 530 billion,

with a 4.5% share of the worlds merchandise. World demand for apparels and textiles is

expected to reach US$ 700 billion by 2012, with the US and Europe continuing to be the

dominant markets for textiles and apparel, though a substantial portion of the incremental

demand will be driven by the Asian countries.

Textile capacities in the developed economies have shrunk during the last few years,

mainly due to high production and labor costs. On the other hand, Asian countries like India,

China, Bangladesh, Vietnam and Cambodia have the advantages of relatively abundant raw

material supplies and low wage costs. Moreover, a number of Asian manufacturers are now

offering not only quality products at the right time and price, but also value added design

solutions to demanding international customers. Europe is still a significant player; however, it

has seen its share decrease from 50% of the world market share to about 30% over the last few

years; this share is expected to reduce even further. Asian textile manufacturers in general and

Indian textile manufacturers in particular are likely to capture more of the global market share in

the coming years, given their increasing technological capabilities, capacities to service large

volume orders and competitive pricing. Thus, over a period of time, the textile manufacturing is

going to be dominated by the Asian countries.

Export Finance


INDIA

India is the second largest producer of textiles and garments in the world and also the

second largest producer of cotton. The textiles sector is Indias second largest employer, giving

direct employment to over 35 million people and providing for indirect employment to an

additional 56 million people. It contributes towards 15% of Indias exports and 4% of Indias

GDP. The industry also accounts for 14% of total industrial production.

The Indian textiles industry is estimated at US$ 52 billion. The domestic textile market, is

expected to grow at a CAGR of 10%, while exports are expected to grow at 19% CAGR. By

2012, the industry is expected to be at US$ 110 billion, of which US$ 50 billion would be in

exports and US$ 60 billion would be domestic sales.

On the export front, international retailers and private label brands are increasingly looking at

India as a viable and quality supply source. Indias design and fashion abilities will add to its

quest in becoming a destination of choice for textiles. Speciality fabrics is also an area where

there is potential for export growth.

Export Finance


SWOT ANALYSIS OF INDIAN TEXTILE INDUSTRY

STRENGTHS:

Strong and diverse raw material base

-Third largest producer of cotton

-Fifth largest producer of man-made fiber and yarn

Vertical and horizontal integrated textile value chain

Globally competitive spinning industry

Average cotton yarn spinning cost at US$ 2.5 per kg, which is lower than all the

countries including China

Low wages: Rate at 0.51 US$ per operator hour as compared to USD 1 of China and

USD 2.5 of Turkey

Unique strength in traditional handlooms and handicrafts

Flexible production system

Diverse design base

WEAKNESSES:

Structural weaknesses in weaving and processing

- 2% of shuttle-less looms as percentage of total looms as against world average of 16%

and China, Pakistan and Indonesia 15%, 9% and 10% respectively.

Highly fragmented and technology backward textile processing sector

Highly fragmented garment industry

Except spinning, all other segments are predominantly decentralized.

Export Finance


Rigid labor laws: proving a bottleneck particularly to the garment sector. Large seasonal

orders cannot be taken because the labour strength cannot be reduced during the slack

season.

Inadequate capacity of the domestic textile machinery manufacturing sector.

Big demand and supply gap in the training facilities in textile sector.

Infrastructural bottlenecks in terms of power, utility, road transport etc.

OPPORTUNITIES

Quota phase out pushing the export growth

Buoyant domestic economy

- Increasing disposable income levels.

- Increasing working female population: The propensity to spend in the case of

working women is higher by 1.3 times as compared to a house wife.

Increased usage of credit cards and availability of cheap finance would also provide

fillip to impulsive apparel purchases.

The revolution in organized retailing would increase the consumption of apparel and

made-ups.

THREATS

Possibility of a global recession triggered by a weakening dollar.

Higher competition especially after 2008 when China cannot be restrained under WTO.

Non-availability of indigenous textile machinery.

Lack of domestic capital and absence of appetite of domestic industries to invest in the

quantities envisaged for 12 percent growth target.

Export Finance


COMPANY PROFILE OF ALOK

INDUSTRIES LTD

Alok was established in 1986 as a

private limited company, it set up its first

polyester texturising plant 1989. It became a

public limited company in 1993. Over the

years, it has expanded into weaving, knitting,

processing, home textiles and garments. And to

ensure quality and cost efficiencies it has integrated backward into cotton spinning and

manufacturing partially oriented yarn through the continuous polymerisation route. It also

provide embroidered products through Grabal Alok Impex Ltd., its associate company.

That is how it has evolved into a diversified manufacturer of world-class home textiles,

garments, apparel fabrics and polyester yarns, selling directly to manufacturers, exporters,

importers, retailers and to some of the worlds top brands.

Alok has recently entered the domestic retail segment through a wholly owned

subsidiary, Alok Retail India Limited, with a chain of stores named H&A that offer garments

and home textiles at attractive price points.

It has also ventured into the realty space through wholly owned subsidiaries with

investments in some prestigious projects in Mumbai.

Export Finance


Textiles Offerings:

Alok is an end-to-end

textile solutions provider. Its

products encompass the

entire value chain from

cotton and blended yarn to

fabrics to garments and

home textiles. A significant

portion of these products are

cotton based - manufactured from both organic cotton and 'regular'

Strengths:

Alok has a diversified customer base, both in India and overseas. In India, it supplies

textile offerings to top-of-the-line retailers, garment and home textile manufacturers and

exporters. It is also a nominated / preferred vendor for several brands and retailers in the

overseas markets, where its wide range and product quality command loyalty and earn respect. It

exports to over seventy countries in North and South America, Europe, Africa, the Middle East

and Asia.

Financial Performance:

It has well established business with net sales of Rs. 4314.67 Crores for the year 2009-

2010.Their plants are located at Silvassa, Rakholi, Dadra Nagar Haveli, Vapi, Pawne, Turbhe &

Bhiwandi. Alok has established a foothold in diversified markets viz; Direct exports, Garment

exporters & Domestic market with large customer base comprising of reputed international

buying houses/ retailers in the overseas market & reputed garment manufactures /exporters &

retailers in the domestic market. Operating profit before tax for the year 2009-2010 is Rs 367.29

crores and operating profit after tax is Rs 242.45 crores. Export Sales for the last quarter of year

2010 was Rs.607.60 crore, a growth of 134.35% over the corresponding quarter of the previous

year (Rs. 259.27 crore).

Export Finance


Export Finance


As mentioned the project is about export finance, so the first thing on which I would like to

throw some light is nothing but export.

What is export?

In economics, an export is any good or commodity, transported from one country to another

country in a legitimate fashion, typically for use in trade. Export is an important part of

international trade. Its counterpart is import.

Export goods or services are provided to foreign consumers by domestic producers. Export of

commercial quantities of goods normally requires involvement of the Customs authorities in both

the country of export and the country of import.

But the question arises why to export?

General objectives will probably be:

To increase profitability

To utilized production capacity to the full

More specifically:

The small domestic market may not provide you with the opportunity for growth that

your company needs

You may be manufacturing a specialized product and find there are not enough customers

through international trade.

You may be looking for the increased security your company can achieve by spreading

its risks over a variety of markets

You may want to ensure that your product is kept up to date by exposure to competition

in international markets.

One major benefit of exporting is that it provides scope to develop a company's strengths and

abilities by improving its balance of payment position. Selling in an international environment

Export Finance


will sharpen your innovative edge and open up opportunities that might never come your way if

you limit yourself to the home market.

Pursuing export markets is recommended in a number of situations:

demonstrated international demand for your products

higher international prices for your manufactured goods

moderate or slow domestic market growth with strong, unsaturated or growing markets

abroad

competitive pressures in your domestic market reducing prices and margins

competitors leveraging their profitability in foreign markets to increase their market share

in your domestic market

relatively low labor or capital costs as compared with foreign manufacturers

Strategic needs: capital, technology, capacity, partners, government assistance, etc.

intangible needs conforming with multi-cultural or internationally oriented corporate

culture

What points to be taken into consideration to form a export strategy. Has ALOK followed those

strategies while starting their business in export or giving it a new height in export business?

Export Strategy

Preparation of an Export Plan is a must for achieving success in Export. The Company should do

a basic SWOT analysis identifying its Strengths, Weaknesses, Opportunities and Threats.

In addition to the above, due compliance with all the Government Rules and Regulations in

force, costs, time schedules, operational steps, impact of export on the company etc. should be

kept in mind.

The steps can be discussed as under:

Export Finance


Objective

Determine how exporting will enhance the company's short, medium and long-term goals.

The very first step that is setting objective is well explained by ALOK industries. ALOK is going

for export for profit, and its gaining a huge profit from export.

Assessment of Markets

Examine foreign markets through research. The purpose is to identify marketing opportunities

and constraints abroad, as well as to identify prospective buyers and customers.

All this is done well with different department of ALOK like marketing, export, R&D, etc

Selecting and preparing the Product:

Selecting and preparing the product for export requires not only product knowledge but also

knowledge of the unique characteristics of each market being targeted. Market research

conducted will give the company an idea of what products can be sold and where

It is important to ascertain the cost of the product at the very beginning. The cost of procuring or

manufacturing the product should be very economical so that it is competitive and you dont lose

out to other exporters for the same product in this respect.

Mode of operation:

You can operate your export business as:

Merchant exporter: i.e. buy goods from merchant/manufacturer and then sell them to

buyer,

Manufacturer Exporter i.e manufacture the goods and then sell them to buyer, or

Agent i.e act on behalf of seller/buyer and charge commission

ALOK is operating as a manufacturing exporter and Merchant exporter

Export Finance


Channels of Export:

Distribution of the product is an important aspect in export and an exporter has to decide how the

overseas sale is to be conducted. The following channels of distribution are generally used-

Export through Overseas Agent (by appointing agent in the overseas Country)

Export by opening a branch office overseas

Export through a canalizing agency

Export through Trading House / Export House

Direct Exports (i.e exporter himself promoting sale of his product)

ALOK is having its branches overseas like it has branches in U.K, Srilanka and Czhek Republic

and it also do direct export and have big agents in oversea too.

TECHNICALITIES INVOLVED IN EXPORT

All exporters have to comply with the legal formalities & duly obtain registrations &

certifications as required under various enactments of the Government before starting the process

of export business.

Bank A/c

Open a Current Account with a reputed Bank which is authorized to deal in foreign

exchange. Alok is well established company it has its a/c in banks like standard chartered bank,

Bank of India, BOB, etc.

Import Export Code No.

No person is allowed to export or import goods without obtaining the IEC No. from the

regional licensing authority unless specifically exempted under any other provision of the Export

Import Policy.

Export Finance


Registration cum Membership Certificate (RCMC):

For availing various concessions under the current Foreign Trade Policy, the exporter is

required to get registered with the concerned Export Promotion Council or Commodity Board by

obtaining Registration-cum Membership Certificate.

Permanent Account Number (PAN):

All exporters & importers who have IEC No. are compulsorily required to have a PAN

No. as well. The Permanent Account Number issued by the Income Tax Authorities is taken as

the common business identifier for all importers & exporters in Customs operation.

Registration for Value Added Tax (VAT):

All legal & natural persons who provide goods, works or services & have an annual sales

turnover exceeding the threshold limit (to be decided by each sate) should register as taxpayer.

All importers are required to register irrespective of their annual turnover.

Registration with Regional Licensing:

The Customs authorities will not allow you to import or export goods into or from India unless

you hold a valid IEC number. For obtaining IEC number you should apply to Regional Licensing

Authority in duplicate in the prescribed form. Before applying for IEC number it is necessary to

open a bank account in the name of your company/firm with any commercial bank authorised to

deal in foreign exchange.

Register With Export Promotion Council:-

In order to enable you to obtain benefits/concession under the export-import policy, you

are required to register yourself with an appropriate export promotion agency by obtaining

registration-cum-certificate.

Export Finance


Shipment Procedure

Once the contract has been won, the export department takes over with preparation of all the

documents necessary to be prepared at each stage of the transaction.

The export procedure can be split into 3 stages:

(i) Pre-shipment

(ii) Shipment

(iii)Post-shipment

Export Finance


Performa is issued

LC is opened and PO is

recieved

Preshipment finance is

obtained on PO / LC

Documentation work

Custom clearance is

obtained

Goods are stuffed in the

container

Flow Chart Of Pre Shipment Process

p

Pre

sh

ipm

en

t

Documents Prepared by

Export Dept.

1. Invoice 2. Packing list 3. Shipping bill 4. GSPA 5. ARE

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Quotation & Order Confirmation

The organization, upon inquiry from a prospective buyer issues a quotation mentioning its terms

and conditions related to shipping of goods, payments, price and quality of goods. It also

provides value & volume of goods, terms for letter of credit, as per the case and other details

related to trade like date and time period for shipment, destination port, and final destination.

The importer on accepting the terms & conditions, sends a Purchase order (PO).

Once the customer has sent the purchase order, it is usually followed up by an order confirmation

from the seller. This must also be accompanied by a pro-forma invoice, which is prepared by

the exporter and is an indication of what the real invoice will look like after delivery. The

importance of this document should not be overlooked as it forms the basis for the preparation of

all the documents required at various stages of the transaction. It is issued against the export

order and is basically an acceptance and reconfirmation of the terms of contract. Providing a

detailed and unambiguous pro-forma invoice is essential, since it provides a base for establishing

Letter of Credit (L/C) or receiving remittance from the importer as the case may be. The opening

of a letter of credit (hereinafter referred to as L/C) is made easier with a pro-forma invoice since

it establishes in advance the various terms and conditions, how the buyer and seller intend to

divide the risks arising out of the export contract, how payment will be made and other

specifications. Thus it allows the bankers to make an accurate assessment of the essentials of the

contract and open the L/C on behalf of the importer.

Given below are the various details/terms/clauses that must be mentioned while preparing the

pro-forma invoice.

The various clauses for a pro-forma invoice include:

Address of the prospective buyer/consignee

Details of goods to be shipped

Details of the price, quantity, rate and amount of shipment

Mode of shipment (Air/Sea/Road)

Port of Loading (Any Port/Airport in India)

Port of Discharge (Named port and country)

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Final Destination (place of delivery, port of discharge or inland destination)

Terms of Payment (TT, L/C, D/P(CAD), D/A etc)

Price Basis (FOB, CFR, CIF etc, which are incoterms)

Apart from these mandatory details that are required to be included in the pro-forma

invoice, other details that must be disclosed vary according to the terms and mode of

payment.

In case the mode of payment is Letter of Credit the following additional details/terms must be

mentioned:

Specify date/s of shipment

L/Cs should be irrevocable and opened by a prime bank

Tolerance (+/- in % ) in quantity and value to be permitted

L/C to be freely negotiable with any bank in India

Place of expiry of L/C should be India

Provide sufficient time to present original documents to the negotiating bank

Partial and Transshipment to be allowed

All bank charges outside country of issue (of L/C) to be on applicants account (importers

account).

In case the mode of payment is through T/T, D/P, and D/A the following additional details/terms

must be included:

Specify date/s of shipment

Tolerance (+/- in % ) in quantity and value to be permitted

To provide beneficiarys banking details (exporters banking details) for calling funds in

case of payment by T/T

Partial and Transshipment to be allowed

Specify payment terms, i.e. T/T or documents against payment (D/P), Cash against

documents (CAD) or documents against acceptance (D/A)

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Bank details of the buyer need to be obtained in case of payment terms being D/P

Modes of Payment

Since mention has been made of the various modes of payment in the above section, it would be

appropriate to briefly explain the various modes of payment in international trade. There are four

commonly used methods of payment in international trade. They are:

Cash in Advance: In this method the payment is made by the importer before the goods

are shipped and before ownership of the goods is transferred. This is easily the most

beneficial option for the exporter since the inflow of cash before the shipment of goods

obviates cash flow problems that arise in other methods of payment. Wire transfers

(Telegraphic Transfer (T/T) is the widely used cash in advance option. Conversely it is

also the riskiest option for the importer since it creates cash flow problems.

Letters of Credit: L/Cs are the popular and secure instruments available to

international traders. An L/C is a commitment made by the importers bank on his behalf,

stating that the payment will be made to the exporter on fulfillment of the terms and

conditions of the L/C. The bank charges a fee from the importer for this service. An L/C

is secure since it protects the importer from payment until the goods are delivered to him

while at the same time protecting the exporter from credit risk (non-payment by

importer). An irrevocable letter of credit is one which cannot be canceled. It guarantees

that a buyer's payment to a seller will be received on time and for the correct amount.

Export Finance


Figure below illustrates pictorially an L/C transaction in proper sequence:

Exporter

Importer

Advising Bank

Issuing Bank

1. C

ontr

act

2. Applies for LC in favor of exporter

3.Issu

es LC

to ad

visin

g b

ank

4. LC is forwarded to the exporter

5b. Forwards documents

6. C

heck

s docs fo

r com

plian

ce

with

LC

and fo

rward

s them

to issu

ing b

ank

7. M

akes p

ayment5

a. S

hip

s G

oods

9. Makes payment

10. Releases Docs required to collect goods

LETTER OF CREDIT TRANSACTION

8. Makes Payment

Documentary Collections: According to this method the payment is made by the

importer upon receiving the documents (required for transfer of title to the goods) such

as the bank commercial invoice, bill of lading and packing list. Documentary collections

involve using a draft and are of two types. Documents against acceptance (D/A) and

Documents against payment (D/P) also known as Cash against Documents (CAD). In the

first case the importer gives an acceptance stating that he will make the payment within a

stipulated period of time at a specified date in order to receive the documents. In the

latter case the importer must make immediate payment at sight (of the documents) in

order to receive the documents. The draft contains instructions that specify the

documents required for transfer of title to the goods.

Export Finance


Figure below illustrates pictorially a documentary collections transaction:

D/P Makes payment at sight

D/A Accepts Draft and makes payment on due date

Exporter

Importer

Remitting Bank

Collecting Bank

1. C

on

trac

t3. F

orw

ards d

ocs to

collectin

g

ban

k

2b. Fwds documents and payment instructions

6. M

akes p

aymen

t at sigh

t

or o

n d

ue d

ate

2a.

Sh

ips

Goods

4. Makes payment at sight or accepts draft and

makes payment on due date

5. Releases docs in exchange for payment

or acceptance of draft

DOCUMENTARY COLLECTIONS

7. Makes Payment

Open Account: This method is the most advantageous as far as the importer is

concerned and conversely the riskiest option for the exporter. According to the terms of

this transaction, the goods are shipped and delivered before the payment is made, which

is usually within a period of 30-90 days from the date of shipment. Although this is least

advantageous for the exporter, the intense competitiveness in the global scenario has

forced exporters to offer open account terms to capture markets abroad. However, the

risk of non-payment can be mitigated with the help of various credit finance instruments.

Export Finance


The diagram below clearly illustrates, on a scale, the safest option and the riskiest option

for the importer and exporter. For instance Cash in Advance is the safest option for the

exporter since he receives cash before shipping the goods, thus payment is guaranteed.

Conversely it is the riskiest option for the importer since he has to make the payment

before he receives the goods, thereby increasing risk of non-delivery.

Inco terms

Inco terms or international commerce terms are internationally recognized sales terms that are

used in international trade circles around the world. They are terms that illustrate the division of

costs and responsibilities between the exporter and importer.

1. The E term (EXW) The only term where the seller/exporter is responsible for making the

goods available at his or her own premises to the buyer/importer

2. The F terms (FCA, FAS, FOB) Here the seller/exporter is responsible to deliver the goods

to a carrier named by the buyer.

3. The C terms (CFR, CIF, CPT, CIP) In this case the seller/exporter is responsible for

contracting and paying for carriage of the goods, but not for additional costs/risk of loss or

damage to the goods once they have been shipped. C terms evidence shipment contracts.

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4. The D terms (DAF, DES, DEQ, DDU, DDP) The seller/exporter is responsible for all costs

and risks associated with bringing the goods to the place of destination. D terms evidence

arrival contracts.

Documentation

Once the importer has accepted the terms and conditions mentioned in the pro-forma invoice he

proceeds to open the Letter of Credit in his bank, (known as the issuing bank) or makes the

advance remittance as per the payment method agreed upon in the contract. In case of an L/C, a

draft L/C is prepared and sent to the exporter for confirmation, who scrutinizes it and makes the

desired changes or gives his acceptance for the same. Upon confirmation of order & receipt of

remittance/ final Letter of Credit from the importer the raw material procurement and production

activity is carried out by the concerned department and factory to produce the goods as per

schedule. On receipt of packing list from the factory, pre-shipment documents are prepared

under appropriate scheme, i.e. DEPB / Duty Drawback.

The Reserve Bank of India has issued Foreign Exchange Management (Export of Goods &

Services) Regulations, 2000. Under Regulation 3, every exporter of goods or software in

physical form or through any other form, either directly or indirectly, to any place outside India

other than Nepal and Bhutan shall furnish to the specified authority a declaration in prescribed

form or supported by such evidence as may be specified.

All exports to which the above requirement applies must be declared on appropriate forms as

indicated below:

GR Form: (in duplicate) for exports other than by post including export of software in physical

form

SDF Form: (in duplicate and appended to the shipping bill) for exports declared to Custom

Offices notified by the Central Government which have introduced EDI system for processing

Shipping Bill.

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PP Form: (in duplicate) for export by post

Documents Required: The documents required to be drawn up may vary based on the country of

import, category of goods etc but for the most part, the documents required are the following:

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Invoices

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Packing list

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Certificate of Origin: International sale contracts usually require a document certifying the

country of origin of the goods, which is necessary to determine import duties payable in the

country of import.

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Export Finance


Mates Receipt: Mates receipt is a document issued by the Chief of the vessel after the goods

are loaded. It contains details such as the name of the shipping line, name of the vessel, port of

loading and discharge, description and condition of the goods. The Mates Receipt is transferable

and it must be presented at the shipping Companys office to collect Bill of Lading after

shipment.

Export Finance


Bill of lading: Bill of Lading is a document issued by the Shipping Company (or its agent)

acknowledging the receipt of goods for shipment on board the vessel, and undertaking to deliver

the goods as received, to the consignee or his order, provided that the freight and other charges

as specified in the Bill of Lading have been duly paid. It is prepared in the standardized Aligned

Document Format. Bill of Lading is a Negotiable Instrument.

It is generally prepared in a set of three originals. All the three must be marked

ORIGINAL. All the Originals are duly signed by the master of the ship or on his behalf

and all the originals are equally valid for taking delivery of the goods.

Therefore a Bill of Lading is:

a formal receipt by the ship-owner or master of the ship

a memorandum of the contract of carriage

a document of title to the goods

Export Finance


Export Finance


Shipping bill: This document is issued by Customs and it certifies custom clearance. A

copy of shipping bill is sent to the exporters bank as a post shipment document. It

contains details about the goods such as:

Indicate the date and place of issuance

Name and mode of the carrier

Name of the consignor and consignee

A brief description of the goods being carried

Indicates the port of loading or taking in charge

Indicates the port of discharge

FOB value of goods in both foreign currency as well as domestic currency

Amount of freight & insurance paid, if any.

Invoice number and Forex account number.

In case of export by sea or air, this document is termed 'Shipping Bill', and in case of export

by road it is called the 'Bill of Export'.

There are 5 types of shipping bills:

(i) Shipping Bill for export of duty free goods which is white in colour.

(ii) Shipping bill for export of goods under claim for duty drawback which is Green in

colour.

(iii)Shipping bill for export of duty free goods ex-bond i.e. from bonded warehouse. This is

pink in colour.

(iv) Shipping Bill for export of dutiable goods which is yellow in colour.

(v) Shipping bill for export under DEPB scheme, which is blue in colour.

Shipping Bill and Bill of Export Regulations prescribe form of shipping bills. It should be

submitted in quadruplicate. If drawback claim is to be made, one additional copy should be

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submitted. Customs authorities give a serial number (called 'Thoka Number') to the shipping

bill, when it is presented.

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Export Finance


A.R.E. From 1 & 2 : Approval for Removal of Excise

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Forwarders Cargo Receipt: This is a document issued by the importers nominated

forwarding agent confirming receipt of the goods/merchandise mentioned there in. This is

in accordance with the arrangement between the importer and the forwarder for Order

Management which includes receiving goods from various vendors, consolidation of

goods at origin port, arranging shipment of the goods to the named port at destination,

initiating custom clearance and transporting the cargo to the required warehouse / store as

per importers requirement.

Continuing with the pre-export procedure, once the goods have been produced and are ready for

shipment, a customs invoice is prepared by the exporting company which is sent to the Custom

House Agents (CHA) or clearing agent. This is necessary since it is the first step in the process

of getting the goods cleared by Customs authorities. It is prepared on a form being presented by

the customs authorities of the importing country and allows for the entry of goods at a

preferential tariff rate.

At the same time the shipping bill is prepared by the shipping company and is the most important

document required by Customs authorities to allow shipment.

Customs checks all the documents and 10% of the goods. Following such examination they

return 2 copies of Invoice and packing list. The GR form is sent to RBI by customs and the

original copy with the exporter is sent to negotiating bank. The clearing agent then prepares the

Bill of Lading draft on the basis of specimen given by the exporter and the same is forwarded to

the shipping company. The shipping company checks the relevant details such as whether the

goods are loaded or not and verifies whether the specifications of the loaded goods match with

the details in shipping bill & draft. On verification of documents and after receiving all their

charges in full, the shipping company issues the Bill of Lading. The CHA collects the Bill of

Lading from the shipping company duly signed.

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Once this exercise is complete, the following documents are handed over to the exporter which

completes the procedures required at the pre-shipment stage.

Invoice/Packing List

Purchase Order

Generalized System of Preferences Certificate of origin

Shipping Bill

ARE1&2

GR/SDF form

L/C

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Shipment of Goods:

Export Shipment Procedure 9

Shipment process

FT

< GOrder confirmed & eitheLC opened in

beneficiarys favour

Upon

receipt of

either

advance or

LC,

beneficiary

initiates

production

planningAfter production and completing

documentation, material is despatched to

load port, ready for shipment

Once the pre-shipment procedures are complete shipment of goods becomes the next stage in the

export process. For carrying out the procedures related to shipment of goods, selection of a

freight forwarding agent is very important.

Freight Forwarder: An international freight forwarder is an agent for the exporter in moving the

export goods to an overseas destination. Freight forwarders assist exporters in preparing price

quotations by advising on freight costs, port charges, consular fees, costs of special

documentation, insurance costs, and their handling fees. Once the order is ready for shipment,

freight forwarders should review all documents to ensure that everything is in order.

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The cost of the shipment, the delivery schedule, and the accessibility to the shipped product by

the foreign buyer are all factors to consider when determining the method of international

shipping.

Broad categories of export shipments are:

Under claim of Drawback of duty

Without claim of Drawback

Export by a 100% Export Oriented Unit

Under Duty Entitlement Pass Book (DEPB) Scheme

Largely, the following procedure may be followed for shipment of goods:

Submit documents to Freight Forwarder, instructing him to book space on the steamer/ airline.

The Exporter is expected to provide the following documents to the Clearing & Forwarding

Agents, who are entrusted with the task of shipping the consignments, either by air or by sea.

Invoice

Packing List

Declaration in FORM SDF (to meet the requirements as per FEMA) in duplicate.

A.R.E. - From 1 and 2 copy

Any other declarations, as required by Customs

On account of the introduction of Electronic Data Interchange (EDI) system for processing

shipping bills electronically at most of the locations - both for air or sea consignments - the C&F

(Clearing & Forwarding) Agents are required to file with Customs the shipping documents,

through a particular format, which will vary depending on the nature of the shipment. The C&F

agents are also charged with the task of getting Shipping Bill/ Bill of Export passed by Custom

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Authorities (obtaining customs authorities LET EXPORT (LEO) endorsement on the shipping

bill).

After completing the shipment formalities, the C & F Agents are expected to forward to the

Exporter the following documents:

Customs endorsed Export Invoice & Packing List

Duplicate of Form SDF

Exchange control copy of the Shipping Bill, processed electronically

A.R.E. (original & duplicate) duly endorsed by Customs

Bill of Lading or Airway bill, as the case may be

Once the goods have been shipped, exporter is required to send a Shipment Advice in aligned

format to the importer intimating the date of shipment of the consignment by a named vessel and

its expected time of arrival at the destination port.

Export Incentive Schemes:

Advance Authorization Scheme Inputs required for production of goods are often imported

by exporters. In order to provide an incentive for export companies to flourish, the Government,

through this scheme allows duty free import of inputs which will be incorporated into the

exported product. Since the raw materials are imported before the export of the final product this

scheme is termed Advance Authorization Scheme. However prohibited items of import cannot

be imported under this scheme. The imports of raw materials are permitted on the basis of

standard input-output norms (SION). The SION are finalized and quantity allowed to be

imported will be based on quantity exported. The Advance Authorization issued would contain

details such as the description, value and quantity of each item permitted against it and also the

export obligation to be fulfilled. Validity of such authorization is 24 months from date of issue.

Once the export obligation has been fulfilled, it can be revalidated for a period of 6 months on

payment of a composition fee of 1%.

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The export obligation period under advance authorizations which was 18 months has currently

been extended to 36 months w.e.f. Feb 26th

, 2009 due to the downturn in the global economy

currently.

Duty Entitlement Passbook Scheme DEPB is another export incentive scheme under which

the exporter is given duty entitlement credit at pre-determined rates on the FOB value of the

goods exported or the value-cap for that category of goods, whichever is lower. The DEPB

scheme initially consisted of both (a) Pre-export DEPB and (b) post-export DEPB scheme.

Currently however, only the latter is applicable, the pre-export scheme having been abolished

w.e.f. April 1st 2000. The intension of this scheme is to neutralize the impact of customs duty on

the import content of an exported product. The exporter is given a Duty Entitlement Pass Book

with the respective credit which is valid for 12 months from the date of issue. The duty credit

under this scheme is calculated by taking into account the deemed import content of said export

product as per the SION.

The duty entitlement credit can be used either to meet the incidence of customs duty on imports

or it can be freely transferred to an importer in exchange for consideration. However this transfer

of DEPB is applicable only for imports at the specified port from which exports have been made.

Imports from any other ports are allowed under Telegraphic Release Advice (TRA) facility as

per the terms and conditions of Department of Revenue notification.

Export Promotion Capital Goods Scheme (EPCG): This is another export incentive scheme

that was brought into effect to lower import duty on products that would be used to manufacture

in export products. It allows for import of capital goods such as machinery at a mere 5% customs

duty subject to an export obligation equivalent to 8 times of duty saved on such import. The

export obligation should be fulfilled within a period of 8 years from Authorization issue-date. In

cases where the duty saved on such imports is in excess of Rs. 100 crore, the export obligation

must be fulfilled over a period of 12 years. Second hand machinery can also be imported under

this scheme. Furthermore capital goods imports are also allowed for zero duty for exports of

agricultural products.

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EPCG at ALOK

Alok is a manufacturing industry which imports capital goods like machinery from different part

of world. ALOK tries its best to take the advantage of this scheme. It is availing this scheme for

a long time is fully able to maintain the average as mentioned in the scheme by law makers. Not

only this on going through its document its very clear that is it successfully fulfilling the export

obligation. In some of the years, ALOK was not able to fulfill the obligation but the clause in the

law regarding clubbing of previous years export with current year helped this industry to be in

line with the needful.

Duty Drawback: Drawback means the rebate of duty, chargeable on any imported materials or

excisable materials used in manufacture or processing of goods, which are manufactured in India

and exported. It is similar to the above mentioned schemes in terms of the intention i.e. reducing

the incidence of import duty, but in this case the duty is not reduced on import but can be

claimed as a rebate at a later stage.

Duty Drawback is applicable to (a) customs duty paid on imported inputs (b) excise duty paid on

indigenous inputs. Duty paid on packing material is also eligible. If customs/excise duty is paid

on part of inputs or rebate/refund is obtained, only that part on which duty is paid and on which

rebate/refund is not obtained will be eligible for drawback. No drawback is available on other

taxes like sales tax and octroi.

STATUS HOLDER

Status holder is not a direct incentive but it is a type of differentiation done by

the government to provide facilities to companies having more exports and thus

having more export related needs.

Grant Of Status:

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Application has to be given to concerned regional licensing authority

headed by joint DGFT. It is granted on the basis of performance during current

& previous 3 years are considered.

Privileges of Star Export House

Exemption of compulsory negotiation of documents through banks

Exemption from furnishing bank guarantee

Enhancement in normal repatriat ion period

100% retention of foreign exchange in export earned foreign currency

account.

Easy and cheap procurement of finance from banks .

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BL is received from the

shipping company

Loading takes place and

mate receipt is issued

Bank docs are prepared and

submitted

Negotiating bank scrutinizes

and send docs to issuing bank

Payment is received by

exporters bank.

BRC received from the bank.

POST-SHIPMENT:

Shipment Takes Place

Bank Documents

1. Invoice 2. Packing list 3. Bill of exchange 4. Certificate of

origin 5. FCR/LR/Airway Bill 6. Bill of Lading

Po

st S

hip

me

nt

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Once the goods have been shipped the transportation documents such as mates receipt are

submitted to the exporter by the clearing agent. This will later be exchanged for the bill of

lading. Upon receipt of these documents, the exporter sends a shipment advice to the importer

to inform him that the goods have been shipped, the date of shipment, name of vessel,

destination port and other relevant details. The next step is the preparation of documents that are

required to be sent to the importer for claim of payment under the L/C terms. Thus the

commercial invoice, certificate of origin, packing list are drawn up. Most of these documents

would already have been prepared during the previous stages. The documents required would

vary depending on the terms of the L/C but for the most part the documents required are:

(i) The packing list

(ii) The bill of lading

(iii)The certificate of origin

(iv) The commercial invoice.

After an internal audit and examination these documents will be submitted to the exporters bank

(negotiating bank) which will forward them to the importers bank to claim the proceeds. When

the negotiating bank receives payment, it will remit the proceeds to the exporter and issue, to the

exporter, a Bank Realization Certificate (BRC) which proves that the proceeds have been

realized. A copy of the complete set of documents is also forwarded to the accounts department

for sales booking.

Although this completes the procedure with regard to export of the goods and receipt of

payment, there still remains the task of claiming duty drawbacks and rebates as may be

applicable.

For this purpose the exporter must obtain the EP/DEPB copy of shipping bill and A.R.E.

forms/Excise Invoice from the clearing agent. This would enable the exporter to claim for

incentive (Duty Drawback/DEPB) with the appropriate authorities. (DGFT/Customs).The proof

of shipment must also be submitted to the excise authorities for release of bond or claim of

rebate. It is also important to monitor export obligation that must be fulfilled under

EPCG/Advance Authorization schemes and compliance of policy requirements from time to

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time. Payments to agent of commission etc must also be made at this stage. Freight, Clearing and

Consultancy bills must be processed and forwarded to accounts for payment.

This effectively completes the entire shipment procedure from beginning to end.

Risk in Export Finance

Before moving on to discuss the various export financing instruments that aid the exporter, both

as a means of raising capital and risk mitigation, it is essential to understand the risks that the

exporter exposes himself to in a trade contract. International trade has always been a profitable

activity and one with vast opportunities, but it is not without a significant degree of risk. These

risks which are vastly different than the ones faced in the domestic markets are not completely

avoidable. Thus the impetus must be placed on minimizing them, which is the key to success in

the export business. While the focus of this section of the report is on listing out and explaining

the various risks that one can encounter in the export business, the following section is entirely

devoted to risks mitigation strategies that are widely used by export houses in India and

internationally to cover their exposure to such threats.

The following are the various risks an exporter faces in international trade:

i. Political Risk

ii. Commercial Risk

iii. Transportation Risk

iv. Exchange Rate Risk

Political Risk

Political Risk comes into the picture when the importing country is faced with political

instability, including wars, insurgency etc. While this may seem innocuous at first, it can lead to

default on payments by the buyer, imposition of emergencies which could lead to confiscation of

property by the government, changes in regulations and in dire circumstances even trade,

currency blockages and revoking of import/export licenses. It is therefore imperative to

determine a countrys political and economic stability before choosing to do business with it.

Political instability is often a precursor to economic and financial instability in the country. This

has equally disastrous consequences, such as currency fluctuations which results in reduced

profits to an exporter.

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3.2. Commercial Risk

Commercial Risk is the risk of default on payment by the buyer for reasons other than political

or economic instability in the country, such as insolvency. Prior to entering a new market or

seeking potential buyers, exporters usually conduct a thorough research on the buyer such as

their credit ratings, relations with current trading partners etc, and thus, insolvency of the buyer

should not be a common reason for default by the buyer. On the other hand, as was witnessed

during the recent sub-prime crisis, banks and financial institutions with seemingly impeccable

credit ratings went under. There is therefore no guarantee that even with thorough research

commercial risk can be entirely avoided and proper precaution such as insurance covers is

advisable.

3.3. Transportation Risk

Transportation risk is simply the risk of damage to the goods during transit. This is usually

covered through insurance, by either the buyer or the seller as decided in the contract (Inco

terms). Around 80% of international trade is carried out through the sea.

3.4. Exchange Rate Risk

Exchange rate risk is the risk that an exporter faces due to fluctuations in currency rates. As

mentioned above, unfavorable fluctuations can adversely affect the exporters returns and

consequently his profit margin. While depreciation in domestic currency can be beneficial to

exporters, an appreciation in the same can eat into the gross margin of the exporter on contracts

currently under execution, and also reduce his ability to generate more contracts in the future.

In order to better grasp this, let us take a hypothetical example.

An exporter produces goods worth 2000 Rs and exports them at a selling price of Rs 2100, with

a time draft for payment to be made 3 months hence. At the time let us say the dollar/rupee

exchange rate was at 1 dollar = 50 rupees. At this exchange rate the importer would have been

billed for $42, i.e. 2100/50.

Three months later due to fluctuations in the currency market the rupee appreciates to Rs 30 per

dollar. At the time of payment the importer pays in full the amount of $42. However the exporter

receives only Rs 1260, i.e. 42 x 30 in the domestic market, at the current exchange rate.This

results in a loss to the exporter of Rs 840, i.e. 2100-1260.

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In order to improve his sales revenue the exporter would have to increase his selling price and in

this effort would be brushed aside by competition from exporters in other countries where the

fluctuations have not been as unfavorable. This is the threat caused by fluctuating exchange

rates.

While the risks mentioned previously (political, commercial, transport risks) are clearly a cause

for concern, probably the most ubiquitous of all the risks is that of fluctuations in exchange rates.

The reason being that while other risks occur only in certain cases, fluctuations in exchange rates

occur regularly due to the presence of an active currency market, making it that much more

essential to have a well planned and implemented strategy to combat this risk. This is usually

handled by the treasury department of an organization.

The Exporters Dilemma

Having discussed the various modes of payment, it is essential to recognize the dilemma faced

by the exporter in the market. Limited access to financing can dangerously hinder the trade and

export potential of an economy, especially emerging market economies for which trade is an

integral component of their growth strategy. The reason for placing such importance on trade

financing is because exporters require adequate short term financing (working capital) to

augment their trading activities, since the goods must be manufactured before payment is made

by the importer, who generally makes payment only once he is in possession of the goods or

even a few days after, but rarely, if ever, in advance. This is known as pre-shipment financing.

Pre-shipment financing comes in the form of short-term loans, overdrafts and cash credits.

Conversely post-shipment financing ensures sufficient liquidity until the importer receives the

goods and the exporter receives the payment for the same. This is also short term in nature. The

dilemma faced by exporters is that with the proliferation of competition in the world, importers

have become increasingly demanding and insist on attractive payment terms, which presents the

exporter with a tricky situation to deal with. Over the years, a number of trade financing

instruments and methods of payments have been designed to cater to this very need. These

financial instruments can come to the rescue of the exporter and a large portion of the risk can be

mitigated even as the importers are offered attractive payment terms with a view to expand

markets abroad.

Export Finance


EXPORT FINANCE AND RISK MITIGATION

As mentioned previously, it is essential to be able to comprehend which financing option can be

made use of in a particular situation, but this by itself is not enough to survive in the global

scenario. With globalizing kicking in, competition is fierce, as a result of which it is not always

possible for an exporter to get his way with the customer. The exporter must be prepared to offer

more attractive terms than his competitor which may not always be in his best interests. Thus,

although a particular mode of financing would be more advantageous to him, he must be

prepared to make compromises in order to satisfy and win customers. Clearly, this puts the

exporter at a disadvantage, since it brings in a greater degree of risk than he might have been

prepared for initially. However, at such a time, it is the knowledge of the various risk mitigating

options that allow him to get the advantage back, while at the same time expanding his export

business.

In the previous sections we have studied export finance from the point of view of the various

modes of payment that the exporter has at his disposal. This section focuses on export finance

from the point of view of the credit facilities extended to the exporters at pre and post shipment

stages. It deals with credit extended to the exporter for financing the purchase, manufacture and

packing of goods intended for overseas markets.

Pre-shipment Finance:

The pre - shipment credit meets the working capital needs of an exporter at the pre-

shipment stage. When an exporter receives an export order, the goods to be exported may not be

readily available with him for shipment. He has to purchase the raw materials/semi-finished

goods, process/manufacture the same, or may procure the goods from their suppliers, pack them

and dispatch them to the port town. The funds required for all these purposes are called pre-

shipment credit. Banks provide pre-shipment credit after taking into consideration all factors

relevant for granting credit. But the basis of granting such credit is:

A letter of credit opened by the importer in favor of the exporter, or

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A confirmed and irrevocable order for the export of goods from India, or any other

evidence of such an order.

The following points are taken into account while granting pre-shipment credit:

Pre-shipment credit is to be granted for the period which is sufficient to meet the needs of

the exporter. But if the period of credit exceeds 180 days, no refinance will be granted by

the Reserve Bank of India. If the pre-shipment advance is not adjusted by submission of

export documents within 360 days, the advance will not remain eligible for concessional

rate of interest.

Packing credit may be released in one lump sum or in installments as required by the

exporter. Banks must monitor the end-use of the funds and ensure their utilization for

genuine requirement of exports.

Pre-shipment credit must be liquidated out of the proceeds of the export bill on its

purchase, discount etc by the banker. Thus the pre-shipment credit must be converted into

post-shipment credit.

In some cases, exporters need packing credit in anticipation of receipt of letters of

credit/firm export order from importers. This happens when the raw materials are

seasonal in nature or when the manufacturing time is greater than the delivery schedule.

In such cases, banks may extend Pre-Shipment Credit Running Account facility and grant

credit taking into account the exporter's needs and without insisting on firm export order

or letter of credit.

Eligibility

Packing Credit is extended to an exporter against a letter of Credit (preferably) or a

confirmed export order in favour of the exporter, within his predetermined credit limit. Though

the bankers insist that the exporters provide them with a confirmed export order (in the least)

along with their PC application, it is at the discretion of the bankers to grant PC even on the basis

of correspondence between the exporter and overseas buyer.

Export Finance


Period of Credit

The PCFC will be available as in the case of rupee credit initially for a maximum period

of 180 days; any extension of the credit will be subject to the same terms and conditions

as applicable for extension of rupee packing credit and it will also have additional interest

cost of 2 per cent above the rate for the initial period of 180 days prevailing at the time of

extension.

Further extension will be subject to the terms and conditions fixed by the bank concerned

and if no export takes place within 360 days, the PCFC will be adjusted at T.T. selling

rate for the currency concerned. In such cases, banks can arrange to remit foreign

exchange to repay the loan or line of credit raised abroad and interest without prior

permission of RBI.

For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll

over basis of the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR

rate for extended period plus permitted margin (0.75 per cent over LIBOR/EURO

LIBOR/EURIBOR).

Liquidation of PCFC Account

I. General

PCFC can be liquidated out of proceeds of export documents on their submission for

discounting/rediscounting under the EBR Scheme or by grant of foreign currency loans (DP

Bills). Subject to mutual agreement between the exporter and the banker it can also be

repaid/prepaid out of balances in EEFC A/c as also from rupee resources of the exporter to

the extent exports have actually taken place.

II. Substitution of order/commodity

Repayment/liquidation of PCFC could be with export documents relating to any other order

covering the same or any other commodity exported by the exporter. While allowing

substitution of contract in this way, banks should ensure that it is commercially necessary

and unavoidable. Banks should also satisfy about the valid reasons as to why PCFC

extended for shipment of a particular commodity cannot be liquidated in the normal method.

Export Finance


As far as possible, the substitution of contract should be allowed if the exporter maintains

account with the same bank or it has the approval of the members of the consortium, if any.

Choice of Packing Credit

Packing Credit can be availed as either

Rupee PC or

PCFC (packing credit in foreign currency)

Packing credit in Indian Rupees

This, as the name suggests is a rupee advance. Let us look at it with a practical example.

XYZ Exports having a confirmed order of USD 100,000 decides to take a rupee advance to

process their order. Assuming the FOB value of this order is $90,000, the bank would extend a

rupee advance of $90,000 times Rs.46 (notional value) = Rs. 41,40,000. Two accounts at this

juncture gets affected a debit to his packing credit account and credit to his CC account, to the

above extent. The interest liability on the above advance as on date is at 1 1/2 % below tenor

related PLR. This credit is retired when an export document to this extent is presented to the

bank.

Packing Credit Foreign Currency (PCFC)

Commercial banks are also free to extend packing credit in foreign currencies (as of now in

5 major currencies USD, EURO, JPY, CHF, GBP). This scheme is designed to ensure export

credit being made available at internationally competitive rates in major currencies. Considering

the above case again, XYZ Exports has a choice to draw his packing credit in USD or any of the

above currencies (to an equivalent extent). $90000 will be given to him at a notional exchange

rate. If exporter avails PCFC in invoicing currency (in this case USD) and chooses to convert

PCFC into rupees and have his CC account credited, conversion is done at the ruling spot rate or

a pre-contracted forward rate. On the other hand, if PCFC is in a currency other than invoicing

currency (say Euro), the (Rupee) amount to be disbursed will be determined on the basis of a

notional exchange rate.

Once the corporate presents an export bill, the above PC in foreign currency gets knocked

off in foreign currency terms. Here, the interest liability of the exporter is on libor related rates;

Export Finance


i.e. libor of the currency in which he has availed advance + bank spread. RBI, however has

advised the commercial banks to keep their spread / bank margin below 1 % p.a.

Salient features and comparison of PC (Re) and PCFC:

1. Both of the above can be maintained as running account at banks discretion.

2. The interest liability on Rupee PC is, say, 10%. However as in the above case, since the

exporter has an asset (export receivable) in USD and a liability (export credit) in rupee he

runs a foreign exchange risk; hence he is permitted to cover his receivable. Dollar being at a

premium to rupee, he receives a premium of say 4% p.a., thus reducing his net cost to 6%. He

may choose to keep his risk /position uncovered based on his view on USD/Re. If, in fact the

rupee weakens to more than 4% annualized before he retires his PC, his effective cost of PC

would come down further (below 6%).

3. The interest liability on Packing Credit Foreign Currency varies depending on the currency in

which the exporter borrows. In case of PC in USD, the interest liability is subject to a

maximum of 3.00% (USD 6 mths Libor) + 1.0% (cap by RBI) = 4.00% as on date. In this

case, the exporter has both asset (export receivable) and liability (export credit) in Dollar

terms. In this respect, he runs no currency risk to the extent of the advance. Hence the

exporters effective cost would be as above i.e. 4.00%. If any of the above parameters change

then the arithmetic will have to be reworked.

4. In PCFC, it is to be noted that an exporter with an export order in USD can borrow in Euro or

any other permitted currency. Here, he would encounter an asset liability mismatch and hence

allowed to take a cross currency cover.

On one hand company seeks growth & on the other hand the demand to reduce costs never

goes away. The company tries to find a way to do both, simultaneously. While opting for

different means of finance either PCFC or RPC companies usually take two things into

consideration first the low interest rate & second flexible repayment options. From the

following example we can understand how company can reduce its cost. Suppose the

company requires USD 1 lakh & interest rate for PCFC is 4.99% (which includes LIBOR

0.47% plus 200 basis points plus 2.50% of other charges & the interest rate for RPC is

7%.Also assume that the exchange rate is INR 46.96/USD & the credit period is 6 months. In

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case of PCFC interest amount comes out to be Rs 117165 & that of RPC is Rs 164360.So the

company would prefer PCFC, as it can save Rs 47195 from it.

PROCESS OF AVAILING PACKING CREDIT FINANCE AT ALOK:

Finance department receives the orders from various department i.e. Home Textile,

Garments, Yarn, Woven Knits.

Orders already in hand are checked with their execution date & payment terms.

Then the limits available in banks for disbursement of packing credit are checked.

If the limits are available with banks then available orders along with the application for

disbursement of fund is send. In some cases orders are send within one month of

disbursement of fund.

The disbursed packing credit is credited to the CC account or current account of the bank

& the same is informed to the treasury department.

The advice of disbursed packing credit is received & the same is checked for the applicable

rate of interest, exchange rate (in case of PCFC) & maturity.

Export Finance


Export Finance


POST-SHIPMENT CREDIT

The need for post-shipment credit arises after the exporter has shipped the goods and has

secured the shipping documents, such as bill of lading, etc. Now, the concern of the exporter is to

realize his dues from the foreign importer. This is invariably done by drawing a bill of exchange

on the importer. The bill may be drawn either on Documents Against Acceptance (D/A) basis or

on Documents against Payment (D/P) basis. In the former case, the importer takes delivery of the

documents by giving his acceptance on the bill, sent to him through the exporter's banker.

Thereafter he takes delivery of the goods from the shipping company and makes payment of the

accepted bill on its due date. In case the bill is drawn on D/P basis the documents are released to

the importer at the time he makes payment of the bill to the exporter's bank, on its presentation.

Exporter's bank provides post-shipment advance to the exporter in either of the two ways, viz,

By purchasing, discounting or negotiating the export bills, By granting advance against bills for

collections. Thus, post-shipment credit is liquidated by the proceeds of the export bills when

received from the importer by the exporter's bank. Banks also grant advances to the exporters

against duty drawback which he has to receive from the government. Such advance is liquidated

when the amount of duty drawback is received by the exporter.

Eligibility

As per packing credit

Quantum

Post shipment credit / advance is restricted to the extent of value of the export bill against

which the advance is sought.

Period of Credit

The period for which the post shipment credit is given is based on the payment terms of the

export bill. For instance, if the payment terms are CAD, bill purchased by bank (EBP) the credit

is extended for notional transit period. RBIs Exchange Control Manual specifies notional transit

period based on the country to which export is made. In case of DA bills (non-LC bills with

usance) the period of credit will be that of Usance + notional transit period.

Export Finance


Where the credit period is specified to commence from B/L date, the due date is known

and PSC is granted till the due date. However, if usance period commences from date of

acceptance, normal transit period is included to arrive at the due date. It is also to be noted that

PSC account, is always maintained on bill to bill basis and not as a running account.

Extension of credit period

Post shipment export credit period is based on the payment terms of the export bill.

However for any reason if the exporter is forced to extend the credit period to his overseas buyer

it is mandatory that the exporter seeks an extension. If the reasons for extension are valid then

the authorized dealer can grant an extension up to a maximum period of 180 days (inclusive of

original credit period) from the date of shipment. If extension is sought for a period that will

exceed 180 days from shipment, permission has to be obtained from RBI, through the authorized

dealer. There are two important aspects to be considered here;

1. For the extended credit (period) the bank is free to charge interest rates related to their PLR

2. As a general practice, Post shipment rupee credit is granted by discounting the export bill. In

such a case, if the realization of export proceeds get delayed - extension of post shipment

credit may be granted by the banker or RBI as the case may be, on request from the exporter ;

but the bill will be crystallized , one month (grace period) from the actual due date.

Crystallization of Export Bills

The exporter while discounting an export bill is committed to deliver foreign exchange on

its due date; where an extension is sought for in realizing the export proceeds bank allows a

grace period of 1 month from the actual due date for the exporter to fulfil his commitment. After

which period the bank procures an equivalent foreign exchange from the market on behalf of the

exporter. The difference in rates the rate at which the exporter had sold his

export finance - shivali mehta

Documents

project export finance

finance export finance

project work

research summary finance

export business

hitesh shah avp finance

export procedure

research acknowledgement