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The Forum of Banking Finance and Exchange Rate Mechanism

Topics to be covered

Modes and Methods of Payment Financial Institutions Export Finance / Import Finance External Commercial Borrowings Factoring and Forfaiting Foreign Exchange Management Act EEFC / Full convertibility Exchange Rate Mechanism

B U S I N E S S  TRADE INDUSTRY COMMERCE

GOVERNMENT OF INDIA Ministry of Ministry ofFinance Commerce RBI – FOREX DEPT DGFT ENFORMENTDIRECTORATE 

CUSTOMS TAXES MOVEMENTS OF GOODS

Business Transaction------ Sale - Contract ------

•Sale Contract Terms -

•Distance•Currency•Law of Land•Trade Practice

Seller Buyer

EXPECTATIONS

Seller Buyer

Payment immediately Payment afterafter delivery of goods receiving the

goods.

Terms of Payment

1.Advance Payment2.Bill Collection3.Open account4.Documentary Letter of Credit

1) Advance Payment : Buyer’s Financial PositionCommercial RiskMonopoly ItemCompetitive Market. Advance Payment may not be possible.Risk to Buyer

2) Bill Collection:

- DP / DA Bills- Banker as Collecting Agent- Risk to Seller

3) Open Account:- Payment on due date- High degree of Risk to the

Seller

4) Documentary Letter of Credit:

Most Convenient method of settling payment in International Trade

Banker acts in a fiduciary capacity

Seller is assured of Payment

Buyer is assured of delivery of goods

Definition of Documentary L/C An ARRANGEMENT by means of which a BANK (issuing /opening Bank) acting at the request of a CUSTOMER (buyer/Importer), undertakes to pay to a THIRD PARTY(seller/Exporter), a predetermined amount by a given date according to agreed stipulations against presentation of stipulated documents. Each L/C should mention that “This L/C is subject to UCPDC publication No.600 (2007 Revision) ICC Guidelines” to be operative.

UCPDC –

A Set of Rules called Uniform Customs and Practice for Documentary credit formulated by ICC – International Chamber of Commerce.First publication 1933, Revisions 1951/1962/1974/1983/1994 and the latest UCPDC 600 w.e.f. 1st July, 2007.

Contents (Articles) of Uniform Customs and Practice for Documentary Credits (UCP 600) are as follows:

Article 1 Application of UCP

Article 2 Definitions

Article 3 Interpretations

Article 4 Credits V. Contracts

Article 5 Documents v. Goods, Services or Performance

Article 6 Availability, Expiry Date and Place for Presentation

Article 7 Issuing Bank Undertaking

Article 8 Confirming bank Undertaking

Article 9 Advising of Credits and Amendments

Article 10 Amendments

Article 11 Teletransmitted and Pre-Advised Credits and Amendments

Article 12 Nomination

Article 13 Bank-to Bank Reimbursement Arrangements

Article 14 Standard for Examination of Documents

Article 15 Complying Presentation

Article 16 Discrepant Documents, Waiver and Notice

Article 17 Original Documents and Copies

Article 18 Commercial Invoice

Article 19 Transport Document Covering at Least two Different Modes of Transport

Article 20 Bill of Lading

Article 21 Non-Negotiable Sea Waybill

Article 22 Charter Party Bill of Lading

Article 23 Air Transport Document

Article 24 Road, Rail or Inland Waterway Transport Documents

Article 25 Courier Receipt, Post Receipt or Certificate of Posting

Article 26 “On Deck”, “Shipper’s Load and Count”, “Said by Shipper to Contain” and Charges Additional to Freight

Article 27 Clean Transport Document

Article 28 Insurance Document and Coverage

Article 29 Extension of Expiry Date or Last Day for Presentation

Article 30 Tolerance in Credit Amount, Quantity and Unit Prices

Article 31 Partial Drawings or Shipments

Article 32 Installment Drawings or Shipments

Article 33 Hours of Presentation

Article 34 Disclaimer on Effectiveness of Documents

Article 35 Disclaimer on Transmission and Translation

Article 36 Force Majeure

Article 37 Disclaimer on Transmission and Translation

Article 38 Transferable Credits

Article 39 Assignment of Proceeds

Operation of Letter of Credit –

Parties to L/C

• Applicant-Buyer, on whose behalf L/C is established.• Beneficiary- Seller, in whose favour the L/C is opened.• Opening Bank- Which opens/establishes the L/C.• Advising Bank- Which advises to the L/C.• Confirming Bank-Which adds confirmation and advises to seller/Beneficiary.• Negotiating Bank- Normally beneficiary’s Bank• Reimbursing Bank – Which normally maintains Nostro account of the opening Bank and reimburses the negotiating Bank.

Types of Letter of Credit –

Confirmed Credit (Art 8 of UCP 600) Transferable Credit Back to Back Credit Revolving Credit Deferred Credit STANDBY LETTER OF CREDIT ICC introduced ISP 98

(International Standby Practices)& also subject to UCPDC 600.

FINANCIAL INSTITUTIONS •RESERVE BANK OF INDIA (RBI)•COMMERCIAL BANKS•FOREIGN EXCHANGE DEALERS’ ASSOCITION OF INDIA (FEDAI)•EXPORT IMPORT BANK OF INDIA (EXIM BANK)•EXPORT CREDIT GUARANTEE CORPORATION OF INDIA (ECGC)

RESERVE BANK OF INDIA •Established in April 1935 (RBI Act 1934)•Share Capital Rs. 5 Crore on recommendations of the Hilton young commission•Each share of Rs. 100/- fully paid•The Govt. held shares of Rs. 2,20,000/-•Nationalised in 1949 (Banking Companies Act 1949)

FUNCTIONS •To Regulate the issue of Bank notes (currency)•To maintain Reserves with a view to Securing monetary Stability•To operate the credit and currency system of the Country.

i) Section 22 of RBI Act – Sole right to issue Bank notes of all denominations

- Coins & R.1 notes on behalf of Government of India.

- The separate issue dept. with their assets and Liabilities

II) Banker to Government – (Except Jammu & Kashmir Govt.)

III) Banker to Bank & Lender of the Last Resort - SLR / CRR

IV) Controller of Credit –• Cash Reserves• Quantitative & qualitative controls• Licensing, Inspection & calling information• Rediscounting facilities to schedule Bank

V) Custodian of Foreign Reserves

VI) Manager of Foreign Exchange – FEMA 1999- To facilitate External Trade and payment- To promote orderly development &

maintenance of Forex Market.

Central Board of Directors of 20 membersGovernor4 Deputy Governors1 Govt. official from MOF10 Nominated Directors by Govt. of India (Eco & Com)4 Directors from Central Govt.

II Commercial Banks •SBI and Associate Banks, Nationalised Banks, Private Banks, Foreign. Banks & Coop. Banks. (Total 109 Commercial Banks)•All Com. Banks are members of FEDAI•Categorization of Branches (Category A,B,C)•Forex Business handled under FEMA 99 & EXIM policy of DGFT•12% of the total credit should be Export Finance.

FUND BASED ASSISTANCE NON-FUND BASE ASST. •Preshipment stage Bank Guarantees•Post Shipment Stage L/Cs (Export Finance) Advisory & Other

Services. Guarantees - Performance Guarantee

- Guarantee for Payment of retention Money

- Advance payment Guarantee

Other Services – •Foreign Bill Collection (Outward / Inward)•Useful information about foreign Buyer/Seller through their Branches & Correspondents.•Remittance instruments – DD/TT/MT•Payment of Freight Charges etc.•Duplicate GR Form to RBI•Issue of Bank’s Certificate to claim incentives against export.

Foreign Exchange Dealers Association of India – FEDAI - Company – established under- Section 25 of Company Law 1956- Established in August 1958 with approval of RBI- Total members 109 comprising- Public Sector Banks - Foreign Banks - Private Sector Banks - Cooperative Banks - Other Financial Institutions

OBJECTIVE -To regulate Forex Dealing among AD Bankers & Public & RBI.

Presently some of the Functions are – - Guidelines & Rules for Forex Business- Training of Bank Personnel for Forex Business- Accreditation of Forex Brokers- To act as facilitator between ADS & RBI, Export

Organisations / Chamber of Commerce etc.- To contribute to the development of Forex Market (depth & liquidity with greater market – discipline).

TRAINING TO BANKERS – - Orientation workshops – special programme- Advanced practically oriented training

programme on FEMA / Derivatives / Risk management / UCPDC etc.

FEDAI represents on behalf of RBI to the International Chamber of Commerce.

ECGC - Export Credit Guarantee Corporation of India Ltd. Established in 1957 by GOICovering Export RiskStrengthening Export promotion BOARD - Administration by Ministry of Commerce (GOI)Representatives of GOIRepresentatives of RBI

Functions- Provides range of credit risk insurance covers to Exporters of goods and servicesProtection to Exporters against payment riskGuarantees to Bankers (WTPCG & WTPSG)Overseas investment insurance to financial institutionsAssistance to recover Bad debtsInformation on credit worthiness of overseas Buyers & country RisksCovers Commercial risks, like insolvency of the buyer and political risks.

EXIM BANK – Export Import Bank of India

Established in Sept 1981, wholly Govt. owned.

Commenced business w.e.f. 1-3-1982. FUNCTIONS – Financing programs for EOUs, Importers etc.Suppliers credit, preshipment credit, buyers credit.Finance for Export projects, Guarantees, forfaiting etc.Financial Support to Agri. Exports.Term Loan, working capitalFinance for Export market developmentImport Finance – Capital goods, Raw materials.

Export Finance

- Short term working Capital Finance

- From the date of receipt of Export order till the date of realisation of Bill.

Preshipment PostshipmentCredit Credit

Preshipment Credit – From date of receipt of Export Order till the date of shipment

Purpose - Procuring raw material/- Processing / Packing etc.

Packing Credit - Rupee Scheme – - Foreign Currency Scheme- Running Account Scheme

Post shipment Credit – From date of shipment of goods till the date of realisation of the Bill

Types of Preshipment Credit – Export Bill purchased / discounting / negotiation.- Advance against bill sent on collection basis- Advance against undrawn balances- Advance against duty drawback etc.

Purpose - To keep Business Cycle on.

General Guidelines of RBI

•Delay in processing credit proposal to be avoided.•Cheapest interest rate/ Affordable interest rate.•12% of Total credit of the Bank should be export finance

Bankers to follow regulations

•RBI Guidelines – Exchange management Regulations FEMA 1999

- IECD Guidelines - DBOD Guidelines

•Trade Control Regulations – EXIM Policy 2009-14•Trade ICC Guidelines – UCPDC – 600, URC 522•ECGC Guidelines•FEDAI Rules

BANKER - To avoid regidity about ratios/margins - To confer more powers to Branch Managers - Financial Documents etc. to be asked for in

one meeting with Exporter. - Time bound programme

CUSTOMER- Proper expertise in the line of business- Proper Infrastructure- Should not fall under Caution list of RBI- Should possess IE Code No.- HS – IT Code No.(From Export Manual Volume I & II of Procedure)

Goods should be freely exportable. If restricted – proper license from DGFT

Export to Debarred Countries - IRAQ- Lic. from UNO Special Programe/GOI under bilateral agreement.

Time Bound Programme - New proposal – 45 days- Revival – 30 days- Adhoc limit – 15 days

Period of Finance - Maximum period 180 days- Extention of 90 days

Quantum of Finance - CIF to be converted into FOB- 25% margin- I & F at later stage

Rate of Interest - Concessional

Liquidation of PC - By submission of Export documents to be P/D/N

IN CASE export could not take place – recovery of P/C under “Export Credit not otherwise specified” + 2%

Operational Flexibility – w.e.f. 14-12-1994 substitution of commodity/buyer or proceeds of other export bill.

Banker to carry out periodical inspection timely stock statement

Post Shipment Finance - Submission of Bill within 21 daysfrom date of shipment

- Bill should accompany GR/PP/SDF/SOFTEX Form.

- Export to ACU Countries thensale proceeds to be receivedin ACU $

Period of Finance - 90 days from date of shipmentor 90 days from date of acceptance

Quantum - 100% of Bill value

Crystalisation of overdue Bill – On 30th day from due date/ notional due date at TT selling

rate or at the request of Customer

Foreign Currency Schemes

Source of Funds for Bank – EEFC/RFC/FCNR

Line of Credit Period – 180 days Interest – Base

LIBOR + 1% Liquidation –

Submission of export documents

Line of Credit Period – 90 days Interest – Base

LIBOR + 1% Liquidation

-Realisation of Export Bill

Preshipment – P C F C Postshipment – E B R D

External Commercial Borrowing Borrowing of Funds in Forex by person resident in India

from a person resident outisde India for the Commercial

purpose.  Temptation on account of low interest rate Repayment in Foreign Currency Calculated Risk Import Finance - Buyer’s Credit – Short term loan for payment of Import

arranged by Importer from the Financial Institution outside India for maturity less than three years.

Supplier’s Credit – Short term loans for where the credit for Imports into India extended by overseas supplier for a period of more than six months.

Financing under L/C - Requesting to Bank to open L/C

- Retiring documents under L/C

- Import Trust ReceiptFinancing against Forein Inward Bill for Collection (FIBC)Financing Import against Deferred PaymentImport Loans by EXIM BANKS