presentation on export finance 2003

8/8/2019 Presentation on Export Finance 2003

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EXPORT FINANCE AND PAYMENT

PRESENTED BYSRI JINTU BORTHAKUR

SRI DIPRANJAL KEOT

10/2/2010


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Concept Of Export Financey The exporter may require short term, medium term or

long term finance depending upon the types of goodsto be exported and the terms of statement offered tooverseas buyer.

y The short-term finance is required to meet workingcapital needs. The working capital is used to meet

regular and recurring needs of a business firm. Theregular and recurring needs of a business firm refer topurchase of raw material, payment of wages andsalaries, expenses like payment of rent, advertising etc.

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Concept of Export Financey The exporter may also require term finance. The term

finance or term loans, which is required for medium

and long term financial needs such as purchase offixed assets and long term working capital.

y Export finance is short-term working capital finance

allowed to an exporter. Finance and credit are availablenot only to help export production but also to sell tooverseas customer on credit.

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APPRISALy Appraisal means an approval of an export credit proposal of

an exporter. While appraising an export credit proposal as acommercial banker, obligation to the following institution

or regulations needs to be adhered to.Obligation to the RBI under the Exchange Control

Regulations are:

Appraise to be the banks customer.

Appraise should have the EXIM code number allotted bythe Director General of Foreign Trade.

Partys name should not appear under the caution list ofthe RBI.

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Contd..Obligations to the Trade Control Authority under the EXIM Policy

are :

Appraise should have IEC number allotted by the DGFT.Goods must be freely exportable i.e. not falling under the

negative list. If it falls under the negative list, then a valid licenseshould be there which allows the goods to be exported. Country

with whom the Appraise wants to trade should not be undertrade barrier.

Obligations to ECGC are:Verification that Appraise is not under the Specific Approval list

(SAL).Sanction of Packing credit advances.

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Guidelines for banks

When a commercial bank deals in export finance it is

bound by the ensuing guidelines: -a)Exchange control regulations.b)Trade control regulations.c)Reserve Banks directives issued through IECD.

d)Export Credit Guarantee Corporation guidelines.e)Guidelines of Foreign Exchange Dealers Associationof India

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Objective of Export Financey To cover commercial & Non-commercial or political

risks attendant on granting credit to foreign buyer.

y To cover natural risks like an earthquake, f lood etc.An exporter may avail financial assistance from any

bank, which consider ensuing factors.

a)Availability of the funds at the required time to the

exporterb)Affordability of the cost of funds

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TYPES OF EXPORT FINANCE

The export finance is being classified into two types .

Pre-shipment finance.

Post-shipment finance

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Preshipment Financey MEANING:Pre-shipment is also referred as packing credit. It is working capital

finance provided by commercial banks to the exporter prior toshipment of goods. The finance required to meet various expensesbefore shipment of goods is called pre-shipment finance or packingcredit.

DEFINITION:

y Financial assistance extended to the exporter from the date of receiptof the export order till the date of shipment is known as pre-shipmentcredit. Such finance is extended to an exporter for the purpose ofprocuring raw materials, processing, packing, transporting,

warehousing of goods meant for exports.

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Importance ofPreshipment finance

To purchase raw material, and other inputs to manufacturegoods.

To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are

shipped.

To pay for packing, marking and labeling of goods. To pay for pre-shipment inspection charges. To import or purchase from the domestic market heavy

machinery and other capital goods to produce export goods. To pay for consultancy services. To pay for export documentation expense

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Forms or Method ofPreshipment

financeCash Packing Credit loan In this Type of credit , the

bank normally grants packing credit advantages,

initially on unsecured basis . Subsequently bank mayask for security.

Advances Against Hypothecations Packing credit isgiven to process the goods for export. The advance is

given against security and the security remains in thepossession of the exporter. The exporter is required toexecute the hypothecation deed in favour of the bank.

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Forms or method ofPre-shipmentyAdvances Against pledge The bank provides

packing credit against security. The security remainsin the possession of the bank. On collection of exportproceeds, the bank makes necessary entries in thepacking credit account of the exporter.

yAdvance Against Red L/C - The Red L/C received fromthe importer authorizes the local bank to grant

advances to exporter to meet working capitalrequirements relating to processing of goods forexports. The issuing bank stands as a guarantor forpacking credit.

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Forms or method ofPre-shipment

Finance .Advance Against Exports Through Export Houses:Manufacturer, who exports through export houses or other

agencies can obtain packing credit, provided such

manufacturer submits an undertaking from the exporthouses that they have not or will not avail of packing creditagainst the same transaction

y Advance Against Duty Draw Back (DBK) :DBK means refund of customs duties paid on the import

of raw materials, components, parts and packing materialsused in the export production. It also includes a refund ofcentral excise duties paid on indigenous materials. Banksoffer pre-shipment as well as post-shipment advancesagainst claim for DBK.

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EXIM Bank schemesSpecial Pre-Shipment Finance Schemes :

y EXIM Banks scheme for grant for Foreign Currency

Pre-Shipment Credit (FCPC) to exporters.y Packing credit for Deemed exports.

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Factoring

y Factoring may be defined as A contract by which thefactor is to provide at least two of the services,(finance, the maintenance of accounts, the collectionof receivables and protection against credit risks) and

the supplier is to assigned to the factor on a continuingbasis byway of sale or security, receivables arising fromthe sale of goods or supply of services.

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Post shipment finance

MEANING:

Post shipment finance is provided to meet workingcapital requirements after the actual shipment ofgoods. It bridges the financial gap between the date ofshipment and actual receipt of payment from

overseas buyer thereof. Whereas the finance providedafter shipment of goods is called post-shipmentfinance.

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Importance of finance at post

shipment stage

To pay to agents/distributors and others for their services. To pay for publicity and advertising in the over seas markets.

To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium.

To pay for freight and other shipping expenses.

To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service.

To pay towards such expenses regarding participation in exhibitionsand trade fairs in India and abroad.

To pay for representatives abroad in connection with their stay board.

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Financial Institution Credit

extensiony Financial institution providing credit, directly or indirectly

to the buyers or by extending credit to the exporters tounable them to extend credit to their buyers.

1. Buyers Credit

2. Line of Credit

3. Short term finance

4. Medium and long term financewith the establishment of export import (EXIM Bank) exportcredit function performed by IDBI were transferred toEXIM bank.

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Post-shipment Credity DEFENITION:

Credit facility extended to an exporter from the date of

shipment of goods till the realization ofthe export proceeds is called Post-shipment Credit

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About EXIM Banky The EXPORT-IMPORT Bank of India, set up in 1982By an

Act of parliament for the purpose of financing, facilitatingand promoting foreign trade of India.

y

EXIM Banks Mission is to Facilitate globalisation ofIndian business.y The bank Functions are segmented into four major

operating groups- Overseas investment Finance

Project Finance Trade Finance Export service Group Agri Business group

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Forfaitingy Forfaiting is a Mechanism of financing exports

1. By discounting Export Receivables .

2. Evidence by Bill of Exchange Or Promissory notes.3.Carrying medium to long term maturities.

4. Without recourse to the seller.(viz- Exporters)

5. On fixed Rate Basis.(Discount).

6. Up to 100% of the contact value .

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Benefits of Forfaitingy Convert a deferred payment export in to a cash transaction.y Improving liquidity and cash flow.y Frees the exporter from cross border political commercial

risk associated with export receivables.y Provides fix rate of finance .Hedges against interest an

exchange risk arising from deferred export credit.y Exporters freed from credit administration and collection

problem.

y Exporters saves on insurance cost and as forfaitingobviates the need for export credit insurance.y Simplicity of documentation enables rapid conclusion of

the forfaiting arrangement.

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Maturity factoring by ECGCy It offered by the export Credit granting Corporation

of India provides the following

1.Credit Protection2.Ledger Maintenance

3.Recievables Management

4.Enables clients to avail discounting facility from bank

by Guaranteeing the advances granted against the bill.

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Export Credit Risk Insurancey ECGC to cover several risks which are not covered by

general insurers.

y

ECGC is to support and strengthen the exportdevelopment of India.

Objective of ECGC are

To provide insurance cover to exporters against political

and commercial risksTo provide insurance cover to exporters against the risk

of exchange rate fluctuations in respect of deferredpayment.

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Contd.

y To Insurance covers to bank against export credit andguarantees extended by them.

y To provide insurance covers to Indian investors abroad

against political risk.

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Insurance coversy Standard policies issue to the exporters to protect them

against payment risks involved in exports on short termcredit.

y

Specific policies design to protect Indian firms againstpayment risk involved in export and deferred terms ofpayment services render to the foreign serviciesconstruction works and turnkey projects undertakenabroad.

y Financial guarantees issued to banks in India to protectthem from risks of law involved in their extendingfinancial support to exporters at the pre-shipment as wellpost-shipment stages,

y Special schemes

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Payment method Of International

Export

y The credit is provided by either the supplier(exporter), the buyer (importer), one or more financialinstitutions, or any combination of the above. The

form of credit whereby the supplier funds the entiretrade as supplier credit.

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Letter Method of Credity These are issued by a bank on behalf of the

importer promising to pay the exporter upon

presentation of the shipping documents.y Time of payment :when shipment is made goods

available to buyers.

yAfter payments risk to exporter.

yVery little or non risk to importer.

y Relies on exporter to ship goods as documentpayment methods.

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Prepayment Methody The goods will not be shipped until the buyer Has paid

the seller.

y Time of payment before shipment goods Available tobuyer.

yAfter payment risk to exporter: None risk to Importer.

y Importer relies completely on exporter to ship Goodsas ordered payment methods

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Draft Method (Bill of Exchange)y These are unconditional promises drawn by the

exporter instructing the buyer to pay the faceamount of the drafts. Banks on both ends usually actas a Intermediaries in the processing ofshipping documents and collection of Payment. Thetransaction are known as documentarycollections.

y Time of payment : On presentation of draft goods

available to buyers.y After payment risk to exporter.

y Disposal unpaid goods risk to importer.

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Contd..y Sight drafts: document against payments when shipment

has been made,, the Draft is presented to the buyer forpayment.

y Time of payment :On maturity of draft goods available tobuyers.

y Before payment risk to exporter.y Relies on buyer to pay the risk to importer.

y Relies on exporter to ship the goods: when the shipmenthas been made, the Buyer accepts (signs) the presenteddraft..

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Open Method Accounty The exporter ships the merchandise and expects the

buyer to remit payment according to the agreed-upon

the terms.y Time of payment: As agreed-upon goods available to

buyers: Before payments risk to exporter: Reliescompletely on buyer to pay the account as agreed-uponrisk to importer.

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Consignments Method

y The exporter retains actual title of the goods that are

shipped to the importer.y Time of payment: At time of sale by buyer to third

party goods available to buyer: Before payment risk toexporter: Allow importer to sale inventory before

paying exporter risk to importer.

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Foreign exchange marketForeign exchange means the process of converting

one currency into another or foreign currencies.

Functions:

1.Transfer of purchasing power.2 provision of credit.3.Provision of hedging facilities.

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Dealings on foreign exchange

market.y Spot exchanges- refers to class of foreign exchange transaction

which requires exchange of currencies on the spot. Thesettlement takes place with in two days.

y Forward exchanges-The forward transaction is an agreementbetween two parties ,requiring the delivery at some specifiedfuture date of a specified amount of foreign currency by one ofthe parties against payment in domestic currency by the otherparty at price agreed upon in the contract.

y Forward exchange rate may bey AT PAR : Supply is equivalent to the demand.y AT PREMIUM : Demand exceeds supply.y AT DISCOUNT: Supply exceeds demand

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Determination of exchange ratesy Purchasing power (parity theory) In the absence of

government control, exchange rate between twocurrencies is determined by the price levels in the

respective countries.y Balance of payments theory: Exchange rate is

determined by the demand for and supply ofcurrencies.

y

The value of currency appreciates when demandfor it increases and depreciates when demand falls,In relation to supply in the foreign exchangemarket

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Exchange controly Exchange control is a means to achieve certain

national objectives like an improvement in the balanceof payment position, restriction of inessential imports

and conspicuous consumption.y Facilitation of import of priority items.

y Control of out flow of capital and maintenance of theexternal value of the currency.

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Exchange rate systemsy Fixed exchange rates :Its eliminates several

uncertainties which can seriously disturb theeconomic system.

y Flexible exchange rates :Its works on the marketmechanism.yAutomatic variations in the exchange rates, in

accordance with the variations in the balance ofpayment position, tend to automatically restore the

balance of payment equilibrium.yA surplus in the balance of payments increases the

exchange rate.y If there is a payment deficit, the exchange rate falls

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Currency exchange risksy Exchange risk is the probability that a company

will be unable to adjust prices and costs to offsetchanges in the exchange rate.

y Economic exposure refers to the risk arising fromeconomic factors through economic transactionsand other economic activities.

yAccounting exposure arises from the need for

purposes of reporting and consolidation to convertthe financial statements of foreign operations fromthe local currencies involved into the homecurrency

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Managing exchange rate risksThere are several measure to eliminate risks of

exchange rate fluctuations.1.Negotiate lower price with foreign supplier.2.Absorb the price increase by the buyer to extent

possible and pass on the rest to the consumers.3 Complementary, approach is to take steps to

minimise exchange risk.

4 exchange risk avoidance.

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Contd..5 Change diversify sources.

6 Currency diversification.

7 Exchange risk adaptation.: Hedging refers to coveringexport risks and its provides a mechanism to exporters andimporters to guard themselves against losses arising fromfluctuations in exchange rates.

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Foreign exchange management

acty Foreign exchange transactions were regulated in

India by the foreign exchange regulation act(FERA),1937.

y This act is also sought to regulate certain aspects ofthe conduct of business out side the country byIndian companies and in India by foreigncompanies.

y The main objective of (FERA) framed againstbackground of severe exchange problem andcontrol economic regime.

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Contd..In 1999 new act foreign exchange management act (FEMA)

has come replaced the( FERA) .The objective of (FEMA)are:

y To facilitate external trade and payments.y To promote the orderly development maintenance of

foreign exchange market.

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presentation on export finance 2003

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