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    Loans Provided to Importers and Exporters by Banks

    INTRODUCTION

    Imports and Exports have been an integral part of our economy since a very

    long time. Trade financing is a way to import and export goods and finance

    their business. Trade finance is a specific topic within the financial service

    industry. Today trade finance is a massive billion of dollars of business.

    Since world trade is increasing the good and commodities are bought and

    sold, and banks and financial institutions should lend money to finance the

    purchase of these goods and commodities.

    Trade finance refers to a wide range of tools that determine how cash, credit,

    investments and other assets can be used for trade. Banks also play a central

    role in facilitating trade, both through the provision of finance and bonding

    facilities and through the establishment and management of payment

    mechanisms such as telegraphic transfers and documentary letters of credit

    (L/Cs). Amongst the intermediated trade finance products, the most

    commonly used for financing transactions is L/Cs, whereby the importer and

    exporter essentially entrust the exchange process (i.e., payment against

    agreed delivery) to their respective banks in order to mitigate counterparty

    risk. Typical trade-related financial services include letters of credit, import

    bills for collection, import financing, shipping guarantees, letter of credit

    confirmation, checking and negotiation of documents, pre-shipment export

    financing, invoice financing, and receivables purchase. Trade finance

    instruments can be structured to include export credit guarantees or

    insurance. Trade finance differs from other forms of credit (e.g., investment

    and working capital) in several ways.

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    Trade finance is much different than commercial lending, mortgage lending

    or insurance. A product is sold and shipped overseas; therefore, it takes

    longer to get paid. Extra time and energy is required to make sure that

    buyers are reliable and creditworthy. Also, foreign buyers - just like

    domestic buyers - prefer to delay payment until they receive and resell the

    goods. Due diligence and careful financial management can mean the

    difference between profit and loss on each transaction.

    All sellers want to get paid as quickly as possible, while buyers usually

    prefer to delay payment, at least until they have received and resold the

    goods. This is true in domestic as well as international markets.

    Increasing globalization has created intense competition for export markets.

    Importers and exporters are looking for any competitive advantage that

    would help them to increase their sales. Flexible payment terms have

    become a fundamental part of any sales package.

    Trade finance is the lifeline of trade because more than 90% of trade

    transactions involve some form of credit, insurance or guarantee. Importexport trade assumes huge importance in the context of overall performance

    of the world economy. An upward trend of import export is indicative of

    smooth functioning of the world economy; whereas a downward trend

    results from economic instability.

    1. EXPORTS

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    Loans Provided to Importers and Exporters by Banks

    Export is one of the most lucrative business activities in India. Exporting is a

    major component of international trade. Exports entail transfer of goods and

    services from a home country to the foreign consumers. Export in simple

    words means selling goods abroad. International market being a very wide

    market, huge quantity of goods can be sold in the form of exports. Export

    refers to outflow of goods and services and inflow of foreign exchange.

    Export occupies a very prominent place in the list of priorities of the

    economic set up of developing countries because they contribute largely to

    foreign exchange pool.

    Exports play a crucial role in the economy of the country. In order to

    maintain healthy balance of trade and foreign exchange reserve it is

    necessary to have a sustained and high rate of growth of exports.

    Exports are a vehicle of growth and development. They help not only in

    procuring the latest machinery, equipment and technology but also the goods

    and services, which are not available indigenously. Exports leads to national

    self-reliance and reduces dependence on external assistance which

    howsoever liberal, may not be available without strings.

    Exports play a very vital role for Indian macroeconomic settings as they

    influence the underlying conditions in the domestic economy and also help

    in keeping the balance of payments under control.

    It is seen that there exists a close relationship between export earnings and

    domestic investment. Higher rates of economic growth tend to be associated

    with higher rates of exports growth. Conversely, most countries with low

    rates of export growth also tend to have, in general, low rates of economic

    growth.

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    Though Indias export compared to other countries is very small, but one of

    the most important aspects of our export is the strong linkages it is forgoing

    with the world economy which is a great boon for a developing nation like

    India.

    1.1 EXPORT FINANCE

    Credit and finance is the life and blood of any business whether domestic or

    international. It is more important in the case of export transactions due to

    the prevalence of novel non-price competitive techniques encountered by

    exporters in various nations to enlarge their share of world markets.

    Export finance is a part of global finance given to the corporate. Exportfinancing enables businesses to bring their products all over the world.

    Importance of credit to exporters cannot be overemphasized. India has to

    compete effectively with other countries in the export markets in order to

    penetrate into new markets and widen its hold on the existing markets. Since

    many countries have been pursuing policies geared to the promotion of

    exports through adequate export credits at low rates of interest, India has

    also pursued the same policy in regard to export finance.

    In all major industrialized countries, banks and other financial institutions

    are deeply involved in financing of exports on special terms. Some of them

    are granting mixed credits that combine export credit with foreign aid todeveloping countries. In all such cases, the governments and central banks of

    those countries are directly involved in subsidizing exports.

    Exporters naturally want to get paid as quickly as possible, while importers

    usually prefer to delay payment until they have received or resold the goods.

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    Because of the intense competition for export markets, being able to offer

    attractive payment terms customary in the trade is often necessary to make a

    sale. Exporters should be aware of the many financing options open to them

    so that they choose the most acceptable one to both the buyer and the seller.

    In many cases, government assistance in export financing for small and

    medium-sized businesses can increase a firm's options. The following

    factors are important to consider in making decisions about financing:

    The need for financing to make the sale: - In some cases, favorable payment

    terms make a product more competitive. If the competition offers better

    terms and has a similar product, a sale can be lost. In other cases, the buyer

    may have preference for buying from a particular exporter, but might buy

    your product because of shorter or more secure credit terms.

    The length of time the product is being financed: - This determines how long

    the exporter will have to wait before payment is received and influences the

    choice of how the transaction is financed.

    The cost of different methods of financing: - Interest rates and fees vary.

    Where an exporter can expect to assume some or all of the financing costs,

    their effect on price and profit should be well understood before a pro forma

    invoice is submitted to the buyer.

    The risks associated with financing the transaction: - The riskier the

    transaction, the harder and more costly it will be to finance. The political and

    economic stability of the buyer's country can also be an issue. To provide

    financing for either accounts receivable or the production or purchase of the

    product for sale, the lender may require the most secure methods of

    payment, a letter of credit (possibly confirmed), or export credit insurance or

    guarantee.

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    The need for pre-shipment finance and for post-shipment working capital:

    -Production for an unusually large order, or for a surge of orders, may

    present unexpected and severe strains on the exporter's working capital.

    Even during normal periods, inadequate working capital may curb an

    exporter's growth. However, assistance is available through public and

    private sector resources

    OBIECTIVES OF EXPORT FINANCE

    To cover commercial & Non-commercial or political risks attendant

    on granting credit to a foreign buyer.

    To cover natural risks like an earthquake, floods etc.

    An exporter may avail financial assistance from any bank, which considers

    the ensuing factors:

    Availability of the funds at the required time to the exporter.

    Affordability of the cost of funds.

    APPRAISAL

    Appraisal means an approval of an export credit proposal of an exporter.

    While appraising an export credit proposal as a commercial banker,

    obligation to the following institutions or regulations needs to be adhered to.

    Obligations to the RBI under the Exchange Control Regulations are:

    Appraise to be the banks customer.

    Appraise should have the EXIM code number allotted by the Director

    General of Foreign Trade.

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

    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 license should be there

    which allows the goods to be exported.

    Country with whom the Appraise wants to trade should not be under

    trade barrier.

    Obligations to ECGC are:

    Verification that Appraise is not under the Specific Approval list

    (SAL).

    Sanction of Packing Credit Advances.

    GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE:

    When a commercial bank deals in export finance it is bound by the ensuing

    guidelines: -

    Exchange control regulations.

    Trade control regulations.

    Reserve Banks directives issued through IECD.

    Export Credit Guarantee Corporation guidelines.

    Guidelines of Foreign Exchange Dealers Association of India.

    1.2 ARRANGING FINANCE FOR EXPORTS

    Financial assistance to the exporters is generally provided by the commercial

    banks before shipment as well as after shipment of goods is known as pre-

    shipment finance and that provided after the shipment of goods is known as

    post-shipment finance. Pre-shipment finance is given for working capital for

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    purchase of raw material processing, packing, transportation, ware-housing

    etc. of the goods meant for export. Post-shipment finance is provided for

    bridging the gap between the shipment of goods and realization of export

    proceeds. The later is done by the Banks by purchasing or negotiating the

    export documents or by extending advance against export bills accepted on

    collection basis. While doing so, the banks adjust the pre-shipment advance,

    if any, already granted to the exporters.

    1.3 PRE-SHIPMENT FINANCE

    'Pre-shipment/Packing Credit' means any loan or advance granted or any

    other credit provided by a bank to an exporter for financing the purchase,

    processing, manufacturing or packing of goods prior to shipment /working

    capital expenses towards rendering of services on the basis of letter of credit

    opened in his favour or in favour of some other person, by an overseas buyer

    or a confirmed and irrevocable order for the export of goods/services from

    India or any other evidence of an order for export from India having been

    placed on the exporter or some other person, unless lodgment of export

    orders or letter of credit with the bank has been waived.

    IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE:

    To purchase raw material, and other inputs to manufacture goods.

    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.

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    To pay for export documentation expenses.

    APPLICATION FOR PRE-SHIPMENT CREDIT:

    An application for pre-shipment advance should be made by the exporter to

    his banker along with the following documents:

    1. Confirmed export order/contract or L/C etc. in original. Where it is

    not available, an undertaking to the effect that the same will be

    produced to the Bank within a reasonable time for verification and

    endorsement should be given.2. An undertaking that the advance will be utilized for the specific

    purpose of procuring/manufacturing/shipping etc., of the goods meant

    for exports only, as stated in the relative confirmed export order or the

    L/C.

    3. If there is a sub-supplier and want to supply the goods to the

    Export/Trading/Star Trading House or Merchant Exporter, an

    undertaking from the Merchant Exporter or Export/Trading/Star

    Trading House stating that they have not/will not avail themselves of

    packing credit facility against the same transaction for the same

    purpose till the original packing credit is liquidated.

    4. Copies of Income Tax/Wealth Tax Assessment Order for the last 2/3

    years in the case of sole proprietor and partnership firm.

    5. Copy of Importers Exporters code number.

    6. Copy of a valid RCMC (Registration cum Membership Certificate)

    held by the Exporter/Trading/Star Trading House Certificate.

    7. Appropriate policy/guarantee of the ECGC.

    8. Any other document required by the Bank.

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    For encouraging exports, RBI has instructed the banks to grant pre-shipment

    advance at concessional rates of interest.

    PERIOD OF ADVANCE

    i. The period for which a packing credit advance may be given by a

    bank will depend upon the circumstances of the individual case, such

    as the time required for procuring, manufacturing or processing

    (where necessary) and shipping the relative goods/ rendering of

    services It is primarily for the banks to decide the period for which a

    packing credit advance may be given having regard to the various

    relevant factors so that the period is sufficient to enable the exporter to

    ship the goods /render the services.

    ii. If pre-shipment advances are not adjusted by submission of export

    documents within 360 days from the date of advance, the advances

    will cease to qualify for concessive rate of interest to the exporter ab

    initio.

    iii. RBI would provide refinance only for a period not exceeding 180days.

    DISBURSEMENT OF PACKING CREDIT

    i. Ordinarily, each packing credit sanctioned should be maintained as

    separate account for the purpose of monitoring period of sanction and

    end-use of funds.

    ii. Banks may release the packing credit in one lump sum or in stages as

    per the requirement for executing the orders/LC.

    iii. Banks may also maintain different accounts at various stages of

    processing, manufacturing, etc. depending on the types of

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    goods/services to be exported, e.g. hypothecation, pledge, etc.,

    accounts and may ensure that the outstanding balance in accounts are

    adjusted by transfer from one account to the other and finally by

    proceeds of relative export documents on purchase, discount, etc.

    iv. Banks should continue to keep a close watch on the end-use of the

    funds and ensure that credit at lower rates of interest is used for

    genuine requirements of exports. Banks should also monitor the

    progress made by the exporters in timely fulfillment of export orders.

    FORMS OR METHODS OF PRE-SHIPMENT FINANCE/PACKING

    CREDIT

    Packing Credit is extended in the following forms:

    1. Packing Credit in Indian Rupee

    2. Packing Credit in Foreign Currency (PCFC)

    1. Packing credit in Indian rupee

    This is taken in Indian Rupees and is given to the exporter in the form of the

    Rupee Loan and the interest is charged at the rate as per RBI directives.

    When any export proceeds are realized, the packing credit is automatically

    adjusted. If it becomes overdue the rate of interest will be charged at the rate

    determined by the individual bank.

    2. Packing credit in Foreign Currency (P.C.F.C.)

    In the case of PCFC, the bankers have their own line of credit with their

    foreign banks and the interest is charged at LIBOR' rate i.e. London Inter

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    Bank Offered Rate plus the interest spread that is mutually agreed upon

    between the bankers and the exporter subject to a minimum of 1.0%, till the

    due date. This is denominated in a foreign currency. The above mentioned

    interest is for 90 days, since the period of liquidation of pre-shipment credit

    normally granted by the bankers for diamond Industry is 90 days from the

    date of availing the facility. Beyond 90 days, if the PCFC becomes overdue

    the interest will be charged based on fresh LIBOR rate prevalent on the 91st

    day plus the interest spread and additional interest at 2% for the overdue

    period. If the payment is not received after 30 days from the due date, the

    Packing credit will be crystallized. It means that the bankers will convert the

    balance PCFC, at the TT selling interbank rate into Indian Rupees and the

    interest will be charged on the entire amount at commercial rate of interest

    from day one of availing the PCFC. The rate of interest varies with different

    banks and is in the range of 15 to 20%.

    'RUNNING ACCOUNT' FACILITY

    i. Pre-shipment credit to exporters is normally provided on lodgment of

    L/Cs or firm export orders. It is observed that the availability of raw

    materials is seasonal in some cases. In some other cases, the time

    taken for manufacture and shipment of goods is more than the

    delivery schedule as per export contracts. In many cases, the exporters

    have to procure raw material, manufacture the export product and

    keep the same ready for shipment, in anticipation of receipt of letters

    of credit/firm export orders from the overseas buyers. Having regard

    to difficulties being faced by the exporters in availing of adequate pre-

    shipment credit in such cases, banks have been authorized to extend

    Pre-shipment Credit Running Account facility in respect of any

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    commodity, without insisting on prior lodgment of letters of

    credit/firm export orders, depending on the banks judgment regarding

    the need to extend such a facility and subject to the following

    conditions:

    a) Banks may extend the Running Account facility only to those

    exporters whose track record has been good as also Export Oriented

    Units (EOUs)/Units in Free Trade Zones/ Export Processing Zones

    (EPZs) and Special Economic Zones (SEZs).

    b) In all cases where Pre-shipment Credit Running Account facility has

    been extended, letters of credit/firm orders should be produced within

    a reasonable period of time to be decided by the banks.

    c) Banks should mark off individual export bills, as and when they are

    received for negotiation/collection, against the earliest outstanding

    pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to

    add that, while marking off the pre-shipment credit in the manner

    indicated above, banks should ensure that concessive credit available

    in respect of individual pre-shipment credit does not go beyond the

    period of sanction or 360 days from the date of advance, whichever is

    earlier.

    d) Packing credit can also be marked-off with proceeds of export

    documents against which no packing credit has been drawn by the

    exporter.

    i. If it is noticed that the exporter is found to be abusing the facility, thefacility should be withdrawn forthwith.

    ii. In cases where exporters have not complied with the terms and

    conditions, the advance will attract commercial lending rate ab initio.

    In such cases, banks will be required to pay higher rate of interest on

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    the portion of refinance availed of by them from the RBI in respect of

    the relative pre-shipment credit. All such cases should be reported to

    the Monetary Policy Department, Reserve Bank of India, Central

    Office, Mumbai 400 001 which will decide the rate of interest to be

    charged on the refinance amount.

    iii. Running account facility should not be granted to sub-suppliers.

    Following special schemes are also available in respect pre- shipment

    finance:

    1. EXIM Banks foreign currency pre- shipment credit scheme.

    2. Scheme of export packing credit to sub-suppliers.

    3. Export credit for supplies to units in special economic zones.

    4. Export credit against advance payments in the form of cheques, drafts,

    etc. and rupee pre- shipment credit to specific sectors/segments.

    1.4 POST-SHIPMENT FINANCE

    'Post-shipment Credit' means any loan or advance granted or any other credit

    provided by a bank to an exporter of goods/services from India from the date

    of extending credit after shipment of goods/rendering of services to the date

    of realization of export proceeds and includes any loan or advance granted to

    an exporter, in consideration of, or on the security of any duty drawback

    allowed by the Government from time to time.

    TYPES OF POST-SHIPMENT CREDITS:

    1. Purchase of Export Documents drawn under Export Order:

    Purchase or discount facilities in respect of export bills drawn under

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    confirmed export order are generally granted to the customers who are

    enjoying Bill Purchase/Discounting limits from the Bank. As in case

    of purchase or discounting of export documents drawn under export

    order, the security offered under L/C by way of substitution of credit-

    worthiness of the buyer by the issuing bank is not available, the bank

    financing is totally dependent upon the credit worthiness of the buyer,

    i.e. the importer, as well as that of the exporter or the beneficiary. The

    documents dawn on DP basis are parted with through foreign

    correspondent only when payment is received while in case of DA

    bills documents (including that of title to the goods) are passed on to

    the overseas importer against the acceptance of the draft to make

    payment on maturity. DA bills are thus unsecured. The bank financing

    against export bills is open to the risk of non-payment. Banks, in order

    to enhance security, generally opt for ECGC policies and guarantees

    which are issued in favor of the exporter/banks to protect their interest

    on percentage basis in case of non-payment or delayed payment which

    is not on account of mischief, mistake or negligence on the part of

    exporter. Within the total limit of policy issued to the customer,

    drawee-wise limits are generally fixed for individual customers. At

    the time of purchasing the bill bank has to ascertain that this drawee

    limit is not exceeded so as to make the bank ineligible for claim in

    case of non-payment.

    2. Advances against Export Bills Sent on Collection: It may

    sometimes be possible to avail advance against export bills sent on

    collection. In such cases the export bills are sent by the bank on

    collection basis as against their purchase/discounting by the bank.

    Advance against such bills is granted by way of a 'separate loan'

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    usually termed as 'post-shipment loan'. This facility is, in fact, another

    form of post- shipment advance and is sanctioned by the bank on the

    same terms and conditions as applicable to the facility of

    Negotiation/Purchase/Discount of export bills. A margin of 10 to 25%

    is, however, stipulated in such cases. The rates of interest etc.,

    chargeable on this facility are also governed by the same rules. This

    type of facility is, however, not very popular and most of the advances

    against export bills are made by the bank by way of

    negotiation/purchase/discount.

    3. Advance against Goods Sent on Consignment Basis: When the

    goods are exported on consignment basis at the risk of the exporter for

    sale and eventual remittance of sale proceeds to him by the

    agent/consignee, bank may finance against such transaction subject to

    the customer enjoying specific limit to that effect. However, the bank

    should ensure while forwarding shipping documents to its overseas

    branch/correspondent to instruct the latter to deliver the document

    only against Trust Receipt/Undertaking to deliver the sale proceeds by

    specified date, which should be within the prescribed date even if

    according to the practice in certain trades a bill for part of the

    estimated value is drawn in advance against the exports.

    4. Advance against Undrawn Balance: In certain lines of export it is

    the trade practice that bills are not to be drawn for the full invoice

    value of the goods but to leave small part undrawn for payment after

    adjustment due to difference in rates, weight, quality etc. to be

    ascertained after approval and inspection of the goods. Banks do

    finance against the undrawn balance if undrawn balance is in

    conformity with the normal level of balance left undrawn in the

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    particular line of export subject to a maximum of 10% of the value of

    export and an undertaking is obtained from the exporter that he will,

    within 6 months from due date of payment or the date of shipment of

    the goods, whichever is earlier surrender balance proceeds of the

    shipment. Against the specific prior approval from Reserve Bank of

    India the percentage of undrawn balance can be enhanced by the

    exporter and the finance can be made available accordingly at higher

    rate. Since the actual amount to be realised out of the undrawn

    balance, may be less than the undrawn balance, it is necessary to keep

    a margin on such advance.

    5. Advance against Retention Money: Banks also grant advances

    against retention money, which is payable within one year from the

    date of shipment, at a concessional rate of interest up to 90 days. If

    such advances extend beyond one year, they are treated as deferred

    payment advances which are also eligible for concessional rate of

    interest.

    6. Advances against Claims of Duty Drawback: Duty Drawback is

    permitted against exports of different categories of goods under the

    'Customs and Central Excise Duty Drawback Rules, 1995'. Drawback

    in relation to goods manufactured in India and exported means a

    rebate of duties chargeable on any imported materials or excisable

    materials used in manufacture of such goods in India or rebate on

    excise duty chargeable under Central Excises Act, 1944 on certain

    specified goods. The Duty Drawback Scheme is administered by

    Directorate of Duty Drawback in the Ministry of Finance. The claims

    of duty drawback are settled by Custom House at the rates determined

    and notified by the Directorate. As per the present procedure, no

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    separate claim of duty drawback is to be filed by the exporter. A copy

    of the shipping bill presented by the exporter at the time of making

    shipment of goods serves the purpose of claim of duty drawback as

    well. This claim is provisionally accepted by the customs at the time

    of shipment and the shipping bill is duly verified. The claim is settled

    by customs office later. As a further incentive to exporters, Customs

    Houses at Delhi, Mumbai, Calcutta, Chennai, Chandigarh, and

    Hyderabad have evolved a simplified procedure under which claims

    of duty drawback are settled immediately after shipment and no funds

    of exporter are blocked.

    However, where settlement is not possible under the simplified procedure

    exporters may obtain advances against claims of duty drawback as

    provisionally certified by customs.

    LIQUIDATION OF POST-SHIPMENT CREDIT:

    Post-shipment credit is to be liquidated by the proceeds of export bills

    received from abroad in respect of goods exported/services rendered

    .Further, subject to mutual agreement between the exporter and the banker it

    can also be repaid/prepaid out of balances in Exchange Earners Foreign

    Currency Account (EEFC A/C) as also from proceeds of any other

    unfinanced (collection) bills. Such adjusted export bills should however

    continue to be followed up for realization of the export proceeds and will

    continue to be reported in the XOS statement.

    RUPEE POST-SHIPMENT EXPORT CREDIT

    PERIOD

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    i. In the case of demand bills, the period of advance shall be the Normal

    Transit Period (NTP) as specified by FEDAI.

    ii. In case of usance bills, credit can be granted for a maximum duration

    of 180 days from date of shipment inclusive of Normal Transit Period

    (NTP) and grace period, if any. However, banks should closely

    monitor the need for extending post-shipment credit upto the

    permissible period of 180 days and they should influence the

    exporters to realise the export proceeds within a shorter period.

    iii. 'Normal transit period' means the average period normally involved

    from the date of negotiation/purchase/discount till the receipt of bill

    proceeds in the Nostro account of the bank concerned, as prescribed

    by FEDAI from time to time. It is not to be confused with the time

    taken for the arrival of goods at overseas destination.

    iv. An overdue bill:

    a) In the case of a demand bill, is a bill which is not paid before the

    expiry of the normal transit period, and

    b) In the case of a usance bill, is a bill which is not paid on the due date

    GOLD CARD SCHEME FOR EXPORTERS

    The applicable rate of interest to be charged under the Gold Card Scheme

    will not be more than the general rate for export credit in the respective bank

    and within the ceiling prescribed by RBI. In keeping with the spirit of the

    Scheme banks will endeavour to provide the best rates possible to Gold Card

    holders on the basis of their rating and past performance.

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    In respect of the Gold Card holders, the concessive rate of interest on post-

    shipment rupee export credit applicable up to 90 days may be extended for a

    maximum period up to 365 days.

    The salient features of the scheme are:

    i. All creditworthy exporters, including those in small and medium

    sectors with good track record would be eligible for issue of Gold

    Card by individual banks as per the criteria to be laid down by the

    latter;

    ii. Banks would clearly specify the benefits they would be offering toGold Card holders

    iii. request from card holders would be processed quickly by banks within

    25 days/15 days and 7 days for fresh application/renewal of limits and

    ad hoc limits, respectively;

    iv. in principle limits would be set for a period of 3 years with a

    provision for stand by limit of 20% to meet urgent credit needs;

    v. card holders would be given preference in the matter of granting of

    packing credit in foreign currency;

    vi. banks would consider waiver of collaterals and exemption from

    ECGC guarantee schemes on the basis of card holders

    creditworthiness and track records, and

    vii.The concessive rate of interest on post-shipment rupee export credit

    applicable upto 90 days may be extended for a maximum period upto

    365 days.

    2. IMPORT

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    Each country has different natural resource and different climatic conditions.

    Some are rich in minerals while some are rich in forest resources. A country

    cannot produce all the commodities required by the nation. It may have

    some commodities in excess while some commodities which are available in

    limited quantity. Hence countries have to depend on other countries.

    A country exports those commodities which are in excess with the country

    and import those which are not available at large within the country, this

    interdependency of one country on other result into international trade. The

    exchange of goods helps both the countries in developing their economy.

    Many billions of dollars worth of goods and services are traded between

    almost every country in the world every day, and this trend is only likely to

    continue.

    It is important to note that even developed countries will be equally

    benefited due to international trade. Growth of undeveloped and under

    developing countries act will provide scope of industrialization in developed

    countries. Poverty of undeveloped countries acts as limiting factor in

    international trade. In case of gulf countries where there are no source to

    cultivate food grains, these countries have to depend on imports. Similarly,

    Indian govt. requirements of crude oil is being met twenty percent by

    domestic production and balance eighty percent requirement is required to

    be imported.

    An import (also termed as international purchasing) activity may be defined

    as a process of procuring goods and service from the supplier/s situated in

    the foreign countries. This activity involves inflow of goods and service

    from the foreign country (exporter country) into the base country (importing

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    country) & in-tune outflow of foreign currency from base country to the

    foreign country towards payments for the goods and services purchased.

    There are basically four main reasons for which a country may decide to

    import a certain good or service:

    1. It simply does not exist in the country: a mineral which is not in the

    country's soil, an agriculture product that can't be produced there, an

    innovation that has been introduced in other countries;

    2. It does not exist at a specific level of quality; thus, a country imports

    better products than domestic production, also as far as advertising orpackaging are concerned;

    3. It is cheaper abroad, since producers there are more efficient, are faced by

    lowercosts, better exploit economies of scale and/or accept lowerprofits;

    4. At the current domestic price, producers do not supply enough good or

    service as the demand requires, also because ofex ante coordination

    problems; accordingly, consumers buy abroad for insufficient domestic

    production.

    2.1 IMPORT FINANCE

    Banks normally do not extend a fund based finance to meet import needs of

    their customers, barring few exceptions. However, they enable industrial

    units and others to have access to imported inputs and machinery by

    establishing letters of credit in favour of the overseas suppliers/sellers. Letter

    of Credit is a non-fund credit facility offered by banks to their constitutes of

    integrity and proven track record in meeting their commitments promptly

    without need for any post import finance.

    2.2 ARRANGING FINANCE FOR IMPORTS

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    It is advisable that financial planning for the imports should be made much

    in advance so as to avoid unnecessary huge demurrages on the imported

    goods lying unclear for want of payment for the documents/customs duty.

    Moreover, further losses may result due to fall in prices of the import

    consignment. It is therefore essential that either you should own sufficient

    funds for completing the import transactions or have obtained necessary

    credit limits from financial institutions/banks in India. Obtaining funds from

    the bank will entail submission of credit proposals to the bank; enabling it to

    sanction a suitable limit for the importers.

    The commercial banks finance the import requirements of the customer.

    This finance mainly takes the form of letter of credit and bank guarantees.

    The same are briefly discussed below:

    2.3 POST IMPORT FINANCE

    Issuing bank in, in receipt of documents under the LC established by it,examines them and ensures that they conform to the terms of LC. If so, they

    intimate the importer/applicant to pay for and retire the documents. The

    applicant, at this stage, may utilize the balance in his Cash Credit Account

    (the item of import is a raw material, etc) or Term loan limit (if the item of

    import is a capital good or equipment) and retire the documents. In respect

    of imports made by exporters, banks may grant packing credit advances to

    meet the cost of imported goods.

    Otherwise, normally banks do not extend any specific post import finance to

    importers who have to suitably manage their own funds to meet the bills in

    time/on the due dates.

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    Before handing over the import documents to the applicant, banks collect

    charges by way of interest commission, etc. to the debit of applicants

    account.

    Within 3 months from date of retirement of import documents, importers are

    required to submit the documentary proof of import in the form of Customs

    certified Exchange Control copy of Bill of Entry to the bank, failing which

    banks will report the importers as defaulters to RBI.

    2.4 LETTER OF CREDIT:

    A Letter of Credit is a signed instrument including an undertaking by the

    banker of a buyer to pay the seller a certain sum of money on presentation of

    documents evidencing shipment of specified goods and subject to

    compliance with the stipulated terms and conditions.

    Banks establish LCs only on account of their customers, who hold a validImporter-Exporter Code Number from the Regional Licensing Authorities

    and produce underlying sales contract between the Indian importer and the

    overseas sellers, accompanied by valid import license in the name of the

    importers, wherever necessary. Banks take into account the norms for

    holding imported inventory, make an appraisal of the request for opening an

    LC like any other fund based working capital facility, prescribe suitable

    margin/securities and then decide to establish the LC.

    Banks have simplified the documentation procedures for LC limits

    sanctioned to their customer and usually, every time when an LC is to be

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    established, and LC application-cum-agreement is obtained from the

    importer which will also serve as an advance document for the LC.

    LETTER OF CREDIT V/S. LOAN APPLICATION

    There is virtually no difference between an application for a loan and a

    request for opening a commercial letter of credit. Although while issuing a

    credit, the bank lends only its name without any actual outlay of funds, it

    must, however, be ready to meet its commitments, for which it has to ensure

    itself about the financial responsibility of its customer as well as the

    marketability of the goods. The merchandise covered by the credit provides

    a security interest to the issuing bank.

    LETTERS OF CREDIT ARE SEPARATE TRANSACTIONS

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    A contract for sale of goods between the seller and the buyer incorporates

    mode of settlement. Letters of credit by their nature are separate from the

    sale contract, and banks are concerned or bound by such sale contracts even

    if the credit bears reference to them.

    The credits stipulate documents which have to be tendered for payment and

    it, therefore, follows that in credits parties deal with documents and not with

    goods, services or performances to which the documents relate.

    It is, therefore, in the interest of all the parties concerned that the conditions

    and term of credit are complete and bare fit of excessive details.

    Payment under a letter of credit does not depend on the performance

    obligation on the part of the exporter except those which the credit imposes.

    Banks accept documents under letters of credit for what those documents

    purport to be on their face. Contract between the buyer and the seller is

    obligatory between themselves. The seller (beneficiary) cannot take

    advantage of any contractual terms in between the buyer and the opening

    bank and between the opening bank and the advising/confirming bank.

    OBTAINING IMPORT LETTER OF CREDIT LIMIT

    Import Letter of Credit limits are sanctioned by the banks on submission of

    complete loan proposal as in case of other types of credit facilities.

    Necessary guidance in this regards should be obtained from your bank.

    However, while applying for Letter of Credit limit it is very essential that

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    other limits are also applied for in one stretch so as to avoid any difficulty

    later. Necessary financial planning is, therefore, needed in advance for

    making the payments of import bills under Letter of Credit on due dates. any

    delay in retirement of bills will not only strain relations of the importer with

    his bank but will also result in additional expenditure by way of extra

    commission, penal interest, demurrage charges, deterioration packing or

    quality of goods, etc. The importer should, therefore, keep in mind that

    i. While importing raw material or consumable stores and spares he

    should make advance arrangements for adequate working capital

    limits or have the necessary funds available with him;

    ii. While importing capital goods such as machinery etc. necessary term

    loan arrangement or financial planning should be made.

    The importer has also to make the necessary arrangements for payment of

    customs duty, which sometimes may be quite substantial.

    Margin

    The banks while sanctioning import Letter of Credit limits may require

    additional securities to cover their risk. A cash margin as per RBI/banks

    rules is also stipulated for Letter of Credit limits. Third party margin or

    security is acceptable subject to certain conditions. The margin is taken at

    the time of establishing the Letter of Credit is released only after the bill

    under Letter of Credit has been retired. It is, therefore, necessary that the

    margin may preferably be kept in the shape of fixed deposit for a suitable

    period to earn interest on the margin deposit.

    2.5 BANK GUARANTEES

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    At the request of the customer, the bank issues guarantees favoring the

    beneficiaries. Thus the contract of a guarantee is a tri-partite contract. The

    customer is the person at whose request the guarantee is issued, the bank is

    the guarantor and the payee / beneficiary i.e. the person in whose favor the

    guarantee is issued. The bank charges commission for issue of guarantee,

    which is an income for the bank. The guarantee is a non-fund based facility

    as the liability on the bank may or may not crystallize on the due date based

    on the failure to perform the contract by the borrower. Therefore they are

    shown as contingent liability by way of footnote to accounts.

    The guarantees are of 2 types they are as follow:-

    i. Performance Guarantee: - performance guarantees normally

    guarantees the performance of the contract. For e.g. the borrower

    getting a contract for construction of a bridge against which the BMC

    may insists on issue of guarantee towards the performance of the

    contract from the borrower.

    ii. Financial Guarantee: - Financial guarantees represent the guarantee

    for ensuring the financial obligations. For instance:- BEST may float a

    tender for supply of BUS from interested contractors and may insists

    on 10% tender money / earnest money to be deposited along with the

    quotations. This is to invite only capable and serious bidders. In case,the bidders who are awarded the contract do not accept the same; the

    bid money will be forfeited. Through the credit facility at the same

    stage of issue of guarantee is a non fund based facility, the bank has to

    be careful in assessing the credit facility viz. Borrowers standing,

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    financial position, business record etc. to lending a fund based facility.

    Therefore, many times the bank insists on cash margin ranging from

    5% to 100% depending upon the customer.

    1. MAJOR FINANCIAL AND OTHER

    INSTITUTIONS

    3.1 EXIM BANK

    Export-Import Bank of India is the premier export finance institution of the

    country, set up in 1982 under the Export-Import Bank of India Act 1981.

    Government of India launched the institution with a mandate, not just to

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    enhance exports from India, but to integrate the countrys foreign trade and

    investment with the overall economic growth. Since its inception, EXIM

    Bank of India has been both a catalyst and a key player in the promotion of

    cross border trade and investment. Commencing operations as a purveyor of

    export credit, like other Export Credit Agencies in the world, EXIM Bank of

    India has, over the period, evolved into an institution that plays a major role

    in partnering Indian industries, particularly the Small and Medium

    Enterprises, in their globalization efforts, through a wide range of products

    and services offered at all stages of the business cycle, starting from import

    of technology and export product development to export production, export

    marketing, pre-shipment and post-shipment and overseas investment.

    OBJECTIVES

    for providing financial assistance to exporters and importers, and for

    functioning as the principal financial institution for coordinating the working

    of institutions engaged in financing export and import of goods and services

    with a view to promoting the countrys international trade

    shall act on business principles with due regard to public interest

    : The Export-Import Bank of India Act, 1981

    EXIM BANK FINANCE TO EXPORTERS

    Besides commercial banks export finance is also made available by the

    EXIM Bank. The EXIM Bank provides financial assistance to promote

    Indian exports through direct financial assistance, overseas investment

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    finance, term finance for export production and export development, pre-

    shipment credit, buyers credit, lines of credit, re-lending facility, export

    bills re-discounting, refinance to commercial banks, finance for computer

    software exports, finance for export marketing and bulk import finance to

    commercial banks. The EXIM Bank also extends non-funded facility to

    Indian exporters in the form of guarantees. The diversified lending

    programme of the EXIM Bank now covers various stages of exports, i.e.

    from the development of export markets to expansion of production capacity

    for exports, production for exports and post shipment financing. The EXIM

    Banks focus is on export of manufactured goods, project exports, exports of

    technology, services and export of computer software.

    EXIM BANK FINANCE TO IMPORTERS

    An importer in India may arrange finance by way of borrowings in Indian

    rupees or foreign exchange through the EXIM Bank in the following two

    ways:

    1. Bulk Import Finance Program (BIF): Short term working capital

    finance is provided under this Scheme to manufacturing companies

    for import of consumable inputs with a minimum order size of Rs. 1

    crore. Interest chargeable for such loans is

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    For rupee loan: 1% below the interest rate on cash credit facility

    charged by the commercial banker subject to a minimum

    interest rate fixed by EXIM Bank.

    For foreign currency loan: depending on cost of funds to EXIM

    Bank with a maximum of 0.75% over LIBOR.

    The loan is to be repaid within one year.

    1. Import Finance: Term Loan for import of capital goods/plant and

    machinery or technology/know-how by Indian manufacturing

    companies is provided under this scheme. The interest rate may bebased on prevailing market rates, or may be linked to the Banks

    minimum lending rate in case of rupee term loan, or floating or fixed

    rates based on the Banks cost of funds in case of foreign currency

    term loan. EXIM Bank shall charge a service fee of 1% of loan

    amount years, determined on the basis of projected cash flows with

    suitable moratorium. The Bank shall secure the loan through an

    appropriate charge on the asset acquired out of the loan and one or

    more additional charge as specified by the Bank.

    Note:-

    EXIM Financing is available in Indian Rupees and in Foreign

    Currency

    Term finance, except for long term working capital, is available for

    periods up to 10 years [in select cases 15 year finance can also be

    made available]

    Interest: Fixed & Floating options [Benchmarks for floating rates -

    LIBOR/G-Sec/MIBOR]

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    Repayments: Amortizing/ Ballooning/ Bullet [As per cash flows]

    3.2 ECGC - EXPORT CREDIT GUARANTEE CORPORATION

    Export Credit Guarantee Corporation of India Limited was established in the

    year 1957 by the Government of India to strengthen the export promotion

    drive by covering the risk of exporting on credit.

    Being essentially an export promotion organization, it functions under the

    administrative control of the Ministry of Commerce & Industry, Departmentof Commerce and Government of India. It is managed by a Board of

    Directors comprising representatives of the Government, Reserve Bank of

    India, banking and insurance and exporting community.

    ECGC is the fifth largest credit insurer of the world in terms of

    coverage of national exports. The present paid-up capital of the company is

    Rs.800 crores and authorized capital Rs.1000 crores.

    WHAT DOES ECGC DO?

    i. Provides a range of credit risk insurance covers to exporters against

    loss in export of goods and services

    ii. Offers guarantees to banks and financial institutions to enable

    exporters to obtain better facilities from them

    iii. Provides Overseas Investment Insurance to Indian companies

    investing in joint ventures abroad in the form of equity or loan.

    HOW DOES ECGC HELP EXPORTERS?

    ECGC offers insurance protection to exporters against payment risks

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    Provides guidance in export-related activities

    Makes available information on different countries with its own credit

    ratings

    Makes it easy to obtain export finance from banks/financial

    institutions

    Assists exporters in recovering bad debts

    Provides information on credit-worthiness of overseas buyers.

    COVERS ISSUED BY ECGC:

    The covers issued by ECGC can be divided broadly into four groups:

    1. STANDARD POLICIES issued to exporters to protect then against

    payment risks involved in exports on short-term credit.

    2. SPECIFIC POLICIES designed to protect Indian firms against

    payment risk involved in (i) exports on deferred terms of payment (ii)

    service rendered to foreign parties, and (iii) construction works and

    turnkey projects undertaken abroad.

    3. FINANCIAL GUARANTEES issued to banks in India to protect

    them from risk of loss involved in their extending financial support to

    exporters at pre-shipment and post-shipment stages; and

    4. SPECIAL SCHEMES such as Transfer Guarantee meant to protect

    banks which add confirmation to letters of credit opened by foreign

    banks, Insurance cover for Buyers credit, etc.

    (A) STANDARD POLICIES:

    ECGC has designed 4 types of standard policies to provide cover for

    shipments made on short term credit:

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    1. Shipments (comprehensive risks) Policy to cover both political and

    commercial risks from the date of shipment

    2. Shipments (political risks) Policy to cover only political risks fromthe date of shipment

    3. Contracts (comprehensive risks) Policy to cover both commercial

    and political risk from the date of contract

    4. Contracts (Political risks) Policy to cover only political risks from

    the date of contract

    RISKS COVERED UNDER THE STANDARD POLICIES:

    1. Commercial Risks

    Insolvency of the buyer

    Buyers protracted default to pay for goods accepted by him

    Buyers failure to accept goods subject to certain conditions

    2. Political risks

    Imposition of restrictions on remittances by the government in the

    buyers country or any government action which may block or delay

    payment to exporter.

    War, revolution or civil disturbances in the buyers country.

    Cancellation of a valid import license or new import licensing

    restrictions in the buyers country after the date of shipment or

    contract, as applicable.

    Cancellation of export license or imposition of new export licensing

    restrictions in India after the date of contract (under contract policy).

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    Payment of additional handling, transport or insurance charges

    occasioned by interruption or diversion of voyage that cannot be

    recovered from the buyer.

    Any other cause of loss occurring outside India, not normally insured

    by commercial insurers and beyond the control of the exporter and / or

    buyer.

    RISKS NOT COVERED UNDER STANDARD POLICIES:

    The losses due to the following risks are not covered:

    1. Commercial disputes including quality disputes raised by the buyer,

    unless the exporter obtains a decree from a competent court of law in

    the buyers country in his favour, unless the exporter obtains a decree

    from a competent court of law in the buyers country in his favour

    2. Causes inherent in the nature of the goods.

    3. Buyers failure to obtain import or exchange authorization from

    authorities in his county

    4. Insolvency or default of any agent of the exporter or of the collecting

    bank.

    5. loss or damage to goods which can be covered by commerci8al

    insurers

    6. Exchange fluctuation

    7. Discrepancy in documents.

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    (B) SPECIFIC POLICIES

    The standard policy is a whole turnover policy designed to provide a

    continuing insurance for the regular flow of exporters shipment of rawmaterials, consumable durable for which credit period does not normally

    exceed 180 days.

    Contracts for export of capital goods or turnkey projects or construction

    works or rendering services abroad are not of a repetitive nature. Such

    transactions are, therefore, insured by ECGC on a case-to-case basis under

    specific policies.

    Specific policies are issued in respect of Supply Contracts (on deferred

    payment terms), Services Abroad and Construction Work Abroad.

    1) Specific policy for Supply Contracts: Specific policy for Supply

    contracts is issued in case of export of Capital goods sold on deferred credit.

    It can be of any of the four forms:

    Specific Shipments (Comprehensive Risks): Policy to cover both

    commercial and political risks at the Post-shipment stage.

    Specific Shipments (Political Risks): Policy to cover only political

    risks after shipment stage.

    Specific Contracts (Comprehensive Risks): Policy to cover political

    and commercial risks after contract date.

    Specific Contracts (Political Risks): Policy to cover only political

    risks after contract date.

    2) Service policy: Indian firms provide a wide range of services like

    technical or professional services, hiring or leasing to foreign parties (private

    or government). Where Indian firms render such services they would be

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    exposed to payment risks similar to those involved in export of goods. Such

    risks are covered by ECGC under this policy.

    If the service contract is with overseas government, then Specific Services(political risks) Policy can be obtained and if the services contract is with

    overseas private parties then specific services (comprehensive risks) policy

    can be obtained, especially those contracts not supported by bank

    guarantees.

    Normally, cover is issued on case-to-case basis. The policy covers 90%of

    the loss suffered.

    3) Construction Works Policy: This policy covers civil construction jobs

    as well as turnkey projects involving supplies and services. This policy

    covers construction contracts both with private and foreign government.

    This policy covers 85% of loss suffered on account of contracts with

    government agencies and 75% of loss suffered on account of construction

    contracts with private parties.

    (C) FINANCIAL GUARANTEES

    Exporters require adequate financial support from banks to carry out their

    export contracts. ECGC backs the lending programmes of banks by issuing

    financial guarantees. The guarantees protect the banks from losses on

    account of their lending to exporters. Six guarantees have been evolved for

    this purpose.

    These guarantees give protection to banks against losses due to non-payment

    by exporters on account of their insolvency or default. The ECGC charges a

    premium for its services that may vary from 5 paisa to 7.5 paisa per month

    for Rs. 100/-. The premium charged depends upon the type of guarantee and

    it is subject to change, if ECGC so desires.

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    The six guarantees are as follows:

    i. Packing Credit Guarantee: Any loan given to exporter for the

    manufacture, processing, purchasing or packing of goods meant forexport against a firm order of L/C qualifies for this guarantee.

    Pre-shipment advances given by banks to firms who enters contracts

    for export of services or for construction works abroad to meet

    preliminary expenses are also eligible for cover under this guarantee.

    ECGC pays two thirds of the loss.

    ii. Export Production Finance Guarantee: this is guarantee enables

    banks to provide finance at pre-shipment stage to the full extent of the

    domestic cost of production and subject to certain guidelines.

    The guarantee under this scheme covers some specified products such

    a textiles, woolen carpets, ready-made garments, etc and the loss

    covered is two third.

    iii. Export Finance Guarantee: this guarantee over post-shipment

    advances granted by banks to exporters against export incentives

    receivable such as DBK. In case, the exporter

    Does not repay the loan, then the banks suffer loss? The loss insured

    is up to three fourths or 75%.

    iv. Post-Shipment Export Credit Guarantee: post shipment finance

    given to exporters by the banks purchase or discounting of export bills

    qualifies for this guarantee. Before extending such guarantee, the

    ECGC makes sure that the exporter has obtained Shipment or

    Contract Risk Policy. The loss covered under this guarantee is 75%.

    v. Export Performance Guarantee: exporters are often called upon to

    execute bid bonds supported by a bank guarantee and it the contract is

    secured by the exporter than he has to furnish a bank guarantee to

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    foreign parties to ensure due performance or against advance payment

    or in lieu of or retention money. An export proposition may be

    frustrated if the exporters bank is unwilling to issue the guarantee.

    This guarantee protects the bank against 75% of the losses that it may

    suffer on account of guarantee given by it on behalf of exporters.

    vi. Export Finance (Overseas Lending) Guarantee: if a bank financing

    overseas projects provides a foreign currency loan to the contractor, it

    can protect itself from risk of non-payment by the con tractor by

    obtaining this guarantee. The loss covered under this policy is to

    extent of three fourths (75%).

    (D) SPECIAL SCHEMES

    A part from providing policies (Standards and Specific) and guarantees,

    ECGC provides special schemes. These schemes are provided to the banks

    and to the exporters. The schemes are:

    1. Transfer Guarantee: the transfer guarantee is provided to safeguard

    banks in India against losses arising out of risk of confirmation of

    L/C. the risks can be either political or commercial or both. Loss due

    to political risks is covered up to 90 % and that due to commercial

    risks up to 75%.

    2. Insurance Cover for Buyers Credit and Lines of Credit: Financial

    Institutions in India have started direct lending to buyers or financial

    institutions in developing countries for importing machinery and

    equipment from India. This sort of financing facilitates immediate

    payment to exporters and frees them from the problem of credit

    management. ECGC has evolved this scheme to protect financial

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    institutions in India which extent export credit to overseas buyers or

    institutions.

    3.Overseas Investment Insurance: with the increasing exports ofcapital goods and turnkey projects from India, the involvement of

    exporters in capital anticipation in overseas projects has assumed

    importance. ECGC has evolved this scheme to provide protection for

    such investment. Normally the insurance cover is for 15 years.

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    Loans Provided to Importers and Exporters by Banks