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Export Finance


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Export Finance is bound by

RBI Guidelines Exchange control regulations under FEMA 1999 Trade control regulations issued by DGFT International Chamber of Commerce Guidelines Uniform

Customs & Practice for Documentary Credits (UCPDC)

ECGC guidelines. FEDAI guidelines Export finance is a short term working capital finance

allowedto an exporter.

It is provided as a Pre shipment credit or Post Shipmentcredit to them.


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Pre-shipment Credit

Means any loan or advance provided by the bank toan exporter for purchasing, processing, manufactu-ring, packing of goods, prior to its shipment .

It is provided on the basis of

A letter of credit, opened in favour of the exporter/some other person, by an overseas buyer, or

A confirmed and irrevocable export order for theexport of goods from India or

Any other evidence of an export order for exportfrom India .


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Post-shipment Credit

Means any loan or advance provided by a bank toan exporter of goods from India from the date ofshipment of goods to the date of realization of exportproceeds.

It also includes any loan or advance granted to anexporter on the security of any duty draw backallowed by the Govt from time to time.


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Type of Pre/Post shipment Credit

Types of Pre shipment credit Packing credit in rupees Packing credit in foreign currency

Types of Post shipment credit Export bills purchased/discounted/ negotiated. Advance against export bills sent on collection. Advance against Duty draw back.


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Interest Rates on Export Credit in Rupees

Interest rate on export credit in rupees is indicated as aceiling rate linked to the PLR of the bank .

The interest charged to the exporter should be less thanthis ceiling rate.

The ceiling rate- Not exceeding the BPLR minus

2.5% for all types of export credits in rupees

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Running A/c Facility for Pre-shipment Credit

Under the Running account facility (RAF) started in 1992,banks can grant PC with out insisting on prior lodgment ofexport LC/ export order .

RAF is granted only to exporters whose track record isgood.

Running account facility is granted only if the necessity toRAF is established by the exporter,

Under the RAF, export LC/firm order should be producedwithin a reasonable period, (with in one month from thedate of availment

Proceeds of bills received for negotiation / collection maybe adjusted against the earliest outstanding Pre shipmentcredit on FIFO basis so that the old PC should not remaino/s beyond the normal period of 270 days.

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RBI Refinance Against Export Credit

To encourage banks to extend more export credit to theexporters and to ensure the flow of credit to the exportsector, RBI has been providing Export credit refinance tothe SCBs,

This is provided as a certain percentage of their out

standing export credits, both at the pre shipment level andpost shipment level. Export credit refinance to banks are given at concessional

rate The quantum, of refinance and export credit refinance

formula is revised by RBI periodically depending on thecredit policy of the Bank.

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Letter of Credit (L/C)

It is a written commitment to pay, by a buyers orimporters bank (called the issuing bank) to the sellers orexporters bank (called accepting bank, negotiating bank orpaying bank). Letters of credit used in international transactions aregoverned by the International Chamber of CommerceUniform Customs and Practice for Documentary Credits(UCP). UCP is the internationally recognized set of rules governing

the use of letters of credit also known as documentary credits. Latest version is UCP-600 effective from July 1, 2007.

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Elements of a Letter of Credit

A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money On presentation of specified documents representing the

supply of goods Within specified time limits Documents must conform to terms and conditions set outin the letter of credit Documents to be presented at a specified place.

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Beneficiary

The beneficiary is entitled to payment as long as he canprovide the documentary evidence required by the L/C. The L/C is a distinct and separate transaction from the

contract on which it is based. All parties deal in documents and not in goods.

The issuing bank is not liable for performance of theunderlying contract between the customer and beneficiary.

The issuing banks obligation to the buyer, is to examine alldocuments to ensure that they meet all the terms andconditions of the L/C.

Upon requesting demand for payment, the beneficiarywarrants that all conditions of the agreement have beencomplied with.

If the beneficiary conforms to the L/C, he/she must be paidb the bank.

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Issuing Bank

The issuing banks liability to pay and to be reimbursedfrom its customer becomes absolute upon the completion ofthe terms and conditions of the L/C. Under the provisions of the UCPDC, the bank is given areasonable amount of time after receipt of the documents to

honor the draft.The issuing banks role is to provide a guarantee to theseller that if compliant documents are presented, the bank willpay the seller. Typically the documents requested will include a

commercial invoice, a transport document such as a bill oflading or airway bill and an insurance document; but therecan be many others.

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Advising Bank

An advising bank, usually a foreign correspondent bank ofthe issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank toensure that the L/C is valid. In addition, the advising bank would be responsible for

sending the document to the issuing bank. The advising bank has no other obligation under the L/C. If the issuing bank does not pay the beneficiary, theadvising bank is not obligated to pay.

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Confirming Bank

The correspondent bank can confirm the L/C for thebeneficiary. At the request of the issuing bank, the correspondent bankobligates itself to ensure payment under the L/C. The confirming bank would not confirm the L/C until it

evaluate the country and bank where the L/C originates. The confirming bank is usually the advising bank.

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Letter of Credit (L/C) - Types

Revocable vrs Irrevocable Once an irrevocable L/C is open it cannot be changedwithout the written consent of all parties including beneficiary. A revocable L/C can be change or withdrawn withoutnotifying the beneficiary.

Confirmed vrs Advised Confirmed L/C is preferred, as the confirming bankpromises to pay. Advised does not guarantee the creditworthiness of the

opening bank.

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Letter of Credit (L/C)Types .

Sight vrs. Usance At sight means the beneficiary is paid as soon as thepaying bank has determined that all necessary documents arein order. Usance time can be between 30 and 180 days after the Bill

of Lading date. This is a form of delayed payment, and shouldbe avoided if possible.

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Standby Letter of Credit (SBLC)

The SBLC serves a different function than the commercialL/C. The commercial L/C is the primary payment mechanism fora transaction. The SBLC serves as a secondary payment mechanism.

A bank will issue SBLC on behalf of a customer to provideassurances of his ability to perform under the terms of acontract between the beneficiary. The parties involved with the transaction do not expect thatthe SBLC will ever be drawn upon. SBLC are issued by banks to stand behind monetaryobligations, to ensure the refund of advance payment, tosupport performance and bid obligation and to ensure thecompletion of a sales contract.


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