exim finance, lc & forfaiting-r

Financial Services

EXPORT IMPORT FINANCE – BILLS, LCs and FORFAITING

04/08/23 Financial Services 2

Bodies monitoring Fn Exch

Exchange Control – R B I Trade Control – Min. of Com GOI Min of Foreign Trade –

Enforcement Directorate, N Delhi F E D A I – Mumbai 13 Export Promotion Councils – all

State Head Quarters in India Export Promotion Board, GOI FIEO New Delhi


1. Facilities to Exporters A. FUND BASED

Pre-shipment Credit (Packing Credit facility) Post-Shipment Credit

Negotiation / Purchase / Discount of Export bills Post-shipment loans / Advances against B Cs Advances against claims of duty drawback

B. NON-FUND BASED Advising / Confirmation of export LCs Export Guarantees Forward Exchange Contracts Back to Back Letter of Credit issue


Financing Exporters a) Pre-Shipment Finance

Packing Credit Advance against receivables/ Export

incentives from Government of India

b) Post-Shipment Finance Negotiation of Export Bills Advances against Bills under collection Others ...


a. Pre-Shipment Finance A Working Capital facility Purchase of raw material etc Covers all costs prior to shipment Two essential features

an Export Order and/or Confirmed Irrevocable Letter of Credit

To Liquidate the advance out of proceeds of export bills negotiated


b. Post Shipment Finance Negotiation or Discounting of Exp Bills Scrutinize the Export Documents

Permissible Currencies ? Permissible method of Payment ? All L/C terms have been complied with ? Customs certified GR / PP form obtained ? Validity of documents per EC Regulations ?


Letter of Credit

Letter of Credit

A letter (firm, absolute and autonomous undertaking) issued by the importer’s bank in favour of the exporter undertaking that the bills drawn by the exporter up to a particular amount will be duly honored by the opening bank, provided the terms and conditions of the credit are strictly complied with by the exporter.


In simple, L C is a

Written assurance of an issuing bank … Given to the seller / exporter / beneficiary On instructions from the importer (applicant) To effect payment …. Up to a stated sum of money Provided the seller presents all specified

documents evidencing shipment of goods or performance of services agreed upon

Within the prescribed period of time.


U C P D C - 500

Uniform Customs and Practices for Documentary Credits, 1993

Revision – Publication No. 500 In force from January 01, 1994 49 Articles covering all aspects International Chamber of

Commerce (ICC), Paris Sets in all terms and conditions Scope for arbitration by ICC


S W I F T, Brussels

Society for Worldwide Inter-bank Financial Telecommunications

Created under Belgian law In operation since May 1977 Comprises computer network

system for all member banks Speed, Security and Efficiency


Parties to an L C Buyer / Importer

/ Opener / Applicant

Buyer’s Bank/ Issuing Bank/ Opening Bank/ Establishing Bank

Seller / Exporter / Beneficiary

Advising / Confirming / Notifying Bk

Paying /Negotiating Bank

Exporter’s Bank


Types of Letters of Credit1. Irrevocable Letter of Credit

2. Revocable Letter of Credit

3. Confirmed Credit

4. Deferred Payment Credit

5. Acceptance Credit

6. Revolving Letter of Credit

7. Transferable Credit

8. Back to Back Credit and

9. Red Clause Credit


Contents in a Letter of Credit Terms - Date, Price, Ports, Qly, Qty,… Draft / Bill of Exchange (in Duplicate/Triplicate) Commercial Invoice - FOB, CIF, C & F, etc Bill of Lading - Complete set ( No.of Copies) Certificate of Origin Marine Insurance Policy - 110 % CIF Value Consular Invoice Fumigation Certificate Weight Certificate


Documents under LC 1. Bill of Exchange or Draft

Date : Demand or Usance LC Amount Value - FOB or CIF Drawee arrangements in sets of 2 or 3


2.Invoice & Packing List

Description of Goods Quantity, Rate Amount Ports of shipment and

destination Freight prepaid or payable at

destination


3. Insurance Mode of shipment Port of Shipment and

Destination Transshipment permitted ? Cover Note, Certificate allowed ? Type of Risks covered Amount - FOB or CIF + 10 %


4. Bill of Lading A receipt from Shippers or their Agents A Document of Title to Goods (UCPDC) Received for Shipment or On Board ? In sets of 2 or 3 ? Negotiable and non-Negotiable copies Types of B/L - Clean, Chartered Party, On

Board, etc..


Some Discrepancies in Export Documents1.L C already expired

2.Late Shipment of Goods

3.Late presentation of Documents

4.Bill amount in excess of L C amount

5.Shipments made to different Port

6.Partial Shipment/ Transshipment done

7.B L or AWB not signed properly or not stamped properly or not authenticated...


Discrepancies….8. Insufficient or incomplete set of BL

9. Defective BL - eg Received for Shipment

10. “On Board” - not authenticated in BL

11.Variations in Packages/Weights/specifics

12.Inconsistency among the different docs.

13.Inadequate or defective Insurance cover

14.Defective Bills of Exchange

15.Non-submission of any other documents


Advances against Incentives from Govt.. Duty Drawback : Export

Incentives in the form of refund of Excise / Customs Duty

Advances for these @ lower rates of interest


Some factors to consider

Flexible attitude to margins,security Exporters capacity to execute Order Quantum of Finance -commensurate ? Standing of the LC Opening Bank ? Status Report on overseas Buyer ? Country Risk in the importer’s country ?


Some factors ... Exporters to comply with Ex Control

Registration - IE Code No. from DGFT ? Possession of Exp L I C or Quota/EPC ? Availability of ECGC Cover/Guarantee ? Spread of Risk-large number of buyers? Risk - covered by Forward Contract ? Any restrictions in importer’s country ?


RBI relaxations to exports AD s to extend PSC for >180 days up to

<270 days without prior clearance “Running Account Facility” can be given Given at concessional rate of interest,

each packing credit to be kept separate Amount of advance can be FOB Value or

Domestic Market Value - lower of the two Clean Packing Advances can be given

selectively - Hypothecation / Pledge


2. Financing Importers Term Loan for machinery

Under LC or DPG

Working Capital for day-to-day needs Under LC or Purchase Contract Raw Material - imported or indigenous Others - spares or components etc


Retirement of Import Bills Strictly under terms of LC

Scrutiny of all documents viz., BE, BL, Invoice, Packing List, Insurance, Certificate of Origin, Consular Invoice, etc

Release Payment by debit to TL / CC Formalities connected to goods release

C & F Agents Customs formalities

Charge on Assets as usual


Factoring

A continuing arrangement between Factor and a “client” (seller of goods/services”)

It is purchasing the client’s a/cs receivables - with or without recourse,

Maintenance of Sales Ledger Collection of Receivables from Customer Follow up and Sending of Statements, Adv Services etc


Forfaiting or Forfeiting ?

Yet another form of long-term factoring;

Right to future payment of cash forfeited through receiving discounted cash flows;

Expected to be in 21st Century banking…


What is Forfaiting ? “Forfait” is derived from French word “a forfait”

which means forfeiting or surrender of rights It is a mechanism of financing exports

by discounting export receivables evidenced by Bills of Exchange or PN without recourse to the seller (viz exporter) carrying medium to long term maturities on a fixed rate basis (discount) upto 100 per cent of the contract value


Six Parties in Forfaiting

1. Exporter (India)

2. Importer (Abroad)

3. Exporter’s Bank (India)

4. Importer’s/Avalising Bank (Abroad)

5. EXIM Bank (India )

6. Forfaiter (Abroad)


Forfaiting : 8 Steps1. Coml contract : Exporter & Foreign Buyer

2. Commitment to Forfait B Exch / Pro Notes

3. Delivery of Goods by Exporter to Buyer

4. Delivery of B Ex / PN to Bank to EXIM Bk

5. Endorsement of BE / PN without recourse

6. Cash Payment/ thro’ a Nostro Account

7. Presentation of BE / PN to Buyer on maty

8. Payment of Debt Instrument on maturity


FACTORING Vs FORFAITING

S.NO FORFAITING FACTORING

1. 100% FINANCE RESTRICTED TO 80%

2. PURE FINANCING ARRANGEMENT

PACKAGE OF SERVICES

3. APPLICABLE FOR DEFERRED TRANSACTIONS

SHORT TERM FINANCING ARRANGEMENT

FACTORING – CLOSER FOLLOW UP OF RECEIVABLES


FACTORING Vs FORFAITINGS.NO FORFAITING FACTORING

4. ONLY INTERNATIONAL TRADE

FOR BOTH DOMESTIC AND INTERNATIONAL TRANSACTIONS

5. BASED ON FINANCIAL STANDING OF THE “AVALLING BANK”

BASED ON EXPORTER’S AND IMPORTER’S STANDING

6. ALWAYS WITHOUT RECOURSE

MAY BE WITH OR WITHOUT RECOURSE

FACTORING – FOLLOWS UP EACH INVOICE


Forfaiting vs. Export Factoring Forfaiting discounts 100% value of Bill Avalising Bank provides unconditional and

irrevocable guarantee for Forfaiting Forfaiting is a pure financing arrangement Forfaiting covers Notes and Bills for Long Term &

Deferred Payments : 3-7 years Forfaiter charges for and covers Exchange Rate

fluctuations risk


Forfaiting means... Forfaiting is the discounting of trade receivables,

without recourse to the Exporter

It is a highly flexible technique that allows an Exporter to grant attractive credit terms to foreign Buyers, without tying up cash flow or assuming the risks of possible late payment or default. Simultaneously, the Exporter is fully protected against interest and/or currency rates moving unfavourably during the credit period

Forfaiting is a highly effective sales tool, which simultaneously improves cash-flow and eliminates risk.


London Forfaiting .... Applications and tenors Typical applications and tenors Commodities (oil, coal, rice, grain, etc.) Financed from 90

days to 18 months Services (engineering, design, maintenance, etc.)

Financed from 180 days to 3 years. Technology (software, computers, communications, etc.)

Financed from 180 days to 5 years. Capital equipment (machine tools, generators, tractors,

etc.) Financed from 2 to 7 years Turn Key Plants (power generation, asphalt production,

etc.) Financed from 3 years to 7 years - Construction/Project (hospitals, airports, factories, etc) Financed from 3 years to 7 years.


What is discountable?

Generally, to discount a receivable without recourse, there should be a document evidencing the debt owed by the Buyer to the Exporter. This debt can be evidenced by a wide range of documentation such as:

· Promissory Notes · Bills of Exchange · Letters of Credit / Standby Letters of Credit · Payment guarantees


What is discountable?.....

Open Book Receivables, subject to certain conditions

In most instances, the debt will need to bear the unconditional, irrevocable and freely transferable guarantee or the Aval of an acceptable bank in the Buyer's country.

In some cases however, London Forfaiting can consider top tier corporate or government debt without additional bank security.


Role of Ex-Im Bank of India

EXIM Bank (estd 1982) is authorised by RBI

A facilitator between Indian Exporters and the overseas Forfaiting Agency

EXIM Bank obtains quotes from Forfaiter

EXIM Bank issues necessary Certificates


EXIM Bank and Forfaiting Arranged the first Transaction in 1993-94 Credit Periods range from 90 days to 7 yrs Goods covered - textiles, plant & m/c etc

Countries - Brazil, Germany, Ghana, Guyana, Indonesia, Iran, Paraguay, Saudi Arabia, South Africa and Turkey


Charges in Forfaiting

Commitment Fee (to Forfaiter)

Discounting Fee (to Forfaiter)

Documentation Fee (EXIM Bank)

Intermediary Service Fee, if any.


Benefits to Exporters Converts a Deferred Payment export into a cash

transaction, improves liquidity Frees Exporter from cross-border political or

commercial risks associated Finances upto 100 percent of export value It is a “Without Recourse” finance Hedges against Interest and Exchange Risks


-Benefits to the importer The Importer can match repayments to projected

revenues, allowing for grace periods. The Importer can obtain 100% financing, and avoid

paying out cash in advance. The Importer can pay interest on a fixed rate basis for

the life of the credit, which will make budgeting simpler and safer.

The Importer can access medium to long term financing which may be prohibitively expensive or completely unavailable locally.

The Importer may be able to take advantage of export subsidy schemes which are often available from the Exporter's government.


Other Important Features

Normally receivables of 1-7 years covered

Export Contract should be in any major currency US Dollars, Pound Sterling, Japanese Yen, Euro etc

Minimum value is of US $ 500,000

Forfaiting Quotes depend on the country risk perceived by the Agency


Some major/active Forfaiters Banque Indosuez Aval Amsterdam Rotterdam Bank Chase Investment Bank PIc Barclays Bank PIc Citicorp Investment Bank PIc Midland Bank Aval, Hungarian International Bank Banque Indosuez Sogem Aval Standard Bank, London Forfaiting Asia, Morgan Greenfell Trade France, ING Cap


List of some Forfaiters Standard Bank, London Hong Kong Bank Indo Aval ABN AMRO Bank Meghraj Financial Services Triumph International Finance India Ltd., Natwest Bank and West LB + EXIM Bk + IFC : GTF, India


Global Trade Finance Pvt Ltd

Co-founded by West Lb Bank (Germany)- 40%, International Finance Corp – 25% and EXIM Bank of India – 35% share-holding

EXIM MD is Chairman of GTF To carry out Factoring and Forfaiting in India Capital Base of Rs. 45 crore – from 2001 In 2002-03, factoring t/o of Rs. 500 crore Total Income Rs. 13.8 cr and Profit – Rs 1.3 cr


Suggested websites www.forfaiting.com www.forfaiting.co.uk www.meridianfinance.com www.mezraforfaiting.com www.londonforfaiting.com www.eximbankindia.com www.ecgcindia.com www.afia-forfaiting.org www.indianexportregister.com


Books on Forfaiting Ref : Mezra / London Forfaiting Guide to Forfaiting by Lutschg : 2 Parts Forfaiting for Exporters by Andy Ripley :

Amazon.com Forfaiting (1986) by Ian Guild EXIM Bank of India Booklet Indian Institute of Bankers, Mumbai Booklet NIBM, Vinimaya ICFAI – Chartered Financial Analyst


Thanks

exim finance, lc & forfaiting-r

Documents

s s s s s s s uniform

s s s s s s written

brusselss s s s s society

shipment s

preshipment financess

bank bank s exporters

collection x

irrevocable letter of