Export Refinance Scheme

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Comprehensive assignment on the export refinance scheme of State Bank of Pakistan.



Assignment submitted to Sir Sarfaraz ChaudryInternational Banking

Submitted byUsman ArshadMBA-D (2nd semester)Reg # 1225155

Table of Contents1.Introduction32.Common Features Of Export Finance Scheme (Part I & II)43.Mark up Rate64.Eligible Exporter, Goods & Services75.Credit Risk86.Implementation and Enforcement Mechanism of the Scheme97.Pre-shipment Finance108.Post-shipment Finance119.Export Finance Scheme (EFS) Part I12a.Operations of the Scheme under Part I15b.Submission of required Documents17c.Substitution of Export LC/Contract19d.Extension in Loan Period and Enhanced Performance Requirements2010.EXPORT FINANCE SCHEME PART II21a.Pre-requisites and procedure of Entitlement of Limit22b.Monitoring of Export Performance24c.Performance Based Mark-up Rate25d.Rollover Facility26e.Extension in Period of Borrowing Limit2711.Other Schemes by SBP28

1. Introduction The Export Finance Scheme (EFS) is in operation since 1973 with the objective to boost exports of the country. Under the scheme short term financing facilities are provided to exporters through Banks for exports of all manufacturing goods especially value added products with the exception of basic & primary commodities/raw materials as mentioned in negative list. The Export Finance Scheme is a crucial instrument for the facilitation of exports in Pakistan. The State Bank of Pakistan provides this financing facility to the exporting community, which principally aims at boosting and enhancing exports in Pakistan. This scheme is primarily for both direct and indirect exporters. Financial institutions provide export finance to the exporters at both pre/post shipment stages. This scheme operates in two parts, Part II and I. The Export Finance Scheme is available at a substantially lower rate than other commercial financing, this is due to the governments continued commitment to promote and shelter export oriented businesses. Under part I of the scheme, export financing is provided to an exporter against either an export order or an irrevocable letter of credit. Both direct and indirect exporters may benefit from this scheme. However, this scheme may only be availed by first time exporters or manufacturers for exporting, i.e. direct and indirect exporters. However, under part II of the scheme, the financing is provided on the basis of previous years performance and may therefore only be availed by experienced exporters. The financing limit is 50% of the last years export performance, which is available on a revolving basis like a cash credit account. The exporter has to realise a 2.0 times of daily average finance availed during the current year otherwise a penalty is imposed on exporters. The most prominent differentiation between the two types i.e, Part I & II financing is their mode of operation. Part I facility is basically allowed on transaction basis whereas Part II facility is a revolving credit. However, both finances are at concessional rates.

2. Common Features Of Export Finance Scheme (Part I & II)

a. The export finance scheme under part I & II can be utilised by the following types of exporters or businesses: Direct Exporter (DE). DE is the one who actually exports eligible commodities. DE may be working as commercial exporters or a trading company. Indirect Exporter (IDE). IDE represents manufacturer or supplier of goods or materials that are to be used as inputs for exports. Small and Medium sized Enterprise (SME). SME is one that reports exports up to equivalent of US$ 2.5 million of exports during last fiscal year. Emerging Direct Exporter (EDE). EDE as indicated by name is a new exporter. b. State Bank of Pakistan reserves the right to reject application submitted by the bank of any particular exporter. State Bank also has the right to delay sanction of financing facility to any exporter if it is sure that exporter has misused the facility. Therefore, decision of the State Bank pertaining to this matter will be binding upon banks/exporters.

c. EFS under part I & II together may be utilised by the exporter given that facility availed under one part is not in duplication of the other part of EFS.

d. The maximum period of export credit for direct exporters is 180 days and for indirect exporters it is 120 days. But for exporters of carpets & rugs, specially hand knotted and man made which require more time for manufacturing, it was decided on 24th October,2001 to relax the provision upto 270 days (both pre/post shipment).

e. Export finance is available both on pre/post shipment stages.

f. The limit for selling of export payments (realised in foreign currency) has increased from 120 days to 180 days.

g. Exporters may avail the exchange rate prevailing on the date of realisation of export proceeds.

h. Exporters showing growth in exports by 10 % may retain up to 50% of the additional export earnings in foreign currency accounts. This amount may be utilised for import of machinery/ equipment and raw materials and for meeting expenditure on export business promotion.

i. Exporters in the Services' Sector including IT-enabled services to retain up to 35% of export earnings.

j. In order to promote exports and to ensure that Small & Medium, Emerging Direct, Direct and Indirect Exporters have access to the credit facilities, the Government has set up a Pre-shipment Export Finance Guarantee (PEFG) agency. The agency has already become operational and many exporters have applied for benefiting from this scheme. The cover obtained by the exporters from the PEFG agency substitutes for the collateral requirements of banks and hedges against the financing risks of commercial banks against manufacturing, non-performance, non-delivery risk and non-payment by the exporters.

k. To promote the financing for the Indirect Exporters, the Government is setting up an Export Product Upgrading Matching Grants Fund. The Export Promotion Bureau has been handed over the responsibility of management of this fund. The purpose of establishment of this new fund is to provide incentive to Direct Exporters establishing Inland Letter of Credit/issuing Standardised Purchase Order and for Indirect Exporters receiving it.

l. Exporters may now submit complaints regarding the Export Finance Scheme before a complaint cell "Export Cell" working in the Banking Supervision Department. Export Cell is composed of epresentatives from Exporters' Associations, Chambers and Export Promotion Bureau and meetings are carried out on quarterly basis to review the progress of the scheme and address collective problems of exporters. Commercial banks have also been advised to establish Export Cells for exclusive handling of the cases/documentation relating to the Export Finance Scheme.

3. Mark up RateCurrently, markup rate under EFS for the borrower stands at 9.4 % (banks get refinance from SBP at 8.4% and are permitted a maximum spread of 1%). The markup rate has been linked with the weighted average yields on six months TBills w.e.f. 2001. To further incentivize the financing under EFS (PartII) the rates under EFS PartII has been linked with export performance. Exporters giving higher performance under EFS PartII can avail mark up rate rebate ranging from 0.51.5 percentage points depending upon the level of performance achieved.

4. Eligible Exporter, Goods & ServicesAll major value added commodities exported from Pakistan are eligible for financing under the scheme, except those mentioned in Negative List. Any exporter who meets the lending criteria of a bank can avail financing under EFS for export of eligible commodities. Facility for Indirect Exporter: EFS Facility is also available to the input suppliers/manufacturers of the Direct Exporter, termed as Indirect Exporter (IDE) on the basis of Standardized Purchase Infrastructure Order (SPO) or the Inland Letter of Credit (ILC) to be established by the Direct Exporter against the particular Export Order/Contract/Letter of Credit. IDE will be eligible to avail finance from banks against ILC or SPO, to the extent of the amount mentioned therein. The period of financing by bank to an Indirect Exporter shall be determined as per the terms of the relevant ILC/SPO, but subject to a maximum of 120 days. Linkage of Overdue Export Proceeds with EFS: EFS has been linked with overdue exports position of an exporter. if overdue export position of an exporter is greater than 5% of the previous years exports shown in EE1 statements, the exporter would not be entitled to avail the EFS facility till such time that the overdue position is reduced to the 5% benchmark level. Permitted Exports Also Include Services:IT enabled services: It includes; software development, web hosting and website services, Medical/ Legal/ Insurance and other transpiration services, Medical billing, data entry, back office processing, engineering services and design, Network consulting, remote education, Animation, Finance and accounting services, customer relationship services and customer interaction etc. Consultancy services: Such sectors include; medical, pharmaceutical, engineering, accountancy, management, financial services, wholesale distribution and retail trade, transportation, storage and communication, telecommunication services, educational services and real estate consultancy services. Gold Jewellery (embedded with or without precious / semiprecious stones)/gemstones/precious and semi precious stones on self consignment basis subject to adherence with the conditions as laid down by SBP from time to time. The Scheme in its broad parameters is also applicable for, a. Local supplies against international tenders b. Export on Post shipment basis as also export proceeds realized under Part II against the eligible go