Export financing

Some Information on ExportSome Information on Export FinancingFinancing

Presented By

Prepared by: Kamalesh Mukherjee, Director, FINTEQ

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Prepared by: Kamalesh Mukherjee, Director, FINTEQ

Export Financing- Sourcesp g

Sources:Commercial banks which are members of the Foreign ExchangeCommercial banks which are members of the Foreign Exchange

Dealer’s Association provide finance at a concessional rate of interest and are refinanced by the Reserve Bank/ Export Import Bank of India In case they do not wish to avail refinance theyBank of India. In case they do not wish to avail refinance, they are entitled for an interest rate subsidy.

Export Import Bank of India, in certain cases, participates with commercial bank in extending medium term loans to exporters.

Other Related Institutions:Other Related Institutions:Reserve Bank of India, being the central bank of country, lays down

the policy frame work and provides guidelines. The RBI functions fi i i tit ti f h t d di t las refinancing institution for short and medium term loans

respectively, provided by commercial banks.Export Credit & Guarantee Corporation (ECGC) also plays an p p ( ) p y

important role through various policies and guarantees providing cover for commercial and political risks involved in export trade.

Export Financing- Forms

Forms of Export Credit

• Pre-shipment credit• Post Shipment credit• Post-Shipment credit• Factoring

Forfaiting• Forfaiting

A. Pre-shipment CreditPre Shipment Finance is provided by financial institutions when the

Exporter wants the payment of the goods before shipment.f fThe objectives of pre shipment finance is to enable the exporter to:

Procure raw materials. Carry out manufacturing process.

fProvide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. M t th fi i l t f th b iMeet other financial cost of the business.

TypesPacking Credit Advance against Cheques /Draft etc. representing Advance Payments.

Forms :Packing Credit in Indian RupeePacking Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)

A. Pre-shipment Credit- EligibilityEligibility

Issued to exporter who has the export order in his own name. As i i l b d hi d f /an exception, it can also be granted to third party manufacturer/

supplier who do not have export orders in their own name.A ten digit importer exporter code number allotted by DGFT. E t h ld t b i th ti li t f RBI Li i d bExporter should not be in the caution list of RBI. License issued by DGFT if the goods to be exported fall under the restricted category. If the goods to be exported are not under OGL (Open GeneralIf the goods to be exported are not under OGL (Open General Licence), the exporter should have the required license /quota permit to export Formal application for releasing the packing credit to the effectFormal application for releasing the packing credit to the effect that the exporter would ship the goods and submit the relevant shipping documents to the banks within prescribed time limit. Firm order or irrevocable L/C or original cable / fax / telex gmessage exchange between the exporter and the buyer. The confirmed order received from the overseas buyer should reveal the information about the full name and address of the

b d i ti tit d l f d (FOBoverseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.

A. Pre-shipment Credit- StagesAppraisal and Sanction of Limits: Banks Check Exporter profile, Product profile, political and economic details about country, and the exporters license/ permitexporters license/ permit Disbursement of Packing Credit Advance: normally allowed when all the documents are properly executed. The quantum of finance depend on the FOB value of contract /LC or the domestic values of

d hi h i f d t b l N ll i d f i htgoods, whichever is found to be lower. Normally insurance and freight charged are also considered. Follow up of Packing Credit Advance: Exporter needs to submit stock statement giving all the necessary information about thesubmit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance. Liquidation of Packing Credit Advance: Packing Credit Ad d t b li id t d t f th t d f th l tAdvance needs to be liquidated out of the export proceeds of the relevant shipment, thereby converting pre-shipment credit into post-shipment credit. In case the export does not take place then the entire advance can also be recovered at a certain interest rate. O d P kiOverdue Packing: Bank considers packing credit as an overdue, if the borrower fails to liquidate the packing credit on the due date. And, if the condition persists then the bank takes the necessary step to recover its dues as per normal recovery procedure.

A. Pre-shipment Credit in Foreign CurrencyAuthorized dealers are only permitted The rate of interest on PCFC is linked to LIBORThe rate of interest on PCFC is linked to LIBOR.The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency transaction is that of the exporter.Sources of funds for the banks for extending PCFC facilitySources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Earner Foreign Currency Account g g y(EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign Currency (Non Resident) Accounts.

A. Pre-shipment Credit –Other issuesPacking Credit Facilities to Deemed ExportsDeemed exports made to multilateral funds aided projects and

d d d h h l b l d f hi hprograms, under orders secured through global tenders for which payments will be made in free foreign exchange, are eligible for concessional rate of interest both at pre and post supply stages.

Packing Credit facilities for Consulting ServicesDo not involve physical movement of goods out of Indian Customs t it P hi t fi b id d t ll th tterritory. Pre-shipment finance can be provided to allow the exporter to mobilize resources like technical personnel and training them.

C / fAdvance against Cheque/Drafts received as advance paymentWhere exporters receive direct payments from abroad by means of p p y ycheques/drafts etc. the bank may grant export credit at concessional rate to the exporters, till the time of realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export orderthat the proceeds are against an export order.

B. Post-shipment CreditPurpose : meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports it is extended to finance receivable against

ost s p e t C ed t

cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies.

Basis : provided against evidence of shipment of goods/suppliesp g p g pp

Nature: Can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of g p ptitle of goods, the finance is normally self liquidating. In case it involves advance against un-drawn balance, it is usually unsecured in nature.

Quantum : C b t d d t 100% f th i i lQuantum : Can be extended up to 100% of the invoice value

Period : Can be short terms or long term, depending on the payment terms offered by the exporter to the importer Six months in case of cashterms offered by the exporter to the importer. Six months in case of cash exports.

Type of Exports covered: Physical exports Deemed export (Type of Exports covered: Physical exports, Deemed export ( provided to the supplier of the goods which are supplied to the designated agencies) and for Capital goods and project exports.

B Post shipment Credit TypesB. Post-shipment Credit- Types

1. Export Bills purchased/discounted. 2. Export Bills negotiated 3. Advance against export bills sent on collection

basis. 4. Advance against export on consignment basis 5. Advance against un-drawn balance on exports

6. Advance against claims of Duty Drawback.

Post-shipment Credit-typesost s p e t C ed t types1. Export Bills Purchased/ Discounted : (DP & DA bills)

E t bill (N L/C Bill ) i d i t f l t t/ dExport bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable export transactions and the proper limit has to be sanctioned to the exporter .

2 Export Bills Negotiated (Bill under L/C):2. Export Bills Negotiated (Bill under L/C): Because of the security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks:

The risk of nonperformance by the exporter, In which case, the issuing banks do not honor the letter of credit. gDocumentary risk where the issuing bank refuses to honor its commitment. So, it is important for the for the negotiating and the lending bank to properly check all documents before submissionlending bank to properly check all documents before submission.

Post-shipment Credit-Types3. Advance Against Export Bills Sent on Collection Basis

Bills can only be sent on collection basis if the bills drawn under LC

ost s p e t C ed t ypes

Bills can only be sent on collection basis if the bills drawn under LC have some discrepancies. Banks may allow advance against these collection bills to an exporter with concessional rates depending upon the transit period in case of DP Bills and transit period plusupon the transit period in case of DP Bills and transit period plus usance period in case of usance bill. Transit period is from the date of acceptance of the export documents for collection by the bank.

4. Advance Against Export on Consignments BasisBank may finance goods exported on consignment basis at the riskBank may finance goods exported on consignment basis at the risk of the exporter. In this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date which should be withindeliver the sale proceeds by specified date which should be within the prescribed date.

Post-shipment Credit-Types

5. Advance against Undrawn Balance

Post-shipment Credit-Types

gIt is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, subject t i f 10 t f th t l i tto a maximum of 10 percent of the export value against an undertaking from the exporter

6 Ad A i t Cl i f D t D b k6. Advance Against Claims of Duty DrawbackThis credit is given only if the in house cost of production is higher in relation to export price due to the existing duty structure. Banks grant advances at lower rate of interest for a period of 90 days andgrant advances at lower rate of interest for a period of 90 days and only if other types of export finance are extended to the exporter by the same bank. After the shipment the exporters lodge their claims to the relevant government authorities. The bank is authorized to greceive the claim amount directly from the concerned government authorities.

ForfaitingForfaiting refers to non-recourse discounting of export receivables. The exporter surrenders, without recourse to him,

Forfaiting

p , ,his rights to claim for payment on goods delivered to an importer.Forfaiter pays exporter in cash and undertakes the risk

i t d ith th tassociated with the export. EXIM bank plays intermediary role between exporter and the overseas forfaiting agency. The exporter approaches EXIM bank for forfaiting transaction The bank receives bills from thebank for forfaiting transaction. The bank receives bills from the exporter and sends them to the forfaiter for discounting. The bank arranges for the discounted proceeds to be remitted to the Indian exporter. The bank issues appropriate certificatesto the Indian exporter. The bank issues appropriate certificates to enable exporters to remit commitment fees and charges. RBI has allowed Authorised dealers to undertake forfaiting of medium term export receivables.pInvolves two cost elements: Commitment fee, payable by the exporter to the forfeiter and Discount fee payable by the exporter for the entire period of credit involved and deducted b th f f it f th t id t th t i t thby the forfaiter from the amount paid to the exporter against the availed bills of exchange.

Forfaiting- BenefitsBenefits to Exporter

100 per cent financing : Without recourse and not occupying t ' dit li

Forfaiting Benefits

exporter's credit line Improved cash flow : Receivables become current cash in flow Reduced administration cost : By using forfeiting the exporter will reduce the relevant management costsreduce the relevant management costs.Advance tax refund: the exporter can make the verification of export and get tax refund in advance just after financing.Risk reduction : enables the exporter to transfer various risk presulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank.Increased trade opportunity : With forfeiting, the exporter is able to grant credit to his buyers freely and thus be more competitive ingrant credit to his buyers freely, and thus, be more competitive in the market.

Benefits to BanksBanks can offer a novel product range to clients, which enable the client to gain 100% finance, as against 80-85% in case of other discounting B k i f b d iBank gain fee based income. Lower credit administration and credit follow up.

Factoring

It is an attractive way of providing export finance to exporters. In this system, factor bears the complete credit risk A factor is a special type of agent who depending upon the type

Factoring

the complete credit risk. A factor is a special type of agent who, depending upon the type of agreement, offers a variety of services. These services include coverage of credit risk, collection of export proceeds, maintenance of accounts receivables and advance of funds. Purchase of receivables of its clients without recourse is the most important service of thePurchase of receivables of its clients without recourse is the most important service of the factor. A big advantage to the exporter is that it is without recourse financing. This means that the risk of non-payment by the importer is to be borne entirely by the factor. In India, International Export Factoring services on with recourse basis have been approved by the RBI. It provides a new dimension to management of export receivables.approved by the RBI. It provides a new dimension to management of export receivables. SBI Factors and Commercial Services Pvt. Ltd., Bombay have been permitted to provide International Export Factoring. In this system, the exporter enters into an export factoring agreement with exporter’s factor. The exporters ship goods to approved foreign buyers. Each invoice is made payable to a specific factor in the importer’s country. Copies of invoices and shipping documents are sent to the Importer’s factor. Exporter’s factor will make prepayment to the export against approved export receivables. On receipt of payments from the importer on due date of invoice, importer’s factor remits th f d t th t ’ f t Th t ’ f t t th t ft d d tithe fund to the exporter’s factor. The exporter’s factor pays to the exporter after deducting the amount of prepayments.

Factoring

A factor is a special type of agent who depending upon the type of agreement offers a ariet of ser ices These ser ices incl de co erage of credit risk

Factoring

offers a variety of services. These services include coverage of credit risk, collection of export proceeds, maintenance of accounts receivables and advance of funds. The exporter enters into an export factoring agreement with exporter’s factor. g gThe exporters ship goods to approved foreign buyers. Each invoice is made payable to a specific factor in the importer’s country. Copies of invoices and shipping documents are sent to the Importer’s factor. Exporter’s factor will make prepayment to the exporter against approved export receivables .p p y p g pp pOn receipt of payments from the importer on due date of invoice, importer’s factor remits the fund to the exporter’s factor. The exporter’s factor pays to the exporter after deducting the amount of prepayments.Factoring may be disclosed or undisclosedFactoring may be disclosed or undisclosedDisclosed factoring is of two types:

Recourse factoring: The client collects the money from the customer but in case customer don’t pay the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of interest and is in very common use.

Nonrecourse factoring: In non recourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first The advantage ofperiod or when the customer pays the factor whichever comes first. The advantage of nonrecourse factoring is that continuous factoring

Duty Drawback Scheme

In case of Central Excise, Manufacturers il C t dit f d t idcan avail Cenvat credit of duty paid on

inputs and utilise the same for payment of d t th d ld i I di thduty on other goods sold in India, or they can obtain refund. Schemes like

f t d b d lmanufacture under bond are also available for customs. Manufacturers or processors who are unable to avail any ofprocessors who are unable to avail any of these schemes can avail duty drawback.

Duty Drawback Scheme (Cont.)

D b k th b t f d t h bl i t d t i l i blDrawback means the rebate of duty chargeable on any imported materials or excisable materials used in manufacture of processing of goods which are manufactured in India and exported. Duty drawback is equal to

• a) customs duty paid on imported inputs SAD plusa) cus o s du y pa d o po ed pu s S p us• b) excise duty paid on indigenous inputs.

Duty paid on packing material is also eligible. However, if inputs are obtained without payment of customs/excise duty, no drawback will be paid. p y y, p

If customs/excise duty is paid on part of inputs or rebate/refund is obtained, only that part on which duty is paid and on which rebate/refund is not obtained will be eligible for d b k N d b k i il bl th t lik l t d t idrawback. No drawback is available on other taxes like sales tax and octroi.

Duty Drawback Scheme (Cont.)

Drawback is allowable if any manufacture process or any operation isDrawback is allowable if any manufacture, process or any operation is carried out in India. Thus, drawback is available not only on manufacture, but also on processing and job work, where goods may not change its identity and no manufacture has taken placyg y p yconsidering average quantity and value of each class of inputs

The rate is fixed under rule 3 of Drawback Rules by consideringThe rate is fixed under rule 3 of Drawback Rules by considering average quantity and value of each class of inputs or manufactured in India. Average amount of duties paid is considered. These rates are fixed for broad categories of products. The rates include drawback on g ppacking materials.

Duty Drawback Scheme (Cont.)

The AIR (All Industry Rate) is usually fixed as % of FOB price of export products. However, in respect of many export products, duty drawback cap (ceiling) has been prescribed.

The table gives allocation of the drawback allowed under tow heads namely –The table gives allocation of the drawback allowed under tow heads namely Customs and Central Excise. The customs portion covers basic customs duty, surcharge and SAD. Excise portion covers basic and special excise duty and CVD. Duty drawback of customs portion can be paid even if exporter has availed Cenvat credit as Cenvat credit is only of excise duty and CVDavailed Cenvat credit, as Cenvat credit is only of excise duty and CVD –MF(DR) circular No. 83/2000-Cus dated 16-10-2000

Duty Drawback Scheme (Cont.)

I di id l t i t i d t d id i t f t lIndividual exporter is not required to produce any evidence in respect of actual duties paid by him on inputs

It is possible to fix All Industry Rate only for some standard products. It cannot be fixed for special type of products In such cases brand rate is fixed underbe fixed for special type of products. In such cases, brand rate is fixed under rule 6. The manufacturer has to be submit application with all details to Commissioner, Central Excise. Such application must be made within 60 days of export.y p

Duty Drawback Scheme (Cont.)

All Industry rate is fixed on average basis Thus a particular manufacturerAll Industry rate is fixed on average basis. Thus, a particular manufacturer may find that the actual duty paid on inputs is higher than All Industry Rates fixed for his product . In such case, he can apply under rule 7 of Drawback Rules for fixation of Special Brand Rate, within 30 days from export.p y p

‘Value’ for the purposes of section 76(1)(b) will be value at the time of export p p ( )( ) pand not the original value of import of the goods. If the imported goods are used before re-export, the drawback will be allowed at a reduced percentage.