Master of Business Administration - Semester 4 IB0018: Export-Import Finance (Book ID: B1145) ASSIGNMENT

Q1.Discuss the methods used for payment in international trade. Explain one of them in detail.
Payment in International Trade Cash in Advance/Advance Payment The best and the completely risk free payment terms, from the point of view of exporters, is 100% advance payment. When the credit standing of the buyer is not known to the exporter or is uncertain advance payment is desirable in international trade. However, very few buyers will accept such terms of payment because a part of their working capital is tied up until the goods are received and sold. Moreover, a buyer having made advance payment has no guarantee that he will receive what he ordered. Even the exporters, who insist on advance payment from their buyers may find themselves at a disadvantage as their buyers may shift to other exporters who do not insist on advance payment. In international trade, it is, however, a common practice that the buyers may agree to make part advance payment, say 20 to 25% so as to create confidence in their suppliers (exporters). The quantum of advance payment depends upon a number of factors such as: i) Relationship between the buyer and exporter ii) Reputation and track record of the exporter iii) Value of the order-small order iv) Nature of the product-product of special manufacture or unique nature v) Exchange Control Regulations in the buyers country-certain country rules do not allow advance payment for imports. Exchange Control Regulations in India In case an Indian exporter has received advance payment from his buyers, he must obtain Foreign Inward Remittance Certificate (FIRC) from the Bank that received the advance payment. Exchange Control Regulations in India permit exporters to receive advance payment (with or without interest) from their overseas buyers. The Authorised Dealer Banks are required to monitor that shipments against such advance payments are effected by the exporters and the relevant FIRC should be endorsed appropriately. The exporter who has received advance payment from a buyer outside India is under an obligation to ensure that i) The shipment is made within one year from the date of receipt of advance payment ii) The rate of interest (if payable on advance payment) does not exceed LIBOR +100 basic points, and iii) The documents covering the shipments are routed through the A.D. Bank through whom the advance payment was received. In case, the exporter fails to make the shipment within one year; he can refund the amount only after obtaining prior approval from RBI.

Q2. Discuss FEDAI rules regarding negotiation of documents under credit.

Fedai Rules regarding Negotiation of Documents under Credit i. The beneficiary must present the documents for negotiation during the working hours of the bank. ii. Foreign currency bills will be negotiated at the negotiating banks bill buying rate or at the contracted rate. iii. The negotiating bank can decide the crystallization period for unpaid negotiated bills. The crystallization into Rupee Liability shall be at the ready T.T. selling rate of exchange of the bank on the date of crystallization.

iv. Interest shall be recovered by the bank on the date of crystallization for the period from the date of expiry of the normal transit period/notional due date to the date of crystallization at per RBI guidelines. v. For refund of negotiation proceeds of unpaid bill, the rate of exchange for conversion shall be the ready T.T selling rate of exchange of the negotiating bank ruling on the date of refund. vi. In case of negotiation banks shall recover interest at the time of negotiation for normal transit period in case of sight/demand bills and for normal transit plus usance period in case of usance bills. vii. Normal transit period shall be as under: a. In case of bills drawn in foreign currency 25 days b. In case of exports to Iraq 120 days c. In case of bills drawn in Indian Rupees 1. When negotiation and reimbursement are in same city in India 3 days 2. When negotiation and reimbursement are in different cities but in India 7 days 3. When reimbursement is from outside India 20 days viii. In case of negotiation of export bills where the L/C provides for reimbursement claim upon negotiation by cable/SWIFT/Telex or other electronic means, the negotiating bank shall recover at the time of negotiation Normal Transit period interest for 5 days. ix. In case the proceeds of the negotiated bills are not received on or before the normal transit period or national due date/actual due date, the banks shall recover overdue interest as per RBI guidelines. x. In case of early realization, proportionate amount of interest charged at the time of negotiation shall be refunded to the beneficiary.

Q3. Explain various types of commercial invoice.

Commercial Invoice It is a document issued by the beneficiary of credit/exporter (Seller) to the buyer raising his claim for the value of goods described therein. It contains details about the goods, price per unit, quantity, total value, advance payment received; if any, discounts allowed. Invoice must contain any other detail as required under the credit. Sometimes credit may stipulate certain declarations to be given in the credit. The number and date of credit must be indicated in Invoice. A Commercial Invoice under credit must be prepared by the beneficiary in compliance with the Article 18 of UCP 600. It may take the form of : i. Customs Invoice ii. Consular Invoice iii. Legalised Invoice Customs Invoice : It is prepared on the format prescribed by the customs authorities of importers country. This is the requirement in U.S.A, Canada, Australia and New Zealand. An exporter can obtain format of this invoice from the Consular office of the importing country. Consular Invoice : It is a commercial invoice duly verified by the Embassy/ Consulate of the importers country based in the country of exportation. Embassy/consulate attested invoice becomes legalised/ consular invoice. This is the requirement of countries like Mexico, Middle East Countries and some African Countries. An exporter has to pay prescribed fee to the Embassy concerned for getting the invoice verified. Legalised Invoice : It is the same as consular invoice. This term is in use in countries like Turkey, Liberia, Taiwan, Latin American countries, etc. Invoice may be legalized by Chamber of Commerce or Consular of the buyers country. The exporter has to pay the prescribed fees.

Q4. Describe the purpose of setting up EXIM Bank.

EXIM Bank of India

Export-Import Bank of India (EXIM Bank) was set up in March 1981 under the Export-Import Bank of India Act, 1981 for the following purposes: i. For providing financial assistance to exporters ii. For providing financial assistance to importers iii. For functioning as the financial institution for co-ordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the countrys international trade. Objective To create and enhance export capabilities of Indian companies Eligible Companies Units set up/proposed to be set up in Export Processing Zones 1. Units under the 100% Export Oriented Units Scheme 2. Units importing capital goods under Export Promotion Capital Goods Scheme 3. Units undertaking expansion/modernisation/upgradation/diversification programmes of existing export oriented units with export orientation of minimum 10% or sales of Rs.5 crores per annum whichever is lower Instrument Term loans in Indian rupees/foreign currency Deferred Payment Guarantee for import of capital goods Interest Rates Rupee term loan linked to Bank's minimum lending rate Foreign currency term loan at floating or fixed interest rates based on Bank's cost of funds Interest is payable semi-annually on reducing balances Interest tax as applicable Service Fee 1% of loan amount payable upfront. Repayment Period Upto ten years, based on projected cash flows inclusive of suitable moratorium. Security Appropriate charge on fixed assets of the company/project plus any other security acceptable to Exim Bank. How to access finance Bank welcomes preliminary discussions with the promoters to determine scope for Exim Bank's finance To facilitate discussions, do send project profile identifying financial requirements Advantage Exim Bank Exim Bank offers comprehensive package to externally oriented companies by way of finance, information, and value added services.

Q5. Explain Commercial and Political Risks covered under ECGC Policies.

ECGC covers the risk of exporters against overseas credit risks under Standard Policy and specific shipments or specific contract policy. Shipments (Comprehensive Risks) Policy is commonly known as the Standard Policy and is ideally suited to cover risk in respect of goods exported on short term credit i.e. credit not exceeding 180 days. It is a whole

turnover policy designed to provide a continuing insurance for regular flow of export shipments of raw materials, consumer goods, consumer durables, etc. This policy covers both commercial and political risks from the date of shipment. It is issued to exporters whose anticipated export turnover for the next 12 months is more than Rs. 50 Lakhs. (The appropriate policy for exporters with an anticipated turnover of less than Rs. 50 Lakhs is explained under the section Small Exporters policy). Risks Covered under the Policy Under the Shipment (Comprehensive Risk) Policy, the Corporation covers, from the date of shipment, the following risks. Commercial Risks Insolvency of the buyer Failure of the buyer to make the payment due within a specified period, normally 4 months from the due date Buyers failure to accept the goods, subject to certain conditions Political Risks Imposition of restrictions by the Government of the buyers country or any government action which may block or delay the transfer of payment made by the buyer. War, civil war, revolution, civil disturbances in the buyers country. New import restrictions or cancellation of a valid import license. Interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer Any other cause of loss occurring outside India, not normally insured by general insurers, and beyond the control of both the exporter and the buyer

Q6. Write short notes on (a) Factoring (b) Forfaiting

Factoring
Factoring is a service that covers the financing and collection of account receivables in domestic and international trade. When it is related to collection of account receivables of exporters, it is called export factoring. Factoring is an ongoing arrangement between the client and Factor, where invoices raised on open account sales are regularly assigned to the Factor for financing. The exporter assigns his accounts receivables in favour of the Factor. Factoring provides 1. Financing by way of pre-payment of the accounts receivables; 2. Sales ledger maintenance; 3. Collection of receivables/recovery of bad debts; and 4. Credit protection against bad debts. Types of Factoring Factoring can be of two types with recourse and without recourse. Under the recourse factoring, the Factor provides financing to the exporter but does not guarantee credit protection. The exporter is required to refund the amount pre-financed together with interest thereon in case of failure/insolvency of the buyer. On the other hand, under without recourse factoring, the Factor undertakes to pay the amount to the exporter on maturity of the credit period but does not provide pre-financing. It is also called maturity factoring. In India, ECGC provides nonrecourse maturity export financing.

Factoring Process Factoring process will involve following steps: 1. The exporter has to enter into an export factoring agreement with the factor. 2. The exporter gets the foreign buyer approved and pre-payment limits fixed from the factor.

3. The exporter ships goods to the approved foreign buyer. 4. Copies of invoices and documents are handed over to the factor. 5. The factor immediately releases 80-85% of the amount of the draft to the exporter. 6. On receipt of payment, the factor releases the balance payment 15-20% to the exporter.

Forfaiting
Forfaiting refers to the non-recourse discounting of export receivables ranging from over 90 days to upto 5 years. Thus the forfaiting agency discounts the international trade receivables of the exporter, pays the exporter in cash and undertakes the risk associated with the receivables. The exporter surrenders his right to claim for payment. Forfaiting can be done upto 5 years. Thus the forfaiting agency discounts the international trade receivables of the exporter, pays the exporter in cash and undertakes the risk associated with the receivables. The exporter surrenders his right to claim for payment. Forfaiting can be done upto 100% value of export receivables. Documents required by the Forfaiter i) Copy of Contract ii) Copy of signed Commercial Invoice iii) Copy of shipping documents such as Bill of Lading / Airway Bill, etc. iv) Letter of assignment and notification to the guarantor v) Letter of guarantee or avail, i.e., importer banks co-acceptance Benefits of Forfaiting Forfaiting provides following benefits to exporters:1. 100% financing is available against export receivables. 2. It is without recourse to the exporter. 3. It helps in saving the premium payable to ECGC for covering payment risk. 4. It converts a credit sale of exporter into cash sale. 5. It enhances the liquidity and cash flow of exporter without affecting the borrowing limits of the exporter. It is off Balance sheet financing. 6. It enables sellers of goods to offer credit to their customers, making their terms more attractive. 7. It relieves the seller of administration and Collection burden. 8. Documentation is simple.