Arranging Finance For Export

Import Export Procedure 2016
ATMIYA INSTITUTE OF TECHNOLOGY & SCIENCE

DEPARTMENT OF I-MBA
SEMESTER V
Subject: Import Export Procedure
Module -3
Subject Code: 4150505

Weightage : 17 Marks
Arranging Finance for Export

Module Content
1.
2.
3.
4.
5.
Pre Shipment Finance

Post Shipment Finance
Bank Guarantee and Letter of Credit
External Commercial Borrowings
Exim Bank Finance
Reference Books:
1. Nabhikumar Jain - How to Import
2. Nabhikumar Jain - How to Export
3. Nabhi Publication - New Import Export Policy
Bhavika Mehta |Atmiya Institute of Technology & Science, Rajkot
PRE SHIPMENT FINANCE

Introduction:
Financial assistance to the exporters is generally provided by the Commercial Banks
before shipment as well as after shipment of the goods.
The assistance provided before shipment of goods is known as pre-shipment finance
and that provided after the shipment of goods is known as post shipment finance.
Pre-shipment finance is given for working capital for purchase of raw material,
processing, packing, transportation, warehousing etc. of the goods meant for export.
Post-shipment finance is provided for bridging gap between the shipment of goods
and realization of export proceeds.
Pre Shipment Finance - Definition
"Pre-shipment/Packing Credit means any loan or advance granted or any other credit
provided by a bank to an exporter for financing the purchase. processing,
manufacturing or packing of goods prior to shipment."
Period of Advance
The period will depend upon the circumstances of the individual cases, as the time
required for procuring, manufacturing or processing (where necessary) and shipping
the relative goods / rendering of services. It is primarily for the banks to decide the
period for which a packing credit advance may be given, having regard to the various
relevant factors.
Application for Packing Credit
An application for pre-shipment advance should be made by you to your banker
alongwith the following documents :
1.Confirmed export order/contract or L/C pc. in original. Where it is not available, an
undertaking to the effect that the same will be produced to the Bank within a reasonable
time for verification and endorsement, should be given.
2. An undertaking that the advance will be utilized for the specific purpose of
procuring/manufacturing/shipping etc., of the goods meant for export only, as stated
in the relative confirmed export order or the L/C.
.

3. If you are a sub-supplier and want to supply the goods to the Export/Trading/Star
Trading House or Merchant Exporter, an undertaking from the Merchant Exporter or
Export/Trading/Star Trading House stating that they have not/will not avail
themselves of packing credit facility against the same transaction for the same purpose
till the original packing credit is liquidated .
4. Copies of Income Tax/Wealth Tax Assessment Order for the last 2/3 years in case of
sole proprietary and partnership firm.
5. Copy of Importer Exporter Code Number.
6. Copy of a valid RCMC(Registration-cum-Membership Certificate) held by you
and/or the Export/Trading/Star Trading House Certificate.
7. Appropriate policy/guarantee of the ECEC.
8. Any other document required by the Bank.
Disbursement of Packing Credit
1. Ordinarily each packing credit sanctioned should be maintained as separate account
for the purpose of monitoring period of sanction and end-use of funds.
2. Banks may release, the packing credit in one lump sum or in stages as per the
requirement for executing the orders/'LC.
3. Banks may also maintain different accounts at various stages of processing,
manufacturing etc. depending on the types of goods/ services to be exported.
4. Banks should continue to keep a close watch on the end-use of the funds and ensure
that credit at lower rates of interest is used for genuine requirements of exports. Banks
should also monitor the progress made by the exporters in timely fulfillment of export
orders.
Liquidation of Packing Credit
The packing credit/ pre-shipment credit granted to an exporter may be liquidated out
of proceeds of bills drawn for the exported commodities on its purchase, discount etc.,
thereby converting pre-shipment credit into post-shipment credit. It can also be repaid
/ prepaid out of balances in Exchange Earners Foreign Currency Alc (EEFC Alc) as also
from rupee resources of the exporter to the extent exports have actually taken place.

Interest Rate on Pre-shipment Credit
For encouraging exports, R.B.I. has instructed the banks to grant preshipment advance
at a concessional rate of interest.
The base rate system has come into place w.e.f. 1.7.2010. Accordingly, interest rates
applicable for all tenors of export credit on advances sanctioned on or after 1.7.2010 will
be at or above Base Rate fixed by the concerned bank.
If pre-shipment advances are not liquidated from proceeds of bills on purchase,
discount etc., on submission of export documents within 360 days from the date of
advance or out of exporter's EEFC A/C or his rupee resources, the advances wi cease to
qualify for prescribed rate of interest for' export credit.
POST SHIPMENT FINANCE

Introduction
Post Shipment Finance is a kind of loan provided by a financial institution to an
exporter or seller against a shipment that has already been made. This type of export
finance is granted from the date of extending the credit after shipment of the goods to
the realization date of the exporter proceeds.
Meaning
Post Shipment Credit means any loan or advance granted or any other credit provided
by a bank to an exporter of goods/services from India from the date of extending credit
after shipment of goods/rendering of services to the date of realization of export
proceeds as per the period of realization prescribed.
Basis of Finance
Post shipment finances is provided against evidence of shipment of goods or supplies
made to the importer or seller or any other designated agency.
Quantum of Finance
As a quantum of finance, post shipment finance can be extended up to 100% of the
invoice value of goods. In special cases, where the domestic value of the goods increases
the value of the exporter order, finance for a price difference can also be extended and

the price difference is covered by the government. This type of finance is not extended
in case of preshipment stage.
Banks can also finance undrawn balance. In such cases banks are free to stipulate
margin requirements as per their usual lending norm.
Period of Finance
Post shipment finance can be off short terms or long term, depending on the payment
terms offered by the exporter to the overseas importer. In case of cash exports, the
maximum period allowed for realization of exports proceeds is six months from the
date of shipment. Concessive rate of interest is available for a highest period of 180
days, opening from the date of surrender of documents. Usually, the documents need to
be submitted within 21days from the date of shipment.
The characteristics of the post shipment finance
1. Finance after the shipment of goods.
2. It is extended to those exporters in whose name the documents stand. ( He may
be the original exporter or the documents would have been transferred in his
name.)
3. It can be a short term finance (for cash exports).
4. It is a working capital finance since it is against receivables.
5. It is extended only against the evidence of authenticated documents evidencing
shipment of goods.
6. Concessionary rate of interest upto due dates (for normal transit period for sight
bills and upto notional due date in case of usance bills). Rate of interest as per
RBI guidelines.
7. Finance can be extended upto 100 % of the bill.
Post shipment Finance is provided in the following forms:

(a) Purchase of Export Documents drawn under Export Order
Purchase or discount facilities in respect of export bills drawn under confirmed export
order are generally granted to the customers who are enjoying Bill
Purchase/Discounting limits from the bank. As in case of purchase or discounting of
export documents drawn und export order, the security offered under L/C by way of
substitution of credit-worthiness of the buyer by the issuing bank is not available, the
bank financing is totally dependent upon the credit worthiness of the buyer, i.e. the
importer, as well as that of the exporter or the beneficiary. The documents drawn on DP
basis are parted with through foreign correspondent only when payment is received
while in case of DA bills documents (including that of title to the goods) are passed on
to the overseas importer against the acceptance of the draft to make payment on
maturity. DA bills are thus unsecured. The bank financing against export bills is open to
the risk of non-payment. Banks, in order to enhance security, generally opt for ECOC
policies and guarantees which are issued in favour of the exporter banks to protect their
interest on percentage basis in case of non-payment or delayed payment which is not on
account of mischief. mistake or negligence on the part of exporter.
(b) Advances against Export Bills Sent on Collection
It may sometimes be Possible to avail advance against export bills sent on collection. In
such cases the export bills are sent by the bank on collection basis as against their
purchase/discounting by the bank. Advance against such bills is granted by way of a
'separate loan' usually termed as post-shipment loan . This facility is, in fact, another
form of post-shipment finance and is sanctioned by the bank on the same terms and
conditions as applicable to the facility of Negotiation/Purchase/Discount of export
bills. A margin of 10 to 25% is, however, stipulated in such cases. The rates of interest
etc., chargeable on this facility are also governed by the same rules. This type of facility
is, however, not very popular and most of the advances against export bills are made by
the bank by way of negotiation/purchase/discount.
(c) Advance against Goods Sent on Consignment Basis
When the goods are exported on consignment basis at the risk of the exporter for sale
and eventual remittance of sale proceeds to him by the agent/consignee, bank may
finance against such transaction subject to the specific limit. However, the bank should
ensure while forwarding shipping documents to its overseas branch/ correspondent to
instruct the latter to deliver the documents only against Trust Receipt/Undertaking

In the base of exports on consignment basis, even if extension in the period beyond 365
days is granted by the Foreign Exchange Department 'FED) for repatriation of export
proceeds, banks will charge appropriate prescribed rate of interest only up to the
notional due date (depending upon the tenor of the bills), subject to a maximum of 365
days.
(d) Advance against Undrawn Balance
In certain lines of export it is the trade practice that bills are not to be drawn for the full
invoice value of the goods but to leave small part undrawn for payment after
adjustment due to difference in rates, weight, quality etc. to be ascertained after
approval and inspection of the goods. Banks do finance against the undrawn balance if
undrawn balance is in conformity with the normal level of balance left undrawn in the
particular line of export subject to a maximum of 10% of the value of export.
(e) Advances against Claims of Duty Drawback
Duty drawback is permitted against exports of different categories of goods under the
'Customs and Central Excise Duty Drawback Rules, 1995'. Drawback in relation to
goods manufactured in India and exported means a rebate of duties chargeable on any
imported materials or excisable materials used in the manufacture of such goods in
India or rebate on excise duty chargeable under Central Excises Act, 1944 on certain
specified goods. The Duty Drawback Scheme is administered by Directorate of Duty
Drawback in the Ministry of Finance. The claims of duty drawback are settled by
Custom House at the rates determined and notified by the Directorate.
As per the present procedure, no separate claim of duty drawback is to be filed by the
exporter. A copy of the shipping bill presented by the exporter at the time of shipment
of goods serves the purpose of claim of duty drawback as well. 'This claim is
provisionally accepted by the customs at the time of shipment and the shipping bill is
duly verified. The claim is settled by customs office later.
As a further incentive to exporters, customs Houses at Mumbai, Kolkata, Chennai,
Chandigarh, Hyderabad have evolved a simplified procedure under which claims of
duty drawback, are settled immediately after shipment and no funds of exporter are
blocked. However, where settlement is not possible under the simplified procedure
exporters may obtain advances against claims of duty drawback as provisionally
certified by customs.

The advance against duty drawback receivables can also be made available to exporters
against- export promotion copy of the shipping bill containing the EGM Number issued
by the Customs Department. Where necessary, the financing bank may have its lien
noted with the designated bank and arrangements may be made with the designated
bank to transfer funds to the financing bank as and when duty drawback is credited by
the Customs.
These advances granted against duty drawback entitlements would be eligible for
concessional rate of interest up to a maximum period of 90 days from the date of
advance.
LETTER OF CREDIT
Definition of Letter of Credit (LC)
Letter of Credit (or Documentary Credit) is an undertaking issued by a bank for the
account of the buyer or for its own account, to pay the seller against the value of the
draft and/or other documents provided that the terms and conditions of the credit are
complied with.
In simple terms, a letter of credit is a bank undertaking of payment separate from the
sales or other contracts on which it is based. It is a way of reducing the payment risks
associated with the movement of goods.
Letters of credit are most often used in international trade, where they are governed by
the Uniform Customs and Practice for Documentary Credits (or UCP).
Why use a Letter of Credit?
The need for a letter of credit is a consideration in the course of negotiations between
the buyer and seller when the important matter of method of payment is being
discussed. Payment can be made in several different ways: by the buyer remitting cash
with his order; by open account whereby the buyer remits payment at an agreed time
after receiving the goods; or by documentary collection through a bank in which case
the buyer pays the collecting bank for account of the seller in exchange for shipping
documents which would include, in most cases, the document of title to the goods. In
the aforementioned methods of payment, the seller relies entirely on the willingness
and ability of the buyer to effect payment.

When the seller has doubts about the credit-worthiness of the buyer and wishes to
ensure prompt payment, the seller can insist that the sales contract provides for
payment by irrevocable letter of credit. Furthermore, if the bank issuing the letter of
credit (issuing bank) is unknown to the seller or if the seller is shipping to a foreign
country and is uncertain of the issuing banks ability to honour its obligation, the seller
can, with the approval of the issuing bank, request its own bank or a bank of
international repute such as Scotiabank to assume the risk of the issuing bank by
confirming the letter of credit.
Step 1: Buyer and seller conclude the sales contract and agreed to use an LC as the
method of payment.

Step 2: Buyer approaches the Issuing Bank to issue an LC on his behalf in favour of the
seller with all the terms and conditions specified.
Step 3: Issuing Bank issues the LC and requests the advising bank to advise or confirm
the credit to the LC beneficiary (seller).
Step 4: Advising/confirming bank authenticates the LC and sends the LC to the LC
beneficiary
Step 5:
Seller prepares and dispatches the goods to the buyers country.
Step 6:
Seller presents the drafts and/or documents to the nominated bank.
10

Step 7:
Nominated (nominated as the negotiating bank) Bank checks documents presented
against the LC terms and conditions and seeks instructions from seller on documentary
discrepancies.
Step 8a:
Nominated Bank forwards the drafts and/or documents to the Issuing Bank.
Step 8b:
If documents are free from discrepancies or discrepancies are supported by sellers
indemnity, nominated bank claims reimbursement from the appointed reimbursing
bank.
Step 8c:
Reimbursing Bank pays the nominated bank against a valid reimbursement authority
received from the Issuing Bank and statement from negotiating bank that the
documents complied with LC terms.
Step 9:
Nominated Bank credits the net proceeds into the sellers account.
Step 10:
Issuing Bank checks documents presented against the LC terms and conditions. If
documents are free from discrepancies, Issuing Bank reimburses the reimbursing bank.
Step 11:
Issuing Bank presents documents to the buyer for payment.
Step 12:
Once payment is received from the buyer, Issuing Bank releases documents to the buyer
for the latter to collect his goods.
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TYPES OF LETTER OF CREDIT
1. Revocable or Irrevocable Letter of Credit
The revocable letter of credit can be changed at any time by either the buyer or the
issuing bank with no notification to the beneficiary. The most recent version of the UCP,
UCP 600, did away with this form of letter of credit for any transaction under their
jurisdiction.
Conversely, the irrevocable letter of credit only allows change or cancellation of the
letter of credit by the issuing bank after application by the buyer and approval by the
beneficiary. All letters of credit governed by the current UCP are irrevocable letters of
credit.
2. Confirmed Letter of Credit
A confirmed letter of credit is one where a second bank agrees to pay the letter of credit
at the request of the issuing bank. While not usually required by law, an issuing bank
might be required by court order to only issue confirmed letters of credit if they are in
receivership. As you might guess, an unconfirmed letter of credit is guaranteed only by
the issuing bank. This is the most common form with regard to confirmation.
3. Transferable Letter of Credit
A letter of credit may also be a transferrable letter of credit. These are commonly used
when the beneficiary is simply an intermediary for the real supplier of the goods and
services or is one of a group of suppliers. It allows the named beneficiary to present its
own documentation but transfer all or part of the payment to the actual suppliers. As
you might guess, an un-transferrable letter of credit does not allow transfer of
payments to third parties.
RISKS IN LETTER OF CREDIT TRANSACTIONS
Letter of credit transactions are not without risks. The risks inherent in these types of
transactions include:
Fraud risk, in which the payment is obtained through the use of falsified or
forged documents for worthless or nonexistent merchandise
Regulatory risk, in which government action may prevent completion of the

transaction
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Legal risk, in which legal action prevents completion of the transaction
Force majeure risk, in which completion of the transaction is prevented by an

external force, such as war or natural disaster
Failure of the issuing or collecting bank
Insolvency of the buyer or beneficiary.
EXIM BANK FINANCE

Meaning:
Export-Import Bank of India (Exim Bank) was set up by an Act of the Parliament THE
EXPORT-IMPORT BANK OF INDIA ACT, 1981 for providing financial assistance
to exporters and importers, and for functioning as the principal 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.
Exim Bank Financing P Programmes
Exim Bank is fully owned by the Government of India and is managed by the Board of
Directors with repatriation from Government, financial institutions, banks and business
community. The Export Import Bank of India (Exim Bank) provides financial assistance
to promote Indian exports through
direct financial assistance,

overseas investment finance,
term finance for export production and export development
pre shipping credit, buyer's credit,
lines of credit, relending facility, export bills rediscounting, refinance to
commercial banks.
Forfeiting Finance from EXIM Bank:

A new financing option for the Indian exporters is available under the forfaiting finance
Scheme recently introduced by the EXIM Bank. Forfaiting is a form of trade finance
involving discounting of medium-term export receivables with or without recourse to
the exporter. The arrangement envisages discounting by Indian exporters of bill of
exchange/promissory notes relating to export transactions which are "avalised" or
guaranteed by the buyer's bankers with overseas forfaiting agencies on "without
recourse" basis.
13

Brief procedure is as follows;
Exporter initiates negotiations with the prospective overseas buyer with regard
to the basic contract price, period of credit, rate of interest, etc.,
After successful negotiations, he furnishes the relevant particulars such as name

and country of overseas buyer, contract value, nature of goods, tenure of credit,
name and country of guaranteeing bankers to the Exim Bank and requests for an
indicative discounting quote. Exim Bank obtains the indicative quote of
forfeiting discount together with commitment fee and other charges, if any, to
be paid by the exporter, from an overseas forfeiting agency.
On receipt of the indicative quote from the Exim Bank, the exporter finalizes
the terms of the contract, loading the discount and other charges in the value
and approaches Exim Bank for obtaining a firm quote. Exim Bank arranges to
get the same from an appropriate overseas forfeiting agency and furnishes the
same to the exporter. At this stage, exporter would be required to confirm
acceptance of the arrangement to Exim Bank within a specific period as
stipulated by that Bank.
The export contract clearly indicates that the overseas buyer shall prepare a
series of avalised Promissory Notes in favour of the exporter and hand them
over against the shipping documents to his banker. The Promissory Notes will
be endorsed with the words without recourse by the exporter and handed over
to his banker in India for onward transmission to the Exim Bank.
Alternatively, the export contract may provide for exporter to draw a series of
Bills of exchange on the overseas buyer which will be sent with the shipping
documents through latter's banker for acceptance by the overseas buyer.
Overseas buyer's banker will handover the documents against acceptance of Bills
of Exchange by the buyer and signature of 'aval' or the guaranteeing bank.
Avalised and accepted bills of exchange will be returned to the exporter through
his banker. Exporter will endorse avalised Bills of Exchange with the words
'without recourse' and return them to his banker for onward transmission to the
Exim Bank.
Exim Bank will forward the Bills of Exchange/Promissory Notes after

verification to the forfeiting agency for discounting by the latter.
Exim Bank will arrange to collect the discounted proceeds of Promissory

Notes/Bills of Exchange from the overseas forfeiting agency and effect payment
to the nostro account of the exporter's bank as per the latter's instruction.
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Arranging Finance For Export

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Import Export Procedure 2016

ATMIYA INSTITUTE OF TECHNOLOGY & SCIENCE

Subject Code: 4150505