EXPORT FINANCE

Table of contents

1. Introduction of automobile industry (current scenario)

2. Company profile (Tata Motors)

3. SWOT analysis of Tata Motors

4. Introduction of Exports

5. Export Finance

 Introduction
 Concept
 Objectives
 Appraisal
6. Types of Export finance

 Pre-Shipment

 Post-Shipment

7. Important Concept in Export Finance

 Factoring

8. Letter of Credit – One of the most common method of

payment in export finance

9. Role of Major Financial and other Institutions

 Export Import Bank of India (EXIM Bank)

 Export Credit Guarantee Control (ECGC)

 Reserve Bank of India (RBI)

10. Learning’s from the project

11. Conclusion

12. Bibliography
ABSTRACT

In the light of growing need & importance of exports for our country it is of utmost
importance that everyone should have an insight in the field of exports.

In the course of last decade, the export scenario in India has undergone a tremendous
change. The liberalization initiated by the government, the keen competition in the
market place & the rapid increase in the export of services have all combined to
change the picture completely

This project will be covering various aspects of export finance. Areas covered in this
project are related to “concept and types of export finance, financial institutions
providing finance for export, Processing export finance in a automobile export unit ”
etc.,” etc.

I hope that this project would provide one, some essential information that will be
useful to in future.
EXECUTIVE SUMMARY

FINANCE IS THE LIFE AND BLOOD OF ANY BUSINESS. Success or failure of

any export order mainly depends upon the finance available to execute the order.
Export finance has always been vital for international finance.

Many Nationalized as well as Private Banks are taking measures to help the exporter
by providing them pre-shipment and post- shipment finance at subsidized rate of
interest. Some of the major financial institutions are EXIM Bank, RBI, and other
financial institutions and banks. EXIM India is the major bank in the field of export
and import of India. It has introduced various schemes like forfaiting, FREPEC
(Finance for Rupee Expenditure for Project Export Contracts) Scheme, etc.

Government is taking measures to help the exporters to execute their export orders
without any hassles. Government has introduced schemes like Duty Entitlement Pass
Book Scheme, Duty free Materials, setting up of Export Promotion Zones and Export
Oriented Units, and other scheme promoting export and import in India. Initially the
Indian exporter had to face many hurdles for executing an export order, but over the
period these hurdles have been removed by the government to smoothen the
procedure of export and import in India.
COMPANY PROFILE - TATA MOTORS LIMITED

Tata Motors Limited is India's largest automobile company, with consolidated

revenues of Rs.70, 938.85cr (USD 14 billion) in 2008-09. It is the leader in
commercial vehicles in each segment, and among the top three in passenger vehicles
with winning products in the compact, midsize car and utility vehicle segments. The
company is the world's fourth largest truck manufacturer, and the world's second
largest bus manufacturer.

The company's 24,000 employees are guided by the vision to be "best in the manner
in which we operate best in the products we deliver and best in our value system and
ethics."

Established in 1945, Tata Motors' presence indeed cuts across the length and breadth
of India. Over 4 million Tata vehicles ply on Indian roads, since the first rolled out in
1954. The company's manufacturing base in India is spread across Jamshedpur
(Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand)
and Dharwad (Karnataka).

Following a strategic alliance with Fiat in 2005, it has set up an industrial joint
venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both
Fiat and Tata cars and Fiat power trains. The company has established a new plant at
Sanand (Gujarat). The company’s dealership, sales, services and spare parts network
comprises over 3500 touch points; Tata Motors also distributes and markets Fiat
branded cars in India.

Tata Motors, the first company from India's engineering sector to be listed in the New
York Stock Exchange (September 2004), has also emerged as an international
automobile company. Through subsidiaries and associate companies, Tata Motors has
operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land
Rover, a business comprising the two iconic British brands that was acquired in 2008.
In 2004, it acquired the Daewoo Commercial Vehicles Company, South Korea's
second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles
Company has launched several new products in the Korean market, while also
exporting these products to several international markets. Today two-thirds of heavy
commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata
Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach
manufacturer, and subsequently the remaining stake in 2009. Hispano's presence is
being expanded in other markets. In 2006, Tata Motors formed a joint venture with
the Brazil-based Marcopolo, a global leader in body-building for buses and coaches to
manufacture fully-built buses and coaches for India and select international markets.
In 2006, Tata Motors entered into joint venture with Thonburi Automotive Assembly
Plant Company of Thailand to manufacture and market the company's pickup vehicles
in Thailand.
The new plant of Tata Motors (Thailand) has begun production of the Xenon pickup
truck, with the Xenon having been launched in Thailand in 2008. Tata Motors is also
expanding its international footprint, established through exports since
1961. The company's commercial and passenger vehicles are already being marketed
in several countries in Europe, Africa, the Middle East, South East Asia, South Asia
and South America. It has franchisee/joint venture assembly operations in Kenya,
Bangladesh, Ukraine, Russia, Senegal and South Africa.

The foundation of the company's growth over the last 50 years is a deep understanding
of economic stimuli and customer needs, and the ability to translate them into
customer-desired offerings through leading edge R&D. With over 3,000 engineers and
scientists, the company's Engineering Research Centre, established in 1966, has
enabled pioneering technologies and products. The company today has R&D centers
in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea, Spain, and the
UK. It was Tata Motors, which developed the first indigenously developed Light
Commercial Vehicle, India's first Sports Utility Vehicle and, in
1998, the Tata Indica, India's first fully indigenous passenger car.

Within two years of launch, Tata Indica became India's largest selling car in its
segment. In 2005, Tata Motors created a new segment by launching the Tata Ace,
India's first indigenously developed mini-truck.

In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, which India
and the world have been looking forward to. The Tata Nano has been subsequently
launched, as planned, in India in March 2009. A development, which signifies a first
for the global automobile industry, the Nano brings the comfort and safety of a car
within the reach of thousands of families. The standard version has been priced at
Rs.100, 000 (excluding VAT and transportation cost). Designed with a family in
mind, it has a roomy passenger compartment with generous leg space and head room.
It can comfortably seat four persons. Its mono-volume design will set a new
benchmark among small cars. Its safety performance exceeds regulatory requirements
in India. Its tailpipe emission performance too exceeds regulatory requirements. In
terms of overall pollutants, it has a lower pollution level than two-wheelers being
manufactured in India today. The lean design strategy has helped minimize weight,
which helps maximize performance per unit of energy consumed and delivers high
fuel efficiency. The high fuel efficiency also ensures that the car has low carbon
dioxide emissions, thereby providing the twin benefits of an affordable transportation
solution with a low carbon footprint.

In May 2009, Tata Motors introduced ushered in a new era in the Indian automobile
industry, in keeping with its pioneering tradition, by unveiling its new range of world
standard trucks called Prima. In their power, speed, carrying capacity, operating
economy and trims, they will introduce new benchmarks in India and match the best
in the world in performance at a lower life-cycle cost.
Tata Motors is equally focused on environment-friendly technologies in emissions and
alternative fuels. . It has developed electric and hybrid vehicles both for personal and
public transportation. It has also been implementing several environment-friendly
technologies in manufacturing processes, significantly enhancing resource
conservation. Through its subsidiaries, the company is engaged in engineering and
automotive solutions, construction equipment manufacturing, automotive vehicle
components manufacturing and supply chain activities, machine tools and factory
automation solutions, high-precision tooling and plastic and electronic components for
automotive and computer applications, and automotive retailing and service
operations.

Tata Motors is committed to improving the quality of life of communities by working

on four thrust areas – employability, education, health and environment. The activities
touch the lives of more than a million citizens. The company's support on education
and employability is focused on youth and women. They range from schools to
technical education institutes to actual facilitation of income generation. In health, our
intervention is in both preventive and curative health care. The goal of environment
protection is achieved through tree plantation, conserving water and creating new
water bodies and, last but not the least, by introducing appropriate technologies in our
vehicles and operations for constantly enhancing environment care.

With the foundation of its rich heritage, Tata Motors today is etching a refulgent
future.
SWOT ANALYSIS OF TATA MOTORS

STRENGTH:

• Strong Presence in the Marketplace:-Tata Motors is the only company in

India with a broad based presence across the industry, in all segments of the
commercial vehicles market – heavy and medium commercial vehicles, light
commercial vehicles, pick-ups, sub one-ton mini-trucks - and key segments -
compact, midsize car and utility vehicle segments - of the passenger vehicles
market.

• Unique Understanding of Customer Need: - With more than 60 years’

presence in the automotive business, Tata Motors understands customer needs
and develops products that meet their needs. To consider a few examples, as
early as in the 1980s, the company launched Light Commercial Vehicles,
amidst Japanese competition, in which it today strongly leads. In the 1990s,
anticipating the need for an affordable family car, it launched the now famous
Tata Indica, which occupies a leading position among compact cars.

• Skill Base Developed over the Last 40 Years:-Tata Motors is also very well-
placed on technology capability. The company had set up its Engineering
Research Centre in as early as 1966.With 1400 scientists and engineers and
state-of-the-art development, testing and validation facilities, it is this
technology capability which has, allowed Tata Motors, over the decades, to
offer indigenously developed products. This strength has been accentuated,
with the inclusion of TMETC, TDCV and Hispano Carrocera in the R&D
network, besides several other specialist external agencies. The company no
longer needs to develop every necessity itself. Today it just has to manage the
process of product creation, drawing upon already available R&D and skills
from different sources.

• People Strength: - The Company’s key strength is its people. The over
22,000 employees comprise a very broad talent base, with the required skills in
every aspect of the industry. With increasing international initiatives by the
company, this talent base is now getting enriched with the necessary
competencies to respond to meet world-class standards of quality and cost.
The company will achieve this by developing and marketing relevant products,
on its existing platforms and new ones, which delight consumers in every
market they are introduced in.

• Tata Motors’ linkages in Europe through Subsidiary Companies: - In

October 2005, Tata Technologies Ltd, a 100 per cent subsidiary of Tata
Motors, acquired a 94.3 per cent stake in INCAT International Limited.
INCAT is a supplier of engineering & design, product lifecycle management
 and product-centric IT services to the automotive, aerospace and durable
goods industries.

• Tata Motors R&D in Europe: - Deepening its engagement with the

European R&D space, in September 2005, Tata Motors set up the Tata Motors
European Technical Centre, a 100 per cent subsidiary, in the UK. It is engaged
in design engineering and development of products for the automotive
industry. Working synergistically, TMETC provides the company with design
engineering support and development services, complementing and
strengthening the company’s skill sets and providing European standards of
delivery to the company’s passenger vehicles.

• The internationalization strategy: - So far has been to keep local managers

in new acquisitions, and to only transplant a couple of senior managers from
India into the new market. The benefit is that Tata has been able to exchange
expertise. For example after the Daewoo acquisition the Indian company
learned work discipline and how to get the final product 'right first time.'

OPPURTUNITIES:

• India’s huge geographic spread-This is one aspect where the company is

looking for and its diversified range of cars suits very much this area of car or
say auto industry in country.

• Easier finance schemes- The current fiscal stimulus and easy loan will surely
guide the company to post good sales as the current trend shows the cars sales
has been boosted by easy loan norms in the country.

• Replacement of aging four wheelers-One of very important reason where the

car industry and commercial vehicle can take advantage in coming days.

• Increasing Road Development, Golden Quadrilateral-As we all know the

infrastructure will surely boost the auto industry as it is directly related to the
this industry and the government policy in spending the money ion
infrastructure will create good demand.

• Increasing dispensable income of rural agri sector-Somehow this year the

rural demand was very enthusiastic than the urban market which drive the auto
industry so, the development of rural infrastructure and condition will create
handsome demand from the rural area.
 • Higher GDP growth-With standing tall during the slowdown our economy
has shown the industry that demands will gain momentum in near future very
soon.

• Increasing disposable income with the service sector- As the consumers

have money in their hand definitely there will be demand from their side so,
this is also very good opportunity for this sector.

• Graduating from two wheeler to four wheeler -The dream of “NANO” will
boost demand for four wheeler in the auto industry.

THREAT:
• Infrastructure- Indian is lacking in proper infrastructure this is slowing the
pace of growth of auto industry.

• Global crisis- This really hurts the Indian growing industry and not only the
auto but tyre industry went for toss.

• High competition from foreign players-As the giants like GM, Audi, MERC
etc are trying to capture the high segment market it is one of the very effective
threat to the company.

• Other competing car manufacturers have been in the passenger car business
for 40, 50 or more years. Therefore Tata Motors Limited has to catch up in
terms of quality and learn production.

• Sustainability and environmentalism could mean extra costs for this low-cost
producer. This could impact its underpinning competitive advantage.
Obviously, as Tata globalizes and buys into other brands this problem could be
alleviated.

• Since the company has focused upon the commercial and small vehicle
segments, it has left itself open to competition from overseas companies for
the emerging Indian luxury segments. For example ICICI bank and
DaimlerChrysler have invested in a new Pune based plant which will build
5000 new Mercedes-Benz per annum. Other players developing luxury cars
targeted at the Indian market include Ford, Honda and Toyota. In fact the
entire Indian market has become a target for other global competitors
including Mahindra and Mahindra, Maruti Udyog, General Motors, Ford and
others.

• Rising prices in the global economy could pose a threat to Tata Motors
Limited on a couple of fronts. The price of steel and aluminium is increasing
 putting pressure on the costs of production. Many of Tata's products run on
Diesel fuel which is becoming.

• expensive globally and within its traditional home market.

WEAKNESS:
• The current financial situation of its recently acquired companies like “Land
Rover-Jaguar” is a problem for the company and it should be back to the track
in the near future.
• The high ratio of debt equity ratio is also weakness of the company.
• The small car segment is still not good for the company due to competitors
like “maruti-suzuki” so, it need to tap this section also.
• The CV segment is becoming highly competitive by new players like
Volvo,and rival M&M coming with new products to compete with in the
market as the rural area has given thumps up to M&M during this year.
• The company's passenger car products are based upon 3rd and 4th generation
platforms, which put Tata Motors Limited at a disadvantage with competing
car manufacturers.
• Despite buying the Jaguar and Land Rover brands (see opportunities below);
Tata has not got a foothold in the luxury car segment in its domestic, Indian
market. Is the brand associated with commercial vehicles and low-cost
passenger cars to the extent that it has isolated itself from lucrative segments
in a more aspiring India?
• It is TML who has bought over JLR, so they better make do with “tat”. The
Tata name is most prestigious in any country……..so such a thought has never
occurred to anyone.
Overview of Automobile Industry

The Automobile industry in India is the seventh largest in the world with an annual
production of over 2.6 million units in 2009.[1] In 2009, India emerged as Asia's
fourth largest exporter of automobiles, behind Japan, South Korea and Thailand.

By 2050, the country is expected to top the world in car volumes with approximately
611 million vehicles on the nation's roads.

Following economic liberalization in India in 1991, the Indian automotive industry

has demonstrated sustained growth as a result of increased competitiveness and
relaxed restrictions. Several Indian automobile manufacturers such as Tata
Motors, Maruti Suzuki and Mahindra and Mahindra, expanded their domestic and
international operations. India's robust economic growth led to the further expansion
of its domestic automobile market which attracted significant India-specific
investment by multinational automobile manufacturers. In February 2009, monthly
sales of passenger cars in India exceeded 100,000 units.

Exports

India has emerged as one of the world's largest manufacturers of small cars.
According to New York Times, India's strong engineering base and expertise in the
manufacturing of low-cost, fuel-efficient cars has resulted in the expansion of
manufacturing facilities of several automobile companies like Hyundai
Motors, Nissan, Toyota, Volkswagen and Suzuki.

In 2008, Hyundai Motors alone exported 240,000 cars made in India. Nissan Motors
plans to export 250,000 vehicles manufactured in its India plant by
2011. Similarly, General Motors announced its plans to export about 50,000 cars
manufactured in India by 2011.

In September 2009, Ford Motors announced its plans to setup a plant in India with an
annual capacity of 250,000 cars for US$500 million. The cars will be manufactured
both for the Indian market and for export. The company said that the plant was a part
of its plan to make India the hub for its global production business. Fiat Motors also
announced that it would source more than US$1 billion worth auto components from
India.
According to Bloomberg L.P., in 2009 India surpassed China as Asia's fourth largest
exporter of cars.

In recent years, India has emerged as a leading center for the manufacture of small
cars. Hyundai, the biggest exporter from the country, now ships more than 250,000
cars annually from India. Apart from shipments to its parent Suzuki, Maruti
Suzuki also manufactures small cars for Nissan, which sells them in
Europe. Nissan will also export small cars from its new Indian assembly line. Tata
Motors exports its passenger vehicles to Asian and African markets, and is in
preparation to launch electric vehicles in Europe in 2010. The company is also
planning to launch an electric version of its low-cost car Nano in Europe and the U.S.
Mahindra & Mahindra is preparing to introduce its pickup trucks and small
SUV models in the U.S. market. Bajaj Auto is designing a low-cost car for the Nissan-
Renault alliance, which will market the product worldwide. Nissan-Renault may also
join domestic commercial vehicle manufacturer Ashok Leyland in another small car
project. While the possibilities are impressive, there are challenges that could thwart
future growth of the Indian automobile industry. Since the demand for automobiles in
recent years is directly linked to overall economic expansion and rising personal
incomes, industry growth will slow if the economy weakens.

Domestic Market Share for 2009-10 % Share

Passenger Vehicles 15.86
Commercial Vehicles 4.32
Three Wheelers 3.58
Two Wheelers 76.23
 Country Cars Commercial Total % change
vehicles

Argentina 380,067 132,857 512,924 -14.1%

Australia 188,158 39,125 227,283 -31.0%

Austria 56,000 15,714 71,714 -52.6%

Belgium 510,300 12,510 522,810 -27.8%

Brazil 2,576,628 605,989 3,182,617 -1.0%

Canada 822,363 667,288 1,489,651 -28.5%

China 10,383,831 3,407,163 13,790,994 48.3%

Czech Rep. 967,760 6,809 974,569 3.0%

Egypt 38,420 27,580 66,000 -42.5%

Finland 10,907 64 10,971 -38.7%

France 1,821,734 228,028 2,049,762 -20.2%

Germany 4,964,523 245,334 5,209,857 -13.8%

Hungary 180,500 2,040 182,540 -47.3%

India 2,166,238 466,456 2,632,694 12.9%

Indonesia 352,172 112,644 464,816 -22.6%

Iran 692,230 60,080 752,310 -28.4%

Italy 661,100 182,139 843,239 -17.6%

Japan 6,862,161 1,072,355 7,934,516 -31.5%

Malaysia 442,186 43,005 485,191 -8.6%

Mexico 939,469 617,821 1,557,290 -28.2%

Netherlands 50,620 25,981 76,601 -42.2%

Poland 819,000 60,186 879,186 -7.1%

Portugal 101,680 24,335 126,015 -28.1%

Romania 279,320 17,178 296,498 20.9%

Russia 595,839 126,592 722,431 -59.6%

Serbia 8,720 1,355 10,075 -13.4%

Slovakia 461,340 0 461,340 -19.9%

Slovenia 202,570 10,179 212,749 7.5%

South Africa 224,000 156,000 380,000 -32.5%

South Korea 3,158,417 354,509 3,512,926 -8.2%

Spain 1,812,688 357,390 2,170,078 -14.6%

Sweden 128,738 27,600 156,338 -49.3%

Taiwan 183,986 42,370 226,356 23.7%

Thailand 305,250 663,055 968,305 -30.5%

Turkey 510,931 358,674 869,605 -24.2%

Ukraine 65,646 3,649 69,295 -83.6%

UK 999,460 90,679 1,090,139 -33.9%

USA 2,249,061 3,462,762 5,711,823 -34.3%

Uzbekistan 110,200 7,700 117,900 -43.3%

Supplementary 285,339 111,568 396,907 -24.8%

Total 47,227,656 13,759,329 60,986,985 -13.5%

Chapter 3- Export Finance

3.1 - INTRODUCTION

Credit and finance is the life and blood of any business whether domestic or
international. It is more important in the case of export transactions due to the
prevalence of novel non-price competitive techniques encountered by exporters in
various nations to enlarge their share of world markets.

The selling techniques are no longer confined to mere quality; price or delivery
schedules of the products but are extended to payment terms offered by exporters.
Liberal payment terms usually score over the competitors not only of capital
equipment but also of consumer goods.

The payment terms however depend upon the availability of finance to exporters in
relation to its quantum, cost and the period at pre-shipment and post-shipment stage.

Production and manufacturing for substantial supplies for exports take time, in case
finance is not available to exporter for production. They will not be in a position to
book large export order if they don’t have sufficient financial funds. Even
merchandise exporters require finance for obtaining products from their suppliers.

This project is an attempt to throw light on the various sources of export finance
available to exporters, the schemes implemented by ECGC and EXIM for export
promotion.

3.3 - CONCEPT OF EXPORT FINANCE:

The exporter may require short term, medium term or long term finance depending
upon the types of goods to be exported and the terms of statement offered to overseas
buyer.
The short-term finance is required to meet “working capital” needs. The working
capital is used to meet regular and recurring needs of a business firm. The regular and
recurring needs of a business firm refer to purchase of raw material, payment of
wages and salaries, expenses like payment of rent, advertising etc.
The exporter may also require “term finance”. The term finance or term loans, which
is required for medium and long term financial needs such as purchase of fixed assets
and long term working capital.
Export finance is mostly short-term working capital finance allowed to an exporter.
Finance and credit are available not only to help export production but also to sell to
overseas customers on credit.

3.4 - OBJECTIVES OF EXPORT FINANCE

• To cover commercial & Non-commercial or political risks attendant on

granting credit to a foreign buyer.
• To cover natural risks like an earthquake, floods etc.

Factors Responsible for Availing Financial assistance from banks

An exporter may avail financial assistance from any bank, which considers the
ensuing factors:

a) Availability of the funds at the required time to the exporter.

b) Affordability of the cost of funds.

3.5 - APPRAISAL

Appraisal means an approval of an export credit proposal of an exporter. While

appraising an export credit proposal as a commercial banker, obligation to the
following institutions or regulations needs to be adhered to.

Obligations to the RBI under the Exchange Control Regulations are:

 Appraisee to be the bank’s customer.

 Appraisee should have the Exim code number allotted by the Director General
of Foreign Trade.
 Party’s name should not appear under the caution list of the RBI.

Obligations to the Trade Control Authority under the EXIM policy are:

 Appraise should have IEC number allotted by the DGFT.

 Goods must be freely exportable i.e. not falling under the negative list. If it
falls under the negative list, then a valid licence should be there which allows
the goods to be exported.
 Country with whom the Appraisee wants to trade should not be under trade
barrier.

Obligations to ECGC are:

 Verification that Appraisee is not under the Specific
Approval list (SAL).

 Sanction of Packing Credit Advances.

GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE:

When a commercial bank deals in export finance it is bound by the ensuing
guidelines: -
1. Exchange control regulations.
2. Trade control regulations.
3. Reserve Bank’s directives issued through IECD.( Industrial & Export Credit
Department (Reserve Bank of India))
4. Export Credit Guarantee Corporation guidelines.
5. Guidelines of Foreign Exchange Dealers Association of India.
Chapter 2

RESEARCH METHODOLOGY

While preparing a project report, it is very essential to know what exactly we are
going to do, how to do, in such a way so that the purpose of our report would be
achieved and what should be the procedure that we are going to adopt. The practical
situations are very different from theoretical studies. So it is very important to
collect appropriate data in such a manner so that it helps us in preparing accurate
report and taking correct decision.
There are several ways of collecting data while doing the project report or any survey.
(1) Primary sources
(2) Secondary sources
(1) Primary sources
For the primary data I took an guidance from from the divisional manager of Tata
Motors Ltd. and requested him to provide related information for the dissertation. He
guided me well about all the procedure of export finance, types of export finance,
explain the circumstances in which an export firm needs the export finance and what
are the sources available for that. I have used their procedure of dealings with clients
and banks in various places in the project as the references.
(2)Secondary data:
I have collected the secondary data from the various Government institutions sites like
EXIM Bank, ECGC and RBI. There are a number of books related to export finance
and international business available in the library and taken the data from company’s
website and various financial and exports documents of the company.

Methodology or the procedure that I follow in company

The methodology adopted in the procedure followed in order to give the projects its
shape is:
• Understanding of working process in an export company.
• Studying the documents used in the export finance.
• Collecting information from export deal files, documents, folders maintained
by the company
• Studying the client’s files regarding export transactions and understanding
various kinds of terms and conditions used in export finance
• Studying the various types of credit facilities given to the export companies
from leading financial institutions
• Finally compiling the data in a proper format and selecting a suitable project

Import – Export Procedure

1) Seller and Buyer conclude a sales contract, with method of payment usually by
letter of credit (documentary credit).
2) Buyer applies to his issuing bank, usually in Buyer's country, for letter of
credit in favour of Seller (beneficiary).
3) Issuing bank requests another bank, usually a correspondent bank in Seller's
country, to advise, and usually to confirm, the credit.
4) Advising bank, usually in Seller's country, forwards letter of credit to
Seller informing about the terms and conditions of credit.
5) If credit terms and conditions conform to sales contract, Seller prepares goods
and documentation, and arranges delivery of goods to carrier
6) Seller presents documents evidencing the shipment and draft (bill of exchange)
to paying, accepting or negotiating bank named in the letter of credit (the
advising bank usually), or any bank willing to negotiate. under the terms of
credit.
 7) Bank examines the documents and draft for compliance with all the letter of
credit terms. If compiled with, bank will pay the amount at sight in case of a
sight Letter of Credit. In case of ussance LOC acceptance for payment on the
due date will be given and payment will be released on the due date.
8) If the documents are presented to a Bank other than the issuing bank, that bank
sends the documents and draft to the issuing bank.
9) The Issuing Bank examines the documents and draft for compliance with
credit terms. If complied with, Seller's draft is honored.
10) Documents release to Buyer after payment or on other terms agreed between
the bank and Buyer.
11) Buyer surrenders bill of lading to carrier (in case of ocean freight)
in exchange for the goods or the delivery order.

CHAPTER 4 - TYPES OF EXPORT FINANCE

We now have a look at the different types of export finance.
Basically the point separating the two types of finances is related to whether the
financial assistance is granted to an exporter prior to or after the shipment of the
goods. Thus, as indicated above the two types of export finances are as follows:-

a) Pre-shipment finance
b) Post-shipment finance

4.1 - PRE-SHIPMENT FINANCE

MEANING:

Pre-shipment is also referred as “packing credit”. It is working capital finance

provided by commercial banks to the exporter prior to shipment of goods. The finance
required to meet various expenses before shipment of goods is called pre-shipment
finance or packing credit.

DEFINITION:

Financial assistance extended to the exporter from the date of receipt of the export
order till the date of shipment is known as pre-shipment credit. Such finance is
extended to an exporter for the purpose of procuring raw materials, processing,
packing, transporting, warehousing of goods meant for exports.

IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE:

• To purchase raw material, and other inputs to manufacture goods.

• To assemble the goods in the case of merchant exporters.
• To store the goods in suitable warehouses till the goods are shipped.
• To pay for packing, marking and labeling of goods.
• To pay for pre-shipment inspection charges.
• To import or purchase from the domestic market heavy machinery and other
capital goods to produce export goods.
• To pay for consultancy services.
• To pay for export documentation expenses.

A pre requisite to avail pre-shipment financing is that the Exporter should have a
credit facility in place with a bank. Each bank has a credit process that
determines the amount of funding the bank can give to the company.

Eligibility for pre-shipment credit

An exporter who holds an export order or Letter of Credit (LC) in his own name to
perform an export contract can avail of pre-shipment credit.

Banks may also grant pre-shipment advances without insisting on prior lodgment of
LCs or purchase orders. This is known as the "Running Account Facility".

Availment of finance as an exporter

This is ‘need based financing’, - which means that banks will lend an amount to you
after factoring in a particular margin (this margin is calculated as a percentage
of the value of the order). The margin differs from bank to bank. Margins are
stipulated for the following reasons :

 to ensure that the exporter has some stake in the transaction

 to cover any erosion in the value of goods, and
 to ensure that there is no lending against the exporter's profit margin.

Quantum of this finance

Post shipment finance can be extended upto 100% of the invoice value of goods.

Tenor of this funding

The RBI has allowed banks to grant this funding at a concession for a maximum
period of 180 days. This period can be extended by the bank without referring to RBI
for a further period of 90 days. Banks grant this extension in cases where the exporter
faces genuine hardships in completing his order.

If an extension is required beyond 270 days (i.e. 180+90 days), the RBI has the
discretion to grant another (maximum) extension of 90 days. However, if the exports
do not take place at the end of this period, the bank will charge interest from day one,
at a rate left to the bank’s discretion.

The currency in which the exporter can obtain pre-shipment credit

Most often the pre-shipment is borrowed in the domestic currency, in the case of an
exporter based in India, the Indian Rupee.

However in some cases, the exporter may want to borrow in foreign currency because
his product has a large import component or he finds the cost of borrowing in foreign
currency lower than borrowing in the local currency.

Borrowing in foreign currency is feasible when the cost of Rupee borrowing (less the
currency premium) is greater than the cost of borrowing in the foreign currency.
This will be easier to understand with the help of an example. Let us assume that an
exporters’ exports and imports are both payable in US Dollars. Let us also assume that
the import component is significant at, say, 70%. In this case, the exporter is open to
the effects of currency movements both at the time of import, and then at the time of
export. Borrowing in USD can hence partially hedge his currency risk on the export
side, since his exports are also going to be in the same currency.

The above facility, allowed to exporters to avail of pre-shipment credit in foreign

currency, is termed as ‘Pre-Shipment Credit in Foreign Currency’ or PCFC.

Such credit is offered at internationally competitive interest rates to enable the

exporter to take advantage of the same under stiff competitive environment.

The Loans are extended at LIBOR /EURIBOR /EURO LIBOR interest rates.

 London Inter Bank Offer Rate which refers to the rates of interest at which
banks are ready to lend money to each other in London’s inter-bank market.
LIBOR rates are the world’s most widely used short term interest rates.
 EURIBOR is Euro Inter Bank Offer Rate, the rate released by European
Banking Federation, used for Euro Inter Banks loan transactions between
banks and Euro region. EURIBOR is generally used as the underlying interest
rate for Euro denominated transactions.
 EURO LIBOR, as the name suggest, refers to LIBOR denominated in EURO.

The ways in which exporter can liquidate the pre-shipment finance

The pre-shipment facility can be liquidated by proceeds of export bills negotiated,

purchased or discounted. As far as possible, banks don't encourage liquidation by
debit to cash credit account.
Another interesting thing is that, once the goods are shipped out and documents
tendered to the bank, the pre-shipment advance is converted to post-shipment
advance.
In the case of PCFC credit, pre-shipment finance is liquidated by discounting bills
under the ‘Rediscounting of Export Bills Abroad’ scheme. PCFC can be liquidated by
discounting of export bills, or by grant of foreign currency loans by a bank. Once the
exporter avails of PCFC, he will not be eligible for post-shipment credit in rupees; he
will have to avail of post-shipment funding in the same currency in which he availed
of the pre-shipment funding.

4.2 POST-SHIPMENT FINANCE

Meaning:
Post shipment finance is provided to meet working capital requirements after the
actual shipment of goods. It bridges the financial gap between the date of
shipment and actual receipt of payment from overseas buyer thereof. Whereas
the finance provided after shipment of goods is called post-shipment finance.
Definition:
Credit facility extended to an exporter from the date of shipment of goods till the
realization of the export proceeds is called Post-shipment Credit.

Importance of Finance at post-shipment stage

 To pay to agents/distributors and others for their services.
 To pay for publicity and advertising in the over seas markets.
 To pay for port authorities, customs and shipping agents charges.
 To pay towards export duty or tax, if any.
 To pay towards ECGC premium.
 To pay for freight and other shipping expenses.
 To pay towards marine insurance premium, under CIF contracts.
 To meet expenses in respect of after sale service.
 To pay towards such expenses regarding participation in exhibitions and
trade fairs in India and abroad.
 To pay for representatives abroad in connection with their stay aboard.

Who is eligible for post-shipment finance?

Post-shipment finance is extended to the actual exporter who has exported the goods
or to an exporter in whose name the export documents are transferred.

On what basis is post-shipment finance extended?

It is extended against evidence of shipment of export goods.

What is the purpose of post-shipment finance?

Post shipment finance is meant to finance export receivables.

What is the quantum of this finance?

Post shipment finance can be extended upto 100% of the invoice value of goods.

What is the period for which this funding is available?

In the case of routine exports, the maximum period allowed for realisation of export
proceeds is 6 months from the date of shipment. Banks can extend post shipment
finance at a lower interest rate upto the normal transit period or due dates. Beyond that
period, banks lend at non-concessional rates or the normal commercial rates.

Chapter 5 - Important concept in export finance

Definition of Forfaiting
The terms forfaiting is originated from a old French word ‘forfait’, which means to
surrender ones right on something to someone else. In international trade, forfaiting
may be defined as the purchasing of an exporter’s receivables at a discount price by
paying cash. By buying these receivables, the forfaiter frees the exporter from credit
and the risk of not receiving the payment from the importer.

How forfaiting works in International Trade

The exporter and importer negotiate according to the proposed export sales contract.
Then the exporter approaches the forfaiter to ascertain the terms of forfaiting. After
collecting the details about the importer, and other necessary documents, forfaiter
estimates risk involved in it and then quotes the discount rate. The exporter then
quotes a contract price to the overseas buyer by loading the discount rate and
commitment fee on the sales price of the goods to be exported and signs a contract
with the forfaiter. Export takes place against documents guaranteed by the
importer’s bank and discounts the bill with the forfaiter and presents the same to the
importer for payment on due date.

Forfaiting
The forfaiting typically involves the following cost elements:
1. Commitment fee, payable by the exporter to the forfaiter ‘for latter’s’ commitment
to execute a specific forfaiting transaction at a firm discount rate with in a specified
time.
2. Discount fee, interest payable by the exporter for the entire period of credit
involved and deducted by the forfaiter from the amount paid to the exporter against
the availised promissory notes or bills of exchange.

Benefits to Exporter
• 100 per cent financing : Without recourse and not occupying exporter's credit line
That is to say once the exporter obtains the financed fund, he will be exempted
from the responsibility to repay the debt.
• Improved cash flow : Receivables become current cash in flow and its is beneficial
to the exporters to improve financial status and liquidation ability so as to
heighten further the funds raising capability.
• Reduced administration cost : By using forfaiting , the exporter will spare from
the management of the receivables. The relative costs, as a result, are reduced
greatly.
• Risk reduction : Forfaiting business enables the exporter to transfer various risk
resulted from deferred payments, such as interest rate risk, currency risk, credit
risk, and political risk to the forfaiting bank.
• Increased trade opportunity : With forfaiting, the export is able to grant credit to
his buyers freely, and thus, be more competitive in the market.

Benefits to Banks
Forfaiting provides the banks following benefits:
• Banks 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 products.
• Bank gain fee based income.
• Lower credit administration and credit follow up.

Chapter 6 - Documents required for getting export finance

International market involves various types of trade documents that need to be
produced while making transactions. Each trade document is differ from other and
present the various aspects of the trade like description, quality, number,
transportation medium, indemnity, inspection and so on. So, it becomes important for
the importers and exporters to make sure that their documents support the guidelines
as per international trade transactions. A small mistake could prove costly for any of
the parties. For example, a trade document about the bill of lading is a proof that
goods have been shipped on board, while Inspection Certificate, certifies that the
goods have been inspected and meet quality standards. So, depending on these
necessary documents, a seller can assure a buyer that he has fulfilled his responsibility
whilst the buyer is assured of his request being carried out by the seller.

Letter of Credit – one of the most important documents required

Letter of Credit L/c also known as Documentary Credit is a widely used term to make
payment secure in domestic and international trade. The document is issued by a
financial organization at the buyer request. Buyer also provide the necessary
instructions in preparing the document.
The International Chamber of Commerce (ICC) in the Uniform Custom and Practice
for Documentary Credit (UCPDC) defines L/C as:
An arrangement, however named or described, whereby a bank (the Issuing bank)
acting at the request and on the instructions of a customer (the Applicant) or on its
own behalf:
1. Is to make a payment to or to the order third party (the beneficiary ) or is to accept
bills of exchange (drafts) drawn by the beneficiary.
2. Authorised another bank to effect such payments or to accept and pay such bills of
exchange (draft).
3. Authorised another bank to negotiate against stipulated documents provided that the
terms are complied with.
A key principle underlying letter of credit (L/C) is that banks deal only in
documents and not in goods. The decision to pay under a letter of credit will be
based entirely on whether the documents presented to the bank appear on their face to
be in accordance with the terms and conditions of the letter of credit.

Parties to Letters of Credit

Applicant: The buyer or importer of goods
Issuing bank: Importer’s bank, who issues the L/C
Beneficiary: The party to whom the L/C is addressed. The
Seller or supplier of goods.
Advising bank: Issuing bank’s branch or correspondent bank in
The exporter’s country to whom the L/C is send for
onward transmission to the beneficiary.
Confirming bank: The bank in beneficiary’s country, which
guarantees the credit on the request of the issuing
 Bank.
Negotiating bank: The bank to whom the beneficiary presents his
Documents for payment under L/C

Types of Letter of Credit

1. Revocable Letter of Credit L/C

A revocable letter of credit may be revoked or modified for any reason, at any time by
the issuing bank without notification. It was rarely used in international trade and not
considered satisfactory for the exporters but has an advantage over that of the
importers and the issuing bank.
There is no provision for confirming revocable credits as per terms of UCPDC, Hence
they cannot be confirmed. It should be indicated in LC that the credit is revocable. if
there is no such indication the credit will be deemed as irrevocable.
2. Irrevocable Letter of Credit L/C
In this case it is not possible to revoke or amend a credit without the agreement of the
issuing bank, the confirming bank, and the beneficiary. From an exporters point of
view it is believed to be more beneficial. An irrevocable letter of credit from the
issuing bank insures the beneficiary that if the required documents are presented and
the terms and conditions are complied with, payment will be made.
3. Confirmed Letter of Credit L/C
Confirmed Letter of Credit is a special type of L/c in which another bank apart from
the issuing bank has added its guarantee. Although, the cost of confirming by two
banks makes it costlier, this type of L/c is more beneficial for the beneficiary as it
doubles the guarantee.
4. Sight Credit and Usance Credit L/C
Sight credit states that the payments would be made by the issuing bank at sight, on
demand or on presentation. In case of usance credit, drafts are drawn on the issuing
bank or the correspondent bank at specified usance period. The credit will indicate
whether the usance drafts are to be drawn on the issuing bank or in the case of
confirmed credit on the confirming bank.
5. Back to Back Letter of Credit L/C
Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is
known as back to back credit when a L/c is opened with security of another L/c.
A back to back credit which can also be referred as credit and counter credit is
actually a method of financing both sides of a transaction in which a middleman buys
goods from one customer and sells them to another.
The parties to a Back to Back Letter of Credit are:
1. The buyer and his bank as the issuer of the original Letter of Credit.
2. The seller/manufacturer and his bank,
3. The manufacturer's subcontractor and his bank.
The practical use of this Credit is seen when L/c is opened by the ultimate buyer in
favour of a particular beneficiary, who may not be the actual supplier/ manufacturer
offering the main credit with near identical terms in favour as security and will be able
to obtain reimbursement by presenting the documents received under back to back
credit under the main L/c.
The need for such credits arise mainly when :
1. The ultimate buyer not ready for a transferable credit.
2. The Beneficiary do not want to disclose the source of supply to the openers.
3. The manufacturer demands on payment against documents for goods but the
beneficiary of credit is short of the funds.
6. Transferable Letter of Credit L/C
A transferable documentary credit is a type of credit under which the first beneficiary
which is usually a middleman may request the nominated bank to transfer credit in
whole or in part to the second beneficiary.
The L/C clearly mentions the margins of the first beneficiary and unless it is specified
the L/C cannot be treated as transferable. It can only be used when the company is
selling the product of a third party and the proper care has to be taken about the exit
policy for the money transactions that take place.
This type of L/C is used in the companies that act as a middle man during the
transaction but don’t have large limit. In the transferable L/C there is a right to
substitute the invoice and the whole value can be transferred to a second beneficiary.
The first beneficiary or middleman has rights to change the following terms and
conditions of the letter of credit:
1. Reduce the amount of the credit.
2. Reduce unit price if it is stated
3. Make shorter the expiry date of the letter of credit.
4. Make shorter the last date for presentation of documents.
5. Make shorter the period for shipment of goods.
6. Increase the amount of the cover or percentage for which insurance cover must be
effected.
7. Substitute the name of the applicant (the middleman) for that of the first beneficiary
(the buyer).
6. Standby Letter of Credit L/C
Initially used by the banks in the United States, the standby letter of credit is very
much similar in nature to a bank guarantee. The main objective of issuing such a
credit is to secure bank loans. Standby credits are usually issued by the applicant’s
bank in the applicant’s country and advised to the beneficiary by a bank in the
beneficiary’s country. Unlike a traditional letter of credit where the beneficiary
obtains payment against documents evidencing performance, the standby letter of
credit allow a beneficiary to obtains payment from a bank even when the applicant for
the credit has failed to perform as per bond.

A Letter of Credit contains these elements:

• A payment undertaking given by the bank (issuing bank) on behalf of the

buyer (applicant)
 • To pay a seller (beneficiary) a given amount of money on presentation of
specified documents representing the supply of goods within specific time
limits
• These documents conforming to terms and conditions set out in the letter of
credit
• Documents to be presented at a specified place.

In simple words, the Issuing Bank's role is twofold:

• To guarantee to the seller that if complete documents are presented, the bank
will pay the seller the amount due. This offers security to the seller – the bank
says in effect "We will pay you if you present documents (XYZ)"
• To examine the documents and only pay if these comply with the terms and
conditions set out in the letter of credit. This protects the buyer's interests - the
bank says "We will only pay your supplier on your behalf if they present
documents (XYZ) that you have asked for"

Advantages to the exporter:

• No blocking of funds if finance options like forfaiting are available.
• Clearance of import regulations.
• Free from liability.
• Pre- shipment finance.
• Non-refusal by importer.
• Reduction in bad-debts.

Advantages to the importer:

• Better terms of trade.
• Assurance of shipment of goods.
• Overdraft facility.
• No blocking of funds.
• Delivery on time.
• Better relations.
Disadvantages of letter of credit:
• Lacks flexibility.
• Complex method
• Expensive for importer

Letters of Credit - Form, Structure and Details

1. Number and ID (this number must be placed on all subsequent documentation
pertaining to the same transaction.
2. Names and details of buyer, seller, opening bank (buyer's bank), correspondent
bank.
3. Description of goods – usually the proforma invoice is attached and this sentence is
then added: "In accordance with proforma invoice number …dated … herewith
attached to this letter of credit and which constitutes an integral and inseparable part
thereof".
4. Total cost or price.
5. A list of documents (with the presentation of which by the seller payment to the
seller will be effected):
a. Commercial invoice, including a list of the goods, details of buyer and seller and
signatures.
b. Packing list signed by seller.
c. Insurance policy including its type, the coverage it affords, amount covered. The
policy's beneficiary must be the opening (importer's) bank and it must be fully
endorsable.
d. Detailed billways, receipts or bill of lading: who is entitled to receive delivery of
the goods, who pays for the carriage, is carriage prepaid and where, etc.
e. Other documents.
6. Dates – when was the L/C opened, how long is it valid, date of loading and date of
presentation of documents at the bank (maximum 21 days after loading of goods, if
not otherwise specified).
7. Special instructions: is transit or transshipment allowed (best to write
"transshipment allowed"), is part shipment allowed (best to write "part shipment or
partial shipment allowed").
If carriage or delivery not according to L/C – payment will NOT BE PAID without specific
acceptance of the importer!!!

Air Waybills
Air Waybills make sure that goods have been received for shipment by air. A typical
air waybill sample consists of three originals and nine copies. The first original is for
the carrier and is signed by a export agent; the second original, the consignee's copy,
is signed by an export agent; the third original is signed by the carrier and is handed to
the export agent as a receipt for the goods.
Air Waybills serves as:
• Proof of receipt of the goods for shipment.
• An invoice for the freight.
• A certificate of insurance.
• A guide to airline staff for the handling, dispatch and delivery of the consignment.
The principal requirement for an air waybill are :
· The proper shipper and consignee must be mention.
· The airport of departure and destination must be mention.
· The goods description must be consistent with that shown on other documents.
· Any weight, measure or shipping marks must agree with those shown on other
documents.
· It must be signed and dated by the actual carrier or by the named agent of a named
carrier.
· It must mention whether freight has been paid or will be paid at the destination point.

Bill of Lading (B/L)

Bill of Lading is a document given by the shipping agency for the goods shipped for
transportation form one destination to another and is signed by the representatives of
the carrying vessel.
Bill of landing is issued in the set of two, three or more. The number in the set will be
indicated on each bill of lading and all must be accounted for. This is done due to the
safety reasons which ensure that the document never comes into the hands of an
unauthorised person. Only one original is sufficient to take possession of goods at port
of discharge so, a bank which finances a trade transaction will need to control the
complete set. The bill of lading must be signed by the shipping company or its agent,
and must show how many signed originals were issued.
It will indicate whether cost of freight/ carriage has been paid or not:
"Freight Prepaid”: Paid by shipper
"Freight collect”: To be paid by the buyer at the port of discharge
The main parties involve in a bill of lading are:
• Shipper -The person who send the goods.
• Consignee -The person who take delivery of the goods.
• Notify Party-The person, usually the importer, to whom the shipping company or its
agent gives notice of arrival of the goods.
• Carrier-The person or company who has concluded a contract with the shipper for
conveyance of goods

Certificate of Origin
The Certificate of Origin is required by the custom authority of the importing country
for the purpose of imposing import duty. It is usually issued by the Chamber of
Commerce and contains information like seal of the chamber, details of the good to be
transported and soon.
The certificate must provide that the information required by the credit and be
consistent with all other document, It would normally include :
• The name of the company and address as exporter.
• The name of the importer.
• Package numbers, shipping marks and description of goods to agree with that on
other documents.
• Any weight or measurements must agree with those shown on other documents.
• It should be signed and stamped by the Chamber of Commerce.

Combined Transport Document

Combined Transport Document is also known as Multimodal Transport Document,
and is used when goods are transported using more than one mode of transportation.
In the case of multimodal transport document, the contract of carriage is meant for a
combined transport from the place of shipping to the place of delivery.
The liability of the combined transport operator starts from the place of shipment and
ends at the place of delivery. This documents need to be signed with appropriate
number of originals in the full set and proper evidence which indicates that transport
charges have been paid or will be paid at destination port.
Multimodal transport document would normally show :
• That the consignee and notify parties are as the credit.
• The place goods are received, or taken in charges, and place of final destination.
• Whether freight is prepaid or to be collected.
• The date of dispatch or taking in charge, and the "On Board" notation, if any must
be dated and signed.
• Total number of originals.
• Signature of the carrier, multimodal transport operator or their agents.

Commercial Invoice
Commercial Invoice document is provided by the seller to the buyer. Also known as
export invoice or import invoice, commercial invoice is finally used by the custom
authorities of the importer's country to evaluate the good for the purpose of taxation.
The invoice must :
• Be issued by the beneficiary named in the credit (the seller).
• Be addressed to the applicant of the credit (the buyer).
• Be signed by the beneficiary (if required).
• Include the description of the goods exactly as detailed in the credit.
• Be issued in the stated number of originals (which must be marked "Original) and
Copies.
• Include the price and unit prices if appropriate.
• State the price amount payable which must not exceed that stated in the credit
include the shipping terms.

Bill of Exchange
A Bill of Exchange is a special type of written document under which an exporter
asks importer a certain amount of money in future and the importer also agrees to pay
the importer that amount of money on or before the future date. This document has
special importance in wholesale trade where large amount of money involved.
Following persons are involved in a bill of exchange:
Drawer: The person who writes or prepares the bill.
Drawee: The person who pays the bill.
Payee: The person to whom the payment is to be made.
Holder of the Bill: The person who is in possession of the bill.

Insurance Certificate
Also known as Insurance Policy, it certifies that goods transported have been insured
under an open policy. It is necessary that the date on which the insurance becomes
effective is same or earlier than the date of issuance of the transport documents. Also,
if submitted under a LC, the insured amount must be in the same currency as the
credit. The requirements for completion of an insurance policy are as follow :
· The name of the party in the favor which the document has been issued.
· The name of the vessel or flight details.
· The place from where insurance is to commerce typically the sellers warehouse or
the port of loading and the place where insurance cases usually the buyer's warehouse
or the port of destination.
· Insurance value that specified in the credit.
· Marks and numbers to agree with those on other documents.
· The description of the goods, which must be consistent with that in the credit and on
the invoice.
· The name and address of the claims settling agent together with the place where
claims are payable.
· Countersigned where necessary.
· Date of issue to be no later than the date of transport documents unless cover is
shown to be effective prior to that date.

Packing List
Also known as packing specification, it contains details about the packing materials
used in the shipping of goods. It also includes details like measurement and weight of
goods. The packing List must:
· Have a description of the goods ("A") consistent with the other documents.
· Have details of shipping marks ("B") and numbers consistent with other documents.

Inspection Certificate
Certificate of Inspection is a document prepared on the request of seller when he
wants the consignment to be checked by a third party at the port of shipment before
the goods are sealed for final transportation.
In this process seller submit a valid Inspection Certificate along with the other trade
documents like invoice, packing list, shipping bill, bill of lading etc to the bank for
negotiation. On demand, inspection can be done by various world renowned
inspection agencies on nominal charges.

CHAPTER 7 - PAYMENT METHOD

There are 3 standard ways of payment methods in the export import
trade international trade market:
 Clean Payment
 Collection of Bills
 Letters of Credit L/C
1. Clean Payments
In clean payment method, all shipping documents, including title documents are
handled directly between the trading partners. The role of banks is limited to clearing
amounts as required. Clean payment method offers a relatively cheap and
uncomplicated method of payment for both importers and exporters. There are
basically two type of clean payments:
Advance Payment
In advance payment method the exporter is trusted to ship the goods after receiving
payment from the importer.
Open Account
In open account method the importer is trusted to pay the exporter after receipt of
goods. The main drawback of open account method is that exporter assumes all the
risks while the importer get the advantage over the delay use of company's cash
resources and is also not responsible for the risk associated with goods.
2. Payment Collection of Bills in International Trade
The Payment Collection of Bills also called “Uniform Rules for Collections” is
published by International Chamber of Commerce (ICC) under the document number
522 (URC522) and is followed by more than 90% of the world's banks. In this method
of payment in international trade the exporter entrusts the handling of commercial and
often financial documents to banks and gives the banks necessary instructions
concerning the release of these documents to the Importer. It is considered to be one
of the cost effective methods of evidencing a transaction for buyers, where documents
are manipulated via the banking system.
There are two methods of collections of bill:
Documents Against Payment D/P
In this case documents are released to the importer only when the payment has been
done.
Documents Against Acceptance D/A
In this case documents are released to the importer only against acceptance of a draft.
3. Letter of Credit L/c
Letter of Credit also known as Documentary Credit is a written undertaking by the
importers bank known as the issuing bank on behalf of its customer, the importer
(applicant), promising to effect payment in favor of the exporter (beneficiary) up to a
stated sum of money, within a prescribed time limit and against stipulated documents.
It is published by the International Chamber of Commerce under the provision of
Uniform Custom and Practices (UCP) brochure number 600.

CHAPTER 8 - RISKS INVOLVED IN THE EXPORT BUSINESS

Whether it be the exporter himself, or the bank financing the exporter in the
preshipment and post-shipment stages, or the bank negotiating the documents of the
exporter, or the bank purchasing the Letter of Credit on behalf of the exporter, or the
bank adding its own confirmation to the overseas Irrevocable Letter of Credit, or the
forfaiting agent – each of these agencies or organizations are faced with risk.
To understand each type of risk and to appreciate the effects of such risk, we must
delve into each of these kinds of risk associated with export trade

Payment for Goods

The risk of non-payment for goods will be dealt with in maximum detail while
compared to the other kinds of risk related to export trade. This is because the risk of
non-payment has several aspects to it.

Commercial risks
▪ Insolvency of the buyer : - He is declared bankrupt if -
He has made a valid assignment, composition or other arrangement for the benefit of
his creditors generally.
If the buyer be an incorporated body - An order has been made for compulsory
winding up, or An effective resolution has been passed for voluntary winding up
provided that such resolution is not merely for the purpose of reconstruction or
amalgamation.
▪ Willful default of the buyer: - : This is reflected in the failure of the buyer to make
payment due within a specified period, normally four months from the due date, to the
exporter. Here, by payment, we refer to the gross invoice value of the goods delivered
to and accepted by the buyer.
▪ Buyer’s failure to accept the goods:- This means failure or refusal on the part of the
buyer to accept goods which have already been exported by the exporter.
Reasons generally cited for such events include quality disputes.
▪ Insolvency of the bank opening the Irrevocable Letter of Credit:
▪ Default of the bank opening the irrevocable Letter of Credit:

Political risks
▪ Transfer of Payment risk: This refers to the imposition of any restriction by the
Government of the buyer’s country or any Government action which may block or
delay the transfer of payment made by the buyer.
▪ War:
▪ New import restrictions:

Other risks
▪ Causes inherent in the nature of the goods:
▪ Buyer’s failure:
▪ Agent’s failure: Risk also comes in the form of insolvency or protracted default of
any agent of the exporter.
▪ Collecting Bank’s failure: Again, as in the above point, there is the risk of
insolvency or default of the collecting bank.
▪ Shipments on consignment basis: Here the risk is two-fold: there is the political risk
of the agent’s country; there is also the commercial risk of non-payment by “ultimate
buyers” if the agent sells the goods to them on credit terms.
▪ Shipments made by air: Where shipments are made by air, the buyers are often able
to obtain delivery of the goods from the airlines before making payment of the bills or
accepting them for payment, as the case may be. There is the risk of the buyer failing
to make the payment subsequently as per the contract. This is generally referred to as
shipping on OPEN DELIVERY terms.

Exchange Risk
Exchange rate volatility is a fact of life. There is a continuous fluctuation in exchange
rates, thereby bringing uncertainty in receipt for exports and payments against
exports.

Extended Credit Period Risk

Extended credit period refers to bills carrying medium or long term maturities. This
involves receivables under a deferred payment contract for export of goods, evidenced
by bills of exchange or promissory notes. All exports of capital goods and other goods
made on medium to long term credit are classified as having an extended credit
period. Risk arising out of an extended credit period or deferred payment for goods
exported is reduced to some extent through the mechanism of Forfaiting.

CHAPTER 9
UCP-600
These are the uniform rules of international payments determined by the ICC
1. Importer signs sales contract which includes prices, schedules of delivery and
payment, types of packing, modes of carriage, volume, documents to be exchanged
and more. Importer gets pro-forma invoice from exporter.
2. Based on the pro-forma invoice, Importer asks his bank to open letter of credit in
favor of Exporter. Importer instructs the opening bank which details to add to the L/C
which are not included in the Sales Contract or in the pro-forma invoice. Such details
may include: permission or prohibition of transit, transshipment, division of the L/C,
part shipment, the number of copies of the documents, certificates of origin, the
coverage amount of the insurance policy, should the policy be endorsed and so on.
3. The bank uses its letter of credit form and incorporates all the terms and conditions
of the sales contract in the letter of credit.
4. The Importer's bank send the details of the L/C to the Exporter's bank (the
Correspondent Bank).
5. The Correspondent Bank informs the Exporter that an L/C was opened in the
Exporter's favor and conveys to the Exporter the details of the L/C.
6. Exporter compares the conditions of the L/C to the conditions of the sales contract
and especially whether the Importer's Bank has irrevocably agreed to accept the
Correspondent Bank's signature regarding the receipt of the documents.
7. Exporter consults his bank and others whether the Importer's bank is a prime,
World Bank of good standing.
8. Exporter makes sure the L/C is valid and corresponds to the timetables agreed with
the Importer regarding both the delivery of the goods and payments. Another
question: can the documents be negotiated or transferred within the term of the L/C?
Can the Exporter accept all the restrictions and limitations of the L/C? Are there any
impossible conditions (for instance, in contravention of the foreign exchange regime)
or wrong details (name of a port which does not exist, etc.).
9. If the L/C is accepted by the Exporter, he starts production and manufacturing
operations. When the goods are ready, Exporter contacts a carrier. After the goods are
loaded, Exporter gets a bill of lading, a certificate of origin EUR1 or FORM A signed
by the Customs, an export list and other documents.
10. Exporter presents documents to his bank which checks whether all required
documents have been presented and whether they comply with the conditions of the
L/C. The correspondent bank then issues an

ACCEPTANCE. The L/C then becomes a bank guarantee.

11. If the correspondent bank is also the confirming bank, it also pays the Exporter.
12. The correspondent bank transfers the documents and the acceptance to the
opening bank.
13. The opening bank checks the documents. But if the correspondent bank is also the
confirming bank – even if the documents are wrong or faulty – the opening bank must
pay.
14. The opening bank transfers the payment to the correspondent and confirming
bank.
15. The opening bank informs the Importer that the documents arrived. Importer
deposits payment with the opening bank (or opens a credit line with it).
16. Importer gets from the opening bank the documents endorsed.
17. Importer clears the goods and takes delivery of them through the carrier (he gets a
delivery order from the carrier, having settled all outstanding accounts with carrier).

FEMA

Introduction
Foreign Exchange Management Act or in short (FEMA) is an act that provides
guidelines for the free flow of foreign exchange in India. It has brought a new
management regime of foreign exchange consistent with the emerging frame work of
the World Trade Organisation (WTO). Foreign Exchange Management Act was
earlier known as FERA (Foreign Exchange Regulation Act), which has been found to
be unsuccessful with the proliberalisation policies of the Government of India.
FEMA is applicable in all over India and even branches, offices and agencies located
outside India, if it belongs to a person who is a resident of India.
Some Highlights of FEMA
· It prohibits foreign exchange dealing undertaken other than an authorised person;
· It also makes it clear that if any person residing in India, received any Forex payment
(without there being a corresponding inward remittance from abroad) the concerned
person shall be deemed to have received they payment from a non authorised person.
· There are certain types of current account transactions, which are totally prohibited,
and therefore no transaction can be undertaken relating to them. These include
transaction relating to lotteries, football pools, banned magazines and a few others.
· FEMA and the related rules give full freedom to Resident of India (ROI) to hold or
own or transfer any foreign security or immovable property situated outside India.
· Similar freedom is also given to a resident who inherits such security or immovable
property from an ROI.
· An ROI is permitted to hold shares, securities and properties acquired by him while
he was a Resident or inherited such properties from a Resident.
· The exchange drawn can also be used for purpose other than for which it is drawn
provided drawl of exchange is otherwise permitted for such purpose.
· Certain prescribed limits have been substantially enhanced. For instance, residence
now going abroad for business purpose or for participating in conferences seminars
will not need the RBI's permission to avail foreign exchange up to US$.
25,000 per trip irrespective of the period of stay, basic travel quota has been increased
from the existing US$ 3,000 to US$ 5,000 per calendar year.

CHAPTER 10 - MAJOR FINANCIAL AND OTHER INSTITUTIONS

For providing credit and finance and insuring export credit risk, there are 3 primary
institutions i.e. EXIM Bank, ECGC, RBI.
Although there are other commercial banks, nationalized institutions and private
institutions such as IFCI, IDBI, engaged in providing finance to exporter. The major
institutions are EXIM Bank, ECGC, and RBI.

10.1 - EXIM BANK

• Set up by an Act of Parliament in September 1981.

• Commenced operations in March 1982.
• Wholly owned by the Government of India.
• Export-Import Bank of India was set up for the purpose of financing, facilitating
and promoting foreign trade in India.
• Exim is the principal financial institution in the country for co-ordinating working
of institutions engaged in financing exports and imports.
PURPOSE

The EXIM bank was established for the purpose of financing medium and long term
loan to the exporters thereby promoting foreign trade of India.

MAIN OBJECTIVES
To provide financial assistance (medium and long term) to exporters and importers.
To function as the principal financial institution for coordinating the working of
institutions engaged in providing export finance.
To promote Foreign Trade of India.
To deal with all matters that may be considered to be incidental or conducive to the
attainment of above objectives.
FUNCTIONS

The assistance provided by EXIM Bank to the exporters can be grouped under two
heads:
Fund Based Assistance.
Non-Fund based Assistance.

A. FUND BASED ASSISTANCE:

• Assistance to Indian Exporters:

(a) It provides financial assistance to “Deferred credit exports”.
(b) It offers credit facilities to “Deemed Exports”.
(c) It finances “Indian Joint Ventures in Foreign countries”.
(d) Finances units in“EPZ/ SEZ and 100% EOU’s”.
(e) It provides Pre-shipment finance to exporters for procuring raw
materials and other inputs.
(f) It finances export/import of machinery and equipment on lease basis.
(g) It provides Computer Software exporters foreign exchange loan subject
to RBI clearance.
(h) It provides finance facility against deferred credit to exporters of
consultancy, technology and other services.
(i) It provides finance to Indian exporters to undertake various export
marketing activities in India and abroad through Export Marketing
Fund (EMF).
(j) It also operates Export Development Fund (EDF) to finance techno-
economic survey/research or any other study for the development of
Indian Exports.
• Assistance to Indian Commercial Banks:
(a) It provides Refinance Facilities so as to Indian exporters who extend
term credit to importers.
(b) It offers Export Bills Rediscounting Facility to commercial banks in
India who have earlier discounted bills of exporters.

2. NON-FUND BASED ASSISTANCE

• Guarantees and Bonds:

EXIM Bank provides non-fund base assistance in the form of guarantees in the nature
of Bid Bonds, Performance Guarantee etc. These guarantees are provided together
with Commercial Banks.

• Advisory and Other Services:

(a) It advises Indian companies, in Executing Contracts Abroad, and on
sources of overseas financing.
(b) It advises Indian exporters on global exchange control practices.
(c) The EXIM Bank offers Financial and Advisory Services to Indian
construction projects abroad.
(d) It advises small-scale manufacturers on export markets and product
areas.
(e) It provides Euro Financing sources and Global Credit sources to
Indian exporters.
(f) It assists the exporters under Forfaiting scheme.

EXPORT FINANCING PROGRAMMES PROVIDED BY EXIM BANK

EXIM INDIA offers a range of financing programs that match the menu of Exim
Banks of the industrialized countries. However, the Bank is a typical in the universe
of Exim Banks in that it has over the years evolved, so as to anticipate and meet the
special needs of a developing country. The Bank provides competitive finance at
various stages of the export cycle covering:
EXIM INDIA operates a wide range of financing and promotional programs. The
Bank finances exports of Indian machinery, manufactured goods, and consultancy and
technology services on deferred payment terms. EXIM INDIA also seeks to co
finance projects with global and regional development agencies to assist Indian
exporters in their efforts to participate in such overseas projects.

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.
A RANGE OF EXPORT SERVICES PROVIDED BY EXIM BANK

EXIM INDIA provides a range of analytical information and export related services
necessary for globalization of Indian companies. EXIM INDIA through its wide
network of alliances with financial institutions, trade promotion agencies, information
providers across the globe assists externally oriented Indian companies in their quest
for excellence and globalization. Services include search for overseas partners,
identification of technology suppliers, negotiating alliances, and development of joint
ventures in India and abroad.

10.2- EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD.

In order to provide export credit and insurance support to Indian exporters, the
GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was
transformed into export credit guarantee corporation limited (ECGC) in 1964. Since
1983, it is now know as ECGC of India Ltd.

ECGC is a company wholly owned by the GOI. It functions under the

administrative control of the Ministry of Commerce and is managed by a Board of
Directors representing government, Banking, Insurance, Trade and Industry. The
ECGC with its headquarters in Bombay and several regional offices is the only
institution providing insurance cover to Indian exporters against the risk of non-
realization of export payments due to occurrence of the commercial and political risks
involved in exports on credit terms and by offering guarantees to commercial banks
against losses that the bank may suffer in granting advances to exports, in connection
with their export transactions.

OBJECTIVES OF ECGC:

 To protect the exporters against credit risks, i.e. non-repayment by buyers

 To protect the banks against losses due to non-repayment of loans by exporters

COVERS ISSUED BY ECGC:

The covers issued by ECGC can be divided broadly into four groups:
 1. STANDARD POLICIES – issued to exporters to protect then against payment
risks involved in exports on short-term credit.
2. SPECIFIC POLICIES – designed to protect Indian firms against payment risk
involved in (i) exports on deferred terms of payment (ii) service rendered to foreign
parties, and (iii) construction works and turnkey projects undertaken abroad.
3. FINANCIAL GUARANTEES – issued to banks in India to protect them from
risk of loss involved in their extending financial support to exporters at pre-shipment and
post-shipment stages; and
4. SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks which
add confirmation to letters of credit opened by foreign banks, Insurance cover for
Buyer’s credit, etc.

10.3- RESERVE BANK OF INDIA

INTRODUCTION:

The RBI with its head quarters in Mumbai and several regional offices is the central
bank of our country to authorize extend and regulate export credit and transaction
including foreign exchange affairs. RBI does not directly provide export finance to the
exporters, but it adopts policies and initiates measures to encourage commercial banks
and other financial institutions to provide liberal export finance.

The major departments of RBI are:

 Industrial and credit department and
 Exchange control department

These Departments administers various policies related to export finance/credit and

foreign exchange.

SCHEMES OFFERED BY RBI TO ENCOURAGE COMMERCIAL BANKS

TO PROVIDE EXPORT CREDIT TO THE EXPORTERS:

EXPORT BILLS CREDIT SCHEME, 1963: Under this scheme, RBI used to grant
advance to scheduled banks against export bills maturing within 180 days. Now this
scheme is not in operation.

PRE-SHIPMENT CREDIT SCHEME, 1969: Under this scheme, RBI provides re-
finance facilities to scheduled banks that provide pre-shipment loans to bonafide
customers.
EXPORT CREDIT INTEREST SUBSIDIES SCHEME, 1968: Under this scheme,
RBI provides interest subsidies of minimum 1.5 % p.a. to banks, which provide export
finance to exporters, provided that the banks charge interest to exporter within the
ceiling prescribed by RBI. The subsidies are given both against packing credit and
post-shipment.

DUTY DRAW BACK CREDIT SCHEME, 1976: Under this scheme, the exporters
can avail an interest free advances from the bank up to 90 days against shipping bill
provisionally certified by the customs authority towards a refund of customs duty. The
advances made by commercial banks under this scheme are eligible for re-finance,
free of interest from RBI for maximum period of 90 days form the date of advance.

Other approves or sanctions of application made by the exporters with RBI

Extension of time limit for realization of export proceeds.

Deduction in invoice price of exports goods.

Fixation of commission to overseas consignee or agents.

Provision of blanket permit where a lump sum exchange is released for a number of
purposes.

Remittance abroad in respect of advertising, legal expenses etc.

Any other matters relating to foreign trade that require clearance form the exchange
Control department of RBI.

Clearance in respect of joint venture abroad.

EXPORT PROMOTION SCHEMES AND INCENTIVES

Schemes for Concessional Imports
Inorder to reduce or remove the anti-export bias inherent in the system of indirect
taxation and to encourage exports, several schemes have been established which
allow importers to benefit from tariff exemptions, especially on inputs. The
schemes have been summarized as under:
Scheme About the Scheme Objective
Export oriented Offers wide option in Attract large number of
Units locations for exporters to
units under set up their units in these
DTA(Domestic Tariff zones
area)
Export Special enclaves separated Develop infrastructure
Processing from for export
Zones DTA by fiscal barriers production at
internationally
competitive prices and
environment
and economic
development
Special A duty-free enclave to be Act as growth engines
Economic treated that boost
Zones as a foreign territory for manufacturing, augment
trade exports
operations and duties and and generate employment
tariffs
Agri-Export Agri-Export Promote agricultural
Zones Zones exports from
Services which are the country and
expected to remunerative
be managed and returns to the farming
coordinated by community in
state a sustained manner
government/corporate
sector and include various
provisions

Software A software development Facilitate export oriented

Technology unit is production
Parks set up for software of computer software
development ,
data entry and conversion,
data
processing, data analysis
and
control data management
or call
center services for exports
Electronic A unit can be set up for Facilitate export oriented
Hardware manufacture and production
Technology development of of computer hardware
Parks electronic hardware or
electronic
hardware and software in
an
integrated manner

Export Houses/Trading Houses/Star Trading Houses/Superstar

Trading Houses
The objective of the scheme Export Houses, Trading Houses, Star Trading
Houses, Superstar Trading Houses is to give recognition to the established
exporters and large export houses to build up the marketing infrastructures and
expertise required for export promotions.

The registered exporters having a record of export performance over a number of

years are granted the status of export/trading houses or star trading houses subject
to the fulfillment of minimum annual average export performance in terms of FOB
value or net exchange earning on physical export or services prescribed in the
Exim policy.

Category Average FOB/FOR value during the

preceding 3 licensing years (in Rs)
Export House 15 crores
Trading House 100 crores
Star Trading Houses 500 crores
Super Star Trading House/premium 2000 crores
trading house

The exporters who have been granted the status of export house/trading house are
entitled to a number of benefits under the EXIM policy including the following:
 L icense/Certificate/Permission and customs clearances for both imports
and exports on self declaration basis
Fixation of input-output norms on a priority basis
Priority finance for medium and long-term capital requirement as per
conditions notified by RBI
Exemption from compulsory negotiation of documents through banks. The
remittance, however, would continue to be received through banking
channels
100% retention of foreign exchange
Enhancement in normal repatriation from 180-360 days
The registered exporters are provided certain extra benefits.
Learning’s/Suggestions through this project:
• ¨ Export Finance is a very important branch to study & understand the overall
gamut of the international finance market.
• ¨ Availability of favorable Export finance schemes directly impacts the local
trade, encourages exporters, enlarges markets abroad, improves quality of
domestic goods and overall helps the nation boost its exchange earnings.
• ¨ The Government of any nation plays a very vital role in boosting export
turnover. The credit policy of the Indian Government is also changed
depending upon the needs of the exporters, global trade environment etc.
• ¨ ECGC and EXIM Bank take a lot of efforts for Export promotion. The
strategies of these 2 agencies in India should be flexible & their finance
schemes should be constantly synchronized with the changing scene of world
trade. This alone can help Indian exporters to stand competition in world
markets effectively and more gain-fully.
CONCLUSION
This project covers various aspects related to export finance. the need of export
finance depends upon the period at pre-shipment and post-shipment stage. The export
company may need the short term, medium term or long term finance depending upon
the types of goods which are to be exported.
The requirement of finance to any exporter can be classified in two parts.
An exporter requires the short-term finance to meet its need of working capital. The
working capital is used to meet regular and day to day operations in the company
needs of a business firm.
It can be anything like purchasing of raw material, payment of wages and salaries to
employees, expenses like payment of rent, advertising etc.
The exporter may also require term finance. The term finance or term loans, which is
required for medium and long term financial needs such as purchase of fixed assets
and long term working capital. Export finance is short-term working capital finance
allowed to an exporter which can be extended up to the post shipment finance.
Finance and credit are available not only to help export production but also to sell to
overseas customers on credit. For that the ECGC is there to provide the finance to the
exporters.