1703BA009 & International Trade Finance

International trade:
The term trade refers to exchange of goods and services and when it takes place across the
countries, it is called international trade.

Gulf countries for example are endowed with expensive oil beyond what they themselves would
need. But there are suffering the scarcity of industrial goods and food grains. In such; situations,
trade across the boundaries helps to exchange your surplus goods with those who do not have.

Categories of foreign trade

Bilateral- This is foreign trade between two countries.
Multi lateral –This is foreign trade between more than two countries.
Import trade –Is when goods and services are brought from another country.
Export trade –Is where goods and services are sold to another country.
Visible trade –This consists of imports and exports of tangible goods e.g. vehicles’, coffee,
plastics, fruits etc
Invisible trade –This refers to the purchase and sale of services or it is the exchange of services
between countries e.g. telecommunications, Insurance, banking etc.

BASIS OF INTERNATIONAL TRADE

A country specializes in a specific commodity due to mobility, productivity and other

endowments of economic resources. This stimulates a country to go for international trade. The
basis of international trade lies in the diversity of economic resources in different countries.

Comparative Advantage vs. Competitive Advantage

A competitive advantage refers to a company, economy, country, or individual's ability to

provide a stronger value to consumers as compared with its competitors. It is similar to but
distinct from comparative advantage. In order to assume a competitive advantage over others in
the same field or area, it's necessary to accomplish at least one of three things: the company
should be the low-cost provider of its goods or services, it should offer superior goods or
services than its competitors, and/or it should focus on a particular segment of the consumer
pool.
Absolute advantage
-Absolute advantage refers to the ability to produce more or better goods and services
than somebody else. Comparative advantage refers to the ability to produce goods and services at
a lower opportunity cost, not necessarily at a greater volume or quality.
Benefits of International Trade
1. Fuller utilization of Natural Resources: International trade enables the natural resources to
be exploited fully. Under developed countries are not in a position to utilize natural resource
fully. Such countries export their raw materials to developed industrial countries.
2. Cheaper goods: International trade provides cheaper goods to those countries which cannot
produce the particular goods. It is so because every country produces those goods in the
production of which it has to incur less comparative cost. Accordingly, international
specialization or trade facilitates higher level of consumption and therefore better quality of life.
3. Surplus production: International specialization enables every country to dispose off its
surplus production. Some countries produce more goods than their own requirement. They sell
this surplus production in other countries and they avoid the occurrences of deflationary
pressures in the domestic economy.
4. Bulk production and economies of scale: On account of international specialization,
‘different countries specialize in the production of those goods alone in which they enjoy
favorable production conditions. As a result goods are produced in large quantity at low price in
consonance with the economics of scale in the words of Mconnell, "International trade is a
means by which nations can specialize increase the productivity of their resources and thereby
realize a larger output than otherwise.
5. Possibility of Economic Development: Economic development of any countries depends
upon the international trade. Underdeveloped countries can make the optimum use of their
available natural resources and raw materials by imparting machinery and technical equipment
from, the developed countries. They are thus enabled to increase their output and exports and
thereby promote economic development. In the words of Robertson, "International trade is an
engine of growth".
6. International co-operation: Mutual co-operation can be developed on the basis of
international specialization with the different countries. It creates an atmosphere of good will,
cordiality and friendship among the trading countries. According to Henry Cornez, "International
specialization is the greatest civilizing agency.
INTERNATIONAL TRADE BARRIERS

1. Economic Barriers

Trade barriers are government-induced restrictions on international trade. Man-made trade

barriers come in several forms,

 Tariffs
 Non-tariff barriers to trade
 Import licenses
 Export licenses
  Import quotas
 Subsidies
 Voluntary Export Restraints
 Local content requirements
 Embargo
 Currency devaluation
 Trade restriction
2. Ethical Barriers

Despite international trading laws and declarations, countries continue to face challenges around
ethical trading and business practices. Countries continue to face challenges around ethical
trading and business practices, especially regarding economic inequalities and human rights
violations.
Arguments Against International Trade

Capital markets involve the raising and investing money in various enterprises. Although some
argue that the increasing integration of these financial markets between countries leads to more
consistent and seamless trading practices, others point out that capital flows tend to favor the
capital owners more than any other group. Likewise, owners and workers in specific sectors in
capital-exporting countries bear much of the burden of adjusting to increased movement of
capital. The economic strains and eventual hardships that result from these conditions lead to
political divisions about whether or not to encourage or increase integration of international trade
markets. Moreover, critics argue that income disparities between the rich and poor are
exacerbated, and industrialized nations grow in power at the expense of under-capitalized
countries.
Anti-Globalization Movements

The anti-globalization movement is a worldwide activist movement that is critical of the

globalization of capitalism. Anti-globalization activists are particularly critical of the
undemocratic nature of capitalist globalization and the promotion of neoliberalism by
international institutions such as the International Monetary Fund (IMF) and the World Bank.
3. Cultural Barriers

It is typically more difficult to do business in a foreign country than in one’s home country
due to cultural barriers.
 With the process of globalization and increasing global trade, it is unavoidable that
different cultures will meet, conflict, and blend together. People from different cultures
find it is hard to communicate not only due to language barriers but also cultural
differences.
 It is typically more difficult to do business in a foreign country than in one’s home
country, especially in the early stages when a firm is considering either physical
investment in or product expansion to another country.

 Expansion planning requires an in-depth knowledge of existing market channels and

suppliers, of consumer preferences and current purchase behavior, and of domestic and
foreign rules and regulations.

 Recognize useful strategic frameworks and tools for assessing variance in cultural
predisposition, such as Hofstede’s Cultural Dimensions Theory.

Foreign trade in economics

The Meaning and Definition of Foreign Trade or International Trade! Foreign trade is exchange
of capital, goods, and services across international borders or territories. In most countries, it
represents a significant share of gross domestic product (GDP).

Foreign Trade in Economic Growth

Foreign trade plays very important role in the economic development of any country. Pakistan
also exports a lot of agricultural product to other countries and imports the capital goods from
other countries. Therefore, it is not wrong to say that economic development of a country
depends of foreign trade.
 Foreign exchange earning
Foreign trade provides foreign exchange which can be used to remove the poverty and other
productive purposes.
 Market expansion
The demand factor plays very important role in increasing the production of any country. The
foreign trade expands the market and encourages the producers. In Pakistan home market is very
limited due to poverty. So it is necessary chat we should sell our product in other countries.
 Increase in investment
Foreign trade encourages the investor to increase the investment to produce more goods. so the
rate of investment increases.
 Foreign investment
Besides the local investment, foreign trade provides incentives for the foreign investors to invest
in those countries where there is a shortage of investment.
 Increase in national income
Foreign trade increases the scale of production and national income of the country. To meet the
foreign demand we increase the production on large scale so GDP also increases.
 Decrease in unemployment
With the rise in the demand of goods domestic resources are fully utilized and it increases the
rate of development in the country and reduces the unemployment in the world.
  Price stability
Foreign trade helps to bring stability in price level. (All those goods which are short and prices
are increasing can be imported and those goods which are surplus can be exported. There by
stopping fluctuation in prices.
 Remove monopolies
Foreign trade also discourages the monopolies. &here every any monopolist increases the prices,
government allows the import of goods to reduce the prices in the country.
 Removal of food shortage
India is also facing the food shortage problem. To remove the food shortage India has imported
the wheat many times. So due to foreign trade we are solving this problem for many years.
 Agricultural development
(Agricultural development is the back bone in our economy. Foreign trade has played very
important role for the development of our agriculture sector. Every year we export rice, cotton,
fruits and vegetables to other countries. The export of goods makes our farmer more prosperous.
It inspires the spirit of development in them.
 Import of consumer goods
India and Pakistan imports the various consumer goods from other countries, which are not
produced inside the country. Today the shortage of any commodity can be removed through
international trade.

 To improve Quality of local products

Foreign trade helps to improve Quality of local products and extends changes in demand and
supply as foreign trade can create competition with the rest of the world.
 External economics
External economics can also be achieved through foreign trade. The industries producing foods
on large scale in Pakistan and India are enjoying the external economics due to international
trade.
 Import of capital goods and technology
The inflow of capital goods and technology in the less developed countries has increased the rate
of economic development, and this is due to foreign trade.
 Import substitution
These countries not only produce import substitute, but also reduce deficit in balance of payment
of their countries.
 Better understanding
Foreign trade provides an opportunity to the people of different countries to meet, discuss, and
exchange views and ideas related to their social, economic and political problems.
 Dissemination of knowledge
Foreign trade is also responsible for dissemination of knowledge and learning from developed
countries to under developed countries.
 Interdependence
Foreign trade is responsible for creating economic depending and establishing economic interest
in the economy of the countries having trade relations.
 Factors productivity
Through foreign trade the productivity of labour and capital and organization increases. Demand
made them mobile on national as well as international level which helps underdeveloped
countries to develop and maintain a high level of growth of developed count
Balance of Trade

Definition: Balance of Trade (BOT) is the difference in the value of all exports and imports of a
particular nation over a period of time. A positive or favorable trade balance occurs when exports
exceed imports. A negative or unfavorable balance occurs when the opposite happens. Simply
put, if a country exports more than what it imports, for a given period of time, it has a positive
BOT.

Define Balance of Trade: BOT means the discrepancy between countries’s exported goods and
services and its imported goods and services.

Example

Country X exports $1 billion of goods and services for the financial year 2015-2016, while in the
same period it imported $1.5 billion of goods. Thus, this country has an unfavorable balance
because it imports more than it exports. This is typically considered unfavorable because it
shows how little the country produces and how dependent it is on foreign countries.

Calculation:

The formula for calculating the BOT can be simplified as the total value of imports minus the
total value of exports.

Balance of Payments (BOP)

The balance of payments is a statement of all transactions made between entities in one country
and the rest of the world over a defined period of time, such as a quarter or a year. These records
include transactions made by individuals, companies and the government. Keeping a record of
these transactions helps the country to monitor the flow of money and develop policies that
would help in building a strong economy.

In a perfect scenario, the Balance of Payments (BoP) should be zero. That is, the money
coming in and the money going out should balance out. But that doesn’t happen in most cases. A
country’s BoP statement correctly indicates whether the country has a surplus or a deficit of
funds. A BoP surplus indicates that a country’s exports are more than its imports. A BoP deficit,
on the other hand, indicates that a country’s imports are more than exports. Both scenarios have
short-term and long-term effects on the country’s economy.
COMPONENTS OF BOP
Now let’s understand the different components of the BoP. The BoP consists of three main
components—current account, capital account, and financial account. As mentioned earlier, the
BoP should be zero. The current account must balance with the combined capital and financial
accounts.

 Current Account
The current account monitors the flow of funds from goods and services trade (import and
export) between countries. Now this includes money received or spent on manufactured goods
and raw materials. It also includes revenue from tourism, transportation receipts, revenue from
specialized services (medicine, law, engineering), and royalties from patents and copyrights. In
addition, the current account includes revenue from stocks.

 Capital Account
The capital account monitors the flow of international capital transactions. These transactions
include the purchase or disposal of non-financial assets (for example, land) and non-produced
assets. The capital account also includes money received from debt-forgiveness and gift taxes. In
addition, the capital account records the flow of the financial assets by migrants leaving or
entering a country and the transfer, sale, or purchase of fixed assets.

 Financial Account
The financial account monitors the flow of funds pertaining to investments in businesses, real
estate, and stocks. It also includes government-owned assets such as gold and Special Drawing
Rights (SDRs) held with the International Monetary Fund (IMF). In addition, it includes foreign
investments and assets held abroad by nationals. Similarly, the financial account includes a
record of the assets owned by foreign nationals.

CURRENT TRENDS IN INDIA

Major current trends in foreign trade are as follows:

Current trends are towards the increasing foreign trade and interdependence of firms, markets
and countries.Intense competition among countries, industries, and firms on a global level is a
recent development owed to the confluence of several major trends. Among these trends are:

1) Forced Dynamism:
International trade is forced to succumb to trends that shape the global political, cultural, and
economic environment. International trade is a complex topic, because the environment it
operates in is constantly changing. First, businesses are constantly pushing the frontiers of
economic growth, technology, culture, and politics which also change the surrounding global
society and global economic context. Secondly, factors external to international trade (e.g.,
developments in science and information technology) are constantly forcing international trade
to change how they operate.

2) Cooperation among Countries:

Countries cooperate with each other in thousands of ways through international organisations,
treaties, and consultations. Such cooperation generally encourages the globalization of business
by eliminating restrictions on it and by outlining frameworks that reduce uncertainties about
what companies will and will not be allowed to do. Countries cooperate:

To gain reciprocal advantages,

To attack problems they cannot solve alone, and
To deal with concerns that lie outside anyone’s territory.

Liberalization of Cross-border Movements:

Every country restricts the movement across its borders of goods and services as well as of the
resources, such as workers and capital, to produce them. Such restrictions make international
trade cumbersome; further, because the restrictions may change at any time, the ability to sustain
international trade is always uncertain. However, governments today impose fewer restrictions
on cross-border movements than they did a decade or two ago, allowing companies to better take
advantage of international opportunities.

Transfer of Technology:
Technology transfer is the process by which commercial technology is disseminated. This will
take the form of a technology transfer transaction, which may or may not be a legally binding
contract, but which will involve the communication, by the transferor, of the relevant knowledge
to the recipient. It also includes non-commercial technology transfers, such as those found in
international cooperation agreements between developed and developing states. Such agreements
may relate to infrastructure or agricultural development, or to international; cooperation in the
fields of research, education, employment or transport.

5) Growth in Emerging Markets:

The growth of emerging markets (e.g., India, China, Brazil, and other parts of Asia and South
America especially) has impacted international trade in every way. The emerging markets have
simultaneously increased the potential size and worth of current major international trade while
also facilitating the emergence of a whole new generation of innovative companies. According to
“A special report on innovation in emerging markets” by The Economist magazine, “The
emerging world, long a source of cheap la, now rivals the rich countries for business innovation”.

WTO
WTO in international trade?

The World Trade Organization (WTO) is an intergovernmental organization that regulates

international trade. The WTO officially commenced on 1 January 1995 under the Marrakesh
Agreement, signed by 124 nations on 15 April 1994, replacing the General Agreement on Tariffs
and Trade (GATT), which commenced in 1948.
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 Goods and services
 Intellectual Property Rights
 Trade Agreements
 Trade Monitoring
 Dispute Settlement
Exim Policy
Exim Policy or Foreign Trade Policy is a set of guidelines and instructions established by
the DGFT in matters related to the import and export of goods in India. DGFT (Directorate
General of Foreign Trade) is the main governing body in matters related to Exim Policy.
The Export-Import Policy (EXIM Policy), announced under the Foreign Trade
(Development and Regulation Act), 1992, would reflect the extent of regulations or liberalization
of foreign trade and indicate the measures for export promotion. Although the EXIM Policy is
announced for a five- year period, announcing a Policy on March 31st of every year, within the
broad frame of the Five Year Policy, for the ensuring year.

A very important feature of the EXIM policy since 1992 is freedom. Licensing,

quantitative restrictions and other regulatory and discretionary controls have been substantially

eliminated.

The Union Commerce Ministry, Government of India announces the integrated Foreign Trade

Policy FTP in every five year. This is also called EXIM policy. This policy is updated every year

with some modifications and new schemes. New schemes come into effect on the first day of

financial year, i.e., April 1, every year. The Foreign Trade Policy which was announced on

August 28, 2009 is an integrated policy for the period 2009-14.

Export-Import (EXIM) Policy frames rules and regulations for exports and imports of a
country. This policy is also known as Foreign Trade Policy. It provides policy and strategy of the
government to be followed for promoting exports and regulating imports. This policy is

periodically reviewed to incorporate necessary changes as per changing domestic and

international environment. In this policy, approach of government towards various types of

exports and imports is conveyed to different exporters and importers.

Objectives of EXIM Policy:

The principal objectives of this Policy are:

1) To facilitate sustained growth in exports to attain a share of at least 1 % of global merchandise
trade.

2) To stimulate sustained economic growth by providing access to essential raw materials,

intermediates, components, consumables and capital goods required for augmenting production
and providing services.

3) To enhance the technological strength and efficiency of Indian agriculture, industry and
services, thereby improving their competitive strength while generating new employment
opportunities, and to encourage the attainment of internationally accepted standards of quality.

4) To provide consumers with good quality goods and services at internationally competitive
prices while at the same time creating a level playing field for the domestic produce.
 UNIT-II
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INCOTERMS
Incoterms are a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under
sales contracts. They are published by the International Chamber of Commerce (ICC) and are widely used in
commercial transactions.
TYPES OF INCOTERMS
 CIF (Cost, Insurance and Freight)
 CIP (Carriage and Insurance Paid to)
 CFR (Cost and Freight)
 CPT (Carriage paid to)
 DAT (Delivered at Terminal)
 DAP (Delivered at Place)
 DDP (Delivery Duty Paid)
 EXW (Ex Works)

CLF INCO TERMS

CIF stands for Cost, Insurance, and Freight. As defined in Incoterms® 2010, CIF means that the seller is required to
deliver the goods on board the vessel or procures the goods already so delivered.

Rules of Cost Insurance Freight incoterm

The seller is responsible for the contract of the carrier and also for the payment of all, costs of pre-carriage,

insurance, and delivery of the goods to the named port of destination.

The risk of loss or damage to the goods, however, passes from seller to buyer when the goods are on board the

vessel.

This rule is to be used only for sea or inland waterway transport.

How does CIF Incoterm work?

It places the obligation on the seller to organize the movement of the cargo to the named destination. This named

destination may be a mutually agreed location between the buyer and seller.

As the Incoterm CIF may only be used for waterway transport, this destination must be a destination accessible

through waterways and may not include a land-locked destination.

Seller’s obligation

CIF means that the seller is obligated but not restricted to :

 Taking care of export customs clearance formalities at origin
 Entering into relevant contracts of carriage with the various carriers
 Arranging and paying for the transportation of the goods from door to the named and agreed destination
 Obtain and pay for cargo insurance
 Handle any and all export permits, quotas, special documentation, etc. relating to the cargo
 Paying for the loading and unloading costs of the cargo on/from the ship

Buyer’s obligation

CIF means that the seller is obligated but not restricted to :

 Handle any movement past the agreed place of destination
 Cover the risk to cargo from the time the seller delivers the cargo on board the ship
 Handle any and all import permits, quotas, special documentation, etc. relating to the cargo
 Handle import customs clearance and all related formalities

FOB

FOB - Free On Board (2000 and 2010)

This term means that the seller delivers when the goods pass the ship's rail at the named port of shipment. This
means the buyer has to bear all costs & risks to the goods from that point. The seller must clear the goods for export.
This term can only be used for ocean transport. If the parties do not intend to deliver the goods across the ship's rail,
the FCA term should be used.

Characteristics

By using FOB the seller clear the goods for exports and delivers when the goods have passed the ship’s rail at the
agreed port. This term is only used for water transportation either sea or inland water. If both parties do not agree to
have goods delivered on board, then FCA is the term to be used.
This term was commonly used when commodities were sold and carrier confirmed the reception of goods
“on board”. When goods are packed in contenerized cargo, then FCA is the most recommended term to use. Because
goods will be delivered in the container terminal prior to be loaded on the vessel. The term is used in commodities
like oil, bulk cargo or grain. There is a common misuse of this term when goods are loaded on a truck, in that case
FCA is the right term to use. In FOB, origin terminal handling charge and all other cost associated to move the
goods on board are paid by the seller.
Seller and Buyer obligations
A. THE SELLER'S OBLIGATIONS
1. Provision of goods The seller must deliver the
goods, provide commercial invoice or an equivalent
electronic document, provide evidence of conformity
or proof of delivery
2. Licences, authorisations and formalities The
seller must provide export licenses or local
authorisations for exporting goods
3. Contracts of carriage and insurance Contract of
carriage on standard industry terms at buyers risk
Contract of insurance without obligation
4. Delivery The seller must deliver the goods on
board on the vessel nominated by the buyer
5. Transfer of risks The seller is responsible until
goods are in place as in the agreed time
6. Costs The seller must pay all cost until the cargo
has passed the ship’s rail, including customs, duties
and taxes and other port related charges including
export customs inspection as per local regulations
documentation
7. Notice to the buyer The seller must provide
notice of the goods delivered on board at sellers
expense
8. Proof of delivery, transport document or
equivalent electronic message The seller must
deliver at buyer’s expense the proof of delivery on
board the ship at the named port of shipment. The
B. THE BUYER'S OBLIGATIONS
1. Payment The buyer must pay the price of goods
as agreed in the contract of sale
2. Licences, authorisations and formalities The
buyer must get any export license and import permit
for the export of goods
3. Contracts of carriage and insurance Contract of
carriage at buyers expense at port of origin until final
destination Contract of insurance without obligation
4. Taking delivery Take ownership of the goods
after loaded into the vessel
5. Transfer of risks The buyer must assume all risk
of loss of damage from the time the goods have been
delivered on agreed vessel. If the vessel is delayed or
doesn’t show, buyer must pay for additional
expenses
6. Costs The buyer pays from the time the goods
passed the ship’s rail, carriage, insurance and import
duties and taxes to final destination
7. Notice to the seller The buyer must give notice of
goods loaded on named vessel at loading point as
per agreement
8. Proof of delivery, transport document or
equivalent electronic message The buyer must
receive the proof of delivery (usually a
transportation document like bill of lading or sea
 seller must assist in obtaining a transport way bill of lading)
document. EDI communication as proof of delivery
is acceptable

9. Checking - packaging – marking The seller 9. Inspection Unless it’s a mandatory at origin, pay
must bear the cost of checking, quality control, any pre-shipment inspection
measuring, weighing, counting, packing of goods
and marking. If special package is required, the
buyer must inform and the seller and agreed on extra
expenses

10. Other The seller must timely provide assistance 10. Other The buyer must pay all costs and charges
in securing information and documentation required incurred in obtaining the documents or equivalent
for transportation and final delivery electronic messages

PAYMENTTERMS

LETTER OF CREDIT

A letter issued by a bank to another bank (especially one in a different country) to serve as a guarantee for payments
made to a specified person under specified conditions.

Revocable

Notably, the Letter can be canceled or amended at any time by either the buyer or the issuing bank without any
formal notification. What must be remembered, is that in the latest version of the UCP 600, revocable Letters of
Credit have been removed for any transaction undertaken within their jurisdiction.

Irrevocable

In contrast, unless all three parties (Buyer, Seller, and Third Party) can agree to terms, then the Letter cannot be
canceled.

Confirmed

In this case, the Letter of Credit will be granted “confirmed” status once the exporters confirming bank has added
it’s obligation to the issuing bank. With this in mind, the obligation will either be in the form of a guarantee or
Assurance of Payment.

Unconfirmed

On the contrary, an Unconfirmed Letter of Credit is only guaranteed by the issuing bank – meaning there is no
confirmation from the exporter’s advisory bank. However, this type of confirmation is most common in LC’s,
although in areas of economic instability or political uncertainty, payment could be at risk.
Transferrable

In scenarios where the Beneficiary is an intermediary for the real suppliers of goods and services, the payment will
need to be transferred to the actual suppliers. In this way, it is transferable to the next supplier in the chain of trade.

Un-transferrable

On the other hand, an Un-transferrable Letter of Credit, payments are prevented from being transferred to any third
parties, as the beneficiary is the recipient.
Straight

A Straight LC or ‘Straight Credit’ is defined by the Bank only being allowed to make payment to the beneficiary
named in the Letter. In short, they are not permitted to send any payment to any third parties or intermediaries.

Consequently, the named beneficiary must present documents to the paying bank on or before the expiration date,
otherwise, the Letter is nulled.

Negotiable

The issuing bank is obligated to pay the beneficiary but also permitted to make payments to any third party
nominated by the original beneficiary.

Difficulties and problems with Letters of Credit

 Letters of credit are used in 11-15% of all global export transactions, accounting for over a trillion US
dollars per year.
 It is now difficult to get technical checkers and it is questionable whether small Letters of Credit are
profitable;
 It is questionable if they are 100% self liquidating;
 There is more regulation surrounding trade finance generally;
 More risk is attached to some countries that banks are now prevented from dealing with;
 LCs are now sometimes used for payment and not seen as just a guarantee for payment;

PRE SHI-PMENT & POST SHIPMENT FINANCE

Meaning: Pre-Shipment finance refers to the credit extended to the exporters prior to the shipment of goods for the

execution of the export order.

Post-Shipment Finance Post-shipment finance refers to the credit extended to the exporters after the shipment of
goods for meeting working capital requirement.
Appraisal and Sanction of Limits
Before making any an allowance for Credit facilities banks need to check the different aspects like product
profile, political and economic details about country. Apart from these things, the bank also looks in to the status

report of the prospective buyer, with whom the exporter proposes to do the business

The Bank extended the packing credit facilities after ensuring the following"

 The exporter is a regular customer, a bona fide exporter and has a goods standing in the market.
 Whether the exporter has the necessary license and quota permit (as mentioned earlier) or not.
 Whether the country with which the exporter wants to deal is under the list of Restricted Cover
Countries(RCC) or not.

“Before disbursing the bank specifically check for the following particulars in the submitted documents"

 Name of buyer
 Commodity to be exported
 Quantity
 Value (either CIF or FOB)
 Last date of shipment / negotiation.
 Any other terms to be complied with

Purpose: It is granted for s as purchase, processing, manufacturing or packing of goods as defined by the Reserve

Bank of India.
Short-term finance is extended for meeting working capital requirement and medium and long-term for exports on
deferred payment
Amount of Finance: Generally, the amount of packing credit does not exceed the FOB value of the goods to be
exported or their domestic value whichever is less.

Post-shipment finance can be given to the extent of 100% of the invoice value of the goods exported

Beneficiary: It is extended to the Indian exporters or deemed exporters from India.

It is extended to the Indian exporters as well as the overseas importers.

Form of Finance:
 It is extended in the following forms:

 Extended Packing Credit Loan;

 Packing Credit Loan (Hypothecation and Pledge);

 Secured Shipping Loan.

 It is extended in the following forms

 It is extended in the following forms:
 Discounting of export bills,
  Against undrawn balances
 Against retention money;
 Against goods on consignment.

Period of Credit: It is granted for a maximum period of 180 days and can be further extended for a period of 90

days with a prior permission of the RBI.

It can be granted for short. medium and long term for periods ranging from 90 days to 12 years depending upon the
nature of exports.

Documentary Evidence: It is extended against the documentary evidence of confirmed export order or letter of

credit.
it is extended against the evidence of shipping documents certified by the customs authorities.

Lending Institutions: It is generally extended by commercial banks in India.

Short-term post-shipment credit is extended by the commercial banks while medium and long-term credits are
extended by the EXIM bank.

Eligibility

Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an
exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not
have export orders in their own name.

In this case some of the responsibilities of meeting the export requirements have been out sourced to them by the
main exporter. In other cases where the export order is divided between two more than two exporters, pre shipment
credit can be shared between them.

FORFEITING

In trade finance, forfeiting is a service providing medium-term financial support for export/import of capital goods.
The third party providing the support is termed the forfeiter.

Forfeiting is a means of financing exporters use that enables them to receive immediate cash by selling their
medium- and long-term receivables -- the amount an importer owes the exporter -- at a discount. The exporter also
eliminates risk by making the sale without recourse, which means the exporter has no liability regarding the
importer's possible default on the receivables. The forfeiter is the individual or entity that purchases the receivables,
and the importer then pays the receivables amount to the forfeiter. A forfeiter is typically a bank or a financial firm
that specializes in export financing.

CHARACTERISTICS OF FORFAITING
Applicability
Suited for exports of capital goods, commodities, and large projects on medium and long-term credit (180 days to
seven years or more)

Risk
Risk of non-payment inherent in an export sale is virtually eliminated

Pros
Eliminates the risk of non-payment by foreign buyers.
Offers strong capabilities in emerging and developing markets

Cons
Cost is often higher than commercial lender financing.
Limited to medium and long-term transactions and those exceeding $100, 00024

Three Additional Major Advantages of Forfeiting

 Volume: Forfeiting can work on a one-off transaction basis, without requiring an ongoing volume of
business.
 Speed: Commitments can be issued within hours or days depending on details and country.
 Simplicity: Documentation is usually simple, concise, and straightforward
 Forfeiting eliminates all risk o---------f the exporter not receiving payment.( protects against credit risk,
transfer risk, and the risks posed by foreign exchange rate or interest rate changes.)

DEFERRED PAYMENT TERMS (LETTER OF CREDIT)

A deferred letter of credit allows the buyer some extra time before payment is required from the importer's
bank.

Example of Deferred Payment Letter of Credit

Dyna Ltd., a UK based company sold goods to Tyra Ltd., an American based company. Dyna Ltd.
expressed in the agreement that they would be able to ship the goods only after one month. Agreeing to the
terms, Tyra Ltd. in consultation with its bank issued a Deferred Payment Letter of Credit. As per the terms
of the Letter of Credit, the bank agreed to pay Dyna Ltd. on presentation of Deferred Letter of Credit after
60 days of shipment date. Therefore, if Dyna Ltd. ships the goods from the UK on 1 July 2017, it can make
its claim after 30th August 2017 from the bank with the Deferred Payment Letter of Credit after submitting
the necessary documents.

EXIM BANK

The Export-Import Bank (Exim bank) was set up on January 1, 1982 to take over the operations of
international finance wing of the IDBI and to provide financial assistance to exporters and importers and to
 function as a head financial institution for coordinating the working of other institutions engaged in
financing of exports and imports of goods and services.

Organisation and Management:

The Exim Bank is managed by a Board consisting of a Managing Director who is the Chairman and 17
Directors representing different areas. They are Secretary to the Department of Industrial Board, Commerce
Secretary, Finance Secretary, Secretary to Banking, Secretary IDBI, Secretary ECGC Secretary RBI, 3
directors representing other scheduled commercial banks, 4 Directors chosen from export community and 3
others representing ministries and departments.
Functions of Exim Bank:

The important functions of Exim Bank are as follows:

(i) It provides direct financial assistance to exporters of plant, machinery and related service in the form of
medium-term credit.
(ii) Underwriting the issue of shares, stocks, bonds, debentures of any company engaged in exports.
(iii) It provides rediscount of export bills for a period not exceeding 90 days against short-term usance
export bills discounted by commercial banks.
(iv) The bank gives overseas buyers credit to foreign importers for import of Indian capital goods and
related services.
(v) Developing and financing export oriented industries.
(vi) Collecting and compiling the market and credit information about foreign trade.

ECGC

The ECGC Limited (Formerly Export Credit Guarantee Corporation of India Ltd) is a company wholly
owned by the Government of India based in Mumbai, Maharashtra. It provides export credit insurance
support to Indian exporters and is controlled by the Ministry of Commerce

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

OVERS 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.

Standard policies

ECGC has designed 4 types of standard policies to provide cover for shipments made on short term credit:

1. Shipments (comprehensive risks) Policy – to cover both political and commercial risks from the date of shipment
2. Shipments (political risks) Policy – to cover only political risks from the date of shipment
3. Contracts (comprehensive risks) Policy – to cover both commercial and political risk from the date of contract
4. Contracts (Political risks) Policy – to cover only political risks from the date of contract

Financial guarantees

Exporters require adequate financial support from banks to carry out their export contracts. ECGC backs the
lending programmes of banks by issuing financial guarantees. The guarantees protect the banks from losses on
account of their lending to exporters. Six guarantees have been evolved for this purpose:-
 Packing Credit Guarantee
 Export Production Finance Guarantee
 Export Finance Guarantee
 Post Shipment Export Credit Guarantee
 Export Performance Guarantee
 Export Finance (Overseas Lending) Guarantee.

IMPORT LICENSE
An import license is a document issued by a national government authorizing the importation of certain
goods into its territory.
Import licensing policy-
Introduction

While the majority of the goods are freely importable, the Exim Policy (2007) of India prohibitsimport of certain
categories of products as well as conditional import of certain items. In such asituation it becomes important
for the importer to have an import license issued by the issuing authorities of the Government of India.

Import License Issuing Authority

In India, Import License is issued by the Director General of Foreign Trade. DGFT Delhi officeis situated in Udyog
Bhawan, New Delhi 110011.

Validity of Import License

Import Licenses are valid for 24 months for capital goods and 18 months for raw materialscomponents, consumable
and spares, with the license term renewable.

Categories of Import

All types of imported goods come under the following four categories:

Freely importable items: Most capital goods fall into this category. Any product declaredas Freely Importable Item
does not require import licenses.
 Licensed Imports:

T h e r e a r e n u m b e r o f g o o d s , w h i c h c a n o n l y b e i m p o r t e r u n d e r a n import license. This

category includes several broad product groups that are classified asc o n s u m e r g o o d s ; p r e c i o u s a n d
s e m i - p r e c i o u s s t o n e s ; p r o d u c t s r e l a t e d t o s a f e t y a n d security; seeds, plants and animals;
some insecticides, pharmaceuticals and chemicals; s o m e e l e c t r o n i c a l l y i t e m s ; s e v e r a l i t e m s
r e s e r v e d f o r p r o d u c t i o n b y t h e s m a l l - s c a l e sector; and 17 miscellaneous or special-category items.

Canalised Items:

There are certain canalised items that can only be importer in India through specified channels or
government agencies. These include petroleum products (to be imported only by the Indian Oil Corporation);
nitrogenous phosphatic, potassic andcomplex chemical fertilizers (by the Minerals and Metals Trading Corporation)
vitamin-A d r u g s ( b y t h e S t a t e T r a d i n g C o r p o r a t i o n ) ; o i l s a n d s e e d s ( b y t h e S t a t e
T r a d i n g Corporation and Hindustan Vegetable Oils); and cereals (by the Food Corporation
of India).

Prohibited items: Only four items-tallow fat, animal rennet, wild animals
a n d unprocessed ivory-are completely banned from importation.

Category of Importer
On the basis of product to be imported and its target buyer, importers categories are divided intothree groups for the
purpose of obtaining import licensing

1.Actual Users

An actual user applies for and receives a license to import of any item for personal use rather than for business or
trade purpose.

2. Registered exporters;

Defined as those who have a valid registration certificate issued byan export promotion council, commodity board or
other registered authority designated by the Government for purposes of export-promotion.

The two types of actual user license are:-

1. General Licenses : This license can be used for the imports of goods from all countries,except those countries from
which imports are prohibited;

2. Specific Licenses: This license can only be used for imports from a specific country.

FINANCING METHODS OF IMPORT OF CAPITAL GOODS

 Asset-Based Loan: Factoring accounts receivable is simply selling your credit accounts or accounts receivable to a
commercial finance company, bank, or other financing company. Accounts receivable are sold at a discount, usually
80-90% of the face value of your credit accounts. The factoring company gives you an advance payment, for a small
fee of 2-3%, for the accounts you would normally have to wait on for payment.

 Use Inventory: Even though inventory financing can be expensive, it is a very effective way of financing this type
of business activity. You use your current inventory to secure a loan to allow you to buy the imported goods your
customers desire. This allows you to increase your inventory without impacting your cash flow as long as you think
you can service your debt.There are three types of inventory financing you can pursue depending on your needs.
You can use a blanket inventory lien, floor planning, or field warehousing.
 Purchase Order Financing: This is similar to factoring your accounts receivable. It goes one step further. You take
your invoices or purchase orders and assign or sell them to a commercial finance company, which assumes the risk
and the task of billing and collecting. After the products are manufactured, the commercial finance company collects
from the customers, takes its cut of the proceeds, and pays you the profit. Purchase order financing is certainly not as
cheap as a bank loan. If banks aren't loaning money, however, it is an option. If your profit margin is high enough
for the goods you are importing, then purchase order financing may be for you. It is important, with purchase order
financing, that you have a good supply chain and creditworthy customers.