International Banking

Central

banks do not deal with customers who have international

banking requirements. Therefore, commercial banks have been

authorized as dealers to undertake foreign exchange transactions.

Banks

normally classify their international banking operations into the

following two segments.

1.

When the dealing is between a bank and a merchant (could be exporter, importer, individuals) when the dealing is between banks (inter-bank segment)

2.

Contd.
The

transactions pertaining to the first segment are carried

out through select branches of the bank that have foreign exchange facility.
At

the same time, banks trade with each other in different

currencies in the inter bank market in order to square up

their positions undertaken for their customers in branches.

Foreign Exchange Management Act (FEMA)

The FEMA 1999 has come into effect from 1/6/2000 and the erstwhile
Foreign Exchange Regulation Act (FERA) has been repealed from that date.

The objective of FEMA is not to control and restrict foreign exchange transactions, rather to regulate them so as to facilitate

external trade and payments and to develop and maintain a

foreign exchange market and to keep it in order.

Contd.
While

the Central Government is authorized to make rules under

the Act, the RBI is vested with powers vide section 47 of the Act

to notify Regulations to carry out the provisions of the Act and

the Rules. The RBI issues its notifications under the series FEMA/RB.
Banks

are required to accept deposits from Persons resident

outside India (i.e. Non residents) only in the manner prescribed under FEMA and rules and regulations made under this Act.

Contd.

Section 2(u) of FEMA provides the definition of Person resident in India as

i) a person residing in India for more than 182 days during the course of the
preceding financial year, but does not include a person who stays outside India on taking up employment /carrying on business outside India

ii) any person or body corporate registered or incorporated in India

iii) an office, branch or agency in India owned or controlled by a person resident outside India iv) an office, branch or agency outside India owned or controlled by a person resident in India.

Contd.

An individual to qualify as resident of India must have stayed in

India for more than 182 days during the last financial year and he must be staying in India for employment, business, vocation or for any other purpose indicating his intention to stay in India for an uncertain period.

As per section 2(w) of FEMA, Person resident outside India

means a) Indian citizens staying outside India for employment/vocation/ business/for other purposes b) Foreign citizens who stay outside India c) Entities registered /

incorporated outside India

Contd.

Person of Indian origin (PIO) : A foreign national of any country other than Bangladesh or Pakistan can be considered as a person of

Indian origin, if he satisfies any one of the following conditions :

a) He is a person who at any time held an Indian passport b) He or either of his parents or either of his grandparents was a citizen of India c) He /she is a spouse of an Indian citizen or a spouse of any person

referred to in sub clause (a) or (b) above.

Contd.

A non resident(i.e. person resident outside India) can be considered as a Non resident Indian if he is either a i) citizen of India or ii) person

of Indian origin.

Overseas Corporate Body means a company, partnership firm, society, other corporate body owned directly or indirectly to the extent of 60 % by non resident Indians and includes overseas trusts in which not less than 60% beneficial interest is directly held by non resident Indians directly or indirectly but irrevocably.

Contd.

All transactions in foreign exchange can be broadly classified into two categories namely a) Capital Account transactions and b) Current Account transactions.

All transactions undertaken by a resident that alters his assets or liabilities outside India are called Capital Account transactions. Similarly all transactions undertaken by a non resident that alters his asset or liability in India are also called Capital account transactions.

Contd.
Examples:

If a person resident in India buys/sells immovable property situated

outside India

A person resident in India invests in securities/ shares issued in foreign currency outside India

A resident borrows in foreign exchange from outside India A non resident keeps his deposits with a bank in India

A non resident purchases/ sells immovable property situated in

India.

Contd.

A Current Account transaction does not affect the balance sheet items (i.e. assets/ liabilities) of a resident outside India or of a non resident in India.

All foreign exchange transactions undertaken by a resident that do not alter his assets/ liabilities are called current account transactions.

Similarly all foreign exchange transactions undertaken by a non resident that do not alter his assets/ liabilities in India are called current account transactions.

Contd.
Examples:

If an exporter receives payment towards the export made by him, it is a revenue receipt for him ( i.e. it will credit Export Sale Account, which is a profit and loss account item and not a balance sheet item).

Similarly, payment for imports, payment of interest on loans/ deposits

from non residents, payment of dividend on investments made by non

residents are all revenue items.

Remittances for living expenses of parents/ spouse/ children living abroad or remittances in connection with travel, education, medical expenses etc. are classified as current account transactions.

Contd.

Authorized Person : Any entity (i.e. company/ firm/ individual) appointed by RBI to deal in (i.e. buy and sell) foreign exchange is

called an Authorized Person.

Depending upon the powers/ authority delegated by RBI to them, the authorized persons can be broadly classified into four categories, namely Authorized Dealer category I

Authorized dealer Category II

Authorized Dealer category III Full fledged Money Changers.

Contd.

Generally Scheduled banks (Commercial banks, State Co-op banks, Urban co-op banks) can be appointed as Authorized Dealer Category I. They can do all current and capital account transactions as delegated to them by the RBI.

Authorized Dealers Category II ( financially strong RRBs) can deal

with specified non-trade related current account transactions like

release of foreign exchange for private or business visits abroad, overseas medical treatment, overseas education etc.

Authorized Dealer category III (NABARD, IFCI) are required to do

foreign exchange transactions for their own requirements and not for the public at large.

Contd.

Full fledged Money changers do the exclusive activity of changing foreign currency into home currency and home currency into foreign

currency.

Different categories of branches of an Authorized Dealer: The branches which are not only permitted to handle all types of business, but also maintain and operate Banks nostro account at foreign centre are called Category A branches.

Contd.

The branches permitted to handle all types of foreign exchange transactions but not maintaining nostro accounts at foreign centers are called Category B branches. However they are permitted to operate banks nostro account at

foreign centers.

Category C (Non AD) branches are not permitted to handle

foreign exchange transactions and are required to route the

same through their designated AD branches.

FEDAI (foreign Exchange Dealers Association of India):

FEDAI is an association and self regulating body of all authorized dealers. It is registered as a non profit making company under provisions of section 25 of the Companies Act.

The main objective of the Association is to further the interests of the Authorized Dealers and to regulate their dealings both interse and with public, brokers, RBI and all other bodies.

As a self regulating body, it frames ground rules called FEDAI Rules to be

followed by all its members. These rules are notified with the approval of
RBI. All authorized dealers are required to submit an undertaking to RBI for adhering to these rules.

Contd.
Nostro Account (Our Account with Foreign Correspondents Abroad) :

If Indian Overseas Bank maintains a Current Account with American Express bank, New York , this Account is called the Nostro Account of IOB with AMEX, NY. The literal meaning of Nostro account is our account with you.

A nostro account is maintained in foreign currency i.e. currency of the country where the account is maintained.

The main objective of opening the nostro account is to help settlement

of transactions in that foreign currency.

Contd.
Vostro Account (Foreign Correspondents Accounts with us in Rupees):

Bank of Ceylon can maintain an account with Indian Overseas Bank

and such an account will be called Vostro Account. The literal meaning of Vostro account is Your account with us. Vostro account is maintained in rupees. The balance in this account is freely convertible to foreign exchange and is also freely repatriable without

any reference to RBI.

Contd.

Loro Account : It is just the nostro account of another bank. If bank A

and bank B are maintaining their nostro accounts with AMEX bank
and bank A wants to transfer say USD 50000 from its nostro account to nostro account of bank B, it would write to AMEX bank- Debit our account by USD 50000 and Credit Loro account- B bank

R return is a fortnightly return submitted by all Category A and

Category B branches of an AD to the RBI giving the details of sales and purchases of foreign exchange made during the relevant period. It

is submitted on 15th and last date of each month. It is the principal

source for compilation of Balance of Payment data of the country.

ENC Statement: It is a fortnightly statement submitted by AD branch to RBI giving details of all export bills handled during the fortnight.

XOS Statement: It is a half yearly statement to be submitted by AD

to RBI giving details of all export bills outstanding beyond prescribed

period of six months from the date of export.

BEF Statement: It is a half yearly statement submitted by AD to RBI giving details of default in non submission of Bills of Entries in case of import.

IBS statement : IBS stands for International Banking Statistics. All

branches are required to submit the statement quarterly and the Head Office is required to consolidate the data of the bank and submit the same to RBI. The return provides the details of international assets and international liabilities held by the country as a whole.

Contd.
In case of a buying transaction, the authorized dealer buys/ acquires foreign exchange from the customer and makes payment in

rupees. Example : i) All inward remittances in foreign exchange

whether by way of drafts/ cheques/ travelers cheques ii) All inward remittances due to export In case of a sale transaction, the authorized dealer gives/ delivers foreign exchange and takes payment in rupees. Example: i) All

outward remittances ii) All imports give rise to sale transaction.

All authorized dealers are required by RBI to give Direct Quote for exchange rates. e.g. 1 USD = Rs 49.13, 1 EUR = Rs 67.58

Contd.

When a quotation gives both the buying and selling rate, it is called a two-way quote. E.g. 1 USD = Rs 49.06/ Rs 49.20

In case of a direct quote, the lower rate is the buying rate (Bid Rate)
and the higher rate is the selling rate (Offer Rate).

Bid rate means the rate at which the authorized dealer bids to buy foreign exchange in the market and offer rate means the rate at which the authorized dealer offers to sell foreign exchange in the market.

The mean of Bid rate and Offer rate is called Middle Rate. The price
difference between Bid and Offer rates is called Basis Point Spread.

Contd.

Buying rates are classified into two categories i) TT Buying Rate is applied to those buying transactions where the AD has already received the foreign exchange to the credit of its nostro account. Example : Payment of FCNR deposit, realization of foreign cheques/ bills sent on collection basis and the nostro account of the AD is credited by its correspondent, Cancellation of DD ii) Bill Buying Rate is applicable to those buying transactions for

which the AD buys the foreign exchange today, but gets the credit to
its nostro account at a future date. Example: Purchase of export bills.

Contd.

Selling rates are of two types: i)TT Selling Rate is applied to all transactions which do not involve

handling of documents ( i.e. Bills of exchange and other instruments

for collection) Examples: Issue of Drafts/ TTs. ii)Bill Selling Rate is applied for transactions which involve handling of Bills of exchange Payment of Import Bills. / other documents by the AD. Example :

Contd.

A Forex transaction to buy or sell currency can be broadly categorized as a spot transaction or a forward transaction.

A spot transaction is a contract to buy or sell a quantity of a foreign

currency for immediate settlement or value. The exchange rate for such a transaction is known as spot rate.

In the case of a forward transaction, the purchase or sale is agreed, but will take place at some time in the future, thereby fixing the rate for a

future exchange of currencies.

Contd.
Every forward contract has three main elements.

It is a binding agreement to buy or sell a specific quantity of one currency in

exchange for another.

The rate of exchange is fixed when the contract is made. The contract is for delivery of the currency, at an agreed future time, either a

specific date or any time between two specific dates, depending on the
contract terms.

A currency is said to be at a premium, when it is costlier for a forward value date.

A currency is said to be at a discount, when it is cheaper for a forward value date.

Notional rate :

Where an AD receives foreign currency for opening/ crediting foreign currency accounts like FCNR deposit account, RFC deposit account,

EEFC deposit account, he is not converting the same to rupees.

However, for accounting purpose, the foreign currency deposit must be expressed in rupees by applying some assumed rate. Such an

assumed rate which is used for notionally converting foreign currency

deposits to rupees is called notional rate.

A notional rate is not a real rate, but an assumed rate to give notional value to foreign currency deposits for accounting purposes. All banks fix the notional rate in line with the Weekly average of Daily rates for different currencies advised by FEDAI on every Friday.

Contd.

Cross Rate : If the rate of a foreign currency is given in terms of another foreign currency, it is called a cross rate. e.g. in India, the rate

quotation USD/GBP is a cross rate quotation.

Base Rate is the rate at which bank is able to get funds from market either for sale or purchase.

Merchant Rates are rates actually quoted to public based on ongoing market rate at the time approached by the customer. Merchant rates

are computed from base rate by loading margins.

Deposit Accounts:

RBI has given general permission to all ADs to open three types of accounts in the name of residents outside India. These are NRO, NRE and FCNR(B) accounts.

NRO ( Non resident ordinary) a/c can be opened by any person resident outside India, whether he is NRI or not., but NRE and FCNR(B) a/c can be opened only by NRIs.

The balance in NRO a/c can be repatriated outside India only to the extent permitted by RBI, but the balance in NRE and FCNR(B) is freely repatriable without any reference to RBI.

NRO and NRE a/c are maintained in rupees, but FCNR(B) is maintained only in certain foreign currencies viz. USD, EUR, GBP, JPY, CAD and AUD.

NRO and NRE a/c schemes permit all types of deposit accounts, but under FCNR(B), only term deposits can be opened.

EEFC(Exchange earners foreign currency) a/c: Exporters of goods and services and other beneficiaries of inward remittances are permitted to open EEFC a/c in foreign currency.

Non resident ordinary account (NRO Account) :

NRO account can be opened in the name of any non residents. NRO account can be opened in the name of a foreign tourist during his

short visit to India, which should be closed at the time of his departure
from India.

Where an Indian citizen having a resident account, leaves India and becomes a non resident, his resident account should be automatically designated as NRO account. The account holder can also credit any

other local receipts due to him (like rent, sale proceeds of house).
Where a non resident Indian receives legitimate dues / income in India, he can open a NRO a/c with such funds.

Contd.

NRO a/c can also be opened by foreign exchange remitted through normal banking channels. Example: foreign DD, foreign Travelers

cheques, foreign currency notes.

Account can be opened jointly with another non resident or resident. While crediting interest on NRO deposits, banks are required to deduct tax at source.

CRR/ SLR is required to be maintained on NRO a/c just like domestic

deposits.

NRE (Non resident External) Rupee account:

NRE a/c can only be opened in the name of non resident Indians. The documents required for opening NRE account are i) A/c opening form

ii) photocopy of valid passport iii) undertaking letter iv) photograph.

The undertaking letter contains a declaration that the account holder would inform the bank when he returns to India for permanent stay.

Joint A/c: Permitted to be opened along with any other NRI. Relationship between joint holders should be recorded. It cannot be

opened along with a resident.

Nomination facility is available in case of NRE a/c.

Contd.

Source of funds for opening the a/c : This can be by way of DD/TT/ International money order/ personal cheques in any permitted

currency. Account can also be opened by transfer of funds from NRE/

FCNR a/c of the account holder / of others.

RBI has allowed banks to allow temporary overdraft up to Rs 50000. The overdraft and interest should be paid back by fresh remittance from abroad/ transfer from NRE/ FCNR account , within two weeks

of the date of advance.

Contd.
Credits which are freely allowed in NRE a/c :

Remittance from abroad through approved banking channel

Interest and sale proceeds of certain securities e.g. NSC, Government

securities, Mutual Fund units which were purchased to the debit of NRE/FCNR a/c or from remittances from abroad.

Credit from local sources like rent, interest, dividend, pension etc, provided AD is satisfied that the fund represents current income and

income tax has been paid on such income.

Contd.
Permitted debits : Local payments/ disbursements, remittances abroad, transfer to NRE/ FCNR a/c are freely permitted.

Loans against NRE account:

Banks have been prohibited from granting fresh loans or renew existing loans in excess of RS 100 lacs against NRE deposits and FCNR deposits, either to the depositor himself or to third parties. The loan amount should not be credited to NRE/ FCNR(B) accounts nor

should it be remitted outside India.

SLR/ CRR is to be maintained on NRE balances.

FCNR (B) Foreign Currency Non Resident (Banks)Scheme

FCNR scheme was introduced to eliminate the exchange risk faced by a non resident making deposit in rupees, as under the FCNR scheme

the deposit is kept in foreign currency, interest and maturity proceeds

are paid in foreign currency and therefore there is no exchange risk for the depositor.

Eligibility to open Account : Can be opened only by NRIs. Overseas

companies, firms, societies and trusts cannot open such accounts.

Type of A/c: Only Term deposits can be accepted under the scheme. The period of deposit should be minimum one year and maximum five years. SB, CD a/c cannot be opened under FCNR(B) scheme.

Contd.

Designated Currency of Deposit: The a/c can be opened only in six designated currencies. USD, GBP, EUR, JPY, CAD, AUD

Date of opening of deposit: FCNR(B) deposit can be opened only

after the receipt of funds in Banks nostro account. Where the depositor tenders Travelers cheques or personal cheques (drawn abroad) , it should be sent to the correspondent bank abroad for credit to banks nostro account and FCNR(B) can be opened with effect from the date of such credit.

Contd.
Depositor becoming resident : When the NRI returns to India for permanent settlement, the deposit can be allowed to run as it is till maturity. Alternatively, the depositor can convert it to a rupee deposit and such conversion will be treated as a premature closure and will be done at TT Buying rate.

Contd.
Loan against FCNR(B) deposit:

Banks have been prohibited from granting fresh loans or renew

existing loans in excess of Rs 100 lacs against NRE and FCNR(B)

deposits either to depositors or third parties.

Loans can be sanctioned in rupees in India to the depositor against his deposit. Such loans can be repaid out of remittance from abroad or out of the maturity proceeds of the deposit or from funds held in his NRO a/c. ADs are also permitted to sanction loans in foreign currency against FCNR(B) deposits.

The period of the loan should be within the maturity period of the

deposit and adequate margin should be maintained.

Contd.
Management of FCNR(B) funds by AD: The ADs are

allowed to manage the exchange risk of FCNR(B) funds

by deploying the same in the following ways : i) Invest in foreign currency treasury bills abroad ii) Lending to other ADs iii) Sanctioning pre shipment credit in foreign currency (PCFC) to exporters

RFC (Resident foreign Currency ) Account:

This deposit scheme is meant for persons of Indian nationality or origin (NRIs and PIOs)who return to India for permanent settlement, after being

resident outside India for a continuous period of not less than one year.

Type: Account can be Term deposits or SB or CD. Balance in RFC a/c can be freely remitted abroad for any bonafide use of the account holder or his dependents and investments abroad.

No credit facility can be sanctioned against RFC deposits. Advantages: i)Interest income on the deposits is completely free from income tax ii) Availability of foreign exchange for future use iii) Conversion to Rupee at any time.

RFC (Domestic) Account:

A person resident in India can open this a/c out of foreign exchange acquired from the following sources.

i) Currency notes/ Travelers cheques acquired

ii) Foreign exchange received through normal banking channel

The a/c will be in the form of Current Account only and shall not bear any interest.

Letter of Credit:

A Letter of Credit (LC) is an instrument for settling trade payments and is an arrangement of making payment against documents.

Under this arrangement, a bank, at the request of a customer,

undertakes to pay a third party by a given date, according to agreed stipulations and against presentation of documents, the counter-value of goods or services shipped.

An LC is a commitment on the Banks part to place an agreed sum at

the sellers disposal on behalf of the buyer under precisely defined

conditions.

Contd..

The importer knows that the negotiating bank will not effect payment to the seller unless and until the latter tenders the documents strictly in

accordance with the terms of the LC.

The seller is assured of getting payment as long as he presents the documents as per LC terms to the negotiating bank.

International Chamber of Commerce (ICC) is a non governmental business organization, founded in 1919 . It formulates business

policies and mechanics for promoting world trade.

Contd..
ICC has come out with standard set of rules for operation of letters of credits, guarantees, collection bills etc. and has published

the same in form of brochures.

UCP 600 :The standard set of rules published by ICC for operation of documentary letters of credit is known as Uniform Customs & Practice for Documentary Credit. The current version, UCP 600 came into force in July 2007.

Contd..
The different parties involved in an import transaction with a LC can be the following:

Applicant : Normally, the applicant is the buyer of the goods or the

importer who approaches the bank for opening the LC. Issuing Bank or Opening Bank: The bank, which issues the LC i.e. the bank, which opens the LC and undertakes to make the payment. Beneficiary (Exporter): A beneficiary is the seller of the goods, who has to receive the payment from the applicant. An LC is issued in the sellers favor in order to enable him or his agent to obtain

payment on submission of the stipulated documents.

Contd..

Advising Bank : An advising bank is one which advises the LC to the beneficiary, thereby assuring the genuineness of the LC. It is normally

situated in the country/ place of the beneficiary. The advising bank

can also be the beneficiarys bank.

Confirming Bank: A confirming bank is one which adds guarantee to the LC opened by another bank, thereby undertaking the responsibility of payment/ negotiation/ acceptance under the credit, in

addition to that of the issuing bank.LC confirmation is not mandatory

and is desirable in some cases where the parties and the banks are not internationally reputed.

Contd..
Reimbursing Bank: This is the bank which is authorized to honor the reimbursement claim in the settlement of negotiation/acceptance or payment lodged with it by the paying, negotiating or accepting bank. It is normally the bank with which the issuing bank has an account

from which payment is to be made. (Nostro account)

Flowchart depicting a typical import transaction with letter of credit:

The importer signs a purchase contract for buying certain goods. The contract would include, among others, specific clauses relating to

means of transport, credit period offered, latest date of shipment,

Incoterms to be used etc.

The importer requests his bank to open an LC in favor of the exporter. The importers bank opens an LC as per the application. The opening bank forwards the original LC to the advising bank in the exporters country.

Contd..

The advising bank, after satisfying itself about the authenticity of the credit, forwards the same to the exporter.

The exporter scrutinizes the LC to ensure that it confirms to the terms

of the contract.

In case any terms are not as agreed, the importer would be asked to make the required amendments to the LC.

In case, the LC is as required, the exporter proceeds to make

arrangements for the goods.

The exporter effects the shipment of goods.

Contd..

The exporter prepares export documents and submits to his bank. The exporters bank (negotiating bank) verifies all the documents with

the LC.

If the documents are in conformity with the terms of the LC, and all other conditions are satisfied, then the bank negotiates the bill.

The exporter receives the payment in his bank account if he wants post shipment finance.

The LC issuing bank receives the bill and documents from the
exporters bank.

Contd..

The importer receives the bill from the LC issuing bank and checks the documents. He then accepts/ pays the bill. On acceptance/

payment, he gets the shipping documents covering the goods

purchased by him.

The LC issuing bank reimburses the amount to the negotiating bank, if the documents are in order.

Exporter receives the payment upon realization, if he has not availed

post shipment finance.

Types of LC :

Irrevocable LC: This is a basic form of LC most commonly used in foreign trade. An irrevocable LC cannot be revoked or amended

without the consent of all parties thereto. Under UCP all LCs are
deemed irrevocable.

A Confirmed LC is confirmed/ guaranteed by a bank other than the issuing bank.

An unconfirmed LC is one where the advising bank or another bank

forwards the LC to the exporter without adding its own undertaking to

make payment on due date, but confirming the LCs authenticity.

Contd..

Revolving LC: Under the terms and conditions of a revolving LC, the amount under the revolving LC can revolve in relation to time or

value. This type of LC provides for delivery of goods in installments

and at intervals. Such a credit will stipulate certain ceiling amount in addition to the date of expiry.

Deferred Payment LC: This type of LC allows the issuing bank to make payment to the beneficiary in installments. The timing and

amount of these installments are predetermined. The buyer gets an

extended time for payment.

Contd..

Transferable LC: In some cases, the seller or beneficiary may not be the actual producer of the goods. In such cases, the seller (exporter)

may request the buyer (importer) to open a transferable, irrevocable

LC. On receipt of the same, he will instruct his bank to transfer the credit in favor of the actual third party supplier.

Standby LC: Standby LCs are used in lieu of bank guarantees in some countries e.g. the USA.

Contd..

Back to Back LC: This is a variant of the transferable LC. In this case, instead of transferring the original LC to the third party supplier, the

exporter uses the LC as security to establish a second LC in favor of the

third party supplier. In other words, when an inland LC is opened by a bank in the exporters country backed by the security of another LC (original LC

by importer), it is known as back to back credit.

Anticipatory LC : It provides for payment to the beneficiary at the pre shipment stage. Under this LC, a Red clause LC provides for payment up

to processing and packing goods for shipment, while a Green clause LC

provides for payment up to point of loading for shipment.

Contd..

It is important to note that all parties in the LC transaction deal with Documents and not with Goods. Documentary collection under the LC may be carried out in two different ways.

Documents against Payment: Documents are release to the importer only against payment. These are also known as sight collection and correspond to cash.

Contd..

Documents against Acceptance: Documents are released to the importer only against the acceptance of a draft. hey are also known as

a term collection and correspond to credit sales.

INCOTERMS can be expanded as International Commercial Terms. They are standard trade definitions most commonly used in International sales contracts. Each Incoterms rule is referred to by a three letter abbreviation. Examples: FOB CFR & CIF

FOB (free on board): The price quoted is such that the seller has to
bear all costs till he loads the goods on the ship named in the contract.

Contd..

CFR (cost and freight) : It means the price quoted is such that the seller has to bear all costs and expenses till the goods are loaded on

board plus freight up to the destination named in the contract.

CIF(cost, insurance & freight): The price quoted by the seller includes all costs till goods are loaded on board and the freight and transit insurance up to the named place of destination.

Trade Finance:

The export credit scheme to finance exporters is intended to facilitate exports through providing working capital finance to exporters at

internationally competitive interest rates. Banks are permitted to

decide appropriate rates of interest based on the current guidelines, borrowers creditworthiness, risk perception and market practices.

Pre shipment Finance (Packing Credit) is a short term working capital finance provided by a bank to an exporter enabling the latter to

procure raw materials, to process/ manufacture the goods, arrange for

transport and warehouse and for shipment of the finished goods. The exporter can avail the PC either in rupees or in a foreign currency.

Features of Packing credit in local currency:

The PC availed against an LC/ order will be adjusted by the Bank from out of the exports made against that LC/order. The bank makes

an endorsement made in the original LC/ order to prevent the exporter

from availing a PC with another bank, while allowing the credit.

Running account facility : This is a facility granted to exporters with good track record to avail PC without lodging an LC/order. He borrower will have to produce the LC/order to the bank within a

reasonable time.

Contd..

The liquidation of PCs outstanding in the running account is done on a first in first out basis.

A PC can be given for a period not exceeding 360 days.

This type of credit is generally granted at a concessional rate of interest.

Refinance can be available by banks from the RBI against the PC granted to the exporters up to a period not exceeding within 180 days.

Features of Pre shipment Credit in Foreign Currency (PCFC) :

The foreign currency loans (FCL) granted to the exporters by the banks are known as PCFC. The salient features of PCFC are similar to

rupee export credit. However, PCFC is available only for cash exports
in foreign currencies USD, GBP, JPY and EUR

For lending under the PCFC scheme, banks can use the foreign currency balances available with them, in EEFC account/ RFC account/ FCNR accounts.

PCFCs can be made as running accounts.

Contd..

PCFC is self liquidating in nature and is liquidated by purchasing/ discounting of related bills.

Post shipment Finance is defined as any loan or advance granted by a

bank to an exporter of goods/ services from the date of extending the credit after the shipment of goods/ services to the date of realization of the export proceeds. It is a working capital finance extended against the evidence of a shipping document for the purpose of

financing the export receivables. Post shipment finance is extended in

the following manner.

Negotiation: (Payment of export bill and document under LC)

Contd..

Purchase: (Providing the finance against export documents without LC, covered by drafts drawn at sight at spot bill buying rate.

Discount ( Providing finance against export documents covered by

drafts without LC drawn on usance at the usance bill buying rate.

Advances against export bills sent on collection basis.

Contd..

After making the shipment, the exporter presents to his bank the det of export documents, such as bill of lading/airway bill, invoice, bill of exchange, insurance policy, certificate of origin, inspection certificate, packing list etc. The bank then verifies the documents and confirms that the shipment of goods is as per the terms of LC/ confirmed order.