Export Finance

EXPORT PRICING

The price policy:

The primary motive of all economic

or business activity is to make profit. The
business may be in one’s own country or
relate to selling abroad. Profitability, in
turn, depends upon a suitable price policy.
In the realm of export marketing, price
continues to be an important tool of
promoting sales abroad not with standing the sophistication achieved in non-
price competition techniques. Export pricing has become a highly specialized
and sophisticated technique. “Too often the exporter prices his goods for
foreign markets by merely adding freight and insurance charges to his domestic
prices, forgetting all other factors that enter into a C&F or CIF quotation.
Sometimes this result in a price that is too high, occasionally it is too low’.
It is imperative to adopt a most suitable price policy for success in international
marketing. It, in turn, is influenced by two major factors, i.e. costs and the
market situation. The assistance available against export adds another
dimension to the pricing policy. The economy of scale and technological
improvement achieved as a result of export sales are still other factors as a
result of export sales are still other factors influencing price decisions.

Parameters of Pricing

Costs & Market Situations:

Costs as well as market situation relating to goods or services to be sold
abroad are a little different. Many additional factors influence their
determination in comparison to those having bearing on pricing for domestic
markets. The raw materials content though may be same in the goods for
domestic sales as well as for selling abroad, the extra care and supervision
which the export goods require result in higher cost, thereby, affecting their

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

price. Then, packing, marking and labeling are some times quite different
resulting in much higher cost for export goods.
Market situation is obviously different in other countries than prevalent at home.
While the latter may be sheltered not much influenced by production and
marketing trends elsewhere, international markets are constantly under
pressure from sellers (exporters) around the world, besides domestic
producers. There is an intense competition whereby the price of the product to
be sold in such a situation has to be highly competitive.

Export Assistance
The availability of various types of assistance against export of a
particular product is another and most significant factor which influences export
pricing. Assistance and facilities to export are now granted in almost all
countries in one form or the other though their intensity or level and the manner
or level and the manner or characters vary. Taxes or cess levied on domestic
production and selling are either refunded or not levied at all on goods sold
abroad.
For example, the excise or customs (import) duty paid on
indigenous/imported raw materials and components used in an export product
are refunded in the form of customs duty drawback. Then, the goods otherwise
subject to excise duty for domestic-selling, can be exported without payment of
duty. Wherever such duty is paid, a refund of the same can be claimed after
exports of such goods.
Export goods are also not subject to sales tax or even octroi duty in case of
several products.
Import or raw materials and components allowed in the form of REP or
Additional import license also result in monetary benefits not only in terms of
their lower prices in comparison to the price of indigenous items, but also on
their sale/transfer to other manufacturers.
Economy of Scale
Export production also results in economy of scale. Since the size of
international markets is unlimited whereby one can increase production to any

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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extent, the principle of increasing returns applies soon than in case of goods
sold in the domestic market. It results in economy on various counts, thereby,
lowering the cost or production and consequently lower price or goods.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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Technological Improvements
The company engaged in export marketing is constantly exposed to the
technological improvement continuously being effected in advanced countries.
It brings in modern manufacturing techniques which result in higher production
and better quality. The goods so produced not only fetch more sales but also
better price.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

Export Costing Methods

Each of the pricing parameters discussed above should be taken into

consideration whatever method of costing is followed. The usual methods of
costing include:-
 The cost plus approach
 The contribution pricing or marginal costing
 The value-added costing

The cost-plus Approach

This approach or costing method implies that the price is fixed at a level
which reflects the average total cost of each unit of output plus a fixed profit
margin. Average cost is the total of all costs divided by the quantity actually
produced or which a unit anticipates it will produce. In arriving at their selling
price, a margin of profit is added to such average cost.
For example:-
Raw material cost including Rs.
Cost of components, etc. 5,000
Labour cost 3,000
Packing cost 1,500
Transport cost 500
_______________________
Total: 10,000
_______________________
Total number of units produced 5,000
Average cost per unit
i.e. 10,000/5000 2.00
Profit margin say 10% 0.20
Selling price 2.20

Obviously, the cost plus method is simple and tend to be adopted by the
trade.

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Cost oriented vis-à-vis Market Oriented. However, the cost-plus method is cost
oriented rather than market oriented and, thus, avoids an important pricing
parameter of market situation discussed above. “It provides the manufacturer
with a very limited picture of his true cost situation. He is prevented from
devising a price policy which will maximize the profitability of his operations.
The manufacturer operating in international markets where there is fierce
competition, is unable to adopt realistic approach to pricing following the cost-
plus approach.
Though the objective of pricing strategy is to secure the optimum price
i.e. the price which gives the maximum return, profit does not accrue on unit
basis. The objective should be to obtain maximum profit from the overall activity
of a firm rather than maximization of the unit price of individual products or
product lines. What is relevant is the total contribution made by a product
towards fixed cost and profit. This depends on the contribution ratio and volume
of sales. While assessing the profitability of exports sales it is necessary to
view cost, price and sales volume in an integrated manner. Since exports
normally results in additional sales turnover, export price should comprise only
those items of cost which are attributable to export production.
Marginal Costing or Contribution pricing
A more sophisticated approach is, therefore, called for pricing any export
product. The use of the principle of marginal costing or contribution pricing is,
therefore, considered much better than the cost plus approach method as the
former takes care of only those costs which are more and directly relevant to
the manufacture of export products. The overhead costs which are a cost of
being in business, and not attributable directly to the production of an export
unit are normally excluded. These should be recovered from the marginal profit
a company receives on the sales of its products.
The total cost in manufacturing a product for the purpose of marginal costing
are, thus, divided into two groups, viz:-
(i) Fixed costs which remain static irrespective of the level of
production and sales.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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(ii) Variable costs which vary with the volume of goods manufactured
and sold.
Fixed and variable costs may accordingly, comprise the following:-

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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Fixed costs
 Cost of land, building or rent
 Lighting, heating, cooling, etc. (of office premises)
 Office expenses
 Management of the business
 Sales staff not directly attributable to export sales
 Research & development
o Plant & machinery
 Advertising, sales promotion not relating to export business
Variable costs
 Raw materials, components used in the export products
 Labour directly employed in the production of export product
 Fuel and power (as distinguished from electricity and
heating/cooling) used in production
 Transportation on carriage of goods to go downs or factory
 Packing, labeling and marking of goods
 Commission paid to salesmen and agents.
 Sales expenditure on maintaining staff for export sales and
promotion therof
 Expenses incurred in maintaining separate branch offices
including those overseas
 Sales promotion expenses on publicity, etc.
The benefits available in direct or indirect form against the export of
product of product should be deducted from the marginal cost arrived on this
basis of above given factors. The normal profit margin may be added as
otherwise the export activity may actually result in loss to the unit unless of
course there is a situation when selling without adding profit margin is better
than that of marking no sale at all.
Determining Factors. The principle of marginal costing, however, holds good
only if;
(i) surplus capacity is available in the unit,

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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(ii) the unit is not wholly/largely export-oriented i.e. its

total/major share of production is not exported,
(iii) capacity of its domestic market to bear fixed costs is not
limited,
(iv) There is scope for price maneuverability in domestic
market.
In the absence of the above given factors, fixed costs may be ignored only in
taking short term price decisions.
Moreover, the above mentioned approach of cost plus or marginal
costing only gives an ex-works price plus a marginal profit to which other
expenses incidental to exporting like carriage of goods to port,
consular/documentation charges, export (customs) duty, inspection fees, etc.,
have to be added while quoting to foreign buyers. These charges are detailed
later in this Chapter.

Value Added Costing

The method of value added costing takes care of the value which is
added to the product at its every stage of production and distribution channels.
The value added by a manufacturer is the difference between the value of the
product to the final consumer and the raw materials and consumable stores
involved in its production, plus his purchases of light and power used during the
manufacturing process. The following example illustrates the value added
principle.
Rs.
Cost of raw materials Rs.10,000
Cost of consumable stores, 5000
Fuel, power etc.
Total = 15,000
Total sales = 20,000
Value added = 5,000

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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Value added of Rs. 5000 includes the contribution made by various

channels including profit.
This principle of value added costing is, however, not applied extensively
on account of its being too simple which even does not tell as to what should
be the selling price. It just assumes a sales price which may not be realistic at
all.

APPROACH TO PRICING

Approach to pricing, by and large, depends upon the experience of the

exporting unit and the sophistication it wants to achieve. The calculation of the
effect of various factors in the cost plus approach or marginal costing principle
is after all complex more so on account of the non availability of
data/information about production costs and market situation. Accordingly, a
unit’s approach to export pricing is different being categorized as.
(i) Probe pricing
(ii) Cost-plus pricing
(iii) The “leader” pricing
(iv) Competitive Pricing
(v) Hot and Cold Bids
(vi) Denial Bids
(vii) Flexible Pricing
(viii) Penetration pricing
(ix) Static Pricing
(x) Price Skimming
(xi) Market-Oriented Pricing
Probe pricing aims at getting feed back information for determining the
price which could ultimately be quoted for an export product. The “leader”
pricing pre-supposes a price less the premium for being “the leader” of units
currently selling in overseas markets. However, it is difficult to adopt as
information on “the leaders” price is not normally available.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

The competitive pricing is one which is likely to be quoted by other

sellers (exporters). It can be found on the basis of past experience. The “hot
and cold” or “denial” bids approach is adopted to keep the competitors of the
guard or to keep your buyers interest in your offer even if his quotation is
unacceptable at the time of its presentation.
Where the company offers the same product at different prices to
different customers, it is flexible pricing which aims at maximizing returns within
a specific time. When the same price is offered to all customers, it is static
pricing. Penetration pricing aims to capture a share of a market by offering a
low price in the 1st instance.
If the exporter chargers a high price hoping to maximize profits on a new
product before competition emerges, it is known as price skimming. In export
oriented pricing, the price is set, following market research, to determine
demand, price trends and competitors.
Export pricing is, thus, highly complex. There is no single magic formula
for accurate and realistic export pricing. It has to be a mixture of different
pricing principles and an appropriate pricing approach.

Export Terms of Delivery

What ever principle and approach to export pricing you adopt, you must
also consider the “terms” on which you will deliver the goods to overseas
buyers. These “terms” will also have an effect on the price you quote.
The Three Conditions
Terms of delivery lay down precisely and legally three conditions:-
1. What charges and expenses will be incurred by both the
exporter and the importer?
2. What and where delivery of the goods takes place.
3. When and where the title to the goods passes from the
exporter to the importer.

Incoterms

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Standard “terms of delivery” have been in use for many years, although
their precise definition varies from country to country. The international
chamber of Commerce (ICC) has codified them under the name “Incoterms”.
These terms have been revised and put into force from 1 st July, 1990, having
been first issued in 1936 and revised in 1953, 1967, 1976, 1980, 1983, 1990
and 2000. Depending on the terms that have been chosen, the buyer (importer)
and the seller (exporter) will know exactly which know exactly which risks they
must insure against since the transfer of responsibility from one to the other is
specifically defined in each case. The documents that will be presented in the
context of a documentary credit, are chosen to prove that the seller has fulfilled
his share of responsibility, and the carrier and forwarder knows under exactly
which conditions they are to do their jobs.
It may be ‘stressed that “Incoterms” only relate to trade terms used in the
contract of sale and thus do not deal with terms sometimes of the same or
similar wording which may be used in contracts of carriage particularly as terms
of various charter parties.
Common Terms
1. Ex-Works4 (or Ex-Factory, Ex-Mill, Ex-Plantation, Ex-Warehouse)
2. Free Carrier (FCA)
3. Delivered Docks
4. F.A.S. (Free Alongside Ship)
5. F.O.B. (Free on Board) or FOB (Airport) or FOA
6. CFR Cost and Freight (named port of destination)
7. FOR and FOT
8. FRC-Free Carrier (named point)
9. C&F Cost & Freight
10. C.I.F.- Cost, Insurance, and Freight (named port of destination)
11. CIF & c
12. CIF & C or FOB & c
13. CIF & c & i
14. CIF ex

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15. CPT Carriage paid to (named port of destination)

16. DAF Delivered at Frontier (-named place)
17. DDP Delivered Duty Paid (named place of destination)
18. DDU- Delivered Duty Unpaid (named place of destination)
19. DEQ Delivered Ex-Quay (Duty Paid) named port of destination)
20. DES Delivered Ex-ship (named port of destination)
21. Franco Quay (Named port of Destination)

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
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Export Pricing Computation

Different Approach
Whatever ‘terms of delivery’ you adopt and whichever factors may your
pricing policy, the export price itself will be computed in a different manner
particularly by:-
Manufactures Exporters
Merchant Exporters/Export
Houses/Trading or Star Trading Houses
State Trading Enterprises (STEs) for export of canalized products.
Though the principle of computation of export price may be same, the actual
quotation is also influenced by other factors like:
(i) Delivery Schedule. While prices are lower for short deliveries, a
higher price is quoted for goods to be supplied over a longer period as
costs generally go up over a period of time. Moreover, go up over a
period of time. Moreover, short deliveries bring revenue gain by way of
saving interest on capital investment.
(ii) Terms of Payment. While softer payment terms where credit is
granted for a longer period results in pegging the price high at least to
the extent of interest payable, lower prices are quoted for cash sale.
(iii) Motivation Pricing. Many a times it is the “push” of the motivation
rather than the “pull” of the retail price which succeeds in getting
increased sales. More so in case of consumer products where it is
advisable to allow the distributor to have a sufficient motivating margin.
The classic example is of sale of soft drinks by the petrol pumps
attendants to motorists.
The new entrant found that his competitor fixed a retail price of Sh. 1-a
round figure for the convenience of the motorists and fixed a 10%
discount for the petrol pump owner. A most daring strategy was adopted
by introducing a new drink and pricing at Sh. 1.40 with the same 10%
discount to the pump owner by another manufacturer. In a short time,
the attendants were pushing only the new drink as the motorists were

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

paying Sh. 1.50 and asking the boys to keep the change. There was
double motivation by this pricing as the owner made higher profit and the
attendants were directly motivated. It took quite a time for the first
manufacturer to stage a come back that too with a longer bottle and at
an expense.
(iv) Size of Order. If the order is expected to be big enough to keep
the manufactures or exporters busy for quite a long time, a lower price is
usually quoted than for a smaller order. After all, every company is
interested in securing long term business contracts even if it results in
comparatively less profit on account of lower price quotation.

Pricing by Merchant Exporters/Export Houses, etc.

The computation of export price by merchant exporters/export houses is
comparatively easier than by manufacturers/exporters. The distinction arises on
account of the fact that while the former purchases the goods from
manufacturers on a pre-determined price, the latter has to take into
consideration different elements of manufacturing which the merchant need not
care for. The merchant usually adds his margin of profit and other expenses
incidental to exporting. But he has to take care of indirect taxes particularly
sales tax and excise duty to which the goods may be subject to and are not got
exempted, when purchased from other manufacturers. In case of
manufactures, however, these two of the products as he need not pay them at
all. He of excise duty and the question of sales tax does not arise as the goods
are not sold in the country.
Since the merchant purchases the goods from other manufacturers, he
may have to pay both the excise duty as well as sales-tax until and unless the
manufacturer agrees to share the excise bond along with the merchant, and
accepts the sales tax declaration on the relevant form.
Pricing by Manufacturers
As discussed in detail earlier, the manufacturers have to take into
consideration the various export costing methods and decide upon the
approach to pricing in one of the manners suitable to the market as well as the

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

product. The merchant exporters/export houses need not go into all these
details. Moreover, the manufacturer’s pricing policy will depend upon the
volume of the expected order and production capacity.
Pricing of Canalised products
In regard to products export of which is canalised through one or the other
agency, an altogether different approach is adopted though the general factors
upon which the pricing depends are necessarily taken into consideration.
Pricing of such products is determined on the basis of various other factors not
directly relevant to the manufacturing or selling cost.
Export Costing Work Sheet
Many items in the export transaction add cost on account of extra
packing charges, freight-inland, ocean or air, documentation and so on. If the
export terms of delivery which you select or foreign buyer wants you to adopt,
make you responsible for some or all of these costs, you may have to pass
them on to your buyer or else factor them into the price of your goods.
Since all these factors vary from one product to another depending upon the
requirement of each buyer and his location, it is better to keep an export
costing work sheet. It is more than a check list of various items of cost which
may come up in export transaction. A costing sheet is your work sheet each
time you have to make an export quotation. A costing sheet also ensures that
all possible charges are added into your quotation, and it will give you an exact
record of your quotation to each foreign buyer.
A sample of export costing work sheet is attempted here. It may be
suitably modified by the exporters to meet their requirements.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
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ELEMENTS OF EXPORT PRICING & ESSENTIAL REFERENCES

A. Reference Information
Exporter’s Information Customer’s Information
1. Reference No……………………. 1. Reference No………………………
Date……………………………… Date………………………………..
2. Exporter Offer/Quotation No……. 2. Name………………………………
And Date………………………… 3. Address……………………………
4. Executives…………………………
5. Phone……………………………..
6. Cable……………………………..
7. Telex/Fax…………………………
B. Product Information
1. Product………………………… 6. Customs Tariff Schedule No……..
Schedule No…………………… 7. GSP Schedule No…………………
2. No. of Units…………………… 8. Packing Standard
3. Specification…………………... 9. Terms of Delivery
(i) Size………………………… (i) FOB
(ii) Dimensions……………….. (ii) C & F / CPT
(iii) Weight…………………… (iii) C.I.F / CIP
4. Standards (iv) others
5. Excise Tariff 10. Export License, if required.

C. Export Assistance
1. Drawback Schedule Sub-Serial No. 4. Reference of Brand Rate Letter
No..
2. Rate of Drawback dt………

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3. Brand Rate, if any 5. Any other Assistance (specify)

D. Dispatch Information
1. Delivery Date…………………… 6. Space Reservation by:
2. Whether part-shipment allowed…
3. Mode of Dispatch 7. Clearing & Forwarding Agent’s
(i) Sea (i) Name
(ii) Air (ii) Address
(iii) Road (iii) Executive
(iv) Post (iv) Telephone
4. Port of Loading (Name) (v) Cable
(i) Seaport (vi) Telex
(ii) Airport (v) Fax
(iii) Land Customs station 8. Pre-shipment Inspection by:
5. Port of Destination (Name) (i) Name & Address
(i) Seaport (ii) Inspection Date………
(ii) Airport 9. Excise Clearance by:
a. Name………………….
b. Date……………………

E. Product Cost
Unit of Account…………………………………….
For Manufacture-Exporter for Merchant-Exporters/Export Houses
(on the principal of marginal costing) purchasing from others
Per Unit Per Unit
1. Raw Materials 1. Purchase price…………………
Indigenous 2. Sale-tax paid…………………..
Imported 3. Excise duty paid2………………
2. Bought-out components 4. Packing cost……………………
Indigenous 5. Commission to agent, if any
Imported 6. Marginal profit
3. Labor(Direct)
4. Finishing, Polishing, etc, charges

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5. Fuel, power & water

6. Other manufacturing expenses
7. Export packing charges
8. Marginal profit
I. Ex-Works price (per unit)
For Manufacture: Rs. …………For Merchant-Exporter: Rs. ………
Total price
(No. of units X per unit price)
Rs. ….. Rs. ………….
Common for both Manufacturer & Merchants
II. F.O.R. Port Town (Total price i.e. No. of units x per unit price)
1. Ex-Works price
Plus
2. Inland transport cost
(i) freight
(ii) forwarder’s charges
III. FOB Port Town
A. Cost & Expenses incidental to exporter ting
1. F.O.R. Port Town as it II above Plus
2. Demurrage charges, if any.
3. Loading charges at transport cos./rail go down
4. Transport charges from road/rail go down to
shipping agent’s go down
5. Unloading and subsequently loading charges at
shipping agent’s go down
6. Transport charges from shipping agent’s go
down to docks,
7. Unloading charges at docks
8. Godown charges
9. Port Trust charges
10. Forwarding and/or shipping agent’s charges
11. Pre-shipment inspection charges

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
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12. consular invoice charges, if any

13. Measurement/weighing charges
14. Rest rapping charges of opened cases
15. Long load/heavy load charges, if any
16. Export duty, if any
17. Octroi duty
18. Charges, if any, on account of:-
(a) Overseas distributors/agents commission4
(b) Cost of providing after sales service
(c) Cost of spare parts
(d) Financing charge, if exporting on credit terms
(e) Direct administrative and selling expenses
(f) Commission to be paid to canalizing agencies or Export
Corporations if goods are exported through them.
19. Other charges, if any, like bank charges
Sub- Total A (11 to 19)
Minus (-) B. Direct Export Assistance
20. Benefit from DEPB/DFRC Schemes
21. Duty drawback, if any
22. Refund of excise duty, if paid
23. Refund of octroi, if paid
24. Other assistance, if any,
Sub-Total B (20 to 24)----------------------
Total III (A-B) = FOB Port Town---------
Iv. C&F
1. FOB port town as at III above, plus
2. Ocean freight from port of shipment to port of
destination.
Total IV (C&F) ------------------
v. CIF
1. C&F as at IV above, plus
2. Marine Insurance

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
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Total v (CIF) in local currency

Convert to invoicing currency……… (INR* Exchange value.)

Currency
Export price to be quoted to a foreign buyer should invariably be either in
a currency asked for by him or international currency like US dollars or pound
Sterling. It may if need be, can also be quoted in Indian rupees.
Accounting Unit
Since accounting units of weights and measurement differ from country
to country, these should be clearly stated in the sale contracts. For example, an
‘English ton’ or ‘long ton’ is 2,240 pounds as against a ‘metric ton’ or ‘tonne’ as
it is called, 2,205 pounds, an ‘American ton’ or ‘short ton’ 2,000pounds and a
‘Spanish ton,’ 2,271.64 pounds. Similarly, a hundred weights in Britain is 112
pounds as against 100 pounds in United States.
It is also necessary to specify whether price quoted to a foreign buyer
refers to gross or net weight.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

FOREIGN EXCHANGE AND RISK MANAGEMENT

Finance and marketing are inseparable in the conduct of international

business. The relationship between the two functions permeates the entire
marketing plan, reaching into almost every marketing plan, reaching into almost
every marketing activity. The large size of many international transactions, the
great distances involved, the many sovereign nations, and the limited
knowledge about customers all combine to require close coordination between
the financial and marketing departments.
Finance and Export Tread
Export financing starts after the order from the buyer has been received,
the export order has been accepted, manufacturing for the export order begins,
and the shipping documents are issued; and it ends at point when the goods
are cleared. Export finance refers to the financing of the goods from the home
port to the foreign port and the inland centers, and remittances accruing from
the sale of these goods. Financing of exports is a specialized business
demanding the operations of institutions that are engaged in it and have special
skills in handling the intricacies of foreign exchange transactions. In export
trade, where business dealings are carried on between parties who may be
separated by many thousand miles, it is necessary to have a clear
understanding of how and when the buyer will pay the exporter for the goods
which have been ordered; and it is up to the exporter to indicate the way in
which he wants the importer to pay him. The development of the export
business is, in one form or another, a capital investment, and must be paid for
by the exporter. In the case of export trade, credits generally cover specified
shipments of merchandise and are represented by documents without which
ownership of the merchandise cannot hands.
Sources of Funds for International Marketing
Funds are needed by firms with foreign subsidiaries for physical facilities
and for working capital to supply inventories, credit, and operating expenses.
Even when the company limits its international activity operating expenses.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

Even when the company limits its international activity to exporting, it needs
funds for inventory, credit, and promotional activities.
Internal Sources of Funds
The multinational firm may be able to raise a portion of the required
funds internally. Some of these funds may be obtained from the parent
company’s operations and investments, while others might be generated by the
affiliate itself or other subsidiary operations within the corporate structure. The
parent organization is an important financial sources as it provides equity for
the subsidiary or loan funds directly to the local unit.
External Sources of Funds
Usually the financing of international marketing requires funds in excess
of those that can be allocated from the parent company. Thus, the firm turns to
outside sources both a private and governmental nature to meet these needs.
Commercial Bank
Banking is one of the most important facilities for the conduct of international as
well as domestic marketing. Some of the services they offered to meet the
needs of the emerging multinational firms.

The World Group:

(i) The International bank for Reconstruction and
Development: The IBRD is the central institution of the group. Founded
in 1946, its functions are:
1. To assist in the reconstruction and development of its member
countries by facilitating the investment of capital for productive purposes,
and there by promote the long range growth of international trade and
the improvement of standards of living.
2. To make loans for productive purposes out of its own funds when
private capital is not available on reasonable terms; and
3. To promote private foreign investment by guarantees and
participation in loans and investments made by private investors.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

The bank makes loans on conventional terms for basic development

projects chiefly to governmental bodies in the borrowing countries or for
government guaranteed loans to private interests.

(ii) The International Finance Corporation (IFC)

This organization was formed in 1956 to assist in the economic
development of its member countries by promoting the growth of the
private sector of their economies. The corporation is to supplement and
assist the investment of private capital and not to compete with it. It is a
development agency that is to finance only enterprises which are
productive in the sense of contributing to the development of the
economies of the member countries in which they operate.
(iii) The International Development Association (IDA):
The third member of the World Bank group, IDA has the primary
objective of creating a supplementary source of development capital for
countries whose balance of payments prospects would not justify their
incurring external debt on conventional terms. IDA credits are repayable
in foreign exchange, but on very lenient terms. A government entity is
usually the borrower. Credits may be repayable over a period of 50
years, including a grace period of 10 years. Compared with conventional
loans, these terms substantially alleviate the repayment problems of the
borrowing countries and bear less heavily on balance of payments.
Regional Development Banks:
Various regional development banks have been established to promote
the development of under developed areas through the provision of
intermediate and long term loans.
International Commercial Payments

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

International commercial payments may be broadly grouped into the

following categories: (1) cash, (2) open accounts, (3) bills of exchange, and (4)
letters of credit.
Cash: Cash is both a method of payment and a term of payment, but as
a method of payment it is rarely used in international marketing. As a method of
payment, the international marketing firm may use cheques like domestic trade.
Or cash may be remitted by means of an international money order for small
amounts. Cash is also a term of payment. Cash may be called for with the
order, or against certificates of manufacture as work on a complicated piece of
equipment progresses. Cash payment is not attractive to buyers since. The
buyer loses the use of funds for a considerable time before the goods are
received, incurring a loss in the use of working capital as well as loss of
interest. Today cash payment used when the importer is of doubtful credit
standing, when the exporter is financially weak, on orders requiring special
instructions, or when the exporter is not cognizant of the competitive situation
faced by manufacturers of other countries.
Open Account:
The open account method of payment for export shipments is the
opposite of the cash method. Under the open account, goods are shipped
without documents calling for payment—the commercial invoice of exporter
indicating the liability. Since no documentary evidence of ownership or
obligation exists, the open account presents difficulties because of differences
in the laws and customs of countries which make it difficult to safeguard the
interests of the exporter. The burden of financing rests upon the exporter. This
requires a greater amount of working capital than other forms of payment and
the exchange risks are assumed by the exporter. Competitive pressures have
forced many producers to use this method after years of selling on more secure
terms.
Channels for Financing
(i) By the Exporter Himself: Even if
manufacturers and exporters have ample capital, it is to be doubted
whether this is the wisest policy to employ it in this manner.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

(ii) By the Export Middleman: The export

middleman, particularly the export merchant or export commission
house, finances export shipments.
(iii) By Banks: The financing of export shipments
is usually done through the discount of documentary drafts by banks.
(iv) By Importers: When the exporter insists upon
letters of credit or cash in advance with the order, he is virtually asking
the importer in the overseas market to finance the transaction. The
importer does this either by placing the actual cash in the hands of the
exporter or by establishing a letter of credit with some bank. In either
case, the effect is the same—the importer has financed the transaction.
(v) By Factors: This method is useful to those
exporters whose working capital is limited. The factor is a combination of
mercantile and banking house which finances manufacturers, exporters,
commission houses and selling agents through the purchase and
discount of receivables created by sales of merchandise. They are
documentary drafts and transactions related to Letters of Credit.
Charges for factoring export transactions are generally assessed on a
percentage basis. But because little or no cash is required, this type of
financing is attractive to many manufacturers and exporters.
Conditions Influencing Foreign Credit Extension:
These are several conditions peculiar to international marketing that
require an exporting firm to view foreign credit differently from domestic credit.
These conditions are:
(i) Supply of banking capital.
(ii) Interest rates.
(iii) Diversification of production.
(iv) Time in transit and business turnover.
(v) Exchange rate fluctuations.
(vi) Competition
(vii) Customs.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
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 Export Finance

At the outset, it is well to emphasize that the influence of these

conditions varies from country to country. While in Canada credit conditions are
practically identical with those in the United States, except for foreign exchange
rates and tariffs, the conditions influencing credit extension are different in
Mexico. The supply of capital varies greatly among countries and is highly
dependent on the nation’s dependent on the nation’s natural resources and
past production.
Counter Trade (Barter)
Most international trade involves a cash transaction. The buyer agrees
to pay the seller in cash within a certain stated time period. Yet many nations
today lack sufficient hard currency to pay for their purchases from other
nations. They want to offer other items in payment, and this has led to a
growing practice called counter trade. Approximately 40 percent of trade with
Communist block nations in yesteryears was handled through counter trade.
Less developed countries are also pressing for more counter trade agreements
when they buy. Although most companies dislike counter trade deals, they may
have no choice if they want the business.
Counter trade takes following forms:
(i) Barter. Barter involves the direct exchange of goods, with no
money and no third party involved. For example, the Germany agreed to
build a steel plant in Indonesia in exchange for Indonesian oil.
(ii) Compensation deal. Hear the seller receives some percentage of
the payment in cash and the rest in products. A British aircraft
manufacturer sold planes to Brazil for 70 percent cash and the rest in
coffee.
(iii) Buyback arrangement. The seller sells a plant, equipment or
technology to another country and agrees to accept as partial payment
products manufactured with the equipment supplied. For example, a
U.S. chemical company built a plant for an Indian company and
accepted partial payment in cash and the remainder in chemicals to be
manufactured at the plant.
(iv) Counter purchase. The seller receives full payment in cash but
agrees to spend a substantial amount of money in that country within a
stated time period. For example, Pepsi-Cola sold its cola syrup to the
USSR for rubles and agreed to buy USSR vodka at a certain rate for
sale in the United States.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Export-Import bank of India:

Objectives: The objective of Exim bank is to promote India’s international

trade. Its logo reflects this. The Logo has two way significance. The import
arrow is thinner than the export arrow. It also reflects the aim of value addition
to exports.
The Export-Import Bank of India was established for providing financial
assistance to exporters and importers, and for functioning as the principal
institution for coordinating the working of institutions engaged in financing
export and import of goods and services with a view to promoting the country’s
international trade. The Exim Bank was established under: The Export-Import
bank of India Act, 1981. The bank started its functioning in 1982.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Finance for exports is needed at five stages

(1) First, an exporter may need finance to develop an exportable product.
(2) Second, finance is needed to upgrade export production through
acquisition of new equipments, ongoing technology.
(3) Third, pre-shipment finance is needed to acquire inputs that get
converted into an export product.
(4) Fourth finance may be needed for systematic marketing activities.
(5) Fifth, buyers abroad may need credit terms to stimulate purchase. Exim
Bank is helping at all five stages. In the financing of non traditional
exports, exim Bank serves as a single source for export finance.
RANGE OF FINANCING PROGRAMMES
Exim Bank promotes India exports through a range and a variety of
lending programmes. This encompasses direct financial assistance to
exporters at pre-shipment stage, term finance for 100% export oriented units,
overseas investment finance, a lending programme for export production,
finance for computer development, term finance for export marketing, buyer’s
credit, lines of credit, export bills rediscounting, refinance and bulk import
finance to commercial banks.
Operations under Programmes of Funded Assistance
Out of sanctions for funded assistance during the period under report,
the largest share was for exports to West Asia (61%), followed by Europe
(12%), south Asia (9%), South East Asia/Far East Asia & Pacific (7%) and Sub-
Saharan Africa (4%). Funded assistance was utilised mainly for exporters to
West Asia (61%) followed by South Asia (11%), Sub-Saharan Africa (10%) and
Americas (8%).

1. Lending Programmes for Indian Companies

(a) Direct Financial Assistance to Exporters.
During the period 1989-90, sanctions and utilizations of direct financial
assistance to exporters amounted to Rs. 1553 million and Rs. 1235
million respectively. Direct assistance to exporters took the form of
differed payment, suppliers’ credit, foreign currency and rupees term
loans to project exporters and finance for export of technology and

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

consultancy services. Utilizations were largely for exports to West Asia

(63%), south Asia (19%).
(b) Leading Programme for Export product Development
Exim Bank introduced in 1988-89 a lending programme which provided
export development loans for purpose of R&D, export product
development and Quality assurance activities which form part of a firm’s
export programme.
(c) Pre-shipment Credit
Pre-shipment credit is extended in participation with commercial banks
for procuring raw materials and inputs required to produce equipment
whose manufacturing cycle exceeds 180 days.
(d) Term Finance for 100% Export Oriented Units
Way of term loans for export oriented units. Sanctions were utilised to
set up export-oriented units for manufacture of granite slabs, gem and
jewellery, sports goods, medical equipment and garments.
(e) Term Finance for Export Production
Under the Agency Credit Line concluded by Exim Bank with international
Finance Corporation (IFC), Washington D.C., finance by way of foreign
currency term Joan is available from IFC to Small and Medium
Enterprises in the private sector for investment in plant and machinery,
as well as product and process know how to create and enhance export
capabilities.
(f) Finance for computer Software Exports
Under the Government of India Software Policy, Exim Bank has been
named as a source of foreign exchange for software exporters. Exim
Bank sanctioned to software exporters, foreign currency loans of USS 6
million and rupee term loans of Rs. 42 million.
(g) Export Marketing Fund I
Under this programme, finance is available to Indian companies for
undertaking export marketing activities. Such finance covers up to 50%
of the total cost incurred on eligible export marketing activities. The
disbursals are in the form of grants. The Export Marketing Fund (EMF) is

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

a component of a World Bank loan to India for promotion of a select

group of engineering export products in developed country markets.
(h) Export Marketing Fund II
During the year under review, Exim Bank was designated as agency to
manage a second export development programme under World Bank
funding. This programme seeks to promote export of all manufactures to
developed country markets, by providing loan cum grant finance in
support of strategic export development plans, at firm level.
(i) Overseas Investment Finance
Finance extended under this lending programme was utilised for equity
investment. Under this programme, finance was utilised for investment in
a subsidiary for melamine faced particle boards in USA. Outstandings at
the end of the year stood at Rs. 30 million.
2. Lending Programmes for Foreign Governments, Companies and
Financial institutions
(a) Overseas Buyer’s Credit
Utilisations under this programme textile industry, construction activity,
supply of products and services.
(b) Lines Credit to Foreign Governments and Financial Institutions
Exim Bank offers lines of credit to foreign governments or overseas
financial institutions. Major part of utilizations were for exports to West
Asia (54%), followed by Sub-Saharan Africa (17%), Americas (11%) and
South-East Asia/Far East & Pacific (10%). The major products financed
under this programme were commercial vehicles, power generation and
distribution equipment, bicycle and bicycle parts, paper mill machinery,
diesel engines and pumps, auto ancillaries and spares and textile
machinery.
3. Lending Programmes for Commercial banks in India
(a) Export Bills Rediscounting
Under this programme, Exim Bank provides short term funds to Indian
commercial banks against export bills that have unexpired usance of a
maximum of 90 days. For this programme, the RBI sets the lending limit.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

(b) Small Scale Industry Export Bills Rediscounting

Under this programme, commercial banks can rediscount eligible export
bills of small scale industry exporters. For this programme, RBI sets the
lending limit.
(c) Refinance
Exim Bank sanctioned. This programme is operated primarily with the
purpose of refinancing medium and long term post-shipment credit
extended by banks to Indian Exporters. Refinance assistance was also
extended to commercial banks for rupee term loans extended by them to
project exporters executing projects in West Asia.
(d) Bulk Import Finance
Under this programme commercial banks avail of finance by discounting
promissory notes drawn in their favor by importer borrowers.
Commercial banks in India extending finance to firms engaged in the
bulk import of eligible industrial inputs can avail of this facility.

Export Promotion
Exim Bank during the year launched three promotional Programmes
aimed at providing finance for export promotion. Funds were earmarked out of
Bank’s Export promotion Reserve for financing of consultancy studies
undertaken by Indian consultants enlisted by the Africa Project Development
Facility. It seeks to promote private sector investment in Africa. Exim bank also
mounted a programme to finance feasibility studies in developing countries: the
project preparatory Studies Overseas Programme. One approval was made
during the year for a feasibility study in the transport sector in South-East
Asia/Far East & Pacific. A third programme provides finance towards market
entry cost incurred by Indian firms exporting to developed countries.
The Role played by Export Credit Guarantee Corporation of India Ltd. In
Risk Management and Financial Guarantees.
Role of the Corporation
ECGC contributes to the country’s export efforts by improving the
competitive capacity of Indian exporters. Through its schemes of export credit

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

insurance, the corporation makes it possible for exporters to match the credit
terms offered by their counterparts from other countries and thereby win more
export orders in the highly competitive international markets. The corporation
also assists exporters to maximize their export turn over through the
guarantees that it issues to the commercial banks in India. The guarantees,
which reduce the lending risk of the banks, create an environment in which
exporter get easier access to export finance, which is a critical factor for the
rapid expansion of business. Payments for exports are open to risks even at
the best of times. The risks have assumed large proportions today due to the
far reaching political and economic changes that are sweeping the world. An
out break of war or civil war may block or delay the payment for goods
exported. The loss of a large payment may spell disaster for any exporter,
whatever is his prudence and competence. On the other hand, too cautious an
attitude in evaluating risks and selecting buyers may result in loss of hard to get
business opportunities. Export credit insurance is designed to protect exporters
from the consequences of the payment risks, both political and commercial,
and to enable them to expand their overseas business without fear of loss.
Export credit insurance also seeks to create a favorable climate in which
exporters can hope to get timely and liberal credit facilities from banks at home.
ECGC is a company wholly owned by the Government of India. It functions
under the administrative control of the Ministry of Commerce and is managed
by a Board of Directors representing Government, Banking, Insurance, Trade,
Industry, etc.
The covers issued by ECGC can be divided broadly into four groups:
(i) Standard policies issued to exporters to protect them against
payment risks involved in exports on short-term credit;
(ii) Specific policies designed to protect Indian firms against
payment risks involved in (a) exports on deferred terms of payment, (b)
services rendered to foreign parties, and (c) construction works and
turnkey projects undertaken abroad;

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

(iii) Financial guarantees issued to banks in India to protect them

from risks of loss involved in their extending financial support to
exporters at the pre-shipment as well as post-shipment stages; and
(iv) Special schemes,viz., Transfer Guarantee meant to protect
banks which add confirmation to Letter of Credit opened by foreign
banks, Insurance cover for Buyer’s Credit, Line of Credit, Overseas
Investment Insurance and Exchange Fluctuation Risk Insurance.
I. Standard Policies
ECGC has designed four types of Standard Policies to provide cover to
shipments made on short-term credit.
(i) Shipments (Comprehensive Risks) Policy- to cover both commercial
and political risks from the date of shipment.
(ii) Shipments (Political Risks) Policy- to cover only political risks from
the date of shipment.
(iii) Contracts (Comprehensive Risks) Policy- to cover both commercial
and political risks from the date of contract.
(iv) Contracts (Political Risks) Policy- to cover only political risks from the
date of contract.
1. Risks Covered
The risks covered under the standard policies are:
(i) Commercial Risk
(a) insolvency of the buyer;
(b) buyer’s protracted default to pay for goods accepted by him; and
(c) Buyer’s failure to accept goods, subject to certain conditions.
(ii) Political Risks
(a) Imposition of restrictions on remittances by the government in the
buyer’s country or any government action which may block or
delay payment to the exporter;
(b) War, revolution or civil disturbances in the buyer’s country;
(c) New import licensing restrictions or cancellation of a valid import
license in the buyer’s country, after the date shipment or contract
as applicable;

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

(d) Cancellation of export license or imposition of new export

licensing restrictions in India after effective date of contract (under
contracts policy);
(e) Payment of additional handling, transport or insurance charges
occasioned by interruption or diversion of voyage which con not
be recovered from the buyer; and
(f) Any other cause of loss occurring outside India, not normally
ensured by general insurers, and beyond the control of the
exporter and/or the buyer.

2. Risks not covered

The Standard Policies do not cover losses due to the following risks:
(a) commercial disputes including quality disputes raised by the buyer,
unless the exporter obtains a decree from a competent court of law in
the buyer’s country in his favour;
(b) causes inherent in the nature of the goods;
(c) buyer’s failure to obtain necessary import or exchange authorization
from authorities in his country;
(d) insolvency or default of any agent of the exporter or of the collecting
bank;
(e) loss or damage to goods which can be covered by general insurers;
(f) exchange rate fluctuation; and
(g) Failure of the exporter to fulfill the terms of the export contract or
negligence on his part.

3. Exporter Co-insurer
ECGC normally pays 90 percent of the losses on account of political or
commercial risks. In the event of loss due to repudiation of contractual
obligations by the buyer, ECGC identifies the exporter up to 90 percent of the
loss if final and enforceable decree against the overseas buyer is obtained in a

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

competent court of law in the buyer’s country. Recoveries made after the
payment of claim are shared with the ECGC in the same proportion in which
the loss was borne.
4. Whole Turnover Principle
ECGC expects a fair spread of risks insured. Therefore an exporter is
required to insure all the shipments that may be made by him during the next 2
years, except those made against advance payment or Irrevocable Letters of
Credit confirmed by banks in India. Exclusions are, however, possible where
items are not of an allied nature.
5. How to obtain Policy
An intending exporter should fill in a proposal form available with all
ECGC offices and submit it to the nearest office. After examining the proposal,
ECGC would send him an acceptance letter stating the terms of its cover and
premium rates.
6. Maximum Liability
Maximum Liability is the limit up to which ECGC would accept liability for
shipments made in each of the policy-years. It will be advisable for exporters to
estimate the maximum outstanding payments due from overseas buyers at
anytime during the policy period and to obtain the policy with Maximum Liability
for such value. The maximum liability fixed under the policy can be enhanced
subsequently, if necessary.
7. Credit Limit
Credit limit is the limit up to which claim can be paid under the policy for
losses on account of commercial risks. As commercial risks are not covered in
the absence of a credit limit, exporters would be well advised to apply to ECGC
for approval of credit limit on buyer in the prescribed form (No 144) before
making shipment.
(i) Status Enquiry Charges
ECGC spends a good amount on getting status reports on overseas
buyers but charges a nominal fee of Rs. 50 for each application. An
exporter need not pay any status enquiry fee for credit limits up to Rs. 5
lakes if he furnishes a bank report not older than 6 months, on the buyer.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

ii) Discretionary limits

If no application for Credit Limit on a buyer has been made, ECGC
accepts liability for commercial risks up to a maximum of Rs. 5,00,000/-
for D.P./C.A.D. transactions and Rs. 2,00,000/- for D.A. transactions
provided that:
(a) at least three shipments have been effected by the exporter to the buyer
during the preceding two years on similar payment terms and at least
one of them was not less than the discretionary limit availed of by the
exporter and
(b) The buyer had made payment for the shipments on due dates.

iii) Restricted Cover Countries

When payment risks become too high in a country, ECGC provides
cover for shipments to such countries on a restricted basis.
Policyholders intending to export to such countries are required to obtain
to obtain specific approval intending to export to such countries are
required to obtain specific approval of ECGC for each shipment/contract
or series of shipments contracts upon payment of Specific Approval Fee.
If such approval is not taken, cover is not available even for political
risks.
8. Declaration of Shipments & Payment of Premium
The premium rates are closely related to the risks involved and vary
according to countries to which goods are exported and the payment
terms. An exporter who obtains a Contracts Policy has to send a
declaration of all outstanding contracts immediately after the policy is
issued.
9. Consignment Exports
Exports on consignment basis may be covered under Shipments
(Comprehensive Risks) Policy by a suitable endorsement thereon. While
political risks are covered from the date of shipment till the date of
receipt of payment is India, commercial risks are covered only after the
Agent/Stockholder submits the ‘Accounts Sales’ to the exporter.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

10. Reporting Defaults

In the event of non-payment of any bill, policy holders are required to
take prompt and effective steps to prevent or minimize loss. A monthly
declaration of all bills which remain unpaid for more than 30 days should
be submitted to ECGC in the prescribed form (No. 205) indicating action
taken in each case.
11. Settlement of Claims
A claim will arise when any of the risks insured under the policy
materializes. If an overseas buyer goes insolvent, the exporter becomes
eligible for a claim one month after his loss is admitted to rank against
the insolvent’s estate or after four months from the due date, whichever
is earlier. In case of protracted default, claim is payable after four
months from the due date.
12. Debt Recovery
Payment of claim by the ECGC does not relieve an exporter of his
responsibility for taking recovery action and realizing whatever amount
that can recover. All amounts recovered, net of recovery expenses,
should be shared with ECGC in the ratio in which the loss was originally
shared. Receipt of a claim from ECGC does not relieve an exporter from
obligations to the Exchange Control Authority for receiving the amount
from the overseas buyers.
II. Specific Policies
The Standard policy is a whole turnover policy designed to provide a
continuing insurance for the regular flow of an exporter’s shipments of
raw materials, consumer goods and consumer durables for which credit
period does not exceed 180 days.
Specific Shipment Policy-Short Term (SSP-ST)
These policies can be availed of by exporters who do not hold the
Standard Policy, in respect of shipments permitted to be excluded from the
purview of the Standard Policy. Exporter can pick and choose the
contract/shipment to be covered and indicate the type of cover required.
Period of the Policy:

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

The policy would be valid for shipment(s) made from the date of issue of
the policy up to last date allowed under the relevant contract for shipment.
Risks Covered:
 Commercial Risks
 Political Risks
 LC Opening Bank Risks
 Insolvency Risk on agent on conditions.
Percentage of Cover: 80%
Important Obligations of the Exporter
 Upfront Premium Payment
 Statement of Shipments made
 Payment Advice Slip
 Statement of Overdue
 Filling of claim within 12 months from Due Date
 Sharing of Recovery
Exports Turnover Policy
Turnover policy is for the benefit of large exporters who contribute not less than
Rs. 10 lakhs per annum towards of the policy holder for a year and the initial
determination of the premium payable on that basis, subject to adjustment at
the end of the year based on actual.
Period of the Policy: 12 months
Risks Covered:
 Commercial Risks
 Political Risks
 LC Opening Bank Risks
Percentage of Cover: 90%
Important Obligations of the Exporter
 Premium will be payable in four equal quarterly installments in
advance.
 Submission of quarterly statement of shipments.
 Declaration of overdue payments.
 Filling of overdue payments.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

 Filling of claim within 24 months from Due Date

 Sharing of Recovery
Software Projects Policy:
The Software Projects policy will provide protection to exporters of
software and related services where the payments will be received in
foreign exchange.
Software Service Exports covered under Software Projects Policy
 Supply of software products and packages, or
 Staffing and programming services, or
 Both off-Shore and on-site development
Risks Covered
Commercial Risks
 Default, Insolvency and Wrongful repudiation after commencement of
services.
Political risks:
1. Transfer Delay variation of exchange rate.
2. War risk
3. Restrictions arises due to Political situation in India or buyers country
4. Refusal of visa for employees of exporter
5. Unjustified restraining of personnel of the exporter.
6. Increase in any tax or introduction of a new tax payable by the exporter.
7. Variation in exchange rate.
(Losses mentioned at 4 to 7 above will be covered maximum upto 25% of
value of export)
Percentage of Cover: 80%
Distinct Characteristics:
 Billing mostly on milestones progress report.
 Exact due dates not possible.
 Losses may be for the work done for which invoice is not raised.
 No physical documentation possible.
 Specific deficiencies & corrective measures.
 No salvage in almost all the cases

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Maturity Factoring
The Maturity Factoring Scheme, as designed by ECGC has certain
unique features and does not exactly fit into the conventional mould of maturity
factoring. The changes devised are intended to give the clients the benefits of
full factoring services through the Maturity Factoring Scheme, thus effectively
addressing the needs of exporters to avail of pre-finance (advance) on the
receivables, for their working capital requirements. One important feature is the
very important role and special benefits envisaged for banks under the scheme.
Benefits:
 100% credit guarantee protection against bad debts.
 Sales register maintenance in respect of factored transactions.
 Regular monitoring of outstanding credits, facilitating collection of
receivables on due date, recovery, at its own cost, of all recoverable bad
debts.
Setting up Charges and Factoring Charges
The factoring application fee payable initially is Rs. 10.000/- For setting
up permitted limits on each of the overseas customers, the exporter will have to
pay a processing fee equal to 0.05% of the permitted limit sought, subject to a
minimum of Rs. 2000/-. After this, the factoring charges payable as and when
an export bill is to be factored depends on the country to which the export is
made and the credit period.
Exporter’s Obligations
 Registration and obtaining permitted limit on the buyer
 Payment of factoring charges with statement of exports made.
 Intimate developments.
III. Financial Guarantees
Exporters require adequate financial support from banks to carry out
their export contracts. ECGC’s guarantees protect the banks from losses on
account of their lending’s to exporters. These guarantees have been designed
to encourage banks to give adequate credit and other facilities for exports, both
at pre-shipment stages, on a liberal basis.
Six guarantees have been evolved for the purpose:

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(1) Packing Credit Guarantee.

(2) Export production Finance Guarantee.
(3) Post-Shipment Export Credit Guarantee.
(4) Export Finance Guarantee.
(5) Export Performance Guarantee.
(6) Export Finance (Overseas Lending) Guarantee.
These guarantees give protection to banks against losses due to
nonpayment by exporters on account of their insolvency or default. ECGC pays
three-fourths of the loss in the case of post-Shipment Export Credit Guarantee,
Export Finance Guarantee, Export Performance Guarantee and Export Finance
(Overseas Lending) Guarantee and two-thirds of the loss in others.
The Corporation agrees to pay higher percentage of loss to banks which
offer to cover all their pre-shipment advances under a Whole turnover Packing
Credit Guarantee. Similarly, a higher percentage of cover is offered under Post-
Shipment Export Credit Guarantee if the bank agrees to cover all its post-
shipment advances on whole turnover basis.
In special cases, ECGC also considers payment of claim to the extent of
80 percent of the loss in respect of advances granted under post shipment
Export Credit Guarantee against shipments of engineering and metallurgical
items of the value of Rs. 2 crores or more under a single contract. In the case
of Export performance Guarantee and Export Finance (Overseas Lending)
Guarantee, ECGC provides higher cover of 90 percent of the loss on payment
of proportionately higher premium.
1. Packing Credit Guarantee:
Any loan given to an exporter for the manufacture, processing,
purchasing or packing of goods meant for export against a firm order or Letter
of Credit qualifies for Packing Credit Guarantee. ‘Pre-shipment’ advances given
by banks to parties who enter into contracts for export of services or for
construction works abroad, to meet preliminary expenses in connection with
such contracts are also eligible for cover under this guarantee. The requirement
of lodgment of letter of credit/export order for granting packing Credit advances

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

may be waived, as permitted by the Reserve Bank of India for certain

commodities.
The premium rate is 7.5 paisa per Rs. 100/- per month or part thereof. A
lower rate of 5 paise per Rs. 100/- per month is charged under the whole turn
over packing Credit Guarantee. Premium under WTPCG is guarantees it is
payable on the daily average product basis, while under individual guarantees it
is payable on maximum outstanding. The percentage of loss covered under
whole turnover Packing Credit Guarantee is 75 as against 66-2/3 percent under
individual guarantee.
Banks which opt for WTPCG will be eligible for similar concessions in
respect of Export Production Finance Guarantee and Export Finance
Guarantee also. These concessions are available also in respect of advances
against contracts for supplies on deferred terms and for construction works, but
the banks will have to obtain separate guarantees for such advances.
2. Export Production Finance Guarantee
The Purpose of this guarantee is to enable banks to sanction advances
at the pre-shipment stage to the full extent of cost of production when it
exceeds the f.o.b. value of the contract/order, the difference representing
incentives receivable. The extent of cover and the premium are the same as
the Packing Credit Guarantees. Banks having WTPCG/WTPSG are eligible for
concessionary premium rate and higher coverage.

3. Post-shipment Export Credit Guarantee

Post-shipment finance given to exporters by banks through purchase,
negotiation or discount of export bills or advances against such bills qualifies
for this guarantee. It is necessary, however, that the exporter concerned should
hold suitable shipments or contracts policy of ECGC to cover the overseas
credit risks.
The premium rate for this guarantee is 5 paise per Rs. 100/- per month.
The percentage of loss covered under the individual Post shipment Guarantee
is 75.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

This guarantee is also issued on whole turnover basis, offering a higher

percentage of cover at a reduced rate of premium. The percentage of cover
under the Whole turnover Post-Shipment Guarantee is 85 for advances granted
to exporters holding ECGC policy. Advances to non-policy holders are also
covered with percentage of cover being 60. The premium rate is 3 paise per
Rs. 100/- per month is advances against L/C bills are also covered under the
guarantee, otherwise it is 4 paisa.
Post-Shipment Export Credit Guarantee can also be had, even where an
exporter does not hold an ECGC policy for finance granted against L/C bills,
provided that an exporter marks shipments solely against letters of Credit. The
premium rate for this cover is 10 paisa per Rs. 100/- per month on the highest
amo0unt outstanding on any day during the month and opened by banks in
countries placed under restricted cover shall be subject to prior approval of the
Corporation.
4. Export Finance Guarantee
This Guarantee covers post-shipment advances granted by banks to
exporters against export incentives receivable in the form of cash assistance,
duty drawback etc. The premium rate for this guarantee is 5 paise per Rs. 100/-
per month and the cover is 75 percent. Banks having WTPCG/WTPSG are
eligible for concessionary premium rate and higher coverage.
5. Export Performance Guarantee
Exporters are often called upon to execute bonds, duly guaranteed by
an Indian bank, at various stages of export business. An exporter who desires
to quote for a foreign tender may have to furnish a bank guarantee for the bid
bond. If he wins the contract, he may have to furnish bank guarantees to
foreign buyers to ensure due performance or against advance payment or in
lieu of retention money or to a foreign bank in case he has to raise overseas
finance for his contract.
Further, for obtaining import license for raw materials or capital goods,
exporters may have to execute an undertaking to export goods of a specified
value within a stipulated time, duly supported by bank guarantees, Bank
guarantees are also furnished by exporters to the Customs, Central Excise or

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Sales Tax authorities for the purpose of clearing goods without payment of duty
or for exemption from tax for goods procured for export. Exporters also furnish
guarantees in support of their export obligations to Export Promotion Councils,
Commodity Borads, the State Trading Corporation of India, the Minerals and
Metals Trading Corporation Of India or recognized Export Houses. To provide
protection to banks which issue the above types of guarantees, ECGC has
evolved the Export performance Guarantee.
An export proposition may be frustrated if the exporter’s bank is unwilling
to issue the guarantee. The export performance Guarantee is aimed at meeting
such situations. The guarantee which is in the nature of a counter-guarantee to
the bank is issued to project the bank against losses that it may suffer on
account of guarantees given by it on behalf of exporters. This protection is
intended to encourage banks to give guarantees on a liberal basis for export
purposes.
Normally cover is extended up to 75 percent of loss but in the case of
guarantees in connection with bid bonds, performance bonds, advance
payment and local finance guarantees and guarantees in lieu of retention
money, the cover may be increased up to 90 percent subject to proportionate
increase in premium.
While the premium rate for guarantees issued to cover bonds relating to
exports on short-term credit is 0.90% p.a. for 75% cover and 1.08% p.a. for
90% cov3er, it is lower for bonds relating to exports on deferred credit and
projects. The rate of premium is 0.80% p.a. for 75% cover and 0.95% p.a. for
90% cover.
In the case of Bid Bonds relating to exports on medium/long-term credit,
overseas projects, and the projects and the projects India financed by
international financial institutions as well as supplies to such projects, ECGC is
agreeable to issue Export-Performance Guarantee on payment of 25% of the
prescribed premium. The balance premium of 75% becomes payable to the
Corporation by the bankers if the exporter succeeds in the bid and gets the
contract.
6. Export Finance (Overseas Lending) Guarantee

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

If a bank financing an overseas project provides a foreign currency loan

to the contractor, it can protect itself from the risk of non-payment by the
contractor by obtaining Export Finance (Overseas Lending) Guarantee.
Premium rate will be 0.90% per annum for 75% cover and 1.08% per annum
for 90% cover. Premium is payable in Indian rupees. Claims under the
guarantee will also be paid only in Indian rupees.
Guarantees
The guarantees issued to banks have been designed to encourage
banks to give adequate credit and other facilities or exports. These protect the
banks from losses inherent in their granting advances to exporters or their
giving guarantees on behalf of exporters.
(i) Guarantees-Short Term Exports
The guarantees relating to short term exports showed excellent results.
The value of bank finance covered by the guarantees rose by 57.52% over the
annualized figure for the previous year to reach the level of Rs. 26,473 crores.
Premium income also rose from Rs. 14.58 crores to Rs. 24.99 crores,
registering a very impressive annualized growth of 114.32%. The total value of
claims paid during the year came to Rs. 5.87 crores. Recoveries at Rs. 0.65
crores were less than Rs. 0.75 crore in the preceding year. The net position
was a surplus of Rs. 19.77 crores as compared to Rs. 2.28 crores in 1988-89.
The Packing Credit Guarantee continued its pre-eminent position
accounting for 72% of advances covered and 75% of the premium income
under all guarantees. The Post shipment Guarantee contributed 26% to the
advances covered and 17% to the premium income in this sector.
(ii) Guarantees-Project and Term Exports
Business under this sector showed an improvement in the year under
report, in terms of value covered. The value of risks covered rose to Rs. 195
crores in 1989-90 from Rs. 164 crores in 1988-89, registering a growth of
48.63% on an annualized basis. Premium income allocable for the year,
however, declined from Rs.6.71 crores in 1988-89 to Rs. 4.88 crores (the
accounting practice is to allocate the premium income proportionately to the
years during which the guarantees remain in force). With very high cliam

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

payments of Rs. 11.51 crores and a low recovery of Rs. 0.41 crore, this sector
of business showed a deficit of Rs. 6.22 crores as against a surplus of Rs. 6.71
crores in 1988-89.
Exchange Fluctuation Risk Cover
The scheme covering exchange fluctuation risk at bid and contract
stages are operated by the Corporation on behalf of the Government of India
and the operational gains or losses are transferred to the Market Development
Fund administered by the Ministry of Commerce. The Corporation receives only
5% of the gross premium towards administrative costs.
Under this scheme which covers export receivable, one policy covering
Risk Value of Rs. 69 lakhs was issued during the year. As at the end of March,
1990, 13 policies were in force covering a total value of Rs. 93.19 crores.
The scheme covering Exchange Fluctuation Risk on account of export-
linked-import-transactions, and advance payments for exports was suspended
in January, 1990 pending review in the light of unsatisfactory experience
gained in operating the scheme since its introduction in September, 1988. At
the end of the year, three policies were in force covering a total Risk Value of
Rs. 84.41 crores.
The total income for the year under both the schemes came to Rs. 28.94
lakhs comprising premium income of Rs. 16.06 lakhs and exchange gains
amounting to Rs. 12.88 lakhs. The out go was Rs. 8.33lakhs comprising Rs.
7.53 lakhs of claims paid and Rs. 0.80 lakh being ECGC’s service charges,
etc., resulting in a surplus of Rs. 20.61 lakhs.
The cumulative financial result of the schemes from their inception up to
31st march, 1990 was a net surplus of Rs. 214.91 lakhs.
 Premium Income
 Claims and Recoveries
 Reinsurance
 Foreign Exchange Earnings and Expenses

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

FOREIGN EXCHANGE
Definition: Foreign exchange, vide Section 2 (n) of the Foreign
Exchange Management Act, 1999 is foreign currency and include:
Deposits, credits and balances payable in any foreign currency, and any
drafts, traveler’s cheques, letters of credit and bills of exchange, expressed or
drawn in Indian currency but payable in any foreign currency; and
Foreign Exchange Transactions
A foreign exchange transaction is a purchase or sale of one national
currency against another. The purchase or sale of currency arises out of import
or export of goods and services, lending and borrowing, transfer of funds, etc.,
between two or more countries. In other words, a foreign exchange transaction
implies a transfer of purchasing power, that is, the acquisition of, or parting
with, the right to wealth in another country.
Sale/Purchase Transactions
(a) Foreign exchange transactions are either sale or purchase transactions.
For instance, when a bank in Kolkata collects an import bill received
from its branch in London, or issues a draft on its correspondent in New
York, the collection of the bill or the issue of the draft is called a sale
transaction.
(b) On the other hand, when a bank in Mumbai purchases an export bill
drawn in dollars and sends it to its correspondent in New York for
collection, or pays a TT drawn on it by its branch in London, the
purchase of the bill or the payment of the TT is a purchase transaction.
Spot/Forward Transactions
(a) Spot: A foreign exchange transaction, whether a purchase or a
sale, may be a spot or a forward transaction. A transaction which
involves an immediate conversion of currency and the delivery or
receipt of the currency sold or bought immediately with the offer
of sale or after the purchase is a spot transaction. Under it
settlement takes place on the second working day.
(b) Forward: When the conversion between two currencies, and
consequently, the receipt or delivery of the currency bought or

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

sold, are to take place at a future date at a rate or exchange

agreed upon now, such a transaction is forward transaction.
Forward transactions are usually made in order to avoid
exchange risks, or for the purpose of squaring up the exchange
position of a bank. Delivery of funds takes place on any day after
spot date.
Foreign Exchange Market
(a) Definition: The foreign exchange market is the market for buying and
selling foreign currencies. There is in India no particular place, kike a
Stock Exchange, for transactions in foreign exchange. The exchange
market may be said to be composed of the two principal operators in it,
namely, the dealers and the brokers. The operations, i.e., buying and
selling of foreign exchange, are done over the telephone or by personal
contact between the brokers and the dealers. The brokers are the
intermediaries acting on commission between the dealers, while the
dealers, i.e., the exchange banks, the State Bank of India and its 7
subsidiaries, the 19 nationalized banks, etc, authorized to deal in foreign
exchange, act as principals buying and selling on their own account. The
costumers as well as the foreign banks with whom the banks in India
enter into forward contracts for purchase or sale of foreign exchange
may also be treated as components of the foreign exchange to and from
banks at rates fixed by it, is at the apex, controlling the exchange market
in India.
(b) Operations: The foreign exchange market has three-tier dealings:
(i) Dealing between banks and customers;
(ii) Dealing between local banks including the reserve Bank and
(iii) Dealing between domestic banks and banks abroad.
(c) Contracts: Transactions in the foreign exchange market are made
through contracts between the dealer and the banker, known as the
‘broker’s contracts.’ Such contracts in India contain, inter alia, a cluse:
Subject to the Rules and Regulations of the Foreign Exchange Dealers
Association of India. (FEDAI)

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

The contracts may be- (i) Cash or Ready, under which the
delivery is to be made immediately, or (ii) Forward, under which the
delivery is to take place at a future date and the option to take delivery
lies with the purchasing bank or customer. All contracts should be
understood to read to be delivered or paid for at the bank. Ready
contracts between banks will be deliverable within two business days
after the date of contract, while those between banks and their
customers will be deliverable on the same day.
(d) Functions: Performs this
(i) Effecting transfer of purchasing power through a clearing process
from one country to another;
(ii) Providing credit for foreign trade; and
(iii) Furnishing facilities for hedging foreign exchange risks.
(e) Hedging:
Hedging means covering exchange risks, i.e., the risks of fluctuations in
the exchange rates which may adversely affect the home currency
realizations of exports and the home currency cost of imports invoiced in
a foreign currency. Such risks are inherent in forward transactions, since
there is always a likelihood of an adverse movement in the rate of
exchange. The exchange risks involved in a forward sale transaction are
covered by a forward purchase and those in a forward purchase
transaction by a forward sale. In other words, the risks are covered by
taking speculative risk in order to offset a bigger speculative risk in the
opposite sense. An importer, having to pay foreign currency abroad in
the future, runs the risk that the price of the currency may rise between
the time the obligation arises and the time it must be discharged. To
cover himself against this risk, that is, to the hedge the risk, he can
deposit abroad funds equal to the prospective debt or he can buy
forward foreign exchange. Similarly an exporter with funds falling due in
foreign exchange at some future date runs the risk that the rate of
exchange may fall between the time he makes the contract and the
payment date. For cover, he can borrow abroad and use the proceeds of

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

his exports, when received, to pay off the debt, or he can sell his
expected foreign currency forward.
Hedging is done through banks. It may be done through the spot market
if the trader has sufficient cash or credit facilities; but it is usually done
through a forward contract.
(f) Spot and Forward market:
The buying and selling of foreign currencies for spot or ready delivery
against domestic currency collectively represent the spot market, while
the buying and the selling of foreign currencies under forward contracts
for delivery at a future date at a rate fixed now represent the forward
market.
Fixed rate of Exchange
(a) Mint Par: Countries like the U.K. the USA, etc., while on gold standard, a
monetary system which was abandoned in 1931, based the value of
their respective currencies on a specified quality of fine gold, marking
their currencies freely convertible into gold at the rate so fixed. This fixed
relationship of the currencies with a common denominator, that is, gold,
led to fixed parties between them, known as the mint par of exchange. It
was held that under this arrangement the exchange rate between two
currencies would vary, if at all, only slightly from the mint par of
exchange, since any movement away from the mint par would make it
profitable to convert the currency into gold, export the gold to a foreign
centre and then convert it into a foreign.
(b) Specie Point: Under gold standard, gold could be exported or imported
freely. But the export or import of gold involved a certain amount of
expenditure in shipping and insuring it, and the expenditure so incurred
set a martin on either side of the mint par of exchange, called the specie
points, to the extent of which the rate of exchange might vary before
there was any movement of gold. When, however, the exported gold
was sold in a foreign currency, there naturally, was a larger demand for
the concerned foreign currency raising its value above the mint par,

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

while when the sale process were sold there were larger offers of that
currency, reducing its value back towards the mint par.
In a reverse process, gold would be imported. But the imported of
gold would necessitate the purchase of foreign currency with which to
obtain the gold, and this would cause the value of that currency to
appreciate back towards the mint par.
Exchange Rate Regimes
(a) Floating Rate: Under a floating exchange rates system there are no
fixed parties, and the rates of exchange are allowed to float, i.e.,
fluctuate freely without official intervention. It has been argued in favor of
floating rates that the fixing of parties with gold or otherwise is, after all,
arbitrary, and that under a fixed exchange rates system the currency
may be overvalued or undervalued, leading to a persistent adverse or
favorable balance of payments, where as by allowing the rate to float in
accordance with the demand for and supply of the currency, it may be
fixed by market operations at the level of the true international value of
the currency, leading to growth in international trade.
A floating exchange rates system implies a complete suspension
of parties or any attempt at pegging the rates, i.e., artificially confining
through official intervention the movement of the rates of exchange
within certain predetermined limits. In practice, however, the necessity of
occasional official intervention to correct too erratic fluctuations in the
rate can not be altogether ruled out.
(b) Flexible Rate: Under a flexible exchange rates system, the rate of
exchange is allowed to fluctuate in response to the market conditions of
demand and supply.
Floating and flexible exchange rates are more or less alike.
However a distinction is attempted by some. According to them, a
floating exchange rate implies a complete absence of official intervention
or of any attempt at pegging the rate, whereas a flexible exchange rate
may be subject to relatively frequent changes in the exchange parties or
may be subject to the pegging of the rate.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Other Exchange Rates Systems

(a) Unitary Exchange Rates Systems: When there is only one official rate of
exchange in a country for all types of transactions, a unitary exchange
rates system is deemed to be in operation. This system is preferable to a
differential exchange rates system for a currency, for the latter system
tends to undermine confidence in the currency. A unitary exchange rates
system is one of the objectives of the IMF, and many leading members
of the Fund, including India, have adopted this system.
(b) Multiple Exchange Rates System: This is an arrangement under which
different rates are permitted for a country’s currency for different types of
transactions. The IMF is opposed to multiple currency practices.
(c) Two-Tier Exchange Rates: A country having a system of multiple
exchange rates may have a controlled rate of exchange for its currency
for certain transaction and a free market rate for other transactions. Or it
may have one rate for export and a lower rate for imports, or one rate for
mercantile transactions and a lower rate for transactions or a capital
nature to prevent any outflow of capital. When this happens the rates are
known as two-tier exchange rates.
Other Exchange Rate
Equilibrium Rates of Exchange: When the value of a currency in terms of
another currency reflects its purchasing power parity and the country maintains
equilibrium in its balance of payments, the rate of exchange between the two
currencies is said to be the equilibrium rate of exchange.
Factors Influencing Exchange Rates
Since the establishment of the IMF, the international monetary system
seemed to be evolving towards fixed rates till coming into force in April 1978 of
its Second Amendment. Nevertheless, the exchange rate between any two
currencies may, and in fact does, vary from day-today within the limits set
under the IMF Agreement; that is, up to 21/4% on either side of the parity. The
rate of exchange, i.e,. the market price of a currency, is determined, as in all
other cases, by the demand for and the supply of the currency. The factors that

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tend to influence such demand and supply are indicated in the following
paragraphs.
(a) Commercial Transactions: If imports exceed exports, the demand for
foreign currencies rises, forcing up the values there of in terms of the
home currency, that is to say the value of the home currency is
depreciated in terms of the concerned foreign currencies. If exports
exceed imports, there is a greater demand for the home currency,
forcing its price up in terms of the concerned foreign currencies. This
may also be called balance of payments factor influencing the rate of
exchange.
(b) Investments: When the government or an industrial concern of a
country undertakes a project in another country, the investment in that
country in connection with the project necessitates the purchase of the
currency of that country, thereby weakening the values of the home
currency in terms of that currency. Conversely, investments in this
country will cause an increased demand for the home currency and push
up its value.
(c) Government Loans and Grants: When a country grants loans or makes
gifts to another country, the currency of the lender country so provided
may be used to buy other currencies in the foreign exchange market for
purchases to be made form those countries. Such Purchases tend to
weaken the value of the lender country’s currency. When the loan is
repaid or when interest on the loan is paid, such payment tends to
strengthen the currency of the lender country.
Tied Loans: Efforts to counteract this adverse effect on the lender
country’s currency have given rise to what is known as tied loan, that is,
loans with stipulation that these must be used to buy goods produced by
the lender country.
(d) Transactions with International Institutions: When a country subscribes
its contribution to the IMF or the International Bank for Reconstruction
and Development (IBRD) or to any of its associates, and that currency is

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list out to another member country, such lending tends to weaken the
exchange rate of the subscriber country’s currency.
(e) Arbitrage: Arbitrage in foreign exchange consists in simultaneous buying
and selling of one or more currencies in different exchange markets so
as to make a profit out of the differences, in the exchange rates of the
currencies at different centers. Arbitrage operations may be classified as
under.
Commercial Rates of Exchange
The rates of exchange quoted in the foreign exchange market are
described below.
Spot Rate
The normal rate quoted in the foreign exchange market is the spot rate. This
rate is quoted for transactions where the foreign currency bought or sold is to
be received or delivered immediately. It is the basic rate from which all other
rates of exchange are calculated.
TT Rates
This is spot rate used for remittances from one country to another by
telegraphic transfers, i.e. for transactions in which the receiving and paying
over of the amounts involved are made almost simultaneously and no question
of interest is involved.
Valuer Recompense (a French phrase): Here the value is receive at one
centre and paid over another centre within 24 hours with no loss of interest.
Value Date: The term value date is a specific date on which the foreign
exchange bought or sold, has to be received or delivered and its price in the
local currency, is to be paid. It is the date on which a payment of fund or an
entry in an account becomes effective and/or subject to interest.
Value-dated Transactions: Transactions in foreign exchange which
specify the date on which the foreign currency bought and sold has to be
delivered and the price there of in the local currency is to be paid are value-
dated transactions.

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Buying and Selling Rates

(a) As noted earlier, A foreign exchange transaction is either a purchase or
a sale transaction, i.e., a transaction which involves either buying or
selling of a foreign currency. For the buying and selling of foreign
currencies, there are different rates. The price in terms of the home
currency at which a banker is willing to buy a foreign currency is the
buying rate, and the price, also in terms of the home currency, at which
the banker will sell a foreign currency is the selling rate, between the two
currencies,
(b) Two-Way Quotation. The buying and selling rates of a currency in terms
another currency vary, and the two are quoted together as under:
Rs.100=₤ 1.2437-1.1821 & ₤ 1=$1.64-1.6316
In the above quotations the rates
Rs. 100= ₤ 1.2437 and ₤ 1=$ 1.64
Are the buying rates, and the rates
Rs. 100 =₤ 1=$ 1.63
Are the selling rates. A quotation with a pair of rates, i.e., the buying and selling
rates, is known as a two way price or quotation.
(c) Dealing Spread: The buying and selling rates of exchange are, as a rule,
different, and the difference between the two is referred to as the dealing
spread, or simply the spread.
(d) Middle Rate: The middle rate of a currency lies exactly half way between
its market buying and selling rates. For instance, if New york is quoted at
₤1=$ 1.64-1.63, the middle rate would be $ 1.635 per ₤ 1.
The middle rate should not, however, be referred to as the mean or
average rate. The rate is calculated by first finding the spread, then dividing it
by 2, and finally by adding the result to the market selling rate or subtracting it
from the buying rate.

There are four types of buying rates

1. TT Buying Rate
2. OD (on Demand ) Buying Rate

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3. Long Buying rate

4. Tel Quel Rate or T.Q. Rate
There are two types of selling rates
1. TT Selling Rate,
2. BC (Bill Collection) Sell Rate,
Cross Rates:
A cross rate is a rate of exchange derived from the quotation of any two
currencies in terms of a third, or of more than two currencies in terms of
another. For instance, if London quotes.
₤ 1= $ 1.60
₤ 1= Rs. 55.70
Then the rupee dollar quotation, i.e. the cross rate, may be found by the Chain
Rule method as under:
₤1.60*100/55.70 =2.874
Or Rs. 100= $2.87
Or if London quotes Zurich at 10.31 ¾-32 Swiss francs per pound, Zurich
quotes Paris at 87 13/16-7/8 Swiss France per 100 French francs, and Paris
quotes Amsterdam at 136.74-76 French francs per 100 florins, then the Cross
Rate between the pound and florin would by the Chain Rule method, be as
under:
?F1= ₤ 1
If ₤ 1= Sw.fcs 10.3175
And if Sw.fcs 87.875= Fr.fcs 100
And if Fr.fcs 136.76 =F1.100
1*10.3175*100*100/1*87.875*136.76 =8.58
Or ₤1=8.58 florins
The rate of exchange is expressed:
(a) In the case of pound sterling Up to the 4th decimal place in multiples
of 5
(b) In the case of U.S. and Canadian Up to the 2nd decimal place in
dollars multiples of 0.01
(c) In the case of French francs and Up to the 2nd decimal place in

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Euros multiples of 5 but ending in zero

(d) In the case of currencies other Up to the 2nd decimal place in
than the above and Belgian multiples of 1/10th, higher or lower
francs, Italian lira and Japanese according as the quotation is for
yen. buying or selling
(e) In the case of Belgian francs The rate is rounded off to the nearest
lira or franc
(f) In the case of Italian lire and The rate is rounded off to the nearest
Japanese yen yen.

Base rate: Is the rates banks offer to the customers by adding or subtracting
exchange margin. These are expressed as follows:
Spot TT buying rate Base rate + exchange margin
Sport Bill buying Base rate + ongoing forward discount/premium
rate depending upon transit period and tenor of bill +
exchange margin
Forward TT buying Base rate + ongoing forward discount/premium
rate depending on the delivery + exchange margin
Spot TT selling Base rate + on ± going forward discount/premium
depending upon the delivery period of bill, transit period
and tenor of bill + exchange margin
Spot TT selling Base rate-exchange margin
Spot Bill selling rate Base rate-exchange margin-handling charge under
FEDAI rules
BC selling rate Cover rate-exchange margin

Calculation of Rupee/Foreign Currency Equivalent

Given the buying and selling rates of rupees in terms of another currency, the
rupee equivalent of a specified amount of that currency or the foreign currency
equivalent of a specified sum of rupees may be found by the method of the
Rule of Three. Where interest for transit period and discount are charged, the

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banks concerned at both ends realize their commission, and/or if the bill is
rediscounted at the prevailing discount rate at the foreign centre all these are to
be added to find the equivalent sum.
Example: If a bank in India quotes its rates for U.S. dollars as under:
Selling Rates Buying rates
Rs. 100 = TT BC TT OD
$ 12.65 $ 12.62 $ 12.75 $ 12.80
What amount in rupees would the bank recover from its customer to remit $
37,000 to Boston by airmail transfer?
Sol: this is a clean sale for the bank. Hence, the rate applicable is the TT selling
rate, viz, Rs.100 = $ 12.65
Therefore, the rupee equivalent of $ 37000 would be:
37,000 * 100 / 12.65 = Rs. 2,92,490.1185.

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FOREIGN EXCHANGE CONTROL IN INDIA

Exchange control was introduced in India on the outbreak of the Second
World War on September 3, 1939, as an adjunct to the British System to boost
the U.K.’s war efforts and embraced the transactions between India and the
then non-sterling area countries. At the end of the war, the huge sterling
balance accumulated on India’s after Independence, needed foreign exchange
most to meet the requirements of her developing economy. But the country’s
sources of foreign exchange earnings were limited to the exports of a few
traditional commodities like tea, jute, etc. Thus, the freezing of the sterling
balance vis-à-vis the needed imports of plant and machinery, raw materials,
Foodstuffs, etc. let to large deficits in India’s balance of payments, even when
the country’s scare foreign balances were supplemented by borrowings from
abroad. Hence, to conserve the country’s scare foreign exchange resources for
use to the best national advantage according to a scheme of priorities and to
correct the balance of payments deficits, the war time measure was continued
taking advantage of the provisions of Article XIV of the IMF Agreement, as a
peace time control system under the Foreign Exchange Regulation Act, 1947,
effective March 25, 1947, which has since been replaced by the Foreign
Exchange Regulation (Amendment) Act 1997 and now new Act, Foreign
Exchange Management Act, 1999 (FEMA), the operations of the Exchange
Control system have now come to encompass transactions with all countries
outside India excepting Nepal and Bhutan.
Definition: Exchange Control means official interference in the foreign
exchange dealings of a country. Exchange control, in short, involves a rationing
of foreign exchange among various competing demands for it, and is effected
through control of receipts, or of payment, or of both as in India.
Objectives: The main objects of exchanger control are to maintain the value of
the country’s currency in terms of other currencies and to bring about and
maintain as far as practicable and equilibrium in the country’s balance of
payments.
Methods:

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 Control of the exchange rate, i.e., fixing the exchange rate of the
country’s currency in terms of other currencies, exchange pegging, etc.
 Fixing currency areas, i.e., fixing the currencies in which payments for
imports and exports should be made and received, to and from specified
countries. Such fixing, by restricting the convertibility of home currency
in terms of other currencies, helps the growth of foreign exchange
resources in approved currencies considered necessary in the national
interest.
 Bilateral agreements, i.e., trade agreements between two countries
contracted principally for the purpose of avoiding the purpose of avoiding
the balance of payments deficits.
Control of Exchange Earning
(I) For the purpose of control of foreign exchange, every person, firm
company or authority in India earning foreign exchange expressed in
any currency other that the currency of Nepal or Bhutan by the export of
goods or services or in any other way is required to surrender the foreign
exchange to an authorized dealer and obtain payment in rupees within
three months from the date of acquisition there of.
(ii) By its notification No. FERA 47/77-RB and FERA 48/77-RB of 24 th
November 1977 under Sections 8 and 9 the FERA 1973, respectively,
the Reserve Bank has made it obligatory for any person acquiring
foreign exchange by way of income on assets held outside India,
inheritance, settlement, gift, remuneration for services or by way pf
payments made on behalf of persons resident outside India, or any
foreign exchange sent to or brought into India- to offer the same for sale
to an authorized dealer within seven days from the date of receipt in or
being brought to India.
The Following are however, exceptions to the general rule:
I. Foreign Exchange held by authorized dealers.
II. Foreign exchange held or acquired by persons for
business or any other purpose within the scope of authorization
by the Reserve bank.

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III. Foreign exchange and any income there on acquired

lawfully, i.e. without contravention of any of the provisions of the
FERA 1973 by persons while they were residents outside India
for a continuous period of not less than one year.
IV. Foreign exchange and any income thereon earned by
persons through employment, business or vocation outside India
taken up or commenced while they were resident outside India
and such stay outside India was for a continuous period of not
less than one year.
V. Foreign exchange held in the form of coins.
VI. Foreign currency or currencies held for numismatic
purpose up to a total of U.S. $ 500.
VII. Foreign currency or currencies held for personal
purposes up to the value of U.S. $ 500 or its equivalent.
(iii) Though the export of goods other than those essentially needed for use
within the country as listed in Schedule I to the Export (Control) Order,
1968, or under deferred payment arrangements is free, i.e., may be
made without any permit or license, exporters are required to declare the
export value of the goods before they are shipped and to lodge the
shipping documents for collection of the export proceeds with an
authorized dealer. The authorized dealer, in his turn, has to report the
collection to the Reserve Bank in due course.
(iv) The Reserve Bank has listed the currencies in which payment for
exports can be received. Thus, the export of goods from shipment till the
receiving of payment as well as the currency in which such payments
can be received is under control.
Control over Spending
i) The spending of foreign exchange is almost fully controlled. Except for
the few items listed in the open general License in operation for the time
being, goods can be imported from outside India only against a license.
Such licences are issued by the Director General of Foreign trade, while

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receipt into India of goods of a value equivalent to the amount of foreign

currency paid out abroad is looked after by the Reserve Bank.
The import policy is announced annually by the Central government, and
the import license, granted by the Director General of Foreign Trade permitting
import of goods, carries with it permission to pay for them, while the Reserve
Bank prescribes, more correctly has prescribed, the currencies as well as the
manner in which payment should be made.
(iii) For the import of services, or for remittances otherwise
than in payment of imported goods, or for the foreign exchange required
for foreign travel, the licensing authority is the Reserve Banks and in some
cases, the Government of India. The control is exercised through permits
granted by the Reserve Bank against an application in a prescribed form.

(v) The issue of foreign exchange in any form, such as traveler’s cheques,
notes, coins etc. to persons resident in India even under instructions
from an overseas branch/correspondent of an authorized dealer requires
prior permission of the Reserve Bank.

Control of Exchange rate

The control on the exchange rate of the rupee is exercised by the
Reserve bank through the rupee-sterling exchange rates fixed by it. The rupee-
sterling rates used to be fixed on the basis of the external parity of the Indian
currency in terms of gold or the U.S. dollar of the weight and fineness in effect
on July 1,1944, as declared by the Government of India in pursuance of the
membership agreement with the International Monetary Fund (IMF) , of which
India is a founder member. The devaluation of the rupee in September 1949
and again in June 1969 and again in June 1966 and 1992 affected the par
value of the rupee in terms of gold as notified to the IMF, and it was revised first
to 0.186621 grammas of fine gold per rupee, and then to 0.118489 grammes
per rupee, that is U.S. $ 13.3333=Rs. 100 or $ 1=Rs. 7.50. with the devaluation
of the pound sterling in November 1967 the exchange rate for the rupee in
terms of pound sterling was fixed at ₤5.5556=Rs. 100 or ₤ 1=Rs. 18. Then in

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August 1971, when the United States suspended the convertibility of its dollar
into gold, the rupee-sterling rate was allowed to fluctuate though the gold parity
and the U.S. dollar parity of the rupee remained unchanged with reference to
the par value of the rupee in terms of the U. S. dollar and the exchange value
of pound sterling daily in the London exchange market where it was allowed to
float freely upwards against the dollar.
The upper and lower limits for the Reserve Bank’s rates for purchase
and sale of pound sterling were fixed, providing a margin of one percent above
and below the exchange value of the pound sterling. This meant that although
the exchange rate for the rupee was pegged to the U.S. dollar, the pound
sterling continued as the currency used by the Reserve Bank for its intervention
in the exchange market.
The buying and selling rates as fixed by the Reserve Bank are the rates
at which it purchases and sells sterling from and to authorized dealers. The
obligation of the Reserve Bank is to deal in sterling only on spot or ready basis,
though it also purchases sterling on a forward basis up to nine months in order
to assure exporters of a reasonable rate of exchange against all normal exports
of The basket peg system was replaced by the Dual Exchange rates. The
convertibility is essentially widening the general acceptability of the currency
from domestic to international population. This is not in the hands of the country
itself, for that foreigners must have a confidence in the economy of the country
in question. More than 45 out of 128 IMF member countries, some of them
quite wealthy, have made their currencies convertible formally, but many of
them are still de facto non-convertible.
Transactions Subject to Control
Generally speaking, transactions having international financial implications are
regulated by the Exchange Control Department. These include:
(a) Purchase and sale of foreign exchange;
(b) Export and import of currency, cheques, drafts, traveler’s cheques
and other financial instruments;
(c) Export and import of securities;
(d) Procedure for realization of the proceeds of exports;

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(e) Foreign travel exchange and therefore;

(f) Acquisition and holding of foreign securities.
(g) Acquisition, holding and disposal of immovable property in India
by foreign nationals and companies;
(h) Acquisition, holding and disposal of immovable property outside
India by residents in India;
(i) Transfer of securities between residents and non-residents
(j) Payments to non-residents or to their accounts in India;
(k) Maintenance of balances at foreign centers;
(l) Trading, commercial and industrial activities in India of foreign
firms and companies and foreign nationals;
(m) Acquisition of business undertaking and holding of shares in
Indian companies by foreign nationals, firms and companies as well as
by corporate bodies predominantly owned by non-resident Indians;
(n) Appointment of non-residents and foreign nationals and
companies as agents or technical/management advisers in India; and
(o) Employment, profession, etc, undertaken in India by foreign
nationals;
(p) Setting up of joint ventures/subsidiaries outside India by Indian
companies.
Permitted Currencies
The permitted currencies are foreign currencies which are freely convertible,
i.e.,
Group A
Australian Dollars Japanese yen
Australian Schillings Kuwaiti dinars
Bahrain dinars Malaysian dollars
Belgian francs Netherlands guiders
Canadian dollars Norwegian kroner
Danishe kroner Pound sterling
Deutsche marks Singapore dollars
French francs Swedish kroner

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Hongkong dollars Swiss francs

Italian lira U.S. dollars

Approved/Permitted Methods for Receipts and of Payments

By an approved method of payment is meant the currency appropriate to
the country of origin of the goods in the case of imports, and the currency
appropriate to the country of destination of the goods in the case of exports.
(a) For Receipts:
An authorized dealer may receive remittance from foreign countries. And
obtain reimbursement from his foreign branches and correspondents in
payment of exports from India and other payments in currencies as detailed
below.

Group Permitted Methods

i) All countries other than those listed (a) Payment in rupees from the
in (ii) below account of a bank situated in
any country in this group
(b) Payment in any permitted
currency
ii) Member countries in the Asian (a)
Clearing Union (except Nepal), Payment for all eligible current
Bangladesh, Myanmar Islamic transactions in Indian rupees or
Republic of Iran, Pakistan and Sri Asian Monetary Unit (AMU) or in
Lanka the currency of the participating
country in which the other party
(b) to the transaction is resident.
Payment in any permitted
currency in other cases.

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(c) Of payments: An authorized dealer may make remittance from India or

provide reimbursement to his branches and correspondents in foreign
countries and other payments in currencies as detailed below.
Group Permitted Methods
(i) All countries other than those (a) Payment in rupees to the account
listed in (ii) below of a resident of any country in
(b) this group
Payment in any permitted
(ii) Member countries in the Asian (a) currency
Clearing Union except Nepal,
Bangladesh, Myanmar, Islamic Payment for all eligible current
Republic of Iran, Pakistan and Sri transactions in Indian rupees or
Lanka Asian Monetary Unit (AMU) or in
the currency of the participating
(b) country in which the other party
to the transaction is resident.
Payment in any permitted
currency in other cases.

Convertible Currencies
A convertible currency is a currency which can be converted into gold or
any there currency freely. The conversion into gold is effected through a bank
dealing in foreign currencies. The convertibility of a currency is said to be
internal when such conversion is permissible only to residents in the country,
and external when it is permissible to non-residents as well. A currency is said
to be fully convertible when there is no restriction, except the exchange rate of
the currency in terms of other currencies, on its conversion into gold or any
other currency, or in respect of transactions in it converting the import and
export of goods and services-transactions on current account as well as capital
account, between residents and non-residents, or among the non-residents
themselves. A fully convertible currency is referred to as a ‘hard currency’,
where as a non-convertible currency is known as ‘soft currency’.

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Choice of Currency in International transactions

While there are no restrictions from the Exchange Control viewpoint on any
foreign currency being chosen in international transactions comprising
import/export trade, consultancy services etc., the current export/import (Exim)
policy stipulates that-
(a) All export contracts and invoices (expect those for which payments are
to be received through the Asian Clearing Union) should be
denominated only in a freely convertible foreign currency, and
(b) All settlements of payments in terms of contracts with overseas parties
have to be made in permitted currency only.
Authorized Dealer
An authorized dealer, vide earlier Section 6 of the Foreign Exchange
Regulation Act, 1973 now replaced with FEMA, 1999 is a person authorized in
writing by the Reserve Bank to deal in foreign exchange. This delegation of
authority was necessary as the Reserve Bank did not, and still does not deal in
foreign exchange with the public. Thus, the intended exchange control is
exercised to a large extent by the authorized dealers on behalf of the Reserve
Bank.
An authorized dealer may have authority to deal in all foreign currencies
or only in specified currencies; or to undertake transactions of all descriptions in
foreign currencies or only certain specified transactions. The authority may be
for a specific period or within specified amounts, and may be revoked by the
revoked by the Reserve Bank for reasons appearing to it to be sufficient for the
purpose.

List of Authorized Dealers in Foreign Exchange

ABN Amro Bank N.V. Canara Bank
Abu Dhabi Commercial Bank Ltd. Catholic Syrian Bank Ltd.
Allahabad bank Ltd. Central Bank of India
American Express Bank Ltd. Centurion bank Ltd.
Andhra Bank Ltd. Chinatrust Commercial Bank
Arab Bangladesh Bank Ltd. Cho Hung Bank

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Bank International Indonesia Citibank N.A.

Bank of America national Trust and City Union Bank Ltd
Savings Association.
Bank of Bahrain and Kuwait B.S.C. Commerz bank
Bank of Baroda Corporation Bank
Bank of Ceylon Credit Agricole Indosuez
Bank of India Credit Lyonnais
Bank of Maharashtra Dena Bank
Bank Muscat S.A.O.G. Deutsche Bank Aktiengesellschaft
Bank of Nova Scotia The Development Bank of Singapore Ltd.
Bank of Punjab Ltd. Development Credit Bank Ltd.
Bank of Rajasthan Ltd. Dhanalaxmi Bank Ltd.
Bank of Tokyo- Mitsubishi Ltd. Federal Bank Ltd.
Banque National De Paris Paribas The Fuji Bank Ltd.
Barclays Bank Ltd. HDFC Bank Ltd.
Beneras State Bank Ltd. Hongkong and Shanghai Banking Corpn.
Bharat Overseas Bank Ltd. ICICI Bank
Bombay Mercantile Cooperative Bank Ltd. Siam Commercial Bank Ltd.
IDBI Bank Ltd. Societe General
Indian Bank Sonali Bank
Indian Overseas Bank South Indian Bank Ltd.
Indusind Bank Ltd. Standard Chartered Grindlays Bank Ltd.
ING Bank State Bank of Bikaner and Jaipur
Jammu and Kashmir Bank Ltd. State Bank Of Hyderabad
Karnataka Bank Ltd. State Bank of India
Karur Vysya Bank Ltd. State Bank of Indore
KBC Bank N.V. State Bank of Mauritius Ltd.
Krcdict Bank N.V. of Belgium State Bank of Mysore
Krung Thai Bank Public Company Ltd. State Bank of patiala
Lakshmi Vilas Bank Ltd. State Bank of Saurashtra
Lord Krishna Bank Ltd. State Bank of Travancore
Maharashtra State Cooperative Bank Ltd. Syndicate Bank

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 Export Finance

Marsheq Bank The Suminioto Bank Ltd.

Morgan Guarantee Trust Co. of New York USA
Nedungadi Bank Ltd. Tamilnad Mercantile Bank Ltd.
Oman International Bank Thomas Cook (India) Ltd.
Oriental Bank of Commerce UCO Bank
Overseas Chinese Banking Corpn. Ltd. Union Bank of India
Punjab National Bank United Western Bank Ltd.
Punjab & Sind Bank UTI Bank Ltd.
Sangli Bank Ltd Vijaya Bank
Sanwa Bank Ltd. Vysya Bank Ltd.
Saraswat Cooperative Bank Ltd.
SBI Commercial and International Bank Ltd.

Authorized dealer’s Transactions with RBI

(a) Legal obligation of RBI: Under Section 40 of the Reserve Bank Of India
Act, 1934, read with the Central Government notification No. S.O. 140
(E) dated 27th February, 1993, the Reserve Bank of India is under
obligation to sell U.S. dollars to the authorized dealers for purposes
approved by the Central Government. And in terms of the said
notification the Reserve Bank has also to buy U.S. dollars from the
authorized dealers to the extent it can at its rate of exchange calculated
with reference to the prevailing market rate.
(b) For Cover Operations for Merchant Transactions only: This recourse to
the Reserve Bank for transactions in foreign currencies is available to
the authorized dealers for their cover operations only, more precisely for
cover of their actual merchant transactions, and not for their anticipated
purchases of the currency from their constituents.
However the authorized dealers may sell to the Reserve Bank U.S.
dollars purchased from their overseas branches/corresponds for funding
the latter’s rupee accounts in India to meet their bonafide needs.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

(c) Currencies dealt in by Reserve Bank: The Reserve Bank buys spot only
US dollars, and does not ordinarily buy either spot or forward any other
currency. Nor does it sell forward any currency to an authorized dealer.
(d) Payment of Rupee value: The payment of rupee value against sale of
foreign currency to the Reserve Bank will be made by the Reserve
Bank’s concerned account of the authorized dealer on the appropriate
value date without waiting for the credit information from the Reserve
Bank’s correspondent.
In the foreign currency amount is not delivered to the overseas
correspondent of the Reserve bank on the value date, interest will be charged
at the Reserve Bank’s rate on the rupee value credited to the account of the
authorized dealer for the days of default. In order that the overdue interest may
be recovered automatically by debit to the authorized dealer’s account with
concerned office of the Reserve Bank the authorized dealer should lodge a
standing authority to that effect with the Reserve Bank. Cases of undue delay
will attract, apart from overdue interest, penalties under the Foreign Exchange
management Act, 1999
1. Standing Instructions to Overseas Correspondent:
Authorized dealers should give standing give standing instructions to
their overseas branch/Correspondents to mention clearly the name of the
principal i.e., the authorized dealer, as well as the name of the concerned
branch there of on whose behalf the foreign currency amounted is delivered to
the Reserve Bank’s account with the Federal Reserve Bank of New York.
2. Submission of Statement:
All transactions with the Reserve Bank should be reported to the
Reserve Bank in appropriate Return. Form A2 need not be completed in
respect of sale of foreign currencies to the Reserve Bank.
Foreign Currency Accounts Overseas
(a) Nostro Account: For the purpose of foreign exchange transactions a
bank authorized to deal in foreign exchange in India requires to maintain
accounts in foreign currencies with its overseas branches or

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 Export Finance

correspondents in different countries. Such an account in a foreign

currency with an overseas branch or correspondent is known as Nostro.
(b) Proforma Account:
(i) The transactions routed through a Nostro account are recorded in
a proforma account in the books of the bank in the home country
on the “mirror principle”, i.e., in a reverse order. In other words,
what is debit in the Nostro account will be credit in the Proforma
account and vice versa. The entries may originate at either end.
For instance, if a TT is drawn by the bank in the home country on
its foreign correspondent, the amount of the TT will be credited to
the Proforma account at the time of issue, while the Nostro
account will be debited with the TT amount subsequently at the
time of payment. Similarly, if a bill drawn under a letter of credit
opened by the bank in the home country and advised through its
overseas correspondent, is negotiated by the latter, the payment
to the beneficiary of the credit will be made to the debit of the
Nostro account, that is to say, the entry will originate at the
foreign centre, and this debit will be responded to afterwards by
the bank in the home country on receipt of the debit advice
together with the bill and the shipping documents, by credit of the
Proforma account.
(ii) The Proforma account is maintained both in the concerned
foreign currency and the home currency, i.e., rupees, and the rate
of exchange at which the conversion of one currency into the
other is made is also recorded.
(c) Vostro Account: The account maintained by an overseas branch or
correspondent with the bank at home is known, as Vostro (an Italian
word meaning your) account. In other words, the rupee account of a
foreign branch or correspondent in the books of a bank in India is a
vostro account.
As is clear from the foregoing paragraphs, the same account may
be Nostro or Vostro, depending on the approach. The rupee account, as

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 Export Finance

indicated above, is vostro account from the point of new of the foreign
branch or correspondent, and the Nostro account referred to in
paragraph (a) above with be Vostro account from the point of view of the
foreign branch or correspondent.
(d) Loro Account: The word Loro means their. Thus, an account
maintained by a bank in a foreign country with a bank in India will be a
Loro account from the point of view of another bank in the same or any
other foreign country.
(e) Escrow Account : An escrow account is a foreign currency account in
US dollar opened with the permission of the Reserve Bank with an
authorized dealer in India for the purpose of routing the export and
import transactions under a counter trade agreement between an Indian
party and an overseas one. No interest is payable on the balances
standing at credit of an escrow account, but the balance temporarily
rendered surplus may be placed in a short-term deposit up to a total
period of one month (in a period of 6 months) at the upper rate of
interest,
Application for the Reserve Bank’s permission to open an escrow
account should be made by the overseas exporter/organization through
the authorized dealer with whom the account is proposed to be opened
to the office of the Reserve Bank under jurisdiction of which the
authorized dealer is functioning.
No overdraft or loan is to be granted against funds in an escrow account.

FORWARD EXCHANGE CONTACT

Definition:
A forward exchange contract in foreign currency is a contract for buying
or selling a foreign currency for delivery on a specified future date or within a
specified future period at a rate of exchange now fixed. No cash passes hands
at the time of making the contract; but the seller agrees to deliver, and the
buyer agrees to take up against payment in a stated currency, the amount of

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

the forewing currency specified on the date or during the period indicated at the
rate of exchange fixed in the contract. In the case of a contract with a customer
cash is received or paid only at the bank.
Need for Forward Contract
(a) Though the IMF agreement stipulated fixed parties of the currencies of
the member countries, it permits a margin of 2.25% on either side of the
parity. This means that the rate of exchange between the currencies of
any two countries which are members of the IMF may normally fluctuate
within this band, apart from the wider fluctuations, under extraordinary
circumstances. Hence an importer, who has payments to make to a
foreign supplier, runs the risk of paying more, and an exporter, who has
payments to receive from a foreign importer, faces the risk of receiving
less, if the rate of exchange rises or falls. Forward deals in foreign
exchange are made to cover, i.e. avoid or eliminate, such risks of
exchange loss.
Forward Contract
(a) Parties: A forward contract may be made between a banker and his
customer or between two bankers. A contract between a banker and his
customer is usually entered into directly, while a contract between
bankers may be made either directly between themselves or through an
exchange broker.
(b) Dates of Delivery: A forward contract must state the fixed date or the first
and the last dates or delivery and not such phrases as “Delivery one
week” or “Delivery one month forward” or “Delivery three months
forward,” etc. It should also contain the phrase:

Specimen of Forward Contract

(Name of bank)
To ______________________________
(Name and address of the party with whom contract is entered into)
We confirm having bought from/sold to you the following exchange:
Against Rate Usance Place Delivery Amount

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
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 Export Finance

(For. (Local
Currency) currency)

“Subject to the Rules and Regulations of the Foreign Exchange Dealers’

Association of India.”
Through (Broker) ________________________________
Signature
General Guidelines
(a) Against Trade Transactions Only: An authorized dealer may enter into
forward contracts with the public without prior approval of the Reserve
bank, provided that he is satisfied that:
(i) The forward sale or purchase is by way of cover of the exchange
risk arising out of a genuine trade transaction;
(ii) The contracting party is in fact exposed to an exchange risk in
respect of the underlying transaction, and
(iii) The risk is in the currency in which the forward cover facility is
desired.
(b) Utilization of cover: Forward contracts are firm contracts and should,
therefore, be taken up by the respective maturity dates in fulfillment of
the transaction in respect of which the contract was entered into. A
banker should, under no circumstances, allow his customer to utilise,
even partially, a contract against any other foreign exchange
commitment or risk. This prohibition applies to utilization of a forward
sale contract against any order other than the one for which the contract
was booked, even when the two orders are covered under the same
import license or OGL.
Where, however, an exporter can not execute an export order for
reasons beyond his control, the forward purchase contract made against
that order may be allowed to be utilized against another order of the

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

same overseas buyer for the same commodity, subject to prior approval
of the Reserve Bank obtained against the exporter’s application in Form
FCC-3. An exporter can get this facility of substitution of export order
once only.
(c) Part Utilization in the case of Forward Purchase Contracts, A banker
may allow (i) a part Utilization of the contract by part deliveries of foreign
equivalent to the value of the part shipment made, or (ii) the utilization of
the contract against shipment of goods different in quality, grade, etc.,
from those mentioned in the original order, provided that the foreign
buyer had agreed to accept those goods under the same order, and the
exporter produces documentary evidence in support thereof.
(d) No Ready Sale/Purchase Against Forward Sale/Purchase: No ready
sale or purchase should be made to or form a customer in respect of a
transaction for which a forward contract has already been entered into.
(e) Noting/Recording of Documents: The documents produced as evidence
by a customer in connection with the booking of a forward contract and
inspected by the banker, such as the Exchange Control copy of the
import license, etc., should be marked “seen” by the banker under his
stamp and initials before they are handed back to the customer, under
his stamp and initials before they are handed back to the customer. The
booking of the contract should be endorsed on the Exchange Control
copy of the Import license.
(f) Submission of Remittance Forms: In the case of forward sales, the
appropriate remittance Form A1 or A2 should be completed only at the
time of actual delivery of the foreign exchange, and not at the Exchange
Control regulations, prior approval of the Reserve Bank should be
obtained for the remittance before making the forward contract.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
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 Export Finance

Forward Exchange
The term forward exchange refers to the foreign currency bought or sold
for delivery on an agreed future date at the rate of exchange now fixed.
Forward Rate
The rate of exchange fixed under a forward contract for buying or for
selling a foreign currency for delivery at a specified future date is known as the
forward rate of exchange, or simply the forward rate. In the case of a sterling
contract the rate has to be in accordance with the guidelines provided by the
FEDAI from time to time. For contracts in other currencies the rate is to be
determined on the basis of market conditions. The rate so fixed in either case is
to be expressed in terms of Rs. 100.
The word forward here implies spot or immediate plus the time lag. i.e.,
the period fixed under the contract for delivery of the foreign exchange bought
or sold.
Forward Rate Quotations
The forward rate is usually quoted in terms of the spot rate, i.e., the rate
of exchange currently ruling in the exchange market for immediate delivery of
one currency another. The rate may be expressed as being at parity with, or at
a premium or discount on, the spot rate.
In the case of forward purchase contract for pound sterling, the banker
may quote ₤0.0025 better, and in the case of forward sale contract for the said
currency he may quote ₤0.0100 less, for every six months or part thereof.
Parity/Premium/Discount
(a) Parity: If pounds for delivery in three months time are offered in Mumbai
at a rate of exchange which is not different from the sport rate, then the
sport rate, say Rs. 100=₤ 1.7955, is at parity with the forward rate. In
other words, the spot rate in this instance is the same as the rate for
delivery of pounds at the expiry of three months. The abbreviation par is
used to denote this position.
(b) Premium/Discount:
(i) A premium or discount in relation to forward rates represents the
margin which is added to, or deducted from; the spot rate and is,

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 Export Finance

therefore, known as the forward margin. To denote at premium or

at discount, the abbreviations pm or dis is used.
(ii) In a currency quotation, i.e., when a varying number of foreign
currency units are quoted against one unit, or a fixed number of
units, of the home currency, a forward rate quoted at a premium
implies that the foreign urgency in question is dearer and that the
rate, at the end of the period for which the exchange is booked,
will be lower than the spot rate by the amount of the premium for
the period. In other words, the buyer will receive fewer units of the
foreign currency for every 100 or any other fixed number of units
of the home currency.
(iii) If, on the other hand, a three months, forward rate is quoted at a
discount, it implies that the foreign currency in question is
cheaper and that the rate, at the end of three months, will be
higher than the spot rate by the amount of the discount. The
buyer will, therefore, receive more units of the foreign currency for
every 100 or any other fixed number of units of the home
currency.
(iv) In a home currency of direct quotation, where a varying number of
home currency units are quoted against a fixed number of units of
a foreign currency, a forward rate quoted at a premium or
discount would mean just the opposite. The rate at the end of the
period of contract would be higher or lower than the spot rate by
the amount of the premium or discount, accordingly as the rate is
at a premium or a discount.
Press Quotations
The forward rates quoted in the press are as under:
London on New York: Spot 1.80 -- 1.8050
Forwards .75 -- .50c
Or 1.25 -- 1.00c
Or 2.00 -- 1.25c premium
London on New York: Spot 1.80 -- 1.8050

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 Export Finance

Forwards 1/4 – 1c - 1.25-2c, 2.50-3c

The Quotations are to be interpreted as indicated discount below:
London spot buying rate for dollars ₤ 1= $ 1.8050
London spot selling rate for dollars ₤ 1= $ 1.80
Forwards mean premium for 1 month, 2 months and 3 months, and discount for
1 month, 2 months, and 3 months on the rate, as the case may be.

Rule for Quoting Forward Rate

(a) In Currency Quotation: (i) Referring to the above quotations, since the
dealer in London would want to receive as many dollars, and to part with
as few dollars, as few dollars, as possible per pound, he would acting on
the principle: by high, sell low, deduct the higher premium figure from the
spot selling rate for his forward selling price.
(b) On the same principle, he would, in the other case, i.e., when the rate is
quoted at a discount, add the higher discount figure to the spot buying
rate to obtain his forward buying price and the lower discount figure to
spot selling rate to get his forward selling price.
The above rules relates to exchange rates on indirect basis. These rules
are given below in a chart form.

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Rates Premium Discount

Selling rates for sales to Quote maximum Quote minimum
customer premium. discount.
Deduct higher premium Add lower discount to
from spot rate. spot rate.
Sell low to make it Sell low to make it less
For option forward
dearer for customer. cheap for customer.
Deduct maximum Add minimum discount
Buying rates for
premium for longest for shortest period.
purchases from
customer. period. Quote maximum
Quote minimum discount.
premium. Add higher discount to
Deduct lower premium spot rate.
from spot rate. Buy high to make it very
For option forward
Buy high to make it less cheap for the bank.
dear for the bank. Add maximum discount
Deduct minimum for longest period.
premium for shortest
period.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

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 Export Finance

PRE-SHIPMENT FINANCE FOR EXPORT

Credit and finance is the life blood of business whether domestic or
international. More so in case of export transactions on account of the
emergence and prevalence of ingenious non-price competitive techniques
encountered by exporters in various countries 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 extended to payment terms offered by
exporters. Liberal payment terms generally score over the competitors of same
or similar products, not only of capital equipment but also of consumer goods.
These terms, however, depend on the availability of finance to exporters
in relation to its quantum, cost and the period not only at post shipment stage
but also at pre-shipment stage. After all, production and manufacturing for
substantial supplies for exports take time in case finance is not available to
exporters for production. They will not be in a position to book large export
orders. Even merchant-exporters require finance for obtaining products from
their suppliers.
Short Term Credit
Pre-shipment finance is also known as ‘packing Credit’. It refers to any
loan or advance granted or any other credit provided by a bank to an exporter
for financing the purchase, processing, manufacturing or packing of goods’
prior to shipment on the basis of letter of credit opened in his favor or in favor of
some other person, by an overseas buyer or a confirmed or irrevocable order
for the export of goods from India or any other evidence, for an order for export
from India having been placed on the exporter or some other persons, unless
lodgment of export order or L/C with the bank has been waived 1. It is, thus,
available to all types of exporters i.e. merchant exporters and Export/Trading
Houses2/Star Trading Houses2/Super Star Trading Houses2 and manufacturer-
exporters, and even to manufacturers of goods supplying to Star Export
Houses.

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Pre-shipment Finance Categories

Packing credit falls in following categories:
 Rupee Pre-shipment credit or packing Credit
 Packing Credit on Deemed Exports
 Rupee export packing credit to manufactures supplier for export
routed through Export Houses, State Trading Enterprises (STE), etc.
 Rupee packing Credit to sub-suppliers
 Rupee Pre-shipment Credit to specific sectors/segments.
A. packing Credit for All Goods other than Software Industry
Packing credit can be sanctioned as:
 Extended packing Credit Loan
 Packing Credit Loan (Hypothecation)
 Packing Credit Loan (pledge)
 Secured Shipping Loan
Further it depends on the nature of production and procurement system
concerning the commodity to be exported.
Extended packing Credit Loan
It is granted to the clients for making advance payment to the suppliers
for acquiring goods to be exported. Thus, it is clean in nature and usually
extended to the parties, who are rated as first class, for a very short duration.
However, bank should assess the procurement period and once the goods are
acquired and are in the custody of the exporter client, convert the clean
advance into PCL hypothecation/pledge or secured shipping loan depending on
the nature of commodity.
Packing Credit hypothecation
It is extended where raw materials, work-in-process and finished goods
meant for export are available as security. The processing/manufacturing may
be undertaken by the exporter himself or though sub-contractors captive units.
Packing Credit Loan
The PCL can be granted as loan in the form of pledge in cases where
exporters are required to collect/obtain the raw materials in odd or bunched lots
or the raw material is seasonal in nature and the actual exports take place in

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 Export Finance

due course in installments as per the shipping/delivery schedules agreed upon

by the overseas buyer.
Secured Shipping Loan
Once the goods are ready for shipment and exporter/supplier has
handed over the goods to the transport operator/clearing & forwarding agent for
dispatch/effecting the shipment, the advance can be granted as secured
shipping loan. This is normally sanctioned for short period considering the time
taken for dispatch of goods to port towns and completion of shipping and
custom formalities. Here bank ensure that the goods are handled by approved
transport operators/C & F Agents.
Secured shipping loan can also be released on receipt of lorry
receipt/rail receipt from the supplier and after forwarding the same to the C&F
agent along with shipping instructions from the party.
Combination of Clean and Secured Advance
Packing credit can also be given as a combination of clean and secured
advance.
Eligibility
The packing credit is given on the strength of letter of credit (L/C)
opened in favor of some other person by foreign buyer or against a confirmed
and irrevocable export order received by him. In case of commodities like tea,
jute, tobacco, machine tools, semi-precious and precious stones, mineral ores,
etc., the credit can be granted on the basis of past export performance of the
client. The applicant should, however, hold an importer-exporter code Number
from the licensing authority concerned and he or any of his associates/sister
concern should not be on the caution list of RBI/ECGC.
L/C or Firm orders (Also see below). It can also be given on production
of sufficient evidence i.e. cable and telex, the L/C or firm export order received
by the exporter and lodged with the bank within a reasonable time (as agreed
upon by the bank) of the grant of such advance. Moreover, the cable/telex
messages should reveal quantity and particulars of goods, value of order, date
of shipment/delivery period, terms of payment and name of buyer. In case of

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 Export Finance

new exporters; bank may insist that they arrange L/Cs showing “opening bank”
as consignee. Moreover, the L/C must also:-
(i) be irrevocable and issued subject to Uniform Customs and Practices for
Documentary Credits,
(ii) For a period which is adequate for production/shipment of goods taking
into consideration the procurement period/production or operating cycle
for goods to be exported,
(iii) No restricted for negotiation to another bank than the bank where
application for packing credit is made,
(iv) Have correct name and address of the exporter, particularly with regard
to spellings,
(v) Expire in India and not at the counter of the opening (foreign) bank,
(vi) Its terms should not contradict each other and instructions therein are
precise and unambiguous. For example, if a L/C calls for shipment in
more than one lot, it can prohibit part shipments or if the contract price is
f.o.b. it can not call for Bill of Lading/Air Waybill evidencing shipment on
prepaid basis.
It can also be given under the ‘Red Clause’ 1 letter of credit i.e. at the
instance and responsibility of the foreign bank establishing the L/C.
In a Red Clause L/C, the packing credit advance is made against a
simple receipt and is unsecured whereas packing credit in normal course (i.e.
not against Red Clause) is made against the deposit of L/C and execution of
letter of pledge/hypothecation/trust receipt and other loan documents.
No L/C or Export Order. Banks would not insist on submission of export
order or L/C for every disbursement of packing credit from exporters with
consistently good track record.
For packing credit against orders, banks may obtain credit report on
overseas buyers from the overseas banks, in addition to asking the applicant to
submit buyer wise limit approved by the ECGC.
But any waiver of submission of export order or L/C would form part of
the terms of sanction of export credit limits and communicated to the Export
Credit Guarantee Corporation. Wherever such waivers are permitted ab initio,

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the same would be incorporated in the sanction proposal issued to the

exporter.
Credit against Advance Payment
If an exporter receives direct remittance from abroad by means of a
cheques or draft, L/C representing advance payment towards future exports
and in case if a bank advances funds against the security of such instruments,
this advance will be treated as exported as export finance and only
concessional rate of interest would be charged like a normal pre-shipment
advance.
Running Account Facility:
Banks may grant pre-shipment advances for exports of any commodity
without insisting on prior lodgment of any commodity without insisting on prior
lodgment of L/Cs or firm export orders on the following conditions.
(i) The need for Running Account Facility is established by the exporters to
the satisfaction of the bank.
(ii) Banks may extend the Running Account facility only to those exporters
whose track record had been good as also Export Oriented Units
(EOUs) Units in Free Trade Zones/Export Processing Zones (EPZs) and
Special Economic Zones (SEZs).
(iii) L/C or firm order is produced within a reasonable period of time to be
decided by the bank.
(iv) The banks should mark off individual export bills, as and when they are
received for negotiation/collection, against the earliest outstanding pre-
shipment credits on FIFO (First-in-First-out) basis. Banks should ensure
that concessive credit available in respect of individual pre-shipment
credit does not go beyond the period of sanction or 360 days from the
date of advance, whichever is earlier.
(v) Packing credit can also be marked-off with proceeds of export
documents against which no packing credit has been drawn by the
exporter.
RAF would not be granted to sub-suppliers.
Rupee Pre-Shipment Credit to Specific Sectors/Segments

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Manufacturer-Suppliers to Exporters/EH,STE etc. Banks may grant

export packing credit to manufacturer suppliers who do not have export
orders/letters of credit in their own name, and goods are exported through the
State Trading Corporation/Minerals and Metal Trading Corporation i.e. State
Trading Enterprises (STEs), etc or other export houses, agencies, etc.
Such advances will be eligible for refinance, provided the following
requirements are complied with apart from the usual stipulations.
(a) Banks should obtain from the export house a letter setting out the details
of the export order and the portion therof the be executed by the supplier
and also certifying that the export house has not obtained and will not
ask for packing credit in respect of such portion of the order as is to be
executed by the supplier.
(b) Banks should, after mutual consultations and taking into account the
export requirements of the two parties, apportion between the two i.e.
the Export House and the Supplier, the period of packing credit for which
the concessionary rate of interest is to be charges. The concessionary
rates of interest on the pre-shipment credit will be available upto the
stipulated periods in respect of the export house/agency and the supplier
put together.
(c) The export house should open inland L/Cs in favor of the supplier giving
relevant particulars of the export L/Cs or orders and the outstanding in
the packing credit account should be extinguished by negotiation of bills
under such inland L/Cs. If it is inconvenient for the export house to open
the latter should draw bills on the export house in respect of the goods
supplied for export and adjust packing credit advances from the
proceeds of such bills. In case the bills drawn under such arrangement
are not accompanied by bills of lading or other export documents, the
bank should obtain through the supplier a certificate from the export
house at the end of every quarter that the goods supplied under this
arrangement have in fact been exported. The certificate should give
particulars of the relative bills such as date, amount and the name of the
bank through which the bills have been negotiated.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(d) Banks should obtain an undertaking from the supplier that the advance
payment, if any, received from the export house against the export order
would be credited to the packing credit account.
Rupee Export Packing Credit to Sub-Suppliers
Packing credit can be shared between an Export Order Holder (EOH)
and sub-supplier of raw materials, components, etc. of the exported goods as
in the case of EOH and manufacturer suppliers, subject to the following.
(a) Running Account facility is not contemplated under the scheme. The
scheme will cover the L/C or export order received in favor of Export
Houses/Trading Houses/Star Trading Houses, etc. or manufacturer
exporters only. The scheme should be made available to the exporters
with good track record.
(b) Bankers to an EOH will open an inland L/C specifying the goods to be
supplied by the sub-supplier to the EOH against the export order or L/C
received by him as a part of the export a L/C, the sub-supplier’s banker
will grant EPC as working capital to enable the sub-supplier to
manufacture the components required for the goods to be exported. On
supplying the goods, the L/C opening bank will pay to the sub-supplier’s
banker against the inland documents received on the basis of inland
L/C. Such payments will thereafter become the export packing credit of
the Export Order Holder.
(c) It is up to the EOH to open any number of L/Cs for the various
components required with the approval of his banker/leader of
consortium of banks within the overall value limit of the order or L/C
received by him. Taking into account the operational convenience, it is
for the L/C opening bank to fix the minimum amount for opening such
L/Cs. The total period of packing credit availed by the sub-supplier(s),
individually or severally and the EOH should be within normal cycle of
production required for the exported goods. Normally, the total period
will be computed from the date of first drawl of packing credit by any one
of the sub-suppliers to the date of submission of export documents by
EOH.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(d) The EOH will be responsible for exporting the goods as per export order
or overseas L/C and any delay in the process will subject him to the
penal provisions issued from time to time. Once the sub-supplier makes
available the goods as per inland L/C terms to the EOH, his obligation of
performance under the scheme will be treated as complied with and the
penal provisions will not be applicable to him for delay by EOH, if any.
(e) The scheme is an additional window besides the existing system of
sharing of packing credit between EOH and manufacturer in respect of
exported goods. The scheme will cover only the first stage production
cycle. For example, a manufacturer exporter will be allowed to open
domestic L/C in favor of his immediate suppliers of components etc. that
are required for manufacture of exportable goods. The scheme will not
be extended to cover suppliers of raw materials/components, etc. to
such immediate suppliers. In case the EOH is merely a trading house,
the facility will be available commencing from the manufacturer to whom
the order has been passed on by the Trading House.
EOUs/SEZ Units :
Such units supplying goods to another EOU/SEZ unit for export
purposes are also eligible for rupee pre-shipment export credit under this
scheme. However, the supplier EOU/SEZ unit will not be eligible for any post-
shipment facility as the scheme does not cover sale of goods on credit terms.
The scheme does not envisage any change in the total quantum of
advance or period. Accordingly, the credit extended under the system will be
treated as export credit from the date of advance to the sub-supplier to the date
of liquidation by EOH under the inland export L/C system and up to the date of
liquidation of packing credit by shipment of goods by EOH and will be eligible
for refinance from RBI by the respective banks for the appropriate periods. It
has to be ensured that no double financing of the same leg of the transaction is
involved.
Banks may approach the ECGC for availing suitable cover in respect of
such advances.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

The scheme does not envisage envisage extending credit by a sub-

supplier to the EOH/manufacture and thus, the payment to sub-suppliers has to
be made against submission of documents by L/C opening bank treating the
payment as EPC of the EOH.
Rupee Pre-Shipment Credit to Construction Contractors
The packing credit advances to the construction contractors to meet
their initial working capital requirements for execution of contracts abroad may
be made on the basis of a firm contract secured from abroad, in a separate
account, on an undertaking obtained from them that the finance is required by
them for incurring preliminary expenses in connection with the execution of the
contract e.g., for transporting the necessary technical staff and purchase of
consumable articles for the purpose of executing the contract abroad, etc.
The advances would be adjusted within 180 days of the date of advance
by negotiation of bills relating to the contract or by remittances received from
abroad in respect of the contract executed abroad. To the extent the
outstanding in the account are not adjusted in the stipulated manner, banks
may charge normal rate of interest on such advance.
The exporters undertaking project export contracts including export of
services may comply with the guidelines/instructions issued by Reserve Bank
of India, Exchange Control Department, Central or finance, Mumbai from time
to time.
Export of Consultancy Services
Some of the Indian consultancy firms have taken up export of
consultancy services in connection with the setting up of industrial and other
projects in foreign countries. Where such consultancy services form part of
turnkey projects or joint ventures set up abroad, banks are considering suitable
credit facilities at the pre-shipment and post-shipment stages. The exporters
may need financial assistance from banks even in cases where consultancy
services alone are exported, particularly, if no advance payments are received.
Banks may consider granting suitable pre-shipment credit facilities
against consultancy agreements to consultancy firms for meeting the expenses
of the technical and other staff employed for the project and purchase of any

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

materials required for the purpose as well as for export of computer software,
both standard and custom built software programs, subject to the usual
conditions of packing credit scheme.
While deciding the pre-shipment facilities, advance payments received
against the contract must be taken into account.
Banks may consider issuing suitable guarantees to exporters of
consultancy services of high value with large advance payment, taking into
account the competence of the firm to undertake the assignment in question
and other related aspects.
Pre-shipment Credit to Floriculture, Grapes and Other Agro-based
Products
In the case of floriculture, pre-shipment credit is allowed to be extended
by banks for purchase of cut-flowers, etc. and all post-harvest expenses
incurred for making shipment.
However, with a view to promoting exports of floriculture, grapes and
other agro-based products, banks are allowed to extend concessional credit for
working capital purposes in respect of export-related activities of all agro-based
products including purchase of fertilizers, pesticides and other inputs for
growing of flowers, grapes, etc., provided banks are in a position to clearly
identify such activities as export-related and satisfy themselves of the export
potential thereof, and the activities are not covered by direct/indirect finance
schemes of NABARD or any other agency, subject to the normal terms &
conditions relating to packing credit.
Export credit should not be extended for investments, such as import of
foreign technology, capital assets or any other which can not be regarded as
working capital.

Export Credit against Proceeds of Cheques, Drafts, etc. Representing

Advance Payment for Exports.
(i) Where exporters receive direct remittances from abroad by means of
cheques, drafts, etc. in payment for exports, banks may grant export
credit at concessive interest rate to exporters of good track record till the

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

realization of proceeds of the cheques, draft etc. received from abroad,

after satisfying themselves that it is against an export order, is as per
trade practices in respect of the goods in question and is an approved
method of realization of export proceeds as per extant rules.
(ii) If, pending compliance with the above conditions, an exporter has been
granted accommodation at normal commercial interest rate, banks may
give effect to concessive export credit rate retrospectively once the
aforesaid conditions have been complied with and refund the difference
to the exporter.
Amount
The loan amount is decided on the basis of export order and the credit
rating of the exporter by the bank. While fixing an amount, the bank may also
take into consideration the exporter’s receivables on account of export
incentives like customs duty drawback, etc.
Generally, the amount of packing credit will not exceed f.o.b. value of the
export goods or their domestic value whichever is less. It can be to the extent
of domestic value of the goods even though such value is higher than their
f.o.b. value, provided the goods are entitled to duty drawback and also covered
by the Export production Finance Guarantee of the ECGC. In such cases,
excess advances can be liquidated from the drawback receivables.

Period of Advance
The period for which a packing credit advance may be given by a bank
will depend upon the circumstances of the individual case, such as the time
required for procuring, manufacturing or processing (where necessary) and
shipping the relative goods. It is primarily for the banks to decide the period for
which a packing credit advance may be given having regard to the various
relevant factors so that the period is sufficient to enable the exporter to ship the
goods.
If pre-shipment advances are not adjusted by submission of export
documents within 360 days from the date of advance, the advances will cease
to qualify for concessive rate of interest to the exporter ab initio.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

RBI would provide refinance only for a period not exceeding 180 days.
Rate of Interest
Banks should charge interest on pre-shipment credit up to 180 days, and
for the period beyond 180 days, but up to 360 days, at the rates to be decided
by the bank within the ceiling rate arrived at on the basis of PLR relevant for the
entire tenor of the export credit.
The rate of interest will be not exceeding BPLRs (Benchmark Prime
Lending Rates) not exceeding 2.5 percentage points, of individual bank
available to their domestic borrowers. The rate or interest beyond 180 days and
up to 360 days will “free” i.e. as desired by the bank keeping in view the BPLR
and spread guidelines.
The period of credit is to be reckoned from the date of advance.
The revision in interest rates made, from time to time, is made applicable
to fresh advances as also to the existing advances for the remaining period of
credit.
If pre-shipment advances are not liquidated from proceeds of bills on
purchase, discount, etc. on submission of export documents within 360 days
from the date of advance, the advances will cease to quality for concessive rate
of interest ab initio.
In cases where packing credit is not extended beyond the original period
of sanction and exports take place after the expiry of sanctioned period but
within a period of 360 days from the date of advance, exporter would be eligible
for concessional credit only up to the sanctioned period. For the balance
period, interest rate prescribed for ECNOS2 at pre-shipment stage will apply.
Further, the reasons for non-extension of the period need to be advised by
banks to the exporter.
In cases where exporters do not take place within 360 days from the
date of pre-shipment advance, such credits will be termed as ‘Export Credit Not
Otherwise Specified’ (ECNOS) and banks may charge interest rate prescribed
for ‘ECNOS – pre-shipment’ from the very first day of the advance.
If exports do not materialize at all, banks should charge on relative
packing credit domestic lending rate plus penal rate of interest, if any, to be

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

decided by the banks on the basis of a transparent policy approved by their

Board.
Packing credit can also be marked-off with proceeds of export
documents against which no packing credit has been drawn by the exporter.
If it is noticed that the exporter is found to be abusing the facility, the
facility would be withdrawn forthwith.
In cases where exports do not take place within 360 days from the date
of pre-shipment advance, such credits will be termed as ‘Export Credit Not
Otherwise Specified’ (ECNOS) and banks may charge interest rate prescribed
for ‘ECNOS –pre-shipment’ from the very first day of the advance.
If exports do not materialize at all, banks should charge on relative
packing credit domestic lending rate plus penal rate of interest, if any, to be
decided by the banks on the basis of a transparent policy approved by their
Board.
In cases where exporters have not complied with the term and
conditions, the advance will attract commercial lending rate ab initio. In such
cases, banks will be required to pay higher rate of interest on the portion of
refinance availed of by them from the RBI in respect of the relative pre-
shipment credit. All such cases should be reported to the Monetary policy
Department, Reserve Bank of India, Central Office, Mumbai 400 001 which will
decide the rate of interest to be charged on the refinance amount.

Application for packing Credit

For obtaining packing credit, a formal application giving details of credit
requirements is to be made to the bank. While some banks have evolved
special forms for the purpose, others either accept the application on general
loan forms or on plain paper. The application is proceed taking into
consideration the following points-

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(i) Demand for loan is genuine. The assessment is based on the letter of
credit/export order or correspondence exchanged between the applicant
and foreign buyer;
(ii) Credit-worthiness of the borrower;
(iii) in case of manufacturer applicants, they have adequate capacity to
process/manufacture the goods, or, they have arrangements to use
manufacturing facilities of other units to produce the goods within the
stipulated delivery schedules;
(iv) organizational setup of the exporter, his arrangements for exercising
control over the quality of the goods, adequacy of packing and transport
system, availability of raw materials for production/processing, etc.

Documents Required
The following documents are to be submitted along with application for
packing credit.
(i) Confirmed export order/contract or L/C etc. in original. Where it is not
available, an undertaking to the effect that the same will be produced to
the bank within a reasonable time for verification and endorsement. This
undertaking is required where the exporter wants to avail himself of
packing credit advance against preliminary information of contract where
by at the later stage the contract or L/C, as the case may be, will be
received by him.
(ii) An undertaking that the advance will be utilised for the specific purpose
of procuring/manufacturing/shipping etc., of the goods meant for export
only as started in the relative confirmed export order or the L/C.
(iii) Where the exporter/applicant asking for the packing credit is a sub-
supplier and wants to supply the goods to the Export/Trading/Star
Trading /Super Star Trading House or merchant exporter, an
undertaking from the merchant-exporter or Export/Trading /Star
Trading/Super Star Trading House stating that they have not/will not
avail themselves of packing credit facility against the same transaction

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

for the same purpose till the original packing credit is liquidated. Such
letter should be countersigned by the bank advising the L/C.
(iv) Joint and several demand pro-note signed on behalf of the firm aswell as
the partner individually.
(v) Letter of continuity (signed on behalf of the firm and partners
individually).
(vi) Letter of pledge to secure demand cash credit against goods (in case of
pledge) or agreement of hypothecation to secure demand cash credit (in
case of hypothecation).
(vii) Letter of authority to operate the account.
(viii) Agreement to utilise the money drawn in terms of contract.
(ix) Letter of hypothecation of bills.
(x) Partnership deed in case of partnership firm or Memorandum of
Association, Articles of Association, Certificate of Incorporation and
Commencement of Business for public/private Ltd. Cos. With certified
copy of the Board Resolutions.
(xi) Audited/Final Financial Statement for the past 3/5 years.
(xii) Copies of Income Tax/Wealth Tax Assessment Order for the past 2/3
years in the case of sole proprietary and partnership firm.
(xiii) Copy of a valid RCMC (Regn.-cum-Membership Certificate) issued by
FIEO held by the exporter and/or the Star Export house Certificate.
(xiv) Appropriate policy/guarantee of the ECGC.
(xv) Any other document required by the bank.
Packing credit advances are normally granted on secured basis.
Nevertheless, clean packing advance may also be granted. Money
advances are clean at their initial stage when goods are not yet
acquired. Once the goods are acquired and are in the custody of the
exporter, banks usually convert the clean advance into
hypothecation/pledge. In such cases, rules regarding submission of
stock statements and insurance would have to be complied with.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Export Credit Limits :

On receipt and scrutiny of application for export credit banks fix a credit
limit which is need based and not directly linked to the availability of collateral
security. Credit will not be denied as long as the requirement of credit limit is
justified on the basis of exporter’s performance and track record.
Sanction/Sanctioning Authority
Normally, packing credit loans are sanctioned by the regional/head office
of the bank on the recommendation of the concerned Branch Manager who
forwards the proposal along with his technical report. The head/regional office
sanctions the loan taking into consideration the recommendation of the branch
and the RBI instructions and also the export regulations, etc.
Sanctioning Authority:
In cases where export credit limits are utilised fully, banks may adopt a
flexible approach in negotiating the bills drawn against L/Cs and consider in
such cases delegating discretionary higher sanctioning powers to Branch
Managers to meet the credit requirements of the exporters.
Ad hoc Limits:
The Branches may be authorized to disburse a certain percentage of the
enhanced adhoc limits, pending sanction by higher authorities /board
/committee which had originally accorded sanctions, to enable the exporters to
execute urgent export orders in time.
Credit for purchase of Goods
Where goods to be exported are to be purchased from other
manufacturers/suppliers, the banks open a letter of credit in favor of supplier on
the strength of packing credit. This arrangement is known as ‘back to back
letter of credit’ or Inland L/C.
The time in sanctioning the packing credit depends upon the amount
applied for, and size of the bank where application is made. While at a small
office, Branch Manager may have very little or no authority to sanctions loan, in
bigger branches such as in port towns, his powers are considerably wide.
Consequently, the time taken for sanction varies from one to three weeks
depending upon the circumstances under which the Branch Manager can

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

sanction or has to obtain sanction from his regional/head office. In the cases
where loan amount involved is large, necessary sanction may take longer
period as loan proposals might have got to be cleared by the Board of
Directors.
Loan Agreement
Before disbursement of loan, the banks require the exporter to execute a
formal ‘loan agreement’. The format of this agreement again differs from one
bank to another. Some banks have a special agreement form designed for the
packing credit, and some use the general loan agreement forms.
Disbursement
The packing Credit may be released in one lumpsum or in stages as per
the requirement for executing the orders/Letter of Credit.
Liquidation of packing Credit
(i) General
The packing credit/pre-shipment credit granted to an exporter must be
liquidated out of proceeds of bill drawn for the exported commodities on its
purchase, discount, etc., therby, converting pre-shipment credit into post-
shipment credit. Further, subject to mutual agreement between the exporter
and the banker, it can also be repaid/prepaid out of the balances in Exchange
Earners Foreign Currency A/c (EEFC A/c) as also from rupee resources of the
exporter to the extent exports have actually taken place. If not so liquidated,
banks should charge the rate of interest for ECNOS – pre-shipment from the
date of advance.
(ii) Packing credit in excess of export value
(a) where by-product can be exported
Where the exporter is unable to tender export bills of equivalent value for
liquidating the packing credit due to the shortfall on account of wastage
involved in the processing of agro products like raw cashew nuts, etc., banks
may allow exporters, inter alia, to extinguish the excess packing credit by
export bills drawn in respect of by-product like cashew shell oil, etc.
(b) Where partial domestic sale is involved

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

In respect of export of agro-based products like tobacco, pepper,

cardamom, cashew nuts, etc., the exporter has necessarily to purchase a
somewhat larger quantity of the raw agricultural produce and grade it into
exportable and non-exportable varieties and only the former is exported. The
non-exportable balance is necessarily sold domestically. For the packing credit
covering such non-exportable portion, banks are required to charge commercial
rate of interest applicable to the domestic advance from the date of advance of
packing credit and that portion of the packing credit and that portion of the
packing credit would not be eligible for any refinance from RBI.
(c) Export of deoiled/defatted cakes
Banks are permitted to grant packing credit advance to exporters of HPS
groundnut and deoiled/defatted cakes to the extent of the value of raw
materials required even though the value thereof exceeds the value of the
export order. The advance in excess of the export order is required to be
adjusted either in cash or by sale of residual by-product oil within a period not
exceeding 30 days from the date of advance to be eligible for concessional rate
of interest.
(iii) Banks have, however, operational flexibility to extend the following
relaxations to their exporter clients who have a good track record:
(a) Repayment/liquidation of packing credit with proceeds of export
documents will continue. However, this could be with export documents
relating to any other order covering the same or any other commodity
exported by the exporter. Commodity exported by the exporter. While
allowing substitution of contract in this way, banks should ensure that it
is commercially necessary and unavoidable. Banks should also satisfy
about the valid reasons as to why packing credit extended for shipment
of a particular commodity cannot be liquidated in the normal method.
Asfar as possible, the substitution of contract should be allowed if the
exporter maintains account with the same bank or it has the approval of
the exporter maintains account with the same bank or it has the approval
of the members of the consortium, if any.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(b) The existing packing credit may also be marked off with proceeds of
export documents against which no packing credit has been drawn by
the exporter. However, it is possible that the exporter might avail of EPC
with one bank and submit the documents to another bank. In view of this
possibility, banks may extend such facility after ensuring that the
exporter has not availed of packing credit from another bank against the
documents submitted.
(c) These relaxations should not be extended to transactions of
sister/associate/group concerns.
Insurance
The bank insists on an insurance cover against fire, theft and burglary
risks for full value of the stocks. Similarly, insurance for goods in transit to port
towns/custom house may have to be arranged. Moreover, the policy must
contain ‘bank clause’.
Export Production Finance Guarantee
This guarantee enables banks to sanction advances at the pre-shipment
stage to the full extent of cost of production when it exceeds the f.o.b. value or
the contract/order, the difference representing incentives receivable. The extent
of cover and the premium are the same as for packing Credit Guarantee.
Banks having WTPCG i.e. Whole Turnover Packing Credit Guarantee is eligible
for concessional premium rates and higher percentage of cover.
Packing Credit Guarantee
Before giving packing credit to exporter, the banks usually insist upon
them to undertake a ECGC packing Credit Guarantee under which the
Corporation shares the risks with the lending bank. Any loan given to an
exporter for the manufacture, processing, purchasing or packing of goods
meant for export against a firm order or letter of credit qualifies for this
‘Guarantee’. Pre-shipment advances given by banks to parties who enter into
contracts for export of services or for construction works aboard to meet
preliminary expenses in connection with such contracts are eligible for cover
under this Guarantee.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

The requirement of lodgment of Letter of Credit/export order for granting

packing credit advances is waived if the bank grants such advances in
accordance with the instructions of the Reserve Bank in that respect.
This Guarantee enables banks to sanction advances at the pre-shipment
stage to the full extent of the cost of production when it exceeds the f.o.b. value
of the contract/order, the difference representing incentives receivables.
The Proposal:
Applications (proposals ) for packing Credit Guarantee are to be sent by
the bank concerned in the prescribed form. In respect of proposals of large
magnitude, say over Rs. 5 lakhs, the following information on the exporting firm
should also be furnished.

(i) A copy of the latest balance sheet.

(ii) Export turnover for the previous two years.
(iii) A report on the firm and on its proprietor/partners/directors, etc.,
indicating, besides their financial position and reputation, the value of the
personal assets properties, etc.
(iv) Whether it is possible to obtain a demand pro-note from the
proprietor/partners/directors, hypothecation/pledge of goods and any
other tangible security.
(v) The names of other banks from whom the exporter has been availing of
pre-shipment finance previously.
Whole Turnover Packing Credit Guarantee:
The WTPCG is issued to banks which undertake to obtain cover for
packing credit advances granted to all its customers on all India basis. In
consideration of the large volume of business offered for cover and the spread
of risks that will thus become available to it, the Corporation grants a higher
percentage of cover, lower premium rate and considerable education in
procedural formalities.
Premium:
The Corporation charges a premium for the risks covered. A lower rate
is charged under a Whole Turnover packing Credit Guarantee.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Export Financing of Software and IT Industry

Pre-shipment or Post-shipment finance can be provided to exporters of
IT and software services in case of specific orders from abroad. “IT service” is
defined as any service which results from the use of any IT software over a
system of IT products for realizing value addition.
Various segments of Information Technology and Software Industry
could be broadly classified into four categories.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(a) Software services and programming services

These services, which are also known as man-power exports, involve
deputation of professionals for delivering programming services at customers’
locations within the country, as well as abroad, under different contracts.
(b) Project services
(i) Customized software development
These services comprise providing solution to specific problems of the
customer which would be utilised by corporate main frame and mini
computer users.
(ii) Systems solution and integration
This involves providing a complete business solution using information
technology. In this, integrator addresses a business problem of the client
and offers an IT based business solution. The work involves
programming, testing, documenting customized software solution for
clients and integration of this programme with the client’s existing IT
system as well as with the systems of the client’s parties/associates.
(iii) Maintenance of software contract
These contracts cover trouble shooting operations and at times even
updation of software.
(c) Software products and packages
These comprise of
(i) Systems software and
(ii) Application software.
(d) Information technology related services (IT service)
IT services such as call centers, mentoring, teleconferencing, tele
medicine etc. result from the use of any IT software over a system of IT
products for realizing value additions.
Export Credit to Processor/Exporters- Agri-Export Zones
(i) Government of India have set up Agri-Export Zones in the country to
promote Agri Exports. Agri-Export Oriented Units (processing) are set up
in Agri-Export Zones aswell as outside the Zones and to promote such
units, production and processing are to be integrated. The producer has

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

to enter into contract farming with farmers and had to ensure supply of
quality seeds, pesticides, micro-nutrients and other material to the group
of farmers from whom the exporter would be purchasing the products as
raw material for production of the final products for export. The
Government, therefore, suggested that such export processing units
may be provided packing credit under the extant guidelines for the
purpose of procuring and supplying inputs to the farmers so that quality
inputs are available to them which in turn will ensure that only good
quality crops are raised. The exporters will be able to purchase/import
such inputs in bulk which will have the advantages of economies of
scale.
(ii) Banks may treat the inputs supplied to farmers by exporters as raw
material for export and consider sanctioning the lines of credit/export
credit to processors/exporters to cover the cost of such inputs required
by farmers to cultivate such crops to promote export of agri products.
The processor units would be able to effect bulk purchases of the inputs
and supply the same to the farmers as per a pre-determined
arrangement.
(iii) Banks have to ensure that the exporters have made the required
arrangements with the farmers and overseas buyers in respect of crops
to be purchased and products to be exported respectively. The financing
banks will also appraise the projects in agri export zones and ensure
that the tie-up arrangements are feasible and projects would take off
within a reasonable period of time.
(iv) They have also to monitor the end-use of funds, viz. distribution of the
inputs by the exporters to the farmers for raising the crops as per
arrangements made by the exporter/main processor units.
(v) They have to further ensure that the final products are exported by the
processors/exporters as per the terms and conditions of the sanction in
order to liquidate the pre-shipment credit as per extant instructions.
Deemed Exports- Concessive Rupee Export Credit

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Banks are permitted to extend rupee pre-shipment and post-supply

rupee export credit at concessional rate of interest to parties against orders for
supplies in respect of projects aided/financed by bilateral or multilateral
agencies/funds (including World Bank, IBRD, IDA), as notified from time to time
by Department of Economic Affairs, Ministry of Finance under the Chapter
“Deemed Exports” in Foreign Trade Policy, which are eligible for grant of
normal export benefits by Government of India.
Advances provided should be adjusted from free foreign exchange
representing payments for the supplies of goods to these agencies. It can also
be repaid/prepaid out of balances in Exchange Earners Foreign Currency
account (EEFC A/c), as also from the rupee resources of the exporter to the
extent supplies have actually been made.
Banks may also extend rupee
(i) Pre-shipment credit, and
(ii) Post-supply credit (for a maximum period of 30 days or up to the
actual date of payment by the receiver of goods, whichever is earlier).
To other categories of supply of goods specified as ‘Deemed Exporters’ under
the same Chapter of foreign trade policy from time to time.
The post-supply advances would be treated as overdue after the period
of 30 days. In cases where such overdue credits are liquidated within a period
of 180 days from the national due date (i.e. before 210 days from the date of
advance), the banks are required to charge, for such extended period, interest
prescribed for the category ‘ECNOS’ at post-shipment stage. If the bills are not
paid within the aforesaid period of 210 days, banks should charge from the
date of advance, the rate prescribed for “ECNOS’ post-shipment.
Banks would be eligible for refinance from RBI for such rupee export
credits extended both at pre-shipment and post-supply stages.
Special Financial package for Large Value
Exports-Rupee Credit Interest Rates
The products eligible for export under special financial package are:
(a) pharmaceuticals (including drugs, fine chemicals),
(b) agro-chemicals (including inorganic and organic chemicals),

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(c) transport equipment (including commercial vehicles, two and three

wheelers, tractors, railway wagons, locomotives),
(d) cement (including glass, glassware, ceramics and refractories),
(e) iron and steel (including iron & steel bars/rods and primary and semi-
fninished iron & steel),
(f) electrical machinery (including transmission)
(g) leather and leather goods,
(h) textiles.
(i) products of aluminium
(j) petroleum products
(k) sugar
(l) foodgrains
Exporters of above products with export contracts of Rs. 100 crore and
above in value terms in one year will be eligible for the special financial
package.
Validity period of the financial package will be from October 1, 2001 to
September 30, 2004.
Exporters covered under the special financial package will be extended
credit for an extended period up to 365 days at pre-shipment as well as post-
shipment states. However, the rate of interest for pre-shipment credit beyond
180 days and for post-shipment credit beyond 90 days are to be decided by
banks taking into account their BPLR and spread guidelines.
Overdue Export Bills Crystallization
Banks take into account the exchange risk inherent in an unpaid export
bill negotiated/purchased/discounted and transfer the exchange risk to the
exporter by crystallizing the foreign currency liability into rupee liability, on the
30th day after the expiry of the Normal Transit period in case of unpaid demand
bills and on 30th day after notional due date in case of unpaid usance bills. In
case the 30th day happens to be a holiday or Saturday, the export bill shall be
crystallized on the next working day. However, if the actual due date is advised
by the foreign correspondent after the notional due date has been arrived at, it

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

will be in order for banks to crystallize the bill on the 30 th day after the actual
due date in the event of non-payment.
For Crystallization into Rupee liability the Authorized Dealer shall apply
the ready TT selling rate of exchange ruling on the date of crystallization or the
original bill buying rate whichever is higher. After receipt of advice of
realization, the Authorised Dealers will adjust the Rupee liability on the bill
crystallized as above by applying the TT buying rate of exchanges or the
contracted rate in case a forward contract has been booked by the customer
after crystallization. Any difference shall be recovered from/paid to the
customer.
Advance against Undrawn Balances
Usually, in case of certain products exporters are required to draw bills
on overseas buyers up to 90 to 98% or FOB value of the contract, the residuary
balance i.e. unknown balance is payble by the overseas buyer after satisfying
himself about the quality/quantity of goods.
Hence, un drawn balances exist where the overseas buyer makes
payment, after making adjustment for difference in weight, quality/quantity of
goods. Payment of undrawn balance is contingent in nature. Banks may
consider granting advances against undrawn balances at concessional rate of
interest based on their commercial judgment and the track record of the buyer.
Advance against undrawn balance can be made at a concessive rate of interest
for a maximum period of 90 days. Such advances are however, eligible for
concessional rate of interest for a maximum period of 90 days only to the extent
these are repaid by actual remittances from abroad and provided such
remittances are received within 180 days after the expiry of NTP in the case of
demand bills and due date in the case of usance bills. For the period beyond 90
days, the rate or interest specified for the category ‘ECNOS’ at post-shipment
stage may be charged.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Post-shipment Credit

Post-shipment credit means1 any loan or advance granted or any other

credit provided by a bank to an exporter of goods from India from the date of
extending the credit after shipment of goods to the date of realization of export
proceeds, and includes any loan or advance granted to an exporter, on
consideration of or on the security of, any duty drawback allowed by the
government from time to time.
Forms of Post-shipment Credit
Post-shipment finance can, therefore, be classified into following
categories:-
(i) export bills purchase/discounted/negotiated,
(ii) advances against bills for collection,
(iii) advances against duty drawback receivable from Government.
Post-shipment credit may also be granted as follows:
(i) Advance against undrawn balances on export bills,
(ii) Advance against retention money,
(iii) Export on consignment basis,
(iv) Advance on exports under deferred payment basis.
Liquidation
Post-shipment credit is to be liquidated by the proceeds of export bills
received from abroad in respect of goods exported.
Rupee Post-shipment Export Credit Period
In the case of demand bills, the period of advance shall be the Normal
Transit Period (NTP) as specified by FEDAI (Foreign Exchange Dealers
Association of India).
In the case of usance bills, credit can be granted for a maximum
duration of 180 days from date of shipment inclusive of Normal Transit Period
(NTP) and grace period, if any. However, banks should closely monitor the
need for extending post-shipment credit up to the permissible period of 180
days and they should influence the exporters to realize the export proceeds
within a shorter period.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Normal transit period means the average period normally involved from
the date of negotiation/purchase/discount till the receipt of bill proceeds in the
Nostro account of the bank concerned, as prescribed by FEDAI from time to
time. It is not to be confused with the time taken for the arrival of goods at
overseas destination.
An overdue bill-
(a) in the case of a demand bill, it is a bill which is not
paid before the expiry of the normal transit period, and
(b) in the case of a usance bill, it is a bill which is not paid
on the due date.
Salient Features
The following are the salient features of post shipment credit.
(a) In the case of bills negotiated/purchased or discounted, interest for
transit period/up to national due date would be charged at the time of
negotiation/purchase discount.
(b) In the above cases where proceeds are before the expiry of normal
transit period/national due date, in the case of demand/usance bills
respective proportionate interest already charged for the remaining
period would be refunded. In other words, with effect from 1st December
1986, in interest is ultimately recovered for actual number of days for
which finance is outstanding.
(c) Or advances against bills on collection bills on collection basis,
interest is charged up to date of reversal of the rupee liability in the
books of the bank in India.
(d) Where export bills are not realized within 180 days from transit
period/national due date for demand/usance bills respectively, they
would not be eligible for concessional interest and would attract interest
at overdue rate from the date of post-shipment advance.
(e) Packing credit advances not liquidated from the proceeds of export
bills or post shipment advances not realized but recovered to the debit of
exporters’ account would also not be eligible for concessive interest but

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

would attract interest at commercial rate from the date of availment of

pre-shipment/post-shipment advance.

Maximum Eligible Finance

In case of post-shipment advances, normally no margin is maintained for
bills drawn under LCs. Only in case of export bills purchased against
contracts/firm orders, depending upon the additional security available, some
banks prescribe certain amount of margin.
Methods
Post-shipment finance is granted under various methods. Hence, the
exporter may choose the type of facility which is most suitable to his needs.
However, whatever be the type of facility granted, banks would scrutinize the
documents submitted for compliance of exchange management provisions like.
(i) the documents are drawn in permitted currencies and payment
receivable as permitted method of payment;
(ii) the relevant GR/PP/SDF form duly certified by the Customs is submitted
and particulars as stated in the GR/PP/SDF form are consistent with the
documents tendered as well as the sale contract/firm order etc./letter of
credit;
(iii) the documents are submitted within the time limit stipulated and in case
of delay suitable explanation is made;
(iv) the period of usance is in consonance with the time limit prescribed for
realization of export proceeds.
Procedure
For availing themselves of the post-shipment finance facilities, the
exporters are to follow the under-mentioned procedure.
(i) They should enclose the documents with covering letter (signed by the
authorized signatory) indicating the type of facility required i.e.
negotiation, purchase or discount etc., the proceeds to be credited to
current/packing credit account, any forward rate to be used for the

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

transaction, instructions regarding collection charges from drawers,

documents to be released against payment/acceptance, etc.
(ii) Documents should be correctly drawn and authenticated.
(iii) Obtain a seller’s contingency policy in case of c.&f./f.o.b. contracts.
Finance against DA/DP (other than L/C Bills sent on Collection Basis.
Post-shipment advance can also be granted against bills sent on collection
basis in the following situations.
(i) When the accommodation available under the foreign bills purchase
limit is exhausted,
Or
(ii) When some export bills drawn under L/C have discrepancies,
(iii) Where it is customary practice in the particular line of trade and in
the case of exports to countries where there are problems of international.
Exports may avail themselves of the forward exchange facility where
they do not wish to be subjected to exchange risk on account of the new
procedures for overdue export bills. The banks will obviously advance only a
certain percentage of the total outstanding bill amount. It implies that margin
will be retained. The advance will be liquidated out of the realization of
proceeds of the bills.
Export on Consignment Basis
Many a times exports are effected on consignment basis i.e. where
payment is receivable subject to sale of goods. Goods are exported under this
scheme at the risk of the exporter for sale and eventual remittance of sale
proceeds by the agent/consignee in due course. A suitable limit for the purpose
will have to be extended by the bank. The overseas branch/correspondent of
the bank is instructed to deliver the documents against “Trust Receipt”. Such
exports are also eligible for bank finance. Advances would be liquidated from
remittance of sale proceeds within 6 months from the date of shipment except
for export through approved Indian warehouses abroad, the time limit for
realization in such cases is 15 months.
Therefore, export on consignment basis should be at par with exports on
outright sale basis on cash terms in matters regarding the rate of interest to be

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

charged by banks on post-shipment credit. Thus, in the case of exports on

consignment basis, even if extension in the period beyond 180 days is granted
by the Foreign Exchange Department for repatriation of export proceeds, banks
will charge appropriate concessive rate of interest only up to the notional due
date (depending upon the tenor of the bills), subject to a maximum of 180 days.
Export of precious and Semi-precious Stones
Precious and semi-precious stones, etc. are exported mostly on
consignment basis and the exporters are not in a position to liquidate pre-
shipment credit account with remittances received from abroad within a period
of 180 days from the date of advance. Banks may, therefore, adjust packing
credit advances in the case of consignment exports, as soon as export takes
place, by transfer of the outstanding balance to a special (post-shipment)
account which in turn, should be adjusted as soon as the relative proceeds are
received from abroad but not later than 180 days from the date of export of
such extended period as may be permitted by Foreign Exchange Department,
Reserve Bank of India. Balance in the special (post-shipment) account will not
be eligible for refinance from RBI.
Consignment Exports to CIS and East European Countries.
RBI (FED) is allowing in deserving cases, on application by individual
exporters with satisfactory track record, a longer period of up to 12 months for
realization of proceeds of export on consignment basis in convertible
currencies to CIS (former USSR) and East European Countries. Banks may
extend post-shipment credit to such exporters for a longer period ab initio.
Accordingly, the interest rate applicable will be as follows:

Period of post-shipment credit Rate of Interest

Up to 90 days from the date of The rate applicable for usance bills for
advance period up to 90 days.
Beyond 90 days and up to 12 months The rate applicable for usance bills
from the date of shipment. beyond 90 days and up to 6 months
from the date of shipment.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

It is expected that sale proceeds of goods exported on consignment basis to

the above countries would be realized within the permitted period of up to 12
months and post-shipment credit liquidation. In case the sale proceeds are not
realized within the said period, the higher rate of interest as applicable for bills
realized beyond 6 months from the date of shipment i.e. ECNOS- post-
shipment will apply for the entire period beyond 6 months.
Refinance to banks against export credit would however, be available from RBI
up to a period of 180 days only each at pre-shipment stages.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Consignment Exports to Russian Federation against Repayment of State

Credit in Rupee:
RBI (FED) is allowing on application, Export houses/Trading houses/Star
Trading houses/Super Star Trading House with satisfactory track record, a
longer period of up to 360 days from the date of shipment for realization of
proceeds of exports of permitted goods as announced by them from time to
time to the Russian Federation on consignment basis against repayment of
State Credits in rupees. For the procedure to be followed, reference may be
made to AD (GP Series) Circular No. 5 dated May 31, 1999 and subsequent
instructions, if any, issued in this regard by Foreign Exchange Department,
Reserve Bank of India. Banks may extend post-shipment credit to such
exporters for a longer period ab initio. Accordingly, the interest rate applicable
will be as follows:
Period of Post-shipment Credit Rate of Interest
Up to 90 days from the date of The rate applicable for usance bills for
advance. period up to 90 days.
Beyond 90 days and up to 360 days The rate applicable for usance bills
from the date of shipment. beyond 90 days and up to 6 months
from the date of shipment.

In case, sale proceeds are not realized within the said period, the higher
rate of interest as applicable for bills realized beyond 6 months from the date of
shipment will apply for the entire period beyond 6 months.
The refinance to banks against export credit would, however, be
available from RBI up to a period of 180 days only each at pre and post
shipment stages.
Exports through the Warehouse-cum-Display Centers Abroad
Some Indian organizations/exporters are permitted by RBI (FED) to
establish warehouses abroad for storing the goods exported from India to
enable them to arrange off-the-shelf sales for achieving greater penetration in
the overseas markets. Since exports to these warehouses are in anticipation of
orders from the buyers overseas, the prescribed period of realization of

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

proceeds of such export has been fixed up to fifteen months from the date of
shipment as against the normal period of six months in other cases.
In view of longer period of realization permitted, ab initio, the interest rates on
the post-shipment credit in rupee against exports through approved warehouses are as
follows:
Period of post-shipment credit Rate of Interest
Up to 90 days from the date of The rate applicable for usance bills for
advance. period up to 90 days.
Beyond 90 days and up to 15 months The rate applicable for usance bills
from the date of shipment. beyond 90 days and up to 6 months
from the date of shipment.

In case sale proceeds are not realized within the said period, the higher
rate of interest as applicable for bills realized beyond 6 months from the date of
shipment i.e. ECNOS-post-shipment will apply for the entire period beyond 6
months.
Refinance to the bank against export credit would be available from RBI
up to a period of 180 days only each at pre-shipment and post-shipment
stages.
Export of Goods for Exhibition and Sale
Banks may provide finance to exporters against goods sent for exhibition
and sale abroad in the normal course in the first instance, and after the sale is
completed, allow the benefit of the concessive rate of interest on such
advances, both at the pre-shipment stage and at the post-shipment stage, up to
the stipulated periods, by way of a rebate. Such advances should be given in
separate accounts.
Post-shipment Credit on Deferred payment Terms
Banks may grant post-shipment credit on deferred payment terms for a
period exceeding one year, in respect of export of capital and producer goods
as specified by RBI (FED) from time to time.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Post-shipment Advances against Duty Drawback Entitlements

Banks may grant post-shipment advance to exporters against their duty
drawback entitlements as provisionally certified by Customs Authorize pending
final sanction and payment.
The advance against duty drawback receivables can also be made
available to exporters against export promotion copy of the shipping bill
containing the EGM Number issued by the Customs Department. Where
necessary, the financing bank may have its lien noted with the designated bank
and arrangements may be made with the designated bank to transfer funds to
the financing bank as and when duty drawback is credited by the Customs.
These advances granted against duty drawback entitlements would be
eligible for concessional rate of interest and refinance from RBI up to a
maximum period of 90 days from the date of advance.
Export Finance Guarantee
This Guarantee by the ECGC covers post-shipment advances by banks
to exporters against export incentives available in the form of duty drawback,
etc.
Retention Money-Advance-against
In the case of turn-key projects/construction contracts, progressive
payments are made by the overseas employer in respect of services segment
of the contract, retaining a small percentage of the progressive payments as
retention money which is payable after expiry of the stipulated period from the
date of the completion of the contract, subject to obtention of certificate(s) from
the specified authority.
Retention money may also be sometimes stipulated against the supplies
portion in the case of turn key projects. It may likewise arise in the case of
subcontracts. The payment of retention money is contingent in nature as it is a
defect liability.
The following guidelines should be followed in regard to grant of
advances against retention money:

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(a) No advances may be granted against retention money relating to

services portion of the contract.
(b) Exporters may be advised to arrange, as far as possible, provision of
suitable guarantees, instead of retention money.
(c) Banks may consider, on a selective basis, granting of advances against
retention money relating to the supplies portion to the contract taking
into account, among others, the size of the retention money accumulate,
its impact on the liquid funds position of the exporter and the past
performance regarding the timely receipt of retention money.
(d) The payment of retention money may be secured by L/C or Bank
Guarantee where possible.
(e) Where the retention money is payable within a period of one year from
the date of shipment, according to the terms of the contract, banks
should charge prescribed concessive rate of interest up to a maximum
period of 90 days. The rate of interest prescribed for the category
‘ECNOS’ at post-shipment stage may be charged for the period beyond
90 day.
(f) Where the retention money is payable after a period of one year from
the date of shipment, according to the terms of the contract and the
corresponding advance is extended for a period exceeding one year, it
will be treated as post-shipment credit given on deferred payment terms
exceeding one year, and the rate of interest for that category will apply.
(g) Advances against retention m oney will be eligible for concessional rate
of interest only to the extent the advances are actually repaid by
remittances received from abroad relating to the retention money and
provided such payments are received within 180 days from the due date
of payment of the retention money, according to the terms of the
contract.
Post-shipment Export Credit Guarantee by the ECGC
Post-shipment fiancé given to exporters by banks through purchase,
negotiation or discount of export bills or advances against such bills qualifies

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

for this guarantee. It is necessary, however, that the exporter concerned should
hold appropriate policy of ECGC to cover the overseas credit risks.
The premium rate for this guarantee is nominal.
This guarantee is also issued on whole-turnover basis, offering a higher
percentage of cover at a reduced rate of premium. The percentage of cover
under the Whole Turnover Post-shipment Guarantee (WTPSG) is 90 for
advances granted to exporters holding ECGC policy. Advances to non-policy
holders are also covered with percentage of cover being 60.
Individual Post-shipment Export Credit Guarantee can also be had, even
where an exporter does not hold an ECGC policy for finance granted against
L/C bills, provided that the exporter makes shipments solely against Letters of
Credit. Advances against bills under Letters of Credit opened by banks in
countries placed under Restricted Cover shall be subject to prior approval of
the Corporation.
Interest on Post-shipment Credit
A selling rate has been prescribed for rupee export credit linked to
Benchmark prime Lending Rates (BPLRs) of individual banks available to their
domestic borrowers. Banks have, therefore, freedom to decide the actual rates
to be charged within the specified ceiling. Further, the ceiling interest rates for
different time buckets under any category of export credit should be on the
basis of the BPLR relevant for the entire tenor of export credit.
Post-shipment Credit from the Date of Advance
It will be as follows up to 30/4/05.
__________________________________
(i) On demand bills for Not exceeding BPLR minus 2.5 percentage points.
Transit period (as specified
By FEDAI)
_________________________________________________________
(ii) Against usance bills (for
Total period comprising usance
Period of export bills, transit period
As specified by FEDAI, and grace

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Period, wherever applicable)+

(a) Up to 90 days Not exceeding BPLR1
Minus 2.5 percentage points
(b) Beyond 90 days and up to Free*
6 months from the date of shipment

(c)Up to 365 days for exporters Not exceeding BPLR1 minus 2.5
Under the gold card scheme percentage points.

(iii) Against incentives receivable Not exceeding BPLR1 minus 2.5

From Govt. (covered by ECGC percentage points
Guarantee) up to 90 days
_________________________________________________________
(iv) Against undrawn balances -do-
(up to 90 days)
_________________________________________________________
(v) Against retention money -do-
(for supplies within one year
from the date of shipment
(up to 90 days)
Deferred Credit
Deferred credit for the Free*
Period beyond 90 days
Export Credit Not otherwise Specified (ECNOS)
____________________________________________________________
(i) Pre-shipment credit free*
(ii) Post-shipment credit free*
^ Up to national due date or actual due date, whichever is earlier.
+ Interest rate for credit beyond 90 days from the date of advance has to
be
Charged slab-wise (1-90 days and 91-180 days).

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

@ Since these are ceiling rates, banks would be free to charge any rate
below the
Ceiling rates.
* Banks are free to decide the rate of interest, keeping in view the BPLR
and
Spread guidelines.
Early Payment of Export Bills
In the case of advances against demand bills, if the bills are realized
before the expiry of the normal transit period (NTP), interest at the concessive
rate shall be charged from the date of advance till the date of realization of
such bills. The date of realization of demand bills for this purpose would be the
date on which the proceeds get credited to the banks’ Nostro accounts.
In the case of advance/credit against usance export bills, interest at
concessive rate may be charged only up to the national/actual due date or the
date on which export proceeds get credited to the bank’s Nostro account
abroad, whichever is earlier, irrespective of the date of credit to the
borrower’s/exporter’s account in India. In cases where the correct due date can
be established before/immediately after availment of credit due to acceptance
by overseas buyer or otherwise, concessive interest can be applied only up to
the actual due date, irrespective of whatever may be the national due date
arrived at, provided the actual due date falls before the national due date.
Where interest for the entire NTP in the case of demand bills or up to
national/actual due date in the case of usance bills as stated at (b) above, has
been collected at the time of negotiation/purchase/discount of bills, the excess
interest collected for the last date of NTP/national due date/actual due date
should be refunded to the borrowers.
Over Due Export Bills
In case of export bills, the rate of interest decided by bank within the
ceiling rate stipulated by RBI will apply upto the due date of the bill (up to NTP
in case of demand bill and specified period in case of usance bills).

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

For the period beyond the due date viz. for the overdue period, the rat
fixed for ‘Export Credit Not Otherwise Specified’ (ECNOS) at post-shipment
stage will apply and no penal interest should be charged additionally.
Banks should ensure that the additional interest by way of overdue
interest (ECNOS) should not be levied where there has been no advance (pre
or post shipment) taken by the exporter.
Interest on Post-shipment Credit Adjusted from Rupee Resources
Banks should adopt the following guidelines to ensure uniformity in
charging interest on post-shipment advances which are not adjusted in an
approved manner due to non-accrul of foreign exchange and advances have to
be adjusted out of the funds received from the Export Credit Guarantee
Corporation of India Ltd. (ECGC) in settlement of claims preferred on them on
account of the relevant export consignment.
(a) In case of exports to certain countries, exporters are unable to realize
export proceeds due to non-expatriation of the foreign exchange by the
Governments/Central Banking Authorities of the countries payment
problems even though payments have been made locally by the buyers.
In these cases ECGC offer cover to exporters for transfer delays. Where
ECGC have admitted the claims and paid the amount for transfer delay,
banks may charge interest as applicable to ‘ECNOS-post-shipment even
if the post-shipment advance may be outstanding beyond six months
from the date of shipment. Such interest would be applicable on the full
amount of advance irrespective of the fact that the ECGC admit the
claims to the extent of 90 percent/75 percent and the exporters have to
bring the balance 10 percent/25 percent from their own rupee resources.
(b) In a case where interest has been charged at commercial rate or
ECNOS if export proceeds are realized in an approved manner
subsequently, the bank may refund to the borrower the excess amount
representing difference between the quantum o f interest already
charged and interest that is chargeable taking into account the said
realization after ensuring the fact of such realization with satisfactory
evidence. While making adjustments of accounts it would be better if the

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

possibility of refund of excess interest is brought to the notice of the

borrower.
Change of Tenor of Bill
In terms of para C.14 of the AP DIP series Circular No. 12 FEMA
Notification issued by RBI (FED), banks have been permitted, on request from
exporters, to allow change of the tenor of the original buyer/consignee,
provided inter alia, the revised due date of payment does not fall beyond six
months from the date of shipment.
In such cases as well as where change of tenor up to six months from
the date of shipment has been allowed, it would be in order for banks to extend
the concessional rate of interest up to the revised notional due date, subject to
the interest rates Directive issued by RBI.
Note: (ceiling rates of interest on credit extended to exporters as
prescribed in the circular are lower than the maximum lending rates normally
charged to other borrowers and are, therefore, indicated as concessive in this
sense).
C. Export Credit in Foreign Currency1
Both pre-shipment and post-shipment credits are available in foreign
currencies under two schemes, namely,-
1. Foreign Currency pre-shipment Credit (PCFC) Scheme
2. Re-discounting of Export Bills Abroad (EBR) Scheme
PCFC
The Foreign Currency pre-shipment Credit (PCFC) is available to
exporting companies as well as commercial banks for lending to the former.
It is an additional window to rupee packing credit scheme, and available
to cover both the domestic i.e. indigenous and imported inputs. It is applicable
only to cash exports. The exporter has two options to avail himself of export
finance.
1. to avail pre-shipment credit in rupees and, then, the post-shipment
credit either in rupees or in foreign currency denominated credit or
discounting/rediscounting of export bills under EBR scheme.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

2. to avail of pre-shipment credit in foreign currency and

discounting/regarding of the export bills in foreign currency under
EBR scheme.
Eligibility
PCFC will also be available both to the supplier EOU/SEZ unit and the
receiver EOU/SEZ unit. The PCFC to receiver EOU/SEZ units will be liquidated
by discounting of export bills.
Pre-shipment credit in foreign currency shall also be available on exports
to ACU (Asian Clearing Union) countries with effect from January 1, 1996.
Deemed Exports.
PCFC may be allowed only for deemed exports for suppliers to projects
financed by multilateral/bilateral agencies/funds. _CFC released for deemed
exports should be liquidated by grant of foreign currency loan at post-supply
stage, for a maximum period of 30 days or up to the date of payment by the
project authorities, whichever is earlier.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Choice of Currency
The PCFC may be extended in one of the convertible currencies,
namely, US dollars, pound Sterling, Japanese yen, Euro, etc. it may also be
given in one convertible currency in respect of an export order invoiced in
another convertible currency. For example, an exporter can avail of PCFC in
US dollar against an export order invoiced in Euro, at the risk and cost of cross
currency transaction of the exporter.
Order or L/C
Banks should not insist on submission of export order or L/C for every
disbursement of pre-shipment credit, from exporters with consistently good
track record. Instead, a system of periodical submission of a Statement of LCs
or Export Orders in hand should be introduced.
Interest
Pre-shipment credit in foreign currency is made available at
LIBOR/EURO LIBOR/EURI BOR related rates of interest (6 months). The
lending rate to the exporter will not exceed one percent, excluding withholding
tax, over LIBOR/EURO LIBOR/EURI BOR.
Pre-shipment Credit in Foreign Currency will be extended only on the
basis of confirmed /firm export orders or confirmed/firm export orders or
confirmed letters of credit (L/Cs).
Running Account Facility
Banks are permitted to extend the Running Account facility under the
PCFC Scheme to exporters for all commodities, on the lines of the facility
available under rupee credit, subject to the following conditions:
(a) The facility may be extended provided the need for ‘Running Account’
facility has been established by the exporters to the satisfaction of the
bank.
(b) Banks may extend the facility only to those exporters whose track record
has been good.
(c) In all cases, where pre-shipment Credit ‘Running Account’ facility has
been extended, the L/Cs or firm orders should be produced within a
reasonable period of time.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

(d) The drawls made under Rupee ‘Running Account’ facility should not be
converted into PCFC advances.
(e) The PCFC will be marked-off on the First-in-First-out’ advances.
(f) PCFC can also be marked off with proceeds of export documents
against which no PCFC has been drawn by the exporter.
Cancellation/Non-Execution of Export Order
In case of cancellation of the export order for which the PCFC was
availed of by the exporter from the bank, or if the exporter is unable to execute
the export order for any reason, it will be in order for the exporter to repay the
loan together with accrued interest thereon, by purchasing foreign exchange
(principal + interest) from domestic market through the bank. In such cases,
interest will be payable on the rupee equivalent of principal amount at the rate
applicable to ‘Export Credit Not Otherwise Specifies’ (ECNOS) at pre-
shipment/stage plus a penal rate of interest to be decided by the bank from the
date of advance after adjustment of interest of PCFC already recovered. Banks
are free to decide the rate of interest for ECNOS at pre-shipment stage, subject
to PLR and spread guidelines.
It will also be in order for the banks to remit the amount to the overseas
bank, provided the PCFC was made available to exporter’ from the line of credit
obtained from that bank.
Banks may extend PCFC to such exporters subsequently, after ensuring
that the earlier cancellation of PCFC was due to genuine reasons.
Forward Exchange Cover
Exporter is allowed to book forward contract on the basis of confirmed
export order prior to availing of PCFC and cancel the contract (for portion of
drawl used for imported inputs) at prevailing market rate on availing of PCFC.
Sharing of PCFC
Banks may extend PCFC to the manufacturer also on the basis of the
disclaimer from the export order holder through his banker.
C.2. EBR Scheme
While exporters have the option to avail of pre-shipment credit and post-
shipment credit either in rupee or in foreign currency (under the EBR Scheme),

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

if, the pre-shipment credit has been availed of in foreign currency; the post-
shipment credit has necessarily to be under the EBR Scheme since foreign
currency. Banks are, therefore, advised to ensure adequate operational
flexibility in view of the options open to the exporters.
This facility will be an additional window available to exporter along with
the existing rupee financing schemes to an exporter at post-shipment stage.
This facility will be available in any convertible currency. It may also be
extended to exports to ACU countries. The Scheme will cover export bills up to
180 days from the date of shipment (inclusive of normal transit period and
grace period), if any. There is, however no bar to include demand bills if
overseas institution has no objection to it.
The scheme envisages Ads rediscounting the export bills in overseas
markets by making arrangements with an overseas agency/bank by way of a
line of credit or banker’s acceptance facility or any other similar facility at rates
linked to London Inter Bank Offered Rate (LIBOR etc.) for six months. Prior
permission of the Reserve Bank will not be required for arranging the
rediscounting facility abroad so long as the spread for rediscounting does not
exceed one percent over the six months LIBOR etc. in the case of
rediscounting withrecourcse basis and 1.5 percent in the case of without
recourse facility. Spread, however, should be exclusive of any withholding tax.
In all other cases, the Reserve Bank’s permission will be needed.
In other words banks are allowed a spread not exceeding one percent
over the rediscount rate. The effective cost to the exporters will therefore, not
exceed 2 percent and 2.5 percent over six months LIBOR (for Indian banks not
having overseas the spread will be 21/2% & 3% respectively) in respect of with
recourse facility, respectively.
In case or re-discounting of export bills on without recourse basis the
credit limits of the exports will be restored immediately. Ads have also been
permitted to utilise the on-shore foreign exchange funds available with them by
way of balances in Exchange Earner Foreign Currency Accounts (EEFC),
Resident Foreign Currency Account (Banks) Scheme.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Exporters can also directly arrange for rediscounting facilities abroad

without prior permission from the Reserve Bank provided the spread
stipulations mentioned in the above paragraph are adhered to. The exporters
will, however, be required to arrange the facility through a designated branch of
an authorized dealer.

Medium and Long Term Credit

Deferred Payment Terms and Project Exports
The packing credit or pre-shipment finance and also post-shipment
finance detailed earlier is given for a maximum period of 180 days. However,
there are cases when goods and services are exported on terms of credit which
exceed the period laid down by the RBI i.e., 180 days for the realization of
export proceeds. Such exports are known as exports on “Deferred payment
Terms”, Hence, export of goods against payment to be received partly or fully
beyond the period statutorily prescribed for realization of export proceeds are
treated as deferred payment exports. Further, where more than 10% of the
value related beyond the prescribed period i.e. six months (180 days) from the
date of shipment, such cases are also treated as deferred payment export. The
credit extended for financing such deferred payment exports is known as
Medium and Long Term Credit. Credit beyond 6 months and less than 5 years
is referred to as “medium term”, and beyond 5 years, as “long term”. Ordinarily,
contracts providing for deferred payment terms will be allowed only for export of
engineering goods (capital goods and consumer durables) and turnkey projects
involving long term payments which are usually deferred over a period of time.
The usual terms for deferred payment exports are the relative contracts
which normally provide for payment of a certain portion of the relative invoices
value as advance or down payment, the balance being payable in instilments
spread over a period of time.
Project exports eligible for export finance are categorized as under:-
(i) Turnkey projects i.e. those projects which involve the rendering of
services like designing, civil construction, erection and commissioning of

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
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 Export Finance

plant or supervision thereof along with the supply of machinery,

equipment and materials,
(ii) Civil construction contracts i.e. which involve erection, civil works and
commissioning apart from supply of equipment,
(iii) Service contracts like-
(a) Engineering service contracts involving supply of service along
such as design, erection, commissioning or supervision of
erection and commissioning,

(b) Consultancy services contracts which include the preparation of

feasibility studies, project reports, preparation of designs and
advice to the project authority on specifications for plant and
equipment, preparation of tender documents, evaluation of tender
and purchase of plant and equipment.
Nature of Credit
Contracts for export of goods on deferred payment terms may be
financed either under ‘Supplier’s credit’ or ‘buyers credit’. Under the former
system, the exporter extends credit directly to the overseas buyer. Buyer’s
credits are credits extended to the foreign buyers by the authorized dealers or
financial institutions in India (including a consortium of authorized dealers of
financial institutions in India).
Bridge Finance
It is given for meeting temporary shortfalls in working capital in respect
of turnkey projects and civil construction contracts. Ass/EXIM bank may clear
project export proposals (incl. service contract proposals) involving bridge
finance up to 25% of the contract value.
Financing
The financing of deferred payment term exports and project exports is
undertaken by several institutions. As such, various aspects of such contracts
require approval of several institutions in India such as RBI, EXIM, ECGC as
well as concerned banks. The express’s bank or the EXIM Bank can
indivieually finance such exports under the power delegated to them.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

There is virtually a three-tier system for clearance of proposals, after

award of contract, for deferred payment finance. This is-
1. Commercial banks who are authorized dealers in foreign
exchange in India, can provide in principle clearance for contracts value
up to Rs. 50 crores, Ads are authorized to consider such proposals
without forwarding them to EXIM Bank, provided credit is required for a
maximum period of one year,
2. EXIM Bank through Authorized Dealer is empowered to give
clearance for contracts of value above Rs. 50 crores and up to Rs.200
crores.
3. Working Group considers proposals of contracts beyond Rs. 200
crores.
Single-Window Clearance
With a view to simplifying the task of financing export of goods on
deferred payment terms and project exports, a working Group consisting of
representatives of all the above mentioned institutions has been constituted to
provide singe-window clearance facility. EXIM Bank is the focal point for the
Working Group.
Eligible Goods/Services
There is a list of goods which are eligible for export under deferred
payment terms. It is in two parts ‘A’ and ‘B’ respectively containing ‘Capital &
producer Goods’ and ‘Other Goods’. This is however, subject to revision as the
working group on project Exports functioning at EXIM Bank may consider
proposals to include new items or exclude existing items from the list.
Third country purchases
Ads may open L/Cs in favor of third country suppliers on back-to-back
basis.
Guarantees
Ads/EXIM Bank/Working Group may approve project export
proposals/service contracts abroad involving all types of guarantees required to
be furnished in connection with execution of projects/contracts abroad.
EXIM Bank services

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

The EXIM Bank is the focal point institution for financing exports on
deferred payment basis and project exports. It fiancés export of Indian
machinery, manufactured goods, consultancy and technological services on
deferred payment terms. Its finance is also available at export production
stages. It undertakes co-financing with global and regional development
agencies and assists Indian exporters in their efforts to participate in such
overseas projects. Its financing programs are summarized below.

EXIM Bank’s Export Financing Services

Exim Bank offers a diverse range of financing services for the Indian
exporter, including a Varity of Export Credit facility, and Finance for Export
Oriented Companies.
Export Credits
Exim Bank offers the following Export Credit facilities, which can be
availed of by Indian companies, commercial banks and overseas entities.
EXIM Bank’s Credit for Indian Companies Executing Contracts
Overseas
Pre-shipment Credit
Where the manufacturing cycle of the export contract exceeds six
months, Exim Bank’s Pre-shipment Credit facility provides access to finance at
the manufacturing stage-enabling exporters to purchase raw materials and
other inputs.
Exporters can also avail of its Foreign Currency Pre-shipment credit
facility to import raw materials and other inputs required for export production.
 Supplier’s Credit
 Underwriting
 Export Marketing Finance
 Import Loans
 Guarantee Facilities
 Forfaiting
Exim Bank’s Credit to project Exporters

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Exim Banks Fiannce to Exporters of Consultancy and Technological

Services
Exim Bank’s Finance to Commercial Banks
Finance for Deemed Exports by Exim Bank
EXIM Bank’s Finance to Overseas Entities

Finance for Export oriented Units by EXIM Bank

For the purpose of financing, an Export Oriented Company is defined as any
company with a minimum export orientation of 10% of net sales, or annual
export sales of Rs. 5 crores, whichever is lower.
Project Finance for Setting up EOUs
Finance for Production Equipment
Finance for Vendors to EOUs
Working Capital Finance
Finance for R&D and Export product Development
Guarantees

Finance for Textile and Jute Industries Technology Up gradation Fund

Scheme
The Bank extends finance to eligible units in textile and jute industries
under the scheme.
Finance for Software Industry
The Bank offers a comprehensive financing/services package for the
software industry. These include project/equipment finance, working capital
finance, and overseas investment finance, besides support for obtaining
product/process certification, export marketing, and export product
development. To address the perceived constraint in the avail ability of trained
software professionals, Exim Bank extends term loans to software exporters for
establishment/expansion of software training institute. Further, the Bank also
facilitates setting up of software technology parks (STPs).
Finance for JVs between Indian and East Asian Companies

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Under the Asian Countries Investment Partners Programme, Exim Bank

provides finance at various stage of a joint venture project cycle viz., sector
study, project identification, feasibility study, prototype development and
technical, managerial assistance.
Finance for Ventures Overseas
Exim Bank offers term loans to Indian companies, both for equity investment in
their ventures overseas as well as on lending purposes.
Besides, Exim Bank also undertakes Direct Equity Stake in Indian
Ventures Abroad, to enable Indian companies to supplement their equity with

Export Services by EXIM Bank

Exim Bank’s equity contribution.
Exim Bank offers a diverse rage of information, advisory and support
services, which enable exporters to evaluate international risks, exploit export
opportunities and improve competitiveness.
Multilateral Agencies Funded Projects Overseas (MFPO)
Commercial Services
Country Profiles
Financial Counseling
Internationalization Support
Information Access
Building Export Capability
International Merchant Banking Services
EXIM Bank’s Promotional Programmes
Grants to Indian firms for MFPO bids. Under the Strategic Market Entry
Support Programme, Exim Bank reimburses the cost of tendering for Indian
firms who have bid successfully for MFPO contracts.
Grants to Indian firms for obtaining product/Process Certification. Exim
Bank provides grant support of up to 50% of the costs incurred by the company
in obtaining certification. The product/process certifications covered under the
programme include ISO 14000, QS 9000 and CE/GS certifications.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Grants to Indian Consultants for undertaking services abroad. Under the

project preparatory Services Overseas (PPSO) Programme. Exim Bank
provides loan/grant finance to enable Indian consultancy firms to take up
project preparatory studies in developing countries.
In an arrangement with International Finance Corporation (IFC),
Washington, Exim Bank is a participant in the trust funds set up by the IFC in
different parts of the world. As a result of this arrangement, Indian consultants
can avail of grant finance for undertaking specific assignments in select
countries in Africa, Eastern Europe, and the Mekong delta region.
EXIM Bank’s L/C’s Confirmation Programme
This programme envisages confirmation of letters of credit received by
Indian exporters from pre-approved banks in the countries of EBRD’s
operations, i.e. the countries of Central and Eastern Europe and the
Commonwelth of Independent States (CIS). EBRD will provide guarantee
facility to Exim Bank to cover such L/C confirmation. The programme covers
the 27 countries of EBRD’s operations and Exim Bank will confirm L/Cs for
supporting Indian exports.
Exim Bank’s L/C confirmation will cover the risk of non-payment by the Issuing
Bank.
Eligibility Criteria
Pricing

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Import Credit

Credits for imports of all items into India are divided into:
1. Credits up to US $ million per import transaction with a maturity
period up to an year.
2. Credit up to US $ 20 million per import transaction with a maturity
period exceeding one year but less than three years for import of capital
goods. Thres credits are known as Trade Credit for import.
Trade Credit for imports shall include
Suppliers credit
Buyers credit
Depending upon source of finance.
External Commercial Borrowing (ECBs)
The ECBs will be buyers credit and suppliers credit for three year and
above.
Trade Credit for Import
Depending on the source of finance, such trade credit will include
suppliers’ credit or buyers’ credit. It may be noted that buyers’ credit and
suppliers’ credit for three years and above come under the category of External
Commercial Borrowings (ECB) which are governed by ECB guidelines.
Amount

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Ads may approve trade credits for imports into India up to USD 20
million per import transaction for import of all items with a maturity period up to
one years. For import of capital goods, Ads may approve trade credits up to
USD 20 million per import transaction with a maturity period of more than one
year and less than three years. No roll over/extension will be permitted by the
AD beyond the permissible period.
As hitherto, Ads shall not approve trade credit exceeding USD 20 million
per import transaction.
The maximum amount of ECB which can be raised by an eligible
borrower under the automatic route is equivalent to US $ 50 million per
financial year for general corporate purpose.

All-in-Cost Ceiling
The all-in-cost ceilings will be as under:
Maturity period All-in-cost ceilings over 6
Months LIBOR*
Up to one year 50 basis points
More than one year 125 basis points
But less than three
Years
for the respective currency of credit or applicable benchmark.
The all-in-cost ceilings include arranger fee. Up front fee, management
fee, handling/processing charges, out of pocket and legal expenses, if any. The
all-in-cost ceilings will be reviewed from time to time.
As hitherto, Ads shall not issue guarantee, letter of undertaking or letter
of comfort in favor of overseas lender on behalf of their importer constituent for
trade credit without period approval of the Reserve Bank.
External Commercial Borrowing
ECBs refer to commercial loans, { in the form of bank loans, buyers,
credit, suppliers, credit, securitized instruments availed from non-resident
lenders with minimum average maturity of 3 years.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

In view of its implication for potential systemic risks, ECB availed by

financial intermediaries need to be distinguished from those availed by
corporate. Banks, etc.
There are two systems of obtaining approval i.e. (1) automatic route not
requiring RBI/Govt. approval and (2) Govt. approval as described below.
Automatic Route
ECB for investment in real sector industrial sector, especially
infrastructure sector in India, will be under Automatic Route, i.e. will not require
RBI/Government approval. In case of doubt as regards eligibility to access
Automatic Route, applicants may take recourse to the Approval Route.
Eligibility Borrowers
Corporate registered under the companies Act, except financial
intermediaries (such as banks, financial institutions (FIs), housing finance
companies and NBFCs), are eligible.
Amount and Maturity
a) ECB up to USD 20 million or equivalent with minimum average maturity
of three years
b) ECB above USD 20 million and up to USD 500 million or equivalent with
minimum average maturity of five years. The maximum amount of ECB
can be raised by an eligible borrower under the automatic route is US $
500 million or equivalent during a colander year.
c) ECB up to USD 20 million can have call/put option provided the
minimum average maturity of 3 years is complied with before exercising
call/put optional
d) ECB under erstwhile USD 5 million Scheme. Ads have been delegated
general permission to approve eliongation of repayment period in cases
of borrowers, who had availed ECB under erstwhile USD 5 million
scheme with the Reserve Bank’s specific approval. Ads may grant
approvals for elongation of repayment period provided there is a consent
letter from the overseas lender for such re-schedulement without any
additional cost.
End-use

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

a) ECB can be raised only for investment (such as import of capital goods,
new projects, modernization/expansion of existing production units) in
real sector industrial sector including small and medium enterprises
(SME) and infrastructure sector-in India. Infrastructure sector is defined
as (i) power, (ii) telecommunication, (iii) railways, (iv) road including
bridges, (v) ports, (vi) industrial parks and (vii) urban invrastructure
(water supply, sanitation and sewage projects). [ ECBs can aalso be
utilised for overseas direct investment in joint ventures (JVs)/wholly
owned subsidiaries (WOSs) as fesh (new) investment or for expension
of existing JV/WOS including mergers and acquisitions abroad by
harnessing resources at globally competitive rates].
b) Utilization of ECB proceeds is permitted in the first stage acquisition of
shares in the disinvestment process and also in the mandatory second
stage offer to the public under the Government’s disinvestment
programme of PSU shares.
c) Utilization of ECB proceeds is not permitted for on-lending or investment
in capital market by corporate.
d) Utilisation of ECB proceeds is not permitted in real estate. The term real
estate excludes development of integrated township as defined by
Ministry of Commerce and Industry, Department of Industrial policy and
promotion,
e) End-uses of ECBs for working capital, general corporate purpose and
repayment of existing rupee loans are not permitted.
Guarantees
Guarantee/standby letter of credit or letter of comfort by banks, financial
institutions and NBFCs relating to ECB is not permitted.
Parking of ECB proceeds overseas
ECB proceeds should be parked overseas until its utilization for
investment abroad.
Prepayment

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Prepayment of ECB up to USD 100 million is permitted without prior

approval of RBI, subject to compliance with the stipulated minimum average
maturity period as applicable for the loan.
Procedure
Borrower may enter into loan agreement with recognized overseas
lender for raising ECB under Automatic Route without prior approval of RBI.
Approval Route
At present, borrower, who had availed ECB under erstwhile USD 5
Million Scheme with specific approval of Reserve Bank, approach the Reserve
bank for elongation of repayment period. It has been decided to delegate
general permission to the designated AD to approve such elongation provided
there is a consent letter from the overseas lender for such reschedulement
without any additional cost. Such approval with existing and revised repayment
schedule along with the Loan Key/Loan Registration Number should be initially
communicated to the Chief General Manage, Foreign Exchange Departement,
Reserve Bank of India, Central Office, ECB Division, and Mumbai within seven
days of approval and subsequently in ECB-2.
Financial institutions dealing exclusively with infrastructure or export
finance such as IDFC, ILFS, power Finance Corporation, power Trading
Corporation, IRCON and EXIM Bank will be considered on a case by case
basis.
Banks and financial institutions which had participated in the textile or
steel sector restructuring package as approved by the Government will also be
permitted to the extent of their investment in the package and assessment by
RBI based on prudential norms. Any ECB availed for this purpose so far will be
deducted from their entitlement.
Cases falling outside the purview of the automatic route limits and
maturity period indicated above.
End Use
a) Same as under “automatic route”
b) Same as under “automatic route”

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

c) Utilization of ECB proceeds is not permitted for on-lending or

investment in capital market by corporate except for banks and financial
institutions eligible.
Guarantees
Guarantee/Standby letter of credit or letter of comfort by banks, financial
institutions and NBFCs relating to ECB is not normally permitted. Applications
for providing guarantee/standby letter of credit or letter of comfort by banks,
financial institutions relating to ECB in the case of SME will be considered on
merit subject to prudential norms.
Packing of ECB proceeds overseas
Same as under automatic route
Prepayment
Same as under automatic route
Refinance as existing ECB
Refinancing of outstanding ECB by raising fresh loans at lower cost is
permitted subject to the condition that the outstanding maturity of the original
loan is maintained.

Procedure
Applicants are required to submit an application in the prescribed form
ECB through designated AD to the Chief Manager-in-Charge, Foreign
Exchange Department, Reserve Bank of India, Central Office, External
Commercial Borrowings Division, Mumbai-400 001 along with necessary
documents.
Factoring/Forfeiting Scheme for Conversion of Credit Sale into Cash Sale.
Factoring may be defined as a contract by which the factor is to provide
at least two of the services and the supplier is to assign to the factor on a
continuing basis, by way of sale or security, receivables arising from the sale of
goods or supply of services.
Defination

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

The word forfeit is derived from the French Word a forfeit meaning the
surrender of rights. In a forfeiting transaction, the exporter surrenders, without
recourse to him, his right to cliam for payment on goods delivered to an
importer, in return for immediate cash payment from a forgather. As a result, an
exporter in India can convert a credit sale into a cash sale, with no recourse to
the exporter or his banker.
All exports of capital goods and other goods made on medium to long
term credit are eligible to be financed through forfeiting.
The EXIM Bank of India is the agency in India which will act as an
intermediary between the Indian exporter and the overseas forfeiting agency.
Ads are permitted to make remittances of commitment fee/service
charges payable by exporters as certified by the EXIM bank. Such remittances
may be permitted in advance in one lump sum or at monthly intervals as
approved by the concerned agency. Where the commitment fee and other
charges exceed 1.5% of the invoice value, the exporters should obtain prior
approval of RBI.
For further details, see author’s book “Finance for Export-Import and
Documentary Credit brought out by Anupam publisher.

International Export Factoring Scheme

Reserve Bank of India have approved the Scheme evolved by SBI
Factors and Commercial Services Pvt. Ltd., Mumbai, for providing
“International Export Factoring” services on With recourse basis. The salient
features of the scheme are as under:
a) An exporter should submit to SBI Factors and Commercial Services pvt.
Ltd. i.e. the Export Factor a list of buyers indicating their names and
street addresses and his credit line needs.
b) The Import Factor located in the importer’s country, selected by EF, will
rate the buyer’s list and the results will be reported to the exporter
through EF. The exporter will apply for a credit limit in respect of

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

overseas importer. IF will grant credit line based on the assessment of

credit worthiness of the overseas importer.
c) The exporter thereafter will enter into an export factoring agreement with
EF. All export receivables will be assigned to EF, who it turn will assign
them it IF.
d) The exporter will ship merchandise to approved foreign buyers. Each
invoice is made payable to a specific factor in the buyer’s country.
Copies of invoices and shipping documents should be sent to IF through
EF. EF will make prepayment to the exporter against approved export
receivables.
e) EF will report the transaction in relevant ENC statement detailing full
particulars such as Exporter’s code No. GR Form Number, Custom No.
Currency, Invoice value, etc.
f) On receipt of payments from buyers on the due date of invoice. IF will
remit funds to EF, who will convert foreign currency remittances into
Rupees and will transfer proceeds to the exporter after deducting the
amount of prepayments, if made. Simultaneously, EF will report the
transaction in the relative ‘R’ return enclosing duplicate copy of the
respective GR form duly certified. The payment received will be the net
payment after deduction of a service fee which rages from 0.5 percent to
2 percent of the value of the invoices.
g) If an approved buyer is unable to pay the proceeds of exports, IF will pay
the receivables to EF, 100 days after the due date. The transactions of
this nature will be reported by EF in half-yearly XOS statements to be
submitted to Reserve Bank, indicating therein the reasons for delay/non-
payment.
ECGC’s Maturity Factoring Scheme
The export credit guarantee corporation has introduced in April 2002 the
non-recourse maturity export factoring scheme. It has certain unique features
and does not exactly fit into the conventional mould of maturity factoring. It
gives the exporters the full benefit of full factoring services to avail themselves

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

of pre-finance (advance) on the receivables, for their working capital

requirements:
Specific Services:
These are:
100% credit guarantee protection against bad debts.
Sales register maintenance in respect of factored transactions.
Regular monitoring of outstanding credits, facilitating collection of
receivables on due date, recovery, at its own cost, of all recoverable
bad debts.
Payments would be received by the exporter, in his account through normal
banking channels. In the event of non- realization of dues on factored export
receivables. ECGC will promptly make the payment in Indian Rupees, of an
equivalent amount, immediately upon the crystallization of dues by the bank.
Specific Benefits to Exporters
These are:
 Option to give easier credit terms to overseas customers-Better
protection than an irrevocable letter of credit, without the need to interest
on establishing one.
 Enables to offer more friendly delivery terms, like direct delivery to the
customer without any risk.
 Reduced foreign bank handling charges on documents.
 Substantial cost savings relating to monitoring and follow up of
receivables, overdue bank interest on delayed collections and recovery
expenses relating to bad debts.
 Increase in export sales, due to more competitive terms offered to
customers.
 Better security than even Letters of Credit.
 Elimination of uncertainties relating to realization of accounts receivables
resulting in better cash management to meet working capital
requirements.
 Full attention to procurement/production, marketing and sales and
growth of business, due to freedom from chasing receivables.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349
 Export Finance

Application
The exporter should send a formal application in the prescribed form,
along with prescreibed fee, through his banker, to the nearest office off the
ECGC, for availing the factoring facility.

Payment
Payment would be received by the exporter in his account through
normal banking channels. If the bill remains unpaid after 30 days of the due
date, ECGC undertakes to make the settlement in Indian rupees of the
crystallized value of the bill immediately on crystallization, and within three days
of getting demand notice from the bank.

Leelabati Institue of Foreign Trade, (School of Export Import Management),

Plot No.- C-78, HIG Housing Board Colony, Baramunda, Bhubaneswar-751003,
Ph: 2550332 (O), Cell: +91 9438421233 / 9437258349