EXPORT

FINANCE

PROJECT GUIDE :
PROF.S.B. KASTURE

PROJECT PREPARED BY:

SACHIN PARAB
NMIMS
MFM –III B
ROLL NO.113
 Index

S.No Table of Contents Page

No.
1 Introduction 02
2 Concept of Export Finance 03
3 Types – Pre-shipment & Post Shipment finance 04/05
4 Letter of Credit 10
5 Export credit in foreign currency 11
6 Role of EXIM Bank in export promotion 12
a) Features/Objectives/Operations 13
b) Lending Programs 15
c) Financing Programs 18
d) FREPEC 20
e) EXIM business profile 22
f) Export Services 23
g) Forfaiting 28
7 Role of ECGC in export promotion
a) Introduction/features 32
b) Products of ECGC 33
8 FAQ –EXIM bank 40
9 Recent developments-EXIM Bank 43-46
10 Exchange Control on Exports 47
11 Trade Related Investment Measures (TRIMs) 49
12 Factoring 50
13 Monetary & Credit Policy 52
14 High Court Ruling 53
15 Learnings from the Project 54
16 Bibliography 55

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 Introduction :

Credit and finance is the life blood of any business whether

domestic or international . It is more important in the case of
export transactions due to the prevalance of novel non-price
competitive techniques encountered by exporters in various
nations to enlarge their share of world markets.

The selling techniques are no longer confined to mere quality,

price or delivery schedules of the products but are extended to
payment terms offered by exporters . Liberal payment terms
usually score over the competitors not only of capital equipment
but also of consumer goods.

The payment terms however depend upon the availability of

finance to exporters in relation to its quantum, cost and the
period at pre-shipment and post-shipment stage.

This project is an attempt to throw light on the various sources of

export finance available to exporters , the schemes implemented by
ECGC and EXIM for export promotion and the recent developments
in the form of tie-EXIM tie-ups , credit policy announced by RBI in
Oct 2001 and TRIMS .

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Concept OF EXPORT FINANCE:-

Export finance is a short term working capital finance allowed to an exporter.

Finance and credit are available to help not only export production but also
to sell overseas customers on credit .

Need for Export Finance :

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

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

An exporter may avail financial assistance from any bank which consider the
ensuing factors:-
a) Availability of the funds at the required time to the exporter.
b) Affordability of the cost of funds.

GUIDELINES FOR EXPORT FINANCE FOR BANKS DEALING IN EXPORT

FINANCE:-

When a commercial bank deals in export finance it is bound by the ensuing

guidelines:-
a) Exchange control regulations.
b) Trade control regulations.
c) Reserve Bank’s directives issued through IECD.
d) Export Credit Guarantee Corporation guidelines.
e) Guidelines of Foreign Exchange Dealers Association of India.

We now have a look at the different types of export finance.

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

i. Pre-shipment finance
Post-shipment finance

Definition of Pre-shipment finance:-

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

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Definition of Post-shipment finance:-

Credit facility extended to an exporter from the date of shipment of goods till the
realisation of the export proceeds is called post-shipment credit.

Pre-shipment finance is available in the form of packing credit and advances

against receivables from the Government like duty drawback, etc.

Post-shipment finance is available in the form of ;

i. Export bills purchased / negotiated / discounted.
ii. Advances against bills sent on collection basis.
iii. Advances against exports on consignments basis.
iv. Advances against undrawn balances.
v. Advances against duty drawback.

We now discuss in detail about pre-shipment finance.

Pre-shipment finance which is generally called packing credit is essentially a

working capital advance made available for the specific purpose of procuring or
processing or manufacturing of goods meant for export.

Two essential features of packing credit advances are:-

a) There should be an export order or a letter of credit.
b) The advances to be liquidated from the relative export proceeds.

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

To RBI under the Exchange Control Regulations:-

Obligations are:-
Appraisee to be the bank’s customer.
Appraisee should have the exim code number alloted by the Director General Of
Foreign Trade.
Party’s name should not appear under the caution list of the RBI.

To the Trade Control Authority under the EXIM policy:-

Obligations are:-
Appraisee should have IEC number alloted by the DGFT.
Goods must be freely exportable i.e. not falling under the negative list. If it falls
under the negative list, then a valid license should be there allowing the export.

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Country with whom the appraisee wants to trade should not be under trade
barrier.

To ECGC:-
Obligations are:-
Verification that appraisee is not under the Specific Approval list (SAL).
SANCTION OF PACKING CREDIT ADVANCES
There are certain factors to be considered while sanctioning the packing credit
advances viz.
i. Banks may relax norms for debt-equity ratio, margins etc but no compromise
in respect of viability of the proposal and integrity of the borrower.
ii. Satisfaction about the capacity of the execution of the orders within the
stipulated time and the management of the export business.
iii. Quantum of finance.
iv. Standing of credit opening bank if the exports are covered under letters of
credit.
v. Regulations, political and financial conditions of the buyer’s country.

DISBURSEMENT OF PACKING CREDIT

After proper sanctioning of credit limits, the disbursing branch should ensure:-
To inform ECGC the details of limit sanctioned in the prescribed format within 30
days from the date of sanction.
a) To complete proper documentation and compliance of the terms of sanction
i.e. creation of mortgage etc.
b) There should be an export order or a letter of credit produced by the exporter
on the basis of which disbursements are normally allowed. In both the cases
following particulars are to be verified:-
i. Name of the buyer
ii. Commodity to be exported
iii. Quantity
iv. Value
v. Date of shipment / negotiation
vi. Any other terms to be complied with.

QUANTUM OF FINANCE

On the basis of the above particulars, the quantum of finance will be fixed.
Normally, the quantum will be fixed on the FOB value of the contract or the LC or
the domestic value of the goods which ever is less after deducting the profit
margin.
If the contract or the LC is on CIF basis, the FOB value will be arrived at by
deducting 13 to 14% from the CIF value if the despatch is through sea and

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around 25% if the despatch is by air. After arriving at the FOB value the usual
margin i.e. profit margin stipulated in the terms of sanction to be deducted.

PERIOD OF FINANCE
This is decided on the basis of the production cycle or upto the date of shipment
mentioned in the order / LC whichever is earlier. But in no case it should exceed
180 days. For reasons beyond the control of exporter, if the shipment could not
be made within 180 daysfrom the date of advance, a further extension of 90 days
can be granted by the banks themselves without referring to Reserve Bank.
Extension of any packing credit beyond 360 days requires ECGC’s approval.

In order to have proper control over the granting and settlement of pre-shipment
credit allowed to exporters at concessive rates of interest, it is necessary for the
banks to maintain separate accounts in respect of each packing credit advanced
to the exporter. Packing credit advance should also be followed up properly at all
stages like submission of stock statements and inspection of stocks at regular
intervals, adequate insurance cover for the stocks etc.
Packing credit advance will always be liquidated with the export proceeds of the
relevant shipment. At this stage the pre-shipment liability of the party is converted
into post-shipment liability.

Post-shipment finance

is essentially an advance against receivables which will be in the form of

shipping documents.
Some of the major exchange control regulations concerning export finance at the
post-shipment stage are as follows:-
i. Exporter should have the code number and each shipment should
accompany the prescribed declaration form in which the value of export will
be declared and duly certified by the customs authority.
ii. Shipping documents along with relative GR form must be submitted to an
AD within 21 days from the date of shipment.
iii. The payment should be received in an approved manner within the
prescribed time limit. i.e. within six months from the date of shipment.

Different types of post-shipment advances

i. Export bills purchased / discounted

ii. Export bills negotiated
iii. Advances against bills sent on collection basis.
iv. Advances against exports on consignment basis.
v. Advances against undrawn balances.
vi. Advances against duty drawback.

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Export bills purchased / discounted:-

Proper limit should be sanctioned to the exporter for purchase of export bills
facility. Since the export is not covered under LC, risk of non-payment may arise.

Export bills negotiated:-(bills drawn under LC)

When export documents are presented to the bank for negotiation, they should
be scrutinized carefully with the terms and conditions of the LC. The operation of
letter of credit is governed by Uniform Customs & Practices for Documentary
Credits (1993 revision) of the International Chamber of Commerce, Brochure no.
500.

Advances against bills sent on collection basis:-

At times, the exporter might have fully utilized his bills and in certain cases the
bills drawn under the LC may have some discrepancies. In such cases the bills
will be sent on collection basis. In some cases, the exporter himself may request
for sending the bills on collection basis anticipating the strengthening of the
foreign currency. Banks may allow advance against these collection bills to an
exporter. Concessive rate of interest can be charged for this advance upto the
transit period in the case of DP Bill and the transit period + usance period +
grace period (if any) in case of usance bills.

Advance against goods sent on consignment basis:-

Goods are exported on consignment basis at the risk of the exporter for sale
abroad. Eventual remittance of sale proceeds will be made by agent / consignee.

Advances against undrawn balances:-

In certain line of export trade, it is the practice of the exporter to leave a part of
the amount as undrawn balance. Adjustment will be made by the buyer for

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difference in weight, quality etc. ascertained after arrival and inspection or
analysis of the goods.

Advances against receivables from Government such as Duty Drawback:-

Where the domestic cost of production of certain goods is higher in relation to

international price, the exporter may get support from the Government so that he

may compete effectively in the overseas market. Export incentives are provided
under the Export Promotion Scheme by the Government of India and other
agencies. This can only be in the form of refund of excise and customs duty
known as Duty Drawback

Period of finance

Post –shipment advance against demand bills will be for a period upto normal
transit period. In case of unasked bills the advance will be for the transit period +
usance period + grace period if any, but in any case not exceeding 180 days
from the date of shipment.

Quantum of finance

In case of post-shipment advances, normally no margin is maintained for bills

drawn under LC’s. Only in case of export bills purchased against contracts / firm
orders, depending upon the additional security available, some banks prescribe
certain amount of margin.

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 Letter of Credit

A letter of credit is a banking mechanism which allows importers to offer secure

terms to exporters.
All letters of credit contain these elements:

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

Put simply, the issuing bank's role is twofold:

• to guarantee to the seller that if compliant documents are presented, the bank
will pay the seller the amount due. This offers security to the seller - the bank
says in effect "We will pay you if you present documents (XYZ)"
• to examine the documents, and only pay if these comply with the terms and
conditions set out in the letter of credit. This protects the buyer's interests - the
bank says "We will only pay your supplier on your behalf if they present
documents (XYZ) that you have asked for"
Note that the letter of credit refers to documents representing the goods - not the goods
themselves! Banks are not in the business of examining goods on behalf of their
customers.
Typically the documents requested will include a commercial invoice, a transport
document such as a bill of lading or airway bill, an insurance document; but there are
many others.

Letters of credit deal in documents, not goods.

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 Export Credit In Foreign Currency :

Both Pre-shipment & post shipment credits are available in foreign currencies
under 2 schemes :

1. Foreign currency pre-shipment credit (FCPC) Scheme :

2. Rediscounting of Export Bills Abroad (EBR) Scheme :

1. FCPC :
The FCPC 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 & available to
cover both the domestic i.e indigenous & imported inputs . The exporter
has two options to avail himself of export finance.
To avail himself of preshipment credit in rupees & then the post shipment
credit either in rupees or in foreign currency denominated credit or
discounting /rediscounting of export bills.
To avail of preshipment credit in foreign currency & discounting
/rediscounting of the export bills in foreign currency.

FCPC will also be available both to the supplier EOU/EPZ unit and the
receiver EOU/EPZ unit .

Pre-shipment credit in foreign currency shall also be available on exports to

ACU (Asian Clearing Union) countries with effect from 1.1.1996.

Eligibility : PCFC is extended only on the basis of confirmed /firm export

orders or confirmed L/Cs . The “Running account facility will not be available
under the scheme . However , the facility of the liquidation of packing credit
under the first in first out method will be allowed .

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.

Sharing of FCPC : Banks may extend FCPC to the manufacturer also

on the basis of the disclaimer from the export order

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Rediscounting of Export Bills Abroad (EBR) Scheme :
The exporter has the option of availing of export credit at the post
shipment stage either in rupee or in foreign currency under the
rediscounting of export bills abroad (EBRD) scheme at LIBOR linked
interest rates.

This facility will be an additional window available to exporter along with the
exiting rupee financing schemes to an exporter at post shipment stage. This
facility will be available in all convertible currencies. This scheme will cover
export bills upto 180 days from the date of shipment (inclusive of nromal
transit period and grace period) .

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) for six months.

Prior permission of RBI will not be required for arranging the rediscounting
facility abroad so long as the spread for rediscounting facility abroad does
not exceed one percent over the six months LIBOR in the case of
rediscounting ‘with recourse’ basis & 1.5% in the case of ‘without recourse’
facility. Spread , should be exclusive of any withholding tax. In all other
cases , the RBI’s permission will be needed .

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 Role of EXIM Bank

in

Exports Promotion

Exim Bank Act

• Set up by an Act of Parliament in September 1981

• Commenced operations in March 1982

• Wholly owned by the Government of India

Export-Import Bank of India was set up for the purpose of financing,

facilitating and promoting foreign trade in India.

Exim is the principal financial institution in the country for co-coordinating

working of institutions engaged in financing exports and imports

Introduction

Exim Bank extends lines of credit to overseas governments/agencies nominated

by them or financial institutions overseas to enable buyers in those countries to
import capital/engineering goods, industrial manufactures and related services
from India on deferred payment terms. This facility enables importers in those
countries to import from India on deferred credit terms as per the terms and
conditions already negotiated between Exim Bank and the overseas agency. The
Indian exporters can obtain payment of eligible value from Exim Bank against
negotiation of shipping documents, without recourse to them.

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Features

The lines of credit are denominated in convertible foreign currencies or Indian

Rupees and extended to sovereign governments/agencies nominated by them or
financial institutions. Such governments/agencies/institutions are the borrowers
and Exim Bank the lender. Terms and conditions of different lines of credit are
varying and details in respect of each line of credit can be obtained from Exim
Bank. It would need to be ascertained from time to time that the lines of credit
have come into effect and uncommitted balance is still available for utilization.
Indian exporters also need to ascertain the quantum of service fees payable to
Exim Bank on account of prorate export credit insurance premium and / or
interest rate differential cost that they can then paid up in their prices to their
importers

OBJECTIVES

Export-Import Bank of India (EXIM INDIA), an apex financial institution, was

set up in 1982 to finance, facilitate and promote India's international trade. The
Bank is the principal financial institution in the country for co-coordinating the
working of institutions engaged in financing exports and imports. The mission of
the Bank is to develop commercially viable relationships with externally oriented
companies by offering a comprehensive range of products and services aimed at
helping Indian companies to globalize.

OPERATIONS - How it works :

• The buyer arranges to obtain allocation of funds under the credit line from
the borrower. The exporter then enters into contract with the buyer, for the
eligible items covered under the line of credit. The contracts would need to
conform to the basic terms and conditions of the respective credit lines.
(Particulars of effective lines of credit are available separately).

• The delivery period stipulated in the contracts should be such that credit
can be drawn from Exim Bank within the terminal disbursement date

14
 stipulated under the respective line of credit agreements. Also, all
contracts should provide for pre-shipment inspection by the buyer or agent
nominated by buyer.

• The buyer arranges to comply with procedural formalities as applicable in

his country and then submits the contract to the borrower for approval.
The borrower in turn forwards copies of the contract to Exim Bank for
approval.

• Exim Bank advises approval of the contract to the borrower, with copy to
exporter, indicating approval number, eligible contract value, last date for
disbursement, and other conditions subject to which approval is granted.

• The Buyer, on advice from the borrower, establishes an irrevocable sight

letter of credit(L/C). A single L/C is to be opened, covering the full eligible
value of the contract including, freight and/or insurance as laid down in the
contract.

• The letter of credit is advised through a bank in India designated by Exim

Bank.

• Exporter ships the goods covered under the contract and presents
documents for negotiation to the designated bank. The Bank forwards
negotiated documents to the buyer.

• On receipt of clean non-negotiable set of shipment documents along with

the relative invoices, inspection certificate and a certificate that documents
negotiated are as per terms of L/C and without reserve from the
negotiating bank and after having satisfied itself, that all formalities have
been complied with in conformity with the terms of the Credit Agreement,
Exim Bank reimburses the eligible value of shipment in equivalent rupees
at spot exchange rate to the negotiating bank for payment to the exporter.

15
 • Exim Bank debits the borrower's account and arranges to collect interest
and principal receivable on due dates as per the terms of the line of credit
agreement between Exim Bank and the borrower.

EXPORT -IMPORT BANK OF INDIA (EXIM)

A Range of Export Services

In addition to finance, EXIM INDIA provides a range of analytical information and

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

A Network of Institutional Linkages

EXIM INDIA is a wholesale bank. The Bank works closely with commercial banks
in India, who through a network of around 60,000 branches operate the retail
export credit system in the country. Besides extensive linkages with commercial
banks by virtue of its refinancing / rediscounting activities and risk participating
arrangements, EXIM INDIA has a working relationship with the sole export credit
insurance agency in India, i.e., the Export Credit Guarantee Corporation of India
Ltd.

A Variety of Lending Programs

EXIM INDIA offers a range of financing programs that match the menu of Exim
Banks of the industrialized countries. However, the Bank is atypical in the
universe of Exim Banks in that it has over the years evolved, so as to anticipate

16
and meet the special needs of a developing country. The Bank provides
competitive finance at various stages of the export cycle covering :

EXIM INDIA operates a wide range of financing and promotional programs. The
Bank finances exports of Indian machinery, manufactured goods, consultancy
and technology services on deferred payment terms. EXIM INDIA also seeks to
co finance projects with global and regional development agencies to assist
Indian exporters in their efforts to participate in such overseas projects.

The Bank is involved in promotion of two-way technology transfer through the

outward flow of investment in Indian joint ventures overseas and foreign direct
investment flow into India. EXIM INDIA is also a Partner Institution with European
Union and operates European Community Investment Partners' Program
(ECIP) for facilitating promotion of joint ventures in India through technical and
financial collaboration with medium sized firms of the European Union.

Export Financing - Finance from Exim Bank

Exim Bank is fully owned by the Government of India and is managed by the
Board of Directors with repatriation from Government, financial institutions, banks
and business community. The Export- Import Bank of India (Exim Bank) provides
financial assistance to promote Indian exports through direct financial assistance,
overseas investment finance, term finance for export production and export
development, pre-shipping credit, buyer's credit, lines of credit, relending facility,
export bills rediscounting, refinance to commercial banks. The Exim Bank also
extends non-founded facility to Indian exporters in the form of guarantees. The
diversified lending program of the Exim Bank now covers various stages of
exports, i.e., from the development of export makers to expansion of production
capacity for exports, production capacity for exports, production for exports and
post- shipment financing. The Exim Bank's focus is on export of manufactured
goods, project exports, exports of technology services and exports of computers
software.

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 FINANCING PROGRAMMES :
Loans to Indian Companies

• Deferred payment exports : Term finance is provided to Indian exporters of

eligible goods and services which enables them to offer deferred credit to
overseas buyers. Deferred credit can also cover Indian consultancy,
technology and other services. Commercial banks participate in this program
directly or under risk syndication arrangements.

• Preshipment credit : finance is available form Exim Bank for companies

executing export contracts involving cycle time exceeding six months. The
facility also enables provision of rupee mobilization expenses for
construction/turnkey project exporters.

• Term loans for export production : Exim Bank provides term loans/deferred
payment guarantees to 100% export-oriented units, units in free trade zones
and computer software exporters. In collaboration with International Finance
Corporation. Washington, Exim Bank provides loans to enable small and
medium enterprises upgrade export production capability. Facilities for
deeded exports; Deemed exports are eligible for funded and non- funded
facilities from Exim Bank.

• Overseas Investment finance : Indian companies establishing joint ventures

overseas are provided finance towards their equity contribution in the joint
venture.

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• Finance for export marketing : This program, which is a component of a World
Bank loan, helps exporters implement their export market development plans.

• Loans to Foreign Governments, Companies and financial Institutions :

Overseas Buyer's Credit : Credit is directly offered to foreign entities for
import of eligible goods and related services, on deferred payment.

• Lines of Credit : Besides foreign governments, finance is available to foreign

financial institutions and government agencies to on-lend in the respective
country for import of goods and services from India.

• Relending Facility to Banks Overseas : Relending facility is extended to banks

overseas to enable them to provide term finance to their clients world-wide for
imports from India.

• Loans to Commercial Banks in India

• Export Bills Rediscounting : Commercial Banks in India who are authorized to

deal in foreign exchange can rediscount their short term export bills with Exim
Banks, for an unexpired usance period of not more than 90 days.

• Refinance of Export Credit : Authorized dealers in foreign exchange can

obtain from Exim Bank 100% refinance of deferred payment loans extended
for export of eligible Indian goods.

• Guaranteeing of Obligations:
Exim Bank participates with commercial banks in India in the issue of
guarantees required by Indian companies for the export contracts and for
execution of overseas construction and turnkey projects.

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Finance for Rupee Expenditure for Project Export Contracts (FREPEC)

What is FREPEC program?

This program seeks to Finance Rupee Expenditure for Project Export Contracts,
incurred by Indian companies.

What is the purpose of this credit?

To enable Indian project exporters to meet Rupee expenditure incurred/required

to be incurred for execution of overseas project export contracts such as for
acquisition/purchase/acquisition of materials and equipment, acquisition of
personnel, payments to be made in India to staff, sub-contractors, consultants
and to meet project related overheads in Indian Rupees.

Who are eligible for assistance under FREPEC program?

Indian project exporters who are to execute project export contracts overseas
secure on cash payment terms or those funded by multilateral agencies will be
eligible. The purpose of the new lending program is to give boost to project
export efforts of companies with good track record and sound financials.

What is the quantum of credit extended under this program?

Up to 100% of the peak deficit as reflected in the Rupee cash flow statement
prepared for the project. Exim Bank will not normally take up cases involving

20
credit requirement below Rs. 50 lakhs. Although, no maximum amount of credit is
being proposed, while approving overall credit limit, credit-worthiness of the
exporter-borrower would be taken into account. Where feasible, credit may be
extended in participation with sponsoring commercial bank(s).

How are disbursements made under this program?

Disbursements will made in Rupees through a bank account of the borrower-

company against documentary evidence of expenditure incurred accompanied by
a certificate of Chartered Accountants.

How is a FREPEC loan to be extinguished?

Repayment of credit would normally be out of project receipts. Period of

repayment would depend upon the project cash flow statements, but will not
exceed 4 (four) years from the effective date of project export contract. The
liability of the borrower to repay the credit and pay interest and other monies will
be absolute and will not be dependent upon actual realization of project bills.

What is the security stipulated for FREPEC loan?

a. Hypothecation of project receivables and project movables.

b. optional: where available

o Personal Guarantees of Directors of the Company.

o Available collateral security.

Refinance of Export Credit

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Authorized Dealers in foreign exchange can obtain from Exim Bank, hundred
percent refinance of deferred payment loans extended for export of eligible
Indian goods.

Exim Bank - Business Profile

THE OPERATIONS ARE GROUPED AS BELOW :

EXPORT CREDITS

• Bank provides exports of Indian machinery, manufactured goods,

consultancy and technology services on deferred payment terms

• Lines of credit/buyer's credits are extended to overseas entities i.e.

governments, central banks, commercial banks, development finance
institutions, regional development banks for financing export of goods and
services from India

1. Project Finance

2. Trade Finance

EXPORT CAPABILITY CREATION

• Export Product Development

• Export Marketing Finance

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 • Export Oriented Units

1. Project Finance

2. Working Capital

3. Production Equipment Finance

• European Community Investment Partners (ECIP)

• Asian Country Investment Partners (ACIP)

• Overseas Investment Finance

• Export Facilitation Programs

1. Software Training Institutes

2. Minor Ports Development

EXPORT SERVICES

In addition to finance, Bank provides a range of information and advisory

services to Indian companies to supplement their efforts aimed at globalization of
Indian business.

What are the types of services provided by Exim Bank?

Exim Bank provides a range of analytical information and export related services.
The Bank's fee based services help identify new business propositions, source
trade and investment related information, create and enhance presence through
joint network of institutional linkages across the globe assists externally oriented
companies in their quest for excellence and globalization. Services include
search for overseas partners, identification of technology suppliers, negotiating
alliances, and development of joint ventures in India and abroad. The Bank also
supports Indian project exporters and consultants to participate in projects
funded by multilateral funding agencies.

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What are the various types of financial facilities provided by Exim Bank to
Indian Companies for export of turnkey/ construction projects, export of
services and export of capital/ engineering goods & consumer durables ?

Exim Bank provides financial assistance to Indian Companies by way of a variety

of lending programs, viz.,

Non-Funded

• Bid Bond

• Advance Payment Guarantee

• Performance Guarantee

• Guarantee for release of Retention Money

• Guarantee for raising Borrowings Overseas

• Other guarantees

Non-Fund Based Facilities

Exam Bank issues following guarantees directly or in participation with other

banks, for project export contract.

• Bid Bond:

Bid Bond is generally issued for a period of six months.

• Advance Payment Guarantee:

Exporters are expected to secure a mobilization advance of 10-20% of the

contract value which is normally released against bank guarantee and is

24
generally recovered on a pro-rata basis from the progress payments during
project execution.

• Performance Guarantee:

Performance guarantee for 5-10% of contract is issued, valid upto completion of

maintenance period normally one year after completion of contract period and/or
grant of Final Acceptance Certificate (FAC) by the overseas employer. Format of
guarantee is expected to be furnished by exporter, at least four weeks before
actual issue, to facilitate discussions and formal approval.

• Guarantee for Release of Retention Money:

This enables the exporter to obtain the release of retention money (normally 10%
of contract value) before obtaining Final Acceptance Certificate (FAC) from client.

• Guarantee for Raising Borrowings Overseas:

Bridge finance may be needed at the earlier phases of the contracts to

supplement the mobilization advance. Bridge finance upto 25% of the contract
value may be raised in foreign currency from an overseas bank against this
guarantee issued by a bank in India. Request for overseas borrowings must be
supported by currency-wise cash flows, also indicating the outstanding letters of
credit and L/C drawl schedule.

• Other Guarantees:

e.g. in lieu of customs duty or security deposit for expatriate labor.

Guarantee commission is charged at rates stipulated by the Foreign Exchange

Dealers Association of India (FEDAI) or as stipulated by guarantee issuing bank.
Margin requirement for issue of guarantee is generally waived by banks for
Export Performance Guarantee. However, appropriate securities are availed of.

25
Funded :

• Pre-shipment Rupee Credit

• Post-shipment Rupee Credit

• Foreign Currency Loan

• Overseas Buyer's Credit

• Lines of Credit

• Loan under FREPEC program

• Refinance of Export Loans

Fund-Based Facilities

1. Pre-Shipment Rupee Credit

Pre-shipment Rupee Credit is extended to finance temporary funding

requirement of export contracts. This facility enables provision of rupee
mobilization expenses for construction/ turnkey projects. Exporters could also
avail of pre-shipment credit in foreign currencies to finance cost of imported
inputs for manufacture of export products to be supplied under the projects.
Commercial banks also extend this facility for definite periods.

Supplier's Credit for deferred payment exports

What is on offer?
Exim Bank offers Supplier's Credit in Rupees or in Foreign Currency at post-
shipment stage to finance export of eligible goods and services on deferred
payment terms.

Supplier's Credit is available both for supply contracts as well as project exports;
the latter includes construction, turnkey or consultancy contracts undertaken
overseas.

26
Who can seek finance?
Exporters can seek Supplier's Credit in Rupees/ Foreign Currency from Exim
Bank in respect of export contracts on deferred payment terms irrespective of
value of export contracts.

What are the general terms of Supplier's Credit?

a. Extent of Supplier's Credit

100% of post-shipment credit extended by exporter to overseas buyer.

b. Currency of Credit
Supplier's Credit from Exim Bank is available in Indian Rupees or in
Foreign Currency.

c. Rate of Interest
The rate of interest for Supplier's Credit in Rupees is a fixed rate and is
available on request. Supplier's Credit in Foreign Currency is offered by
Exim Bank on a floating rate basis at a margin over LIBOR dependent
upon cost of funds.

d. Security
Adequate security by way of acceptable letter of credit and/or guarantee
from a bank in the country of import or any third country is necessary, as
per RBI guidelines.

Period of Credit and Repayment

Period of credit is determined for each proposal having regard to the value of
contract, nature of goods covered, security, competition. Repayment period for
Supplier's Credit facility is fixed coinciding with the repayment of post-shipment
credit extended by Indian exporter to overseas buyer. However, the Indian
exporter will repay the credit to Exim Bank as per agreed repayment schedule,
irrespective of whether or not the overseas buyer has paid the Indian exporter.

Overseas Buyer's Credit

27
Credit is offered directly to overseas buyer for a specific project/ contract.

EXIM BANK

Recent Headlines:

Shri T. C. Venkat Subramanian, Managing Director, Exim Bank of India, handed

over a cheque for Rs. 38 crores to Union Finance Minister, Shri Yashwant Sinha,
representing the dividend paid by the Bank to the Government for the year ended
March 31, 2001. The dividend payout amounts to 24.6 % of the Bank's net profit
for the year 2000-01. The profit before tax of the Bank for the year April 2000 to
March 2001 amounted to Rs. 205 crores. The Bank has maintained one of the
highest employee productivity in India. Its profit before tax per employee for the
year 2000-01 was Rs. 135 lacs.

Forfaiting - An Export Finance Option by EXIM

Forfaiting is a mechanism of financing exports.

• by discounting export receivables

• evidenced by bills of exchange or promissory notes

• without recourse to the seller (viz. exporter)

• carrying medium to long term maturities

• on a fixed rate basis (discount)

28
 • upto 100 percent of the contract value.

The word `forfait' is derived from the French word `a forfait' which means the
surrender of rights.

Simply put, forfaiting is the non-recourse discounting of export receivables. In a

forfaiting transaction, the exporter surrenders, without recourse to him, his rights
to claim for payment on goods delivered to an importer, in return for immediate
cash payment from a forfaiter. 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.

What exports are eligible for forfaiting?

All exports of capital goods and other goods made on medium to long term credit
are eligible to be financed through forfaiting.

How does forfaiting work?

Receivables under a deferred payment contract for export of goods, evidenced

by bills of exchange or promissory notes, can be forfaited.

Bills of exchange or promissory notes, backed by co-acceptance from a bank

(which would generally be the buyer's bank), are endorsed by the exporter,
without recourse, in favour of the forfaiting agency in exchange for discounted
cash proceeds. The banker's co-acceptance is known as avalisation. The co-
accepting bank must be acceptable to the forfaiting agency.

Is there a prescribed format for the bills of exchange or promissory notes?

Yes. The bills of exchange or promissory notes should be in the prescribed

format.

What role will Exim Bank play in forfaiting transactions?

The role of Exim Bank will be that of a facilitator between the Indian exporter and
the overseas forfaiting agency.

29
How will Exim Bank facilitate a forfaiting transaction?

On a request from an exporter, for an export transaction which is eligible to be

forfaited, Exim Bank will obtain indicative and firm forfaiting quotes - discount
rate, commitment and other fees - from overseas agencies.

Exim Bank will receive availed bills of exchange or promissory notes, as the case
may be, and send them to the forfaiter for discounting and will arrange for the
discounted proceeds to be remitted to the Indian exporter.

Exim Bank will issue appropriate certificates to enable Indian exporters to remit
commitment fees and other charges.

What does forfaiting cost include?

A forfaiting transaction has typically three cost elements;

• Commitment fee

• Discount fee

• Documentation fee

What benefits accrue to an exporter from forfaiting?

• Converts a deferred payment export into a cash transaction,

improving liquidity and cash flow

• Frees the exporter from cross-border political or commercial risks

associated with export receivables

• Finance up to 100 percent of the export value is possible as

compared to 80-85 percent financing available from conventional
export credit program

• As forfaiting offers without recourse finance to an exporter, it does

not impact the exporter's borrowing limits. Thus, forfaiting

30
 represents an additional source of funding, contributing to improved
liquidity and cash flow

• Provides fixed rate finance; hedges against interest and exchange

risks arising from deferred export credit

• Exporter is freed from credit administration and collection problems

• Forfaiting is transaction specific. Consequently, a long term banking

relationship with the forfaiter is not necessary to arrange a forfaiting
transaction

• Exporter saves on insurance costs as forfaiting obviates the need

for export credit insurance

• Simplicity of documentation enables rapid conclusion of the

forfaiting arrangement.

31
ECGC (Export Credit Guarantee Corporation of India Limited )
Export Credit Guarantee Corporation of India Limited, was established in the
year 1957 by the Government of India to strengthen the export promotion drive
by covering the risk of exporting on credit.
Being essentially an export promotion organization, it functions under the
administrative control of the Ministry of Commerce, Government of India. It is
managed by a Board of Directors comprising representatives of the Government,
Reserve Bank of India, banking, insurance and exporting community. ECGC, the
fifth largest credit insurer of the world in terms of coverage of national exports.
The present paid-up capital of the company is Rs.340 crores, which is expected
to be enhanced to Rs.500 crores by the year 2002.

What does ECGC do?

• provides a range of credit risk insurance covers to exporters against loss

in export of goods and services, and also

• offers guarantees to banks and financial institutions to enable exporters

obtain better facilities from them.

• Provides Overseas Investment Insurance to Indian companies investing in

joint ventures abroad in form of equity or loan.

How does ECGC help exporters?

ECGC provides

• insurance protection to exporters against payment risks

32
 • guidance in export related activities

• provides information on credit-worthiness of overseas buyers

• provides information on about 180 countries with its own credit ratings

• makes it easy to obtain export finance from banks/financial institutions

• assists exporters in recovering bad debts

When should an exporter approach ECGC?

The point at which cover normally begins is the date of dispatch i.e. shipment
Proposal for a Standard Policy may be made at any time. For specific policies
ECGC should be approached well before shipments begin, preferably before
concluding a contract.

33
PRODUCTS :

The covers issued by ECGC can be divided broadly into four groups:
1) Standard Policy
2) Specific Policies
3) Financial Guarantees
4) Special Schemes

STANDARD POLICY
Shipments (Comprehensive Risks) Policy, which is commonly known as
the Standard Policy, is the one ideally suited to cover risks in respect of
goods exported on short term credit; i.e. credit not exceeding 180 days.
The policy covers both commercial and political risks from the date of
shipment.

Risks covered under the policy :

Under the Shipments (Comprehensive Risks) Policy, the Corporation
covers, from the date of shipment, the following risks:
1) Commercial Risks

• Insolvency of the buyer

• Failure of the buyer to make the payment within a specified period,

normally 4 months from the due date

• Buyer's failure to accept the goods, subject to certain conditions

2) Political Risks

• Imposition of restrictions by the Government of the buyer's country or any

Government action which may block the delay of transfer of payment
made by the buyer.

• War, civil war, revolution or civil disturbances in the buyer's country

34
 • New import restrictions or cancellation of a valid import license

• Interruption or diversion of voyage outside India resulting in payment of

additional freight or insurance charges which cannot be recovered from
the buyer.

• Any other cause of loss occurring outside India, not normally insured by
general insurers and beyond the control of both the exporter and the
buyer.

Risks not covered

The policy does not cover losses due to the following risks:

• 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 favor.

• Causes inherent in the nature of the goods

• Buyer's failure to obtain necessary import or exchange authorization from

authorities in his country.

• Insolvency or default of any agent of the exporter or of the collecting bank.

• Loss or damage to goods which can be covered by general insurers

• Exchange rate fluctuation

• Failure of the exporter to fulfill the terms of export contract or negligence

on his part.

Shipments Covered

The shipments (Comprehensive Risks) Policy is meant to cover all the shipments
that may be made by an exporter on credit terms during a period of 24 months
ahead. In other words, an exporter is required to offer for insurance each and

35
every shipment that may be made by him in the next 24 months on DP, DA or
Open Delivery terms to buyers other than his own associates. The Policy cannot
be issued for selected shipments. selected buyers or selected markets.

Exclusions

Where an exporter is dealing with several distinct items, ECGC may agree to
exclude all shipments of certain agreed items, provided that what is offered for
insurance consists of all items of an allied nature and offers the Corporation a
reasonable portion of the exporter's total business with a fair spread of risks.

Maximum Liability

As the policy is intended to cover all the shipments that may be made by an
exporter in a period of 24 months ahead, the Corporation will fix its Maximum
Liability under each policy. The Maximum Liability is the limit up to which ECGC
would accept liability for shipments made during the policy period for both
commercial and political risks. It will be advisable to estimate the maximum
outstanding payments due from overseas buyers at any one time during the
policy period and to obtain the policy with maximum liability for such a value. The
maximum Liability fixed under the Policy can be enhanced subsequently, if
necessary.

Credit Limits

Commercial risks are covered subject to a Credit Limit approved by the

Corporation on each buyer to whom shipments are made on credit terms. The
exporter has therefore to apply for a suitable Credit Limit on each buyer. On the
basis of its own judgment of the creditworthiness of the buyer, as ascertained
from credit reports obtained from banks and specialized agencies abroad, the
Corporation will approve a Credit Limit which is the limit up to which it will pay
claim on account of losses arising from commercial risks. The Credit limit is a
revolving limit and once approved it will hold good for all shipments to the buyer
as long as there is no gap of more than 12 months between the two shipments.

36
Credit limit is a limit on the Corporation's exposure on the buyer for commercial
risks and not a limit on the value of shipment that may be made to him. Premium
has, therefore, to be paid on the full value of each shipment even where the
value of the shipment or the total value of bills outstanding for payment is in
excess of the credit limit.

As the Credit Limit is indicative of the safe limit of credit that can be
extended to the buyer, it will be advisable for exporters to see that the total value
of bills outstanding with the buyer at any one time is not out of proportion to the
Credit Limit. In cases where the Credit Limit that the Corporation is prepared to
grant is far lower than the value of outstanding, exporters should discuss the
problem with the Corporation.

Credit Limits need not be obtained if a shipment is made on D.P or C.A.D

terms and if the value of shipment does not exceed Rs. 10 lacs. Political as well
as commercial risks will stand automatically covered for such shipments, the only
qualification being the claims will not be paid on more than four buyers during the
Policy period under this provision.

Premium Rates

Depending on the combination of the payment term and the country group, the
premium may range from 0.07% to 3.5%. ECGC's premium rates are one of the
lowest among credit insurers in the world.

When does a claim become payable?

A claim could arise when the exporter suffers loss arising from any of the
insured risks and will be paid to the exporter immediately upon the loss being
ascertained by the Corporation. In case of insolvency of an overseas buyer,
losses will be ascertained one month after the exporter's claim is admitted to rank
against the insolvent's estate or after four months from the due date, whichever is
earlier. In case of default by the buyer and in all other cases, loss will be
ascertained four months from the due date. Expenses incurred by the exporter

37
on account of additional handling, transport or insurance charges because of
interruption or diversion of voyage out side India could also form part of the
insured loss.

The Corporation normally pays 90% of the loss, whether it arises due to the
commercial risks or political risks. A lower percentage of cover may be offered in
certain cases.

Sharing recovery with ECGC

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 recovering the amount from the overseas buyer.

Small Exporter's Policy

ECGC issues a Small Exporter's Policy to exporters whose anticipated

export turnover for the next twelve months does not exceed Rs. 50 lakhs. For
further information about the scheme, feel free to contact ECGC.

Specific Policies

Specific Policies are 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. These policies are issued separately for each specific contract, and
cover risks normally from the date of contract.

Financial Guarantees

Financial Guarantees are issued to banks in India to protect them from risks
of loss involved in their extending financial support at pre-shipment and post-

38
shipment stages. These also cover a host of non-fund based facilities that are
extended to exporters.

Special Schemes

Transfer Guarantee meant to protect banks which add confirmation to Letters of

Credit opened by foreign banks, Insurance cover for Buyers Credit and Lines of
Credit, and Exchange Fluctuation Risk Insurance.

Overseas Investment Insurance

ECGC has evolved a scheme to provide protection for Indian investments

abroad. Any investments made by way of equity capital or untied loan for the
purpose of setting up or expansion of overseas projects will be eligible for cover
under investment insurance.

The investments may be either in cash or in the form of export of Indian

capital goods and services. The cover will be available for the original investment
together with annual dividends or interest receivable.

The risks of war, expropriation and restriction on remittances are covered

under the schemes. As the investor would be having a hand in the management
of the joint venture, no cover for commercial risks would be provided under the
scheme. For investment in any country to qualify for investment insurance, there
should preferably be a bilateral agreement protecting investment of one country
in the other. ECGC may consider providing cover in the absence of any such
agreement provided it is satisfied that the general laws of the country afford
adequate protection to the investments.

The period of insurance cover would not normally exceed 15 years. In case
of projects involving long construction periods, cover may be extended for a
period of 15 years from the date of completion of the project subject to a
maximum of 20 years from the date of commencement of the investment.

39
Amounts insured shall be reduced progressively in the last five years of the
insurance period.

FAQ

40
1. What is Export-Import Bank of India? What are its objectives?
The Export-Import Bank of India (Exim Bank) is a public sector financial
institution created by an Act of Parliament, the Export-import Bank of India Act,
1981. The business of Exim Bank is to finance Indian exports that lead to
continuity of foreign exchange for India. The Bank's primary objective is to
develop commercially viable relationships with a target set of externally oriented
companies by offering them a comprehensive range of products and services,
aimed at enhancing their internationalisation efforts.

2. What is the place of Exim Bank in the institutional structure for financing
developmental needs?
There are apex institutions in the country, which deal with major economic
activities, viz. industry, agriculture and foreign trade. The Industrial Development
Bank of India extends term industrial loans; the National Bank for Agricultural
loans; and the Exim Bank extends term loans for foreign trade. All these
institutions are wholesale banks. They, therefore work closely with commercial
banks and other state level financial institutions that operate the retail banking
system in the country.

3. What are the types of services provided by Exim Bank?

Exim Bank provides a range of analytical information and export related services.
The Bank's fee based services help identify new business propositions, source
trade and investment related information, create and enhance presence through
joint network of institutional linkages across the globe, and assists externally
oriented companies in their quest for excellence and globalisation. Services
include search for overseas partners, identification of technology suppliers,
negotiating alliances, and development of joint ventures in India and abroad. The
Bank also supports Indian project exporters and consultants to participate in
projects funded by multilateral funding agencies.

4. How does Exim Bank support Indian consultants to secure assignments

overseas?
Exim Bank encourages Indian consultants to gain and enhance their international
exposure by assisting them in securing assignments overseas.
Assignments are awarded under programme sponsored by International Finance
Corporation (IFC) in Washington to promote private sector development in select
countries and regions. Arrangements set in place cover:
• Africa Project Development Facility
• African Management Services Company
• Africa Enterprise Fund
• South-east Europe Enterprise Development Facility
• Mekong Project Development Facility
• Business Advisory and Technical Assistance Services (BATAS)
• Other Technical Assistance & Trust Funds
Exim Bank assists these agencies in the recruitment of Indian consultants and
meets the professional fees of the consultant selected by IFC.

41
Consultancy assignments undertaken comprise pre-feasibility studies, project
and investment related services, management information systems, operations
and maintenance support mainly for SMEs in a variety of sectors like agriculture,
agro-industry, consumer goods, light engineering, telecom.

5. What are the various types of financial facilities provided by Exim Bank
to Indian Companies for export of turnkey/ construction projects, export of
services and export of capital/ engineering goods & consumer durables ?
Exim Bank provides financial assistance to Indian Companies by way of a variety
of lending programmes, viz.,
Non-Funded
• Bid Bond
• Advance Payment Guarantee
• Performance Guarantee
• Guarantee for release of Retention Money
• Guarantee for raising Borrowings Overseas
• Other guarantees
Funded
• Pre-shipment Rupee Credit
• Post-shipment Rupee Credit
• Foreign Currency Loan
• Overseas Buyer's Credit
• Lines of Credit
• Loan under FREPEC programme
• Refinance of Export Loans

6. How is Forfaiting useful as an export financing option ? What role does

Exim Bank play in a Forfaiting transaction ?
Forfaiting is a mechanism of financing exports by discounting export receivables
evidenced by bills of exchange/ promissory notes without recourse to the
exporter.
Exim Bank plays the role of an intermediary for facilitating the forfaiting
transaction between the Indian exporter and the overseas forfaiting agency.

7. What are the various types of financial facilities provided by Exim Bank
to Indian Companies for export capability creation?
Exim Bank provides financial assistance to Indian Companies for export
capability creation by way of a variety of lending programmes, viz.,
• Lending Programme for Export Oriented Units
• Production Equipment Finance Programme
• Import Finance
• Export Marketing Finance Programme
• Lending Programme for Software Training Institutes
• Programme for Financing Research & Development
• Programme for Export Facilitation: Port Development

42
 • Export Vendor Development Lending Programme
• Foreign Currency Pre-Shipment Credit
• Working Capital Term Loan Programme for Export Oriented units

8. What type of financial assistance is extended by Exim Bank in setting up

joint ventures?
Assistance is extended to Indian Promoter Companies by way of programmes
that address to different requirements of the promoter company in setting up of
the joint venture.
• Overseas Investment Finance Programme for setting up joint ventures
and wholly owned subsidiaries abroad.
• Asian Countries Investment Partners (ACIP) Programme for creation
of a joint venture in India with East Asian countries, through four facilities
that address different stages of a project cycle.

43
 RECENT DEVELOPMENTS

Exim Bank Goes The Electronic Way :

Exim Bank has introduced an option to investors in its bonds to hold the same in
dematerialised form. The Bank has established connectivity with the National
Securities Depository Limited and Central Depository Services (India) Limited
through its new Transfer Agent, viz, NVs Datamatics Financial Software and
Services Limited, with effect from November 1, 2001.

As on October 31, 2001 there were 9 series of Exiin Bank bonds guaranteed by
Government of India (SLR Bonds) amounting to Rs. 526.45 crores and 8 series
of Exim Bank bonds (non-SLR Bonds) amounting to Rs. 1,800.00 crores. As a
part of risk management strategies and in an effort to average out the cost of
funds, the Bank has started tapping the debt market in tranches, in the current
year. So far, in the current year the Bank has raised Rs.250 crores of 5-year
non-SLR Bonds at bench-mark pricing levels ranging from 8.80% p.a. to 8.95%
p.a. (payable annually). Apart from Bonds, the Bank also issues Commercial
Papers for period upto 1 year, Certificate of Deposits for period from 1 to 3 years
and Term Deposits for period from 1 to 5 years. All the above instruments
across the maturity spectrum have been assigned the highest credit rating by
CRISIL and ICRA.

EXIM BANK STUDY HIGHLIGHTS BUSINESS PRACTICES OF

44
 SUCCESSFUL INDIAN EXPORTERS

Exim Bank has come out with a new study, titled "Business Practices of
Successful Indian Exporters." The book was released by the Union Commerce
Secretary, Mr. Prabir Sengupta, at a function jointly organised by Exiin Bank and
the Federation of Indian Export Organisations (FIEO), in New Delhi on
September 14, 2001.

While a favourable trading environment may condition a firm's entry into the
export trade, long-term success, to a large extent, is determined by the efforts of
the individual firms. This is evident from the fact that even within sectors which
have a high share of the export basket, not all firms are successful exporters.
This latest study from Exim Bank, therefore, attempts to trace out the generic
success factors/ business practices that characterise successful exporters across
export sectors,

The study focuses on six sectors: three traditional (apparel, spices and marine
products) and three nontraditional (pharmaceuticals, agro-chemicals and auto-
components). For each of these sectors, the study offers an overview of the
world trade environment and the Indian export scenario, which serve as a
backdrop for understanding the industry level issues.

The study is based on a sample of 138 firms from 21 locations across the
country, ensuring adequate coverage and response. Detailed information was
obtained and in-depth interviews carried out in order to gain insights into the
business practices followed by the successful exporting firms in different sectors.

The study is based on a cluster analysis, which involves clubbing firms with
similar business practices into one cluster, and isolating the characteristics and
imperatives for such clusters in each sector. The set of business practices thus
obtained was then compared across the six sectors, to yield a set of common
or ,generic' success factors that would apply across sectors. The study,
thereafter, highlights the need for transfer of these business practices between
firms, and identifies potential avenues for intervention by policy makers and other
agencies, for facilitating such a transfer. Some of the recommended measures
include awareness programmes, establishing an export-information repository,
and mechanisms for inter-industry learnings.

According to the study, twelve success factors/ business practices appear to be

generic, although varying in criticality and emphasis, across sectors. These are:
global market intelligence, strong global networking, direct relationship with
buyers, clear product-market strategy for exports, strong R & D skills, access to
technology, competitive raw material sourcing skills, world class manufacturing
and quality standards, timely execution of orders, moving up the global value
chain, clear export thrust, and entrepreneurial zeal.

45
The study firmly establishes that the days when firms could turn to the
government for support, subsidy or protection for their business are well and truly
over. Exporters now need to evolve their own strategies to meet the challenges
of a dynamic business environment, not only in India, but also at the global level.
Export success therefore, hinges more on firm dynamics than on government
policies and regulations.

Exim Bank, UTI Bank Sign Business Tie-Up

46
Export-Import Bank of India (Exim Bank) and UTI Bank Ltd., have announced a
tie-up for co-financing exports and export oriented companies, as also for
providing value added services to support the internationalisation efforts of small
and medium-sized externally oriented companies. The two Banks signed a
Memorandum of Understanding (MOU) to signal this joint initiative, on Monday,
December 10, 2001, in Mumbai. Mr. T. C. Venkat Subramanian, Managing
Director of Exim Bank and Mr. P. J. Nayak, Chairman & Managing Director of
UTI Bank Ltd. signed the MOU.

Under the MOU, the institutions have agreed to:

• Jointly provide export credits and loans to exporter customers, consistent
with their respective operational policies and procedures.
• Offer available information and advisory services to assist corporate
clients seeking to create and enhance their international presence through
exports, technology and investment tie-ups.
• Co-operate in promotional activities, including exchange of information
relating to business and investment opportunities, organising seminars/
workshops and exchange of faculty.
•
Exim Bank, with its overseas offices and institutional linkages with multilateral
institutions, export credit agencies, foreign banks, and trade and investment
promotion agencies in more than 28 countries, has in place a global network for
promotion of India's international trade and investment. Exim Bank's range of
financing programmes cover import of technology, strategic export marketing,
equipment finance, project finance and overseas investment finance, including
equity investments in Indian ventures overseas. Exim Bank's joint venture
company, Global Trade Finance Pvt. Ltd., offers export factoring / forfaiting
services.

UTI Bank has a network of 116 branches and extension counters, which offer
both working capital and term loans to its exporter customers. The Bank also has
a strong network of 411 ATMs across 47 cities and towns in the country.
Branches offer a full range of services in corporate, retail and international
banking, treasury management, and merchant and investment banking.
For the half year ended 30th September, 2001, the total income of UTI Bank
increased by 67% yoy to Rs. 733.53 crores. The net profit of the bank was Rs.
56.32 crores, up from Rs. 35.17 crores for the first half of the previous year,
representing a 60% rise .

Given the synergy of operations between the two institutions, this alliance will
further the consolidation of a one-stop, single banking window for exporters of
goods and services.

Exchange Control Relating to Exports:

47
1. Export Import Code Number : every person/firm/company engaged in
export import business should obtain an Export Import Code number
issued by the DGFT . The exporter should invariably quote the code
number in all declarations/forms which are explained below:

2. Export Declaration forms:

As per Section 7 (1) (3) of FEMA , any export of goods from India should be
declared in the prescribed forms to the effect that full value of exports will
be realized within the prescribed period in the prescribed manner.

The prescribed forms which are used for the purposes are given below:

• GR Form : Exports made otherwise than by post.

• PP Form : Exports made by post parcel.

• Softex Form : Exports of software in non-physical form.

• SDF Form : On account of introduction of electronic

data inter change system at certain customs offices where shipping bills are
processed electronically.

3. Prescribed Time : The maximum time prescribed by RBI for realization of

export proceeds is six months from date of shipment . If the bills are
not realized within this time stipulated , the exporter should apply to RBI
for extension of time in a form called ETX form . All overdue bills which
are not realized within the due date will be reported to RBI in a half
yearly statement.

4. Prescribed Method : The payment for export proceeds should be

received through the medium of Authorized Dealers (ADs) . In
exceptional cases where the track record of the exporter is good , ADs
will accept the amount received by exporters direct by cheque , DD etc.
The currency of the receipt of payment should be appropriate to the
final place of destination of the shipment as declared in the GR form
irrespective of the country residence of the buyer.

5. Submission of export documents : The exporter has to declare the value

of the goods of export to the customs in GR form and submit the
form in duplicate to them. After certication , the original will be retained
by the customs for onward transmission to RBI & the duplicate will be
handed to the exporter .
As per exchange control regulations , the duplicate copy of GR form along
with the shipping documents should be submitted to the Authorized
Dealers (ADs) within 21 days of shipment. If the exporter receives

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 advance payment for exports for the full value , the ADs will release the
GR form accordingly.

Remittances connected with exports :

• Remittance of Agency Commission : Agency commission can be remitted

by the ADs upto a maximum of 12.5% of invoice value provided it is
declared & approved by customs in exchange control forms.

• Reduction in Invoice Value : After the export bill has been negotiated or
sent for collection , if the invoice is to be reduced , ADs can approve the
same if the reduction does not exceed 10% of the invoice value.

• Claim Against Exports : Can also be upto 10% of invoice value which
will be cleared by Authorized Dealers .

Agreement on Trade-Related Investment Measures (TRIMs)

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This Agreement, negotiated during the Uruguay Round of WTO, applies only
to measures that affect trade in goods. Recognizing that certain investment
measures can have trade-restrictive and distorting effects, it states that no
Member shall apply a measure that is prohibited by the provisions of GATT
Article III (national treatment) or Article XI (quantitative restrictions). Examples
of inconsistent measures, as spelled out in the Annex's Illustrative List,
include local content or trade balancing requirements. The Agreement
contains transitional arrangements allowing Members to maintain notified
TRIMs for a limited time following the entry into force of the WTO (two years
in the case of developed country Members, five years for developing country
Members, and seven years for least-developed country Members). The
Agreement also establishes a Committee on TRIMs to monitor the operation
and implementation of these commitments.

Summary of the TRIMs Agreement

The agreement recognizes that certain investment measures restrict and
distort trade. It provides that no contracting party shall apply any TRIM
inconsistent with Articles III (national treatment) and XI (prohibition of
quantitative restrictions) of the GATT. To this end, an illustrative list of TRIMs
agreed to be inconsistent with these articles is appended to the agreement.
The list includes measures which require particular levels of local
procurement by an enterprise ("local content requirements") or which restrict
the volume or value of imports such an enterprise can purchase or use to an
amount related to the level of products it exports ("trade balancing
requirements").

The agreement requires mandatory notification of all non-conforming TRIMs

and their elimination within two years for developed countries, within five
years for developing countries and within seven years for least-developed
countries. It establishes a Committee on TRIMs which will, among other
things, monitor the implementation of these commitments. The agreement
also provides for consideration, at a later date, of whether it should be
complemented with provisions on investment and competition policy more
broadly.

FACTORING

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Factoring may be defined as a contract by which the factor is to provide
at least two of the services (finance , the maintenance of accounts , the
collection of receivables and protection against credit risks) 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 .

Factoring offers smaller companies the instant cash advantage that was once
available only to large companies with high sales volumes. With factoring, there's
no need for credit or collection departments, and no need to spend your profits
on maintaining accounts receivables.

Simply put...factoring turns your receivable into cash today, instead of waiting to
be paid at a future date.

International export Factoring Scheme :

RBI has approved the above 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 follows:

a) An exporter should submit to SBI Factors & Commercial Services Pvt.Ltd

i.e the Export Factor (EF) a list of buyers (customers) indicating their
names & street addresses and his credit line needs .

b) The Import Factor (IF) located in the importers country selected by EF ,

will rate the buyer’s list and the results will be reporter to the exporter
through EF . The exporter will apply for a credit limit in respect of
overseas importer . IF will grant credit line based on the assessment of
credit-worthiness of the overseas importer.

c) The exporter will thereafter enter into an export factoring agreement with
EF. All export receivable will be assigned to the EF , who in turn will
asiign them to IF.

d) The exporter will ship merchandise to approved foreign buyers . Each

invoice is made payable to a specific factor in the buyer’s (importer)
country . Copies of invoices & 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

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 rupees and will transfer proceeds to the exporter after 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 ranges from 0.5 % to 2%
of the value of the invoices.

g) If an approved buyer (importer) 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 the half yearly
XOS statements to be submitted to RBI , indicating therein the reasons
for delay /non payment .

Monetary And Credit Policy 2001-02 dated 22.10.01

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The major features Relating to Exports in this mid term policy are as
follows:

On account of global slowdown , exports have not done well during the
current year & imports increased by 2.5% as against an increase of
13.8% last year . Trade deficit in the first 5 months of the current financial
year at US $ 4.6 billion was higher than that of US $3.7 billion in the same
period last year.

The Governor recalled that as part of the efforts to provide support to

exporters during the prevailing period of global uncertainty , the Reserve
Bank advised reduction in ceiling interest rates on rupee export credit by 1%
point across the board for a period of 6 months. Taking into account
forward premia , the effective interest cost on rupee export credit is only
3.0- 4.0 percent (assuming a forward premia of 5.0% ) which is internationally
competitive. Similarly , exporters are free to avail of foreign currency loans
in the currency of their choice at internationally competitive rates.

In the past several measures have been introduced to ensure timely

delivery of credit to exporters at reasonable cost and removal of procedural
hassles. RBI Governor has mentioned the work of the survey on exporters ‘
satisfaction has been launched by the National Council Of Applied Research
(NCAER) New Delhi.

July 2,2001 High Court Ruling :

Export Losses not Entitled to tax concessions

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 In a landmark judgement , the Mumbai High court ruled that only
profit from exports is entitled to tax concessions under Section 80HHC
of the Income tac act. Losses are not to be considered for deduction under
Section 80 HHC , the court ruled. The division bench comprising of Justice S
H Kapadia & Justice V C Daga , gave this ruling on 2.7.2001 , in an appeal
filed by Ipca Labs against and order by the Income Tax Appelate Tribunal.

Case Details : The HC had to decide whether the loss incurred in export of
goods was to be ignored while determining the appellant’s entitlement to
deduction u/sec 80 HHC (3) c of I-T Act . In this case , Ipca’s export income
contained 2 parts : One that resulted in Profit and the other that resulted
in losses . Ipca claimed deductions for the profit it had made in the export
of goods manufactured by it , even though it made a loss in the export of
goods made by other manufacturers .

The company claimed that the loss it had incurred should be ignored
because the loss was in export of gods made by others , the benefits of
which had been surrendered by the company in favour of the supporting
manufacturers.

The It dept on the other hand , took a stand that profit & loss should be
aggregated & only the balance is entitled for deductions. As per the
department , the result was a net loss from the export of goods , in the case
of Ipca. As a result the company did not get any benefit under Section 80
HHC.

Ipca’s return indicated a net loss from the export of goods - loss from goods
manufactured by supporting manufacturing at Rs.6.86 crore and profits from
export of goods manufactured by it at Rs.3.78 crore. In its ruling the high
court said:

However , the argument is that because of the disclaimer , the loss on the
export of trading goods amounting to Rs.6.86 crore be ignored and only the
profits from the self manufactured goods at Rs.3.78 crore alone should be
taken into account. This is an ingenious method because if this argument is
accepted then the supporting manufacturers as well as the exporting house
would both be entitled to the benefits of tax concessions or deductions
under Section 80 HHC.

Learnings/Suggestions through this project :

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♦ Export Finance is a very important branch to study & understand the overall
gamut of the international finance market .

♦ Availability of favourable Export finance schemes directly impacts the local trade,
encourages exporters , enlarges markets abroad , improves quality of domestic
goods and overall helps the nation boost its exchange earnings .

♦ The Government of any nation plays a very vital role in boosting export turnover .
The credit policy of the Indian Government is also changed depending upon the
needs of the exporters , global trade environment etc. The credit policy of Oct 2001 is
a pointer in this direction.

♦ A lot of efforts are taken by ECGC and EXIM Bank for Export promotion . The
stategies of these 2 agencies in India should be flexible & their finance schemes
should be constantly synchronised with the changing scene of world trade . This
alone can help Indian exporters to stand competition in world markets effectively
and more gain-fully.

♦ Finally ,a very essential question needs to be answered by the International Trade

gurus with reference to “Relevance of EXIM Policy in the current times”. Exim
policies had emerged when the state decided to limit imports and encourage
exports in order to maintain currency reserves . However , such ideas backfired:
consumers were hurt and producers turned lazy .

Hence its time the experts/gurus answer the following queries:

a) Should the state get out of the way of trade?

b) Is the protection inherent in the new EXIM policy good for the country?
c) Would India be a major exporter if only she was equipped with a working
infrastructure

An appropriate , rational and feasible reply to the above three questions matched
with devoted & sincere implementation by the governments will go a long way in
making India a powerhouse for international trade in the years to come …….
………………

Books/Magazines/Article Referred:

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Export –What Where & How By Paras Ram
♦ A Guide to Export By M .I .Mahajan
♦ ECGC Services Manual
♦ RBI Mid term review for year 2001-02
♦ Economic Times
♦ Financial Express
♦ Business Standard

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