EXPORT FINANCE AND PAYMENT

PRESENTED BY
SRI JINTU BORTHAKUR
SRI DIPRANJAL KEOT

12/07/21
Concept Of Export Finance
The exporter may require short term, medium term or
long term finance depending upon the types of goods
to be exported and the terms of statement offered to
overseas buyer.

The short-term finance is required to meet “working

capital” needs. The working capital is used to meet
regular and recurring needs of a business firm. The
regular and recurring needs of a business firm refer to
purchase of raw material, payment of wages and
salaries, expenses like payment of rent, advertising etc.

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Concept of Export Finance
The exporter may also require “term finance”. The
term finance or term loans, which is required for
medium and long term financial needs such as
purchase of fixed assets and long term working
capital.

Export finance is short-term working capital finance

allowed to an exporter. Finance and credit are
available not only to help export production but also
to sell to overseas customer on credit.
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 APPRISAL
Appraisal means an approval of an export credit proposal
of an exporter. While appraising an export credit proposal
as a commercial banker, obligation to the following
institution or regulations needs to be adhered to.
Obligation to the RBI under the Exchange Control
Regulations are:
 Appraise to be the bank’s customer.
 Appraise should have the EXIM code number allotted by
the Director General of Foreign Trade.
 Party’s name should not appear under the caution list of
the RBI.

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Contd..
Obligations to the Trade Control Authority under the EXIM
Policy are :

➢Appraise should have IEC number allotted by the DGFT.

➢Goods must be freely exportable i.e. not falling under the
negative list. If it falls under the negative list, then a valid
license should be there which allows the goods to be exported.
Country with whom the Appraise wants to trade should not be
under trade barrier.
Obligations to ECGC are:
➢Verification that Appraise is not under the Specific Approval
list (SAL).
➢Sanction of Packing credit advances.

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Guidelines for banks
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

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Objective of Export Finance
To cover commercial & Non-commercial or political
risks attendant on granting credit to foreign buyer.
To cover natural risks like an earthquake, flood etc.
An exporter may avail financial assistance from any
bank, which consider ensuing factors.
 a)Availability of the funds at the required time to the
exporter
b)Affordability of the cost of funds

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TYPES OF EXPORT FINANCE

The export finance is being classified into two types .

Pre-shipment finance.
Post-shipment finance

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Preshipment Finance
 MEANING:
Pre-shipment is also referred as “packing credit”. It is working capital
finance provided by commercial banks to the exporter prior to
shipment of goods. The finance required to meet various expenses
before shipment of goods is called pre-shipment finance or packing
credit.
DEFINITION:

 Financial assistance extended to the exporter from the date of receipt

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

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Importance of Preshipment
finance
 To purchase raw material, and other inputs to manufacture
goods.
 To assemble the goods in the case of merchant exporters.
 To store the goods in suitable warehouses till the goods are
shipped.

 To pay for packing, marking and labeling of goods.

 To pay for pre-shipment inspection charges.
 To import or purchase from the domestic market heavy
machinery and other capital goods to produce export goods.
 To pay for consultancy services.
 To pay for export documentation expense

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Forms or Method of Preshipment
finance
Cash Packing Credit loan – In this Type of credit , the
bank normally grants packing credit advantages,
initially on unsecured basis . Subsequently bank may
ask for security.
Advances Against Hypothecations –Packing credit is
given to process the goods for export. The advance is
given against security and the security remains in the
possession of the exporter. The exporter is required to
execute the hypothecation deed in favour of the bank.

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Forms or method of Pre-shipment
Advances Against pledge – The bank provides
packing credit against security. The security remains
in the possession of the bank. On collection of export
proceeds, the bank makes necessary entries in the
packing credit account of the exporter.
Advance Against Red L/C - The Red L/C received
from the importer authorizes the local bank to grant
advances to exporter to meet working capital
requirements relating to processing of goods for
exports. The issuing bank stands as a guarantor for
packing credit.

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Forms or method of Pre-shipment
Finance .
Advance Against Exports Through Export Houses:
Manufacturer, who exports through export houses or other
agencies can obtain packing credit, provided such
manufacturer submits an undertaking from the export
houses that they have not or will not avail of packing
credit against the same transaction
Advance Against Duty Draw Back (DBK) :
DBK means refund of customs duties paid on the
import of raw materials, components, parts and packing
materials used in the export production. It also includes a
refund of central excise duties paid on indigenous
materials. Banks offer pre-shipment as well as post-
shipment advances against claim for DBK.

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EXIM Bank schemes
Special Pre-Shipment Finance Schemes :
EXIM Bank’s scheme for grant for Foreign Currency
Pre-Shipment Credit (FCPC) to exporters.
Packing credit for Deemed exports.

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Factoring

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 assigned to the factor on a
continuing basis byway of sale or security, receivables
arising from the sale of goods or supply of services”.

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Post shipment finance
MEANING:
Post shipment finance is provided to meet working
capital requirements after the actual shipment of
goods. It bridges the financial gap between the date of
shipment and actual receipt of payment from
overseas buyer thereof. Whereas the finance provided
after shipment of goods is called post-shipment
finance.

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Importance of finance at post
shipment stage
 To pay to agents/distributors and others for their services.
 To pay for publicity and advertising in the over seas markets.
 To pay for port authorities, customs and shipping agents charges.
 To pay towards export duty or tax, if any.
 To pay towards ECGC premium.

 To pay for freight and other shipping expenses.

 To pay towards marine insurance premium, under CIF contracts.

 To meet expenses in respect of after sale service.

 To pay towards such expenses regarding participation in exhibitions

and trade fairs in India and abroad.
 To pay for representatives abroad in connection with their stay board.

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Financial Institution Credit
extension
Financial institution providing credit, directly or indirectly
to the buyers or by extending credit to the exporters to
unable them to extend credit to their buyers.
1. Buyer’s Credit
2. Line of Credit
3. Short term finance
4. Medium and long term finance
with the establishment of export import (EXIM Bank)
export credit function performed by IDBI were transferred
to EXIM bank.

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Post-shipment Credit
DEFENITION:
Credit facility extended to an exporter from the date of
shipment of goods till the realization of
the export proceeds is called Post-shipment Credit

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About EXIM Bank
The EXPORT-IMPORT Bank of India, set up in 1982By an
Act of parliament for the purpose of financing, facilitating
and promoting foreign trade of India.
EXIM Banks Mission is to Facilitate globalisation of
Indian business.
The bank Functions are segmented into four major
operating groups-
 Overseas investment Finance
 Project Finance
 Trade Finance
 Export service Group
 Agri Business group

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 EXIM Bank’s Range Of Financing Programs

Forfeiting and Finance for

Export Credits guarantees EOU

For Indian Companies

For 1.Project finance
1.Preshipment Credit
Overseas 2.Equipment
2.Post shipment Suppliers Credit
Entities Finance
3.Finance for deemed exports
1.Buyers 3.Working capital
4.Financing Rupee expenditure for
Credit Finance
Project exports
2.Line of 4.Other Facilities
5.Financing for consultancy and
credit
Technology service
For Commercial banks
1.Exports Bills Rediscounting
2. Refinance of Exports(supplier’s) Credit
3.Refincing of foreign currency pre-shipment 21
Forfaiting
Forfaiting is a Mechanism of financing exports
1. By discounting Export Receivables .
2. Evidence by Bill of Exchange Or Promissory notes.
3.Carrying medium to long term maturities.
4. Without recourse to the seller.(viz- Exporters)
5. On fixed Rate Basis.(Discount).
6. Up to 100% of the contact value .

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Benefits of Forfaiting
Convert a deferred payment export in to a cash
transaction.
Improving liquidity and cash flow.
Frees the exporter from cross border political commercial
risk associated with export receivables.
Provides fix rate of finance .Hedges against interest an
exchange risk arising from deferred export credit.
Exporters freed from credit administration and collection
problem.
Exporters saves on insurance cost and as forfaiting
obviates the need for export credit insurance.
Simplicity of documentation enables rapid conclusion of
the forfaiting arrangement.
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Maturity factoring by ECGC
It offered by the export Credit granting Corporation
of India provides the following
1.Credit Protection
2.Ledger Maintenance
3.Recievables Management
4.Enables clients to avail discounting facility from bank
by Guaranteeing the advances granted against the
bill.

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Export Credit Risk Insurance
ECGC to cover several risks which are not covered by
general insurers.
ECGC is to support and strengthen the export
development of India.
Objective of ECGC are
To provide insurance cover to exporters against
political and commercial risks
To provide insurance cover to exporters against the
risk of exchange rate fluctuations in respect of
deferred payment.
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Contd.

To Insurance covers to bank against export credit and

guarantees extended by them.
To provide insurance covers to Indian investors
abroad against political risk.

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Insurance covers
Standard policies issue to the exporters to protect them
against payment risks involved in exports on short term
credit.
Specific policies design to protect Indian firms against
payment risk involved in export and deferred terms of
payment services render to the foreign servicies
construction works and turnkey projects undertaken
abroad.
Financial guarantees issued to banks in India to protect
them from risks of law involved in their extending
financial support to exporters at the pre-shipment as well
post-shipment stages,
Special schemes

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Payment method Of International
Export

 The credit is provided by either the supplier

(exporter), the buyer (importer), one or more
financial institutions, or any combination of the
above. The form of credit whereby the supplier funds
the entire trade as supplier credit.

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Letter Method of Credit
These are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
Time of payment :when shipment is made goods
available to buyers.
After payments risk to exporter.
Very little or non risk to importer.
Relies on exporter to ship goods as document
payment methods.
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Prepayment Method
The goods will not be shipped until the buyer Has
paid the seller.
Time of payment before shipment goods Available to
buyer.
After payment risk to exporter: None risk to
Importer.
Importer relies completely on exporter to ship Goods
as ordered payment methods

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Draft Method (Bill of
Exchange)
These are unconditional promises drawn by the
exporter instructing the buyer to pay the face
amount of the drafts. Banks on both ends usually act
as a Intermediaries in the processing of
shipping documents and collection of Payment. The
transaction are known as documentary
collections.
Time of payment : On presentation of draft goods
available to buyers.
After payment risk to exporter.

Disposal unpaid goods risk to importer.

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Contd..
Sight drafts: document against payments when shipment
has been made,, the Draft is presented to the buyer for
payment.

Time of payment :On maturity of draft goods available to

buyers.
Before payment risk to exporter.
Relies on buyer to pay the risk to importer.
Relies on exporter to ship the goods: when the shipment
has been made, the Buyer accepts (signs) the presented
draft..

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Open Method Account
The exporter ships the merchandise and expects the
buyer to remit payment according to the agreed-upon
the terms.
Time of payment: As agreed-upon goods available to
buyers: Before payments risk to exporter: Relies
completely on buyer to pay the account as agreed-
upon risk to importer.

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Consignments Method
The exporter retains actual title of the goods that are
shipped to the importer.
Time of payment: At time of sale by buyer to third
party goods available to buyer: Before payment risk to
exporter: Allow importer to sale inventory before
paying exporter risk to importer.

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Foreign exchange market
Foreign exchange means the process of converting
one currency into another or foreign currencies.

Functions:

1.Transfer of purchasing power.

2 provision of credit.
3.Provision of hedging facilities.

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Dealings on foreign exchange
market.
Spot exchanges- refers to class of foreign exchange transaction
which requires exchange of currencies on the spot. The
settlement takes place with in two days.
Forward exchanges-The forward transaction is an agreement
between two parties ,requiring the delivery at some specified
future date of a specified amount of foreign currency by one of
the parties against payment in domestic currency by the other
party at price agreed upon in the contract.
Forward exchange rate may be
AT PAR : Supply is equivalent to the demand.
AT PREMIUM : Demand exceeds supply.
AT DISCOUNT: Supply exceeds demand

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Determination of exchange rates
Purchasing power (parity theory) In the absence
of government control, exchange rate between
two currencies is determined by the price levels in
the respective countries.
Balance of payments theory: Exchange rate is
determined by the demand for and supply of
currencies.
The value of currency appreciates when demand
for it increases and depreciates when demand
falls, In relation to supply in the foreign exchange
market

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Exchange control
Exchange control is a means to achieve certain
national objectives like an improvement in the
balance of payment position, restriction of inessential
imports and conspicuous consumption.
Facilitation of import of priority items.
Control of out flow of capital and maintenance of the
external value of the currency.

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Exchange rate systems
Fixed exchange rates :Its eliminates several
uncertainties which can seriously disturb the
economic system.
Flexible exchange rates :Its works on the market
mechanism.
Automatic variations in the exchange rates, in
accordance with the variations in the balance of
payment position, tend to automatically restore the
balance of payment equilibrium.
A surplus in the balance of payments increases the
exchange rate.
If there is a payment deficit, the exchange rate falls

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Currency exchange risks
Exchange risk is the probability that a company
will be unable to adjust prices and costs to offset
changes in the exchange rate.
Economic exposure refers to the risk arising from
economic factors through economic transactions
and other economic activities.
Accounting exposure arises from the need for
purposes of reporting and consolidation to
convert the financial statements of foreign
operations from the local currencies involved into
the home currency

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Managing exchange rate risks
There are several measure to eliminate risks of
exchange rate fluctuations.
1.Negotiate lower price with foreign supplier.
2.Absorb the price increase by the buyer to extent
possible and pass on the rest to the consumers.
3 Complementary, approach is to take steps to
minimise exchange risk.
4 exchange risk avoidance.

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Contd..
5 Change diversify sources.

6 Currency diversification.

7 Exchange risk adaptation.: Hedging refers to covering

export risks and its provides a mechanism to exporters and
importers to guard themselves against losses arising from
fluctuations in exchange rates.

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Foreign exchange management
act
Foreign exchange transactions were regulated in
India by the foreign exchange regulation act
(FERA),1937.
This act is also sought to regulate certain aspects
of the conduct of business out side the country by
Indian companies and in India by foreign
companies.
The main objective of (FERA) framed against
background of severe exchange problem and
control economic regime.

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Contd..
In 1999 new act foreign exchange management act (FEMA)
has come replaced the( FERA) .The objective of (FEMA)
are:
To facilitate external trade and payments.
To promote the orderly development maintenance of
foreign exchange market.

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