Marketing Project

EXPORT FINANCE
EXPORT FINANCE
SUBMITTED TO: UNIVERSITY OF MUMBAI OCTOBER 2012 Deepak Yadav- Roll No. Project Guide: Prof. Devika Suryavanshi
T.Y.B.M.S. 2012-13
EXPORT FINANCE
PREFACE
In the light of growing need & importance of exports for our country it is of utmost importance that everyone should have an insight in the field of exports. In the course of last decade, the export scenario in India has undergone a tremendous change. The liberalization initiated by the government, the keen competition in the market place & the rapid increase in the export of services have all combined to change the picture completely This project will be covering various aspects of export finance. Areas covered in this project are related to concept and types of export finance, financial institutions etc. I hope that this project would provide one, some essential information that will be useful to in future.
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EXPORT FINANCE
PREFACE
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EXPORT FINANCE
PREFACE
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EXPORT FINANCE
PREFACE
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EXPORT FINANCE
TABLE OF CONTENTS
Chapter. no
1 2 Introduction of Exports Export Finance 2.1 Introduction 2.2 Concept 2.3 Objectives 3 2.4 Appraisal Types of Export finance 3.1 Pre-Shipment 4 5 3.2 Post-Shipment Letter of Credit One of the most common method of payment in export finance Some important Concept in Export Finance 5.1 Forfeiting 5.2 Factoring 6 5.3 Suppliers Credit for Deferred Payment exports Major Financial and other Institutions 6.1 Export Import Bank of India (EXIM Bank) 6.2 Export Credit Guarantee Control (ECGC) 7 8 9 10 11 6.3 Reserve Bank of India (RBI) Market Development Assistance (MDA) High Court Ruling: Export Losses are not entitled to Tax Concessions Case Study Conclusion Bibliography 64 66 67 119 122 36 24 29 12
Particulars
Page No.
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EXECUTIVE SUMMARY T.Y.B.M.S. 2012-13

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EXPORT FINANCE
FINANCE IS THE LIFE AND BLOOD OF ANY BUSINESS. Success or failure of any export order mainly depends upon the finance available to execute the order. Nowadays export finance is gaining great significance in the field of international finance. Many Nationalized as well as Private Banks are taking measures to help the exporter by providing them pre-shipment and post- shipment finance at subsidized rate of interest. Some of the major financial institutions are EXIM Bank, RBI, and other financial institutions and banks. EXIM India is the major bank in the field of export and import of India. It has introduced various schemes like forfeiting, FREPEC Scheme, etc. Even Government is taking measures to help the exporters to execute their export orders without any hassles. Government has introduced schemes like Duty Entitlement Pass Book Scheme, Duty free Materials, setting up of Export Promotion Zones and Export Oriented Units, and other scheme promoting export and import in India. Initially the Indian exporter had to face many hurdles for executing an export order, but over the period these hurdles have been removed by the government to smoothen the procedure of export and import in India.
CHAPTER 1 - INTRODUCTION OF EXPORTS Export in simple words means selling goods abroad. International market being a very wide market, huge quantity of goods can be sold in the form of exports.
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EXPORT FINANCE Export refers to outflow of goods and services and inflow of foreign exchange. Export occupies a very prominent place in the list of priorities of the economic set up of developing countries because they contribute largely to foreign exchange pool. Exports play a crucial role in the economy of the country. In order to maintain healthy balance of trade and foreign exchange reserve. It is necessary to have a sustained and high rate of growth of exports. Exports are a vehicle of growth and development. They help not only in procuring the latest machinery, equipment and technology but also the goods and services, which are not available indigenously. Exports leads to national self-reliance and reduces dependence on external assistance which howsoever liberal, may not be available without strings. Though Indias export compared to other countries is very small, but one of the most important aspects of our export is the strong linkages it is forging with the world economy which is a great boon for a developing nation like India.
CHAPTER 2 - EXPORT FINANCE 2.1 - INTRODUCTION
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EXPORT FINANCE Credit and finance is the life and blood of any business whether domestic or international. It is more important in the case of export transactions due to the prevalence 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. Production and manufacturing for substantial supplies for exports take time, in case finance is not available to exporter for production. They will not be in a position to book large export order if they dont have sufficient financial funds. Even merchandise exporters require finance for obtaining products from their suppliers. 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.
2.2 - CONCEPT OF EXPORT FINANCE:
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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. 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 customers on credit. 2.3 - OBIECTIVES OF 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 considers the ensuing factors: a) Availability of the funds at the required time to the exporter. b) Affordability of the cost of funds.
2.4 - APPRAISAL
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EXPORT FINANCE 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 institutions or regulations needs to be adhered to. Obligations to the RBI under the Exchange Control Regulations are: Appraise to be the banks customer. Appraise should have the Exim code number allotted by the Director General of Foreign Trade. Partys name should not appear under the caution list of the RBI. 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. GUIDELINES 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 Banks directives issued through IECD. d) Export Credit Guarantee Corporation guidelines. e) Guidelines of Foreign Exchange Dealers Association of India.
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EXPORT FINANCE
CHAPTER 3 - TYPES OF EXPORT FINANCE

The export finance is being classified into two types viz. Pre-shipment finance. Post-shipment finance. 3.1 - PRE-SHIPMENT 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. IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE: 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 labelling 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 expenses.
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EXPORT FINANCE FORMS OR METHODS OF PRE-SHIPMENT FINANCE:

1.
Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security.
2.
Advance Against Hypothecation: 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.
3.
Advance 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.
4.
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.
5.
Advance Against Back-To-Back L/C: The merchant exporter who is in possession of the original L/C may request his bankers to issue Back-To-Back L/C against the security of original L/C in favour of the sub-supplier. The sub-supplier thus gets the Back-To-Bank L/C on the basis of which he can obtain packing credit.
6.
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.
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EXPORT FINANCE
7.
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 advance against claims for DBK.
8.
Special Pre-Shipment Finance Schemes:
Exim-Banks scheme for grant for Foreign Currency Pre-Shipment Credit (FCPC) to exporters. Packing credit for Deemed exports.
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EXPORT FINANCE SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE 1. PACKING CREDIT SANCTION OF PACKING CREDIT ADVANCES: There are certain factors, which should 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 buyers 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.
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EXPORT FINANCE 2. FOREIGN CURRENCY PRE-SHIPMENT CREDIT (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 him of export finance. To avail him of pre-shipment 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 pre-shipment 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 /firms 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 L/Cs 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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EXPORT FINANCE 2.2 - 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. 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. 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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EXPORT FINANCE FORMS/METHODS OF POST SHIPMENT FINANCE

1.
Export bills negotiated under L/C: The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter.
2.
Purchase of export bills drawn under confirmed contracts: The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter.
3.
Advance against bills under collection: In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills.
4.
Advance against claims of Duty Drawback (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 advance against claims for DBK.
5.
Advance against goods sent on Consignment basis: The bank may grant postshipment finance against goods sent on consignment basis.
6.
Advance against Undrawn Balance of Bills: There are cases where bills are not drawn to the full invoice value of gods. Certain amount is undrawn balance which is due for payment after adjustments due to difference in rates, weight, quality etc. banks offer advance against such undrawn balances subject to a maximum of 5% of the value of export and an undertaking is obtained to surrender balance proceeds to the bank.
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EXPORT FINANCE
7.
Advance against Deemed Exports: Specified sales or supplies in India are considered as exports and termed as deemed exports. It includes sales to foreign tourists during their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is offered for a maximum of 30 days.
8.
Advance against Retention Money: In respect of certain export capital goods and project exports, the importer retains a part of cost goods/ services towards guarantee of performance or completion of project. Banks advance against retention money, which is payable within one year from date of shipment.
9.
Advance against Deferred payments: In case of capital goods exports, the exporter receives the amount from the importer in installments spread over a period of time. The commercial bank together with EXIM bank do offer advances at concessional rate of interest for 180 days.
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EXPORT FINANCE
SOME SCHEMES UNDER OPERATION IN PRE-SHIPMENT FINANCE 1. DEFERRED CREDIT Meaning: Consumer goods are normally sold on short term credit, normally for a period upto 180 days. However, there are cases, especially, in the case of export of capital goods and technological services; the credit period may extend beyond 180 days. Such exports were longer credit terms (beyond 180 days) is allowed by the exporter is called as deferred credit or deferred payment terms. How the payment is received? The payment of goods sold on deferred payment terms is received partly by way of advance or down payment, and the balance being payable in installments spread over a period of time. Period of financial credit support: Financial institutions extend credit for goods sold on deferred payment terms (subject to approval from RBI, if required). The credit extended for financing such deferred payment exports is known as Medium Term and Long Term Credit. The medium credit facilities are provided by the commercial banks together with EXIM Bank for a period upto 5 years. The long term credit is offered normally between 5 yrs to 12 yrs, and it is provided by EXIM Bank. Amount of credit support: Any loan upto Rs.10crore for financing export of capital goods on deferred payment terms is sanctioned by the commercial bank which can refinance itself from Exim bank. In case of contracts above Rs.10 Lakhs but not more than Rs50crore, the EXIM Bank has the authority to decide whether export finance could be provided. Contracts above Rs.50crore need the clearance from the working group on Export Finance.
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EXPORT FINANCE
2. REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) 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 normal transit period and grace period) . The scheme envisages ADs rediscounting the export bills in overseas markets by making arrangements credit with an overseas agency/ bank facility by way of a line of facility at rates or bankers acceptance or any other similar
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 RBIs permission will be needed.
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EXPORT FINANCE
3. FINANCE FOR RUPEE EXPENDITURE FOR PROJECT EXPORT CONTRACTS (FREPEC) 1. What is FREPEC Program?
This program seeks to Finance Rupee Expenditure for Project Export Contracts, incurred by Indian companies. 2. To What is the purpose of this Credit? 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. 3. 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. 4. 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 credit requirement below Rs. 50 lakhs. Although, no maximum amount of credit is being proposed, while approving overall credit limit, creditworthiness of the exporter-borrower would be taken into account. Where feasible, credit may be extended in participation with sponsoring commercial banks.
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5.
How are Disbursements made under this Program?
Disbursements will made in Rupees through a bank account of the borrowercompany against documentary evidence of expenditure incurred accompanied by a certificate of Chartered Accountants. 6. 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. 7. What is the security stipulated for FREPEC loan?
Hypothecation of project receivables and project movables. Optional: where available Personal Guarantees of Directors of the Company. Available collateral security.
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EXPORT FINANCE
CHAPTER 4 - LETTER OF CREDIT

INTRODUCTION: This is one of the most popular and more secured of method of payment in recent times as compared to other methods of payment. A L/C refers to the documents representing the goods and not the goods themselves. Banks are not in the business of examining the goods on behalf of the customers. Typical documents, which are required includes commercial invoice, transport document such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in documents and not goods. DEFINITION: A Letter of Credit can be defined as an undertaking by importers bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C. PARTIES INVOLVED IN LETTER OF CREDIT: Applicant: Issuing bank: Beneficiary: Advising bank: The buyer or importer of goods Importers bank, who issues the L/C The party to whom the L/C is addressed. The Seller or supplier of goods. Issuing banks branch or correspondent bank in The exporters country to whom the L/C is send for Onward transmission to the beneficiary. Confirming bank: The bank in beneficiarys country, which Guarantees the credit on the request of the issuing Bank. Negotiating bank: The bank to whom the beneficiary presents his Documents for payment under L/C
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A Letter of Credit contains these elements: A payment undertaking given by the bank (issuing bank) on behalf of the buyer (applicant) To pay a seller (beneficiary) a given amount of money limits These documents conforming to terms and conditions set out in the letter of credit Documents to be presented at a specified place. on presentation of specified documents representing the supply of goods within specific time
In simple words, the Issuing Bank's role is twofold: To guarantee to the seller that if complete 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" ADVANTAGES OF LETTER OF CREDIT ADVANTAGES TO THE EXPORTER: No blocking of funds. Clearance of import regulations. Free from liability. Pre- shipment finance. Non-refusal by importer. Reduction in bad-debts.
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ADVANTAGES TO THE IMPORTER: Better terms of trade. Assurance of shipment of goods. Overdraft facility. No blocking of funds. Delivery on time. Better relations.
DISADVANTAGES OF LETTER OF CREDIT: Lacks flexibility. Complex method Expensive for importer Problem of revocable L/C
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Sample Document: Letter of Credit (Documentary Credit) THE MOON BANK INTERNATIONAL OPERATIONS 5 MOONLIGHT BLVD., EXPORT-CITY AND POSTAL CODE EXPORT-COUNTRY
OUR ADVICE NO. MB-5432 To, UVW Exports 88 Prosperity Street East, Suite 707 Export-City and Postal Code Dear Sirs:
ISSUING BANK REF. NO. & DATE SBRE-777 January 26, 2005
We have been requested by The Sun Bank, Sunlight City, Import-Country to advise that they have opened with us their irrevocable documentary credit number SB-87654 For account of DEF Imports, 7 Sunshine Street, Sunlight City, Import-Country in your favor for the amount of not exceeding Twenty Five Thousand U.S. Dollars (US$25,000.00) available by your draft(s) drawn on us at sight for full invoice value Accompanied by the following documents: 1. Signed commercial invoice in five (5) copies indicating the buyer's Purchase Order No. DEF-101 dated January 10, 2005 2. Packing list in five (5) copies. 3. . Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable copies, issued to order of The Sun Bank, Sunlight City, Import-Country, notify the above accountee, marked "freight Prepaid", dated latest March 19, 2005, and showing documentary credit number.
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EXPORT FINANCE 4. Insurance policy in duplicate for 110% CIF value covering Institute Cargo Clauses (A), Institute War and Strike Clauses, evidencing that claims are payable in ImportCountry.
Covering:
100 Sets 'ABC' Brand Pneumatic Tools, 1/2" drive,
complete with hose and quick couplings, CIF Sunny Port Shipment from: Partial shipment Tran-shipment Special conditions: 1. All documents indicating the Import License No. IP/123456 dated January 18, 2005. 2. All charges outside the Import-Country are on beneficiary's account Documents must be presented for payment within 15 days after the date of shipment. Draft(s) drawn under this credit must be marked Drawn under documentary credit No. SB-87654 of The Sun Bank, Sunlight City, Import-Country, dated January 26, 2005 We confirm this credit and hereby undertake that all drafts drawn under and in conformity with the terms of this credit will be duly honored upon delivery of documents as specified, if presented at this office on or before March 26, 2005 Very truly yours, __________________________ Authorized Signature
Unless otherwise expressly stated, this Credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500.
Moonbeam Port, Export-Country to Sunny Port, Import-Country Prohibited Permitted
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CHAPTER 5 - SOME IMPORTANT CONCEPTS IN EXPORT FINANCE
5.1 - FORFEITING Forfeiting 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) Upto 100 percent of the contract value.
The word `forfeit' is derived from the French word `a forfeit' which means the surrender of rights. Simply put, Forfeiting is the non-recourse discounting of export receivables. In a forfeiting 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 forfeiter. 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.
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EXPORT FINANCE CONCEPT OF FORFEITING 1. What exports are eligible for forfeiting? All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfeiting. 2. How does forfeiting 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 forfeiting agency in exchange for discounted cash proceeds. The co-accepting bank must be acceptable to the forfeiting agency. 3. 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. 4. What role will Exim Bank play in forfeiting transactions? The role of Exim Bank will be that of a facilitator between the Indian exporter and the overseas forfeiting agency. 5. How will Exim Bank facilitate a forfeiting transaction? On a request from an exporter, for an export transaction which is eligible to be forfaited, Exim Bank will obtain indicative and firm forfeiting 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 forfeiter for discounting and will arrange for the discounted proceeds to be remitted to the Indian exporter.
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EXPORT FINANCE Exim Bank will issue appropriate certificates to enable Indian exporters to remit commitment fees and other charges. 6. What does forfeiting cost include? A forfeiting transaction has typically three cost elements: Commitment fee Discount fee Documentation fee
7. What benefits accrue to an exporter from forfeiting? 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 forfeiting offers without recourse finance to an exporter, it does not impact the exporter's borrowing limits. Thus, forfeiting 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 forfeiter is not necessary to arrange a forfeiting transaction Exporter saves on insurance costs as forfeiting obviates the need for export credit insurance
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5.2 - 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 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. In simple words...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 follows: 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 . The Import Factor (IF) located in the importers country selected by EF, will rate the buyers list and the results will be reported 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. Pvt. Ltd Mumbai for providing International Export Factoring the scheme are as Services on with recourse basis. The salient features of
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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 assign them to IF. The exporter will ship merchandise to approved foreign buyers. Each invoice is made payable to a specific factor in the buyers (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. EF will report the transaction in relevant ENC statement detailing full particulars, such as Exporters Code Number, GR Form Number, Custom Number, Currency, Invoice value etc. On receipt of payments from buyers on the due date of invoice, IF will remit funds to EF who will convert foreign currency remittances into rupees and will transfer proceeds to the exporter after deducting the amount of prepayments, if made. Simultaneously, EF will report the transaction in the relative R returns 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. 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 statements which are to be submitted to RBI, indicating therein the reasons for delay /non payment.
5.3 - Supplier's Credit for deferred payment exports
Definition of Deferred Payment Exports: In terms of Regulation 9 of the Foreign Exchange Management Act 1999, the amount representing the full export value of goods exported must be realized and repadriated to India within 6 months of date of export. T.Y.B.M.S. 2012-13
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EXPORT FINANCE Exports where more than 10% of the value is realized beyond the prescribed period, i.e. 6 months from date of shipment, are treated as Deferred Payment Exports 1. What is an offer? Exim Bank offers Supplier's Credit in Rupees or in Foreign Currency at postshipment 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. 2. 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. 3. What are the general terms of Supplier's Credit?
Extent of Supplier's Credit: 100% of post-shipment credit extended by exporter to overseas buyer.
Currency of Credit: Supplier's Credit from Exim Bank is available in Indian Rupees or in Foreign Currency.
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.
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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: Credit is offered directly to overseas buyer for a specific project/ contract.
CHAPTER 6 - MAJOR FINANCIAL AND OTHER INSTITUTIONS

For providing credit and finance and insuring export credit risk, there are 2 primary institutions i.e. EXIM Bank and ECGC.
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EXPORT FINANCE Although there are other commercial banks, nationalized institutions and private institutions such as IFCI, IDBI, engaged in providing finance to exporter. The major institutions are EXIM Bank, ECGC, and RBI.
6.1 - EXIM BANK

Exim Bank Act-Completed 20 years of operations. 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-ordinating working of institutions engaged in financing exports and imports.
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INTRODUCTION The Export-Import bank of India is the apex institution for project finance, which provides direct finance and coordinates the working of the institution, which is engaged in financing export or import of goods and services. It has taken over the operations of international finance wing of the industrial development bank of India (IDBI). The EXIM bank of India came into existence on 1st January 1982, and started functioning from 1st march 1982. It has its headquarter in Mumbai and its branches and offices in important cities in India and abroad. Offices Head office Mumbai. A network of 13 offices in India and Overseas. Domestic Offices - Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune. Overseas Offices - Budapest, Johannesburg, Milan, Singapore, Washington DC.
PURPOSE The EXIM bank was established for the purpose of financing medium and long term loan to the exporters thereby promoting foreign trade of India. MAIN OBJECTIVES To provide financial assistance (medium and long term) to exporters and importers. To function as the principal financial institution for coordinating the working of institutions engaged in providing export finance. To promote Foreign Trade of India. To deal with all matters that may be considered to be incidental or conducive to the attainment of above objectives.
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EXPORT FINANCE FUNCTIONS The assistance provided by EXIM Bank to the exporters can be grouped under two heads: Fund Based Assistance. Non-Fund based Assistance. The various assistance provided by EXIM Bank can be charted as follows:
ASSISTANCE OFFERED BY EXIM BANK
FUND BASED ASSISTANCE

INDIAN PARTIES. INDIAN BANKS. OVERSEAS BUYERS. OVERSEAS BANKS.
NON-FUND BASED ASSISTANCE
FINANCIAL GUARANTEES. ADVISORY AND OTHER SERVICES.
A. FUND BASED ASSISTANCE: Assistance to Indian Exporters:

(a) (b) (c) (d)
It provides financial assistance to Deferred credit exports. It offers credit facilities to Deemed Exports. It finances Indian Joint Ventures in Foreign countries. Finances units inEPZ/ SEZ and 100% EOUs. materials and other inputs.
(e) It provides Pre-shipment finance to exporters for procuring raw (f) It finances export/import of machinery and equipment on lease basis. (g) It provides Computer Software exporters foreign exchange loan subject to RBI clearance. (h) It provides finance facility against deferred credit to exporters of consultancy, technology and other services.
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EXPORT FINANCE (i) It provides finance to Indian exporters to undertake various export marketing activities in India and abroad through Export Marketing Fund (EMF). (j) It also operates Export Development Fund (EDF) to finance technoeconomic survey/research or any other study for the development of Indian Exports. Assistance to Indian Commercial Banks: (a) It provides Refinance Facilities so as to Indian exporters who extend term credit to importers. (b) It offers Export Bills Rediscounting Facility to commercial banks in India who have earlier discounted bills of exporters. Assistance to Overseas Buyers: (a) It offers Overseas Buyers Credit facility to foreign importers for import of Indian capital goods and related services with repayment spread over a period of years.
Assistance to Overseas Banks: (a) Long term finance is also provided under Lines of Credit to finance financial institutions abroad, who in turn, extend finance to importers of their country to buy Indian Capital goods. (b) It provides Relending Facility to overseas Banks to make available term finance to their clients for import of Indian goods.
2. NON-FUND BASED ASSISTANCE Guarantees and Bonds:
EXIM Bank provides non-fund base assistance in the form of guarantees in the nature of Bid Bonds, Performance Guarantee etc. These guarantees are provided together with Commercial Banks.
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EXPORT FINANCE Advisory and Other Services:

(a)
It advises Indian companies, in Executing Contracts Abroad, and on sources of overseas financing.
(b) It advises Indian exporters on global exchange control practices.

(c)
The EXIM Bank offers Financial and Advisory Services to Indian construction projects abroad. It advises small-scale manufacturers on export markets and product areas. It provides Euro Financing sources and Global Credit sources to Indian exporters. It assists the exporters under Forfeiting scheme.
(d)
(e)
(f)
FREQUENTLY ASKED QUESTIONS (FAQs) IN EXIM BANK 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 internationalization efforts. 2. What is the place of Exim Bank in the institutional structure for financing developmental needs?
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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 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. 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
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EXPORT FINANCE 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. 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, agroindustry, 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 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
Funded

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EXPORT FINANCE 6. How is Forfeiting useful as an export financing option? What role does Exim Bank play in a Forfeiting transaction? Forfeiting 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 forfeiting 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 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.
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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.
EXPORT FINANCING PROGRAMMES PROVIDED BY EXIM BANK 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 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, and consultancy and technology services on deferred payment terms. EXIM INDIA also seeks to co
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EXPORT FINANCE 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. 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.
Loans to Indian Entities
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.
Pre-shipment credit: finance is available form Exim Bank for companies executing export contracts involving cycle time exceeding six months. The facility
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EXPORT FINANCE 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. 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 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.
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EXPORT FINANCE 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.
Loans to Overseas Entities 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 worldwide for imports from India.
A RANGE OF EXPORT SERVICES PROVIDED BY EXIM BANK
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.
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A. ADVISORY SERVICES
I. MULTILATERAL AGENCIES FUNDED PROJECTS OVERSEAS (MFPO) Services Information and support services to Indian companies to help improve their prospects for securing business in multilateral agencies funded projects. Dissemination of business opportunities in funded projects Providing detailed information on projects of interest
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EXPORT FINANCE Information on Procurement Guidelines, Policies, Practices of Multilateral Agencies Assistance for Registration with Multilateral Agencies Advising Indian companies on preparation of Expression of Interest, Capability Profile. Bid Intervention II. PROMOTING INDIAN CONSULTANCY TIE-UP WITH: International Finance Corporation, Washington D.C. Africa Project Development Facility Africa Enterprise Fund Technical Assistance & Trust Funds Mekong Project Development Facility
Eastern & Southern African Trade & Development Bank (PTA Bank) African Management Services Company (AMSCO), Netherlands
EXAMPLES Gems & Jewellery Study - Zambia Financial Training Mission - Kenya Cement Project - Cameroon Software - Madagascar Wool Knitting - Vietnam Textile - Nigeria Refrigeration - Ghana
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EXPORT FINANCE Financial Training - Poland
III. EXIM BANK AS A CONSULTANT Feasibility study for establishment of an export credit and guarantee facility for Gulf Cooperation Council countries. Regional cooperation in export finance and export credit guarantees for ESCAP. Study on promotion of international competitiveness and exports of manufactured goods for ESCAP. Setting up the AFRICAN-EXIM Bank. Designing of Export Financing Programmes - Turkey Setting up an Exim Bank in Malaysia Design of Export Marketing Seminars for SMEs in Vietnam Export Development Project : Ukraine Enterprise Support Fund : Armenia Establishing an Export Credit Guarantee Company in Zimbabwe Advisory services to Industrial Development Corporation of South Africa for international finance products
B. KNOWLEDGE BUILDING I. EXIMIUS CENTRE FOR LEARNING, BANGALORE Set up, in October 1994, to organize seminars and workshops in areas such as international trade & investment, export marketing, quality,
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EXPORT FINANCE packaging, business opportunities in multilateral agencies funded projects, sector and country specific programmes Guest faculty from network partners such as IFC, World Bank, EBRD, UNIDO. Number of Programmes Conducted: 53 II. RESEARCH STUDIES Research Studies on products, sectors, countries, macro economic issues relevant to international trade and investment Number of research studies published as Occasional Papers: 85 INFORMATION Exporters/Importers Industry/Market Reports Trade Regulations & Laws Country Reports International Quality Standards Partner Identification Product Display Examples of Information Services Hungarian Pharmaceutical Sector Importers of Sanitary ware, Castings in North America Importers of Agro-chemicals in Eastern Europe Study for ear buds market in Hungary Study of the Indian Wine market for a Hungarian Company Partner identification for an Italian Sanitary ware manufacturer Study of the Indian Crane Industry for a Finnish company Regulatory Framework for setting up a Pharma Project in China Market report for Computer Monitors in India for a Singaporean firm Study on Bicycle market in Eastern Europe for Indian Cycle exporter
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EXPORT FINANCE Market Potential for Denim in South East Asia
6.2 - EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD. In order to provide export credit and insurance support to Indian exporters, the GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was transformed into export credit guarantee corporation limited (ECGC) in 1964. Since 1983, it is now know as ECGC of India Ltd. ECGC is a company wholly owned by the GOI. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing government, Banking, Insurance, Trade and Industry. The ECGC with its headquarters in Bombay and several regional offices is the only institution providing insurance cover to Indian exporters against the risk of non-realization of export payments due to occurrence of the commercial and political risks involved in exports on credit terms and by offering guarantees to commercial banks against losses that the bank may suffer in granting advances to exports, in connection with their export transactions. OBJECTIVES OF ECGC: To protect the exporters against credit risks, i.e. non-repayment by buyers To protect the banks against losses due to non-repayment of loans by exporters COVERS ISSUED BY ECGC: The covers issued by ECGC can be divided broadly into four groups:
1.
STANDARD POLICIES issued to exporters to protect then against payment SPECIFIC POLICIES designed to protect Indian firms against payment risk
risks involved in exports on short-term credit.

2.
involved in (i) exports on deferred terms of payment (ii) service rendered to foreign parties, and (iii) construction works and turnkey projects undertaken abroad.
3.
FINANCIAL GUARANTEES issued to banks in India to protect them from
risk of loss involved in their extending financial support to exporters at pre-shipment and post-shipment stages; and
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4.
SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks which
add confirmation to letters of credit opened by foreign banks, Insurance cover for Buyers credit, etc. (A) STANDARD POLICIES: ECGC has designed 4 types of standard policies to provide cover for shipments made on short term credit: 1. 2. 3. 4. of contract RISKS COVERED UNDER THE STANDARD POLICIES: 1. 2. Commercial Risks Insolvency of the buyer Buyers protracted default to pay for goods accepted by him Buyers failure to accept goods subject to certain conditions Political risks Imposition of restrictions on remittances by the government in the buyers War, revolution or civil disturbances in the buyers country. Cancellation Shipments (comprehensive risks) Policy to cover both political and Shipments (political risks) Policy to cover only political risks from the date Contracts (comprehensive risks) Policy to cover both commercial and Contracts (Political risks) Policy to cover only political risks from the date commercial risks from the date of shipment of shipment political risk from the date of contract
country or any government action which may block or delay payment to exporter. of a valid import license or new import licensing restrictions in the buyers country after the date of shipment or contract, as applicable. Cancellation of export license or imposition of new export licensing Payment of additional handling, transport or insurance charges occasioned Any other cause of loss occurring outside India, not normally insured by restrictions in India after the date of contract (under contract policy). by interruption or diversion of voyage that cannot be recovered from the buyer. commercial insurers and beyond the control of the exporter and / or buyer.
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RISKS NOT COVERED UNDER STANDARD POLICIES: The losses due to the following risks are not covered: 1. Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyers country in his favour, unless the exporter obtains a decree from a competent court of law in the buyers country in his favour 2. 3. county 4. 5. 6. 7. Insolvency or default of any agent of the exporter or of the collecting bank. loss or damage to goods which can be covered by commerci8al insurers Exchange fluctuation Discrepancy in documents. Causes inherent in the nature of the goods. Buyers failure to obtain import or exchange authorization from authorities in his
(B). SPECIFIC POLICIES
The standard policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of exporters shipment of raw materials, consumable durable for which credit period does not normally exceed 180 days. Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad are not of a repetitive nature. Such transactions are, therefore, insured by ECGC on a case-to-case basis under specific policies. Specific policies are issued in respect of Supply Contracts (on deferred payment terms), Services Abroad and Construction Work Abroad. 1) Specific policy for Supply Contracts: Specific policy for Supply contracts is issued in case of export of Capital goods sold on deferred credit. It can be of any of the four forms:
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EXPORT FINANCE Specific Shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the Post-shipment stage. Specific Shipments (Political Risks) Policy to cover only political risks after shipment stage. Specific Contracts (Comprehensive Risks) Policy to cover political and commercial risks after contract date. Specific Contracts (Political Risks) Policy to cover only political risks after contract date. 2) Service policy: Indian firms provide a wide range of services like technical or professional services, hiring or leasing to foreign parties (private or government). Where Indian firms render such services they would be exposed to payment risks similar to those involved in export of goods. Such risks are covered by ECGC under this policy. If the service contract is with overseas government, then Specific Services (political risks) Policy can be obtained and if the services contract is with overseas private parties then specific services (comprehensive risks) policy can be obtained, especially those contracts not supported by bank guarantees. Normally, cover is issued on case-to-case basis. The policy covers 90%of the loss suffered. 3) Construction Works Policy: This policy covers civil construction jobs as well as turnkey projects involving supplies and services. This policy covers construction contracts both with private and foreign government. This policy covers 85% of loss suffered on account of contracts with government agencies and 75% of loss suffered on account of construction contracts with private parties. (C). FINANCIAL GUARANTEES Exporters require adequate financial support from banks to carry out their export contracts. ECGC backs the lending programmes of banks by issuing financial guarantees. The guarantees protect the banks from losses on account of their lending to exporters. Six guarantees have been evolved for this purpose:(i). Packing Credit Guarantee
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EXPORT FINANCE (ii). Export Production Finance Guarantee (iii). Export Finance Guarantee (iv). Post Shipment Export Credit Guarantee (v). Export Performance Guarantee (vi). Export Finance (Overseas Lending) Guarantee. These guarantees give protection to banks against losses due to non-payment by exporters on account of their insolvency or default. The ECGC charges a premium for its services that may vary from 5 paise to 7.5 paise per month for Rs. 100/-. The premium charged depends upon the type of guarantee and it is subject to change, if ECGC so desires. (i) Packing Credit Guarantee: Any loan given to exporter for the manufacture, processing, purchasing or packing of goods meant for export against a firm order of L/C qualifies for this guarantee. Pre-shipment advances given by banks to firms who enters contracts for export of services or for construction works abroad to meet preliminary expenses are also eligible for cover under this guarantee. ECGC pays two thirds of the loss. (ii) Export Production Finance Guarantee: this is guarantee enables banks to provide finance at pre-shipment stage to the full extent of the of the domestic cost of production and subject to certain guidelines. The guarantee under this scheme covers some specified products such a textiles, woolen carpets, ready-made garments, etc and the loss covered is two third. (iii) Export Finance Guarantee: this guarantee over post-shipment advances granted by banks to exporters against export incentives receivable such as DBK. In case, the exporter Does not repay the loan, then the banks suffer loss? The loss insured is up to three fourths or 75%. (iv) Post-Shipment Export Credit Guarantee: post shipment finance given to exporters by the banks purchase or discounting of export bills qualifies for this guarantee. Before extending such guarantee, the ECGC makes sure that the exporter has obtained Shipment or Contract Risk Policy. The loss covered under this guarantee is 75%. (v) Export Performance Guarantee: exporters are often called upon to execute bid bonds supported by a bank guarantee and it the contract is secured by the exporter than he has to
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EXPORT FINANCE furnish a bank guarantee to foreign parties to ensure due performance or against advance payment or in lieu of or retention money. An export proposition may be frustrated if the exporters bank is unwilling to issue the guarantee. This guarantee protects the bank against 75% of the losses that it may suffer on account of guarantee given by it on behalf of exporters. (vi) Export Finance (Overseas Lending) Guarantee: if a bank financing overseas projects provides a foreign currency loan to the contractor, it can protect itself from risk of nonpayment by the con tractor by obtaining this guarantee. The loss covered under this policy is to extent of three fourths (75%). (D) SPECIAL SCHEMES A part from providing policies (Standards and Specific) and guarantees, ECGC provides special schemes. These schemes are provided o the banks and to the exporters. The schemes are: I. Transfer Guarantee: the transfer guarantee is provided to safeguard banks in India against losses arising out of risk of confirmation of L/C. the risks can be either political or commercial or both. Loss due to political risks is covered up to 90 % and that due to commercial risks up to 75%. II. Insurance Cover for Buyers Credit and Lines of Credit: Financial Institutions in India have started direct lending to buyers or financial institutions in developing countries for importing machinery and equipment from India. This sort of financing facilitates immediate payment to exporters and frees them from the problem of credit management. ECGC has evolved this scheme to protect financial institutions in India which extent export credit to overseas buyers or institutions. III. Overseas Investment Insurance: with the increasing exports of capital goods and turnkey projects from India, the involvement of exporters in capital anticipation in overseas projects has assumed importance. ECGC has evolved this scheme to provide protection for such investment. Normally the insurance cover is for 15 years. 6.3 - RESERVE BANK OF INDIA
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EXPORT FINANCE INTRODUCTION: The RBI with its head quarters in Mumbai and several regional offices is the central banks of our country to authorize extend and regulate export credit and transaction including foreign exchange affairs. RBI does not directly provide export finance to the exporters, but it adopts policies and initiates measures to encourage commercial banks and other financial institutions to provide liberal export finance. The Two Departments of RBI are: Industrial and credit department and Exchange control department These Departments administers various policies related to export finance/credit and foreign exchange. SCHEMES OFFERED BY RBI TO ENCOURAGE COMMERCIAL BANKS TO PROVIDE EXPORT CREDIT TO THE EXPORTERS: EXPORT BILLS CREDIT SCHEME, 1963: Under this scheme, RBI used to grant advance to scheduled banks against export bills maturing within 180 days. Now this scheme is not in operation. PRE-SHIPMENT CREDIT SCHEME, 1969: Under this scheme, RBI provides re-finance facilities to scheduled banks that provide pre-shipment loans to bonafide customers. EXPORT CREDIT INTEREST SUBSIDIES SCHEME, 1968: Under this scheme, RBI provides interest subsidies of minimum 1.5 % p.a. to banks, which provide export finance to exporters, provided that the banks charge interest to exporter within the ceiling prescribed by RBI. The subsidies are given both against packing credit and post-shipment. DUTY DRAW BACK CREDIT SCHEME, 1976: Under this scheme, the exporters can avail an interest free advances from the bank up to 90 days against shipping bill provisionally certified by the customs authority towards a refund of customs duty. The advances made by commercial banks under this scheme are eligible for re-finance, free of interest from RBI for maximum period of 90 days form the date of advance.
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EXPORT FINANCE
Other approves or sanctions of application made by the exporters with RBI Extension of time limit for realization of export proceeds. Deduction in invoice price of exports goods. Fixation of commission to overseas consignee or agents. Provision of blanket permit where a lump sum exchange is released for a number of purposes. Remittance abroad in respect of advertising, legal expenses etc. Any other matters relating to foreign trade that require clearance form the exchange Control department of RBI. Clearance in respect of joint venture abroad.
GUIDELINES ISSUED BY RBI under section 47 of THE FEMA, 1999. Issued by RBI under Sec. 47 of Foreign Exchange Management Act, 1999. Types of Exports covered: Export of Goods on Deferred Payment Terms (e.g. Export of machinery, equipment, manufactured products) Turnkey Projects (e.g. Setting up of Sugar Plant, Cement Plant) Construction Projects (e.g. Construction of Roads, Dams, Bridges) Consultancy & Technical Services (e.g. Operation & Maintenance Contracts) collectively referred to as 'PROJECT & SERVICES EXPORTS'. TURNKEY, CONSTRUCTION & SUPPLY BIDS / CONTRACTS

Upto Rs. 50 crores: Scheduled Commercial Banks. Upto Rs. 200 crores: Exim Bank. Above Rs. 200 crores: Working Group.
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EXPORT FINANCE SERVICES BIDS / CONTRACTS On Cash Terms

Upto Rs. 5 crores: Scheduled Commercial Banks. Upto Rs. 10 crores: Exim Bank. Above Rs. 10 crores: Working Group.
On Deferred Payment Terms
For any amount: Working Group.
How to apply for loan? The proposal is to be submitted in the prescribed application form (Ref: Memorandum PEM) along with implementation schedule, currency-wise cash flows and write-up with regard to site and infra-structural condition, and sub-contracting arrangements envisaged. In case of a non-Government buyer, status report on the client/prime contractor would first need to be obtained. The completed applications are to be submitted to the sponsoring bank, for consideration, within fifteen days of entering into contract.
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EXPORT FINANCE It would also be necessary to consult ECGC in advance in cases where corporation's insurance cover and/or counter guarantees are required. The applications are forwarded by the sponsoring banks with their comments, to the following agencies which constitute the Working Group: Exim Bank, Mumbai. Reserve Bank of India, Exchange Control Department, Mumbai. Export Credit Guarantee Corporation of India Limited, Mumbai. Ministry of Finance, Department of Economic Affairs, Banking Division, New Delhi. Ministry of Finance, Department of Economic Affairs (FT), New Delhi. Ministry of Commerce, New Delhi. Other participating banks Export Capability Creation Programmes: Lending Programme for Export Oriented Units Production Equipment Finance Programme Technology Up gradation Fund Scheme for Textile and Jute Industries Overseas Investment Finance Programme Equity Investment in Indian Ventures Abroad Asian Countries Investment Partners Programme Export Marketing Finance Programme Export Product Development Programme Export Vendor Development Programme Programme for Export Facilitation: Port Development Software Training Institutes
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EXPORT FINANCE Foreign Currency Pre-shipment Credit Working Capital Term Loan Programme for Export Oriented Units Bulk Import Finance Finance for Research & Development for Export Oriented Units Long Term Working Capital Import Finance
Post-Award Clearance of Export Contracts Exporter submits application in prescribed from along with copies of contract through his commercial bank for Post Award Clearance. Exporter can directly approach Exim Bank for proposals of value limits upto Rs.200 crores. On receipt of application and contract copies from the commercial bank, EXIM Bank approves the proposal if the same falls within its delegated powers or convenes Working Group meeting. In approved cases, Exim Bank/Working Group accords clearance to the final terms and conditions of the contract including various fund based and non-fund based facilities and requisite exchange control approvals. On the basis of package post award clearance granted by Exim Bank/Working Group, final approvals for fund based and non-fund based facilities and requisite exchange control approvals are issued by the concerned institutions and export's banks. Criteria for Consideration for Clearance of Export Proposals Exporter's financial position, track record. Status of overseas client - Government/ Private. Break-up of contract value - Indian / Third Country / Local. Risk Assessment of Buyer's Country. Estimates of Cost and Profitability. Currency of Payment - Convertible Currency / Local Currency Security - Letter of Credit, Bank Guarantee, Government Guarantee, Externalization undertaking of Central Bank.
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EXPORT FINANCE Foreign Exchange Outgo. Facilities required by the exporter. Salient Parameters of Appraisal for Clearance of Export Proposals Payment Terms : Advance Payment, Progress / Down Payment, Deferred Payment, Retention Money Availability of ECGC Cover, where necessary Important Contractual Clauses : Preshipment Inspection Arbitration Force Majeure Status of Exporter : Prime Contractor/Sub-contractor/ Consortium Member Penalty / Liquidated Damages for delay in Contract Execution Price Escalation Source of Funding : Multilateral / Local Foreign Exchange Outgo Facilities required by the exporter
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EXPORT FINANCE
CHAPTER 7 - MARKETING DEVELOPMENT ASSISTANCE (MDA) INTRODUCTION: Market developing assistance is provided for meeting the expenditure on export promotion scheme and projects for the development of market abroad for Indian products. It is available for sponsoring trade delegation abroad, market studies, publicity, setting of warehouse/showroom, research and development, quality control, etc. it is available to an individual/organization engaged in/concerned with export marketing. BENEFICIARIES: It is available largely to; Export houses. Trading houses. Star trading houses. Super Star trading houses. Individual exporter or other persons sponsored or drafted by the approved organization such as EPC, IIFT, IIP, FIEO, MOC etc. The MDA grants disbursed by two agencies namely: I. Federation of Indian export organization (FIEO) II. Ministry of Commerce (MOC). BENEFITS AVAILABLE UNDER MARKET DEVELPOMENT ASSISTANCE SCHEME The consultancy firms may be provided assistances from the MDA for the following type of activities and at the specified rate. I. Export Publicity Assistance- for publicity campaign at 60% of the net expenditure after taking into account the revenue from sales and advertisement
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EXPORT FINANCE for publishing magazines including journals, directories, brochure, pamphlets, etc. for use abroad. II. For organization of trade fairs and exhibition. III. Overseas market surveys/studies- for undertaking market studies abroad at 80%. IV. MDA for opening foreign offices and other export activities- for opening an operating foreign office at 60% of the approved expenditure for the first two years, 40% for the next two years and 25% for the fifth year. V. 40% of the expenditure on brand publicity. VI. 60% of the approved expenditure to consultancy firms undertaking feasibility studies abroad on their own initiative. Cost of such studies includes cost on international travel, boarding etc. the firms having a minimum annual turnover of Rs. 10 lacs are entitled for this benefits. VII. 50% reimbursement of the cost of preparation and submission of bids for turnkey/construction projects/ operational and maintenance of services contracts/consultancy contracts subject to standard cost ceilings on different bids. VIII. 2.5% of bid value upto Rs. 50 lacs relating to consultancy projects. The assistance will go upto to2.5% of Rs. 50 lacs plus 1% of the incremental cost of project beyond Rs. 50 lacs subject a maximum of Rs. 6 lacs. IX. 50% of the financing cost of bid bond. X. Sponsoring trade delegations and study-cum-sales teams. XI. Foreign exchange for specified purposes. XII. Exemption/rebate in income tax on exports or foreign exchange earnings. XIII. Reimbursement of central sale tax is exemption form sales tax.
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CHAPTER 8 - ` HIGH COURT RULING: EXPORT LOSSES NOT ENTITLED TO TAX CONCESSIONS
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 Tax Act. Losses are not to be considered for deduction HHC, the court ruled. Justice V C Daga, gave this ruling on 2.7.2001, in an appeal against and order by the Income Tax Appellate Tribunal. Case Details: The HC had to decide whether the loss incurred in export of goods was to be ignored while determining the appellants entitlement to deduction u/sec 80 HHC (3) c of I-T Act. In this case, Ipcas 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 goods 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. Ipcas 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 T.Y.B.M.S. 2012-13
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under Section 80 filed by Ipca Labs
The division bench comprising of Justice S.H. Kapadia &
EXPORT FINANCE 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.
CASE STUDY
THE GLOBAL FINANCIAL CRISIS: IMPACT ON BANGLADESH I Introduction
The world economy is currently experiencing the worst global financial crisis since the Great Depression. While major world economies have taken a massive hit resulting in negative growth rates in key countries or regions, including the US, EU and Japan, the contagion also spread to emerging developing countries like China, Brazil, India and South Africa, as well as to the countries of South East Asia and Latin America. The magnitude of impact seems to depend on the extent of integration with the rest of the world (or to use World Bank jargon, the extent of liberalization that has taken place). The impact on LDCs like Bangladesh has been muted in the first, and even the second round. However, there is growing evidence that third round impacts are making themselves felt, manifested in declining exports, declining migration of labour, growing number of sick industries, industrial unrest, and reduced growth. There are also fears that poverty and unemployment may be exacerbated and MDG targets could become jeopardized. Countries like Bangladesh are interested in understanding the socio-economic impact of the global financial and economic crisis as well as policy options to cope with emerging challenges. This study addresses itself to the task of assessing the unfolding impact of the GFC on Bangladesh. There is a consensus that the chief transmission mechanisms relevant for Bangladesh are quite limited, operating through the impact on exports, remittances and labour exports, and imports. These could also lead to second order effects operating through lowering of growth, balance of payment and budgetary effects, as well as micro effects on employment and poverty. Flows of FDI and ODI (including food aid) have dwindled as well, leaving LDCs like Bangladesh
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EXPORT FINANCE to deal with the crisis on their own. A saving grace has been the lack of a liberalized capital account in Bangladesh, which prevented dramatic capital outflows, and have not contributed to increased vulnerability. The possibility of an adverse impact on agriculture has not been raised in the current debate. However, low world and Indian food prices arising from a volatile international market, has caused agricultural prices to be depressed, especially since Bangladesh imports significant quantities of agricultural produce, including cereals, from time to time. The current rice price situation suggests that the problem of farm incentives is a serious concern. Thus, the main focus of this paper is to review the following issues: (a) Impact of the global financial and economic crisis on the macro-economy, such as growth prospects, inflation, interest rate, level and composition of public expenditure, budget deficit, exports & imports, balance of payments, public debt, etc. (b) (c ) issues (d) Mitigation and policy: policies adopted, recommendations Impact of GFC on different sectors of the economy like agriculture, Micro level impact: on households, rural-urban poverty, inequality, gender manufacturing, construction, SME, trade etc.
The above analysis is likely to involve an examination of a number of indicators, e.g. - Foreign capital flows/FDI and ODA flows - Availability of credit - Exports - Global commodity price behaviour - GDP and investment - Employment, unemployment, poverty - School drop out (especially of girls) - Basic health care - Widening fiscal deficit/ fiscal space - Balance of payments - Monetary stance - Social safety nets
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EXPORT FINANCE It is widely recognized that in the case of Bangladesh, the direct transmission channels that are most relevant are exports, labour exports and remittances, and global commodity price changes and imports. The first task therefore is to assess what has been happening on these key fronts. However, it is useful to begin with a review of macro-economic performance in the backdrop of the GFC.
II
MACRO-ECONOMIC PERFORMANCE
Economic Growth The GDP growth rate has been consistently over 6 percent over the last few years despite a number of weather related shocks emanating from cyclones and floods. There is considerable speculation about what impact the GFC will have on GDP growth with widely different figures emanating from different institutions. The World Bank suggested that growth could decline to 4.5 percent while most other observers had put the figure at 5.5 to 5.8 percent. Preliminary estimates now available from the Bangladesh Bureau of Statistics (BBS) put the figure at 5.88 percent for FY 2008-09. This is the lowest GDP figure posted in the last five years, and is significantly less than the target (6.5 percent). Most observers however feel that this is a commendable performance in the backdrop of the GFC following on sharp fluctuations in world food and fuel prices, high inflation levels, and low investor confidence. To put it in context, the deceleration in GDP in Bangladesh was much slower, compared to e.g. India and Vietnam (CPD-IBRD 2008-09). Tangible sectors of the economy (largely agriculture and manufacturing) posted a moderate growth of 5.38 percent while the intangible sectors (e.g. services) recorded a 6.2 percent growth. The contribution of industrial sector to GDP was around 29 percent, with agriculture accounting for around 16 percent. Services, on the other hand contributed close to 51 percent to the GDP. Overall, the performance of agriculture was striking at 4.7 percent growth, even higher than the official target, with the crop sector posting a growth of almost 6 percent helping immensely to shore up a worsening food security problem. While services overall performed well, three out of the nine sub-sectors experienced relatively poor performance (compared to 2008-08), in particular for wholesale and retail trade, transport and communication, and financial intermediation.
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EXPORT FINANCE Investment Growth in gross capital formation increased by 5.72 percent, significantly above the rate achieved in the preceding year (1.8 percent) however, this remains lower than the longer run trend of 8-9 percent. Investment as a percentage of GDP is just over 24.2 percent, marginally lower than the target set under the MTMF of the PRSP at 24.4 percent. It has tended to decline in recent years, mainly because of a decline in public investment. To put it in context, Bangladeshs investment rate is low compared to regional standards (e.g. India invests 40 percent of GDP) and well below the savings rate of 32.3 percent, implying substantial potential to scale up investment if the right conditions are in place. The current climate however has dampened investor confidence, arising out of a number of bottlenecks relating to infrastructure, an uncertain world market, and most crucially, an acute energy crisis. Public Finance/Budget Total revenue collection in 2008-09 is estimated to fall short of target by around 2 percent (CPD-IRBD), mainly due to the shortfall experienced in tax revenue collection by the National Board of Revenue (NBR). In fact, non-NBR tax revenue is estimated to have exceeded the target set very comfortably, although non-tax revenues also dipped into the red. The revenue collection effort of the NBR has certainly been constrained by international forces, first stemming from the sharp rise in food and fuel prices (causing Bangladesh to reduce duties on many food items), and secondly, in the wake of the GFC, which led to a collapse in world commodity markets and reduction in import-based duties and taxes (which account for more than 40 percent of tax collection). Collection of import duty is estimated at 2.3 percent in 2008-09 against a target of 13.1 percent. Similarly, achievement by way of supplementary duties was very poor. However, these losses were compensated to an extent by growth in income tax collection (over 20 percent compared to a target of only 11 percent). On the basis of projected revenue earnings and expenditures for 2008-09 and 200910, the size of the budget deficit is estimated to be 3.19 percent of GDP in 2008-09 (down significantly from 4.18 percent in the preceding year) rising to 4.5 percent in 2009-10. This suggests that the government would need to be ready to deal with a significantly larger deficit in 2009-10, because of a large budget designed to meet the challenges of the global economic crisis. It would be important to carefully balance financing the budget from bank and non-bank sources and through foreign financing.
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EXPORT FINANCE While the government has generally opted to go for more non-bank financing, its ability to use foreign financing has tended to be poor. Budget expenditures for 2008-09 have also been well below target. The major expenditure accounts are interest (19.8%), education (17.7%), public services ((14.6%), agriculture (11.5%), defense (8.8%) and public order and safety (8.6%). In the light of the GFC it will be important to scale up expenditures and improve utilization of the ADP during the next fiscal. A concerted effort is urgently needed to improve utilization rates. Money and Inflation The spiraling inflation that was observed over 2006-08, led mainly by volatile world markets especially for food and energy products, was tamed by bumper rice harvests in the country combined with a slump in world markets in the wake of the global recession. The current worry is not so much with high inflation rates (which has come down from 11 percent in July 2008 to 5-6 percent in July 2009) and containing the money supply but in fact with low prices for farm produce that is acting as a disincentive for future production. The response of the government has been to expand subsidies (for fertilizer, fuel, credit). However, the government also needs to be ready to deal with re-emerging inflationary pressures once the recession eases off and world commodity markets rebound, towards the end of fiscal 2009-10. Credit The demand for credit has remained sluggish in the economy, especially from the private sector. Credit to the government sector grew at a modest rate but private sector credit declined, leading to excess liquidity in the banking system. Indeed, the level of liquidity increased by over 60 percent in 2008-09 compared to the preceding period, due to several factors: (a) the demand for import credit declined in the face of lower import prices, (b) uncertainty in the world market has led the private sector to postpone investments, and generally to adopt a more conservative approach, and (c) government expenditure during 2008-09 has also been low.1 However, the most important reason behind the reluctance of the private sector to invest is the energy crisis that has hit the country, which is a domestic issue and has little to do with the GFC. Indeed, one might argue that if energy did not act as a constraint, Bangladesh could have reaped significant gains from the GFC by reaching out to new markets and undertaking strategic investments in upgrading technology and equipment.
1
The Daily Star, June 10 reported: Banks awash with cash as industrial lending plunges.
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EXPORT FINANCE Interest Rate In the light of slackening demand, the supposedly high interest rate charged by banks in Bangladesh has come in for a lot of harsh criticism. Recently, the Bangladesh Bank asked all commercial banks to limit the lending rate to 13 percent (from 15.5 percent previously). Some banks responded by lowering the interest rate on fixed deposits, leaving the average spread only slightly reduced, despite a significant drop in the inflation rate. The high lending rates are blamed on inefficiency, market segmentation and lack of competition although no systematic analysis has been conducted to actually examine this issue. Preliminary analysis by BIDS actually does not suggest that the spread is too high although others consider it to be one of the highest in the world (CPD-IBRD, 2009 p.14). The matter will require further investigation but what can be said perhaps with greater confidence is that the interest rate is not a key determinant of the decision to invest in Bangladesh, given the other much more serious constraints that investors must overcome (including energy, and generally costs of doing business). Exchange Rate Bangladesh adopted a free-floating exchange rate in 2003, and is believed to be conducting a policy of managed float, keeping the BDT stable against its main trading currency the BDT. The local currency has remained virtually unchanged against the USD since 2006, giving rise to concerns among a segment of exporters that Bangladesh is losing its competitiveness in the light of large losses experienced by the USD against all other currencies in the wake of the GFC. The Bangladesh Bank however feels that there are no grounds for depreciating the BDT since the effect on exports are unlikely to be large, and there may be adverse effects of higher import costs that could negate any gains made. Recent research by BIDS-PRP (Hossain and Ahmed, 2009) suggest that there may be some gains from small adjustments to the exchange rate a view however that is not supported by all. It is generally felt (although this exercise does not appear to have been conducted) that the exchange rate is at equilibrium and needs little adjustment or intervention.2 Foreign Direct Investment
These views were given in a seminar held at the Bangladesh Institute of Development Studies (BIDS) on 16 July, 2009 by the immediate past governor of the Bangladesh Bank, the Finance Minister, Government of Bangladesh as well a number of professional economists present.
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EXPORT FINANCE The global flow of FDI fell by over 28 percent in 2008 and is expected to fall further in 2009. FDI to Bangladesh over July-April 2009 was around $900 million a 91 percent increase over the preceding period. Net portfolio investment was negative. Bangladesh has not emerged as an important destination for FDI due to its poor image, inadequate infrastructure, and more recently, the energy crunch. There is considerable potential however, in terms of investments in infrastructure, energy and manufacturing, especially in the light of the very recently approved strategy of supporting public-private partnerships. Given Bangladeshs excellent growth performance, rising incomes (GDP per capita is now around $700) and a more affluent middle class, there is a significant domestic market that would be attractive for many investors. Foreign Aid Foreign aid flows to Bangladesh in 2008-09 appear to have remained roughly at the 2007-08 level. However, food aid has declined dramatically. Thus over the period July-April (2008-09), food aid fell to $37.6 million compared to $83.3 million during the same period in the preceding year. The total amount has declined from historical levels of around a million tons to around 80,000 tons this year.3 Food security has been given the highest priority by the current government but given the large volatility often experienced in domestic food production, there is always a threat of crop losses and high domestic price levels. Given the recent volatility seen in world food markets, the government remains worried about food security, and would have welcomed an assurance of some food aid of at least 200,000 tons. There is a fear that low farm gate prices this summer, following on good harvests and low world market prices, will impact negatively on the next winter harvest, and could destabilize the crucial rice market. Balance of Payments Bangladeshs balance of payments has improved in 2008-09, in sharp contrast to many other countries in the region, arising from excellent performance in exports and remittances, and a slow-down in imports. These aspects are treated in some detail in the next section. III
3
PERFORMANCE OF KEY SECTORS
EXPORTS
Statement by Food Minister, reported in the Daily Star, July 10, 2009
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EXPORT FINANCE Bangladeshs export earnings have risen rapidly since the early 1990s. Exports have grown from around 7 percent of GDP in 1991 to around 18 percent in 2006. Two main sources of economic growth have been manufacturing and services, both crucially dependent on the RMG sector. Thus, any impact on the countrys export processing sector, and in particular on the large RMG sector, will adversely affect economic performance. The main driver of the export sector is the ready-made garments industry (RMG) which accounts for almost four fifth of our total export earnings. Almost two and a half million people, ninety percent of them women, are employed in the RMG sector. While a large but undetermined number of people are involved in various ancillary and support services e.g. banking, insurance, transport etc. to this sector, the workers are largely drawn from the poorer sections of society. Any adverse effects on the RMG sector will thus have far-reaching implications for the entire economy and society. The export sector is potentially vulnerable to the on-going financial crisis as it heavily depends on the EU and US markets which have been badly hit. Almost half of Bangladeshs exports go to the EU, while another quarter goes to the US. High export concentration is a source of vulnerability for Bangladeshs exports, especially in the context of the current recession. There are at least two channels through which the crisis can hurt Bangladesh. Declining wealth and earnings in the USA and EU has reduced import demand and may reduce demand for Bangladeshi exports. Another impact could be through the banking system, reducing trade credit to buyers involved in imports from Bangladesh. This may in turn affect our exports.
Bangladeshs export performance held up until July-December 2008-09, but decelerated quite rapidly thereafter. It will be observed from figure below that the export growth rate plunged in Jan-April 2009, clearly marking the impact of the GFC.
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EXPORT FINANCE In other words the second and third round effects of the crisis were beginning to be felt. Figure 1: Half Yearly Growth (%) of Bangladeshs Export (Year-over-Year)
30 25 20 15 10 5 0 Jan-June July-Dec Jan-June July-Dec Jan-June July-Dec Jan-April* 2009
25.39
23.18
24.93 16.70 9.22 6.88
3.96
2006
2007
2008
* Four months average growth over Jan-April2008 Source: Calculated based on data accessed from IFS, 2008 and Bangladesh Bank Awareness about global recession and its impact on occupation and daily life All of the respondents know about recession. They correctly identified that leather industry has been badly affected by global recession due to its high export dependency. The workers have attributed their reduced working hours in the factory to falling export orders due to this global recession. When export orders decline, factory owners substitute relatively older workers with young workers since they have to pay the new groups of workers, comparatively lower wage. However, none of the eleven respondents have been laid off in spite of export order contraction. The direct impact of the recession is lower working hours which has reduced their income, and made family maintenance more difficult. They have also related the deteriorated law and order situation with increased unemployment due to recession. To combat the recessionary affects on leather industries, workers suggested initiating production of leather processing chemicals domestically as well as increased production of leather goods, locally. However, workers revealed that situation has improved at present compared to the previous eight months. Expectation about the next six months to one year
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EXPORT FINANCE Workers, in general, are pessimistic about the future. In the context of this FGD issues raised here, they believe that situation will not change in the coming days if leather processing chemicals are not produced locally, continuing price hike of necessities is not checked and law and order is not controlled.
Although there has been deceleration in export growth, Bangladesh is one of the few countries in the world to achieve a positive growth rate. For example, its performance in the US market, contrasts sharply with that of many other countries in the region. Export growth has turned negative for India, Philippines and Sri Lanka although China and Vietnam have managed to post positive growth rates. Bangladesh registered a 12.5 percent export growth in woven products and 25.9 percent export growth in knit products to the US market at a time when US imports of these items actually shrank by 3.6 and 1.6 percent. Overall exports to the US grew by 13.6 percent in the face of a mere 2 percent growth in total US imports over the JulyDecember, 2008 period. This basically indicates that Bangladesh has been increasing its market share in the US apparel market at the expense of competing countries. Some Bangladeshi exports have been adversely affected in the US market, including frozen fish, headgear and jute products. Even in the midst of severe recession, Bangladesh RMG products, especially woven, knit and home textile have continued to register positive growth during January-April 2009 unlike countries like China, India, Pakistan, Sri Lanka etc. Export growth of jute, headgear, plastic to USA has remained negative.
Table 1: Quarterly Growth of Exports of Major Items to USA Growth of Exports (Jan-Apr 2009 on Jan-Apr 2008) (Year-on-Year) BD USA* China India Pakistan Philippines Sri Lanka Vietnam 12.89 -3.64 -21.21 -28.80 -3.69 -2.62 7.35 13.50 11.94 15.52 -2.65 -9.72 -22.37 -15.44 8.21
Woven Knit
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EXPORT FINANCE 10.01 Fish Headgears Home Textile Jute Plastics 14.24 19.31 35.01 52.95 -6.65 -39.48 -6.46 11.61 12.33 -9.47 110.84 70.55 -10.76 -42.10 107.78
23.25 24.22 19.76 Source: Calculated based on data accessed from USITC, June-2009.
By the end of 2009 (1st quarter) we see that except for Bangladesh, all other countries experienced negative growth in the US market (figure 3). Against all this adversity, total Bangladesh exports climbed to 11.38 per cent - further evidence of rising market share for Bangladesh. It may be noted that though Bangladesh experienced double digit export growth in the US market, this was 6.7 percent lower than the preceding quarter indicating that the impact of the crisis was very real. Bangladeshs performance even in the depressed EU market improved in more recent months. Thus, in January-March 2009 Bangladeshs export performance to EU market was better than in the US market, and far better than its own performance in the previous quartyer. Except Bangladesh and Pakistan, all other countries exhibit negative export growth to EU market, with the leading role played by woven, knit, headgears, and leather products (1.3).
Table 2 Growth of Exports to EU (Jan-Mar 2009 over Jan-Mar 2008)
Woven Knit Fish Home Textile Headgears Plastics
Bangladesh 22.31 23.23 -10.96 6.06 34.91 -13.86
China 14.81 25.95 6.94 1.98 3.71 -3.25
India 13.82 -0.48 8.46 0.09 4.70 -
Pakistan 19.33 -4.89 -100.00 7.43 15.60 19.31
Sri Lanka 10.18 15.99 13.73 -10.34 11.58 -22.34
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EXPORT FINANCE 31.16 23.98 -
Jutes Rawhide
-41.29 -44.00
34.15 -
298.56
-9.49 -46.33
39.30 42.72 Leather Products 69.49 3.63 8.16 71.90 Total 18.94 -6.06 -8.63 2.89 -0.53 Source: Calculated based on data accessed from Eurostat, 2009 The main advantage of Bangladesh over its competitors is its price. Exporters from Bangladesh have been cutting back on prices further in trying to cope with the crisis. Indeed, unit prices, calculated by dividing value by quantity for the top ten RMG products exported by Bangladesh, reveal that with few exceptions, there is a downward price trend for most categories of products. Exports of jute goods, leather and leather goods and frozen food have been hit hard by the recession. Export of jute goods, for example, declined by 18 percent in the first 10 months of 2008-09 while price and demand declined by 20-25 percent. Stakeholder Perceptions China: An important factor Discussion with the key exporters and importers suggest that China has been an important factor due to which the global financial crisis has been an opportunity for Bangladesh to expand export to US and EU as well as diversify to new markets. Sourcing from China has become expensive as the Chinese currency appreciated and labour laws were being strictly implemented. Textile products are generally considered to be low price and low valued item in China and a major shift could occur to Bangladesh in the future. Hong Kong based buyers consider Bangladesh a more reliable, cheaper supplier compared to many other countries. A small diversion from China can be a big gain for Bangladesh. Indeed, the high growth of knitwear in 2008 has been due to diversion from China. Diversifying to new markets
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EXPORT FINANCE RMG is a buyers market. Suppliers in Bangladesh have been trying to enter the high quality Japanese market but have not been able to do so. This is because of the fact that culturally, Japanese were more comfortable with China. About 80 percent of the clothing export to Japan is from China. The other major supplier to Japan is Vietnam. By the end of 2008, Japanese buyers were searching for sourcing from other low cost countries. A major Japanese buyer, Uniqlo has already expressed an interest in procuring $600 million worth of apparels from Bangladesh, indicating that Bangladesh is well poised to enter the Japanese market. Diversification to higher-end products By the end of 2008, the buyers started to search for new, lower cost suppliers for outerwear including jackets and mens suits, in a bid to relocate away from China. For sweater, polo shirt, trousers (especially denim) and home textiles Bangladesh has a strong comparative advantage. Bangladesh is considered better than India in T-shirts and polo shirts. On the other hand, Vietnam and Cambodia do not have backward linkages for knitwear. Thus, Bangladesh has emerged as a strong contender based on its good quality yarn and a short lead time for export, in addition to its low cost advantage and good quality workmanship. Labour costs Chinas production costs is rising in yuan and in US$ terms. The table shows that seven Asian countries are now offering lower labour costs than China. Labour costs are still the lowest in Bangladesh, at 22 US cents per hour or 2.5 times of that in China (Inland). Other low wage exporters are Cambodia, Pakistan and Vietnam, where labour costs are at 33 cents, 37 cents and 38 cents respectively.
Incentive package of competing countries Bangladesh has one of the highest costs of finance. The entrepreneurs opined that the interest rate is over 14 percent, and this is increasing cost of production. On the other hand the competitors in other countries have access to various incentive packages.
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EXPORT FINANCE China has been increasing the tax rebate for textile and clothing industry, from 11 percent to 14 percent. Interest rates have been reduced from 6.93 percent to 6.66 percent. Pakistan has also proposed a package for its textile industry: devaluation of currency by 30 percent, a fund for research and development , withdrawal of 15 percent sale tax on ginned cotton, reduced interest rates ( from 17.14 percent to 3.5 percent), provision of 1.5 percent subsidy for export, and total withdrawal of VAT and Tax for imports of some machineries and dice chemicals. India has devalued its currency by 25 percent, provided 50,000 crore (Indian Rupee) under the Technology Upgradation Fund, reduced interest rates from 17 percent to 6 percent, provided 60000 crore rupees for increasing cotton production, and added 10% capital subsidy for extra grant, and had not withdraw 5% interest subsidy under the TTUF, and withdrew import Tax for some machineries and chemicals used in clothing sector Buyers pay when goods are sold The exporters opined that the L/C is in favour of the buyers. After the goods have been shipped, some buyers negotiate to pay 30 percent and only if the goods are sold the rest of the payment would be made or else they would return the goods. Request to delay shipment Even after orders have been confirmed, buyers are requesting for delaying shipments. Importers are shifting delivery by up to two months, causing warehousing problems, problems with timely repayment to banks and eben payment of wages to workers. Even reputed buyers like H&M had placed orders and confirmed and then asked to wait. Industry insiders estimated that up to 3 percent of orders will be cancelled.
Short-term Outlook and Opportunities for RMG Survival of some firms at stake
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EXPORT FINANCE Those firms who have good reputation will survive and expand. There will be cash flow problem for some small firms Manufacturing firms will face problems related to storage, disrupted project planning due to delayed orders, declining production, and cash flow Banks will have problems as (a) goods already exported, but payment not received; (b) goods produced but not shipped (c) goods produced but payment renegotiated Impact on wage payment: Firms will find it difficult to pay salary to workers
Industrial unrest has increased in the RMG sector as many smaller firms find it difficult to cope. In its headline news on July 1, 2009, The Daily Star squarely blames the recent industrial unrest in the RMG sector on the spillover effects of the GFC. It reports: The low-paid workers have been demanding regular payment and re-opening of the closed factories soon. But the sick and sub-contracting factories can hardly pay their workers because of a huge shortfall in orders from big factories and international buyers in the wake of the global recession. Margins are thin and sub-contracts are difficult to obtain, forcing many units to shut down. The larger, more diversified units are managing to survive with some difficulty, and are expected to be able to ride out the storm. Media reports have painted quite an optimistic picture for the prospects of the RMG sector. Thus The Daily Star states in its business page (Jul 12 , 2009): With the signs of economic recovery in the western world, foreign buyers now lean towards Bangladeshs ready made products, placing orders at an enhanced rate. Industry chiefs think if current trends in the world market continue, it will fetch a boon for Bangladesh. For the first time, and very signifivcantly, there is keen interest from Japanese buyers as well.
IMPACT ON REMTTANCES Remittance flows to Bangladesh have grown rapidly over the last ten years from around 3 percent of GDP in 1995 to around 9.5 percent today, despite concerns that
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EXPORT FINANCE outflow of migrants is in decline. From January 1 to May 30 last year, 3.78 lakh workers went abroad. The figure this year for the same period is 2.12 lakh. Last year 9 lakh workers went abroad while this year this figure is likely to come down substantially, to around 5 lakh. According to a Daily Star report (July 2, 2009): Labour outflow is falling as Saudi Arabia, Dubai and Malaysia, three main job destinations for Bangladeshis, are not hiring workers from the country now. It further notes, remittance inflow is still showing an upward trend but the situation may change at the end of the year... A total of some five million Bangladeshis are estimated to be resident overseas. While initially most of the migrant labour went to the Middle East, mainly to Saudi Arabia, there has been considerable diversification of destination countries in more recent years. Today, migrants are found in significant concentration all over the Far East and Europe, including Malaysia, South Korea and Japan and in Germany and Italy. Other traditional destinations (USA and UK) also remain very important both as a source of remittance and as a favoured destination. Remittances play a crucial role in the Bangladesh economy today. At the macro level, it has helped to ease our foreign exchange constraint, stabilizing the exchange rate and allowing Bangladesh to import much needed raw materials, intermediate goods and capital equipment. Comfortable reserves of foreign exchange have also contributed to overall macro stability and have reduced aid dependency, along with rapid growth of our export sector. At the micro level, remittances have had a beneficial impact on household consumption, reducing poverty and creating jobs. The local economy has also benefited indirectly as large out-migration, especially from some parts of the country led to localized labour scarcity, causing wages to rise. Inevitably, there are costs as well, which unfortunately have not been adequately assessed. These relate to the hardships and deprivations that migrants face both during the risky process of migration and while staying in the host country. Both social and economic costs are faced by families of migrants, especially when heavy debts have to be incurred and remain unpaid for long periods of time. Another well-known impact has been on land
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EXPORT FINANCE and real estate demand both in urban and rural areas, especially from where migration has been particularly large. Thus, migration and remittances are not unmixed blessings although the popular view tends to highlight the positive aspects only. Given the GFC, there is every reason to be worried about the demand for migrant labour in host countries and the possible impact on remittance flows back to Bangladesh. There have been well-publicized incidents of migrants being sent back home or visas being cancelled even before visa-recipients were able to leave for their destinations. In many cases, these incidents were not directly related to the GFC but were rooted in domestic problems in the host countries. Nevertheless, there is a sense that the situation could worsen further. The media has quoted official agencies to report that the number of migrants leaving Bangladesh has halved over the past one year. It is reported that the number of migrants declined by over 36 percent in JulyMarch 2008-09 compared to the same period in the preceding year. At the same time around 30,000 workers returned home during the first quarter of 2009. There is no immediate reflection of these figures in the remittance data although it is likely that such an effect will take place with a lag of 1-2 years. Recent Trends and Patterns From 2003 to 2008, worldwide flow of remittances (i.e. the global remittance market) almost doubled (from USD 206 billion to USD 375 billion). Bangladesh experienced a dramatic rise in remittance growth even in 2008-09, rising by 22.4 percent over the preceding year. There has been a gradual change in the share of remittance flows by regions. From 1980 to 2006, the inflow of remittances from the Middle-East remained above 70 percent. However, since 2006, there has been a shift towards new sources, like USA, Canada, UK, Germany, Italy, Malaysia, and Japan reflecting considerable diversification of labour flows. The Kingdom of Saudi Arabia (K.S.A.) is the most important source of remittances for Bangladesh, followed by the U.A.E, U.S.A and U.K. The USA, KSA and UK
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EXPORT FINANCE account for almost 60 percent of total remittances (table 3.4). Germany, Italy and Malaysia have also become important labour destination countries for Bangladesh. Likely Future Trend Uncertainty in remittance flows to Bangladesh stems from several sources: The economic slowdown (as mainly indicated by poor GDP growth rates and high unemployment levels), in two of the major remittance source countries, namely the U.S.A and U.K (which account for almost 28 percent of remittance flows to Bangladesh); The fall in oil prices and the magnitude of impact on the economy of GCC countries (which accounts for 63 percent of our total remittance earnings) Uncertainty about exchange rates Declining number of migrants
The brunt of the world recession is being felt in the USA and EU, including UK, so that any adverse effects on remittances are likely to originate in those countries or regions. The Middle East is also likely to be affected by declining oil prices, and more importantly, by an expectation of slowing external demand. This has already led to some major investments to be put on hold, e.g. major construction works in UAE catering largely to foreign demand. Remittances are shaped by complex factors present in both host countries and sending countries. In addition, it is also determined by individual characteristics like gender, skill, and socio-economic circumstances of the family back home. The main determinants of remittances are thought to be the bilateral exchange rate, economic conditions or GDP of the host country, the total stock of migrants4. The economy of the Middle East is heavily dependent on oil export earnings. Oil exporting countries in the Gulf region are expected to grow at an average rate of 6.1 percent in 2009, lower than in 2008, On the other hand, consumer price inflation
4
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EXPORT FINANCE (CPI) in oil exporting countries is projected to rise to 15.7 percent in 2008 from 10.0 percent in 2007 and ease to 13.6 percent in 2009. Though the recent global financial crisis will lower the growth of oil exporting countries, growth rates will remain moderately good at over 5 percent for the region as a whole. The two countries that are of particular importance to Bangladesh are Saudi Arabia and U.A.E where GDP growth rates are expected to be 4.3 and 6.0 percent respectively, in 2009. Remittance inflows from Saudi Arab are unlikely to be seriously affected because of the huge budget surplus that it has managed to build up in the face of high oil prices. It is using these resources now to undertake counter-cyclical policies, intended to offset any adverse effects of the world recession.5 Other oil-exporting countries in the region also appear to have adopted similar policies. These developments bode well for remittance flows to Bangladesh in the short to medium term. There are a number of factors that tend to provide some grounds for cautious optimism. These include amongst others, the following:6
A rising share of skilled labor in total overseas employment of Bangladeshi workers in 2008-09; A stable exchange rate; Remittance flows do not seem to be influenced by GDP growth rates of host countries; A large accumulated stock of migrants already in place; The rising trend of remittance inflows in most developing countries and increasing share of Bangladesh in the world remittance market.
IMPLICATIONS FOR IMPORTS Bangladeshs imports as a share of GDP have been rising steadily over the past three decades. A valuable portion about 27 percent of GDP was spent on import payments in 2007-08. Around 76 percent of export earnings originate in the RMG sector, of which 54 percent goes into imports of inputs needed for the RMG industry. Given the importance of imports for Bangladeshs economic growth and development, the
5 6
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EXPORT FINANCE implications for the balance of trade and payments, it is important to assess the likely impact of the world recession on the volume, structure and of imports, and the terms of trade. Import based revenues also comprise of a significant part of the national budget and could be cause for concern. The sharp fall in energy and food prices in the world market has benefited Bangladesh immensely. The country is dependent on POL imports from the world market and is also a significant importer of food. The domestic economy is therefore quite sensitive to movements in the world price of these key commodities. Before the onset of the recession, Bangladesh was reeling under the price pressures in the world market, leading to a high (double-digit) domestic inflation rate and fears of an impending food crisis. The advent of the recession brought prices down drastically, and as an importer, Bangladesh benefited greatly with domestic price pressures falling quickly, and the government making large savings from reduced subsidies, especially on diesel. Bangladesh has also benefited from the terms of trade effect as the import prices faced fell more sharply than export prices.
Overall imports and its composition The total import payments in 2008 (January-November) amounted to US$ 22260.7 million, which is 31 percent higher than import payments in the previous year. Total merchandise imports showed a robust 35 percent growth (on adjusted fob basis) during July-October 2008 despite a sharp decline in imports of food grains over the corresponding period of the previous fiscal year (table 3.1). In case of L/C settlements, except for food grains all other categories of import show positive growth in the face of falling prices in international markets (table 4.2 & 4.3). In order to understand the nature of impact of increased imports in the economy, it is important to take a more disaggregated view. From the composition of imports it is
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EXPORT FINANCE clear that capital machinery, crude petroleum products, cotton, yarn and fertilizer, textiles and articles, were the key commodities whose imports increased significantly. In other words, the nature of imports suggests that these were meant either to increase production or raise productivity in manufacturing industry and agriculture. In July-November, 2008 food grain imports declined by around 25 percent compared to the same period of the previous year. In November 08 the wheat price per metric ton was US $227 compared to $321 in the same month in 2007. Rice price also declined significantly from $1015 to $563 per metric ton from March08 to November08. In terms of volume, foodgrain imports stood at 11.7 lakh metric tons during July-December, 2008 compared to 20.7 lakh metric tons in the same period in 2007. The slide in food imports was due to good domestic production and a respectable public stock level. Public food stocks stood at 13.2 lakh metric tons at the end of December, 2008 compared to 7.1 lakh metric tons at the end of December, 2007. Total import payments in FY 2008-09 (July-April) were 8.86 per cent higher than import payments in the same period of the previous year. The month to month import payments show a downward trend in the last couple of months however, mainly through declining imports of food grains and capital machinery. The decline of food grains import is largely because of the significant increase in agricultural production. The decline in capital machinery is due to lower investor confidence, slowdown of export growth, and the raging energy crisis in the country. In case of L/C settlements, except for food grains all other categories of import show positive growth in the face of falling prices in international markets; LC opening data however clearly reveals the negative import trends for capital goods and industrial raw materials (tables below).
Table 4.1 Composition of imports (In million US dollar) Items 2007-08 2008-09P 2008-09P % Changes
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EXPORT FINANCE July-Apr 2 A. Food Grains 1317.7 Rice 825.6 Wheat 492.1 Edible oil 822 Sugar 255.4 C. Consumer & Intermediate Goods 7784.8 Clinker 289.7 Crude petroleum 535.4 Fertilizer 509.1 Dyeing and tanning materials 174.2 Raw cotton 1030 Yarn 550.4 Textile and articles thereof 1570.2 D. Capital Goods & Others 4438.9 Capital machinery 1401 Grand Total (A+B+C+D+E+F) 17645.6 P for provisional July-Mar 3 720.3 233.4 486.9 695.5 320.2 8191.1 212.4 433.4 923.7 198.4 1006.7 609.2 1603.7 4728.4 1100.4 17431.8 July-Apr 4 831.1 235.1 596 726.1 358.2 8936.7 247.4 466.1 943.2 217.6 1104.4 667.8 1794 5229.3 1184.8 19209.1 4 over 2 5 -36.93 -71.52 21.11 -11.67 40.25 14.8 -14.6 -12.94 85.27 24.91 7.22 21.33 14.25 17.81 -15.43 8.86
Source: Statistics Department, Bangladesh Bank.
Table 4.2 Statement of import L/C settlement and import LCs opened & settled Sectors/commodities Food grains (Rice & Wheat) Capital Machinery % change Value % change Value July-May 2007-08 L/C Opening and Settlement Openin Settleme (million US$) Value g 2016.1 3 198.57 1612.5 8 17.25 2264.7 4 nt 1358.64 179.27 1287.35 -10.38 1886.2 July-May 2008-09 Openin Settleme g 792.89 -60.67 1122.5 2 -30.39 1761.0 7 nt 861.3 -36.61 1290.24 0.22 1921.23
Petroleum
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EXPORT FINANCE % change Value % change Value % change Value % change Exim Bank and Lines of Credit Export-Import Bank of India (Exim Bank) is the apex financial institution in India, operating in the sphere of financing Indias international trade. Exim Bank was established in March 1982, under an Act of Parliament of India. In the international arena, Exim Bank belongs to a universe of Export Credit Agencies. Such Agencies exist in most industrialized economics and many large developing countries, with the principal objective of promoting exports through finance. However, as one of the first Export Credit Agencies to be established in a developing country, Exim Banks export financing and promotion activities are far more diverse than similar institutions in industrialised countries. Exim Banks mission 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. The Banks principal focus is on promoting Indias exports by offering finance at various stages of export cycle like product development, production, marketing, export credit at pre-shipment and post-shipment stages, investment abroad and import of technology. The Bank operates a wide range of lending programmes. Financial packages offered by the Bank are competitive and multi-currency. Within India, Exim Bank has representative offices at Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi and Pune. The Bank has five overseas offices at Budapest, Johannesburg, London, Singapore and Washington D.C. 5.38 8211.3 4 38.75 8169.5 39.71 22274. 29 39.52 -1.96 6997.68 28.33 6747.77 26.22 18277.6 4 24.80 -22.24 7850.4 2 -4.40 8411.6 5 2.96 19938. 55 -10.49 1.86 7925.72 13.26 7913.75 17.28 19912.2 4 8.94
Industrial Raw Materials Others
Total
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EXPORT FINANCE These offices prospect for business and market the Banks services in their respective areas of operation. Exim Bank operates a range of financing programmes and provides information advisory services. One of the export credit programmes operated by Exim Bank is Lines of Credit. Exim Bank extends Lines of Credit to overseas Commercial Banks, Financial Institutions, Regional Development Banks and other overseas entities to provide a safe mode of non-recourse financing option to Indian exporters, particularly SMEs.
Implication for Inflation The commodity price boom of 2006-08 was due to strong growth in global demand. In agriculture, higher oil and fertilizer prices, along with increased demand for biofuels and feed leading to a reduction in grain stocks, have been more important than fast growth per se (Global Economic Prospects - 2008, World Bank). This happened even as agricultural production increased, stimulated by large subsidies given to agriculture by the USA and EU. There are other factors that can affect commodity prices. One such crucial factor is the price of crude oil. On the demand side, crude oil prices affect the price of other commodities by entering into the aggregate production function of primary commodities through the use of various energy-intensive inputs and, through transportation over long distances - an energy-demanding process. Further, some commodities compete directly with synthetic products, which are produced from crude oil (cotton with man-made fibers, natural rubber with synthetic rubber)7. It is in the nature of commodities for their prices to show pronounced cyclical behavior. Indeed, some of the most influential early insights about the role of
7
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EXPORT FINANCE expectations in pricing behavior derived from observations of how the interaction between prices and quantities in agricultural markets tended to generate price cycles (Kaldor 1934). It would seem that just as high demand levels for food, feed, and biofuels led to high world prices of commodities, the sharp fall in demand in the wake of the global recession has had a dramatic effect in the opposite direction, leading to rock bottom prices. Much of the emerging trend will depend crucially on the nature of expectations that are being formed. The benefits of lower world prices have been reaped by Bangladesh, especially through lower inflation, including lower food and energy prices.8 Another channel that can help lower the inflation rate of Bangladesh is the declining trend of inflation in major trading partners. The headline inflation rate of Bangladesh already started to decline from 10.82 percent in July08 to 6.03 percent in December08, currently hovering at around 5 percent (in July 2009). The inflation rate of the major trading partners like India, China, and Hong Kong has declined significantly in recent months as well (See CEIC database & ADB website)9.
Table 4.3
World commodity prices
% Change Mar/Feb Commodity Non-Energy Energy

8
Apr/Mar 4.1 5.7 3.0
May/Apr 9.7 4.9 13.1
% Change May 09/May 08 -43.9 -25.9 -51.7
2.9 -0.1 5.1
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EXPORT FINANCE Crude 12.4 7.1 15.6 -52.7 Agriculture* -1.3 4.9 6.3 Na Food 1.0 4.8 5.8 -19.5 Corn 0.9 2.5 6.9 -25.9 Wheat 2.8 1.1 9.9 -21.9 Soybean Oil -1.1 13.4 7.4 -36.5 Industrial Metals 2.8 8.4 4.3 -38.2 Gold* -2.0 -3.7 4.3 na Sources: IMF; Estimations based on data provided by the IMF. * World Bank Index na Not available
AGRICULTURE Low world prices combined with successive bumper harvests in 2008-09, especially of foodgrains, has led to a price slump. While consumers have found respite from the sky rocketing inflation of 2008, farmers are in distress. The newly elected government has given very high priority to agriculture, including scaling up of fertilizer and fuel subsidies. Out of a total The government also announced ambitious plans to support farm prices through a procurement drive but met with little success due to inadequate storage space in godowns and procurement efforts aimed at rice (from millers) rather than directly in paddy from the farm gate. There are now concerns that these low prices could operate as a disincentive for the next crop in the winter, at a time when price pressures in the world market could once again exert themselves.
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EXPORT FINANCE In fact much of the stimulus package announced by the government in April, 2009 is aimed at the agricultural sector. Out of an additional allocation of BDT 34.2 billion almost BDT 30 billion is related to agriculture or food, and the remaining for subsidies to exports. SUMMING UP Exports Despite fears of markets drying up, factories closing down and large-scale bankruptcies in the wake of the global recession, Bangladesh has coped well, especially in the US market. Market share in the EU however has taken a hit in the face of stiff competition from China on the back of withdrawal of quotas on the Chinese and a sharp depreciation of the Euro against the Taka. On the positive side, the reputation of Bangladesh as a low-cost, reliable source in the RMG market has been established and a foothold has been gained in the huge Chinese market. Local firms also seem poised to break into the $12 billion Japanese market. China and India have become increasingly expensive, especially for lower end products, prompting buyers to search out lower cost sources that are reliable and can meet their stringent quality standards. It is in this context that buyers have been looking closely at Bangladesh. During the initial phase of the recession, Bangladesh has coped very well. Local firms have also been engaged in chalking out a more competitive strategy: larger firms have tended to increasingly tie up directly with retailers, and have thereby reaped a huge advantage. Smaller operators find this difficult and continue to rely on buying houses, placing them at a much greater risk. The other strategy has been to diversify products where some gains have been made, as producers moved up to the higher end of the low-end spectrum. There is a long way to go in this direction as well as distinct opportunities that seem to be opening up. An example is the increasing demand for outer-wear garments like jackets and sweaters that low-cost sources like Bangladesh could target. Low import prices for capital goods, intermediate goods, and raw
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EXPORT FINANCE materials provide an excellent opportunity to rebuild inventories and stocks, expand the productive base and upgrade technology. However, as the recession deepened further, export growth slumped, affecting the RMG sector as well, leading to closures and even industrial unrest. The situation was made worse by an on going energy crisis and worsening investor confidence. Thus, the opportunities afforded by low import prices could not be fully utilized with imports now declining quickly, especially for raw materials and capital goods. This has led to a surplus in the current account of the balance of payments, which in this case cannot be considered a positive development. The primary textile industry or backward-linked industries that have grown on the back of the RMG success, adds distinct strength and competitiveness to the RMG sector, serving to reduce lead time. It also acts as a check against Indian textile prices, which in its absence, would certainly use its quasi-monopoly status to raise import prices to a much higher level. If really needed, this sector should be given assistance to remain afloat in the wake of the deepening recession. Specific sectors have already been hit by the recession, including leather, frozen fish and jute. In the case of frozen fish, dwindling demand has been compounded by questionable phyto-sanitary standards that have hurt our reputation. Given the current market situation, it is imperative that Bangladesh competes in terms of price and quality, including bio-security considerations, if markets are to be retained. Remittances There is little doubt that the recession has affected labour market prospects abroad adversely. However, a greater problem lies in the corruption and malpractices that have plagued the sector for years. The two are of course inter-related. No one wants to see the plight of labourers languishing in their airports or open spaces. There are also reports of increasing involvement in crime engaged in by migrant workers. The recession provides us with an opportunity to address urgent concerns of the sector to rid it off corruption and develop a strategy to deal with labour issues both in their
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EXPORT FINANCE home and destination countries. There is an urgent need for pre-departure orientation of workers along with detailed briefing about rights and obligations. As far as the immediate short run problems are concerned, remittances are unlikely to be seriously affected over 2009-10. There was an unprecedented wave of migration over 2007 and 2008 so that the full impact of that on remittances is yet to be felt. The current decline in the number of migrants is unlikely to cause a fundamental shift in the remittance flow pattern any time soon. For the longer term, a concerted effort is required to build up a skilled labour force for export including skilled manpower in security and related services, under a strict institutional framework, perhaps somewhat along the lines of the peace keeping forces sent out under the UN. Imports We have benefited enormously from cheap food, fuel and other crucial imports due to the recession. As recovery starts, this situation will also be slowly reversed so that we need to make the most of this situation. We should reduce import taxes and encourage a massive build up of inventories, spares, capital so that we can take full advantage of the recovery when it occurs. Given the fact that we have been barely hit by the recession, we are in a perfect position to be able to do so. However, more recent trends suggest that we are unlikely to be able to utilize this opportunity due to confounding factors. Finally, we should aggressively pursue an expansionary monetary and fiscal policy, encourage consumption of domestically produced goods, inject purchasing power in the farm sector and reduce the cost of retailing credit. An expansionary policy will lead to some inflationary pressures which however, would not pose any serious threat. IV MICRO-LEVEL IMPACT
Bangladesh has been spared from the worst effects of the Global Financial Crisis although in the last few months, exports have decelerated at an alarming rate. Thus, in addition to non-RMG export sectors like leather, sea-food and jute products, smaller
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EXPORT FINANCE RMG units have turned sick, resulting in loan default, delayed or irregular payment of wages to workers, industrial unrest, and even shutdown of some units. It is difficult to establish the extent or magnitude of this problem but it is thought to be significant. This suggests that micro-level impacts (on individuals and households) could be important. While we have noted that remittances have continued to perform well, it is also correct that the rate of labour exports have fallen sharply in the last few months. It is difficult to know whether this is a short-term phenomenon or a precursor to longerterm change. This, along with the suspicion that large numbers of labourers are likely to be sent home, suggests that the domestic labour market will come under pressure. According to official sources 28,000 workers returned home during the first quarter of 2009, a figure that appears unexceptional. One way to assess the impact on poverty is to use the growth elasticity of poverty used by PRSP II, which suggests that with a GDP growth of 5.88 percent, 1.76 million people would emerge out of poverty. Using an alternative methodology (ILO), the employment impact of this growth would be around 2 million. It should be borne in mind that food price volatility in 2008 may have aggravated the poverty situation while growth, and low food prices in late 2008 to 2009, especially stemming from excellent agricultural performance, is likely to have had a very positive impact. An attempt was made to obtain a grassroots view of the GFC through focus group discussions with workers in selected sectors. Given the time constraint, three FGD were conducted in and around the city of Dhaka, with (a) RMG workers belonging to smaller units, (b) workers employed by the leather industry, a sector that has been hard hit by the GFC, and (c) returned and would-be migrants. IV.1 Garments Workers Focus Group Discussion, June 2009
The following Focus Group Discussion on garments workers, conducted on the issue Garment Workers Situation in Bangladesh-Impact of Globalization, was primarily aimed at understanding the consequences of global financial crisis on garments industry workers daily lives. Of the ten garments workers in the FGD, seven were female and three were male.10
10
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EXPORT FINANCE A brief review of the findings from the discussion is presented here. The following themes were addressed in order to gauge the implications of the global financial crisis on employment, consumption expenditure, education, health, social security and gender aspect of garments workers. Employment and earning: The respondents work in different garments industries. Most of them have several years of work experience in the garments sector. Some have directly entered the RMG industry from school while others have changed profession to get involved in the RMG industry. Employment opportunities seem quite limited. Sometimes higher paying jobs are found but distance from home imposes a constraint. Wage earning of the respondents is found to be very low. Only four of the ten respondents reported an income in the range of Taka 3000-5000 ($ 43 - $71). Helpers in the training period earn the minimum amount Taka 1200 ($17). In addition to wage income, only helpers, operators, and quality control personnel earn overtime, and all workers earn bonuses during the two EID festivals. All reported that their current earnings have fallen compared to the previous year. Moreover, their earnings are insufficient to meet daily minimum expenditure including cost of childrens education. Only one out of ten had an additional earning member in the family. Interestingly, most of the female workers were found to be single, having separated from their husbands. Only two respondents reported sending back money to their extended family in the villages. This seems to be a source of anxiety.
Income shortfall and coping strategies: During periods of income shortfall or emergency need, garments workers borrow money. Almost everyone has some form of personal loan, and they think that average loan is increasing overtime. The major source of borrowing is the nearby grocery shop, from where they buy necessities in credit and repay the loan when salary is received. Occasionally they also borrow money from comparatively high paid co-workers on short term basis. Everyone said that they tended to feel insecure due to continuing financial crisis.
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EXPORT FINANCE Consumption: Food consumption is mainly characterized by a preponderance of carbohydrates. Usually they take three meals a day but remain dissatisfied with the quality of meal. One reported that because of the high price last year, the situation was so bad that sometimes we had to go without food to be able to feed the kids. Generally, they consume cheap/ low quality rice. They eat fish twice a week. Vegetable intake is also irregular due to high prices and lack of time to cook. The respondents thoughtreveal that current consumption of vegetables was lower compared to last year. Most of them reside near their work places. Privacy issue is totally neglected as a number of people share a single room. Whenever landlords fix the roofs made of CI sheet, the rent is raised. Electricity supply is highly irregular. For cooking, 12 to13 people have to share the same gas burner. Almost all drink tap water. Water supply is also irregular. Number of bathrooms in the housing complex is far less than required. Queuing to use cooking burner and bathroom is a daily ordeal. The main mode of commuting to work is walking as most of them live very close to their work places. For traveling to distant places, when required, workers usually walk rather than commute, as they cannot afford transportation costs with their meagre income. Mobile telephone in the nearby phone/Fax service center is the major way of distant communication. Average expenditure on phone call is Taka 15 to 20 ($ 0.21 to $ 0.28 ) per month, which is reported to be inadequate. Male workers, in general, spend more on phone bill compared to their female counterparts. Health Condition General health condition of garments workers is very bad. Gastric problem is a common complaint but no specific treatment has been reported; often the pharmacists at the local drugstore prescribe medicines. Situation in this regard is unchanged between current year and last year. Education of Children
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EXPORT FINANCE Higher tuition is a barrier for childrens education. Although most of them send their children to school, they are unable to purchase necessary books and stationeries to support kids education due to extremely limited income. Moreover, these school going children suffer from different social status related problems in the school. Children coming from more affluent families look down on them and do not want to associate. This generates some form of inferiority complex among the children of the garment workers. In spite of persistent financial hardship, most of the workers are very eager to continue their childrens education rather than drawing them into the workforce, for remunerated income. Very few are found to have shifted children from school to work with the purpose of augmenting income. In decisions related to continuing education, sex of their children does not matter. This implies that sons and daughters are treated equally. With regard to aspirations from their off-springs (regardless of gender), opinions vary. One wants to educate her daughter up to the tenth grade, and another one dreams of making her daughter a physician. Interestingly, one respondent said: I want that my daughter completes 7th grade so that she can at least get a job in the garments industry. Gender Issue Female workers pointed out the advantages and disadvantages they faced in the garment industries, where they work. Most of them started working with a dream of a better lifestyle. Female workers get 3-months of unpaid maternity leave. They also get medical benefit if they fall sick while working. General perception is that workers were better off last year, compared to this year. However, managing jobs in the garments industry is relatively difficult for female workers due to the distance factor. Female workers prefer to work in nearby places due to security concerns. So, option of working places is relatively narrow for female workers. In the past, education was not compulsory for a garment job, but now it is a requirement that contributes positively to upward mobility. Female workers reported about verbal abuse too. Moreover, female workers are paid less than male workers depicting a clear picture of gender discrimination. The problems reported did not change at all compared to last
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EXPORT FINANCE year. No family conflicts or clashes have been attributed to working in garments industry. Security of Jobs and General Working Conditions Jobs in the garments industry are not secure. Major issues of complaint against employers are timely salary, overtime payment, weekly holidays, and irregular adjustment in the pay scale. Workers11, in general, feel helpless and vulnerable. Although they have taken garment jobs with the dream of improving their family living conditions, in reality, very little has been achieved. Workers have experienced severe constraints in maintaining themselves, and no significant improvement in family welfare and progress has been discernable, from their engagement in the garment industry. The situation is in no way different from last year. They think that BGMEA-Workers bipartite discussion might help resolve disputes. But BGMEA is reluctant to solve workers problems. The general feeling about BGMEAs inspection team is that they are unscrupulous and easily manipulated by the bosses to give a good report. Information About Global Recession and its Impact On Workers Lives The respondents know about global recession, as they mentioned that a recession has worsened peoples welfare globally. Due to the recession, the current situation throughout the world is worse than ever before. The reduced working hours in the months of October-December of last year was the direct consequence of this recession. They were in serious financial trouble at that time. Some reported that employers stopped paying overtime since then, which reduces their take-home pay. However, none of the respondents reported job loss due to shrinking export demand caused by the recession. However, workers think that global recession has little relationship with many of their day to day economic hardships. Instead, most of them are due to national unrest and domestic factors. The workers are not optimistic about a positive change in living standard in the next six months to one year, given their current socio-economic situation. They believe
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EXPORT FINANCE that consistent food price inflation and unadjusted pay scale will trap then into a lower standard of living. IV.2 Leather Industry Workers Focus Group Discussion, June 2009 The following Focus Group Discussion on the leather industry workers, conducted on the issue Leather Industry Workers Situation in Bangladesh-Impact of Globalization, primarily aimed at understanding the consequences of the global financial crisis on leather industry workers daily lives. Of the eleven leather workers in the FGD, eight were male and three were female.12 Employment and earning: The respondents are working in different leather industries in the Hajaribag area of Dhaka where many processing units are located. None of them have worked in other industries so far. They have been working in different branches for a long time, and work experience varies from three to forty years. Since the job is tough and demanding in nature, and restricts under 18 labour, getting a work in the leather industry is relatively easier. Regular working hours are from six in the morning to two in the afternoon. At first, workers work on a daily basis and later on monthly basis. Wage is counted on calendar day basis while payment is made on weekly/bi-monthly/monthly structure. Among the respondents, six of the workers work on monthly, three on daily, and two work on irregular payment system. Wage per calendar day for new and old workers has been fixed at Tk80 ($1.15) and Tk60 ($0.86). Temporary male and female workers earn at the rate of Tk 14 ($0.2) and Tk 11 ($0.16) per hour. The male workers earnings variy from Tk3100-4000 ($45-$58) while that of female workers lie in the range of Tk 1500-2500 ($22-$36) per month. Minimum wages in the leather industry is Tk 10-14 ($0.14-0.2) per hour. Contract basis work is uncommon in the small leather industries that mainly depend on subcontracts offered by large counterparts. So, payment in the former group of industries is generally on a weekly/monthly basis. Overtime work opportunity depends on the number of orders available to the factory. So, overtime work hours and earnings vary. In particular, after the Eid-ul-Azha when millions of animals are slaughtered as sacrifice raw leather supply shoots up and the workload becomes very heavy with a lot of opportunity of overtime work.
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EXPORT FINANCE Generally, overtime hour is from three in the afternoon to ten at night. However, in 2008, export of leather. Consequently, overtime work also declined as well. Almost all the respondents said that their income is inadequate even to maintain themselves. The existing minimum wage level in the leather industry is very low. Many have to supplement their wages through additional work, e.g. rickshaw pulling, working in tea-stall or grocery shops. Payment does not compensate for the extremely demanding jobs in tanneries. If better opportunity is given, most of the respondents said they would change their tannery job and switch to another industry or to some informal work like rickshaw or van pulling. Taking Loans and developing coping strategies Since wage earning from leather industry is even barely enough to maintain an individual, almost everyone has to take loans to some extent from neighbors, friends, and the local grocery stores. Some have also borrowed money from NGOs, associations and cooperatives. Permanent workers who are entitled to take loans from provident fund (once service age exceeds ten years), borrow money in advance from provident fund and repay it in installments. Incentive package of competing countries Bangladesh has one of the highest costs of finance. The entrepreneurs opined that the interest rate is over 14 percent, and this is increasing cost of production. On the other hand the competitors in other countries have access to various incentive packages. China has been increasing the tax rebate for textile and clothing industry, from 11 percent to 14 percent. Interest rates have been reduced from 6.93 percent to 6.66 percent. Pakistan has also proposed a package for its textile industry: devaluation of currency by 30 percent, a fund for research and development , withdrawal of 15 percent sale tax on ginned cotton, reduced interest rates ( from 17.14 percent to 3.5 percent), provision of 1.5 percent subsidy for export, and total withdrawal of VAT and Tax for imports of some machineries and dice chemicals. India has devalued its currency by 25 percent, provided 50,000 crore (Indian Rupee) under the Technology Upgradation Fund, reduced interest rates from 17 percent to 6 percent, provided 60000 crore rupees for increasing cotton production, and added 10% capital subsidy
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EXPORT FINANCE for extra grant, and had not withdraw 5% interest subsidy under the TTUF, and withdrew import Tax for some machineries and chemicals used in clothing sector Buyers pay when goods are sold The exporters opined that the L/C is in favour of the buyers. After the goods have been shipped, some buyers negotiate to pay 30 percent and only if the goods are sold the rest of the payment would be made or else they would return the goods. Request to delay shipment Even after orders have been confirmed, buyers are requesting for delaying shipments. Importers are shifting delivery by up to two months, causing warehousing problems, problems with timely repayment to banks and eben payment of wages to workers. Even reputed buyers like H&M had placed orders and confirmed and then asked to wait. Industry insiders estimated that up to 3 percent of orders will be cancelled.
Short-term Outlook and Opportunities for RMG Survival of some firms at stake Those firms who have good reputation will survive and expand. There will be cash flow problem for some small firms Manufacturing firms will face problems related to storage, disrupted project planning due to delayed orders, declining production, and cash flow Banks will have problems as (a) goods already exported, but payment not received; (b) goods produced but not shipped (c) goods produced but payment renegotiated Impact on wage payment: Firms will find it difficult to pay salary to workers
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EXPORT FINANCE Industrial unrest has increased in the RMG sector as many smaller firms find it difficult to cope. In its headline news on July 1, 2009, The Daily Star squarely blames the recent industrial unrest in the RMG sector on the spillover effects of the GFC. It reports: The low-paid workers have been demanding regular payment and re-opening of the closed factories soon. But the sick and sub-contracting factories can hardly pay their workers because of a huge shortfall in orders from big factories and international buyers in the wake of the global recession. Margins are thin and sub-contracts are difficult to obtain, forcing many units to shut down. The larger, more diversified units are managing to survive with some difficulty, and are expected to be able to ride out the storm. Media reports have painted quite an optimistic picture for the prospects of the RMG sector. Thus The Daily Star states in its business page (Jul 12 , 2009): With the signs of economic recovery in the western world, foreign buyers now lean towards Bangladeshs ready made products, placing orders at an enhanced rate. Industry chiefs think if current trends in the world market continue, it will fetch a boon for Bangladesh. For the first time, and very signifivcantly, there is keen interest from Japanese buyers as well.
IMPACT ON REMTTANCES Remittance flows to Bangladesh have grown rapidly over the last ten years from around 3 percent of GDP in 1995 to around 9.5 percent today, despite concerns that outflow of migrants is in decline. From January 1 to May 30 last year, 3.78 lakh workers went abroad. The figure this year for the same period is 2.12 lakh. Last year 9 lakh workers went abroad while this year this figure is likely to come down substantially, to around 5 lakh. According to a Daily Star report (July 2, 2009): Labour outflow is falling as Saudi Arabia, Dubai and Malaysia, three main job destinations for Bangladeshis, are not hiring workers from the country now. It further notes, remittance inflow is still showing an upward trend but the situation may change at the end of the year...
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EXPORT FINANCE A total of some five million Bangladeshis are estimated to be resident overseas. While initially most of the migrant labour went to the Middle East, mainly to Saudi Arabia, there has been considerable diversification of destination countries in more recent years. Today, migrants are found in significant concentration all over the Far East and Europe, including Malaysia, South Korea and Japan and in Germany and Italy. Other traditional destinations (USA and UK) also remain very important both as a source of remittance and as a favoured destination. Remittances play a crucial role in the Bangladesh economy today. At the macro level, it has helped to ease our foreign exchange constraint, stabilizing the exchange rate and allowing Bangladesh to import much needed raw materials, intermediate goods and capital equipment. Comfortable reserves of foreign exchange have also contributed to overall macro stability and have reduced aid dependency, along with rapid growth of our export sector. At the micro level, remittances have had a beneficial impact on household consumption, reducing poverty and creating jobs. The local economy has also benefited indirectly as large out-migration, especially from some parts of the country led to localized labour scarcity, causing wages to rise. Inevitably, there are costs as well, which unfortunately have not been adequately assessed. These relate to the hardships and deprivations that migrants face both during the risky process of migration and while staying in the host country. Both social and economic costs are faced by families of migrants, especially when heavy debts have to be incurred and remain unpaid for long periods of time. Another well-known impact has been on land and real estate demand both in urban and rural areas, especially from where migration has been particularly large. Thus, migration and remittances are not unmixed blessings although the popular view tends to highlight the positive aspects only. Given the GFC, there is every reason to be worried about the demand for migrant labour in host countries and the possible impact on remittance flows back to Bangladesh. There have been well-publicized incidents of migrants being sent back home or visas being cancelled even before visa-recipients were able to leave for their destinations. In many cases, these incidents were not directly related to the GFC but
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EXPORT FINANCE were rooted in domestic problems in the host countries. Nevertheless, there is a sense that the situation could worsen further. The media has quoted official agencies to report that the number of migrants leaving Bangladesh has halved over the past one year. It is reported that the number of migrants declined by over 36 percent in JulyMarch 2008-09 compared to the same period in the preceding year. At the same time around 30,000 workers returned home during the first quarter of 2009. There is no immediate reflection of these figures in the remittance data although it is likely that such an effect will take place with a lag of 1-2 years. Recent Trends and Patterns From 2003 to 2008, worldwide flow of remittances (i.e. the global remittance market) almost doubled (from USD 206 billion to USD 375 billion). Bangladesh experienced a dramatic rise in remittance growth even in 2008-09, rising by 22.4 percent over the preceding year. There has been a gradual change in the share of remittance flows by regions. From 1980 to 2006, the inflow of remittances from the Middle-East remained above 70 percent. However, since 2006, there has been a shift towards new sources, like USA, Canada, UK, Germany, Italy, Malaysia, and Japan reflecting considerable diversification of labour flows. The Kingdom of Saudi Arabia (K.S.A.) is the most important source of remittances for Bangladesh, followed by the U.A.E, U.S.A and U.K. The USA, KSA and UK account for almost 60 percent of total remittances (table 3.4). Germany, Italy and Malaysia have also become important labour destination countries for Bangladesh.
Consumption Respondents take three meals a day but are highly dissatisfied with the quality and quantity of food items. They consume low priced, low quality rice. They can never eat meat/protein daily. In every one or two weeks, they buy small fish. They can hardly remember when they ate big fish the last time. Meat is so expensive that they buy it
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EXPORT FINANCE once in every two/three months. For some people, meat is only consumed during festivals or when guests visit them. Compared to last year, prices of pulses have come down. Now, workers can consume low priced and low quality pulses like Anchor or kheshari. Similarly, vegetable intake is limited to low priced items. Most of the fruits are expensive, and therefore, relatively cheaper fruits, such as Jackfruit, are the only fruits consumed. In the past, male members of the family often used to take snacks outside their home. Now, the frequency of such practices have decreased. Interestingly women said they never eat outside. Leather workers with children said that they are unable to buy milk powder for their kids, as they exhaust their limited incomes in managing their plain subsistence. Most of the workers live close to the factory in which they work. Some of them live in a group, while others live in sublet housing with other families. They have to share toilets and even burner for cooking. Surrounding environment is not different from slums. Most of the houses have leaks in the roofs, and when it rains, the residents suffer more. The landlords fix the leaks but on condition of increased rents. Every year, rent is increased by a significant amount. The bills for utilities are paid with the rent. Electricity supply is irregular and gas burner for cooking requires queuing as many residents have to share the same burner. Water supply is inadequate as landlords provide only limited supply of water.
Childrens Education and Parenting Mothers stay most of the time with their children as fathers do not get enough time due to their jobs outside. However, some said that fathers give time after work. With a miniscule amount of income, workers in the leather industry cannot afford to buy toys or attend or arrange birthday functions for their kids. Five of the respondents have school going kids. The other respondents either have toddlers or have no issue at all. None of them have reported taking children out of school to work in spite of financial hardships. They are unwilling to stop schooling of the children even if their monetary situation worsens. Five of the respondents have daughters. The schooling decision is gender unbiased. None have restrained his/her girl child from schooling - rather they are committed to educating their daughters and
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EXPORT FINANCE sons. Interestingly, some expressed their views as follows: Web would prefer to educate our daughters more than our sons as the girls are more attentive and more meritorious. Security of Job Jobs in the leather industry are generally uncertain. Workers on a daily basis can be verbally retrenched at any time, while permanent workers are laid off through advance notice. In the light of the contract with trade unions, thirty to fifty percent workers are made permanent every year. Workers involved with trade unions are made permanent first. Permanent workers have some sort of certainty in their jobs as they are supposed to be informed four months before being laid off and must be paid all dues. Issues of Female workers Female workers, under-represented in the industry, are facing a lot of problems in the industries where they work. Their job is made permanent less frequently compared to the male workers. One respondent expressed her experience this way: I had been requesting for a long time to make me permanent but the owner did not pay any attention. Finally they agreed, but only after I got a prize in the International Womens Day. Being mostly temporary, female workers do not get any benefit in case they are laid off from work. Female workers thought that leather industry, in general, lacks equal rights for women. They are paid less than male workers for an equivalent amount of work. Since female workers are less in number and work under temporary basis, they cannot protest when injustice is done against them. The work environment is unfriendly for the women. They do not get pregnancy leave. Factories do not have separate toilets or prayer rooms for female workers. Sometimes they have to do heavy work for which they are not physically fit, but are paid less. Working besides high heat generating furnaces is also difficult for the women. There is no place for rest in case they fall sick while working in the factory. But no evidence is found regarding verbal abuses or physical assault in the factories. Awareness about global recession and its impact on occupation and daily life
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EXPORT FINANCE All of the respondents know about recession. They correctly identified that leather industry has been badly affected by global recession due to its high export dependency. The workers have attributed their reduced working hours in the factory to falling export orders due to this global recession. When export orders decline, factory owners substitute relatively older workers with young workers since they have to pay the new groups of workers, comparatively lower wage. However, none of the eleven respondents have been laid off in spite of export order contraction. The direct impact of the recession is lower working hours which has reduced their income, and made family maintenance more difficult. They have also related the deteriorated law and order situation with increased unemployment due to recession. To combat the recessionary affects on leather industries, workers suggested initiating production of leather processing chemicals domestically as well as increased production of leather goods, locally. However, workers revealed that situation has improved at present compared to the previous eight months. Expectation about the next six months to one year Workers, in general, are pessimistic about the future. In the context of this FGD issues raised here, they believe that situation will not change in the coming days if leather processing chemicals are not produced locally, continuing price hike of necessities is not checked and law and order is not controlled.
IV.3 Migrant Workers Focus Group Discussion, June 2009 The following Focus Group Discussion on migrant workers, conducted on the issue Migrant Workers Situation in Bangladesh - Impact of Globalization, primarily aimed at understanding the consequences of the Global Financial Crisis on Migrant Workers daily lives. Of the nine migrant workers in the FGD, eight were male and one was a female.13 A brief review of the findings from the discussion is presented here. The following themes were addressed in order to gauge the implications of the global financial crisis on employment, consumption expenditure, education, health, social security and gender aspect of migrant workers.
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EXPORT FINANCE Employment and earning: The respondents went abroad for work to achieve a better standard of life. All the migrants, except one female respondent, had migrated willingly and the decision for migration was taken at the family level. Before migrating, they earned approximately Tk 4000-5000 ($60-$70) per month, on an average, in Bangladesh. So, they left for foreign destinations with the expectation of a much higher income. But their expectations and dreams were dampened from the very beginning as most of them could not find a job on arrival. They had to wait quite long to get a job. Six of the respondents went to UAE, two to Singapore and one to Saudi Arabia. They worked in different places, such as, construction firm, shipyard, and hospitals. Income earning was lowest in hospitals, an amount of Tk 8200 ($118). Monthly earnings of those who worked in shipyard and construction firms ranged from Tk 20000-22000 ($290-$319) and Tk 25000-30000 ($362-$435). Wage was determined on a daily basis although payment was made either in the middle or end of each month. The respondents worked abroad for various durations during the period of September, 2008 to June, 2009. Six of them stayed for eight months, one for six months, and another one for five months. However, life in a foreign location was full of extreme misery and hardship. The job contract was flawed and violated in various ways. Employers forcefully kept their important paper and documents (passport, work permit, ID card, contract paper etc) at the very beginning. According to the contract the employer was supposed to pay for residence, food and medical allowance. But they provided only storage quality room for residence purpose, and nothing else. Payment was less than the said amount and very much irregular. All of them had to overwork without any additional overtime payment. Problems faced while abroad and its consequences: All the respondents had to come back home permanently at different periods within the current year, because of inadequate and irregular payment. Their employers kept all the papers and documents at the beginning. So, if they were fired from that company, they were bereft of their documents and consequently they became illegal. Other companies utilized this same strategy to exploit them. In the face of such terrible conditions, they tried to complain and seek help from the resident Bangladesh Embassies in those countries but could not get any response. They blamed the unscrupulous manpower agents in their home
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EXPORT FINANCE country for their immense suffering. Due to inhuman living experiences abroad, most of them are not interested to migrate for work anymore. Given a second opportunity, and better employment options, only a few are willing to migrate again, or to send their families or friends abroad for work. Migrant workers current problems in Bangladesh Being deceived and forced to return to Bangladesh, the migrant workers find life worse and socially awkward. They are in severe financial distress. Their misfortune and return have made them socially distressed. Again, family conflict rising from unsuccessful migration is making their life miserable. Some have fled away from their village, avoiding people who had lent them money for migration. Most of them have no work at present and are not optimistic about obtaining any decent jobs. So, they are accumulating more loans, mortgaging land, selling real assets like cows and trees. Two of the migrants have reported to be working in subsistence farming, and other two are working temporarily on a salary of Tk 5000 ($72) per month. Money sent from abroad The migrant workers earned such poor amount of money, that they could not repay (recover) even a tiny portion of the loans they borrowed (spent) for going abroad. Only fifty six percent of the respondents have sent remittances amounting to Tk10,000 ($144) once or twice during the first few months. Most of these remittances have been spent for their families living expenses rather than being invested in any productive activities. Except one, all of them had to return empty handed. Only one managed to bring a little amount of money. Consumption Food consumption and housing standards are very poor. Migrant workers are unable to purchase clothes, shoes or cosmetics according to their needs. Even consumption of soap, washing powder and cosmetics has been drastically reduced compared to the previous year. Migrant workers mostly reside in their village. On account of the huge debt burden, those who have fled away from their village homes, reside in sub-let rooms in the cities where they are temporarily employed. Housing condition is utterly poor.
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EXPORT FINANCE Surroundings are dirty and privacy issue is totally neglected as a number of people share a single room. House rent has increased compared to last year, and with the current unemployment, the increased rent is more burdensome. Respondents living in villages appear to enjoy better living conditions and better sanitation. None of the respondents have personal cell phones. So, mobile telephone in the nearby phone/Fax service center is the main mode of distant communication. But mobile charges are not affordable on a sustained basis. They reported use of cell phones only in cases of emergencies. Education of Children Only three respondents have families with children and two families have school going kids. Both these families send their children to school. They intend to continue their education as much as possible in spite of all financial constraints. They are gender sensitive and progressive, and do not want to restrain their daughters from being educated. Gender Issues: Women in Decision Making, Parenting, and Evidence of Gender Violence Among the respondents, women take care of the children while males give one or two hours a day. Women in the respondents family do not spend much time outside their homes. Although males migrated after discussing with family members, the only female migrant worker in this FGD, reported that she went abroad due to pressure from her husband. She was unwilling to migrate and her family members or relatives were not consulted in this matter. However, for migrating abroad, she did not face any ill remark or criticism from anybody in the society. While travelling to the foreign country and staying abroad, the female respondent said that she did not face wage or gender discrimination, and did not suffer from any type of physical assaults. Rather her problem was similar to those faced by male migrant workers i.e. no overtime, irregular payment, lack of official documentation and being illegal etc. However, like the male workers she also reported verbal abuse and mental torture at the hospital she had worked in Singapore. Information about global recession and its influence on current problems
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EXPORT FINANCE They have little knowledge about global recession and they do not see any clear association of their job loss, return and subsequent sufferings in their daily lives with the global crisis. Their struggle abroad was mainly because of deceitful manpower businessmen and middlemen. In the home country, they are not getting jobs because of a squeezed job market and reduced work opportunity. They reported incidents of forced return from abroad have decreased although they had witnessed an escalation in number of returned migrants at some point during the end of last year. Recommendations to improve the situation After facing traumatic experiences while working abroad, respondents have suggested some ways to improve the current situation. Government should ensure that migration cost is not higher than what is stipulated - currently it is Tk 84000 ($1200). Unscrupulous activities of the middlemen and agents should be strictly checked. The job contract should be signed in the presence of recruiting agency and government representatives. Besides, the bilateral relationship with foreign countries, particularly those who take workers from Bangladesh, should be improved, and Bangladesh embassies in those countries need to be made more effective. After Bangladeshi citizens have migrated as workers, both the government of Bangladesh and the foreign country officials should monitor migrant workers right to ensure their welfare. All the respondents had to come back to Bangladesh permanently at different periods of the current year because of inadequate and irregular payment. Although at some point of time, while travelling to their foreign destinations, they were legal migrants, their situation became vulnerable when their employers or brokers confiscated their legal documents to gain control over them. Thus, many migrants who were bonafide workers subsequently found themselves stranded in a foreign country and helpless against the forces of the authority. The rigidity of the governmental machinery in a foreign country became oppressive due to the suspicion and stigma usually attached to migrants from poor countries. Thus, devoid of government of Bangladeshs support and patronage, they were pushed back. In the face of such terrible conditions, they tried to complain and seek help from the corresponding Bangladesh Embassies in those countries but did not get any response. They blamed the unscrupulous manpower agents in Bangladesh for their terrible sufferings and unexpected return. Due to inhuman living experiences in the foreign countries, most of them are not at all
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EXPORT FINANCE interested to migrate for work anymore. Given a better opportunity, only a few are willing to migrate again, or to send their families or friends abroad for work.
Migrant Workers Current Problems in Bangladesh Being deceived and pushed back home, the migrant workers find life worse and socially awkward. They are in severe financial distress. Their abrupt return to Bangladesh has made them mentally and socially distressed. Again, family conflict rising from unsuccessful migration makes their life miserable. Some have fled away from own village being afraid of people who lent them money for going abroad. Most of them have no work at present, and, are not getting any decent jobs. Optimism about the future The migrant workers are not optimistic about a positive change in living standard in the next six months to one year, given their current socio economic context. They are very afraid of the future as they do not see any signs of increased employment opportunity in Bangladesh in the near future. The three FGDs reported in this section bring out in stark terms the very difficult livelihood options and strategies pursued by workers and migrants, both men and women. What comes out quite clearly is that there is a some impact of the current global crisis at the grassroots level, alluded to both by RMG and leather workers, but this is mainly in terms of reduced earnings due to declining overtime, irregular payment, reduced working hours rather than outright employment. The spectre of large scale redundancy in the industrial labour sector remains a distant possibility only. The brunt of the impact really is in terms of lost or foregone opportunities because of the slowdown of exports, and consequently a general slowing down of investments, imports, and the usual knock-on effects on allied services sectors, and ultimately on employment. V. MITIGATION AND POLICY
The government considers the threat to food security the most serious threat to the economy and has given the food, agricultural and related sectors the most attention. There was widespread concern that the GFC would have deep and profound impact
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EXPORT FINANCE on the economy, especially through the export and the remittance channels. These however, have held up very well, although in the last 2-3 months, the rate of export deceleration has increased. The export sector and export dependent industries have been adversely affected by the global downturn but other domestic factors have had a much greater impact, especially the energy crisis in the country, and a deteriorating law and order situation. These additional factors have increased costs while the GFC has led to squeezing of margins to its very core. The situation has become very difficult for small and even medium sized plants while even the larger ones are now wary of expanding investment in capacity or new units. The mitigation strategy of the government to date consists of a number of measures that include a stimulus package that was launched in April, a much expanded budget with a focus on agriculture and social safety nets, extensive food and fertilizer subsidies, and scaled up agricultural credit. A relatively small part of the stimulus package has been allocated for direct support to the export sector. The Stimulas Package A stimulus package was unveiled by the government in April 2009 to combat the effects of the global financial crisis. The additional allocation under this package in the budget was BDT 34.2 billion, of which agriculture claimed the lions share (BDT 15 billion) with another BDT 5 billion allocated for agricultural credit. Power got BDT 6 billion while food subsidies received BDT 3.7 billion. An amount of BDT 4.5 billion was retained for subsidies to exports. It should be noted that these were in addition to existing allocations under these heads. It is clear that the main thrust of the package was to promote agricultural production through credit, and subsidies on fuel and fertilizers, and to provide cheaper food to disadvantaged groups. The small allocation for export subsidies despite strong pressure from the private sector shows that the government was not very worried about the impact of the GFC on this sector.14 Budget: 2009-10 The government has announced the new budget for 2009-10 which is large by historical standards at over 117,000 crore BDT (or 1170 billion) consisting of an ADP of BDT 30,000 crore. The size of the ADP is 19 percent higher than that of the preceding year and 33 percent higher than the revised ADP for 2008-09. By any count, this is an ambitious target, set in part because of the uncertainty surrounding
14
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EXPORT FINANCE economic trends, both domestic and international. On the domestic front, Bangladesh has in recent times been hit by two major cyclones. It has also been badly hit by the global commodity market volatility in 2008, and is wary of further shocks emanating from the global financial crisis or from fresh natural disasters or a poor harvest. It is these concerns that have been reflected in the budgetary allocations for 2009-10. Agriculture has received renewed interest attracting the largest allocation under the ADP at 19 percent, with transport at 15 percent, energy and power at 14 percent and education at 13 percent. Apart from its agriculture focus, the new budget has also given duty relief for industry in the form of reduced taxes on imports of capital goods and machinery, thereby seeking to stimulate private investment. The interest rate has also been capped by the central bank at a maximum of 13.5 percent, down from the average of 15.5 percent earlier, again intended to encourage investment. Large allocations have been made for food, fertilizer subsidy and for social safety nets, including new programmes like the Employment Generation Scheme, and the one house one farm scheme. Agricultural Credit The central bank has announced a liberal, multi-targeted and inclusive farm credit policy worth BDT 11500 crore (115 billion) which is 23 percent higher than the last fiscal period a significant scaling up. Loan sizes are also set to be raised. A special focus on backward areas and small/marginal farmers has been stipulated, along with new mechanisms for delivery including linking up with NGOs, replacement of collateral by community-based guarantees, and disbursement in the presence of local elite and officials, and extension into new commodities including fruit and vegetable. There will nevertheless be implementation challenges that will ultimately determine the efficiency and effectiveness of the approach. A pilot exercise is advisable to fine tune delivery if the program is to avoid degeneration into a pure patronage distribution mechanism. Another problem surrounds the whole question of the missing middle the problem of effectively and efficiently reaching the medium farmer. The medium farmer is the most productive component of the agricultural sector and any attempt to stimulate agricultural growth, bypassing them, is likely to be successful. Social Safety Nets
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EXPORT FINANCE This defined as all kinds of cash and kind transfers to the poor, including welfare activities, unemployment benefits for retrenched workers, subsidized healthcare, shelter for the homeless, subsidized diesel, pension benefits etc. geared to reduce vulnerabilities of the poorest. During the last two decades, the government of Bangladesh has been pursuing a number of safety net programmes. Currently, there are five types of programmes in place: cash support programmes, (b) food aid, (c) special programme for poverty reduction, (d) self-employment through microcredit, and (e) specific poverty reduction programmes.The safety net programmes received an allocation of 2.8 percent of the GDP in 2008-09. Over time, there has been a shift from the charity approach to the development approach. In the current budget, these types of programmes have been further expanded and there are proposals for scaling up. Traditionally, some groups have always been left out, including ethnic minorities, backward regions like the char, haorss and monga areas, and occupational minorities. There seems to be greater awareness of the need for better targeting along some of these categories, as borne out by the explicit references made in the agricultural credit policy recently announced. Problems that remain include low coverage, inappropriate targeting, leakages and weak implementation. Need to Shift Gear? Focus on food security and agriculture is correct, but need to move on to derive benefits from new/emerging opportunities: this calls for incentives for the private sector Position ourselves in order to gain from the recovery: provide incentives to enter into new markets or diversify exports. Incentives to expand manufacturing capacity Assist in setting up captive power plants; Activate PPP: focus on energy Review interest rate policy: widely perceived to be too high and a constraint to growth Reduce business costs and improve security and law-order Small firms need special support: Nothing done for them so far but they are an important source of employment; also unrest hurts everyone
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EXPORT FINANCE Fine tune safety nets: too many now, need to assess and focus on the most effective and most efficient. Same is true for distribution of subsidies/credit: effective mechanisms missing Need for flexibility: Uncertainty is large world markets can turn volatile once more or we can be struck by another natural disaster so need to develop a large emergency fund.
CHAPTER 9 - CONCLUSION
Learnings/Suggestions through this project: Export Finance is a very important branch to study & understand the overall gamut of the international finance market. Availability of favorable 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.
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EXPORT FINANCE 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. ECGC and EXIM Bank take a lot of efforts for Export promotion. The strategies of these 2 agencies in India should be flexible & their finance schemes should be constantly synchronized 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.
Credit and finance is the life and blood of any business whether domestic or international. It is more important in the case of export transactions due to the prevalence 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. Production and manufacturing for substantial supplies for exports take time, in case finance is not available to exporter for production. They will not be in a position to book large export order if they dont have sufficient financial funds.
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EXPORT FINANCE Even merchandise exporters require finance for obtaining products from their suppliers. Export in simple words means selling goods abroad. International market being a very wide market, huge quantity of goods can be sold in the form of exports. Export refers to outflow of goods and services and inflow of foreign exchange. Export occupies a very prominent place in the list of priorities of the economic set up of developing countries because they contribute largely to foreign exchange pool. Exports play a crucial role in the economy of the country. In order to maintain healthy balance of trade and foreign exchange reserve. It is necessary to have a sustained and high rate of growth of exports. Exports are a vehicle of growth and development. They help not only in procuring the latest machinery, equipment and technology but also the goods and services, which are not available indigenously. Exports leads to national self-reliance and reduces dependence on external assistance which howsoever liberal, may not be available without strings. Though Indias export compared to other countries is very small, but one of the most important aspects of our export is the strong linkages it is forging with the world economy which is a great boon for a developing nation like India. 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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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 customers on credit. 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
BIBLIOGRAPHY
Books Referred: Export What Where & How Export Marketing by Paras Ram by Michael Vaz
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EXPORT FINANCE Export Management by T. A .S. Balagopal
Newspapers and Magazines Ref erred: Business India
Economic Times Internet Websites:

www.google.com www.economictimes.com www.rediff.com
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EXPORT FINANCE

EXECUTIVE SUMMARY T.Y.B.M.S. 2012-13

CHAPTER 2 - EXPORT FINANCE 2.1 - INTRODUCTION

2.2 - CONCEPT OF EXPORT FINANCE:

CHAPTER 3 - TYPES OF EXPORT FINANCE

EXPORT FINANCE FORMS OR METHODS OF PRE-SHIPMENT FINANCE:

Special Pre-Shipment Finance Schemes:

EXPORT FINANCE FORMS/METHODS OF POST SHIPMENT FINANCE

How are Disbursements made under this Program?

CHAPTER 4 - LETTER OF CREDIT

100 Sets 'ABC' Brand Pneumatic Tools, 1/2" drive,

Moonbeam Port, Export-Country to Sunny Port, Import-Country Prohibited Permitted

CHAPTER 5 - SOME IMPORTANT CONCEPTS IN EXPORT FINANCE

5.1 - FORFEITING Forfeiting is a mechanism of financing exports.

5.3 - Supplier's Credit for deferred payment exports

CHAPTER 6 - MAJOR FINANCIAL AND OTHER INSTITUTIONS

6.1 - EXIM BANK

ASSISTANCE OFFERED BY EXIM BANK

FUND BASED ASSISTANCE

NON-FUND BASED ASSISTANCE

FINANCIAL GUARANTEES. ADVISORY AND OTHER SERVICES.

A. FUND BASED ASSISTANCE: Assistance to Indian Exporters:

2. NON-FUND BASED ASSISTANCE Guarantees and Bonds:

EXPORT FINANCE Advisory and Other Services:

(b) It advises Indian exporters on global exchange control practices.

Loans to Indian Entities

A RANGE OF EXPORT SERVICES PROVIDED BY EXIM BANK

EXPORT FINANCE Financial Training - Poland

EXPORT FINANCE Market Potential for Denim in South East Asia

risks involved in exports on short-term credit.

FINANCIAL GUARANTEES issued to banks in India to protect them from

SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks which

(B). SPECIFIC POLICIES

EXPORT FINANCE SERVICES BIDS / CONTRACTS On Cash Terms

On Deferred Payment Terms

For any amount: Working Group.

under Section 80 filed by Ipca Labs

The division bench comprising of Justice S.H. Kapadia &

PERFORMANCE OF KEY SECTORS

24.93 16.70 9.22 6.88

Table 2 Growth of Exports to EU (Jan-Mar 2009 over Jan-Mar 2008)

Woven Knit Fish Home Textile Headgears Plastics

Bangladesh 22.31 23.23 -10.96 6.06 34.91 -13.86

China 14.81 25.95 6.94 1.98 3.71 -3.25

India 13.82 -0.48 8.46 0.09 4.70 -

Pakistan 19.33 -4.89 -100.00 7.43 15.60 19.31

Sri Lanka 10.18 15.99 13.73 -10.34 11.58 -22.34

EXPORT FINANCE 31.16 23.98 -

Source: Statistics Department, Bangladesh Bank.

Industrial Raw Materials Others

% Change Mar/Feb Commodity Non-Energy Energy

Apr/Mar 4.1 5.7 3.0

May/Apr 9.7 4.9 13.1

% Change May 09/May 08 -43.9 -25.9 -51.7

2.9 -0.1 5.1

EXPORT FINANCE Export Management by T. A .S. Balagopal

Newspapers and Magazines Ref erred: Business India

Economic Times Internet Websites:

www.google.com www.economictimes.com www.rediff.com

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