Export Finance from Banks

IMI, Kolkata
2018

1
Why Export Finance?
Payment
Purchase Export on Collection of
to
of RM Creditors
Credit Cash from
Receivables

Time
O A B C

• Mismatch between the Time of Cash Inflow and Cash Outflow

• No problem in case own Funds are available
• Banks offer Funds to tide over the deficits in the Net Cash Flow

2
Balance Sheet: A Recap
Assets = Liabilities + Equity
LTA + CA = [LTL + CL] + Equity
CA = [LTL + Equity – LTA] + [CLOBB + BB]
CA = NWC + CLOBB + BB

NWC
Bank
Borrowings
TCA

CLOBB

3
Banking Arrangements
(a) Sole Banking: WC is availed from a Single Bank
(b) Consortium Banking: A Consortium of Banks [led by a Lead Bank]
provides the Working Capital to the Firm.
The Assessment of Working Capital is done by the Lead Bank and all the
other Member Banks have to accept the Assessment.
Participating Banks are bound by the Inter-se Agreement
(c) Multiple Banking: A group of Banks provides the WC to the firm
Every Member Bank individually assesses the Requirement
No Inter-se Agreement exists

• Banks are immaterial, Banking System is Important

• A Firm should not be Over-financed or Under-financed by the
Banking System
4
How Much Finance?
• MPBF = Maximum Permissible Bank Finance for Working Capital
• MPBF from the entire Banking System is Important
• As per Extant Guidelines by RBI, the MPBF can be assessed by any
of the following Methods:
(a) MPBF – Method I
(b) MPBF – Method II [Most Popular]
(c) Turnover Method [Appropriate for Traders]
(d) Cash Budget Method [Appropriate for Seasonal Industries]
• MPBF is always Assessed for the Future [Next 1 or 2 Years]
• Sum Total of WCF from all the Banks <= Assessed MPBF [A MUST]

5
 MPBF [Method I]

As on As on As on
31.3.2018 (Rs. 31.3.2019 (Rs. 31.3.2020 (Rs.
Crores) Crores) Crores)
Srl No Computation of MPBF [Actual] [Estimated] [Projected]
1 Current Assets 17.88 26.95 27.14
2 Current Liabilities Other Than Bank Borrowings 9.09 13.78 12.78
3 Working Capital Gap ( 1- 2 ) 8.79 13.17 14.36
4 Minimum Stipulated NWC ( 25 % OF 3 ) 2.20 3.29 3.59
5 Actual/Projected NWC 4.65 5.82 7.01
6 Item 3 - Item 4 6.59 9.88 10.77
7 Item 3 - Item 5 4.14 7.35 7.35
8 M.P.B.F( lower of 6 and 7 ) 4.14 7.35 7.35

6
 MPBF [Method II]

As on As on As on
31.3.2018 (Rs. 31.3.2019 (Rs. 31.3.2020 (Rs.
Crores) Crores) Crores)
Srl No Computation of MPBF [Actual] [Estimated] [Projected]
1 Current Assets 17.88 26.95 27.14
2 Current Liabilities Other Than Bank Borrowings 9.09 13.78 12.78
3 Working Capital Gap ( 1- 2 ) 8.79 13.17 14.36
4 Minimum Stipulated NWC ( 25 % OF 1 ) 4.47 6.74 6.79
5 Actual/Projected NWC 4.65 5.82 7.01
6 Item 3 - Item 4 4.32 6.43 7.58
7 Item 3 - Item 5 4.14 7.35 7.35
8 M.P.B.F( lower of 6 and 7 ) 4.14 6.43 7.35

7
What Does RBI Say?
• Focus on increasing Exports – Exports EARN FOREX
• Minimum 12% of the Net Bank Credit to be allocated for Financing
Exports
• Concession in Interest Rates:  PLR-2.50% upto 180 Days
• > 180 Days: Freedom of Banks to decide the rates
• Timelines for Credit Decision
(a) Fresh Sanction/ Enhancement: Within 45 Days
(b) Renewal: Within 30 Days
(c) Adhoc Facility: Within 15 Days
• Quarterly Reporting to RBI – Form C

• CONCERN: Export Credit should not be Misused

8
WC Finance for Export
Pre-Shipment Credit
• Fund Based Credit facility given for executing all activities upto the Shipment
Stage
• This type of facility is also called Export Packing Credit (EPC)

Post Shipment Credit

• Fund Based Credit facility extended after the completion of Shipment

9
Pre-Shipment Credit
• The facility is given to cover the following :
(a) Purchase of Raw Materials
(b) Expenses incurred for converting RM to FG
(c) Warehousing
(d) Packaging
(e) Expenses incurred for putting the consignment on board

• EPC is disbursed against LC [received for the customer] or against confirmed

order – This is done to ensure that the facility is used only for the purpose f
exports

• Banks endorses the LC/Order Copy so that the exporter cannot avail further
credit from any other Bank
10
Pre-Shipment Credit…Contd.
• Margin is Calculated on the FOB value of the order

• EPC to be liquidated from the Post-Shipment Credit

• In case EPC is liquidated from the Domestic Sources, Banks charge a penal
interest

• Disbursement is done directly to the Suppliers. In case of cash disbursement,

if any, the amount is credited to the Current Account of the Exporter

11
Post-Shipment Credit
• Credit is given after the Shipment is completed
• Post-Shipment Credit is disbursed on the basis of the Export Invoice & the
Bill of Lading
• Credit is given on the CIF value of the consignment
• 0% Margin on the Post Shipment Facility
• A part of the post shipment credit is used to liquidate the EPC [entirely]
• In case of Pre-shipment Credit, Bank has recourse to the RM, WIP and FG.
But in case of Post-Shipment Credit, Bank has recourse to only Receivables
• To reduce the risk of delinquency, Bank stipulates the following:
(a) Confirmed LC
(b) Rating of the Overseas Buyer by International Rating Agency [like D&B]
(c) ECGC Coverage to hedge Counter Party Risks
(d) Country Risk Rating [In case, the Sovereign Risk is high, Bank refrains
from providing Export Finance] 12
Post-Shipment Credit…Contd.
• Post Shipment Finance is to be liquidated out of the Export Proceeds
• Export Proceeds are to be realized in all cases within 180 Days [except for
Capital Goods Export]
• If Export Proceeds are not realized within 180 days, RBI has to be intimated
• For an Exporter, writing off Export Receivables requires a series of
formalities. The formalities act as a deterrent for writing-off Export
Receivables
• The safeguards are adopted to counter arbitrage opportunities arising out of
the availability of Export Finance at Concessional Interest Rates

13
Export Credit - Steps
• Application to Banks
(a) Past Financials/ Bank Statements
(b) Business Model/ Statutory Clearances
(c) MOA/ Partnership Deed
(d) CMA Data

• Credit Rating by Banks – Ability & Willingness to Pay, Caution List by RBI,
DGFT, ECGC Approval List

• Sanction of Facility

• Document Execution

14
Export Credit - Formalities
• Security Creation
For WC Finance
(a) Primary Security – Current Assets
(b) Collateral Security – Fixed Assets, Other Collateral Security, Personal
Guarantee, Corporate Guarantee
(c) Charge Registered with ROC – In case of Limited Families

• Disbursement

• Periodical Statement of Export Orders, LCs submitted to Banks

• Repayment

15