Export Finance

Export Finance is bound by

RBI Guidelines Exchange control regulations under FEMA 1999 Trade control regulations issued by DGFT International Chamber of Commerce Guidelines Uniform Customs & Practice for Documentary Credits (UCPDC) ECGC guidelines. FEDAI guidelines Export finance is a short term working capital finance allowed to an exporter. It is provided as a Pre shipment credit or Post Shipment credit to them.

Pre-shipment Credit
Means any loan or advance provided by the bank to an exporter for purchasing, processing, manufacturing, packing of goods, prior to its shipment . It is provided on the basis of A letter of credit, opened in favour of the exporter/ some other person, by an overseas buyer, or A confirmed and irrevocable export order for the export of goods from India or Any other evidence of an export order for export from India .

Post-shipment Credit
Means any loan or advance provided by a bank to an exporter of goods from India from the date of shipment of goods to the date of realization of export proceeds.
It also includes any loan or advance granted to an exporter on the security of any duty draw back allowed by the Govt from time to time.

Type of Pre/Post shipment Credit

Types of Pre shipment credit Packing credit in rupees Packing credit in foreign currency
Types of Post shipment credit Export bills purchased/discounted/ negotiated. Advance against export bills sent on collection. Advance against Duty draw back.

Interest Rates on Export Credit in Rupees

Interest rate on export credit in rupees is indicated as a ceiling rate linked to the PLR of the bank . The interest charged to the exporter should be less than this ceiling rate. The ceiling rate- Not exceeding the BPLR minus 2.5% for all types of export credits in rupees

Running A/c Facility for Pre-shipment Credit

Under the Running account facility (RAF) started in 1992, banks can grant PC with out insisting on prior lodgment of export LC/ export order . RAF is granted only to exporters whose track record is good. Running account facility is granted only if the necessity to RAF is established by the exporter, Under the RAF, export LC/firm order should be produced within a reasonable period, (with in one month from the date of availment Proceeds of bills received for negotiation / collection may be adjusted against the earliest outstanding Pre shipment credit on FIFO basis so that the old PC should not remain o/s beyond the normal period of 270 days.

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RBI Refinance Against Export Credit

To encourage banks to extend more export credit to the exporters and to ensure the flow of credit to the export sector, RBI has been providing Export credit refinance to the SCBs, This is provided as a certain percentage of their out standing export credits, both at the pre shipment level and post shipment level. Export credit refinance to banks are given at concessional rate The quantum, of refinance and export credit refinance formula is revised by RBI periodically depending on the credit policy of the Bank.

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Letter of Credit (L/C)

It is a written commitment to pay, by a buyers or importers bank (called the issuing bank) to the sellers or exporters bank (called accepting bank, negotiating bank or paying bank). Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits (UCP). UCP is the internationally recognized set of rules governing the use of letters of credit also known as documentary credits. Latest version is UCP-600 effective from July 1, 2007.

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Elements of a Letter of Credit

A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money On presentation of specified documents representing the supply of goods Within specified time limits Documents must conform to terms and conditions set out in the letter of credit Documents to be presented at a specified place.

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Beneficiary
The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the L/C. The L/C is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary. The issuing banks obligation to the buyer, is to examine all documents to ensure that they meet all the terms and conditions of the L/C. Upon requesting demand for payment, the beneficiary warrants that all conditions of the agreement have been complied with. If the beneficiary conforms to the L/C, he/she must be paid by the bank.

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Issuing Bank
The issuing banks liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the L/C. Under the provisions of the UCPDC, the bank is given a reasonable amount of time after receipt of the documents to honor the draft. The issuing banks role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill and an insurance document; but there can be many others.

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Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank to ensure that the L/C is valid. In addition, the advising bank would be responsible for sending the document to the issuing bank. The advising bank has no other obligation under the L/C. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.

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Confirming Bank
The correspondent bank can confirm the L/C for the beneficiary. At the request of the issuing bank, the correspondent bank obligates itself to ensure payment under the L/C. The confirming bank would not confirm the L/C until it evaluate the country and bank where the L/C originates. The confirming bank is usually the advising bank.

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Letter of Credit (L/C) - Types

Revocable vrs Irrevocable Once an irrevocable L/C is open it cannot be changed without the written consent of all parties including beneficiary. A revocable L/C can be change or withdrawn without notifying the beneficiary. Confirmed vrs Advised Confirmed L/C is preferred, as the confirming bank promises to pay. Advised does not guarantee the creditworthiness of the opening bank.

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Letter of Credit (L/C) Types .

Sight vrs. Usance At sight means the beneficiary is paid as soon as the paying bank has determined that all necessary documents are in order. Usance time can be between 30 and 180 days after the Bill of Lading date. This is a form of delayed payment, and should be avoided if possible.

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Standby Letter of Credit (SBLC)

The SBLC serves a different function than the commercial L/C. The commercial L/C is the primary payment mechanism for a transaction. The SBLC serves as a secondary payment mechanism. A bank will issue SBLC on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that the SBLC will ever be drawn upon. SBLC are issued by banks to stand behind monetary obligations, to ensure the refund of advance payment, to support performance and bid obligation and to ensure the completion of a sales contract.

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