CHAPTER –I Export Financing

1.INTRODUCTION

1.1Why Export Finance?

As the countries became border less with the introduction of the concept of globalization
in early 19th century and by liberalizing the principles of protectionism (A country
restricting trade to its one geographical arena).Growing needs of countries and
disproportionate distribution of resources insist a specific country to import various
goods and services (commercial and domestic), thus this encourages exports of goods and
services to various countries for foreign exchange mechanism and to maintain the balance
of trade. Banks provide need-based export finance both at pre-shipment and post
shipment, to the exporters at competitive rates of interest. Export finance in foreign
currencies is required to provide funds to large corporate clients. Banks also provides
non-fund based services for imports by way of opening of import Letters of Credit; bank
guarantees and Lines of Credit (Buyers' Credit/ Suppliers' Credit) also as part of
international trade.

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.
Like working capital is used to meet regular and recurring needs of a business firm i.e..
Purchase of raw material, payment of wages and salaries, expenses like payment of rent,
advertising etc.. For Export business 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 procurement, packaging
and sale to overseas customers on credit.

1.2 OBJECTIVES OF EXPORT FINANCE:

Though Export Financing was in practice before setting up of EXIM bank in 1982, its
mechanism is being regulated properly after introduction of Export-Import Bank of
India Act 1981. Subsequently many banks came into this era and started financing
exports and export related activities. RBI as the Apex bank regulates the functioning of
all the commercial banks and their export finance mechanism; it also issues Master
Circulars to The Chairmen/Chief Executives of all Commercial Banks periodically and
through Foreign Exchange Management Act. Export Credit has been listed one among
priority sector lending and RBI has prescribed targets for Foreign banks operating in
India as 12 percent of Net Bank Credit and for Domestic banks (both public sector and
private sector banks) it does not come under priority sector. The main objectives are:

Appraisal of Export Credit

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 bank’s customer.

• Appraise should have the Exim code number allotted by the Director General of
Foreign Trade.
• Party’s name should not appear under the caution list of the RBI.

Obligations to the Trade Control Authority under the EXIM policy are:

• Appraise should have Importer Exporter Code(IEC) number allotted by the

Directorate General of Foreign Trade(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.
• Embassies role in export finance is also prominent in encouraging and developing
the trade relations among countries.

Obligations to Export Credit Guarantee Corporation of India Limited are:

• Verification that Appraise is not under the Specific Approval list (SAL).
• Sanction of Packing Credit Advances.
• Offers insurance protection to exporters against payment risks
• Provides guidance in export-related activities
 • Makes available information on different countries with its own credit ratings
• Makes it easy to obtain export finance from banks/financial institutions
• Assists exporters in recovering bad debts
• Provides information on credit-worthiness of overseas buyers

1.3GENERAL 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 Bank’s directives issued through Industrial and Export Credit Department
(IECD).
d) Export Credit Guarantee Corporation guidelines.
e) Guidelines of Foreign Exchange Dealers Association of India.
f) Guidelines of Diamond Dollar Account (DDA) Scheme
g) Restoration of Limits and Availability of Export Benefits such as Export Earners
Foreign Currency (EEFC) Account

1.4 FIFO (http://www.indiaexporters.in/)

The Federation of Indian Export Organizations represents the Indian entrepreneurs' spirit
of enterprise in the global market. Known popularly as "FIEO", this apex body of Indian
export promotion organizations was set up jointly by the Ministry of Commerce,
Government of India and private trade and industry in the year 1965. FIEO is thus a
partner of the Government of India in promoting India's exports.

1.5 Union Budget 2008-09 for the Exporter

The union budget for 2008-09 did not address the problems faced by the Indian exporters.
According to a report, the budget has not addressed the problems faced by the exporters
in view of appreciating rupee and stagnating traditional markets. People are also
disappointed as the proposal to provide zero rating of exports through refund of states and
local levies, exemption from FBT (fringe benefit tax) on genuine business expenses,
exemption from all service taxes on services used during the course of exports to provide
a level playing field to Indian exporters have not been considered.

2. TYPES OF EXPORT CREDIT

Most of the banks including EXIM bank finance or provides export finance to companies
in two types:

- Pre-shipment credit.
- Post-shipment credit.

2.1Pre-shipment credit:

Definition:

'Pre-shipment credit' means any loan or advance granted or any other credit provided
by a bank to an exporter for financing the purchase, processing, manufacturing or
packing of goods prior to shipment, on the basis of letter of credit opened in his favour
or in favour of some other person, by an overseas buyer or a confirmed and irrevocable
order for the export of goods from India or any other evidence of an order for export from
India having been placed on the exporter or some other person, unless lodgement of
export orders or letter of credit with the bank has been waived.
1. Packing credit in Indian Rupees
2. Running Account facility to established exporters
3. Packing Credit in Foreign currency
4. Foreign Letter of Credit and Foreign Bank Guarantees for procuring materials
and services
5. To purchase raw material, and other inputs to manufacture goods.
6. To assemble the goods in the case of merchant exporters.
7. To store the goods in suitable warehouses till the goods are shipped.
8. To pay for packing, marking and labeling of goods.
9. To pay for pre-shipment inspection charges.
10. To import or purchase from the domestic market heavy machinery and other
capital goods to produce export goods.
11. To pay for consultancy services.
12. To pay for export documentation expenses.

2.2 Post-shipment credit:

Definition
'Post-shipment Credit' means any loan or advance granted or any other credit provided by
an institution to an exporter of goods from India from the date of extending credit after
shipment of goods to the date of realisation of export proceeds.

1. Negotiation of Documents under Letters of Credit

2. Purchase/discount of export bills under LCs or Confirmed orders
3. Purchase/discount of Export bills in Foreign currency.
4. Demand loans against export bills sent on collection.

2.3 Generally this credit is of two types:

- Fund based credit.

- Non-Fund based credit.

ASSISTANCE OFFERED BY EXIM BANK

FUND BASED NON-FUND BASED

ASSISTANCE ASSISTANCE

INDIAN PARTIES. FINANCIAL

INDIAN BANKS. GUARANTEES.
OVERSEAS BUYERS. ADVISORY AND OTHER
OVERSEAS BANKS. SERVICES.

2.4 Financing of Receivables (Factoring) for Small and Medium Businesses by banks is
a structured working capital finance solution that includes finance against domestic or
export receivables, collection of receivables on due date, credit protection and credit
advisory services. It is an internationally accepted financing solution that allows
exporters to convert their accounts receivables to cash thereby releasing the cash
generation potential of their business.

Difference between Factoring cash credit and limit: Banks typically analyze
their customer’s last audited financial statements to assess the Working Capital
finance requirements for cash credit. This approach fails when a business is
experiencing rapid growth and limits assessed on a historical basis may not be
sufficient to fuel business growth. Factoring analyses the funding needs of the
business based on the current and projected sales volume and is therefore more in
tune with the needs of the business. Additionally, a Cash Credit facility requires
 you to provide collateral security that is not necessary in case of a Factoring
facility. Factoring solutions offer funding upto 90% of invoice value whereas the
working capital bank provides between 60 – 75% funding.

2.5 Bill Discounting Facility

The remitting bank may finance a good creditworthy exporter by purchasing or

discounting his collection bills under an "Export Line". However,

• If the importer refuses a bill the Bank has purchased, the Bank must be sure of
being able to get a refund.
• The importer must be reliable. The Bank usually tries to avoid the risk of refusal
by keeping in touch with large banks.
• The Bank always ensures that when a bill is purchased, it is drawn on approved
drawees within limits.

2.6 Forfaiting

Forfaiting is the selling, at a discount, of longer term accounts receivable or promissory

notes of the foreign buyer. These instruments may also carry the guarantee of the foreign
government. Both U.S. and European forfaiting houses, which purchase the instruments
at a discount from the exporter, are active in the U.S. market. Because forfaiting may be
done either with or without recourse to the exporter, the specific arrangements should be
verified by the exporter.

2.7 Deemed Exports

‘Deemed Exports’ as defined in the Export and Import Polilcy, 1997-2002 means those
transactions in which the goods supplied do not leave the country and the supplier in
India receives the payment for the goods. It means the goods supplied need not go out of
India to treat them as ‘Deemed Export’.

The Suppliers of the goods under ‘Deemed Exports’ should make application to the
regional licensing authority, concerned claiming the benefits of ‘Deemed Exports’. The
applications should be made in the forms given in Appendix 17 of ‘Hand Book of
Procedure’s of export and Import Policy, 1997-2002. Along-with documents prescribed
therein.

3 LETTER OF CREDIT : (Source:

http://www.infodriveindia.com/Exim/Guides/Export-
Finance/Ch_3_Letter_Of_Credit_Lc.aspx)

Letter of Credit L/c also known as Documentary Credit is a widely used term to make
payment secure in domestic and international trade. The document is issued by a financial
organization at the buyer request. Buyer also provide the necessary instructions in
preparing the document.

The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for
Documentary Credit (UCPDC) defines L/C as:

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting
at the request and on the instructions of a customer (the Applicant) or on its own behalf :

1. Is to make a payment to or to the order third party ( the beneficiary ) or is to

accept bills of exchange (drafts) drawn by the beneficiary.
2. Authorised another bank to effect such payments or to accept and pay such bills
of exchange (draft).
3. Authorised another bank to negotiate against stipulated documents provided that
the terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and
not in goods. The decision to pay under a letter of credit will be based entirely on whether
the documents presented to the bank appear on their face to be in accordance with the
terms and conditions of the letter of credit.

3.1Parties to Letters of Credit

• Applicant (Opener): Applicant which is also referred to as account party is

normally a buyer or customer of the goods, who has to make payment to
beneficiary. LC is initiated and issued at his request and on the basis of his
instructions.

• Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter
of credit and takes the responsibility to make the payments on receipt of the
documents from the beneficiary or through their banker. The payments has to be
made to the beneficiary within seven working days from the date of receipt of
documents at their end, provided the documents are in accordance with the terms
and conditions of the letter of credit. If the documents are discrepant one, the
rejection thereof to be communicated within seven working days from the date of
of receipt of documents at their end.

• Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to
receive payment from the applicant. A credit is issued in his favour to enable him
or his agent to obtain payment on surrender of stipulated document and comply
with the term and conditions of the L/c.
If L/c is a transferable one and he transfers the credit to another party, then he is
referred to as the first or original beneficiary.

• Advising Bank : An Advising Bank provides advice to the beneficiary and takes
the responsibility for sending the documents to the issuing bank and is normally
located in the country of the beneficiary.
 • Confirming Bank : Confirming bank adds its guarantee to the credit opened by
another bank, thereby undertaking the responsibility of payment/negotiation
acceptance under the credit, in additional to that of the issuing bank. Confirming
bank play an important role where the exporter is not satisfied with the
undertaking of only the issuing bank.

• Negotiating Bank: The Negotiating Bank is the bank who negotiates the
documents submitted to them by the beneficiary under the credit either advised
through them or restricted to them for negotiation. On negotiation of the
documents they will claim the reimbursement under the credit and makes the
payment to the beneficiary provided the documents submitted are in accordance
with the terms and conditions of the letters of credit.

• Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the

reimbursement claim in settlement of negotiation/acceptance/payment lodged
with it by the negotiating bank. It is normally the bank with which issuing bank
has an account from which payment has to be made.

• Second Beneficiary : Second Beneficiary is the person who represent the first or
original Beneficiary of credit in his absence. In this case, the credits belonging to
the original beneficiary is transferable. The rights of the transferee are subject to
terms of transfer.

3.2Types of Letter of Credit

1. Revocable Letter of Credit L/c

A revocable letter of credit may be revoked or modified for any reason, at any time by the
issuing bank without notification. It is rarely used in international trade and not
considered satisfactory for the exporters but has an advantage over that of the importers
and the issuing bank.

There is no provision for confirming revocable credits as per terms of UCPDC, Hence
they cannot be confirmed. It should be indicated in LC that the credit is revocable. if
there is no such indication the credit will be deemed as irrevocable.

2. Irrevocable Letter of CreditL/c

In this case it is not possible to revoked or amended a credit without the agreement of the
issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view
it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank
insures the beneficiary that if the required documents are presented and the terms and
conditions are complied with, payment will be made.

3. Confirmed Letter of Credit L/c

Confirmed Letter of Credit is a special type of L/c in which another bank apart from the
issuing bank has added its guarantee. Although, the cost of confirming by two banks
makes it costlier, this type of L/c is more beneficial for the beneficiary as it doubles the
guarantee.

4. Sight Credit and Usance Credit L/c

Sight credit states that the payments would be made by the issuing bank at sight, on
demand or on presentation. In case of usance credit, draft are drawn on the issuing bank
or the correspondent bank at specified usance period. The credit will indicate whether the
usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the
confirming bank.

5. Back to Back Letter of Credit L/c

Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known
as backtoback credit when a L/c is opened with security of another L/c.

A backtoback credit which can also be referred as credit and countercredit is actually a
method of financing both sides of a transaction in which a middleman buys goods from
one customer and sells them to another.

The parties to a BacktoBack Letter of Credit are:

1. The buyer and his bank as the issuer of the original Letter of Credit.
2. The seller/manufacturer and his bank,
3. The manufacturer's subcontractor and his bank.

The practical use of this Credit is seen when L/c is opened by the ultimate buyer in
favour of a particular beneficiary, who may not be the actual supplier/ manufacturer
offering the main credit with near identical terms in favour as security and will be able to
obtain reimbursement by presenting the documents received under back to back credit
under the main L/c.

The need for such credits arise mainly when :

1. The ultimate buyer not ready for a transferable credit

2. The Beneficiary do not want to disclose the source of supply to the openers.
3. The manufacturer demands on payment against documents for goods but the
beneficiary of credit is short of the funds

6. Transferable Letter of Credit L/c

A transferable documentary credit is a type of credit under which the first beneficiary
which is usually a middleman may request the nominated bank to transfer credit in whole
or in part to the second beneficiary.
The L/c does state clearly mentions the margins of the first beneficiary and unless it is
specified the L/c cannot be treated as transferable. It can only be used when the company
is selling the product of a third party and the proper care has to be taken about the exit
policy for the money transactions that take place.

This type of L/c is used in the companies that act as a middle man during the transaction
but don’t have large limit. In the transferable L/c there is a right to substitute the invoice
and the whole value can be transferred to a second beneficiary.

The first beneficiary or middleman has rights to change the following terms and
conditions of the letter of credit:

1. Reduce the amount of the credit.

2. Reduce unit price if it is stated
3. Make shorter the expiry date of the letter of credit.
4. Make shorter the last date for presentation of documents.
5. Make shorter the period for shipment of goods.
6. Increase the amount of the cover or percentage for which insurance cover must be
effected.
7. Substitute the name of the applicant (the middleman) for that of the first
beneficiary (the buyer).

3.3 Standby Letter of Credit L/c

Initially used by the banks in the United States, the standby letter of credit is very much
similar in nature to a bank guarantee. The main objective of issuing such a credit is to
secure bank loans. Standby credits are usually issued by the applicant’s bank in the
applicant’s country and advised to the beneficiary by a bank in the beneficiary’s country.

Unlike a traditional letter of credit where the beneficiary obtains payment against
documents evidencing performance, the standby letter of credit allow a beneficiary to
obtains payment from a bank even when the applicant for the credit has failed to perform
as per bond.

A standby letter of credit is subject to "Uniform Customs and Practice for Documentary
Credit" (UCP), International Chamber of Commerce Publication No 500, 1993 Revision,
or "International Standby Practices" (ISP), International Chamber of Commerce
Publication No 590, 1998.

3.4Export Operations Under L/c

Export Letter of Credit is issued in for a trader for his native country for the purchase of
goods and services. Such letters of credit may be received for following purpose:

1. For physical export of goods and services from India to a Foreign Country.
 2. For execution of projects outside India by Indian exporters by supply of goods
and services from Indian or partly from India and partly from outside India.
3. Towards deemed exports where there is no physical movements of goods from
outside India But the supplies are being made to a project financed in foreign
exchange by multilateral agencies, organization or project being executed in India
with the aid of external agencies.
4. For sale of goods by Indian exporters with total procurement and supply from
outside India. In all the above cases there would be earning of Foreign Exchange
or conservation of Foreign Exchange.

Banks in India associated themselves with the export letters of credit in various capacities
such as advising bank, confirming bank, transferring bank and reimbursing bank.

In every cases the bank will be rendering services not only to the Issuing Bank as its
agent correspondent bank but also to the exporter in advising and financing his export
activity.

1. Advising an Export L/c

The basic responsibility of an advising bank is to advise the credit received from
its overseas branch after checking the apparent genuineness of the credit
recognized by the issuing bank.

It is also necessary for the advising bank to go through the letter of credit, try to
understand the underlying transaction, terms and conditions of the credit and
advice the beneficiary in the matter.

The main features of advising export LCs are:

1. There are no credit risks as the bank receives a onetime commission for the
advising service.
2. There are no capital adequacy needs for the advising function.

2. Advising of Amendments to L/Cs

Amendment of LCs is done for various reasons and it is necessary to fallow all
the necessary the procedures outlined for advising. In the process of advising the
amendments the Issuing bank serializes the amendment number and also ensures
that no previous amendment is missing from the list. Only on receipt of
satisfactory information/ clarification the amendment may be advised.

3. Confirmation of Export Letters of Credit

It constitutes a definite undertaking of the confirming bank, in addition to that of
the issuing bank, which undertakes the sight payment, deferred payment,
acceptance or negotiation.

Banks in India have the facility of covering the credit confirmation risks with
ECGC under their “Transfer Guarantee” scheme and include both the commercial
and political risk involved.
 4. Discounting/Negotiation of Export LCs
When the exporter requires funds before due date then he can discount or
negotiate the LCs with the negotiating bank. Once the issuing bank nominates the
negotiating bank, it can take the credit risk on the issuing bank or confirming
bank.

However, in such a situation, the negotiating bank bears the risk associated with
the document that sometimes arises when the issuing bank discover discrepancies
in the documents and refuses to honor its commitment on the due date.

5. Reimbursement of Export LCs

Sometimes reimbursing bank, on the recommendation of issuing bank allows the
negotiating bank to collect the money from the reimbursing bank once the goods
have been shipped. It is quite similar to a cheque facility provided by a bank.

In return, the reimbursement bank earns a commission per transaction and enjoys
float income without getting involve in the checking the transaction documents.

reimbursement bank play an important role in payment on the due date ( for
usance LCs) or the days on which the negotiating bank demands the same (for
sight LCs)

3.5Regulatory Requirements

Opening of imports LCs in India involve compliance of the following main regulation:

3.6Trade Control Requirements

The movement of good in India is guided by a predefined se of rules and regulation. So,
the banker needs to assure that make certain is whether the goods concerned can be
physically brought in to India or not as per the current EXIM policy.

3.7Exchange Control Requirements

The main objective of a bank to open an Import LC is to effect settlement of payment due
by the Indian importer to the overseas supplier, so opening of LC automatically comes
under the policies of exchange control regulations.

3.8UCPDC Guidelines

Uniform Customs and Practice for Documentary Credit (UCPDC) is a set of predefined
rules established by the International Chamber of Commerce (ICC) on Letters of Credit.
The UCPDC is used by bankers and commercial parties in more than 200 countries
including India to facilitate trade and payment through LC.

UCPDC was first published in 1933 and subsequently updating it throughout the years. In
1994, UCPDC 500 was released with only 7 chapters containing in all 49 articles .

The latest revision was approved by the Banking Commission of the ICC at its meeting in
Paris on 25 October 2006. This latest version, called the UCPDC600, formally
commenced on 1 July 2007. It contain a total of about 39 articles covering the following
areas, which can be classified as 8 sections according to their functions and operational
procedures.

Serial No. Article Area Consisting

Application, Definition and
1. 1 to 3 General
Interpretations
Credit vs. Contracts, Documents
2. 4 to 12 Obligations
vs. Goods
Reimbursement, Examination of
Liabilities and Documents, Complying,
3. 13 to 16
responsibilities. Presentation, Handling
Discrepant Documents
Bill of Lading, Chapter Party Bill of
Lading, Air Documents, Road Rail
4. 17 to 28 Documents etc. Documents, Courier , Postal etc.
Receipt. On board, Shippers' count,
Clean Documents, Insurance documents
Extension of dates, Tolerance in
Miscellaneous
5. 29 to 33 Credits, Partial Shipment and
Provisions
Drawings. House of Presentation
Effectiveness of Document
Transmission and Translation
6 34 to 37 Disclaimer
Force Majeure
Acts of an Instructed Party
Transferable Credits
7 38 & 39 Others
Assignment of Proceeds

3.9ISBP 2002

The widely acclaimed International Standard Banking Practice(ISBP) for the

Examination of Documents under Documentary Credits was selected in 2007 by the ICCs
Banking Commission.

First introduced in 2002, the ISBP contains a list of guidelines that an examiner needs to
check the documents presented under the Letter of Credit. Its main objective is to reduce
the number of documentary credits rejected by banks.

3.10FEDAI Guidelines

Foreign Exchange Dealer's Association of India (FEDAI) was established in 1958 under
the Section 25 of the Companies Act (1956). It is an association of banks that deals in
Indian foreign exchange and work in coordination with the Reserve Bank of India, other
organizations like FIMMDA, the Forex Association of India and various market
participants.
FEDAI has issued rules for import LCs which is one of the important area of foreign
currency exchanges. It has an advantage over that of the authorized dealers who are now
allowed by the RBI to issue stand by letter of credits towards import of goods.

As the issuance of standby of letter of Credit including imports of goods is susceptible to

some risk in the absence of evidence of shipment, therefore the importer should be
advised that documentary credit under UCP 500/600 should be the preferred route for
importers of goods.

Below mention are some of the necessary precaution that should be taken by authorised
dealers While issuing a stands by letter of credits:

1. The facility of issuing Commercial Standby shall be extended on a selective basis

and to the following category of importers
i. Where such standby are required by applicant who are independent power
producers/importers of crude oil and petroleum products
ii. Special category of importers namely export houses, trading houses, star
trading houses, super star trading houses or 100% Export Oriented Units.
2. Satisfactory credit report on the overseas supplier should be obtained by the
issuing banks before issuing Stands by Letter of Credit.
3. Invocation of the Commercial standby by the beneficiary is to be supported by
proper evidence. The beneficiary of the Credit should furnish a declaration to the
effect that the claim is made on account of failure of the importers to abide by his
contractual obligation along with the following documents.
i. A copy of invoice.
ii. Nonnegotiable set of documents including a copy of non negotiable bill of
lading/transport document.
iii. A copy of Lloyds /SGS inspection certificate wherever provided for as per
the underlying contract.
4. Incorporation of a suitable clauses to the effect that in the event of such invoice
/shipping documents has been paid by the authorised dealers earlier, Provisions to
dishonor the claim quoting the date / manner of earlier payments of such
documents may be considered.
5. The applicant of a commercial stand by letter of credit shall undertake to provide
evidence of imports in respect of all payments made under standby. (Bill of Entry)

3.11Fixing limits for Commercial Stand by Letter of Credit L/c

1. Banks must assess the credit risk in relation to stand by letter of credit and explain
to the importer about the inherent risk in stand by covering import of goods.
2. Discretionary powers for sanctioning standby letter of credit for import of goods
should be delegated to controlling office or zonal office only.
 3. A separate limit for establishing stand by letter of credit is desirable rather than
permitting it under the regular documentary limit.
4. Due diligence of the importer as well as on the beneficiary is essential .
5. Unlike documentary credit, banks do not hold original negotiable documents of
titles to gods. Hence while assessing and fixing credit limits for standby letter of
credits banks shall treat such limits as clean for the purpose of discretionary
lending powers and compliance with various Reserve Bank of India's regulations.
6. Application cum guarantee for stand by letter of credit should be obtained from
the applicant.
7. Banks can consider obtaining a suitable indemnity/undertaking from the importer
that all remittances towards their import of goods as per the underlying contracts
for which stand by letter of credit is issued will be made only through the same
branch which has issued the credit.
8. The importer should give an undertaking that he shall not raise any dispute
regarding the payments made by the bank in standby letter of credit at any point
of time howsoever, and will be liable to the bank for all the amount paid therein.
He importer should also indemnify the bank from any loss, claim, counter claims,
damages, etc. which the bank may incur on account of making payment under the
stand by letter of credit.
9. Presently, when the documentary letter of credit is established through swift, it is
assumed that the documentary letter of credit is subject to the provisions of
UCPDC 500/600 Accordingly whenever standby letter of credit under ISP 98 is
established through SWIFT, a specific clause must appear that standby letter of
credit is subject to the provision of ISP 98.
10. It should be ensured that the issuing bank, advising bank, nominated bank. etc,
have all subscribed to SP 98 in case stand by letter of credit is issued under ISP
98.

When payment under a stand by letter of credit is effected, the issuing bank to report such
invocation / payment to Reserve Bank of India.

CHAPTER: 4 INSTITUTIONAL FRAMEWORK

4.1 EXIM BANK:

Having its Head office at Mumbai and a network of 13 offices in India and Overseas:

• SET UP BY AN ACT OF PARLIAMENT IN SEPTEMBER 1981

• WHOLLY OWNED BY GOVERNMENT OF INDIA
• COMMENCED OPERATIONS IN MARCH 1982
• APEX FINANCIAL INSTITUTION

4.1.1 OBJECTIVES OF EXIM BANK

(http://www.eximbankindia.com/objective.asp)
“… for providing financial assistance to exporters and importers, and for
functioning as the principal financial institution for coordinating the working
of institutions engaged in financing export and import of goods and services
with a view to promoting the country’s international trade…”

“… shall act on business principles with due regard to public interest”

: The Export-Import Bank of India Act, 1981

Evolving Vision

THE INITIATIVES (http://www.eximbankindia.com/organisation.asp)

• Exim Bank of India has been the prime mover in encouraging project
exports from India. The Bank provides Indian project exporters with a
comprehensive range of services to enhance the prospect of their securing
export contracts, particularly those funded by Multilateral Funding
Agencies like the World Bank, Asian Development Bank, African
Development Bank and European Bank for Reconstruction and
Development.

• The Bank extends lines of credit to overseas financial institutions, foreign

governments and their agencies, enabling them to finance imports of goods
and services from India on deferred credit terms. Exim Bank’s lines of
Credit obviate credit risks for Indian exporters and are of particular
relevance to SME exporters.
 • The Bank’s Overseas Investment Finance programme offers a variety of
facilities for Indian investments and acquisitions overseas. The facilities
include loan to Indian companies for equity participation in overseas
ventures, direct equity participation by Exim Bank in the overseas venture
and non-funded facilities such as letters of credit and guarantees to
facilitate local borrowings by the overseas venture.

• The Bank provides financial assistance by way of term loans in Indian

rupees/foreign currencies for setting up new production facility,
expansion/modernization/upgradation of existing facilities and for
acquisition of production equipment/technology. Such facilities particularly
help export oriented Small and Medium Enterprises for creation of export
capabilities and enhancement of international competitiveness.

• Under its Export Marketing Finance programme, Exim Bank supports Small
and Medium Enterprises in their export marketing efforts including
financing the soft expenditure relating to implementation of strategic and
systematic export market development plans.

• The Bank has launched the Rural Initiatives Programme with the objective
of linking Indian rural industry to the global market. The programme is
intended to benefit rural poor through creation of export capability in rural
enterprises.

• In order to assist the Small and Medium Enterprises, the Bank has put in
place the Export Marketing Services (EMS) Programme. Through EMS, the
Bank seeks to establish, on best efforts basis, SME sector products in
overseas markets, starting from identification of prospective business
partners to facilitating placement of final orders. The service is provided on
success fee basis.

• Exim Bank supplements its financing programmes with a wide range of

value-added information, advisory and support services, which enable
exporters to evaluate international risks, exploit export opportunities and
improve competitiveness, thereby helping them in their globalisation
efforts.

4.1.2AREAS OF FINANCE(http://www.eximbankindia.com/eou.asp)

Term Finance (For Exporting Companies)

• Project Finance
• Equipment Finance
• Import of Technology & Related Services
• Domestic Acquisitions of businesses/companies/brands
• Export Product Development/ Research & Development
• General Corporate Finance
Working Capital Finance (For Exporting Companies)

• Funded
o Working Capital Term Loans [< 2 years]
o Long Term Working Capital [upto 5 years]
o Export Bills Discounting
o Export Packing Credit
o Cash Flow financing
• Non-Funded
o Letter of Credit Limits
o Guarantee Limits

Working Capital Finance (For Non- Exporting Companies)

• Bulk Import of Raw Material

Term Finance (For Non- Exporting Companies)

• Import of Equipment

Export Finance

• Pre-shipment Credit
• Post Shipment Credit
• Buyers' Credit
• Suppliers' Credit [including deferred payment credit]
• Bills Discounting
• Export Receivables Financing
• Warehousing Finance
• Export Lines of Credit (Non-recourse finance)

Equity Participation (In Indian Exporting Companies)

• To part finance project expenditure(Project, inter alia, includes new project/

expansion/ acquisition of business/company/ brands/research &
development)

Note:-
a. Exim Financing is available in Indian Rupees and in Foreign Currency
b. Term finance, except for long term working capital, is available for periods up
to 10 years [in select cases 15 year finance can also be made available]
c. Interest: Fixed & Floating options [Benchmarks for floating rates - LIBOR/G-
Sec/MIBOR]
d. Repayments: Amortizing/ Ballooning/ Bullet [As per cash flows]

4.2 EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD.

(https://www.ecgc.in/Portal/aboutus/aboutus.asp#q1)

4.2.1 Why Insurance for Export credit?

- Changing needs of countries.
- Availability of alternatives:
With the effect of technological developments and scientific researches
alternatives are made available domestically decreasing the necessity to import.
Similarly worldwide exports are affected with these developments and availability
of alternatives may lead to decrease in import requirements for some countries
and further this effects the marketability of Exporters of such products.

Payments for exports are open to risks even at the best of times. The risks have assumed
large proportions today due to the far-reaching political and economic changes that are
sweeping the world. An outbreak of war or civil war may block or delay payment for
goods exported. A coup or an insurrection may also bring about the same result.
Economic difficulties or balance of payment problems may lead a country to impose
restrictions on either import of certain goods or on transfer of payments for goods
imported. In addition, the exporters have to face commercial risks of insolvency or
protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or
losing his capacity to pay are aggravated due to the political and economic uncertainties.
Export credit insurance is designed to protect exporters from the consequences of the
payment risks, both political and commercial, and to enable them to expand their
overseas business without fear of loss.

4.2.2 Functions Of ECGC:

• Offers insurance protection to exporters against payment risks

• Provides guidance in export-related activities

• Makes available information on different countries with its own credit ratings

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

• Assists exporters in recovering bad debts

• Provides information on credit-worthiness of overseas buyers’.

4.2 Export Promotion Councils in India

Export promotion councils set up under Foreign Trade Policy of the Government (of
India) are those which encourage and facilitate the export mechanism in various sectors
not only undertaking the necessary export promotion initiatives but also providing
necessary technical information, guidance and support to exporters in various goods and
services both in public and private sector and also to set up overseas projects.
Few Export Promotion Councils in India are:

ENGINEERING EXPORT PROMOTION COUNCIL

Objectives: Set up by the Ministry of Commerce, Govt. of India, EEPC INDIA has
entered its golden jubilee year and is serving its ever-growing strength of over 12,000
members from amongst large Corporate Houses, Star Trading Houses, etc.
WebSite: http://www.eepcindia.org/

OVERSEAS CONSTRUCTION COUNCIL OF INDIA

Project Exports Promotion Council of India (PEPC) is an export promotion council set up
by the Government of India in 1984 (as Overseas Construction Council of India).
PEPC in line with the Foreign Trade Policy of the Government (of India) not only
undertakes the necessary export promotion initiatives but also provides necessary
technical information, guidance and support to Indian Civil and Engineering (EPC)
construction including process engineering contractors and consultants – in public or
private sector – to set up overseas projects in any of the following modules of
engineering service:-
CIVIL CONSTRUCTION (STRUCTURES/INFRASTRUCTURE)
TURNKEY
PROCESS AND ENGINEERING CONSULTANCY SERVICES
PROJECT CONSTRUCTION ITEMS (EXCLUDING STEEL AND CEMENT) /
PROJECT GOODS
Website : http://www.projectexports.com/

BASIC CHEMICALS, PHARMACEUTICALS AND COSMETICS EXPORT

PROMOTION COUNCIL
(Set up by Ministry of Commerce, Government of India)
Website: http://www.chemexcil.gov.in

And

• CHEMICALS AND ALLIED PRODUCTS EXPORT PROMOTION

COUNCIL
• PLASTICS & LINOLEUMS EXPORT PROMOTION COUNCIL
• COUNCIL FOR LEATHER EXPORTS
• SPORTS GOODS EXPORT PROMOTION COUNCIL
• GEM AND JEWELLERY EXPOR PROMOTION COUNCIL
• SHELLAC EXPORT PROMOTION COUNCIL
• CASHEW EXPORT PROMOTION COUNCIL
 • ELECTRONICS AND COMPUTER SOFTWARE EXPORT PROMOTION
COUNCIL

Textiles Sector:

• APPAREL EXPORT PROMOTION COUNCIL

• CARPET EXPORT PROMOTION COUNCIL
• COTTON TEXTILE EXPORT PROMOTION COUNCIL
• EXPORT PROMOTION COUNCIL FOR HANDICRAFTS
• HANDLOOM EXPORT PROMOTION COUNCIL
• THE INDIAN SILK EXPORT PROMOTION COUNCIL
• SYNTHETIC & RAYON TEXTILE EXPORT PROMOTION COUNCIL
• WOOL & WOOLENS EXPORT PROMOTION COUNCIL

CHAPTER: 5 VARIOUS BANKS AND THEIR POLICIES

5.1 EXIM bank and its policies for export finance:

http://www.eximbankindia.com/exp_credits.asp

Exim Bank offers the following Export Credit facilities, which can be availed of
by Indian companies, commercial banks and overseas entities.

For Indian Companies executing contracts overseas

5.1.1Pre-shipment credit

Exim Bank's Pre-shipment Credit facility, in Indian Rupees and foreign currency,
provides access to finance at the manufacturing stage - enabling exporters to
purchase raw materials and other inputs.

5.1.2Supplier's Credit

This facility enables Indian exporters to extend term credit to importers (overseas)
of eligible goods at the post-shipment stage.

5.1.3For Project Exporters

Indian project exporters incur Rupee expenditure while executing overseas project
export contracts i.e. costs of mobilisation/acquisition of materials, personnel and
equipment etc. Exim Bank's facility helps them meet these expenses.

5.1.4For Exporters of Consultancy and Technological Services

Exim Bank offers a special credit facility to Indian exporters of consultancy and
technology services, so that they can, in turn, extend term credit to overseas
importers.

5.1.5Guarantee Facilities

Indian companies can avail of these to furnish requisite guarantees to facilitate

execution of export contracts and import transactions.

5.2 Allahabad bank:

http://www.allahabadbank.com/exp_fin.asp

“The bank provides need-based export finance both at pre-shipment and post shipment, to
the exporters at competitive rates of interest. Export finance in foreign currency is also
being provided to large corporate clients. For this purpose there are 55 authorised
branches spread all over India which are manned with trained personnel as also equipped
with the latest communication tools like Fax/ ISD/ SWIFT etc. In addition there are two
fully computerised Dealing Rooms at Kolkata and Mumbai which provide competitive
exchange rates to the exporters. We have a vast network of correspondents all over the
world and maintain foreign currency (Nostro) accounts in 10 currencies viz. USD, GBP,
EURO, JPY, SGD, DKK, SEK, CAD, AUD and SWF with prime banks in various time
zones like New York, London, Frankfurt, Tokyo, Singapore etc. Bank also provides non-
fund based services for imports by way of opening of import Letters of Credit, guarantees
etc. We also have Lines of Credit (Buyers' Credit/ Suppliers' Credit) with reputed
International Financial Institutions.”

5.3Andhra Bank(http://andhrabank.in/scripts/ExportAndImportFinance.aspx)

A friend in need is indeed. Andhra Bank is a friend in need and devised a host of loan
options keeping ‘YOU’ in focus to meet your financial requirements in time. The simple
hassle free procedures and speedy decisions helps the customer to run his activity
smoothly without monitory hassles. The various loan products are designed to suit the
needs of customers at large and the details are as follows:
EXPORT & IMPORT FINANCE

Andhra Bank in tune with Government guidelines is actively financing export and import
trade transactions. The Bank is providing credit to exporters on simple and hassle free
terms.

Bank is providing both export finance and import finance.

5.3.1Pre-shipment Finance:

1. Packing credit in Indian Rupees

2. Running Account facility to established exporters
3. Packing Credit in Foreign currency
4. Foreign Letter of Credit and Foreign Bank Guarantees for procuring materials and
services

5.3.2Post-shipment Finance:

1. Negotiation of Documents under Letters of Credit

2. Purchase/discount of export bills under LCs or Confirmed orders
3. Purchase/discount of Export bills in Foreign currency.
4. Demand loans against export bills sent on collection

5.4 State Bank of India (http://www.statebankofindia.com/user.htm)

State Bank of India is an active participant in the area of finance of Project export
activities. These activities will mainly involve financing the fund based and non fund
based requirements of the project exporters.

• Export of engineering goods on deferred payment terms

• Execution of turnkey projects abroad
• Execution of overseas civil construction contracts abroad
• Exports of services are the contracts for export of consultancy, technical and other
services.

Project export contracts are generally of high value and exporters undertaking them are
required to offer competitive terms to be able to secure orders from foreign buyers in the
face of stiff international competition.

Our vast network of branches spread all over the country which are authorized to handle
trade related transactions, substantial presence overseas with branches/offices in all major
commercial centers of the world covering all time zones and our strong network of
correspondent relationship with top ranking banks in several countries adds to our
competitive strengths to facilitate and meet various requirements of project exporters.
More over we also enjoy the comprehensive credentials in International banking
community.

5.4.1 Credit facilities offered by us:

Various types of credit facilities, both non fund and fund based, that the project exporters
may need at the time of bidding and/ or for execution of the project are extended by the
Bank.

5.4.2Non Fund Based Facilities

Letter of Credit facility on behalf of our customer enabling him to import raw material
required for manufacturing goods for project export is provided by us and also all other
types of guarantees required for project export contract are issued by us:

Bid Bond Guarantee

Advance Payment Guarantee
Performance Guarantee Down
Payment Guarantee
Retention Money Guarantee
Maintenance Guarantee
Overseas Borrowing Guarantee

5.4.3Fund based

i) Pre-shipment credit both in Indian rupees and in foreign currency to extend financial
assistance for procuring/ manufacturing/ processing/ packing/ shipping goods meant for
export.

ii) Rupee/ Foreign currency supplier's credit : When a project export is on deferred
credit terms, we meet the financial requirement of our exporter in Indian rupees or
foreign currency.

iii) Buyer’s credit :Bank also participates in grant of credit to foreign buyers under the
Buyer’s Credit Scheme’ of Exim Bank.

5.4.4REGULATORY FRAMEWORK

Exchange Control Regulations:

The exchange control regulations relating to Project and Service Exports revised from
time to time are contained in the Memorandum of Instructions on Project and Service
Exports (PEM) issued by Reserve Bank of India. The directions contained in the PEM are
issued under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act,
1999 (42 of 1999)

Authority structure for clearance of Project Export proposals:

Reserve Bank of India has laid down the authority structure for clearance of project
export proposals based on the value of contract:

Contract value up to USD 100 mio– Authorised Dealer

Contract value above USD 100 mio – Working Group

Thus proposals with contract value up to USD 100 mio can be cleared at State Bank of
India and proposals with contract value above USD 100 mio, the reference to Working
Group is done by SBI as the Sponsoring Bank on behalf of our customer.

Awareness in export policies

Marketing policies and their influence in export finance polices.
Embassies role in export policy.
Changing needs of countries.
Availability of alternatives:
With the effect of technological developments and scientific researches alternatives are
made available domestically decreasing the necessity to import. Similarly worldwide
exports are affected with these developments and availability of alternatives may lead to
decrease in import requirements for some countries and further this effects the
marketability of Exporters of such products.
Export of Jute to
Domestic products and countries preferences and risks in exports and export finance.
https://www.ecgc.in/Portal/aboutus/aboutus.asp#q1
Role of RBI in exports and ministry of commerce and industry (EXIM policy 04-09)