Export Fiance

8/3/2019 Export Fiance

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EXPORT FINANCE

• Financing of foreign trade more

complicated due to the separation of buyer

and seller by long distances, differences incurrencies, regulations and varied needs.

• Various agencies like EXIM Bank,

commercial banks, SIDBI, ECGC areproviding useful services to facilitate

foreign trade.



Methods of export finance

• Pre-shipment finance

• Post- shipment finance

• Credit lines

• Factoring

•

Forfaiting



PRE – SHIPMENT FINANCE

• Also known as Packing credit

• It refers to the credit required by the exporter

before the shipment of the goods.



Eligibility

1. Exporter should be allotted a 10 digit Importer –

exporter code (I E Code) by DGFT

2. Exporter should not be in the caution list of RBI.

3. Exporter should have a firm export order in hand or a

L/c be opened in his favour

4. Also avalable to EOUs and EPZ without orders also.5. If the export goods are not in the OGL(open general

license) , then special license is obtained by exporter



Purpose

1. Manufacturing, processing,purchasing or

packing goods meant for exports

2. Exporting consultancy services

3. Import of goods under advance license



Amount of packing credit

• 90% of the FOB value of goods or 75% of

the CIF value.

• Maximum upto the domestic value of the

goods



Period of credit

• Generally for a max period of 180 days or

the date of shipment , whichever is earlier.

• Further extension upto 90 days for

unforeseen circumstances



Interest rates

• Interest is based on PLR. Currently at – 4.5%

(below PLR)upto 180 days PLR+0.5% after 90days

• Interest subvention scheme

– Govt provides financial support upto 2% For textiles,

handicrafts, carpets, leathers, gems and jewellary,

marine and small and medium exporters. Deadline has

been extended from 30/9/2009 upto 31/3/2010



Security

• By pledge

• By hypothecation

• Against incentives receivable

• Against red clause L/c

•

Against back to back L/c



PCFC

• Pre – shipment credit in foreign currency

• Finance in foreign currency at LIBOR

based interest rates for max 180

days.(LIBOR + 3.5%)

• Advantageous when material needs to be

imported

• Provides cover from exchange risk.



Post shipment finance

• Finance granted after the shipment of goods

• Applicable when a credit period is granted

to buyers

• To meet the working capital needs.



Eligibility

• Available to exporters who have already

shipped the goods.



Tenure and Interest rates

• Generally upto 90 days or the due date of bill payable by the importer, whichever is

earlier.• Can be extended upto another 90 days (

total max 180 days)

•

Interest rates : – Upto 90 days : PLR – 2.5%

– Beyond 90 days : PLR + 0.5%



Forms of Finance

1. Purchase of export bills

2. Advance against acceptance of documents

under L/c

3. Advance against bills under collection

4. Advance against export incentives

5. Advance against retention money

6. Advance against deemed exports



Guarantee

• Appropriate policy of ECGC requires

• Repayment is to be done out of the export

receipts.



Post shipment credit in Foreign

currency• Exporters who have availed PCFC have to

necessarily avail post shipment credit in f.c.

•Interest rate cannot be more than 0.75% aboveLIBOR

• Three avenues of finance

1. Use of on-shore foreign currency funds

2. Banks raising foreign currency abroad

3. Exporters using overseas lines of credit or factoring-

forfaiting services.



LINES OF CREDIT

• Exim Bank extends Lines of Credit (LOCs) tooverseas financial institutions, regional developmentbanks, sovereign governments and other entities

overseas, to enable buyers in those countries, toimport goods and services from India on deferredcredit terms.

• The Indian exporters can obtain payment of eligiblevalue from Exim Bank, without recourse to them,

against negotiation of shipping documents.• LOC is a financing mechanism that provides a safe

mode of non-recourse financing option to Indianexporters, especially to SMEs, and serves as aneffective market entry tool.



Procedure



1. Exim Bank signs agreement with Borrower and announceswhen effective.

2. Exporter checks procedures and Service fee with Exim Bank

and negotiates contract with Importer.3. Importer consults borrower and signs contract with exporter.

4. Borrower approves contract.

5. Exim Bank approves contract and advises borrower and alsoexporter and commercial bank.

6. Exporter ships goods.

7. Commercial bank negotiates shipping documents and paysexporter.

8. Exim Bankreimburses Commercial bank on receipt of claim bydebit to borrower.

9. Borrower repays Exim Bank on due date.



•

EligibleGoods

Capital goods, plant and machinery, industrial manufactures,consumer durables and any other items eligible for beingexported under the 'Exim Policy' of the Government of India.

General

• Exporters are advised to check with Exim Bank beforefinalizing the contracts with the buyers, details of service feeand other charges, if any, payable by the exporters on thecontracts to be covered under the relative LOC.



Factoring

• “factoring means an arrangement between a factor and hisclient which includes at least two of the following services tobe provided by the factor; i) finance, (ii) maintenance of

accounts, (iii) collection of debts and (iv) protection againstcredit risk

Factoring is the purchase of export receivables (with or without

recourse) on an ongoing basis

• Management, collection and administration of export receivables is

taken over by the factor• Finance upto 90% of the export receivables

• Available from EXIM bank, Can factors, HSBC factors etc.



Mechanism of factoring

• Buyer Buyer negotiates terms of purchasingthe material with the seller

• Buyer receives delivery of goods with invoiceand instructions by the seller to makepayment to factor on due date

• Buyer makes payment to factor in time or

gets extension of time or in the case ofdefault is subject to legal process at thehands of the factor



Mechanism of factoring

• Seller Sells goods to the buyer as perMoU/agreement

• Delvers copies of invoice, delivery challan,MoU, instructions to make payment to factorgiven to buyer

• Seller receives 80 percent or more payment

in advance from factor on selling thereceivables

• Seller receives balance payment from factorafter deduction of facto’s service charges etc.



Cost of factoring

• Service fee (for administrating the salesledger as well as protection against bad

debts – as a percentage of invoicevalue or number of invoices)

• Discount charges (advance provided by

factor and is interest which is PLR plusor minus)



Two-Factor System of Factoring :

• There are usually four parties to a cross-borderfactoring transactions

1. Exporter (client)

2. Importer (customer

3. Export Factor

4. Import Factor

Two factor system results in two separate but inter-linked agreements Between exporter and exportfactor



• Usually export and import factors belong to a formalchain of factors with well-defined rules governing theconduct of business.

• Import factor provides a link between export factorand the importer and serves to solve the internationalbarriers like language problem, legal formalities andso on. He also underwrites customer trade creditrisks, collects receivables and transfers funds to the

export factor in the currency of the invoice• Functions of factors are divided between export

factor and import factor



Types of Factoring Services

• Recourse and Non-recourse Factoring

• Advance and Maturity Factoring Advancepaid against invoice where as in maturityfactoring payment is made against guaranteeor collection of receivables

• Full Factoring Disclosed and Undisclosed

Factoring Name of the factor is disclosed inthe invoice by the supplier/client asking thecustomer to make payment to the factor



Forfaiting

• It denotes the purchase of tradebills/promissory notes by a bank/financialinstitution without recourse to the seller.

• The purchase is in the form of discounting thedocuments covering the entire risk of non-payment in collection. All risks and collectionproblems are fully the responsibility of thepurchaser (Forfaiter) who pays cash to sellerafter discounting the bills/notes.



Forfaiting Steps

• Exporter enters into a fortaiting arrangement with a forfaiterwhich is usually a reputed bank including exporter’s bank

• Exporter sells the availed notes/bills to the bank (forfaiter) at a

discount without recourse.• The agreement provides for the basic terms of the arrangement

such as cost of forfaiting, margin to cover risk, commitmentcharges, days of grace, fee to compensate the forfaiter for lossof interest due to transfer and payment delays, period of

forfaiting contract, installment of repayment, usually bi-annualinstalment, rate of interest and so on. The rate of interest ordiscount charged by the forfaiter depends upon the terms of thenote/bill, the currency in which it is determined, credit rating ofthe avalling bank, country risk of the importer etc



Forfaiting Steps

• Payment to forfaiter to the exporter of the face valueof the bill/note less discount

• Forfaiter may hold these notes/bills till maturity forpayment by the importer’s bank. Alternatively, he can

securitize them and sell the short-term paper in thesecondary market as high-yielding unsecured paper



Difference

• Factoring

1. Upto 80% finance

2. Financing almost all

receivables3. Upto 180 days

4. Advisory andadministration services

also5. does not guard against

exchange ratefluctuations

• Forfaiting

1. 100% finance

2. Finances single

transaction

3. For longer tenures

4. Only financing service

5. forfaiter charges apremium for such risk

Export Fiance

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