EXPORT FINANCING

Export Financing
Export Financing describes the activity of governments helping companies by financing their export activities. It can be in form of working capital loans or term financing for foreign buyers, packing credits etc.

It involves various risks such as political risks, exchange risks, commercial risks etc.

WORKING:

Payment Types:
Selling on Open Account Cash in Advance Pre-Shipment Finance Post-Shipment Finance

Trade Finance

BENEFITS:
Promoting Foreign Trade. It helps in reducing Trade Deficit. Helps in building Foreign exchange reserves. Internationalisation of Products. Building Relationships.

MARKET PLAYERS
COMMERCIAL BANKS:

It serve as an important intermediary for inter-country transactions.

It oversee the transactions, offer credit checks on potential buyers, contract with overseas banks in dealing with foreign purchases and smooth out any currency exchanges necessary for the exporting firm. It offers pre-shipment credit, which is short-term financing for working capital at the beginning of the export process. Banks also offer credit to foreign buyers, advance payment prior to currency changing hands and offer loans secured by the existence of foreign demand.

 EXIM BANK
Set up by an Act of Parliament in September 1981. Wholly owned by the Government of India. Exim is the principal financial institution in the country for coordinating working of institutions engaged in financing exports and imports. Offices: Head office Mumbai A network of 13 offices in India and Overseas. Domestic Offices - Ahemdabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune. Overseas Offices - Budapest, Johannesburg, Milan, Singapore, Washington DC.

FUNCTIONS OF EXIM BANK

From financing Facilitating India foreign trade and promoting Foreign trade. To creating export capability by arranging competitive financing at various stages of export cycle. Providing Consultancy and high range of services to exporters.

Forms of Export Financing

Pre-shipment Credit Post-shipment Credit Factoring

Forfaiting

Pre-shipment Credit

Pre-shipment credit means any loan or advance granted or any other credit provided by bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment. It is also referred to as Packing Credit.

Objectives Pre-shipment Credit

The objective is to enable the exporter to: Procure raw material. Carry out manufacturing process. Procure a secure warehouse for goods and material. Process and pack the goods. Ship the goods to the buyers. Meet the financial cost to the business

raw

Types and Forms of Pre-shipment Credit

Types: Packing Credit Advance against cheques /drafts etc. representing advance payment. Forms: Packing credit in Indian rupees. Packing credit in foreign currencies.

Eligibility for Pre-shipment Credit

Issued to exporter who has export in his own name. A Ten digit Exporter code number allotted by DGTF. Exporter should not be in caution list of RBI. The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.

Stages of Pre-shipment Credit

Appraisal and sanction of limits. Disbursement of packing credit advance. Follow up packing credit advance. Liquidation of packing credit advance. Overdue packing

Pre-shipment Credit in Foreign Currency

Authorized dealers are only permitted. The rate of interest on PCFC is linked to LIBOR. The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency transaction is that of the exporter. Sources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign Currency (Non Resident) Accounts.

SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE

DEFERRED CREDIT- Consumer goods are normally sold on short term credit, normally for a period up to 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.

 REDISCOUNTING OF EXPORT BILLS ABROAD (EBRD) SCHEME - 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 up to 180 days from the date of shipment (inclusive of normal transit period and grace period) .

POST-SHIPMENT FINANCE

PURPOSE: Post-shipment meant to finance export sales receivables after the date of shipment of goods to the date of realisation of exports proceeds.
BASIS: provided goods/supplies. against evidence of shipment of

 NATURE: can be both secured as well a unsecured. It can be extended up to 100% of the invoice value.
PERIOD: depending on the payment terms offered by the exporter to the importer finance can be short terms or long term.

TYPE OF EXPORTS COVERED: physical exports, capital goods and project exports and deemed exports (provided to the supplier of the goods which are supplied to the designated agencies).

POST-SHIPMENT CREDIT TYPES

EXPORT BILLS PURCHASED/DISCOUNTED (DP & DA Bills): Export Bills (Non L/C Bills) is used in terms of sale contract/order may be discounted or purchased by the banks. Used in indisputable export transactions with proper limit sanctioned to the exporter. EXPORT BILLS NEGOTIATED (BILL UNDER L/C): Due to the availability of the security, banks often become ready to extend the finance against bills under L/C. However, this arises two major risk factors for the banks: Firstly, the risk of non-performance by exporter, (in this case, issuing banks do not honour the letter of credit) Secondly, documentary risk in which the issuing bank refuses to honour its commitment. Thus, its important for the negotiating bank to check all documents before submission.

 ADVANCE AGAINST EXPORT BILLS SENT ON COLLECTION BASIS: Bills can only be sent on collection basis if the bills drawn under L/C have some discrepancies. Banks may allow advance against these collection bills to exporters depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill.
ADVANCES AGAINST EXPORTS ON CONSIGNMENTS BASIS: Banks may finance goods exported on the consignment basis at the risk of the exporter. In this case bank instructs the overseas banks to deliver the documents only against trust receipts/undertaking to deliver he sale proceeds by specified date which should be within the prescribed date.

 ADVANCES AGAINST UNDRAWN BALANCE: It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, subject to a maximum of 10% of the export value against an undertaking from the exporter. ADVANCES AGAINST CLAIMS OF DUTY DRAWBACKS: This credit is given only if the in house cost of production is higher in relation to export price due to the existing duty structure. Banks grant advances at lower rate of interest for a period of 90 days and only if other types of export finance are extended to the exporter by the same bank.

Factoring
Factoring is an arrangement in which receivables on account of sale of goods or services are sold to the factor at a certain discount. As the factor gets the title to the receivables on account of the factoring contract, factor becomes responsible for all credit control, sales ledger administration and debt collection from the customers

3 parties are involved in Factoring transactions as shown below:

Export Factoring
The process of conversion of credit sales into cash. Here, a financial institution which is usually a bank (Factor) buys the accounts receivable of a company usually a client and then pays up to 80% of the amount immediately on agreement.

The remaining amount is paid to the client when the customer pays the debt.

 Parties involved: Importer, Exporter, Import factor, Export factor. Factor bears the complete credit risk and provide a variety of services. These services include maintenance o accounts receivables, collection of export proceeds, coverage of credit risk. Export factoring is different from the general factoring as there are 4 parties involved in export factoring transactions namely: Two Separate but interrelated contracts : Between Exporter and export factor Export factor and import factor

Characteristics of Export Factoring

Applies to businesses engaged in international market. Period for factoring is 90 to 150 days. Considered to be a costly source of finance An ideal financial solution for new and emerging firms without strong financials. Credit rating is not mandatory

 Cost of factoring = Finance cost + Operating cost. (Varies from 1.5% to 3 % per month). For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged Not possible in case of Bad Debts. In India Factoring can be done for invoices as low as Rs.1,000.

 RBI as a measure to solve the problem of the working capital of the suppliers extended the factoring as the new form of the financial services in India. It was set up after the recommendation Kalyanasundaram Committee in 1988. of the

They initially developed the concept of the inland Factoring.

But later on Export Financing become one of their emphasized sector.

Mechanism
Exporter sells goods on open credit. Export receivables are factored to the factor on the non-recourse basis(generally). All the supporting documents relating to the export transaction are given to the export factor. Export factor performs its function of credit collection, sales ledger accounting and collection to the import factor with respect to the customers located in the importing country. Import factor collects the money due from the customers concerned. Import factor effects the payments to the export factor on assignment or maturity or collection or as per the agreement. Export factor makes payment to the exporter upon assignment or maturity or collection or as per the agreement.

Types of Factoring
Disclosed: Seller notifies the buyer of the factor's name in the invoice, telling the buyer to make payment to the factor on due date. the debtor is informed of the assignment of debts to the factor, and is accordingly required to cooperate with the factor for future transactions and collections. 1. Recourse Factoring: The client collects the money from the customer but in case customer dont pay the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of interest and is in very common use. Non-recourse factoring: factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.

2.

 Undisclosed Factoring: In undisclosed factoring (factoring without notification), the seller does not notify the buyer of the existence of the factoring deal, so the name of the factor is not disclosed on the invoice. In undisclosed factoring, the factor none-theless retains control, maintaining the seller's sales ledger and providing short-term finance against sales invoices, even though the transactions take place in the name of the seller.

Advantages of Export Factoring

Increases working capital Avoid additional liabilities Improves credit monitoring Reduces administrative cost Reduces suppliers credit cost Protection against bad debts in case of non recourse Better management of organization

Two Common Export Factoring Financing Arrangements and Their Costs

1. In Discount factoring, the factor issues an advance of funds against the exporters receivables until money is collected from the importer. The cost is variable, depending on the time frame and the dollar amount advanced. 2. In Collection factoring, the factor pays the exporter, less a commission charge, when receivables are at maturity, regardless of the importers financial ability to pay. The cost is fixed, ranging generally between 1 and 4 per cent, depending on the country, sales volume, and amount of paperwork involved. However, as a rule of thumb, export factoring usually costs about twice as much as export credit insurance.

Companies offering export factoring service:

SBI Global Factors Limited (SBIGFL) is the only provider of international factoring, domestic factoring and forfaiting services under one roof in India. SBIGFL has established itself as a market leader in international factoring providing value added services to its clients.

Canbank Factors Ltd

Foremost Factors Ltd (FFL) The Hongkong and Shanghai Bank Corporation Limited (HSBC) Export Credit Guarantee Corporation of India Ltd. (ECGC) India Factoring and Finance Solutions Pvt Ltd (India Factoring)

Statutes applicable to export financing in India:

Factoring transactions in India are governed by the following Acts:a) Indian Contract Act 1872

b)
c) d) e)

Sale of Goods Act 1930

Transfer of Property Act 1882 Banking Regulation Act 1949 Foreign Exchange Regulation Act 1973

Why Factoring has not become popular in India

Banks reluctance to provide factoring services Banks resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines). Problems in recovery. Factoring requires assignment of debt which attracts Stamp Duty. Cost of transaction becomes high.

FACTORING v/s BILLS DISCOUNTING

1. BILL DISCOUNTING Bill is separately examined and discounted. 1. FACTORING Pre-payment made against all unpaid and not due invoices purchased by Factor.

2.

Financial Institution does not have responsibility of Sales Ledger Administration and collection of Debts. No notice of assignment provided to customers of the Client.

2.

Factor has responsibility of Sales Ledger Administration and collection of Debts.

3.
3.

Notice of assignment is provided to customers of the Client.

FACTORING v/s BILLS DISCOUNTING (contd)

BILLS DISCOUNTING Bills discounting is usually done with recourse.
FACTORING

4.

4.

Factoring can be done without or without recourse to client. In India, it is done with recourse. Factor cannot re-discount the receivable purchased under advanced factoring arrangement.

5.

Financial Institution can get the bills re-discounted before they mature for payment.

5.

Forfaiting
Forfaiting is a mechanism by which the right for export receivables of an exporter (Client) is purchased by a Financial Intermediary (Forfaiter) without recourse to him. Credit Sale gets converted as Cash Sale Finance available up to 100% of value

MECHANICS OF FORFAITING
EXPORTER IMPORTER

FORFAITER

AVALLING BANK

HELD TILL MATURITY SELL TO GROUPS OF INVESTORS TRADE IN SECONDARY MARKET

Process
Promissory notes are sent for avalling to the Importers Bank. Availed notes are returned to the Importer. Availed notes sent to Exporter. Availed notes sold at a discount to a Forefaiter on a NON-RECOURSE basis. Exporter obtains finance. Forfaiter holds the notes till maturity or securitises these notes and sells the Short Term Paper either to a group of investors or to investors at large in the secondary market.

CHARACTERISTICS OF FORFAITING
Converts Deferred Payment Exports into cash transactions, providing liquidity and cash flow to Exporter. Absolves Exporter from Cross-border political or conversion risk associated with Export Receivables.

Finance available up to 100% (as against 75-80% under conventional credit) without recourse.
Acts as additional source of funding and hence does not have impact on Exporters borrowing limits. It does not reflect as debt in Exporters Balance Sheet. Provides Fixed Rate Finance and hence risk of interest rate fluctuation does not arise.

 Exporter is freed from credit administration. Provides long term credit unlike other forms of bank credit. Saves on cost as ECGC Cover is eliminated. Simple Documentation as finance is available against bills. Forfait financer is responsible for each of the Exporters trade transactions. Hence, no need to commit all of his business or significant part of business. Forfait transactions are confidential.

COSTS INVOLVED
Commitment Fee:- Payable to Forfaiter by Exporter in consideration of forfaiting services. Commission:- Ranges from 0.5% to 1.5% per annum. Discount Fee:- Discount rate based on LIBOR for the period concerned. Documentation Fee:involved. where elaborate legal formalities are

Service Charges:- payable to Exim Bank.

WHY FORFAITING HAS NOT DEVELOPED

Relatively new concept in India. Depreciating Rupee No ECGC Cover High cost of funds High minimum cost of transactions (USD 250,000) RBI Guidelines are vague. Very few institutions offer the services in India. Exim Bank alone does. Long term advances are not favored by Banks as hedging becomes difficult. Lack of awareness.

Duty Drawback Scheme

Drawback means the rebate of duty chargeable on any imported materials or excisable materials used in manufacture of processing of goods which are manufactured in India and exported. Duty drawback is equal to: Custom Duty paid on imported inputs SAD + Excise duty paid on indigenous inputs.

Activities covered:
Duty paid on packing material Rebate/refund is available only on the part on which the duty is paid in case of partial custom/excise duty. No drawback is available on other taxes like Sales tax and Octroi. Drawback is available on processing and job work. The rate is fixed under rule 3

 Individual exporter is not required to produce any evidence in respect of actual duties paid by him on inputs In special type of products brand rate is fixed under rule 6

Value for the purposes of section 76(1)(b) will be value at the time of export and not the original value of import of the goods

MAJOR INSTITUTIONS INVOLVED IN EXPORT FINANCE

Reserve Bank of India (RBI)
Regulate export credit and transaction including foreign exchange affairs RBI does not directly provide export finance to the exporters Adopts policies and initiates measures to encourage commercial banks and other financial institutions to provide liberal export finance.

Foreign Exchange Regulations Act, 1973

Registration The exporter shall register with and obtain importer-exporter code number from the Director General of Foreign Trade (DGFT). Declaration Prior to export of goods to any country, the exporter should furnish a declaration on The full export value of goods The exact value is not deducible, the expected value has been or will be paid within the period

Time Limit for Realization of Export Proceeds

The full export value of the goods must be realized on the due date for payment or within six months from the date of shipment whichever is earlier.

In respect of export to Indian owned warehouses abroad a maximum period of fifteen months is allowed.

Export Credit & Guarantee Corporation (ECGC)

Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India
Aim to strengthen the export promotion drive by covering the risk of exporting on credit.

It is the fifth largest credit insurer of the world in terms of coverage of national exports.

Objectives
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

GOLD SCHEME
Minister for Commerce & Industry had proposed issuance of a Gold Card to creditworthy exporters with good track record for easy availability of export credit on best terms

Objectives of the Scheme Better terms of credit rates of interest Faster processing of the application at simpler norms The credit limits will be sanctioned for a period of 3 years Gold Card holders will be given preference for grant of packing credit in foreign currency

 Issuance of foreign currency credit cards for meeting urgent payment obligations The charges schedule and fee-structure of services by banks will be lower Norms in respect of security and collaterals relaxed The banks may consider any other facility/benefit to the exporters

 Export credit as a percentage of total exports fell from 19.8 per cent in 2008 to 13.4 per cent in 2011
Year 2007-08 2008-09 2009-10 Exports 655,863 840,755 845,533 Export Credit 129,983 128,940 138,143 Export Credit 19.8 15.3 16.3

The government is now looking at various measures for 2010-11 153,794 community 13.4 extending easy 1,142,648 loans to the exporting

 RBI has sets a target of reaching 12 per cent export credit to net bank credit to banks, Aug23,2012
Export credit given to agriculture and small industries will be treated as priority sector loans. The export credit of 5.5% available to pharma companies has now been withdrawn and a duty drawback has been introduced that will reimburse companies by just 1-2 % for using imported raw material in their exports

 Over the four fiscal years ended March 31, 2012, the government injected Indian rupee (INR) 3 billion annually in EXIM, increasing the bank's paid-up capital to INR23 billion, from INR11 billion Axis, ICICI, IDBI raises 250mn USD, 750mn USD & 250mn SD.

THANK YOU!!

Group 5: Saurabh Kumar Rajat Kathuria Urvashi Chopra Priya Gupta Gaurav Mittal Kanika Aggarwal Sharad Goel