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Presented for
Seminar On
SUBMITTED BY – SUBMITTED TO –
SAURABH JAIN Dr. AMIT SHARMA
GOVT. ENGINEERING COLLEGE, AJMER GOVT ENGINEERING COLLEGE, AJMER
ND
MBA-: PART – 1 ( 2 SEM )
EXECUTIVE SUMMARY - :
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Credit and finance is the life blood of any business whether domestic or
international. It is more important in the case of export transactions due to
the prevalance of novel non-price competitive techniques encountered by
exporters in various nations to enlarge their share of world markets.
The selling techniques are no longer confined to mere quality, price or delivery
schedules of the products but are extended to payment terms offered by
exporters. Liberal payment terms usually score over the competitors not only
of capital equipment but also of consumer goods.
India has a mission to capture 2% of the global share of trade by 2010, up from
the Present level of less than 1%. Export is one of the lucrative business
activities in India. In the light of growing need & importance of exports for our
country it is of utmost importance that everyone should have an insight in the
field of exports.
In the course of last decade, the export scenario in India has undergone a
tremendous change. The liberalization initiated by the government, the keen
competition in the market place & the rapid increase in the export of services
have all combined to change the picture completely. The government also
provides various promotional schemes to the exporters for earning valuable
foreign exchange for the country and for meeting their requirements for importing
modern technology and essential inputs. Besides, the income from export
business is also exempted to the specified extent under the Income Tax Act,
1961, Refund of Central Excise and Custom Duty on export is also made under
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the Duty Drawback Scheme of the Government. There is no Sales Tax on
products meant for exports.
This project is an attempt to throw light on the various sources of export finance
available to exporters, the schemes implemented by ECGC and EXIM for export
promotion and analysis of risk in export trade related services.
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TABLE OF CONTENTS
1. Introduction to Exports 5
2. Concept of Export Financing 8
3. Import – Export Procedure 10
4. Types of Export Finance 15
5. Letter of Credit 17
6. Some Importanant Concepts in 23
Export Financing
7. Risks Involved In Export Business 26
8. Major Financial Institutions 30
9. Export Promotion Schemes 41
And Incentives
10. Policy Initiatives And Incentives by 45
the State Government
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1) INTRODUCTION TO EXPORTS:-
Export in simple words means selling goods abroad. International market being a
very wide market, huge quantity of goods can be sold in the form of exports.
Export refers to outflow of goods and services and inflow of foreign exchange.
Export finance is a short term working capital finance allowed to an exporter.
Finance and credit are available to help not only export production but also
to sell overseas customers on credit . The Foreign Trade (Development and
Regulation) Act, 1992 defines export as taking out of India any goods by land,
sea or air. "Export" with its grammatical variations and cognate expressions,
means taking out of India to a place outside India, as per Section 2 (18) or the
Customs Act, 1962. The CA further defines "export goods" as "any goods which
are to be taken out of India to a place outside India".
The Customs Act also contains definition of exporter, who in relation to any
goods at any time between their entry for export and the time when they are
exported includes any owner or any person holding himself out to be the
exporter.
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3. Employment opportunities: Export trade calls for more production,
which ultimately opens door for more employment opportunities, not
only in the export sector but also in allied sectors like banking,
insurance etc.
4. Financing of Development plans: Export earning can be a source of
financing development plans through the import of capital goods and
technology. The foreign exchange earned thru exports can be utilized
for planned economic development of a country.
5. Optimum utilization of Resources: There can be optimum use of
resources. The excess production can be directed to other countries,
there by enabling the exporting country to earn favorable foreign
exchange.
6. Research & Development: Goods to be exported to other countries
may not be sold in the same form as it is available in the local markets.
Products have to be redesigned according the requirement of the
importing country. This leads to constant R & D, which ultimately leads
to improve technology and production system. The fruits of R & D
would benefit the customers not only in the overseas market but also in
the domestic markets.
7. Spread Effect: Because of export industry, other sectors also expand
such as banking, transport, insurance etc. and at the same time a
number of ancillary industries come into existence to support the
export sector.
8. High Standard of Living: Export trade calls for more production, which
in turn increases employment opportunities. More employment means
more purchasing power as a result of which people enjoy new and
better quality goods, which in turn improves standard of living of the
people.
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B. From the viewpoint of a business organization:
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2) CONCEPT OF EXPORT FINANCING :-
2.2) APPRAISAL
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
Obligations to the Trade Control Authority under the EXIM policy
Obligations to ECGC
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Guidenlines 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 IECD.
d) Export Credit Guarantee Corporation guidelines.
e) Guidelines of Foreign Exchange Dealers Association of India.
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3 ) Import – Export Procedure
1 Seller and Buyer conclude a sales contract, with method of payment usually
by letter of credit (documentary credit).
2 Buyer applies to his issuing bank, usually in Buyer's country, for letter of
credit in favor of Seller (beneficiary).
3 Issuing bank requests another bank, usually a correspondent bank in Seller's
country, to advise, and usually to confirm, the credit.
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4 Advising bank, usually in Seller's country, forwards letter of credit to
Seller informing about the terms and conditions of credit.
5 If credit terms and conditions conform to sales contract, Seller
prepares goods and documentation, and arranges delivery of
goods to carrier
6 Seller presents documents evidencing the shipment and draft (bill
of exchange) to paying, accepting or negotiating bank named in the
credit (the advising bank usually), or any bank willing to negotiate.
under the terms of credit
7 Bank examines the documents and draft for compliance with credit
terms. If complied with, bank will pay, accept or negotiate.
8 Bank, if other than the issuing bank, sends the documents and
draft to the issuing bank.
9 Bank examines the documents and draft for compliance with credit
terms. If complied with, Seller's draft is honored.
10 Documents release to Buyer after payment, or on other terms
agreed between the bank and Buyer.
11 Buyer surrenders bill of lading to carrier (in case of ocean freight)
in exchange for the goods or the delivery order.
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4) TYPES OF EXPORT FINANCE
Meaning :
Definition :
Financial assistance extended to the exporter from the date of receipt of the
export order till the date of shipment is known as pre-shipment credit. Such
finance is extended to an exporter for the purpose of procuring raw materials,
processing, packing, transporting, warehousing of goods meant for exports.
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♦ To pay for export documentation expenses.
POST-SHIPMENT FINANCE
Meaning :
Post shipment finance is provided to meet working capital requirements after the
actual shipment of goods. It bridges the financial gap between the date of
shipment and actual receipt of payment from overseas buyer thereof. Whereas
the finance provided after shipment of goods is called post-shipment finance.
Definition :
Credit facility extended to an exporter from the date of shipment of goods till the
realization of the export proceeds is called Post-shipment Credit.
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5) LETTER OF CREDIT
Introduction :
This is one of the most popular and more secured of method of payment in
recent times as compared to other methods of payment. A L/C refers to the
documents representing the goods and not the goods themselves. Banks are not
in the business of examining the goods on behalf of the customers. Typical
documents, which are required includes commercial invoice, transport document
such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in
documents and not goods.
Definition :
A Letter of Credit can be defined as “an undertaking by importer’s bank stating
that payment will be made to the exporter if the required documents are
presented to the bank within the validity of the L/C”.
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Negotiating bank: The bank to whom the beneficiary presents his
Documents for payment under L/C
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Advantages of Letters of Credit
To the exporter:
• No blocking of funds.
• Clearance of import regulations.
• Free from liability.
• Pre- shipment finance.
• Non-refusal by importer.
• Reduction in bad-debts.
To the importer:
• Better terms of trade.
• Assurance of shipment of goods.
• Overdraft facility.
• No blocking of funds.
• Delivery on time.
• Better relations.
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Sample Document: Letter of Credit (Documentary Credit)
To,
UVW Exports
88 Prosperity Street East, Suite 707
Export-City and Postal Code
Dear Sirs:
We have been requested by The Sun Bank, Sunlight City, Import-Country to advise
that they have opened with us their irrevocable documentary credit number SB-
87654
For account of DEF Imports, 7 Sunshine Street, Sunlight City, Import-Country in
your favor for the amount of not exceeding Twenty Five Thousand U.S. Dollars
(US$25,000.00) available by your draft(s) drawn on us at sight for full invoice value
3. . Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable
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copies, issued to order of The Sun Bank, Sunlight City, Import-Country, notify
the above accountee, marked "freight Prepaid", dated latest March 19, 2005,
and showing documentary credit number.
4. Insurance policy in duplicate for 110% CIF value covering Institute Cargo
Clauses (A), Institute War and Strike Clauses, evidencing that claims are
payable in Import-Country.
Special conditions:
1. All documents indicating the Import License No. IP/123456 dated January 18, 2005.
Documents must be presented for payment within 15 days after the date of shipment.
Draft(s) drawn under this credit must be marked
We confirm this credit and hereby undertake that all drafts drawn under and in conformity
with the terms of this credit will be duly honored upon delivery of documents as specified, if
presented at this office on or before March 26, 2005
__________________________
Authorized Signature
Unless otherwise expressly stated, this Credit is subject to the Uniform Customs and Practice
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for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No.
500.
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6.1 - FORFEITING
The word `forfeit' is derived from the French word `a forfeit' which means the
surrender of rights.
Simply put, Forfeiting is the non-recourse discounting of export receivables. In a
forfeiting transaction, the exporter surrenders, without recourse to him, his rights
to claim for payment on goods delivered to an importer, in return for immediate
cash payment from a forfeiter. As a result, an exporter in India can convert a
credit sale into a cash sale, with no recourse to the exporter or his banker.
All exports of capital goods and other goods made on medium to long term credit
are eligible to be financed through forfeiting.Receivables under a deferred
payment contract for export of goods, evidenced by bills of exchange or
promissory notes, can be forfaited.
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● As forfeiting offers without recourse finance to an exporter, it does not impact
the exporter's borrowing limits. Thus, forfeiting represents an additional source of
funding, contributing to improved liquidity and cash flow
● Provides fixed rate finance; hedges against interest and exchange risks arising
from deferred export credit
● Exporter is freed from credit administration and collection problems
● Forfaiting is transaction specific. Consequently, a long term banking
relationship with the forfeiter is not necessary to arrange a forfeiting transaction
● Exporter saves on insurance costs as forfeiting obviates the need for export
credit insurance
6.2 - FACTORING
Factoring offers smaller companies the instant cash advantage that was once
available only to large companies with high sales volumes. With Factoring,
there's no need for credit or collection departments, and no need to spend your
profits on maintaining accounts receivables.
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7) RISKS INVOLVED IN THE EXPORT BUSINESS
Whether it be the exporter himself, or the bank financing the exporter in the pre-
shipment and post-shipment stages, or the bank negotiating the documents of
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the exporter, or the bank purchasing the Letter of Credit on behalf of the
exporter, or the bank adding its own confirmation to the overseas Irrevocable
Letter of Credit, or the factoring agent, or the forfaiting agent, or the bank adding
its guarantee in a bid bond – each of these agencies or organisations are faced
with risk.
To understand each type of risk and to appreciate the effects of such risk, we
must delve into each of these kinds of risk associated with export trade
the risk of non-payment for goods will be dealt with in maximum detail while
compared to the other kinds of risk related to export trade. This is because the
risk of non-payment has several aspects to it.
COMMERCIAL RISKS
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to the exporter. Here, by payment, we refer to the gross invoice value of the
goods delivered to and accepted by the buyer.
▪ Buyer’s failure to accept the goods:- This means failure or refusal on the part of
the buyer to accept goods which have already been exported by the exporter.
Reasons generally cited for such events include quality disputes.
▪ Insolvency of the bank opening the Irrevocable Letter of Credit:
▪ Default of the bank opening the irrevocable Letter of Credit:
POLITICAL RISKS
▪ Transfer of Payment risk: This refers to the imposition of any restriction by the
Government of the buyer’s country or any Government action which may block or
delay the transfer of payment made by the buyer.
▪ War:
▪ New import restrictions:
OTHER RISKS
▪ Causes inherent in the nature of the goods:
▪ Buyer’s failure:
▪ Agent’s failure: Risk also comes in the form of insolvency or protracted default
of any agent of the exporter.
▪ Collecting Bank’s failure: Again, as in the above point, there is the risk of
insolvency or default of the collecting bank.
▪ Shipments on consignment basis: Here the risk is two-fold: there is the political
risk of the agent’s country; there is also the commercial risk of non-payment by
“ultimate buyers” if the agent sells the goods to them on credit terms.
▪ Shipments made by air: Where shipments are made by air, the buyers are
often able to obtain delivery of the goods from the airlines before making
payment of the bills or accepting them for payment, as the case may be. There
is the risk of the buyer failing to make the payment subsequently as per the
contract. This is generally referred to as shipping on OPEN DELIVERY terms.
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Exchange Risk
Extended credit period refers to bills carrying medium or long term maturities.
This involves receivables under a deferred payment contract for export of goods,
evidenced by bills of exchange or promissory notes. All exports of capital goods
and other goods made on medium to long term credit are classified as having an
extended credit period.
Risk arising out of an extended credit period or deferred payment for goods
exported is reduced to some extent through the mechanism of Forfaiting.
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8) MAJOR FINANCIAL AND OTHER INSTITUTIONS
For providing credit and finance and insuring export credit risk, there are 2
primary institutions i.e. EXIM Bank and ECGC.
8.1 - EXIM BANK
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exports .
Offices :-
Head office – Mumbai.
A network of 13 offices in India and Overseas.
Domestic Offices - Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata,
Mumbai, New Delhi, Pune.
Overseas Offices - Budapest, Johannesburg, Milan, Singapore, Washington DC.
Purpose : -
The EXIM bank was established for the purpose of financing medium and long
term loan to the exporters thereby promoting foreign trade of India.
Main Objectives : -
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● To provide financial assistance (medium and long term) to exporters and
importers.
● To function as the principal financial institution for coordinating the working of
institutions engaged in providing export finance.
●To deal with all matters that may be considered to be incidental or conducive to
the attainment of above objectives.
Functions : -
The assistance provided by EXIM Bank to the exporters can be grouped under
two heads:
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• Assistance to Overseas Buyers:
(a) It offers “Overseas Buyer’s Credit” facility to foreign importers for
import of Indian capital goods and related services with repayment
spread over a period of years.
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Exim Bank plays the role of an intermediary for facilitating the forfaiting
transaction between the Indian exporter and the overseas forfeiting agency.
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It promotes Indian consultancy by having tie up with
International Finance Corporation, Washington D.C.
Africa Project Development Facility
Africa Enterprise Fund
Technical Assistance & Trust Funds
Mekong Project Development Facility
Eastern & Southern African Trade & Development Bank (PTA Bank)
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African Management Services Company (AMSCO), Netherlands
EXAMPLES
INFORMATION Function
Exporters/Importers
Industry/Market Reports
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Trade Regulations & Laws
Country Reports
International Quality Standards
Partner Identification
Product Display
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In order to provide export credit and insurance support to Indian exporters,
the GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was
transformed into export credit guarantee corporation limited (ECGC) in 1964. Since
1983, it is now know as ECGC of India Ltd.
ECGC is a company wholly owned by the GOI. It functions under the
administrative control of the Ministry of Commerce and is managed by a Board of
Directors representing government, Banking, Insurance, Trade and Industry. The
ECGC with its headquarters in Bombay and several regional offices is the only
institution providing insurance cover to Indian exporters against the risk of non-
realization of export payments due to occurrence of the commercial and political
risks involved in exports on credit terms and by offering guarantees to commercial
banks against losses that the bank may suffer in granting advances to exports, in
connection with their export transactions.
OBJECTIVES OF ECGC:
To protect the exporters against credit risks, i.e. non-repayment by buyers
To protect the banks against losses due to non-repayment of loans by
exporters
The covers issued by ECGC can be divided broadly into four groups:
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2. SPECIFIC POLICIES – designed to protect Indian firms against payment risk
involved in (i) exports on deferred terms of payment (ii) service rendered to foreign
parties, and (iii) construction works and turnkey projects undertaken abroad.
3. FINANCIAL GUARANTEES – issued to banks in India to protect them from
risk of loss involved in their extending financial support to exporters at pre-shipment
and post-shipment stages; and
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9) EXPORT PROMOTION SCHEMES AND INCENTIVES
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inputs as imported and additional
specified percentage of fob value
duty is not levied
of exports made in freely
convertible currency
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A unit can be set up for
Electronic Facilitate export oriented production
manufacture and development of
Hardware of computer hardware
electronic hardware or electronic
Technology
hardware and software in an
Parks
integrated manner
The objective of the scheme Export Houses, Trading Houses, Star Trading
Houses, Superstar Trading Houses is to give recognition to the established
exporters and large export houses to build up the marketing infrastructures and
expertise required for export promotions.
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The exporters who have been granted the status of export house/trading house
are entitled to a number of benefits under the EXIM policy including the following:
• License/Certificate/Permission and customs clearances for both imports
and exports on self declaration basis
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10) POLICY INITIATIVES AND INCENTIVES BY THE
STATE GOVERNMENTS
The state governments generally do not distinguish between production for
domestic market and production for export market. Therefore, there had
been few specific measures taken by the state governments especially
targeted at exporting units. However, the state governments have taken a
number of policy measures to encourage industrial activity in the state.
These measures mainly relate to
(a) Capital investment subsidy or subsidy for the preparation of
feasibility report, project report, etc.;
(b) Waiver or deferment of sales tax or providing loans for sales tax
purposes;
(c) Exemption from entry tax, octroi duty, etc.;
(d) Waiver of electricity duty;
(e) Power subsidy;
(f) Exemption from taxes for certain captive power generation
units;
(g) Exemption from stamp duties; and
(h) Provision of land at concessional rate, etc.
It may be noted that most of the exemptions tend to encourage
capital or power-intensive units, though some concessions are linked to
turnover. Most of the concessions in the state industrial policies have been
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designed keeping in view the manufacturing industries. An analysis of
industrial policies of various states indicates that most state governments
do compete among themselves in extending such concessions.
Suitable provision has been made in the Annual Plan of the Department of
Commerce for allocation of funds to the states on the twin criteria of gross
exports and the rate of growth of exports.
The States shall utilise this amount for developing infrastructure such as roads
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connecting production centres with the ports, setting up of Inland Container
Depots and Container Freight Stations, creation of new State level export
promotion industrial parks/zones, augmenting common facilities in the existing
zones, equity participation in infrastructure projects, development of minor ports
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• Residual essential activities connected with marketing promotion efforts
abroad.
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Research and product development
Reverse visits of the prominent buyers from the project focus
countries
• To undertake export potential survey of the states
• To take registration charges for product registration abroad for
pharmaceuticals, bio-technology, and agro-chemicals
• To test charges for engineering products abroad
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awareness among the target beneficiaries due to poor marketing of the
scheme.
♦ Export Finance is a very important branch to study & understand the overall
gamut of the international finance market.
♦ Availability of favorable Export finance schemes directly impacts the local
trade, encourages exporters, enlarges markets abroad, improves quality of
domestic goods and overall helps the nation boost its exchange earnings.
♦ The Government of any nation plays a very vital role in boosting export
turnover. The credit policy of the Indian Government is also changed
depending upon the needs of the exporters, global trade environment etc.
The credit policy of Oct 2001 is a pointer in this direction.
♦ ECGC and EXIM Bank take a lot of efforts for Export promotion. The
strategies of these 2 agencies in India should be flexible & their finance
schemes should be constantly synchronized with the changing scene of world
trade. This alone can help Indian exporters to stand competition in world
markets effectively and more gain-fully.
♦ Finally, a very essential question needs to be answered by the International
Trade gurus with reference to “Relevance of EXIM Policy in the current
times”. Exim policies had emerged when the state decided to limit imports
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and encourage exports in order to maintain currency reserves. However, such
ideas backfired: consumers were hurt and producers turned lazy.
Bibliography- :
Assistance provided by Exim ( 1998 ) . Retrieved on August 12 , from
www.eximbank.com
Indian Trade Marching ( 2002 ) . Retrieved on July 15, from
www.exportimporttrade.com
Indian prospectives of Business ( 2006 ) . Retrieved on July 10 from
www.tradeindia.com
Ram Paras ( 2005 ). Export –What Where & How . Delhi : Trade India Books
Mahajan M.. I. A Guide to Export . Mumbai : Export Intro Books
ECGC Services Manual
RBI Mid term review for year 2001-02
Import – Export Procedure ( 2004 ) Retrieved on August 10, 2009 from www.
Exportprocedures.com
A.D. Pillai ( 2003 ) .Risks involved in Export Financing. New Delhi – The
Financial Express
Borleaug D. Global Exports ( 2006 ) Washington D.C. -Economic Times
Pillai . M . Analysis of Risk ( 2008 ), New Delhi – The Business Standard
Objectives and Scope ( 2002 ) . Retrieved on August 10 , from
www.ecgcindia.com
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