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Fall - 2015

Master in Business Administration: Semester IV


IB0018 : Export-Import Finance

Q1. Discuss the role of EXIM bank in promoting foreign trade


Answer.
Role of EXIM bank in promoting foreign trade
The Export-Import Bank of India, also known as Exim Bank of India, is the leading export
finance institution in the country. The bank was set up in the year 1982 under the Export-Import
Bank of India Act 1981. The Government of India launched the Export-Import Bank Of India
with an aim to augment exports from India and also to combine the country's foreign trade and
investment with the overall economic growth.
Objectives
Export-Import Bank of India plays the role of source of finance, promoter, coordinator and
consultation to India's Foreign Trade. The bank is the coordinator of the Working Group
Mechanism for the clearance of projects, service exports and deferred payment exports. This
group comprises of Exim Bank and Government of India representatives from the Ministries of
Finance, Commerce and external Affairs, Export Credit Guarantee Corporation of India Ltd,
commercial banks that are certified foreign exchange dealers and the Reserve Bank of India.
Exim Bank offers a diverse range of financing services for the Indian exporter, including a
variety of Export Credit Facilities and Finance for Export Oriented Companies. Exim Bank's
mission is to facilitate globalisation of Indian business. EXIM Bank arranges short term
(normally upto 180 days) lines of credit in foreign currency from foreign lending agencies and
lends the funds to AD banks.

Functions

The Bank offers a range of financing programmes that match the menu of Exim Banks of
the industrialized countries. However, the Bank is atypical in the universe of Exim Banks
in that it has over the years evolved, so as to anticipate and meet the special needs of a
developing country. The Bank provides competitive finance at various stages of the
export cycle.


The Bank finances exports of Indian machinery, manufactured goods, consultancy and
technology services on deferred payment terms. It also seeks to co-finance projects with
global and regional development agencies to assist Indian exporters in their efforts to

participate in such overseas projects.


The Bank is involved in promotion of two-way technology transfer through the outward
flow of investment in Indian joint ventures overseas and foreign direct investment flow
into India. It is also a Partner Institution with European Union and operates for
facilitating promotion of joint ventures in India through technical and financial
collaboration with medium sized firms of the European Union.

Conclusion
The primary objective of the Export-Import Bank of India is to provide financial assistance to
importers and exporters and function as the top financial institution. Some of the services of the
bank include: overseas investment finance, film finance, export credit, finance for export
oriented units and agricultural & SME finance.

Q2. What is the need for export finance in India? Write a short note on export financing
facilities in India.
Answer.
Need for export finance
Export finance refers to financial assistance extended by banks and other financial institutions to
businesses for the shipping of products outside a country or region. Export financing enables
MSMEs to expand its reach to a global audience. Export financing is a major component of
successful export transactions. Exporters need finance for purchasing, processing, packaging and
for their day to activities. Banks in every country provide export finance facilities on liberal
terms. In India too, all the AD banks provide export finance to exporters under the guidelines
provided by RBI. An exporter needs finance at two stages, i.e., before shipment (pre-shipment)
and after shipment (post shipment).
Export financing facilities in India
'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.
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.

The purpose of the export finance facilities is to provide financial support to suppliers/exporters
in the Member Countries to enable them to perform export transactions. Under this category,
There are Pre-export Finance, Single/Multiple Supplier Refinancing Facilities and also Export
Finance Facility Guarantees.
Typically, suppliers/exporters loans will be short-term. Longer tenors may apply to cases where
traded goods have long manufacturing periods (e.g. capital goods) and /or trade contracts terms
provide deferred payment options.

Q3. As an exporter, what benefits you can get from Post shipment finance scheme? Discuss
the types of post shipment credits.
Answer.
Post shipment finance scheme
Post shipment finance may be defined as a loan or advance granted by banks to their exporter
clients after the shipment of goods till the date of receipt of payment from overseas buyer or
credit opening bank. It is a short term credit provided by banks to exporters to meet their
working capital requirements after the shipment of goods. When an exporter has made the
shipment and submits his documents to the bank, the bank adjusts the packing credit granted
earlier and extends the remaining amount of export bill to exporter. The amount of packing credit
given earlier is also converted into post shipment finance.

Benefits

Improves liquidity as you get paid for your exports bills in advance before the bills are

due for payment


It eases your cash flow position by providing greater financial liquidity and flexibility in
administering your receivables.

It allows you to extend more liberal terms of payment to your existing buyers as well as
new buyers thus competiting with foreign suppliers Assign the benefits under your credit
insurance policies as additional collateral to banks for additional financing or financing

on better terms.
Export bills eligible for discounting can be under various modes of payments. These

include the following:


Open Account Terms Documents Against Acceptance (DAA), Document Against
Payments (DAP) Post Dated Cheques Letters of Credit Bank Guarantees

Types of Post Shipment Finance


Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or
seller against a shipment that has already been made. This type of export finance is granted from
the date of extending the credit after shipment of the goods to the realization date of the exporter
proceeds. Exporters dont wait for the importer to deposit the funds.
The post shipment finance can be classified as:

Export Bills purchased/discounted.


Export Bills negotiated
Advance against export bills sent on collection basis.
Advance against export on consignment basis
Advance against undrawn balance on exports
Advance against claims of Duty Drawback.

Q4. Write short notes on:


a) Export credit Guarantee Corporation
b) Foreign exchange risk
Answer.
a) Export credit Guarantee Corporation
Almost all countries of the world have set up organizations in their countries to provide credit
risk insurance facilities to their exporters. In India, Government of India has set up ECGC to
cover export credit risk. In 1957, Government of India set up the Export Risk Insurance
Corporation of India. In 1964, the name was changed to Export Credit and Guarantee
Corporation Ltd. Once again in 1983, the name was changed to Export Credit Guarantee
Corporation of India Ltd. It is a Government of India organization, having Head office in
Mumbai. There are a number of regional offices and branch offices all over India. ECGC is

under the administrative control of Ministry of Commerce and is managed by a Board of


Directors consisting of representatives from government, banking, insurance, trade and industry.
Two main functions of ECGC are:
1. It covers the risk of non-payment due to commercial and political risks arising in respect of
exports on credit terms.
2. It issues guarantees to banks underwriting a major part of the loss that may arise in respect of
advance or other support they extend to exporters in connection with their export business.

b) Foreign exchange risk


Foreign exchange risk is the risk to the value of ones assets when it is valued in another
currency. The exchange rate of a currency to another may be volatile. It is this change in value of
the currency that gives rise to foreign exchange risk. Depreciation in the currency in which your
assets are denominated will result in a lower value of your assets when measured in another
currency compared to the period before depreciation.
Businesses without commercial contracts expressed in domestic currency (or fixed by an agreed
rate of exchange) are fully exposed to exchange risk. Exchange risk may arise because of
exchange rate movements in the period from the original commercial contract to the time of
settlement of the domestic equivalent of the foreign currency amount.

Q5. Discuss the payment options available to exporter and importer.


Answer.
Payment options available to exporter and importer
There are 3 standard ways of payment methods in the export import trade international trade
market:
1. Clean Payment
2. Collection of Bills
3. Letters of Credit L/c
1. Clean Payments

Clean payment method offers a relatively cheap and uncomplicated method of payment for both
importers and exporters.
There are basically two type of clean payments:
Advance Payment
In advance payment method the exporter is trusted to ship the goods after receiving payment
from the importer.
Open Account
In open account method the importer is trusted to pay the exporter after receipt of goods. The
main drawback of open account method is that exporter assumes all the risks while the importer
get the advantage over the delay use of company's cash resources and is also not responsible for
the risk associated with goods.
2. Payment Collection of Bills in International Trade
The Payment Collection of Bills also called Uniform Rules for Collections is published by
International Chamber of Commerce (ICC) under the document number 522 (URC522) and is
followed by more than 90% of the world's banks.
There are two methods of collections of bill:
Documents Against Payment D/P
In this case documents are released to the importer only when the payment has been done.
Documents Against Acceptance D/A
In this case documents are released to the importer only against acceptance of a draft.
3. Letter of Credit L/c
Letter of Credit also known as Documentary Credit is a written undertaking by the importers
bank known as the issuing bank on behalf of its customer, the importer (applicant), promising to
effect payment in favour of the exporter (beneficiary) up to a stated sum of money, within a
prescribed time limit and against stipulated documents. It is published by the International
Chamber of Commerce under the provision of Uniform Custom and Practices (UCP) brochure
number 500.

Various types of L/Cs are:


Revocable & Irrevocable Letter of Credit (L/c)
A Revocable Letter of Credit can be cancelled without the consent of the exporter. An
Irrevocable Letter of Credit cannot be cancelled or amended without the consent of all parties
including the exporter.
Sight & Time Letter of Credit
If payment is to be made at the time of presenting the document then it is referred as the Sight
Letter of Credit. If payment is to be made after the lapse of a particular time period as stated in
the draft then it is referred as the Term Letter of Credit.
Confirmed Letter of Credit (L/c)
Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to
that of the issuing bank.

Q6. What is custom duty? Discuss its types.


Answer:

Custom duty

A tax levied on imports (and, sometimes, on exports) by the customs authorities of a country to
raise state revenue, and/or to protect domestic industries from more efficient or predatory
competitors from abroad.
Customs duty is based generally on the value of goods or upon the weight, dimensions, or some
other criteria of the item (such as the size of the engine, in case of automobiles)
Types
Export duties are levied occasionally to mop up excess profitability in international prices of
goods in respect of which domestic prices may be low at the given time. But the sweep of import
duties is quite wide. Import duties are generally of the following types:Basic Duty: - it may be at the standard rate or, in the case of import from some other countries,
at the preferential rate.
Additional customs duty: - equal to central excise duty leviable on like goods produced or
manufactured in India. Additional duty is commonly referred to as Countervailing duty or C.V.D.

It is payable only if the imported article is such as, if produced in India, its process of production
would amount to 'manufacture' as per the definition in Central Excise Act, 1944. Exemption from
excise duty has the effect of exempting additional duty of customs.
Additional duty is calculated on a value base of aggregate of value of the goods including
landing charges and basic customs duty. Other duties like anti-dumping duty, safeguard duty etc
are not taken into account. In case of goods covered by provisions of the Standards of Weights
and Measures Act, 1976, the value base would be the retail sale price declared on the package of
the goods less the rebate as notified under the Central Excise Act, 1944 for such goods
True Countervailing duty or additional duty of customs: - is levied to offset the disadvantage
to like Indian goods due to high excise duty on their inputs. It is levied to provide a level playing
field to indigenous goods which have to bear various internal taxes.
Anti-dumping Duty/ Safeguard Duty: - for import of specified goods with a view to protecting
domestic industry from unfair injury. It would not apply to goods imported by a 100% EOU
(Export Oriented Units) and units in FTZ (Free Trade Zones) and SEZ (Special Economic
Zones). On export of goods, anti-dumping duty is relatable only by way of a special brand rate of
drawback.
Education cess: - at the prescribed rate is levied as a percentage of aggregate duties of customs.
If goods are fully exempted from duty or are chargeable to nil duty or are cleared without
payment of duty under prescribed procedure such as clearance under bond, no cess would be
levied.

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