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EXPORT AND IMPORT FINANCE IN INDIA

CHAPTER 1
INTRODUCTION OF BANK

The statutory basis for control of imports into India is found


in the Foreign Trade (Development and Regulation) Act, 1992 which
empowers the Central Government to prohibit or otherwise control
imports. Deriving power under this Act, Central Government has notified
the Export and Import Policy, 1992-97.

Export and Import financing provides importers who have


orders from customers in the United States, or foreign customers backed
by a letter of credit, with the necessary financial backing to provide their
overseas supplier with a letter of credit to guarantee payment of goods.

The whole process works because the importer will


supply you with basic information on the import company and their
customers. You then evaluate the credit worthiness of the customers. For
each of the approved customers, the importer will supply us with copies
of purchase orders that are to be filled. We will then arrange a letter of
credit to be issued to the suppliers bank with the supplier as the
beneficiary.

Financing can be arranged to cover 100% of the


transaction. This provides the importer with sufficient financial strength
to sell larger orders than they would be able to on their own financial
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strength. Depending on the strength of the buyer, this may be done on
open account with the domestic buyer, allowing the buyer to increase
their purchasing power.

Export finance is a short term working capital finance


allowed to an exporter. An exporter may avail financial assistance from
any bank, which is taking care of the following factors:

Funds should be available to the exporter at the required


time to ensure availability of funds to eligible borrowers. Reserve Bank
has prescribed time schedule to Commercial banks for speedy sanctioning
of export credit limits. Further, banks are advised that 12% of their total
credit should be for export finance.

EXPORT AND IMPORT FINANCE IN INDIA

1.1 HISTORY OF BANK:

A bank is

a financial

institution and

a financial

intermediary that

accepts deposits and channels those deposits into lending activities, either
directly or through capital markets. A bank connects customers that have
capital deficits to customers with capital surpluses Due to their critical
status within the financial system and the economy generally; banks
are highly regulated in most countries. Most banks operate under a
system known as fractional reserve banking where they hold only a
small reserve of the funds deposited and lend out the rest for profit. They
are generally subject to minimum capital requirements which are based
on an international set of capital standards, known as the Basel Accords.

The oldest bank still in existence is Monte dei Paschi di Siena,


headquartered in Siena, Italy, which has been operating continuously
since

1472

It

is

followed

by Berenberg

Bank of

Hamburg

(1590) and Sveriges Riks bank of Sweden (1668).

Banking in the modern sense of the word can be traced to medieval and
early Renaissance Italy,

to

the

rich
3

cities

in

the

north

EXPORT AND IMPORT FINANCE IN INDIA


like Florence, Venice and Genoa.

The Bardi and Peruzzi families

dominated banking in 14th century Florence, establishing branches in


many other parts of Europe. One of the most famous Italian banks was
the Medici Bank, set up by Giovanni di Bicci de' Medici in 1397.

1.2

DEFINATION OF BANK:
Oxford Dictionary defines a bank as an establishment for custody

of money, which it pays out on customers order.


A financial institution that provides services, such as accepting deposits,
giving business loans and auto loans, mortgage lending, and basic
investment products like savings accounts and certificates of deposit. The
traditional commercial bank is a brick and mortar institution with tellers,
safe deposit boxes, vaults and ATMs. However, some commercial banks
do not have any physical branches and require consumers to complete all
transactions by phone or Internet. In exchange, they generally pay higher
interest rates on investments and deposits, and charge lower fees.

EXPORT AND IMPORT FINANCE IN INDIA

1.3 FEATURES OF BANK :


1. Dealing in money :
Bank is a financial institution which deals with other
peoples money i.e. money given by depositors.
2. Individual/ firm/ Company :
A bank may be a person, firm or a company. A banking
company means a company which is in the business of banking.
3. Acceptance of Deposit :
A bank accepts money from the people in the form of
deposits which are usually repayable on demand or after the expiry
of a fixed period. It gives safety to the deposits of its customers. It
also acts as a custodian of funds of its customers.

4. Giving Advances :
A bank lends out money in the form of loans to those who
require to it for different purposes.

EXPORT AND IMPORT FINANCE IN INDIA

5. Payment and withdrawal :


A bank provides easy payment and withdrawal facility to its
customers in the form of cheques and drafts, it also brings bank
money in circulation. This money is in the form of cheques, drafts
etc.
6. Agency and Utility Services :
A bank provides various banking facilities to its customers.
They include general Utility services and Agency services.
7. Profit and service Orientation :
A bank is a profit seeking institution having service oriented
approach.
8. Ever Increasing Function :
Banking is a evolutionary concept. There is a continuous
expansion and diversification as regards the functions, services and
activities of a bank.

EXPORT AND IMPORT FINANCE IN INDIA

1.4

Types of Bank.

1) Scheduled Bank
All banks which are included in the Second Schedule to the Reserve
Bank of India Act, 1934 are scheduled banks. These banks comprise
Scheduled Commercial Banks and Scheduled Cooperative Banks. The
type of banks comes under these Scheduled Commercial Banks and
Scheduled Cooperative Banks can be seen in the above figure. All most
all banks are Scheduled banks in India.
2) Commercial Banks
Commercial banks may be defined as, any banking organization that
deals with the deposits and loans of business organizations Commercial
banks issue bank checks and drafts, as well as accept money on term
deposits. Commercial banks also act as moneylenders, by way of
installment loans and overdrafts. Commercial banks also allow for a
variety of deposit accounts, such as checking, savings, and time deposit.
These institutions are run to make a profit and owned by a group of
individuals.
3) Public Sector Banks
These are banks where majority stake is held by the Government of India.
Examples of public sector banks are: SBI, Bank of India, Canara Bank,
etc.

EXPORT AND IMPORT FINANCE IN INDIA


4) Private Sector Banks
These are banks majority of share capital of the bank is held by private
individuals. These banks are registered as companies with limited
liability. Examples of private sector banks are: ICICI Bank, Axis bank,
HDFC, etc.
5) Foreign Banks
These banks are registered and have their headquarters in a foreign
country but operate their branches in our country. Examples of foreign
banks in India are: HSBC, Citibank, Standard Chartered Bank, etc.
6) Regional Rural Banks
Regional Rural Banks were established under the provisions of an
Ordinance promulgated on the 26th September 1975 and the RRB Act,
1976 with an objective to ensure sufficient institutional credit for
agriculture and other rural sectors. The area of operation of RRBs is
limited to the area as notified by GOI covering one or more districts in
the State. RRBs are jointly owned by GOI, the concerned State
Government and Sponsor Banks (27 scheduled commercial banks and
one State Cooperative Bank); the issued capital of a RRB is shared by the
owners in the proportion of 50%, 15% and 35% respectively.Prathama
bank is the first Regional Rural Bank in India located in the city
Moradabad in Uttar Pradesh.

7) Cooperative Banks

EXPORT AND IMPORT FINANCE IN INDIA


A co-operative bank is a financial entity which belongs to its members,
who are at the same time the owners and the customers of their bank.
Co-operative banks are often created by persons belonging to the same
local or professional community or sharing a common interest. Cooperative banks generally provide their members with a wide range of
banking and financial services (loans, deposits, banking accounts,
etc).They provide limited banking products and are specialists in
agriculture-related products. Cooperative banks are the primary
financiers of agricultural activities, some small-scale industries and selfemployed workers. Co-operative banks function on the basis of "noprofit no-loss".

1.5 OBJECTIVES OF THE STUDY:

EXPORT AND IMPORT FINANCE IN INDIA


1. To understand all the dimensions of import & export finance.

2. To document the various source of import & export finance in


India.

3. To examine the documents used in the import & export finance.

4. To learn about the strategies & techniques used by banks to finance


the importer & exporter.

5. To find various types of import export finance.

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1.6 WHAT IS IMPORT AND EXPORT

Import is when you buy something from another country and get
it shipped to you. The term import is derived from the conceptual meaning as to
bring in the goods and services into the port of a country. The buyer of such
goods and services is referred to an "importer" who is based in the country of
import whereas the overseas based seller is referred to as an "exporter". Thus an
import is any good (e.g. a commodity) or service brought in from one country to
another country in a legitimate fashion, typically for use in trade. It is a good
that is brought in from another country for sale Import goods or services are
provided to domestic consumers by foreign producers. An import in the
receiving country is an export to the sending country.

Export is when you sell something to another country and it then


ship it. This term export is derived from the conceptual meaning as to ship the
goods and services out of the port of a country. The seller of such goods and
services is referred to as an "exporter" who is based in the country of export
whereas the overseas based buyer is referred to as an "importer". In
International Trade, "exports" refers to selling goods and services produced in
the home country to other markets. Any good or commodity, transported from
one country to another country in a legitimate fashion, typically for use in trade.
Export

goods

or

services

are

provided

domestic producers

11

to

foreign consumers by

EXPORT AND IMPORT FINANCE IN INDIA

Meaning of Exporter:

The person who sends goods or commodities to a foreign


country, in the way of commerce; -- opposed to importer. Is known as exporter.
The seller ships the goods and then hands over the document related to the
goods to their banks with the instruction on how and when the buyer would pay

Exporter's Bank:

The exporter's bank is known as the remitting bank, and they


remit the bill for collection with proper instructions. The role of the remitting
bank is to:

Check that the documents for consistency.

Send the documents to a bank in the buyer's country with instructions on


collecting payment.

Pay the exporter when it receives payments from the collecting bank.

Meaning of Importer:
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EXPORT AND IMPORT FINANCE IN INDIA


The person who brings or carries in from an outside source,
especially to bring in (goods or materials) from a foreign country for trade or
sale is known as importer. The buyer / importer are the drawee of the Bill.
The role of the importer is to:

Pay the bill as mention in the agreement (or promise to pay later).

Take the shipping documents (unless it is a clean bill) and clear the
goods.
Importer's Bank:

This is a bank in the importer's country: usually a branch or


correspondent bank of the remitting bank but any other bank can also be used
on the request of exporter .The collecting bank act as the remitting bank's agent
and clearly follows the instructions on the remitting bank's covering schedule.
However the collecting bank does not guarantee payment of the bills except in
very unusual circumstance for undoubted customer, which is called availing.
Importer's bank is known as the collecting / presenting bank.

The Role of the Collecting Bank:

Act as the remitting bank's agent.

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EXPORT AND IMPORT FINANCE IN INDIA


Present the bill to the buyer for payment or acceptance.

Release the documents to the buyer when the exporter's instructions have
been followed.

Remit the proceeds of the bill according to the Remitting Bank's schedule
instructions.
If the bill is unpaid / unaccepted, the collecting bank :

May arrange storage and insurance for the goods as per remitting bank
instructions on the schedule.

Protests on behalf of the remitting bank (if the Remitting Bank's schedule
states Protest)

Requests further instruction from the remitting bank, if there is a problem


that is not covered by the instructions in the schedule.

Once payment is received from the importer, the collecting bank remits
the proceeds promptly to the remitting bank less its charges.

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EXPORT AND IMPORT FINANCE IN INDIA

CHAPTER 2

2.1 EXPORT / IMPORT FINANCE IN INDIA

The statutory basis for regulation of exports from India is the Foreign
Trade (Development and Regulation) Act 1992. The Government is empowered
to ban the export of certain goods from India and/ or restrict export in quantity,
value etc. by subjecting them are licensing procedure.

Export from the country is generally free. The export goods may be
classified under any of the following categories:-

a) Free items exportable without restrictions.

b) Restricted exportable under a license or permission

c) State Trading export can be done through specified Trading enterprise.

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EXPORT AND IMPORT FINANCE IN INDIA


d) Prohibited cannot be exported.

Finance for exports is available from commercial banks under two


categories-

(1) Pre-shipment finance (or packing credit)


(2) Post shipment finance.

Financing of Export and Imports of Goods and Services:

Exports are a subject of significance to every economy whether


developing or developed because they represent the biggest source of earning
foreign exchange. The need is all the more acute for a developing economy,
which mostly experiences deficit on its current account as well as capital
account.

Increasing exports enable the economy to earn foreign exchange,


enhance foreign exchange reserves, improve balance of trade, balance of
payments, correct deficits in Balance Of Payments (BOP), and improve
exchange value of its currency.
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EXPORT AND IMPORT FINANCE IN INDIA

The share of Indias exports in world trade is below 1% and along


with the persistent deficits in its BOD necessitates the need for a major thrust on
exports. However, over the years the exports have grown well and more so the
compositions of exports (goods & services exported) have undergone a charge.
This has happened mainly after the liberalization and globalization of our
economy post 1991.

The Government has treated on this objective by announcing the


following

incentives to an exporter:

1. Cheaper rates of interest on Bank finance (export rates today hover


around 8% to 8.50% compared to non export rates of 12-15%)

2. Duty concessions on imports for exports.

3. Cash Incentives for exports viz. Tax breaks for export units, duty
drawback schemes.

4. Providing Infrastructure facilities viz. Free trade Zones Export Zones etc.

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EXPORT AND IMPORT FINANCE IN INDIA


5. Establishing of EXPORT IMPORT BANK OF INDIA bank to promote
exports.

6. Establishing Export Credit Guarantee Corporation- EXPORT CREDIT


AND GURANTEE CORPORATION to provide a protective shelter to
exports against inherent international trade risks.

2.2 EXPORT FINANCING


Export financing describes the activity of governments helping
companies by financing their export activities. They offer low interest
rate loans that the company could otherwise not obtain at a rate lower
than market price. Export financing promotes trade as it provides an
opportunity for those organizations that would otherwise not have been
able to participate in trade activities because of financial constraints.

TYPES OF EXPORT CREDIT

1. PRE SHIPMENT FINANCE:


Packing Credit.

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EXPORT AND IMPORT FINANCE IN INDIA


Advance against cheque /Draft etc. representing Advance Payments.

Pre shipment finance is extended in the following forms:

Packing Credit in Indian Rupee

Packing Credit in Foreign Currency (PCFC)

ELIGIBILITY:
Pre shipment credit is only issued to that exporter who has the export
order in his own name. However, as an exception, financial institution can also
grant credit to a third party manufacturer or supplier of goods who does not
have export orders in their own name. In this case some of the responsibilities
of meeting the export requirements have been out sourced to them by the main
exporter. In other cases where the export order is divided between two more
than two exporters, pre shipment credit can be shared between them.

PACKING CREDIT

PACKING CREDIT is any loan or advance granted or any other credit provided
by a bank to an exporter for financing the purchase, processing, manufacturing
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EXPORT AND IMPORT FINANCE IN INDIA


or packing of goods prior to shipment, on the basis of letter of credit opened in
his favor or in favor of some other person, by an overseas buyer or a confirmed
and irrevocable order for the export of goods from the producing country or any
other evidence of an order for export from that country having been placed on
the exporter or some other person, unless lodgment of export orders or letter of
credit with the bank has been waived.

Packing Credit Facilities to Deemed Exports:


Deemed exports made to multilateral funds aided projects and programme,
under orders secured through global tenders for which payments will be made in
free foreign exchange, are eligible for concessional rate of interest facility both
at pre and post supply stages.

Packing Credit facilities for Consulting Services:


In case of consultancy services, exports do not involve physical movement
of goods out of Indian Customs Territory. In such cases, Pre-shipment finance
can be provided by the bank to allow the exporter to mobilize resources like
technical personnel and training them.

Advance against Cheque/Drafts received as advance payment:


Where exporters receive direct payments from abroad by means of
cheques/drafts etc. the bank may grant export credit at concessional rate to the
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EXPORT AND IMPORT FINANCE IN INDIA


exporters of goods track record, till the time of realization of the proceeds of the
cheques or draft etc. The Banks however, must satisfy themselves that the
proceeds are against an export order.

2. POST SHIPMENT FINANCES:


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.
Types:

Export bills purchased /negotiated/discounted.


Advances against bills sent on collection basis.
Advances against exports on consignment basis.
Advances against UN drawn balances.
Advances against duty drawback.

1. Export bills purchased /negotiated/discounted:


Export bills (Non L/C Bills) is used in terms of sale contract/ order may
be discounted or purchased by the banks. It is used in indisputable international
trade transactions and the proper limit has to be sanctioned to the exporter for
purchase of export bill facility.

2. Advances against bills sent on collection basis:

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EXPORT AND IMPORT FINANCE IN INDIA


Bills can only be sent on collection basis, if the bills drawn under LC have
some discrepancies. Sometimes exporter requests the bill to be sent on the
collection basis anticipating the strengthening of foreign currency. The transit
period is from the date of acceptance of the export documents at the banks
branch for collection and not from the date of advance.

3. Advance against Export on Consignments Basis:


Bank may choose to finance when the goods are exported on consignment
basis at the risk of the exporter for sale and eventual payment of sale proceeds
to him by the consignee. However, in this case bank instructs the overseas bank
to deliver the document only against trust receipt /undertaking to deliver the sale
proceeds by specified date, which should be within the prescribed date even if
according to the practice in certain trades a bill for part of the estimated value is
drawn in advance against the exports. In case of export through approved Indian
owned warehouses abroad the times limit for realization is 15 months.

4. Advance 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, if undrawn balance is in conformity
with the normal level of balance left undrawn in the particular line of export,
subject to a maximum of 10 percent of the export value. An undertaking is also
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EXPORT AND IMPORT FINANCE IN INDIA


obtained from the exporter that he will, within 6 months from due date of
payment or the date of shipment of the goods, whichever is earlier surrender
balance proceeds of the shipment.

5. Advance against Claims of Duty Drawback:


Duty Drawback is a type of discount given to the exporter in his own
country. This discount is given only, if the in house cost of production is higher
in relation to international price. This type of financial support helps the
exporter to fight successfully in the international markets. In such a situation,
banks grants advances to exporters at lower rate of interest for a maximum
period of 90 days. These are granted only if other types of export finance are
also extended to the exporter by the same bank.

2.3 IMPORT FINANCING

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EXPORT AND IMPORT FINANCE IN INDIA


All imports permitted by trade policy qualify as current account
transactions for which the importer can buy currency from an authorized dealer.
Earlier, credit on imports was restricted to a period of 6
months, unless otherwise approved by the Reserve Bank. This since been
extended to 3 years for both suppliers and buyer credits, provided.

The amount does not exceed US$ 100 per import transaction, and

The interest does not exceed LIBOR + 0.5% for credit unto 1 year,
and LIBOR + 1.25% for periods beyond 1 year.

2.4 CREDIT ON IMPORTS


The economics of importing on credit as compared to
sight payment would depend upon the:

1. Rupee and FX interest rates. Foreign currency interest rates will


Generally be linked to London Inter Bank Offer Rate in the currency in
question.
2. Exchange rate movement or the cost of handing in the forward Market.
3. Difference in commission charged by banks on sight and nuisance letters
of credit and the stamp duty on nuisance bills, where applicable.
Again, the interest paid may attract deduction of tax at
source, since it is being paid to non-residents. For calculation the amount, the
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EXPORT AND IMPORT FINANCE IN INDIA


interest may need to be grossed. The impact of the TDS would be lower, if the
credit is taken from a resident of a country with whom India has signed a
Double Taxation Avoidance Treaty. Some corporate include the interest element
in the price of the goods to avoid this problem. This would be economical only
if the import duty is lower than the TDS on the gross interest.

2.5 LETTER OF CREDIT

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 favor 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
brochure number 500.
L/C is a binding document that a buyer can request from his bank in order to
guarantee that the payment for goods will be transferred to the seller. Basically,
a letter of credit gives the seller reassurance that he will receive the payment for
the goods. In order for the payment to occur, the seller has to present the bank
with the necessary shipping documents confirming the shipment of goods
within a given time frame. It is often used in international trade to eliminate
risks such as unfamiliarity with the foreign country, customs, or political
instability.

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EXPORT AND IMPORT FINANCE IN INDIA


Advantages of Letter of Credit Importers:

1. Certain of shipment of goods:

The exporter cannot get any benefit under the letter of credit without
shipping the goods and submitting documents to the bank. Therefore, the
importer is certain to get the supply.

2. Delivery on time:
As the exporter submits documents in time for negotiation, it
reaches the opening bank in time. This enables the importer not only to collect
the documents on time but also to collect the goods from the customs.

3. Overdraft facility:
When the importer falls short of payment, he can take possession
of the documents against overdraft facility

4. Better terms of trade:


The opening bank provides credit facility to the importer. This helps
the importer to obtain better terms of trade from the foreign supplier.

5. Funds are not blocked:

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EXPORT AND IMPORT FINANCE IN INDIA


There is no need for the importer to block his funds by making
advance payment to the exporter.

6. Long business associations:


Letter of credit protects the interest of both the exporter and the
importer. Nothing is left to the imagination of both the parties because the letter
of credit mentions all the terms and conditions of the business. It helps the
exporter and importer to have prolonged business associations

Advantages of Letter of Credit to the Exporters:

1. Provides packing credit:


Exporters can easily collect pre-shipment finance from the banks
against letter of credit. Red clause letter of credit is issued to the exporter to
enable him to collect pre-shipment finance from the bank.

2. Clearance of exchange control regulations:


When the opening bank issues the letter of credit it indicates that the
importer has fulfilled all provisions of exchange control regulations in his
country. Transfer of funds will not create a problem from the exchange control
authorities.

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EXPORT AND IMPORT FINANCE IN INDIA


3. No blocking of funds:
The exporter gets immediate payment from the bank when he submits
full set of negotiable documents to the bank. If the documents are drawn as per
the terms of the letter of credit the bank pays the exporter in full. Therefore, the
exporter does not have to block his funds

4. No bad debts:
As the payment is guaranteed by the opening bank, the exporter is free
from the problem of bad debt. In case the exporter holds a confirmed letter of
credit, there is double guarantee by the opening bank & the confirming bank.

5. No liability:
In case of confirmed letter of credit and without recourse clause, the
liability of the exporter comes to an end as soon as he hands over the relevant
documents to the bank.

6. Certainty of payment:
The importer cannot refuse to take possession of the goods and to clear
the payment when the terms of payment are the letter of credit. This problem
of no possession of goods and non-payment may arise in case of D/P and D/A.

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EXPORT AND IMPORT FINANCE IN INDIA

2.6 TYPES OF LETTER OF CREDIT

A letter of credit may be revocable or irrevocable. If there is no indication


of this reference, the credit will be deemed as irrevocable.

A revocable credit may be amended or cancelled at any moment without


prior notice to the beneficiary. However, the issuing bank is bound to reimburse
for the negotiation made prior to receipt of such notice.

The irrevocable credit is a definite undertaking of the issuing bank and


cannot be amend or cancelled without the agreement of the confirming bank and
the beneficiary.

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EXPORT AND IMPORT FINANCE IN INDIA


1. Confirmed Credit:
When another bank adds its confirmation to the irrevocable letter of the
credit it becomes a confirmed credit and it constitutes a definite undertaking of
the confirming bank in addition to the issuing bank.

2. Transferable Credit:
A letter of credit is transferable only if it is expressly designated by the
issuing bank. The beneficiary of such a credit has the right to request the
nominated bank to transfer the credit to another party or more than one party if
partial shipment is permitted. The transferable credit can be transferred once
only.

3. Red Clause credit:


Red clause credit enables the beneficiary to avail pre-shipment credit
from the nominated bank. This credit bears normally a clause in red authorizing
the nominated bank to make an advance to the seller prior to shipment. GREEN
clause credit in addition to permitting pre shipment advance also entails storing
of goods in the name of the bank.

4. Bank to Bank Credit:


When the exporter used his export letter of credit as a cover for issuing a
credit in favor of his supplier, the second credit is called back-to-back credit.

5. Revolving Credit:

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EXPORT AND IMPORT FINANCE IN INDIA


In a revolving credit the amount of drawing is reinstated and made available
to the beneficiary again after a period of time on notification of payment by the
applicant or merely the fact that shipment has been made.
The maximum value up to which the credit can be revolved and the expiry
date of the letter of credit is generally specified in the revolving credit. The reinstatement clause should be always incorporated in revolving letter of credit.

6. Deferred Payment Credits and Acceptance Credits:


Under deferred payment credit the amount is payable in installments for a
stipulated longer period. Usually a part is paid in advance and the balance is
payable in agreed installments as agreed in the text of the letter of credit.

CHAPTER 3
ROLE OF BANKS IN EXPORT AND IMPORT FINANCE

Along with public sector banks, the foreign banks also provide financial
assistance to Indian exporters. They offer financial facilities to exporters and
thereby contribute for export promotion. In addition, the exchange banks also
provide banking and financial facilities to importers from their respective
countries.

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It is a fact that foreign exchange banks are in a better position to offer
finance to exporters due to their world wide banking contacts, huge financial
resources and expert staff.

Foreign banks are banks incorporated in foreign countries (UK, USA,


France, Japan, etc) but are functioning in India through their branches or branch
offices opened at important commercial centers such as Mumbai, Chennai,
Calcutta, and Delhi and so on.

Foreign banks operate under the supervision of the RESERVE BANK OF


INDIA and have to function as per the provision made in the Banking
Regulation Act, 1949.

These banks provide financial support to international trade as per the


policies of the government. In addition, they also conduct other banking
functions and offer banking and financial services to their customers (exporters)

Foreign banks operating in India include Lloyds Bank, Standard Chartered


Bank, Citi Bank; Grind lays Bank, and so on. These banks have their offices at
important commercial centers in India.

Foreign banks offer various financial services to exporters from their home
country. For example, they issue letter of credit to their clients and also provide
financial facilities. They collect payment for goods imported and arrange to

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make payment to Indian exporters by completing the necessary formalities and
procedures.

The documentary bills of exchange may be sent to these banks and collect
payment for the goods.

Along with such services, the foreign banks (also called foreign exchange
banks) also provide many facilities to Indian Exporters who open the account in
such banks.

For example, they arrange to make payment for the goods imported. They
also provide discounting facility to Indian exporters and also offer various types
of guarantees. Exports proceeds are also collected on behalf of Indian exporters
as a result; immediate cash is available to exports.

In addition, the foreign banks provide pre-shipment and post-shipment


finance to exporters. Similarly, they help Indian exporters in the remittance of
money from India to other countries for different purposes subject to rules and
procedures prescribed by the RESERVE BANK OF INDIA.
The following are the institutions that are directly or indirectly concerned
with import and export financing:

1. Commercial Banks
2. Export Import Bank of India (EXIM Bank)
3. Reserve Bank of India (RBI)
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4. Export Credit Guarantee Corporation of India Ltd (ECGC)

3.1 RESERVE BANK OF INDIA (RBI) :

The Reserve Bank of India is the apex financial


institution of the countrys financial system entrusted with the task of control,
supervision, promotion, development and planning. Reserve Bank of India is
the queen bee of the Indian financial system which influences the commercial
banks management in more than one way. The RESERVE BANK OF INDIA
influences the management of commercial banks through its various policies,
directions and regulations. Its role in bank management is quite unique. In fact,
the RESERVE BANK OF INDIA performs the four basic functions of
management, viz., planning, organizing, directing and controlling in laying a
strong foundation for the functioning of commercial banks.

Objectives of the Reserve Bank of India:

The Preamble to the Reserve Bank of India Act, 1934 spells


out the objectives of the Reserve Bank as: to regulate the issue of Bank notes
34

EXPORT AND IMPORT FINANCE IN INDIA


and the keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to its
advantage.

Prior to the establishment of the Reserve Bank, the Indian


financial system was totally inadequate on account of the inherent weakness of
the dual control of currency by the Central Government and of credit by the
Imperial Bank of India.

The Hilton-Young Commission, therefore, recommended


that the dichotomy of functions and division of responsibility for control of
currency and credit and the divergent policies in this respect must be ended by
setting-up of a central bank called the Reserve Bank of India which would
regulate the financial policy and develop banking facilities throughout the
country. Hence, the Bank was established with this primary object in view.

Functions of the Reserve Bank of India:

The Reserve Bank of India performs all the typical functions of a


good Central Bank. In addition, it carries out a variety of developmental and
promotional functions attuned to the course of economic planning in the
country:

1. Issuing currency notes, to act as a currency authority.


35

EXPORT AND IMPORT FINANCE IN INDIA


2.
3.
4.
5.
6.
7.

Serving as banker to the Government.


Acting as bankers bank and supervisor.
Monetary regulation and management.
Exchange management and control.
Collection of data and their publication.
Miscellany export oriented units developmental and promotional

8.
a)
b)
c)

functions and activities.


Agricultural Finance.
Industrial Finance
Export Finance.
Institutional promotion

3.2. EXPORT IMPORT BANK OF INDIA (EXIM)

Role of Export Import Bank of India:

The Export-Import Bank of India is a public sector financial


insinuation crested by an Act of Parliament, the Export-import Bank of India
Act. 1981. The Bank came in existence in January 1982 and commenced
operations from March 1, 1982. EXPORT IMPORT BANK OF INDIA is the
principal financial institution for co-coordinating the working of institutions
engaged in financing export and Import trade of India. The Business of
EXPORT IMPORT BANK OF INDIA is to finance, facilitate and promote
foreign trade of India.

The process of industrial development in India resulted in


diversification an expansion of the expert sector in the seventies Development
of capabilities for export of capital goods. Engineering goods, manufactured
36

EXPORT AND IMPORT FINANCE IN INDIA


products, projects and services as also setting up of joint industrial ventures
abroad are an important outcome of this process.

Operations of Export Import Bank of India:

EXPORT IMPORT BANK OF INDIA Bank's operational


philosophy comprises five major components.

1. To make the Indian exporter internationally competitive on the count of


financing terms offered by him.

2. To Develop alternate financing solutions for an Indian Exporter in his


effort to be internationally competitive.
3. To provide information on export opportunities in new traditional exports
including currency adviser to Indian manufacturers so that new export
opportunities are pursued.
4. To provide selective production, marketing, finance for making Indian
manufactured products internationally competitive.
5. To respond to export problems of Indian Exporters and pursue policy
resolutions.

The Bank is continuously building capabilities to anticipate and


respond to development export opportunities information technology and
translate national foreign trade policies into action plan.
37

EXPORT AND IMPORT FINANCE IN INDIA

Finance & Services Provided By Export Import Bank of India:

EXPORT IMPORT BANK OF INDIA plays fourpronged role with regard to India's foreign trade: those of a co-coordinator, a
source of finance, consultant and promoter. EXPORT IMPORT BANK OF
INDIA is the Coordinator of the Working Group Mechanism for clearance of
Project and Services Exports and Deferred Payment Exports (for amounts above
a certain value currently US$ 100 million).The Working Group comprises
EXPORT IMPORT BANK OF INDIA, Government of India representatives
(Ministries of Finance, Commerce, External Affairs), Reserve Bank of India,
Export Credit Guarantee Corporation of India Ltd. and commercial banks who
are authorized foreign exchange dealers. This inters- institutional Working
Group accords clearance to contracts (at the post-award stage) sponsored by
commercial bank or EXPORT IMPORT BANK OF INDIA, and operates as a
one-window mechanism for clearance of term export proposals. On its own,
EXPORT IMPORT BANK OF INDIA can now accord clearance to project
export proposals up to US$ 100 million in value.

38

EXPORT AND IMPORT FINANCE IN INDIA

3.3. EXPORT CREDIT AND GUARANTEE CORPORATION


(ECGC)

Payments for export are open to risks even at the best of times. The
risks have assumed large proportions due to political and economic charges in
the world. A civil war in a country may block or delay the payment for exports.
Economic difficulties or BOP position may also force a country to restrict
payments outflow to the exporters.

It is also possible that the buyer may turn insolvent or may refuse to
make the payment. In light of the above, the export business though may appear
lucrative is fraught with risks, With a view to protect a shelter to the exporters
against

the

export

risks,

EXPORT

CREDIT

AND

GURANTEE

CORPORATION was established in 1957 by the Government of India under the


administrative control of ministry of commerce.
It is managed by Board of Directors comprising of representatives
of the Governments, Reserve Bank of India, Banks, and Insurance and
exporting community. EXPORT CREDIT AND GURANTEE CORPORATION
is the fifth largest credit insurer of the world presently covers 17.31% of Indias
total exports with a paid up capital of Rs 1.50 bn.

39

EXPORT AND IMPORT FINANCE IN INDIA

Major Functions of Export Credit and Guarantee Corporation:

1. To provide a range of credit risk insurance covers to exporters against a


loss in export of goods and services.

2. To offer guarantees to banks and financial institutions to enable exporters


obtain better facilities from them.

Export Credit and Guarantee Corporation also helps Exporters by:

Providing insurance protection to exporters against payment risks

Providing guidance in export related activities

Providing information on creditworthiness of overseas buyers

Providing information on about 180 countries with its own credit


ratings

40

EXPORT AND IMPORT FINANCE IN INDIA


Marketing it easy to obtain export finance from banks/ financing
institutions

Assisting exporters in recovering bad debts

Policies and Schemes of Export Credit and Guarantee Corporation:

1.
2.
3.
4.

Standard Policy
Specific Policy
Financial Guarantees
Other

MAIN ACTIVITIES OF EXPORT CREDIT AND GUARANTEE CORPORATION:

EXPORT CREDIT AND GURANTEE CORPORATION


provides a wide range of credit risk insurance cover to exporters against loss in
export of goods and services. It also offer guarantees to banks and financial
institutions to enable the exporters to obtain better facilities from the banks.

The covers offered by Export Credit and Guarantee Corporation to the


Exporters are:
i.

Standard Policies to exporters to protect them against payment risks


involved in exports on short term credit.

41

EXPORT AND IMPORT FINANCE IN INDIA


ii.

Specific Policies designed to protect Indian firms against payment risks


involved in
a) Exports on deferred payment terms
b) Services rendered to Foreign Parties
c) Construction works and turnkey projects undertaken abroad.

The Guarantees offered by Export Credit and Guarantee Corporation to


the Banks are:

i.
ii.
iii.
iv.
v.
vi.

Packing Credit Guarantee


Export Production Finance Guarantee
Post-shipment Export Credit Guarantee
Export Finance Guarantee
Export Performance Guarantee
Export Finance Guarantee.

3.4. COMMERCIAL BANK:

Role of Commercial Banks in Export Finance:

The major part of export finance is provided by commercial banks.


They also provide other facilities and services to the exporters. The function of
commercial banks can be grouped under two heads.
(A)Fund Based Assistance
(B)Non-Fund Based Assistance
The assistance provided and commercial banks in respect of export
finance can be charted as follows:
42

EXPORT AND IMPORT FINANCE IN INDIA

COMMERC
IAL
BANKS
FUND
BASED
ASSISTANC
E

NON FUND
BASED
ASSISTANC
E

(A) Fund Based Facilities:


The commercial banks provide fund based activities at
(i) Pre-shipment Stage, and
(ii) Post-Shipment Stage.

(B) Non-Fund Based Assistance:


1. Bank Guarantees:
a) Guarantee for foreign currency loans sanctioned by a financial
institution abroad to Indian exporters who raise funds to finance
their projects abroad.

b) Performance guarantee which is generally required in export of


capital goods and also in case of turnkey and construction projects.
43

EXPORT AND IMPORT FINANCE IN INDIA

c) Banks issue a guarantee for payment of retention money by the


overseas party who would release the retention money to the Indian
party only after receiving guarantee from bank.

d) The banks also issue advance payment guarantee to the overseas


buyer who normally makes certain advance payment to the Indian
exporter against a bank guarantee.

e) Banks issue bid bonds so as to enable exporters to participate in


various global tenders.

Other Services:

a) They collect export proceeds from the importer and credit the

same to

exporters account.
b) The banks assist the exporter in the collection of useful information on
the credit worthiness of the foreign buyer through their foreign agents.
c) The banks issue bank drafts in case of payment of freight charges and
such other charges.
d) The banks send the duplicate copy of GR form to the RESERVE BANK
OF INDIA after realization of export proceeds.
e) The banks issue bank certificates in respect of export sales value, which
are useful for claiming incentives.

44

EXPORT AND IMPORT FINANCE IN INDIA

CHAPTER 4

PAYMENT METHODS IN EXPORT & IMPORT TRADE:

1
.C le a n
1.Clean
P
aym en t
Payment
s
s

2
.P a y m e
2.Payme
n
t
nt
C
o lle c t io
Collectio
n
of B
ills
n of
Bills
in
in
In
te r n a t i
Internati
o
nal
onal
Tr
ade
Trade

3
.L e t te r
3.Letter
o
f Credit
C re d it
of
L
/c
L/c

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

4.1. Clean Payments


In clean payment method, all shipping documents, including title
documents are handled directly between the trading partners. The
role of banks is limited to clearing amounts as required. Clean
payment method offers a relatively cheap and uncomplicated
45

EXPORT AND IMPORT FINANCE IN INDIA


method of payment for both importers and exporters.
There are basically two types 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.

4.2. 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.
In this method of payment in international trade the exporter
entrusts the handling of commercial and often financial documents
to banks and gives the banks necessary instructions concerning the
release of these documents to the Importer. It is considered to be
one of the cost effective methods of evidencing a transaction for
buyers, where documents are manipulated via the banking system.
46

EXPORT AND IMPORT FINANCE IN INDIA


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.

4.3. 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 favor 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
47

EXPORT AND IMPORT FINANCE IN INDIA


If payment is to be made at the time of presenting the document
then it is referred as the Sight Letter of Credit. In this case banks
are allowed to take the necessary time required to check the
documents.
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. By adding
its commitment, the Confirming Bank takes the responsibility of
claim under the letter of credit, assuming all terms and conditions
of the letter of credit are met.

CHAPTER 5

48

EXPORT AND IMPORT FINANCE IN INDIA

DOCUMENTS USED IN FOREIGN TRADE

Documents are used to record a written evidence of having


carried out a transaction in both local and international trade. This section deals
with the documents used in international trade where there is fairly large
number of documents required to satisfy the two basic requirements, viz.
Regulatory and Operational.

Nostro Account:
The Demand Draft Deposit account belonging to a domestic
bank maintained in an overseas bank denominated in foreign currency is nostro
account.
Vostro Account:
The Demand Draft Deposit account belonging to a domestic
bank maintained in an domestic bank denominated in domestic currency is
vostro account.
A list of the various document required in cross border trade is given
below:

Commercial Invoice
Bills of Lading/Airway Bill
Marine Insurance Policy and Certificate
Bills of Exchange
Consular Invoice
Customs Invoice
Certificate of Origin
49

EXPORT AND IMPORT FINANCE IN INDIA


Inspection Certificate
Packing List

5.1. Commercial Invoice:


It is the sellers bill for the merchandise. It contains a description of
the goods, the price per unit at a particular location and total value of the goods,
packing specifications, terms of sale, teams of payment, identification markers
of the packages, bill of lading number, etc. There is no standards form for
commercial invoice.

Each exporter designs his own format of commercial invoice.


Usually, a commercial invoice is required to be duly signed by the seller and is
submitted in a set of at least three copies. Its main purpose is to check whether
the appropriate goods have been shipped and also the unit price, total value,
marking on the package, etc.

5.2. Bill of Landing/Airway Bill:


This document is an evidence of shipment the goods. It is a receipt
duly signed and issued by a shipping company acknowledging that the goods
mentioned in the document have been shipped or received for shipment and an
undertaking to deliver the goods at the agreed destination.

Bill of Lending is

the most important document in foreign trade. A Bill of Lending serves the
following proposes.

50

EXPORT AND IMPORT FINANCE IN INDIA

a) It is a document of title to goods: - The Bill of Landing is a


document giving ownership rights to the goods and the possession
of a Bill of Landing entitle the holder to the and is transferable by
endorsement. Transfer of the Bill of Landing after appropriate
endorsement is tantamount to the transfer of goods.

b) It is a receipt from the shipping company: - It constitutes


evidence that the goods have been received by the shipping
company. As a receipt it is only an evidence of the number and
sizes of packages involved and does not guarantee the contents of
the packages.

c) It is an evidence of contract for the carriage or transportation


of goods: - The freight contract between the shipping company and
the exporter is usually mentioned in the Bill of Landing except in
the case of a charter ship where the contract of charter incorporates
the freight payable by the shipper.

51

EXPORT AND IMPORT FINANCE IN INDIA

5.3.Marine Insurance Policy and Certificate:

In International trade it is customary to insure the goods against the risks


of loss or damage. Whether the insurance will be taken by the exporter on his
own account or on the account of the overseas buyer depends on the terms of
sale.

A marine insurance policy can take either by an open policy or a specific


policy. Open policy is taken by exporters who have continuous shipments to
make and the insurance policy is issued as an open cover, which can be used for
insurance of all consignments to one or more destinations. The insurance
company will then issue an insurance certificate to cover Individual shipments
made under the open policy.

For the financing bank, a marine insurance policy is a very important


document accompanying the shipping documents as it provides additional cover
for the advance it has made to the importer.

5.4. Bill of Exchange:


A bill of exchange is an unconditional order in writing, addressed by the
drawer (exporter/shipper) to the drawer (importer/buyer) requiring the drawer to
pay on demand a stated sum of money to the bearer/specified person or
organization. A bill of exchange is a negotiable instrument and is payable to the
bearer or to the person in whose favor it is endorsed.
52

EXPORT AND IMPORT FINANCE IN INDIA

In International Trade the normal practice is to send documents in two sets


as such bill of exchange is also generally drawn in two sets, one each to be sent
along with each set of document. When drawn in two sets, each one bears an
exclusion clause making the other invalid.

The drawing of a bill of Exchange is not always necessary. In certain


countries bill of exchange is not recognized as a legal document, while it is
discouraged in a few other countries due to incidence of a heavy stamp duty. In
India also bill of exchange for document drawn on DA basis for tenure over 90
days attracts Stamp Duty.

5.5. Consular Invoice:


A consular invoice is a special type of invoice required by some
countries for their imports. Such invoices are required by the USA, Canada,
Philippines and some Middle East countries, etc. a consular invoice is made out
on a prescribed format certified by the consulate of the importing country
stationed in the exporters country. The main purpose of the consular invoice to
the importing country is to have authenticated particulars of the goods that are
importing into their country.

5.6. Customs Invoice:


Certain countries such as Canada and the USA need customs invoice.
Canada has prescribed a specific from of customs invoice for allowing entry of
merchandise at preferential tariff rates.
53

EXPORT AND IMPORT FINANCE IN INDIA


The USA, in addition to the special customs invoice, requires a particular
annex to the invoice, for Cotton Manufacturers. The forms are supplied by the
consular office of the respective importers country and are to be duly filled in
and signed by the shipper.

5.7. Certificate of Origin:


In many countries, permission to import is refused unless a certificate
of origin is produced by the buyer. This document may form part of the invoice
itself. The essential feature is certification of the country of origin indicating
where the goods were originally produced and/or manufactured.

5.8. Inspection Certificate:


Inspection certificate by an established inspection Authority is
needed under some contracts or by some countries. This certificate is issued by
one of the authorized inspection agencies in the exporters country by the
agency nominated by the importer.

5.9. Packing List:


The exporter prepares a packing list showing, item by item, the contents
of the containers or cases to enable the receiver of the shipment to check the
identify of the shipment. It should give the description of the goods, number and
marks on the packages, quantity per package, net weight and gross weight,
measurement, etc.
54

EXPORT AND IMPORT FINANCE IN INDIA


There is no particular form prescribed for this purpose.
The exporter concerned may design his own packing list.

CHAPTER 6
FOREIGN TRADE POLICY

The new (FOREIGN TRADE POLICY) takes an integrated


view of the overall development of India's foreign trade and. goes beyond the
traditional focus on pure exports. This would be clear in itself, but a means to
economic growth and national development. The primary purpose is not the
mere earning of foreign exchange, but the stimulation of greater economic
activity."

6.1 OBJECTIVES AND STRATEGY OF FOREIDN TRADE


POLICY, 2009-14:

In line with the above focus, the FOREIDN TRADE POLICY lays down two
major objectives:

55

EXPORT AND IMPORT FINANCE IN INDIA

I. To double our percentage share of global merchandise trade within the next
five years; and

II. To act as an effective instrument of economic growth by giving a thrust to


employment generation.

6.2 MAIN FEATURES OF FOREIGN TRADE POLICY, 200914:

The main features of FOREIGN TRADE POLICY, 2009-014, are as


follows:

1. Doubling share of global merchandise trade:


FOREIGN TRADE POLICY (2009-14) envisaged a
doubling of India's share in world exports from 0.75 per cent to 1.5 per cent by
2014.

2. Five thrust sectors:


Sectors with significant export prospects coupled with
potential for employment generation in semi-urban and rural areas were
identified as thrust sectors. FOREIGN TRADE POLICY announced specific
56

EXPORT AND IMPORT FINANCE IN INDIA


strategies (termed 'Special Focus Initiatives') for five such sectors: Agriculture,
Handicrafts, Handlooms, Gems and Jeweler, and Leather and Footwear sector.

Main strategies announced for the five sectors outlined in the FOREIGN
TRADE POLICY are as follows:

(i) In agriculture, a new scheme called Vishesh Krishi Upaj Yojana was
introduced to boost exports of fruits, vegetables, flowers, minor forest produce
and their value added products. Export of these products would qualify for duty
free credit entitlement equivalent to 5 per cent of the value of exports. In
addition, the policy made capital goods imported for agriculture under the
Export Promotion Capital Goods (EPCG) scheme duty free.
(ii) The package for gems and jeweler sector includes:
(a) Duty free import of consumables for metals other than gold and platinum up
to 2 per cent of the value of exports; (ii) duty free re-import entitlement for
rejected jeweler up to 2 per cent of the value of exports;
(iii) duty free import of commercial samples of jeweler increased to Rs. 1 lakh;
and (iv) allowing import of gold of 18 carat and above under the replenishment
scheme.

(iii) As far as the handlooms and handicrafts sector is concerned, the FOREIGN
TRADE POLICY announced that a new Handicraft Special Economic Zone
would be established. In addition, duty sops for trimmings and embellishments
imported by handlooms and handicraft producers were increased to 5 per cent of
the value of exports.
57

EXPORT AND IMPORT FINANCE IN INDIA

(iv) In the leather and footwear sector, the duty-free entitlements of import
trimmings, embellishments and footwear components were increased to 3
percent. This is expected to help the leather and footwear sector save up to 5 per
cent of its import costs. In addition, duty free import of specified items for
leather sector was increased to 5 per cent of the value of exports.

3. 'Served from India' to be Built as a Brand:


Presently services contribute more than 50 per cent of the
country's GDP. To provide a thrust to service exports, FOREIDN TRADE
POLICY advocated a number of steps. These include:

(i) Served from India brand will be created to catapult India the world over as a
major global services hub.

(ii) An exclusive Export Promotion Council for services would be set up in


order to map opportunities in key markets, and develop strategic market access
programme.

(iii) Individual service providers who earn foreign exchange of at least Rs. 5
lakh, and other service providers who earn foreign exchange of at least Rs. 10
lakh would be eligible for a duty credit entitlement of 10 per cent of total
foreign exchange earned by them.

58

EXPORT AND IMPORT FINANCE IN INDIA


(iv) Stand-alone restaurants would be entitled to duty credit equivalent to 20 per
cent of the foreign exchange Earned. In the case of hotels, the entitlement would
be 5 per cent.

(v) Healthcare and educational institutions would be entitled to duty credit of 10


per cent of the foreign exchange earned.

4. New categories of star houses:


The FOREIDN TRADE POLICY announced a new
categorization of status holders. Under the new scheme, export houses were
divided into five categories depending upon their export performance in three
years.
The categories were
(i) One Star (export of Rs. 15 crore)

(ii) Two Star (export of Rs. 100 crore)

(iii) Three Star (export of Rs. 500 crore)

(iv) Four Star (export of Rs. 1,500 crore); and

(v) Five Star (export of Rs. 5,000 crore).a star export house was entitled to get
license, certificate, permissions and customs clearances for both imports and
59

EXPORT AND IMPORT FINANCE IN INDIA


exports on self-declaration basis. The star export house was also granted the
benefit of 100 per cent retention of foreign exchange in Export Earners Foreign
Currency (EEFC) account. It was also to be eligible for consideration under the
Target plus Scheme and enjoy a number of other privileges (like exemption
from furnishing Bank Guarantee).

5. "Target Plus' Scheme:


Exporters who exceed the annual export target were to be
rewarded under the Target plus Scheme. This reward was in terms of
entitlement to duty-free credit based on incremental export earnings. With the
target for 2004-05 being fixed at 16 per cent, the lower limit for qualifying for
these rewards was pegged at 20 per cent. Target plus scheme was abandoned in
the second supplement to Foreign Trade Policy announced on April 7, 2006.
6. Setting up of Free Trade and Warehousing Zones (FTWZs):
The FOREIDN TRADE POLICY introduced a new
scheme to establish Free Trade and Warehousing Zones to create trade-related
infrastructure to facilitate the import and export of goods and services with
freedom to carry out trade transactions in free currency. This is aimed at making
India into a global trading hub. Each zone would have minimum outlay of Rs.
100 crore and 5, 00,000 square meters built-up area. Foreign direct investment
would be permitted up to 100 per cent in the development and establishment of
the zones and their infrastructural facilities.

7. Scopes for Export oriented units:

60

EXPORT AND IMPORT FINANCE IN INDIA


The FOREIGN TRADE POLICY announced a number of
benefits for the export- oriented units. These include: (i) Export Oriented Units
to be exempted from service- tax in proportion to their exported goods and
services; (ii) Export Oriented Units to be permitted to retain 100 per cent of
export earnings in EEFC accounts; (iii) Income tax benefits on plant and
machinery to be extended to Domestic Tariff Areas that converting Export
Oriented Units; and (iv) Import of capital goods to be on self- certification basis
for Export Oriented Units.

8.Reducing transactional costs and simplifying procedures:


The FOREIGN TRADE POLICY announced a number of
rationalization measures' to reduce transactional costs and simplify procedures.
These include: (i) All exporters with minimum turnover of Rs. 5 crore exempted
from furnishing bank guarantee (this will help small exporters who incur high
transactional costs); (ii) Import of second-hand capital goods permitted without
any age restrictions; (iii) Minimum depreciated value for plant and machinery to
be located into India reduced from Rs. 50 crore to Rs. 25 be filed reduced; (vii)
Time bound introduction of Electronic Data Interface for export transactions,
etc

9. Focus on infrastructure development Some:


special measures announced for infrastructure development
in the FOREIGN TRADE POLICY are: (i) The threshold limit of designate
Towns of Export Excellence' has been reduced from Rs.1000 crores to Rs. 250
crore in the five thrust-sectors announced (ii) Funds from Assistance to States
61

EXPORT AND IMPORT FINANCE IN INDIA


for infrastructure Development of Exports used for development of Agri Export
Zones also, (iii) establishment of common facility centre will be encouraged for
use by house-based service providers; and (,v) Pragati Maidan at Delhi will be
transformed into a world-class complex.
10. Other measures:
Of the various other measure announced in the FOREIGN TRADE
POLICY. the following deserve specific mention

(i) Biotechnology Parks to be set up in the country having all the facilities of
100 per cent EXPORT ORIENTED UNITs.
(ii) The Board of Trade to be revamped and given a clear and dynamic role.
(iii) Financial assistance to be provided to export for meeting their costs and
legal expenses related to trade matters like anti-dumping action and
countervailing duties in other countries.

(iv) Although the DEPB (Duty Entitlement and Pass book Scheme) is as it
covers 52 per cent of India's exports and is easy to administer.

CHAPTER 7
INFORMATION OF BANK OF INDIA

62

EXPORT AND IMPORT FINANCE IN INDIA

7.1 INTRODUCTION:Bank of India (BOI) is an Indian state-owned commercial bank with


headquarters in Mumbai, Maharashtra, India. Government-owned since
nationalization in 1969, Bank of India has 4545 branches as on 31
December 2013, including 54 branches outside India, and about ATMs.
BOI is a founder member of SWIFT (Society for Worldwide Inter Bank
Financial Telecommunications), which facilitates provision of costeffective financial processing and communication services. The Bank
completed its first one hundred years of operations on 7 September 2006.

7.2 History:Previous banks that used the name Bank of India

63

EXPORT AND IMPORT FINANCE IN INDIA


At least three banks having the name Bank of India had preceded the
setting up of the present Bank of India.
1. A person named Sagar Rajani set up the first Bank of India in Delhi
(Kolkata) in 1828, but nothing more is known about this bank.
2. The second Bank of India was incorporated in London in the year
1836 as an Anglo-Indian bank; it is not clear that it ever actually
functioned.
The third bank named Bank of India was registered in Bombay (Mumbai)
in the year 1906.
The current bank

Bank of India, Mumbai Main Branch


The earlier holders of the Bank of India name had failed and were no
longer in existence by the time a diverse group of Hindus, Muslims,
Parsees, and Jews helped establish the present Bank of India in 1906. It
was the first in India promoted by Indian interests to serve all the
communities of India. At the time, banks in India were either owned by
Europeans and served mainly the interests of the European merchant
houses or by different communities and served the banking needs of their
own community.
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The promoters incorporated the Bank of India on 7 September 1906
under Act VI of 1882, with an authorized capital of Rs. 10 million
divided into 100,000 shares each of Rs. 100. The promoters placed
55,000 shares privately, and issued 45,000 to the public by way of IPO on
3 October 1906; the bank commenced operations on 1 November 1906.
The lead promoter of the Bank of India was Sir Sassoon J. David (1849
1926). He was a member of the Sassoons, who in turn were part of a
Bombay community of Baghdadi Jews, which was notable for its history
of social service. Sir David was a prudent banker and remained the chief
executive of the bank from its founding in 1906 until his death in 1926.
The first board of directors of the bank consisted of Sir Sassoon David,
Sir Cowasjee Jehangir, J. Cowasjee Jahangir, Sir Frederick Leigh Croft,
Ratanjee Dadabhoy Tata, Gordhandas Khattau, Lalubhai Samaldas,
Khetsety Khiasey, Ramnarain Hurnundrai, Jenarrayen Hindoomull Dani,
Noordin Ebrahim Noordin.
1906: BOI founded with Head Office in Bombay.
1921: BOI entered into an agreement with the Bombay Stock
Exchange to manage its clearing house.
1946: BOI opened a branch in London, the first Indian bank to do
so. This was also the first post-WWII overseas branch of any
Indian bank.
1950: BOI opened branches in Tokyo and Osaka.
1951: BOI opened a branch in Singapore.

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1953: BOI opened a branch in Kenya and another in Uganda.
1955: BOI opened a branch in Tanganyika.
1960: BOI opened a branch in Hong Kong.
1962: BOI opened a branch in Nigeria.
1967: The Government of Tanzania nationalized BoI's operations
in Tanzania and folded them into the government-owned National
Commercial Bank, together with those of Bank of Baroda and
several other foreign banks.
1969: The Government of India nationalized the 14 top banks,
including Bank of India. In the same year, the People's Democratic
Republic of Yemen nationalized BoI's branch in Aden, and the
Nigerian and Ugandan governments forced BoI to incorporate its
branches in those countries.
1970: National Bank of Southern Yemen incorporated BoI's branch
in Yemen, together with those of all the other banks in the country;
this is now National Bank of Yemen. BOI was the only Indian bank
in the country.
1972: BOI sold its Uganda operation to Bank of Baroda.
1974: BOI opened a branch in Paris. This was the first branch of an
Indian bank in Europe.
1976: The Nigerian government acquired 60% of the shares in
Bank of India (Nigeria).
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1978: BOI opened a branch in New York.
1970s: BOI opened an agency in San Francisco.
1987: BOI took over the three UK branches of Central Bank of
India (CBI). CBI had been caught up in the Sethia fraud and
default and the Reserve Bank of India required it to transfer its
branches.
2003: BOI opened a representative office in Shenzhen.
2005: BOI opened a representative office in Vietnam.
2006: BOI plans to upgrade the Shenzen and Vietnam
representative offices to branches, and to open representative
offices in Beijing, Doha, and Johannesburg. In addition, BOI plans
to establish a branch in Antwerp and a subsidiary in Dar-esSalaam, marking its return to Tanzania after 37 years.
2007: BOI acquired 76 percent of Indonesia-based PT Bank
Swadesi.
2011: BOI opened a fully owned Subsidiary in Auckland, New
Zealand on 6 October 2011 (Bank of India (New Zealand) Ltd.)
2012: BOI opened a fully owned subsidiary in Uganda on 18 June
2012 (Bank of India (Uganda) Ltd.).
2013: BoI opened a fully owned subsidiary in Botswana on 9
August 2013 (Bank of India (Botswana) Ltd.

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FINDINGS
While selling abroad, importers may undergo Credit risk, Currency
risk, Carriage risk and Country risk. These risks can be insured to a great
extent by taking appropriate steps. Credit risk against the buyer can be
covered by insisting upon an irrevocable letter of credit from the overseas
buyer. An appropriate policy from Export Credit and Guarantee
Corporation of India Ltd. can also be obtained for this purpose. Country
risks are also covered by the ECGC. As regards currency risk, i.e.
possible loss due to adverse fluctuation in exchange rate, importer should
obtain forward cover from his bank authorized to deal in foreign
exchange. Alternatively, he should obtain export order in Indian rupees.
Carriage risk, i.e. possible loss of cargo in transit can be covered by
taking a marine insurance policy from the general insurance companies.
Indian exporters while selling abroad may face various commercial
and political risks. The commercial risks may arise due to insolvency of
the buyer; failure of the buyer to make the payment due within the
specified period; or buyer's failure to accept the goods, subject to the
given conditions. While, the political risks may be due to imposition of
restrictions by the Government of the buyer's country or any Government
action which may block or delay the transfer of payment made by the
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buyer; war, civil war, revolution or civil disturbances in the buyer's
country.
Hence, in order to ensure safe and successful overseas expansion
plans it is necessary to provide a comprehensive insurance cover against
all such risks faced by an entrepreneur. Such an insurance facility seeks to
create a favorable climate in which investors including exporters can get
timely and liberal credit facilities from banks at home. ECGC provides a
range of credit risk insurance covers to exporters against loss in export of
goods and services as well as offers guarantees to banks and financial
institutions to enable exporters to obtain better facilities from them.

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The Interpretation gathered from the primary data were:


As other leading banks in india, Bank of India is also actively involved
in EXIM finance. Following are the Interpretation after doing survey
through questionnaire :
1.
2.
3.
4.

BOI collect import bills on behalf of their client from third party.
BOI provide NOSTRO A/C services to importer and exporter.
BOI discount bills in form of Letter Of Credit
Negligible scope/ small scope for default in EXIM finance
repayment is speculated by the bank, after due risk assessment

before providing EXIM loan/ advances/ finance.


5. To recover the loan/ advanced forwarded to EXIM client / loanee,
bank hold charge over assets & holdings, mortgage & also pledge
over assets.
6. Export bills rediscounting & refinance facility of export credit is
available in BOI.
7. Bank do not provide EXIM finance facility to non-bank clients.
8. BOI is taking due care of their EXIM finance by the way of risk
assessment of their clients & also or pledge over their assets.

LIMITATIONS OF THE PROJECT

The Study covers only 1 Bank in details.


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EXPORT AND IMPORT FINANCE IN INDIA

The study is subject to limitation of time i.e.


months

The topic being vast, the study has been


limited to one banking institution namely, SIDBI.

The major limitation encountered during the


study was the time frame within which the
project had to be completed.

CONCLUSION

Credit and finance is the life and blood of any business whether
domestic or international. The payment terms however depend upon the
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availability of finance to exporters in relation to its quantum, cost and the
period at pre-shipment and post-shipment stage.
The providers of export and import finance also extend advisory
and planning assistance to the importers and exporters. The Government
of India and RESERVE BANK OF INDIA has conceived various
schemes to stimulate and support exports and imports. Thus this
specialized form of financing of foreign trade is a crucial contributor to
world industrial development of the country.
The biggest benefit of import and export financing is that the
company will get the working capital needed for growth
The financing solutions will enhance a companys cash flow by
ensuring that the company and its suppliers are paid in a timely fashion.
The funding will help in taking on new opportunities, both locally and
internationally. Benefits include:
1. Commercial trade credit verification services and help to establish
credit limits for national and international customers.
2. Predictable cash flow: Advancing funds against invoices, providing
working capital to pay employees and suppliers.
3. Financing to pay suppliers - allowing the company to deliver its
large purchase orders.
4. For Importers: Import financing / purchase order financing handles
supplier payments for large purchase orders enabling to take on
orders and deliver orders that in the past would have exceeded its
working capital capabilities.

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ANNEXURE

1. Do you collect import bills on behalf of your customer?

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EXPORT AND IMPORT FINANCE IN INDIA


Ans:

Yes

No

2. Should importer & exporter maintain Nostro account with you to


enable international trade?
Ans:

Yes

No

3. Do you discount bill drawn under letter of credit as well as outside it?
Ans:

Yes

No

4. Is their scope for default in loan repayment by exporter & importer?


Ans:

Yes

No

5. Do you hold any charge /mortgage /pledge over their assets through
which you can recover your outstanding loan?
Ans:

Yes

No

6. Do you avail export bills rediscounting & refinance facility of export


credit from Reserve Bank of India and Export Import bank of India?

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Ans:

Yes

No

No7. Are you giving bill discounting facility to non bank customers as
well?
Ans:

Yes

No

8. If yes, what are the general guidelines for the same?


Ans:

Yes

No

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EXPORT AND IMPORT FINANCE IN INDIA

APPENDIX

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BIBLIOGRAPHY

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EXPORT AND IMPORT FINANCE IN INDIA


Books reference:
International Financial Management Finance of Foreign Trade and
FOREIGN EXCHANGE
International Business International Banking Foreign Trade.
Import Export Procedure & Document.

Jeff Madura.
C.Jeevanandam.
Charles WL Hill.
Scott B. Macdonald.

WEBLIOGRAPHY

WWW.yahoo.co.in
WWW.google.co.in
WWW.rediff.com
WWW.eximbank.org

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