Export Finance: Meaning and

Export Credit in India

This article provides an overview on the concept of ‘Export
Finance’. After reading this article you will learn about:
1. Meaning of Export Finance 2. Export Credit in India
3. Export Finance to Overseas Importers 4. Credit Risk
Insurance in Export Finance 5. WTO Compatibility of
Trade Finance and Insurance Schemes.
Meaning of Export Finance:
In order to be competitive in markets, exporters are often expected
to offer attractive credit terms to their overseas buyers. Extending
such credits to foreign buyers put considerable strain on the
liquidity of the exporting firms. Therefore, it is extremely important
to make adequate trade finances available to the exporters from
external sources at competitive terms during the post-shipment
stage.

Unless competitive trade finance is available to the exporters, they

often resort to quote lower prices to compensate their inability to
offer competitive credit terms. As a part of export promotion
strategy, national governments around the world offer export credit,
often at concessional rates to facilitate exports.

Export Credit in India:

ADVERTISEMENTS:

In India, export credit is available both in Indian rupees and foreign

currency as discussed here.
Export credit in Indian rupees:

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
The Reserve Bank of India (RBI) prescribes a ceiling rate for the
rupee export credit linked to Benchmark Prime Lending Rates
(BPLRs) of individual banks available to their domestic borrowers.
However, the banks have the freedom to decide the actual rates to
be charged with specified ceilings.

Generally, the interest rates do not exceed BPLR minus

2.5 percentage points per annum for the specified
categories of exports as under:
ADVERTISEMENTS:

1. Pre-shipment credit (from the date of advance)

(a) Up to 180 days

(b) Against incentives receivable from the government covered by

Export Credit and Guarantee Corporation (ECGC) guarantee up to
90 days

2. Post-shipment credit (from the date of advance)

(a) On demand bills for transit period, as specified by FEDAI

(Foreign Exchange Dealers Association of India)

(b) Usance bills (for total period comprising usance period of export
bills, transit period as specified by FEDAI, and grace period,
wherever applicable)

(i) Up to 90 days

(ii) Up to 365 days for exporters under the Gold Card Scheme

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
(c) Against incentives receivable from government (covered by
ECGC Guarantee) up to 90 days

ADVERTISEMENTS:

(d) Against undrawn balances (up to 90 days)

(e) Against retention money (for supplies portion only) payable

within one year from the date of shipment (up to 90 days)

Pre-shipment credit:
Pre-shipment credit means any loan or advance granted by a bank
to an exporter for financing the purchase, processing,
manufacturing, or packing of goods prior to shipment. It is also
known as packing credit. As the ultimate payment is made by the
importer, his/her creditworthiness is important to the bank.

Banks often insist upon the L/C or a confirmed order before

granting export credit. The banks reduce the risk of non-payment
by the importer by collateral or supporting guarantee.

Period of advance:
The period of packing credit given by the bank varies on a case to
case basis, depending upon the exporter’s requirement for
procurement, processing, or manufacturing and shipping of goods.
Primarily, individual banks decide the period of packing credit for
exports.

However, the RBI provides refinance to the banks only for a period
not exceeding 180 days. If pre-shipment advances are not adjusted
by submission of export documents within a period of 360 days

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
from the date of advance, the advance cease to qualify for
concessive rate of interest ab initio. Banks may release the packing
credit in one lump sum or in stages, depending upon the
requirement of the export order or L/C.

Liquidation of packing credit:

The pre-shipment credit granted to an exporter is liquidated out of
the proceeds of the bills drawn for the exported commodities on its
purchases, discount, etc., thereby converting pre-shipment credit to
post-shipment credit.

The packing credit may also be repaid or prepaid out of the balances
in Exchange Earners’ Foreign Currency (EEFC) Account. Moreover,
banks are free to decide the rate of interest from the date of
advance.

Running account facility:

Generally, pre-shipment credit is provided to exporters on
lodgement of L/Cs or firm export orders. It has also been observed
that in some cases the availability of raw material is seasonal
whereas the time taken for manufacture and shipment of goods is
more than the delivery schedule as per the export contracts in
others.

Besides, often the exporters have to procure raw material,

manufacture the export products, and keep the same ready for
shipment, in anticipation of the receipt of firm export orders or
IVCs from overseas buyers. In view of these difficulties faced by the
exporters in availing the pre-shipment credit in such cases, banks

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
are authorized to extend pre-shipment credit ‘running account
facility’.

Such running account facility is extended in respect of any

commodity without insisting upon prior lodgement of a firm export
order or an IVC depending upon the bank’s judgment.

Post-shipment credit:
Post-shipment credit means any loan or advance granted or any
other credit provided by a bank to an exporter of goods from the
date of extending credit after shipment of goods to the date of
realization of export proceeds. It includes any loan or advance
granted to an exporter, in consideration of any duty drawback
allowed by the government from time to time.

Thus, the post-shipment advance can mainly take the form

of:
i. Export bills purchased, discounted, or negotiated

ii. Advances against bills for collection

iii. Advances against duty drawback receivable from government

Post-shipment finance can be categorized as:

i. Advances against undrawn balances on export bills

ii. Advances against retention money

iii. Exports on consignment basis

iv. Exports of goods for exhibition and sale

v. Post-shipment credit on deferred payment terms

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
Post-shipment credit is to be liquidated by the proceeds of export
bills received from abroad in respect of goods exported.

Period of post-shipment credit:

In the case of demand bills, the period of advance is the normal
transit period (NTP) as specified by the FEDAI. Normal transit
period means the average period normally involved from the date of
negotiation, purchase, or discount till the receipt of bill proceeds in
the Nostro account of the bank concerned, as prescribed by the
FEDAI from time to time.

It is not to be confused with the time taken for the arrival of goods
at overseas destination.

The demand bill is not paid before the expiry of the normal transit
period whereas the usance bill is paid after the due date and is also
termed as an overdue bill. In case of usance bills, credit can be
granted for a maximum duration of 365 days from date of shipment
inclusive of NTP and grace period, if any.

However, banks closely monitor the need for extending post-

shipment credit up to the permissible period of 365 days and they
also influence the exporters to realize the export proceeds within a
shorter period.

Export credit in foreign currency:

In order to make credit available to the exporters at internationally
competitive rates, banks (authorized dealers) also extend credit in
foreign currency’ (Exhibit 15.3) at LIBOR (London Interbank
Offered Rates), EURO LIBOR (London Interbank Offered Rates
dominated in Euro), or EURIBOR (Euro Interbank Offered Rates).
Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
LIBOR is a daily reference rate based on the interest rates at which
banks offer to lend unsecured funds to other banks in the London
wholesale (or ‘interbank’) money market. The rate paid by one bank
to another for a deposit is known as London Interbank Bid Rate
(LIBID).

Pre-shipment credit in foreign currency:

To enable the exporters to have operational flexibility, banks extend
pre-shipment credit in foreign currency (PCFC) in any one of the
convertible currencies, such as US dollars, pound sterling, Japanese
yen, euro, etc., in respect to an export order invoiced in another
convertible currency.

For instance, an exporter can avail of PCFC in US dollars against an

export order invoiced in euro. However, the risk and cost of cross-
currency transaction are that of the exporter.

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
Under this scheme, the exporters have the following
options to avail export finance:
i. To avail of pre-shipment credit in rupees and then the post-
shipment credit either in rupees or discounting/re-discounting of
export bills under Export Bills Abroad (EBR) scheme

ii. To avail of pre-shipment credit in foreign currency and

discount/rediscounting of the export bills in foreign currency under
EBR scheme

iii. To avail of pre-shipment credit in rupees and then convert at the

discretion of the bank

Banks are also permitted to extend PCFC for exports to Asian

Currency Union (ACU) countries. The applicable benefit to the
exporters accrues only after the realization of the export bills or
when the resultant export bills are rediscounted on ‘without
recourse’ basis. The lending rate to the exporter should not exceed
1.0 percent over LIBOR, EURO LIBOR, or EURIBOR, excluding
withholding tax.

Post-shipment credit in foreign currency:

The exporters also have options to avail post-shipment export credit
either in foreign currency or domestic currency. However, the post-
shipment credit has also to be in foreign currency if the pre-
shipment credit has already been availed in foreign currency so as
to liquidate the pre-shipment credit.

Normally, the scheme covers bills with usance period up to 180 days
from the date of shipment. However, RBI approval needs to be
obtained for longer periods. Similar to the PCFC scheme, post-
Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
shipment credit can also be obtained in any convertible currency.
However, most Indian banks provide credit in US dollars.

Under the rediscounting of Export Bills Abroad Scheme (EBR),

banks are allowed to rediscount export bills abroad at rates linked
to international interest rates at post-shipment stage.

Banks may also arrange a Banker’s Acceptance Factor (BAF) for

rediscounting the export bills without any margin and duly covered
by collateralized documents. Banks may also have their own BAF
limits fixed with an overseas bank, a rediscounting agency or
factoring agency on ‘without recourse’ basis.

Exporters also have the option to arrange for themselves a line of

credit on their own with an overseas bank or any other agency,
including a factoring agency for rediscounting their export bills
directly.

Export Finance to Overseas Importers:

Generally, commercial banks extend exports credit, often at
concessional rates, to finance export transactions to the exporters as
a part of their export promotion measures. In addition, credit is also
available to overseas buyers so as to facilitate import of goods from
India, mainly under two forms:

Buyer’s credit:
It is a credit extended by a bank in exporter’s country to an overseas
buyer, enabling the buyer to pay for machinery and equipment that
s/he may be importing for a specific project.

Line of credit:

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
It is a credit extended by a bank in exporting country (for example,
India) to an overseas bank, institution, or government for the
purpose of facilitating the import of a variety of listed goods from
the exporting country (India) into the overseas country. A number
of importers in the foreign country may be importing the goods
under one line of credit.

Commercial banks carry out the task of export financing under the
guidelines of the central bank (for example Reserve Bank of India).
The export financing regulations are modified from time to time.
Most countries have an apex bank coordinating the country’s efforts
of financing international trade.

For instance, the Export-Import Bank of India is the principal

financial institution coordinating the working of institutions
engaged in export import finance in India, whereas the US too has
the Export-Import Bank of the US for carrying out similar activities.

Credit Risk Insurance in Export Finance:

Easy and hassle-free access to export finance significantly enhances
firms’ abilities to compete in international markets. Prior to
agreeing to finance a firm’s export transactions, banks need to be
assured of the ability of the borrowers to repay the loan. Generally,
banks insist on pleading adequate collateral before sanctioning
export finance.

In an international transaction, as a firm has to deal with an

overseas buyer operating in a different legal and political
environments, the risks increases manifolds on the smooth conduct
of the commercial transaction.

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
The major commercial risks in international trade
transactions are as follows:
i. Non-payment by the importer at the end of the credit period or
after some specified period after the expiry of credit term

ii. Non-acceptance of goods by the importer despite of its

compliance with the export contract

iii. Insolvency of the purchaser

It has been observed that commercial risks have resulted in more

losses in international transactions compared to political risks.
Credit risk insurance provides protection to exporters who sell their
goods on credit terms. It covers both political and commercial risks.
Credit insurance also facilitates exporters in getting export finances
from commercial banks.

The benefits provided by credit insurance to the exporters

are:
i. Exporters can offer competitive payment terms to their buyers.

ii. It protects the exporters against the risk and financial costs of
non-payment.

iii. Exporters also get covered against further losses from

fluctuations in foreign exchange rates after the non-payment.

iv. It provides exporters a freer access to working capital.

v. The insurance cover reduces exporters’ need for tangible security

while negotiating credit with their banks.

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
vi. Credit insurance provides exporters a second check on their
buyers.

vii. Exporters get access to and benefit from the credit insurer’s
knowledge of potential payment risks in overseas markets and their
commercial intelligence, including changes in their import
regulations.

Insurance policies and guarantees extended by export credit

agencies such as ECGC can be used as collateral for trade financing.
Once the perceived risks of default are reduced, banks are often
willing to grant favourable terms of credit to the exporters. Thus, in
addition to funding for exports, export finances also limit the firm’s
risk of international transactions.

Most countries have central-level export credit agencies (ECAs) to

cover credit risks offering a number of schemes to suit varied needs
of the exporters for export credit and guarantee.

Examples include Export Credit and Guarantee Corporation

(ECGC) in India, Export Credit Guarantee Department (ECGD) in
the UK, Export Risk Insurance Agency (ERIA) in Switzerland, and
Export Finance and Insurance Corporation (EFIC) in Australia.

Export Credit Guarantee Corporation:

Export Credit Guarantee Corporation (ECGC) of India, established
in 1957 by the Government of India is the principal organization for
promoting exports by covering the risks of exporting on credit. It
functions under the administrative control of the Ministry of
Commerce. ECGC is the world’s fifth largest credit insurer in terms
of coverage of national exports.
Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB
The ECGC mainly:
i. Provides a range of credit risk insurance covers to exporters
against loss in export of goods and services

ii. Offers guarantees to banks and financial institutions to enable

exporters obtain better facilities from them

iii. Provides overseas investment insurance to Indian companies

investing in joint ventures abroad in the form of equity or loan

Compiled & Edited by Prof.GVS Rao MBA CAIIB PGD IRPM DCB