Export Finance

6-Aug-11

R K Gupta

 Similar

to the requirement of finance for

carrying out domestic business, Banks

extend short term finance to the

manufacturers and traders for execution of

export orders and supply of the goods to

the Foreign Buyers.

While dealing with Export Finance, Banks are bound by the following guidelines.

Reserve Bank of India Guidelines Directions under FEMA 1999. Trade Control Regulations Foreign Trade Policy 2009-2014. International Chambers of Commerce (ICC) guidelines such as UCPDC-600 and URC- 522.

Export Credit Guarantee Corporation of India. FEDAI guidelines and rules thereof.

 In

terms of Foreign Trade and Development

Regulation Act. 1992, Exports is defined as taking out goods outside India in physical, non physical or in the form of services in return of Foreign Exchange.

Movement of goods and services and the movement of the currency are the two legs of the export transaction, while the first one is governed

by the provisions of FTD&R Act. 1992 through (FTP

2009-2014), where as the other leg of the transaction is governed by RBI through (FEMA1999)

Export

Goods

FEX

FTD&R Act.1992

FEMA 99

DGFT

RBI

FTP 2009-14

ECM

Customs

ADs

Funds should be made available to the Exporter at a required time. As such it is expected of Banks that export credit proposals should be sanctioned within 45 days of receipt of application, renewal of Export facilities be done in 30 days and adhoc facility be given in 15 days.

Banks are advised to achieve an export target of 12% of their total credit portfolio.

In order to compete in the International market, credit ought to be provided at a cheaper rate of interest.

Exporters credit requirement, both at pre shipment and post shipment stage should be considered in total.

 A.

Export Finance is provided in two stages, namely Pre-shipment finance, being a short term working capital finance extended for procurement of raw material, its processing and manufacturing, packing and forwarding and

B.

Post shipment finance, being again a short term finance provided against the export receivables extended from the point of submission of export documents till the date of

realization.

Receipt of LC or Order Purchase of Raw material Manufacturi ng/ Processing Packing & Forwarding Shipment by air/ sea Submission of docs. to banks Realization of bill

POSTSHIPMENT

FORWARD BOOKING

PRE-SHIPMENT

Sanction of PC A: against order B; Regular PC limit

If pc remains outstanding for more than 360 days, it is an overdue PC, no interest benefit

Disbursement of PC A: In lump sum B: In stages

PACKING CREDIT

Repayment of PC by 1: submitting the Export Documents 2: Out of EEFC A/c.

1. Open separate account for each PC 2.Control Ledger to Monitor outstanding under each account

Running Account Facility. Apply FIFO method

Packing Credit means a finance provided at a pre shipment

stage to the exporter for execution of an export order. This

covers credit extended for purchase, processing, manufacturing, packing and forwarding the goods meant for export till the point of their shipment. This is basically a need based finance extended on the basis of confirmed irrevocable Export order or the Export Letter of Credit.

Packing Credit against lodgment of Export orders or the Letter of Credit.

Advance against Govt. receivables such as duty

drawback, etc.

Advance against cheques/drafts representing advance payment

PC is basically a need based finance for working capital. Therefore the period of advance be decided based on the working capital cycle or the time spent on execution of the export order, which includes the time taken for completing the manufacturing process, packing of the goods keeping them ready for shipment.

For Merchant Exporter it may be the time taken for procurement of the goods, packing them and forwarding etc.

As per RBI guidelines advance however should be liquidated maximum within a period 360 days or else it does not qualify for concessional rate of interest ab initio

Normally PC should be liquidated by the Exporter by submitting the Export documents after the shipment takes place in respect of the Export order for which PC is availed.

RBI in order to allow more operational flexibility have allowed banks to extend order substitution facility to their exporter clients who has a good track record.

The PC availed can be liquidated by submission of the export

documents in respect of some other export order for which no PC is

availed.

While extending the above facility Bank needs to ensure, that

allowing such facility is a commercial necessity and unavoidable.

The Exporter should be asked the reason as to why exporter could not submit the export documents in respect of the earlier order for

which PC is availed.

As stated above it is a must to submit the export order for

availing PC, however in practice this always is not possible

and in genuine cases PC is allowed to be released in the absence of regular export order or LC as the case may be. This facility for very good customers is allowed under exceptional circumstances is referred to as Running Account Facility.

In some cases availability of raw material is seasonal i.e. in case of agro

products, where raw material is required to be purchased in bulk to fulfill the

requirement for the full year.

In case of Manufacturer Exporters, contracts are required to be entered into

with the regular buyers for the entire year, indicating the exact quantities
rates etc. and shipment schedule for the supplies thru ought the year.

In many case Exports have to keep the goods ready for the anticipated orders

received at the last moment.

Generally Banks allow (RAF) to those exporters whose track record is good as

also to the units in the free trade zones such as (SEZs), (EPZs) and (EOUs).

In all cases where (RAF) is allowed, the export orders and /or the LCs be submitted within a reasonable period of time as decided by the Bank.

The principal of First in First Out (FIFO) should be followed in such a manner
that the time between the first debit and the first credit should not exceed 360 days.

PC can also be marked off against the export order for which no PC is availed.

Interest Rate effective from July 1st, 2010 will be at the Base Rate or

more for any tenor of Pre shipment finance but not exceeding 360
days from the date of disbursement of PC.

If Preshipment finance is not liquidated within 360 days, commercial rate of interest together with penalty is charged, ab initio.

If PC is liquidated, but after the sanctioned period or after 360 days, Banks can decide their own rate of interest generally referred as EXPORT CREDIT NOT OTHERWISE SPECIFIED i.e. (ECNOS)

Ordinarily each PC should be maintained as a separate account for

the purpose of monitoring and end use verification.

Banks may release PC in one lump sum or in stages as per the requirement for execution of the Export order/LC.

Bank should continue to keep a close watch on the end use of the funds and ensure that PC at a concessional rate of interest is used only for fulfillment of the export order.

Thank You