Fund based Working Capital Limits for Exporters

 Export credit

• This scheme is intended to make short term working capital finance available to exporters at concessional rates of interest
• Largely 2 types of Credit – Pre Shipment Credit & Post Shipment Credit

 Export credit : Pre Shipment Credit

• Packing credit is sanctioned to an exporter for financing the purchase, processing, manufacturing, or even packing of goods prior to shipment.
• Packing credit can also be extended to as working capital assistance to meet expenses such as wages, salary utility payments required for manufacture or processing goods/services for exports
• Packing credit is sanctioned / granted on the basis of confirmed orders/ Irrevocable Letter of credit etc.
• Different kinds of letters of credit are there based on which quantum of finance is considered.
• Normal period of packing credit is based on the tenor of the confirmed order /letter of credit.
• It should not exceed 6 months in the normal circumstances

 Types of Pre Shipment Credit

• Confirmed orders
• Advances against back to back letters of credit
• Red or green clause letter of credit
• Advances against export incentive
• Running packing credit for good exporters

 Export credit : Post Shipment Credit

• Post shipment credit means any loan, credit or advance granted to an exporter by banks / financial institutions. 
• This is generally given after the shipment of goods/services by the exporter take place.
• This loan can also be sanctioned against duty drawback allowed by the Govt of India .
• As per extant guidelines of RBI, the period prescribed for realization of export proceeds is 12 Months

Types of Post Shipment Credit

• Export Bills Purchased and Discounted
• Export Bills Negotiated,  Advance against export bills sent on collection,  Advance against exports on a consignment basis
• Advance against the undrawn balance on exports
• Advance against claims of Duty Drawback

 Export Incentives:MEIS

• Merchant Exports for Indian Schemes (MEIS)
• Export incentives are certain benefits exporters receive from the Govt of India as acknowledgement for bringing in foreign exchange & as compensation for the cost incurred on sending goods and services out of the country.
• Export incentives can take the form of :-

1. Subsidies that lower export prices viz Tax concessions  such as duty exemptions ( which enable duty free import of  inputs for export production) & duty remission 
2. Credit facilities with lesser cost 

• In India export incentives are in line with govt. Flagship- “ Made in India” & “Atma Nirbhar Bharat”
• MEIS has since been withdrawn w.e.f.1ST January 2021. 
• New scheme called Remission of Duties & taxes on exported Products (RODTEP) has been introduced which shall refund the embedded duties suffered in export of goods
• Govt has announced Production linked incentive scheme for all MSMEs which helps exporters

 Import credit

• A loan or advance facility offered specifically to facilitate import of current assets/working assets
• Import credit is a credit facility that an importer has with a bank in the country where it resides
• Import credit is a facility that an importer has with  a lender, generally a bank
• Import facilities :

A) letters of credit

B) Bank Guarantees

C) Trade Credit through Standby Letter of Credit

Modes of payment in international trade:

• Advance payment:  the importer pays the seller  before goods are despatched
• Bills on collection: Seller despatches the goods to the buyer with an agreement that the buyer makes payment within a specified period but underlying documents delivered to its bankers
• Letters of credit: a debt instrument issued by a bank on behalf of its customer to make payment to a third party against certain stipulated conditions.

 Letters of credit for imports & Exports 

• Governed by Uniform Customs and Practice For Documentary Credits

     ( UCPDC)  UCP 600

 Applicant           Buyer

Issuing Bank    Buyers bank ( resident in buyers country 

Advising bank   Sellers bank ( resident in Sellers country)

Beneficiary        seller

 Modes of LC Payment

      Sight Payment

      Deferred or Usance payment

 Trade Finance

• Trade Finance is by way of a letter of credit: this can be sight/demand LC or Usance LC
• Advantage of Usance LC is the availability of time period to make the payment
• In case of Import or export Letters of credit, it is better to take forward cover to hedge the risk of currency fluctuation
• Banks/ financial institutions normally advise the customer for a minimum percentage of hedging unless the customer has a natural hedge in their business activity
• SBLC; Standby Letter of Credit; are irrevocable agreements for the payment of money. They function like guarantees or obligations and are provided by the bank for the benefit of the beneficiary

ECGC    

ECGC provided a range of insurance covers to Indian Exporters

• Covers the risk of Non realization of Export Proceeds due to commercial or political risks
• Different types of credit insurance covers to banks and other financial institutions to enable them to extend credit facilities to exporters
• Export factoring facility for MSME sector which is a package of financial products consisting of working capital finance, credit Risk protection.
• Provides information on the credit worthiness of buyers.

 Need for ECGC Cover

• Payments of exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far reaching political and Geo economic changes that are sweeping the world
• ECGC caution list
• ECGC does not cover the following risks

A) exchange loss due to fluctuation in currency exchange rates

B) any loss which arises due to dispute in quality.

 Kinds of Guarantees offered by ECGC

• PC credit guarantee
• Export production finance guarantee
• Export finance guarantee
• Export finance ( overseas lending) guarantee
• From a Banks point of view ECGC cover protects banks to the extent of 75% or 90% of the loss suffered by banks on account of such guarantees.

Non-Fund based Working Capital Limits 

 Letters of Credit

• A number of banks adopt the practice of parking the dues of the borrower in respect of devolved LCs and invoked guarantees in a separate account which is not a regular sanctioned facility. As a result, these are not reflected in the principal operating account of the borrower. This renders application of the prudential norms for the identification of NPAs difficult. It is, therefore, advised that if the debts arising out of devolvement of LCs or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification, and provisioning.

 Letters of Guarantees

• Various types of guarantees are issued by the banks on behalf of their customers. Bank Guarantees (BG) is also known as Letter of Guarantees which can be broadly classified as (i) Financial Guarantees and (ii) Performance guarantees. Earnest money Deposit guarantee or Bid Bond Guarantee, Guarantee for Payment of Customs duty (specific or continuing), Advance Payment Guarantee (APG), Deferred Payment Guarantee (DPG), Shipping Guarantee, Performance guarantee, Retention Money guarantees, etc. are some of the prominent types of guarantees issued by the banks.
• Bank Guarantee or letter of guarantee is a fee-based credit facility extended by the banks to their customers. The non-fund-based facilities are the letter of guarantee or letters of credit by the banks wherein banks get fee income. Since there is no immediate outflow of funds from the banks they are also known as the non-fund-based facility. However in the case of a non-fund based credit facility, the bank has to discharge the financial liability of the contract agreed to the guarantee or documentary credit, if the contract is partly or fully not performed by the custom

 Financial Guarantees

• Financial guarantees are issued by the banks whenever a contract is awarded to their customer, who is generally a contractor of civil work or a supplier of goods, machinery, equipment by a Government Department or large industrial undertakings, the customer is under obligation to offset cash security or earnest money as a token of due compliance of the terms and conditions of the contract. This cash security provided by the contractor or supplier is forfeited by the Government Department or the company which awarded the contract, in the event the contractor or supplier fails to comply with the terms stipulated in the sanction. The customer normally will have an option to furnish a bank guarantee in lieu of cash security, so that his working funds are not unnecessarily blocked. The guarantees issued by banks for the above purpose is called financial guarantee wherein the banks undertake to pay the guaranteed amount during a specified period on demand from the beneficiary. 

 Financial Guarantees - Examples

• Guarantee for Earnest money Deposit (Local Tender)/Bid Bond Guarantee (international tender): A bid bond guarantee is a guarantee issued by the bank to the effect that the bidder would not withdraw the bid before the expiry of the bid/tender period or in case the contract is awarded to the bidder that he would comply with the terms of the tender and enter into the contract.
• Guarantee for Payment of Customs duty (specific or continuing): A customer may require a guarantee favoring the customs department for payment of customs duty covering import of raw materials. It means that the guarantee covers custom duty in arrears to the Customs Department by the customer up to a limit (stating maximum of amount) of guarantee undertaken by the bank.
• Advance Payment Guarantee (APG): Although Advance Payment guarantee is associated with the financial guarantee it has the inherent risk of performance guarantee Advance payment guarantees are issued on behalf of the (i) Supplier of raw materials/finished goods or (ii) on behalf of a contractor for execution of contract when he receives the advance payment. Since the supplier receives an advance from the purchaser for the supply of raw material or finished goods on a future date, it is a substitution of working capital funds. In the case of execution of the contract, if any one of the terms of the contract is not fulfilled, the guarantee is likely to be invoked. While accepting the request from the customer for APG limit the banker should thoroughly analyze all risk factors.
• Deferred Payment Guarantee (DPG): In the cases of purchase of capital goods/machinery where the seller offers credit to the buyer and the buyer’s bank guarantees the due payments to the seller. Here the seller draws drafts of different maturities on the buyer which are accepted by the buyer and co-accepted by the Buyer’s bank. Thereby the buyer’s bank guarantees due payment of those drafts drawn by the seller which represents the total consideration of the contract of sale/supply. The seller avails the refinance from his bank against co-accepted bills. DPG involves the substitution of the term loan. Hence procedure applicable for assess

 Difference between a Buyers Credit and Letter of Credit
 Buyers Credit V/s Letter of Credit

 Buyer’s Credit Letter of Credit

Meaning

Is a loan facility Is a payment instrument

Usage

Usually available for Available for all size of

high value transactions transactions

Cost

Interest + Fees Only Fees, no Interest

Parties Involved

Importer, Importer’s bank Importer, Importer’s bank,

& and overseas funding bank Exporters & Exporter’s Bank

Scope

Limited to funds Wide scope involves entire

International transactions

 Conclusion

• I would like to conclude by saying that the export industry in India is mainly through MSMEs
• Govt and banks have tailor made  various facilities and incentives to boost exports in the country