Main topics to be covered

• Pre-shipment Credit in Rupees and  Foreign Currency;
• Overview of Factoring and Forfaiting;
• FEMA guidelines regarding export credit including pre-shipment & post shipment.
• Export credit- how it is different as compared to other credit- EPC/ Foreign Bill discounting
• Pre-shipment and Post-shipment products
• Period of realization, crystallization and write-off
• Concept of Interest rates and Interest equalization
• Guidelines for deemed exports/ status holder exporters/ sub-suppliers 
• ECGC Cover
• PCFC/ EBR
• Modus operandi of factoring and forfaiting
• Difference between factoring and forfaiting
• Risks involved in factoring and forfaiting

ELIGIBILITY 

• EXPORTERS WHO HAVE IE CODE NO.
• GOODS ARE EXPORTABLE
• EXPORTERS WHO  HOLD  EXPORT ORDERS OR L/C
• SUB SUPPLIER, SUPPORTING MANUFACTURERS.
• APPLICANT SHOULD NOT BE PLACED IN –
• EXPORTERS CAUTION LIST/DEFAULTERS LIST/SAL, BSAL LIST OF ECGC.

 CLASSIFICATION:-

• • PRE SHIPMENT FINANCE-

           PACKING CREDIT IN RUPEE-CLEAN PC

PACKING CREDIT IN FOREIGN CURRENCY-PCFC

• • POST SHIPMENT FINANCE-

           PURCHASE

           DISCOUNT

           NEGOTIATION

           RUPEE FINANCE

Export finance is broadly classified into two categories :

i) PRE SHIPMENT FINANCE -PACKING CREDIT 

Any loan, advance or any other credit granted to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment Submission of Documents: The exporter has to submit the shipping documents to the AD within 21 days of the shipment. 

ii) POST-SHIPMENT FINANCE- FDB/FBE/EBR.

Regulatory guidelines

i) Timely availability of credit:

• Funds should be available at the required time.
• Time schedule is prescribed for early disposal  of applications

   ii) Cost of the credit should be affordable:

• To enable exporters to compete in the  international markets – credit should be available  at competitive rates.

 General guidelines on export finance

• RBI – no restriction to finance upto hundred percent of the export order or LC value.
• Finance on the circumstances of each case – operating cycle.
• PC advance to be adjusted by submission of export documents within 360 days – lest advance will cease to qualify for concessional rate of interest – ab-initio.

Eligibility for Availing :

• Exporter with I E Code No.
• Having export orders or L/C
• Can be availed by :                                                  
• suppliers & supporting Manufacturers

Import Export Code 

• Import Export Code Number (IEC): Every person / firm / company engaged in Export Business has to obtain an IEC number.
• IEC Code is issued by Director General of Foreign Trade (DGFT)
• An IEC holder has to ensure that the details in IEC are updated electronically every Year.

 PACKING CREDIT

• It’s a credit prior to shipment for
• Purchasing 
• Processing
• Manufacturing
• Packing of goods

PACKING CREDIT - Overview

• Extended in :
• Indian Rupees as Rupee packing credit (PC)
• In designated currencies as Pre shipment credit in Foreign Currency
• (PCFC)
• Sanctioning for PCLimits
• Margin
• Period of finance
• Depends on Production Cycle/shipping Schedule
• Maximum Period 360 days
• RBI Provide Refinance Up to 180 Days
• Extended to 270 Days at higher concession rate

 General guidelines on export finance

• PC advance – closed from EEFC funds / rupee resources – to the extent exports have actually taken place.
• Liquidation is also possible from the export proceeds of any other order – of same commodity or any other commodity.
• Packing credit in excess of export value 
  • where by product can be exported
  • where partial domestic sale is involved
  •  export of deoiled / cakes etc.
• Running account facility can be extended to exporters of good track record.
• Packing credit can be extended to sub-suppliers – based on the inland LC opened on behalf of EOH

 Quantum of Finance

• Take into consideration of advance payment
• Arrive at FOB  component
• Normally should not exceed the FOB value or the domestic market value of goods, whichever is less

DISPOSAL OF FOREX LOAN APPLICATIONS 

POST SHIPMENT FINANCE 

Time Limit for Receiving Export Payment:-

• The Value of the goods and software exports made by the exporters is required to be realized fully and repatriated to the country within a period of 9 months from the date of exports.
• The amount representing the full export value of goods exported to a warehouse established outside India , the proceeds shall be realized within 15 months
• In case of export of software-> The date of Invoice to be reckoned as Date of Export In case of other cases -> The date of Shipment is the Date of Export.
• Due to COVID-19 Pandemic the RBI in consultation with the GOVT of India has extended the period of realization from the existing period of 9 Months to 15 Months from the date of export, for the exports made up to or on July 31,2020.
• Maximum Permissible Period for Export Credit:-

Pre-shipment Export Credit -> 1 Year (MAX)

Post-shipment Export Credit -> 9 months (MAX)

The exporter has to submit the shipping documents to the Authorized Dealer within 21 days of the shipment.

TYPES OF FINANCE

• By Purchasing the Foreign Currency Amount
• Rupee Finance- Without purchasing The Foreign Currency
• Foreign Currency Finance- BRD

 NORMAL TRANSIT PERIOD

• Export Bills in Foreign Currency – 25 days
• NTP for  SWIFT/TT Reimbursement – 5 days

RUPEE ADVANCE

• Non Availability of Exchange Rates.
• Drawn on non-position Currencies.
• Discrepant Documents
• At The Specific Request of the Exporter.
• Bills Payable in Listed Countries,

Interest Equalization Scheme

• Rupee export credit interest rate subvention scheme was formulated based on GOI instructions – operational instructions issued by RBI.
• The scheme is in vogue till 2024. This scheme is available for employment oriented export sectors.
• The rate of Interest equalization @3% for pre & Post shipment export credit. For Micro, small and medium enterprises – it is increased to 5%.
• The ministry will place funds in advance with RBI and reimbursement would be made on a monthly basis.

Crystallization of overdue bills

• ADs should formulate their own rules.
• Policy should be transparent
• Forex amount should be converted to rupee liability – TT selling rate.
• Once realized after crystallization – TT buying rate.

GOLD CARD FOR EXPORTERS ELIGIBILITY

• Exporters -Good track record - “Standard”- 3 years and there are no irregularities / adverse Features.
• NOT APPLICABLE : Who are blacklisted by ECGC OR Included in RBI’s defaulter’s list / caution list or making losses for the past 3 years OR
• Having overdue Export bills in excess of 10%of the previous year’s turnover.
• BENEFIT :
• CREDIT LIMIT: Need-based finance on annual turnover basis with a liberal approach. “In-principle” the limits Will be sanctioned for a period of 3 years with a provision for automatic renewal
• A stand-by limit of not less than 20% of the assessed limit may be additionally made available to facilitate urgent credit needs.

DEEMED EXPORTS

• Deemed exports – as defined in FTP are those transactions
• Goods supplied do not leave the country
• Payment for such transactions is received in either Indian Rupee or free foreign exchange

STATUS HOLDER

• An applicant shall be categorized as Status holder upon achieving export performance during the current and previous 2 financial years.
• The export performance will be counted on the basis of FOB Value of the export earnings in free foreign exchange.
• Following Status is granted by DGFT depending on the export performance. 

EDPMS: Export Data Processing and Monitoring Systems launched by RBI on February 28, 2014 for effective monitoring and follow up of export transactions.

IDPMS : Import Data Processing and Monitoring Systems launched by RBI on October 10, 2016 to facilitate data processing for import payments

Mechanism of International Factoring

• The exporter approaches export factor (EF) – information on debtors.
• EF contacts Import Factor (IF) – in different countries – assess the debtors – indicates credit cover.
• Agreement signed between exporter – EF
• Once invoices are submitted – payment is made of EF – sends to IF
• IF collects debts from debtors – in case of non-collection – has to pay from his resources.
• On receipt of payment EF – releases the remaining amount
• With recourse factoring and non-recourse factoring.

Main functions of Export Factor

• Assessment of the financial status of the exporter.
• Assessment of the financial status of the importer through IF.
• Prepayment of the receivables to the exporter after documentation.
• Follow Up for recovery with the import factor.
• Sharing of the commission with the import factor.

Import Factor

• Maintaining the details of sales to debtors in his country.
• Collection of debts from the importers and remitting the proceeds to the export factor.
• Providing credit protection in case of financial inability by any of the debtors.

What is Forfaiting?

• Forfaiting is a mechanism of financing exports
• By discounting export receivables
• Bills of exchange or promissory notes
• Without recourse to the seller
• Carrying medium to long term maturities
• On a fixed rate basis (discount)
• Upto 100% of the contract value

Forfaiting

• Exports of capital goods & other goods on medium to long term credit – under deferred payment contract.
• The importer’s bank would be co-accepting the bill – known as avalisation.
• The costs involved are Commitment fee, Discount fee, and Documentation fee.
• All the costs are transferred to an overseas buyer.
• Frees the exporter from cross border political or commercial risks.
• 100% of export value as compared to 80-85% from conventional export credit programmes.
• It is without a recourse basis.
• Hedges against interest and exchange risks arising from deferred export credits
• Free from credit administration and collection problems
• Transaction specific – long term relationship with forfait not necessary.
• Saves on insurance costs – no need for export credit insurance.
• Normally between 1-5 years – in all major currencies.
• Generally equivalent to US$2,50,000/- 

COMPARISON BETWEEN FACTORING AND FORFAITING  

FACTORING

• Domestic & International
• Short term receivables of low and medium value
• Drawing Bill of Ex not mandatory
• With or without recourse
• Continuous arrangements factor and client

FORFAITING

• International
• Medium terms and high value
• Bill of exchange is accepted by buyer and co-accepted by (avalisation) by importer”s bank.
• Necessarily without recourse
• Deals are concluded transaction wise.

ECGC

ECGC offers insurance protection to exporters against payment risks at Pre shipment and post shipment stage and insurance coverage to banks in respect of their pre shipment and post shipment finance.

 Export Credit Guarantee Corporation of India Ltd

• It functions under the administrative control of Ministry of Commerce & Industry, and is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, and insurance and exporting community

 What does ECGC do ?

• Provides a range of credit risk insurance covers to exporters against loss in export of goods and services
• Offers Export Credit Insurance covers to banks and financial institutions to enable exporters to obtain better facilities from them
• Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan

 The Countries have been classified by ECGC into three categories as given below:

• Open Cover
• Restricted Cover-Group I: For which Revolving limits are to be approved by ECGC, normally for one year.
• Restricted Cover –Group II: For which specific approval has to be obtained from ECGC on a case to case basis, on merits.