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Introduction To Cross Border Banking: International Finance

This document discusses various aspects of pre-shipment export finance. It begins by defining cross-border banking and trade finance, noting that international trade relies on differences in comparative advantages between countries. It then describes pre-shipment finance, which supports exporters before goods are shipped. This includes packing credit (domestic currency loans), advances on export payments, and pre-shipment credit in foreign currency. Eligible persons and the basis for these loans are provided. The document also discusses sanctioning of credit limits, loan periods, account maintenance requirements, and liquidating loans upon shipment of goods.

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Chandra Kanth
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175 views20 pages

Introduction To Cross Border Banking: International Finance

This document discusses various aspects of pre-shipment export finance. It begins by defining cross-border banking and trade finance, noting that international trade relies on differences in comparative advantages between countries. It then describes pre-shipment finance, which supports exporters before goods are shipped. This includes packing credit (domestic currency loans), advances on export payments, and pre-shipment credit in foreign currency. Eligible persons and the basis for these loans are provided. The document also discusses sanctioning of credit limits, loan periods, account maintenance requirements, and liquidating loans upon shipment of goods.

Uploaded by

Chandra Kanth
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter No. 6 Page No.

124

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

INTRODUCTION TO CROSS BORDER BANKING

THE GROWTH OF INTERNATIONAL TRADE IN COMMODITIES,


SERVICES AND RESOURCES NECESSITATES A MECHANISM
FOR PAYMENT / TRANSMISSION OF VALUE OF
COMMODITIES, SERVICES OTHER RESOURCES FROM ONE
COUNTRY TO THE OTHER COUNTRY AND ALSO FOR
CONVERSION OF CURRENCY OF ONE COUNTRY INTO THAT
OF ANOTHER COUNTRY CAN BE BEST EFFECTED THROUGH
BANKS. SUCH TRANSACTIONS OF BANKS ARE KNOWN AS
CROSS BORDER BANKING FUNCTIONS.

Chapter No. 6 Page No. 124

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

CROSS BORDER TRADE FINANCE

IT REFERS TO THE FINANCING OF FOREIGN TRADE AND


INCLUDES EXPORT FINANCE AND IMPORT FINANCE.

THE INTERNATIONAL TRADE IS BASED ON THE PRINCIPLE


OF COMPARATIVE ADVANTAGE WHICH ARISE OUT OF
DIFFERENCES IN RESOURCES, COSTS, DEMAND AND
SUPPLY TECHNOLOGY BETWEEN THE COUNTRIES.

THE COMPARATIVE ADVANTAGE REFERS TO THE RELATIVE


EFFICIENCY OF PRODUCING GOODS AND SERVICES.

COUNTRIES ENGAGE IN EXPORT AND IMPORT OF GOODS


AND SERVICES DUE TO DIFFERENCES IN RELATIVE
EFFICIENCIES OF PRODUCTION.

Chapter No. 6 Page No. 124

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

EXPORT FINANCE

EXPORTER NEED FINANCIAL ASSISTANCE FOR THE


EXECUTION OF AN EXPORT ORDER FROM THE DATE OF
RECEIPT OF AN EXPORT ORDER TILL THE DATE OF
REALIZATION OF EXPORT PROCEEDS AT ANY STAGE.

EXPORT FINANCE IS A SHORT- TERM CAPITAL FINANCE


ALLOWED TO AN EXPORTER.

EXPORT FINANCE CAN BE CLASSIFIED INTO TWO


CATEGORIES, DEPENDING UPON AT WHAT STAGE OF
EXPORT ACTIVITY THE FINANCE IS EXTENDED.

PRE-SHIPMENT FINANCE AND POST SHIPMENT FINANCE.

Chapter No. 6 Page No. 125

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

PRE-SHIPMENT FINANCE

PRE-SHIPMENT FINANCE IS FINANCIAL ASSISTANCE


EXTENDED TO THE EXPORTERS, PRIOR TO SHIPMENT
OF EXPORTS.
PRE-SHIPMENT FINANCE CAN BE CLASSIFIED AS :
PACKING CREDIT (DOMESTIC CURRENCY).

ADVANCES AGAINST CHEQUES / DEMAND DRAFTS


RECEIVED AS ADVANCE PAYMENT.

PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC)

Chapter No. 6 Page No. 125

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

PRE-SHIPMENT CREDIT / PACKING CREDIT

PACKING CREDIT MEANS:


ANY LOAN OR ADVANCE GRANTED OR ANY OTHER CREDIT
PROVIDED BY A BANK TO AN EXPORTER.
FOR FINANCING:
THE PURCHASE, PROCESSING, MANUFACTURING OR
PACKING OF GOODS PRIOR TO SHIPMENT.
ON THE BASIS OF:
LETTER OF CREDIT OPENED IN HIS FAVOUR OR IN FAVOUR
OF SOME OTHER PERSON BY AN OVERSEAS BUYER OR A
CONFIRMED AND IRREVOCABLE ORDER FOR EXPORT OF
GOODS.

Chapter No. 6 Page No. 125

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

PERSONS ELIGIBLE FOR PACKING CREDIT

AN EXPORTER WHO HAS AN IMPORT-EXPORT CODE


NUMBER (IEC).

HE SHOULD NOT BE IN THE CAUTION LIST OF ECGC.

SHOULD HAVE A LETTER OF CREDIT OPENED IN HIS


FAVOUR OR A CONFIRMED AND IRREVOCABLE ORDER FOR
EXPORT OF GOODS.

PACKING CREDIT LOAN CAN ALSO BE ALLOWED TO THE


SUPPORTING MANUFACTURER SUPPLIER OF THE GOODS
WHO DO NOT HAVE EXPORT ORDERS OR L / C IN THEIR
NAME.

Chapter No. 6 Page No. 126

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

BASIS FOR ALLOWING PACKING CREDIT

NAME OF THE OVERSEAS BUYER.

PARTICULARS OF GOODS TO BE EXPORTED.

QUANTITY AND UNIT PRICE OF GOODS TO BE


EXPORTED.

DATE OF SHIPMENT AND TERMS OF SALES AND


PAYMENTS.

Chapter No. 6 Page No. 126

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

SANCTION OF EXPORT CREDIT LIMIT

THE BANK SHOULD LOOK INTO THE ASPECTS OF PRODUCT


PROFILE, COUNTRY PROFILE AND COMMODITY PROFILE.

EXPORTER IS A REGULAR CUSTOMER, BONAFIDE


EXPORTER AND HAS A GOOD STANDING IN THE MARKET.

EXPORTER IS NOT IN THE CAUTION LIST.

EXPORTER HAS AN IEC CODE ALLOTTED BY DGFT.


GOODS SHOULD NOT BE CLASSIFIED AS BANNED /
CANALIZED/ RESTRICTED AND HAS A VALID LICENCE FOR
THE SAME IF REQUIRED.

EXPORTER SHOULD NOT BE UNDER ECGCs SPECIFIC


APPROVAL LIST. (SIL)

Chapter No. 6 Page No. 127

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

PERIOD OF FINANCE

PACKING CREDIT FINANCE BEING A NEED BASED AND


SHORT TERM FINANCE. THE PERIOD FOR WHICH A
PACKING CREDIT ADVANCE MAY BE GIVEN BY A BANK
WILL DEPEND UPON THE CIRCUMSTANCES OF THE
INDIVIDUAL CASE, SUCH AS THE TIME REQUIRED FOR
PROCURING, MANUFACTURING OR PROCESSING AND
SHIPPING RELATIVE GOODS. IT IS PRIMARILY FOR THE
BANKS TO DECIDE THE PERIOD TO ENABLE THE EXPORTER
TO SHIP THE GOODS.

IF PRE-SHIPMENT ADVANCES ARE NOT ADJUSTED BY


SUBMISSION OF EXPORT DOCUMENTS WITHIN 180 DAYS
FROM THE DATE OF ADVANCE, THEN THE BANK WILL
CHARGE AT CONCESSIONAL RATE OF INTEREST.

Chapter No. 6 Page No. 128

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

MAINTENANCE OF ACCOUNTS

SEPARATE LOAN ACCOUNTS FOR EACH PACKING CREDIT


LOAN AGAINST PARTICULAR EXPORT ORDER.

BANKS MAY RELEASE THE PACKING CREDIT IN ONE LUMP


SUM OR IN STAGES AS PER REQUIREMENTS.

BANKS MAY MAINTAIN DIFFERENT ACCOUNTS AT VARIOUS


STAGES OF PROCESSING, MANUFACTURING etc.
DEPENDING UPON THE TYPES OF GOODS TO BE
EXPORTED.

OUTSTANDING BALANCE IN ACCOUNTS ARE ADJUSTED BY


TRANSFER FROM ONE ACCOUNT TO THE OTHER AND
FINALLY BY PROCEEDS A OF RELATIVE EXPORT
DOCUMENTS.

Chapter No. 6 Page No. 128

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

DISBURSAL OF LOAN ACCOUNTS

PROPER END USE OF FUNDS SHOULD ALWAYS BE


ENSURED.

PCL SHOULD NOT BE DISBURSED IN LUMP SUM AMOUNT.

PCL SHOULD BE DISBURSED IN PHASED MANNER TAKING


INTO ACCOUNT THE PRODUCTION CYCLE, REQUIREMENT
OF FUNDS AND SHIPMENT SCHEDULE.

PCL SHOULD BE DISBURSED BY MAKING DIRECT PAYMENT


TO THE SUPPLIERS .

IF IT IS NOT POSSIBLE TO MAKE PAYMENT DIRECT TO THE


SUPPLIERS, THEN THE LOAN CAN BE CREDITED TO THE
EXPORTERS CURRENT ACCOUNT AND DRAWING FROM
THERE SHOULD BE SUPERVISED.

Chapter No. 6 Page No. 129

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

LIQUIDATION OF PACKING CREDIT ADVANCE

ALL PACKING CREDIT LOANS MUST BE ADJUSTED BY


PROCEEDS OF EXPORT BILLS PURCHASED /NEGOTIATED
OR PSEF / RUPEE ADVANCE ALLOWED.

THE LOANS CAN ALSO BE ADJUSTED BY THE PROCEEDS


OF CASH INCENTIVE / DUTY DRAW BACK CLAIMS OR ANY
OTHER ENTITLEMENT IN CONNECTION WITH THE EXPORTS
RECEIVED FROM THE GOVT.

LOANS CAN NOT BE ADJUSTED BY EXPORT PROCEEDS


DUE TO EXPORTERS FAILURE TO SHIP THE GOODS.

IN NO CASE THE PCL SHOULD REMAIN OUTSTANDING IF


THE RELATIVE SHIPMENT HAS TAKEN PLACE AND THE
DOCUMENTS HAVE BEEN SUBMITTED TO THE BANK.

Chapter No. 6 Page No. 130

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY

BANKS CAN EXTEND PRE-SHIPMENT CREDIT IN FOREIGN


CURRENCY (PCFC) TO EXPORTERS FOR DOMESTIC AND
IMPORTED INPUTS OF EXPORTED GOODS AT LIBOR/EURO
LIBOR/EURIBOR RELATED RATES OF INTEREST.

IT IS AN ADDITIONAL WINDOW FOR PROVIDING PRESHIPMENT CREDIT TO INDIAN EXPORTERS AT


INTERNATIONALLY COMPETITIVE RATES OF INTEREST.

BANKS ARE COVERING ALL PRE-SHIPMENT ADVANCES


GRANTED BY THEM UNDER WHOLE TURNOVER PACKING
CREDIT GUARANTEE POLICY FROM EXPORT CREDIT
GUARANTEE CORPORATION LTD.

Chapter No. 6 Page No. 130

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

DEFERRED PAYMENT EXPORTS

CONTRACTS: EXPORTS UNDER DEFERRED PAYMENT


ARRANGEMENT MAY BE UNDER SIMPLE CONTRACTS.

GOODS SUPPLIED: THE GOODS TRADED IN UNDER


DEFERRED PAYMENT ARRANGEMENTS CONSISTS USUALLY
OF HIGH PRICED CAPITAL AND ENGINEERING GOODS.

TERMS OF PAYMENT: LONG TERM CREDIT TO THE


OVERSEAS BUYER IS OFFERED.
o
o
o

2 YEARS FOR CONSUMER DURABLES AND OTHER


ENGINEERING GOODS.
11 YEARS FOR CAPITAL AND PRODUCER GOODS.
12 YEARS FOR TURNKEY PROJECTS.

Chapter No. 6 Page No. 131

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

BUYERS CREDIT

IN FOREIGN TRADE, THE BUYERS CREDIT REFERS TO


A LONG TERM CREDIT GRANTED BY THE
EXPORTERS BANKER TO THE OVERSEAS BUYER ON
AN UNDERTAKING TO PAY THE VALUE OF EXPORTS
BY INSTALLMENTS AT REGULAR INTERVALS OVER A
SPECIFIED NUMBER OF YEARS, AND FURNISHING A
BANK GUARANTEE.

Chapter No. 6 Page No. 134

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

TURNKEY PROJECTS

RBI APPROVAL: ANY OFFER FOR A TURNKEY PROJECT


ABROAD, IRRESPECTIVE OF THE VALUE OR NATURE OF
THE CONTRACT, MAY BE MADE BY AN INDIAN EXPORTER /
CONTRACTOR ONLY WITH THE PRIOR APPROVAL OF THE
RESERVE BANK.

EXIM BANKS PACKAGE CLEARANCE: THE EXIM BANK IN


GRANTING THE APPROVAL CONSIDERS THE :

ECONOMIC AND TECHNICAL VIABILITY OF THE OVERSEAS


PROJECT.
CONT.

Chapter No. 6 Page No. 134

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

TURNKEY PROJECTS

APPOINTMENT OF AN OVERSEAS AGENT TO SECURE


MARKET INFORMATION, FOLLOW UP THE BID, LIAISON
WITH THE FOREIGN BUYER.

THE MANNER OF FINANCING THIRD COUNTRY PURCHASES,


IF ANY REQUIRED UNDER THE CONTRACT.

ACCOUNT ABROAD: ONE OR MORE FOREIGN CURRENCY


ACCOUNTS INTHE COUNTRY OF THE PROJECT OR ANY
OTHER COUNTRY MAY BE OPENED BY THE EXPORTER
WITH THE APPROVAL OF THE RESERVE BANK, TO
FACILITATE TO ROUTE THE EXPENDITURE THROUGH THE
SAID ACCOUNT.
CONT.

Chapter No. 6 Page No. 135

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

TURNKEY PROJECTS

SITE OFFICE : A SITE OFFICE MAY BE ESTABLISHED IN THE


FOREIGN COUNTRY WHERE THE PROJECT IS BEING
EXECUTED.
THIRD PARTY PURCHASES: WHERE A PROJECT
NECESSITATE IMPORTS FROM A THIRD COUNTRY TO THE
FOREIGN COUNTRY IN WHICH THE PROJECT HAS BEEN
UNDERTAKEN SUCH IMPORTS SHOULD NORMALLY BE PAID
IN CASH.
A FOREIGN CURRENCY LOAN OR OVERDRAFT FOR THE

PURPOSE OF BRIDGING THE TEMPORARY SHORTFALL


IN CASH FLOW IN EXECUTION OF THE EXPORT ORDER
MAY BE RAISED.

Chapter No. 6 Page No. 135

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

JOINT VENTURE ABROAD

THE RESERVE BANK EXTENDS TO THE FIRMS AND


COMPANIES WHICH HAVE OBTAINED THE GOVERNMENTS
PERMISSION :
ITS APPROVAL TO OPEN OFFICES, APPOINT AGENTS OR
POST REPRESENTATIVES ABROAD IN CONNECTION WITH
THE JOINT VENTURE OR THE CONSULTANCY SERVICES /
TECHNICAL SERVICES.
THE PURPOSE IS TO ASSIST THE EXPORTERS TO AUGMENT
THEIR EXPORT EARNINGS OR TO PROVIDE AFTER SALES
SERVICE AND CONSUMER ADVICE FOR SOPHISTICATED
MACHINERY AND ENGINEERING GOODS EXPORTED
ABROAD.

Chapter No. 6 Page No. 135

International Finance
CROSS BORDER FINANCING EXPORT FINANCE PRE-SHIPMENT

BANK CREDIT
CREDIT FROM AN ELIGIBLE BANK FOR EXPORTS UNDER A
SUPPLY OR TURNKEY CONTRACT UNDER DEFERRED
PAYMENT TERMS MAY BE HAD AT THE
PRE-SHIPMENT
AND / OR
POST-SHIPMENT STAGE
AT A
PREFERENTIAL RATE OF INTEREST.

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