Unit 2 Financing Foreign Trade

UNIT 2
FINANCING FOREIGN TRADE

EXPORT FINANCE
• Exporters offer attractive credit terms to their overseas
buyers
• This makes strain on the liquidity of the exporting
firms
• So adequate trade finances available to the exporters
from external sources at competitive terms during the
post-shipment stage
• As a part of export promotion strategy, national
governments around the world offer export credit,
often at concessional rates to facilitate exports.
1. PRE-SHIPMENT FINANCE
• Pre Shipment Finance is issued by a financial
institution when the seller wants the payment of the
goods before shipment.
• The main objectives behind pre-shipment finance or
pre-export finance is to enable exporter to: Procure
raw materials, manufacturing, warehousing, packing,
shipping, and financial costs
• Types of Pre Shipment Finance
1. Packing Credit
2. Advance against Cheques/Draft etc. representing
Advance Payments.
Preshipment finance is extended in the following forms :
 Packing Credit in Indian Rupee
 Packing Credit in Foreign Currency (PCFC)
Requirment for Getting Packing Credit
• A ten digit importerexporter code number allotted by DGFT.
• Exporter should not be in the caution list of RBI.
• If the goods to be exported are not under OGL (Open General
Licence), the exporter should have the required license /quota
permit to export the goods.
• Formal application form for credit
• Irrevocable letter of credit
• Licence issued by DGFT
• Exporter who has export order in his own name
• Quantum of Finance is granted to an exporter against the LC or an
expected order.
Different Stages of Pre Shipment Finance
1. Appraisal and Sanction of Limits – bank verifies country, product,
importer – ensures exporter’s bonafides, license and importer’s
country is Restricted cover country (RCC)
2. Disbursement of Packing Credit Advance – after bank ensures
exporter produces all documents – quantum of finance as per FOB
value – disbursals at stages only – maximum duration of packing
credit is 180 days + 90 days as per bank’s discretion
3. Follow up of Packing Credit Advance – exporter should submit stock
statement – used by banks to secure packing credit in advance
4. Liquidation of Packing Credit Advance – out of the export proceeds
of relevant shipment – converting preshipment into postshipment
credit
5. Overdue Packing – if borrower fails to liquidate the packing credit
on due date then bank takes the necessary step to recover its dues
as per normal recovery procedure
Special Cases
1. Packing Credit to Sub Supplier – exporter can transfer credit to
manufacturer
2. Running Account facility – exporter of any origin can get credit
3. Preshipment Credit in Foreign Currency (PCFC) – rate of interest linked to
LIBOR
4. Packing Credit Facilities to Deemed Exports - Deemed exports made to
multilateral funds, aided projects and programmes, under orders
secured through global tenders for which payments will be made in free
foreign exchange
5. Packing Credit facilities for Consulting Services - allow the exporter to
mobilize resources like technical personnel and training them
6. Advance against Cheque/Drafts received as advance payment - Where
exporters receive direct payments from abroad by means of
cheques/drafts etc. the bank may grant export credit at concessional
rate to the exporters of goods track record, till the time of realization of
the proceeds of the cheques or draft etc
2. POST SHIPMENT FINANCE
• Post Shipment Finance is a kind of loan provided by a financial
institution to an exporter or seller against a shipment that has already
been made.
Basic Features :-
1. Purpose of Finance: finance export sales receivable after the date of
shipment of goods to the date of realization of exports proceeds
2. Basis of Finance : against evidence of shipment of goods
3. Types of Finance : Post shipment finance can be secured or
unsecured.
4. Quantum of Finance - 100% of the invoice value of goods
5. Period of Finance : short term or long term - Concessive rate of
interest is available for a highest period of 180 days
Postshipment finance can be provided for three types of export :
1. Physical exports 2. Deemed export 3. Capital goods and project
exports

Types of Post Shipment Finance
1. Export Bills purchased/discounted.(Non L/c bills)

2. Export Bills negotiated ( Bill under L/c)
3. Advance against export bills sent on collection basis –
Banks may allow advance against these collection bills to
an exporter with a concessional rates of interest
4. Advance against export on consignment basis
5. Advance against undrawn balance on exports – Subject to
maximum of 10% export value
6. Advance against claims of Duty Drawback - Duty Drawback
is a type of discount given to the exporter in his own
country - lower rate of interest for a maximum period of
90 days
TOPIC-1.2 : POST CREDIT IN FOREIGN CURRENCY
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 at LIBOR (London
Interbank Offered Rates), EURO LIBOR (London Interbank
Offered Rates dominated in Euro), or EURIBOR (Euro
Interbank Offered Rates)
Pre-shipment credit in foreign currency
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.,
Under this scheme, the exporters have the following options
to avail export finance:
i. To avail 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 pre-shipment credit in rupees and then convert at
the discretion of the bank
Post-shipment credit in foreign currency
The exporters also have options to avail post-shipment export credit
either in foreign currency or domestic currency
• 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
• Scheme covers bills with usance period up to 180 days from the
date of shipment.
• Rediscounting of Export Bills Abroad Scheme (EBR)
Export Finance to Overseas Importers: to finance export
transactions to the exporters and 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:
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.
Topics for Once in a Semester
• IBRD – 3 PERSONS
• EXIM BANK – 2
• ASIAN DEVELOPMENT BANK – 3
• ECGC – 2
• MIGA - 4

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UNIT 2

FINANCING FOREIGN TRADE

1. Export Bills purchased/discounted.(Non L/c bills)

Export credit in foreign currency:

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