IB 18 GUIDE

EXPORT IMPORT FINANCE IN INDIA

QNO1. What is the need for export finance in India? Write a short note on export financing facilities in
India.

 Need for export finance

 Financing facilities

ANSWER -

Need for Export Finance: In view of the importance of export credit in maintaining the pace of export
growth, RBI has initiated several measures in recent years to ensure timely and hasslefree flow of credit
to the export sector. These measures, inter alia, include rationalization and liberalization of export credit
interest rates, flexibility in repayment/prepayment of pre shipment credit, special financial package for
large value exporters, export finance for agricultural exports, gold card scheme for exporters.

RBI introduced the export financing scheme in 1967 for the first time specifically for meeting the
exporter’s requirements. Previously exporters used to avail commercial loans from various banks to
fund their export operations. This was a costly affair as there were no public sector banks by then, and
private banks and money lenders used to charge an exorbitant rate of interest from exporters.

Export financing may be denominated either in Indian Rupees or in foreign currency. For both types of
pre shipment financing, RBI sets a ceiling on the interest rate that banks may charge from borrowers
under the scheme. Since RBI fixes only the ceiling rate of interest for export credit; hence banks are free
to fix lower rates of interest for exporters on the basis of their actual cost of funds, operating expenses
and taking into account the track record and the risk perception of the borrower/exporter.

The Government of India understands that there is much stake involved in export-import business as
trade is the lifeline of any economy. Many countries worldwide give much importance to export-import
operations as international trade provides nations the opportunities of reaping benefits of competitive
and comparative advantage in their trade operations.

Export Financing Facilities: Having realized that Indian exporters have to be supported by appropriate
financing options so as to provide them a level playing field in international markets; the Government of
India has decided that export finance shall be available at both stages—pre and post shipment stages of
international trade transactions. There may be different financing requirements of exporters at pre and
post shipment finance stage such as packing credit to sub supplier, running account facility, packing
credit in foreign currency, packing credit for deemed exports, packing credits for consulting services and
advance against cheques/ drafts received as advance payments. One of the crucial aspects that emerge
is that export financing facilities should be designed so as to resolve the finance needs both at pre
shipment and post shipment stages.

The scheme of export financing was first introduced by the RBI in 1967. The scheme is intended to make
short-term working capital finance available to exporters at internationally comparable interest rates.
Under the earlier scheme in force up to 30 June 2010, RBI fixed only the ceiling rate of interest for
export credit while banks were free to decide the rates of interest within the ceiling rates keeping in
view the BPLR (Benchmark Prime Lending Rate) and spread guidelines and taking into account the ‘track
record of the borrowers’ and the risk perception.

Banks were advised to fix their BPLR after taking into account the following factors:

(a) Actual cost of funds

(b) Operating expenses

(c) A minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin.

QNO3 As an exporter, what benefits you can get from Post shipment finance scheme? Discuss the
types of post shipment credits.

Post shipment finance

Types

ANSWER - Post Shipment Finance Scheme: Post shipment credit is offered by commercial banks in the
form of any loan or advance after the shipment of goods/services from India. Post shipment finance is
offered in two ways—either in India currency or in foreign currency. An export order is usually invoiced
in foreign currency but it can be invoiced in any other currency as well. Post shipment finance is usually
up to the date of realization of export proceeds after the shipment of goods/rendering of services.
However, liberal interest rates for post shipment finance are only for the period of 180 days. As per RBI
guidelines, post shipment export credit can take any of the following forms:

Post shipment finance is sanctioned and offered to the exporter only after the shipment of
goods/rendering of services and is usually granted after the liquidation of pre shipment finance on the
submission of export documents by the exporter.
• Purpose of Finance: The purpose of post shipment finance is to provide cheaper credit services to the
exporter from the date of shipment of goods to the date of realization of export proceeds.

• Basis of Finance: Post shipment finance is granted and extended to exporters on the submission of
export/import documents by him after having shipped the goods to the overseas importer. Such export
bills act as an evidence of shipment of goods or supplies made to the importer or seller or any other
designated agency.

• Types of Finance: Post shipment finance, in international day transaction, can be both secured as well
as unsecured. As such finance is granted on the basis of evidence that the goods have already been
shipped and export bills are submitted to the bank for realization of payment. Such documents retain
the title of goods, thus banks provide post shipment finance in cases of documentary collection as well
as documentary credit.

• Quantum of Finance: Post shipment finance can be granted up to 100 per cent invoice value of
exportable goods. In circumstances when the domestic value of such goods is higher than the invoiced
value of the export order, banks can use their discretionary power to grant post shipment finance for
the price difference. Post shipment finance can also be given against claim of duty drawback. Banks in
India are free to determine the margin requirement while sanctioning post shipment credit to the
exporter.

• Period of Finance: Post shipment finance can be granted for short-term as well as for long-term
purposes, depending on the export cycle, payment terms and nature of business.

Financing for Various Types of Export Buyer’s Credit: Post shipment finance in India is offered and
granted by banks and financial institutions for any of the followings three types of export:

(a) Physical exports: Post shipment finance can be extended to the actual exporter of goods or to the
exporter in whose name the trade documents are prepared or transferred.
(b) Deemed Export: Post shipment finance can be extended to the supplier of the goods which are
supplying the goods to designated agencies/bodies/ organization as allowed in chapter 8 of Foreign
Trade Policy 2009-14.

(c) Capital goods and project exports: Post shipment finance in cases of capital goods and project
exports can be extended in the name of the overseas buyer. However, the disbursal of post shipment
credit is directly made to the domestic exporter.

(d) Supplier’s Credit: In order to promote Indian exports in international markets the Government of
India has come up with various schemes under various financial institutions including EXIM Bank of
India. Supplier credit can be specific to supplier or can be against lines of credit whereby such credit is
offered by bank to the buyers for procuring/importing the large scale contract.

4 Write short notes on:

a) Export credit guarantee corporation b Foreign exchange risk

a) Meaning and role of ECGC

b Meaning of foreign exchange risk

ANSWER - -(A) Export credit guarantee corporation : ECGC designed its polices keeping in mind the
interests of various sections of exporters such as small exporters, large scale exporters, IT services
exporters, occasional exporters, and has one of the largest range of product and services to enable the
exporter to choose the best possible option keeping in mind the risk and exposure involved in particular
transactions. ECGC offers various policies based on risk perception and usually the premium is less in the
case of lower risk transactions and countries.

As risk is an inevitable part of international trade, transactions and payments for exports are always
open to risks even at the best of times. Interestingly such risks have assumed large proportions in
today’s world due to the far-reaching political and economic changes that are sweeping every aspect of
the world. An outbreak of war or civil war or political rebellion or public disturbances may block or delay
payment for goods exported, thereby putting the exporter under dock. A coup or an insurrection may
also bring the economic and political system to a halt bringing the exporter in a critical situation. As new
global economic order is getting formed, countries are increasingly facing the problems of economic
difficulties or balance of payment and such problems may lead a country to impose restrictions on either
import of certain goods or on transfer of payments for goods imported due to such economic reasons.
Main Functions of ECGC: Main functions of ECGC are explained as under:

Answer-(b) Foreign Exchange Risk: The risk that arises due to changes in the gains and losses due to
fluctuations in exchange rate due to number of exposures is termed as exchange risk. This risk is based
on anticipated or forecasted rates considering the fluctuations and the organization’s vulnerability to
such risks. This uncertainty in the value of the currency is the reason behind this exchange risk. This
exchange or currency risk can be classified as recurring risks or non recurring risks. The main cause of
recurring risks is the organization’s financial structure. These risks arise due to changes in the
composition of currency or the activities of business of the firm.

Assessing Exchange Risk: The entire process of assessing foreign exchange risk is a dynamic and ongoing
task. It begins from the initial forecasting and is carried out continuously till the completion of the
transaction. To assess risk it is important to understand the presence of transaction, translation and
economic exposure.

Assessment of risk involves the following steps:

QNO5. Discuss the payment options available to exporter and importer.

Modes of payment

ANSWER - Mode of Payment : about the mode of payment in exports are based on the importer’s
ability, willingness and honesty to make payments. There are five basic methods of receiving payments
from the importers in international trade. In addition to these five; new adaptations in the mode of
payments have evolved in the globalized era such as sales on consignment basis, electronic or
telegraphic transfer, collections against documents, PayPal, etc. The various methods of payment
have been ranked as under in order from being the most secure for the exporter to least secure and
similarly for importer.

They are as follows:

(i) Payment in Advance

(ii) Letter of Credit

(iii) Documentary collections

(a) Documents Against Payment

(b) Documents Against Acceptance

(iv) Open account

Table: Summarization of Payment Methods- From Secure to Unsecure

Following is detailed elaboration of five basic and other modes of payments which have evolved in the
globalized era of international trade for the realization of export proceeds from the importer.

(i) Payment in Advance: Payments in advance, alternatively known as cash in advance is the safest and
most secure mode of realization of export\ proceeds for an exporter as he will receive the payment
before the goods are shipped to the country of the importer. By using this method of payment, exporter
can not only avoid the credit risk involved in the trade deal, but also he will receive the payments well in
advance before the actual transfer of ownership of goods in favour of the importer.
(ii) Letters of Credit: In an era of economic recession, the Letters of Credit (L/Cs) are considered to be
among the safest and most secure modes of payment available to the exporters. A L/C is a commitment
by the L/C issuing bank on behalf of the importer that payment will be made to the exporter subject to
the fulfilment of the terms and conditions which has been agreed upon between the exporter and
importer in the letter of credit.

The exporter has to submit the trade documents as agreed in the L/C through his collecting bank to the
issuing bank for the fulfilment of contract of payments.

(iii) Documentary Collection: Under this mode of payment, the exporter submits the trade documents to
his bank and entrusts it to the collection of payment from the importer. The exporter bank, here known
as the remitting bank, sends the trade documents to the importer’s bank, here known as collecting bank
for This payment mode is very competitive, cost effective and less risky than the open account method.
However, it is more risky than payment in advance and letter of credit.

Payment settlement under this mode may be under any of following methods:

(a) Documents against Payments: When payment is received on handing over the documents; this will
be known as Sight Drafts or Documents against Payments. This is the best payment option as it is cost
effective, competitive and mutually acceptable to both the exporter and importer.

(b) Documents against Acceptance: The exporter sometimes has to extend the credit to the importer so
as to win buyers or penetrate new markets. Such payment option is also known as Time Draft or Usance
Bill. The exporter extends definite credit period as mutually agreed between the seller and buyer and
the importer accepts trade documents but will make payment in subsequent time during mutually
agreed period of 30 to 90 days. Such extension of credit facilitates the importer to sell these goods in
local markets and make the payments.
(iv) Open Account: Open account method is the most risky mode of payment for an exporter as under
this method goods are shipped or transported and delivered to the importer on credit basis and
payment is realized after account, the exporter is required to directly bill to the importer and he is
expected to make the payment under agreed terms and conditions at a future date. In the present
turbulent times, this is the most advantageous preposition to any importer as he can sell the goods in
local market during the credit period and then make the payment to the exporter. The importer not only
enjoys cash flow but is also free from all kinds of commercial, economic and political risks.

Figure- Process of Execution for Payment under Open Accounts

Key Features of Open Account Method:

(a) Such payment option can be used in safe and secure trade partnerships with importers with whom
the exporter has very good trade relations for a long period of time. Additionally, such markets should
also be politically and economically stable and have strong regulatory and legal framework.

(b) This payment is to be used with caution only to get access to competitive and inaccessible markets.
The exporter can use this strategy with extreme diligence and credit insurance cover.

QNO6. What is custom duty? Discuss its types.

Meaning

types

ANSWER - Customs Duty: The customs duty is one of the most important sources of revenue to the
national exchequer and the main objectives for levy of customs duty are as follows:

(a) Raising revenue for the national exchequer which can be fruitfully used for developmental purposes.

(b) Regulating and controlling the imports of foreign goods into India, thereby ensuing order in the
market.
(c) Conserving foreign exchange and regulating the supply of essential and needed goods in the
domestic market.

(d) Providing protection to the domestic industry by restricting and prohibiting the import of selected
goods through imposition of high duty, import licensing, quota system and outright import ban and
enabling the domestic industry to stand up against the foreign competition.

Types of Customs Duties: Following are the duties which are collected in India under customs duties.
Such duty can be imposed on both import and export duties, however the revenue contributed by
export duties is nominal as they are imposed only to stabilize internal market condition and control the
supply of such goods in the market.

(i) Basic Customs Duty: All goods which are imported into India are chargeable with Basic Customs Duty
under Customs Act, 1962. The applicable rates of Basic Customs Duty are given in the First Schedule of
the Customs Tariff Act, 1975 as amended from time-to-time under Finance Acts. The Basic Customs Duty
can be fixed on the basis of ad-valorem rate or on specific rate basis. Ad-valorem Duty is applied when
the rates of commodities are not subject to sudden changes as such duty paid varies with the prices of
products. On the other hand, specific duty is easy to assess and is applicable where the goods are tough
to measure and quantify.

(ii) Additional (Countervailing) Duty of Customs: Additional duty of customs is a customs duty which is
imposed on goods which have received government subsidies in the originating or exporting
country.The importing country in order to reduce the impact of such subsidies and low cost of products,
flooding into the domestic market may impose such duty for the protection of domestic industry and
neutralize the impact of subsidies. For customs purpose, it is treated in the same way as antidumping
duty. It is possible to have both anti-dumping duty and countervailing duty on the same product.

(iii) Education Cess: Education cess is leviable at the rate of 2 per cent on the aggregate of duties of
customs. Items attracting Customs Duty at bound rates under international commitments are exempted
from this cess. In addition to primary education cess, secondary education cess is also applicable at the
rate of 1 per cent on the aggregate of duties of customs.

(iv) Special CVD: Special Countervailing Duty (CVD) is leviable at the rate of 4 per cent on all imported
goods in order to compensate/neutralize the incidence of VAT with reference to the Indian producer.
Since the exporter has been exempted from payment of VAT, same is imposed at the time of import to
ensure level playing field between domestic producers and importers.

Q.NO7- As an exporter, what the benefits you can get from Post shipment finance
scheme? Discuss the types of post shipment credits.

Post shipment finance 7

Types 3

Answer- Post Shipment Finance Scheme: Post shipment credit is offered by commercial
banks in the form of any loan or advance after the shipment of goods/services from India. Post
shipment finance is offered in two ways—either in India currency or in foreign currency. An
export order is usually invoiced in foreign currency but it can be invoiced in any other currency
as well. Post shipment finance is usually up to the date of realization of export proceeds after
the shipment of goods/rendering of services. However, liberal interest rates for post shipment
finance are only for the period of 180 days. As per RBI guidelines, post shipment export credit
can take any of the following forms:

Post shipment finance is sanctioned and offered to the exporter only after the shipment of
goods/rendering of services and is usually granted after the liquidation of pre shipment finance
on the submission of export documents by the exporter.

• Purpose of Finance: The purpose of post shipment finance is to provide cheaper credit
services to the exporter from the date of shipment of goods to the date of realization of export
proceeds.

• Basis of Finance: Post shipment finance is granted and extended to exporters on the
submission of export/import documents by him after having shipped the goods to the overseas
importer. Such export bills act as an evidence of shipment of goods or supplies made to the
importer or seller or any other designated agency.

• Types of Finance: Post shipment finance, in international day transaction, can be both
secured as well as unsecured. As such finance is granted on the basis of evidence that the
goods have already been shipped and export bills are submitted to the bank for realization of
payment. Such documents retain the title of goods, thus banks provide post shipment finance in
cases of documentary collection as well as documentary credit.

• Quantum of Finance: Post shipment finance can be granted up to 100 per cent invoice value
of exportable goods. In circumstances when the domestic value of such goods is higher than
the invoiced value of the export order, banks can use their discretionary power to grant post
shipment finance for the price difference. Post shipment finance can also be given against claim
of duty drawback. Banks in India are free to determine the margin requirement while sanctioning
post shipment credit to the exporter.

• Period of Finance: Post shipment finance can be granted for short-term as well as for long-
term purposes, depending on the export cycle, payment terms and nature of business.

Financing for Various Types of Export Buyer’s Credit: Post shipment finance in India is
offered and granted by banks and financial institutions for any of the followings three types of
export:
(a) Physical exports: Post shipment finance can be extended to the actual exporter of goods or
to the exporter in whose name the trade documents are prepared or transferred.

(b) Deemed Export: Post shipment finance can be extended to the supplier of the goods which
are supplying the goods to designated agencies/bodies/ organization as allowed in chapter 8 of
Foreign Trade Policy 2009-14.

(c) Capital goods and project exports: Post shipment finance in cases of capital goods and
project exports can be extended in the name of the overseas buyer. However, the disbursal of
post shipment credit is directly made to the domestic exporter.

(d) Supplier’s Credit: In order to promote Indian exports in international markets the Government
of India has come up with various schemes under various financial institutions including EXIM
Bank of India. Supplier credit can be specific to supplier or can be against lines of credit
whereby such credit is offered by bank to the buyers for procuring/importing the large scale
contract.

Q.NO8-Write short note on:

a) Export credit guarantee corporation 5

b) Meaning of foreign exchange risk 5

Answer-(A) Export credit guarantee corporation : ECGC designed its polices keeping in
mind the interests of various sections of exporters such as small exporters, large scale
exporters, IT services exporters, occasional exporters, and has one of the largest range of
product and services to enable the exporter to choose the best possible option keeping in mind
the risk and exposure involved in particular transactions. ECGC offers various policies based on
risk perception and usually the premium is less in the case of lower risk transactions and
countries.

As risk is an inevitable part of international trade, transactions and payments for exports are
always open to risks even at the best of times. Interestingly such risks have assumed large
proportions in today’s world due to the far-reaching political and economic changes that are
sweeping every aspect of the world. An outbreak of war or civil war or political rebellion or public
disturbances may block or delay payment for goods exported, thereby putting the exporter
under dock. A coup or an insurrection may also bring the economic and political system to a halt
bringing the exporter in a critical situation. As new global economic order is getting formed,
countries are increasingly facing the problems of economic difficulties or balance of payment
and such problems may lead a country to impose restrictions on either import of certain goods
or on transfer of payments for goods imported due to such economic reasons.

Main Functions of ECGC: Main functions of ECGC are explained as under:

Answer-(b) Foreign Exchange Risk: The risk that arises due to changes in the gains and
losses due to fluctuations in exchange rate due to number of exposures is termed as exchange
risk. This risk is based on anticipated or forecasted rates considering the fluctuations and the
organization’s vulnerability to such risks. This uncertainty in the value of the currency is the
reason behind this exchange risk. This exchange or currency risk can be classified as recurring
risks or non recurring risks. The main cause of recurring risks is the organization’s financial
structure. These risks arise due to changes in the composition of currency or the activities of
business of the firm.

Assessing Exchange Risk: The entire process of assessing foreign exchange risk is a
dynamic and ongoing task. It begins from the initial forecasting and is carried out continuously
till the completion of the transaction. To assess risk it is important to understand the presence of
transaction, translation and economic exposure.

Assessment of risk involves the following steps:

Q.NO9- Discuss the payment option available to exporter and importer.

Mode of Payment 10

Answer- Mode of Payment : about the mode of payment in exports are based on the
importer’s ability, willingness and honesty to make payments. There are five basic methods of
receiving payments from the importers in international trade. In addition to these five; new
adaptations in the mode of payments have evolved in the globalized era such as sales on
consignment basis, electronic or telegraphic transfer, collections against documents, PayPal,
etc. The various methods of payment have been ranked as under in order from being the
most secure for the exporter to least secure and similarly for importer.
They are as follows:
(i) Payment in Advance
(ii) Letter of Credit
(iii) Documentary collections
(a) Documents Against Payment
(b) Documents Against Acceptance

(iv) Open account

Table: Summarization of Payment Methods- From Secure to Unsecure
Following is detailed elaboration of five basic and other modes of payments which have evolved
in the globalized era of international trade for the realization of export proceeds from the
importer.

(i) Payment in Advance: Payments in advance, alternatively known as cash in advance is the
safest and most secure mode of realization of export\ proceeds for an exporter as he will
receive the payment before the goods are shipped to the country of the importer. By using this
method of payment, exporter can not only avoid the credit risk involved in the trade deal, but
also he will receive the payments well in advance before the actual transfer of ownership of
goods in favour of the importer.

(ii) Letters of Credit: In an era of economic recession, the Letters of Credit (L/Cs) are
considered to be among the safest and most secure modes of payment available to the
exporters. A L/C is a commitment by the L/C issuing bank on behalf of the importer that
payment will be made to the exporter subject to the fulfilment of the terms and conditions which
has been agreed upon between the exporter and importer in the letter of credit.
The exporter has to submit the trade documents as agreed in the L/C through his collecting
bank to the issuing bank for the fulfilment of contract of payments.
(iii) Documentary Collection: Under this mode of payment, the exporter submits the trade
documents to his bank and entrusts it to the collection of payment from the importer. The
exporter bank, here known as the remitting bank, sends the trade documents to the importer’s
bank, here known as collecting bank for This payment mode is very competitive, cost effective
and less risky than the open account method. However, it is more risky than payment in
advance and letter of credit.
Payment settlement under this mode may be under any of following methods:
(a) Documents against Payments: When payment is received on handing over the
documents; this will be known as Sight Drafts or Documents against Payments. This is the best
payment option as it is cost effective, competitive and mutually acceptable to both the exporter
and importer.
(b) Documents against Acceptance: The exporter sometimes has to extend the credit to the
importer so as to win buyers or penetrate new markets. Such payment option is also known as
Time Draft or Usance Bill. The exporter extends definite credit period as mutually agreed
between the seller and buyer and the importer accepts trade documents but will make payment
in subsequent time during mutually agreed period of 30 to 90 days. Such extension of credit
facilitates the importer to sell these goods in local markets and make the payments.

(iv) Open Account: Open account method is the most risky mode of payment for an exporter
as under this method goods are shipped or transported and delivered to the importer on credit
basis and payment is realized after account, the exporter is required to directly bill to the
importer and he is expected to make the payment under agreed terms and conditions at a future
date. In the present turbulent times, this is the most advantageous preposition to any importer
as he can sell the goods in local market during the credit period and then make the payment to
the exporter. The importer not only enjoys cash flow but is also free from all kinds of
commercial, economic and political risks.

Figure- Process of Execution for Payment under Open Accounts

Key Features of Open Account Method:

(a) Such payment option can be used in safe and secure trade partnerships with importers with
whom the exporter has very good trade relations for a long period of time. Additionally, such
markets should also be politically and economically stable and have strong regulatory and legal
framework.
(b) This payment is to be used with caution only to get access to competitive and inaccessible
markets. The exporter can use this strategy with extreme diligence and credit insurance cover.

Q.NO10-What is custom duty? Discuss its types.

Meaning 4

Types 6

Answer- Customs Duty: The customs duty is one of the most important sources of revenue to
the national exchequer and the main objectives for levy of customs duty are as follows:
(a) Raising revenue for the national exchequer which can be fruitfully used for developmental
purposes.

(b) Regulating and controlling the imports of foreign goods into India, thereby ensuing order in
the market.

(c) Conserving foreign exchange and regulating the supply of essential and needed goods in the
domestic market.

(d) Providing protection to the domestic industry by restricting and prohibiting the import of
selected goods through imposition of high duty, import licensing, quota system and outright
import ban and enabling the domestic industry to stand up against the foreign competition.

Types of Customs Duties: Following are the duties which are collected in India under customs
duties. Such duty can be imposed on both import and export duties, however the revenue
contributed by export duties is nominal as they are imposed only to stabilize internal market
condition and control the supply of such goods in the market.

(i) Basic Customs Duty: All goods which are imported into India are chargeable with Basic
Customs Duty under Customs Act, 1962. The applicable rates of Basic Customs Duty are given
in the First Schedule of the Customs Tariff Act, 1975 as amended from time-to-time under
Finance Acts. The Basic Customs Duty can be fixed on the basis of ad-valorem rate or on
specific rate basis. Ad-valorem Duty is applied when the rates of commodities are not subject to
sudden changes as such duty paid varies with the prices of products. On the other hand,
specific duty is easy to assess and is applicable where the goods are tough to measure and
quantify.

(ii) Additional (Countervailing) Duty of Customs: Additional duty of customs is a customs

duty which is imposed on goods which have received government subsidies in the originating or
exporting country.The importing country in order to reduce the impact of such subsidies and low
cost of products, flooding into the domestic market may impose such duty for the protection of
domestic industry and neutralize the impact of subsidies. For customs purpose, it is treated in
the same way as antidumping duty. It is possible to have both anti-dumping duty and
countervailing duty on the same product.

(iii) Education Cess: Education cess is leviable at the rate of 2 per cent on the aggregate of
duties of customs. Items attracting Customs Duty at bound rates under international
commitments are exempted from this cess. In addition to primary education cess, secondary
education cess is also applicable at the rate of 1 per cent on the aggregate of duties of customs.

(iv) Special CVD: Special Countervailing Duty (CVD) is leviable at the rate of 4 per cent on all
imported goods in order to compensate/neutralize the incidence of VAT with reference to the
Indian producer. Since the exporter has been exempted from payment of VAT, same is imposed
at the time of import to ensure level playing field between domestic producers and importers.

Q.no11.Elaborate the role of EXIM bank in promoting foreign trade.

 Objectives 3
 Functions 6
 Conclusion 1

Answer- Objective: The main objectives of EXIM Bank are:

(i) To provide financial assistance (medium and long-term) to exporters and importers

(ii) To promote international trade from the country

(iii) To function as the principal financial institution for coordinating the working of institutions engaged
in providing trade finance

(iv) To deal with all the issues that may be considered to be incidental or conducive to the attainment of
above objectives

Functions: The main functions of EXIM Bank are to provide fund based and non fund based assistance.

Fund based assistance:

(i) Assistance to exporters in India

(a) Assistance in the form of deferred credit exports

(b) Credit facilities for deemed exports

(c) Financing of Indian joint ventures abroad

(d) Financial assistance to units located in EPZ/SEZ and EOUs

(e) Availability of pre-shipment finance in order to procure raw materials and other intermediate goods

(f) Financial assistance for exporting/importing machinery and equipment on lease

(g) Foreign exchange loans for computer software exporters subject to clearance from RBI

(h) Deferred credit financing facility for exports of consultancy, technology and other services

(i) Export financing assistance for undertaking export marketing activities through the export marketing
fund

(j) The export development fund has been earmarked for undertaking technology and economic survey
to develop Indian exports.

(ii) Assistance to Indian commercial Banks

(a) Refinance facilities to lend to Indian exporters who extend term credit to importers.

(b) Export bills rediscounting facility to commercial banks in India who have earlier discounted bills of
exporters.

(iii) Assistance to Overseas Buyers

(a) EXIM Bank offers ‘Overseas Buyer’s Credit’ facility to foreign importers. This is offered for importing
capital goods and related services. The repayment period is spread over a period of years.

(iv) Assistance to Overseas Banks

(a) The EXIM Bank extends lines of credit to provide finance to financial institutions overseas. These
international financial institutions extend finance to importers to buy capital goods.
(b) The Bank also provides relending facilities to banks in foreign countries and makes available finance
to the clients for import of goods into the country.

Non-fund based assistance:

(v) Guarantees and bonds: EXIM Bank provides guarantees as a nonfund based assistance. These
guarantees are usually in the form of bid bonds, performance guarantee, etc. The commercial banks also
assist in providing these guarantees.

(vi) Advisory services:

(a) The Bank advises Indian companies abroad in order to find sources of financing abroad.

(b) The Bank also provides advisory services on international exchange control practices.

(c) It also offers financial and advisory services for constructions abroad.

(d) The small scale manufacturers are also advised on the feasible markets for exports and products.

(e) The bank also provides euro financing and global credit to Indian exporters.

(f) Forfeiting services are also offered for the exporters.

Conclusion: RBI is the central bank of the country and is hence the apex bank which controls the
monetary system in India. This is the apex bank which deals in providing project finance and direct
finance. The EXIM Bank has taken over the operations of the International Finance Wing of the Industrial
Development Bank of India (IDBI). It came into existence on 1 January 1982 and started its operations
from 1 March 1982.

Q.no12 Explain the Mechanism for Disbursal of Pre Shipment Finance?

Mechanism for Disbursal of Pre Shipment Finance 10

Answer- Mechanism of Disbursal of Pre Shipment Finance: Ordinarily, each packing credit sanctioned
should be maintained as separate account for the purpose of monitoring the period of sanction and end-
use of funds. Pre shipment finance to exporters goes through following stages from sanction to its
liquidation.

(i) Appraisal and Sanction of Limits: Banks check various aspects while making an appraisal and sanction
of export credit to exporters. Some of the important aspects that banks check are product profile of the
exporter in international market, political and economic environment of the country of import etc.
Banks also look into the creditworthiness and solvency report of the prospective buyer, with whom the
exporter proposes to do business.
The sanction of pre shipment export credit is based on the satisfactory appraisal of the following:

(a) The exporter has a good track record or is a regular customer of the bank. He is a bonafide exporter
and has a good standing in the market in respect of his creditworthiness.

(b) The exporter has all the necessary licenses/permits and volume permit as mandated in Schedule II of
the ITC (HS) classification of Foreign Trade Policy for Export.

(c) The country to which the exports are to be made is not under UN watch list or does not fall under the
Restricted Cover Countries (RCC) or is not facing any kind of international sanctions for transfer of funds
like Iran, Ivory Coast, Somalia, Iraq, Syria ,etc.

(ii) Disbursement of Packing Credit Advance: On completion of successful appraisal of various aspects
for disbursal of export credit; banks check whether the exporter has executed the list of documents as
stipulated by it for this purpose. Disbursement of export credit is normally allowed only after the
successful submission of all documents by the exporter.

Banks use special checks for the following particulars while processing the running account facility to the
exporter:

(a) Name of the buyer

(b) Commodity to be exported

(c) Quantity

(d) Period of credit

(e) International demand of the product

(f) Value (either CIF or FOB)

(g) Last date of shipment/collection/negotiation

(h) Any other terms to be complied with

The quantum of pre shipment export finance is fixed depending on the FOB value of the export order or
value of irrevocable Letter of Credit or the domestic values of goods, whichever is found to be lower.
Bank may consider the inclusion of marine insurance and freight charges at subsequent stages when
confirm order has come and the goods are ready to be shipped.

(iii) Follow up of Packing Credit Advance: Banks usually hypothecate the stock of the exporter and
exporter is required to submit stock statement providing all the necessary details about the stocks.
Banks use such stocks as a guarantee for securing the pre shipment export credit in advance. Banks may
demand such information from the exporter at the time as they deem fit keeping in mind the exporter’s
reputation and creditworthiness. In addition, banks also physically inspect the stocks at regular intervals
at the premises of the exporter.
(iv) Liquidation of Packing Credit Advance: Pre shipment export credit has to be liquidated out into post
shipment credit after the submission of export bills by the exporter or alternatively on realization of
export proceeds of the relevant shipment. The liquidation of pre shipment export credit can also be
done by the payment receivable as export benefits/incentives/subsidies from the Government of India.

If the exporter has failed to provide the goods for export or export could not take place due to
cancellation of order or any other reason; then banks are authorized to recover/realize the entire
advance from the exporter along with a certain interest rate. In some cases, RBI Master Circular allows
some flexibility in the use of packing credit whereby the exporter is allowed and permitted to substitute
the exportable commodity. Thus, pre shipment export finance can be repaid by export proceeds of
another commodity which can be exporter to the same or another buyer.

(v) Overdue Packing Credit: In some cases, banks may have to consider pre shipment export finance as
overdue if the exporter fails to liquidate the packing credits as per stipulated rules and regulations of
RBI. Banks are allowed to grant overdue finance in bonafide cases but if the condition persists and the
exporter fails to liquidate the packing credit even after such overdue period; then the banks can take the
necessary actions to recover such dues as per the normal recovery procedure.

Q.no13.What are the various trade financing schemes?

Trade Financing Schemes 10

Answer- Trade Financing Schemes: The EXIM Bank of India plays the role of a coordinator, consultant,
promoter and a source of finance. The bank acts a coordinator for clearance of Projects and Services
Exports and Deferred Payment Exports of the Working Group Mechanism. A number of financing
schemes are provided by RBI.

Export Credits

The EXIM Bank regularly offers credit facilities for exports to be availed by

companies in India and abroad as well as commercial banks. The export credits

offered by EXIM Bank of India can be divided in the following manner:

(i) Companies in India executing overseas contracts: Various exporters who enter into contracts with
foreign counterparts can avail facilities like:

(a) Pre Shipment Credit: This facility is provided at the pre shipment stage and can be offered in both
Indian Rupees and foreign currency.

The credit is provided to avail financial facilities for manufacturing and procuring inputs as well as other
raw materials.
(b) Supplier’s Credit: This is a kind of post shipment finance which is given by Indian exporters to their
overseas importers.

(c) Project Exports: The EXIM Bank extends finance for executing project exports abroad. The costs of
mobilization of resources and materials along with equipment and personnel. This finance is usually
provided in rupees.

(d) Export of Consultancy and Technological Services: The exporters of consultancy and technological
services can avail credit facilities so that they can fulfill the requirements of the importers.

(e) Guarantees: These instruments are required by Indian exporters to execute export contracts through
guarantees. These guarantees are also required for various import transactions.

(ii) Commercial Banks: The EXIM Bank of India offers rediscounting facility to commercial banks. This
facility enables the banks to rediscount the export bills of their customers. The customers need to be
Small Scale Industries customers having usance export bills not exceeding 90 days.

(iii) Facilities for Indian Companies: The EXIM Bank extends finance for deemed exports. Deemed
exports are exports made by Indian companies to units situated in SEZs or EOUs.

(iv) Overseas Entities: The EXIM Bank offers buyer’s credit for imports from India and abroad. This credit
is usually provided on deferred payment terms. The goods eligible for availing buyer’s credit are capital
goods, machinery, consumer goods and any goods as prescribed by the Foreign Trade Policy of India.

2. Finance for Export Oriented Units: The EXIM Bank provides finance to export oriented units which
are exporting as well as non-exporting. The main kinds of financial instruments are:

(i) Exporting Companies: These companies are offered term finance and working capital finance in order
to fulfill their export obligations.

(a) Term finance is provided for specific purposes like project finance, financing for equipment, import of
technology, acquisition purpose, product development for export, research & development and general
corporate finance.

(b) Working capital finance is either funded or non-funded. The funded instruments of working capital
are loans for less than 2 years and upto 5 years.

(ii) Non-exporting companies: The bank provides working capital finance for importing raw materials in
bulk as well as importing equipment.

(a) Export finance is provided as it is provided to general exporters like pre shipment credit, post
shipment credit, buyer’s credit, supplier’s credit, discounting of bills, export receivables financing,
warehousing financing and lines of credit.
3. Overseas Investment Finance: The EXIM Bank assists Indian companies to finance their equity
participation in joint ventures abroad as well as in wholly owned subsidiaries. The Bank also provides
direct financing to overseas joint ventures and wholly owned subsidiaries.

4. Lines of Credit: The EXIM Bank provides a number of lines of credit to financial institutions abroad. It
also extends to various regional banks, governments and other entities overseas. These lines of credit
enable buyers to import products from India on deferred terms of credit. The payments are provided
without recourse to Indian exporters against negotiation of various documents.

Figure: Flowchart Depicting the Lines of Credit

5. SME and Export Finance: The Small and Medium Enterprise (SME) sector contributes significantly to
the socio-economic growth of the country. This growth is aided through growth in exports and
employment generation. SMEs also help in building the industrial base of the country and increasing
entrepreneurship. This makes the SMEs a well recognized sector for achieving international
competitiveness in today’s globalized world. The services offered by various consultants to these SMEs
are quite costly. The SMEs do not have a department focused on enhancing these factors and facilitating
growth.

6. Agricultural and Export Finance: In the post globalization scenario, Indian exports have found scope
especially for agricultural products. The bank has a separate agri business group to look into the
financing requirements of the export oriented companies dealing in agricultural products. Agri finance
for exports is provided through term loans, export credit in the form pre shipment and post shipment
finance, guarantees, import finance and buyer’s credit.

The EXIM Bank in order to develop a strong background for provided export assistance to agricultural
units has built strong linkages with various other prominent stakeholders in this sector. The main
stakeholders are Ministry of Food Processing Industries, Government of India, NABARD, National
Horticultural Board, Small Farmers’ Agri Business Consortium, APEDA, etc. The EXIM Bank also provides
advisory services to agricultural exporters apart from financial assistance.
Q.no14 What are the various Risks Coverage under ECGC Policies? Discuss in detail.

Risks Coverage under ECGC Policies 10

Answer- Risks Covered under ECGC Policies: The following risks are covered from the date of shipment
of cargo under the standard policy of ECGC.

Commercial Risks (a) Cases of insolvency of the importer.

(b) Cases of failure of the importer to ensure the

payment to exporter within a specified period
which is usually four months from the due date of
realization of export proceeds.

(c) Cases under which the importer has failed to

accept the cargo. Such cases are subject to
certain conditions as specified by ECGC.

Political Risks a) The circumstances under which the Importer

country government may restrict the import of
certain cargo or any other government action
resulting in blockage or delay the transfer of
payment made by the importer such as Forex
Restrictions.

(b) The cases of war, rebellion, civil war,

revolution or civil disturbances in the importer’s
country. The importer country may also impose
restrictions or may cancel the valid import license
of the importer.

(c) The cases under which there is an interruption

or diversion of voyage outside India which
compels the exporter to make additional freight
or insurance charges and such charges or
expenses cannot be recovered from the importer.

(d) The cases under which any other loss has

occurred outside India and such loss is usually not
insurable by the General Insurance Companies
and such losses are also beyond the control of
both the exporter and the importer.

Q.no15 Discuss the Methods of Import Finance And Import Financing Schemes.

 Methods of Import Finance

 Import Financing Schemes
Answer- Methods of Import Finance: Import financing has a number of benefits like its ability to be
tailor made depending upon the need of the business. There are a number of imports financing methods
like financing under L/C, financing against bills for collection, financing under deferred payment,
financing by EXIM Bank and financing under foreign credit.

(i) Financing Import under L/C: A L/C is a guarantee or a commitment by a bank in the importer’s
country to pay to the seller overseas the price of the good or service being supplied. After the L/C is
opened, the issuing bank sends it to the advising bank in the exporter’s country. The exporter is known
as a beneficiary while the importer is known as an applicant. If the beneficiary is satisfied by the terms
and conditions specified in the L/C, he ships the goods and obtains the documents as mentioned in the
contract. These documents are then submitted to a bank for scrutinizing and for checking their
conformity with the credit.

(ii) Financing against Bills under Collection: Here imports are not covered by documentary credit but
are covered by documentary collections. Under collections, the exporter’s bank is known as the
collecting bank while the importer’s bank is known as the remitting bank. The documents are forwarded
from the collecting bank in order to collect export proceeds from the importer while payment is made
through the remitting bank. The collecting bank in this case examines the documents. The documents
need to be made in the required format and as per the terms and conditions decided between the
exporter and importer. The bank also requires instructions from the exporter on how to handle these
documents and the financial and shipping documents should be endorsed in favour of the bank. The
bank presents these documents to the importer for either payment or acceptance.

(iii) Financing Imports against Deferred Payment: In case the supplier has agreed to supply goods on
credit terms which exceeds six months, then imports are said to be deferred or on deferred payment. In
India, the authorized dealers have to approach the Reserve Bank of India and get approval for advance
payment along with bank guarantee and installments.

The documents to be submitted for this approval are exchange control copy of import license and a copy
of the contract. The appraisal required for issue of guarantees or loans is more or less like term
financing. To import under deferred payment terms, the importer should have sufficient cash to finance
the installments.

(iv) Financing under Foreign Credit: International financial institutions and even foreign governments
provide assistance to Indian traders in the form of loans and development credits. The loans granted are
of two kinds: loans in free foreign currency and tied loans. DGFT and RBI bring out notifications for the
terms and conditions for loans. These loans have detailed instructions and the procedures to be
followed for opening a letter of credit and submission of documents. The payments under foreign
currency can be made through a letter of commitment or a reimbursement method.

(v) Import Loans by Export-Import Bank of India: EXIM Bank provides finance for importing goods from
third countries which are required for executing overseas projects which have been won by Indian
exporters. The EXIM Bank finances imports which are used for the purpose of exports. These are
separate entities like Export Oriented Units, Technological Parks and specific zones. They export
software, plants and machinery, technology and expansion of production facility.

(vi) Import of raw material and loan against CAPEX equipment: Buyer’s credit is the credit availed by an
importer (buyer) from overseas lenders i.e. banks and financial institutions for payment of Imports on
due date. The overseas banks lend the importer (buyer) based on the letter of comfort (a type of a bank
guarantee) issued by the importer’s bank. Buyer’s credit helps local importers access to cheaper foreign
funds on LIBOR rates (London Inter Bank Offered Rates). RBI regulations stipulate that an importer can
seek buyer’s credit up to 360 days from the date of shipment in case of raw material and 1080 days/3
years for a CAPEX transaction.

Import Financing Schemes: Import finance is defined as the funding facilitiy or loan provided to the
importer to provide sufficient funds for purchase of goods. Each loan varies with the requirements of
the importer and the type of goods imported. The bank or the third party who provides the import
financing facility can assist in improving the importer’s cash flow by providing immediate cash to
purchase the required goods. The third party advances the accounts receivable by making cash easily
available to both the exporter and the importer. The third party also runs credit protection programmes
which safeguards credit lenders from lending money to customers who do not have the capacity to pay
back.

Figure: Process of Import Finance

Q.no16 What is Foreign Exchange Market? Explain the Participants in Foreign Exchange Markets.

 Meaning 4
 Participants 6

Answer- Foreign Exchange Market: The foreign exchange market or currency market exists wherever
international currencies are traded for another. Foreign exchange market, known also as forex market,
is by far the largest market in the world. No other market of the world is comparable to forex markets in
terms of cash value traded every day. Forex market transactions include trading between large banks,
central banks, foreign exchange dealers, currency speculators, transnational corporations, governments
and other financial and non financial institutions.
Forex market is governed by global and regional developments, the economic stability of a country and
also through market sentiments. Individual traders i.e. retailers constitute a very small portion of global
foreign exchange market.

The unique features of a foreign exchange market are:

• It has one of the highest trading volumes in the world.

• It has extremely large amount of liquidity in day-to-day operations.

• It has varied and large number of players and participants in the market.

• It does not hold any physical entity and can take place anywhere in the world.

• It has a large geographical dispersion.

• Forex market never sleeps i.e. it works 24 hours a day, except on weekends.

• Although the forex market is regulated by the regulations of every country yet it is not entirely
governed by any specific regulation; in fact it is driven by variety of factors.

• Time to respond to favourable and unfavourable conditions is very less in forex market and the
response has to be quick.

Participants in Foreign Exchange Markets: Various participants of forex markets are:

(i) Banks: The inter-bank market constitutes not only the largest size of global forex market as it caters
to both the majority of commercial turnover and large amounts of speculative trading that take place
every day in global forex market. Due to quick access to information, efficient understanding of
economic fundamentals and sound knowledge of market psychology, large banks trade billions of dollars
every day. Large banks participate in forex markets on behalf of customers, proprietary desks and for
their own account.

(ii) Commercial companies: Commercial companies include mainly multinational and transnational
companies that trade foreign currencies in order to pay for goods and services and investments abroad.
Commercial companies though often trade fairly small amounts but their participation in forex markets
is based on real demands unlike large banks or speculators who participate in forex market to make
quick money.

(iii) Central banks: Central banks like the Reserve Bank of India (RBI) play an important role in
international foreign exchange markets. Central banks try to control the money supply in the system in
order to stabilize the upward or downward fall of rupee. If rupee is falling, RBI can intervene by
supplying more dollars to the system to control deprecation of rupee. The central bank will do this only
in cases of free fall to protect investor/market sentiments. Central bank also intervenes in forex markets
to control inflation and interest rates. Central banks usually have official or unofficial target rates for
their currencies.
(iv) Investment management firms: Investment management firms participate in forex market to
typically manage large accounts on behalf of their customers such as asset management companies,
insurance companies, pension funds and endowments funds. Their participation in forex markets
facilitates the orderly transactions in foreign securities on behalf of their clients.

(v) Hedge funds: Hedge funds are also active participants in global forex markets especially when the
quantum of risks is increasing due to globalized integrated business operations among countries. Hedge
funds, due to their specialized business operations in forex markets, have gained a reputation for
aggressive currency speculation since 1991. Hedge funds, today control billions of dollars and have no
dearth of equity and borrowings.

(vi) Retail forex brokers: Retail forex brokers are the smallest but not the least important market
participants in forex market. They are also referred as ‘market makers’ as they handle currency
operations every minute in order to cater to the needs of ordinary individuals, remittance senders, etc.
According to Bloomberg, a retail forex broker has a forex trading volume of around 40-50 billion daily.