Introduction to Export Finance

Credit and finance is the life and blood of any business whether domestic or international. It is more important in the case of export transactions due to the prevalence of novel non-price competitive techniques encountered by exporters in various nations to enlarge their share of world markets.

The selling techniques are no longer confined to mere quality; price or delivery schedules of the products but are extended to payment terms offered by exporters. Liberal payment terms usually score over the competitors not only of capital equipment but also of consumer goods.

The payment terms however depend upon the availability of finance to exporters in relation to its quantum, cost and the period at pre-shipment and post-shipment stage.

Production and manufacturing for substantial supplies for exports take time, in case finance is not available to exporter for production. They will not be in a position to book large export order if they don’t have sufficient financial funds. Even merchandise exporters require finance for obtaining products from their suppliers.

This project is an attempt to throw light on the various sources of export finance available to exporters, the schemes implemented by ECGC and EXIM for export promotion and the recent developments in the form of tie-EXIM tie-ups, credit policy announced by RBI in Oct 2001 and TRIMS.

Concept of Export Finance:

The exporter may require short term, medium term or long term finance depending upon the types of goods to be exported and the terms of statement offered to overseas buyer.

The short-term finance is required to meet “working capital” needs. The working capital is used to meet regular and recurring needs of a business firm. The regular and recurring needs of a business firm refer to purchase of raw material, payment of wages and salaries, expenses like payment of rent, advertising etc.

The exporter may also require “term finance”. The term finance or term loans, which is required for medium and long term financial needs such as purchase of fixed assets and long term working capital.

Export finance is short-term working capital finance allowed to an exporter. Finance and credit are available not only to help export production but also to sell to overseas customers on credit.

Objectives of Export Finance:

  • To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer.
  • To cover natural risks like an earthquake, floods etc.

An exporter may avail financial assistance from any bank, which considers the ensuing factors:

a)      Availability of the funds at the required time to the exporter.

b)      Affordability of the cost of funds.

Appraisal:

Appraisal means an approval of an export credit proposal of an exporter. While appraising an export credit proposal as a commercial banker, obligation to the following institutions or regulations needs to be adhered to.

Obligations to the RBI under the Exchange Control Regulations are:

  • Appraise to be the bank’s customer.
  • Appraise should have the Exim code number allotted by the Director General of Foreign Trade.
  • Party’s name should not appear under the caution list of the RBI.

Obligations to the Trade Control Authority under the EXIM policy are:

  • Appraise should have IEC number allotted by the DGFT.
  • Goods must be freely exportable i.e. not falling under the negative list. If it falls under the negative list, then a valid license should be there which allows the goods to be exported.
  • Country with whom the Appraise wants to trade should not be under trade barrier.

Obligations to ECGC are:

  • Verification that Appraise is not under the Specific Approval list (SAL).
  • Sanction of Packing Credit Advances.

Guidelines for banks dealing in Export Finance:

When a commercial bank deals in export finance it is bound by the ensuing guidelines: –

a)      Exchange control regulations.

b)      Trade control regulations.

c)      Reserve Bank’s directives issued through IECD.

d)     Export Credit Guarantee Corporation guidelines.

e)      Guidelines of Foreign Exchange Dealers Association of India.

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