Sumaiya's Doc

7/31/2019 Sumaiya's Doc

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CERTIFICATE

This i s to cert i fy that the project work Export Finance

is a bonaf ide record of work done by Ms Shah Sumaiya under my

g ui da nc e i n p ar ti al f ul fi l l me nt o f t he r eq ui re me nt s f or t he

tra ining programme in Alok Industr ies Ltd.

Mr Hitesh Shah

Asst. V.P Finance, Alok Industries Ltd


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Export Finance

Project Report submitted to the

Department of Business & Financial Studies

University Of Kashmir

In Partial Fulfillment of the requirements for the

Degree of Masters in Finance & Control

Submitted

By

Shah Sumiya

Project Advisor: Mr. Hitesh Shah

Alok Industries Ltd


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Acknowledgement

First and foremost, I would like to express my

sincere gratitude to my project guide,Mr. Hitesh

Shah,Asst V.P Finance. I was privileged to

experience a sustained enthusiastic and involved

interest from his side. This fueled my enthusiasm

even further and encouraged me to boldly step

into what was a totally dark and unexploredexpanse before me.I also want to thank him for

providing me with a good environment and

facilities to complete this project.

The guidance and support received from all theteam members including Mr Sagar,Mr

Satyanayaran,Ms Nidhi, Mr Ajit,Mr Sandeep, Mr

Ram,Ms Megha, who contributed to this project,

was vital for the success of the project. I am

grateful for their constant support and help.

Finally, an honorable mention goes to my familyand friends for their understanding and support.


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Introduction:

Textile industry in India is the second largest employment generator after

agriculture. It holds significant status in India as it provides one of the most

fundamental necessities of the people. Textile industry was one of the earliest

industries to come into existence in India and it accounts for more than 30% of

the total exports. In fact Indian textile industry is the second largest in the

world, second only to China.

Textile Industry is unique in the terms that it is an independent industry, from

the basic requirement of raw materials to the final products, with huge value-

addition at every stage of processing. Textile industry in India has vast potentialfor creation of employment opportunities in the agricultural, industrial,

organised and decentralised sectors & rural and urban areas, particularly for

women and the disadvantaged. Indian textile industry is constituted of the

following segments: Readymade Garments, Cotton Textiles including

Handlooms, Man-made Textiles, Silk Textiles, Woollen Textiles, Handicrafts,

Coir, and Jute.

ores

Strengths of Indian textile Industry

India has rich resources of raw materials of textile industry. It is one of

the largest producers of cotton in the world and is also rich in resources of

fibres like polyester, silk, viscose etc.

India is rich in highly trained manpower. The country has a huge

advantage due to lower wage rates. Because of low labour rates the

manufacturing cost in textile automatically comes down to very

reasonable rates.

India is highly competitive in spinning sector and has presence in almost

all processes of the value chain.


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Indian garment industry is very diverse in size, manufacturing facility,

type of apparel produced, quantity and quality of output, cost,

requirement for fabric etc. It comprises suppliers of ready-made garments

for both, domestic or export markets.

Weakness

Massive Fragmentation:

A major loop-hole in Indian textile industry is its huge fragmentation in

industry structure, which is led by small scale companies. Despite the

government policies, which made this deformation, have been gradually

removed now, but their impact will be seen for some time more. Since most

of the companies are small in size, the examples of industry leadership are

very few, which can be inspirational model for the rest of the industry.

The industry veterans portrays the present productivity of factories at half

to as low as one-third of levels, which might be attained. In many cases,

smaller companies do not have the fiscal resources to enhance technology

or invest in the high-end engineering of processes. The skilled labor is

cheap in absolute terms; however, most of this benefit is lost by smallcompanies.

The uneven supply base also leads barriers in attaining integration between

the links in supply chain. This issue creates uncontrollable, unreliable and

inconsistent performance.

Political and Government Diversity:

The reservation of production for very small companies that was imposed

with an intention to help out small scale companies across the country, ledsubstantial fragmentation that distorted the competitiveness of industry.

However, most of the sectors now have been de-reserved, and major

entrepreneurs and corporate are putting-in huge amount of money in

establishing big facilities or in expansion of their existing plants.

Secondly, the foreign investment was kept out of textile and apparel

production. Now, the Government has gradually eliminated these

restrictions, by bringing down import duties on capital equipment, offering

foreign investors to set up manufacturing facilities in India. In recent years,

India has provided a global manufacturing platform to other multi-national


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companies that manufactures other than textile products; it can certainly

provide a base for textiles and apparel companies.Despite some motivating

step taken by the government, other problems still sustains like various

taxes and excise imbalances due to diversification into 35 states and Union

Territories. However, an outline of VAT is being implemented in place ofall other tax diversifications, which will clear these imbalances once it is

imposed fully.

Labour Laws:

In India, labour laws are still found to be relatively unfavorable to the trades,

with companies having not more than ideal model to follow a 'hire and fire'

policy. Even the companies have often broken their business down into small

units to avoid any trouble created by labour unionization.

In past few years, there has been movement gradually towards reforming labour

laws, and it is anticipated that this movement will uphold the environment more

favourable


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Company Profile Of Alok Industries Ltd

1. Alok was established in 1986 as a private limited company, it set up its first polyester

texturising plant 1989. It became a public limited company in 1993. Over the years, it has

expanded into weaving, knitting, processing, home textiles and garments. And to ensure quality

and cost efficiencies it has integrated backward into cotton spinning and manufacturing

partially oriented yarn through the continuous polymerisation route. It also provide

embroidered products through Grabal Alok Impex Ltd., its associate company.

- That is how it has evolved into a diversified manufacturer of world-class home textiles,

garments, apparel fabrics and polyester yarns, selling directly to manufacturers, exporters,

importers, retailers and to some of the worlds top brands.


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- Alok has recently entered the domestic retail segment through a wholly owned subsidiary,

Alok Retail India Limited, with a chain of stores named H&A that offer garments and home

textiles at attractive price points.

- It has also ventured into the realty space through wholly owned subsidiaries with investments

in some prestigious projects in Mumbai.

2. Textiles Offerings:

Alok is an end-to-end textile solutions provider. Its products encompass the entire value chain

from cotton and blended yarn to fabrics to garments and home textiles. A significant portion of

these products are cotton based - manufactured from both organic cotton and 'regular'

Strengths:

Alok has a diversified customer base, both in India and overseas. In India, it supplies textile

offerings to top-of-the-line retailers, garment and home textile manufacturers and exporters. It


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is also a nominated / preferred vendor for several brands and retailers in the overseas markets,

where its wide range and product quality command loyalty and earn respect. It exports to over

seventy countries in North and South America, Europe, Africa, the Middle East and Asia.

Financial Performance:

It has well established business with net sales of Rs. 4314.67 Crores for the year

2009-2010.Their plants are located at Silvassa, Rakholi,Dadra Nagar Haveli,

Vapi, Pawne, Turbhe & Bhiwandi.Alok has established a foothold in diversified

markets viz; Direct exports,Garment exporters & Domestic market with large

customer base comprising of reputed international buying houses/ retailers in

the overseas market & reputed garment manufactures /exporters & retailers in

the domestic market. Operating profit before tax for the year 2009-2010 is Rs

367.29 crores and operating profit after tax is Rs 242.45 crores. Export Sales

for the last quarter of year 2010 was Rs. 607.60 crore, a growth of 134.35%

over the corresponding quarter of the previous year (Rs. 259.27 crore).


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TECHNICALITIES INVOLVED IN EXPORT:

All exporters have to comply with the legal formalities & duly obtain

registrations & certifications as required under various enactments of the

Government before starting the process of export business.

Bank A/c

Open a Current Account with a reputed Bank which is authorised to deal in

foreign exchange.The Bank will ask for a copy of the incorporation document

i.e., partnership deed or company Memorandum & Articles as applicable.

Today Alok is well established company it has its a/c in banks like standard

chartered bank,Bank of India,BOB,etc.

Import Export Code No.

No person is allowed to export or import goods without obtaining the IEC No.

from the regional licensing authority unless specifically exempted under any

other provision of the Export Import Policy.

Application for obtaining Import Export Code No. should be to the Director

General Of Foreign Trade in the Aayaat Niry aat Form accompanied with-

Bank Reciept for payment of application fee

Certificate from Banker of Exporting firm evidencing that the exporter is

maintaining an account there

Self Ceftified Copy of Permanent Account Number (PAN).

Two copies of passport size photographs of applicant duly attested.


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The exporter has to site the IEC No. so allotted by DGFT on all export

declerations forms.

It shall be valid for all branches,units,divisions etc., as indicated on the IEC No.

Registration cum Membership Certificate (RCMC):

For availing various concessions under the current Foreign Trade Policy , the

exporter is required to get registered with the concerned Export Promotion

Council or Commodity Board by obtaining Registration-cum Membership

Certificate.

The Exporter has to apply in the prescribed Form to the Export Promotion

Council along with the following documents:-

Self Certified Copy of the Import Export Code No.

Bank Certificate in support of the applicants financial soundness.

The concerned Registering Authority shall issue the RCMC indicating the

status of the status of the applicant as Manufacturer-Exporter or Merchant

Exporter.

The RCMC shall be deemed to be valid from 1st April of the licensing year in

which it was issued & shall be valid for 5 years ending 31st March of the

licensing year, unless otherwise specified.

Permanent Account Number (PAN):

All exporters & importers who have IEC No. are compulsorily required to have

a PAN No. as well. The Permanent Account

Number issued by the Income Tax Authorities is taken as the common business

identifier for all importers & exporters in Customs operation.

The DGFT maintains PAN based validated directory of importers & exporters.

In view of this, the processing of documents relating to exports & imports based

on PAN & IEC No. is mandatory as the system will process only such


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documents having the aforesaid data in the directory validated by DGFT.

Therefore all exporters should submit their PAN particulars to the DGFT

promptly.

Registration for Value Added Tax (VAT):

VAT is levied on the difference between the the sale price of the goods

produced or the services rendered,& the cost thereof that is ,the difference

between the output & the input.

All legal & natural persons who provide goods, works or services & have an

annual sales turnover exceeding the threshold limit (to be decided by each sate)

should register as taxpayer. All importers are required to register irrespective of

their annual turnover. It is the person, NOT the enterprise ,who is registered for

VAT.

Exporter will need to complete the registration application form, which will be

supplied by the office, & take it or post it to the local VAT office. The local

VAT office will deal with the application & send you a Certificate of VAT

Registration.

Registration with Regional Licensing:

The Customs authorities will not allow you to import or export goods into or

from India unless you hold a valid IEC number.For obtaining IEC number you

should apply to Regional Licensing Authority (list given in Appendix 2) in

duplicate in the prescribed form given in Appendix 1.Before applying for IEC

number it is necessary to open a bank account in the name of your

company/firm with any commercial bank authorised to deal in foreign

exchange.The duly signed application form should be supported by thefollowing documents:

Bank Receipt (in duplicates)/Demand Draft for the payment of the fee of

Rs.1,000/-

Certificate from the Banker of the applicant firm as per Annexure 1 to the form

given in Appendix 1 of this book.

Two copies of Passport size photographs of the applicant duly attested by thebanker to the applicants.


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A copy of Permanent Account No issued by Income Tax Authorities.If PAN has

not been allotted,a copy of application of PAN submitted to Income Tax

Authorities.

In case the application is signed by an authorised signatory,a copy of the letterof legal authority may be furnished.

If there is any non-resident interest in the firm & NRI investment is to be made

with repatriation benefits,a simple declaration indicating whether it is held with

the general/specific permission of the RBI on the letter head of the firm should

be furnished.In case of specific approval,a copy may also be furnished.

Exporters Profile as per form attached to Appendix 1 of this book (See

Appendix 1A of this Book). The Regional Licensing Authority concerned wilon merits grant an IEC number to the applicant.The number should normally be

given within 3 days provided the application is complete in all respects & is

accompanied by the prescribed documents.An IEC number allotted to a

applicant shall be valid for all its branches/divisions as indicated on the IEC

number.

Register With Export Promotion Council:-

In order to enable you to obtain benefits/concession under the export-importpolicy,you are required to register yourself with an appropriate export

promotion agency by obtaining registration-cum- certificate.

For this purpose you should apply in the prescribed form,given at Appendix 3 of

this Book to the Export Promotion Council relating to your main line of

business.

For list of Registering Agencies,please refer to Appendix 4 of this

book.However,if the export is such that it is not covered by any EPC,RCMC inrespect thereof may be obtained from the Regional Licensing Authority

concerned.

An application for registration is granted, the EPC or FIEO shall issue the

RCMC indicating the status of the applicant as merchant exporter or

manufacturer exporter. The RCMC shall be valid for five years ending 31st

March of the licensing year in which it was issued.


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Registration with Sales Tax Authorities: Goods which are to be shipped out of

the country for export are eligible for exemption from both Sales Tax and

Central Sales Tax. For this purpose, you should get yourself registered with the

Sales Tax Authority of your state after following the procedure prescribed under

the Sales Tax Act applicable to your State.

Every license/certificate/permission shall be valid for the period of specified in

the license/certificate/permission and shall contain such terms and conditions as

may be specified by the licensing authority which may include:

The quantity, description and value of the goods

Actual user condition

Export obligation

Value addition to be achieved

Minimum export price

EXPORTS

Export in simple words means selling goods abroad. International marketbeing a very wide market, huge quantity of goods can be sold in the form of

exports. Export refers to outflow of goods and services and inflow of foreign

exchange.Export occupies a very prominent place in the list of priorities of the

economic set up of developing countries because they contribute largely to

foreign exchange pool. Exports play a crucial role in the economy of the

country. In order to maintain healthy balance of trade and foreign exchange

reserve it is necessary to have a sustained and high rate of growth of

exports.The export procedure has been split into two stages preshipment &postshipment.

PROCEDURE

PRE - SHIPMENT PROCEDURE

The exporting company issues a quotation to its prospective buyer mentioning its terms

and conditions related to shipping of goods, payments, and quality of goods. It also


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provides value & volume of goods, terms for letter of credit , as per the case and other

details related to trade like date and time period for shipment , destination port , and

final destination. The importer on accepting the terms & conditions send a Purchase

order (PO) and if payment term is a L/C payment then Letter Of Credit (L/C) is opened in

favor of the seller (beneficiary / exporter ) and is handed over to the exporter via the

negotiating bank / advising bank . On receipt of the LC by the seller it is scrutinized and if

there is any discrepancy in it from the terms and conditions mentioned in quotation or

any terms that cannot be complied with, then an amendment is asked from buyer . On

receipt of PO/LC production orders are sent to the production dept . and preshipment

finance is also obtained. Preshipment finance can also be obtained on a provisional basis

from banks

before receiving the PO/LC. As soon as goods are ready for dispatch the export

department prepares various documents required as per the Indian Customs norms and

also books space with the shipping company, which is done on the basis of measurement

of the consignment and after this shipping is taken care by authorized clearing and

forwarding agent s(C&F) appointed by the exporter . On sale of goods the excise

paid on the inputs and capital goods can be claimed back through CENVAT credit

and in case of exports the excise payment on final goods is exempted.

The CENVAT credit may be utilized for payment of

(a) Any duty of excise on any final product ; or

(b) An amount equal to CENVAT credit taken on inputs if such inputs are

removed as such or after being partially processed; or

(c) An amount equal to the CENVAT credit taken on capital goods if such

capital goods are removed as such; or

(d) Service tax on any output service

The goods can be exported under bonds in which exporter furnishes

bond and hence he need not pay excise duty on his inputs and there is no

cash out flow for him. But the goods purchased under bond can be used onlyfor export purposes. In case of exports under bond an account of exporter is


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opened with excise dept wherein amount equivalent to duty payable is

debited. When the exporter furnishes proof of exports the amount so

mentioned in the proof is credited. As soon as the goods are ready in factory

invoice and packing list is prepared by export department . These documents

are forwarded to the CHA (clearing agent ) . The CHA prepares the shipping

bill and forwards the necessary documents to the customs for endorsement .

The goods are then released from factory to be sent to customs. When the

customs gives its clearance then only the goods are loaded on the vessel .

After the goods are loaded the captain of the vessel issues a Mate Receipt ,

which gives the confirmation that the goods have been loaded on the vessel

in good condition and if the goods are not in good condition the Captain

issues a Stained Mate Receipt .

CUSTOM CLEARANCE PROCEDURE:

For custom clearance following documents are to be sent :

Invoice- 4 copies

Packing list - 4 copies

Exchange control GR form- 1 (duplicate) copy

SDF form- 1 copy

EP copy- 1

DEPB copy- 1

Application for removal of excise (ARE) copy- 1

For examination custom checks all the documents and 10% of the goods. On

examination they return 2 copies of Invoice and packing list . The GR form is

sent to RBI by customs and the original copy with the exporter is send to

negotiating bank. The clearing agent prepares the Bill of Lading draft on the

basis of specimen given by the exporter and the same is forwarded to the

shipping company. On the basis of draft the shipping company checks the

relevant details like whether the goods are loaded or not and the loaded

particulars match with the details in shipping bill & draft . On verification ofdocuments and after they receive all their charges in full , shipping company


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issues the Bill of Lading. The CHA collects the BL from the shipping

company duly signed and the following documents is handed over to the

exporter .

Invoice/Packing List

Purchase Order

Generalized System of Preferences Certificate of origin (GSP form A)

Shipping Bill

ARE1&2

GR form/SDF form

L/C

The Pre Shipment procedure closes here .

POST SHIPMENT PROCEDURE

The export department on receiving documents from CHA prepares

various post shipment documents and sends them to the

advising/negotiating bank to get the payment . The post shipment

documents are prepared in two sets; one set is for buyer and one set for

advising/negotiating bank. Buyer Set Number Bank Set Number

Bill Of Exchange 1+1

Covering Letter

Invoice 4 originals Invoice 1 copy

Packing List 4 originals Packing List 1 copy

Bill of lading 3 originals Bill of lading 1 copy

Certificate of Origin 1 copy

Exchange Control 1+1


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Any other document as per LC

SDF 1+1

If the export is against an LC then the bank documents to be sent

is mentioned in L/C. The negotiating bank will scrutinize these documents

and if found in order , negotiate the same. If the export is DA/DP then one

set of documents is sent to bank in which payment from that particular

buyer is going to be received and one to buyer directly for release of

goods from port . The issuing bank makes the payment to the negotiating

bank if there is no discrepancy in the terms and conditions as mentioned

in L/C. If there is any discrepancy then the issuing bank asks for a NOC or

a discrepancy waiver approval from the importer and after it is given thenonly the payment is released to the negotiating bank. Then the

beneficiarys bank gets the payment from issuing bank and on receiving

the payment it issues a Bank Realization Certificate (BRC) . This

document confirms the export realization and is used for getting the

incentives hence it is send to the Director General of Foreign Trade

(DGFT) for the Duty. Entitlement Pass Book (DEPB) scheme application. A

copy of Bank Realization Certificate (BRC) is sent to RBI directly by the

negotiating bank.

DOCUMENTATIONS

The documents generally required for post shipment procedure:

Invoice

Packing list

Bill of exchange

Certificate of origin

Forward Cargo Receipt /Lorry Receipt /Airways Bill or Bill of Lading

Shipping Bill

A.R.E. 1&2

Mates Receipt Declaration Form


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INVOICE: A commercial invoice is a prima - facie evidence of the contract of sale andpurchase. It is a document made by the exporter on the importer indicating details like

description of the goods consigned, consignor s name, consignees name , name of thesteamer , number and date of bill of lading, country of origin of goods, price, terms of

payment , amount of freight etc. Following are the conditions that must be exercised in

order to ensure that an invoice is considered valid: The invoice should be made out in the

name of the applicant or the party specified in LC To be signed by an authorized

signatory of the exporter. The invoice should be drawn in the same currency of LC unless

otherwise specified also mentioning the terms of delivery & routing of merchandize. The

invoice should not include any charges not stipulated in the LC. Also, the gross value of

invoice should not exceed credit value. The invoice should show deduction towards

advance payment made, agency commission payable etc. as applicable. Final amount of

invoice or the percentage of drawing as permitted in the LC should correspond with the

draft amount. If partial shipments are affected, amount of drawings should preferably

correspond to proportionate quantities shipped. If invoices issued for an amount in

excess of the amount permitted by the credit , the drawing should not exceed the

amount of credit . Details stated on the invoice should correspond exactly to details

specified in al l other documents. Also, the details should certify the facts like origin of

goods etc, stipulated in the LC

PACKING LIST: It contains minute details of the goods, which are to be exported. It is usedto describe the goods in detail for the verification in clearance process. It is a pre-shipment

document prepared by exporting company. It contains following details:

Excise number Color , Size, Set /pair , Cartoons, Pieces, Weight , Measurement & Dimension of

the goods packing. Shipping company utilizes this information to calculate the volume of space to

be occupied by a consignment . It also states other details like name of exporter , cosignee, portof

loading, discharge & destination.

BILL OF LADING:

A bill of lading is a document issued by the shipping company or its agent acknowledgingthe receipt of the goods for carriage which are deliverable to the consignee or his assignee

in the same condition as they were received. Bill of lading is closely related to the LC. It is avery important document when it comes to LC mode of payment . Each & every LC has the


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provision of presentation of Bill of Lading before payment is discharged on it . The

possession of the original bill of lading enables the holder to claim the goods from the carrier

. It is the only negotiable document & is a title to the goods. It is generally issued in three

originals and all the three are sent to the buyer as a post shipment document . The bill of

lading must contain the following elements:

Show the name of the carrier and must be issued by a named carrier or his agent , the bill of

lading must also be signed by the named carrier or his agent . Bear a distinct number Indicate

the date and place of issuance Indicate the name of the consignor and consignee Indicate a brief

description of the goods being carried Indicate port of loading and/or taking in charge Indicate

port of discharge

Be issued in full set of originals. Meet all other stipulation of the credit Must indicate whether

freight is prepaid or payable Delivery agent contact details All terms & conditions of carriage at

the reverse

There are different types of bill of lading enlisted below:

Container bill of lading

House bill of lading

Master bill of lading

Express bill of lading

Charter party bill of lading

Combined transport bill of lading

Clean bill of lading

Claused bill of lading

Short - form bill of lading

Liner bill of lading

Through bill of lading

Switch bill of lading


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Lash bill of lading

Stale bill of lading

On-board bill of lading

It is important to use proper terms in a LC for a bill of lading because the BL has to be generated

a s per the LC terms & conditions.

Signing of bill of lading : The signing of bill of lading must be reflected by means of a

signature of an

Identified owner

Identified agent of the master or owner

Identified master (captain)

CERTIFICATE OF ORIGIN: Many countries require a certificate of origin from thesupplier of goods stating the origin of goods and certified by the chamber of commerce or any

other recognized authority in the exporter s country. It must contain the following features:

It must be signed and issued by an independent recognized by the govt. of the exporting country

such as chamber of commerce etc. certifying the origin of the goods. The country of origincertified must be as per the LC requirement and consistent with the declaration given by the

beneficiary in his invoice/other documents.

It must indicate the description of goods and should be consistent with other documents.

It must indicate the quantity/weight of the goods and should be consistent with other documents.

It must indicate the name of the consignor /seller and name of the consignee/buyer , invoice no.

& date.

SHIPPING BILL:

This document is issued by the customs and is certificate of custom clearance. A copy of shipping

bill is sent to the seller s bank as a post shipment document . It contains all the details about

the goods like: Bears a distinct number known as SB number.

Indicate the date and place of issuance

Name and mode of the carrier


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Indicate the name of the consignor and consignee

Indicate a brief description of the goods being carried

Indicate port of loading or taking in charge

Indicate port of discharge

FOB value of goods in both foreign currency as well as domestic currency

Amount of freight & insurance paid, if any.

Invoice number and For ex a cocount number also.

A.R.E.1&2 (Application for Removal of Excisable Goods):

It is an export document for export clearance. It is an application made to Excise department for

taking the goods out of the factory. There are two types of ARE forms ARE1 & ARE2. ARE1 is used

if export made is in discharge of export obligation under any scheme. ARE2 is used when export

is not in discharge of any obligation. It is issued in five copies:

Original Rebate Claim

Duplicate Rebate Claim

Triplicate Excise Department

Quadruplicate Plant / Factory

Quintuplicate Plant / Factory

It contains the following information -

A running serial number beginning from the first day of the financial year . Manufacturer s

name, address and excise registration number . Brief description of goods like quantity, weight &

packaging.

Value & rate of duty imposed and Amount of rebate claimed.


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FCR / LR / Airway Bill:

Al l the three documents are issued for the same purpose but for different means. Freight cargo

receipt is issued when the goods are exported through sea route, Lorry receipt is issued in the

case when goods are exported by road and Airways Bill is issued when goods are exported via

airways. In absence of BL these documents act as a proof for export of goods. These documents

are issued in

lieu of BL, which is issued and sent to the buyer with the shipment itself by the shipping

company.

MATES RECEIPT

It is issued by the Chief of the vessel after the goods are loaded. It contains:

the name of shipping line

the name of vessel

the name of port of loading

the name of port of discharge

the name of place of delivery

Marks and nos

Kind of packages

Description of goods

Container no.

Gross weight

condition of cargo at time of receipt

Shipping bill no. & date

The Mates Receipt is transferable and it must be presented at the shipping Companys office to

be exchanged into Bill of Lading.


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DECLARATION FORMS

The Reserve Bank of India has issued Foreign Exchange Management (Export of Goods &

Services) Regulations, 2000. Under Regulation 3, every exporter of goods or software in

physical form or through any other form, either directly or indirectly, to any place outside

India other than Nepal and Bhutan shall furnish to the specified authority a declaration in

prescribed form or supported by such evidence as may be specified.

All exports to which the above requirement applies must be declared on appropriate forms as

indicated below:

GR Form: (in duplicate) for exports other than by post including export of software in

physical form

SDF Form: (in duplicate and appended to the shipping bill) for exports declared to

Custom Offices notified by the Central Government which have introduced EDI system

for processing Shipping Bill.

PP Form: (in duplicate) for export by post

SOFTEX: (in triplicate) for export of software otherwise than in physical form.

The above forms are printed in a distinctive colour and each set bears a printed number which

appears on both copies of the form. Exporter can obtain these forms from Reserve Bank of India.

(They can be obtained from authorized dealers also.)

MODES OF RECEIVING PAYMENTS under export trade / international trade viz

ADVANCE PAYMENT: It refers to the mechanism under which payment is made inadvance by the importer , after which the exporter makes the shipment .

Advantage to the buyer under advance payment mechanism: None

Advantage to the seller:

Use of funds

No binding


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Risk to the buyer: Following are the risks being under taken by the buyer in case of

advance payment mechanism.

Funds committed

No control over goods

Seller may not ship

Risk to the seller: None

Thus, under this system, while the seller enjoys a highly favorable position, the buyer is

exposed to large-scale peril s.

OPEN ACCOUNT MECHANISM: It refers to a mode of payment whereby theshipping documents are sent by the exporter directly to the importer , without coursing the

documents through the banks, upon the buyer s promise to pay at some future date after

shipment .

Advantage to the buyer : The buyer enjoys the following advantages.

Pay when you like

Control over goods

Advantages to the sellers : None

Risk to the buyer : None

Risk to the seller:

No control over goods or payment

Buyers may refuse to pay

DELIVERY AGAINST PAYMENT: In this mode payment is made when documentspertaining to delivery of goods are received. The exporter submits the documents in his

bank , which is transferred to buyer s bank . The buyer s bank makes the payment and

passes over the documents to the buyer who in turns receives the goods against those

documents.

Advantages to the buyer:


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No commitment of funds in advance

No risk involved as payment made against documents

Advantages to the seller:

Risk is minimized as banks come in the picture

Release of funds quick with delivery of goods

Control over goods and payment exists

Risk associated with buyer: none

Risk associated with seller: none

DELIVERY AGAINST ACCEPTANCE: In this mode of payment the seller receivesmoney after a certain period of time. This time is provided as credit period to the buyer . The

date of credit is calculated from the date of shipment i.e. date given in Bill of Lading.

Advantages to the buyer:

Gets extra time to pay for the goods at no extra cost .

Advantages to the seller:

The provision of extra credit period helps in getting more customers.

Risk associated with buyer: none

Risk associated with seller: none

LETTER OF CREDIT: A letter of credit can be defined as a conditional under taking ofpayment given by a bank. Expressed more fully, it is a written conditional under taking

issued on behalf of the importer (applicant ) by the issuing bank to the exporter of goods

(beneficiary) to pay for the goods or services, provided the documents submitted conform

strictly to terms and conditions of the credit . From this definition it can be seen that there

are basically three parties to a letter of credit : a) the buyer/ importer , who requires that

a credit be issued in his favour; b) the beneficiary ( the supplier of goods) ; and c) the

issuing bankwhich issues the credit at the request of the buyer or importer . The credit is


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usually (but not always) advised to the beneficiary through a bank in the beneficiary's

country ( the advising bank) .

Following are the parties to a letter of credit .

The Applicant

The Issuing bank

The Beneficiary

The Advising bank

The Confirming bank

The Nominated bank

The Reimbursement bank

THE APPLICANT: Generally, the applicant of an LC is the buyer of the goods who has tomake payment to the seller . At his request and instructions the issuing bank opens the LC. An

issuing bank itself can also be an applicant

THE ISSUING BANK: It is the bank, which opens the LC in favor of the beneficiary. Byopening the LC the issuing bank under takes the responsibility to make payment to the seller

on compliance of the required terms and conditions. T he issuing bank is the applicant s

bank that opens, issues or establishes the credit . It is accountable to honor the documents if

it is in order .

THE BENEFICIARY: The beneficiary is the party who is to receive payment from the

applicant . The LC is opened in his favor to enable him to receive payment on the submission

of the stipulated documents.

THE ADVISING BANK: The advising bank advises the credit to the beneficiary.Advising of credit is done only after verifying the authenticity of the credit . When a bank

advises a credit , it implies that it authenticates the signatures of the issuing bank. The

advising bank is usually located in the country of the beneficiary.

THE CONFIRMING BANK: The advising bank or any other bank so authorized by theissuing bank may assume the role of a confirming bank and add its confirmation to the LC


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opened by an issuing bank .The bank which has been asked to confirm an LC is under no

obligation to confirm it . It can independently chose either to confirm or not , but it should

advise its decision t the issuing bank immediately. A confirming bank for all practical purpose

enters the role of an issuing bank and assumes primary responsibility of effecting payment

under the LC to the beneficiary, upon hi s complying with the terms of the LC.

THE NOMINATED BANK: Nominated bank is the bank that is nominated andauthorized by the issuing bank

To pay if the LC is a payment LC

Incurred a deferred payment undertaking

Accept drafts, if the credit stipulates so

Negotiate

Where a credit is specified as freely negotiable, any bank can negotiate the

document s under such an LC. However , where credit is specified as freely

negotiable, any bank can negotiate the document s under such an LC. However , where

credit is restricted for negotiation the issuing bank specifies the banks which are nominated

banks and to whom the documents are to be presented for negotiation etc. Any other bankthan the nominated bank in the LC cannot negotiate bills under an LC with restricted for

negotiation clause.

THE REIMBURSING BANK: It is the bank, nominated by the issuing bank authorizedto honor to reimburse the claim in settlement of negotiation/acceptance/payment lodged with

it by the paying, negotiating or accepting bank. It is normally the bank, which the issuing bank

has accounted,

from which payment is to be made.

FEATURES OF LETTER OF CREDIT: The features of letter of credit may be outlinedas under :

It is a conditional bank under taking of payment .

It ensures payment provided the terms and conditions of the credit have


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been fulfilled.

It is based on documents only and not on merchandise.

It is an arrangement by banks to facilitate and settle international trade.

Important aspects to be looked in an Inward LC:

Does the credit comply with all the terms of commercial contract , such as description of

goods, unit price( s) , quantity, payment / shipment terms etc? Are the name and address of

buyer as well as seller are mentioned correctly? Does the credit contain any conditions, which

are unacceptable or difficult to comply with? Can the documents required by the credit be

easily obtained and presented? Is the documentary credit duly authenticated by the advising

bank and irrevocable? Does the credit state that it is subject to Uniform Customs andPractices (UCP) for documentary credits, ICC publication No.500? Does the credit clearly state

the date(s) and place( s) of shipment and expiry? Are the dates and period sufficient to ensure

compliance and obtain payment under the credit? Does the credit contain excessive details

and ambiguous terms which are difficult to comply with; documents are inconsistent or

contradictory with each other ; non-documentary conditions which are unclear or difficult to

comply? In case if any of the terms and conditions are not acceptable then immediately a

request has to be made to the buyer for the necessary amendments under the credit .The

scrutinized LC if ok is sent to the bank for negotiations after the shipment. Before sending thedocuments to banks they are thoroughly to avoid any discrepancies, which could lead to

rejection from the credit -opening bank. Some of commonly observed discrepancies are:

Documentary Credit has expired

Late Shipment of goods

Description of goods on invoice differs from that in the credit

Shipment is uninsured

Documents not presented within the specified time after shipment of goods

Claused bill of lading

Insurance cover expressed in a currency other than that of the credit

Absence of signatures, where required on the documents presented


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Opening of letter of credit: The following basic rules should be exercised during the course

of opening up of a letter of credit.

Instructions to the opening bank should be clear , precise, and correct .

All terms and conditions should be documentary in nature.

The terms and conditions should agree with those of the contract .

ADVANTAGES OF LC: There are advantages to both the buyer and seller whensettlement is arranged by letter of credit.

From the perspective of sellers

Credit worthiness of bank replaces that of buyer

Shift the sovereign risk of the buyer s country to a bank

Low cost financing options are available for LC backed bills

From the buyer s perspective :

Seller will not be paid unless his documents conform to the terms and conditions of the LC.

Flexible payment terms

DIFFERENT TYPES OF LETTER OF CREDITS.

A Revocable Credit is one, which can be amended or cancelled at any time without prior

notice or warning to the seller . It involves risks to the beneficiary, as the credit may beamended or cancelled while the goods are in transit and before correct documents are

presented. The seller of goods would then face the problem of obtaining payment directly

from the buyer . A revocable credit gives the buyer maximum flexibility, as it can be amended

or cancelled without prior notice to the seller up to the moment of presentation of documents

to the bank at which the issuing bank has made the credit available for payment .

An Irrevocable Credit cannot be amended or cancelled without the agreement of the issuing

bank, the confirming bank ( if the credit is confirmed) and the seller (beneficiary) . Anirrevocable credit gives the seller greater comfort of payment but is really only dependent


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upon the under taking of a bank abroad. The buyer can request the advising bank to add its

confirmation to an irrevocable credit if he is not satisfied with the assurance of the credit

issuing bank. If the advising bank agrees, the irrevocable credit becomes a confirmed

irrevocable credit. For adding confirmation, the bank will charge commission, which may

have to be paid by seller. A confirmed irrevocable credit gives the seller a double assurance of

payment, since a bank in the seller 's country has now added its own under taking in addition

to that of the issuing bank to pay for the documents drawn under the letter of credit ,

provided of course, the documents are drawn strictly in compliance with the terms of the

credit .

A transferable credit under Article 48 of the UCP is one under which the beneficiary has the

right to give instructions to the bank, which is authorized, by the credit -issuing bank to effect

payment , accept drafts or negotiate documents to make the credit available in whole or in

part to one or more

parties. A letter of credit can be transfer red only if it is expressly designated as transferable

by the issuing bank and can be transfer red once only (however , if part shipments are not

prohibited, fractions of a transferable credit may be transfer red to more than one beneficiary)

. When a credit is transfer red to a second beneficiary or a number of second beneficiaries, it

must be transfer red on the terms and conditions specified in the original credit , except that :

The amount of the credit may be reduced

Any unit price may be reduced

The validity may be curtailed

The specified period of time after the date of shipment for presentation of documents may be

curtailed

The latest shipment date may be curtailed

The name of the first beneficiary can be substituted

Insurance cover percentage may be increased in such a way as to provide the amount of

cover stipulated in the original credit

The first beneficiary may request that payment or negotiation be effected at the place to

which the credit has been transferred, up to and including the original expiry date.


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A Back-To-Back Credit can be described as credit and counter -credit . It is a method of

financing both sides of a transaction in which a middleman buys goods from one customer

and sells them to another , both settlements being made under documentary credits. When

the documents are received under back -to-back credit by the bank, they will advise the

opener of the receipt of documents under the back -to-back credit. The opener substitutes his

own invoices and drafts made out in the name of the foreign buyer and tenders the

documents for negotiation under the export letter of credit . The bank will then negotiate both

the documents and honor the documents submitted under back-to-back credit from the

proceeds of the original export credit . The difference, if any, between the amount paid under

the back-to-back credit and amount reimbursed from the foreign bank under the export credit

will be paid to the original beneficiary, less bank charges.

Revolving Credits are those, which renew themselves automatically. If the renewal is not

automatic but subject to reinstatement instructions, the credit is not , in a true sense, a

revolving credit in international usage. It is rather a credit of fixed amount , which has to be

increased by means of amendment instructions after each drawing or , alternatively, a credit

of a fixed total amount is payable by specific instalments.

Under a revolving credit , the drawings made under the credit can be re-available to the

beneficiary, upon receipt of instructions from the opening bank to the effect that the amount

has been reinstated in the credit . A credit can be made revolving as to time or up to a

maximum amount of drawing.

Installment credit : It stipulates that shipment may be made in installments at specified

periods of time. Installment credit differs from simple credit which permits partial shipment in

the sense that under installment credit , the time a s well as the quantity is stipulated .on the

contrary, under a simple credit , which permits partial shipment , there is no stipulation as totime and quantity.

Deferred credit : It is mostly used in those trades where a portion of money is paid by the

buyer after verification of goods or after assessing the value of the goods taken into account

the quality, shortages etc. date for payment of credit may or may not be specified. Hence,

such scheme is known as deferred credit .

Transit credit : Normally, when an LC is opened, it will be advised to the beneficiary by a

bank that is based in the beneficiary s country. In case of a transit credit , the services of a

bank located in a third country will be used. Such a requirement may be cal led for where the


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opening bank has no correspondent relations with any bank in the beneficiary s country.

Countries may open transit credit whose credit may not be readily accepted by in the

beneficiary s country. In such a case, a bank in a third country may be requested to open the

LC.

Reimbursement credit : When a credit is denominated in the currency of a third country,

such credit is termed as reimbursement credits. Sometimes credits where a

paying/accepting/negotiating bank is reimbursed in manner other than by debit to the vector

account of the opening bank or by credit to the nostrum account of the

paying/accepting/negotiating bank held with the opening bank are also referred to as

reimbursement credits.

Anticipatory credit : Payment under a letter of credit is usually made at the post shipment

stage. Hence, under anticipatory credit payment is made to the exporter at the pre -shipment

stage in anticipation of goods and submission of bills at a later stage. Anticipatory credit is of

two types: red clause credit and green clause credit .

The Red Clause in the credit enables him to borrow money from the bank to pay for the

goods

to be shipped. The beneficiary thus purchases the goods and Effects the shipments. After

shipment s are made, the documents are tendered to the bank. However, the opening bank

immediately on effecting payment will Reimburse the bank making payment under the red-

clause credit to beneficiary. The object of the inclusion of the red clause in a letter of credit is

to enable the beneficiary to obtain pre - finance from a bank in his country. It is called so

because, historically, it was usually printed in red on the advice of credit . There are two types

of red -clause credits. One is secured and other , unsecured.

Under unsecured credit , the payment in advance will be made to the beneficiary against

presentation of clean drafts only, drawn on the advising bank/opening bank. Under secured or

documentary red -clause credit , the advance will be made against warehouse receipts or

similar document s and the beneficiary's under taking to deliver the relative Bills of Lading

upon shipment .

A Green-Clause Credit is one, which envisages the granting of storage facilities at the port in

addition to the pre -shipment payment to the beneficiary.


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A Standby letter of credit , while possessing all the elements of a documentary credit

subject to UCP, is often used in lieu of performance guarantee. Basically, the standby credit is

intended to cover a non -performance (default ) situation, as with the traditional letter of

credit . The bank authorized to make payment under a standby letter of credit will affect

payment on presentation of requisite documents called for in the credit to the beneficiary,

although the opener may claim performance. Credits are available for settlement by

acceptance/ negotiation payment /deferred payment . The negotiation under a confirmed

credit is without recourse while one under an unconfirmed credit is with recourse to drawer

unless specified otherwise. Typically, a letter of credit nominated in any other currency other

than that of the beneficiary will be available by `negotiation'.

EXPORT FINANCING

Foreign Trade implies a trade transaction between two parties, each one of whom is located in

a different country. In other words, trading between two different countries is referred to as

foreign trade. It is to be distinguished from the home trade, which takes place within the

frontiers of the same country. The basic task of financing the foreign trade is similar to that of

the home

trade i.e. to receive payments from the buyers and to make payments to the sellers. This task

is largely performed through the instrument of bills of exchange, which are called foreign bills

of exchange. Banks play an important role in facilitating the process of receipt of payments in

case of foreign trade. But the international character of foreign trade gives rise to a number of

problems which render the task of financing complicated. These complexities are as follows:

Lack ofuniformity in the currencies of the two countries;

Lack ofpersonal contacts between the buyers and the sellers;

Variations in the trade practices and usages in the two countries; and

Different legal and regulatory systems in the two countries.

Hence banks adopt their practices and techniques to suit the needs of financing the foreign

trade. Letters of credit play an important role in financing the foreign trade. Reserve Bank of

India provides refinance to the banks at concessional rate. Export Import Bank also providesrefinance in respect of medium term export credit and directly extends export credit.


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Guarantees issued by Export Credit Guarantee Corporation of India facilitate the task of

financing the foreign trade.

TYPES OF EXPORT CREDIT

The credit required by an exporter from a banker is broadly divided into two categories, viz (i)

Pre-shipment credit, and (ii) Post-shipment credit. Both of these may be acquired either in

Indian Rupees or in Foreign Currencies.

Pre - Shipment Credit means any loan or advance or any other credit provided by a bank to

an exporter for financing the purchase, processing, manufacturing or packing of goods prior to

shipment.

Post - Shipment Credit means any loan or advance granted or any other credit provided bya bank to an exporter of goods from India after the shipment of goods to the realization of the

export proceeds. Thus the dividing line between the two types of export credits is the date of

shipment. Generally, the pre-shipment credit is extinguished by the submission of export bills

and connected documents. Thereafter, it is called post-shipment credit.

PRE - SHIPMENT CREDIT

The pre - shipment credit meets the working capital needs of an exporter at the pre-shipment

stage. When an exporter receives an export order, the goods to be exported may not be

readily available with him for shipment. He has to purchase the raw materials/semi-finished

goods, process/manufacture the same, or may procure the goods from their suppliers, pack

them and dispatch them to the port town. The funds required for all these purposes are called

pre-shipment credit. Banks provide pre-shipment credit after taking into consideration all

factors relevant for granting credit. But the basis of granting such credit is:

A letter of credit opened by the importer in favor of the exporter, or

A confirmed and irrevocable order for the export of goods from India, or any other evidence of

such an order.

The following points are taken into account while granting pre-shipment credit:

1. Pre-shipment credit is to be granted for the period which is sufficient to meet the needs of

the exporter. But if the period of credit exceeds 180 days, no refinance will be granted by the

Reserve Bank of India. If the pre-shipment advance is not adjusted by submission of export


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documents within 360 days, the advance will not remain eligible for concessional rate of

interest.

2. Packing credit may be released in one lump sum or in instalments as required by the

exporter. Banks must monitor the end-use of the funds and ensure their utilization for genuinerequirement of exports.

3. Pre-shipment credit must be liquidated out of the proceeds of the export bill on its

purchase, discount etc by the banker. Thus the pre-shipment credit must be converted into

post-shipment credit.

4. In case of agro-based products, the non-exportable products are to be sold within the

country. Banks must charge interest at commercial rate, as applicable to domestic advance,

on packing credit covering non-exportable portion.

5. In some cases, exporters need packing credit in anticipation of receipt of letters of

credit/firm export order from importers. This happens when the raw materials are seasonal

in nature or when the manufacturing time is greater than the delivery schedule. In such

cases, banks may extend Pre-Shipment Credit Running Account facility and grant credit

taking into account the exporter's needs and without insisting on firm export order or letter

of credit.

Eligibility

Packing Credit is extended to an exporter against a letter of Credit (preferably) or a confirmed

export order in favour of the exporter, within his predetermined credit limit. Though the

bankers insist that the exporters provide them with a confirmed export order (in the least)

along with their PC application, it is at the discretion of the bankers to grant PC even on the

basis of correspondence between the exporter and overseas buyer.

Spread

1. The spread for pre-shipment credit in foreign currency will be related to the international

reference rate such as LIBOR/EURO LIBOR/EURIBOR (6 months).

2. The lending rate to the exporter should not exceed 0.75 per cent over LIBOR/EURO

LIBOR/EURIBOR, excluding withholding tax.

3. LIBOR/EURO LIBOR/EURIBOR rates are normally available for standard period of 1, 2, 3, 6

and 12 months. Banks may quote rates on the basis of standard period if PCFC is required for


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periods less than 6 months. However, while quoting rates for non-standard period, banks

should ensure that the rate quoted is below the next upper standard period rate.

4. Banks may collect interest on PCFC at quarterly intervals against sale of foreign currency

or out of balances in EEFC accounts or out of discounted value of the export bills if PCFC isliquidated within the quarterly rest for collection of interest.

Period of Credit

(i) The PCFC will be available as in the case of rupee credit initially for a maximum period of

180 days; any extension of the credit will be subject to the same terms and conditions as

applicable for extension of rupee packing credit and it will also have additional interest cost of

2 per cent above the rate for the initial period of 180 days prevailing at the time of extension.

(ii) Further extension will be subject to the terms and conditions fixed by the bank concerned

and if no export takes place within 360 days, the PCFC will be adjusted at T.T. selling rate for

the currency concerned. In such cases, banks can arrange to remit foreign exchange to repay

the loan or line of credit raised abroad and interest without prior permission of RBI.

(iii)For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll over

basis of the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR rate for extended

period plus permitted margin (0.75 per cent over LIBOR/EURO LIBOR/EURIBOR).

Disbursement of PCFC

(i) In case, full amount of PCFC or part thereof is utilized to finance domestic input, banks may

apply appropriate spot rate for the transaction.

(ii) As regards the minimum lots of transactions, it is left to the operational convenience of

banks to stipulate the minimum lots taking into account the availability of their ownresources. However, while fixing the minimum lot, banks may take into account the needs of

their small customers also.

(iii)Banks should take steps to streamline their procedures so that no separate sanction is

needed for PCFC once the packing credit limit has been authorized and the disbursement is

not delayed at the branches.

Liquidation of PCFC Account

(i)General


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PCFC can be liquidated out of proceeds of export documents on their submission for

discounting/rediscounting under the EBR Scheme detailed in para 2.2 or by grant of foreign

currency loans (DP Bills). Subject to mutual agreement between the exporter and the banker

it can also be repaid/prepaid out of balances in EEFC A/c as also from rupee resources of the

exporter to the extent exports have actually taken place.

(ii)Packing credit in excess of F.O.B. value In certain cases, (viz. agro based products like HPS

Groundnut, defatted & deoiled cakes, tobacco, pepper, cardamom, cashew nuts, etc.) where

packing credit required is in excess of FOB value, PCFC would be available only for exportable

portion of the produce.

(iii)Substitution of order/commodity

Repayment/liquidation of PCFC could be with export documents relating to any other order

covering the same or any other commodity exported by the exporter. While allowing

substitution of contract in this way, banks should ensure that it is commercially necessary and

unavoidable. Banks should also satisfy about the valid reasons as to why PCFC extended for

shipment of a particular commodity cannot be liquidated in the normal method. As far as

possible, the substitution of contract should be allowed if the exporter maintains account with

the same bank or it has the approval of the members of the consortium, if any.

Sharing of EPC under PCFC

(i) The rupee export packing credit is allowed to be shared between an export order holder

and the manufacturer of the goods to be exported.

(ii) Similarly, banks may extend PCFC also to the manufacturer on the basis of the disclaimer

from the export order holder through his bank. PCFC granted to the manufacturer can be

repaid by transfer of foreign currency from the export order holder by availing of PCFC or by

discounting of bills. Banks should ensure that no double financing is involved in the

transaction and the total period of packing credit is limited to the actual cycle of production of

the exported goods.

(iii) The facility may be extended where the banker or the leader of consortium of banks is the

same for both the export order holder and the manufacturer or, the banks concerned agree to

such an arrangement where the bankers are different for export order holder and


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manufacturer. The sharing of export benefits will be left to the mutual agreement between

the export order holder and the manufacturer.

Choice of Packing Credit

Packing Credit can be availed as either

- Rupee PC or

- PCFC (packing credit in foreign currency)

Packing credit in Indian Rupees : This, as the name suggests is a rupee advance. Let us

look at it with a practical example. XYZ Exports having a confirmed order of USD100,000

decides to take a rupee advance to process their order. Assuming the FOB value of this order

is $90,000, the bank would extend a rupee advance of $90,000 times Rs.46 (notional value) =

Rs.41,40,000. Two accounts at this juncture gets affected a debit to his packing credit

account and credit to his

CC account, to the above extent. The interest liability on the above advance as on date is at 1

1/2 % below tenor related PLR. This credit is retired when an export document to this extent is

presented to the bank (we will deal with is in further detail under Post shipment credit).

Packing Credit Foreign Currency (PCFC): Commercial banks are also free to extend

packing credit in foreign currencies (as of now in 5 major currencies USD, EURO, JPY, CHF,

GBP). This scheme is designed to ensure export credit being made available at internationally

competitive rates in major currencies. Considering the above case again, XYZ Exports has a

choice to draw his packing credit in USD or any of the above currencies (to an equivalent

extent). $90000 will be given to him at a notional exchange rate. If exporter avails PCFC in

invoicing currency (in this case USD) and chooses to convert PCFC into rupees and have his

CC account credited , conversion is done at the ruling spot rate or a pre-contracted forward

rate (dealt with under forward cover section). On the other hand, if PCFC is in a currency other

than invoicing currency (say Euro), the (Rupee) amount to be disbursed will be determined on

the basis of a notional exchange rate.

Once the corporate presents an export bill, the above PC in foreign currency gets knocked off

in foreign currency terms (details under Post shipment finance). Here, the interest liability of

the exporter is on libor related rates; i.e. libor of the currency in which he has availed advance


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+ bank spread. RBI, however has advised the commercial banks to keep their spread / bank

margin below 1 % p.a.

Salient features and comparison of PC (Re) and PCFC:

1. Both of the above can be maintained as running account at banks discretion.

2. The interest liability on Rupee PC is, say, 10%. However as in the above case, since the

exporter has an asset (export receivable) in USD and a liability (export credit) in rupee he

runs a foreign exchange risk; hence he is permitted to cover his receivable. Dollar being at a

premium to rupee, he receives a premium of say 4% p.a., thus reducing his net cost to 6%.

He may choose to keep his risk /position uncovered based on his view on USD/Re. If, in fact

the rupee weakens to more than 4% annualized before he retires his PC, his effective cost of

PC would come down further (below 6%). 3. The interest liability on Packing Credit Foreign

Currency varies depending on the currency in which the exporter borrows. In case of PC in

USD, the interest liability is subject to a maximum of 3.00% (USD 6 mths Libor) + 1.0% (cap

by

RBI) = 4.00% as on date. In this case, the exporter has both asset (export receivable) and

liability (export credit) in Dollar terms. In this respect, he runs no currency risk to the extent

of the advance. Hence the exporters effective cost would be as above i.e. 4.00%. If any of

the above parameters change then the arithmetic will have to be reworked.

4. In PCFC, it is to be noted that an exporter with an export order in USD can borrow in Euro or

any other permitted currency. Here, he would encounter an asset liability mismatch and

hence allowed to take a cross currency cover.

PROCESS OF AVAILING PACKING CREDIT FINANCE AT ALOK:

Finance department receives the orders from various department i.e. Home Textile, Garments,

Yarn, Woven Knits.

Orders already in hand are checked with their execution date & payment terms.

Then the limits available in banks for disbursement of packing credit are checked.

If the limits are available with banks then available orders along with the application for

disbursement of fund is send. In some cases orders are send within one month of

disbursement of fund.


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The disbursed packing credit is credited to the CC account or current account of the bank &

the same is informed to the treasury department.

The advice of disbursed packing credit is received & the same is checked for the applicable

rate of interest, exchange rate (in case of PCFC) & maturity.

POST-SHIPMENT CREDIT

The need for post-shipment credit arises after the exporter has shipped the goods and has

secured the shipping documents, such as bill of lading, etc. Now, the concern of the exporter

is to realize his dues from the foreign importer. This is invariably done by drawing a bill of

exchange on the importer. The bill may be drawn either on Documents Against Acceptance

(D/A) basis or on Documents against Payment (D/P) basis. In the former case, the importer

takes delivery of the documents by giving his acceptance on the bill, sent to him through the

exporter's banker. Thereafter he takes delivery of the goods from the shipping company and

makes payment of

the accepted bill on its due date. In case the bill is drawn on D/P basis the documents are

released to the importer at the time he makes payment of the bill to the exporter's bank, on

its presentation. Exporter's bank provides post-shipment advance to the exporter in either ofthe two ways, viz, By purchasing, discounting or negotiating the export bills, By granting

advance against bills for collections. Thus, post-shipment credit is liquidated by the proceeds

of the export bills when received from the importer by the exporter's bank. Banks also grant

advances to the exporters against duty drawback which he has to receive from the

government. Such advance is liquidated when the amount of duty drawback is received by

the exporter.

Eligibility

As per packing credit

Quantum

Post shipment credit / advance is restricted to the extent of value of the export bill against

which the advance is sought.

Period of Credit:The period for which the post shipment credit is given is based on the payment

terms of the export bill.


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For instance, if the payment terms are CAD, bill purchased by bank (EBP) the credit is

extended for notional transit period. RBI s Exchange Control Manual specifies notional transit

period based on the country to which export is made. In case of DA bills (non-LC bills with

usance) the period of credit will be that of Usance + notional transit period.

Where the credit period is specified to commence from B/L date, the due date is known and

PSC is granted till the due date. However, if usance period commences from date of

acceptance, normal transit period is included to arrive at the due date. It is also to be noted

that PSC account, is always maintained on bill to bill basis and not as a running account.

Extension of credit period

As explained earlier post shipment export credit period is based on the payment terms of the

export bill. However for any reason if the exporter is forced to extend the credit period to his

overseas buyer it is mandatory that the exporter seeks an extension. If the reasons for

extension are valid then the authorized dealer can grant an extension up to a maximum

period of 180

days (inclusive of original credit period) from the date of shipment. If extension is sought for a

period that will exceed 180 days from shipment, permission has to be obtained from RBI,

through the authorized dealer. There are two

important aspects to be considered here;1. For the extended credit (period) the bank is free to

charge interest rates related to their PLR

2. As a general practice, Post shipment rupee credit is granted by discounting the export bill.

In such a case, if the realization of export proceeds get delayed - extension of post shipment

credit may be granted by the banker or RBI as the case may be, on request from the

exporter ; but the bill will be crystallized , one month (grace period) from the actual due date.

Crystallization of Export Bills

The exporter while discounting an export bill is committed to deliver foreign exchange on its

due date; where an extension is sought for in realizing the export proceeds bank allows a

grace period of 1 month from the actual due date for the exporter to fulfil his commitment.

After which period the bank procures an equivalent foreign exchange from the market on

behalf of the exporter. The difference in rates the rate at which the exporter had sold his


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foreign exchange originally and the rate at which it is bought from the market (to fulfil his

commitment) is debited to the exporters account.

Illustration:

To illustrate the above, let us assume an exporter discounting his bill of $100,000 with

realization period of 25days; the spot being 42.45 and 25 days premium 10 paisa . The bank

would purchase the bill and extend a PSC of RS. 42.55 lacks = ($100,000*(42.45+0.10)).

Exporter has a commitment to deliver $100,000 with in 25 days form the date of discount.

Any of the following scenario is a possibility.

1. The exporter may realize his proceeds within 25 days in which case his PSC gets retired /

knocked off and his interest liability is limited to the no. of days for which he has utilized the

PSC

2. The exporter may have received his export proceeds neither within the original credit

period (25days) nor within the grace period (30 days from 25 days). In which case, in the

above illustration, bank would crystallize the export bill on 55th day from discounting.

Assuming the rate on 55th day to be 46.70 / USD, then the cost to exporter is a. RS 0.15

/USD or Rs.15000 against USD 100000 is recovered from the exporter.

Plus

b. Interest for first 25 days at PSC interest rate and for further period (till proceeds are

realized) at penal rate specified by the bank is recovered from the exporter Assuming the

rate on 55th day to be 42.40 / USD, then the cost to company is a. The bill is crystallized at a

no debit - no credit in spite of positive difference of Rs.0.15 in favour of exporter for the

simple reason that the bill is crystallized and not cancelled. i.e. if the exporter informs the

bank about the probable delay in realizing the export proceeds within the original credit

period (25 days) and requests for cancellation along with request for extension, any positive

difference in exporters favour will be credited to the exporter.

Salient features of Post Shipment Credit:

1. Interest on Post Shipment Credit is the same as PC.

2. PSC is usually granted by purchasing or discounting an export bill. However some banks

grant PSC as advance against bills sent under collection.


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PROCESS OF AVAILING POST - SHIPMENT FINANCE AT ALOK:

Export L/C's are collected by finance department which is scrutinized and entered into the

system.

A copy of L/C along with a checklist is sent to respective merchandiser & department head

and one copy to export documentation fro the confirmation of the L/C terms & original being

retained by the finance department.

The original L/C is sent to the bank along with export documents that are sent for

negotiation/ purchase/ discount/ collection. The documents are normally negotiated/

purchased or discounted & sent for collection in some cases only.

Bank negotiates the documents backed by L/C that are in strict conformity to the L/C terms.The proceeds of the same are credited as per the instructions given to the bank by the

finance department.

Bank purchases the documents which are on Delivery against Cash (CAD)/ Documents

against Payment (DP sight)/ L/C sight (incase the discrepant documents). The proceeds of the

same are credited as per the instructions given to the bank by the finance department.

Bank discounts the documents which are on deferred payment basis i.e. Documents against

Acceptance (DA 60, 90 days)/ L/C sight 30, 60, 90, 120 days/ L/C 30, 60, 90, 120 days from BL

date. The proceeds of the same are credited as per the instructions given to the bank by the

finance department.

PERIOD OF CREDIT

Export bills are of two types.

DEMAND BILLS, which are payable on demand or on presentation before the importer.In case of demand bills, the banker grants an advance to the exporter, but the period of

dvance should not exceed the normal transit period i.e. the average period normally involved

from the date of purchase/ discount of the bill till the receipt of the proceeds of the bill by the

bank. Such advance is thus automatically liquidated with the realization of the export bills.

USANCE BILLS which mature after a period of time. In case of usance bills banks grant

credit for a maximum period of 180 days from the date of shipment inclusive of normal transit

period and the grace period. Such bills are presented for acceptance before the importer and


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thereafter it is retained by the bank concerned. On its due date it is presented again before

the acceptor for its payment. There are two methods of dealing with such bills-(a) purchase or

discounting of the bills and (b) collection of the bills.

PURCHASE / DISCOUNTING OF BILLS:

In case of purchase of documentary bills by the exporter's banker, it is usual for the latter to

give immediate credit for the bills. An amount by way of discount, fee, interest, etc, is charged

by the banker from the amount of the bill and the remaining amount is immediately made

available to the exporter (drawer of the bill). This facility is generally granted in case where

the standing of the exporter is good and he is considered credit-worthy for the amount of the

bill, because in case the drawee of the bill refuses to honour the bill, the banker shall be

entitled to recover its amount from the drawer exporter. If the banker is unable to recover theamount of

the bill from the exporter also his ultimate remedy would be to realize it by disposing off the

goods exported. Therefore while Purchasing/discounting the export bills, the banker takes into

consideration the nature of the goods covered by the bills, the nature of its demand and the

possibilities of variations in its price. Moreover, the exporter is required to take a suitable

guarantee issued by the Export Credit Guarantee Corporation. We shall study about these

guarantees later in this unit. In addition to the above, the banker also takes into account the

foreign exchange regulations in the importer's country and purchases the export bill if the

importer's country has not imposed any restrictions on making such payments. The banker

also examines the documents enclosed with the bill and ensures that they are genuine and

are in order.

COLLECTION OF BILLS: The banker collects the foreign bills on behalf of the

customer in the same way as in the case of home trade: In case the exporter sends to his

banker export bills for collection, the latter proceeds according to the instructions given by

the exporter drawer and makes its payment to him as and when the proceeds of the bill are

realized from the importer. Obviously, in case of collection of bills, the banker does not grant

any advance to the exporter immediately on receipt of the bills for collection. Such practice is

usually adopted when the exporter does not enjoy reputation which is required in case the bill

is purchased/discounted by the banker.

NEGOTIATION OF BILLS UNDER LETTERS OF CREDIT


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The above mentioned methods of realizing the export bills is prevalent in cases where the

foreign buyer is well known to the exporter and the latter feels no risk or hesitation in sending

the documents on D/A or DIP basis. But in circumstances where the exporter has no previous

experience of dealing with the importer or has no reliable information on the financial

standing and credit-worthiness of the importer, he might not like to adopt the above

procedure for realizing his dues. This risk of uncertainty about receiving payment is largely

mitigated by securing a letter of undertaking from the banker of the importer. Such letter is

called, Letter of Credit (L/C) which plays a very important role in financing the foreign trade.

A Letter of Credit is defined as a letter issued by the banker of the buyer, at the latter's

request, in favour of the seller (exporter) informing him that the issuing banker undertakes to

accept the bills drawn in respect of exports made to the buyer specified therein. It is thus, a

written

intimation from the banker issuing it, that they have been instructed to open a credit for a

certain amount of goods to be exported under certain terms and conditions. The importer at

whose request the L/C is issued is called the applicant, the exporter is called the beneficiary

and the banker issuing it is called the issuing banker. The greatest benefit of securing a L/C by

the exporter from the importer is the certainty of payment of the export bills, as the

importer's bank gives an undertaking to this effect. This enhances the value of the export bills

drawn under L/C. The bill may be easily negotiated by the exporter with his banker. Moreover,

it also provides security against exchange restrictions in the importer's country.

ADVANTAGES OF EXPORT FACTORING VIS--VIS OTHER

PAYMENT OPTIONS

There are other payment options such as Letter of Credit, Documents against Acceptance(DA), Documents against payment (DP) and Advance payments. However all these options

have shortcomings such as the cost and delay involved in LCs, no guaranteed payment in

respect of DA bill and buyer not being able to satisfy himself on the quality of products before

making payments in respect of DP bill. The two-factor system provides collection services and

credit protection and also credit facilities to buyers on open account terms. Thus this system

is superior compared to other payment options available to an exporter.

FUND BASED BANK FACILITIES


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CASH CREDIT (CC)

Conventionally, working capital financing in India is in the form of cash credit facility. Under

the cash credit system, the lending bank sanctions a maximum loan limit to a customer.

Utilization is subject to availability of adequate assets pledged or hypothecated. The drawing

power is adjusted at regular intervals (normally once a month) by considering the level of

current asset that has been paid for and deducting margin(s) theyre from at stipulated

rate(s). These margins are worked out in line with the lending norms of Tandon Committee.

The amount of loan outstanding can vary freely within the drawing power and at times the

balance in the cash credit account can even be in credit. Interest is payable based on the

actual level of loan enjoyed on a daily product basis. Thus, a fixed limit is worked out for any

loan account by assessing the customers peak requirement on the basis of its projected

holding of current asset.

Once this limit is set, the borrower becomes virtually entitled to draw, subject to sufficient

current asset holding, any amount up to the limit. The borrower has the option to draw at any

point of time, without any prior notice, up to the extent of the limit. But no corresponding

obligation either to compensate the banker for this option or to ensure an optimum utilization

of the facility at all points of time. Therefore, a banker may be called upon to arrange for largeamounts of funds at short or no notice at pre-determined rate of interest. In such a situation,

funds management and financial planning become relatively low priority issues for the

borrowers. They can pass on the consequences of inadequate planning and inefficient

management on their p