Export Finance in India Essay

Credit and finance is the life and blood of any concern whether domestic or international. It is more outcomeant in the causal agent of merchandiseinging transactions imputable to the prevalence of novel non-price competitive techniques encountered by exportationationers in various nations to enlarge their sh ar of world markets. The failing techniques ar no spaciouser confined to mere quality price or livery schedules of the products precisely are extended to recompense bourns offered by exporters. freehand payment terms usu exclusivelyy score over the competitors non plainly of keen equipment but also of consumer goods.The payment terms however aim upon the availability of finance to exporters in relation to its quantum, cost and the period at pre- consignment and post- load stage. outturn and manufacturing for substantial supplies for exports take metre, in case finance is non available to exporter for fruit. They will not be in a localisation to book larg e export order if they dont comport sufficient monetary funds. Even merchandise exporters direct finance for obtaining products from their suppliers. This term paper 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 sensitive-fashioned victimizations in this field.Concept of Export payThe exporter may require of a sudden term, medium term or long term finance depending upon the types of goods to be exported and the terms of statement offered to impertinent vendee. The pitiful-term finance is required to jibe working(a) not bad(p) needs. The working capital is used to meet reparation and recurring needs of a business firm like leverage of raw material, payment of wages and salaries, expenses like payment of rent, advertising etc.tera The exporter may also require term finance for medium and long term pecuniary needs much(prenominal) as purchase of be tter as set ups and long term working capital. Export finance is short-term working capital finance allowed to an exporter. Finance and reference work are available not simply to help export production but also to sell to overseas customers on impute.Objectives of Export Finance To gallop mercenary & Non- commercial messageised message or governmental ventures attendant on granting character to a hostile buyer. To cover natural risks like an earthquake, floods etc. An exporter may avail financial service 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.AppraisalAppraisal means an approval of an export consultation 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 have Regulations are Appraise to be the banks customer. Appraise should have the Exim code procedure shell out by the Director General of Foreign good deal. Partys pick up should not appear under the caution diagnose 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, and so a valid license should be there which allows the goods to be exported. clownish with whom the Appraise wants to hand should not be under trade barrier. Obligations to ECGC are Verification that Appraise is not under the peculiar(prenominal) Approval list (SAL). Sanction of Packing Credit Advances.Guidelines for banks dealing in Export FinanceWhen a commercial bank deals in export finance it is move by the ensuing guidelines a) Exchange control regulations.b) Trade control regulations.c) booking marges directives issued through IECD.d) Export Credit tackle federation guidelines.e) Guidelines of Foreign Exchange Dealers Association of India.Export-import bank of India(EXIM avow)The Export-import bank of India (EXIM bound) was set up in January 1982 as a statutory corporation wholly own by central government. It is managed by the display board of Directors with repatriation from Government, financial institutions, banks and business community. The main(prenominal) objective of Export-Import Bank (EXIM Bank) is to put forward financial assistance to promote the export production in India. The financial assistance provided by the EXIM Bank widely includes the following Direct financial assistance Foreign investment finance experimental condition loaning options for export production and export development Pre-shipping credit Buyers credit Lines of credit Re-loaning facility Export bills rediscounting finance to commercial banksThe Export-Import Bank also provides non-funded facility in the form of guarantees to the Indian exporters. Development of export makers Expansion of export production capacity Production for exports Financing post-shipment activities Export of manufactured goods Export of projects Export of engine room and software packagesExport financing programmes provided by EXIM Bank IndiaEXIM INDIA offers a reach of financing programs that match the menu of Exim Banks of the industrialized countries. The Bank provides competitive finance at various stages of the export bout covering. EXIM INDIA operates a wide field of financing and promotional programs. The Bank finances exports of Indian machinery, manufactured goods, and consultancy and technology serve on deferred payment terms. EXIM INDIA also seeks to co-finance projects with global and regional development agencies to assist Indian exporters in their efforts to participate in such overseas projects. The Bank is relate in promotion of twain-way technology deepen through the outward flow of investment in Indian mut ual ventures overseas and foreign direct investment flow into India.EXIM INDIA is also a Partner Institution with European Union and operates European Community coronation Partners Program (ECIP) for facilitating promotion of joint ventures in India through technical and financial collaboration with medium sized firms of the European Union. The Export- Import Bank of India (Exim Bank) provides financial assistance to promote Indian exports through direct financial assistance, overseas investment finance, term finance for export production and export development, pre-shipping credit, buyers credit, lines of credit, re impart facility, export bills rediscounting, refinance to commercial banks.Loans to Indian Entities Deferred payment exports Term finance is provided to Indian exporters of pensionable goods and operate, which enables them to offer deferred credit to overseas buyers. Deferred credit piece of ass also cover Indian consultancy, technology and other services. commerci alised banks participate in this program directly or under risk syndication arrangements. Pre-shipment credit finance is available from Exim Bank for companies executing export weighs involving cycle time exceeding six months. The facility also enables formulation of rupee mobilization expenses for construction/turnkey project exporters. Term loans for export production Exim Bank provides term loans/deferred payment guarantees to 100% export-oriented units, units in free trade zones and computer software exporters. In collaboration with International Finance connection. Washington, Exim Bank provides loans to enable small and medium enterprises to upgrade their export production capability. oversea Investment finance Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture. Finance for export selling This program, which is a component of a World Bank loan, helps exporters implement their export market de velopment plans.Loans to Commercial Banks in India Export Bills Rediscounting Commercial Banks in India who are allow to deal in foreign change underside rediscount their short term export bills with Exim Banks, for an unexpired usage period of not more than 90 days. Refinance of Export Credit Authorized dealers in foreign exchange can obtain from Exim Bank 100% refinance of deferred payment loans extended for export of suitable Indian goods. checking of Obligations Exim Bank participates with commercial banks in India in the issue of guarantees required by Indian companies for the export contracts and for execution of overseas construction and turnkey projects.industrial Finance bow window of India (IFCI)Government of India came forward to set up the industrial Finance Corporation of India (IFCI) in July 1948 under a Special Act. The Industrial Development Bank of India, scheduled banks, indemnification companies, investment trusts and co-operative banks are the shareholde rs of IFCI. The Government of India has guaranteed the repayment of capital and the payment of a minimum annual dividend. Since July I, 1993, the corporation has been converted into a company and it has been given the status of a Ltd. Company with the name Industrial Finance Corporations of India Ltd. IFCI has got itself registered with Companies Act, 1956. Before July I, 1993, general public was not permitted to hold shares of IFCI, only Government of India, RBI, Scheduled Banks, Insurance Companies and Co-operative Societies were holding the shares of IFCI.Management of IFCIThe corporation has 13 members Board of Directors, including Chairman. The Chairman is appointed by Government of India after consulting Industrial Development Bank of India. He works on a unharmed time basis and has tenure of 3 years. Out of the 12 directors, tetrad are nominated by the IDBI, two by scheduled banks, two by co-operative banks and two by other financial institutions like policy companies, inve stment trusts, etc. IDBI normally nominates three outside persons as directors who are experts in the fields of industry, labour and economics, the fourth nominee is the Central autobus of IDBI. The Board meets once in a month.It frames policies by keeping in view the interests of industry, commerce and general public. The Board acts as per the instructions accepted from the government and IDBI. The Central Government obligates the power up to the Board and appoints a rude(a) one in its place. IFCI also has Standing consultatory Committees one each for textile, sugar, jute, hotels, engineering and chemical processes and allied industries. The experts in diverse fields appointed on consultative Committees. The chairman is the ex-officio member of all Advisory Committees. All applications for assistance are first discussed by Advisory Committees before they go to Central Committees.Financial Resources of IFCIThe financial resources of the corporation be of share capital bonds a nd debentures and borrowings. a) Share Capital The IFCI was set up with an authorized capital of Rs. 10crores consisting of 20,000 shares of Rs. 5,000 each. This capital was later on increased at polar times and by walk, 2003 it was Rs. 1068 crores. b) Bonds and Debentures The Corporation is authorized to issue bonds and debentures to supplement its resources but these should not exceed ten times of paid-up capital and reserve fund. The bonds and debentures stood at a figure of Rs.15366.5 crores as on 31st parade 2003. c) Borrowings The Corporation is authorized to borrow from government IDBI and financial institutions. Its borrowings from IDBI and Govt. of India were Rs. 975.6 crore on March 31, 2003. Total assets of IFCI as on March 31, 2003 aggregated Rs. 22866 crore.Functions of IFCIo Granting loans or advances to or subscribing to debentures of industrial concerns repayable within 25 years. Also it can convert part of such loans or debentures into equity share capital at its option. o Underwriting the issue of industrial securities i.e. shares, stock, bonds, or debentures to be sell off within 7 years. o Subscribing directly to the shares and debentures of public special(a) companies. o Guaranteeing of deferred payments for the purchase of capital goods from abroad or within India. o Guaranteeing of loans raised by industrial concerns from scheduled balls or state co-operative banks. playacting as an means of the Central Government or the World Bank in pry of loans sanctioned to the industrial concerns.IFCI provides financial assistance to eligible industrial concerns regardless of their size. However, now-a-days, it entertains applications from those industrial concerns whose project cost is about Rs. 2 crores be nonplus up to project cost of Rs. 2 crores various state level institutions (such as Financial Corporations, SIDCs and banks) are expected to meet the financial requirements of feasible concerns. While approving a loan application, IFC I gives due consideration to the feasibleness of the project, its importance to the nation, development of the reflexive areas, social and economic viability, etc.The most of the assistance sanctioned by IFCI has gone to industries of national priority such as fertilizers, cement, power generation, paper, industrial machinery etc. It has sanctioned nearly 49 per cent of its assistance for projects in backward districts. IFCI introduced a scheme for pale units also. The scheme was for the revival of sick units in the tiny and small outstrip sectors. Another scheme was framed for the self-employment of idle young persons. The corporation has modify not only merchant banking but also financing of leasing and necessitate purchase companies, hospitals, equipment leasing etc. were the other new activities of the corporation in the exist few years.Promotional ActivitiesThe promotional role of IFCI has been to fill the gaps, either in the institutional infrastructure for the promotio n and growth of industries, or in the provision of the much needed guidance in project intensification, formulation, implementation and operation, etc. to the new tiny, small-scale or medium scale entrepreneurs or in the efforts at improving the productivity of human and material resources.(a) Development of sweptback Areas IFCI introduce a scheme of confessional finance for projects set up in backward areas. The backward-districts were divided into three categories depending upon the state of development there. All these categories were eligible for concessional finance. Nearly 50 per cent of total lending of IFCI has been to develop backward areas.(b) Promotional purposes- IFCI has been operating six promotional schemes with the object of helping entrepreneurs to set up new units, broadening the entrepreneurial base, encouraging the adoption of new technology, tackling the problem of sickness and promoting opportunities for self development and Self employment of unemployed pers ons etc. These schemes are as such1. Subsidy for Adopting Indigenous engineering2. Meeting Cost of Market Studies3. Meeting Cost of Feasibility Studies4. Promoting bantam Scale and Ancillary Industries5. Revival of Sick Units6. Self-development and Self employment SchemeExport Credit Guarantee Corporation of India (ECGC) In order to provide export credit and insurance fight back to Indian exporters, the GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was transformed into export credit guarantee corporation limited (ECGC) in 1964. Since 1983, it is now know as ECGC of India Ltd. ECGC is a company wholly owned by the Government of India. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing government, Banking, Insurance, Trade and Industry. The ECGC with its headquarters in Bombay and several regional offices is the only institution providing insurance cover to Indian exporters agains t the risk of non-realization of export payments due to occurrence of the commercial and semipolitical risks involved in exports on credit terms and by offering guarantees to commercial banks against losses that the bank may suffer in granting advances to exports, in connection with their export transactions.Objectives of ECGC To value the exporters against credit risks, i.e. non-repayment by buyers To protect the banks against losses due to non-repayment of loans by exportersCovers issued by ECGCThe covers issued by ECGC can be divided broadly into four groups measurement POLICIES issued to exporters to protect them against payment risks involved in exports on short-term credit. detail POLICIES Designed to protect Indian firms against payment risk involved in (i) exports on deferred terms of payment (ii) service rendered to foreign parties, and (iii) construction works and turnkey projects undertaken abroad. FINANCIAL GUARANTEES Issued to banks in India to protect them fro m risk of loss involved in their extending financial support to exporters at pre-shipment and post-shipment stages. SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks which add confirmation to letters of credit opened by foreign banks, Insurance cover for Buyers credit, etc.STANDARD POLICIESECGC has intentional 4 types of standard policies to provide cover for shipments made on short term credit Shipments (comprehensive risks) Policy to cover both political and commercial risks from the accompaniment of shipment. Shipments (political risks) Policy- to cover only political risks from the date of shipment Contracts (comprehensive risks) Policy- to cover both commercial and political risk from the date of contract Contracts (Political risks) Policy - to cover only political risks from the date of contractRISKS COVERED UNDER THE STANDARD POLICIES1. Commercial Risksa) Insolvency of the buyerb) Buyers protracted default to pay for goods accepted by himc) Buyers fail ure to accept goods subject to certain conditions2. Political risksa) Imposition of restrictions on remittances by the government in the buyers surface area or any government action which may block or holdup payment to exporter. b) War, revolution or civil disturbances in the buyers country. Cancellation of a valid import license or new import licensing restrictions in the buyers country after the date of shipment or contract, as applicable. c) Cancellation of export license or imposition of new export licensing restrictions in India after the date of contract (under contract policy). d) earnings of additional handling, transport or insurance charges occasioned by interruption or diversion of voyage that cannot be recovered from the buyer. e) Any other cause of loss occurring outside India, not normally insured by commercial insurers and beyond the control of the exporter and / or buyer.RISKS NOT COVERED UNDER STANDARD POLICIESa) Commercial disputes including quality disputes rai sed by the buyer, unless the exporter obtains a decree from a competent court of fairness in the buyers country in his favour, unless the exporter obtains a decree from a competent court of law in the buyers country in his favour b) Causes inherent in the reputation of the goods.c) Buyers failure to obtain import or exchange authorization from authorities in his county d) Insolvency or default of any agent of the exporter or of the collecting bank. e) loss or damage to goods which can be covered by commerci8al insurers f) Exchange fluctuationg) Discrepancy in documents.SPECIFIC POLICIESThe standard policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of exporters shipment of raw materials, consumable durable for which credit period does not normally exceed 180 days. Specific policies are issued in respect of Supply Contracts (on deferred payment terms), Services Abroad and Construction Work Abroad.1) Specific policy for Supply Contracts Specific policy for Supply contracts is issued in case of export of Capital goods sold on deferred credit. It can be of any of the four forms a) Specific Shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the Post-shipment stage b) Specific Shipments (Political Risks) Policy to cover only political risks after shipment stage. c) Specific Contracts (Comprehensive Risks) Policy to cover political and commercial risks after contract date. d) Specific Contracts (Political Risks) Policy to cover only political risks after contract date.2) Service policyIndian firms provide a wide range of services like technical or master key services, hiring or leasing to foreign parties (private or government). Where Indian firms render such services they would be exposed to payment risks similar to those involved in export of goods. Such risks are covered by ECGC under this policy. The policy covers 90%of the loss suffered.3) Construction Works PolicyIt covers civi l construction jobs as well as turnkey projects involving supplies and services of both with private and foreign government. This policy covers 85% of loss suffered on write up of contracts with government agencies and 75% of loss suffered on account of construction contracts with private parties.FINANCIAL GUARANTEESExporters require adequate financial support from banks to carry out their export contracts. ECGC backs the lending programmes of banks by issuing financial guarantees. The guarantees protect the banks from losses on account of their lending to exporters. Six guarantees have been evolved for this purpose-(i). Packing Credit Guarantee(ii). Export Production Finance Guarantee(iii). Export Finance Guarantee(iv). Post Shipment Export Credit Guarantee(v). Export cognitive operation Guarantee(vi). Export Finance (Overseas Lending) Guarantee.These guarantees give protection to banks against losses due to non-payment by exporters on account of their insolvency or default. The ECGC charges a premium for its services that may vary from 5 paise to 7.5 paise per month for Rs. 100/-. The premium supercharged depends upon the type of guarantee and it is subject to change, if ECGC so desires.