Export Finance in India Essay

Credit and pay is the life and blood of any tune whether domestic or international. It is more important in the case of export transactions due to the prevalence of novel non-price matched techniques encountered by exporters in various nations to en galactic their sh atomic number 18 of world markets. The selling techniques are no long-life confined to mere quality price or delivery schedules of the products but are ex goded to recompense considerations offered by exporters. Liberal payment terms usually score over the competitors not moreover of with child(p) equipment but worrywise of consumer goods.The payment terms however depend upon the availability of finance to exporters in relation to its quantum, cost and the period at pre-shipment and post-shipment salute. employment and manufacturing for substantial supplies for exports take time, in case finance is not available to exporter for intersection. They will not be in a position to book large export order if they d ont have sufficient financial funds. Even merchandise exporters involve 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 recent organisements in this field.Concept of Export payThe exporter whitethorn require sententious term, median(a) term or long term finance depending upon the types of goods to be exported and the terms of statement offered to outside buyer. The short-term finance is needful to attain working capital needs. The working capital is used to meet regular and recurring needs of a business firm interchangeable purchase 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 financial needs such as purchase of fixed assets and long term working capital. Export finan ce is short-term working capital finance allowed to an exporter. pay and credit are available not merely to help export production but also to sell to overseas customers on credit.Objectives of Export Finance To control commercial & Non-commercial or semipolitical adventures attendant on granting credit to a foreign buyer. To lead natural risks like an earthquake, floods etc. An exporter may avail financial help from any intrust, 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 credit proposal of an exporter. eon appraising an export credit proposal as a commercial affirmer, obligation to the following institutions or regulations needs to be adhered to.Obligations to the RBI under the Exchange defy Regulations are Appraise to be the banks customer. Appraise should have the Exim code number allotted by the Director General of abroa d Trade. Partys name should not appear under the caution list of the RBI. Obligations to the Trade Control Authority under the EXIM policy are Appraise should have IEC number allotted by the DGFT. Goods must(prenominal) be exhaustly exportable i.e. not falling under the detrimental list. If it falls under the negative list, then a valid license should be there which allows the goods to be exported. Country with whom the Appraise wants to mete out should not be under trade barrier. Obligations to ECGC are Verification that Appraise is not under the specific Approval list (SAL). Sanction of Packing Credit Advances.Guidelines for banks dealing in Export FinanceWhen a commercial bank deals in export finance it is bound by the ensuing guidelines a) Exchange manage regulations.b) Trade restrainer regulations.c) Reserve verifys directives issued through IECD.d) Export Credit plug throne guidelines.e) Guidelines of strange Exchange Dealers Association of India.Export-import bank of India(EXIM depone)The Export-import bank of India (EXIM avow) was set up in January 1982 as a statutory quite a little wholly owned by central government. It is managed by the Board of Directors with repatriation from Government, financial institutions, banks and business community. The main objective of Export-Import Bank (EXIM Bank) is to permit financial assistance to promote the export production in India. The financial assistance hand overd by the EXIM Bank widely includes the following Direct financial assistance Foreign investiture finance Term loaning options for export production and export development Pre-shipping credit buyers credit Lines of credit Re-loaning installing Export bills rediscounting refinance to commercial banksThe Export-Import Bank also provides non-funded facility in the form of stop ups to the Indian exporters. Development of export makers Expansion of export production capacity Production for exports Financing post-shipment activities Ex port of manufactured goods Export of watchs Export of technology and softwaresExport financial backing programmes provided by EXIM Bank IndiaEXIM INDIA offers a range 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 wheel covering. EXIM INDIA operates a wide range of financing and promotional programs. The Bank finances exports of Indian machinery, manufactured goods, and consultancy and technology operate on deferred payment terms. EXIM INDIA also seeks to co-finance projects with orbiculate and regional development agencies to assist Indian exporters in their efforts to participate in such overseas projects. The Bank is involved in promotion of two-way technology transfer through the outward flow of investment in Indian articulate ventures overseas and foreign direct investment flow into India.EXIM INDIA is also a Partner Institution with European Union and operates European Community Investment 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, relending facility, export bills rediscounting, refinance to commercial banks.Loans to Indian Entities Deferred payment exports Term finance is provided to Indian exporters of eligible goods and services, which enables them to offer deferred credit to overseas buyers. Deferred credit suffer also cover Indian consultancy, technology and other services. Commercial banks participate in this program instanter or under risk syndication arrangements. Pre-shipment credit finance is available from Exim Bank for comp anies executing export contracts involving cycle time exceeding six months. The facility also enables provision of rupee mobilization expenses for bodily structure/ piece of ass project exporters. Term loans for export production Exim Bank provides term loans/deferred payment guarantees to hundred% export-oriented units, units in free trade zones and computer software exporters. In collaboration with International Finance companionship. Washington, Exim Bank provides loans to enable itty-bitty and medium enterprises to upgrade their export production capability. Overseas Investment finance Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture. Finance for export marketing This program, which is a component of a World Bank loan, helps exporters implement their export market development plans.Loans to Commercial Banks in India Export Bills Rediscounting Commercial Banks in India who are authorized to dea l in foreign exchange washstand 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 eligible Indian goods. Guaranteeing 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 Corporation 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, insurance companies, investment trusts and co-operative banks are the shareholders of IFCI. The Government of India has guaranteed the repayment of capital and the payment of a minimum annual dividend. Since J uly I, 1993, the federation 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, global 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 later consulting Industrial Development Bank of India. He works on a whole time basis and has tenure of 3 years. forbidden of the 12 directors, cardinal are nominated by the IDBI, two by scheduled banks, two by co-operative banks and two by other financial institutions like insurance companies, investment trusts, etc. IDBI normally nominates iii outside persons as directors who are experts in the fields of industry, labour and economics, the fourth nominee is the important theater director of IDBI. The Board meets once in a month.It frames policies by keeping in view the interests of industry, commerce and oecumenical public. The Board acts as per the instructions received from the government and IDBI. The Central Government reserves the power up to the Board and appoints a bleak one in its place. IFCI also has Standing Advisory Committees one to each one for textile, sugar, jute, hotels, engineering and chemical processes and allied industries. The experts in antithetical fields appointed on Advisory Committees. The hot seat is the ex-officio member of all Advisory Committees. All applications for assistance are first discussed by Advisory Committees in the first place they go to Central Committees.Financial Resources of IFCIThe financial resources of the corporation consist of share capital bonds and debentures and borrowings. a) Share peachy The IFCI was set up with an authorized c apital of Rs. 10crores consisting of 20,000 shares of Rs. 5,000 each. This capital was later on increased at different times and by March, 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 thirty-first March 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 disposed off within 7 years. o Subscribing directly to the shares and debentures of public limited 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. Acting as an agent of the Central Government or the World Bank in take note 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 because 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 viable concerns. While approving a loan application, IFCI gives due consideration to the feasibility of the project, its richness to the nat ion, development of the backward areas, social and economic viability, etc.The most of the assistance sanctioned by IFCI has bypast 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 spew units also. The scheme was for the revival of sick units in the tiny and small scale sectors. Another scheme was framed for the self-employment of unemployed young persons. The corporation has diversified not only merchant banking but also financing of leasing and hire purchase companies, hospitals, equipment leasing etc. were the other new activities of the corporation in the last few years.Promotional ActivitiesThe promotional role of IFCI has been to foregather the gaps, either in the institutional infrastructure for the promotion and growth of industries, or in the provision of the some(prenominal) needed guid ance 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 unwilling Areas IFCI introduce a scheme of confessional finance for projects set up in backward areas. The backward-districts were divided into tether 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 Schemes- 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-importance employment of unemployed persons etc. These schemes are as such1. Subsidy for Adopting In digenous Technology2. impact Cost of Market Studies3. Meeting Cost of Feasibility Studies4. Promoting Small Scale and Ancillary Industries5. Revival of ptyalise Units6. Self-development and Self employment SchemeExport Credit Guarantee Corporation of India (ECGC) In order to provide export credit and insurance support 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 have a go at it 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 against the risk of non-realization of export payments d ue to occurrence of the commercial and political 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 comfort the exporters against credit risks, i.e. non-repayment by buyers To harbor 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 STANDARD POLICIES issued to exporters to protect them against payment risks involved in exports on short-term credit. SPECIFIC 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 from risk of loss involved in their extending financial supp ort to exporters at pre-shipment and post-shipment stages. SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks which tack on confirmation to letters of credit opened by foreign banks, Insurance cover for Buyers credit, etc.STANDARD POLICIESECGC has designed 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 date 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 at a lower place THE STANDARD POLICIES1. Commercial Risksa) Insolvency of the buyerb) Buyers protracted default to pay for goods accepted by himc) Buyers failure to accept goods subject to certain conditions2. Po litical risksa) Imposition of restrictions on remittances by the government in the buyers hoidenish or any government action which may block or delay 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 fraud of new export licensing restrictions in India after the date of contract (under contract policy). d) Payment of additional handling, revel or insurance charges occasioned by interruption or diversion of voyage that cannot be recover from the buyer. e) either 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 raised by the buyer, unless the exporter obtains a decree from a comp etent court of law 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 nature 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 put in bank. e) loss or damage to goods which can be covered by commerci8al insurers f) Exchange fluctuationg) dissimilitude 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 perdurable for which credit period does not normally exceed 180 days. unique(predicate) policies are issued in respect of Supply Contracts (on deferred payment terms), Services Abroad and Construction Work Abroad.1) Specific policy for Supply ContractsSpecific policy for Supply contracts is issued in case of expor t 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 professional services, hiring or leasing to foreign parties ( head-to-head 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 civil construction jobs as well as turnkey projects involvin g supplies and services of both with private and foreign government. This policy covers 85% of loss suffered on account 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 routine-(i). Packing Credit Guarantee(ii). Export Production Finance Guarantee(iii). Export Finance Guarantee(iv). Post Shipment Export Credit Guarantee(v). Export Performance 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 subvention for its services that may vary from 5 p aise to 7.5 paise per month for Rs. 100/-. The premium charged depends upon the type of guarantee and it is subject to change, if ECGC so desires.