EXPORT CREDIT

Exports for a developing country like India play a very important role as foreign exchange earner for the country. Government of India offers many incentives to exporters and entire Government's policy is geared towards export promotion. Commercial banks are called upon to play an important role in export promotion by granting various credit facilities at very liberal term. Present exchange regulations i.e. FEM (Export of Goods and Services) Regulations, 2000 framed under FEMA, 1999 require association of a bank at every stage by an exporter and export proceeds have to be settled through the medium of a bank authorised to deal in foreign exchange. Selection of a bank or branch of a bank, therefore, assumes importance for the exporter for smooth conduct of his business. The following points are to be kept in mind while selecting the bank/branch for transacting export business:

§ Exports can be handled by a bank who is authorized to deal in foreign exchange. State Bank of India, its associates, all nationalised banks and important scheduled banks have been granted foreign exchange licence by Reserve Bank of India, There may, however, still be a few small banks which do not have FEX licence and may not be able to handle export documents directly.

§ All the branches of a bank authorized to deal in foreign exchange may not be directly handling export documents. The branches of banks am divided in three categories as under for this purpose:

(i) Category ‘A’ branches which maintain position and nostro accounts (foreign currency accounts with foreign banks) and can directly handle all types of foreign exchange business.

(ii) Category 'B' branches which do not maintain position or nostro accounts but are authorized to handle foreign exchange business directly. The realisation of export documents are received by such branches through foreign currency accounts of category ‘A’ branches.

(iii) Category 'C' branches which cannot undertake foreign exchange business on their own and have to route it either through category ‘A’ branches or through category 'B' branches.

As per the general policy of banks there am very few branches in category ‘A’ and those are located in major metropolitan cities. Category ‘B’ branches are located in major cities and towns. If a bank has a large number of branches in a city, one or two of its branches in that city may only be in category ‘A’. Preference should be given to category ‘A’ branch followed by category 'B' branch. Dealing with category 'C branch may create difficulties and realisation of export bill maybe delayed as along processing route will be involved in such cases.

§ A lengthy exchange control procedure is involved in all export transactions. International trade also requires intimate knowledge of rules/regulations as applicable to export/import business besides fast and efficient means of communication. All the major banks have now opened 'overseas branches' which specialise in providing banking services for international trade. If no overseas branch is operating in an area, the branch which is having a full‑fledged foreign exchange department equipped with necessary infrastructure should be selected.

§ Export trade may involve invoicing in foreign currency, which will be converted to Indian rupees by the banks after applying the relevant exchange rate. Banks are free to quote exchange rates for various currencies based upon the prevailing market conditions and a lot of competition exists in the matter. It will, therefore, be advisable to study the exchange rate quotations of a few banks and the transaction be put through at the best available rate for maximum advantage.

Another important factor, which needs attention, is that many banks are dealing only in a few selected foreign currencies. The export bills drawn in a currency in which a bank is not dealing will be realised by converting the foreign currency amount of the bill in other foreign currency in which the bank is dealing. In such transaction the exporter will be put to unnecessary exchange risk for such conversion. It is, therefore, advisable that export bill is routed through that bank only which is directly dealing in the currency of invoice.

As stated earlier, association of a bank at every stage of export transaction is essential and it is the obligation of the bank handling export transaction to ensure that all export policy and exchange control requirements are met. The scope of this chapter is limited to discuss le credit facilities that are available to exporters from the bank and discussion on exchange control regulations etc. has not been made for obvious reasons.

The various facilities that are available to exporters for financing their export business are as under:

Facilities to Exporters

|

|

Fund Based | |				Non – Fund Based | |
Preshipment Credit		Postshipment Credit |			Advising & confirmation of expert L/C		Export guarantees	Forward exchange contracts	Back to back L/C
	Negotiation /Purchase /Discount of export bills		Postshipment loans/ advances against export bill s sent on collection			Advance against claims of duty drawback ect.

Special features of export credit

A few incentives/relaxation including prescription of ceiling rates of interest have been announced by Reserve Bank of India in recent times to ensure steady and need based flow of credit towards exports so that no export effort suffers for want of credit. The scheduled commercial banks are required to lend a minimum of 12 per cent of advances as export credit. Export credit is to be given over-riding priority and chief executives of banks me required to personally monitor export credit. In order to facilitate exports, the Reserve Bank of India also provides refinance to banks for extending credit to exports.

The other important provisions relating to export credit are discussed hereunder:

^* 1. No margin requirements against export receivables

As per general scheme of lending, borrowers are required to provide margin @25% of Working Capital gap/total current assets from long term sources to conform to I st or 2nd method of lending as the case may be. 2nd method of lending is applicable to all borrowers with limits of Rs.100 lacs and above. As a relaxation for export credit the exporter customers are not required to provide any margin against export receivables. However, export receivables are to be included in current assets while calculating MPBF. This point is illustrated by considering the following example:

Total current assets 10,000

(including export receivables of 3000)

Current liabilities other than bank borrowings 2000

Actual NWC with the borrower 2000

MPBF as per second method of lending in this case will he calculated as under :

	As per general Scheme	With no margin on export receivable
(i) Total Current Assets (ii) Current liabilities (iii) Working Capital Gap (iv) Minimum stipulated margin (25% of total current assets) (v) Actual N.W. Capital (vi) iii ‑ iv (vii) iii ‑ v (viii) MPBF (Lower of vi or vii) (ix) Excess borrowing representing shortfall in NWC	100000 2000 8000 2500 2000 5500 6000 5500 500	10000 2000 8000 1750 2000 6250 6000 6000 ___

It will be observed from the above calculation that non‑stipulation of margin on export receivables results in higher MPBF.

II. Application of Ist Method of Lending

Banks are required to adopt the second Method of lending recommended by the Tandon Committee while assessing MPBF for all borrowers having aggregate working capital of Rs.100 lacs and above from the banking system. As an encouragement to the small scale export units, Reserve Bank has decided that export units having to their credit exports of not less than 25 per cent of their total turnover during the previous accounting year will henceforth not be subject to the Second Method of Lending by banks in assessing their MPBF provided their aggregate working capital limits from the banking system ate less than Rs.1 crore.

To illustrate this point, let us consider the following example

Total current assets including export receivables of 3000 10000

Current Liabilities 2000

Method II Method I

(i) Total Current Assets 10000 10000

(ii) Current liabilities 2000 2000

(iii) Working Capital Gap (WCG) 8000 8000

(iv) Minimum stipulated margin being 25% 1750 1250

of total current assets/WCG

(excluding export receivables)

(v) MPBF 6250 6750

Margin requirements by the exporter will thus get substantially mduce4 enabling the small exporters to obtain higher working capital limits.

III. Export Credit Over and above MPBF

It my be possible that exporters may receive additional letters of credit firm export order subsequent to fixation of credit limits by the banks and bank are not able to grant additional limits because of the ceiling of existing sanctioned limit arrived at on the basis of maximum permissible bank finance (MPBF). Reserve Bank has now directed the banks to ensure that the credit requirements of the export sector are promptly met and, additional credit need of exporters for implementing expert orders, should be met in full even if sanction of such additional credit exceeds MPBF.

It may be noted that RBI has since withdrawn its prescription relating to assessment of working capital needs based on die concept of MPBF and bank will be free to frame their own method in this regard. Nevertheless any method that may be adopted by a bank is most likely to continue with these relaxation to ensure timely and adequate credit for exports.

IV. Exemption from Application of Loan Delivery System

As per extant guidelines of Reserve Bank of India MPBF of borrowers is to be bifurcated in 'loan component' and 'cash credit component' as under:

Category of Borrowers Loan Cash Credit

Component Component

Borrowers with MPBF of Rs.10 crores and above 80% 20%

It is provided in this scheme that export credit limits by way of pre shipment and post‑shipment will continue to be granted to the full extent Bifurcation of MPBF into 'cash credit component' and 'loan component' wit be done only after excluding export credit limits from the overall MPBF.

V. Reserve Bank of India's Instructions

The RBI has issued number of guidelines and instructions to Banks in regard to various matters from time to time. All such instructions relating to Rupee Export Credit and Export Credit in Foreign Currency have been updated and revised vide Master Circular IECD No. 4/04.02.02/2002‑03 dated July 30 2002.and IECD No. 5/04.02.02/2002‑03 dated July 30, 2002 respectively,

PRESHIPMENT CREDIT

All credit facilities sanctioned to exporters for procuring/manufacturing/ processing/packing/warehousing/shipping the goods meant for exports are termed as 'Pre‑shipment Credit'. This facility is also referred to as 'packing

credit'. Packing credit may be taken as equivalent to 'cash credit' in domestic business except that cash credit facility is sanctioned as a continuous/running facility whereas packing credit advance is disbursed for a specific purpose to

enable the exporter to meet a specific export obligation. Every pre‑shipment advance is, therefore, considered as a separate loan account a domestic advance or inter se.

The credit limits for pre‑shipment advance are considered simultaneously along with other facilities and it is generally made a sub‑limit within the overall cash credit limit sanctioned to the borrower. However, for those borrowers who are exclusively engaged in export, separate packing credit limits are sanctioned by the banks. The procedure and techniques adopted by the bank are the same as in cast of other advances. However, the assessment of working capital requirement may be based upon the export orders in hand with the exporter besides his capacity to meet that commitment. A very flexible approach in this regard is taken by the banks and adequate finance is available for every viable export proposal. A few important points that need to be kept in mind while putting up an application to the bank for sanctioning of credit limits for exports are given below:

§ Export from India is allowed either against an export L/C or against an export order. The bank may also sanction packing credit which may be disbursed either against an L/C or against an order. Correct position in this regard must be explained to the bank to avoid any difficulty later. It may be noted that if the limit by the bank is sanctioned against L/C disbursement against an order may not be allowed by the bank.

§ Even in case of exports under L/C, the exporter may receive the L/C at a very late stage and maybe required to procure/manufacture the goods much before the L/C is received. In this situation also some difficulty may be faced in getting the packing credit released from the bank. It would, therefore, be necessary to discuss all these matters with the bank at the time of sanctioning of limits.

§ All pre‑shipment advances are to be liquidated from the proceeds of export bills. Application for sanctioning of suitable post‑shipment facilities shall, therefore, be simultaneously made. Exporter may also be entitled for duty drawback etc. and credit limits against claims of such incentives shall also be obtained at that time. Full details of these facilities are given later.

§ Exporters may aim require back to back L/C or L/C facilities for purchase of raw material etc. which are generally sanctioned by banks as a sub‑limit of overall packing credit limit. The position in this regard be also ascertained and suitable limits obtained for this purpose.

The purpose of the above discussion is to emphasise the need to apply for total credit requirements at one time with all the relevant details made available to the bank in the beginning itself so that suitable limits are sanctioned avoiding any request for adhoc facilities at a later date. The general terms and conditions of granting packing credit advances by banks are given below:

Importer Exporter Code Number

No commercial export from India is permitted on behalf of a person/firm/ company who has not been allotted an 'Importer Exporter Code Number'.

A few firms may be completing exports through registered Export/Trading Houses and are eligible to avail packing credit limits from the hanks. Such firms may not he required to obtain the code number.

Submission of Export Order/L/C

The exporter has to produce a confirmed export order or L/C as per the terms of sanction at the time of disbursement of packing credit. In the absence of an export order/LIC, the bank may accept some other communication from the overseas buyer provided it contains minimum details giving the name of the buyer the value of the order, quantity and particulars of the goods to be exported, date of shipment and terms of payment. Even in such cases final sales contract/ LIC will be required to be submitted to the bank at a later stage.

Sometimes an export order is received by an export house/trading house or a merchant exporter who may pass on this order to a sub‑supplier who is not directly exporting. Such sub‑supplier may also avail packing credit facility from the bank. The packing credit in such cases can be granted after getting a letter from the export house/trading house giving details of the order and also confirming that he (export house/trading house) has not availed any packing credit against that order.

There payment of such advance should be from the proceeds of bills drawn under inland L/C (back to back L/C) opened by the export house/merchant exporter in favour of the sub‑supplier. Where such an L/C is not opened, the sub-supplier may draw a bill on the export house. If 'Bill of Lading' is not enclosed with the documents by the sub‑supplier, then a certificate from the export house/ merchant exporter would be necessary to the effect that the goods have actually been exported.

Disbursement of Packing Credit

Normally Banks treat each packing credit as separate account to monitor period of sanction and end‑use of fund.

Banks may release the packing credit in one lump sum or in different stages as per the requirement for executing the orders/LC.

Sometimes Banks also maintain different accounts at various stages of manufacturing, processing etc. and ensure that the outstanding balance in accounts are adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount etc.

Banks should keep a close watch on the end‑use of the funds and ensure that credit at lower rates of interest is used for genuine requirements of exports. Banks should also monitor the progress made by the exporters in timely fulfilment of export orders.

Extension of Pre‑shipment Credit ‑'Running Account' facility

The requirement of prior lodgement of letters of credit or firm orders has been waived by Reserve Bank of India and banks have been permitted to grant pre-shipment advances for exports of any commodity without insisting on prior lodgement of letters of credit/firm export orders depending on the bank's judgement regarding the need to extend such a facility. Granting of such facility may be subject to the following general conditions:

(i) The facility will be allowed to only those exporters whose track record has been good as also EOU, units in Free Trade Zone, EPZs and SEZs. New exporters may not for obvious reasons be allowed this facility.

(ii) The exporters to whom this facility is allowed will be required to produce letters of credit/firm export orders within a reasonable; period of time.

(iii) The banks shall mark off individual export bills, as and when they are received for negotiation/purchase/collection, against the earlier outstanding pre‑shipment credit on 'First in First Out' (FIFO) basis.

(iv) The banks can also mark‑off the packing credit with proceeds of export documents against which no packing credit has been drawn by the exporter.

(v) The facility will not be allowed for inventory build up and only need based limits will be allowed.

(vi) The benefit of concessional rate of interest will be permitted upto the period of sanction or 360 days from the date of advance, whichever is earlier.

(vii) If any exporter is found abusing the facility or does not comply with the above terms and conditions, the facility of running account will be withdrawn.

(viii) Running account facility are not granted to sub‑suppliers.

(ix) In cases where exporters have not complied with the terms and conditions, the advance will attract commercial lending rate ab initio.

Repayment

The repayment of packing credit advance can be only from the proceeds of the bills drawn under the export order/LC against which the pre‑shipment advance was granted to the exporter by the bank. No repayment of pre-shipment advance can be effected from local funds in which case the advance will not be treated as 'pre‑shipment advance' and no benefit of concessional rate will be available to such an advance from the date of original advance.

¹ Subject to mutual agreement between the exporter and the banker the packing credit/pre-shipment credit can also be repaid/prepaid out of balances in Exchange Earners Foreign Currency Ale as also from rupee resources of the exporter to the extent exports have actually taken place.

Furthermore every packing credit advance will be treated as a separate loan and no running account facility will be permitted except to the extent stated in earlier paragraph. The repayment of packing credit account will also be required to be done on separate loan account basis.

Repayment of Packing Credit in excess of Export Value

q In case there is a shortfall because of wastage involved in the processing of agro‑products like raw cashew nuts, etc. banks may allow exporters to pay off by export bills drawn in respect of by product like cashew shell oil, etc.

q In respect of export of agro‑based products like tobacco, pepper, cardamom, cashew nuts, etc, the exporter has to purchase a larger quantity of raw agricultural produce for grading it into exportable and non‑exportable varieties. Ranks are required to charge commercial rate of interest applicable to the domestic advance, on the packing credit covering such non‑exportable portion, from the date of advance of packing credit.

q For exports of HPS groundnuts and de‑oiled and defatted cakes, packing credit can be granted upto the cost of raw material required even though the value of advance exceeds the value of export order. The advance in excess of export order must be adjusted either in cash or by selling residual groundnuts or by‑product oil as soon as possible but within 30 days from the date of advance.

Relaxations granted in the area of Export Packing Credit

Reserve Bank has announced a few relaxations in operational aspects of export packing credit as under:

(i) Banks may allow repayment of a packing credit with export documents relating to any other order covering the same or any other commodity exported by the exporter.

(ii) The banks shall allow substitution of contract only when the substitution is commercially necessary and unavoidable.

(iii) In case packing credit is availed of from a consortium of banks, the substitution of the contract shall he allowed only with the approval of the members of consortium.

(iv) The relaxations are available both under packing credit availed in rupees or in foreign currency.

(v) The relaxation is however, not extended to transactions of sister/ associate/group concerns.

(vi) The existing packing credit may also be marked off with export proceeds of documents against which no packing credit has been drawn by the exporter.

Period of Advance

The period of packing credit advance is decided by the banks keeping in view the various relevant factors of individual case like time required for procuring, manufacturing or processing and shipping the relative goods. The period of packing advance should be sufficient to enable the exporter to ship the goods.

The pre‑shipment advances, however, are to be adjusted by submission of export documents within 360 days from the date of advance. If pre‑shipment advances are not so adjusted, they loose the benefit of concessional rate of interest from the original date of advance itself.

RBI, however, provides refinance only for a maximum period of 180 days.

Rates of Interest (w.e.t 1.11.2003)¹

Pre-shipment advances are granted to the exporters at concessional rates as under:

(i) Pre-shipment advance upto initial 180 days (ii)Pre-shipment advance for a further period of 90 days (i.e. beyond 180 days and upto 270 days) (iii)Pre-shipment advance against incentives receivable from Government covered by ECGC guarantee (upto 90 days) (iv)Pre-shipment advance not otherwise specified

Not exceeding PLR minus 2.5 percentage points Free Not exceeding PLR minus 2.5 percentage points Free

The other important points as regards rates of interest on packing credit advances are given below:

q The rates indicated against (i), (ii) and (iii) are only ceiling rates and therefore, banks shall be free to charge any rate below these rates.

q The term 'Free' indicated against (ii) and (iv) implies that the banks are free to decide the rate of interest to be charged, keeping in view the PLR and spread guidelines.

q If the export does not materialise at all and the packing credit advance is required to be adjusted from local funds, the entire advance will not be considered as an export credit from the date of original advance itself and interest at the commercial lending rate plus penal rate of interest if any, may be charged by the bank from the date of original advance.

q No other service charges are payable by the exporters except guarantee fee on packing credit guarantee of ECGC obtained by the bank.

q Revision in interest rates from time to time are applicable to fresh advances as also to the existing advances for the remaining period of credit.

Security for Packing Credit Advances

The goods meant for export form the primary security for the bank granting packing credit advance. The form of charge may, however, change at different stages depending upon the nature of exports. The packing credit may initially be clean at the time of disbursement; may be covered by hypothecation charge over the raw material, semi‑finished and finished goods later; hypothecation charge be converted to pledge of finished goods meant for exports or may even be covered by document of title to goods (LR/RR) if the goods are sent for shipment to a port city. This aspect of security must he discussed in detail with the bank in the initial stages itself so that operations in the account are convenient.

Concept of Margin

The concept of margin in case of packing credit is actually linked with the value of order/L1C and/or with value of security and different banks have their own standards in this regard. The most accepted concept of margin in these accounts is as under:

q Margin on export order/L/C: This margin is applied on the value of export order/letter of credit at the time of initial disbursement when the packing credit may not be backed by security of goods. Usually a high margin is stipulated in such cases.

A few banks sanction a sub‑limit for such drawings by the exporters within the overall packing credit limit sanctioned in their favour to restrict their exposure towards unsecured advances.

q Margin on security: This is usual margin as applicable to other advances backed by security of goods such as cash credit accounts etc.

ECGC Guarantee

Most of the banks cover their packing credit advances under 'Packing Credit Guarantee' of Export Credit Guarantee Corporation of India Ltd. (ECGC). ECGC issues packing credit guarantees on each exporter individually and also has the system of issuing a guarantee in favour of the bank on whole turnover basis.

Premium on the guarantee is generally recovered from the exporter. The rates of premium on individual guarantees are higher in comparison to rates on 'Whole Turnover Packing Credit Guarantee' issued to banks. It is necessary to obtain this information from the bank as cost of additional premium for individual guarantee may sometimes be quite heavy depending upon the turnover in the account. Guarantees issued by ECGC are in addition to various policies issued by ECGC in favour of exporters to cover the risk of non‑payment or other political risk involved in export trade. Full details of these policies may be obtained from any office of ECGC.

Exim Bank's Foreign Currency Pre‑Shipment Credit (FCPC) Scheme

Objective

Under this programme, short‑term foreign currency finance is available to eligible exporters for financing inputs for export production such as raw materials, components and consumables. The finance is repayable in foreign currency from proceeds of the relative exports.

FCPC programme represents another funding source to the exporter for expanding export volumes, particularly of' manufactured and value added goods. It eliminates two‑way exchange conversion costs and exchange risk, thus enhancing export competitiveness. FCPC can be a cost effective funding source as compared to rupee export credit as well as overseas supplier's credit depending on market conditions for loans under FCPC. As far as commercial banks are concerned, loans availed of from Exim Bank are exempt from Cash Reserve Ratio, Statutory Liquidity Ratio and Incremental Credit‑Deposit Ratio requirements.

Eligible Borrowers

§ Exporting companies.

§ Commercial Banks for on lending to exporting customers.

Interest Rates

§ Rate shall not exceed 2% over London Inter Bank Offer Rate (LIBOR).

§ In case FCPC is extended through commercial bank which does not have foreign branches the interest rate should not exceed 2.5% over LIBOR or any other rate as specified by Reserve Bank of India from time to time.

§ Interest on refinance to commercial banks will be mutually agreed.

Instrument

Short term foreign currency loans.

Repayment

Maximum 180 days from the date of disbursement.

Security

Pari passu charge on current assets in case of direct loans.

How to access finance

Bank welcomes preliminary discussions with the promoters to determine scope for Exim Bank's finance.

For more details, see Chapter ‘Export Import Bank of India (EXIM Bank).'

Extension of Packing Credit facility to Sub-Suppliers

The packing credit is allowed to be shared between an Export Order Holder (including trading house) and a sub‑supplier of raw materials, components etc. as in case of EOH and manufacturer suppliers. The detailed guidelines in this regard are as under:

(i) The packing credit facility for the sub‑supplier will be available only on the basis of an export order or letter of credit (L/C) in the name of Export Order Holder. No running a/c facility will be permitted to sub‑supplier. The scheme will be available to exporters with good track record.

(ii) The Export Order Holder may open inland L/C through his banker in favour of his sub‑suppliers on the basis of the export orders or L/C received by him. On the basis of such inland L/C the sub-supplier's bank can grant packing credit to the sub‑supplier. Such packing credit will be liquidated from the proceeds of the bills drawn under L/C. The L/C opening bank will grant packing credit to the Export Order Holder at this stage.

(iii) Export Order Holder can open any number of L/Cs for the various components required within the overall value limit of the order L/C.

(iv) The scheme will cover only the rupee packing credit. The finance given to both the sub‑supplier and Export Order Holder will be eligible for export packing credit at interest rates as per RBI's interest rate directive for the specified period as announced from time to time.

(v) The minimum amount for opening inland L/Cs; will be as fixed by the bank concerned.

(vi) The Export Order Holder will be responsible for exporting the goods as per export order or LIC and any delay in the process will subject him to the penal provisions as applicable. Once the sub-supplier makes available the goods as per inland LIC terms to the Export Order Holder, his obligation of performance under the scheme will be treated as completed and penal provisions will not be applicable to him for any delay by Export Order Holder.

(vii) The scheme will cover only the first stage of production cycle. In other words a manufacturer exporter will be allowed to open inland L/C in favour of his immediate suppliers of raw material/ components etc. that are required for manufacture of exported goods. The scheme will not be extended to cover supplies of raw material/components etc. to such immediate suppliers. In case Export Order Holder is only a trading house, the facility will be available commencing from the manufacturer to whom the order has been passed on by the trading house.

(viii) E0Us/EPZ/SEZ units supplying goods to another E0U/EPZ/SEZ unit for export purposes are also eligible for rupee pre‑shipment export credit under this Scheme. However, the supplier E0U/EPZ/SEZ unit will not be eligible for any post‑shipment facility as the scheme does not cover sales of goods on credit terms.

(ix) The scheme does not envisage any change in the total quantum of advance or period of advance. Accordingly, the credit extended under the system will be treated as export credit from the date of advance to the sub‑supplier to the date of liquidation by Export Order Holder under the inland export L/C system and upto the date of liquidation of packing credit by shipment of goods by Export Order Holder.

(x) In the case of PCFC granted to the manufacturer the amount shall be repaid by transfer of PCFC availed of by the Export Order Holder or by discounting of bills.

Export Credit for Supplies to Units in Special Economic Zone (SEZ)¹

As per EXIM Policy announced on 31.3.2003, goods and services being supplied to SEZ from Domestic Tariff Area (DTA) shall be treated as exports and accordingly supply to SEZ from DTA would be eligible for export credit facilities.

Export Credit against Advance Payments in the form of Cheques, Drafts etc.

(a) Banks may grant export credit at concessive interest rate to exporters of good track record against cheques, drafts etc., which have been received by the exports as direct remittances from abroad, in payment for exports. Such export credit may be granted till the realisation of proceeds of the cheque, draft etc. Banks, however, must satisfy themselves that the receipt of cheque, draft etc. is against an export order, as per the trade practice and is an approved method of realisation of export proceeds as per extant rules.

(b) If an exporter has been granted accommodation at normal interest rate, bank may give effect to concessive export credit rate retrospectively once the aforesaid conditions have been complied with and refund the difference to the exporter.

Rupee Pre-shipment Credit to Specific Sectors/Segments

Export Packing credit may be granted by the Banks to manufacturer suppliers who do not have export orders/letter of credit in their own name and goods are exported through STC/MMTC or other export houses, agencies etc.

Banks are eligible for refinance for such advances if the following additional requirements are complied with:

(a) A letter from export house with details of export order and the portion to be executed by the supplier.

(b) Certificate of the export house that no packing credit will be obtained by them with respect to the above portion.

(c) Banks should apportion period of packing credit between the Export House and supplier.

(d) Export House should open an inland L/C in favour of the supplier or the supplier should draw bill on the export house.

(e) Bank should also obtain an undertaking from the supplier that the advance payment, if any, received from the export house against the export order would be credited to the packing credit account.

Pre‑shipment Credit to Construction Contractors

Salient features of this scheme are as under:

(i) Packing credit advances are granted to construction contractors to meet the initial working capital requirement for execution of contracts abroad.

(ii) An undertaking is obtained from the contractor that the finance is required by them for incurring preliminary expenses e.g., for transporting the necessary technical staff and purchase of' consumable articles etc.

(iii) Packing credit advances are made in separate accounts.

(iv) The advances should be adjusted within 180 days by negotiation of bills relating to the contract or by remittances received from abroad in respect of contract executed abroad. Banks may charge normal rate of interest on such unadjusted advances.

Pre‑shipment Credit for Export of Consultancy Services

Consultancy firms engaged in export of consultancy services may avail suitable pre‑shipment credit facilities from the Banks. The other requirements in this regard are:

(i) Credits are granted to meet the expenses of the technical and other staff employed for the project and purchase of any materials required for the purpose and for expert of computer software.

(ii) Advance payments received against the contract are taken into account while deciding the pre‑shipment facilities.

(iii) Banks also issue suitable guarantees to exporters of high value consultancy services with large advance payments.

(iv) All other usual conditions of packing credit scheme are applicable.

Pre‑shipment credit to Floriculture, Grapes and other Agro‑based Products

Normally, in the case of floriculture" pre‑shipment credits are allowed by banks for purchase of cut‑flowers, etc. and all post harvest expenses for making shipment.

In the case of floriculture, grapes and other agro‑based products, banks now extend concessional credit for working capital purposes in respect of export related activities of all agro‑based products including purchase of fertilisers, pesticides and other inputs for growing of flowers, grapes etc. subject to the following conditions:

(i) The activities are necessarily export‑related to the satisfaction of the bank.

(ii) Activities are not covered by direct/indirect finance schemes of NABARD or any other agency.

(iii) All other normal terms and conditions relating to packing credit such as period, quantum, liquidation etc. shall apply.

(iv) Export credit should not be granted for investments or any other item which cannot be regarded as working capital.

Export Credit to Processors/Exporters‑Agri‑Export Zones

'Agri Export Oriented Units (processing)' set up in 'Agri Export Zones' are provided packing credit under the existing guidelines for procuring and supplying inputs to the fanners. The other directions of RBI in this regard are:

(i) Banks may sanction the lines of credit/export credit to processors/ exporters on the basis of inputs supplied by them to farmers as raw material.

(ii) Exporters must make required arrangements with the farmers and overseas buyers to the satisfaction of banks.

(iii) Banks have to monitor the end‑use of funds and have to ensure that the final products are exported by the processor/exporters as per terms /conditions of the sanction.

It has been clarified that the above credit facilities are available to exporters of Agricultural Products/Agri‑Export Oriented Units (Processing) located outside the Agri‑Export Zones also under the extent export‑credit guidelines. ¹

POST SHIPMENT ADVANCES

All credit facilities granted to exporters before shipment of goods meant for export are termed as 'pre‑shipment advances' which have already been covered in detail. Credit facilities which are sanctioned to exporters after completion of shipment are termed as post shipment facilities. Complete flow chart of an export transaction may be represented as under:

Packing credit by bank

Granting of post-shipment credit by the

bank & Adjustment of packing credit

advances

Granting of post-shipment advance by

way of loan against claims of duty

drawback

Adjustment of all post-shipment advances

granted by the bank.

Export order

Procurement/manufacturing etc. of goods meant for exports and their shipment. Actual shipment of goods to the foreign buyer

Preparation of necessary export bill and submission of those documents to the bank for negotiation/purchase/discount

Preparation of claims of duty drawback etc., and submission of those claims to concerned authorities

Realisation of export bills and claims under duty drawback

It will be noted from the flow chart that post‑shipment advance granted to an exporter by way of negotiation/purchase/discount of export bills will be first utilised for adjustment of outstanding packing credit, if any, and the balance amount only will be available to the exporter.

Post‑shipment advances are mainly in the following forms

(i) Export bills purchased/discounted/negotiated.

(ii) Advances against bills for collection.

(iii) Advances against duty drawback receivable from Government.

Negotiation/Purchase/Discount of Export Bills

It has already been emphasised that limits for the above facility must be got sanctioned along with the packing credit limit to have smooth operations with the bank. Important points which require attention of the exporters in this regard are discussed hereunder:

q The export bills may be drawn either under an export letter of credit received in favour of the exporter or against a confirmed export order. Bills drawn under L/C are considered comparatively safer by banks as the guarantee of the foreign bank is available and a few banks do not place any restrictions for such negotiations as long as the documents do not contain any discrepancy. A few banks, however, sanction separate limits for such negotiation also. The position in this regard will require clarification at the time of making application for sanctioning of credit limits. Sanctioning of proper limits for purchase/discount of export bills drawn against export order is a must in all the banks. Limit sanctioned for L/C bills will not normally be allowed to be availed for non‑L/C bills and proper assessment of limits in this regard shall be made to avoid any difficulty at a later stage.

q The export bills 'May be drawn either on D/P basis or on D/A basis. The documents under D/A bills are delivered against acceptance and banks are not left with any security. The bills may similarly be drawn either payable on demand or payable after a usance period. The realisation in respect of demand' bills will be quicker than for usance bills. The approach of the bank while sanctioning facilities against usance D/A bills will be different as it would amount to clean exposure for the bank for a long time. Furthermore higher limits will be required if the bills are drawn on usance basis. Banks will also not accept usance bills for limits sanctioned against DIP demand bills. All these points must, therefore, be kept in mind and application for the required limits must be made to the bank after careful planning. Important terms and conditions on which these facilities are generally granted are given hereunder:

Operational Aspects of Negotiation/Purchase/Discount of Export Bills

Important operational aspects of the above facility are given below:

q Enough care need to be given while preparing documents of export bill particularly if the same is drawn under an L/C. The rights and obligations of the beneficiary under a letter of credit are discussed in a separate chapter. It is necessary that all the documents are drawn strictly in conformity with the terms of credit. If the export is not backed by an L/C, the documents shall be drawn in conformity with the underlying sale contract and it should be ensured that all exchange control regulations are fully complied with.

q After completion of shipment and preparation of necessary documents, the export bill must be presented to the bank for negotiation/purchase/discount as the case may be. The bill is to be presented to the bank within a maximum period of 21 days from the date of shipment.

q The bank will convert the foreign currency amount of the bill at the time of negotiation/purchase at the relevant exchange rate and simultaneously recover interest up to the notional due date as already explained. The proceeds of the bill will be first utilised for adjustment of packing credit, if any, and the balance amount will be payable to the exporter.

q The exporter must arrange fast processing of the bill at bank and ensure that the documents are despatched to the foreign bank as soon as possible. The bank selected by the exporter must have a very large network of foreign correspondents for expeditious processing and realisation of export bills.

q The bill will be realised by the bank through its foreign currency account maintained at a foreign centre and the exporter must pay interest to the bank only upto the day the foreign currency amount is credited in that account. The realisation advice by the branch which handled the export bill may be received late but it shall indicate the 'value date' on which the foreign currency was realised by the bank.

If the 'value date' is earlier than the notional due date bank should allow refund of interest already charged in excess. If the 'value date' is after the notional date, the bank will recover interest for additional period as per rules already stated.

q If the bill is not realised within 30 days counted from the notional due date, the bank will convert the rupee amount back into foreign currency and shall transfer the advance to a separate head i.e. 'Overdue Export‑Bills Realisation A/c.' The exchange risk will now be open against exporter and the conversion as above will also be normally against the exporter. It is, therefore, necessary that the exporter must ensure prompt realisation of export bills negotiated with banks. This system is termed as 'Crystallisation' of export bills.

Delay in realisation of export bills may not only result into charging of higher interest but may also result in exchange loss at the time of crystallisation. Delay may normally occur in case of DP shipments where documents reach earlier than the actual cargo, particularly for shipments from inland containers depot. As per the normal trade practice, the buyer makes the payment only after the goods have reached the destination and the actual journey period may be more than the normal transit period as fixed by FEDAI. In such circumstances the bills become overdue calling for penal interest and crystallisation. In such circumstances exporter may draw usance bills under DP terms so that the bills are paid by the buyer within the notional due date as per the terms and tenor of the bill. In such an eventuality, the bank will charge interest rates as applicable to usance bills and incidence of overdues and consequent penal interest/ crystallisation may be minimised and DP terms will also be retained.

Rate of Interest (w.e.f. 1.11.2003)¹

1. Post‑shipment credit (i) Demand bills for transit period (as specified by FEDAI) (ii) Usance bills (For total period comprising usance period of export bills, transit period as specified by FEDAI and grace period wherever applicable (a) upto 90 days (b) Beyond 90 days and upto six months from the date of shipment (iii) Against incentives receivable from government covered by ECGC guarantee upto 90 days (iv) Against undrawn balances (upto 90 days) (v) Against retention money (for supplies portion only) payable within one year from the date of shipment (upto 90 days) 2. Deferred Credit Deferred Credit for period beyond 180 days 3. Export Credit Not Otherwise Specified Post‑shipment credit

Not exceeding PLR minus 2.5 percentage points Not exceeding PLR minus 2.5 percentage points Free Not exceeding PLR minus 2.5 percentage points __do__ __do__ Free Free

Notes: (1) The rates indicated against (i) to (v) above are only ceiling rates and therefore, banks shall be free to charge any rate below these rates.

(2) The term 'Free' indicated above implies that the banks are free to decide the rate of interest to be charged, keeping in view the PLR and spread guidelines.

(3) Revision in interest rates from time to time are applicable to fresh advances as also to the existing advances for the remaining period of credit.

q Normal Transit Period: Foreign Exchange Dealers Association of India with the approval of Reserve Bank of India has fixed transit period for export bills drawn in foreign currencies as well as Indian rupees known as Normal Transit Period (NTP). This transit period comprises the average period normally involved from the date of negotiation/purchase/discount till the receipt of bill proceeds in the Nostro account of the bank.

q Notional Due Date: To determine the due date of an export bill we have to consider the following components :

(i) Normal transit period as fixed by FEDAI.

(ii) Usance period of the bill.

The notional due date of an export bill may thus be calculated after adding both the above components.

The concessional rate of interest is chargeable upto the notional due date subject to a maximum of 90 days. Let us consider the following two examples to illustrate this point.

(i) US $ bill payable on demand on USA.

For this bill

Normal Transit Period 25 days

Usance Period Nil

_______

Total 25 days

The notional due date will fall after 25 days and interest at the prescribed rate of the bank concerned will also be charged up to a maximum period of 25 days.

(ii) 90 days US $ bill on Japan

For this bill

Normal Transit Period 25 days

Usance period 90 days

______

Total 115 days

The notional due date in this case will fall after 115 days and interest at the prescribed rate of the bank concerned shall be charged for first 90 days and higher rate as prescribed shall be charged from 91st to 115 days.

Fixed Due Date: In case of export usance bills where due dates are reckoned from date of shipment or date of bill of exchange etc. no Normal Transit Period shall be applicable since the actual dud date is known.

The post shipment advance granted by the banks should be realised only from the proceeds of export bills/claims under duty drawback as the case may be. If local funds are utilised for adjustment, the advance will not be considered as an export credit from the date of advance itself and will be subject to normal interest rate applicable to commercial credit plus penal interest.

Interest on Overdue Export Bills

Overdue bill, in the case of a demand bill means a bill which is not paid before the expiry of the normal transit period, and in the case of a usance bill it means a bill which is not paid on the due date.

Overdue export bills fall under the category of post‑shipment credit not otherwise specified. Banks are now free to decide the rate of interest to be charged on such export credit keeping in view the PLR and spread guidelines.

Advances against Export Bills Sent on Collection

It may sometimes be possible to avail advance against export bills sent on collection. In such cases the export bills will be sent by the bank on collection basis and will not be purchased/discounted. Advance against such bills will be granted by way of a 'separate loan' usually termed as 'post‑shipment loan'. Ibis facility is, in fact, other form of post‑shipment advance and will be sanctioned by the bank on the same terms and conditions as applicable to the facility of Negotiation/Purchase/Discount of export bills. A margin of 10 to 25% may, however, be stipulated in such cases. The rates of interest etc. chargeable on this facility are also governed by the same rules. This type of facility is, however, not very popular and most of the advances against export bills are made by the banks by way of negotiation/purchase/discount.

This facility is useful in volatile forex market where depreciation of rupee is expected in the short term. In the process of obtaining 'post‑shipment loan' the exchange risk is borne by the exporter till realisation of bill as foreign currency amount will be converted to rupees only on realisation of bill. Any exchange benefit (loss) between the date of advance till realisation shall be on the account of the exporter.

The post‑shipment facility in the shape of 'post‑shipment loan' as above is considered beneficial to the exporter on the following grounds.

(i) The exporter will be paying interest on the funds actually utilised by him.

(ii) There will not be any risk of recon version of the amount of the bill into foreign currency in case of delay in realisation of bill. In fact foreign currency amount of the bill will be converted to Indian rupees only after it has been realised.

It should, however, be noted that the exporter will be exposed to exchange fluctuation risk till the realisation of bill.

Advances Against Claims of Duty Drawback

Duty drawback is permitted against exports of different categories of goods under the 'Customs and Central Excise Duty Drawback Rules, 1995'. Drawback in relation to goods manufactured in India and exported means a rebate of duties chargeable on any imported materials or excisable materials used in the manufacture of such goods in India or rebate on excise duty chargeable under Central Excise Act, 1944 on certain specified goods. The Duty Drawback Scheme is administered by Directorate of Duty Drawback in the Ministry of Finance. The claims of duty drawback are settled by Customs House at the rates determined and notified by the Directorate.

As per the present procedure, no separate claim of duty drawback is to be filed by the exporter. A copy of the shipping bill presented by the exporter at the time of making shipment of goods serves the purpose of claim of duty drawback as well. This claim is provisionally accepted by the customs at the time of shipment and the shipping bill is duly verified. The claim is settled by customs office later.

As a further incentive to exporters Customs Houses at Mumbai, Kolkata, Chennai, Chandigarh, Hyderabad have evolved a simplified procedure under which claims of duty drawback are settled immediately after shipment and no funds of exporter are blocked. However, where settlement is not possible under the simplified procedure exporters may obtain advances against claims of duty drawback as provisionally certified by customs.

Banks grant post‑shipment advances to exporters against their duty drawback entitlements on the following basis :

(i) against provisionally certified amounts of entitlements by Customs Authorities pending final sanction or

(ii) against export promotion copy of the shipping bill containing the EGM number issued by the Customs Department.

These advances are eligible for concessional rate of interest up to a maximum period of 90 days.

Advance against Goods Sent on Consignment Basis

When the goods are exported on consignment basis at the risk of the exporter for sale and eventual remittance of sales proceeds to him by the agent/consignee, bank may finance against such transaction subject to the customer enjoying specific limit to that effect. However, the bank should ensure that while forwarding shipping documents to its overseas branch/ correspondent to instruct the latter to deliver the documents only against Trust Receipt/Undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports.

The concessive rate of interest is available only upto the notional due date (as per tenor of the bill) subject to a maximum of 180 days, even if extension for realisation and repatriation of export proceeds beyond 180 days has been granted.

Advance against Undrawn Balance

In certain lines of export it is the trade practice that bills are not to be drawn for the full invoice value of the goods but to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. to be ascertained after approval and inspection of the goods. Banks do finance against the undrawn balance if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export subject to a maximum of 10% of the value of export. Such advances are eligible for concessional rate of interest for a maximum period of 90 days only to the extent these are repaid by actual remittances from abroad and provided such remittances are received within 180 days from the expiry of Normal Transit Period in the case of demand bills and due date in the case of usance bills.

Advance against Retention Money

Banks also grant, on selective basis, advances against retention money (for supplies portion only), which is payable within one year from the date of shipment at concessional rate of interest. if such advances extend beyond one year they are treated as deferred payment advances and in such a case rate applicable to 'Deferred Credit' shall apply.

Such advances will be eligible for concessional rate of interest only to the extent these are actually repaid by remittances from abroad relating to the retention money and provided such payments are received within 180 days from the due date.

Change of Tenor of Bill ‑ Applicability of Concessive Rate of Interest

Bankers may allow change of tenor of bills in respect of bills drawn on the original buyer or the alternate buyer, provided the revised due date does not fall beyond six months from the date of shipment and the change is requested before the original due date. In such cases of change of tenor, banks may extend the concessional rate of interest upto the revised notional due date subject to a maximum period of six months from the date of shipment.

Export Finance for Storing and Sale through Warehouses Abroad

Some Indian organisations were permitted by the Reserve Bank of India to establish warehouses abroad for storing the goods exported from India to enable them to arrange off‑the‑shelf sales for achieving greater penetration in the overseas markets. Since exports to these warehouses are in anticipation of orders from the buyers overseas, the prescribed period of realisation of proceeds of such exports has been fixed at fifteen months from the date of shipment as against the normal period of six months in other cases. However, the post shipment export credit provided by banks to support these operations is at present subject to the same interest rate structure as is applicable to normal cash exports where permitted period of realisation of export proceeds is not to exceed six months from the date of shipment. These rates, at present, are fixed by RBI from time to time.

In view of longer period of realisation permitted ab‑initio, RBI has rationalised the interest rates on post‑shipment credit against exports through approved warehouses. Accordingly, in respect of post‑shipment credit extended to exports through overseas warehouses the interest rate applicable will be as under:

Period of Post‑Shipment Credit	Rate of Interest
(a) Upto 90 days (b) Beyond 90 days and upto 15 months from the date of shipment	The rate applicable for usance bills for period upto 90 days The rate applicable for usance bills beyond 90 days and upto six months from the date of shipment

It is expected that sale proceeds of goods consigned to the above warehouses would be realised within the permitted period of fifteen months and post‑shipment credit liquidated. In case, however, this does not happen, the higher rate of interest as applicable for bills realised beyond six months from the date of shipment will apply for the entire period beyond six months.

Consignment export to CIS and East European Countries

RBI allows in deserving cases to individual exporters with satisfactory track record, a longer period of up to 12 months for realisation of proceeds of export on consignment basis in convertible currencies to CIS (former USSR) and East European Countries. The applicable interest rates are as follows :

Period of Post‑Shipment Credit	Rate of Interest
(a) Upto 90 days (b) Beyond 90 days and upto 360 days from the date of shipment	The rate applicable for post-shipment credit for usance bills, for period upto 90 days The rate applicable for post-shipment credit for usance bills for the period beyond 90 days and upto six months, form the date of shipments

The exporters should realise sale proceeds of such exports on consignment basis to the above countries within the permitted period of up to 12 months. If the post shipment credit is not liquidated within the permitted period, the higher rate of interest applicable to export credit not otherwise specified at post shipment stage will apply for the entire period beyond 6 months.

Exports on consignment basis to Russian Federation against Repayments of State Credits

In respect of post‑shipment credit extended to export of goods on consignment basis to Russian Federation against repayments of State Credits, the rates of interest stand rationalised and shall be as under

Period of Post Shipment Credit	Rate of Interest
(a) Upto 90 days (b) Beyond 90 days and upto 360 days from the date of shipment	The rate applicable for post-shipment credit for usance bills, for period upto 90 days The rate applicable for post-shipment credit for usance bill for the period beyond 90 days and upto six months from the date of shipment

The exporters are expected to realise sate proceeds of such exports within the permitted period of 360 days to avail the benefit of above concessive rates. If the post shipment credit is not liquidated within the permitted period, the rate applicable to export credit not otherwise specified at post‑shipment stage will apply for the entire period beyond six months.

Exports of Goods for Exhibition and Sale

Banks also provide finance to exporters against, goods sent for exhibition and sale abroad in the normal course in the first instance. Benefit of the concessive rate of interest on such advances at the pre‑shipment and post-shipment stages, up to the stipulated period, by way of a rebate are allowed after the sale is completed.

Post‑shipment Credit on Deferred Payment Terms

Banks grant post‑shipment credit on deferred payment terms for a period exceeding one year, in respect of export of capital and producer goods as per RBI's specification from time to time.

EXPORT CREDIT IN FOREIGN CURRENCY

Discounting/Rediscounting of Bills Abroad

With the introduction of scheme of discounting/re‑discounting of export bills abroad a new window has been opened for allowing post‑shipment credit to exporters at internationally competitive interest rates. The method of extending post‑shipment credit under all other existing schemes will continue along with this scheme. The salient features of this scheme are as under:

(i) The scheme mainly covers export bills with usance period upto 180 days from the date of shipment (inclusive of normal transit period and grace period if any). Demand bills can also be included if overseas institutions providing discounting/rediscounting facilities have no objections to it. Rediscounting of bills having payment terms beyond 180 days will require prior approval from RBI.

(ii) The facility under the scheme is available in all convertible currencies.

(iii) Banks may arrange rediscounting facilities with foreign banks/other institutions and have been permitted to arrange necessary lines of credit (EBR).

(iv) The discounting/rediscounting facility is permitted "with recourse" or "without recourse" as per the arrangement.

(v) Banks are also permitted to hold export bills in their own portfolio without rediscounting or may utilise the foreign exchange resources available with them in EEFC accounts/RFC accounts/FCNRB accounts for discounting usance bills or may discount them in local market/under 'Bankers Acceptance Facility' (BAF).

(vi) In the case of demand bills banks may even grant foreign exchange loans to the exporters from out of the foreign currency balances available with them.

(vii) The lending rate to the exporter should not exceed 0.75% over LIBOR/EURO LIBOR/EURIBOR excluding withholding tax.

(viii) The proceeds of the bill in foreign currency may be utilised to adjust PCFC or rupee value of the discounted bill may be utilised to liquidate the outstanding packing credit.

(ix) There will be no change in the method of crystallisation in case of overdue bills. Interest at 2% above the rate of discounting shall be charged from the due date till the date of crystallisation.

(x) Interest rate as per RBI's interest rate directive for post‑shipment credit in rupees will be applicable from the date of crystallisation.

(xi) There will be no change in the existing system of coverage provided by ECGC.

(xii) The exporters, on their own, can arrange for themselves a line of credit with an overseas bank or any other agency (including a factoring agency) for discounting their export bills direct subject to the following terms and conditions:

(a) Direct discounting of export bills will only be permitted through the designated branch of an authorised dealer.

(b) Discounting of export bills will be routed through designated bank/authorised dealer from whom the packing credit facility has been availed of. In case, these are routed through any other bank, that bank will have to first arrange to adjust the amount of packing credit outstanding with the concerned bank.

(c) The rate of remuneration to the bank handling export bills is to be decided between bank and the exporter.

(xiii) Banks may also extend export Bills Rediscounting facility for exports to ACU countries.

PRE‑SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC)

With a view to provide pre‑shipment credit to Indian exporters at internationally competitive rates of interest Reserve Bank of India has permitted Banks in India to provide Pre‑shipment Credit in Foreign Currency (PCFC). The PCK scheme will be in addition to normal packing credit schemes in Indian rupees presently available to Indian exporters. ¹ [The exporter will now have the following options for availing export finance:

(a) to avail of pre‑shipment credit in rupees and then the post‑shipment credit either in rupees or discounting/rediscounting of export bills under EBR Scheme.

(b) to avail of pre‑shipment credit in foreign currency and discount/ rediscounting of the export bills in foreign currency under EBR scheme.

(c) to avail of pre‑shipment credit in foreign currency and then repay/ prepay it out of balances in EEFC Alc or rupees resources.

(d) to avail of pre‑shipment credit in rupees and then convert drawals into PCFC at the discretion of the banks.]

Exporters availing packing credit in Foreign Currency under this scheme are not eligible to avail post shipment credit in Indian rupees. The broad aspects of PCFC scheme are given below:

(i) Packing credit under foreign currency is available to cover both the domestic and imported inputs of goods to be exported from India.

(ii) PCFC can be availed in any convertible foreign currency and can be extended in one convertible currency in respect of an export order invoiced in another convertible currency.

(iii) Banks will grant PCFC out of foreign currency resources available with them under EEFC account, FCNR (B) accounts and RFC accounts and may also negotiate required lines of credit from their foreign branches/correspondents. Banks can also utilise the foreign currency balances available under Escrow Accounts and Exporters Foreign Currency Account for this purpose.

(iv) PCFC will be available for an initial period of, 180 days as in case of rupee credit. Any extension in period of PCFC beyond 180 days will be subject to the same terms and conditions as are applicable for extension of rupee packing credit and will be granted at an interest rate which is higher by 2% of the rate charged for the initial period of 180 days prevailing at the time of extension.

Any further extension of PCFC will be subject to the terms and conditions of the bank concerned and if no export takes place within 360 days, PCFC will be adjusted at TT selling rate for the currency concerned and benefit of rate of interest will also be withdrawn. Banks in such cases will charge interest as stipulated under the head "Export credit not otherwise specified" plus applicable penal interest from the date of advance. Similar procedure shall be applicable for liquidation of PCFC in case of cancellation of export order.

(v) The running alc facility will be permitted under PCFC on the same lines as in case of packing credit in rupees.

(vi) PCFC will be available only for cash exports and will not cover 'Deferred Payment Exports'.

(vii) The lending rate to exporter shall not exceed 0.75%over LIBOR/ EURO LIBOR/ EURIBOR for PCFC upto 180 days. Beyond 180 days and upto 360 days rate of interest shall be the rate for initial period of 180 days prevailing at the time of extension plus 2 percentage points.

(viii) Withholding tax as per applicable rates will be payable by the exporter in addition to interest as above.

(ix) In case full amount of PCFC or part thereof is utilised to finance domestic inputs the foreign currency amount will be converted to Indian rupees at appropriate exchange rates.

(x) PCFC will be available with 'MPBF'/credit limits sanctioned in favour of exporter.

(xi) ECGC cover will be available in rupees only, whereas PCFC is in foreign currency.

¹ (xii) (a) PCFC can be liquidated out of proceeds of export documents on their submission for discounting/rediscounting under EBR Scheme.

(b) It can also be repaid/prepaid out of EEFC A/c or from the rupee resources of the exporter to the extent exports have actually taken place.

(c) The export bills must be discounted or covered by grant of foreign currency loans to liquidate the outstanding PCFC.

(d) PCFC cannot be treated as a loan to be repaid in order to avail of post‑shipment credit separately.

(e) PCFC cannot be liquidated with foreign exchange acquired from other sources.

(xiii) With the introduction of Diamond Dollar Account (DDA) Scheme wherein local sale and purchase of rough/cut and polished diamonds has been permitted between the DDA holders, banks shall be in order to allow liquidation of PCFC granted to a DDA holder by dollar proceeds received from sate of cut and polished diamonds to another DDA holder.

(xiv) PCFC can be extended for exports to ACU countries.

Deemed Exports

PCFC can also be extended for 'deemed exports' for supplies to projects financed by multilateral/bilateral agencies/funds. This should he liquidated by grant of foreign currency loan at post‑supply stage, for a maximum period of 30 days or up to the date of payment by the project authorities, whichever is earlier.

Sharing of Export Credit under PCFC Scheme

PCFC can now be availed by the manufacturer on the basis of disclaimer from the export order holder in the same way as permitted under rupee credit scheme. PCFC granted to the manufacturer will be adjusted by transferring foreign currency from the export order holder.

PCFC for Supplies from one EOU/EPZ/SEZ Un it to an other EOU/EPZ/SEZ Unit

Supplies made to E0Us/EPZ/SEZ Units are treated as Deemed Exports and Reserve Bank of India has permitted granting KFC both to the supplier EOU/ EPZ/SEZ unit and the receiver EOU/EPZ/SEZ unit. PCFC for supplier EOU/ EPZ/SEZ unit will be for supply of raw material/components for goods which will be further processed and finally exported by receiver EOU/EPZ/SEZ unit. The PCFC extended to a supplier EOU/EPZ/SEZ unit will have to be liquidated by receipt of foreign exchange form the receiver EOU/EPZ/SEZ unit, for which purpose, the receiver E0U/EPZ/SEZ Unit can avail of PCFC. The stipulation regarding liquidation of PCFC by payment in foreign exchange will be met in such cases not by negotiation of export documents but by transfer of foreign exchange from the banker of the receiver EOU/EPZ/SEZ unit to the banker of supplier EOU/EPZ/SEZ unit.

PCFC granted to receiver E0U/EPZ/SEZ unit will be liquidated by discounting of export bills as per general procedure in this regard. Furthermore such transaction will be treated as exports for the supplier unit and import for the receiving unit.

Simplification of Procedure for Delivery of Export Credit

The Reserve Bank of India has issued from time to time, various instructions and guidelines relating to customer service, simplification of procedures for delivery of export credit. These instructions have been updated vide Master Circular No. IECD 6/04.02.02/2002‑03 dated 30.7.2002. Salient features of the same are given below.

A. Simplification of Procedures

(i) Banks should simplify the Application Form and reduce data requirements from exporters for assessment of their credit needs, so that exporters do not have to seek outside professional help to fill in the Application Form or to furnish data required by the bank.

(ii) Banks should adopt any of the methods, viz. Projected Balance Sheet method, Turnover method or Cash Budget method, for assessment of working capital requirements of their exporter‑customers, whichever is‑ most suitable and appropriate to their business operations.

(iii) In the case of Consortium Finance, once the consortium has approved the assessment, member banks should simultaneously initiate their respective sanction processes.

B. 'On Line' Credit to Exporters

(i) Banks provide 'Line of Credit' normally for one year which is reviewed annually. In case of delay in renewal, the sanctioned limits should be allowed to continue uninterrupted and urgent requirements of exporters should be met on ad hoc basis.

(ii) In case of established exporters having satisfactory track record, banks should consider sanctioning a 'Line of Credit' for a longer period, say 3 years, with in‑built flexibility to step‑up/step‑down the quantum of limits within the overall outer limits assessed. The step‑up limits will become operative on attainment of pre‑determined performance parameters by the exporters. Banks should obtain security documents covering the outer limit sanctioned to the exporters for such longer period.

(iii) In case of export of seasonal commodities, agro‑based products etc., banks should sanction Peak/Non‑peak credit facilities to exporters.

(iv) Banks should permit inter changeability of pre‑shipment and post-shipment credit limits.

(v) Term Loan requirements for expansion of capacity, modernisation of machinery and upgradation of technology should also be met by banks at their normal rate of interest.

(vi) Assessment of export credit limits should be 'need based' and not directly linked to the availability of collateral security. As long as the requirement of credit limit is justified on the basis of the exporter's performance and track record, the credit should not be denied merely on the grounds of non‑availability of collateral security.

C. Waiver of Submission of Orders or L/Cs for Availing Pre‑shipment Credit

(i) Banks should not insist on submission of export order or L/C for every disbursement of pre‑shipment credit, from exporters with consistently good track record. Instead a system of periodical submission of a Statement of L/Cs or export orders in hand, should be introduced.

(ii) In respect of exporters with good track record, banks may follow the system of obtaining periodical statement of outstanding orders/L/Cs on hand and waive the requirement of submission of order/LC. This should be brought to the notice of ECGC and should be incorporated in the sanction proposals and sanction letters. If such waivers are permitted after sanction of export credit limits, the same may be incorporated in the terms of sanction by way of amendments and communicated to ECGC.

D. Handling of Export Documents

Banks are required to obtain, among others, original sale contract/ confirmed order/Performa invoice countersigned by overseas buyer/indent from authorised agent of overseas buyer for handling the export documents as per Exchange Control regulations. Submission of such documents need not be insisted upon at the time of handling the export documents, since the goods have already been valued and cleared by the Customs authorities, except in the case of transactions with Letter of Credit (L/C) where the terms of L/C require submission of the sale contract/other alternative documents.

E. Fast Track Clearance of Export Credit

(i) At specialised branches and branches having sizeable export business, a facilitation mechanism for assisting exporter‑customers should be put in place for quick initial scrutiny of credit application and for discussions for seeking additional information or clarifications.

(ii) Banks should streamline their internal systems and procedures to comply with the stipulated time limits for disposal of export credit proposals and also endeavour to dispose of export credit proposals ahead of the prescribed time schedule. A flow chart indicating chronological movement of Credit Application from the date of receipt till the date of sanction, should also accompany credit proposals.

(iii) Banks should delegate higher sanctioning powers to their branches for export credit.

(iv) Banks should consider reducing at least some of the intervening layers in the sanctioning process. It would be desirable to ensure that the total number of layers involved in decision‑making in regard to export finance does not exceed three.

(v) Banks should introduce a system of 'Joint Appraisal' by officials at branches and administrative offices, to facilitate quicker processing of Export Credit proposals.

(vi) Where feasible, banks should set up a 'Credit Committee' at specialised branches and at administrative offices, for sanctioning working capital facilities to exporters. The 'Credit Committee' should have sufficiently higher sanctioning powers.

F. Publicity and Training

Generally, export credit at internationally competitive rates is made available in foreign currency at select branches of banks. In order to make the Scheme more popular, wide publicity should be given by banks and more number of branches should be designated for making available export credit in foreign currency. Officers at operating level should be provided with adequate training.

G. Time Limit for Sanction

The sanction of fresh/enhanced export credit limits should be made within 45 days from the date of receipt of credit limit application with the required details and supported by the requisite statements. In case of renewal of limits and sanction of ad hoe credit facilities, the time taken by banks should not exceed 30 days and 15 days respectively.

H. Adhoc Limits

(i) Banks should respond to a situation promptly when exporters require ad hoc limits to take care of large export orders which were not foreseen earlier. Banks should also adopt a flexible approach in respect of exporters, who for genuine reasons could not bring in corresponding additional contribution in respect of higher credit limits sought for specific orders. No additional interest is to be charged in respect of such ad hoe limits.

(ii) Banks are advised to adopt a flexible approach in negotiating the bills drawn against L/Cs in case of exporters who have fully utilised the export credit limits. In such cases banks should delegate discretionary/higher sanctioning powers to branch managers to meet the credit requirement of exporters. Branches should also be authorised to disburse a certain percentage of the enhanced/ad hoc limits, pending sanction by the higher authorities/board/committee who had originally accorded sanctions.

FORWARD EXCHANGE CONTRACTS

(i) Banks are permitted to allow an exporter to book forward contract on the basis of confirmed export order prior to availing of PCFC and cancel the contract (for portion of drawal used for imported inputs) at prevailing market rates on availing of PCK.

(ii) Banks also allow customers to seek cover in any permitted currency of their choice which is actively traded in the market, subject to ensuring that the customer is exposed to exchange risk in a permitted currency in the underlying transaction.

(iii) Forward contracts can be allowed only on compliance of exchange control requirement.

EXPORT GUARANTEES

Bid Bonds and Performance Bonds or Guarantees for Exports

(i) Exchange Control Stipulations

In terms of Notification No. FEMA/8/2000‑RB, dated 3rd May 2000, authorised dealers have the permission to give performance bond or guarantee in favour of overseas buyers on account of bona fide exports from India.

Prior approval of RBI should be obtained by the authorised dealers for issue of performance bonds/guarantees in respect of caution listed exporters.

Before issuing any such guarantees, they should satisfy themselves with the bona fides of the applicant and his capacity to perform the contract and also that the value of the bid/guarantee as a percentage of the value of the contract/tender is reasonable and according to the normal practice in international trade and that the terms of the contract are in accordance with the Exchange Control Regulations.

Authorised dealers, may also, subject to what has been stated above, issue counter‑ guarantees in favour of their branches/correspondents abroad in cover of guarantees required to be issued by the latter on behalf of Indian exporters in cases where guarantees of only resident banks are acceptable to overseas buyers in accordance with local laws/regulations.

If and when the bond/guarantee is invoked authorised dealers may make payments due there under to non‑resident beneficiaries but a report should be sent to RBI where the amount of the remittance exceeds US $ 5,000 or its equivalent.

(ii) Other Stipulations

With a view to boost exports, banks should adopt a flexible approach in the matter of obtaining cover and earmarking of assets/credit limits, drawing power, while issuing bid bonds and performance guarantees for export purposes. Banks may, however, safeguard their interests by obtaining an Export Performance Guarantee of ECGC, wherever considered necessary.

Export Credit & Guarantee Corporation (ECGC) would provide 90 per cent cover for bid bonds, provided the banks give an undertaking not to insist on cash margins.

The banks may not, therefore, ask for any cash margin in respect of bid bonds and guarantees which are counter‑guaranteed by ECGC.

In other cases, where such counter‑guarantees of ECGC are not available, for whatever reasons, the banks may stipulate a reasonable cash margin only where it is considered absolutely necessary, as they satisfy themselves generally about the capacity and financial position of the exporter while issuing such bid bonds/guarantees.

Banks may consider sanctioning separate limits for issue of bid bonds. Within the limits so sanctioned, bid bonds against individual contracts may be issued, subject to usual considerations.

As per FEDAI Rules, the banks may refund 50per cent of the commission received by them on die bid bonds which am cancelled due to non‑acceptance of tender.

Unconditional Guarantees in favour of Overseas Employers/Importers on behalf of Indian Exporters

While agreeing to give unconditional guarantee in favour of overseas employers/importers on behalf of Indian Exporters, the banks should obtain an undertaking from the exporter to the effect that when the guarantee is invoked, the bank would be entitled to make payment notwithstanding any dispute between the exporter and the importer. Although, such an undertaking may not prevent the exporter from approaching the Court for an injunction order, it might weigh with the Court in taking a view whether injunction order should be issued.

Banks may, while issuing guarantees in future, keep the above points in view and incorporate suitable clauses in the agreement in consultation with their legal advisers. This is considered desirable as non‑honouring of guarantees on invocation might prompt overseas banks not to accept guarantees of Indian banks, thus hampering the country's export promotion effort.

Commission on Export Guarantees

The commission chargeable on export guarantees, earlier governed as per the rules of Foreign Exchange Dealers Association of India, is now left at the discretion of individual banks who are totally free to determine their own charges.

Precautions to be taken by Banks in case of Project Exports

Banks are aware that the Working Group mechanism has been evolved for the purpose of giving package approvals in principle at pre‑bid/post‑bid stages for high value overseas project exports. The role of the Working Group is mainly regulatory in nature, but the responsibility of project appraisal and that of monitoring the project lies solely on the sponsor bank.

As the Working Group approvals are based on the recommendations of the sponsor banks, the latter should examine the project proposal thoroughly with regard to the capacity of the contractor/sub‑contractors, protective clauses in the contracts, adequacy of security, credit ratings of the overseas sub‑contractors, if any, etc.

Therefore, the need for a careful assessment of financial and technical demands involved in the proposals vis‑a‑vis the capability of the contractors (including sub‑contractors) as well as the overseas employers can hardly be under‑rated to the financing of any domestic projects. In fact, the export projects should be given more attention in view of their high values and the possibilities of foreign exchange losses in case of failure apart from damage to the image of Indian entrepreneurs.

While bid bonds and performance guarantees cannot be avoided, it is to be considered whether guarantees should be given by the banks in all cases of overseas borrowings for financing overseas projects. Such guarantees should not be executed as a matter of course merely because of the participation of Exim, Bank and availability of counter‑guarantee of ECGC. Appropriate arrangements should also be made for post‑award follow‑up and monitoring of the contracts.

FORFAITING AS AN INSTRUMENT OF EXPORT FINANCE

Forfaiting is a form of trade finance involving discounting of medium term export receivables with or without recourse. It has already been established as a medium of finance in developed countries and is akin to 'Bill Re‑discounting Scheme' as obtaining in India. Exim Bank has introduced this instrument in India for the Indian exporters. The salient features of the scheme introduced by Exim Bank in this regard are as under:

(a) The exporter will finalise contract with the prospective buyer with regard to order, quantity, basic contract price, currency of payment, delivery period and credit terms.

(b) After finalisation of contract, the exporter should furnish the following details to the Exim Bank.

(i) Name and address of overseas buyer

(ii) Country to which exports are to be made

(iii) Name of the guarantor bank (i.e. aval), if known to the exporter

(v) Nature of goods

(v) Order quantity

(vi) Amount of order ‑ base price, interest rate

(vii) Delivery period and repayment schedule

(viii) Name of the authorised dealer who will handle the export transaction for the exporter in India

(c) Based on this information, Exim Bank will arrange to obtain an indicative quote for forfaiting discount together with commitment fee and other charges, if any to be paid by the exporter, from an overseas forfaiting agency.

(d) On receipt of indicative rate, the exporter may finalise the contract, loading the discounting and other charges in the value and approach Exim Bank for obtaining a firm quote.

(e) Exim Bank will obtain a firm quote from an overseas forfaiting agency and furnish the same to the exporter.

(f) The exporter will have to confirm the arrangement to the Exim Bank within the prescribed period as indicated by that Bank while communicating the firm quote.

(g) The export contract should clearly indicate that the overseas buyer should prepare a series of avalised promissory notes in favour of the exporter and hand them over against shipping documents to his banker. Avalising means co‑acceptance and/or guarantee as we understand in India and will have to be arranged by the overseas buyer/exporters as per the arrangement.

(h) The exporter will send necessary shipping documents to the banker of the overseas buyer and receive avalised promissory notes there against.

(i) These promissory notes will be endorsed with the words 'without recourse' by the exporter and handed over to his bankers in India for onward transmission to Exim Bank.

(j) Alternatively, the exporter may draw a series of Bills of Exchange on the overseas buyer which will be sent with the shipping documents to the buyer bank for acceptance by the overseas buyer. Overseas buyer's bankers will handover the documents against acceptance of Bills of exchange by the buyer and signature of 'aval' or the guaranteeing bank. Avalised and accepted bills of exchange will be returned to the exporter through his hanker. Exporter will endorse avalised Bills of with the words 'without recourse' and return them to his banker for onward transmission to Exim Bank.

(k) Exim Bank will forward the Bills of Exchange/Promissory Notes after verification to the forfaiting agency for discounting.

(1) Exim Bank will arrange to collect the discounted proceeds of Promissory Notes/Bills of Exchange from the overseas forfaiting agency and effect payment to the nostro account of the exporter's bank as per the latter's instructions.

(m) The exporter's bank in turn will pay the proceeds to the exporter.

(n) Exim Bank will charge a service fee for facilitating the forfaiting transaction which will be payable in Indian rupees.

Benefits Accruing to an Exporter from Forfaiting

§ Converts a deferred payment export into a cash transaction, improving liquidity and cash flows.

§ Frees the exporter from cross‑border political or commercial risks associated with export receivables.

§ Finance upto 100 percent of the export value is possible as compared to 80‑85 percent financing available from conventional export credit programmes.

§ As forfaiting offers without recourse finance to an exporter, it does not impact the exporter's borrowing limits. Thus, forfaiting represents an additional source of funding, contributing to improved liquidity and cash flows.

§ Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit.

§ Exporter gets freedom from credit administration and collection problems.

§ Forfaiting is transaction specific. Consequently, a long term banking relationship with the forfaiter is not necessary to arrange a forfaiting transaction.

§ Exporter saves on insurance costs as forfaiting obviates the need for export credit insurance.

§ Simplicity of documentation enables rapid conclusion of the forfaiting arrangement.

Reserve Bank of India has also permitted the authorised dealers (banks) to arrange forfaiting of medium term export receivables on the same lines as per the scheme of EXIM Bank and many international forfaiting agencies have now become active in Indian market. Forfaiting may be usefully employed as an additional window of export finance, particularly for exports to those countries for which normal export credit is not extended by the commercial banks.

It must be noted that charges of forfaiting are eventually to be passed on to the ultimate buyer and should, therefore, be so declared on relative export declaration forms.

POST‑SHIPMENT GUARANTEE 0F ECGC

Position regarding ECGC guarantee in respect of post‑shipment advances is a bit confusing as a number of factors are involved and policy differs from bank to bank, Two issues are basically involved in this regard as under:

• Post‑Shipment Guarantees of ECGC issued to banks.

• Shipment policies issued to exporters.

Post‑shipment guarantees to banks are also issued on two basic coverings:

• All exports, or

• Exports not backed by letters of credit i.e., non‑L/C exports.

However, post‑shipment, guarantee on individual customers is issued by ECGC only if that customer has also obtained shipment policy from ECGC. This amounts to double insurance which is in favour of the bank but considerably adds to the cost of the exporter as he has to bear not only the cost of policy but has to pay premium on post‑shipment guarantee obtained by the bank. The premium on the policy is payable on whole turnover basis on all exports.

ECGC has now started issuing post‑shipment guarantees on whole turnover basis just in the same manner as for packing credits and entire post‑shipment advances granted by a bank by way of negotiation/purchase/discount of export bills may now be covered under this guarantee. Banks have also been given the option to cover either all exports or only non‑L/C exports. There is no condition of exporters obtaining shipment policies from ECGC. The rates of premium on Whole Turnover Post Shipment Guarantee are also reduced in comparison to those payable on individual guarantees.

ADVISING AND CONFIRMING EXPORT LETTERS OF CREDIT

Advising bank does not undertake any commitment except to verify the authenticity of the message received by it at, the time of advising the letter of credit to the exporter. Advising of a letter of credit does not, therefore, involve any credit risk for the bank.

Confirmation of a letter of credit implies a definite undertaking being given by the confirming bank in addition to the opening bank and the confirming bank is placed in the same position as that of the opening bank in relation to the beneficiary. But even in these cases the confirmation to the letter of credit is added by the bank on behalf of the opening bank only and not on account of beneficiary (exporter). This would also, therefore, not constitute a credit facility to the exporter. These services facilitate banking operations and the beneficiary of the letter of credit may not be the customer of the bank.

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[R1] This guideline has since been withdrawan by Reserve Bank but is most likely to be continued by the banks due to emphasis on export credit.

[R2] Circular No. IECD.9/04.02.02/2002‑03, dated 31.10.2002.

[R3] As per DBOD No. BC 41/13.07.01/2003‑04 dt. 31.10.2003 w.e.f. 1.11.2003 to 30.4.2004.

[R4] Circular No. IECD 16/04.02.02/2002‑03 dt. 1.4.2003.

[R5] Circular No. IECD 2046/04.02.02B/2001‑02 dated 23.11.2002.

[R6]As per DBOD No. BC 41/13.07.01/2003‑04 dt. 31.10.2003 effective from 1.11.2003 to 30.4.2004.

[R7]Substituted by Circular No. IECD.9/04.02.02/2002‑03. dated 31.10.2002.

[R8]Circular No. lECD 9104.02.02/2002‑03. dated 31.10.2002.