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EXPORT FINANCE
TEXTILE INDUSTRY OVERVIEW
THE WORLD MARKET
The 'lo$al textile trade ,includin' clothin'- is estimated to $e around .&/ 012
$illion3 with a 4 05 share of the world6s merchandise 7orld demand for apparels and
textiles is expected to reach .&/ 822 $illion $y 92+93 with the .& and Europe continuin'
to $e the dominant mar#ets for textiles and apparel3 thou'h a su$stantial portion of the
incremental demand will $e dri%en $y the Asian countries
Textile capacities in the de%eloped economies ha%e shrun# durin' the last few
years3 mainly due to hi'h production and la$or costs On the other hand3 Asian countries
li#e India3 China3 :an'ladesh3 !ietnam and Cam$odia ha%e the ad%anta'es of relati%ely
a$undant raw material supplies and low wa'e costs (oreo%er3 a num$er of Asian
manufacturers are now offerin' not only "uality products at the ri'ht time and price3 $ut
also %alue added desi'n solutions to demandin' international customers Europe is still a
si'nificant player; howe%er3 it has seen its share decrease from 025 of the world mar#etshare to a$out 125 o%er the last few years; this share is expected to reduce e%en further
Asian textile manufacturers in 'eneral and Indian textile manufacturers in particular are
li#ely to capture more of the 'lo$al mar#et share in the comin' years3 'i%en their
increasin' technolo'ical capa$ilities3 capacities to ser%ice lar'e %olume orders and
competiti%e pricin' Thus3 o%er a period of time3 the textile manufacturin' is 'oin' to $e
dominated $y the Asian countries
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INDIA
India is the second lar'est producer of textiles and 'arments in the world and also
the second lar'est producer of cotton The textiles sector is India6s second lar'est
employer3 'i%in' direct employment to o%er 10 million people and pro%idin' for indirect
employment to an additional 0< million people It contri$utes towards +05 of India6s
exports and 45 of India6s =*P The industry also accounts for +45 of total industrial
production
The Indian textiles industry is estimated at .&/ 09 $illion Indian apparel and textiles are
exported to o%er a hundred countries and ha%e reached .&/ +> $illion in 922
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SWOT ANALYSIS OF INDIAN TEXTILE INDUSTRY
STRENGTHS :
&tron' and di%erse raw material $ase
-Third largest producer of cotton
-Fifth largest producer of man-made fiber and yarn
!ertical and hori ontal inte'rated textile %alue chain
=lo$ally competiti%e spinnin' industry
A%era'e cotton yarn spinnin' cost at .&/ 9 0 per #'3 which is lower than all the
countries includin' China
Bow wa'es Rate at 2 0+ .&/ per operator hour as compared to .&* + of
China and .&* 9 0 of Tur#ey
.ni"ue stren'th in traditional handlooms and handicrafts
Flexi$le production system
*i%erse desi'n $ase
W EAKNESSES :
D &tructural wea#nesses in wea%in' and processin'
- 2% of shuttle-less looms as percentage of total looms as against world average of
16% and China, a!istan and "ndonesia 1#%, $% and 1 % respectively&
D i'hly fra'mented and technolo'y $ac#ward textile processin' sector
D i'hly fra'mented 'arment industry
D Except spinnin'3 all other se'ments are predominantly decentrali ed
D Ri'id la$or laws proving a bottlenec! particularly to the garment sector& 'arge
seasonal orders cannot be ta!en because the labour strength cannot be reduced
during the slac! season&
D Inade"uate capacity of the domestic textile machinery manufacturin' sector
D :i' demand and supply 'ap in the trainin' facilities in textile sector
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D Infrastructural $ottlenec#s in terms of power3 utility3 road transport etc
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O PPORT N!T!ES
D uota phase out pushin' the export 'rowthD :uoyant domestic economy
? "ncreasing disposable income levels&
- "ncreasing wor!ing female population( The propensity to spend in the case of wor!ing
women is higher by 1&) times as compared to a house wife&
D Increased usa'e of credit cards and a%aila$ility of cheap finance would also pro%ide
fillip to impulsi%e apparel purchases
D The re%olution in or'ani ed retailin' would increase the consumption of apparel and
made?ups
T HREATS
D Possi$ility of a 'lo$al recession tri''ered $y a wea#enin' dollar
D i'her competition especially after 922@ when China cannot $e restrained under 7TO
D Non?a%aila$ility of indi'enous textile machinery
D Bac# of domestic capital and a$sence of appetite of domestic industries to in%est in the
"uantities en%isa'ed for +9 percent 'rowth tar'et
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COMPANY PROFILE
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Alo# is one of India6s leadin' inte'rated textile manufacturers 7ith more than two
decades of in%ol%ement in the textile industry3 the Company is present across the textile
%alue chain from spinnin' to home textiles3 'arments and retailin' of products
manufactured $y us It operates in fi%e ma)or di%isions3 Cotton Garn3 Apparel Fa$rics
,7o%en H nitted-3 ome Textiles3 =arments and Polyester Garn In addition to these3
which are the Company6s Jcore6 $usinesses3 our throu'h its su$sidiaries3 has also recently
%entured into retailin' of products manufactured $y us and realty Their presence across
the textile %alue chain can $e $est depicted $y the a$o%e 'raph
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The Company6s %ertically inte'rated facilities and flexi$ility of operations ena$les them
to produce cotton and cotton $lended fa$rics in %arious counts and construction and a
wide ran'e of finishes Their 'lo$al si e3 modern technolo'y in e"uipments3 inte'rated
plants and manufacturin' flexi$ility coupled with product de%elopment team and
competent mar#etin' force facilitates a deep understandin' of customer needs and its
satisfactory fulfilment This product3 customer and mar#et di%ersification also ensures
ris# miti'ation and sta$ility of earnin's and places the Company at a competiti%e
ad%anta'e o%er other players in the industry
Their core competency lies in manufacturin' of "uality textile products and assurin' our
customers of product consistency and timely deli%ery schedules at international prices
O%er a period of time the Company has $een the recipient of se%eral awards and trophiesincludin' trophies $y Texprocil for the Company6s export performance
For the year ended (arch 1+3 922@3 Alo#6s total consolidated re%enue was Rs 939@9 2+
crores and their consolidated profit after tax after minority interest was Rs +@8 11 crores
As at (arch 1+3 922@3 Company6s total consolidated assets were Rs @32@1 4@ crores and
consolidated net worth was Rs +3419 @< crores
For the half year ended &eptem$er 123 922@3 Alo#6s total consolidated re%enue was Rs
+39>4 @+ crores and consolidated profit after tax after minority interest was Rs +9 2+
crores As at &eptem$er 123 922@3 the Company6s total consolidated assets were Rs
@3+ 01 crores and consolidated net worth was Rs +3
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CONCEPT OF INTERNATIONAL TRADE:
International trade is the exchan'e of 'oods and ser%ices $etween countries
This type of trade 'i%es rise to a world economy3 in which prices3 or supply and demand3
affect and are affected $y 'lo$al e%ents Political chan'e in Asia3 for example3 could
result in an increase in the cost of la$or3 there$y increasin' the manufacturin' costs for an
American snea#er company $ased in (alaysia3 which would then result in an increase in
the price that you ha%e to pay to $uy the tennis shoes at your local mall A decrease in the
cost of la$or3 on the other hand3 would result in you ha%in' to pay less for your new
shoes
Tradin' 'lo$ally 'i%es consumers and countries the opportunity to $e exposed
to 'oods and ser%ices not a%aila$le in their own countries Almost e%ery #ind of product
can $e found on the international mar#et food3 clothes3 spare parts3 oil3 )ewelry3 wine3
stoc#s3 currencies and water &er%ices are also traded tourism3 $an#in'3 consultin' andtransportation A product that is sold to the 'lo$al mar#et is an export3 and a product that
is $ou'ht from the 'lo$al mar#et is an import Imports and exports are accounted for in a
countryKs current account in the $alance of payments
Trade is what #eeps economies and nations ali%e Trade demands create
domestic production and the inflows of funds from o%erseas Countries that ha%e limited
domestic resources3 such as &in'apore3 must $e a$le to #eep up with domestic production
of %arious 'oods and ser%ices so as to maintain a trade surplus3 as they cannot produce
e%erythin' they need in within their own $orders
Exportin' is increasin' yearly3 'lo$ally This is due to %arious factors First3 $oth lar'e
and small firms export L not )ust lar'e firms Also3 under the 7orld Trade Or'ani ation
,7TO- there has $een a decline in trade $arriers This holds true for other re'ional trade
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a'reements such as the European .nion ,E.- and North American Free Trade A'reement
,NAFTA-
Some important "enefit# of !nternationa$ Trade
Enhances the domestic competiti%eness
Ta#es ad%anta'e of international trade technolo'y
Increase sales and profits
Extend sales potential of the existin' products
(aintain cost competiti%eness in your domestic mar#et
Enhance potential for expansion of your $usiness
=ains a 'lo$al mar#et share Reduce dependence on existin' mar#ets
&ta$ili e seasonal mar#et fluctuations
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!N%O &!NTERNAT!ONAL %O''ER%!AL( TER'S :
Group E ) *eparture
E+W ) E, Wor-# &named p$ace(
The seller ma#es the 'oods a%aila$le at his premises The $uyer is responsi$le for all
char'es
Group . ) 'ain carria/e unpaid
FCA L Free Carrier ,named place-
The seller hands o%er the 'oods3 cleared for export3 into the custody of the first carrier
,named $y the $uyer- at the named place This term is suita$le for all modes of transport3
includin' carria'e $y air3 rail3 road3 and containerised M multi?modal transport
FA& L Free Alon'side &hip ,named loadin' port-The seller must place the 'oods alon'side the ship at the named port The seller must
clear the 'oods for export; this chan'ed in the 9222 %ersion of the Incoterms &uita$le for
maritime transport only
FO: L Free On :oard ,named loadin' port-
The classic maritime trade term3 Free On :oard seller must load the 'oods on $oard the
ship nominated $y the $uyer3 cost and ris# $ein' di%ided at shipKs rail The seller must
clear the 'oods for export (aritime transport only
Group % ) 'ain carria/e paid
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CFR L Cost and Frei'ht ,named destination port-
&eller must pay the costs and frei'ht to $rin' the 'oods to the port of destination
owe%er3 ris# is transferred to the $uyer once the 'oods ha%e crossed the shipKs rail
(aritime transport only
CIF L Cost3 Insurance and Frei'ht ,named destination port-
Exactly the same as CFR except that the seller must in addition procure and pay for
insurance for the $uyer (aritime transport only
CPT L Carria'e Paid To ,named place of destination-
The 'eneralM containerisedM multimodal e"ui%alent of CFR The seller pays for carria'e to
the named point of destination3 $ut ris# passes when the 'oods are handed o%er to thefirst carrier
CIP L Carria'e and Insurance Paid to ,named place of destination-
The containeri ed transportMmultimodal e"ui%alent of CIF &eller pays for carria'e and
insurance to the named destination point3 $ut ris# passes when the 'oods are handed o%er
to the first carrier
Group * ) Arri0a$
*AF L *eli%ered At Frontier ,named place-
It can $e used when the 'oods are transported $y rail and road The seller pays for
transportation to the named place of deli%ery at the frontier The $uyer arran'es for customs clearance and pays for transportation from the frontier to his factory The passin'
of ris# occurs at the frontier
*E& L *eli%ered Ex &hip ,named port-
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7here 'oods are deli%ered ex ship3 the passin' of ris# does not occur until the ship has
arri%ed at the named port of destination and the 'oods made a%aila$le for unloadin' to
the $uyer The seller pays the same frei'ht and insurance costs as he would under a CIF
arran'ement .nli#e CFR and CIF terms3 the seller has a'reed to $ear not )ust cost3 $ut
also Ris# and Title up to the arri%al of the %essel at the named port Costs for unloadin'
the 'oods and any duties3 taxes3 etc are for the :uyer A commonly used term in
shippin' $ul# commodities3 such as coal3 'rain3 dry chemicals and where the seller either
owns or has chartered3 their own %essel
*E L *eli%ered Ex uay ,named port-
It means the same as *E&3 $ut the passin' of ris# does not occur until the 'oods ha%e
$een unloaded at the port of destination
**. L *eli%ered *uty .npaid ,named destination place-
It means that the seller deli%ers the 'oods to the $uyer to the named place of destination
in the contract of sale The 'oods are not cleared for import or unloaded from any form of
transport at the place of destination The $uyer is responsi$le for the costs and ris#s for
the unloadin'3 duty and any su$se"uent deli%ery $eyond the place of destination
owe%er3 if the $uyer wishes the seller to $ear cost and ris#s associated with the import
clearance3 duty3 unloadin' and su$se"uent deli%ery $eyond the place of destination3 then
this all needs to $e explicitly a'reed upon in the contract of sale
**P L *eli%ered *uty Paid ,named destination place-
It means that the seller pays for all transportation costs and $ears all ris# until the 'oods
ha%e $een deli%ered and pays the duty Also used interchan'ea$ly with the term Free
*omicile
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EXPORT FINANCE
%ON%EPT
Export financin' is another important area of export $usiness Export finance
refers to the credit facilities ex?tended to the exporters at pre?shipment and post?shipment
sta'es It includes any loan to an exporter for financin' the purchase3 processin'3
manufacturin' or pac#in' of 'oods meant for o%erseas mar#ets The exporter may re"uire
short term3 medium term or lon' term finance dependin' upon the types of 'oods to $e
exported and the terms of statement offered to o%erseas $uyer
The short?term finance is re"uired to meet 12or-in/ capita$3 needs The wor#in' capital
is used to meet re'ular and recurrin' needs of a $usiness firm The re'ular and recurrin'needs of a $usiness firm refer to purchase of raw material3 payment of wa'es and salaries3
expenses li#e payment of rent3 ad%ertisin' etc
The exporter may also re"uire 1term finance34 The term finance or term loans3 which is
re"uired for medium and lon' term financial needs such as purchase of fixed assets and
lon' term wor#in' capital
Export finance is short?term wor#in' capital finance allowed to an exporter Finance and
credit are a%aila$le not only to help export production $ut also to sell to o%erseas
customers on credit
Credit is also extended after the shipment of 'oods to the date of reali ation of export
proceeds In this unit3 you will learn %arious schemes of finance a%ail?a$le to exporters at
pre?shipment and post?shipment sta'es
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!n#titutiona$ .rame2or-
Institutional framewor# for pro%idin' finance comprises Reser%e :an# of lndia3
Commercia+ :an#s3 Export Import :an# of India and Export Credit and =uarantee
Corporation Reser%e :an# of India3 $ein' the central $an# of country3 lays down the
policy frame wor# and pro?%ides 'uidelines for implementation Finance short or medium
term3 is pro%ided exclusi%ely $y the Indian and forei'n commercial $an#s which aremem$ers of the Forei'n Exchan'e *ealer6s Association The Reser%e :an# of India
function as refinancin' institutions for short and medium term loans respecti%ely3
Pro%ided $y commercial $an#s Export Import :an# of India3 in certain cases3
participates with commercial $an# in extendin' medium term loans to exporters
Commercial $an#s pro%ide finance at a concessional rate of interest and in turn are
refinanced $y the Reser%e :an# Export Import :an# of India at concessional rate In
case they do not wish to a%ail refinance3 they are entitled for an interest rate su$sidy
Export Credit H =uarantee Corporation ,EC=C- also plays an important role throu'h its
%arious policies and 'uarantees pro%idin' co%er for commercial and political ris#s
in%ol%ed in export trade
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EXPORT PROCEDURE
Once the contract has $een won3 the export department ,which handles the
documentation- ta#es o%er with preparation of all the documents necessary to $e prepared
at each sta'e of the transaction
The export procedure can $e split into 1 sta'es
,i- Pre?shipment
,ii- &hipment
,iii- Post?shipment
PRE-SHIPMENT PROCESS
uotation H Order Confirmation
The or'ani ation3 upon in"uiry from a prospecti%e $uyer issues a "uotation mentionin'
its terms and conditions related to shippin' of 'oods3 payments3 price and "uality of
'oods It also pro%ides %alue H %olume of 'oods3 terms for letter of credit3 as per the case
and other details related to trade li#e date and time period for shipment3 destination port3
and final destination The "uotation here may$e of two types
Firm "uotation
Jwithout en'a'ement6 "uotation
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i- In case of a Jfirm6 "uotation3 it is analo'ous to an unconditional underta#in'
on the part of the seller and if the $uyer accepts the "uotation3 it $inds the
seller in a contract of sale In order not to $ind himself indefinitely the seller
usually specifies a period of %alidity for the contract $y usin' the words Jfirm
until 6 which implies that the $uyer should ma#e his decision re'ardin' the
"uotation within a specified period of time
ii- A "uotation includin' the clause Jwithout en'a'ement6 'i%es the seller more
latitude and does not $ind him into the contract upon simple acceptance from
the seller In other words the seller can still choose to i'nore the "uotation if
he so desires3 e%en after the $uyer has a'reed to it A further confirmation is
re"uired from the seller to $rin' the contract into existence The importer onacceptin' the terms H conditions3 sends a Purcha#e order &PO(4
Once the customer has sent the purchase order3 it is usually followed up $y an order
confirmation from the seller ,irrespecti%e of whether it is a Jfirm6 or Jwithout
en'a'ement6 "uotation- 7hile the order confirmation from the seller is not necessary in
case of a Jfirm6 "uotation3 it is sent merely to ensure clarity $etween the parties This
must also $e accompanied $y a pro5forma in0oice 3 which is prepared $y the exporter and
is an indication of what the real in%oice will loo# li#e after deli%ery The importance of
this document should not $e o%erloo#ed as it forms the $asis for the preparation of all the
documents re"uired at %arious sta'es of the transaction It is issued a'ainst the export
order and is $asically an acceptance and reconfirmation of the terms of contract
Pro%idin' a detailed and unam$i'uous pro?forma in%oice is essential3 since it pro%ides a
$ase for esta$lishin' Better of Credit ,BMC- or recei%in' remittance from the importer as
the case may $e ,Better of credit and an ad%ance payment are two modes of pre?shipment
payment and will $e dealt with in detail later- The openin' of a letter of credit
,hereinafter referred to as BMC- is made easier with a pro?forma in%oice since it
esta$lishes in ad%ance the %arious terms and conditions3 how the $uyer and seller intend
to di%ide the ris#s arisin' out of the export contract3 how payment will $e made and other
specifications Thus it allows the $an#ers to ma#e an accurate assessment of the
essentials of the contract and open the BMC on $ehalf of the importer
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=i%en $elow are the %arious detailsMtermsMclauses that must $e mentioned while preparin'
the pro?forma in%oice The terms in these clauses which re"uire explanation are descri$ed
in the followin' pa'es and also with appropriate endnotes
The %arious clauses for a pro?forma in%oice include
Address of the prospecti%e $uyerMconsi'nee
*etails of 'oods to $e shipped
*etails of the price3 "uantity3 rate and amount of shipment
(ode of shipment ,AirM&eaMRoad-
Port of Boadin' ,Any PortMAirport in India-
Port of *ischar'e ,Named port and country-
Final *estination ,place of deli%ery3 port of dischar'e or inland destination-
Terms of Payment ,TT3 BMC3 *MP,CA*-3 *MA etc-
Price :asis ,FO:3 CFR3 CIF etc3 which are incoterms-
Apart from these mandatory details that are re"uired to $e included in the pro?
forma in%oice3 other details that must $e disclosed %ary accordin' to the terms and
mode of payment
In case the mode of payment is Better of Credit the followin' additional detailsMterms
must $e mentioned
&pecify dateMs of shipment
BMC6s should $e irre%oca$lei and opened $y a prime $an# ii
Tolerance ,QM? in 5 - in "uantity and %alue to $e permitted iii
BMC to $e freely ne'otia$le with any $an# in India
Place of expiry of BMC should $e India
Pro%ide sufficient time to present ori'inal documents to the ne'otiatin' $an# i%
Partial % and Transshipment %i to $e allowed
All $an# char'e6s outside country of issue ,of BMC- to $e on applicants account
,importers account-
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In case the mode of payment is throu'h TMT3 *MP3 and *MA the followin' additional
detailsMterms must $e included
&pecify dateMs of shipment
Tolerance ,QM? in 5 - in "uantity and %alue to $e permitted
To pro%ide $eneficiary6s $an#in' details ,exporter6s $an#in' details- for callin'
funds in case of payment $y TMT %ii
Partial and Transshipment to $e allowed
&pecify payment terms3 i e TMT or documents a'ainst payment ,*MP-3 Cash
a'ainst documents ,CA*- or documents a'ainst acceptance ,*MA-
:an# details of the $uyer need to $e o$tained in case of payment terms $ein' *MP
,CA*- or *MA
On receipt of pac#in' list from the factory pre?shipment documents are prepared under
appropriate scheme3 i e *EP: M *uty *raw$ac# M Ad%ance Authori ation ,in case where
the raw materials used in the export product are imported- as the case may $e; duly
"uotin' the EPC= Bicense no towards fulfillment of a%era'e or export o$li'ationunderta#en a'ainst import of Capital =oods ,Plant and (achinery- and forward to
clearin' a'ent and factory for processin'
=et the documents processed at Customs M Port $y clearin' a'ent and to $e #ept
ready to recei%e the 'oods at port M container frei'ht station for cartin'
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SHIPMENT OF GOODS:
Once the pre?shipment procedures are complete shipment of 'oods $ecomes the next
sta'e in the export process For carryin' out the procedures related to shipment of 'oods3
selection of a frei'ht forwardin' a'ent is %ery important
Frei'ht Forwarder An international frei'ht forwarder is an a'ent for the exporter in
mo%in' the export 'oods to an o%erseas destination Frei'ht forwarders assist exporters in
preparin' price "uotations $y ad%isin' on frei'ht costs3 port char'es3 consular fees3 costs
of special documentation3 insurance costs3 and their handlin' fees Once the order is
ready for shipment3 frei'ht forwarders should re%iew all documents to ensure that
e%erythin' is in order
The cost of the shipment3 the deli%ery schedule3 and the accessi$ility to the shipped
product $y the forei'n $uyer are all factors to consider when determinin' the method of
international shippin'
:road cate'ories of export shipments are
D.nder claim of *raw$ac# of duty
D7ithout claim of *raw$ac#
DExport $y a +225 Export Oriented .nit
D.nder *uty Entitlement Pass :oo# ,*EP:- &cheme
Bar'ely3 the followin' procedure may $e followed for shipment of 'oods
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&u$mit documents to Frei'ht Forwarder3 instructin' him to $oo# space on the steamerM
airline The Exporter is expected to pro%ide the followin' documents to the Clearin' H
Forwardin' A'ents3 who are entrusted with the tas# of shippin' the consi'nments3 either
$y air or $y sea
In%oice
Pac#in' Bist
*eclaration in FOR( &*F %iii ,to meet the re"uirements as per FE(A- in duplicate
A R E ? From + and 9 copy
Any other declarations3 as re"uired $y Customs
On account of the introduction of Electronic *ata Interchan'e ,E*I- system for
processin' shippin' $ills electronically at most of the locations ? $oth for air or sea
consi'nments ? the CHF ,Clearin' H Forwardin'- A'ents are re"uired to file with
Customs the shippin' documents3 throu'h a particular format3 which will %ary dependin'
on the nature of the shipment The CHF a'ents are also char'ed with the tas# of 'ettin'&hippin' :illM :ill of Export passed $y Custom Authorities ,o$tainin' customs
authorities6 JBET EXPORT6 ,BEO- endorsement on the shippin' $ill-
After completin' the shipment formalities3 the C H F A'ents are expected to forward to
the Exporter the followin' documents
Customs endorsed Export In%oice H Pac#in' Bist*uplicate of Form &*FExchan'e control copy of the &hippin' :ill3 processed electronicallyA R E ,ori'inal H duplicate- duly endorsed $y Customs:ill of Badin' or Airway $ill3 as the case may $e
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D Exchan'e Control Copy H &*F
D :an# Reali ation Certificate ,:RC-
D Frei'ht Certificate
If the export is a'ainst an BC then the $an# documents to $e sent is mentioned in BMC
,*ocument to $e couriered to $e :an# Address- The ne'otiatin' $an# will scrutini e
these documents and if found in order3 ne'otiate the same If the export is *AM*P then
one set of documents is sent to $an# in which payment from that particular $uyer is 'oin'
to $e recei%ed and one to $uyer directly for release of 'oods from port
The issuin' $an# ma#es the payment to the ne'otiatin' $an# if there is no discrepancy in
the terms and conditions as mentioned in BMC If there is any discrepancy then the issuin'
$an# as#s for a NOC or a discrepancy wai%er appro%al from the importer and after it is'i%en then only the payment is released to the ne'otiatin' $an#
Then the $eneficiary6s $an# 'ets the payment from issuin' $an# and on recei%in' the
payment it issues a :an# reali ation Certificate ,:RC- This document confirms the
export reali ation and is used for 'ettin' the incenti%es hence it is send to the *=FT for
the *EP: scheme A copy of :RC is sent to R:I directly $y the ne'otiatin' $an#
Commercial In%oice
A $ill for the 'oods from the seller to the $uyer These in%oices are often used $y
'o%ernments to determine the true %alue of 'oods when assessin' customs duties
=o%ernments that use the commercial in%oice to control imports will often specify its
form3 content3 num$er of copies3 lan'ua'e to $e used3 and other characteristics A
commercial in%oice is a prima?facie e%idence of the contract of sale and purchase It
is a document made $y the exporter on the importer indicatin' details li#e description
of the 'oods consi'ned3 consi'nor6s name3 consi'nee6s name3 name of the steamer3
num$er and date of $ill of ladin'3 country of ori'in of 'oods3 price3 terms of payment3
amount of frei'ht etc
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Followin' are the conditions that must $e exercised in order to ensure that an in%oice is
considered %alid
DThe in%oice should $e made out in the name of the applicant or the party specified in BC
DTo $e si'ned $y an authori ed si'natory of the exporter
DThe in%oice should $e drawn in the same currency of BC unless otherwise specified also
mentionin' the terms of deli%ery H routin' of merchandi e
DThe in%oice should not include any char'es not stipulated in the BC Also3 the 'ross
%alue of in%oice should not exceed credit %alue
DThe in%oice should show deduction towards ad%ance payment made3 a'ency
commission paya$le etc as applica$le
DFinal amount of in%oice or the percenta'e of drawin' as permitted in the BC should
correspond with the draft amountDIf partial shipments are affected3 amount of drawin's should prefera$ly correspond to
proportionate "uantities shipped
DIf in%oices issued for an amount in excess of the amount permitted $y the credit3 the
drawin' should not exceed the amount of credit *etails stated on the in%oice should
correspond exactly to details specified in all other documents Also3 the details should
certify the facts li#e ori'in of 'oods etc3 stipulated in the BC
Consular In%oice
(ainly needed for the countries li#e enya3 .'anda3 Tan ania3 (auritius3 New ealand3
:urma3 Ira"3 Ausatralia3 Fi)i3 Cyprus3 Ni'eria3 =hana3 an i$ar etc It is prepared in the
prescri$ed format and is si'nedM certified $y the counsel of the importin' country located
in the country of export
Customs In%oice
(ainly needed for the countries li#e .&A3 Canada3 etc It is prepared on a special form
$ein' presented $y the Customs authorities of the importin' country It facilitates entry of
'oods in the importin' country at preferential tariff rate
Be'ali ed In%oice
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This shows the sellerKs 'enuineness $efore the appropriate consulateM cham$er of
commerceM em$assy It do not ha%e any prescri$ed form
Pac#in' Bist M7ei'ht Note
DThe wei'ht certificate???wei'ht list or wei'herKs certificate???is most often used in the
export 'oods sold on wei'ht $asis It is issued $y the official wei'her on the doc# or the
independent certified wei'her
DIn case of transport other than $y sea and unless the letter of credit ,BMC- specifically
stipulates that the certification of wei'ht must $e $y means of a separate document3 a
wei'ht stamp or declaration of wei'ht that is superimposed on the transport document $y
the carrier or his a'ent is accepta$le
D Considera$ly more detailed and informati%e than a standard domestic pac#in' list3 it
itemi es the material in each indi%idual pac#a'e and indicates the type of pac#a'e3 such
as a $ox3 crate3 drum3 $ales3 pallets or carton :oth commercial stationers and frei'ht
forwarders carry pac#in' list forms
D Color3 &i e3 &etMpair3 Cartoons3 Pieces3 7ei'ht3 (easurement H *imension of the 'oods
pac#in' &hippin' company utili es this information to calculate the %olume of space to
$e occupied $y a consi'nment
D It also states other details li#e name of exporter3 consi'nee3 port of loadin'3dischar'e H destination
:ill of ladin'
D A document that esta$lishes the terms of a contract $etween a shipper and a
transportation company under which frei'ht is to $e mo%ed $etween specified points for a
specified char'e .sually prepared $y the shipper on forms issued $y the carrier3 it ser%es
as a document of title3 a contract of carria'e3 and a receipt for 'oods Also see Air
way$ill3 Inland $ill of ladin'3 Ocean $ill of ladin'
D :ill of ladin' is closely related to the BC It is a %ery important document when it
comes to BC mode of payment Each H e%ery BC has the pro%ision of presentation of
:ill of Badin' $efore payment is dischar'ed on it The possession of the ori'inal $ill of
ladin' ena$les the holder to claim the 'oods from the carrier It is the only ne'otia$le
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&witch $ill of ladin'
Bash $ill of ladin'
&tale $ill of ladin'
On?$oard $ill of ladin'
FCRMBRMAirways :ill
D All the three documents are issued for the same purpose $ut for different means Frei'ht
car'o receipt is issued when the 'oods are exported throu'h sea route3 Borry receipt is
issued in the case when 'oods are exported $y road and Airways :ill is issued when
'oods are exported %ia airways In a$sence of :B these documents act as a proof for
export of 'oods These documents are issued in lieu of :B3 which is issued and sent to the
$uyer with the shipment itself $y the shippin' company
&hippin' :ill
D This document is issued $y the customs and is certificate of custom clearance A copy of
shippin' $ill is sent to the seller6s $an# as a post shipment document It contains all the
details a$out the 'oods li#e :ears a distinct num$er #nown as &: num$er
D Indicate the date and place of issuance
D Name and mode of the carrier
D Indicate the name of the consi'nor and consi'nee
D Indicate a $rief description of the 'oods $ein' carried
D Indicate port of loadin' or ta#in' in char'eD Indicate port of dischar'e
D FO: %alue of 'oods in $oth forei'n currency as well as domestic currency
D Amount of frei'ht H insurance paid3 if any
D In%oice num$er and Forex account num$er also
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:ill of Exchan'e
D The $ill of exchan'e3 commonly referred to as the draft or the $ill3 is an unconditional
order in writin'3 si'ned and addressed $y the drawer ,the exporter usually- to the drawee
,the confirmin' $an# or the issuin' $an# usually-3 re"uirin' the drawee to pay the drawer
a certain sum of money at si'ht or at a fixed or determina$le future time
D The draft is widely used in international trade3 most fre"uently in the payment a'ainst a
letter of credit ,BMC- It is also used in the open account without any BMC in%ol%ed
*rawer
The drawer is the party who issues the draft and to whom the payment is made The
drawer is the seller ,the exporter- and the payee of the draft The payee could $e another
party rather than the exporter3 or could $e the $ona fide holder ,the $earer- of the draft
*rawee
The drawee is the party who owes the money or a'rees to ma#e the payment and towhom the draft is addressed ,made out- The drawee is the $uyer ,the importer-3 the
acceptor and the payer of the draft in a documentary collection In a letter of credit the
drawee most often is the confirmin' $an# or the issuin' $an#3 which is the acceptor and
the payer of the draft
Remittin' :an#
The exporterKs $an# to whom the exporter sends the draft3 shippin' documents and
documentary collection instructions3 and who su$se"uently relays them to the collectin'
$an# in a documentary collection is called the remittin' $an#
The term remittin' $an# as used under a letter of credit may refer to a nominated $an#
from whom the issuin' $an# or the confirmin' $an#3 if any3 recei%es the shippin'
documents
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Collectin' :an# ,Presentin' :an#-
The $an# in the importerKs country ,the importerKs $an# usually- in%ol%ed in
processin' the collection???presents the draft to the importer for payment or acceptance3
and thereafter releases the shippin' documents to the importer in accordance with the
instructions of the exporter???is called the collectin' $an# or the presentin' $an#
Inspection Certificate or Inspection Report
The inspection certificate???inspection report or report of findin's???is re"uired $y some
importers andMor importin' countries The export?trader uses such a report in the
inspection of 'oods purchased from a manufacturer The export?manufacturer also uses
such a report in the inspection of its own productions
In case an inspection certificate is re"uired3 the importer may stipulate in the letter of
credit ,BMC- to use a specific independent sur%eyor
In the case of a forei'n 'o%ernment re"uired pre?shipment inspection3 which is stipulated
in the BMC3 the report of findin's can $e in the form of a security la$el attached on the
in%oice The la$el $ears the num$er and date of the correspondin' report of findin'sissued $y the forei'n 'o%ernment en'a'ed sur%eyor
Certificates of Ori'in
The certificate of ori'in is a document certifyin' the country in which the product
was manufactured3 and in certain cases may include such information as the local
material and la$or contents of the product
&ome importin' countries re"uire a certificate of ori'in to esta$lish whether or not a
preferential duty rate is applica$le A popular example of the certificate of ori'in is the
Form A3 which is often called the =&P Form A
The certificate of ori'in ,CMO- is an alternati%e to the declaration or the certification
andMor le'ali ation of the commercial in%oice The CMO is $ased on the rules of the
country of ori'in
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The country of ori'in is the country where the 'oods are 'rown3 produced or
manufactured The manufactured 'oods must ha%e $een su$stantially transformed in the
exportin' country as the country of ori'in3 to their present form ready for export Certain
operations such as pac#a'in'3 splittin' and sortin' may not $e considered as sufficient
operations to confer ori'in
The certificate of ori'in includes the Form A3 Cham$er of Commerce Certificate of
Ori'in3 ExporterKs Certificate of Ori'in3 and Free Trade (ar#et Certificate of Ori'in The
trade a'reement3 import practice3 and letter of credit ,BMC- stipulation determine the type
of CMO needed
ExporterKs Certificate of Ori'in
D .nless the letter of credit ,BMC- stipulates a specific certificate of ori'in ,CMO- form
andMor the issuer andMor the wordin' ,data content-3 the exporter may issue hisMher own
CMO usin' the company letterhead The CMO contents may include the same data as in the
commercial in%oice and pac#in' list3 addin' a declaration that the 'oods in "uestion are
manufactured in the exportin' country3 and that the amount shown on in%oice is the true
and correct %alue
D *ependin' on the BMC stipulation3 the certificate of ori'in issued $y the exporter may $e
self?certified andMor re"uire certification $y a Cham$er of Commerce or the 'o%ernmentforei'n trade office The certification normally re"uires payment of a fee3 unless self?
certified
&hippin' Ad%ice
D The shippin' ad%ice is a notice to the importer on summary of the shipment
D Forei'n importer may arran'e the car'o insurance on time $ased on the shippin' ad%ice
,if $uyer is to arran'e the insurance- (oreo%er3 importer may #now when to recei%e the
'oods and arran'e with a customs $ro#er for the car'o clearance
D The shippin' ad%ice is particularly important in short?sea trades3 for example within the
Asian countries where the 'oods may arri%e at the port of destination $efore the shippin'
documents3 and in the ports of destination where theft and pilfera'e of the imported
'oods is rampant
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:eneficiaryKs Certificate
D The $eneficiaryKs certificate3 sometimes referred to as the certificate of assurance3 is a
certification issued $y the $eneficiary of the letter of credit ,BMC- showin'3 unless
wordin' is specified in the BMC3 the summary of a consi'nment and declarin' ,i e 3
assurin' the consi'nee- that the shipment in "uestion conforms to the specifications in the
sales contract The exporter can issue a $eneficiaryKs certificate usin' company letterhead
ealth Certificate
Phytosanitary or Plant ealth Certificate
The prefix KphytoK means plant The phytosanitary certificate???plant health certificate???is
issued $y the 'o%ernment a'ricultural department or certified inspector for such
a'ricultural products as seeds3 fruits3 %e'eta$les3 rice3 wheat3 soy$ean3 corn3 and milled
materials ,e ' flour and soy$ean meal-3 certifyin' that the 'oods are free from harmful
pests and diseases
Fumi'ation CertificateD The fumi'ation certificate is issued $y a speciali ed treatment plant or firm for
a'ricultural and forestry products3 certifyin' that the 'oods ha%e $een treated with smo#e
or fumes The purpose of fumi'ation is to #ill insects or disinfect For example3 wood
may $e fumi'ated with methyl $romide
D In some countries3 a fumi'ation certificate may $e re"uired to o$tain a phytosanitary
certificate for the forestry products
Analysis Certificate
D The analysis certificate is re"uired $y certain importin' countries andMor importers for
tariff or other purposes3 usually issued as proof of product composition or contents It is
o$tained from an independent testin' la$oratory Importers may specify a testin'
la$oratory in the letter of credit ,BMC-
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Fax &hippin' Ad%ice
D The fax shippin' ad%ice is an ad%ance facsimile ,fax- notice to the importer on
summary of the shipment It %aries sli'htly from the mail shippin' ad%ice The
information in a fax shippin' ad%ice may include the purchase order or contract num$er3
letter of credit ,BMC- num$er and date3 description of 'oods ,in 'eneral terms-3 total
num$er of pac#a'es3 carrier and %oya'eMfli'ht num$er3 ET* ,estimated time of
departure- from named port or point of ori'in3 and ETA ,estimated time of arri%al- at
named port or point of destination
D In practice3 a fax shippin' ad%ice is often sent to the importer e%en if the BMC does not
specifically call for such ad%ice
D The printout of the fax transmission report will show whether or not the ad%ice is
successfully transmitted to the importer3 the report is a proof of transmission
Insurance certificate
.sed to assure the consi'nee that insurance will co%er the loss of or dama'e to the car'o
durin' transit These can $e o$tained from frei'ht forwarder or with direct insurance
company
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METHODS/TERMS OF PAYMENT
There are 4 primary methods of payment in international trade
i- Cash in Ad%anceii- Betters of Creditiii- *ocumentary Collectionsi%- Open Account
1) Ca ! "# A$%a#&'
The cash?in?ad%ance method of payment is the safest for exporters since the payment is
made $efore the 'oods are shipped and credit ris# ,ris# of non?payment- is miti'ated It
also in%ol%es the least paperwor# and payment is made "uic# and in a secure manner In
today6s scenario3 an adapted %ersion of this method is often used3 wherein a part payment
,42?825- is made in ad%ance and the remainder of the payment is made upon receipt of
'oods This method is also expensi%e for the importer since the fee for an international
wire transfer is paid $y the sender ,importer- ix This is a common form of this method
used in Alo# Industries as well
Applica$ility It is recommended in hi'h?ris# trade transactions where ris# of non?
payment is more prominent due to political insta$ility in the country of import3 or when
the credit ratin' of the importer is un%erifia$le or dou$tful Althou'h it is hi'hly
$eneficial to the exporter3 it must $e used with caution since unattracti%e payment terms
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may lead to a drop in sales and loss of mar#et owe%er3 if the product is rare and in
demand3 the exporter can always use it to his ad%anta'e and lo$$y for cash?in?ad%ance
payment terms
7hile usin' this method3 exporters must pro%ide clear routin' instructions to the importer
and the re"uired details such as3 "an-6# name7 addre##7 account num"er7 SW!.T code
,&ociety for 7orld Inter$an# Financial Telecommunication- and in case of . & dealin's
the A8A &American 8an-in/ A##ociation( num"er4
On occasions the importer may insist on an a$%a#&' (a *'#+ , a.a#+'' 3 which would
allow him to reco%er the payment in case the exporter fails to deli%er accordin' to the
contract In such cases it is ad%isa$le for the exporter to instruct the $an# to ma#e the
'uarantee "#0('.a+"%' until he recei%es the full payment
2) L'++'. O3 C.'$"+
The $uyer and the seller who are located in different countries3 may not #now each other
and hence many times the pro$lem of :uyer6s creditworthiness hampers the trade
$etween the $uyer and the seller The main o$)ecti%es of the $uyer and the seller in any
international trade and contradictory in terms of :uyer will always try to delay the
payment while the seller would li#e to recei%e funds at the earliest
To miti'ate this pro$lem3 &eller always re"uest :uyer to arran'e for a Better of Credit to
$e issued $y :uyer6s :an# .pon issuance of Better of Credit3 the :uyer6s $an# replaces
its own Creditworthiness to that of the :uyer3 it underta#es to reim$urse the &eller for the
%alue of the Better of Credit Irre%oca$lyS pro%ided two underline conditions are fulfilled
$y the &eller
All the documents stated in the BC are presented;
All the terms and conditions of the BC are complied with
A standard3 commercial $etter of credit is a document issued mostly $y a financial
institution underta#in'
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The BC can also $e the source of payment for a transaction3 meanin' that redeemin' the
letter of credit will pay an exporter Betters of credit are used primarily in international
trade transactions of si'nificant %alue3 for deals $etween a supplier in one country and a
customer in another The parties to a letter of credit are usually a "eneficiary who is to
recei%e the money3 the i##uin/ "an- of whom the applicant is a client3 and the ad0i#in/
"an- of whom the $eneficiary is a client Almost all letters of credit are irre%oca$le3 i e 3
cannot $e amended or canceled without prior a'reement of the $eneficiary3 the issuin'
$an# and the confirmin' $an#3 if any
Some of the *ocument# %a$$ed for under a L%
Financial *ocuments ?:ill of Exchan'e3 Co?accepted *raft
Commercial *ocuments ?In%oice3 Pac#in' list
&hippin' *ocuments ?Transport *ocument3 Insurance Certificate3 Commercial3
Official or Be'al *ocuments Official *ocuments? Bicense3 Em$assy le'ali ation3 Ori'in Certificate3 Inspection
Cert 3 Phyto?sanitary Certificate Transport *ocuments ?:ill of Badin' ,ocean or multi?modal or Charter party-3
Airway $ill3 BorryMtruc# receipt3 railway receipt3 C(C Other than (ate Receipt3
Forwarder Car'o Receipt3 *eli%er Challan etc Insurance documents ?Insurance policy3 or Certificate $ut not a co%er note
Le/a$ princip$e# /o0ernin/ documentary credit#
One of the primary peculiarities of the documentary credit is that the payment o$li'ation
is a$stract and independent from the underlyin' contract of sale or any other contract in
the transaction Thus the $an#6s o$li'ation is defined $y the terms of the credit alone3 and
the sale contract is irrele%ant The defences of the $uyer arisin' out of the sale contract do
not concern the $an# and in no way affect its lia$ility Article 1,a- .CP states this
principle clearly Article 4 the .CP further states that $an#s deal with documents only3
they are not concerned with the 'oods ,facts- Accordin'ly3 if the documents tendered $y
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the $eneficiary3 or his or her a'ent3 appear to $e in order3 then in 'eneral the $an# is
o$li'ed to pay without further "ualifications
The policies $ehind adoptin' the a$straction principle are purely commercial and reflect a
party6s expectations firstly3 if the responsi$ility for the %alidity of documents was thrown
onto $an#s3 they would $e $urdened with in%esti'atin' the underlyin' facts of each
transaction and would thus $e less inclined to issue documentary credits as the
transaction would in%ol%e 'reat ris# and incon%enience &econdly3 documents re"uired
under the credit could in certain circumstances $e different from those re"uired under the
sale transaction; $an#s would then $e placed in a dilemma in decidin' which terms to
follow if re"uired to loo# $ehind the credit a'reement Thirdly3 the fact that the $asic
function of the credit is to pro%ide the seller with the certainty of recei%in' payment3 aslon' as he performs his documentary duties3 su''ests that $an#s should honour their
o$li'ation notwithstandin' alle'ations of misfeasance $y the $uyer Finally3 courts ha%e
emphasised that $uyers always ha%e a remedy for an action upon the contract of sale3 and
that it would $e a calamity for the $usiness world if3 for e%ery $reach of contract $etween
the seller and $uyer3 a $an# were re"uired to in%esti'ate said $reach
The principle of strict complianceS also aims to ma#e the $an#6s duty of effectin'
payment a'ainst documents easy3 efficient and "uic# ence3 if the documents tenderedunder the credit de%iate from the lan'ua'e of the credit the $an# is entitled to withhold
payment e%en if the de%iation is purely terminolo'ical
The price of L%#
All the char'es for issuance of Better of Credit3 ne'otiation of documents3
reim$ursements and other char'es li#e courier are to the account of applicant or as per the
terms and conditions of the Better of credit If the BC is silent on char'es3 then they are tothe account of the Applicant The description of char'es and who would $e $earin' them
would $e indicated in the field 8+: in the Better of Credit
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Partie# in0o$0ed in L% tran#action:
+ The Applicant is the party that arran'es for the letter of credit to $e issued
9 The :eneficiary is the party named in the letter of credit in whose fa%or the letter of
credit is issued
1 The Issuin' or Openin' :an# is the applicant6s $an# that issues or opens the letter of
credit in fa%or of the $eneficiary and su$stitutes its creditworthiness for that of the
applicant
4 An Ad%isin' :an# may $e named in the letter of credit to ad%ise the $eneficiary that
the letter of credit was issued The role of the Ad%isin' :an# is limited to esta$lish
apparent authenticity of the credit3 which it ad%ises
0 The Payin' :an# is the $an# nominated in the letter of credit that ma#es payment to
the $eneficiary3 after determinin' that documents conform3 and upon receipt of funds
from the issuin' $an# or another intermediary $an# nominated $y the issuin' $an#
< The Confirmin' :an# is the $an#3 which3 under instruction from the issuin' $an#3
su$stitutes its creditworthiness for that of the issuin' $an# It ultimately assumes the
issuin' $an#6s commitment to pay
Letter of %redit Proce##:
Commercial Better of Credit Flow
Applicant approaches Issuin'M Openin' :an# with BC application form duly filled and
re"uests Issuin' :an# to issue a Better of Credit in fa%our of :eneficiary
Issuin' :an# issues a Better of Credit as per the application su$mitted $y an Applicant
and sends it to the Ad%isin' :an#3 which is located in :eneficiary6s country3 to formally
ad%ise the BC to the $eneficiary
Ad%isin' :an# ad%ises the BC to the :eneficiary
Once :eneficiary recei%es the BC and if it suits hisM her re"uirements3 heM she prepares
the 'oods and hands o%er them to the carrier for dispatchin' to the Applicant
eM &he then hands o%er the documents alon' with the Transport *ocument as per BC to
the Ne'otiatin' :an# to $e forwarded to the Issuin' :an#
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Issuin' :an# reim$urses the Ne'otiatin' :an# with the amount of the BC post
Ne'otiatin' :an#6s confirmation that they ha%e ne'otiated the documents in strict
conformity of the BC terms Ne'otiatin' :an# ma#es the payment to the :eneficiary
&imultaneously3 the Ne'otiatin' :an# forwards the documents to the Issuin' :an# to $e
released to the Applicant to claim the 'oods from the carrier
Applicant reim$urses the Issuin' :an# for the amount3 which it had paid to the
Ne'otiatin' :an#
Issuin' :an# releases all documents alon' with the titled Transport *ocuments to the
Applicant
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Type# of Letter of %redit
+- Irre%oca$le
An irre%oca$le letter of credit can neither $e amended nor cancelled without the
a'reement of all parties to the credit .nder .CP022 all letters of credit are deemed to $e
irre%oca$le unless otherwise stated ere3 the importerKs $an# 'i%es a $indin' underta#in'
to the supplier pro%ided all the terms and conditions of the credit are fulfilled
9- .nconfirmed
The ad%isin' $an# forwards an unconfirmed letter of credit directly to the exporter
without addin' its own underta#in' to ma#e payment or accept responsi$ility for
payment at a future date3 $ut confirmin' its authenticity
1- Confirmed
A confirmed letter of credit is one in which the ad%isin' $an#3 on the instructions of theissuin' $an#3 has added a confirmation that payment will $e made as lon' as compliant
documents are presented This commitment holds e%en if the issuin' $an# or the $uyer
fails to ma#e payment The added security to the exporter of confirmation needs to $e
considered in the context of the standin' of the issuin' $an# and the current political and
economic state of the importerKs country A $an# will ma#e an additional char'e for
confirmin' a letter of credit In many cases3 the confirmin' $an# is located in
:eneficiary6s country
Confirmation costs will %ary accordin' to the country in%ol%ed3 $ut for many countries
considered a hi'h ris# will $e $etween 95?@5 There also may $e countries issuin'
letters of credit3 which $an#s do not wish to confirm ? they may already ha%e enou'h
exposure in that mar#et or not wish to expose themsel%es to that particular ris# at all
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4- &tand$y Betters of Credit
A stand$y letter of credit is used as support where an alternati%e3 less secure3 method of
payment has $een a'reed They are also used in the .nited &tates of America in place of
$an# 'uarantees &hould the exporter fail to recei%e payment from the importer he may
claim under the stand$y letter of credit Certain documents are li#ely to $e re"uired to
o$tain payment includin' the stand$y letter of credit itself; a si'ht draft for the amount
due; a copy of the unpaid in%oice; proof of dispatch and a si'ned declaration from the
$eneficiary statin' that payment has not $een recei%ed $y the due date and therefore
reim$ursement is claimed $y letter of credit The International Cham$er of Commerce
pu$lishes rules for operatin' stand$y letters of credit ? I&P>@ International &tand$y
Practices
0- Re%ol%in' Better of Credit
The re%ol%in' credit is used for re'ular shipments of the same commodity to the same
importer It can re%ol%e in relation to time or %alue If the credit is time re%ol%in' once
utilised it is re?instated for further re'ular shipments until the credit is fully drawn If the
credit re%ol%es in relation to %alue once utilised and paid the %alue can $e reinstated for
further drawin's The credit must state that it is a re%ol%in' letter of credit and it may
re%ol%e either automatically or su$)ect to certain pro%isions Re%ol%in' letters of credit
are useful to a%oid the need for repetitious arran'ements for openin' or amendin' letters
of credit
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of credit is recei%ed $y the exporter from the openin' $an#3 that letter of credit is used as
security to esta$lish a second letter of credit drawn on the exporter in fa%our of his
importer (any $an#s are reluctant to issue $ac#?to?$ac# letters of credit due to the le%el
of ris# to which they are exposed3 whereas a transfera$le credit will not expose them to
hi'her ris# than under the ori'inal credit
Ad0anta/e# of Letter of %redit:
The $eneficiary is assured of payment as lon' as it complies with the terms and
conditions of the letter of credit The letter of credit identifies which documents must $e
presented and the data content of those documents The credit ris# is transferred from the
applicant to the issuin' $an#
The $eneficiary can en)oy the ad%anta'e of miti'atin' the issuin' $an#6s country ris# $y
re"uirin' that a $an# in its own country confirm the letter of credit That $an# then ta#es
on the country and commercial ris# of the issuin' $an# and protects the $eneficiary
The $eneficiary minimi es collection time as the letter of credit accelerates payment of
the recei%a$les
The $eneficiary6s forei'n exchan'e ris# is eliminated with a letter of credit issued in the
currency of the $eneficiary6s country
Ri#-# in0o$0ed in Letter of %redit4
&ince all the parties in%ol%ed in Better of Credit deal with the documents and not with the
'oods3 the ris# of :eneficiary not shippin' 'oods as mentioned in the BC is still persists
The Better of Credit as a payment method is costlier than other methods of payment such
as Open Account or Collection
The :eneficiary6s documents must comply with the terms and conditions of the Better of
Credit for Issuin' :an# to ma#e the payment
The :eneficiary is exposed to the Commercial ris# on Issuin' :an#3 Political ris# on the
Issuin' :an#6s country and Forei'n Exchan'e Ris# in case of .sance Better of Credits
Better of Credit Process
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potential to lend to importers3 thus $rin'in' a$out a decline in the use of the BMC
instrument
EXPORT INCENTIVES
1) A$%a#&' A +!0."5a+"0# S&!'*'
It is issued to allow duty free import of inputs3 which are physically incorporated
in export product ,ma#in' normal allowance for wasta'e- Ad%ance Authori ations are
issued for inputs of export items 'i%en under &ION ,&tandard Input Output Norms-These can also $e issued on the $asis of Adhoc norms or self declared norms
!alidity 94 months from the date of issue for $oth import and export acti%ity
2) D + E#+"+6'*'#+ Pa 7008 9DEPB) S&!'*'
The O$)ecti%e of *EP: is to neutrali e incidence of customs duty on import
content of export product Neutrali ation shall $e pro%ided $y way of 'rant of duty credit
a'ainst export product Credit shall $e a%aila$le a'ainst such export products and at such
rates as may $e specified $y *=FT $y way of pu$lic notice Credit may $e utili ed for
payment of Customs *uty on freely importa$le items
!alidity for import it shall $e as prescri$ed in and :oo# of Procedures %+ The
*EP: shall $e %alid for a period of 94 months from the date of issue
*EP: and M or items imported a'ainst it are freely transfera$le
4) D + $.a 7a&8 0# ';(0.+ 03 ,00$
!arious schemes li#e EO.3 &E 3 *EEC3 manufacture under $ond etc are a%aila$le
to o$tain inputs without payment of customs duty3 excise duty and ser%ice tax or o$tain
refund of duty paid on inputs
(anufacturers can a%ail Cen%at credit of duty paid on inputs and utili ed the same for
payment of duty on other 'oods sold in India3 or they can o$tain refund
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(anufacturers or processors who are una$le to a%ail any of these schemes can a%ail Jduty
draw$ac#6 ere3 the excise duty3 customs duty and ser%ice tax paid on inputs is refunded
to the exporter of finished product $y way of Jduty draw$ac#6
Payment of draw$ac#
The payment of draw$ac# is made under the rules and interest3 $y the CustomMCentral
Excise Collectorate ha%in' Uurisdiction o%er the port Mairport M land customs station
throu'h which exports are affected to the exporter or to the a'ent specially authorised
$y the exporter to recei%e the said amount of draw$ac# and interest The payment of
draw$ac# and interest is made $y credit in the exporterKs account maintained with the
respecti%e Custom ouse
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EXPORT FINANCE
In the pre%ious sections we ha%e studied export finance from the point of %iew of the
%arious modes of payment that the exporter has at his disposal This section focuses on
export finance from the point of %iew of the credit facilities extended to the exporters at
pre and post shipment sta'es It deals with credit extended to the exporter for financin'
the purchase3 manufacture and pac#in' of 'oods intended for o%erseas mar#ets Theo$)ecti%e is to educate the reader a$out pre and post shipment credit
PRE-SHIPMENT FINANCE
Pre?shipment finance is pro%ided to the exporters for the purchase of raw materials3
processin' them and con%ertin' them into finished 'oods for the purpose of export
'ode# of Pre5 Shipment .inance
9( Pac-in/ %redit
The $asic purpose of pac#in' credit is to ena$le the eli'i$le exporters to procure process3
manufacture or store the 'oods meant for export Pac#in' credit refers to any loan to an
exporter for financin' the purchase3 processin'3 manufacturin' or pac#in' of 'oods as
defamed $y the Reser%e :an# of India It is a short?term credit a'ainst exporta$le 'oods
Pac#in' credit is normally 'ranted on secured $asis &ometimes clear ad%ance may also
$e 'ranted (any ad%ances are clean at their initial sta'e when 'oods are not yet
ac"uired Once the 'oods are ac"uired and are in the custody of the exporter $an#s
usually con%ert the clean ad%ance into hypothecation pled'e Bet us first discuss the
detail procedure of pac#in' credit
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Eli'i$ility Pac#in' credit is a%aila$le to all exporters whether merchant exporter3 ExportM
Tradin'M &tar Tradin'M &uper &tar Tradin' ouses and manufacturer exporter
(anufacturers of 'oods supplyin' to ExportM Tradin'M &TM &&T ouses and (erchant
exporters are eli'i$le for pac#in' credit The?forei'n $uyer throu'h the medium of a
reputed $an# 'i%es the credit to eli'i$le exporters3 for specified purposes a'ainst
irre%oca$le letter of credit It is also a%aila$le a'ainst a confirmed or firm export
orderMcontract placed $y the $uyer for export of 'oods from India
( Runnin/ Account .aci$ity:
The R:I has permitted $an#s to 'rant pac#in' credit ad%ances e%en without lod'ment of?
BM C or firm?orderM contract under the scheme of Runnin' Ac?count Facility su$)ect to3the fol+owin' conditions
i- The $an# may extend this facility only to those exporters whose trac# record has $een
'ood
ii- BMC or firm order is produced within a reasona$le period of time For Commodities
under selecti%e credit control3 $an#s should insist on production of BCs or firm orders
within one month from the date of sanction
iii- The concessi%e credit a%aila$le in respect of indi%idual pre?shipment credit should not
'o $eyond +@2 days Pac#in' credit may also $e 'i%en under the Red Clause letter of
credit In this method3 credit6 is 'i%en at the instance and responsi$ility of the forei'n
$an# esta$lishin' the BC ere3 the pac#in' credit ad%ance is made a'ainst a simple
receipt and is unsecured
Amount ? The loan amount is decided on the $asis of export order and the credit ratin' of
the exporter $y the $an# =enerally the amount of pac#in' credit will not exceed FO:
%alue of the export 'oods or their domestic %alue whiche%er is less It can $e to the extent
of domestic %alue of the 'oods e%en
thou'h such %alue is hi'her than their FO: %alue pro%ided the 'oods are entitled to duty
draw $ac# and also co%ered $y the Export Production Finance =uarantee of the EC=C
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Period ? The pac#in' credit can $e 'ranted for a maximum period of +@2 days from the
date of dis$ursement The $an#s are authorised $y R:I to extend this period This period
can $e extended for a further period of >2 days3 in case of nonshipment of 'oods within
+@2 days The extension can $e done pro%ided the $an#s are satisfied that the reasons for
extension are due to circumstances $eyond the control of the exporters Pre?shipment
credit may $e 'i%en for a lon'er period upto a maximum of982 days3 if the $an#s are
satisfied a$out the need for lon'er duration of credit
Rate of Interest ?The interest paya$le on pre?shipment finance is usually lower than the
normal rate3 pro%ided the credit is extin'uished $y lod'in' the export $ills on remittances
from a$road If the exporter fails to do so they would not $e a$le to a%ail concessional
rate of interest In order to a%ail the pac#in' credit; exporters are expected to ma#e aformal application to the $an# 'i%in' details of credit re"uirements alon' with the
re"uired documents
;( Ad0ance a/ain#t !ncenti0e#
7hen the %alue of the materials to $e procured for export is more than FO: %alue of the
contract3 the exporters may 'et pac#in' credit ad%ance more than the FO: %alue of the
'oods The excess of cost of production o%er the FO: %alue of the contract represents
incenti%es recei%a$les For example3 when the domestic price of 'oods exceeds the %alue
of export orders3 the difference represents duty draw$ac# entitlement :an#s can 'rant
ad%ances a'ainst duty draw$ac# at pre?shipment sta'eV su$)ect to the condition that the
loan is co%ered $y Export Production Finance =uarantee of Export Credit =uarantee
Corporation ,EC=C- This 'uarantee ena$les $an#s to sanction ad%ances at the pre?
shipment sta'e to the full extent of cost of
production The extent of co%er and the premium are the3 same as for pac#in' credit
'uarantee
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facility is a%aila$le in any of the con%erti$le currencies The credit will $e self?li"uidatin'
in nature and accordin'ly after the shipment of 'oods the $ills will $e eli'i$le for
discountin'M rediscountin' or for post?shipment credit in forei'n currency The exporters
can a%ail this finance under the followin' two options
i- The exporters may a%ail pre?shipment credit in rupees and3 then3 the post?shipment
credit either in rupees or in forei'n currency denominated credit or discountin'M
rediscountin' of export $ills
ii- The exporters may a%ail pre?shipment credit in forei'n currency and discountin'M
rediscountin' of the export $ills in forei'n currency
PCFC credit will also $e a%aila$le $oth to the supplier units of EP M EO. and the
recei%er units of EP M EO. The credit in forei'n currency shall also $e a%aila$le on
exports to Asian Clearin' .nion ,AC.- Countries This will $e extended only W l the $asis of confirmed firm export orders or confirmed BMCs The Runnin' Account facility
will not $e a%aila$le under the scheme
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POST-SHIPMENT FINANCE
It may $e defined as any loan or ad%ance 'ranted or any other credit
pro%ided $y a $an# to an exporter of 'oods from India from the date of extendin' the
credit after shipment of 'oods to the date of reali ation ion of export proceeds It includes
any loan or ad%ance 'ranted to an exporter on consideration of or on the security of3 any
duty draw$ac# or any cash recei% a$les $y way of incenti%e from the 'o%ernment
7hile 'rantin' post?shipment finance3 $an#s are 'o%erned $y the 'uidelines issued $y the
R:I3 the rules of the Forei'n Exchan'e *ealers Association of India ,FE*AI-3 the Trade
Control and Exchan'e Control Re'ulations and the International Con%entions and Codes
of the International Cham$ers of Commerce The exporters are re"uired to o$tain credit
limits suita$le to their needs The "uantum of credit depends on export sales andrecei%a$les Post shipment finance is 'ranted under %arious methods The exporter may
choose the type of facility as per his re"uirement The :an#s scrutini e the documents
su$mitted for compliance of exchan'e control pro%isions li#e
i- The documents are drawn in permitted currencies and payment recei%a$le as permitted
method of payment;
ii- The rele%ant =RMPP form duly certified $y the customs is su$mitted and particulars as
stated in the =RMPP form
'ode# of Po#t5 Shipment .inance
9( Ne/otiation of E,port *ocument# under Letter# of %redit
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Ne'otiation of Export *ocuments under Betters of Credit where the exports are under
letter of credit arran'ements3 the $an#s will ne'otiate the export $ills pro%ided it is drawn
in conformity with the letter of credit 7hen documents are presented to the $an# for
ne'otiation under BMC3 they should $e scrutini ed carefully ta#in' into account all the
terms and conditions of the credit All the documents tendered should $e strictly in
accordance with the BMC terms It is to $e noted that the BMC issuin' $an# under?ta#es to
honour its commitment only if the $eneficiary su$mits the stipulated documents E%en
the sli'htest de%iation from those specified in the BMC can 'i%e an excuse to the issuin'
$an# of refusin' the reim$ursement of the payment that mi'ht ha%e $een already made $y
the ne'otiatin' $an#
( Purcha#e=*i#count of .orei/n 8i$$#
Purchase or discount facilities in respect of export $ills drawn under confirmed export
contracts are 'enerally 'ranted to exporters who en)oy $ill purchaseMdiscountin' limits
sanctioned $y the $an# As the security offered $y the issuin' $an# under letter of credit
arran'ement is not a%aila$le3 the financin' $an# is totally dependent upon the credit
worthiness of the forei'n $uyer The documents3 under the *ocuments a'ainst Payment
,*IP- arran'ements3 are released throu'h forei'n correspondent only when payment is
recei%ed 7hereas in the case of *ocuments a'ainst Acceptance ,*MA- $ills3 documents
are deli%ered to the o%erseas importers a'ainst acceptance of the draft to ma#e payment
on maturity &ince the financin' $an#s are open to the ris# of non?payment3 EC=C
policies issued in fa%or of exporters and assi'ned to $an#s are insisted upon
.nder the policy3 EC=C fixes limits and payment terms for indi%idual $uyers and the
financin' $an# has to ensure that the limit is not exceeded so that the $enefits of policy
are a%ail?a$le :an#s also secure a 'uarantee from EC=C on the post shipment finance
extended $y them either on a selecti%e or whole turno%er $asis :an#s sometimes do
o$tain credit reports on forei'n $uyers $efore they purchase the export $ills drawn on the
forei'n $uyer
;( Ad0ance a/ain#t 8i$$# Sent on %o$$ection
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Post?shipment finance is 'ranted a'ainst $ills sent on collection $asis in the followin'
situations
i- 7hen the accommodation a%aila$le under the forei'n $ills purchase limit is exhausted
ii- 7hen some export $ills drawn under BM C ha%e discrepancies
.OR.E!T!NG
Forfeitin' is another method of medium term financin' ,+?0 yrs- which is open to the
exporter should he re"uire it It in%ol%es the purchase of recei%a$les ,$ills drawn on the
importer- from the exporter such as acceptance drafts drawn under BMC3 $ills of exchan'e3 promissory notes and other ne'otia$le instruments These are usually
purchased sans recourseS i e without recourse to the exporter This means that the
exporter will not $e held lia$le in case of non?payment $y the importer These recei%a$les
are $ills drawn $y the exporter upon the importer containin' an unconditional 'uarantee
,'enerally issued $y the importer6s $an#- to pay The $an#s in turn can deal with these
$ills in two ways They can either hold them until maturity and follow up with the
importer or sell these $ills to other in%estors ,a'ain sans recourseS-A term commonly interchan'ed with forfaitin'3 is 3a&+0."#, owe%er it must $e
remem$ered that factorin' in%ol%es the financin' smaller claims such as for consumer
'oods and is usually pro%ided for periods ran'in' from >2?+@2 days Forfaitin' on the
other hand is used to finance capital 'oods exports ran'in' from 1?0 yrs Factorin'
effecti%ely ta#es care of commercial ris# while forfaitin' co%ers political ris# also since
the applicant 'ets cash in hand without recourse
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.A%TOR!NG
Factorin' is similar to forfeitin' in that it also allows the exporter to raise finance a'ainst
his outstandin' export $ills and in%ol%es the purchase of the exporter6s recei%a$les The
difference is that it factorin' houses pro%ide credit for a term ran'in' $etween >2?+@2
days and is therefore a sound and flexi$le source of financin' wor#in' capital finance
compared to loans Factorin' is a suita$le option when export $ills are of lar'e amounts3
collection of de$ts is uniform and distri$uted fairly e%enly o%er the financial year .nli#e
forfaitin' which is always without recourse3 in order to a%ail non?recourse factorin'3
credit limits must $e a'reed on for each customer Factorin' houses prefer the de$tors to
$e %aried and are usually a%erse to pro%ide factorin' ser%ices in cases where one de$tor
accounts for a ma)ority of the or'ani ation6s sales Factorin' houses may typically ta#econtrol of the exporter6s sales led'er Thus as and when a sale is made3 the in%oice is and
the export $ill is sent to the factor3 who arran'es the finance of a si ea$le proportion ,@2?
@05- of the %alue of the export $ill The factor then follows up with the importer and
collects payments on the exporter6s $ehalf The remainder of the $ill %alue ,+0?925-3 less
ser%ice char'es will $e recei%ed once the factor collects payment from the importer
The ad%anta'e that factorin' pro%ides o%er the more traditional methods of o%erdrafts is
that while an o%erdraft hypothecated a'ainst export $ills can arran'e for only around 02?
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.%NR
Forei'n Currency Non?Resident account is a form of term deposit option a%aila$le to
Non Resident Indians who wish to operate a $an# account in India These can $e opened
in four currencies3 *ollar3 Euro3 Pound and Uapanese Gen 7hat ma#es it the preferred
option for most NRI6s is that under this scheme3 repayments are made in the same forei'ncurrency in which they were opened3 thus protectin' the account holder from fluctuations
in exchan'e rates
Out of funds mo$ili ed throu'h this scheme3 $an#s can lend money to corporates in
forei'n currencies ,a%aila$le under this scheme- This is ad%anta'eous since the rates at
which loans are extended throu'h the FCNR route are lin#ed to BI:OR and are low cost
compared to traditional rupee credit Thus corporates can con%ert their rupee lia$ilities
into forei'n currency lia$ilities at low cost (oreo%er the re'ulations are relaxed
compared to EC:6s which ma#es it attracti%e for corporates who are loo#in' for a low
cost alternati%e to meet their wor#in' capital re"uirements Amounts for which credit is
extended is 'enerally 'reater than .&* +223222
owe%er3 as with any means of financin' this is also not without some de'ree of ris# It
'oes without sayin' that where two currencies are in%ol%ed the ris# posed throu'h
fluctuatin' exchan'e rates is always present On a smaller le%el3 there is also the ris# of
the BI:OR $ein' set hi'her than domestic rates Of the two the exchan'e rate ris# is the
one that corporates must watch out for owe%er3 they can "uite easily hed'e this ris#
with a forward contract which will $e explained in the next section
The followin' illustration will help understand how the FCNR route wor#s out more
cost?friendly
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!LL STRAT!ON 9:
*omestic rupee credit V +1 05
On the other hand a < month BI:OR loan would wor# out to
< month BI:OR V 8 95 :an#s6 mar'in V 95 Other transaction costs V 2 095
Tota$ %o#t: >4? @ Bi$or assumed to $e + 95
Thus the o%erall result is a net sa%in' of +1 0?> 895 V ;4?B@
This is the net sa%in' on an unhed'ed FCNR loan3 and therefore is open to ris# of
fluctuatin' exchan'e rates In order to co%er this ris# the appropriate option would $e to
enter into a forward contract to $uy forei'n currency forward in the mar#et This
procedure will $e explained in the followin' sections
I# +!' "66 +.a+"0# LIBOR !a 7''# +a8'# a+ a# a *'$ .a+' a#$ " #0+ a#
"#$"&a+"0# 03 & ..'#+ LIBOR 6'%'6 =
00
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RISK MITIGATION
Ris# presents itself in %arious forms3 from mo%ements in competitors6 prices3 shorta'e of
raw material leadin' to fluctuation in its prices3 forei'n exchan'e rates and interest rates
The exporter concerns himself mainly with the ris# posed $y fluctuatin' forei'n
exchan'e rates since his entire $usiness fuels itself from earnin's denominated mostly in
forei'n exchan'e Forei'n exchan'e ris# exposure is common to all who participate in
international trade where $uyin'Msellin' of 'oods denominated in forei'n currencies is
una%oida$le Thus any chan'e in rates from the time of shipment of 'oods to the time the
recei%a$les are reali ed can affect the exporter6s mar'in either fa%ora$ly or unfa%ora$ly
Thus it is the ris# that the exporter runs of $ein' a$le to ad)ust his cost and price to offset
chan'es in exchan'e rates In order to a%oid the unfa%ora$le the exporter must ha%e in
place a sound strate'y to com$at these ris#s This opens up the su$)ect of ris#
mana'ement in export financeFluctuatin' exchan'e rates need not always $e unfa%ora$le3 since if the dollar appreciates
,rupee declines- he can stand to ma#e a su$stantial profit For instance if the export %alue
was / 9222 and the rupee depreciates from 42 to 403 the exporter would now recei%e Rs
>2222 in place of @2222 Considerin' that export orders are usually in num$ers of o%er
/+222223 this can result in windfall 'ains for the exporter owe%er on downside3 with
appreciation on the rupee he can incur a su$stantial loss3 which is why mana'in' this
exposure ,forei'n currency ris#- is top priority for an exporter Exposure can $e
understood to mean any future expected cash flow whose ma'nitude is su$)ect to chan'e
due to fluctuations in the %aria$les that determine it ,exchan'e rates-
:efore we 'o into the ris# miti'ation procedures and techni"ues the exporter can turn to3
it is necessary to $e ac"uainted with the mar#et for forei'n exchan'e dealin's which
forms the re'ulatory $ody throu'h which ris# miti'ation is carried out
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.orei/n E,chan/e E,po#ure
7hen the condition pre%alent in the mar#et results in the exchan'e rates $ecomin'
extremely %olatile the exchan'e rate mo%ements desta$ili e the cash flows of a $usiness
si'nificantly &uch desta$ili ation of cash flows that affects the profita$ility of the
$usiness is the ris# from forei'n currency exposures Exposure is thus the de'ree to
which a company is affected $y such fluctuations in currency rates &uch exposure may
$e of four types
Transaction Exposure Translation Exposure Economic Exposure Operatin' Exposure
Tran#action E,po#ure:
Transaction exposure is the exposure that arises from forei'n currency denominated
transactions which an entity is committed to It may arise from contractual3 forei'ncurrency3 future cash flows For instance3 if a firm has entered into a contract to sell
computers at a fixed price denominated in a forei'n currency3 the firm would $e exposed
to exchan'e rate mo%ements till it recei%es the payment and con%erts the receipts into
domestic currency The exposure of a company in a particular currency is measured in net
terms3 i e after settin' off potential cash inflows with outflows
&uppose that a company exportin' in .&*3 while costin' the transaction had rec#oned on
'ettin' say Rs 44 per dollar :y the time the exchan'e transaction materiali es and the
proceeds are sold for rupees3 the exchan'e rate mo%ed to say Rs 42 per dollar The
profita$ility of the export transaction can $e completely wiped out $y the mo%ement in
the exchan'e rate &uch transaction exposure arises when a $usiness has forei'n currency
denominated receipt and payment The ris# is an ad%erse mo%ement of the exchan'e rate
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from the time the transaction is $ud'eted till the time the exposure is extin'uished $y sale
or purchase of the forei'n currency a'ainst the domestic currency
The firm may not necessarily ha%e losses from the transaction exposure; it may earn
profits also In fact3 the international firms ha%e a num$er of items in $alance sheet ,as
stated a$o%e-; at a point of time3 on some of the items ,say payments-3 it may suffer
losses due to wea#enin' of its home currency; it is then li#ely to 'ain on forei'n currency
receipts Notwithstandin' this contention3 in practice3 the transaction exposure is %iewed
from the perspecti%e of the losses This perceptionMpractice may $e attri$uted to the
(."#&"(6' 03 &0# '.%a+" *
Tran#$ation E,po#ure:
Translation exposure is the exposure that arises from the need to con%ert %alues of assetsand lia$ilities denominated in a forei'n currency3 into the domestic currency Any
exposure arisin' out of exchan'e rate mo%ement and resultant chan'e in the domestic?
currency %alue of the deposit would classify as translation exposure It is the potential for
chan'e in reported earnin's andMor in the $oo# %alue of the consolidated corporate e"uity
accounts3 as a result of chan'e in the forei'n exchan'e rates
Translation exposure arises from the need to translate forei'n currency assets or
lia$ilities into the home currency for the purpose of finali in' the accounts for any 'i%en
period
Translation exposure relates to the chan'e in accountin' income and $alance sheet
statements caused $y the chan'es in exchan'e rates; these chan'es may ha%e ta#en place
$yMat the time of finali ation of accounts %is?Y?%is the time when the asset was purchased
or lia$ility was assumed In other words3 translation exposure results from the need to
translate forei'n currency assets or lia$ilities into the local currency at the time of
finali in' accounts The followin' example illustrates the impact of translation exposure
!LL STRAT!ON :
An Indian corporate firm has ta#en a loan of .& / +2 million3 from a $an# in the .&A to
import plant and machinery worth .& / +2 million On the date of the transaction3 the
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exchan'e rate was Rs 48 2 Thus3 the imported plant and machinery in the $oo#s of the
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