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Transcript of Project on Imports and Exports..
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Loans Provided to Importers and Exporters by Banks
INTRODUCTION
Imports and Exports have been an integral part of our economy since a very
long time. Trade financing is a way to import and export goods and finance
their business. Trade finance is a specific topic within the financial service
industry. Today trade finance is a massive billion of dollars of business.
Since world trade is increasing the good and commodities are bought and
sold, and banks and financial institutions should lend money to finance the
purchase of these goods and commodities.
Trade finance refers to a wide range of tools that determine how cash, credit,
investments and other assets can be used for trade. Banks also play a central
role in facilitating trade, both through the provision of finance and bonding
facilities and through the establishment and management of payment
mechanisms such as telegraphic transfers and documentary letters of credit
(L/Cs). Amongst the intermediated trade finance products, the most
commonly used for financing transactions is L/Cs, whereby the importer and
exporter essentially entrust the exchange process (i.e., payment against
agreed delivery) to their respective banks in order to mitigate counterparty
risk. Typical trade-related financial services include letters of credit, import
bills for collection, import financing, shipping guarantees, letter of credit
confirmation, checking and negotiation of documents, pre-shipment export
financing, invoice financing, and receivables purchase. Trade finance
instruments can be structured to include export credit guarantees or
insurance. Trade finance differs from other forms of credit (e.g., investment
and working capital) in several ways.
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Loans Provided to Importers and Exporters by Banks
Trade finance is much different than commercial lending, mortgage lending
or insurance. A product is sold and shipped overseas; therefore, it takes
longer to get paid. Extra time and energy is required to make sure that
buyers are reliable and creditworthy. Also, foreign buyers - just like
domestic buyers - prefer to delay payment until they receive and resell the
goods. Due diligence and careful financial management can mean the
difference between profit and loss on each transaction.
All sellers want to get paid as quickly as possible, while buyers usually
prefer to delay payment, at least until they have received and resold the
goods. This is true in domestic as well as international markets.
Increasing globalization has created intense competition for export markets.
Importers and exporters are looking for any competitive advantage that
would help them to increase their sales. Flexible payment terms have
become a fundamental part of any sales package.
Trade finance is the lifeline of trade because more than 90% of trade
transactions involve some form of credit, insurance or guarantee. Importexport trade assumes huge importance in the context of overall performance
of the world economy. An upward trend of import export is indicative of
smooth functioning of the world economy; whereas a downward trend
results from economic instability.
1. EXPORTS
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Loans Provided to Importers and Exporters by Banks
Export is one of the most lucrative business activities in India. Exporting is a
major component of international trade. Exports entail transfer of goods and
services from a home country to the foreign consumers. Export in simple
words means selling goods abroad. International market being a very wide
market, huge quantity of goods can be sold in the form of exports. Export
refers to outflow of goods and services and inflow of foreign exchange.
Export occupies a very prominent place in the list of priorities of the
economic set up of developing countries because they contribute largely to
foreign exchange pool.
Exports play a crucial role in the economy of the country. In order to
maintain healthy balance of trade and foreign exchange reserve it is
necessary to have a sustained and high rate of growth of exports.
Exports are a vehicle of growth and development. They help not only in
procuring the latest machinery, equipment and technology but also the goods
and services, which are not available indigenously. Exports leads to national
self-reliance and reduces dependence on external assistance which
howsoever liberal, may not be available without strings.
Exports play a very vital role for Indian macroeconomic settings as they
influence the underlying conditions in the domestic economy and also help
in keeping the balance of payments under control.
It is seen that there exists a close relationship between export earnings and
domestic investment. Higher rates of economic growth tend to be associated
with higher rates of exports growth. Conversely, most countries with low
rates of export growth also tend to have, in general, low rates of economic
growth.
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Though Indias export compared to other countries is very small, but one of
the most important aspects of our export is the strong linkages it is forgoing
with the world economy which is a great boon for a developing nation like
India.
1.1 EXPORT FINANCE
Credit and finance is the life and blood of any business whether domestic or
international. It is more important in the case of export transactions due to
the prevalence of novel non-price competitive techniques encountered by
exporters in various nations to enlarge their share of world markets.
Export finance is a part of global finance given to the corporate. Exportfinancing enables businesses to bring their products all over the world.
Importance of credit to exporters cannot be overemphasized. India has to
compete effectively with other countries in the export markets in order to
penetrate into new markets and widen its hold on the existing markets. Since
many countries have been pursuing policies geared to the promotion of
exports through adequate export credits at low rates of interest, India has
also pursued the same policy in regard to export finance.
In all major industrialized countries, banks and other financial institutions
are deeply involved in financing of exports on special terms. Some of them
are granting mixed credits that combine export credit with foreign aid todeveloping countries. In all such cases, the governments and central banks of
those countries are directly involved in subsidizing exports.
Exporters naturally want to get paid as quickly as possible, while importers
usually prefer to delay payment until they have received or resold the goods.
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Because of the intense competition for export markets, being able to offer
attractive payment terms customary in the trade is often necessary to make a
sale. Exporters should be aware of the many financing options open to them
so that they choose the most acceptable one to both the buyer and the seller.
In many cases, government assistance in export financing for small and
medium-sized businesses can increase a firm's options. The following
factors are important to consider in making decisions about financing:
The need for financing to make the sale: - In some cases, favorable payment
terms make a product more competitive. If the competition offers better
terms and has a similar product, a sale can be lost. In other cases, the buyer
may have preference for buying from a particular exporter, but might buy
your product because of shorter or more secure credit terms.
The length of time the product is being financed: - This determines how long
the exporter will have to wait before payment is received and influences the
choice of how the transaction is financed.
The cost of different methods of financing: - Interest rates and fees vary.
Where an exporter can expect to assume some or all of the financing costs,
their effect on price and profit should be well understood before a pro forma
invoice is submitted to the buyer.
The risks associated with financing the transaction: - The riskier the
transaction, the harder and more costly it will be to finance. The political and
economic stability of the buyer's country can also be an issue. To provide
financing for either accounts receivable or the production or purchase of the
product for sale, the lender may require the most secure methods of
payment, a letter of credit (possibly confirmed), or export credit insurance or
guarantee.
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The need for pre-shipment finance and for post-shipment working capital:
-Production for an unusually large order, or for a surge of orders, may
present unexpected and severe strains on the exporter's working capital.
Even during normal periods, inadequate working capital may curb an
exporter's growth. However, assistance is available through public and
private sector resources
OBIECTIVES OF EXPORT FINANCE
To cover commercial & Non-commercial or political risks attendant
on granting credit to a foreign buyer.
To cover natural risks like an earthquake, floods etc.
An exporter may avail financial assistance from any bank, which considers
the ensuing factors:
Availability of the funds at the required time to the exporter.
Affordability of the cost of funds.
APPRAISAL
Appraisal means an approval of an export credit proposal of an exporter.
While appraising an export credit proposal as a commercial banker,
obligation to the following institutions or regulations needs to be adhered to.
Obligations to the RBI under the Exchange Control Regulations are:
Appraise to be the banks customer.
Appraise should have the EXIM code number allotted by the Director
General of Foreign Trade.
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Partys name should not appear under the caution list of the RBI.
Obligations to the Trade Control Authority under the EXIM policy are:
Appraise should have IEC number allotted by the DGFT.
Goods must be freely exportable i.e. not falling under the negative list.
If it falls under the negative list, then a valid license should be there
which allows the goods to be exported.
Country with whom the Appraise wants to trade should not be under
trade barrier.
Obligations to ECGC are:
Verification that Appraise is not under the Specific Approval list
(SAL).
Sanction of Packing Credit Advances.
GUIDELINES FOR BANKS DEALING IN EXPORT FINANCE:
When a commercial bank deals in export finance it is bound by the ensuing
guidelines: -
Exchange control regulations.
Trade control regulations.
Reserve Banks directives issued through IECD.
Export Credit Guarantee Corporation guidelines.
Guidelines of Foreign Exchange Dealers Association of India.
1.2 ARRANGING FINANCE FOR EXPORTS
Financial assistance to the exporters is generally provided by the commercial
banks before shipment as well as after shipment of goods is known as pre-
shipment finance and that provided after the shipment of goods is known as
post-shipment finance. Pre-shipment finance is given for working capital for
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purchase of raw material processing, packing, transportation, ware-housing
etc. of the goods meant for export. Post-shipment finance is provided for
bridging the gap between the shipment of goods and realization of export
proceeds. The later is done by the Banks by purchasing or negotiating the
export documents or by extending advance against export bills accepted on
collection basis. While doing so, the banks adjust the pre-shipment advance,
if any, already granted to the exporters.
1.3 PRE-SHIPMENT FINANCE
'Pre-shipment/Packing Credit' means any loan or advance granted or any
other credit provided by a bank to an exporter for financing the purchase,
processing, manufacturing or packing of goods prior to shipment /working
capital expenses towards rendering of services on the basis of letter of credit
opened in his favour or in favour of some other person, by an overseas buyer
or a confirmed and irrevocable order for the export of goods/services from
India or any other evidence of an order for export from India having been
placed on the exporter or some other person, unless lodgment of export
orders or letter of credit with the bank has been waived.
IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE:
To purchase raw material, and other inputs to manufacture goods.
To assemble the goods in the case of merchant exporters.
To store the goods in suitable warehouses till the goods are shipped.
To pay for packing, marking and labeling of goods.
To pay for pre-shipment inspection charges.
To import or purchase from the domestic market heavy machinery and
other capital goods to produce export goods.
To pay for consultancy services.
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To pay for export documentation expenses.
APPLICATION FOR PRE-SHIPMENT CREDIT:
An application for pre-shipment advance should be made by the exporter to
his banker along with the following documents:
1. Confirmed export order/contract or L/C etc. in original. Where it is
not available, an undertaking to the effect that the same will be
produced to the Bank within a reasonable time for verification and
endorsement should be given.2. An undertaking that the advance will be utilized for the specific
purpose of procuring/manufacturing/shipping etc., of the goods meant
for exports only, as stated in the relative confirmed export order or the
L/C.
3. If there is a sub-supplier and want to supply the goods to the
Export/Trading/Star Trading House or Merchant Exporter, an
undertaking from the Merchant Exporter or Export/Trading/Star
Trading House stating that they have not/will not avail themselves of
packing credit facility against the same transaction for the same
purpose till the original packing credit is liquidated.
4. Copies of Income Tax/Wealth Tax Assessment Order for the last 2/3
years in the case of sole proprietor and partnership firm.
5. Copy of Importers Exporters code number.
6. Copy of a valid RCMC (Registration cum Membership Certificate)
held by the Exporter/Trading/Star Trading House Certificate.
7. Appropriate policy/guarantee of the ECGC.
8. Any other document required by the Bank.
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Loans Provided to Importers and Exporters by Banks
For encouraging exports, RBI has instructed the banks to grant pre-shipment
advance at concessional rates of interest.
PERIOD OF ADVANCE
i. The period for which a packing credit advance may be given by a
bank will depend upon the circumstances of the individual case, such
as the time required for procuring, manufacturing or processing
(where necessary) and shipping the relative goods/ rendering of
services It is primarily for the banks to decide the period for which a
packing credit advance may be given having regard to the various
relevant factors so that the period is sufficient to enable the exporter to
ship the goods /render the services.
ii. If pre-shipment advances are not adjusted by submission of export
documents within 360 days from the date of advance, the advances
will cease to qualify for concessive rate of interest to the exporter ab
initio.
iii. RBI would provide refinance only for a period not exceeding 180days.
DISBURSEMENT OF PACKING CREDIT
i. Ordinarily, each packing credit sanctioned should be maintained as
separate account for the purpose of monitoring period of sanction and
end-use of funds.
ii. Banks may release the packing credit in one lump sum or in stages as
per the requirement for executing the orders/LC.
iii. Banks may also maintain different accounts at various stages of
processing, manufacturing, etc. depending on the types of
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goods/services to be exported, e.g. hypothecation, pledge, etc.,
accounts and may 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.
iv. Banks should continue to 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 fulfillment of export orders.
FORMS OR METHODS OF PRE-SHIPMENT FINANCE/PACKING
CREDIT
Packing Credit is extended in the following forms:
1. Packing Credit in Indian Rupee
2. Packing Credit in Foreign Currency (PCFC)
1. Packing credit in Indian rupee
This is taken in Indian Rupees and is given to the exporter in the form of the
Rupee Loan and the interest is charged at the rate as per RBI directives.
When any export proceeds are realized, the packing credit is automatically
adjusted. If it becomes overdue the rate of interest will be charged at the rate
determined by the individual bank.
2. Packing credit in Foreign Currency (P.C.F.C.)
In the case of PCFC, the bankers have their own line of credit with their
foreign banks and the interest is charged at LIBOR' rate i.e. London Inter
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Bank Offered Rate plus the interest spread that is mutually agreed upon
between the bankers and the exporter subject to a minimum of 1.0%, till the
due date. This is denominated in a foreign currency. The above mentioned
interest is for 90 days, since the period of liquidation of pre-shipment credit
normally granted by the bankers for diamond Industry is 90 days from the
date of availing the facility. Beyond 90 days, if the PCFC becomes overdue
the interest will be charged based on fresh LIBOR rate prevalent on the 91st
day plus the interest spread and additional interest at 2% for the overdue
period. If the payment is not received after 30 days from the due date, the
Packing credit will be crystallized. It means that the bankers will convert the
balance PCFC, at the TT selling interbank rate into Indian Rupees and the
interest will be charged on the entire amount at commercial rate of interest
from day one of availing the PCFC. The rate of interest varies with different
banks and is in the range of 15 to 20%.
'RUNNING ACCOUNT' FACILITY
i. Pre-shipment credit to exporters is normally provided on lodgment of
L/Cs or firm export orders. It is observed that the availability of raw
materials is seasonal in some cases. In some other cases, the time
taken for manufacture and shipment of goods is more than the
delivery schedule as per export contracts. In many cases, the exporters
have to procure raw material, manufacture the export product and
keep the same ready for shipment, in anticipation of receipt of letters
of credit/firm export orders from the overseas buyers. Having regard
to difficulties being faced by the exporters in availing of adequate pre-
shipment credit in such cases, banks have been authorized to extend
Pre-shipment Credit Running Account facility in respect of any
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commodity, without insisting on prior lodgment of letters of
credit/firm export orders, depending on the banks judgment regarding
the need to extend such a facility and subject to the following
conditions:
a) Banks may extend the Running Account facility only to those
exporters whose track record has been good as also Export Oriented
Units (EOUs)/Units in Free Trade Zones/ Export Processing Zones
(EPZs) and Special Economic Zones (SEZs).
b) In all cases where Pre-shipment Credit Running Account facility has
been extended, letters of credit/firm orders should be produced within
a reasonable period of time to be decided by the banks.
c) Banks should mark off individual export bills, as and when they are
received for negotiation/collection, against the earliest outstanding
pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to
add that, while marking off the pre-shipment credit in the manner
indicated above, banks should ensure that concessive credit available
in respect of individual pre-shipment credit does not go beyond the
period of sanction or 360 days from the date of advance, whichever is
earlier.
d) Packing credit can also be marked-off with proceeds of export
documents against which no packing credit has been drawn by the
exporter.
i. If it is noticed that the exporter is found to be abusing the facility, thefacility should be withdrawn forthwith.
ii. In cases where exporters have not complied with the terms and
conditions, the advance will attract commercial lending rate ab initio.
In such cases, banks will be required to pay higher rate of interest on
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the portion of refinance availed of by them from the RBI in respect of
the relative pre-shipment credit. All such cases should be reported to
the Monetary Policy Department, Reserve Bank of India, Central
Office, Mumbai 400 001 which will decide the rate of interest to be
charged on the refinance amount.
iii. Running account facility should not be granted to sub-suppliers.
Following special schemes are also available in respect pre- shipment
finance:
1. EXIM Banks foreign currency pre- shipment credit scheme.
2. Scheme of export packing credit to sub-suppliers.
3. Export credit for supplies to units in special economic zones.
4. Export credit against advance payments in the form of cheques, drafts,
etc. and rupee pre- shipment credit to specific sectors/segments.
1.4 POST-SHIPMENT FINANCE
'Post-shipment Credit' means any loan or advance granted or any other credit
provided by a bank to an exporter of goods/services from India from the date
of extending credit after shipment of goods/rendering of services to the date
of realization of export proceeds and includes any loan or advance granted to
an exporter, in consideration of, or on the security of any duty drawback
allowed by the Government from time to time.
TYPES OF POST-SHIPMENT CREDITS:
1. Purchase of Export Documents drawn under Export Order:
Purchase or discount facilities in respect of export bills drawn under
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confirmed export order are generally granted to the customers who are
enjoying Bill Purchase/Discounting limits from the Bank. As in case
of purchase or discounting of export documents drawn under export
order, the security offered under L/C by way of substitution of credit-
worthiness of the buyer by the issuing bank is not available, the bank
financing is totally dependent upon the credit worthiness of the buyer,
i.e. the importer, as well as that of the exporter or the beneficiary. The
documents dawn on DP basis are parted with through foreign
correspondent only when payment is received while in case of DA
bills documents (including that of title to the goods) are passed on to
the overseas importer against the acceptance of the draft to make
payment on maturity. DA bills are thus unsecured. The bank financing
against export bills is open to the risk of non-payment. Banks, in order
to enhance security, generally opt for ECGC policies and guarantees
which are issued in favor of the exporter/banks to protect their interest
on percentage basis in case of non-payment or delayed payment which
is not on account of mischief, mistake or negligence on the part of
exporter. Within the total limit of policy issued to the customer,
drawee-wise limits are generally fixed for individual customers. At
the time of purchasing the bill bank has to ascertain that this drawee
limit is not exceeded so as to make the bank ineligible for claim in
case of non-payment.
2. 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 are sent by the bank on
collection basis as against their purchase/discounting by the bank.
Advance against such bills is granted by way of a 'separate loan'
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usually termed as 'post-shipment loan'. This facility is, in fact, another
form of post- shipment advance and is 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%
is, however, 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 bank by way of
negotiation/purchase/discount.
3. 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 sale 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 while forwarding shipping documents to its overseas
branch/correspondent to instruct the latter to deliver the document
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.
4. 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
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particular line of export subject to a maximum of 10% of the value of
export and an undertaking is obtained from the exporter that he will,
within 6 months from due date of payment or the date of shipment of
the goods, whichever is earlier surrender balance proceeds of the
shipment. Against the specific prior approval from Reserve Bank of
India the percentage of undrawn balance can be enhanced by the
exporter and the finance can be made available accordingly at higher
rate. Since the actual amount to be realised out of the undrawn
balance, may be less than the undrawn balance, it is necessary to keep
a margin on such advance.
5. Advance against Retention Money: Banks also grant advances
against retention money, which is payable within one year from the
date of shipment, at a concessional rate of interest up to 90 days. If
such advances extend beyond one year, they are treated as deferred
payment advances which are also eligible for concessional rate of
interest.
6. 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 manufacture of such goods in India or rebate on
excise duty chargeable under Central Excises 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 Custom House at the rates determined
and notified by the Directorate. As per the present procedure, no
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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 Delhi, Mumbai, Calcutta, Chennai, Chandigarh, and
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.
LIQUIDATION OF POST-SHIPMENT CREDIT:
Post-shipment credit is to be liquidated by the proceeds of export bills
received from abroad in respect of goods exported/services rendered
.Further, subject to mutual agreement between the exporter and the banker it
can also be repaid/prepaid out of balances in Exchange Earners Foreign
Currency Account (EEFC A/C) as also from proceeds of any other
unfinanced (collection) bills. Such adjusted export bills should however
continue to be followed up for realization of the export proceeds and will
continue to be reported in the XOS statement.
RUPEE POST-SHIPMENT EXPORT CREDIT
PERIOD
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i. In the case of demand bills, the period of advance shall be the Normal
Transit Period (NTP) as specified by FEDAI.
ii. In case of usance bills, credit can be granted for a maximum duration
of 180 days from date of shipment inclusive of Normal Transit Period
(NTP) and grace period, if any. However, banks should closely
monitor the need for extending post-shipment credit upto the
permissible period of 180 days and they should influence the
exporters to realise the export proceeds within a shorter period.
iii. 'Normal transit period' means 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 concerned, as prescribed
by FEDAI from time to time. It is not to be confused with the time
taken for the arrival of goods at overseas destination.
iv. An overdue bill:
a) In the case of a demand bill, is a bill which is not paid before the
expiry of the normal transit period, and
b) In the case of a usance bill, is a bill which is not paid on the due date
GOLD CARD SCHEME FOR EXPORTERS
The applicable rate of interest to be charged under the Gold Card Scheme
will not be more than the general rate for export credit in the respective bank
and within the ceiling prescribed by RBI. In keeping with the spirit of the
Scheme banks will endeavour to provide the best rates possible to Gold Card
holders on the basis of their rating and past performance.
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In respect of the Gold Card holders, the concessive rate of interest on post-
shipment rupee export credit applicable up to 90 days may be extended for a
maximum period up to 365 days.
The salient features of the scheme are:
i. All creditworthy exporters, including those in small and medium
sectors with good track record would be eligible for issue of Gold
Card by individual banks as per the criteria to be laid down by the
latter;
ii. Banks would clearly specify the benefits they would be offering toGold Card holders
iii. request from card holders would be processed quickly by banks within
25 days/15 days and 7 days for fresh application/renewal of limits and
ad hoc limits, respectively;
iv. in principle limits would be set for a period of 3 years with a
provision for stand by limit of 20% to meet urgent credit needs;
v. card holders would be given preference in the matter of granting of
packing credit in foreign currency;
vi. banks would consider waiver of collaterals and exemption from
ECGC guarantee schemes on the basis of card holders
creditworthiness and track records, and
vii.The concessive rate of interest on post-shipment rupee export credit
applicable upto 90 days may be extended for a maximum period upto
365 days.
2. IMPORT
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Each country has different natural resource and different climatic conditions.
Some are rich in minerals while some are rich in forest resources. A country
cannot produce all the commodities required by the nation. It may have
some commodities in excess while some commodities which are available in
limited quantity. Hence countries have to depend on other countries.
A country exports those commodities which are in excess with the country
and import those which are not available at large within the country, this
interdependency of one country on other result into international trade. The
exchange of goods helps both the countries in developing their economy.
Many billions of dollars worth of goods and services are traded between
almost every country in the world every day, and this trend is only likely to
continue.
It is important to note that even developed countries will be equally
benefited due to international trade. Growth of undeveloped and under
developing countries act will provide scope of industrialization in developed
countries. Poverty of undeveloped countries acts as limiting factor in
international trade. In case of gulf countries where there are no source to
cultivate food grains, these countries have to depend on imports. Similarly,
Indian govt. requirements of crude oil is being met twenty percent by
domestic production and balance eighty percent requirement is required to
be imported.
An import (also termed as international purchasing) activity may be defined
as a process of procuring goods and service from the supplier/s situated in
the foreign countries. This activity involves inflow of goods and service
from the foreign country (exporter country) into the base country (importing
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country) & in-tune outflow of foreign currency from base country to the
foreign country towards payments for the goods and services purchased.
There are basically four main reasons for which a country may decide to
import a certain good or service:
1. It simply does not exist in the country: a mineral which is not in the
country's soil, an agriculture product that can't be produced there, an
innovation that has been introduced in other countries;
2. It does not exist at a specific level of quality; thus, a country imports
better products than domestic production, also as far as advertising orpackaging are concerned;
3. It is cheaper abroad, since producers there are more efficient, are faced by
lowercosts, better exploit economies of scale and/or accept lowerprofits;
4. At the current domestic price, producers do not supply enough good or
service as the demand requires, also because ofex ante coordination
problems; accordingly, consumers buy abroad for insufficient domestic
production.
2.1 IMPORT FINANCE
Banks normally do not extend a fund based finance to meet import needs of
their customers, barring few exceptions. However, they enable industrial
units and others to have access to imported inputs and machinery by
establishing letters of credit in favour of the overseas suppliers/sellers. Letter
of Credit is a non-fund credit facility offered by banks to their constitutes of
integrity and proven track record in meeting their commitments promptly
without need for any post import finance.
2.2 ARRANGING FINANCE FOR IMPORTS
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It is advisable that financial planning for the imports should be made much
in advance so as to avoid unnecessary huge demurrages on the imported
goods lying unclear for want of payment for the documents/customs duty.
Moreover, further losses may result due to fall in prices of the import
consignment. It is therefore essential that either you should own sufficient
funds for completing the import transactions or have obtained necessary
credit limits from financial institutions/banks in India. Obtaining funds from
the bank will entail submission of credit proposals to the bank; enabling it to
sanction a suitable limit for the importers.
The commercial banks finance the import requirements of the customer.
This finance mainly takes the form of letter of credit and bank guarantees.
The same are briefly discussed below:
2.3 POST IMPORT FINANCE
Issuing bank in, in receipt of documents under the LC established by it,examines them and ensures that they conform to the terms of LC. If so, they
intimate the importer/applicant to pay for and retire the documents. The
applicant, at this stage, may utilize the balance in his Cash Credit Account
(the item of import is a raw material, etc) or Term loan limit (if the item of
import is a capital good or equipment) and retire the documents. In respect
of imports made by exporters, banks may grant packing credit advances to
meet the cost of imported goods.
Otherwise, normally banks do not extend any specific post import finance to
importers who have to suitably manage their own funds to meet the bills in
time/on the due dates.
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Before handing over the import documents to the applicant, banks collect
charges by way of interest commission, etc. to the debit of applicants
account.
Within 3 months from date of retirement of import documents, importers are
required to submit the documentary proof of import in the form of Customs
certified Exchange Control copy of Bill of Entry to the bank, failing which
banks will report the importers as defaulters to RBI.
2.4 LETTER OF CREDIT:
A Letter of Credit is a signed instrument including an undertaking by the
banker of a buyer to pay the seller a certain sum of money on presentation of
documents evidencing shipment of specified goods and subject to
compliance with the stipulated terms and conditions.
Banks establish LCs only on account of their customers, who hold a validImporter-Exporter Code Number from the Regional Licensing Authorities
and produce underlying sales contract between the Indian importer and the
overseas sellers, accompanied by valid import license in the name of the
importers, wherever necessary. Banks take into account the norms for
holding imported inventory, make an appraisal of the request for opening an
LC like any other fund based working capital facility, prescribe suitable
margin/securities and then decide to establish the LC.
Banks have simplified the documentation procedures for LC limits
sanctioned to their customer and usually, every time when an LC is to be
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established, and LC application-cum-agreement is obtained from the
importer which will also serve as an advance document for the LC.
LETTER OF CREDIT V/S. LOAN APPLICATION
There is virtually no difference between an application for a loan and a
request for opening a commercial letter of credit. Although while issuing a
credit, the bank lends only its name without any actual outlay of funds, it
must, however, be ready to meet its commitments, for which it has to ensure
itself about the financial responsibility of its customer as well as the
marketability of the goods. The merchandise covered by the credit provides
a security interest to the issuing bank.
LETTERS OF CREDIT ARE SEPARATE TRANSACTIONS
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A contract for sale of goods between the seller and the buyer incorporates
mode of settlement. Letters of credit by their nature are separate from the
sale contract, and banks are concerned or bound by such sale contracts even
if the credit bears reference to them.
The credits stipulate documents which have to be tendered for payment and
it, therefore, follows that in credits parties deal with documents and not with
goods, services or performances to which the documents relate.
It is, therefore, in the interest of all the parties concerned that the conditions
and term of credit are complete and bare fit of excessive details.
Payment under a letter of credit does not depend on the performance
obligation on the part of the exporter except those which the credit imposes.
Banks accept documents under letters of credit for what those documents
purport to be on their face. Contract between the buyer and the seller is
obligatory between themselves. The seller (beneficiary) cannot take
advantage of any contractual terms in between the buyer and the opening
bank and between the opening bank and the advising/confirming bank.
OBTAINING IMPORT LETTER OF CREDIT LIMIT
Import Letter of Credit limits are sanctioned by the banks on submission of
complete loan proposal as in case of other types of credit facilities.
Necessary guidance in this regards should be obtained from your bank.
However, while applying for Letter of Credit limit it is very essential that
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other limits are also applied for in one stretch so as to avoid any difficulty
later. Necessary financial planning is, therefore, needed in advance for
making the payments of import bills under Letter of Credit on due dates. any
delay in retirement of bills will not only strain relations of the importer with
his bank but will also result in additional expenditure by way of extra
commission, penal interest, demurrage charges, deterioration packing or
quality of goods, etc. The importer should, therefore, keep in mind that
i. While importing raw material or consumable stores and spares he
should make advance arrangements for adequate working capital
limits or have the necessary funds available with him;
ii. While importing capital goods such as machinery etc. necessary term
loan arrangement or financial planning should be made.
The importer has also to make the necessary arrangements for payment of
customs duty, which sometimes may be quite substantial.
Margin
The banks while sanctioning import Letter of Credit limits may require
additional securities to cover their risk. A cash margin as per RBI/banks
rules is also stipulated for Letter of Credit limits. Third party margin or
security is acceptable subject to certain conditions. The margin is taken at
the time of establishing the Letter of Credit is released only after the bill
under Letter of Credit has been retired. It is, therefore, necessary that the
margin may preferably be kept in the shape of fixed deposit for a suitable
period to earn interest on the margin deposit.
2.5 BANK GUARANTEES
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At the request of the customer, the bank issues guarantees favoring the
beneficiaries. Thus the contract of a guarantee is a tri-partite contract. The
customer is the person at whose request the guarantee is issued, the bank is
the guarantor and the payee / beneficiary i.e. the person in whose favor the
guarantee is issued. The bank charges commission for issue of guarantee,
which is an income for the bank. The guarantee is a non-fund based facility
as the liability on the bank may or may not crystallize on the due date based
on the failure to perform the contract by the borrower. Therefore they are
shown as contingent liability by way of footnote to accounts.
The guarantees are of 2 types they are as follow:-
i. Performance Guarantee: - performance guarantees normally
guarantees the performance of the contract. For e.g. the borrower
getting a contract for construction of a bridge against which the BMC
may insists on issue of guarantee towards the performance of the
contract from the borrower.
ii. Financial Guarantee: - Financial guarantees represent the guarantee
for ensuring the financial obligations. For instance:- BEST may float a
tender for supply of BUS from interested contractors and may insists
on 10% tender money / earnest money to be deposited along with the
quotations. This is to invite only capable and serious bidders. In case,the bidders who are awarded the contract do not accept the same; the
bid money will be forfeited. Through the credit facility at the same
stage of issue of guarantee is a non fund based facility, the bank has to
be careful in assessing the credit facility viz. Borrowers standing,
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financial position, business record etc. to lending a fund based facility.
Therefore, many times the bank insists on cash margin ranging from
5% to 100% depending upon the customer.
1. MAJOR FINANCIAL AND OTHER
INSTITUTIONS
3.1 EXIM BANK
Export-Import Bank of India is the premier export finance institution of the
country, set up in 1982 under the Export-Import Bank of India Act 1981.
Government of India launched the institution with a mandate, not just to
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enhance exports from India, but to integrate the countrys foreign trade and
investment with the overall economic growth. Since its inception, EXIM
Bank of India has been both a catalyst and a key player in the promotion of
cross border trade and investment. Commencing operations as a purveyor of
export credit, like other Export Credit Agencies in the world, EXIM Bank of
India has, over the period, evolved into an institution that plays a major role
in partnering Indian industries, particularly the Small and Medium
Enterprises, in their globalization efforts, through a wide range of products
and services offered at all stages of the business cycle, starting from import
of technology and export product development to export production, export
marketing, pre-shipment and post-shipment and overseas investment.
OBJECTIVES
for providing financial assistance to exporters and importers, and for
functioning as the principal financial institution for coordinating the working
of institutions engaged in financing export and import of goods and services
with a view to promoting the countrys international trade
shall act on business principles with due regard to public interest
: The Export-Import Bank of India Act, 1981
EXIM BANK FINANCE TO EXPORTERS
Besides commercial banks export finance is also made available by the
EXIM Bank. The EXIM Bank provides financial assistance to promote
Indian exports through direct financial assistance, overseas investment
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finance, term finance for export production and export development, pre-
shipment credit, buyers credit, lines of credit, re-lending facility, export
bills re-discounting, refinance to commercial banks, finance for computer
software exports, finance for export marketing and bulk import finance to
commercial banks. The EXIM Bank also extends non-funded facility to
Indian exporters in the form of guarantees. The diversified lending
programme of the EXIM Bank now covers various stages of exports, i.e.
from the development of export markets to expansion of production capacity
for exports, production for exports and post shipment financing. The EXIM
Banks focus is on export of manufactured goods, project exports, exports of
technology, services and export of computer software.
EXIM BANK FINANCE TO IMPORTERS
An importer in India may arrange finance by way of borrowings in Indian
rupees or foreign exchange through the EXIM Bank in the following two
ways:
1. Bulk Import Finance Program (BIF): Short term working capital
finance is provided under this Scheme to manufacturing companies
for import of consumable inputs with a minimum order size of Rs. 1
crore. Interest chargeable for such loans is
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For rupee loan: 1% below the interest rate on cash credit facility
charged by the commercial banker subject to a minimum
interest rate fixed by EXIM Bank.
For foreign currency loan: depending on cost of funds to EXIM
Bank with a maximum of 0.75% over LIBOR.
The loan is to be repaid within one year.
1. Import Finance: Term Loan for import of capital goods/plant and
machinery or technology/know-how by Indian manufacturing
companies is provided under this scheme. The interest rate may bebased on prevailing market rates, or may be linked to the Banks
minimum lending rate in case of rupee term loan, or floating or fixed
rates based on the Banks cost of funds in case of foreign currency
term loan. EXIM Bank shall charge a service fee of 1% of loan
amount years, determined on the basis of projected cash flows with
suitable moratorium. The Bank shall secure the loan through an
appropriate charge on the asset acquired out of the loan and one or
more additional charge as specified by the Bank.
Note:-
EXIM Financing is available in Indian Rupees and in Foreign
Currency
Term finance, except for long term working capital, is available for
periods up to 10 years [in select cases 15 year finance can also be
made available]
Interest: Fixed & Floating options [Benchmarks for floating rates -
LIBOR/G-Sec/MIBOR]
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Repayments: Amortizing/ Ballooning/ Bullet [As per cash flows]
3.2 ECGC - EXPORT CREDIT GUARANTEE CORPORATION
Export Credit Guarantee Corporation of India Limited was established in the
year 1957 by the Government of India to strengthen the export promotion
drive by covering the risk of exporting on credit.
Being essentially an export promotion organization, it functions under the
administrative control of the Ministry of Commerce & Industry, Departmentof Commerce and Government of India. It is managed by a Board of
Directors comprising representatives of the Government, Reserve Bank of
India, banking and insurance and exporting community.
ECGC is the fifth largest credit insurer of the world in terms of
coverage of national exports. The present paid-up capital of the company is
Rs.800 crores and authorized capital Rs.1000 crores.
WHAT DOES ECGC DO?
i. Provides a range of credit risk insurance covers to exporters against
loss in export of goods and services
ii. Offers guarantees to banks and financial institutions to enable
exporters to obtain better facilities from them
iii. Provides Overseas Investment Insurance to Indian companies
investing in joint ventures abroad in the form of equity or loan.
HOW DOES ECGC HELP EXPORTERS?
ECGC offers insurance protection to exporters against payment risks
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Provides guidance in export-related activities
Makes available information on different countries with its own credit
ratings
Makes it easy to obtain export finance from banks/financial
institutions
Assists exporters in recovering bad debts
Provides information on credit-worthiness of overseas buyers.
COVERS ISSUED BY ECGC:
The covers issued by ECGC can be divided broadly into four groups:
1. STANDARD POLICIES issued to exporters to protect then against
payment risks involved in exports on short-term credit.
2. SPECIFIC POLICIES designed to protect Indian firms against
payment risk involved in (i) exports on deferred terms of payment (ii)
service rendered to foreign parties, and (iii) construction works and
turnkey projects undertaken abroad.
3. FINANCIAL GUARANTEES issued to banks in India to protect
them from risk of loss involved in their extending financial support to
exporters at pre-shipment and post-shipment stages; and
4. SPECIAL SCHEMES such as Transfer Guarantee meant to protect
banks which add confirmation to letters of credit opened by foreign
banks, Insurance cover for Buyers credit, etc.
(A) STANDARD POLICIES:
ECGC has designed 4 types of standard policies to provide cover for
shipments made on short term credit:
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1. Shipments (comprehensive risks) Policy to cover both political and
commercial risks from the date of shipment
2. Shipments (political risks) Policy to cover only political risks fromthe date of shipment
3. Contracts (comprehensive risks) Policy to cover both commercial
and political risk from the date of contract
4. Contracts (Political risks) Policy to cover only political risks from
the date of contract
RISKS COVERED UNDER THE STANDARD POLICIES:
1. Commercial Risks
Insolvency of the buyer
Buyers protracted default to pay for goods accepted by him
Buyers failure to accept goods subject to certain conditions
2. Political risks
Imposition of restrictions on remittances by the government in the
buyers country or any government action which may block or delay
payment to exporter.
War, revolution or civil disturbances in the buyers country.
Cancellation of a valid import license or new import licensing
restrictions in the buyers country after the date of shipment or
contract, as applicable.
Cancellation of export license or imposition of new export licensing
restrictions in India after the date of contract (under contract policy).
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Payment of additional handling, transport or insurance charges
occasioned by interruption or diversion of voyage that cannot be
recovered from the buyer.
Any other cause of loss occurring outside India, not normally insured
by commercial insurers and beyond the control of the exporter and / or
buyer.
RISKS NOT COVERED UNDER STANDARD POLICIES:
The losses due to the following risks are not covered:
1. Commercial disputes including quality disputes raised by the buyer,
unless the exporter obtains a decree from a competent court of law in
the buyers country in his favour, unless the exporter obtains a decree
from a competent court of law in the buyers country in his favour
2. Causes inherent in the nature of the goods.
3. Buyers failure to obtain import or exchange authorization from
authorities in his county
4. Insolvency or default of any agent of the exporter or of the collecting
bank.
5. loss or damage to goods which can be covered by commerci8al
insurers
6. Exchange fluctuation
7. Discrepancy in documents.
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(B) SPECIFIC POLICIES
The standard policy is a whole turnover policy designed to provide a
continuing insurance for the regular flow of exporters shipment of rawmaterials, consumable durable for which credit period does not normally
exceed 180 days.
Contracts for export of capital goods or turnkey projects or construction
works or rendering services abroad are not of a repetitive nature. Such
transactions are, therefore, insured by ECGC on a case-to-case basis under
specific policies.
Specific policies are issued in respect of Supply Contracts (on deferred
payment terms), Services Abroad and Construction Work Abroad.
1) Specific policy for Supply Contracts: Specific policy for Supply
contracts is issued in case of export of Capital goods sold on deferred credit.
It can be of any of the four forms:
Specific Shipments (Comprehensive Risks): Policy to cover both
commercial and political risks at the Post-shipment stage.
Specific Shipments (Political Risks): Policy to cover only political
risks after shipment stage.
Specific Contracts (Comprehensive Risks): Policy to cover political
and commercial risks after contract date.
Specific Contracts (Political Risks): Policy to cover only political
risks after contract date.
2) Service policy: Indian firms provide a wide range of services like
technical or professional services, hiring or leasing to foreign parties (private
or government). Where Indian firms render such services they would be
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exposed to payment risks similar to those involved in export of goods. Such
risks are covered by ECGC under this policy.
If the service contract is with overseas government, then Specific Services(political risks) Policy can be obtained and if the services contract is with
overseas private parties then specific services (comprehensive risks) policy
can be obtained, especially those contracts not supported by bank
guarantees.
Normally, cover is issued on case-to-case basis. The policy covers 90%of
the loss suffered.
3) Construction Works Policy: This policy covers civil construction jobs
as well as turnkey projects involving supplies and services. This policy
covers construction contracts both with private and foreign government.
This policy covers 85% of loss suffered on account of contracts with
government agencies and 75% of loss suffered on account of construction
contracts with private parties.
(C) FINANCIAL GUARANTEES
Exporters require adequate financial support from banks to carry out their
export contracts. ECGC backs the lending programmes of banks by issuing
financial guarantees. The guarantees protect the banks from losses on
account of their lending to exporters. Six guarantees have been evolved for
this purpose.
These guarantees give protection to banks against losses due to non-payment
by exporters on account of their insolvency or default. The ECGC charges a
premium for its services that may vary from 5 paisa to 7.5 paisa per month
for Rs. 100/-. The premium charged depends upon the type of guarantee and
it is subject to change, if ECGC so desires.
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The six guarantees are as follows:
i. Packing Credit Guarantee: Any loan given to exporter for the
manufacture, processing, purchasing or packing of goods meant forexport against a firm order of L/C qualifies for this guarantee.
Pre-shipment advances given by banks to firms who enters contracts
for export of services or for construction works abroad to meet
preliminary expenses are also eligible for cover under this guarantee.
ECGC pays two thirds of the loss.
ii. Export Production Finance Guarantee: this is guarantee enables
banks to provide finance at pre-shipment stage to the full extent of the
domestic cost of production and subject to certain guidelines.
The guarantee under this scheme covers some specified products such
a textiles, woolen carpets, ready-made garments, etc and the loss
covered is two third.
iii. Export Finance Guarantee: this guarantee over post-shipment
advances granted by banks to exporters against export incentives
receivable such as DBK. In case, the exporter
Does not repay the loan, then the banks suffer loss? The loss insured
is up to three fourths or 75%.
iv. Post-Shipment Export Credit Guarantee: post shipment finance
given to exporters by the banks purchase or discounting of export bills
qualifies for this guarantee. Before extending such guarantee, the
ECGC makes sure that the exporter has obtained Shipment or
Contract Risk Policy. The loss covered under this guarantee is 75%.
v. Export Performance Guarantee: exporters are often called upon to
execute bid bonds supported by a bank guarantee and it the contract is
secured by the exporter than he has to furnish a bank guarantee to
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foreign parties to ensure due performance or against advance payment
or in lieu of or retention money. An export proposition may be
frustrated if the exporters bank is unwilling to issue the guarantee.
This guarantee protects the bank against 75% of the losses that it may
suffer on account of guarantee given by it on behalf of exporters.
vi. Export Finance (Overseas Lending) Guarantee: if a bank financing
overseas projects provides a foreign currency loan to the contractor, it
can protect itself from risk of non-payment by the con tractor by
obtaining this guarantee. The loss covered under this policy is to
extent of three fourths (75%).
(D) SPECIAL SCHEMES
A part from providing policies (Standards and Specific) and guarantees,
ECGC provides special schemes. These schemes are provided to the banks
and to the exporters. The schemes are:
1. Transfer Guarantee: the transfer guarantee is provided to safeguard
banks in India against losses arising out of risk of confirmation of
L/C. the risks can be either political or commercial or both. Loss due
to political risks is covered up to 90 % and that due to commercial
risks up to 75%.
2. Insurance Cover for Buyers Credit and Lines of Credit: Financial
Institutions in India have started direct lending to buyers or financial
institutions in developing countries for importing machinery and
equipment from India. This sort of financing facilitates immediate
payment to exporters and frees them from the problem of credit
management. ECGC has evolved this scheme to protect financial
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institutions in India which extent export credit to overseas buyers or
institutions.
3.Overseas Investment Insurance: with the increasing exports ofcapital goods and turnkey projects from India, the involvement of
exporters in capital anticipation in overseas projects has assumed
importance. ECGC has evolved this scheme to provide protection for
such investment. Normally the insurance cover is for 15 years.
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