EXPORT FINANCE

INTRODUCTION
Financial assistence is extended by the banks to the exporters at pre-shipment and postshipment stages. Financial assitence extended to the exporter priorto shipment of goods from India falls within the scope of pre-shipment finance while that extended after shipment of the goods falls under post-shipment finance. While the pre-shipment finance is provided for working capital for the purchase of raw material, processing, packaging, transportation, warehousing etc.of the goods meant for export, post-shipment finance is generally provided in order to bridge the gap between shipment of goods and and the realisation of proceeds.

OBJECTIVES
1. To cover commercial and non-commercial risks and political risks attendant on granting credit to a foreign buyer. 2. To cover natural risks such as earthquakes,floods etc. 3. To make available funds at the required time to the exporter. 4. To ensure that the cost of funds are affordable to the exporter.

APPRAISAL
Appraisal means an approval of an export credit proposal of an exporter. Whileappraising an export credit proposal as a commercial banker, obligation to thefollowing institutions or regulations needs to be adhered to.

Obligations to the RBI under the Exchange Control Regulations are:

y Appraise to be the bank s customer. y Appraise should have the Exim code number allotted by the Director General of Foreign Trade. y Party s 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. y Country with whom the Appraise wants to trade should not be under trade barrier. y y

Obligations to ECGC are:

y 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: a)Exchange control regulations. b)Trade control regulations. c)Reserve Bank s directives issued through IECD. d)Export Credit Guarantee Corporation guidelines. e)Guidelines of Foreign Exchange Dealers Association of India.

TYPES OF EXPORT FINANCE

The export finance is being classified into two types viz.
Pre-shipment finance. Post-shipment finance

PRE-SHIPMENT FINANCE
MEANING:

Pre-shipment is also referred as packing credit . It is working capital financeprovided by commercial banks to the exporter prior to shipment of goods. The financerequired to meet various expenses before shipment of goods is called pre-shipmentfinance or packing credit. DEFINITION: Financial assistance extended to the exporter from the date of receipt of the exportorder till the date of shipment is known as pre-shipment credit. Such finance isextended to an exporter for the purpose of procuring raw materials, processing,packing, transporting, warehousing of goods meant for exports.

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 labelling 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. To pay for export documentation expenses

POST-SHIPMENT FINANCE
MEANING: Post shipment finance is provided to meet working capital requirements after theactual shipment of goods. It bridges the financial gap between the date of shipmentand actual receipt of payment from overseas buyer thereof. Whereas the financeprovided after shipment of goods is called post-shipment finance.

DEFENITION:
Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit.

IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE:

To pay to agents/distributors and others for their services. To pay for publicity and advertising in the over seas markets. To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service. To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. To pay for representatives abroad in connection with their stay board

LETTER OF CREDIT
INTRODUCTION:
This is one of the most popular and more secured of method of payment in recenttimes as compared to other methods of payment. A L/C refers to the documentsrepresenting the goods and not the goods themselves. Banks are not in the business ofexamining the goods on behalf of the customers. Typical documents, which arerequired includes commercial invoice,

transport document such as Bill of lading orAirway bill, an insurance documents etc. L/C deals in documents and not goods.

DEFINITION:
A Letter of Credit can be defined as an undertaking by importer s bank stating that payment will be made to the exporter if the required documents arepresented to the bank within the validity of the L/C .

PARTIES INVOLVED IN LETTER OF CREDIT:

y y y y y y Applicant: The buyer or importer of goods Issuing bank: Importer s bank, who issues the L/C Beneficiary: The party to whom the L/C is addressed. The Seller or supplier of goods. Advising bank: Issuing bank s branch or correspondent bank inThe exporter s country to whom the L/C is send for Onward transmission to the beneficiary. Confirming bank: The bank in beneficiary s country, whichGuarantees the credit on the request of the issuing Bank. Negotiating bank: The bank to whom the beneficiary presents his Documents for payment under L/C.

A Letter of Credit contains these elements:

A payment undertaking given by the bank (issuing bank) on behalf of the buyer (applicant) To pay a seller (beneficiary) a given amount of money on presentation of specified documents representing the supply of goods within specific time limits These documents conforming to terms and conditions set out in the letter of credit Documents to be presented at a specified place

ADVANTAGES OF LETTER OF CREDIT

ADVANTAGES TO THE EXPORTER: No blocking of funds. Clearance of import regulations. Free from liability.

Pre- shipment finance. Non-refusal by importer. Reduction in bad-debts. ADVANTAGES TO THE IMPORTER: Better terms of trade. Assurance of shipment of goods. Overdraft facility. No blocking of funds. Delivery on time. Better relations.

DISADVANTAGES OF LETTER OF CREDIT: Lacks flexibility. Complex method Expensive for importer Problem of revocable L/C

ROLE OF EXIM
Exim Bank plays a four-pronged role with regard to Indias foreign trade:     Co-ordinator A source of finance Consultant Promoter

coordinator

consultant

EXIM

source of finance

promoter

CO-ORDINATION ROLE OF THE EXIM BANK

Exim Bank is the co-ordinator of the working group mechanism for the clearance of Project and Services Exports and Deferred Payment Exports(for amounts above a certain value-currently US$ 100mn).The Working Group comprises Exim Bank,Government of

India representatives (Ministries of Finance,Commerce& Industry,External Affairs),RBI,ECGC of India Ltd. and commercial banks who are authorized foreign exchange dealers.This interinstitutional Working Group accords clearance to contracts(at the post award stage) sponsored by commercial banks or Exim Bank and operates as a one-window mechanism for clearance of term export proposals.Exim Bank can accord clearance on its own to project export proposals upto US$ 100mn in value.Exim Bank plays the key role of a co-ordinator and facilitator for the promotion of project exports.

EXIM BANK AT ALL STAGES OF THE EXPORT BUSINESS

preshipment

export marketing

EXIM

postshipment

export production

FOREX MANAGEMENT

Introduction:
The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized over-the-counter financial market for trading currencies. Financial centers around the world function of trading between a wide range of different types of buyers and sellers. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a INDIA business to import British goods and pay Pound Sterling, even though the business's income is in INDIAN Rupees. It also supports speculation, and facilitates the carry trade. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the worlds major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of: y y y y its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates;

y y

the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size. As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements, [ as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.]

Objective:
Maintaining core cover to total exposures ratio, as per forecast of market conditions. Periodical evaluation of unhedged exposures. Market intelligence and identification of seasonal factors. Diversification of currency mix to reduce interest cost on foreign currency borrowings. Identifying market opportunities and operate to derive invisible gains/opportunity benefits. Adopt appropriate hedging strategies to achieve lower interest cost on foreign currency loans. Periodical review of interest rate exposures to devise options for reducing the interest cost on foreign currency borrowings.

Determinants:

economic factors

political conditions

speculation

Economic factors
.
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Economic policy comprises government fiscal policy and monetary policy Government budget deficits or surpluses: The market usually reacts negatively and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency. Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade For example, trade deficits may have a negative impact on a nation's currency. Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation. Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a

country's economy, the better its currency will perform, and the more demand for it there will be. Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency.

Political Conditions
There could be a profound effect of internal, regional, and international political conditions and events on currency markets. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political instability can produce negative/positive impacts on a nations economy. For instance, the country currency can be negatively effected by the destabilization of coalition governments in India. Similarly, in a country that is experiencing financial difficulties, the rise of a political faction that is believed to be fiscally responsible can have the opposite effect.

MARKET PSYCHOLOGY

1. Differentials in Inflation As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies.. Those countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. This is also usually accompanied by higher interest rates. 2. Differentials in Interest Rates Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher

interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates - that is, lower interest rates tend to decrease exchange rates. 3. Current-Account Deficits The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest and dividends. A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit. 4. Public Debt Countries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors. In the worst case scenario, a government may print money to pay part of a large debt, but increasing the money supply inevitably causes inflation. Moreover, if a government is not able to service its deficit through domestic means, then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. 5. Terms of Trade A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. If the price of a country's exports rises by a greater rate than that of its imports, its terms of trade have favorably improved. Increasing terms of trade shows greater demand for the country's exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country's currency (and an increase in the currency's value). If the price of exports rises by a smaller rate than that of its imports, the currency's value will decrease in relation to its trading partners. 6. Political Stability and Economic Performance Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to

the currencies of more stable countries.

SPECULATION
Speculative forces can have a major effect on exchange rates. Example : There are expectations that a currency will be devalued. Speculator will start selling the currency in preparation for buying it back later at a cheaper rate, hence selling pressure from speculators extends to other market participants. This activity creates liquidity in the Foreign Exchange Market.

TYPES OF TRANSACTIONS
SPOT TRANSACTION A Foreign Exchange Transaction with funds delivered or settled on a specific spot date. Spot refers to settlement within two common business days. FORWARD TRANSACTION A Foreign Exchange Transactions in which currencies bought or sold for delivery at a fixed price at a specified future date. Business Days : Monday to Friday HEDGING An attempt to reduce risk by taking Forward exchange position equal and opposite to an existing physical requirement for foreign exchange.

FORWARD CONTRACT It is an agreement between two parties to buy or sell an asset / currency at a fixed price at a specified future date. OPTION CONTRACT The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given currency at a specified price (the strike price) during a specified period of time under the terms and conditions of the agreement. FORWARD RATES What is Forward Foreign Exchange Transaction ?  It is a transaction executed today to buy one currency for another currency at a rate agreed today with settlement at an agreed future time, for example in six months. What Determines Forward Rate ?  In introduction we looked at the factors influencing exchange rates and indicated that high interest rates in the long term lead to a weaker currency.  But do we know by how much the currency will weaken ? Is it just a guess ?  In practical terms banks wishing to manage their risk, Calculate the forward rate by taking the spot rate today and adjusting it by the differential of the interest rate on the two currencies

ROLE OF RBI:
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

THE END