DRIVE-SPRING 2014
PROGRAM-MBADS (SEM 4/SEM 6) MBAFLEX/ MBAN2 (SEM 4) PGDIB (SEM 2)
SUBJECT CODE & NAMEIB0018 – Export-Import Finance
BK ID-B1910
CREDIT & MARKS-4 CREDITS, 60 MARKS
Q1. Discuss the role of EXIM bank in promoting foreign trade
(Objectives, functions, conclusion) 3, 6, 1
Answer.
Role of EXIM bank in promoting foreign trade
The Export-Import Bank of India, also known as Exim Bank of India, is the leading export finance
institution in the country. The bank was set up in the year 1982 under the Export-Import Bank of India
Act 1981. The Government of India launched the Export-Import Bank Of India with an aim to augment
exports from India and also to combine the country's foreign trade and investment with the overall
economic growth.
Objectives
Export-Import Bank of India plays the role of source of finance, promoter, coordinator and consultation
to India's Foreign Trade. The bank is the coordinator of the Working Group Mechanism for the clearance
of projects, service exports and deferred payment exports. This group comprises of Exim Bank and
Government of India representatives from the Ministries of Finance, Commerce and external Affairs,
Export Credit Guarantee Corporation of India Ltd, commercial banks that are certified foreign exchange
dealers and the Reserve Bank of India.
Exim Bank offers a diverse range of financing services for the Indian exporter, including a variety of
Export Credit Facilities and Finance for Export Oriented Companies. Exim Bank's mission is to facilitate
globalisation of Indian business. EXIM Bank arranges short term (normally upto 180 days) lines of credit
in foreign currency from foreign lending agencies and lends the funds to AD banks.
Functions

The Bank offers a range of financing programmes that match the menu of Exim Banks of the
industrialized countries. However, the Bank is atypical in the universe of Exim Banks in that it
has over the years evolved, so as to anticipate and meet the special needs of a developing country.
The Bank provides competitive finance at various stages of the export cycle.

The Bank finances exports of Indian machinery, manufactured goods, consultancy and
technology services on deferred payment terms. It also seeks to co-finance projects with global
and regional development agencies to assist Indian exporters in their efforts to participate in such
overseas projects.

The Bank is involved in promotion of two-way technology transfer through the outward flow of
investment in Indian joint ventures overseas and foreign direct investment flow into India. It is
also a Partner Institution with European Union and operates for facilitating promotion of joint
ventures in India through technical and financial collaboration with medium sized firms of the
European Union.
Conclusion
The primary objective of the Export-Import Bank of India is to provide financial assistance to importers
and exporters and function as the top financial institution. Some of the services of the bank include:
overseas investment finance, film finance, export credit, finance for export oriented units and
agricultural & SME finance.
Q2. What is the need for export finance in India? Write a short note on export financing
facilities in India.
(Need for export finance, Financing facilities) 5, 5
Answer.
Need for export finance
Export finance refers to financial assistance extended by banks and other financial institutions to
businesses for the shipping of products outside a country or region. Export financing enables MSMEs to
expand its reach to a global audience. Export financing is a major component of successful export
transactions. Exporters need finance for purchasing, processing, packaging and for their day to activities.
Banks in every country provide export finance facilities on liberal terms. In India too, all the AD banks
provide export finance to exporters under the guidelines provided by RBI. An exporter needs finance at
two stages, i.e., before shipment (pre-shipment) and after shipment (post shipment).
Export financing facilities in India
'Pre-shipment 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, 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 from India or any other
evidence of an order for export from India having been placed on the exporter or some other person,
unless lodgement of export orders or letter of credit with the bank has been waived.
Post-shipment Credit' means any loan or advance granted or any other credit provided by an institution
to an exporter of goods from India from the date of extending credit after shipment of goods to the date
of realisation of export proceeds.
The purpose of the export finance facilities is to provide financial support to suppliers/exporters in the
Member Countries to enable them to perform export transactions. Under this category, There are Preexport Finance, Single/Multiple Supplier Refinancing Facilities and also Export Finance Facility
Guarantees.
Typically, suppliers/exporters loans will be short-term. Longer tenors may apply to cases where traded
goods have long manufacturing periods (e.g. capital goods) and /or trade contracts terms provide
deferred payment options.
Q3. As an exporter, what benefits you can get from Post shipment finance scheme?
Discuss the types of post shipment credits.
(Post shipment finance, types) 7, 3
Answer.
Post shipment finance scheme
Post shipment finance may be defined as a loan or advance granted by banks to their exporter clients
after the shipment of goods till the date of receipt of payment from overseas buyer or credit opening
bank. It is a short term credit provided by banks to exporters to meet their working capital requirements
after the shipment of goods. When an exporter has made the shipment and submits his documents to the
bank, the bank adjusts the packing credit granted earlier and extends the remaining amount of export
bill to exporter. The amount of packing credit given earlier is also converted into post shipment finance.
Benefits

Improves liquidity as you get paid for your exports bills in advance before the bills are due for
payment

It eases your cash flow position by providing greater financial liquidity and flexibility in
administering your receivables.

It allows you to extend more liberal terms of payment to your existing buyers as well as new
buyers thus competiting with foreign suppliers Assign the benefits under your credit insurance
policies as additional collateral to banks for additional financing or financing on better terms.

Export bills eligible for discounting can be under various modes of payments. These include the
following:

Open Account Terms Documents Against Acceptance (DAA), Document Against Payments (DAP)
Post Dated Cheques Letters of Credit Bank Guarantees
Types of Post Shipment Finance
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against
a shipment that has already been made. This type of export finance is granted from the date of extending
the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don’t
wait for the importer to deposit the funds.
The post shipment finance can be classified as:

Export Bills purchased/discounted.

Export Bills negotiated

Advance against export bills sent on collection basis.

Advance against export on consignment basis

Advance against undrawn balance on exports

Advance against claims of Duty Drawback.
Q4. Write short notes on:
a) Export credit Guarantee Corporation
b) Foreign exchange risk
(Meaning and role of ECGC, Meaning of foreign exchange risk) 5, 5
Answer.
a) Export credit Guarantee Corporation
Almost all countries of the world have set up organizations in their countries to provide credit risk
insurance facilities to their exporters. In India, Government of India has set up ECGC to cover export
credit risk. In 1957, Government of India set up the Export Risk Insurance Corporation of India. In 1964,
the name was changed to Export Credit and Guarantee Corporation Ltd. Once again in 1983, the name
was changed to Export Credit Guarantee Corporation of India Ltd. It is a Government of India
organization, having Head office in Mumbai. There are a number of regional offices and branch offices all
over India. ECGC is under the administrative control of Ministry of Commerce and is managed by a
Board of Directors consisting of representatives from government, banking, insurance, trade and
industry.
Two main functions of ECGC are:
1. It covers the risk of non-payment due to commercial and political risks arising in respect of exports on
credit terms.
2. It issues guarantees to banks underwriting a major part of the loss that may arise in respect of advance
or other support they extend to exporters in connection with their export business.
b) Foreign exchange risk
Foreign exchange risk is the risk to the value of one’s assets when it is valued in another currency. The
exchange rate of a currency to another may be volatile. It is this change in value of the currency that gives
rise to foreign exchange risk. Depreciation in the currency in which your assets are denominated will
result in a lower value of your assets when measured in another currency compared to the period before
depreciation.
Businesses without commercial contracts expressed in domestic currency (or fixed by an agreed rate of
exchange) are fully exposed to exchange risk. Exchange risk may arise because of exchange rate
movements in the period from the original commercial contract to the time of settlement of the domestic
equivalent of the foreign currency amount.
Q5. Discuss the payment options available to exporter and importer.
(Modes of payment) 10
Answer.
Payment options available to exporter and importer
There are 3 standard ways of payment methods in the export import trade international trade market:
1. Clean Payment
2. Collection of Bills
3. Letters of Credit L/c
1. Clean Payments
Clean payment method offers a relatively cheap and uncomplicated method of payment for both
importers and exporters.
There are basically two type of clean payments:
Advance Payment
In advance payment method the exporter is trusted to ship the goods after receiving payment from the
importer.
Open Account
In open account method the importer is trusted to pay the exporter after receipt of goods. The main
drawback of open account method is that exporter assumes all the risks while the importer get the
advantage over the delay use of company's cash resources and is also not responsible for the risk
associated with goods.
2. Payment Collection of Bills in International Trade
The Payment Collection of Bills also called “Uniform Rules for Collections” is published by International
Chamber of Commerce (ICC) under the document number 522 (URC522) and is followed by more than
90% of the world's banks.
There are two methods of collections of bill:
Documents Against Payment D/P
In this case documents are released to the importer only when the payment has been done.
Documents Against Acceptance D/A
In this case documents are released to the importer only against acceptance of a draft.
3. Letter of Credit L/c
Letter of Credit also known as Documentary Credit is a written undertaking by the importers bank
known as the issuing bank on behalf of its customer, the importer (applicant), promising to effect
payment in favour of the exporter (beneficiary) up to a stated sum of money, within a prescribed time
limit and against stipulated documents. It is published by the International Chamber of Commerce under
the provision of Uniform Custom and Practices (UCP) brochure number 500.
Various types of L/Cs are:
Revocable & Irrevocable Letter of Credit (L/c)
A Revocable Letter of Credit can be cancelled without the consent of the exporter. An Irrevocable Letter
of Credit cannot be cancelled or amended without the consent of all parties including the exporter.
Sight & Time Letter of Credit
If payment is to be made at the time of presenting the document then it is referred as the Sight Letter of
Credit.
If payment is to be made after the lapse of a particular time period as stated in the draft then it is
referred as the Term Letter of Credit.
Confirmed Letter of Credit (L/c)
Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of
the issuing bank.
Q6. What is custom duty? Discuss its types.
(Meaning, types) 4, 6
Answer.
Custom duty
A tax levied on imports (and, sometimes, on exports) by the customs authorities of a country to raise
state revenue, and/or to protect domestic industries from more efficient or predatory competitors from
abroad.
Customs duty is based generally on the value of goods or upon the weight, dimensions, or some other
criteria of the item (such as the size of the engine, in case of automobiles)
Types
Export duties are levied occasionally to mop up excess profitability in international prices of goods in
respect of which domestic prices may be low at the given time. But the sweep of import duties is quite
wide. Import duties are generally of the following types:Basic Duty: - it may be at the standard rate or, in the case of import from some other countries, at the
preferential rate.
Additional customs duty: - equal to central excise duty leviable on like goods produced or
manufactured in India. Additional duty is commonly referred to as Countervailing duty or C.V.D. It is
payable only if the imported article is such as, if produced in India, its process of production would
amount to 'manufacture' as per the definition in Central Excise Act, 1944. Exemption from excise duty
has the effect of exempting additional duty of customs.
Additional duty is calculated on a value base of aggregate of value of the goods including landing charges
and basic customs duty. Other duties like anti-dumping duty, safeguard duty etc are not taken into
account. In case of goods covered by provisions of the Standards of Weights and Measures Act, 1976, the
value base would be the retail sale price declared on the package of the goods less the rebate as notified
under the Central Excise Act, 1944 for such goods
True Countervailing duty or additional duty of customs: - is levied to offset the disadvantage to
like Indian goods due to high excise duty on their inputs. It is levied to provide a level playing field to
indigenous goods which have to bear various internal taxes.
Anti-dumping Duty/ Safeguard Duty: - for import of specified goods with a view to protecting
domestic industry from unfair injury. It would not apply to goods imported by a 100% EOU (Export
Oriented Units) and units in FTZ (Free Trade Zones) and SEZ (Special Economic Zones). On export of
goods, anti-dumping duty is relatable only by way of a special brand rate of drawback.
Education cess: - at the prescribed rate is levied as a percentage of aggregate duties of customs. If
goods are fully exempted from duty or are chargeable to nil duty or are cleared without payment of duty
under prescribed procedure such as clearance under bond, no cess would be levied.