• EXPORT FINANCE-1

    EXPORT FINANCE

    PRE-SHIPMENT FINANCE

    ‘Pre-shipment’ also referred as ‘Packing Credit’ means:

    • Any loan or advance granted, or any other credit provided by a bank to an exporter either for financing the purchase, processing, manufacturing or packing of goods prior to shipment or for 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 lodgement of export orders or letter of credit with the bank has been waived.

    We shall study about this article further, in detail, in our next post.

    Keep reading!!

  • forfaiting

    Forfaiting

    Forfaiting is a type of export financing in which a forfaitor (usually a bank or a finance company) purchases freely-negotiable instruments (such as unconditionally-guaranteed letters of credit and ‘to order’ bills of exchange) at a discount from an exporter. This arrangement is Without Recourse to the exporter who is relieved of all risks, but is liable for the payment’s legal validity and any defect resulting from the underlying transaction.

    Unlike factoring, forfaiting is available for 100 percent of the payment amount, but is normally for relatively larger sums and for longer maturity dates ranging from periods as short as 180 days and as long as 3-5 years. It is a type of ‘off balance sheet financing.’

    forfaiting2

    Did you know that – “The terms forfaiting originated from an old French word ‘forfait’, which means to surrender one’s right on something, to someone else. Here the right to the receivable is surrendered by the exporter to the forfaitor”!!!

  • factoring

    Factoring

    Factoring is the selling of the business’s receivables to a factoring company. The factoring company or the Factor pays the business a specific percentage of the value of the accounts receivable and deducts a small fee being the cost incurred for collection of payment on maturity.

    As the Factor collects the receivables instead of the business, one way to look at factoring is that a business is outsourcing its receivables collections process. Based on specific country regulations, factoring could be with OR without recourse.

    If the factoring is done without recourse, it would become an ‘off-balance sheet finance’.

    factoring2

    Did you know that – “In Factoring, generally a maximum of 80% of the value of receivables is paid to the business and is normally availed for shorter durations ranging from 30 days to 180 days”!!!

  • odi

    Overseas Direct Investment (ODI)

    Overseas Direct Investment is any investment made by an Indian entity by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity. This investment can be in the nature of Joint Ventures/ Wholly Owned Subsidiaries. Like FDI, there are two routes for such investments to be made: Automatic route and Approval route.

    In India, under ODI Scheme, investments can be made out of various avenues like:

    • drawal of foreign exchange from an AD bank in India
    • capitalisation of exports;
    • swap of shares
    • proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs)
    • balances held in EEFC account of the Indian party
    • other such avenues as defined by RBI from time to time

    Did you know that – “If the ODI is made out of a company’s EEFC account balances, the ceiling on the maximum remittance amount, which is linked to the Net Worth of the company, does not apply”!!!

     

  • trade-finance1

    TRADE FINANCE

    The term ‘Trade Finance’ is basically related to ‘domestic’ as well as ‘international’ Trade transactions. Trade Finance refers to finance for Trade.

    For a trade transaction, there should be a seller to sell the goods or services and a buyer who will buy the goods or use the services. Various intermediaries such as banks / financial institutions can facilitate this trade transaction by financing the trade.

    Though international trade has been in existence for centuries, trade finance was subsequently developed as a means of facilitating it further. The widespread use of trade finance is one of the factors that have contributed to the enormous growth of international trade in recent decades.

    We will keep discussing more about this product in our subsequent posts. Keep reading.. OR

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  • external-commercial-borrowings

    EXTERNAL COMMERCIAL BORROWINGS (ECB)

    ECBs refer to commercial loans in the form of bank loans, securitized instruments (like floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares), buyers’ credit or suppliers’ credit availed of from non-resident lenders with a minimum average maturity of 3 years.

    Recognised lenders under ECB could be :

    • international banks,
    • international capital markets,
    • multilateral financial institutions (such as IFC, ADB, CDC, etc.)
    • export credit agencies,
    • suppliers of equipments,
    • foreign collaborators and foreign equity holders

    ECB can also be availed under Automatic route and Approval route. The application of such borrowed funds and the sectors wherein they would be utilised, would depend on the type of route selected.

    Did you know that – “Banks in India cannot issue BGs / SBLCs / LOCs in favour of overseas lenders to cover their risk in an ECB transaction” !!!

  • suppliers-credit

    SUPPLIER’S CREDIT

    Supplier’s Credit is a financing arrangement under which an exporter or overseas bank extends credit to the importer for his imports. There would be an L/c issued by the importer’s bank, and a specific bank with whom a prior arrangement has been made, undertakes to pay to the supplier on presentation of L/c compliant terms. The exporter gets the payment at sight basis and importer needs to repay to overseas bank only at the end of the Usance period.

    In India, supplier’s credits for imports up to USD 20 million per import transaction is permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment) for current a/c imports and upto 3 years for capital goods imported into India.

    Did you know that – “Supplier’s Credit is only possible when there is an L/c involved in an import transaction. Hence, unlike Buyer’s Credit, for DA transactions Supplier’s Credit cannot be availed”!!!

  • buyers-credit-1

    BUYER’S CREDIT

    Buyer’s credit is short term credit availed by an importer (buyer) from overseas lenders such as banks and other financial institutions for the goods they are importing. The overseas banks usually lend to the importer based on the letter of comfort (similar to a bank guarantee) issued by the importer’s bank. For this service the importer’s bank or the buyer’s credit consultant charges a fee called an arrangement fee.

    buyers-credit-2

    In India, buyer’s credits for imports up to USD 20 million per import transaction is permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment) for current a/c imports and upto 3 years for capital goods imported into India.

    Did you know that – “Buyer’s credit in India is only permissible if the goods have entered the country. Hence Buyer’s Credit cannot be availed in a Merchanting trade transaction”!!!

  • standby-credit

    STAND-BY LETTER OF CREDIT

    A Standby Letter of Credit (SBLC) is a written obligation of an issuing bank to pay a defined sum of money to a beneficiary on behalf of their customer in the event that their customer fails to fulfil a contractual commitment to the beneficiary.  It is important to note that regardless of any disputes between its customer and the beneficiary the bank is obliged to pay upon first demand.

    Did you know that – “Standby L/cs originated in the United States as it was not possible to issue BGs there. This was because the banking legislation in U.S. forbids banks to assume guarantee obligations on behalf of their clients. To circumvent this rule, the U.S. banks created the SBLC.”!!!

     

  • bank-garantee

    Bank Guarantee (BG)

    A Bank Guarantee is an instrument issued by the Bank in which the Bank agrees to pay a specific amount of money to the beneficiary of the BG, in the event of non-performance of underlying commitment by the applicant of the BG.

    There are 3 parties to a BG viz. The Guarantor – The bank that issues the BG, The Applicant – on whose behalf the BG issued, The Beneficiary – who is the recipient in whose favour the BG is issued. A BG is payable on first demand and such demand is raised by the beneficiary immediately on breach of contract by the applicant.

    There are mainly 2 types of BGs, viz. Financial BGs and Performance BGs.  Of late, another financial instrument namely Standby Letter of Credit (SBLC), has gained prominence and is being used as an alternative to BGs across the world.

    Did you know that – “A bank guarantee is always issued with an intention that it should never get invoked and should always remain unutilised”!!!

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