PAYMENT COLLECTION AGENT BILL:

Introduction Payment Collection Against Bills also known documentary collection as is a payment method used in international trade all over the world by the exporter for the handling of documents to the buyer's bank and also gives the banks necessary instructions indicating when and on what conditions these documents can be released to the importer. Collection Against Bills is published by International Chambers of Commerce (ICC), Paris, France. The last updated issue of its rule was published on January 1, 1966 and is know as the URC 522. It is different from the letters of credit, in the sense that the bank only acts as a medium for the transfer of documents but does not make any payment guarantee. However, collection of documents are subjected to the Uniform Rules for Collections published by the International Chamber of Commerce (ICC). Role of Various Parties

Exporter The seller ships the goods and then hands over the document related to the goods to their banks with the instruction on how and when the buyer would pay. Exporter's Bank The exporter's bank is known as the remitting bank , and they remit the bill for collection with proper instructions. The role of the remitting bank is to :

Check that the documents for consistency. Send the documents to a bank in the buyer's country with instructions on collecting payment. Pay the exporter when it receives payments from the collecting bank.

Buyer/Importer The buyer / importer is the drawee of the Bill. The role of the importer is to :

Pay the bill as mention in the agreement (or promise to pay later). Take the shipping documents (unless it is a clean bill) and clear the goods.

Importer's Bank

This is a bank in the importer's country : usually a branch or correspondent bank of the remitting bank but any other bank can also be used on the request of exporter. The collecting bank act as the remitting bank's agent and clearly follows the instructions on the remitting bank's covering schedule. However the collecting bank does not guarantee payment of the bills except in very unusual circumstance for undoubted customer , which is called availing. Importer's bank is known as the collecting / presenting bank. The role of the collecting banks is to :

Act as the remitting bank's agent Present the bill to the buyer for payment or acceptance. Release the documents to the buyer when the exporter's instructions have been followed. Remit the proceeds of the bill according to the Remitting Bank's schedule instructions.

If the bill is unpaid / unaccepted, the collecting bank :

May arrange storage and insurance for the goods as per remitting bank instructions on the schedule. Protests on behalf of the remitting bank (if the Remitting Bank's schedule states Protest) Requests further instruction from the remitting bank, if there is a problem that is not covered by the instructions in the schedule. Once payment is received from the importer, the collecting bank remits the proceeds promptly to the remitting bank less its charges.

Documents Against Payments (D/P) This is sometimes also referred as Cash against Documents/Cash on Delivery. In effect D/P means payable at sight (on demand). The collecting bank hands over the shipping documents including the document of title (bill of lading) only when the importer has paid the bill. The drawee is usually expected to pay within 3 working days of presentation. The attached instructions to the shipping documents would show "Release Documents Against Payment" Risks : Under D/P terms the exporter keeps control of the goods (through the banks) until the importer pays. If the importer refuses to pay, the exporter can:

Protest the bill and take him to court (may be expensive and difficult to control from another country). Find another buyer or arrange a sale by an auction.

With the last two choices, the price obtained may be lower but probably still better than shipping the goods back, sometimes, the exporter will have a contact or agent in the importer's country that can help with any arrangements. In such a situation, an agent is often referred to as a CaseofNeed, means someone who can be contacted in case of need by the collecting bank. If the importers refuses to pay, the collecting bank can act on the exporter's instructions shown in the Remitting Bank schedule. These instructions may include:

Removal of the goods from the port to a warehouse and insure them. Contact the case of need who may negotiate with the importer. Protesting the bill through the bank's lawyer.

Docuemts Against Aceptance (D/A) Under Documents Against Acceptance, the Exporter allows credit to Importer, the period of credit is referred to as Usance, The importer/ drawee is required to accept the bill to make a signed promise to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the documents and clear his goods. The payment date is calculated from the term of the bill, which is usually a multiple of 30 days and start either from sight or form the date of shipment, whichever is stated on the bill of exchange. The attached instruction would show "Release Documents Against Acceptance". Risk Under D/A terms the importer can inspect the documents and , if he is satisfied, accept the bill for payment o the due date, take the documents and clear the goods; the exporter loses control of them. The exporter runs various risk. The importer might refuse to pay on the due date because :

He finds that the goods are not what he ordered. He has not been able to sell the goods. He is prepared to cheat the exporter (In cases the exporter can protest the bill and take the importer to court but this can be expensive). The importer might have gone bankrupt, in which case the exporter will probably never get his money.

Usance D/P Bills A Usance D/P Bill is an agreement where the buyer accepts the bill payable at a specified date in future but does not receive the documents until he has actually paid for them. The reason is that airmailed documents may arrive much earlier than the goods shipped by sea.

The buyer is not responsible to pay the bill before its due date, but he may want to do so, if the ship arrives before that date. This mode of payments is less usual, but offers more settlement possibility. These are still D/P terms so there is no extra risk to the exporter or his bank. As an alternative the covering scheduled may simply allow acceptance or payments to be deferred awaiting arrival of carrying vessel. There are different types of usance D/P bills, some of which do not require acceptance specially those drawn payable at a fix period after date or drawn payable at a fixed date. Bills requiring acceptance are those drawn at a fix period after sight, which is necessary to establish the maturity date. If there are problems regarding storage of goods under a usance D/P bill, the collecting bank should notify the remitting bank without delay for instructions. However, it should be noted that it is not necessary for the collecting bank to follow each and every instructions given by the Remitting Banks.

LETTER OF CREDIT:
Introduction Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document. The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as: "An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf : 1. Is to make a payment to or to the order third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary. 2. Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft). 3. Authorised another bank to negotiate against stipulated documents provided that the terms are complied with. A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether

the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit. Parties to Letters of Credit

Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or customer of the goods, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his instructions. Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker. The payments has to be made to the beneficiary within seven working days from the date of receipt of documents at their end, provided the documents are in accordance with the terms and conditions of the letter of credit. If the documents are discrepant one, the rejection thereof to be communicated within seven working days from the date of of receipt of documents at their end. Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to receive payment from the applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of stipulated document and comply with the term and conditions of the L/c. If L/c is a transferable one and he transfers the credit to another party, then he is referred to as the first or original beneficiary. Advising Bank : An Advising Bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank and is normally located in the country of the beneficiary. Confirming Bank : Confirming bank adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment/negotiation acceptance under the credit, in additional to that of the issuing bank. Confirming bank play an important role where the exporter is not satisfied with the undertaking of only the issuing bank. Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents submitted to them by the beneficiary under the credit either advised through them or restricted to them for negotiation. On negotiation of the documents they will claim the reimbursement under the credit and makes the payment to the beneficiary provided the documents submitted are in accordance with the terms and conditions of the letters of credit. Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. It is normally the bank with which issuing bank has an account from which payment has to be made.

Second Beneficiary : Second Beneficiary is the person who represent the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.

Types of Letter of Credit 1. Revocable Letter of Credit L/c A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. It is rarely used in international trade and not considered satisfactory for the exporters but has an advantage over that of the importers and the issuing bank. There is no provision for confirming revocable credits as per terms of UCPDC, Hence they cannot be confirmed. It should be indicated in LC that the credit is revocable. if there is no such indication the credit will be deemed as irrevocable. 2. Irrevocable Letter of CreditL/c In this case it is not possible to revoked or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. 3. Confirmed Letter of Credit L/c Confirmed Letter of Credit is a special type of L/c in which another bank apart from the issuing bank has added its guarantee. Although, the cost of confirming by two banks makes it costlier, this type of L/c is more beneficial for the beneficiary as it doubles the guarantee. 4. Sight Credit and Usance Credit L/c Sight credit states that the payments would be made by the issuing bank at sight, on demand or on presentation. In case of usance credit, draft are drawn on the issuing bank or the correspondent bank at specified usance period. The credit will indicate whether the usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the confirming bank. 5. Back to Back Letter of Credit L/c Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as backtoback credit when a L/c is opened with security of another L/c.

A backtoback credit which can also be referred as credit and countercredit is actually a method of financing both sides of a transaction in which a middleman buys goods from one customer and sells them to another. The parties to a BacktoBack Letter of Credit are: 1. The buyer and his bank as the issuer of the original Letter of Credit. 2. The seller/manufacturer and his bank, 3. The manufacturer's subcontractor and his bank. The practical use of this Credit is seen when L/c is opened by the ultimate buyer in favour of a particular beneficiary, who may not be the actual supplier/ manufacturer offering the main credit with near identical terms in favour as security and will be able to obtain reimbursement by presenting the documents received under back to back credit under the main L/c. The need for such credits arise mainly when : 1. The ultimate buyer not ready for a transferable credit 2. The Beneficiary do not want to disclose the source of supply to the openers. 3. The manufacturer demands on payment against documents for goods but the beneficiary of credit is short of the funds 6. Transferable Letter of Credit L/c A transferable documentary credit is a type of credit under which the first beneficiary which is usually a middleman may request the nominated bank to transfer credit in whole or in part to the second beneficiary. The L/c does state clearly mentions the margins of the first beneficiary and unless it is specified the L/c cannot be treated as transferable. It can only be used when the company is selling the product of a third party and the proper care has to be taken about the exit policy for the money transactions that take place. This type of L/c is used in the companies that act as a middle man during the transaction but dont have large limit. In the transferable L/c there is a right to substitute the invoice and the whole value can be transferred to a second beneficiary. The first beneficiary or middleman has rights to change the following terms and conditions of the letter of credit: 1. 2. 3. 4. 5. Reduce the amount of the credit. Reduce unit price if it is stated Make shorter the expiry date of the letter of credit. Make shorter the last date for presentation of documents. Make shorter the period for shipment of goods.

6. Increase the amount of the cover or percentage for which insurance cover must be effected. 7. Substitute the name of the applicant (the middleman) for that of the first beneficiary (the buyer). Standby Letter of Credit L/c Initially used by the banks in the United States, the standby letter of credit is very much similar in nature to a bank guarantee. The main objective of issuing such a credit is to secure bank loans. Standby credits are usually issued by the applicants bank in the applicants country and advised to the beneficiary by a bank in the beneficiarys country. Unlike a traditional letter of credit where the beneficiary obtains payment against documents evidencing performance, the standby letter of credit allow a beneficiary to obtains payment from a bank even when the applicant for the credit has failed to perform as per bond. A standby letter of credit is subject to "Uniform Customs and Practice for Documentary Credit" (UCP), International Chamber of Commerce Publication No 500, 1993 Revision, or "International Standby Practices" (ISP), International Chamber of Commerce Publication No 590, 1998. Import Operations Under L/c The Import Letter of Credit guarantees an exporter payment for goods or services, provided the terms of the letter of credit have been met. A bank issue an import letter of credit on the behalf of an importer or buyer under the following Circumstances

When a importer is importing goods within its own country. When a trader is buying good from his own country and sell it to the another country for the purpose of merchandizing trade. When an Indian exporter who is executing a contract outside his own country requires importing goods from a third country to the country where he is executing the contract.

The first category of the most common in the day to day banking Fees And Reimbursements The different charges/fees payable under import L/c is briefly as follows 1. The issuing bank charges the applicant fees for opening the letter of credit. The fee charged depends on the credit of the applicant, and primarily comprises of :

(a) Opening Charges This would comprise commitment charges and usance charged to be charged upfront for the period of the L/c. The fee charged by the L/c opening bank during the commitment period is referred to as commitment fees. Commitment period is the period from the opening of the letter of credit until the last date of negotiation of documents under the L/c or the expiry of the L/c, whichever is later. Usance is the credit period agreed between the buyer and the seller under the letter of credit. This may vary from 7 days usance (sight) to 90/180 days. The fee charged by bank for the usance period is referred to as usance charges (b)Retirement Charges 1. This would be payable at the time of retirement of LCs. LC opening bank scrutinizes the bills under the LCs according to UCPDC guidelines , and levies charges based on value of goods. 2. The advising bank charges an advising fee to the beneficiary unless stated otherwise The fees could vary depending on the country of the beneficiary. The advising bank charges may be eventually borne by the issuing bank or reimbursed from the applicant. 3. The applicant is bounded and liable to indemnify banks against all obligations and responsibilities imposed by foreign laws and usage. 4. The confirming bank's fee depends on the credit of the issuing bank and would be borne by the beneficiary or the issuing bank (applicant eventually) depending on the terms of contract. 5. The reimbursing bank charges are to the account of the issuing bank. Risk Associated with Opening Imports L/cs The basic risk associated with an issuing bank while opening an import L/c are : 1. The financial standing of the importer As the bank is responsible to pay the money on the behalf of the importer, thereby the bank should make sure that it has the proper funds to pay. 2. The goods Bankers need to do a detail analysis against the risks associated with perishability of the goods, possible obsolescence, import regulations packing and storage, etc. Price risk is the another crucial factor associated with all modes of international trade. 3. Exporter Risk There is always the risk of exporting inferior quality goods. Banks need to be

protective by finding out as much possible about the exporter using status report and other confidential information. 4. Country Risk These types of risks are mainly associated with the political and economic scenario of a country. To solve this issue, most banks have specialized unit which control the level of exposure that that the bank will assumes for each country. 5. Foreign exchange risk Foreign exchange risk is another most sensitive risk associated with the banks. As the transaction is done in foreign currency, the traders depend a lot on exchange rate fluctuations. Export Operations Under L/c Export Letter of Credit is issued in for a trader for his native country for the purchase of goods and services. Such letters of credit may be received for following purpose: 1. For physical export of goods and services from India to a Foreign Country. 2. For execution of projects outside India by Indian exporters by supply of goods and services from Indian or partly from India and partly from outside India. 3. Towards deemed exports where there is no physical movements of goods from outside India But the supplies are being made to a project financed in foreign exchange by multilateral agencies, organization or project being executed in India with the aid of external agencies. 4. For sale of goods by Indian exporters with total procurement and supply from outside India. In all the above cases there would be earning of Foreign Exchange or conservation of Foreign Exchange. Banks in India associated themselves with the export letters of credit in various capacities such as advising bank, confirming bank, transferring bank and reimbursing bank. In every cases the bank will be rendering services not only to the Issuing Bank as its agent correspondent bank but also to the exporter in advising and financing his export activity. 1. Advising an Export L/c The basic responsibility of an advising bank is to advise the credit received from its overseas branch after checking the apparent genuineness of the credit recognized by the issuing bank. It is also necessary for the advising bank to go through the letter of credit, try to understand the underlying transaction, terms and conditions of the credit and advice the beneficiary in the matter. The main features of advising export LCs are: 1. There are no credit risks as the bank receives a onetime commission for the

advising service. 2. There are no capital adequacy needs for the advising function. 2. Advising of Amendments to L/Cs Amendment of LCs is done for various reasons and it is necessary to fallow all the necessary the procedures outlined for advising. In the process of advising the amendments the Issuing bank serializes the amendment number and also ensures that no previous amendment is missing from the list. Only on receipt of satisfactory information/ clarification the amendment may be advised. 3. Confirmation of Export Letters of Credit It constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank, which undertakes the sight payment, deferred payment, acceptance or negotiation. Banks in India have the facility of covering the credit confirmation risks with ECGC under their Transfer Guarantee scheme and include both the commercial and political risk involved. 4. Discounting/Negotiation of Export LCs When the exporter requires funds before due date then he can discount or negotiate the LCs with the negotiating bank. Once the issuing bank nominates the negotiating bank, it can take the credit risk on the issuing bank or confirming bank. However, in such a situation, the negotiating bank bears the risk associated with the document that sometimes arises when the issuing bank discover discrepancies in the documents and refuses to honor its commitment on the due date. 5. Reimbursement of Export LCs Sometimes reimbursing bank, on the recommendation of issuing bank allows the negotiating bank to collect the money from the reimbursing bank once the goods have been shipped. It is quite similar to a cheque facility provided by a bank. In return, the reimbursement bank earns a commission per transaction and enjoys float income without getting involve in the checking the transaction documents. reimbursement bank play an important role in payment on the due date ( for usance LCs) or the days on which the negotiating bank demands the same (for sight LCs) Regulatory Requirements Opening of imports LCs in India involve compliance of the following main regulation: Trade Control Requirements

The movement of good in India is guided by a predefined se of rules and regulation. So, the banker needs to assure that make certain is whether the goods concerned can be physically brought in to India or not as per the current EXIM policy. Exchange Control Requirements The main objective of a bank to open an Import LC is to effect settlement of payment due by the Indian importer to the overseas supplier, so opening of LC automatically comes under the policies of exchange control regulations. UCPDC Guidelines Uniform Customs and Practice for Documentary Credit (UCPDC) is a set of predefined rules established by the International Chamber of Commerce (ICC) on Letters of Credit. The UCPDC is used by bankers and commercial parties in more than 200 countries including India to facilitate trade and payment through LC. UCPDC was first published in 1933 and subsequently updating it throughout the years. In 1994, UCPDC 500 was released with only 7 chapters containing in all 49 articles . The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCPDC600, formally commenced on 1 July 2007. It contain a total of about 39 articles covering the following areas, which can be classified as 8 sections according to their functions and operational procedures. Serial No. 1. 2. 3. Article 1 to 3 4 to 12 13 to 16 Area General Obligations Liabilities and responsibilities. Consisting Application, Definition and Interpretations Credit vs. Contracts, Documents vs. Goods Reimbursement, Examination of Documents, Complying, Presentation, Handling Discrepant Documents Bill of Lading, Chapter Party Bill of Lading, Air Documents, Road Rail etc. Documents, Courier , Postal etc. Receipt. On board, Shippers' count, Clean Documents, Insurance documents Extension of dates, Tolerance in Credits, Partial Shipment and Drawings. House of Presentation Effectiveness of Document Transmission and Translation Force Majeure

4.

17 to 28

Documents

5. 6

29 to 33 34 to 37

Miscellaneous Provisions Disclaimer

7 ISBP 2002

38 & 39

Others

Acts of an Instructed Party Transferable Credits Assignment of Proceeds

The widely acclaimed International Standard Banking Practice(ISBP) for the Examination of Documents under Documentary Credits was selected in 2007 by the ICCs Banking Commission. First introduced in 2002, the ISBP contains a list of guidelines that an examiner needs to check the documents presented under the Letter of Credit. Its main objective is to reduce the number of documentary credits rejected by banks. FEDAI Guidelines Foreign Exchange Dealer's Association of India (FEDAI) was established in 1958 under the Section 25 of the Companies Act (1956). It is an association of banks that deals in Indian foreign exchange and work in coordination with the Reserve Bank of India, other organizations like FIMMDA, the Forex Association of India and various market participants. FEDAI has issued rules for import LCs which is one of the important area of foreign currency exchanges. It has an advantage over that of the authorized dealers who are now allowed by the RBI to issue stand by letter of credits towards import of goods. As the issuance of stand by of letter of Credit including imports of goods is susceptible to some risk in the absence of evidence of shipment, therefore the importer should be advised that documentary credit under UCP 500/600 should be the preferred route for importers of goods. Below mention are some of the necessary precaution that should be taken by authorised dealers While issuing a stands by letter of credits: 1. The facility of issuing Commercial Standby shall be extended on a selective basis and to the following category of importers i. Where such standby are required by applicant who are independent power producers/importers of crude oil and petroleum products ii. Special category of importers namely export houses, trading houses, star trading houses, super star trading houses or 100% Export Oriented Units. 2. Satisfactory credit report on the overseas supplier should be obtained by the issuing banks before issuing Stands by Letter of Credit. 3. Invocation of the Commercial standby by the beneficiary is to be supported by proper evidence. The beneficiary of the Credit should furnish a declaration to the effect that the claim is made on account of failure of the importers to abide by his contractual obligation along with the following documents. i. A copy of invoice.

Nonnegotiable set of documents including a copy of non negotiable bill of lading/transport document. iii. A copy of Lloyds /SGS inspection certificate wherever provided for as per the underlying contract. 4. Incorporation of a suitable clauses to the effect that in the event of such invoice /shipping documents has been paid by the authorised dealers earlier, Provisions to dishonor the claim quoting the date / manner of earlier payments of such documents may be considered. 5. The applicant of a commercial stand by letter of credit shall undertake to provide evidence of imports in respect of all payments made under standby. (Bill of Entry) Fixing limits for Commercial Stand by Letter of Credit L/c 1. Banks must assess the credit risk in relation to stand by letter of credit and explain to the importer about the inherent risk in stand by covering import of goods. 2. Discretionary powers for sanctioning standby letter of credit for import of goods should be delegated to controlling office or zonal office only. 3. A separate limit for establishing stand by letter of credit is desirable rather than permitting it under the regular documentary limit. 4. Due diligence of the importer as well as on the beneficiary is essential . 5. Unlike documentary credit, banks do not hold original negotiable documents of titles to gods. Hence while assessing and fixing credit limits for standby letter of credits banks shall treat such limits as clean for the purpose of discretionary lending powers and compliance with various Reserve Bank of India's regulations. 6. Application cum guarantee for stand by letter of credit should be obtained from the applicant. 7. Banks can consider obtaining a suitable indemnity/undertaking from the importer that all remittances towards their import of goods as per the underlying contracts for which stand by letter of credit is issued will be made only through the same branch which has issued the credit. 8. The importer should give an undertaking that he shall not raise any dispute regarding the payments made by the bank in standby letter of credit at any point of time howsoever, and will be liable to the bank for all the amount paid therein. He importer should also indemnify the bank from any loss, claim, counter claims, damages, etc. which the bank may incur on account of making payment under the stand by letter of credit. 9. Presently, when the documentary letter of credit is established through swift, it is assumed that the documentary letter of credit is subject to the provisions of UCPDC 500/600 Accordingly whenever standby letter of credit under ISP 98 is established through SWIFT, a specific clause must appear that standby letter of credit is subject to the provision of ISP 98. 10. It should be ensured that the issuing bank, advising bank, nominated bank. etc, have all subscribed to SP 98 in case stand by letter of credit is issued under ISP 98. 11. When payment under a stand by letter of credit is effected, the issuing bank to report such invocation / payment to Reserve Bank of India.

ii.

Export Finance and Documentation

Introduction International market involves various types of trade documents that need to be produced while making transactions. Each trade document is differ from other and present the various aspects of the trade like description, quality, number, transportation medium, indemnity, inspection and so on. So, it becomes important for the importers and exporters to make sure that their documents support the guidelines as per international trade transactions. A small mistake could prove costly for any of the parties. For example, a trade document about the bill of lading is a proof that goods have been shipped on board, while Inspection Certificate, certifies that the goods have been inspected and meet quality standards. So, depending on these necessary documents, a seller can assure a buyer that he has fulfilled his responsibility whilst the buyer is assured of his request being carried out by the seller. The following is a list of documents often used in international trade:

Air Waybill Bill of Lading Certificate of Origin Combined Transport Document Draft (or Bill of Exchange) Insurance Policy (or Certificate) Packing List/Specification Inspection Certificate

Air Waybills Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample consists of of three originals and nine copies. The first original is for the carrier and is signed by a export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the goods. Air Waybills serves as: Proof of receipt of the goods for shipment. An invoice for the freight. A certificate of insurance. A guide to airline staff for the handling, dispatch and delivery of the consignment.

The principal requirement for an air waybill are :

The proper shipper and consignee must be mention. The airport of departure and destination must be mention. The goods description must be consistent with that shown on other documents. Any weight, measure or shipping marks must agree with those shown on other documents. It must be signed and dated by the actual carrier or by the named agent of a named carrier. It must mention whether freight has been paid or will be paid at the destination point.

Bill of Lading (B/L) Bill of Lading is a document given by the shipping agency for the goods shipped for transportation form one destination to another and is signed by the representatives of the carrying vessel. Bill of landing is issued in the set of two, three or more. The number in the set will be indicated on each bill of lading and all must be accounted for. This is done due to the safety reasons which ensure that the document never comes into the hands of an unauthorised person. Only one original is sufficient to take possession of goods at port of discharge so, a bank which finances a trade transaction will need to control the complete set. The bill of lading must be signed by the shipping company or its agent, and must show how many signed originals were issued. It will indicate whether cost of freight/ carriage has been paid or not : "Freight Prepaid" : Paid by shipper "Freight collect" : To be paid by the buyer at the port of discharge The bill of lading also forms the contract of carriage. To be acceptable to the buyer, the B/L should :

Carry an "On Board" notation to showing the actual date of shipment, (Sometimes however, the "on board" wording is in small print at the bottom of the B/L, in which cases there is no need for a dated "on board" notation to be shown separately with date and signature.) Be "clean" have no notation by the shipping company to the effect that goods/ packaging are damaged.

The main parties involve in a bill of lading are:

Shipper o The person who send the goods. Consignee o The person who take delivery of the goods.

Notify Party o The person, usually the importer, to whom the shipping company or its agent gives notice of arrival of the goods. Carrier o The person or company who has concluded a contract with the shipper for conveyance of goods

The bill of lading must meet all the requirements of the credit as well as complying with UCP 500. These are as follows :

The correct shipper, consignee and notifying party must be shown. The carrying vessel and ports of the loading and discharge must be stated. The place of receipt and place of delivery must be stated, if different from port of loading or port of discharge. The goods description must be consistent with that shown on other documents. Any weight or measures must agree with those shown on other documents. Shipping marks and numbers and /or container number must agree with those shown on other documents. It must state whether freight has been paid or is payable at destination. It must be dated on or before the latest date for shipment specified in the credit. It must state the actual name of the carrier or be signed as agent for a named carrier.

Certificate of Origin The Certificate of Origin is required by the custom authority of the importing country for the purpose of imposing import duty. It is usually issued by the Chamber of Commerce and contains information like seal of the chamber, details of the good to be transported and so on. The certificate must provide that the information required by the credit and be consistent with all other document, It would normally include :

The name of the company and address as exporter. The name of the importer. Package numbers, shipping marks and description of goods to agree with that on other documents. Any weight or measurements must agree with those shown on other documents. It should be signed and stamped by the Chamber of Commerce.

Combined Transport Document Combined Transport Document is also known as Multimodal Transport Document, and is used when goods are transported using more than one mode of transportation. In the case of multimodal transport document, the contract of carriage is meant for a combined transport from the place of shipping to the place of delivery. It also evidence receipt of

goods but it does not evidence on board shipment, if it complies with ICC 500, Art. 26(a). The liability of the combined transport operator starts from the place of shipment and ends at the place of delivery. This documents need to be signed with appropriate number of originals in the full set and proper evidence which indicates that transport charges have been paid or will be paid at destination port. Multimodal transport document would normally show :

That the consignee and notify parties are as the credit. The place goods are received, or taken in charges, and place of final destination. Whether freight is prepaid or to be collected. The date of dispatch or taking in charge, and the "On Board" notation, if any must be dated and signed. Total number of originals. Signature of the carrier, multimodal transport operator or their agents.

Commercial Invoice Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or import invoice, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation. The invoice must :

Be issued by the beneficiary named in the credit (the seller). Be address to the applicant of the credit (the buyer). Be signed by the beneficiary (if required). Include the description of the goods exactly as detailed in the credit. Be issued in the stated number of originals (which must be marked "Original) and copies. Include the price and unit prices if appropriate. State the price amount payable which must not exceed that stated in the credit include the shipping terms.

Bill of Exchange A Bill of Exchange is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where large amount of money involved. Following persons are involved in a bill of exchange: Drawer: The person who writes or prepares the bill. Drawee: The person who pays the bill.

Payee: The person to whom the payment is to be made. Holder of the Bill: The person who is in possession of the bill. On the basis of the due date there are two types of bill of exchange:

Bill of Exchange after Date: In this case the due date is counted from the date of drawing and is also called bill after date. Bill of Exchange after Sight: In this case the due date is counted from the date of acceptance of the bill and is also called bill of exchange after sight.

Insurance Certificate Also known as Insurance Policy, it certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered. It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents. Also, if submitted under a LC, the insured amount must be in the same currency as the credit and usually for the bill amount plus 10 per cent. The requirements for completion of an insurance policy are as follow :

The name of the party in the favor which the documents has been issued. The name of the vessel or flight details. The place from where insurance is to commerce typically the sellers warehouse or the port of loading and the place where insurance cases usually the buyer's warehouse or the port of destination. Insurance value that specified in the credit. Marks and numbers to agree with those on other documents. The description of the goods, which must be consistent with that in the credit and on the invoice. The name and address of the claims settling agent together with the place where claims are payable. Countersigned where necessary. Date of issue to be no later than the date of transport documents unless cover is shown to be effective prior to that date.

Packing List Also known as packing specification, it contain details about the packing materials used in the shipping of goods. It also include details like measurement and weight of goods. The packing List must :

Have a description of the goods ("A") consistent with the other documents. Have details of shipping marks ("B") and numbers consistent with other documents

Inspection Certificate Certificate of Inspection is a document prepared on the request of seller when he wants the consignment to be checked by a third party at the port of shipment before the goods are sealed for final transportation. In this process seller submit a valid Inspection Certificate along with the other trade documents like invoice, packing list, shipping bill, bill of lading etc to the bank for negotiation. On demand, inspection can be done by various world renowned inspection agencies on nominal charges.

Export Pre Shipment and Post Shipment Finance.

Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. The main objectives behind preshipment finance or pre export finance is to enable exporter to:

Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business.

Types of Pre Shipment Finance

Packing Credit Advance against Cheques/Draft etc. representing Advance Payments.

Preshipment finance is extended in the following forms :

Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)

Requirment for Getting Packing Credit This facility is provided to an exporter who satisfies the following criteria

A ten digit importerexporter code number allotted by DGFT. Exporter should not be in the caution list of RBI.

If the goods to be exported are not under OGL (Open General Licence), the exporter should have the required license /quota permit to export the goods.

Packing credit facility can be provided to an exporter on production of the following evidences to the bank: 1. Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time limit. 2. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer. 3. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted. The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment. Eligibility Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not have export orders in their own name. In this case some of the responsibilities of meeting the export requirements have been out sourced to them by the main exporter. In other cases where the export order is divided between two more than two exporters, pre shipment credit can be shared between them Quantum of Finance The Quantum of Finance is granted to an exporter against the LC or an expected order. The only guideline principle is the concept of NeedBased Finance. Banks determine the percentage of margin, depending on factors such as:

The nature of Order. The nature of the commodity. The capability of exporter to bring in the requisite contribution.

Different Stages of Pre Shipment Finance

Appraisal and Sanction of Limits

1. Before making any an allowance for Credit facilities banks need to check the different aspects like product profile, political and economic details about country. Apart from these things, the bank also looks in to the status report of the prospective buyer, with whom the exporter proposes to do the business. To check all these information, banks can seek the help of institution like ECGC or International consulting agencies like Dun and Brad street etc. The Bank extended the packing credit facilities after ensuring the following" a. The exporter is a regular customer, a bona fide exporter and has a goods standing in the market. b. Whether the exporter has the necessary license and quota permit (as mentioned earlier) or not. c. Whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries(RCC) or not. Disbursement of Packing Credit Advance 2. Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed. Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provide a special packing credit facility and is known as Running Account Packing. Before disbursing the bank specifically check for the following particulars in the submitted documents" a. b. c. d. e. f. Name of buyer Commodity to be exported Quantity Value (either CIF or FOB) Last date of shipment / negotiation. Any other terms to be complied with

The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of goods, whichever is found to be lower. Normally insurance and freight charged are considered at a later stage, when the goods are ready to be shipped. In this case disbursals are made only in stages and if possible not in cash. The payments are made directly to the supplier by drafts/bankers/cheques. The bank decides the duration of packing credit depending upon the time required by the exporter for processing of goods.

The maximum duration of packing credit period is 180 days, however bank may provide a further 90 days extension on its own discretion, without referring to RBI. Follow up of Packing Credit Advance 3. Exporter needs to submit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides the rate of submission of this stocks. Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals. Liquidation of Packing Credit Advance 4. Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant shipment, thereby converting preshipment credit into postshipment credit. This liquidation can also be done by the payment receivable from the Government of India and includes the duty drawback, payment from the Market Development Fund (MDF) of the Central Government or from any other relevant source. In case if the export does not take place then the entire advance can also be recovered at a certain interest rate. RBI has allowed some flexibility in to this regulation under which substitution of commodity or buyer can be allowed by a bank without any reference to RBI. Hence in effect the packing credit advance may be repaid by proceeds from export of the same or another commodity to the same or another buyer. However, bank need to ensure that the substitution is commercially necessary and unavoidable. Overdue Packing 5. Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing credit on the due date. And, if the condition persists then the bank takes the necessary step to recover its dues as per normal recovery procedure. Special Cases

Packing Credit to Sub Supplier 1. Packing Credit can only be shared on the basis of disclaimer between the Export Order Holder (EOH) and the manufacturer of the goods. This disclaimer is normally issued by the EOH in order to indicate that he is not availing any credit facility against the portion of the order transferred in the name of the manufacturer. This disclaimer is also signed by the bankers of EOH after which they have an option to

open an inland L/C specifying the goods to be supplied to the EOH as a part of the export transaction. On basis of such an L/C, the subsupplier bank may grant a packing credit to the subsupplier to manufacture the components required for exports. On supply of goods, the L/C opening bank will pay to the sub supplier's bank against the inland documents received on the basis of the inland L/C opened by them. The final responsibility of EOH is to export the goods as per guidelines. Any delay in export order can bring EOH to penal provisions that can be issued anytime. The main objective of this method is to cover only the first stage of production cycles, and is not to be extended to cover supplies of raw material etc. Running account facility is not granted to subsuppliers. In case the EOH is a trading house, the facility is available commencing from the manufacturer to whom the order has been passed by the trading house. Banks however, ensure that there is no double financing and the total period of packing credit does not exceed the actual cycle of production of the commodity. Running Account facility 2. It is a special facility under which a bank has right to grant preshipment advance for export to the exporter of any origin. Sometimes banks also extent these facilities depending upon the good track record of the exporter. In return the exporter needs to produce the letter of credit / firms export order within a given period of time. Preshipment Credit in Foreign Currency (PCFC) 3. Authorised dealers are permitted to extend Preshipment Credit in Foreign Currency (PCFC) with an objective of making the credit available to the exporters at internationally competitive price. This is considered as an added advantage under which credit is provided in foreign currency in order to facilitate the purchase of raw material after fulfilling the basic export orders. The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). According to guidelines, the final cost of exporter must not exceed 0.75% over 6 month LIBOR, excluding the tax. The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency truncation is that of the exporter. The sources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign

Currency(NonResident) Accounts. Banks are also permitted to utilize the foreign currency balances available under Escrow account and Exporters Foreign Currency accounts. It ensures that the requirement of funds by the account holders for permissible transactions is met. But the limit prescribed for maintaining maximum balance in the account is not exceeded. In addition, Banks may arrange for borrowings from abroad. Banks may negotiate terms of credit with overseas bank for the purpose of grant of PCFC to exporters, without the prior approval of RBI, provided the rate of interest on borrowing does not exceed 0.75% over 6 month LIBOR. Packing Credit Facilities to Deemed Exports 4. Deemed exports made to multilateral funds aided projects and programmes, under orders secured through global tenders for which payments will be made in free foreign exchange, are eligible for concessional rate of interest facility both at pre and post supply stages. Packing Credit facilities for Consulting Services 5. In case of consultancy services, exports do not involve physical movement of goods out of Indian Customs Territory. In such cases, Preshipment finance can be provided by the bank to allow the exporter to mobilize resources like technical personnel and training them.

Advance against Cheque/Drafts received as advance payment 6. Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.

Export Post Shipment Finance.

Introduction 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 dont wait for the importer to deposit the funds. Basic Features The features of postshipment finance are:

Purpose of Finance Postshipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies. Basis of Finance Postshipment finances is provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency. Types of Finance Postshipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self liquidating. In that case it involves advance against undrawn balance, and is usually unsecured in nature. Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature.

Quantum of Finance As a quantum of finance, postshipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of preshipment stage. Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm. Period of Finance Postshipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.

Financing For Various Types of Export Buyer's Credit

Postshipment finance can be provided for three types of export :

Physical exports: Finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred. Deemed export: Finance is provided to the supplier of the goods which are supplied to the designated agencies. Capital goods and project exports: Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter.

Supplier's Credit Buyer's Credit is a special type of loan that a bank offers to the buyers for large scale purchasing under a contract. Once the bank approved loans to the buyer, the seller shoulders all or part of the interests incurred. Types of Post Shipment Finance The post shipment finance can be classified as : 1. 2. 3. 4. 5. 6. 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.

1. Export Bills Purchased/ Discounted.(DP & DA Bills) Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. 2. Export Bills Negotiated (Bill under L/C) The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks: 1. The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit. 2. The bank also faces the documentary risk where the issuing bank refuses to honour its commitment. So, it is important for the for the negotiating bank, and the lending bank to properly check all the necessary documents before submission. 3. Advance Against Export Bills Sent on Collection Basis Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period

plus usance period in case of usance bill. The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance. 4. Advance Against Export on Consignments Basis Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank 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. In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months. 5. Advance against Undrawn Balance It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also 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. 6. Advance Against Claims of Duty Drawback Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the inhouse cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets. In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank. After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities. Crystallization of Overdue Export Bills Exporter foreign exchange is converted into Rupee liability, if the export bill purchase / negotiated /discounted is not realize on due date. This conversion occurs on the 30th day

after expiry of the NTP in case of unpaid DP bills and on 30th day after national due date in case of DA bills, at prevailing TT selling rate ruling on the day of crystallization, or the original bill buying rate, whichever is higher.

Export International Trade Transport Risk.

Introduction It is quite important to evaluate the transportation risk in international trade for better financial stability of export business. About 80% of the world major transportation of goods is carried out by sea, which also gives rise to a number of risk factors associated with transportation of goods. The major risk factors related to shipping are cargo, vessels, people and financing. So it becomes necessary for the government to address all of these risks with broadbased security policy responses, since simply responding to threats in isolation to one another can be both ineffective and costly. While handling transportation in international trade following precaution should be taken into consideration.

In case of transportation by ship, and the product should be appropriate for containerization. It is worth promoting standard order values equivalent to quantities loaded into standard size containers. Work must be carried out in compliance with the international code concerning the transport of dangerous goods. For better communication purpose people involve in the handling of goods should be equipped with phone, fax, email, internet and radio. About the instructions given to the transport company on freight forwarder. Necessary information about the cargo insurance. Each time goods are handled; there risk of damage. Plan for this when packing for export, and deciding on choice of transport and route. The expected sailing dates for marine transport should be built into the production programme, especially where payments is to be made by Letter of Credit when documents will needs to be presented within a specified time frame. Choice of transport has Balance Sheet implications. The exporter is likely to received payments for goods supplied while they are in transit. Driver accompanied road transport provides peace of minds, but the ability to fill the return load will affect pricing.

Transport Insurance

Export and import in international trade, requires transportation of goods over a long distance. No matter whichever transport has been used in international trade, necessary insurance is must for ever good. Cargo insurance also known as marine cargo insurance is a type of insurance against physical damage or loss of goods during transportation. Cargo insurance is effective in all the three cases whether the goods have been transported via sea, land or air. Insurance policy is not applicable if the goods have been found to be packaged or transported by any wrong means or methods. So, it is advisable to use a broker for placing cargo risks. Scope of Coverage The following can be covered for the risk of loss or damage:

Cargoimport, export cross voyage dispatched by sea, river, road, rail post, personal courier, and including associated storage risks. Good in transit (inland). Freight service liability. Associated stock.

However there are still a number of general exclusion such loss by delay, war risk, improper packaging and insolvency of carrier. Converse for some of these may be negotiated with the insurance company. The Institute War Clauses may also be added. Regular exporters may negotiate open cover. It is an umbrella marine insurance policy that is activated when eligible shipments are made. Individual insurance certificates are issued after the shipment is made. Some letters of Credit Will require an individual insurance policy to be issued for the shipment, While others accept an insurance certificate. Specialist Covers Whereas standard marine/transport cover is the answer for general cargo, some classes of business will have special requirements. General insurer may have developed specialty teams to cater for the needs of these business, and it is worth asking if this cover can be extended to export risks. Cover may be automatically available for the needs of the trade. Example of this are:

Project Constructional works insurers can cover the movement of goods for the project. Fine art

Precious stonesSpecial Cover can be extended to cover sending of precious stones. Stock through put cover extended beyond the time goods are in transit until when they are used at the destination.

Seller's Buyer's Contingent Interest Insurance An exporter selling on, for example FOB (INCOTERMS 2000) delivery terms would according to the contract and to INCOTERMS, have not responsibility for insurance once the goods have passed the ship's rail. However, for peace of mind, he may wish to purchase extra cover, which will cover him for loss or will make up cover where the other policy is too restrictive . This is known as Seller's Interest Insurance. Similarly, cover is available to importers/buyers. Seller's Interest and Buyer's Interest covers usually extended cover to apply if the title in the goods reverts to the insured party until the goods are recovered resold or returned. Loss of Profits/ Consequential Loss Insurance Importers buying goods for a particular event may be interested in consequential loss cover in case the goods are late (for a reason that id insured) and (expensive) replacements have to be found to replace them. In such cases, the insurer will pay a claim and receive may proceeds from the eventual sale of the delayed goods

Export Import (Exim) Policy Benifits for Export Business. Introduction Highlight of Exim Policy 200207 Service Exports Status Holders Hardware/Software Gem & Jewellery Sector Removal of Quantitative Restrictions Special Economic Zones Scheme EOU Scheme EPCG Scheme DEPB Scheme DFRC Scheme Miscellaneous

Introduction Export Import Policy or better known as Exim Policy is a set of guidelines and instructions related to the import and export of goods. The Government of India notifies the Exim Policy for a period of five years (1997 2002) under Section 5 of the Foreign Trade (Development and Regulation Act), 1992. The current policy covers the period

2002 2007. The Export Import Policy is updated every year on the 31st of March and the modifications, improvements and new schemes becames effective from 1st April of every year. All types of changes or modifications related to the Exim Policy is normally announced by the Union Minister of Commerce and Industry who coordinates with the Ministry of Finance, the Directorate General of Foreign Trade and its network of regional offices. Highlight of Exim Policy 2002 - 07

1. Service Exports Duty free import facility for service sector having a minimum foreign exchange earning of Rs. 10 lakhs. The duty free entitlement shall be 10% of the average foreign exchange earned in the preceding three licensing years. However, for hotels the same shall be 5 % of the average foreign exchange earned in the preceding three licensing years. Imports of agriculture and dairy products shall not be allowed for imports against the entitlement. The entitlement and the goods imported against such entitlement shall be non transferable. 2. Status Holders a. Duty free import entitlement for status holder having incremental growth of more than 25% in FOB value of exports (in free foreign exchange). This facility shall however be available to status holder having a minimum export turnover of Rs. 25 crore (in free foreign exchange). b. Annual Advance Licence facility for status holder to be introduced to enable them to plan for their imports of raw material and component on an annual basis and take advantage of bulk purchase. c. Status holder in STPI shall be permitted free movement of professional equipments like laptop/computer. 3. Hardware/Software a. To give a boost to electronic hardware industry, supplies of all 217 ITA1 items from EHTP units to Domestic Tariff Area (DTA) shall qualify for fulfillment of export obligation. b. To promote growth of exports in embedded software, hardware shall be admissible for duty free import for testing and development purpose. Hardware up to a value of US$ 10,000 shall be allowed to be disposed off subject to STPI certification. c. 100% depreciation to be available over a period of 3 years to computer and computer peripherals for units inEOU/EHTP/STP/SEZ.

4. Gem & Jewellery Sector a. Diamonds & Jewellery Dollar Account for exporters dealing in purchase /sale of diamonds and diamond studded jewellery . b. Nominated agencies to accept payment in dollar for cost of import of precious metals from EEFC account of exporter. c. Gem & Jewellery units in SEZ and EOUs can receive precious metal Gold/silver/platinum prior to export or post export equivalent to value of jewellery exported. This means that they can bring export proceeds in kind against the present provision of bringing in cash only. 5. Removal of Quantitative Restrictions a. Import of 69 items covering animals products, vegetables and spice antibiotics and films removed from restricted list b. Export of 5 items namely paddy except basmati, cotton linters, rare, earth, silk, cocoons, family planning device except condoms, removed from restricted list. 6. Special Economic Zones Scheme a. Sales from Domestic Tariff Area (DTA) to SEZ to be treated as export. This would now entitle domestic suppliers to DutyDrawback / DEPB benefits, CST exemption and Service Tax exemption. b. Agriculture/Horticulture processing SEZ units will now be allowed to provide inputs and equipments to contract farmers in DTA to promote production of goods as per the requirement of importing countries. c. Foreign bound passengers will now be allowed to take goods from SEZs to promote trade, tourism and exports. d. Domestics sales by SEZ units will now be exempt from SAD. e. Restriction of one year period for remittance of export proceeds removed for SEZ units. f. Netting of export permitted for SEZ units provided it is between same exporter and importer over a period of 12 months. g. SEZ units permitted to take job work abroad and exports goods from there only. h. SEZ units can capitalize import payables. i. Wastage for sub contracting/exchange by gem and jewellery units in transactions between SEZ and DTA will now be allowed. j. Export/Import of all products through post parcel /courier by SEZ units will now be allowed. k. The value of capital goods imported by SEZ units will now be amortized uniformly over 10 years. l. SEZ units will now be allowed to sell all products including gems and jewellery through exhibition and duty free shops or shops set up abroad. m. Goods required for operation and maintenance of SEZ units will now be allowed duty free.

7. EOU Scheme Provision b,c,i,j,k and l of SEZ (Special Economic Zone) scheme , as mentioned above, apply to Export Oriented Units (EOUs) also. Besides these, the other important provisions are: a. EOUs are now required to be only net positive foreign exchange earner and there will now be no export performance requirement. b. Period of Utilization raw materials prescribed for EOUs increased from 1 years to 3 years. c. Gems and jewellery EOUs are now being permitted sub contracting in DTA. d. Gems and jewellery EOUs will now be entitled to advance domestic sales. 8. EPCG Scheme a. The Export Promotion Capital Goods (EPCG) Scheme shall allow import of capital goods for preproduction and post production facilities also. b. The Export Obligation under the scheme shall be linked to the duty saved and shall b 8 times the duty saved. c. To facilities upgradation of existing plant and machinery, import of spares shall be allowed under the scheme. d. To promote higher value addition in export, the existing condition of imposing an additional Export Obligation of 50% for products in the higher product chain to be done away with. e. Greater flexibility for fulfillment of export obligation under the scheme by allowing export of any other product manufactured by the exporter. This shall take care of the dynamics of international market. f. Capital goods up to 10 years old shall also be allowed under the Scheme. g. To facilitate diversification in to the software sector, existing manufacturer exporters will be allowed of fulfill export obligation arising out of import of capital goods under the scheme for setting up of software units through export of manufactured goods of the same company. h. Royalty payments received from abroad and testing charges received in free foreign exchange to be counted for discharge of export obligation under EPCG Scheme. 9. DEPB Scheme a. Facility for pro visional Duty Entitlement Pass Book(DEPB) rates introduced to encourage diversification and promote export of new products. b. DEPB rates rationalize in line with general reduction in Customs duty. 10. DFRC Scheme a. Duty Free Replenishment Certificate (DFRC) scheme extended to deemed export to provide a boost to domestic manufacturer.

b. Value addition under DFRC scheme reduced from 33% to 25%. 11. Miscellaneous a. Actual user condition for import of second hand capital goods up to 10 years old dispensed with. b. Reduction in penal interest rate from 24% to 15% for all old cases of default under Exim policy c. Restriction on export of warranty spares removed. d. IEC holder to furnish online return of importers/exporters made on yearly basis. e. Export of free of cost goods for export promotion @ 2% of average annual exports in preceding three years subject to ceiling of Rs. 5 lakhs permitted. Foreign Exchange Management Act (FEMA) for Export Import Foreign Exchange. ntroduction Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organisation (WTO). Foreign Exchange Management Act was earlier known as FERA (Foreign Exchange Regulation Act), which has been found to be unsuccessful with the proliberalisation policies of the Government of India. FEMA is applicable in all over India and even branches, offices and agencies located outside India, if it belongs to a person who is a resident of India. Some Highlights of FEMA

It prohibits foreign exchange dealing undertaken other than an authorised person; It also makes it clear that if any person residing in India, received any Forex payment (without there being a corresponding inward remittance from abroad) the concerned person shall be deemed to have received they payment from a nonauthorised person. There are 7 types of current account transactions, which are totally prohibited, and therefore no transaction can be undertaken relating to them. These include transaction relating to lotteries, football pools, banned magazines and a few others. FEMA and the related rules give full freedom to Resident of India (ROI) to hold or own or transfer any foreign security or immovable property situated outside India. Similar freedom is also given to a resident who inherits such security or immovable property from an ROI. An ROI is permitted to hold shares, securities and properties acquired by him while he was a Resident or inherited such properties from a Resident.

The exchange drawn can also be used for purpose other than for which it is drawn provided drawl of exchange is otherwise permitted for such purpose. Certain prescribed limits have been substantially enhanced. For instance, residence now going abroad for business purpose or for participating in conferences seminars will not need the RBI's permission to avail foreign exchange up to US$. 25,000 per trip irrespective of the period of stay, basic travel quota has been increased from the existing US$ 3,000 to US$ 5,000 per calendar year.

Buyers's /Supplier's Credit Trade Credit have been subjected to dynamic regulation over a period of last two years. Now, Reserve Bank of India (RBI) vide circular number A.P. (DIR Series) Circular No. 24, Dated November 1, 2004, has given general permission to ADs for issuance of Guarantee/ Letter of Undertaking (LoU) / Letter of Comfort (LoC) subject to certain terms and conditions . In view of the above, we are issuing consolidated guidelines and process flow for availing trade credit . 1. Definition of Trade Credit : Credit extended for imports of goods directly by the overseas supplier, bank and financial institution for original maturity of less than three years from the date of shipment is referred to as trade credit for imports. Depending on the source of finance, such trade credit will include supplier's credit or buyers credit , Supplier 's credit relates to credit for imports into India extended by the overseas supplier , while Buyers credit refers to loans for payment of imports in to India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers credit and suppliers credit for three years and above come under the category of External Commercial Borrowing (ECB), which are governed by ECB guidelines. Trade credit can be availed for import of goods only therefore interest and other charges will not be a part of trade credit at any point of time. 2. Amount and tenor : For import of all items permissible under the Foreign Trade Policy (except gold), Authorized Dealers (ADs) have been permitted to approved trade credits up to 20 millions per import transaction with a maturity period ( from the date of shipment) up to one year. Additionally, for import of capital goods, ADs have been permitted to approved trade credits up to USD 20 millions transactions with a maturity period of more than one year and less than three years. No roll over/ extension will be permitted by the AD beyond the permissible period. 3. All in cost ceiling : The all in cost ceiling are as under: Maturity period up to one year 6 months LIBOR +50 basis points. Maturity period more than one year but less than three years 6 months LIBOR* + 125 basis point

* for the respective currency of credit or applicable benchmark like EURIBOR., SIBOR, TIBOR, etc. 4. Issue of guarantee, letter of undertaking or letter of comfort in favour of overseas lender : RBI has given general permission to ADs for issuance of guarantee / Letter of Undertaking (LOU) / Letter of Comfort (LOC) in favour of overseas supplier, bank and financial instruction, up to USD 20 millions per transaction for a period up to one year for import of all non capital goods permissible under Foreign Trade Policy (except gold) and up to three years for import of capital goods. In case the request for trade credit does not comply with any of the RBI stipulations, the importer needs to have approval from the central office of RBI. FEMA regulations have an immense impact in international trade transactions and different modes of payments.RBI release regular notifications and circulars, outlining its clarifications and modifications related to various sections of FEMA. PPT \Financing International Trade: Financing International Trade 19 Chapter South-Western/Thomson Learning 2006 Slides by Yee-Tien (Ted) Fu Chapter Objectives: Chapter Objectives To describe the methods of payment for international trade; To explain common trade finance methods; and To describe the major agencies that facilitate international trade with export insurance and/or loan programs. Payment Methods for International Trade: Payment Methods for International Trade In any international trade transaction, credit is provided by either the supplier (exporter), the buyer (importer), one or more financial institutions, or any combination of the above. The form of credit whereby the supplier funds the entire trade cycle is known as supplier credit. Payment Methods for International Trade: : Prepayments The goods will not be shipped until the buyer has paid the seller. Time of payment : Before shipment Goods available to buyers : After payment Risk to exporter : None Risk to importer : Relies completely on exporter to ship goods as ordered Payment Methods for International Trade Method Payment Methods for International Trade: : Letters of credit (L/C) These are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents. Time of payment : When shipment is made Goods available to buyers : After payment Risk to exporter :

Very little or none Risk to importer : Relies on exporter to ship goods as described in documents Payment Methods for International Trade Method Payment Methods for International Trade: : Drafts (Bills of Exchange) These are unconditional promises drawn by the exporter instructing the buyer to pay the face amount of the drafts. Banks on both ends usually act as intermediaries in the processing of shipping documents and the collection of payment. In banking terminology, the transactions are known as documentary collections. Payment Methods for International Trade Method Payment Methods for International Trade: : Drafts (Bills of Exchange) Sight drafts (documents against payment) : When the shipment has been made, the draft is presented to the buyer for payment. Time of payment : On presentation of draft Goods available to buyers : After payment Risk to exporter : Disposal of unpaid goods Risk to importer : Relies on exporter to ship goods as described in documents Payment Methods for International Trade Method Payment Methods for International Trade: : Drafts (Bills of Exchange) Time drafts (documents against acceptance) : When the shipment has been made, the buyer accepts (signs) the presented draft. Time of payment : On maturity of draft Goods available to buyers : Before payment Risk to exporter : Relies on buyer to pay Risk to importer : Relies on exporter to ship goods as described in documents Payment Methods for International Trade Method Payment Methods for International Trade: : Consignments The exporter retains actual title to the goods that are shipped to the importer. Time of payment : At time of sale by buyer to third party Goods available to buyers : Before payment Risk to exporter : Allows importer to sell inventory before paying exporter Risk to importer : None Payment Methods for International Trade Method Payment Methods for International Trade: : Open Accounts The exporter ships the merchandise and expects the buyer to remit payment according to the agreed-upon terms. Time of payment : As agreed upon Goods available to buyers : Before payment Risk to exporter : Relies completely on buyer to pay account as agreed upon Risk to importer : None Payment Methods for International Trade Method Comparison of Payment Methods: Comparison of Payment Methods

Trade Finance Methods: Trade Finance Methods Accounts Receivable Financing An exporter that needs funds immediately may obtain a bank loan that is secured by an assignment of the account receivable. Factoring (Cross-Border Factoring) The accounts receivable are sold to a third party (the factor), that then assumes all the responsibilities and exposure associated with collecting from the buyer. Trade Finance Methods: Letters of Credit (L/C) These are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents. The importer pays the issuing bank the amount of the L/C plus associated fees. Commercial or import/export L/Cs are usually irrevocable. Trade Finance Methods Trade Finance Methods: Sometimes, the exporter may request that a local bank confirm (guarantee) the L/C. Trade Finance Methods Letters of Credit (L/C) The required documents typically include a draft (sight or time), a commercial invoice, and a bill of lading (receipt for shipment). Example of an Irrevocable Letter of Credit: Example of an Irrevocable Letter of Credit Documentary Credit Procedure: Documentary Credit Procedure Trade Finance Methods: Variations include standby L/Cs : funded only if the buyer does not pay the seller as agreed upon transferable L/Cs : the first beneficiary can transfer all or part of the original L/C to a third party assignments of proceeds under an L/C : the original beneficiary assigns the proceeds to the end supplier Trade Finance Methods Letters of Credit (L/C) Trade Finance Methods: Bankers Acceptance (BA) This is a time draft that is drawn on and accepted by a bank (the importers bank). The accepting bank is obliged to pay the holder of the draft at maturity. If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA. Trade Finance Methods Bankers Acceptance: Bankers Acceptance Trade Finance Methods: In general, all-in-rates are lower than bank loan rates. They usually fall between the rates of short-term Treasury bills and commercial papers. Trade Finance Methods Bankers Acceptance (BA) The bank accepting the drafts charges an all-in-rate (interest rate) that consists of the discount rate plus the acceptance commission.

Life Cycle of a Typical Bankers Acceptance: Life Cycle of a Typical Bankers Acceptance 8. Pay Discounted Value of BA 1 - 7 : Prior to BA 14. Pay Face Value of BA 10. Sign Promissory Note to Pay 9. Pay Discounted Value of BA 16. Pay Face Value of BA 15. Present BA at Maturity 14 - 16 : When BA matures 8 - 13 : When BA is created Trade Finance Methods: Working Capital Financing Banks may provide short-term loans that finance the working capital cycle, from the purchase of inventory until the eventual conversion to cash. Trade Finance Methods Trade Finance Methods: Medium-Term Capital Goods Financing (Forfaiting) The importer issues a promissory note to the exporter to pay for its imported capital goods over a period that generally ranges from three to seven years. The exporter then sells the note, without recourse, to a bank (the forfaiting bank). Trade Finance Methods Trade Finance Methods: Countertrade These are foreign trade transactions in which the sale of goods to one country is linked to the purchase or exchange of goods from that same country. Common countertrade types include barter, compensation (product buy-back), and counterpurchase. The primary participants are governments and MNCs. Trade Finance Methods Agencies that Motivate International Trade: Due to the inherent risks of international trade, government institutions and the private sector offer various forms of export credit, export finance, and guarantee programs to reduce risk and stimulate foreign trade. Agencies that Motivate International Trade Agencies that Motivate International Trade: Agencies that Motivate International Trade Export-Import Bank of the U.S. (Ex-Imbank) This U.S. government agency aims to create jobs by financing and facilitating the export of U.S. goods and services and maintaining the competitiveness of U.S. companies in overseas markets. It offers guarantees of commercial loans, direct loans, and export credit insurance. Agencies that Motivate International Trade: Private Export Funding Corporation (PEFCO) PEFCO is a private corporation that is owned by a consortium of commercial banks and industrial companies. In cooperation with Ex-Imbank, PEFCO provides medium- and long-term fixed-rate financing for foreign buyers through the issuance of long-term bonds. Agencies that Motivate International Trade Agencies that Motivate International Trade: Overseas Private Investment Corporation (OPIC) OPIC is a U.S. government agency that assists U.S. investors by insuring their overseas investments against a broad range of

political risks. It also provides financing for overseas businesses through loans and loan guaranties. Agencies that Motivate International Trade