UNIT – II – IMPORT – EXPORT FINANCE

PART- A
1. State the objectives of EXIM bank?
The EXIM bank was set up in 1982 by the Government of India as a public sector
financial institution under an act of the parliament. The main objectives of the EXIM
bank are as follows:

• It helps in financing of import and export of machinery and equipment on lease

basis.

• It helps in financing of joint ventures in foreign countries.

• It also provides technical, administrative and financial assistance to the parties in

connection with import and export.
2. What do you mean by Letter of Credit?
The Letter of Credit popularly known as LC is the most important document in
international trade. The LC is a letter issued by the overseas importer’s bank and
addressed to the exporter or its Indian corresponding bank for payment provided the
exporter meets the terms and conditions of contract as indicated in the letter of credit.
Thus the promise to pay usually made by the overseas importer has been substituted by
his bank. This gives the exporter greater credit security.
3. List the cost covered by pre shipment finance?
Pre –shipment credit is the loan or any other credit given by a bank to an exporter for
financing (a) procuring raw materials and components to manufacture the product or (b)
processing or assembling or packing the goods for export.
Pre – shipment finance would normally cover the following costs:

• Cost of purchase or production.

• Packing including any special packing for export.

• Costs of special inspection or tests required by the importer.

• Internal transport costs.

• Port, customs and shipping agent’s charges.

• Freight and insurance charges if the contract is either CIF contract or C &
f contract and

• Export duty or tax, if any.

4. Define forfeiting?
 Forfeiting enables an exporter to convert overseas credit sales into cash sales through the
process of discounting of export receivables. The bill of exchange accepted by the
importer is surrender to the forfeiting agency, which pays him in cash after deducting a
fee. The understanding is that the agency will collect the dues from the importer on
expiry of the said period.
5. What do you mean by deferred payment terms?
Our exchange control regulations stipulate that exporter should realize the foreign
exchange for their exports within 180 days from the date of shipment. Contracts for
export of goods against payment to be received fully or partly after the expiry of the
stipulated period for the realization of export proceeds are treated as Deferred Payments
terms.
6. What is the need for finance in international trade?
Finance is needed in international trade for the following reasons:

• As a means of consideration for the exchange of goods and services.

• To meet the foreign exchange regulations.

• To obtain licenses and permissions for import and export.

• For document preparation and verification.

• For custom clearances and

• Also for pre and post shipment activities etc.

7. What are FOB, D/P, and CIF?
FOB – FREE ON BOARD

• Seller makes goods available at named port of shipment. Places goods on

board vessel “over the ship’s rail”. Freight
Collected.

• To be used for sea or waterway carriage only, never for air or land
shipments.

• Seller is responsible for pre carriage, export licenses and usually port or
forwarding fees.
D/P – DOCUMENTS AGAINST PAYMENT
D/P is the one where the exporter ships the goods to the buyer (importer)
but the documents will be handed over to the buyer’s bank only after the payment is
made.
 CIF – COST, INSURANCE AND FREIGHT

• Seller makes goods available at a named port of destination. Freight

prepaid.

• Seller covers costs of main carriage and insurance coverage.

• Goods must pass over ship’s rail at port of destination.

• Used fore sea or inland waterway shipments.

8. What is revolving credit?
If an exporter is well known to the banker and his past performance has been
satisfactory, the banks are usually prepared to grant revolving pre – shipment credit in
connection with successive deliveries. This implies that upon repayment of the first loan,
the exporter is automatically granted a corresponding loan on the same terms. This
procedure offers the advantage of saving time and costs as the original documents serve
as a basis for extended credit.
9. What are the benefits of ECGC?

In order to provide export credit and insurance support to Indian exporters the
Government of India has set up the Export Credit Guarantee Corporation Limited
(ECGC) in 1964.
The benefits of ECGC are as follows:

• It helps in reducing foreign bank handling charges on documents.

• It helps in increasing the export sales, which could be achieved mainly due to the
competitive terms offered to the customers.

• It provides better security than L/C.

• It provides full attention to procurement, production, marketing, sales and growth

of business due to the freedom from chasing receivables.
10. What is line of credit?
A line of credit is a type of credit in which a bank undertakes to provide credit to
a client during a predefined period. The client may either withdraw the credit amount all
at once, or make a certain number of withdrawals during the specified period. In this case
the EXIM bank extends credit to financial institutions in the importing country by
assuming credit risks.
11. What do you mean by consignment sale?
 In consignment sale the exporter consigns the goods to his agent in the foreign
market and sells the goods to the buyer. In this method the exporter retains the title of
goods until the seller has made some payments.
In case of consignment sales, banks usually establish a special post – shipment
credit account which is adjusted when the goods are sold abroad and the sale proceeds
received.
12. What are C, D, E terms?
Under the INCO terms the “C” ,”D” ,”E” terms stands to denote the following and
it includes in it various terms.
“C “terms (main carriage paid)

• CIP – Carriage and Insurance Paid to

• CPT – Carriage Paid To

• CFR – Cost and Freight

• CIF – Cost , Insurance and Freight

D terms (arrival)

• DAF – Delivered At Frontier

• DDP – Delivered Duty Paid

• DDU – Delivered Duty Unpaid

• DES – Delivered Ex Ship

• DEQ – Delivered Ex Quay

“E” terms (departure)

• EXW – Ex Works(named place)

13. Explain DAF, DES, DEQ, DDU, and DDP?
DAF – Delivered at Frontier to a named place.
DES – Delivered Ex Ship to a named port of destination.
DEQ – Delivered Ex Quay to a named port of destination.
DDU – Delivered Duty Unpaid to a named port of destination.
DDP – Delivered Duty Paid to a named place of destination.
14. Define port, charges?
 PORT – The port refers to the collective facilities and terminals that conduct
maritime trade handling functions in harbors and also which handles shipping. It always
plays a strategic role in the development of domestic and international trade and also the
economic development of the country. The ports are playing the role as an industry than
just a passive actor not only in transportation but also in complete supply chain
management of a nation.
CHARGES – It refers to those costs incurred as a result of the import.
In other words it refers to the purchase made in overseas currency and it includes
payments made to foreign currency accounts. It also includes drafts, cheques and
dividend warrants etc. and also negotiations made under traveler’s letter of credit.
15. What is arbitration?
Arbitrage is the act of simultaneously buying a good at a low price in one market and
selling that same good at a higher price in another market to make a profit.
The International Chamber of Commerce offers Arbitration services in case of
contractual dispute. Arbitration is an important tool used to settle the commercial
problems without litigation.
16. What are the types of post shipment credit?
Post – shipment finance is required by the exporters to bridge the gap between the
time of shipment of goods and the actual payment for the goods exported.
There are three types of post - shipment credit. They are as follows:

• Short term: It is usually for 6 months and provided by banks.

• Medium term: It is usually offered for a period beyond 6 months and up to

5 years. These loans are also provided by commercial banks in
collaboration with EXIM bank of India. It is provided in case of durable
consumer goods and light capital goods.

• Long term: It is provided in case of sale of capital goods, complete plants

and turnkey jobs. The period of credit is usually more than 5 years.
17. What do you mean by buyers credit?
It is a means of financing an export transaction involving capital goods and equipment
of a large value or complete turn – key projects on long term credit.
In this case, EXIM bank directly extends credit to the importer. Indian exporters can
receive their payments straightway from the EXIM bank.
18. What is back-to-back credit?
In case the goods are to be procured or purchased from a supplier or a manufacturer,
the banks may open a letter of credit in favor of the suppliers under what is known as
 “back – back letter of credit”. Export houses for getting letters of credit in favor of their
suppliers usually adopt this procedure. In such cases credit can be extinguished by
drawing a bill on the export house.
19. What is import licensing?
Import licensing can be defined as administrative procedures requiring the submission
of an application or other documentation (other than those required for customs purposes)
to the relevant administrative body as a prior condition for importation of goods.
Import licenses are mainly employed (1) as means of restricting outflow of foreign
currency to improve a country's balance of payment position; (2) to control entry of
dangerous items such as explosives, firearms, and certain substances; or (3) to protect the
domestic industry from foreign competition.
20. State the methods of financing for import and export of capital goods?
The method of financing for import and export of capital goods is as follows:

• Consignment sale

• Open account

• Advance payments

• Letter of credit

• Guarantees

• Bankers’ acceptance facility etc.

21. State any two advantage of forfaiting?
Forfaiting enables an exporter to convert overseas credit sales into cash sales through
the process of discounting of export receivables.
Advantages of forfaiting:

• The exporter is relieved from all kinds of transaction risks.

• Documentation procedure is simple.

• It frees the exporter from political and commercial risks.

• It provides a hedge against interest and exchange risks.

• Exporter saves on insurance costs.

• Exporter’s liquidity position improves with the inflow of funds.

22. State the functions of EXIM bank?
 The functions of EXIM bank are as follows:

• Pre –shipment credit

• Forfeiting

• Letter of credit confirmation

• Underwriting

• Supplier’s credit

• Finance for deemed exports

• Finance for EOUs and EPZs

• Overseas investment finance

• Export manufacturing finance

• Export vendor development finance

• Export product development finance etc.

23. Who are the parties to letter of credit?
The Letter of Credit, popularly known as LC, is the most important document in
International Trade wherein the creditworthiness of the importer is made known to the
exporter. The parties to the Letter of Credit are as follows:

• Applicant

• Issuing bank (opening bank)

• Beneficiary bank

• Advising bank

• Confirming bank

• Nominated bank

• Reimbursing bank
24. What are the auxiliary services of EXIM bank?
The auxiliary services of EXIM bank are as follows:

• It provides Export Marketing Fund to promote exports of manufactures to

developed countries.
 • It helps Indian companies to go global by setting up subsidiaries and joint
ventures abroad.

• It provides advisory and information services to potential exporters about projects

abroad especially about multilaterally funded ones.

• It also helps companies in preparing bids according to strict conditions very often
prescribed by multilateral agencies.

• It arranges training programmes for exporters often by inviting foreign experts.

• It provides term finance for developing and launching new products for exports.

• It also introduced “cluster of excellence” programme for up gradation of quality

standard and obtaining ISO certification.
PART – B
1. Discuss in detail the INCO terms used in import/export trade?
The INCO terms were published in 1936 and it is revised periodically to keep up
with changes in the international trade needs.
Under the INCO terms 2000, the terms are grouped into C, D, E, F designated by
the first letter of the term as follows:
“C “terms (main carriage paid)

• CIP – Carriage and Insurance Paid to

• CPT – Carriage Paid To

• CFR – Cost and Freight

• CIF – Cost, Insurance and Freight

“D” terms (arrival)

• DAF – Delivered At Frontier

• DDP – Delivered Duty Paid

• DDU – Delivered Duty Unpaid

• DES – Delivered Ex Ship

• DEQ – Delivered Ex Quay

“E” terms (departure)

• EXW – Ex Works (named place)

 “F” terms (main carriage unpaid)

• FAS – Free Alongside Ship

• FCA – Free Carrier

• FOB – Free On Board

2. What is the need for finance in international trade?
Finance is an essential requirement for any kind of business. So is the case with
international trade. The various sources of finance have to be explored by the exporter
and importer in order to fulfill the financial requirements for his business.
Finance is needed in international trade for the following reasons:

• As a means of consideration for the exchange of gods and services.

• To purchase raw materials and other inputs to manufacture goods.

• To assemble the goods in the case of merchant exporters. To store the goods in
suitable warehouses till the goods are shipped.

• To pay for packing, marking and labeling of goods.

• To pay for pre – shipment inspection charges.

• To pay for consultancy services.

• To import or purchase from the domestic market heavy machinery and other
capital goods to produce export goods.

• To pay for export documentation expenses.

• To pay for publicity and advertising in the overseas markets.

• To pay for port authorities, customs, and shipping agent’s charges.

• To pay towards export duty or tax, if any.

• To pay towards ECGC premium.

• To pay for freight and other shipping expenses.

• To pay towards various expenses in connection with visits abroad for market
surveys or for some other purpose.

• To pay for collecting information on overseas market either before or after

shipment of goods.
 • To pay towards expenses regarding participation in exhibition and trade fairs in
India an abroad.

• To pay for representatives abroad in connection with their stay abroad.

• To pay for any other activity in connection with export of goods.

3. What is letter of credit? Discuss the different types of it?
The Letter of Credit popularly known as LC is the most important document in
international trade. The LC is a letter issued by the overseas importer’s bank and
addressed to the exporter or its Indian corresponding bank for payment provided the
exporter meets the terms and conditions of contract as indicated in the letter of credit.
Thus the promise to pay usually made by the overseas importer has been substituted by
his bank. This gives the exporter greater credit security.
The various types of Letter of Credit as follows:

• Clean LC – this may be negotiated against a clean draft. It is a draft without any
documents attached to it.

• Documentary LC – the draft must be accompanied by the documents specified in

the LC.

• Assignable LC – under this the beneficiary (exporter) may assign the rights to
another beneficiary for a stated period and specified credit.

• Non – assignable LC – the rights and the period cannot be transferred to any other
beneficiary.

• Cash LC - in this case the exporter draws cash on the assigned draft.

• Acceptance LC – in this case the draft drawn by the importer has to be accepted
by the exporter.

• Revocable LC – it may be cancelled / revoked at any time without the notice of

the beneficiary.

• Irrevocable LC – it is the one which cannot be modified or cancelled without the

consent of the parties.

• Confirmed LC – if the LC is confirmed by the exporter’s bank it becomes

confirmed LC.

• Back – to – back LC – in this case the credit is opened by the beneficiary in favor
of the domestic suppliers.

• Revolving LC – it is used to designate a new credit for each shipment.

 • Red clause LC – in this case the beneficiary draws a predetermined LC as soon as
it is established.
4. What is the difference between pre and post shipment finance?
The difference between the pre and post shipment finance are as follows:
a) Meaning:

• In pre shipment finance, financial assistance is extended prior to the

shipment.

• In post shipment it is extended after the shipment.

b) Purpose:

• In pre shipment for the purpose of procuring, manufacturing, processing,

packing etc. finance is extended.

• In post shipment finance is extended from the period between shipments to

receipt of payment.
c) Beneficiary:

• It is the Indian exporter or the supplier in case of pre shipment.

• It is overseas buyer or overseas financial institution in poast shipment.

d) Documentary evidence:

• Pre shipment finance is provided against export order or L/C.

• Post shipment finance is provided against shipping documents attested by

customs.
e) Form of finance:

• It may be fund based or non – fund based in pre shipment.

• It is generally fund based in post shipment.

f) Amount:

• It depends upon the export order and credit rating by the bank.

• It depends upon the value of goods exported.

g) Period:

• The period will be normally around 180 days.

• The period may extend over 1 to 12 years.

 h) Rate of interest:

• In pre shipment the rate of interest is 13 to 15 %

• In post shipment the rate of interest is 13 % up to the first 90 days.

i) Sources:

• Pre shipment finance is usually provided by commercial banks.

• Post shipment finance is provided by commercial banks (short term),EXIM

bank (medium and long term)
5. Explain – forfeiting, deferred payment, ECGC schemes.
FORFAITING:
Forfeiting enables an exporter to convert overseas credit sales into cash sales
through the process of discounting of export receivables. The bill of exchange accepted
by the importer is surrender to the forfeiting agency which pays him in cash after
deducting a fee. The understanding is that the agency will collect the dues from the
importer on expiry of the said period.
Advantages of forfaiting:

• The exporter is relieved from all kinds of transaction risks.

• Documentation procedure is simple.

• It frees the exporter from political and commercial risks.

• It provides a hedge against interest and exchange risks.

• Exporter saves on insurance costs.

• Exporter’s liquidity position improves with the inflow of funds.

DEFERRED PAYMENT:
Our exchange control regulations stipulate that exporter should realize the foreign
exchange for their exports within 180 days from the date of shipment. Contracts for
export of goods against payment to be received fully or partly after the expiry of the
stipulated period for the realization of export proceeds are treated as Deferred Payments.
Security for deferred payment could be provided by:

• Letter of Credit

• Pro – notes executed by Government buyers / public sector undertakings.

 • Acceptable bank guarantees.

• Bills duty accepted by bank and

• Any other security considered adequate.

ECGC SHEMES:
The risk element in export business is greater than in domestic trade because the parties
to the contract belong to two different countries. The overseas buyer may be at default or
he may go bankrupt. In order to provide export credit and insurance support to Indian
exporters the Government of India has set up the Export Credit Guarantee Corporation
Limited (ECGC) in 1964.
Functions of ECGC:

• It helps in obtaining financial assistance from commercial banks and other financial
institutions.

• It helps in collecting and disseminating information to exporters regarding credit –

worthiness of overseas buyers.

• It also helps in developing and diversifying exports.

• It insures the exporters credit risks and provides a sense of security.

• It charges a low rate of premium to enable the exporters to compete effectively in the
overseas market.
Various policies or covers issued by ECGC:

• Specific policies

• Standard policies

• Financial guarantees

• Special schemes
Risks covered by ECGC:

• Commercial risks: insolvency of the buyer, default in the payment, buyer’s failure to
accept the goods.

• Political risks: Government action which delays payment, war revolution, cancellation of
import licenses and any other loss occurring outside India.
Risks not covered by ECGC:

• Fluctuations in exchange rate

• Loss or damage which cannot be covered by general insurance

• Insolvency of the agent of the exporter etc.