Mib 3.6 unit ii on 10 09 12

NEGOTIATION OF EXPORT BillsNEGOTIATION OF EXPORT Bills
Instructions for Opening a Letter of Credit
Examination of a Letter of Credit
Common Discrepancies
Negotiation with Discrepancies
Documents for Negotiation
Presentation of Documents
2

NegotiationNegotiation
Negotiation means the purchase by the
nominated (negotiating) bank of drafts and
shipping documents under a complying
presentation by advancing or agreeing to
advance funds to the beneficiary
An exporter presents a draft (a bill of exchange)
and shipping documents specified in the letter
of credit to a nominated bank or any bank if
there is no nominated bank, which becomes a
negotiating bank, to get paid.
3

Instructions for Opening a Letter ofInstructions for Opening a Letter of
CreditCredit
Items usually included in the instructions to open an
L/C.
(1) An Irrevocable letter of credit subject to the UCP of
the latest version; UCP No. 600 (2007 Revision)
(2) Whether the L/C is to be confirmed by a U.S. bank or
not.
(3) The name and address of the beneficiary: in favor of
exporter.
(4) Whether the L/C is to be transferable or not
(5) Terms of payment such as at sight or usance
(6) Where negotiation or payment is to be effected
4

Instructions for Opening a Letter of CreditInstructions for Opening a Letter of Credit
(7) Whether the payment is to be made in for e.g
U.S. dollars or other foreign currency
(8) What trade terms are to be used: FOB, CFR or
CIF?
(9) Coverage of marine insurance:
(10) Documents to be required for negotiation
Commercial invoice
Packing list
Marine insurance policy or certificate
Ocean bill of lading
Other documents specified in the L/C
5

Instructions for Opening a Letter of CreditInstructions for Opening a Letter of Credit
(11) Whether partial shipments are allowed or not
(12) Whether transshipments are allowed or
prohibited
(13) Presentation period/date: A period of time
for presentation of documents after shipment
(14) Ports of loading and unloading
(15) The latest shipment date
(16) The expiry date
6

Examination of a Letter of CreditExamination of a Letter of Credit
When a letter of credit is received, exporter must:
(1)Examine the conditions and documents specified in
the L/C and determine whether he can meet them or
not.
(2) If there are any conditions he cannot meet, request
his buyer to amend the L/C as ap before he starts
manufacturing export goods.
(3) If the L/C calls for a time draft, have the L/C specify
that the discount interest for the time draft shall be
for account of accountee (importer), when agreement
was a sight draft but L/C is opened with a time draft
(4) Hold off shipping the order until he receives an
amendments to the L/C as requested.
7

Common DiscrepanciesCommon Discrepancies
 A discrepancy: any inconsistence or difference
from the terms and conditions stipulated in the
letter of credit in minute details.
(1) Drafts
a. Draft amount is different from invoice
b. Draft tenor is different from the L/C
c. Wrong drawee
8

(2) Commercial invoices
a. Different merchandise description from the
L/C
b. Invoices is not issued by the beneficiary
c. Insufficient copies are presented
d. Incorrect accountee's name and address are
stated
e. Different prices from the L/C
f. Terms of trade such as FOB, CFR or CIF
different from the L/C
9

(2) Commercial invoices (continued)
g. Marks and numbers of packages
are different from all other
documents
h. Weight is different from the L/C
i. Different currency from the L/C
10

(3) Packing list
a. Different description of merchandise
from the L/C
b. Different number of unit, net weight
and gross weight from the L/C
11

(4) Ocean Bill of Lading
a. Less than a full set of original B/L is presented
b. The B/L not properly endorsed
c. The B/L not marked with "On Board“
notation, if B/L contains the indication
“intended vessel” or "Received for shipment"
d. The B/L not properly consigned.
e. In the case of CFR or CIF, the term "Freight
Prepaid" is not marked, that is, no indication
of freight prepaid by the exporter
f. Merchandise description is different from the
L/C
12

Common Discrepancies
(4) Ocean Bill of Lading (continued)
g. Different ports of loading and/or unloading from
the L/C
h. Notations on the B/L that the merchandise or
packages are damaged
i. The B/L indicates the "On Deck" shipment
j. Stale B/L : Not presented within time limit after
shipment as stipulated in the L/C : within ____
days after date of issuance of bills of lading
k. Late shipment: The bill of lading date marked
later than the shipment date specified in the L/C
13

(5) Marine Insurance Certificate or Policy
a. Different coverage from the L/C
b. Insufficient coverage
c. Not the same currency as the L/C
d. Different merchandise description
e. The effective date later than the shipment
date
f. Broker's cover note presented instead of
insurance certificate or policy
14

(6) Other discrepancies
a. Not all documents required in L/C
are presented
b. Documents are presented after the
expiry date of the L/C
15

Negotiation withNegotiation with
DiscrepanciesDiscrepancies In case discrepancies are found by negotiating bank,
exporter must correct the discrepancies.
 If exporter cannot correct them such as the shipping date,
then exporter should
(1) request the issuing bank to amend the letter of credit to
cover discrepancies or authorize to pay in lieu of
discrepancies
(2) At the same time, inform the buyer of the discrepancies
and request his acceptance and amendment to the Letter
of Credit.
(3) Release shipping documents to issuing bank after the L/C
is amended. Buyer’s acceptance of discrepancies are not
enough. The Letter of Credit must be amended.
(4) Do not send the shipping documents to the issuing bank
on a collection basis.
16

Documents for NegotiationDocuments for Negotiation
Depend on the stipulation in the
letter of credit.
 Exporter must present all documents
specified in the letter of credit for
negotiation.
 Any missing document or incorrect
document becomes a discrepancy.
 Issuing bank of the L/C has under no
circumstances an obligation to honor the
draft and shipping documents with
discrepancies.
17

Documents for NegotiationDocuments for Negotiation
Common documents used in the international trade
accompanying exporter’s Draft (Bill of Exchange)
(1) Commercial Invoice
(2) Packing List
(3) Ocean Bill of Lading
(4) Marine Insurance Certificate
(5) Any other documents if required by the L/C
• Certificate of Country Origin
• Consular Invoice
• Inspection Certificate
• Beneficiary's statement
18

Presentation of DocumentsPresentation of Documents
Draft and all shipping documents must
be presented to a negotiating bank
together with the original letter of credit.
Presentation must be made within a
specified period of time after shipment in
the L/C, but not later than 21 days after
shipment
A bank must determine whether or not
presentation is a complying presentation
in 5 banking days
19

If a nominated (negotiating) bank, a
confirming bank, if any, or the issuing
bank determines that a presentation
does not comply,
 it may refuse to honor or negotiate,
then
 it must give a single notice to presenter
no later than the close of the 5th
banking
days. 20

The notice must state
 The bank is refusing to honor or negotiate
 Each discrepancy
 The bank’s disposal of shipping documents:
• The bank is holding documents pending
instructions from the presenter or
• The issuing bank is holding documents until it
receives a waiver from the applicant & agrees to
accept it or
• The bank is returning documents or
• The bank is acting according to the previous
instructions from the presenter. 21

 If a bank does not follow these negotiation and notice
provisions,
• The bank cannot claim that the documents do not
constitute a complying presentation.
• The bank must honor or negotiate.
 A document presented but not required by the Credit
will be disregarded.
 If a Credit contains a condition without stipulating the
document to indicate compliance with the condition,
• Banks will deem such condition not stated and will
disregard it.
22

Export
Financing
Methods
and
Terms of
Paymen
t

Open Account,
Collections,
Letters of Credit,
Cash in Advance

Methods of Payment-Decision Factors
Relationship
Amount of Order
Type of Product
Competitor’s Terms
Flow Needs
Working Capital Needs
Costs
Profit Margins
Current Interest Rates

Key Factors in Payments
• Internationaltradepresentsaspectrumofrisk,causinguncerta
intyoverthetimingofpaymentsbetweentheexporter(seller)a
nd importer(foreign buyer).
• To exporters, any sale is a gift until payment is received.
• Therefore, the exporter wants payment as soon as
possible, preferably as soon as an order is placed or before
the goods are sent to the importer.
• To importers, any payment is a donation until the goods
are received.
• Therefore, the importer wants to receive the goods as
soon as possible, but to delay payment as long as possible,
preferably until after the goods are resold to generate
enough income to make payment to the exporter.

Cash in Advance
• Seller requires payment prior to shipment
• Seller has no commercial or country risk; use of
funds for working capital; no cost;
uncompetitive from sales standpoint.
• Buyer has risk of non- receipt of goods; bears all
financing costs; capital tied up.
• Used for relatively small amounts, new
customers, one-time sales, when seller needs
working capital source, when buyer or country
risk is high, down payment

CHARACTERISTICS OF PAYMENT IN ADVANCE
Applicability
Recommended for use in high-risk trade relationships or
export markets, and ideal for Internet-based businesses.
Risk
Exporter is exposed to virtually no risk as the burden of risk
is placed nearly completely on the importer.
Pros
Payment before shipment
Eliminates risk of non payment
Cons
May lose customers to competitors over payment terms
No additional earnings through financing operations

Open Account
• Exporter ships goods and bills the importer for
payment at sight or at a future date
• Seller has full risk and country risk; no use of
funds; full cost of financing; competitive sales
terms. Risks may be mitigated through credit
insurance or standby LC.
• Buyer has use of funds; no product risk
• Used for well-established customers with good
credit; low risk country; competitive sales
reasons

O/A
Least secure for exporter,
most attractive to buyer.
Goods are shipped and
documents are sent for
payment at the appropriate
time as may be agreed.
Exporter has little or no
control over the process

Characteristics of Open Account Payments
Applicability:
Recommended for use (1) in secure trading relationships or
markets or (2) in competitive markets to win customers with
the use of one or more appropriate trade finance techniques.
Risk:
Exporter faces significant risk as the buyer could default on
payment obligation after shipment of the goods.
Pros: Boost competitiveness in the global market
Establish and maintain a successful trade relationship
Cons:
Exposed significantly to the risk of non payment
Additional costs associated with risk mitigation measures

Documentary Collection
• Exporter ships goods and routes documents
through banks
• Seller retains title until payment or acceptance.
• Buyer must agree to allow bank to pay seller on
a sight draft, or accept a time draft prior to
receiving title docs for Customs.
• Used for well-established customers with good
credit; low risk country; competitive sales
reasons

Sight Draft
• The sight draft is most commonly used in international trade. In a sight
draft, the payment is on demand or on presentation of the negotiation
documents to the paying bank or the importer. In practice, the bank
may pay within three (3) working days (not instantly) after the receipt
and review of the negotiation documents and if they are in order, that
is, the documents comply exactly to the letter of credit (L/C)
stipulations.
• In certain countries where the business relationships between the
exporter and the bank is well established, the bank may pay the
exporter a few hours after the receipt of the negotiation documents
that are in order.
• In the sample L/C it was stipulated "available by your draft(s) drawn at
sight", as such the payment is by sight draft(s).

Term Draft
The term draft--(time draft or usance draft)---is used in a
deferred payment arrangement. The payment is on the
maturity date determinable in accordance with the stipulations
of the letter of credit (L/C). The maturity date can be at a
stated period after sight or after date:
After sight
after the draft is presented to the drawee for acceptance, for
example, "at 90 days sight" and "at 120 days after sight".
After date
after a specific date, for example, "at 150 days B/L date" (i.e.,
the maturity date is 150 days after the date of the bill of
lading) and "at 180 days after date" (i.e., the maturity date is
180 days after the date of the draft).
Unless the maturity date is tied to a specific date, the importer
may refuse to accept the draft until the goods have arrived,
such deferred acceptance can extend the maturity date.

Documentary Collections-The Role of the Banks
Both banks act as facilitators, similar to a trusted “collection
agency”, each looking out for their client’s interests
Neither bank guarantees payment
Seller’s Bank:
Receives copy of Direct Collection Letter (DCL) w/ tracking
number
Tracks maturity dates and follows up with messages to buyer’s
bank if necessary
Buyer’s Bank:
Receives DCL and shipping docs from seller (or their forwarder)
Gets instructions from buyer to pay / not pay
Responsibility to retain title docs until payment/acceptance
Pays seller’s bank (not seller), OR notifies seller’s bank of non-
payment and returns title documents to seller’s bank

Documentary Collections-The Seller’s Perspective
As a selling term Fairly competitive payment term relative to cash
in advance or LC:-
Benefits / Risks Buyer could refuse the shipment
• Incoterm Issues
• Air shipment v. Ocean shipment
• Time draft v. Sight draft
• Stock item v. Custom manufactured
Cost / ConvenienceLow cost
• Easy documentation (often done by forwarder) by web
software or paper
• No examination of docs
Best Bet (lowest risk)Sight drafts, ocean shipments

Documentary Collections-The Buyer’s Perspective
As a purchasing term Strongly preferable to having to issue
an import LC or provide cash in advance.
Benefits / Risks Retain ability to refuse shipment
• If a sight draft, no inspection of goods prior to payment
• Control when and if payment is made, even on an
accepted time draft
• No meaningful examination of docs
Cost / Convenience No credit line usage
• Low processing costs
• Can defer payment on sight drafts until ship arrives

Direct Collection-Sight Draft
1.Seller makes shipment to buyer
2.Draft, documents and direct collection letter sent to
buyer’s bank copy of DCL to seller’s bank (2a)
3.Draft and copy of invoice sent to buyer
4.Buyer agrees to allow bank to debit account and pay
5.Title documents released to buyer for Customs
clearance
6.Payment made to seller’s bank
7.Seller’s acc’t is credited

Direct Collection-Time Draft
1.Seller makes shipment to buyer
2.Draft, documents and direct collection letter sent to
buyer’s bank with copy of DCL to seller’s bank
3.Time draft and invoice sent to buyer
4.Accepted (signed) draft returned to buyer’s bank
5.Title documents released to buyer for Customs
clearance
6.Advice of acceptance sent to seller’s bank
7.Acknowledgement of acceptance sent to seller
8.At maturity and uyer’s authorization, buyer’s
account is debited
9.Payment made to seller’s bank
10.Seller’s acct is credited

Characteristics of Documentary Collection
Applicability:
Recommended for use in established trade relationships
and in stable export markets.
Risk:
Exporter is exposed to more risk as D/C terms are more
convenient and cheaper than an LC to the importer.
Pros:
Bank assistance in obtaining payment
The process is simple, fast, and less costly than LCs
Cons:
Banks’ role is limited and they do not guarantee payment
Banks do not verify the accuracy of the documents

Letter of Credit L/C
• An LC, also referred to as a documentary credit, is a
contractual agreement where by a bank in the buyer’s
country, known as the issuing bank, acting on behalf of its
customer (the buyer or importer), authorizes a bank in the
seller’s country, known as the advising bank, to make
payment to the beneficiary (the seller or exporter) against
the receipt of stipulated documents.
• The LC is a separate contract from the sales contract on
which it is based and, therefore, the bank is not concerned
whether each party fulfills the terms of the sales contract.
• The bank’s obligation to pay is solely conditional upon the
seller’s compliance with the terms and conditions of the
LC. In LC transactions, banks deal in documents only, not
goods.

Characteristics of Letter of Credit
Applicability:
Recommended for use in new or less-established trade
relationships when you are satisfied with the credit
worthiness of the buyer's bank.
Risk:
Risk is evenly spread between seller and buyer provided all
terms and conditions are adhered to.
Pros:
Payment after shipment.
A variety of payment, financing and risk mitigation options
Cons:
Process is complex and labor intensive
Relatively expensive in terms of transaction costs

TYPES OF LETTER OF CREDIT
Irrevocable Letter of Credit
Revocable letter of credit
Confirmed Letter of Credit
Unconfirmed
Special Letters of Credit or Standby letter of
credit
Inland letter of credit
Back to Back letter of Credit
Bank lines of Credit LOC

7. Documents
3. Letter of Credit
Applicant
Importer/Buyer
Exporter’s Bank/
Advising Bank
Importer’s Bank/
Issuing Bank
Buyer & Seller Agree
6.
Documents 8.
Documents
2.
Application
1. 1.
5. Product
is Shipped
2.
9.
10.
Export Letter of
Credit Cycle
4.
Letter of
Credit
Beneficiary
Exporter/Seller

7. Documents
3. Letter of Credit
Applicant
Importer/Buyer
Exporter’s Bank/
Advising Bank/
Confirming Bank
Importer’s Bank/
Issuing Bank
Buyer & Seller Agree
6.
Documents 8.
Documents
2.
Application
1. 1.
5. Product
is Shipped
2.
9.
10.
Confirmed
Letter of Credit
Cycle
4.
Confirmed
Letter of
Credit
Beneficiary
Exporter/Seller
Confirming Bank
3a. L/C
3a. Confirmed
L/C

Transferable
Letter of Credit
Seller/Exporters Bank
Advising Bank
Transferring BankManufacturer’s
Bank
Importer
Exporter/Seller
9. $50,000
Received6.
Documents
& BL
1. LC
Application
5. Product Shipped to Seller
or directly to Importer
Product
Importer’s Bank/
Issuing Bank
2. Transferable LC
$50,000
3. Transferable LC
$30,000
4. LC
$30,000
7.
Documents
& BL
8.
Documents
& BL
9.
Documents
& BL
10.
$30,000
Received

Export Financing
Exporters naturally want to get paid as quickly as
possible, while importers usually prefer to
delay payment until they have received the
goods. Because of the intense competition for
export markets, being able to offer attractive
payment terms customary in the trade is often
necessary to make a sale. Exporters should be
aware of the many financing options open to
them so that they choose the most acceptable
one to both the buyer and the seller.

Export credit can be broadly classified into
• Pre-shipment finance and
• post shipment finance.
• Preshipment
finance refers to finance extended to
purchase, processing or packing of goods
meant for exports
• Financial
assistance extended after the shipment of
exports falls within the scope of post
shipment finance

PACKING CREDIT
• As loan or cash credit against pledge or hypothecation.
• Verification of Exporter-Importer Code No. issued by
DGFT.
• Party should not be in the RBI Caution
list or ECGC Special Approval List.
• Export is not to a listed country
• Verify order/LC
• Up-to date knowledge of export policy
• Commodity should not be in the negative list.
• Commodity should have a good market
• Terms of contract
• No FEMA violation
• Borrower should be credit worthy.

• Working capital may be defined as funds required
to carry the required level of Current
assets to enable the industry to carry
on its operations at the expected levels
uninterruptedly..
• The guidelines set by Nayak Committee for
computation of WC finance quantum for
village, tiny and other SSI industries
to a minimum extent of 20% of Projected/ Accepted
Turnover to continue Guidelines
with regard to specific activities / industries / situations
to continue (Sugar / tea
industries, Rehabilitation cases, Export Financing etc.)
Banks may consider Cash Flow approach of financing
in order to close the gap between
the sanctioned limits and the utilization levels …

Quantum of finance:
• FOB value of goods minus profit and credit
margin
Cost of production less margin (can be
more if the domestic cost is more
than the FOB value and the difference
is accounted as incentives like duty draw-back
etc. subject to export production finance
guarantee of ECGC).
• In the case of exports on CIF value basis PC
can be granted towards insurance and freight also
• Period of finance: to coincide
with the date for shipment and normally up
to 180 days

Clean Packing Credit
• Granted to credit worthy parties where advance
payment is required to be made to the supplier.
• Quantum determined based on the likely purchase
pattern of the exporter with their suppliers.
• Period of CPC is determined based on the
facts of each case (but not later
than the period of contract /LC.
• A higher margin of say 25% should be stipulated,
collected each time and remitted along with PC to
the supplier.
• CPC should be converted as PC or Bills

EXPORT FINANCE
• PRE SHIPMENT finance : Deals with the
finance schemes available before the
shipment has been made.
• POST SHIPMENT finance : on the
contrary deals with credit available after
the goods have shipped.
Both stages are crucial for the exporter

Pre-shipment finance
• PSF.. Offer liquidity to the
exporter to produce raw
materials, carry out
processing, packing,
transporting and warehousing
of the goods to be exported.

• Pre-Export Finance: provision of funds to
cover the period between signing of purchase
orders and payment (short-term, working
capital)
• –Pre-export finance typically covers:
• Cost of inland transport to port
• Purchase of raw materials for processing
• Cost of processing
• Storage costs

Illustrative procedure (commodities)
• Exporter provides title to or pledges products to bank
• –Products that have yet to be produced
• –Products that have been produced (warehouse
receipt)
• Bank provides credit facility
• Payment
• –Trader takes delivery
• –Bank receives payment directly from buyer
• »Escrow account
• »Evidence account

Methods of Pre-Export Finance
• Open Account: –Exporter ships goods without any guarantee of
payment, thereby financing importer
–Risk of transaction dependent on relationship/importer integrity.
• Documentary letter of credit (see UCC Art. 5 and UCP 500): Letter
from bank, addressed to exporter, in which bank promises to pay or accept
drafts if exporter conforms 100% to conditions within the letter.
• Three parties:
• –Issuer: the issuing bank
• –Account party (importer)
• –Beneficiary (exporter)
• •Three agreements
• –Trade contract between importer and exporter
• –Documentary credit between bank and exporter
• –Reimbursement agreement between bank and importer

Documentary Letter of credit
Revocable/Irrevocable
• –A revocable letter of credit can be cancelled or amended by the issuing
bank; the bank does not need the exporter/beneficiary’s consent.
Confirmed/Unconfirmed
• –Issuing bank forwards letter of credit to exporter’s bank
• –Exporter’s bank promises to pay exporter (confirms l/c)
• –In an unconfirmed transaction, the advising bank acts as the issuing
bank’s agent and bears no obligation to exporter
Back-to-back
• –Typically used by brokers, the letter of credit allows the beneficiary to
assign its rights in one letter of credit to the issuer of a second letter of
credit
• –Both letters of credit must require identical documents
Transferable
• –The original beneficiary can transfer the letter of credit to third parties

Documentary Letter of credit
• Revolving
• –Typically used in construction contracts
• –Allows beneficiary to draw on the letter of credit, up to a certain
amount, usually without presentation of documents
• –The account party replenishes the account
“Red clause” letter of credit
• –Exporter can use to obtain pre-shipment finance by providing either (i)
a statement of purpose or (ii) an undertaking to provide specified
documents.
• –Issuing bank provides exporter with a percentage of the L/C amount
• –Advising bank guarantees reimbursement
“Green clause” letter of credit
• –Similar to “red clause” letters of credit, but pre-shipment finance is
contingent upon the production of warehouse receipts…

Letter of credit Settlement
Sight payment (sight draft)
• –Exporter presents documents and receives payment
Deferred payment (dated draft)
• –Exporter presents documents and receives payment at some
specified future time
Acceptance (time draft)
• –Exporter (i) presents documents and (ii) draws a usance draft
• –Bank accepts bill of exchange for payment on a future date
Negotiation
• –Exporter may choose a bank and negotiate the payment of a
sight or usance draft
• –Bank will either:
• »Advance payment with recourse to the exporter
• »Advance payment less a fee (discount)
• »Pay exporter when issuing bank provides payment

Post shipment Finance
• Provides credit facility from the date
shipment of the goods to the time
export payment is realized
( expenses between period of
shipment dispatch and payment
realisation…

Export Finance –Post-Export
Post-Export Finance (medium/long-term)
• –Post-Export finance typically covers:
• •Account receivables
• •Equipment
• •Other fixed assets
–Methods of Post-Export Finance
• •Revolving line of credit
• •Term loan
• •Finance accounts receivable

Methods of Post-Export Finance
Finance account receivables
–Typically used in two instances
• •Undercapitalized company with permanent financing
need
• •Temporary insufficient cashflow
–Banks provide loan secured by:
• •Assignment of receivables
• •Assignment of commodity inventory
–Loan
• •Made on a revolving basis against a pool of receivables
–Borrower
• •Responsible for collecting from customers
• •Responsible for 100% loan repayment despite inability to
collect from customers

Export Finance –Forms of Risk
Commercial risk
•The risk that either party will not fulfill its
obligations
Transportation risk
•The risk that goods become damaged or destroyed
during transport
Exchange risk
• •The risk that currency fluctuations will affect the
value of the transaction
Political risk
• •The risk that government policy changes, wars,
embargoes, etc., will prevent the conclusion or
affect the value of the transaction

Indian Case study ; RBI sources !
• PRE-SHIPMENT EXPORT CREDIT, Definition:
…any loan or advance granted or any other credit provided by a
bank to an exporter for financing the purchase, processing,
manufacturing or packing of goods prior to shipment / working
capital expenses towards rendering of services on the basis of
letter of credit opened in his favour or in favour of some other
person, by an overseas buyer or a confirmed and irrevocable
order for the export of goods / services from India or any other
evidence of an order for export from India having been placed on
the exporter or some other person, unless lodgement of export
orders or letter of credit with the bank has been waived.

Period of Advance
The period for which a packing credit advance may be
given by a bank will depend upon the circumstances
of the individual case, such as the time required for
procuring, manufacturing or processing (where
necessary) and shipping the relative goods /
rendering of services.
It is primarily for the banks to decide the period for which a
packing credit advance may be given, having regard to the
various relevant factors so that the period is sufficient to
enable the exporter to ship the goods / render the services

• If pre-shipment advances are not adjusted by
submission of export documents within 360
days from the date of advance, the advances
will cease to qualify for concessive rate of
interest to the exporter ab initio.
• RBI would provide refinance only for a
period not exceeding 180 days.

Disbursement of Packing Credit
Banks may also maintain different
accounts at various stages of processing,
manufacturing, etc. depending on the
types of goods / services to be exported,
e.g. hypothecation, pledge, etc.,
accounts and may ensure that the
outstanding balance in accounts are
adjusted by transfer from one account to
the other and finally by proceeds of
relative export documents on purchase,

Banks should continue to keep a close
watch on the end-use of the funds
and ensure that credit at lower rates
of interest is used for genuine
requirements of exports. Banks
should also monitor the progress
made by the exporters in timely
fulfillment of export orders.

Liquidation of Packing Credit
The packing credit / pre-shipment credit granted
to an exporter may be liquidated out of
proceeds of bills drawn for the exported
commodities on its purchase, discount etc.,
thereby converting pre-shipment credit into
post-shipment credit. Further, subject to
mutual agreement between the exporter and
the banker it can also be repaid / prepaid out
of balances in Exchange Earners Foreign
Currency A/c ( EEFC A/c ) as also from rupee
resources of the exporter to the extent

Running Account' Facility
In many cases, the exporters have to procure raw
material, manufacture the export product and
keep the same ready for shipment, in anticipation
of receipt of letters of credit / firm export orders
from the overseas buyers. Having regard to
difficulties being faced by the exporters in availing
of adequate pre-shipment credit in such cases,
banks have been authorized to extend Pre-
shipment Credit ‘Running Account’ facility in
respect of any commodity, without insisting on
prior lodgment of letters of credit / firm export
orders, depending on the bank’s judgment
regarding the need to extend such a facility and
subject to the following conditions:

a) Banks may extend the ‘Running Account’ facility only to those
exporters whose track record has been good as also to Export
Oriented Units (EOUs) / Units in Free Trade Zones / Export
Processing Zones (EPZs) and Special Economic Zones (SEZs)
(b) In all cases where Pre-shipment Credit ‘Running Account’ facility has
been extended, letters of credit / firm orders should be produced
within a reasonable period of time to be decided by the banks.
(c) Banks should mark off individual export bills, as and when they are
received for negotiation / collection, against the earliest outstanding
pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to
add that, while marking off the preshipment credit in the manner
indicated above, banks should ensure that concessive credit available
in respect of individual pre-shipment credit does not go beyond the
period of sanction or 360 days from the date of advance, whichever
is earlier.
(d) Packing credit can also be marked-off with proceeds of export
documents against which no packing credit has been drawn by the
exporter.

Export Credit against Proceeds of Cheques, Drafts, etc.
Representing Advance
Payment for Exports
Where exporters receive direct remittances
from abroad by means of cheques, drafts, etc.
in payment for exports, banks may grant
export credit at concessive interest rate to
exporters of good track record till the
realization of proceeds of the cheque, draft
etc. received from abroad, after satisfying
themselves that it is against an export order,
is as per trade practices in respect of the
goods in question and is an approved method
of realization of export proceeds as per extant

Rupee Export Packing Credit to Manufacturer Suppliers for
Exports Routed through STC/MMTC/Other Export Houses,
Agencies, etc.
Banks may grant export packing credit
to manufacturer suppliers who do not
have export orders/letters of credit in
their own name, and goods are
exported through the State Trading
Corporation/Minerals and Metal
Trading Corporation or other export
houses, agencies, etc.

Requirements
(a) Banks should obtain from the export house a letter
setting out the details of the export order and the portion
thereof to be executed by the supplier and also certifying
that the export house has not obtained and will not ask
for packing credit in respect of such portion of the order
as is to be executed by the supplier.
(b) Banks should, after mutual consultations and taking into
account the export requirements of the two parties,
apportion between the two i.e. the Export House and the
Supplier, the period of packing credit for which the
concessionary rate of interest is to be charged. The
concessionary rates of interest on the pre-shipment
credit will be available up to the stipulated periods in
respect of the export house/agency and the supplier put
together.

The export house should open inland L/Cs in favour of the supplier
giving relevant particulars of the export L/Cs or orders and the
outstandings in the packing credit account should be extinguished
by negotiation of bills under such inland L/Cs. If it is inconvenient
for the export house to open such inland L/Cs in favour of the
supplier, the latter should draw bills on the export house in
respect of the goods supplied for export and adjust packing credit
advances from the proceeds of such bills. In case the bills drawn
under such arrangement are not accompanied by bills of lading or
other export documents, the bank should obtain through the
supplier a certificate from the export house at the end of every
quarter that the goods supplied under this arrangement have in
fact been exported. The certificate should give particulars of the
relative bills such as date, amount and the name of the bank
through which the bills have been negotiated.

Export of Services
In view of the large number of categories of
service exports with varied nature of
business as well as in the environment of
progressive deregulation where the
matters with regard to micromanagement
are left to be decided by the individual
financing banks, the banks may formulate
their own parameters to finance the
service exporters.

Exporters of services qualify for working capital export credit
(pre and post shipment) for consumables, wages, supplies etc.
• The proposal is a genuine case of export of services.
• The item of service export is covered under
Appendix – 36 of the Hand Book (Vol.1)
• The exporter is registered with the Export
Promotion Council for services
• There is an Export Contract for the export of the
Service
• There is a time lag between the outlay of working
capital expense and actual receipt of payment from
the service consumer or his principal abroad.
• There is a valid Working Capital gap i.e. service is
provided first while the payment is received some
time after an invoice is raised.

• Banks should ensure that there is no double
financing/excess financing.
• The export credit granted does not exceed the
foreign exchange earned less the
• margins if any required, advance
payment/credit received.
• Invoices are raised
• Inward remittance is received in Foreign
Exchange.
• Company will raise the invoice as per the
contract where payment is received from
overseas party, the service exporter would utilize
the funds to repay the export credit availed of
from the bank.

India: POST-SHIPMENT EXPORT CREDIT
Post-shipment Credit' means any loan or
advance granted or any other credit provided
by a bank to an exporter of goods / services
from India from the date of extending credit
after shipment of goods / rendering of
services to the date of realization of export
proceeds and includes any loan or advance
granted to an exporter, in consideration of,
or on the security of any duty drawback
allowed by the Government from time to

Types of Post-shipment Credits:
(i)Export bills purchased/
discounted/ negotiated.
(ii) Advances against bills for
collection.
(iii) Advances against duty
drawback receivable from
Government

Liquidation of Post-shipment Credit:
Post-shipment credit is to be liquidated by the
proceeds of export bills received from abroad in
respect of goods exported / services rendered.
Further, subject to mutual agreement between
the exporter and the banker it can also be
repaid / prepaid out of balances in Exchange
Earners Foreign Currency Account (EEFC A/C) as
also from proceeds of any other unfinanced
(collection) bills. Such adjusted export bills
should however continue to be followed up for
realization of the export proceeds and will

Rupee Post-shipment Export
Credit
• the case of demand bills, the period of advance shall be the
Normal Transit Period (NTP) as specified by FEDAI.
• In case of usance bills, credit can be granted for a maximum
duration of 365 days from date of shipment inclusive of Normal
Transit Period (NTP) and grace period, if any. However, banks
should closely monitor the need for extending post shipment credit
up to the permissible period of 365 days and they should influence
the exporters to realize the export proceeds within a shorter
period.
• Normal transit period' means the average period normally
involved from the date of negotiation / purchase / discount till the
receipt of bill proceeds in the Nostro account of the bank
concerned, as prescribed by FEDAI from time to time. It is not to be
confused with the time taken for the arrival of goods at overseas
destination.

Post-shipment Advances against Duty
Drawback Entitlements
• Banks may grant post-shipment advances to exporters
against their duty drawback entitlements as provisionally
certified by Customs Authorities pending final sanction
and payment.
• The advance against duty drawback receivables can also
be made available to exporters against export promotion
copy of the shipping bill containing the EGM Number
issued by the Customs Department. Where necessary,
the financing bank may have its lien noted with the
designated bank and arrangements may be made with
the designated bank to transfer funds to the financing
bank as and when duty drawback is credited by the
Customs

ECGC Whole Turnover Post-shipment
Guarantee Scheme
The Whole Turnover Post-shipment
Guarantee Scheme of the Export Credit
Guarantee Corporation of India Ltd. (ECGC)
provides protection to banks against non-
payment of post-shipment credit by
exporters. Banks may, in the interest of
export promotion, consider opting for the
Whole Turnover Post-shipment Policy. The
salient features of the scheme may be
obtained from ECGC.

DEEMED EXPORTS - CONCESSIVE RUPEE EXPORT
CREDIT
Banks are permitted to extend rupee pre-
shipment and post-supply rupee export credit at
concessional rate of interest to parties against
orders for supplies in respect of projects
aided/financed by bilateral or multilateral
agencies/funds (including World Bank, IBRD,
IDA), as notified from time to time by
Department of Economic Affairs, Ministry of
Finance under the Chapter "Deemed Exports" in
Foreign Trade Policy, which are eligible for grant
of normal export benefits by Government of

INTEREST ON EXPORT CREDIT
• A ceiling rate has been prescribed for rupee export credit
linked to Benchmark Prime Lending Rates (BPLRs) of
individual banks available to their domestic borrowers.
Banks have, therefore, freedom to decide the actual
rates to be charged within the specified ceilings. Further,
the ceiling interest rates for different time buckets under
any category of export credit should be on the basis of
the BPLR relevant for the entire tenor of export credit.
• ECNOS: ECNOS means Export Credit Not Otherwise
Specified in the Interest Rate structure for which banks
are free to decide the rate of interest keeping in view the
BPLR and spread guidelines. Banks should not charge
penal interest in respect of ECNOS.

Interest Rate Structure
• Pre-shipment Credit (from the date of advance) : (a) Up to 180
days / (b)Against incentives receivable from Government covered
by ECGC Guarantee up to 90 days.
• Post-shipment Credit (from the date of advance) : a) On demand
bills for transit period (as specified by FEDAI) (b) Usance bills (for
total period comprising usance period of export bills, transit
period as specified by FEDAI, and grace period, wherever
applicable)
Up to 90 days
Up to 365 days for exporters under the Gold Card Scheme.
(c) Against incentives receivable from Govt. (covered by ECGC
Guarantee) up to 90 days
(d) Against undrawn balances (up to 90 days)
(e) Against retention money (for supplies portion only) payable

EXPORT CREDIT IN FOREIGN CURRENCY
• Pre-shipment Credit in Foreign Currency (PCFC): The
scheme is an additional window for
providing pre-shipment credit to Indian
exporters at internationally competitive
rates of interest. It will be applicable to
only cash exports. The instructions with
regard to Rupee Export Credit apply to
export credit in foreign currency also
mutatis mutandis, unless otherwise
specified.

Source of Funds for Banks
• The foreign currency balances available with the bank in
Exchange Earners Foreign Currency (EEFC) Accounts,
Resident Foreign Currency Accounts RFC(D) and Foreign
Currency (Non-Resident) Accounts (Banks) Scheme
could be utilized for financing the pre-shipment credit in
foreign currency.
• Banks are also permitted to utilise the foreign currency
balances available under Escrow Accounts and Exporters
Foreign Currency Accounts for the purpose, subject to
ensuring that the requirements of funds by the account
holders for permissible transactions are met and the
limit prescribed for maintaining maximum balance in
the account under broad based facility is not exceeded.

Post-shipment Export Credit in Foreign
Currency
• Banks may utilise the foreign exchange
resources available with them in Exchange
Earners Foreign Currency Accounts (EEFC),
Resident Foreign Currency Accounts (RFC),
Foreign Currency (Non-Resident) Accounts
(Banks) Scheme, to discount usance bills and
retain them in their portfolio without resorting
to rediscounting. Banks are also allowed to
rediscount export bills abroad at rates linked to
international interest rates at post-shipment
stage.

Mib 3.6 unit ii on 10 09 12

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Similar a Mib 3.6 unit ii on 10 09 12

Similar a Mib 3.6 unit ii on 10 09 12 (20)

Más de Sanjeev Patel

Más de Sanjeev Patel (20)

Mib 3.6 unit ii on 10 09 12

Notas del editor