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Consulting Services for Import Export Strategy & Export Finance for Indian Companies

Apohan Corporate Consultants Pvt. Ltd. > Financial Strategy > Consulting Services for Import Export Strategy & Export Finance for Indian Companies

Import Export Strategy & Export Finance

Framework of Exports & Imports:

Export Import Policy or Exim Policy under the Foreign Trade (Development and Regulation Act), 1992 governs the exports and imports. The latest version is Exim Policy 2015-2020. India gets preferential treatment under various different Preferential Trading Agreements [PTAs], Free Trade Agreements [FTAs], Comprehensive Economic Cooperation Agreements [CECAs] and Comprehensive Economic Partnerships Agreements [CEPAs] in bilateral and multilateral relations. Global norms are governed by World Trade Organisation (WTO) and various enabling institutions.

Special export dedicated areas:

The government and the industry have created special physical areas for promotion of Exports. They are:
EOUs: Export oriented unit
EHTPs: Electronic hardware technology park
STPs: Software technology park
BTPs: Biotechnology Park

In these free trade zones, the value of the goods exported should be not less than 50% from the domestic market. The basic purpose behind them is : Export promotion, creation of a cluster, supply chain, logistics, etc.

Types of payments in Exports:

Type of payment mechanism agreed between the exporter and importer is very crucial in international trade. There are three types of payment mechanisms.

Clean Payments

In clean payment method, all shipping documents, including title documents are handled directly between the trading partners. The role of banks is limited to clearing amounts as required. Clean payment method offers a relatively cheap and uncomplicated method of payment for both importers and exporters.

There are basically two type of clean payments:

Advance Payment

In advance payment method the exporter is trusted to ship the goods after receiving payment from the importer.

Open Account
In open account method the importer is trusted to pay the exporter after receipt of goods.

The main drawback of open account method is that exporter assumes all the risks while the importer get the advantage over the delay use of company’s cash resources and is also not responsible for the risk associated with goods.

Documentary collection:

It is followed by more than 90% of the banks. The exporter entrusts the handling of commercial and financial documents to banks. He gives the banks necessary instructions concerning the release of these documents to the Importer. It is a cost effective method.

There are two methods of collections of bill this way :

Documents Against Payment:

In this case documents are released to the importer only when the payment has been done.

Documents Against Acceptance:

In this case documents are released to the importer only against acceptance of a draft.

Letter of Credit:

Letter of Credit also known as Documentary Credit is a written guarantee by the importer’s bank on behalf of the importer for the payment against trade documents.

Types of Letters of Credit:

Revocable & Irrevocable Letter of Credit:

Revocable Letter of Credit:

It can be cancelled without the consent of the exporter.

Irrevocable Letter of Credit:

It cannot be cancelled or amended without the consent of the exporter.

Sight & Time Letters of Credit

Sight Letter of Credit:

In this, the payment is made at the time of presenting the documents.

Term Letter of Credit:

In this, banks are allowed to take an agreed time to check the documents and the payment is to made after that.

Confirmed Letter of Credit:

In this, the confirming bank commits the responsibility of claim under the letter of credit if issuer bank fails.

Different types of export finance are as follows:

Pre- shipment finance (Packing Credit):

Pre-shipment finance is provided when the exporter or seller wants the payment even before the shipment of the products or goods. It is provided for the purchase of raw materials/goods, processing them into finished products, storage cost, packing and marking of goods prior to shipment. It is approved when a firm order is placed by the importer. Its period is 180 days (or 270 days).

Post shipment finance (before bill type):

After dispatching the goods to the importer, the exporter has to make a bill, which is to be paid by the importer. It takes about 3 to 6 months before the amount is received by the exporter. This time gap effects the production of the exporter. For this purpose, the exporter will present the bill to the financial institution which provides finance for exports. The bank can purchase the bill or collect the bill or even discount the bill. Post shipment finance is used to pay the wages or other services, to pay for cargo/shipping charges, to pay for advertising in overseas market for promotion.

Post shipment finance (after collection of bills, bill discounting)

The finance or loan can be obtained by the exporter based on the bills of the purchase made by the importer or overseas company. In the case of any default, the finance company will compensate about 80% of the default amount.

Deferred export finance:

Finance is also available for the importers / oversea buyers to facilitate import of goods. There are two types:

Suppliers finance:

In this, the finance is provided to the Indian exporter much before the export transaction by his local bank to sell the goods and the repayment is made on the installment basis.

Buyer’s finance:

In this, finance is provided to the importer by the Indian exporter’s locla bank. The exporter gets immediate payments. The important page to the Indian Bank in installments. The liquidity with the important by providing loan from India helps in boosting Indian exports.

Types of export credit based on currency

1. Rupee Based Credit
2. Foreign currency credit

Allowances and subsidies:

When there is unexpected rise in expenditure due to national and international changes, the government provides allowances or subsidies for export.

Cash compensatory support:

It is a subsidy given to the exporters by the Indian government whenever there is an increase in expenditure such as increase in transport cost or wage of the laborers.

Duty drawback:

In this, imported duty paid on imports for value addition & then export is refunded.

Deemed exports:

In this, the suppliers (in the domestic tariff area) to the exporters (in special economic zones) are given finance.

EPCG (Export Promotion Capital Goods Scheme or Advanced Authorization Scheme):

In this, an importer imports the capital goods at zero rates of customs duty subject to an exports of 6 times of duty saved in around 6 years. To promote local capital goods manufacturers, the imports this Scheme are not be eligible for exemption in case of goods in lists of anti-dumping and safeguard duty protection.

Star status:

Reputed international trading houses in India have been given One, Two, Three, Four, Five Star Export House status in recognition of their performance and for ease of their transactions .

Duty Free Tariff Preference (DFTP) Scheme:

It is duty free tariff preference for Least Developed Countries (LDCs) where no duty is paid on imports subject to conditions.

Exim Bank Schemes:

Exim Bank’s Grassroots Initiatives & Development (GRID) program:

It provides assistance to small enterprises

Exim Bank’s export marketing assistance:

It helps exporters in locating overseas distributors, partners, buyers.

Exim Bank’s Export Marketing Fund (EMF):

In this, finance is made available to Indian companies for undertaking marketing activities in foreign countries. The Bank also helps in product adaptation, overseas operations and importer travel to India.

E-Commerce Exports:

In this, small value goods exported through courier services on e-commerce platforms are given export incentives.

Merchandise Exports from India Scheme (MEIS – for goods) & Service Exports from India Scheme (SEIS for services):

They provide duty credit scrips for achievement of export performance at a particular percentage off the net export value. This percentage is different for different export destinations, exported goods, etc. They can be used by the importers to pay the import duty. This, in a way, make the exporters important for the importers. The scrips are freely transferable. They can also be used for excise duty and service tax payments.

Financial institutions which offer export finance:

1. EXIM Bank
2. Export Credit Guarantee Corporation of India
3. Development banks (IDBI, ICICI)
4. National Small Industries Corporation
5. Commercial banks
6. State Finance Corporations
7. RBI Departments: Industrial and credit department & exchange control department

Apohan services:

Apohan helps a business in formulation of an export strategy. It provides the Consulting Services for export Finance.

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