Though banks are providing different types of loans to customers, export finance is a kind of advance by which not only the customer is benefited but also the country itself as it brings valuable foreign exchange earnings. Hence, government has given more importance to export finance and has simplified various procedures involved in obtaining finance. Reserve Bank of India has also given instructions to commercial banks that they should give top priority in the sanctioning of export finance.
There are basically five types of export finance.
- Pre-shipment export finance
- Post shipment export finance
- Export finance against collection of bills.
- Deferred export finance
- Export finance against allowances and subsidies.
Pre-shipment export finance:
The exporter is provided finance even for the purchase of raw materials and processing them into finished products but this finance can be provided only when the exporter has firm order from the importer and the importer has also given an anticipatory Letter of Credit from his bank. So, against the export order received from the importer, the exporter is given finance by his bank which is called pre-shipment export finance.
Post shipment export finance:
After dispatching the goods to the importer, the exporter draws a bill, against which the importer will make payment. But this may take a minimum period of 3 to 6 months and this time gap will affect the exporter in his continuation of production. For this purpose after exporting, the export bill will be presented by the exporter to his bank. The bank will prefer to purchase the bill or collect the bill or even discount the bill, which depend on the economic status of the importing country.
Examples for Post shipment export finance
For example 1, if the export is made to USA against the Letter of Credit of the importer, the exporter’s bank will purchase the bill and pay the full value to the exporter. Here, the bank gains as the value of currency is bound to go up since it belongs to a developed country. The entire risk of the bill is borne by the bank.
For example 2, if the export is made to Egypt or Philippines, the bill will be discounted for 60 or 70% of the value as they both belong to developing countries. If the export is made to countries in Africa, such as Namibia, Rwanda, Somalia, etc., the bill will be collected and paid to the exporter after 3 or 6 months, since the importing country happens to be a poor country.
Export finance against collection of bills:
When export is made to different countries, loan can be obtained from the bank against the bills sent for collection. As there are institutions such as Export Credit Guarantee Corporation, banks will come forward to provide finance to exporters. In case of a default, the guaranteeing company will indemnify at least 80% of defaulted amount. While financing against the export bills, the banker will take into account the FOB invoice and not CIF invoice (FOB — Free on Board invoice — Price includes all expenses incurred until the goods are kept on board the ship. CIF invoice includes costs, insurance and freight and so this type of an invoice will not be taken by the banker for financing).
Deferred export finance:
To enable the importer to purchase valuable goods, hire purchase financing or lease finance may be arranged. There are two types of deferred export finance.
- Supplier’s finance; and
- Buyer’s finance.
Supplier’s finance in exporting:
In the supplier’s finance, exporter’s bank will finance the exporter so that he will sell the goods on installment basis to the importer. The exporter will receive the full value and the payment made in installments by the importer will be received by the exporter’s bank.
Buyer’s Finance in exporting:
In buyer’s finance, the buyer is given credit under line of credit by the exporter’s bank and the exporter will be made to export.
Export finance against allowances and subsidies:
Exporters are given subsidies by the government so that they can sell the goods on reduced price to importer. For example, cash compensatory support is a subsidy given to the exporter by the government whenever there is an increase in expenditure, due to reasons beyond the control of the exporter, such as increase in transport cost or wage of the laborers.
There are also allowances given for increasing exports. Example for this is duty drawback. Here, when a product is imported duty is paid. After processing, it is exported at a higher value. The duty paid at the time of import is refunded which is called duty drawback. Gold is imported and duty is paid. It is converted into jewel and exported at a higher value and the import duty is refunded. It may take some time to receive the refund but the bank will finance against the refund of duty.
When the exporter is faced with a sudden increase in expenditure due to reasons beyond his control, the government comes forward to provide cash compensatory support which is a percentage of costs of his finished product. Example: Deviation in the shipping route due to war.
There is also export finance given to deemed exports i.e., in free trade zones at Mumbai, Chennai, Calcutta, Delhi, Cochin and Vizag, the suppliers of goods to foreign exporters are given finance. In these free trade zones, the value of the goods exported should be not less than 50% from the domestic market. Hence, the suppliers are provided finance under deemed export finance.
In the year 2000, the government has come forward to start economic zones in Gujarat and Tamilnadu for the purpose of increasing exports. There is also a pass book facility available to the exporter for continuous finance from the banks.
Institutions involved in export finance:
Number of institutions have not only emerged in providing export finance but even the existing institutions have opened up various avenues in granting export finance. The institutions are:
- Export Import bank
- Commercial banks, both nationalized and non-nationalized
- Development banks such as IDBI, ICICI, etc.
- Small Industries Development Bank of India
- State Finance Corporations
- National Small Industries Corporation
- Export Credit Guarantee Corporation.
All the above institutions are providing finance for exporters directly as well as indirectly. They are also guaranteeing for the loans given by foreign banks. The foreign banks are giving offshore lending which our Indian banks are yet to take up. In offshore lending, loans are given in foreign exchange enabling the foreign buyers to purchase goods from the domestic producer. There is also export finance given to deemed exports which consists of finance made available to those who are supplying raw materials or semi finished goods to foreign companies operating in India, especially in export processing zones or in free trade zones.