IB & EXM unit 4

EXPORT FINANCE

Meaning

Export finance refers to the policies, practices and procedures

employed in financing export business. Export financing is the study
of the financial network for export trade and includes the study of
export credit institutions, foreign exchange implications, and the
methods of securing payments.

Export financing broadly cover all aspects of arranging finance

for export and securing payments from the overseas buyers.
Financial facilities are available to the exporters from the banks even
before the shipment of goods and after the shipment of goods.
Besides these facilities from the network of financial institutions,
export credit guarantees and export credit insurance facilities have
also been provided to the exporter.

IMPORTANCE OF EXPORT FINANCE

Finance is important to exporters:

1. To purchase raw materials, and other inputs to manufacture
export products.
2. To assemble the goods in the case of merchant exporters.
3. To store the goods in suitable warehouses till the goods are
demanded for shipment.
4. To pack, mark and label the goods.
5. To pay pre-shipment inspection costs.
6. To pay freight and insurance charges under C.I.F. quotation.
7. To pay for port, customs and shipping agent’s charges.
8. To pay export duty or tax, if any.
9. To pay ECGC premium charges.
10. To promote sales of domestic goods in the international
markets by way of advertising, publicity etc.
11. To pay for export documentation charges.
12. To import or purchase in the domestic market heavy capital
goods, machinery etc.

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13. To pay for consultancy firms for their services.

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

Thus exporters need finance to promote the sale of goods and

sometime to meet various expenses prior to and after shipment of
goods till the export proceeds are realised.

Packing Credit

Packing credit is one of the most viable financing options for

businesses that indulge in exports. It comes in handy for small and
medium-sized enterprises and in turn, boosts cash flow. Generally, the
international sales’ cycle is longer than the domestic ones, and often
leaves a wide operating capital gap. Regardless, with the help of
financing options like packing credit, exporters can meet the financial
gap successfully.

What Is Packing Credit?

Packing credit is a loan extended to exporters and sellers to meet the

expenses of procuring goods, before shipment. In other words, it is pre-
shipment finance that is offered to exporters and comes in handy for boosting
their trade. With the help of packing trade, exporters can procure raw material
or finished products before shipment, and also streamline their export process
seamlessly.

Typically, such a funding option can be availed from authorised

banking institutions as per RBI’s guidelines. It is essentially a government-
backed policy that boosts exports to generate more foreign currency, and
meanwhile, promotes financial growth of the country. Banking institutions may
also extend packing credit against finished goods or stock of raw materials.
Hence, it serves as working capital for export-oriented businesses.

How Does Packing Credit Work?

Exporters approach a designated bank with an export order to access

funds under packing credit. Once the request is processed, the executive
officer of the bank visits the company and assesses the value of the export
order.

To benefit from this loan facility, a separate packing credit account is

opened in the name of the exporter. Once the account is created, the bank
issues credit, either in partial or full proportion of the invoice value. They also
weigh in the estimated risk accompanying a specific export order before
issuing the credit.

It must be noted that the loan amount is sanctioned either in

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exporters’ currency or into a currency that can be readily converted. The same
is decided jointly by the exporter and the banking institution as well.
On receiving payment for a particular shipment from an overseas
buyer, the banking institution holding the account, adjusts the credit balance.
Subsequently, the loan availed for the said export order is closed.

Types Of Packing Credit:

Typically, there are 8 types of packing credit. They are discussed in

brief below –

• Secured shipping loan

• Extended packing credit
• Advances against Letter of Credit
• Green or red Letter of Credit
• Advances against duty drawbacks
• Pre-shipment loan ( Foreign Currency)
• Advances against export incentives
• Packing Credit Against Entitlements under Advance License
(Imports)

Besides becoming aware of how packing credit works and what are
its types, businesses should also learn its accompanying characteristics.

Features Of Packing Credit:

These are among the most noteworthy characteristics of this credit

option –

• It can be self-liquidated.
• It accompanies flexible terms of credit.
• The repayment tenure depends on export cycle (typically up to 6
months).
• The accompanying interest rate is low.
• It helps to cover comprehensive expenses.
• The amount of credit is based on a business’s needs.
• Cost of availing packing credit is fixed and competitive.

Significance Of Packing Credit:

Packing credit comes in handy for exporters and helps to streamline

their supply chain. With the funds availed, businesses involved in exports can
bridge the working capital gap, and more or less, shorten the operating cycle
successfully.

Eligibility Criteria Of Packing Credit:

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Businesses need to belong to either of the following categories to

qualify for packing credit –

1. Start-ups
2. Manufacturers
3. Merchant exporters
4. Existing customers of the bank
Notably, banking institutions are quite stringent when it comes to
setting eligibility criteria against a business credit, to minimise the risk of
default or late payments. Subsequently, some financial institutions may find it
challenging to avail required credit, under this funding option.

PRE-SHIPMENT FINANCE

MEANING

Pre-shipment finance is also known as packing credit. It is a

working capital finance provided by commercial banks to the exporter
prior to shipment of goods.

Reserve Bank of India has defined packing credit as “any loan

to an exporter for financing like purchase, processing, manufacturing
or packing of goods”. Finance is needed in order to convert raw
materials into finished goods and packing of the same would be
termed on pre-shipment finance. But for a merchant exporter who
obtains finished goods directly and packing of the same would also
term as packing credit.

Pre-shipment is finance required by an exporter prior to the

shipment of goods. This is basically needed for the purchase of
raw materials, processing packing, transportation, warehousing, etc.
It is also termed as self-liquidating finance as it gets liquidated and
repaid from the proceeds of export bills, when purchased negotiated
and discounted. Packing credit is available to all types of exporters,
i.e. merchant, manufacturing exporter, export houses, trading houses,
star trading houses, and super star trading houses.

11.3.1 SALIENT FEATURES OF PRE-SHIPMENT FINANCE

The salient features of packing credits are as follows:

1. Eligibility: Packing credit is granted to the exporters to facilitate

them to process export order/or a letter of credit received against the
export contract.

An indirect exporter can also obtain packing credit provided:

(a) He produces a letter from concerned export houses or other

concerned party stating that a portion of the export order has been
allotted in his favour.

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(b) The export houses or other concerned party should also state that
they do not wish to obtain packing credit for the same.

2. Purpose: The packing credit is required by the exporter to meet

working capital requirements before shipment of good, such as
payment of raw materials etc.

3. Documents required: Packing credit is granted against the

following documents:
(a) Confirmed export order.
(b) Letter of credit received against the contract.
(c) Relevant policy issued by ECGC.
(d) Personal bond from sureties known to bank.

4. Forms / Methods of Packing Credit:

(i) Cash packing credit loan : Where advances are granted
initially on unsecured basis.
(ii) Against hypothecation: Where exporters have to
necessarily process or handle goods before exporting.
(iii) Against pledge: where advances are made against the
goods stored in custody of bank.
(iv) Against Red Clause L/C : Where the L/C from the importer
instructs to the negotiating bank to provide packing credit.

5. Amount of packing credit: The amount of packing credit

depends on the amount of export order and credit rating of the
exporter by the bank. The bank may also consider the export
incentives receivable such as IPRS, DBK etc.

6. Period of packing credit: It is normally granted for a period of 180

days. Further extension of 90 days can be provided with the prior
permission of RBI.

7. Rate of interest: The rate of interest per annum is as follows :

(a) Upto 180 days .... 13% p.a.
(b) For additional 90 days .... 15% p.a.

8. Loan agreement: Before disbursement of loan, the bank

requires the exporter to execute a formal loan agreement.

9. Maintenance of accounts: As per RBI directives bank must

maintain separate accounts in respect of each pre-shipment advance.
Running accounts are permitted in case of certain items produced in
FTZs,/EPZs and 100% EOUs.

10. Disbursement of loan: Normally, packing credit advances are

not sanctioned in lump sum, but it is disbursed in a phased manner.

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11. Monitoring the use of advance: The bank advancing packing

credit should monitor the use of packing credit by exporter i.e. whether
the amount is used for export purpose or not. Penalty can be imposed
for misuse.

12. Repayment: The repayment of loan must be made out of export

proceeds only. No repayment can be made out of local funds in
which case, the advance will not be treated as packing credit and no
benefits of concessional rate will be applicable.

POST SHIPMENT FINANCE

MEANING
Post shipment finance is provided to meet working capital needs
after the actual shipment of goods. It bridges the financial gap
between the date of shipment and actual receipt of payment from
overseas buyer thereof.

SALIENT FEATURES

The salient features of post-shipment are as follows:

1. Eligibility: It is extended to the actual exporter who has shipped

the goods or to an exporter in whose name export document are
transferred. It can also be allotted to overseas buyer or institutions
under the scheme of ‘Buyer’s credit and Lines of credit’ operated
by EXIM Bank.

2. Purpose: Post shipment finance provides working capital to the

export from the date of shipment to the date of realisation of export
proceeds.

3. Documents required: It is extended against the evidence of

shipping documents indicating the actual shipment of goods or
necessary evidence in case of deemed exports.

4. Forms of Post-shipment Finance: Post shipment may be

provided in one of the following forms:
(a) Export bills negotiated under L/C.
(b) Purchase of Export bills drawn under confirmed contracts.
(c) Advance against bills under collection.
(d) Advance against export incentives receivables.
(e) Advance against goods sent on consignments basis.
(f) Advance against undrawn balance of bills.
(g) Advance against deemed exports.
(h) Advance against Retention money.

5. Amount of Post-shipment Credit: The amount of post-

shipment finance depends upon whether it is short term, long term

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or medium term. It also depends upon the value of capital goods and
equipment or turnkey projects. Any loan upto Rs. 2 crores for financing
export of capital goods is decided by commercial bank which can
refinance itself from EXIM Bank. In case of export contract above Rs.
2 crores but not more than Rs. 5 crores , the EXIM has the authority
to decide whether export finance could be provided. Contracts above
Rs. 5 crores need the clearance by the Working Groups on Export
Finance, consisting of representatives from EXIM Bank, RBI, ECGC
and the bankers of the exporter. In case of large contracts
representatives from Ministries of Commerce and Finance also act
as members of Working Groups.

6. Period of Post-Shipment Finance:

(a) Short Term: The period is usually 180 days. The loan is provided
by commercial banks.

(b) Medium Term: The period is usually 5 years and the commercial
banks together with EXIM Bank give this type of medium term loan.
(c) Long Term: The period is above 5 years to 12 years. It is provided
by EXIM Bank in case of sale of capital goods, complete plants and
turnkey projects.

7. Rates of Interest: Post shipment finance facility is granted at

concessional rate of interest of 15% for a period of 90 days. For
medium and long term loan the rate of interest is applicable as per the
directives of RBI issued from time to time.

8. Loan Agreement: Before disbursement of loan, the banks require

the exporter to execute a formal loan agreement.

9. Maintenance of Accounts: As per RBI directives, banks must

maintain separate accounts in respect of each pre-shipment advance.
However, running accounts are permitted in case of certain items
produced in FTZs/EPZs and 100% EOUs.

10. Disbursement of Loan Amount: Normally, packing credit

advances are not sanctioned in lump-sum but they are disbursed in a
phased manner.

METHODS OF PAYMENT

There are different methods of securing payments of an export

proceed. The seller has to make sure that the sale proceed is
credited in his account within 180 days from the date of shipment of
goods.

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The following are the methods of securing payment from the

overseas buyers :

1. Open Account: Open Account is also called Trade Credit.

Under this method, there is an understanding between the seller and
the buyer on the terms of credit and rate of interest on the outstanding
amount. This facility is extended by the seller to his overseas buyer
only when he is confident of the buyers’ integrity to honour his
commitments.

2. Bank Draft: This is a popular method of making foreign

payments. This is issued by a Commercial bank on the branch of that
bank in that foreign country. The bank directs the Branch Manager of
that country to make payment of a specified amount in foreign
exchange to a particular party in that country. Some nominal
commission is charged by the Bank for issuing such bank draft. After
getting this draft, the customer can send the draft in ordinary post
cover by air-mail.

3. Cash Against Documents (C.A.D.): Under this system the

exporter sends the export documents to the commercial bank in his
own country and directs the banker to deliver the export documents to
the importer on receipt of the specified amount. Such points are
agreed upon by both the parties. This is a very safe method or
realising the payments particularly in case of dealings with new
customers, about whom the exporter has no knowledge in respect of
credit worthiness, this method is considered very safe. He cannot
afford to dissatisfy him by demanding payments in advance. Under
this system the payment is made when documents of title are given to
him. The whole process is done through some commercial bank.

4. Foreign Bills of Exchange: This is an important method of

payment. The bills of exchange are prepared by the exporter and sent
to the importer through a commercial bank along with the documents.
On acceptance of these bills or Documents against Acceptance (D.A.)
in the bill of exchange the importer makes payment to the commercial
bank in that foreign country and subsequently the payment are
received in India.

Three copies of the foreign bills of exchange are prepared

and sent in separate post covers.

5. Letter of Credit : Letter of credit (L/C) is a popular method of

securing payment from overseas buyer. Under this method the
importer maintains account with a bank, and purchases a letter of
credit from his own bank. In the letter or credit the bank of importer’s
country writes to the bank of the exporter’s country to make the
payments of certain amount to the exporter on delivery by the exporter
to the bank against certain specified export

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documents. This letter is sent to the exporter. After complying the

shipment formalities, the exporter submits this letter to the bank along
with necessary documents and can realise the payments. The bank
will be sending this letter of credit and will get the payment. The
banker of the importer will call upon the importer and delivers the
documents. The amount is already debited to the importer’s account.
This is a very common and safer method of securing payment of in
the foreign trade.

The exporter must decide about the method of securing payment

once he accepts an export assignment. In India exporters are held
responsible to see that the sales proceed is credited to their account
within 180 days from the date of shipment of goods. As such
exporters usually do not extend credit to importers and decide the
method of receiving payment.

EXPORT-IMPORT BANK OF INDIA (EXIM BANK)

MEANING
The EXIM bank of India is a public sector financial institution
established on 1st January, 1982. It started operating from 1st march,
1982. It was established by an Act of Parliament, for the purpose of
financing, facilitating and promoting foreign trade. It is also the
principal financial institution for coordinating the working of institutions
engaged in financing India’s foreign trade.

This bank was mainly created for the purpose of financing

medium and long term loans to exporters there by promoting the
country’s foreign trade.

OBJECTIVES OF EXIM BANK

The main objectives and purposes of EXIM bank are as follows

1. Financing of export and imports of goods and services not only

of India but also of third world countries.
2. Financing of joint ventures in foreign countries.
3. Financing of Indian manufactured goods, consultancy and
technological services of deferred payment terms.
4. Financing R&D and techno-economic study.
5. Co-financing global and regional development agencies.

FUNCTIONS OF EXIM BANK

The assistances offered by EXIM bank to the exporters can be
grouped under the following three categories.

FUNCTIONS OF EXIM BANK

1. Fund Based Assistance
a. Financial assistance to Indian companies
b. Financial assistance to foreign govt. and business firms
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c. Financial assistance to Indian commercial banks
2. Non-Fund Based Assistance
a. Guarantees and bonds
b. Advisory and other services
We would discuss each of these briefly.

1. Fund Based Assistance

It provides direct loans to exporters, refinance, overseas buyers
credit, foreign lines of credit, overseas investment finance and pre-
shipment credit.

It also re-discounts export bills, and extends re-lending facility to

banks abroad. It also renders technology and consultancy services.

It also provides term finance for export-oriented units. It assists SSI

who is exporting by its bill rediscounting programme. It also has an
'agency credit line' with IFC. It refinances exports of computer
software. Fund based assistance is divided into three broad groups:

(i) Financial Assistance to Indian Exporters.

(ii) Financial Assistance to Overseas Buyers and Agencies and
(iii) Financial Assistance to Indian Commercial Banks.

a. Financial Assistance to Indian Companies: EXIM bank

provides loans to Indian Companies in the following manner:

I. Direct Financial assistance to exporters: Funds are

provided on deferred payment terms to Indian exporters to
enables them to extend deferred credit to the overseas buyer.
Commercial banks participate in this programme directly or
under the Risk Syndication facility.

II. Consultancy & Technology Services: Indian companies can

obtain finance from EXIM Bank to extend deferred credit to
overseas buyers of Indian consultancy, technology and other
services.

III. Pre-shipment Credit: Packing credit is available for

construction/turnkey project exporters involving cycle time
exceeding six months.

IV. Facilities for Export Oriented Units: EXIM Bank provides

term loans/deferred payment guarantee for projects in export
oriented units and units in free trade zones.

V. Facilities for Deemed Exports: Deemed export transactions

are eligible for funded and non funded facilities from EXIM
Bank.

VI. Overseas Investment Financing: EXIM Bank provides

finance to Indian Company establishing a joint venture abroad
and requires funds towards equity participation in the joint
venture.
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b. Financial Assistance to Foreign Governments and Business

Firms : EXIM bank also provides loans to foreign Governments,
Companies and Financial Institutions in the following ways:

I. Overseas Buyer’s Credit: This is offered directly to foreign

buyers to import eligible Indian goods and related services
with repayment terms spread over a period of years.

II. Lines of Credit to Foreign Governments: EXIM Bank also

provide credit to foreign governments and foreign financial
institutions. Such lines provide term finance import eligible
Indian goods and related services.

III. Relending facility to banks overseas: Relending facility to

enable overseas banks to provide term finance to importers
for import of eligible Indian goods. Banks overseas would
intermediate between foreign buyers and EXIM Bank and the
latter would intermediate with the suppliers.

c. Financial Assistance to Indian Commercial Banks: EXIM Bank

provides loans to Indian Commercial Banks as explain below:

I. Export Bills Rediscounting : Exchange banks in India can

rediscount their short term export bills for a period of 90 days
with EXIM Bank.

II. Refinance of export credit: EXIM Bank provides to

authorised dealers in foreign exchange hundred per cent
refinance of deferred payment loans. For export contracts up
to Rs. 2 crores, automatic refinance facility is available. For
proposals beyond Rs. 2 crores, EXIM Bank’s approval is
required.

2. Non-Funded Assistances
Non-funded assistances provide cover assistance, retent on
money, guarantees etc.

(a) Issue of Guarantees: EXIM bank participates with commercial

banks in India in the issue of guarantees such as advance payment
guarantee, performance guarantee, and guarantee for retention
money and guarantee for borrowings abroad required for execution of
export contracts.

The bank charges at present interest ranging between 7.5%

p.a. and 12.5% p.a. in connection with its export financing
programmes.

(b) Advisory and Other Services: It advises Indian companies, in

executing contract abroad, and on sources of overseas financing. It
advises Indian exporters on global exchange control practices. The
EXIM bank offers financial and advisory services to Indian
construction projects abroad. It advises small-scale manufacturers
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on export markets and product areas. EXIM bank provides access to

Euro Financing sources and global credit sources to Indian exporters.
It assists the exporters under forfeiting scheme.

EXIM bank also provides advisory services relating to

Marketing research, merchant banking, Foreign exchange, risk
syndication, dissemination of information through publications.

The Bank is headquartered at Maker Chambers IV, 8th floor,

222, Nariman Point, Bombay-400 021 and it has six representative
offices at New Delhi, Calcutta, Madras, Abidjan, Washington D.C.,
and Singapore.

11.7 ROLE OF COMMERCIAL BANKS

The exporter is expected to repay the amount of loan to the

bank as soon as he receives export proceeds. Generally, the lending
bank itself realizes the export proceeds from the importer’s banks.

Commercial banks provide a major part of export finance. They

extend financial assistance both at pre-shipment as well as post-
shipment levels to exporters not only on priority basis but also on
liberal terms.

The directives of Reserve Bank of India under Exchange

Control Regulation Act make it obligatory for payments of exports to
be settled through the medium of a bank in India authorized to deal in
foreign exchange. Commercial banks services are divided into
(a) Fund Based Assistance (Financial Services)
(b) Non-Fund Based Assistance (Non-Financial Assistance)

(a) FUND BASED ASSISTANCE

The commercial banks provide fund based activities at pre-
shipment stage and post-shipment stage.

(i) Pre-Shipment Stage

The commercial banks provide finance on short terms basis for
a normal period of 180 days at a very concessional rate of interest.
The various forms of advance are cash packing credit loan,
advance against hypothecation, advance against pledge etc.

(ii) Post-Shipment Stage

The commercial banks provide finance at the post-shipment
stage normally for a period of 90 days at a concessional rate of
interest. The various forms of post-shipment finance are negotiation
of bills drawn under LC, purchase/discounting of bills, overdraft
against bills under connection etc.
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(b) NON-FUND BASED ASSISTANCE

(I) Banks Guarantees
Banks are authorized to issue guarantees and furnish bid bonds
in favour of overseas buyers. The various guarantees issued by banks
are-

1. Bid Bonds – Banks issue bid bonds to enable exporters to

participate and quote price in various global tenders.

2. Preference Guarantee – It is required in case of export of capital

goods and turnkey projects and construction contracts.

3. Advance Payment Guarantee – The banks also issue advance

payment guarantee to the overseas buyer who normally makes
certain advance payment to the Indian exporter against a bank
guarantee.

4. Guarantee for Payment of Retention Money – Banks issue a

guarantee for payment of retention money by the overseas party who
would release the retention money to the Indian party only after
receiving guarantee from bank.

5. Guarantee for Foreign Currency Loans – It is sanctioned by

financial institution abroad to Indian exporters who raise funds to
finance their projects abroad.

(ii) Credit Rating of Importers

Banks undertake credit rating of importers on request from
exporters. They collect important information about their credit
worthiness and supply the same to the exporters.

(iii) Information about Foreign Exchange

Banks also provide information on the exchange rates of
various countries.

(iv) Dollar Account

Commercial banks provide services to their clients by opening
25% dollar account. Under this account, an exporter is allowed to
retain 25% of the receipts in foreign currency accounts with a bank
in India; these accounts help exporters to meet payment in foreign
currencies.

(v) Invoicing in a Foreign Currency

Sometimes a buyer insists for invoicing in a foreign currency
which is generally suitable to him. Banks provide necessary
information on this matter, such as whether the said currency is
marketable or not, if the contract is not for major currencies.
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(vi) Confirmation of Letter of Credit

Banks also undertake the job of advising and confirming of L/C
opened by importers.

(vii) Forward Exchange Contracts

Banks cover the risks of fluctuations in foreign exchange rates
by fixing the rate in advance for future transactions. Such rates are
known as forward exchange rates.

(viii) Currency for Invoicing Services

Banks provide foreign currencies for invoicing services, as
all currencies are not readily available and may require prior
permission for their release.

11.8 EXPORT CREDIT AND GUARANTEE

CORPORATION OF INDIA LTD. (ECGC)

11.8.1 MEANING

Export Credit and Guarantee Corporation of India Ltd. (ECGC) was

established by the Government of India in December 1983. ECGC is
a fully owned Government Company. It operates under the overall
supervision of the Ministry of Commerce. It is managed by a Board of
Directors. These directors are representatives of the Government,
RBI, banking, insurance and export community. ECGC insures the
exporters and finds finance for them.

11.8.2 OBJECTIVES OF ECGC

The main objectives of ECGC are:
(a) To facilitate the growth of India’s export trade by providing
credit insurance cover to India exporters and giving them
guarantee for enlarging exports of the country.
(b) To provide the supplementary facilities which are necessary for
diversifying exports.
(c) To conduct any other function which the Government asks
them to do from time to time. This includes giving credit and
guarantees in foreign currencies for importing raw materials
which are required for manufacturing of processing export
goods.

ECGC does not give direct export assistance to the exporters.

It only helps them to get export finance from the lending institution.
They do this by agreeing to share the risk with the lending institution,
through their policies and guarantees. The ECGC issues different
types of insurance policies in order to protect the interest of
exporters and the lending institution. It also
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collects and distributes information regarding credit worthiness of

overseas buyers.

Banks and financial institution need guarantee for lending

financial support to the exporters. A number of financial guarantees
have been introduced by ECGC on the strength of which credit can
be extended to exporters and banks and financial institution are
protected.

11.8.3 GUARANTEES OF ECGC

Important guarantees offered by ECGC are:

1. Packing credit guarantee.
2. Post-shipment export credit guarantee.
3. Export finance guarantee.
4. Export production finance guarantee
5. Export performance guarantee
6. Transfer guarantee.

1. Packing credit guarantee: An exporter requires pre-shipment

finance or packing credit, for procuring raw material manufacture
goods, and packs them. This all requires finance. Commercial banks
provide this finance ECGC issues guarantee to protect these banks
against:
(a) Non-delivery of shipping documents by the exporter to the
bank. The guarantee given by ECGC for this purpose cover
66.67% losses.
(b) Non-payment of debt of shipment is not made. The guarantee
issued by ECGC indemnifies bank to the extent of 75% of the
losses due to non-payment of debts.
(c) In case of credit granted to small scale merchant exporter
whose turnover does not exceed Rs. 2 lakhs and if such
exporter fails to repay. ECGC indemnifies the back up to 90%
of the losses.

2. Post-shipment export credit guarantees: The commercial

banks extend post-shipment finance or post shipment credit to the
exporter. This type of finance is granted through purchase
negotiations and discounting of export bills. The financial banks
are protected under this guarantee by the ECGC. The banks are
protected against:

(a) Default or insolvency of exporter

(b) Non - Performance of export contract
(c) Dispute between exporter and importer
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The banks are normally protected under this guarantee by the

ECGC upto 75% of the losses.

3. Export finance guarantee: It takes time normally to claim

incentive money from the government. This claim is to be made by
exporter only after shipment of goods. But exporters funds are
blocked in this course. He needs finance for keeping his activities
continue. Commercial banks help him in this regard. Against these
incentives the exporter can get from the banks maximum 50% of
finance of the FOB value of goods or actual amount receivable on
account of incentive whichever is less.

The financial institutions banks are protected by the ECGC against

(a) Default or insolvency of the exporter.
(b) Any enforceable loss
75% of the losses incurred by the bank are compensated by
the ECGC.

4. Export production finance guarantee: The goods of exporter

sold in the foreign market are much lower in value. It is only when the
exporter receives the amount of incentives from government and
export proceed from importers, he makes up the full value of goods
commensurate with the cost of production. But realization of
incentives takes time invariably.

As a result exporter's finances are blocked. This guarantee

of ECGC enables manufacturer/exporter to get finance from
commercial banks upto 50% over and above FOB value of the goods
at the pre-shipment and post-shipment stage. The guarantee is
issued to financing bank to indemnify to the extent of 66.67% of any
loss owing insolvency or protracted default on the part of
manufacturer/exporter.

5. Export performance guarantee: Sometimes exporter has to

furnish bank guarantee to the foreign buyer. This guarantee is
required when exports are made on deferred terms basic. The
bank guarantee is required by the exporter for the following purposes.

(a) Bid Bond: Foreign buyer wants this to quote a tender. This
guarantee is a sort of certificate of genuiness of the offer submitted by
the buyer.

(b) Advance payment: After securing bid, the buyer may use to pay
exporter certain percentage of the value of export contract as an
advance money. This is provided against the bank guarantee.
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(c) Ensuring performance of contract: This guarantee is required

by the buyer when the contract is given to exporter. This guarantee
ensures that export will fulfil his commitment.

(d) Payment of retention money: In order to ensure performances

from exporter the buyer may retain certain percentage of contract
money as a retention money. This money is released to exporter if the
guarantee of bank is given for this purpose.

e) Loans of foreign currency: Sometimes exporter may have to

raise funds in foreign currency to finance his operations of export
project. Financial institutions abroad willing to grant funds to exporter
in foreign currency may need such guarantee. The banks can issue
this guarantee to enable exporter to furnish to the foreign financing
institutions and get the funds in foreign currency.

6. Transfer Guarantee: Exporter prefers a letter of credit to be

confirmed by a reputed bank in India. Exporter’s own bank may
confirm the L/C required from foreign buyers. The exporter receives
the money of export transaction from the confirming bank. The
confirming bank, however, may fall in trouble if the payment is not
received from foreign buyers or from his foreign bank. ECGC has
devised transfer guarantee scheme. Under this guarantee scheme,
confirming bank has to see that transfer of money is guaranteed from
the foreign country which is due to be payable to the confirming bank
of L/C.

11.8.4 RISK COVERED BY ECGC

ECGC covers commercial risk as well as political risk.

1. Commercial Risks :
(a) Insolvency of the buyer.
(b) Failure of the buyer to make the payment due within 2 months
from the due date.
(c) Buyer’s failure to accept the goods, due to no fault of the
exporter, provided that legal action against the buyer is
considered to be inadvisable.

2. Political Risks :
(a) Imposition of restrictions by the Government of the buyer’s
country or any Government action which may block or
delay the transfer of payment made by the buyer.
(b) War, civil war, revolution or civil disturbances in the buyer’s
country.
(c) New import restrictions or cancellation of a valid import
licence.
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(d) Interruption or diversion of voyage outside India resulting in

payment of additional freight or insurance charges which
cannot be recovered from the buyer.

Any other cause of loss occurring outside India, not normally

insured by general insurers and beyond the control of both the
exporter and the buyer.

11.8.5 RISK NOT COVERED

The Policy does not cover losses due to following risks:

(a) Commercial disputes including quality disputes raised by the
buyer, unlike the exporter obtains a decree from a
competent court of law in the buyer;s country in his favour.
(b) Causes inherent in the nature of the goods.
(c) Buyer’s failure to obtain necessary import or exchange
authorisation from authorities in his country.
(d) Insolvency or default of any agent of the exporter or of the
collecting bank.
(e) Loss or damage to goods which can be covered by general
insurance.
(f) Exchange rate fluctuation.
(g) Failure of the exporter to fulfill the terms of the export
contract or negligence on his part.

11.8.6 POLICIES ISSUED BY ECGC

ECGC issues policies which cover the various risks involved in

export trade. They are as follows:

(A) Standard policies: Standard policies are issued to cover various

political risks and commercial risks. There are four policies which are
issued under standard policy.

(i) Shipments (Comprehensive Risks) policy to cover both

commercial and political risks from the date of shipment.
(ii) Shipments (Political Risks). policy to cover only political
risks from the date of shipment.
(iii) Contract (Comprehensive Risks) policy to cover both
commercial and political risks from the date of contract.
(iv) Contract (Political Risks) policy to cover only political risks
from the date of contract.
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90% of the losses on account of political and commercial risks

are covered by ECGC. It may be less than 90% in cases of certain
countries or some shipments.

(B) Specific policies: Contract for exports of capital goods, turn- key
projects or construction works and those projects which are not of a
repetitive nature are required to be insured by EGCG on a case -
to - case basis under specific policies. There are various types of
policies under this which are:

1. For supply contracts:

(i) Specific shipments (comprehensive Risks ) policy to cover both
commercial and political risks at the post shipment stage.
(ii) Specific shipment ( Political Risks) policy to cover political
risks at the post - shipment stage in cases where the buyer
is overseas government or payments are guaranteed by Govt.
or by banks.
(iii) Specific contracts (Comprehensive Risks) policy.
(iv) Specific contract (Political risks) policy.

2. For buyer’s credit or Line of credit: The buyer’s credit as

the name suggests in the credit granted to the buyers by the financial
institution to finance a particular export contract. ECGC has a policy
under which financial institution such credit get insured. Under lines
of credit, a loan is extended to Govt. of financial institutions is the
importing country for financing import of specified items from the
leading country.

(C) Services policy: A wide range of services such as , technical,

professional, etc. are rendered to overseas buyers. When an exporter
renders services to overseas buyers, there is a risk of payment which
can be insured under service policies of ECGC. There are two type of
policies which are available namely :

(a) Specific services contract (Comprehensive Risks) policy

which covers both political and commercial risks.
(b) Specific services contract (Political Risks) policy, which covers
only political risks.
If the services are obtained by overseas government, specific
services contract (Political Risk) policy in takes. On the contrary, if
services are to be utilised by private buyers which are not guaranteed
by banks a comprehensive risks specific service contract - Policy is
obtained. Such policies cover 90% of the loss suffered by the seller.
A wide range of services, like technical or
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professional services, hiring or leasing can be covered under these

policies.

(D) Construction works policy: This policy is basically to cover turn-

key projects involving suppliers and services. Two types of policies
which are evolved to cover the risks are namely Govt. and private
buyers. Contract with Govt. buyers are covered with political risks
and private buyers are covered with comprehensive risks. The
policies, issued to cover contract with government, the percentage of
loss payable by ECGC is 85% and that of private buyers 75%.

(E) Special Policies: Specific policies are meant for special ECGC
scheme for small exporters. In order to give boost to export from small
exporters special policies have been drafted for them with various
features. This scheme is restricted to those exporters whose
anticipated total export turnover for the period of 12 months ahead is
not more them Rs. 25 Lakhs. This scheme covers 95% of commercial
risks and 100% political risks.

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