The finance available to the importer can come from his bank in the form of import loan or from his overseas supplier in the form of trade credit. In the case of trade credit, there are no special conditions and a trade credit of six months is considered to be normal. A trade credit is considered as an external commercial borrowing when it is beyond 6 months. We will now study these two main classifications in detail.
Table of Content
Import Loan
Imports can be either related to a capital equipment or raw material. In the case of capital equipment, the funds required for import will be assessed as a part of project finance. In the latter case, however, import requirement will be assessed as working capital facility for the company. Thus, there are no separate provisions for granting import loans. The banks that finance import loans may be required to observe certain stipulations regarding rate of interest, security, margin, etc. This is a part of the regulatory mechanism only.
An importer also has other facilities like key cash credit or open cash credit with the bank. When a bill covering import of raw materials or other items is released by payment by the importer out of his own sources or by debit to the cash credit account, the imported goods stand as security for the cash credit account. For the goods to be charged as the security for key cash credit, it is important that they are in possession of the bank and not delivered to the importer.
The essential of the pledge is lost if the goods are to be delivered to the importer and the bank loses its right over the goods. A pledge, however, cannot be created unless the importer is allowed to take delivery of the goods from port and place them in the godown. Problems may arise in situations when a trust receipt is to be taken from the importer, and he is allowed to take the delivery of the goods and keep them in the godown.
In such a case, the trust receipt is taken by the importer and he is allowed to take the delivery of the goods and keep them in the godown. In the case of trust receipt, the importer agrees that the goods held by him are not by way of ownership but he is acting as an agent for the bank. Banks, hence, continue to have rights of the pledge. The LC calling for the usance bill also requires trust receipt facility, e.g. the letter of credit calls for 90 days sight bill, the exporter tenders the bill through the negotiating bank and gets it accepted by the issuing bank.
Since the bill bears the bank’s acceptance, the exporter is assured of getting the payment at maturity. The bill can be discounted with his bank, if the exporter is in urgent need of funds. The issuing bank will like to retain possession of goods till the payment is made. Importer, on the other hand, would like to take possession of goods as they arrive, use them in manufacture and/or sell them and pay against the bill. Here, the Trust release of the importer can be used to release the payment by the bank.
Depending upon the creditworthiness of the customer, the bank may also allow him to:
- Use as well as sell the goods
- Use goods for manufacturing purposes
- Insist on margin
- Release funds in parts
The letter in which the importer acknowledges that the goods are held by him in trust for the bank and agrees to make over the sales proceeds to the bank is called a ‘trust letter’. It also has an undertaking to keep the goods and transactions arising out of these goods separate from the other transactions. In cases of insolvency of the importer, the bank can repossess the goods and the official receiver cannot claim them. If the goods were sold by the borrower, the bank can appropriate the proceeds of sale.
Actually, the trust receipt does not secure the bank entirely. Few risks which might still come up are:
- The importer may re-pledge the goods with another bank or person.
- The importer may sell the goods without remitting the amount to the bank.
- In case of insolvency of the importer, it will be difficult to trace the proceeds of the goods.
Thus, additional credit risk is involved in the release of goods against trust receipt for the bank. One of the alternatives to the trust facility is getting the goods cleared through the bank’s approved clearing agents. The clearing and forwarding agents specialise in the task of facilitating shippers in fulfilling the formalities with respect to booking space in ship and complying with customs, port and shipping-related formalities both in booking and releasing goods.
The clearing agents who are employed to get the goods cleared and delivered at the godown of the customer, who is secured under pledge to the bank, act as agents of the bank during the transit. The goods remain in the possession of the bank and thus the essence of the pledge is not violated. Clearing agents are carefully selected by analysing their reputation in the market and integrity.
Trade Credits
The credit extended by the overseas supplier, bank and financial institution for imports for a maturity period of less than 3 years is called ‘trade credit’ (frequently referred to as ‘TC’). It includes supplier’s credit or buyer’s credit depending upon the source of finance. Supplier’s credit is the credit for imports into India extended by the overseas supplier, whereas buyer’s credit is the credit for payment of imports into India arranged from a bank or financial institution outside India for a maturity of less than 3 years.
Such buyer’s and supplier’s credit come in the category of External Commercial Borrowing (ECB) and is governed by the ECB guidelines as follows:
Amount and Maturity
Trade credits for imports into India can be approved up to USD 20 million per import transaction by banks for imports permissible under the current Foreign Trade Policy (FTP) of the DGFT with a maturity period up to one year (from the date of shipment). For capital goods imports as classified by Directorate General of a Foreign Trade (DGFT), the approval of trade credit up to USD 20 million per import transaction with a maturity period of more than 1 year and less than 3 years by banks is required. The trade credits exceeding the value of USD 20 million per import transaction cannot be approved by banks.
All-in-cost Ceilings
All-in-cost-ceilings include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses. For a maturity period of up to 1 year, the all-in-cost-ceiling is 50 Basis Points and for a maturity period of more than 1 year but less than 3 years, the all-in-cost-ceiling is 125 Basis Points.
Guarantee
The LC/guarantees/letter of undertaking/letter of comfort can be issued by banks in favour of overseas supplier, bank and financial institutions for up to USD 20 million per transaction for a period of up to 1 year for import of all non-capital goods permissible under the Foreign Trade Policy (except Gold) and up to 3 years for import of capital goods, subject to prudential guidelines given by the Reserve Bank of India from time to time. The period of such Letter /Guarantee have to be co-terminus with the period of credit, calculated from the date of shipment.
Export Finance
The export finance or the financial requirements of an exporter are met by commercial banks. The facilities extended by commercial banks are generally classified into the following two types:
- Pre-shipment finance
- Post-shipment finance
Pre-shipment finance (also known as packing credit) is the advance granted to the exporter to procure, process, manufacture, pack, and prepare the goods for export. Thus, this is the facility extended before and till the goods are shipped for export.
The following are some of the important aspects of packing credit advances:
Eligibility
Only bona fide exporters can get a pre-shipment credit on the strength of LC established by banks of standing abroad in favour of the exporter. In case of non-availability of LC, the strength of the firm order can also be used to grant credit.
Type of accounts
Packing credit can be normally given in the form of a loan account; a separate account is being maintained for each export order. However, depending upon the merits from case to case, basis packing credit can be extended by banks as a running account. Also, the condition of prior lodgement of LC/firm order to exporters can be waived off.
Period of Loan and Interest
Circumstances of individual case determine the period for which a packing credit is granted. These include the time required for procuring, manufacturing or processing and shipping the related goods. Banks have the discretion to decide the period for which the facility of packing credit has to be granted.
Quantum of Advance
The amount advanced as pre-shipment finance should not exceed the FOB price or the domestic cost of production, whichever is lesser. Depending upon the worthiness of the party, margin may also be stipulated. If LOC or firm order is on CIF/CFR basis, the value should be reduced to FOB value and finance eligible should be calculated on that value.
Sources of Repayment
Proceeds of foreign bills of exchange should be used to repay the packing credit account. Export incentives like duty drawback can also be used for the same. Further, depending upon mutual agreement between the exporter and the bank, balances in the EEFC account and rupee resources of the exporter can also be used for repayment.
Appraisal
Packing credit has to be adjusted out of the export bills tendered by the borrowers on shipment of goods. Thus, the packing credit limit should be considered along with limit for purchase of foreign bills. The routine credit appraisal norms of the banks are also applied in case of packing credit. Other than the experience of the borrower in exports, the bank also has to judge him on the basis of character, capital, etc. Also, an enquiry into the exchange regulations being fulfilled or not can also be done by the bank.
Documentation
Documents taken for advance against goods like demand promissory note, hypothecation or pledge agreement, etc. should be taken in the case of packing credit. Some banks might have a separate agreement for the same.
Conduct of Accounts
Unless it has been decided that the running account facility is to be given a separate loan, the account should be maintained for each export contract, and the disbursement of loans should be done in stages depending upon the exporter’s requirements. However, lump sum disbursement disregarding the actual requirement for the purpose of the loan should be discouraged.
In post-shipment finance, credit facility is extended to the exporter from the time goods are shipped and till the export proceeds are realised. It can be of various forms like negotiation of a bill drawn, purchase of a bill not drawn, advance against the bill sent for collection and advance against the duty drawback.
RBI provides the following guidelines for the assessment of export credit needs:
- Banks should simplify the application form and reduce data requirements from exporters for assessment of their credit needs, so that exporters do not have to seek outside professional help to fill in the application form or to furnish data required by the banks.
- Banks should adopt any of the methods, viz. projected balance sheet method, turnover method or cash budget method, for assessment of working capital requirements of their exportercustomers, whichever is most suitable and appropriate to their business operations.
- In the case of consortium finance, once the consortium has approved the assessment, member banks should simultaneously initiate their respective sanction processes.
