Role Of Export Import Bank Of India And Export Credit Guarantee Corporation

Role Of Export Import Bank Of India

Export-Import Bank of India [EXIM BANK] was set up by an Act of Parliament on January 1, 1982 for the purpose of financing, facilitating and promoting the foreign trade of India. It is the principal financial institution for coordinating the working of institutions engaged in financing exports and imports. It is also allowed to finance export of consultancy and related services, assist joint venture in third world countries, and finance export-oriented industries. Besides the finance function, EXIM Bank also renders a diverse range of information, advisory and support services to exporters. The functions of the EXIM bank thus broadly fall in the following three categories:

EXIM Bank

1. 1. Export Financing
   2. Export Services
   3. Promotional Activities

Export Financing By EXIM Bank

Though the EXIM Bank performs all the above three functions, the focus of the Bank is on export financing, for which it has introduced a number of lending programs which are meant for:

• • Indian Exporters
  • Commercial Banks
  • Overseas Entities

We shall discuss these programs meant for financing of exports from India.

[A] – Lending Programs For Exporters: EXIM Bank provides finance to exporters directly through the following schemes:

Pre-Shipment Credit: Pre-shipment credit is provided to Indian exporters to enable there to buy raw materials and other inputs for export contracts involving production time exceeding six months.

Foreign Currency Pre-shipment Credit: Under this scheme, credit is provided in foreign currency to the exporters to enable them to import raw materials and other inputs needed for export production.

Export [Supplier’s] Credit: Under this scheme, EXIM Bank extends medium term credit for periods exceeding six months to exporters to enable them to extend term credit to overseas importers of eligible Indian goods. Such credit is called Supplier’s Credit. Indian exporters of plants, equipment, machinery and related services are eligible for assistance under this scheme.

Finance For Consultancy And Technology Services: EXIM Bank offers a special credit facility to Indian exporters of consultancy and technology services, so that they can, in turn, extend term credit to overseas importers. The services covered include providing personnel for rendering technical services, transfer of technology/know-how preparations of project feasibility reports etc.

Finance For Project Export Contracts: Indian project exporters incur rupee expenditure while executing overseas project export contracts. EXIM Bank helps them in meeting these expenses.

Service To Exporters: EXIM Bank renders the following important services to the exporters:

Guarantee Facilities: EXIM Bank enables Indian companies to provide requisite guarantees to facilitate execution of export contracts and import transactions.

Forfaiting: Forfaiting is a financing mechanism that enables a company to convert credit sale to cash sale on without recourse basis. In other words, the exporter transfers his receivables for exported goods to a third party [i.e. forfaitor] who pays immediately their value to the exporter after deducting his commission and realizes afterwards from the debtors. EXIM Bank acts as a facilitator for the Indian exporter in availing the services of an overseas forfaiting agency.

[B] – Facilities For Commercial Banks In India: EXIM Bank provides the following refinance/re-discounting facilities to commercial banks in India:

Export Bills Re-Discounting Facility: Under this facility the commercial banks may re-discount the export bills of their small scale industry customers with the EXIM Bank. The usance of such export bills should not exceed 90 days.

Refinance Of Export [Supplier’s] Credit: This facility enables the commercial banks to avail refinance from EXIM Bank in respect of the credit granted to Indian exporters of eligible goods, who, in turn, extend term credit for more than 180 days to importers overseas.

[C] – Facilities For Overseas Entities

The following facilities are offered by EXIM Bank to overseas buyers and financial institutions, etc.

Buyer’s Credit: Overseas buyers can avail of Buyer’s Credit from EXIM Bank to import eligible goods from India on deferred payment terms.

Lines Of Credit: Under Lines of credit EXIM Bank grants credit to Overseas Financial Institutions, Foreign Governments and their Agencies to enable them to on lend term loans to finance import of eligible goods from India.

 

Role Of Export Credit Guarantee Corporation

Export Credit Guarantee Corporation [ECGC], a company wholly owned by the Government of India, is not a lending institution. Its objective is mainly to help exporters to obtain finance from commercial banks. This objective is achieved by

• • Issuing insurance policies to the exporters to cover their commercial and political risks in respect of the goods exported by them.
  • Issuing financial guarantees to banks to cover the risks involved in providing credit to exporters.

It charges premium for issuing such policies which are as low as possible. The ECGC, thus, plays a very important role in the financing of exports from India. We shall study in detail about these policies.

The Products And Services Offered By ECGC Are Broadly Classified As Under:

1. 1. Credit Insurance Policies.
   2. Maturity Factoring.
   3. Guarantees To Banks.
   4. Special Schemes.

 

• Credit Insurance Policies

Some of the important credit insurance policies are discussed below.

Standard Policy: The Shipments [Comprehensive Risks] Policy is the most important policy issued by ECGC. It covers the risks in respect of goods exported on short term credit i.e. credit not exceeding 180 days. This policy covers both commercial and political risks from the date of shipment. It is issued to those exporters whose estimated export turnover is more than Rs.50 lakh during the next 12 months. The policy covers the following commercial and political risks:

Commercial Risk:

• • Insolvency of the buyer.
  • Default by the buyer to make payment for the goods accepted by them within a specified period.
  • Buyer’s failure to accept the goods [when such non-acceptance is not due to exporter’s actions].

Political Risks:

• • Imposition of restriction on remittance by the government of the buyer’s country or any Government, action blocking or delaying transfer of funds by the buyer.
  • War, civil war, revolution or civil disturbances in the buyer’s country.
  • New import restrictions or cancellation of a valid import license.
  • Additional handling, transport or insurance charges due to interruption or diversion of voyage, 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.

Risk Not Covered: The following risks are not covered by the Standard Policies of ECGC:

• • Commercial disputes including quality disputes raised by the buyer, unless the Exporter obtains a decree from a competent court of law in the buyer’s country in his favor.
  • Causes inherent in the nature of the goods.
  • Buyer’s failure to obtain necessary import or exchange authorization from authorities in his country.
  • Insolvency or default of any agent of the exporter or of the collecting bank.
  • Loss or damage to goods which can be covered by general insurers.
  • Exchange rate fluctuations.
  • Failure of the exporter to fulfil the terms of the export contracts or negligence on his part.

Standard policy covers all shipments made by an exporter on credit terms during a period of 24 months. Shipments made against advance payments or those supported by irrevocable letters of credit with confirmation by an Indian Bank may be excluded.

ECGC fixes its maximum liability under each policy. It is the limit up to which ECGC accepts liability for shipments made in each year.

Commercial risks are covered subject to a credit limit approved by the corporation on each buyer to whom goods are sold on credit terms.

The ECGC normally pays 90% of the loss whether it arises due to commercial risks or political risks. The remaining 10% of the loss is borne by the exporter himself.

Small Exporter’s Policy: In order to encourage small exporters, such policies are issued with improved terms over the standard policies. Small exporters are those whose anticipated export turnover during the next 12 months does not exceed Rs.50 lakhs. These policies are issued for a period of 12 months [as against 24 months in case of standard policies]. In case of these policies ECGC pays the claims to the extent of 95 percent in case of commercial risks and up to 100 percent in case of political risks.

Specific Shipment Policy [Short term]: To cover risks in respect of a specific shipment or shipments against a specific contract.

Buyer Wise Policy: To cover risks in respect of all shipments to one or a few buyers.

Consignment Exports Policy: To cover risks in respect of export of goods on consignment basis.

Buyer Exposure Policies: To cover risks in respect of shipments to a single buyer or multi-buyers based on the expected exposure.

Software Projects Policy: To cover risk of non-payment to the Indian exporters who provide software services.

IT – Enabled Services [Specific Customer] Policies: To cover risk of non payment to the Indian exporters who provide IT – enabled services.

Services Policy: To cover risk of non-payment to Indian companies entering into contract with foreign principals for providing them with technical or professional services.

Construction Works Policy: To provide cover to an Indian Contractor who executes a civil construction job abroad.

Specific Policy For Supply Contract: To cover risks in respect of export of capital goods or turnkey projects involving medium/long term credit.

Insurance Cover For Buyer’s Credit And Line Of Credit: To cover risks in respect of credit extended by a bank in India to an overseas buyer for paying for machinery and equipment to be imported from India or credit extended by a bank in India to an overseas institution for facilitating imports from India.

 

• Maturity Factoring

The Maturity Factoring scheme, as designed by ECGC has certain unique features and does not exactly fit into the conventional mould of maturity factoring. The changes devised are intended to give the clients the benefits of full factoring services through the Maturity Factoring scheme, thus effectively addressing the needs of exporters to avail of pre-finance [advance] on the receivables, for their working capital requirements. One important feature is the very important role and special benefits envisaged for banks under the scheme.

Specific Services Provided Under This Scheme Are: 

• • 100 percent credit guarantee protection against bad debts.
  • Sales register maintenance in respect of factored transactions.
  • Regular monitoring of outstanding credits, facilitating collection of receivables on due date, recovery, at its own cost, of all recoverable bad debts.

Payments would be received by the exporter, in his account, through normal banking channels. In the event of non-realization of dues on factored export receivables. ECGC will promptly make the payment in Indian Rupees, of an equivalent amount, immediately upon the crystallization of dues by the bank [exchange rate as on the date of crystallization will apply].

Process Of Getting Finance Under This Scheme:

ECGC would facilitate easier availability of bank finance to its factoring clients, by rendering such advances to be an attractive proposition to banks. The Factoring Agreement that would be concluded by ECGC with its clients has an in-built provision incorporating an on-demand guarantee in favor of the bank without any additional payment or compliance or other requirements to be satisfied by the bank.

Specific Benefits To The Exporters Under This Scheme:

• • Option to give easier credit terms to overseas customers – Better protection than an irrevocable letter of credit, without the need to insist on establishing one.
  • Enables to offer more friendly delivery terms, like direct delivery to the customer [as against DP/DA] without any risk.
  • Reduced foreign bank handling charges on documents.
  • Substantial cost savings relating to monitoring and follow up [telephones, faxes, follow-up visits] of receivables, overdue bank interest on delayed collections and recovery expenses relating to bad debts.
  • Increase in export sales, due to more competitive terms offered to customers.
  • Better security than even Letters of Credit [as there is a possibility of refusal of payment in the latter on account of even minor discrepancies].
  • Elimination of uncertainties relating to realization of accounts receivables resulting in better cash management to meet working capital requirements.
  • Full attention to procurement/production, marketing and sales and growth of business, due to freedom from chasing receivables.

 

• Guarantee To Banks

As we have already noted, exporters obtain pre-shipment and post-shipment credit from the banks. By granting such export credit, banks bear the risks of non-recovery of the amount advanced for various reasons. ECGC issues financial guarantees to the banks, assuring them that in the event of an exporter failing to discharge his liability to the bank, the ECGC would make good a major portion of the loss thus caused to the bank.

ECGC issues the following types of financial guarantees to the banks:

Packing Credit Guarantee: Packing Credit guarantee is issued for a period of 12 months and covers all advances made by the bank to an exporter within an approved limit during the period. The bank has to submit monthly declaration of the advances and repayments. Premium is charged at the rate of 10 Paisa Per Rs. 100 per month on the highest amount of advance outstanding on any day during
the months. ECGC reimburses the bank to the extent of 66.6% of its loss, if the entire amount due from the exporter is not recovered within a period of 4 months from the due date of repayment. If any amount is recovered by the bank subsequently, it is to be shared between ECGC and the bank in the same ratio; in which the loss was borne by them.

Export Production Finance Guarantee: This guarantee is also issued in respect of packing credit granted by banks. It enables the banks to sanction advances to the full extent of cost of production if it exceeds the F.O.B value of the export order. The difference represents the incentive receivable by the exporter. The extent of cover and premium rates are the same as in case of Packing Credit Guarantee.

Post-Shipment Export Credit Guarantee: Post-shipment finance given to exporters by way of purchase, negotiation or discount of export bills or advances against such bills is eligible for this guarantee. The exporter is required to hold a suitable policy of ECGC to cover the overseas credit risks.

ECGC charges premium @ 7 Paisa per Rs.100 per month and reimburses the loss to the extent of 75%. This guarantee is also issued on whole turnover basis. In such cases the loss is covered to the extent of 85%, in case the advance is granted to exporters holding ECGC policy. Advances granted to non-policy-holders are also covered but the percentage of cover is 60%. The premium rate is 5 Paisa per Rs.100 per month, if advances granted under Letters of Credit bills are also covered under this guarantee. Otherwise the premium rate is 6 Paisa.

Individual Post-Shipment Export Credit Guarantee can also be obtained in case of non-policy holder, provided the exporter makes shipments solely against letters of credit.

Export Finance Guarantee: This guarantee is issued to cover post-shipment advances granted by banks to exporters against export incentives receivable in the form of cash assistance, duty drawbacks, etc. Thus this guarantee is issued when bank provides finance equal to the difference between the export value and the domestic price; such difference is receivable by the exporter from the Government.

ECGC charges premium of such policies @ 10 Paisa per Rs.100 per month and covers loss to the extent of 75%. Banks having whole turnover packing credit guarantees are eligible for concession in premium rate and higher cover.

Export Performance Guarantee: In the course of export business, exporters are often required to provide guarantees by an Indian bank. For example, bank guarantee is required in case of Bid bonds, Performance bonds, against advance payments or their export obligations. ECGC issues Export Performance Guarantees to the banks to provide protection against losses that may be suffered by them on account of guarantees given by them on behalf of their customers. These guarantees act as counter guarantees and aim at encouraging the banks to give guarantees liberally for export business.

Normally the guarantee covers up to 75% of the loss. But in case of guarantees issued in connection with bid bonds, performance bonds, advance payment and local finance guarantees and guarantees in lieu of retention money, the cover may be increased to 90% premium rate ranges from 90 Paisa p.a. to Rs.1.08 per annum for 90% guarantee cover.

Export Finance [Overseas Lending] Guarantee: This guarantee is issued if a bank finances an overseas project and provides a foreign currency loan to the contractor. It covers the risk of non-payment by the contractor. The premium rates are similar to those prescribed for the performance guarantee. Premium is payable in Indian rupees and so is the case with the claims.

 

• Special Schemes

Transfer Guarantee: Transfer guarantees are issued to an Indian bank which adds its confirmation to a foreign Letter of Credit in favor of Indian exporter. Such banker, called confirming banker, may suffer loss due to the insolvency or default of the opening banker or due to certain political risks or transfer delays or moratorium on payments. Transfer guarantees may cover either political risks alone or both political and commercial risks. Loss from political risks is covered up to 90% and losses due to commercial risks are covered up to 75%.

Overseas Investment Insurance: Under this scheme protection is granted to investment made abroad by way of equity capital or untied loans for the purpose of setting up or expansion of overseas projects. It covers both investments made in cash or by way of export of capital goods and services from India. This scheme covers not only original investment but also annual dividends or interest receivable. Risks arising out of war, expropriation or restriction on remittances are covered under the scheme but no cover is provided for commercial risks. The period of insurance cover does not normally exceed 15 years in case of projects involving the construction period.

Exchange Fluctuation Risk Cover: This cover is available for payments scheduled over a period of 12 months or more and up to 15 years. Cover can be obtained from the date of bidding and right up to the final instalment. Under this cover, ECGC covers the risks to the exporters on account of fluctuations in the exchange rate. Cover is available for all amounts receivable under the contract. Contracts under Buyer’s credit and lines of credit are also eligible for cover under this scheme.

The basis for cover is a reference rate which is agreed upon i.e. the rate prevailing at the time of bidding or the date of the contract at the option of the contractor/exporter. Loss or gain within a range of 2% of the reference rate will go to the exporter’s account. If the loss exceeds 2% ECGC will make good the loss in excess of 2% but not exceeding 35% of the reference rate. In other words the loss or gain up to 2% and beyond 35% of reference rate will be borne by the exporter. Within these limits the loss/gain will accrue to ECGC. The rate of premium is 40 Paisa per Rs. 100 per annum.

 

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