Types Of Export Credit And Letter Of Credit

Export Credit And Letter Of Credit

• Export Credit

The credit required by an exporter from a banker is broadly divided into two categories, viz [1] Pre-Shipment Credit [2] Post-Shipment Credit. Both of these may be acquired either in Indian Rupees or in Foreign Currencies. Hence, Export Credit may be further sub-categorized.

Pre-Shipment Credit: Means any loan or advance or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment.

Post-Shipment Credit: Means any loan or advance granted or any other credit provided by a bank to an exporter of goods from India after the shipment of goods to the realization of the export proceeds. Thus the dividing line between the two types of export credits is the date of shipment. Generally, the Pre-Shipment Credit is extinguished by the submission of export bills and connected documents. Thereafter, it is called Post-Shipment Credit.

Pre-Shipment Export Credit

The pre-shipment credit meets the working capital needs of an exporter at the pre-shipment stage. When an exporter receives an export order, the goods to be exported may not be readily available with him for shipment. He has to purchase the raw materials/semi-finished goods, process/manufacture the same, or may procure the goods from their suppliers, pack them and dispatch them to the port town. The funds required for all these purposes are called pre-shipment credit.

Banks provide pre-shipment credit after taking into consideration all factors relevant for granting credit. But the basis of granting such credit is:

1. • A Letter Of Credit opened by the importer in favor of the exporter.
   • A confirmed and irrevocable order for the export of goods from India, or any
     other evidence of such an order.

The Following Points Are Taken Into Account While Granting Pre-Shipment Credit:

1. 1. Pre-shipment Credit is to be granted for the period which is sufficient to meet the needs of the exporter. But if the period of credit exceeds 180 days, no refinance will be granted by the Reserve Bank of India. If the pre-shipment advance is not adjusted by submission of export documents within 360 days, the advance will not remain eligible for concessional rate of interest.
   2. Packing credit may be released in one lump sum or in installments as required by the exporter. Banks must monitor the end-use of the funds and ensure their utilization for genuine requirement of exports.
   3. Pre-shipment credit must be liquidated out of the proceeds of the export bill on its purchase, discount etc. by the banker. Thus the pre-shipment credit must be converted into post-shipment credit.
   4. In case of agro-based products, the non-exportable products are to be sold within the country. Banks must charge interest at commercial rate, as applicable to domestic advance, on packing credit covering non-exportable portion.
   5. In some cases, exporters need packing credit in anticipation of receipt of letters of credit/firm export order from importers. This happens when the raw materials are seasonal in nature or when the manufacturing time is greater than the delivery schedule.

In such cases, banks may extend Pre-Shipment Credit Running Account Facility and grant credit taking into account the exporter’s needs and without insisting on firm export order or letter of credit.

Post-Shipment Export Credit

Need for Post-Shipment Credit arises after the exporter has shipped the goods and has secured the shipping documents, such as bill of lading, etc. Now, the concern of the exporter is to realize his dues from the foreign importer. This is invariably done by drawing a bill of exchange on the importer. The bill may be drawn either on Documents Against Acceptance [D/A] basis or on Documents Against Payment [D/P] basis. In the former case, the importer takes delivery of the documents by giving his acceptance on the bill, sent to him through the exporter’s banker. Thereafter he takes delivery of the goods from the shipping company and makes payment of the accepted bill on its due date. In case the bill is drawn on DIP basis the documents are released to the importer at the time he makes payment of the bill to the exporter’s bank, on its presentation.

Exporter’s bank provides Post-Shipment Advance to the exporter in either of the two ways, viz,

• • By purchasing, discounting or negotiating the export bills.
  • By granting advance against bills for collections.

Thus, Post-Shipment Credit is liquidated by the proceeds of the export bills when received from the importer by the exporter’s bank.

Banks also grant advances to the exporters against duty drawback which he has to receive from the government. Such advance is liquidated when the amount of duty drawback is received by the exporter.

Period Of Credit:- Export Bills Are Of Two Types.

1- Demand Bills, which are payable on demand or on presentation before the importer. In case of demand bills, the banker grants an advance to the exporter, but the period of advance should not exceed the normal transit period i.e. the average period normally involved from the date of purchase/discount of the bill till the receipt of the proceeds of the bill by the bank. Such advance is thus automatically liquidated with the realization of the export bills.

2- Usance Bills, which mature after a period of time. In case of usance bills banks grant credit for a maximum period of 180 days from the date of shipment inclusive of normal transit period and the grace period. Such bills are presented for acceptance before the importer and thereafter it is retained by the bank concerned. On its due date it is presented again before the acceptor for its payment.

There Are Two Methods Of Dealing With Such Bills.

[1]- Purchasing/Discounting Of Bills: In case of purchase of documentary bills by the exporter’s banker, it is usual for the latter to give immediate credit for the bills. An amount by way of discount, fee, interest, etc., is charged by the banker from the amount of the bill and the remaining amount is immediately made available to the exporter [Drawer Of The Bill]. This facility is generally granted in case where the standing of the exporter is good and he is considered credit-worthy for the amount of the bill, because in case the drawee of the bill refuses to honor the bill, the banker shall be entitled to recover its amount from the drawer exporter.

If the banker is unable to recover the amount of the bill from the exporter also his ultimate remedy would be to realize it by disposing off the goods exported. Therefore while purchasing/discounting the export bills, the banker takes into consideration the nature of the goods covered by the bills, the nature of its demand and the possibilities of variations in its price. Moreover, the exporter is required to take a suitable guarantee issued by the Export Credit Guarantee Corporation.

In addition to the above, the banker also takes into account the foreign exchange regulations in the importer’s country and purchases the export bill if the importer’s country has not imposed any restrictions on making such payments. The banker also examines the documents enclosed with the bill and ensures that they are genuine and are in order.

[2]- Collection Of Bills: The banker collects the foreign bills on behalf of the customer in the same way as in the case of home trade: In case the exporter sends to his banker export bills for collection, the latter proceeds according to the instructions given by the exporter drawer and makes its payment to him as and when the proceeds of the bill are realized from the importer. Obviously, in case of collection of bills, the banker does not grant any advance to the exporter immediately on receipt of the bills for collection. Such practice is usually adopted when the exporter does not enjoy reputation which is required in case the bill is purchased/discounted by the banker.

Negotiation Of Bills Under Letters Of Credit:- The above mentioned methods of realizing the export bills is prevalent in cases where the foreign buyer is well known to the exporter and the latter feels no risk or hesitation in sending the documents on D/A or DIP basis. But in circumstances where the exporter has no previous experience of dealing with the importer or has no reliable information on the financial standing and credit-worthiness of the importer, he might not like to adopt the above procedure for realizing his dues. This risk of uncertainty about receiving payment is largely mitigated by securing a letter of undertaking from the banker of the importer. Such letter is called, Letter of Credit [L/C] which plays a very important role in financing the foreign trade.

A Letter of Credit is defined as a letter issued by the banker of the buyer, at the latter’s request, in favor of the seller [Exporter] informing him that the issuing banker undertakes to accept the bills drawn in respect of exports made to the buyer specified therein. It is thus, a written intimation from the banker issuing it, that they have been instructed to open a credit for a certain amount of goods to be exported under certain terms and conditions. The importer at whose request the L/C is issued is called the Applicant, the exporter is called the Beneficiary and the banker issuing it is called the Issuing Banker.

The greatest benefit of securing a L/C by the exporter from the importer is the certainty of payment of the export bills, as the importer’s bank gives an undertaking to this effect. This enhances the value of the export bills drawn under L/C. The bill may be easily negotiated by the exporter with his banker. Moreover, it also provides security against exchange restrictions in the importer’s country.

 

• Letter Of Credit

Letters Of Credit Are Of Various Types As Described Below.

Documentary Letter Of Credit And Clean Letter Of Credit

When the L/C contains a clause that documents of title to goods, such as bill of lading, insurance policy, invoice, consular invoice, certificate of origin, etc., must be attached with the bill of exchange drawn under L/C, it is called a Documentary L/C. In the absence of such a clause, it is called a Clean Letter of Credit.

Fixed Credit And Revolving Credit

In case of fixed credit, the L/C specifies the amount up to which one or more bills may be drawn by the beneficiary within the specified period of time. But in case of revolving credit, the L/C specifies the total amount up to which bills drawn may remain outstanding at a time. As soon as a bill is paid by the importer, another bill may be drawn by the exporter on the importer under the same L/C.

Revocable And Irrevocable Letter Of Credit

When the opening banker reserves to itself the right to cancel or modify the credit at any time without prior notice to the beneficiary, it is called revocable L/C. When a L/C cannot be revoked or cancelled as above it is an irrevocable L/C and provides unconditional undertaking to the exporter.

Confirmed And Unconfirmed Letter Of Credit

When the issuing banker requests the advising bank [i.e. the banker in exporter’s country], to add its own confirmation, also to an irrevocable credit and the latter does so, it is called irrevocable and Confirmed L/C. After confirmation the advising banker is called Confirming Banker and takes upon itself the task of negotiating the export bills without recourse to the drawer.

With And Without Recourse Credit

In case of ‘With Recourse‘ bills the banker, as the holder of the bill, can recover obligation. The negotiating banker should, therefore, take the following precautions the amount of the bill from its drawer, in case the drawee of the bill fails to honor it. On the other hand, in case of Without Recourse Credit the issuing banker will have recourse to the drawee only. If he fails to pay, banker can realize by disposing off the goods.

Negotiating: When a bill of exchange is drawn under a letter of credit, it may be negotiated with any banker in the exporter’s country. But if the L/C mentions the name of any particular bank for the purpose of negotiation, it must be negotiated only with that banker.

By negotiation we mean that the negotiating banker [i.e. the banker through whom the export bills are sent to the importer], pays to the drawer the value of the bill on the basis of the undertaking given by the opening banker. But it is very important that the terms and conditions specified in the L/C are duly complied with, because if any condition is not complied with, the opening banker shall not remain liable to meet its obligation. The negotiating banker should, therefore, take the following precautions at the time of negotiating the export bills.

The last date within which the bill must be negotiated has not expired because L/C becomes ineffective after the expiry of such date.

The documents required to be attached with the bill must be in order. If the banker finds any irregularity or deficiency therein, he must get it rectified; otherwise refuse to negotiate the bill.

The following documents are usually enclosed with the Bill of Exchange:

• • Invoice
  • Bill Of Lading
  • Marine Insurance Policy
  • Certificate Of Origin

The invoice and other documents must have the same description of the goods as is given in the letter of credit.

 

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