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
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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
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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

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1. Fund Based Assistance
a. Financial assistance to Indian companies
b. Financial assistance to foreign govt. and business firms
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.
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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.

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
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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.
 21

(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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